Pfizer 2007 Annual Report Download - page 27

In 2005, we recorded an income tax charge of $1.7 billion, included
in Provision for taxes on income, in connection with our decision
to repatriate approximately $37 billion of foreign earnings in
accordance with the American Jobs Creation Act of 2004 (the Jobs
Act). The Jobs Act created a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by
providing an 85% dividend-received deduction for certain
dividends from controlled foreign corporations in 2005. In
addition, during 2005, we recorded a tax benefit of $586 million,
primarily related to the resolution of certain tax positions.
Discontinued Operations—Net of Tax
For further discussion about our dispositions, see the “Our
Strategic Initiatives—Strategy and Recent Transactions: Dispositions”
section of this Financial Review. The following amounts, primarily
related to our former Consumer Healthcare business, have been
segregated from continuing operations and included in
Discontinued operations—net of tax in the consolidated
statements of income:
YEAR ENDED DEC. 31,
_______________________________________
(MILLIONS OF DOLLARS) 2007 2006 2005
Revenues $— $4,044 $3,948
Pre-tax income/loss (5) 643 695
(Benefit)/provision for
taxes on income(a) 2(210) (244)
Income/loss from operations of
discontinued businesses—
net of tax (3) 433 451
Pre-tax gains/(losses) on sales of
discontinued businesses (168) 10,243 77
(Benefit)/provision for taxes
on gains(b) 102 (2,363) (30)
Gains/(losses) on sales of
discontinued businesses—
net of tax (66) 7,880 47
Discontinued operations—
net of tax $ (69) $8,313 $498
(a) Includes a deferred tax expense of nil in 2007, $24 million in 2006
and $25 million in 2005.
(b) Includes a deferred tax benefit of nil in 2007, $444 million in 2006,
and nil in 2005.
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—prior to considering certain income statement elements.
We have defined Adjusted income as Net income before the
impact of purchase accounting for acquisitions, acquisition-related
costs, discontinued operations, the cumulative effect of a change
in accounting principles and certain significant items. The Adjusted
income measure is not, and should not be viewed as, a substitute
for U.S. GAAP Net income.
The Adjusted income measure is an important internal
measurement for Pfizer. We measure the performance of the
overall Company on this basis. 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
•Annual and long-term compensation, including annual cash
bonuses, merit-based salary adjustments and share-based
payments for various levels of management, is based on
financial measures that include Adjusted income. The Adjusted
income measure currently represents a significant portion of
target objectives that are utilized to determine the annual
compensation for various levels of management, although the
actual weighting of the objective may vary by level of
management and job responsibility and may be considered in
the determination of certain long-term compensation plans. The
portion of senior management’s bonus, merit-based salary
increase and share-based awards based on the Adjusted income
measure ranges from 10% to 30%.
Despite the importance of this measure to management in goal
setting and performance measurement, we stress that Adjusted
income is a non-U.S. 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 with the calculation of similar measures for
other companies. Adjusted income is presented solely to permit
investors to more fully understand how management assesses our
performance.
We also recognize that, as an internal measure of performance,
the Adjusted income measure has limitations and we do not
restrict our performance-management process solely to this
metric. A limitation of the Adjusted income measure is that it
provides a view of our operations without including all events
during a period, such as the effects of an acquisition or
amortization of purchased intangibles and does not provide a
comparable view of our performance to other companies in the
pharmaceutical industry. We also use other specifically tailored
tools designed to ensure the highest levels of our performance.
For example, our R&D organization has productivity targets,
upon which its effectiveness is measured. In addition, Performance
Share Awards grants made in 2006, 2007 and future years will be
paid based on a non-discretionary formula that measures our
performance using relative total shareholder return.
Purchase Accounting Adjustments
Adjusted income is calculated prior to considering certain
significant purchase-accounting impacts, such as those related to
our acquisitions of BioRexis, Embrex, Rinat, sanofi-aventis’ rights
to Exubera, PowderMed, Idun and Vicuron, as well as net asset
acquisitions. These impacts can include charges for purchased
in-process R&D, the incremental charge to cost of sales from the
sale of acquired inventory that was written up to fair value and
the incremental charges related to the amortization of finite-lived
2007 Financial Report 25
Financial Review
Pfizer Inc and Subsidiary Companies