Warner-Lambert Company and Subsidiaries
Five-year Summary of Selected Financial Data
- ------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
RESULTS FOR YEAR:
Net sales $8,180 $7,231 $7,040 $6,417 $5,794
Cost of goods sold 2,408 2,347 2,428 2,155 1,918
Research and development
expense 672 555 501 456 465
Income before income taxes,
minority interests and
accounting changes 1,233 1,177 1,149 1,005 318 (a)
Income before accounting
changes 870 787 740 694 285 (a)
Net income 870 787 740 694 331 (a,b)
Net income per common share - basic:
Income before accounting
changes 3.20 2.90 2.74 2.59 1.06 (a)
Net income 3.20 2.90 2.74 2.59 1.23 (a,b)
Net income per common share - diluted:
Income before accounting
changes 3.11 2.85 2.71 2.57 1.05 (a)
Net income 3.11 2.85 2.71 2.57 1.22 (a,b)
- ------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current assets $3,297 $2,785 $2,778 $2,515 $2,219
Current liabilities 2,589 2,137 2,425 2,353 2,016
Working capital 708 648 353 162 203
Property, plant and
equipment 2,427 2,168 2,006 1,846 1,599
Total assets 8,031 7,197 6,101 5,533 4,828
Long-term debt 1,831 1,720 634 535 546
Total debt 2,203 2,300 1,529 1,460 1,199
Shareholders' equity 2,836 2,581 2,246 1,816 1,390
- ------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION:
Average number of common
shares outstanding
(in millions) 271.7 271.2 270.0 268.2 270.0
Common stock price per share:
High $152 5/8 $ 80 $ 49 $43 3/8 $38 3/16
Low 69 1/2 44 5/8 36 11/16 30 29 7/8
Year-end 124 3/16 75 48 9/16 38 1/2 33 3/4
Book value per common share 10.42 9.52 8.28 6.75 5.18
Cash dividends per
common share 1.52 1.38 1.30 1.22 1.14
- ------------------------------------------------------------------------------------------
OTHER DATA:
Number of employees
(in thousands) 40 38 37 36 35
Capital expenditures $495 $389 $387 $406 $347
Cash dividends paid 413 374 351 327 308
Depreciation and amortization 275 231 202 181 170
- ------------------------------------------------------------------------------------------
(a) Includes a net restructuring charge of $525 pretax ($360 after tax or $1.34
per share).
(b) Includes a credit of $63 or $.23 per share for the adoption of SFAS No.
109, "Accounting for Income Taxes" and a charge of $17 after tax or $.06
per share to adopt SFAS No. 112, "Employers' Accounting for Postemployment
Benefits."
32
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Income
- ---------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(Dollars in millions,
except per share amounts)
Net sales $8,179.8 $7,231.4 $7,039.8
- ---------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 2,407.6 2,346.9 2,427.5
Selling, general and
administrative 3,676.3 3,115.8 2,979.8
Research and development 672.2 554.8 501.2
Other expense (income), net 190.3 37.2 (17.3)
- ---------------------------------------------------------------------
Total costs and expenses 6,946.4 6,054.7 5,891.2
- ---------------------------------------------------------------------
Income before income taxes and
minority interests 1,233.4 1,176.7 1,148.6
Provision for income taxes 363.9 321.2 279.1
Minority interests - 69.0 130.0
- ---------------------------------------------------------------------
Net income $ 869.5 $ 786.5 $ 739.5
- ---------------------------------------------------------------------
Net income per common share:
Basic $ 3.20 $ 2.90 $ 2.74
Diluted $ 3.11 $ 2.85 $ 2.71
- ---------------------------------------------------------------------
Consolidated Statements of Retained Earnings
- ---------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(Dollars in millions,
except per share amounts)
Retained earnings at beginning
of year $3,436.2 $3,042.9 $2,654.5
Net income 869.5 786.5 739.5
Cash dividends paid
on common shares (413.1) (374.4) (351.1)
International operations year-
end change (Note 1) - (18.8) -
- ---------------------------------------------------------------------
Retained earnings at end of year $3,892.6 $3,436.2 $3,042.9
- ---------------------------------------------------------------------
Cash dividends per common share $ 1.52 $ 1.38 $ 1.30
- ---------------------------------------------------------------------
See notes to consolidated financial statements.
