Management's Discussion and Analysis
of Financial Condition and Results of Operations
Net Sales
- ---------
Worldwide sales for 1994 were $6,417 million compared to $5,794
million in 1993, an 11 percent increase. Sales growth of
approximately 7 percent was from the full-year reporting impact
of businesses acquired in 1993 and sales of approximately $320
million in 1994 from products contributed by Wellcome plc
("Wellcome") to the Warner Wellcome joint venture operations
(described below), partly offset by the absence of the
chocolate/caramel business (which was sold in October 1993).
Unit volume growth accounted for the remaining 4 percent increase
in 1994 sales. Price increases and foreign exchange rate changes
did not have an impact on worldwide sales growth in 1994. In
1993, sales grew 4 percent; unit volume gains and price increases
were each 3 percent and foreign exchange rate changes had an
unfavorable impact of 2 percent.
[Sales, presented in graphic format, were $4.7 billion in 1990,
$5.1 billion in 1991, $5.6 billion in 1992, $5.8 billion in 1993
and $6.4 billion in 1994.]
On a geographic basis, U.S. sales in 1994 were $2,954 million, an
increase of $207 million or 8 percent over 1993. Growth was
primarily attributable to the inclusion of the Wellcome products
and the full-year reporting of 1993 acquisitions. International
sales increased $416 million or 14 percent to $3,463 million.
The full-year reporting of 1993 acquisitions and the inclusion of
Wellcome products increased international sales by approximately
5 percent. In 1993, U.S. sales fell $67 million or 2 percent to
$2,747 million, while international sales rose $263 million or 9
percent to $3,047 million. After adjusting for exchange rate
changes, 1993 international sales increased 14 percent over 1992
levels.
Consumer Health Care Products
- -----------------------------
1994 1993 1992
------------ ------------ -------
(Dollars in millions)
Net Sales $ 2,970 +25% $ 2,374 +12% $ 2,129
Worldwide sales of consumer health care products increased 25
percent over 1993. Warner-Lambert acquired several businesses in
this segment in 1993, including the European, U.S. and Canadian
operations of WILKINSON SWORD. The full-year recognition of
sales from these businesses coupled with approximately $320
million in 1994 sales of products contributed by Wellcome to the
Warner Wellcome joint venture operations increased this segment's
sales by approximately 17 percent in 1994.
U.S. consumer health care product sales in 1994 grew 26 percent
to $1,466 million. The full-year reporting of businesses acquired
in 1993 and the inclusion of Wellcome products, including SUDAFED
and ACTIFED cold medications and NEOSPORIN topical anti-
infective, increased sales by approximately 23 percent. Products
achieving growth in the U.S. during 1994 included LISTERINE
Antiseptic mouthwash (resulting from the introduction of
FRESHBURST LISTERINE), BENADRYL antihistamine (benefiting from
the introduction of BENADRYL Dye-Free antihistamine) and sales
from the introduction of SILK EFFECTS women's wet-shave system.
International consumer health care product sales rose 24 percent
to $1,504 million. Sales growth of 12 percent resulted from the
inclusion of the Wellcome products in Canada, certain countries
in Europe, Australia and New Zealand, and the full-year reporting
of acquired businesses. Products with international sales growth
included HALLS cough tablets, TETRA aquarium products and SCHICK
wet-shaving products.
In December 1993, Warner-Lambert signed separate agreements with
both Wellcome and Glaxo Holdings plc ("Glaxo") governing the
establishment of joint ventures in various countries to develop
and market a broad range of nonprescription consumer health care
products.
Warner-Lambert's agreement with Wellcome calls for both companies
to contribute to the joint venture operations current and future
over-the-counter (OTC) products. Joint venture operations formed
pursuant to a global principles agreement began in the U.S. and
Canada in January 1994, in Australia, New Zealand and certain
countries in Europe in June 1994 and in Germany in November 1994.
Warner-Lambert consolidates the financial results of the joint
venture operations. Additional joint venture operations may be
established by Warner-Lambert and Wellcome in other countries
throughout the world. A New Drug Application (NDA) for the
conversion to OTC use of Wellcome's antiviral drug ZOVIRAX as a
genital herpes medication was filed with the U.S. Food and Drug
Administration (FDA) in August 1993. On January 12, 1995, the
FDA's Antiviral Drugs and Nonprescription Drugs Advisory
Committees met and recommended not to approve ZOVIRAX as an OTC
treatment. Although Wellcome will continue to pursue approval,
it is not possible to predict the actions the FDA will take
relating to this Rx-to-OTC switch and approval in the near term
seems unlikely. ZOVIRAX cold sore cream has been approved for OTC
use and is being sold by Warner Wellcome in several countries.
Warner-Lambert and Glaxo formed a joint venture in the U.S. that
commenced operations in December 1993. The joint venture will
develop, seek approval of and market OTC versions of Glaxo
prescription drugs in the U.S., including ZANTAC, its
pharmaceutical product for ulcer treatment. Additional joint
ventures are expected to be formed with Glaxo in other major
markets outside the U.S., excluding Japan.
On September 30, 1994, Glaxo submitted a NDA filing to the FDA
for the sale in the U.S. of ZANTAC as an OTC product for the
treatment of episodic heartburn. In December 1994, ZANTAC
gained OTC marketing approval in the U.K. as a treatment for
episodic heartburn and is expected to be launched in March 1995.
In addition, in the first quarter of 1994, BECONASE, an OTC
allergy nasal spray from Glaxo was marketed in the U.K. Warner-
Lambert will share in the profits generated by these brands as
well as other OTC products sold by the joint venture.
In January 1995, Glaxo announced an offer to acquire all of the
shares of Wellcome. It is unclear what impact this acquisition
(if completed) will have on Warner-Lambert.
In 1993, worldwide sales of consumer health care products
increased 12 percent over 1992. The growth was partly due to the
March 1993 acquisition of the European, U.S. and Canadian
operations of WILKINSON SWORD that increased the year-to-year
comparison by 6 percent. U.S. sales grew 3 percent and
international sales rose 21 percent. Major contributors to U.S.
sales growth were HALLS, BENADRYL and E.P.T. pregnancy test kits.
Products with international sales growth were HALLS, TETRA and
SCHICK.
Confectionery Products
- ----------------------
1994 1993 1992
------------- ------------- -------
(Dollars in millions)
Net Sales $ 1,368 +5% $ 1,306 +10% $ 1,189
Worldwide sales of confectionery products increased 5 percent in
1994. U.S. sales declined 5 percent to $479 million due to the
sale of the chocolate/caramel business in the fourth quarter of
1993. Excluding chocolate/caramel sales, U.S. sales grew 5
percent from 1993, led by MINT*A*BURST chewing gum (introduced in
December 1993), FRUIT WAVES hard candy and MIGHTY MORPHIN POWER
RANGERS gum (both introduced in 1994). International sales were
$889 million, an increase of 11 percent, 12 percent at constant
exchange rates. Products with international sales growth included
TRIDENT sugarless gum and CLORETS gums and mints.
In 1993, worldwide sales of confectionery products increased 10
percent over 1992, with U.S. sales up 3 percent and international
sales increasing 14 percent. U.S. sales growth was led by
TRIDENT, MINT*A*BURST and CINN*A*BURST chewing gum.
International sales growth was led by TRIDENT, CLORETS and
CINN*A*BURST.
Pharmaceutical Products
- -----------------------
1994 1993 1992
------------ ------------- -------
(Dollars in millions)
Net Sales $ 2,079 -2% $ 2,114 -7% $ 2,280
Worldwide sales of pharmaceutical products in 1994 were 2 percent
lower than in 1993. U.S. sales were down $74 million or 7
percent to $1,009 million, while international sales were up 4
percent to $1,070 million. The decline in U.S. sales was from
sales erosion and price reductions of both the lipid-regulator
LOPID and its generic equivalent, gemfibrozil, as a result of
generic competition. Sales of the two products fell $197 million
in 1994 and are anticipated to fall further by approximately $65
million in 1995.
Partly offsetting the sales decline of LOPID and gemfibrozil in
the U.S. was sales growth from the cardiovascular drug ACCUPRIL
(which benefited from expanded labeling as a treatment for
congestive heart failure), the anticonvulsant DILANTIN, sales
from COGNEX, the company's drug for the treatment of Alzheimer's
disease (which was introduced in the third quarter of 1993), and
the add-on epilepsy therapy NEURONTIN (which was launched during
the first quarter of 1994). Products with international sales
growth were ACCUPRIL, CAPSUGEL empty hard-gelatin capsules and
NEURONTIN (which by the end of 1994 had gained marketing approval
in sixteen countries). Although there were no significant
international sales of COGNEX in 1994, by year-end Warner-Lambert
had received marketing approval for COGNEX in seven countries
outside the U.S.
Warner-Lambert continues to make progress in resolving the issues
related to the consent decree that the company entered into with
the FDA in 1993. The consent decree with the FDA is a court-
approved agreement that primarily requires the company to certify
that laboratory and/or manufacturing procedures at its
pharmaceutical manufacturing facilities in the U.S. and Puerto
Rico meet current Good Manufacturing Practices established by the
FDA. Most of those pharmaceutical products which the company
intends to continue manufacturing and/or marketing have returned
to full manufacture and distribution, and laboratories in all
U.S. pharmaceutical plants have received certification. The
company is working with the FDA to complete facility
certification for the Vega Baja and Fajardo plants in Puerto
Rico.
In 1993, worldwide sales of pharmaceutical products were 7
percent lower than 1992, with U.S. and international sales
falling 10 percent and 4 percent, respectively. In the U.S.,
sales fell due to the loss of patent protection on LOPID and the
FDA regulatory issues connected to the company's pharmaceutical
manufacturing. Compliance with FDA restrictions resulted in an
estimated loss of sales revenue of approximately $135 million in
1993. International sales were lower due to the negative impact
of foreign exchange rates and 1993 health care reform measures in
Germany. At constant exchange rates, international sales
increased 2 percent from 1992.
