Pfizer 2011 Annual Report Download - page 37

Financial Review
Pfizer Inc. and Subsidiary Companies
On October 25, 2010, the Governor of Puerto Rico signed into law Act 154 to modify the Puerto Rico source-of-income rules and
implement an excise tax on the purchase of products by multinational corporations and their subsidiaries from their Puerto Rico
affiliates that will be in effect from 2011 through 2016. Act 154 had no impact on our results in 2010, since it did not become effective
until 2011. Act 154 had a negative impact on our results in 2011 and will continue to negatively impact results through 2016. The
impact of Act 154 is recorded in Cost of sales and Provision for taxes on income. The impact this year is reflected in our financial
guidance for 2012.
DISCONTINUED OPERATIONS
For additional information about our discontinued operations, see Notes to Consolidated Financial Statements—Note 2D.
Acquisitions, Divestitures, Collaborative Arrangements and Equity-Method Investments: Divestitures.
The components of Discontinued operations—net of tax, substantially all of which relate to our Capsugel business, follow:
YEAR ENDED DECEMBER 31,
(MILLIONS OF DOLLARS) 2011 2010 2009
Revenues $ 507 $752 $740
Pre-tax income from discontinued operations 31 140 148
Provision for taxes on income(a), (c) 23 52 51
Income from discontinued operations—net of tax 888 97
Pre-tax gain/(loss) on sale of discontinued operations 1,688 (11) 15
Provision for taxes on income(b), (d) 384 — (2)
Gain/(loss) on sale of discontinued operations—net of tax 1,304 (11) 17
Discontinued operations—net of tax $1,312 $ 77 $114
(a) Deferred tax amounts are not significant for 2011.
(b) Includes a deferred tax expense of $190 million for 2011.
(c) Includes deferred tax expense of $16 million and $8 million, respectively for 2010 and 2009.
(d) Deferred tax amounts are not significant for 2010 and 2009.
ADJUSTED INCOME
General Description of Adjusted Income Measure
Adjusted income is an alternative view of performance used by management, and we believe that investors’ understanding of our
performance is enhanced by disclosing this performance measure. We report Adjusted income in order to portray the results of our
major operations––the discovery, development, manufacture, marketing and sale of prescription medicines for humans and animals,
consumer healthcare (over-the-counter) products, vaccines and nutrition products––prior to considering certain income statement
elements. We have defined Adjusted income as Net income attributable to Pfizer Inc. before the impact of purchase accounting for
acquisitions, acquisition-related costs, discontinued operations and certain significant items. The Adjusted income measure is not,
and should not be viewed as, a substitute for U.S. GAAP net income. Adjusted total costs represent the total of Adjusted cost of
sales, Adjusted SI&A expenses and Adjusted R&D expenses, which are income statement line items prepared on the same basis
as, and are components of, the overall Adjusted income measure.
The Adjusted income measure is an important internal measurement for Pfizer. We measure the performance of the overall
Company on this basis in conjunction with other performance metrics. The following are examples of how the Adjusted income
measure is utilized:
•senior management receives a monthly analysis of our operating results that is prepared on an Adjusted income basis;
•our annual budgets are prepared on an Adjusted income basis; and
•senior management’s annual compensation is derived, in part, using this Adjusted income measure. Adjusted income is one of the
performance metrics utilized in the determination of bonuses under the Pfizer Inc. Executive Annual Incentive Plan that is designed to
limit the bonuses payable to the Executive Leadership Team (ELT) for purposes of Internal Revenue Code Section 162(m). Subject to
the Section 162(m) limitation, the bonuses are funded from a pool based on the achievement of three financial metrics, including
adjusted diluted earnings per share, which is derived from Adjusted income. Beginning in 2011, this metric accounts for 40% of the
bonus pool made available to ELT members and other members of senior management and will constitute a factor in determining each
of these individual’s bonus.
Despite the importance of this measure to management in goal setting and performance measurement, we stress that Adjusted
income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in
its usefulness to investors. Because of its non-standardized definition, Adjusted income (unlike U.S. GAAP net income) may not be
comparable to the calculation of similar measures of other companies. Adjusted income is presented solely to permit investors to
more fully understand how management assesses performance.
36 2011 Financial Report