33
Warner-Lambert Company and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
(Dollars in millions)
Assets:
Cash and cash equivalents $ 756.5 $ 390.8
Short-term investments 16.7 101.5
Accounts receivable, less allowances of
$34.5 in 1997 and $36.6 in 1996 1,160.2 1,148.7
Other receivables 210.3 155.2
Inventories 742.9 647.0
Prepaid expenses and other current assets 410.4 341.6
- ---------------------------------------------------------------------
Total current assets 3,297.0 2,784.8
Investments and other assets 593.8 788.7
Property, plant and equipment 2,427.0 2,168.0
Intangible assets 1,712.7 1,455.8
- ---------------------------------------------------------------------
$ 8,030.5 $ 7,197.3
- ---------------------------------------------------------------------
Liabilities and shareholders' equity:
Short-term debt $ 372.1 $ 579.2
Accounts payable, trade 890.6 613.0
Accrued compensation 186.6 170.3
Other current liabilities 894.0 614.6
Federal, state and foreign income taxes 245.6 159.8
- ---------------------------------------------------------------------
Total current liabilities 2,588.9 2,136.9
Long-term debt 1,831.2 1,720.5
Deferred income taxes 172.7 143.5
Other noncurrent liabilities 602.2 615.4
Shareholders' equity:
Preferred stock - none issued - -
Common stock issued:
1997 and 1996 - 320,660,536 shares 320.7 320.7
Capital in excess of par value 216.7 125.8
Retained earnings 3,892.6 3,436.2
Cumulative translation adjustments (430.0) (236.2)
Treasury stock, at cost:
1997 - 48,436,529 shares;
1996 - 49,456,251 shares (1,164.5) (1,065.5)
- ---------------------------------------------------------------------
Total shareholders' equity 2,835.5 2,581.0
- ---------------------------------------------------------------------
$ 8,030.5 $ 7,197.3
- ---------------------------------------------------------------------
See notes to consolidated financial statements.
34
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in millions)
Operating Activities:
Net income $ 869.5 $ 786.5 $ 739.5
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 275.5 230.8 201.9
Gains on sales of businesses - (75.2) (117.0)
Minority interests - 69.0 130.0
Deferred income taxes (27.6) 70.7 91.5
Changes in assets and liabilities,
net of effects from acquisitions/
dispositions of businesses:
Receivables (121.3) (211.3) (171.9)
Inventories (110.1) (23.9) (20.0)
Accounts payable and accrued
liabilities 660.6 108.4 (23.1)
Other, net 17.2 67.3 (31.7)
- ---------------------------------------------------------------------------------
Net cash provided by operating
activities 1,563.8 1,022.3 799.2
- ---------------------------------------------------------------------------------
Investing Activities:
Purchases of investments (17.2) (217.1) (438.5)
Proceeds from maturities/sales of
investments 112.5 500.4 340.8
Capital expenditures (494.8) (389.0) (387.3)
Acquisitions of businesses (229.0) (1,064.8) (34.3)
Proceeds from dispositions of businesses - 137.4 136.1
Other, net (16.8) (80.4) 15.6
- ---------------------------------------------------------------------------------
Net cash used by investing activities (645.3) (1,113.5) (367.6)
- ---------------------------------------------------------------------------------
Financing Activities:
Proceeds from borrowings 1,564.7 2,165.2 1,828.6
Principal payments on borrowings (1,609.4) (1,422.7) (1,766.6)
Purchases of treasury stock (135.2) (138.9) (17.6)
Cash dividends paid (413.1) (374.4) (351.1)
Distributions paid to minority interests - (102.4) (96.5)
Proceeds from stock option exercises 71.9 64.1 61.2
- ---------------------------------------------------------------------------------
Net cash (used) provided by
financing activities (521.1) 190.9 (342.0)
- ---------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (31.7) (4.7) (11.7)
- ---------------------------------------------------------------------------------
Net increase in cash and cash equivalents 365.7 95.0 77.9
Cash and cash equivalents at beginning
of year 390.8 295.8 217.9
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 756.5 $ 390.8 $ 295.8
- ---------------------------------------------------------------------------------
See notes to consolidated financial statements.
35
Notes to Consolidated Financial Statements
Warner-Lambert Company and Subsidiaries
(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"). Investments in companies in
which Warner-Lambert's interest is between 20 percent and 50 percent are
accounted for using the equity method.
Effective January 1, 1996, the company's international operations that
previously reported financial results on a fiscal-year basis ending November 30
changed to a calendar-year basis ending December 31. The change was made
primarily to reflect the results of these operations on a more timely basis. The
results of operations for international subsidiaries for the month of December
1995 are included as a charge of $18.8 against retained earnings.