Cost and Expenses
- -----------------
Cost of goods sold increased 12 percent to $2,155 million in
1994. In addition to higher sales volume, the increase was due to
the full-year reporting impact of companies acquired in 1993 and
the Warner Wellcome joint venture operations. Cost of goods sold
increased 6 percent in 1993 to $1,918 million. Cost of goods
sold as a percentage of net sales increased to 33.6% in 1994 from
33.1% in 1993 and 32.4% in 1992. The increases in the ratio were
primarily due to higher cost of goods ratios in the
pharmaceutical segment, resulting from both an unfavorable
product mix and higher costs related to regulatory compliance
issues.
Marketing expense rose 7 percent to $2,351 million in 1994
compared with a 5 percent increase to $2,196 million in 1993.
The increase in marketing expense in 1994 was due to the full-
year inclusion of acquired businesses and the Warner Wellcome
joint venture operations, partially offset by reductions in the
U.S. pharmaceutical sales force. In 1993, marketing expense
increased due to the inclusion of acquired companies' results,
the introduction of new products and sales force expansions in
international markets. As a percentage of net sales, marketing
expense was 36.6% compared with 37.9% in 1993 and 37.5% in 1992,
as sales growth outpaced the company's investment in marketing in
1994.
Administrative and general expense of $444 million increased 11
percent from $400 million in 1993, primarily reflecting the full-
year inclusion of the acquired businesses and costs related to
the Warner Wellcome joint venture operations. Expenses in 1993
were 6 percent higher than 1992, mainly due to costs associated
with corrective actions aimed at regulatory compliance at certain
manufacturing facilities, coupled with the inclusion of acquired
companies' results. As a percentage of net sales, administrative
and general expense was 6.9% in both 1994 and 1993 and 6.7% in
1992.
Research and development expense totaled $456 million in 1994, 2
percent lower than $465 million in 1993, due to reduced spending
on selected pharmaceutical programs. In 1993, research and
development expense also fell 2 percent, reflecting the absence
of spending on the Novon specialty polymer business and more
focused R&D spending on selected pharmaceutical projects. As a
percentage of net sales, research and development expense was
7.1% versus 8.0% in 1993 and 8.5% in 1992. These decreases are
attributable to the reductions in R&D spending and the higher
percentage of company sales being generated by consumer health
care products (which require a lower level of R&D spending than
pharmaceutical products).
Other expense (income), net of $6 million was $34 million
unfavorable compared to 1993, primarily due to higher interest
expense (resulting from increased debt levels from the company's
1993 and 1994 acquisitions and an increase in interest rates).
For 1993, other expense (income), net of $(29) million was $2
million favorable compared to 1992, partially reflecting lower
financial expenses in Brazil due to improved cash flow.
With the commencement of the Warner Wellcome joint venture
operations in 1994, minority interests increased to $92 million.
Restructuring
- -------------
In 1993, the company recorded a net restructuring charge of $525
million pretax ($360 million after tax or $2.67 per share), that
included a $70 million charge in the first quarter for the
disposition of the Novon specialty polymers business, a $13
million gain in October on the sale of the chocolate/caramel
business and a $468 million charge in the fourth quarter covering
the rationalization of manufacturing facilities, principally in
North America, including the eventual closing of seven plants,
and for organizational restructuring and related workforce
reductions of about 2,800 positions. The program was prompted by
the combined impact of rapid and profound changes in the
company's competitive environment. These changes included the
growing impact of managed health care and other cost-containment
efforts in the U.S., cost regulations in Europe and changes in
U.S. tax law. During 1994, the company closed two manufacturing
sites (Carolina, Puerto Rico and Harbin, China) and reduced the
workforce by approximately 1,300 positions, primarily consisting
of U.S. sales force, Puerto Rico manufacturing and European
administrative positions. The restructuring activities are
proceeding as planned and are expected to be substantially
completed by 1997. (See Note 3 to the consolidated financial
statements for the detailed provisions and subsequent utilization
of reserves).
In 1993 the company estimated that on completion of the 1993
restructuring actions it would generate average annual pretax
savings (compared with pre-restructuring spending levels)
of approximately $150 million by 1997. The company is unaware of
any event that would significantly change spending or anticipated
savings with respect to the 1993 restructuring actions. The
company will invest the savings in its core businesses to further
strengthen its overall competitive position and enhance its long-
term profitability.
A restructuring charge of $544 million pretax ($418 million after
tax or $3.11 per share) was included in 1991 results. The pretax
charge included a provision for the worldwide rationalization of
manufacturing and distribution facilities to take advantage of
the elimination of trade barriers primarily in Europe, North
America and the Andean region, for a worldwide staff reduction
program of approximately 2,700 positions, including a voluntary
retirement incentive program, and for other issues. As a result
of this program, the company has already closed twelve
manufacturing facilities, mainly in Europe and South America,
completed two additional partial facility rationalizations and
reduced the workforce by more than 1,800 positions, primarily
consisting of worldwide administrative, European and South
American manufacturing and European research positions. The
restructuring activities are proceeding generally as planned and
are expected to be substantially completed by 1997. The major
remaining planned action is a pharmaceutical manufacturing
rationalization program that includes the closing of several
additional facilities.
[Sales per employee, presented in graphic format, were $134
thousand in 1990, $142 thousand in 1991, $159 thousand in 1992,
$159 thousand in 1993 and $179 thousand in 1994.]
In 1991 the company estimated that on completion of the 1991
restructuring actions it would generate approximately $1 billion
in cumulative pretax savings through 1998. The company is unaware
of any event that would significantly change spending or
anticipated savings with respect to the 1991 restructuring
actions. Similar to the savings resulting from the 1993
restructuring activity, the company will also invest these
savings in its core businesses to further strengthen its overall
competitive position and enhance its long-term profitability.
The company anticipates that the remaining spending for the 1993
and 1991 restructuring activities will be funded from cash
provided by operations.
Accounting Changes
- ------------------
The company adopted, effective January 1, 1993, Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which increased net income in 1993 by $63 million
or $.47 per share; and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," which decreased net income in 1993 by
$17 million ($27 million pretax) or $.13 per share.
Income Taxes
- ------------
1994 1993 1992
---- ---- ----
Effective tax rate before
accounting changes:
As reported 21.8% 10.5% 25.0%
Excluding restructuring
and after minority interests 24.0% 23.5% 25.0%
The 1994 reported tax rate of 21.8 percent was higher than the
1993 reported tax rate of 10.5 percent principally due to the
effect of a 31.4 percent tax benefit rate associated with the
1993 restructuring actions.
The 1994 effective tax rate (calculated on income before taxes
less minority interests) was 24.0 percent. The 1993 effective
tax rate, excluding the impact of accounting changes and the net
restructuring charge, was 23.5 percent. The increase in the
company's tax rate was partially due to the tax consequences
associated with research expense, including the comparison with
an unusually high effective tax rate benefit on research expense
in 1993 resulting from the August 1993 retroactive extension of
the U.S. research tax credit. Another factor contributing to the
rise in the 1994 tax rate was the lowered tax benefit from
operations in Puerto Rico. These increases were partially offset
by the company's ability to recognize additional deferred tax
assets.
The 1993 effective tax rate of 23.5 percent, excluding the impact
of accounting changes and the net restructuring charge, was lower
than the 1992 effective tax rate of 25.0 percent largely due to
the August 1993 retroactive extension of the U.S. research tax
credit.
The company anticipates that its effective tax rate will increase
several percentage points in 1995 as a consequence of the 1995
phase-in of U.S. tax law changes enacted in 1993 and expected
changes in the company's global profit composition.
Net Income
- ----------
Net income in 1994 was $694 million or $5.17 per share compared
to $331 million or $2.45 per share in 1993. Excluding the 1993
net restructuring charge of $360 million or $2.67 per share and
the net impact of the accounting changes adopted in 1993 of $46
million or $.34 per share, 1994 net income and earnings per share
both increased 8 percent. Net income in 1993 of $645 million,
excluding restructuring and accounting changes, was in line with
1992. Earnings per share of $4.78 was unchanged from 1992,
principally due to the pharmaceutical segment, where regulatory
issues related to the company's pharmaceutical manufacturing had
a negative impact on both sales and profits.
Inflation
- ---------
Inflation has not been a significant factor in Warner-Lambert's
business because of the modest rates of inflation in the U.S. and
the principal foreign countries in which the company maintains
operations.
Liquidity and Capital Resources
- -------------------------------
Selected financial data presented below:
1994 1993 1992
---- ---- ----
Return on average shareholders'
equity:
As reported 43% 23% 48%
Excluding restructuring and
accounting changes 43% 40% 48%
Return on average total assets:
As reported 13% 7% 17%
Excluding restructuring and
accounting changes 13% 14% 17%
Cash and cash equivalents amounted to $218 million at December
31, 1994, a decrease of $223 million from December 31, 1993. The
company also holds $401 million in short-term investments and
other nonequity securities (included in investments and other
assets) that do not qualify as cash equivalents, representing an
increase of $240 million since 1993. Combined, cash and cash
equivalents, short-term investments and other nonequity
securities increased $17 million compared to 1993. Net debt
(total debt less cash and cash equivalents, short-term
investments and other nonequity securities) of $841 million at
December 31, 1994 increased $243 million from $598 million at
December 31, 1993. This increase is primarily attributable to
spending related to the 1993 and 1991 restructuring activities
(including purchases of property, plant and equipment) and the
acquisition of businesses.
At December 31, 1993, cash and cash equivalents amounted to $441
million, a decrease of $278 million from 1992. Short-term
investments and other nonequity securities of $161 million at
December 31, 1993 were $66 million higher than 1992. Combined,
cash and cash equivalents, short-term investments and other
nonequity securities declined $212 million. Net debt of $598
million at December 31, 1993 changed from a net cash position of
$77 million at December 31, 1992. The change to a net debt
position is primarily attributable to the acquisitions of
businesses in 1993.
