Pfizer 2008 Annual Report Download - page 31

Financial Review
Pfizer Inc and Subsidiary Companies
As part of this new cost-reduction initiative, we intend to reduce our total worldwide workforce by approximately 10%. Reductions will
span sales, manufacturing, research and development, and administrative organizations. We expect to incur costs related to this
new cost-reduction initiative of approximately $6 billion, pre-tax, of which $1.5 billion was recorded in 2008.
We incurred the following costs in connection with all of our cost-reduction initiatives:
YEAR ENDED DECEMBER 31,
(MILLIONS OF DOLLARS) 2008 2007 2006
Implementation costs(a) $1,605 $1,389 $ 788
Restructuring charges(b) 2,626 2,523 1,296
Total costs related to our cost-reduction initiatives $4,231 $3,912 $2,084
(a) For 2008, included in Cost of sales ($745 million), Selling, informational and administrative expenses ($413 million), Research and development
expenses ($433 million) and Other (income)/deductions—net ($14 million). For 2007, included in Cost of sales ($700 million), Selling, informational
and administrative expenses ($334 million), Research and development expenses ($416 million) and Other (income)/deductions—net ($61 million
income). For 2006, included in Cost of sales ($392 million), Selling, informational and administrative expenses ($243 million), Research and
development expenses ($176 million) and Other (income)/deductions—net ($23 million income).
(b) Included in Restructuring charges and acquisition-related costs.
From the beginning of the cost-reduction and transformation initiatives in 2005 through December 31, 2008, the restructuring
charges primarily relate to our supply network transformation efforts and the restructuring of our worldwide marketing and research
and development operations, and the implementation costs primarily relate to accelerated depreciation of certain assets, as well as
system and process standardization and the expansion of shared services.
The components of restructuring charges associated with all of our cost-reduction initiatives follow:
COSTS INCURRED
ACTIVITY
THROUGH
DECEMBER 31,
ACCRUAL
AS OF
DECEMBER 31,
(MILLIONS OF DOLLARS) 2008 2007 2006 2005-2008 2008(a) 2008(b)
Employee termination costs $2,004 $2,034 $ 809 $5,150 $3,045 $2,105
Asset impairments 543 260 368 1,293 1,293 —
Other 79 229 119 440 390 50
Total $2,626 $2,523 $1,296 $6,883 $4,728 $2,155
(a) Includes adjustments for foreign currency translation.
(b) Included in Other current liabilities ($1.5 billion) and Other noncurrent liabilities ($636 million).
From the beginning of the cost-reduction and transformation initiatives in 2005 through December 31, 2008, Employee termination
costs represent the expected reduction of the workforce by 30,700 employees, mainly in manufacturing, sales and research; and
approximately 19,500 of these employees have been terminated. Employee termination costs are recorded when the actions are
probable and estimable and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily
include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.
Other (Income)/Deductions—Net
In 2008, we recorded charges of approximately $2.3 billion resulting from an agreement in principle with the U.S. Department of
Justice to resolve the previously reported investigation regarding allegations of past off-label promotional practices concerning
Bextra, as well as certain other open investigations, and charges of approximately $900 million related to agreements and
agreements in principle to resolve certain NSAID litigation and claims (see the “Our 2008 Performance: Certain Charges—Bextra
and Certain Other Investigations and Certain Charges—Certain Product Litigation—Celebrex and Bextra” sections of this Financial
Review). Also in 2008, we recorded lower net interest income of $772 million, compared to $1.1 billion in 2007, due primarily to
lower average net financial assets, reflecting proceeds of $16.6 billion from the sale of our Consumer Healthcare business in late
December 2006, and lower interest rates, which were partially offset by the receipt of a one-time cash payment of $425 million,
pre-tax, in exchange for the termination of a license agreement, including the right to receive future royalties.
In 2007, we recorded higher net interest income of $1.1 billion compared to $437 million in 2006, due primarily to higher average net
financial assets during 2007, reflecting proceeds of $16.6 billion from the sale of our Consumer Healthcare business, and higher
interest rates. Also in 2007, we recorded a gain of $211 million related to the sale of a building in Korea. In 2006, we recorded a
charge of $320 million related to the impairment of our Depo-Provera intangible asset. See also Notes to Consolidated Financial
Statements—Note 6. Other (Income)/Deductions—Net.
Provision for Taxes on Income
Our overall effective tax rate for continuing operations was 17.0% in 2008, 11.0% in 2007 and 15.3% in 2006. The tax rate in 2008
reflects the impact of the agreements and the agreements in principle to resolve certain legal matters in 2008, which are either not
deductible or deductible at lower tax rates, higher acquired IPR&D expenses in 2008, which are primarily not deductible for tax
purposes, and the change in the jurisdictional mix of income, partially offset by the tax benefits discussed below.
In the second quarter of 2008, we effectively settled certain issues common among multinational corporations with various foreign
tax authorities primarily relating to years 2000 through 2005. As a result, we recognized $305 million in tax benefits. Also, in the
2008 Financial Report 29