Reclassification - Certain prior year amounts have been reclassified to conform
with the current year presentation.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect certain reported amounts. Actual amounts could
differ from those estimates.
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. The
company continually reviews goodwill and other intangible assets to evaluate
whether events or changes have occurred that would suggest an impairment of
carrying value. An impairment would be recognized when expected future operating
cash flows are lower than the carrying value.
Advertising costs - Advertising costs are expensed as incurred and amounted to
$819.8 in 1997, $670.6 in 1996 and $644.0 in 1995.
Newly issued accounting standards - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting the components of comprehensive income and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which replaces
existing segment disclosure requirements and requires reporting certain
financial information regarding operating segments on the basis used internally
by management to evaluate segment performance. The company will adopt SFAS Nos.
130 and 131 in the first quarter of 1998 and year-end 1998, respectively. These
Statements will affect disclosure and presentation in the financial statements
but will have no impact on the company's consolidated financial position,
liquidity, cash flows or results of operations.
Note 2 - Net Income Per Common Share:
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," (EPS)
which requires dual presentation of basic and diluted EPS for all periods. Basic
EPS is computed by dividing net income by the average number of common shares
outstanding for the period. The diluted EPS computation includes the potential
impact on the average number of common shares outstanding if all common stock
options issued are exercised. The dilutive effect of stock options is computed
using the treasury stock method which assumes the repurchase of common shares by
the company at the average market price for the period. The Statement was
effective December 31, 1997.
36
The EPS computations were as follows:
(Shares in thousands)
- ---------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------
Basic EPS:
Net income $869.5 $786.5 $739.5
Average common shares outstanding 271,729 271,220 270,043
- ---------------------------------------------------------------------
$3.20 $2.90 $2.74
- ---------------------------------------------------------------------
Diluted EPS:
Net income $869.5 $786.5 $739.5
Average common shares outstanding 271,729 271,220 270,043
Impact of potential future stock
option exercises, net of shares
repurchased 8,001 4,474 2,572
- ---------------------------------------------------------------------
Average common shares outstanding -
assuming dilution 279,730 275,694 272,615
- ---------------------------------------------------------------------
$3.11 $2.85 $2.71
- ---------------------------------------------------------------------
Note 3 - Interest Income and Interest Expense:
Interest income and interest expense are included in Other expense (income),
net. Interest income totaled $41.7, $54.8 and $49.7 and interest expense totaled
$167.0, $145.9 and $122.7 in 1997, 1996 and 1995, respectively. Total interest
paid was $151.9, $140.7 and $112.8 and interest costs of $8.3, $9.6 and $10.1
have been capitalized and included in Property, plant and equipment for those
respective periods.
Note 4 - Acquisitions and Divestitures:
On May 21, 1997, Warner-Lambert Company purchased the remaining 66 percent of
the Jouveinal group it did not already own. In January 1993, Warner-Lambert
initially acquired a 34 percent interest in Jouveinal, a privately held French
pharmaceutical group. Prior to the acquisition of the remaining interest,
Jouveinal was accounted for as an equity method investment. Other smaller
acquisitions were also completed during the second quarter of 1997, the effects
of which were not material. Total consideration, including estimated acquisition
costs, net of cash acquired and proceeds from the sale of certain acquired
assets, was approximately $235.0 for these acquisitions. The transactions were
financed with a long-term credit facility.
In 1996, Warner-Lambert purchased Glaxo Wellcome plc's minority interest in the
Warner Wellcome joint venture operations. The transaction was completed in the
second half of the year. Total consideration for the acquisition including
estimated acquisition costs, was approximately $1.1 billion. The transaction was
financed with commercial paper. Warner-Lambert entered into an agreement in
December 1993 with Wellcome plc to establish this joint venture with operations
in various countries to develop and market a broad range of over-the-counter
(OTC) products. The joint venture commenced operations in 1994. Glaxo plc
acquired Wellcome plc in 1995 and changed the name of the combined company to
Glaxo Wellcome plc.
In April 1995, Warner-Lambert acquired Adams S.A., a privately held manufacturer
of confectionery products in Argentina for cash consideration, net of cash
acquired, of $34.3.