Trade receivables days sales outstanding (DSO) increased to 47
days in 1994 compared to 45 days in 1993. The increase was
primarily attributable to a higher proportion of international
sales, which traditionally have a higher DSO than the company
overall. The inventory turnover rate decreased to 3.7 from the
previous year's 3.9, reflecting higher inventory levels in all
segments.
Expenditures for property, plant and equipment were $406 million
in 1994, $347 million in 1993 and $334 million in 1992. Capital
spending commitments planned by the company over the next several
years include the consolidation and upgrading of manufacturing,
distribution and research facilities, and for organizational
restructuring in connection with the company's restructuring
plans announced in 1993 and 1991. In 1994, the company announced
plans to make an initial capital investment of approximately $30
million during the next three years to establish a confectionery
and consumer health care products operation in the People's
Republic of China. The company estimates that 1995 expenditures
for property, plant and equipment will be approximately $410
million.
In June 1994, Warner-Lambert acquired Saila S.p.A., a privately
held confectionery company based in Italy. The total purchase
price was approximately $66 million. The company completed
several acquisitions and investments in 1993 for a total cash
consideration of $429 million (see Note 4 to the consolidated
financial statements).
The company has unused available lines of credit from banks
totaling $1.0 billion. The company's bond ratings by Standard
and Poor's Corporation (AA) and Moody's Investor Services (Aa3)
did not change during 1994.
As of December 31, 1994, less than two million shares of common
stock remain to be repurchased under current authorization from
the Board of Directors.
Insurance
- ---------
Consistent with trends in the pharmaceutical industry, the
company self-insures, up to certain threshold amounts, against
certain types of risk. The company also has in place risk
management programs to minimize exposure to loss. Management
believes its overall risk management programs are adequate to
protect its assets and earnings against significant loss.
Environment
- -----------
The company is involved in various environmental matters,
including actions initiated by the Environmental Protection
Agency. It is not possible to predict with certainty the outcome
of such matters or the total cost of remediation. In
management's opinion, such proceedings will not result in a
material adverse effect on the company's financial position,
liquidity, cash flow or results of operations for any year. (For
additional information see Note 19 to the consolidated financial
statements.)
Other
- -----
The devaluation of the Mexican peso in December of 1994 had no
effect on the company's 1994 results, since its Mexican
subsidiary is consolidated on the basis of a fiscal year ending
on November 30. Although the devaluation will have an impact on
the company's 1995 results, management believes that such impact
will not be material. Management also believes that the
company's geographic diversity minimizes exposure to currency
fluctuations resulting in one or more foreign countries.
Shareholder Information
- -----------------------
Book value per share of common stock at year-end 1994 was $13.50
compared with $10.36 in 1993, which reflected the 1993
restructuring charge.
Cash dividends paid in 1994 totaled $327 million. A dividend of
$.61 per share was paid in each quarter of 1994 for an annual
total of $2.44 per share. This was a 7 percent increase over the
prior year total of $2.28 per share, paid in four quarterly
dividends of $.57 per share during 1993. In January 1995, the
Board of Directors approved a 7 percent increase in the quarterly
dividend rate to $.65 cents per share payable in the first
quarter of 1995.
Dividends have been paid on Warner-Lambert's common stock since
its listing on the New York Stock Exchange in 1951. Annual
dividend payments per share have increased for 43 consecutive
years.
[Dividends per share, presented in graphic format, were $1.52 in
1990, $1.76 in 1991, $2.04 in 1992, $2.28 in 1993 and $2.44 in
1994.]
Warner-Lambert's common stock ticker symbol is WLA. The principal
market on which the stock is traded is the New York Stock
Exchange, but the stock is also listed and traded on the
following domestic and international stock exchanges: Chicago,
Pacific, London and Zurich. The average number of common shares
outstanding in 1994 and 1993 was 134,112,000 and 135,000,000,
respectively. Shareholders of record totaled approximately 43,000
as of December 31, 1994 and 46,000 as of December 31, 1993.
The high and low prices for Warner-Lambert's common stock were as
follows:
1994 1993
----------------- ------------------
High Low High Low
------- ------- ------- -------
First quarter $68 3/4 $60 1/4 $70 3/4 $59 3/4
Second quarter 72 1/2 60 76 3/8 67
Third quarter 86 3/4 64 71 3/4 62 1/2
Fourth quarter 82 1/4 73 72 63 3/8
The 1994 year-end closing price of Warner-Lambert common stock
was $77 per share.
Warner-Lambert Company and Subsidiaries
Five-year Summary of Selected Financial Data
- ------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
RESULTS FOR YEAR:
Net sales $6,417 $5,794 $5,598 $5,059 $4,687
Cost of goods sold 2,155 1,918 1,814 1,626 1,515
Research and development
expense 456 465 473 423 379
Income before income taxes,
minority interests and
accounting changes 1,005 318 (a) 860 223 (c) 682
Income before accounting
changes 694 285 (a) 644 141 (c) 485
Net income 694 331 (a,b) 644 35 (c,d) 485
Per common share:
Income before accounting
changes 5.17 2.11 (a) 4.78 1.05 (c) 3.61
Net income 5.17 2.45 (a,b) 4.78 .26 (c,d) 3.61
- ------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current assets $2,515 $2,219 $2,176 $1,844 $1,559
Current liabilities 2,353 2,016 1,333 1,250 1,101
Working capital 162 203 843 594 458
Property, plant and
equipment 1,846 1,599 1,507 1,350 1,301
Total assets 5,533 4,828 4,077 3,602 3,261
Long-term debt 535 546 565 448 307
Total debt 1,460 1,199 736 576 537
Shareholders' equity 1,816 1,390 1,528 1,171 1,402
- ------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION:
Average number of common
shares outstanding
(in millions) 134.1 135.0 134.7 134.4 134.3
Common stock price per share:
High $86 3/4 $76 3/8 $79 1/4 $82 1/4 $70 3/8
Low 60 59 3/4 58 3/8 61 3/4 49 5/8
Year-end 77 67 1/2 69 1/8 77 5/8 67 1/2
Book value per common share 13.50 10.36 11.29 8.70 10.44
Cash dividends per
common share 2.44 2.28 2.04 1.76 1.52
- ------------------------------------------------------------------------------------------
OTHER DATA:
Number of employees
(in thousands) 36 35 34 34 34
Capital expenditures $ 406 $ 347 $ 334 $ 326 $ 240
Cash dividends paid 327 308 275 237 204
Depreciation and amortization 181 170 156 135 120
- ------------------------------------------------------------------------------------------
(a) Includes a net restructuring charge of $525 pretax ($360 after tax or $2.67 per
share).
(b) Includes a credit of $63 or $.47 per share for the adoption of SFAS No. 109,
"Accounting for Income Taxes" and a charge of $17 after tax or $.13 per share to
adopt SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
(c) Includes a restructuring charge of $544 pretax ($418 after tax or $3.11 per share).
(d) Includes a charge of $106 after tax or $.79 per share to adopt SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Warner-Lambert Company and Subsidiaries
Segment Information
Industry Segments
- -----------------------------------------------------------------------------------------------
Research and
Net Sales (1) Operating Profit (3) Development Expense
- -----------------------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
- -----------------------------------------------------------------------------------------------
(Millions of dollars)
Consumer Health Care $2,970 $2,374 $2,129 $ 714 $ 440 $ 460 $ (65) $ (61) $ (70)
Confectionery 1,368 1,306 1,189 264 201 227 (23) (22) (20)
Pharmaceutical 2,079 2,114 2,280 716 384 843 (368) (382) (383)
-------------------------
Research and develop-
ment expense (456) (465) (473) $(456) $(465) $(473)
- -----------------------------------------------------------------------------------------------
Net sales and
operating profit $6,417 $5,794 $5,598 1,238 560 1,057
- --------------------------------------------
Corporate expense (2) (233) (242) (197)
- --------------------- ----------------------
Income before income
taxes, minority
interests and
accounting changes $1,005 $ 318 $ 860
- --------------------- ----------------------
- ----------------------------------------------------------------------------------------------
Depreciation and
Identifiable Assets Amortization Capital Expenditures
- ----------------------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
- ----------------------------------------------------------------------------------------------
(Millions of dollars)
Consumer Health Care $1,837 $1,491 $1,088 $ 61 $ 61 $ 53 $129 $115 $109
Confectionery 872 680 620 31 29 26 83 60 54
Pharmaceutical 1,991 1,769 1,476 80 72 67 183 160 151
- ----------------------------------------------------------------------------------------------
Subtotal 4,700 3,940 3,184 172 162 146 395 335 314
Corporate 833 888 893 9 8 10 11 12 20
- ----------------------------------------------------------------------------------------------
Total $5,533 $4,828 $4,077 $181 $170 $156 $406 $347 $334
- ----------------------------------------------------------------------------------------------
Geographic Areas
- -----------------------------------------------------------------------------------------------
Net Sales (1) Operating Profit (3) Identifiable Assets
- -----------------------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
- -----------------------------------------------------------------------------------------------
(Millions of dollars)
United States $2,954 $2,747 $2,814 $ 844 $ 441 $ 871 $1,915 $1,705 $1,616
Europe, Middle East
and Africa 1,618 1,390 1,339 428 231 322 1,649 1,305 826
Americas and Far
East 1,845 1,657 1,445 422 353 337 1,136 930 742
- -----------------------------------------------------------------------------------------------
Subtotal 6,417 5,794 5,598 1,694 1,025 1,530 4,700 3,940 3,184
Research and develop-
ment expense (456) (465) (473)
- -----------------------------------------------------------------------------------------------
Total $6,417 $5,794 $5,598 $1,238 $ 560 $1,057 $4,700 $3,940 $3,184
- -----------------------------------------------------------------------------------------------
(1) Export sales, intersegment sales and intergeographic area sales were not material.
(2) Corporate expense included general corporate income and expense, corporate investment
income, interest expense and net foreign currency adjustments.