All acquisitions have been accounted for under the purchase method. The excess
of purchase price over the estimated fair values of net tangible and
identifiable intangible assets acquired has been treated as goodwill. Net assets
and results of operations of all acquisitions, except Warner Wellcome, have been
included in the consolidated financial statements since the effective
acquisition dates. Financial results of Warner Wellcome were consolidated prior
to acquisition of the minority interest. The acquisitions did not have a
material pro forma impact on consolidated earnings.
In the first quarter 1996, Warner-Lambert sold Warner Chilcott Laboratories, its
generic pharmaceutical business. Net proceeds were $137.4. The sale resulted in
a pretax gain of $75.2, which is included in Other expense (income), net for the
year ended December 31, 1996. On an after-tax basis, the gain was $45.7 or $.17
per share.
In the third quarter 1995, the company sold its PRO toothbrush business. Net
proceeds were $136.1 resulting in a pretax gain of $117.0, which is included in
Other expense (income), net for the year ended December 31, 1995. On an
after-tax basis, the gain was $82.4 or $.31 per share.
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 in Latin America. Net aggregate exchange (gains) losses resulting
from foreign currency transactions and translation adjustments related to
subsidiaries operating in highly inflationary countries amounted to $(18.2),
$7.6 and $14.3 in 1997, 1996 and 1995, respectively. The cumulative translation
adjustments component of shareholders' equity was charged with $193.8, $19.9 and
$35.3 in 1997, 1996 and 1995, respectively. The increase in the 1997
37
charge was due to the strengthening of the U.S. dollar versus several
international currencies during the year.
Note 6 - Inventories:
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
Raw materials $167.7 $130.9
Finishing supplies 53.1 52.0
Work in process 95.6 69.2
Finished goods 426.5 394.9
- ---------------------------------------------------------------------
$742.9 $647.0
- ---------------------------------------------------------------------
Note 7 - Property, Plant and Equipment:
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
Land $ 38.6 $ 39.6
Buildings 1,245.7 1,187.4
Machinery, furniture and fixtures 2,684.6 2,430.6
- ---------------------------------------------------------------------
3,968.9 3,657.6
Less accumulated depreciation (1,541.9) (1,489.6)
- ---------------------------------------------------------------------
$ 2,427.0 $2,168.0
- ---------------------------------------------------------------------
Depreciation expense totaled $218.8, $199.1 and $186.3 in 1997, 1996 and 1995,
respectively.
Note 8 - Intangible Assets:
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
Goodwill $1,267.5 $1,001.6
Trademarks and other intangibles 602.3 564.1
- --------------------------------------------------------------------
1,869.8 1,565.7
Less accumulated amortization (157.1) (109.9)
- ---------------------------------------------------------------------
$1,712.7 $1,455.8
- ---------------------------------------------------------------------
The increase in the intangible assets balance was primarily related to the
Jouveinal acquisition discussed in Note 4.
Amortization expense totaled $56.7, $31.7 and $15.6 in 1997, 1996 and 1995,
respectively.
Note 9 - Debt:
The components of Short-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
Commercial paper $ - $172.8
Notes payable 209.7 401.0
Current portion of long-term debt 162.4 5.4
- ---------------------------------------------------------------------
$372.1 $579.2
- ---------------------------------------------------------------------
The weighted-average interest rate, excluding the current portion of long-term
debt, was 6.2 percent and 6.6 percent for commercial paper and notes payable
outstanding at December 31, 1997 and 1996, respectively. The company has
lines-of-credit arrangements with numerous banks with interest rates generally
equal to the best prevailing rate. At December 31, 1997, worldwide unused lines
of credit amounted to $2.4 billion. The 1997 current portion of long-term debt
includes $150.0 notes due 1998. During 1997, the company paid the short-term
portion of commercial paper borrowings and reclassified a $200.0 note payable to
long-term.
The components of Long-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
Commercial paper $ 990.0 $1,250.5
Variable rate term loan 354.7 -
Variable rate master note 200.0 -
6 5/8% notes due 2002 199.7 199.7
8% notes due 1998 - 150.0
7.6% industrial revenue bonds due 2014 24.6 24.6
Other 62.2 95.7
- ---------------------------------------------------------------------
$1,831.2 $1,720.5
- ---------------------------------------------------------------------
At December 31, 1997, all commercial paper and the master note have been
classified as long-term debt due to the company's intent and ability to
refinance on a long-term basis. These instruments are supported by lines of
credit. At December 31, 1997, the weighted-average interest rate was 5.8 percent
for commercial paper outstanding. The interest rate on the master note at
December 31, 1997 was 5.7 percent.
The variable rate term loan has an annual interest rate based on local interbank
rates plus a margin. The weighted-average interest rate at December 31, 1997 was
4.4 percent. A portion of the loan matures in 2001 with the balance due in 2002.
The aggregate annual maturities of long-term debt at December 31, 1997, payable
in each of the years 1999 through 2002, excluding short-term borrowings
reclassified to long-term are $24.2, $12.3, $64.5 and $503.8, respectively.
As of December 31, 1997, the company had shelf registrations filed with the
Securities and Exchange Commission under which it could issue up to $850.0 of
debt securities for general corporate purposes. In January 1998, the company
refinanced certain other debt by issuing $250.0 of 5 3/4 percent notes due 2003
and $250.0 of 6 percent notes due 2008 leaving $350.0 of debt registered under
the shelf registration.
38
Note 10 - Financial Instruments:
The estimated fair values of financial instruments were as follows:
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
( ) = Liability Amount Value Amount Value
- ---------------------------------------------------------------------
Investment securities $ 168.3 $ 168.7 $ 247.0 $ 246.8
Long-term debt (1,831.2) (1,836.9) (1,720.5) (1,727.4)
Foreign exchange
contracts (.7) 12.5 - 17.4
- ---------------------------------------------------------------------
Investment securities and Long-term debt were valued at quoted market prices for
similar instruments. The fair values of the remaining financial instruments in
the preceding 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 investment securities were reported in the following balance sheet
categories:
- -------------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------------
Cash and cash equivalents $ 28.8 $ 10.1
Short-term investments 16.0 99.9
Investments and other assets 123.5 137.0
- -------------------------------------------------------------------
$168.3 $247.0
- -------------------------------------------------------------------
The investment securities portfolio was primarily comprised of negotiable
certificates of deposit, Puerto Rico government bonds, guaranteed collateralized
mortgage obligations and Ginnie Mae certificates as of year-end 1997 and 1996.
These securities are classified as "held-to-maturity." Equity securities,
categorized as "available-for-sale," were immaterial.
As of December 31, 1997, the long-term investments of $123.5 included $18.1 of
interest-bearing, mortgage-backed securities maturing beyond 10 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 pharmaceutical, consumer health care and
confectionery businesses worldwide. The company's products are distributed to
wholesalers and directly or indirectly to pharmacies, chain food stores, mass
merchandisers, smaller independent retailers, hospitals, government agencies,
health maintenance organizations and other managed care entities. 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's interest-bearing investments are
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. The
company 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
risks.
The company's foreign exchange risk management objectives are to stabilize cash
flows and reported income from the effect of foreign currency fluctuations and
reduce the overall foreign exchange exposure to insignificant levels. 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,
intercompany lending, net investments in foreign subsidiaries and anticipated
net income of foreign affiliates. The company continually monitors its exposures
and enters into foreign exchange contracts for periods of up to two years to
hedge such exposures.
At December 31, 1997 and 1996, the company had forward or purchased option
foreign exchange contracts with contractual amounts of $514.2 and $375.2,
respectively. These contracts principally exchange Japanese yen, German marks,
British pounds and French francs for U.S. dollars; Canadian dollars for Italian
lira and British pounds; and U.S. dollars for Irish punts in 1997; and Japanese
yen, British pounds, German marks and French francs for U.S. dollars; and
Canadian dollars for Italian lira and British pounds in 1996.
The company's interest rate risk management objectives are to manage the
interest cost of debt by using a mix of long-term fixed rate and short-term
variable rate instruments and entering into certain interest rate swap
agreements. Interest rate swap agreements were not material during 1997 or 1996.
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.
Gains and losses related to derivatives designated as effective hedges of firm
commitments are deferred and recognized in income as part of, and concurrent
with, the underlying hedged transaction. Other derivative instruments, which are
primarily related to hedging foreign currency denominated assets and liabilities
and anticipated net income of foreign subsidiaries, are
39
marked to market on a current basis with gains and losses recognized in Other
expense (income), net. 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 expense amounted to
$92.1, $82.6 and $80.8 in 1997, 1996 and 1995, respectively.