(3) Operating profit by industry segments and geographic areas included restructuring
charges (see Note 3 to the consolidated financial statements) as follows:
Restructuring
- -----------------------------------------------------------------------------------------------
Industry Segments Geographic Areas
- ---------------------------------- ------------------------------------
1993 1993
- ---------------------------------- ------------------------------------
(Millions of dollars) (Millions of dollars)
Consumer Health Care $(105) United States $(314)
Confectionery (46) Europe, Middle East
Pharmaceutical (314) and Africa (119)
- ---------------------------------- Americas and Far East (32)
Operating loss (465) ------------------------------------
Corporate expense (60) Operating loss $(465)
- ---------------------------------- ------------------------------------
Loss before
income taxes $(525)
- ----------------------------------
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Income
- ---------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
(Millions of dollars,
except per share amounts)
Net sales $6,416.8 $5,793.7 $5,597.6
- ---------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 2,155.1 1,918.1 1,814.3
Marketing 2,351.0 2,196.5 2,099.1
Administrative and general 443.6 399.6 377.4
Research and development 456.0 464.9 473.5
Other expense (income), net 5.8 (28.6) (26.5)
Restructuring - 525.2 -
- ---------------------------------------------------------------------
Total costs and expenses 5,411.5 5,475.7 4,737.8
- ---------------------------------------------------------------------
Income before income taxes, minority
interests and accounting changes 1,005.3 318.0 859.8
Provision for income taxes 219.1 33.5 214.5
Minority interests 92.2 (.5) 1.6
- ---------------------------------------------------------------------
Income before accounting changes 694.0 285.0 643.7
Accounting changes (net of tax) - 46.0 -
- ---------------------------------------------------------------------
Net income $ 694.0 $ 331.0 $ 643.7
- ---------------------------------------------------------------------
Per common share:
Income before accounting changes $ 5.17 $ 2.11 $ 4.78
Accounting changes - .34 -
- ---------------------------------------------------------------------
Net income $ 5.17 $ 2.45 $ 4.78
- ---------------------------------------------------------------------
Consolidated Statements of Retained Earnings
- ---------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
(Millions of dollars,
except per share amounts)
Retained earnings at beginning
of year $2,287.7 $2,264.6 $1,895.7
Net income 694.0 331.0 643.7
Cash dividends paid
on common shares (327.2) (307.9) (274.8)
- ---------------------------------------------------------------------
Retained earnings at end of year $2,654.5 $2,287.7 $2,264.6
- ---------------------------------------------------------------------
Cash dividends per common share $ 2.44 $ 2.28 $ 2.04
- ---------------------------------------------------------------------
See notes to consolidated financial statements.
Warner-Lambert Company and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
(Millions of dollars)
Assets:
Cash and cash equivalents $ 217.9 $ 440.5
Short-term investments 247.2 61.2
Receivables, less allowances of
$21.8 in 1994 and $20.5 in 1993 1,096.0 890.8
Inventories 636.2 476.5
Prepaid expenses and other current
assets 318.0 349.7
- ---------------------------------------------------------------------
Total current assets 2,515.3 2,218.7
Investments and other assets 557.6 487.4
Equity investments in
affiliated companies 234.2 208.6
Property, plant and equipment 1,846.0 1,599.3
Intangible assets 379.7 314.1
- ---------------------------------------------------------------------
$5,532.8 $4,828.1
- ---------------------------------------------------------------------
Liabilities and shareholders' equity:
Short-term debt $ 925.1 $ 652.8
Accounts payable, trade 517.7 427.1
Accrued compensation 150.6 141.2
Other current liabilities 601.8 614.5
Federal, state and foreign income taxes 158.2 180.3
- ---------------------------------------------------------------------
Total current liabilities 2,353.4 2,015.9
Long-term debt 535.2 546.2
Deferred income taxes 88.0 69.2
Other noncurrent liabilities 718.5 798.6
Minority interests 21.3 8.6
Shareholders' equity:
Preferred stock - none issued - -
Common stock - 160,330,268 shares
issued 160.3 160.3
Capital in excess of par value 152.2 120.1
Retained earnings 2,654.5 2,287.7
Cumulative translation adjustments (181.0) (224.8)
Treasury stock, at cost:
1994 - 25,734,568 shares;
1993 - 26,190,513 shares (969.6) (953.7)
- ---------------------------------------------------------------------
Total shareholders' equity 1,816.4 1,389.6
- ---------------------------------------------------------------------
$5,532.8 $4,828.1
- ---------------------------------------------------------------------
See notes to consolidated financial statements.
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ----------------------------------------------------------------------
(Millions of dollars)
Operating Activities:
Net income $ 694.0 $ 331.0 $ 643.7
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 181.4 170.4 155.6
Minority interests 92.2 (.5) 1.6
Restructuring - 525.2 -
Accounting changes (net of tax) - (46.0) -
Deferred income taxes 44.3 (129.6) 5.6
Changes in assets and liabilities,
net of effects from acquisitions/
dispositions of businesses:
Receivables (167.9) (134.1) (172.6)
Inventories (140.6) (70.3) (19.8)
Accounts payable and accrued
liabilities (77.5) (79.2) 24.6
Pension contributions (22.1) (100.0) (18.5)
Other items, net 41.2 (.2) 16.4
- ----------------------------------------------------------------------
Net cash provided by operating
activities 645.0 466.7 636.6
- ----------------------------------------------------------------------
Investing Activities:
Purchases of investments (656.1) (236.5) (76.0)
Proceeds from sales of investments 415.7 166.2 56.6
Purchases of property, plant and equipment (406.4) (347.1) (334.3)
Acquisitions of businesses (66.3) (429.0) -
Proceeds from dispositions of businesses - 83.4 -
Other 13.2 4.4 18.2
- ----------------------------------------------------------------------
Net cash used by investing activities (699.9) (758.6) (335.5)
- ----------------------------------------------------------------------
Financing Activities:
Proceeds from borrowings 762.7 627.6 332.8
Principal payments on borrowings (527.6) (192.1) (161.9)
Purchases of treasury stock (41.7) (112.4) (22.8)
Cash dividends paid (327.2) (307.9) (274.8)
Distributions paid to minority interests (79.4) (.5) (.2)
Proceeds from exercise of stock options 43.1 14.5 22.7
- ----------------------------------------------------------------------
Net cash (used) provided by
financing activities (170.1) 29.2 (104.2)
- ----------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents 2.4 (15.2) (14.2)
- ----------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (222.6) (277.9) 182.7
Cash and cash equivalents at beginning
of year 440.5 718.4 535.7
- ----------------------------------------------------------------------
Cash and cash equivalents at end of year $ 217.9 $ 440.5 $ 718.4
- ----------------------------------------------------------------------
See notes to consolidated financial statements.
Warner-Lambert Company and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
Note 1 - Significant Accounting Policies:
Basis of consolidation - The consolidated financial statements include
the accounts of Warner-Lambert Company and all controlled,
majority-owned subsidiaries ("Warner-Lambert" or the "company").
Substantially all foreign subsidiaries and branches are consolidated
on the basis of fiscal years ending on November 30. Investments in
companies in which Warner-Lambert's interest is between 20 percent and
50 percent are accounted for using the equity method. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
Cash equivalents - Cash equivalents include nonequity short-term
investments with original maturity dates of 90 days or less.
Inventories - Inventories are valued at the lower of cost or market.
Cost is determined principally on the basis of first-in, first-out or
standards which approximate average cost.
Property, plant and equipment - Property, plant and equipment are
recorded at cost. The cost of maintenance, repairs, minor renewals
and betterments and minor equipment items is charged to income; the
cost of major renewals and betterments is capitalized. Depreciation
is calculated generally on the straight-line method over the estimated
useful lives of the various classes of assets.
Intangible assets - Intangible assets are recorded at cost and are
amortized on the straight-line method over appropriate periods not
exceeding 40 years.
Advertising costs - Advertising costs are expensed as incurred and
amounted to $601.3 in 1994, $598.4 in 1993 and $591.4 in 1992.
Income taxes - Statement of Financial Accounting Standards (SFAS) No.
109 was adopted effective January 1, 1993. Under SFAS No. 109,
deferred taxes are based on temporary differences between assets and
liabilities for financial reporting purposes and for tax purposes.
Deferred taxes are measured using the enacted tax rates expected to
apply when temporary differences are settled or are realized. Prior
to 1993, deferred taxes were computed based on Accounting Principles
Board Opinion No. 11.
Net income per share - Net income per share is computed based on the
average number of common shares outstanding during the year. The
dilutive effect of common stock equivalents is immaterial. The
average number of shares used in the determination of net income per
share was 134,112,000 in 1994, 135,000,000 in 1993 and 134,717,000 in
1992.
Note 2 - Interest Income and Interest Expense:
Interest income and interest expense are included in other expense
(income), net. Interest income totaled $49.7, $39.7 and $53.1 and
interest expense totaled $93.7, $64.2 and $80.8 in 1994, 1993 and
1992, respectively. Total interest paid was $86.2, $65.4 and $78.4 in
1994, 1993 and 1992, respectively. Interest costs of $9.4, $8.6 and
$8.1 in 1994, 1993 and 1992, respectively, have been capitalized and
included in property, plant and equipment.
Note 3 - Restructuring:
In 1993 and 1991, the company recorded restructuring charges of $525.2
($360.4 after tax or $2.67 per share) and $544.0 ($418.0 after tax or
$3.11 per share), respectively, for the worldwide rationalization of
manufacturing and distribution facilities and for organizational
restructuring. Details of individual provisions are as follows:
In the first quarter of 1993, the company recorded a one-time charge
of $70.0 relating to the disposition of its Novon Products Group. The
charge included $26.0 for the write-down of property, plant and
equipment to its net realizable value and $44.0 for operating losses
and other expenses anticipated to be incurred during the phase-out
period. In November 1993, the company discontinued the operations of
the Novon Products Group.
In October 1993, Warner-Lambert sold the assets of its
chocolate/caramel business in Cambridge, Massachusetts to Chicago-
based Tootsie Roll Industries, Inc. for approximately $82.0, resulting
in a pre-tax gain of $13.1. The sale included the Junior'r' Mints, Sugar
Daddy'r', Sugar Babies'r', Charleston Chew!'r' and Pom Poms'r' product
lines.