The future minimum rental commitments under noncancellable capital and operating
leases at December 31, 1997 are summarized below:
- ---------------------------------------------------------------------
Capital Operating
- ---------------------------------------------------------------------
1998 $ 3.5 $ 53.1
1999 15.5 35.9
2000 2.1 19.4
2001 3.5 12.7
2002 1.4 12.9
Remaining years 6.2 112.9
- --------------------------------------------------------------------
Total minimum lease payments 32.2 246.9
Less minimum sublease income - (30.2)
------------------------
Net minimum lease payments 32.2 $216.7
-------------------------
Less amount representing interest (6.5)
- -----------------------------------------------------
Present value of minimum lease payments $25.7
- -----------------------------------------------------
Property, plant and equipment included capitalized leases of $30.2, less
accumulated depreciation of $3.5, at December 31, 1997 and $33.5, less
accumulated depreciation of $3.5, at December 31, 1996. Long-term debt included
capitalized lease obligations of $24.2 and $27.1 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.
The plans' funded status at December 31 was as follows:
- ----------------------------------------------------------------------
Plans in Which
Plans in Accumulated
Which Assets Exceed Benefits
Accumulated Benefits Exceed Assets
- ----------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------
Plan assets at fair value $2,280.0 $2,044.6 $ 22.6 $ 23.8
(primarily invested in
equities and bonds)
- ----------------------------------------------------------------------
Actuarial present value of
accumulated benefit
obligation:
Vested 1,914.8 1,792.8 118.3 107.4
Nonvested 43.3 40.6 18.2 12.6
- ----------------------------------------------------------------------
1,958.1 1,833.4 136.5 120.0
Estimated future
salary increases 177.1 172.9 26.7 29.1
- ----------------------------------------------------------------------
Projected benefit
obligation 2,135.2 2,006.3 163.2 149.1
- ----------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 144.8 38.3 (140.6) (125.3)
Unrecognized net
(asset) obligation (4.0) (4.7) 3.3 4.0
Unrecognized prior
service cost 38.4 43.9 .6 .7
Unrecognized net
actuarial (gain) loss (8.0) 67.2 36.5 27.5
Minimum liability
adjustment - - (18.3) (12.5)
- ----------------------------------------------------------------------
Net pension asset
(liability) included
in the Consolidated
Balance Sheets $ 171.2 $ 144.7 $(118.5) $(105.6)
- ----------------------------------------------------------------------
40
Foreign plan assets at fair value included in the preceding table were $760.0 in
1997 and $707.3 in 1996. The foreign plan projected benefit obligation was
$710.6 in 1997 and $690.9 in 1996.
The assumptions for the U.S. plans included a 10.5 percent expected long-term
rate of return on plan assets and an expected 4.0 percent increase in salary
levels for each of the years ended December 31, 1997, 1996 and 1995. The
weighted-average discount rate was 7.75 percent, 8.0 percent and 7.75 percent
for 1997, 1996 and 1995, respectively. Assumptions for foreign plans did not
vary significantly from the U.S. plans.
Pension costs for the plans included the following components:
- ----------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
Service cost - benefits earned
during the year $ 54.4 $ 53.8 $ 49.3
Interest cost on projected
benefit obligation 156.0 153.3 144.4
Return on assets (319.7) (237.9) (276.7)
Net amortization and deferral 155.4 84.2 108.8
- ----------------------------------------------------------------------
Net pension expense $ 46.1 $ 53.4 $ 25.8
- ----------------------------------------------------------------------
Net pension expense attributable to foreign plans included in the above was
$14.8, $17.5 and $22.2 in 1997, 1996 and 1995, respectively.
Note 13 - Other Postretirement Benefits:
The company provides other postretirement benefits, primarily health insurance,
to qualifying domestic retirees and their dependents. The company is generally
self-insured for these costs and the plans are funded on a pay-as-you-go basis.
These plans are currently noncontributory for domestic employees who retired
prior to January 1, 1992 and the company has implemented a cap which limits
future contributions for medical and dental coverage under these plans.
Effective January 1, 1998 the company expanded the health insurance program
to include all domestic employees who have retired after December 31, 1991
and their dependents, and future retirees meeting minimum age and service
requirements. These benefits are contributory, and also contain provisions
that limit future company cost. This amendment increased the accumulated
postretirement benefit obligation by $88.8 as of December 31, 1997. This
amount will be amortized to expense over the average remaining employee service
period of six years to reach eligibility beginning in 1998.
The net periodic postretirement benefit cost for domestic retirees amounted to
$17.5, $17.0 and $17.4 in 1997, 1996 and 1995, 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, 1997 1996
- ------------------------------------------------------------------
Accumulated postretirement benefit
obligation $273.1 $186.0
Unrecognized prior service cost (96.5) (8.3)
Unrecognized net actuarial loss (51.6) (50.4)
- ------------------------------------------------------------------
Accrued postretirement benefit cost
recognized in the Consolidated
Balance Sheets $125.0 $127.3
- ------------------------------------------------------------------
The weighted-average discount rate used to develop the accumulated
postretirement benefit obligation was 7.75 percent, 8.0 percent and 7.75 percent
for 1997, 1996 and 1995, respectively. As a result of the amendment discussed
above, separate assumed health care cost trend rates were used. For those
employees retiring before January 1, 1992, the assumed health care cost trend
rate was 9.8 percent in 1997 declining to 5.5 percent over eight years for
retirees under age 65. For those 65 and over, a rate of 6.3 percent was used in
1997 declining to 5.5 percent over three years. For those employees retiring
after December 31, 1991, rates of either 9.5 percent or 7.0 percent were used in
1997 depending on coverage option, with both rates declining to 5.0 percent over
seven years. A one percentage point increase in the health care cost trend rates
in each year would increase the accumulated postretirement benefit obligation as
of December 31, 1997 by $13.1 and the net periodic postretirement benefit cost
for 1997 by $.6.
Other postretirement benefits for foreign plans expensed under the cash method
in 1997, 1996 and 1995 were not material.
41
Note 14 - Income Taxes:
The components of income before income taxes and minority interests were:
- ---------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
U.S. and Puerto Rico $ 560.5 $ 515.1 $ 485.6
Foreign 672.9 661.6 663.0
- ---------------------------------------------------------------------
$1,233.4 $1,176.7 $1,148.6
- ---------------------------------------------------------------------
The Provision for income taxes consisted of:
- ---------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
Current:
Federal $132.9 $ 39.2 $ 17.6
Foreign 226.6 194.1 163.5
State and Puerto Rico 32.0 17.2 6.5
- ---------------------------------------------------------------------
391.5 250.5 187.6
- ---------------------------------------------------------------------
Deferred:
Federal (26.7) 25.8 30.5
Foreign (1.9) 39.5 55.3
State and Puerto Rico 1.0 5.4 5.7
- ---------------------------------------------------------------------
(27.6) 70.7 91.5
- ---------------------------------------------------------------------
Provision for income taxes $363.9 $321.2 $279.1
- ---------------------------------------------------------------------
The tax effects of significant temporary differences which comprise the deferred
tax assets and liabilities were as follows:
- ----------------------------------------------------------------------
December 31, 1997 1996
- ----------------------------------------------------------------------
Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------
Restructuring reserves $ 62.4 $ - $ 82.3 $ -
Compensation/benefits 103.4 - 80.5 -
Postretirement/post-
employment obligations 60.3 - 60.2 -
Inventory 42.2 10.8 31.2 10.0
Foreign tax loss and
other carryforwards 42.2 - 27.4 -
Research tax credit
carryforwards 30.2 - 25.3 -
Pensions 14.2 61.0 12.5 54.4
Property, plant and
equipment 30.3 200.0 11.9 193.6
Intangibles - 80.0 - 37.4
Other 158.5 60.4 138.1 56.6
- ---------------------------------------------------------------------
543.7 412.2 469.4 352.0
Valuation allowances (28.9) - (28.8) -
- ---------------------------------------------------------------------
$514.8 $412.2 $440.6 $352.0
- ---------------------------------------------------------------------
The research tax credit carryforwards of $30.2 expire in 2010, 2011 and 2012.
Income taxes of $246.5, $205.1 and $173.6 were paid during 1997, 1996 and 1995,
respectively. Prepaid expenses and other current assets included deferred income
taxes of $206.4 and $154.4 at December 31, 1997 and 1996, respectively.
Investments and other assets included deferred income taxes of $99.8 and $94.2
at December 31, 1997 and 1996, respectively.
The earnings of Warner-Lambert's operations in Puerto Rico are subject to tax
pursuant to a grant, effective through September 2011. The grant provides for
certain tax relief if certain conditions are met. The company continued to be in
compliance with these conditions at December 31, 1997.
42
Earnings of foreign subsidiaries considered to be reinvested for an indefinite
period at December 31, 1997 were approximately $1.3 billion. 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
earnings.
The Provision for income taxes in 1997 was reduced by 1.4 percentage points due
to the favorable tax impact of the liquidation of a foreign affiliate.