In November 1993, a restructuring charge of $468.3 was recorded for
the rationalization of manufacturing facilities, principally in North
America, including the eventual closing of seven plants, and for
organizational restructuring and related workforce reductions of about
2,800 positions. The program was prompted by the combined impact of
rapid and profound changes in the company's competitive environment,
including the growing impact of managed health care and other cost
containment efforts in the U.S., cost regulations in Europe and
changes in U.S. tax law. During 1994, two manufacturing sites were
closed (Carolina, Puerto Rico and Harbin, China) and workforce
reductions of approximately 1,300 positions have been made, primarily
consisting of U.S. sales force, Puerto Rico manufacturing and European
administrative positions.
In the fourth quarter of 1991, a restructuring charge of $544.0 was
recorded primarily for the rationalization of manufacturing and
distribution facilities to take advantage of the elimination of trade
barriers, primarily in Europe, North America and the Andean Region,
and for a worldwide staff reduction program, including a voluntary
retirement incentive program, resulting in a planned workforce
reduction of approximately 2,700 positions. As of December 31, 1994,
the company has closed 12 manufacturing facilities, mainly in Europe
and South America, completed two partial facility rationalizations and
reduced the workforce by more than 1,800 positions, primarily
consisting of worldwide administrative, European and South American
manufacturing and European research positions. Major activities still
to be completed include the closing of several additional facilities
as part of a pharmaceutical manufacturing rationalization program.
Initial 1993 and 1991 provisions and the subsequent utilization by
major components are summarized in the table below:
Amounts Reserve
1993 & 1991 Utilized Balance at
Restructuring Through December
Provisions 1994 31, 1994
- ----------------------------------------------------------------------
Severance and related costs $ 468.0 $234.6 $233.4
Plant closures and related costs 161.5 82.7 78.8
Work-systems redesign 71.5 9.0 62.5
Operating losses during 35.3 35.3 -
phase-out period
Other 107.3 79.3 28.0
Asset write-offs 225.6 225.6 -
- ---------------------------------------------------------------------
Total $1,069.2 $666.5 $402.7
- ---------------------------------------------------------------------
The company records restructuring charges based on available
information at the time the decision is made and approval is received
to proceed with the plan. Reserves are considered utilized when
specific restructuring criteria are completed or benefits paid. The
company continues to expense normal operating costs against current
operations while production is being phased out of facilities to be
closed. There were no material realignments of reserves by major
category from amounts estimated in the original restructuring plans.
As of December 31, 1994, other current liabilities included $146.2 and
other noncurrent liabilities included $256.5 of the remaining
restructuring reserve balance to be utilized. Restructuring
provisions include pharmaceutical manufacturing rationalizations,
which include extensive product relocations requiring regulatory site
and process approvals. The product relocations are being phased in
with the related approval processes anticipated to take a minimum of
two years each. The company has determined that the restructuring
reserve balance is adequate to cover the remaining restructuring
actions, which are anticipated to be substantially completed by 1997.
Note 4 - Investments, Acquisitions and Alliances:
In June 1994, Warner-Lambert acquired Saila S.p.A., a privately held
confectionery company based in Italy.
In January 1993, Warner-Lambert purchased a 34 percent equity interest
in Jouveinal S.A., a French pharmaceutical company, and entered into a
license option agreement which grants Warner-Lambert the right of
first refusal to license future Jouveinal products outside of France,
Canada and French-speaking Africa. Warner-Lambert also acquired the
remaining 51 percent interest in a previously formed Italian
confectionery joint venture. Total consideration approximated $225
for these transactions.
In March 1993, Warner-Lambert acquired the European, U.S. and Canadian
operations of WILKINSON SWORD, an international manufacturer and
marketer of razors and blades, for approximately $145 including debt
assumed.
In July 1993, Warner-Lambert acquired the assets of the consumer
health products business of Fisons plc in Australia and New Zealand
for $23. The Fisons operations include the ROSKEN line of therapeutic
skin care products.
In September 1993, two acquisitions were completed. Warner-Lambert
acquired Willinger Bros., Inc., a manufacturer of aquarium products
marketed under the WHISPER and SECONDNATURE trademarks. In addition,
Warner-Lambert acquired CACHOU LAJAUNIE, a French manufacturer of
breath freshening confectioneries. Total consideration, including
debt assumed for these acquisitions, approximated $67.
Cash consideration, excluding cash acquired and debt assumed, for the
above acquisitions approximated $66 in 1994 and $429 in 1993. Except
for the equity investment in Jouveinal, the above acquisitions have
been accounted for under the purchase method and accordingly, the net
assets and results of operations have been included in the
consolidated financial statements since the dates of acquisition. The
excess of purchase price over the estimated fair values of the net
tangible and intangible assets acquired has been treated as goodwill.
The pro forma full-year effect of the above acquisitions on
consolidated earnings would not have been material in the respective
years of acquisitions.
In December 1993, Warner-Lambert signed separate agreements with Glaxo
Holdings plc ("Glaxo") and Wellcome plc ("Wellcome") governing the
establishment of joint ventures in various countries to develop and
market nonprescription consumer health care products.
Warner-Lambert established the first of these joint ventures in the
U.S. with Glaxo, whereby the two parties have formed Glaxo Warner-
Lambert OTC G.P. The joint venture will develop, seek approval of and
market over-the-counter (OTC) versions of Glaxo prescription drugs in
the U.S., including ZANTAC, a prescription ulcer treatment product.
Additional joint ventures are expected to be formed in other major
markets outside the U.S., excluding Japan. Development costs, profits
and losses and voting control will be shared equally. Glaxo will
receive a royalty on sales of OTC versions of Glaxo prescription drugs
by the joint ventures. Warner-Lambert uses the equity method of
accounting to record its share of profits and losses.
Warner-Lambert and Wellcome formed a joint venture to develop and
market nonprescription consumer health care products pursuant to a
global principles agreement. The U.S. and Canadian joint venture
operations commenced in January 1994. Joint venture operations in
Australia, New Zealand and certain countries in Europe became
operational during 1994. The alliance calls for both companies to
contribute OTC products, excluding HALLS and ROLAIDS, to the joint
venture. After a two-year phase-in period following establishment of
the U.S. Warner Wellcome joint venture, Warner-Lambert and Wellcome,
respectively, will receive approximately 70 percent and 30 percent of
the profits generated in the U.S. on current products, excluding
ZOVIRAX. Future OTC switch products will be subject to a profit split
favoring the innovator. Warner-Lambert has voting control and has
consolidated the financial results of the joint venture, reflecting
Wellcome's share as minority interest. Warner-Lambert's consolidated
net sales included products contributed by Wellcome of approximately
$320 for 1994.
In the U.S., Warner-Lambert assigned its interest in the Glaxo Warner-
Lambert joint venture to the U.S. Warner Wellcome joint venture.
Warner Wellcome and Glaxo will share development costs and profits
equally, with Wellcome receiving ten percent of Warner Wellcome's
share of the U.S. joint venture's profits.
Note 5 - International Operations:
In translating foreign currency financial statements, local currencies
of foreign subsidiaries and branches have generally been determined to
be the functional currencies, except for those in hyperinflationary
economies (principally Brazil and Venezuela). Net aggregate exchange
losses (gains) resulting from foreign currency transactions and
translation adjustments related to subsidiaries operating in highly
inflationary countries amounted to $15.3, $9.8 and $(1.1) in 1994,
1993 and 1992, respectively.
Note 6 - Inventories:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
Raw materials $112.3 $ 88.6
Finishing supplies 54.2 38.6
Goods in process 93.2 79.3
Finished goods 376.5 270.0
- ---------------------------------------------------------------------
$636.2 $476.5
- ---------------------------------------------------------------------
Note 7 - Property, Plant and Equipment:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
Land $ 34.7 $ 33.8
Buildings 1,016.1 915.0
Machinery, furniture and fixtures 2,116.8 1,885.4
- ---------------------------------------------------------------------
3,167.6 2,834.2
Less accumulated depreciation (1,321.6) (1,234.9)
- ---------------------------------------------------------------------
$ 1,846.0 $ 1,599.3
- ---------------------------------------------------------------------
Depreciation expense totaled $168.9, $159.0 and $148.7 in 1994, 1993
and 1992, respectively.
Note 8 - Intangible Assets:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
Purchased patents, trademarks and other
intangibles $236.7 $179.9
Goodwill 205.3 181.5
- ---------------------------------------------------------------------
442.0 361.4
Less accumulated amortization (62.3) (47.3)
- ---------------------------------------------------------------------
$379.7 $314.1
- ---------------------------------------------------------------------
The increase in purchased patents, trademarks and other intangibles
was primarily attributable to the acquisition of Saila S.p.A.
discussed in Note 4.
Amortization expense totaled $12.5, $11.4 and $6.9 in 1994, 1993 and
1992, respectively.
Note 9 - Debt:
The components of short-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
Commercial paper $641.4 $507.5
Notes payable - bank and other 250.6 123.5
Current portion of long-term debt 33.1 21.8
- ---------------------------------------------------------------------
$925.1 $652.8
- ---------------------------------------------------------------------
The weighted average interest rate was 6.3 percent and 4.6 percent for
commercial paper and notes payable outstanding at December 31, 1994
and 1993, respectively. The company has lines of credit arrangements
with numerous banks with interest rates generally equal to the prime
rate for domestic banks and the best prevailing rate for foreign
banks. At December 31, 1994, worldwide unused short-term lines of
credit amounted to $1.0 billion.
The components of long-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
6 5/8% notes due 2002 $199.6 $199.6
8% notes due 1998 150.0 150.0
8 1/8% notes due 1996 100.0 100.0
Industrial revenue bonds due 2014 24.6 24.7
Other 61.0 71.9
- ---------------------------------------------------------------------
$535.2 $546.2
- ---------------------------------------------------------------------
The industrial revenue bonds due 2014 have a stated interest rate of
7.6 percent and an effective interest rate of 7.2 percent.
The aggregate annual maturities of long-term debt at December 31,
1994, payable in each of the years 1996 through 1999, are $116.3,
$6.3, $165.4 and $2.5, respectively.
The company has entered into interest rate swap agreements to reduce
its interest expense on long-term debt, see Note 10.
Note 10 - Financial Instruments:
The estimated fair values of financial instruments were as follows:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
( ) = Liability Amount Value Amount Value
- ---------------------------------------------------------------------
Investment securities $ 482.8 $ 479.2 $ 341.5 $ 345.8
Long-term debt (535.2) (513.8) (546.2) (575.9)
Interest rate swaps .3 (17.3) 5.1 8.8
Foreign exchange contracts .1 (19.2) - (16.1)
- ---------------------------------------------------------------------
Investment securities and long-term debt are valued at quoted market
prices for similar instruments. The fair values of the remaining
financial instruments in the above table are based on dealer quotes
and reflect the estimated amounts that the company would pay or
receive to terminate the contracts. The carrying values of all other
financial instruments in the consolidated balance sheets approximate
fair values.
The company adopted the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," effective January
1, 1994. Adoption of SFAS No. 115 had no impact on earnings since all
nonequity securities are categorized as "held-to-maturity" and,
accordingly, continue to be carried at amortized cost. At December
31, 1994 and 1993, respectively, gross unrealized gains were $.4 and
$4.3. Gross unrealized losses were $4.0 at December 31, 1994. The
investment securities portfolio was comprised of negotiable
certificates of deposit, Puerto Rico government bonds, guaranteed
collateralized mortgage obligations and Ginnie Mae certificates,
repurchase agreements and short-term U.S. dollar-linked Mexican
government bonds. Equity securities, categorized as "available-for-
sale," were immaterial.
The investment securities (mentioned above) were reported in the
following balance sheet categories:
- -------------------------------------------------------------------
December 31, 1994 1993
- -------------------------------------------------------------------
Cash and cash equivalents $ 74.6 $173.1
Short-term investments 247.2 61.2
Investments and other assets 161.0 107.2
- -------------------------------------------------------------------
$482.8 $341.5
- -------------------------------------------------------------------
As of December 31, 1994, the long-term investments of $161.0 included
$71.2 of interest-bearing, mortgage-backed securities maturing beyond
ten years.
Financial instruments that potentially subject the company to
concentrations of credit risk are trade receivables and interest-
bearing investments. The company sells a broad range of products in
the consumer health care, confectionery and pharmaceutical businesses
worldwide. Due to the large number and diversity of the company's
customer base, concentrations of credit risk with respect to trade
receivables are limited. The company does not normally require
collateral. The company places substantially all of its interest-
bearing investments in high-quality liquid instruments, such as
certificates of deposit issued by major banks or securities issued or
guaranteed by the U.S. or other governments and limits the amount of
credit exposure to any one issuer.
The company does not hold or issue financial instruments for trading
purposes nor is it a party to leveraged derivatives. The company uses
derivatives, particularly interest rate swaps and forward or purchased
option foreign exchange contracts, that are relatively straightforward
and involve little complexity as hedge instruments to manage interest
rate and foreign currency risk.
The counterparties to the company's derivatives consist of major
international financial institutions. Because of the number of these
institutions and their high credit ratings, management believes
derivatives do not present significant credit risk to the company.
The following table summarizes interest rate swap agreements:
- -------------------------------------------------------------------
Notional Amounts Weighted
--------------- Average Weighted Average
December 31, Fixed Floating Pay Rate
--------------- Maturity Receive -----------------
1994 1993 Date Rate 1994 1993
---- ---- ---- -------- ---- ----
$250 $250 1996 8.1% 7.7% 5.5%
200 200 2002 6.6 5.1 3.8
- -------------------------------------------------------------------
Interest rate swap agreements effectively convert fixed rates on long-
term debt to floating rates. Interest to be paid or received is
accrued over the life of the agreements as an adjustment to interest
expense. The company's intent is to reduce overall interest expense
while maintaining an acceptable level of risk to interest rate
fluctuations. As a result of these swap agreements, interest expense
was reduced by $3.7, $12.4 and $1.5 in 1994, 1993 and 1992,
respectively. The impact of a 100 basis point change in market
interest rates would change annual net income by approximately $3.4.
The swap agreements specifically hedge $450 of long-term notes which
are disclosed in Note 9. As market interest rates fluctuate, the
unrealized gain or loss on the swap portfolio moves in an inverse
relationship to the fair value of the underlying debt. The company
had an unrealized loss on the interest rate swap portfolio of $17.6 as
of December 31, 1994 and an unrealized gain of $3.7 as of December 31,
1993.
The company's foreign exchange risk management objectives are to
stabilize cash flows and reported income from the effects of foreign
currency fluctuations. Extensive international business activities
result in a variety of foreign currency exposures including foreign
currency denominated assets and liabilities, firm commitments,
anticipated intercompany sales and purchases of goods and services,
dividend and royalty remittances and anticipated net income of foreign
affiliates, which is hedged on an intra-quarter basis. The company's
strategy in managing these currency risks is to selectively hedge
exposures by entering into forward or purchased option foreign
exchange contracts for periods of up to two years. The company
believes the risks associated with its unhedged exposures are not
significant.
Gains and losses related to effective hedges, including hedges of
anticipated transactions, are recognized in income as part of, and
concurrent with, the hedged transaction.
The table below summarizes the contractual amounts of forward or
purchased option foreign exchange contracts:
Contractual Amounts
-------------------
December 31,
Currency Currency -------------------
Sold Purchased 1994 1993
------------ ------------- ------ ------
Japanese yen U.S. dollars $112.9 $167.8
U.S. dollars British pounds 34.3 69.4
French francs U.S. dollars 10.0 18.5
German marks U.S. dollars - 81.2
Other Other 6.9 11.3
The cash flows associated with derivative financial instruments are
classified as operating in the consolidated statements of cash flows.
Note 11 - Leases:
The company rents various facilities and equipment. Rental costs
charged to income under all operating leases totaled $78.5, $76.3 and
$70.1 in 1994, 1993 and 1992, respectively.
The future minimum rental commitments under noncancellable capital and
operating leases at December 31, 1994 are summarized below:
- ---------------------------------------------------------------------
Capital Operating
- ---------------------------------------------------------------------
1995 $ 4.8 $ 27.2
1996 4.2 20.4
1997 3.8 13.2
1998 3.1 10.6
1999 3.1 9.5
Remaining years 21.1 91.6
- --------------------------------------------------------------------
Total minimum lease payments 40.1 172.5
Less minimum sublease income (.2) (29.9)
---------------------
Net minimum lease payments 39.9 $142.6
-------
Less amount representing interest (15.8)
- -----------------------------------------------------
Present value of minimum lease payments $ 24.1
- -----------------------------------------------------
Property, plant and equipment included capitalized leases of $34.4,
less accumulated depreciation of $13.0, at December 31, 1994 and
$33.0, less accumulated depreciation of $11.7, at December 31, 1993.
Long-term debt included capitalized lease obligations of $21.9 and
$22.3 at those respective dates.
Note 12 - Pensions:
The company has various noncontributory pension plans covering
substantially all of its employees in the U.S. Benefits covering most
employees are based on years of service and average compensation
during the last years of employment. Current policy is to fund these
plans in an amount that ranges from the minimum contribution required
by ERISA to the maximum tax deductible contribution. Certain foreign
subsidiaries also have various plans, which are funded in accordance
with the statutory requirements of the particular countries.
Pension costs for the plans included the following components:
- ----------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ----------------------------------------------------------------------
Service cost - benefits earned
during the year $ 50.9 $ 44.9 $ 42.0
Interest cost on projected
benefit obligation 134.3 130.1 122.6
Return on assets (24.2) (199.2) (127.2)
Net amortization and deferral (124.5) 59.4 (5.5)
- ----------------------------------------------------------------------
Net pension expense $ 36.5 $ 35.2 $ 31.9
- ----------------------------------------------------------------------
Net pension expense attributable to foreign plans and included in the
above was $21.4, $17.9 and $18.2 in 1994, 1993 and 1992, respectively.
The 1993 restructuring charge, discussed in Note 3, included a $4.6
curtailment loss representing a decrease in unrecognized prior service
costs resulting from a reduction in domestic plan participants.
The plans' funded status at December 31 was as follows:
- ----------------------------------------------------------------------
Plans in Which
Plans in Accumulated
Which Assets Exceed Benefits
Accumulated Benefits Exceed Assets
- ----------------------------------------------------------------------
1994 1993 1994 1993
- ----------------------------------------------------------------------
Plan assets at fair value $1,583.9 $1,605.9 $ 70.5 $ 80.6
- ----------------------------------------------------------------------
Actuarial present value of
accumulated benefit
obligation:
Vested 1,421.5 1,464.9 140.3 141.6
Nonvested 45.4 30.3 9.4 10.4
- ----------------------------------------------------------------------
1,466.9 1,495.2 149.7 152.0
Estimated future
salary increases 138.5 171.5 27.6 35.7
- ----------------------------------------------------------------------
Projected benefit
obligation 1,605.4 1,666.7 177.3 187.7
- ----------------------------------------------------------------------
Excess of projected
benefit obligation over
plan assets (21.5) (60.8) (106.8) (107.1)
Unrecognized net
(asset) obligation (22.0) (38.1) 7.2 7.8
Unrecognized prior
service cost 36.2 41.8 2.7 3.0
Unrecognized net
actuarial loss 150.8 208.5 21.5 28.7
Minimum liability
adjustment - - (18.6) (19.0)
- ----------------------------------------------------------------------
Net pension asset
(liability) included
in consolidated
balance sheets $ 143.5 $ 151.4 $ (94.0) $ (86.6)
- ----------------------------------------------------------------------
Plan assets are composed primarily of investments in equities and
bonds.
Foreign plan assets at fair value included in the preceding table were
$570.1 in 1994 and $524.1 in 1993. The foreign plan projected benefit
obligation was $596.4 in 1994 and $536.2 in 1993.
The assumptions for the U.S. plans were:
- ----------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ----------------------------------------------------------------------
Expected long-term rate of
return on plan assets 10.5% 10.5% 10.5%
Expected increase in
salary levels 4.0 4.0 5.0
Weighted average discount
rate 8.8 7.5 8.8
- ----------------------------------------------------------------------
Assumptions for foreign plans did not vary significantly from the U.S.
plans.
Note 13 - Postemployment Benefits:
The company adopted the provisions of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," effective January 1, 1993.
This accounting change resulted in a cumulative effect adjustment
which decreased net income upon adoption by $17.0 ($27.0 pretax) or
$.13 per share. SFAS No. 112 requires employers to recognize an
obligation for postemployment benefits to former or inactive employees
after employment but before retirement. This one-time charge
primarily represented the present value of medical and life insurance
costs for employees receiving long-term disability benefits.
Note 14 - Other Postretirement Benefits:
The company provides other postretirement benefits, primarily health
insurance, for domestic employees who retired prior to January 1, 1992
and their dependents. Although the plans are currently
noncontributory, the company has implemented a cap which limits future
contributions for medical and dental coverage under these plans. The
company is generally self-insured for these costs and the plans are
funded on a pay-as-you-go basis. Domestic employees retiring after
December 31, 1991 will receive additional pension benefits based on
years of service in lieu of these benefits.
The annual cost of providing other postretirement benefits for
domestic retirees amounted to $15.0, $14.0 and $13.4 in 1994, 1993 and
1992, respectively. These amounts primarily represent the accrual of
interest on the present value obligation.
A reconciliation from the plans' benefit obligation to the liabilities
recognized in the consolidated balance sheets as of the latest
actuarial valuations was as follows:
- ---------------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------------
Accumulated postretirement benefit
obligation $179.3 $180.2
Unrecognized prior service cost 1.8 2.0
Unrecognized net actuarial loss (49.4) (45.9)
- ---------------------------------------------------------------------
Accrued postretirement benefit cost
recognized in the consolidated
balance sheets $131.7 $136.3
- ---------------------------------------------------------------------
The health care cost trend rate used to develop the accumulated
postretirement benefit obligation for those retirees under age 65 was
12.3 percent in 1994 declining to 6 percent over 12 years. For those
65 and over, a rate of 8 percent was used in 1994 declining to 6
percent over 7 years. A one percentage point increase in the health
care cost trend rate in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1994 by $5.8 and
the interest cost component of the postretirement benefit cost for
1994 by $.5. The weighted average discount rate used to develop the
accumulated postretirement benefit obligation was 8.8 percent, 7.5
percent and 8.8 percent for 1994, 1993 and 1992, respectively.
Other postretirement benefit costs for foreign plans expensed under
the cash method in 1994, 1993 and 1992 were not material.
Note 15 - Income Taxes:
Effective January 1, 1993, the company changed its method of
accounting for income taxes from the deferred method to the liability
method required by SFAS No. 109, "Accounting for Income Taxes." This
accounting change resulted in a cumulative effect adjustment which
increased net income upon adoption by $63.0 or $.47 per share.
The components of income before income taxes, minority interests and
accounting changes were:
- ---------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
U.S. and Puerto Rico $ 469.2 $ 15.8 $473.6
Foreign 536.1 302.2 386.2
- ---------------------------------------------------------------------
$1,005.3 $318.0 $859.8
- ---------------------------------------------------------------------
The 1993 income before income taxes and accounting changes included a
restructuring charge of $374.6 for U.S. and Puerto Rico and $150.6 for
foreign, see Note 3.
The provision for income taxes consisted of:
- ---------------------------------------------------------------------
Liability Liability Deferred
Method Method Method
- ---------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
Current:
Federal $ 22.7 $ 22.0 $ 54.2
Foreign 143.4 123.4 127.3
State and Puerto Rico 8.7 17.7 27.4
- ---------------------------------------------------------------------
174.8 163.1 208.9
- ---------------------------------------------------------------------
Deferred:
Federal 38.0 (95.0) (14.5)
Foreign .8 (19.6) 14.4
State and Puerto Rico 5.5 (15.0) 5.7
- ---------------------------------------------------------------------
44.3 (129.6) 5.6
- ---------------------------------------------------------------------
Provision for income taxes $219.1 $ 33.5 $214.5
- ---------------------------------------------------------------------
The principal timing difference included in the deferred tax provision
for 1992 was $26.7 related to the 1991 restructuring actions.
Taxes credited to shareholders' equity for employee benefit plans were
$11.9 and $4.3 for years ended December 31, 1994 and 1993,
respectively.
The tax effects of significant temporary differences which comprise
the deferred tax assets and liabilities were as follows:
- ----------------------------------------------------------------------
December 31, 1994 1993
- ----------------------------------------------------------------------
Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------
Restructuring reserves $196.3 $ - $ 287.9 $ -
Compensation/benefits 64.2 - 61.3 -
Postretirement/post-
employment obligations 62.1 - 64.6 -
Property, plant and equip-
ment 47.9 164.4 47.8 162.4
Foreign tax loss and
other carryforwards 37.5 - 22.0 -
Research tax credit carry-
forwards 37.0 - 27.0 -
Inventory 22.7 - 20.7 -
Pensions 12.6 44.9 25.2 55.9
Other 87.9 28.2 61.1 13.0
- ---------------------------------------------------------------------
568.2 237.5 617.6 231.3
Valuation allowances (91.6) - (108.9) -
- ---------------------------------------------------------------------
$476.6 $237.5 $ 508.7 $231.3
- ---------------------------------------------------------------------
The research tax credit carryforwards of $37.0 will be available until
the years 2007 through 2009.
Valuation allowances as of January 1, 1993 of $92.0 were primarily
related to the potential inability to utilize foreign operating loss
and capital loss carryforwards and the inability to realize some
deferred tax assets associated with the 1991 restructuring. During
1993, valuation allowances increased $16.9 principally due to the
potential inability to realize deferred tax assets associated with the
1993 restructuring. During 1994, valuation allowances decreased $17.3
primarily due to improved profitability in European operations which
resulted in the realization of some deferred tax assets associated
with the 1991 restructuring actions offset by the recognition of $13.1
of valuation allowances for acquired foreign capital loss
carryforwards. If these capital loss carryforwards are realized in
the future, the related valuation allowance will reduce acquisition
goodwill.
Income taxes of $186.1, $155.0 and $211.8 were paid during 1994, 1993
and 1992, respectively. Prepaid expenses and other current assets
included deferred income taxes of $173.9 and $218.0 at December 31,
1994 and 1993, respectively. Investments and other assets included
deferred income taxes of $157.2 and $135.8 at December 31, 1994 and
1993, respectively.
The earnings of Warner-Lambert's subsidiary operating in Puerto Rico
are subject to tax pursuant to a grant, effective through December
2003. The grant provides for certain tax relief and reduced
withholding tax rates upon repatriation of Puerto Rico earnings
provided that certain conditions are met. The company continued to be
in compliance with these conditions at December 31, 1994.
Earnings of foreign subsidiaries considered to be reinvested for an
indefinite period at December 31, 1994 totaled approximately $488. No
additional U.S. income taxes or foreign withholding taxes have been
provided on these earnings. It would be impractical to compute the
estimated deferred tax liability on these reinvested earnings.
As of December 31, 1994, Warner-Lambert's U.S. federal income tax
returns through 1986 had been examined and settled with the Internal
Revenue Service.
The company's effective income tax rate before accounting changes
differed from the U.S. statutory tax rate as follows:
- ---------------------------------------------------------------------
Liability Liability Deferred
Method Method Method
- ---------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 34.0%
Income earned in Puerto Rico (5.0) (5.5) (6.8)
Foreign income subject to
reduced tax rates including
taxes on repatriation (7.1) (4.6) (1.4)
U.S. research tax credit, net (.6) (1.8) (.5)
State and local taxes, net .7 .9 1.3
Other items, net 1.0 (.5) (1.6)
Effect of restructuring - (13.0) -
Effect of minority interests (2.2) - -
- ---------------------------------------------------------------------
Effective tax rate before
accounting changes 21.8% 10.5% 25.0%
- ---------------------------------------------------------------------
The 1993 effective tax rate of 10.5 percent included the effect of a
31.4 percent tax benefit rate on the restructuring charge discussed in
Note 3. Excluding the effect of the restructuring charge, the
effective tax rate was 23.5 percent. The lower effective tax rate for
1993 also reflected the retroactive extension of the research tax
credit enacted as part of The Omnibus Budget Reconciliation Act of
1993 and a decrease in the overall international tax rate, due to
changes in certain affiliates' operating results, coupled with a $3.0
tax effect of applying the one percentage point increase in the U.S.
statutory tax rate to existing net deferred tax assets. There was a
separate 37.0 percent tax benefit rate on the $27.0 charge for the
change in accounting principle regarding SFAS No. 112, discussed in
Note 13.
Note 16 - Shareholders' Equity:
The authorized preferred stock of Warner-Lambert Company is 5 million
shares with a par value of $1.00 per share, of which there are no shares issued.
The authorized common stock of Warner-Lambert Company is 300 million shares with
a par value of $1.00 per share.
Changes in certain components of shareholders' equity are summarized as follows:
- -----------------------------------------------------------------------------------------------
Capital in Cumulative Treasury Stock
Common Excess of Translation -----------------------
Stock Par Value Adjustments Shares Cost
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1991 $160.3 $ 92.6 $(128.9) (25,736,008) $(849.0)
Shares repurchased, at cost - - - (325,118) (22.8)
Employee benefit plans - 21.9 - 1,070,956 20.6
Translation adjustment - - (30.8) - -
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1992 160.3 114.5 (159.7) (24,990,170) (851.2)
Shares repurchased, at cost - - - (1,680,290) (112.4)
Employee benefit plans - 5.6 - 479,947 9.9
Translation adjustment - - (65.1) - -
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1993 160.3 120.1 (224.8) (26,190,513) (953.7)
Shares repurchased, at cost - - - (647,001) (41.7)
Employee benefit plans - 35.0 - 1,102,946 25.8
Translation adjustment - - 43.8 - -
Unrealized market value adjust-
ments on equity securities - (2.9) - - -
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1994 $160.3 $152.2 $(181.0) (25,734,568) $(969.6)
- -----------------------------------------------------------------------------------------------
Pursuant to the company's Stockholder Rights Plan, a right is attached
to each outstanding share of common stock. In the event that any
person or group acquires 20 percent or more of the outstanding common
shares, or acquires the company in a merger or other business
combination, or engages in certain self-dealing transactions, each
right (other than those held by the "Acquiring Person") will entitle
its holder to purchase, for a specified purchase price, stock of the
company or the Acquiring Person having a market value of twice such
purchase price. The rights expire on July 8, 1998 and can be redeemed
for $.005 per right by the Board of Directors prior to the time the
rights become exercisable.
Note 17 - Stock Options and Awards:
Warner-Lambert has stock plans established in 1992, 1989, 1987 and
1983 which provide for the granting of options to employees to
purchase shares of common stock within prescribed periods at a price
equal to fair market value on the date of the grant. There are
outstanding options under all plans; however, additional options may
be granted only under the 1992 plan.
The 1992 Stock Plan also provides for the granting of restricted stock
and performance awards. Restricted stock granted to employees is
delivered upon the expiration of restricted periods established at the
time of grant. The value of the shares at the date of the grant is
being amortized to compensation expense over the restricted periods,
with the unamortized portion representing unearned compensation
reflected as a reduction of shareholders' equity. Performance awards
provide for the recipient to receive payment in shares, cash or any
combination thereof equivalent to the award being granted.
The aggregate number of shares of common stock which may be awarded
under the 1992 Stock Plan in any year during its five-year term is not
more than 1.75 percent of the issued shares of common stock on January
1 of the year of grant. In any year in which stock awards are granted
for less than the maximum permissible number of shares, the balance of
unused shares will be added to the number of shares permitted to be
granted during the following year. No stock awards may be granted
under the 1992 Stock Plan after April 28, 1997.
The 1992 Stock Plan also contains provisions for the granting of
rights which permit the optionee to receive an amount equal to the
excess of the market price of the common stock over the option price
when the rights are exercised and receive payment in shares of common
stock, cash or a combination of both. Options and rights granted
generally become exercisable after one year in annual 25 percent
increments and expire ten years from the date of grant. The value of
rights granted is charged to income over the vesting period from the
date the market price first exceeds the option price, with adjustments
made based on market fluctuations to the date of exercise. At December
31, 1994, rights with respect to 650,600 shares of common stock were
outstanding.
Transactions involving stock options, rights and awards are summarized
as follows:
- ---------------------------------------------------------------------
Number Price
of Shares Per Share
- ---------------------------------------------------------------------
Stock options, rights and awards
outstanding, December 31, 1992 8,747,333 $14.81 - $77.75
Stock options and rights:
Granted 1,519,725 65.06 - 75.25
Exercised (439,454) 14.81 - 73.69
Cancelled (282,951) 14.81 - 77.75
Stock awards:
Granted 51,270 65.69 - 75.75
Delivered (55,875) 44.56 - 77.06
Cancelled (13,453) 44.16 - 77.75
- ---------------------------------------------------------------------
Stock options, rights and awards
outstanding, December 31, 1993 9,526,595 17.00 - 76.98
Stock options and rights:
Granted 1,611,205 63.25 - 80.50
Exercised (1,129,564) 17.00 - 73.69
Cancelled (406,203) 17.00 - 73.69
Stock awards:
Granted 38,110 62.94 - 80.19
Delivered (61,001) 44.16 - 76.38
Cancelled (6,860) 54.47 - 75.81
- ---------------------------------------------------------------------
Stock options, rights and awards
outstanding, December 31, 1994 9,572,282 18.03 - 80.50
- ---------------------------------------------------------------------
Stock options and rights
exercisable, December 31, 1994 4,293,736 $18.03 - $76.38
- ---------------------------------------------------------------------
Shares available for annual grants at:
December 31, 1993 5,913,951
December 31, 1994 7,040,375
- ------------------------------------------------
Note 18 - Contingencies:
Various claims, suits and complaints, such as those involving
government regulations, patents and trademarks and product liability,
arise in the ordinary course of Warner-Lambert's business. In the
opinion of Warner-Lambert, all such pending matters are without merit
or are of such kind, or involve such amounts, as would not have a
material adverse effect on the consolidated financial position,
liquidity, cash flow or results of operations for any year.
Note 19 - Environmental Liabilities:
The company is involved in various environmental matters including
actions initiated by the Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act
(i.e., CERCLA or Superfund legislation and similar legislation),
various state environmental organizations and other parties. The
company is presently remediating environmental problems at certain
sites, including sites previously owned.
The company accrues costs for estimated environmental liabilities
when management becomes aware that a liability exists and is able to
reasonably estimate the amount, generally no later than the completion
of studies to determine the feasibility and cost of remedial
techniques. Outside consultants are generally used to assess the
costs of remediation. For most sites, there are other potentially
responsible parties (PRPs); for these sites, all PRPs may be jointly
and severally liable to pay all cleanup costs. In developing the
accrual, the company considers the extent to which other PRPs can be
expected to contribute. Accruals are established based on current
technology and are not discounted.
Some portion of the liabilities associated with the company's
environmental actions may be covered by insurance. The company is
currently in litigation with respect to the scope and extent of
liability coverage from certain insurance companies; however,
recoveries will not be recorded as income until there is assurance
that recoveries are forthcoming.
In management's opinion, the liabilities for all matters mentioned
above which are probable and reasonably estimable are adequately
accrued for. Management believes that the amount accrued for
environmental liabilities is not material and that it is remote that
costs significantly in excess of such accrual will be incurred. While
it is not possible to predict with certainty the outcome of the
matters described above or the ultimate costs of remediation,
management believes it is unlikely that their ultimate disposition
will have a material adverse effect on the company's consolidated
financial position, liquidity, cash flow or results of operations for
any year.
Note 20 - Segment Information:
Financial information by industry segment and geographic area for
1994, 1993 and 1992 is presented on page 33 of this report under the
caption "Segment Information."
Industry segments are comprised as follows: Consumer Health Care -
consisting of OTC products, razors and blades, pet care products and
the Novon Products Group which was discontinued in 1993, see Note 3;
Confectionery - consisting of chewing gums, breath mints and, until
disposition in the fourth quarter of 1993, chocolate/caramel brands,
see Note 3; Pharmaceutical - consisting of ethical pharmaceuticals,
biologicals and empty hard-gelatin capsules.
Note 21 - Quarterly Financial Information - Unaudited:
- -----------------------------------------------------------------------------------------------
1994 Quarters 1993 Quarters
- -----------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
- -----------------------------------------------------------------------------------------------
Net sales $1,472.9 $1,552.2 $1,671.0 $1,720.7 $1,331.7 $1,449.7 $1,478.5 $1,533.8
Gross profit 993.9 1,042.9 1,101.6 1,123.3 920.8 977.8 980.2 996.8
Income (loss)
before accounting
changes 190.4 196.7 169.2 137.7 136.1 189.9 155.9 (196.9)
Net income (loss) 190.4 196.7 169.2 137.7 182.1 189.9 155.9 (196.9)
Per common share:
Income (loss)
before accounting
changes 1.42 1.47 1.26 1.02 1.01 1.40 1.16 (1.46)
Net income (loss) 1.42 1.47 1.26 1.02 1.35 1.40 1.16 (1.46)
- -----------------------------------------------------------------------------------------------
First quarter 1993 results included a pretax restructuring charge of $70.0 or $45.0 after tax
for the disposition of the Novon Products Group as discussed in Note 3, a charge of $17.0 after
tax or $.13 per share to adopt SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," and a credit of $63.0 or $.47 per share for the adoption of SFAS No. 109,
"Accounting for Income Taxes." The third quarter 1993 effective tax rate was 19.6 percent
compared with 23.3 percent for the first half of 1993 due to the retroactive extension of the
research tax credit enacted in August 1993. Fourth quarter 1993 results included a net pretax
restructuring charge of $455.2 or $315.4 after tax, see Note 3.
Report by Management
The management of Warner-Lambert Company has prepared the accompanying
consolidated financial statements and related information in
conformity with generally accepted accounting principles and is
responsible for the information and representations in such financial
statements, including estimates and judgments required for their
preparation. Price Waterhouse LLP, independent accountants, has
audited the consolidated financial statements and their report appears
herein.
In order to meet its responsibilities, management maintains a system
of internal controls designed to provide reasonable assurance that
assets are safeguarded and that financial records properly reflect all
transactions. The internal control system is augmented by an ongoing
internal audit program, an organizational structure that provides for
appropriate division of responsibility and communication programs that
explain the company's policies and standards.
The Audit Committee of the Board of Directors, composed entirely of
nonemployee directors, meets periodically with the independent
accountants, management and internal auditors to review auditing,
internal accounting controls and other financial reporting matters.
Both the independent accountants and internal auditors have full
access to the Audit Committee.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the company's affairs are conducted according
to the highest standards of personal and corporate conduct. This
responsibility is characterized and reflected in the company's Creed,
which summarizes Warner-Lambert's commitment to its customers,
colleagues, shareholders, business partners and society.
Report of Independent Accountants
PRICE WATERHOUSE LLP
To the Board of Directors and Shareholders of Warner-Lambert Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of
cash flows present fairly, in all material respects, the financial
position of Warner-Lambert Company and its subsidiaries at December
31, 1994 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for the opinion expressed above.
As discussed in Notes 13 and 15 to the financial statements, effective
January 1, 1993 the company changed its accounting for postemployment
benefits and income taxes.
Price Waterhouse LLP
- --------------------
4 Headquarters Plaza North
Morristown, New Jersey
January 23, 1995