As of December 31, 1997, Warner-Lambert's U.S. federal income tax returns
through 1992 have been examined and settled with the Internal Revenue Service.
The company's effective income tax rate differed from the U.S.
statutory tax rate as follows:
- ---------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 35.0%
Tax exemption for Puerto Rico operations (3.3) (6.2) (4.6)
Foreign income subject to increased
(reduced) tax rates including
taxes on repatriation .9 .5 (1.9)
U.S. research tax credit, net (1.2) (.6) (.5)
State and local taxes, net 1.0 1.0 .7
Other items, net (2.9) (.7) (1.3)
Effect of minority interests - (1.7) (3.1)
- ---------------------------------------------------------------------
Effective tax rate 29.5% 27.3% 24.3%
- ---------------------------------------------------------------------
Note 15 - Shareholders' Equity:
The authorized preferred stock of Warner-Lambert is 5 million shares with a par
value of $1.00 per share, of which there are no shares issued.
Common stock issued was $320.7, $320.7 and $160.3 at December 31, 1997, 1996 and
1995, respectively. On April 23, 1996, the shareholders approved an increase in
the number of shares authorized from 300 million to 500 million in order to
effectuate a two-for-one stock split effective May 3, 1996.
Changes in certain components of shareholders' equity are summarized as follows:
- ---------------------------------------------------------------------
Treasury Stock
Capital in ----------------------
Excess of Shares in
Par Value Thousands Cost
- ---------------------------------------------------------------------
Balance at December 31, 1994 $ 152.2 (25,735) $ (969.6)
Shares repurchased, at cost - (229) (17.6)
Employee benefit plans 54.1 1,233 28.9
Unrealized market value
adjustments on equity securities 11.2 - -
- ---------------------------------------------------------------------
Balance at December 31, 1995 217.5 (24,731) (958.3)
Two-for-one stock split (160.3) (24,731) -
Shares repurchased, at cost - (2,423) (138.9)
Employee benefit plans 64.8 2,429 31.7
Unrealized market value
adjustments on equity securities 3.8 - -
- ---------------------------------------------------------------------
Balance at December 31, 1996 125.8 (49,456) (1,065.5)
Shares repurchased, at cost - (1,436) (135.2)
Employee benefit plans 101.9 2,455 36.2
Unrealized market value
adjustments on equity securities (11.0) - -
- ---------------------------------------------------------------------
Balance at December 31, 1997 $ 216.7 (48,437) $(1,164.5)
- ---------------------------------------------------------------------
Pursuant to the company's Stockholder Rights Plan, as amended March 25, 1997, a
right is attached to each outstanding share of common stock. In the event that
any person or group acquires 15 percent or more of the outstanding common
shares, or acquires the company in a merger or other business combination, 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 March 25, 2007 and can be redeemed for $.01 per right by the Board of
Directors prior to the time the rights become exercisable.
43
Note 16 - Stock Options and Awards:
Warner-Lambert has stock awards outstanding at December 31, 1997 granted under
various stock plans. Future grants may be issued under the 1996 Stock Plan which
became effective January 1, 1997. The 1996 Stock Plan provides for the granting
of stock awards to employees in the form of options to purchase shares of common
stock at a price equal to fair market value on the date of the grant, restricted
stock and performance awards. Options generally become exercisable in
installments of 25 percent per year on each of the first through the fourth
anniversaries of the grant date and have a maximum term of 10 years. Restricted
stock granted to employees is delivered upon the expiration of restricted
periods established at the time of grant. Performance awards, which are also
subject to restricted periods, 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
1996 Stock Plan in any year is not more than 1.65 percent of the issued shares
on January 1 of the year of the 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 made under the 1996 Stock Plan
after April 23, 2007.
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock awards.
Accordingly, no compensation cost has been recognized for stock options.
Compensation expense is recorded over the vesting period for restricted stock
and performance awards. Expense of $13.3, $9.2 and $5.0 for restricted stock and
performance awards was charged to income in 1997, 1996 and 1995, respectively.
Had compensation cost been recorded as an alternative provided by FASB Statement
No. 123, "Accounting for Stock-Based Compensation," for options granted in 1997,
1996 and 1995, the company's net income and basic earnings per share would have
been reduced by $29.2 or $.11 per share in 1997, by $10.7 or $.04 per share in
1996 and by $1.8 or $.01 per share in 1995. These amounts are for disclosure
purposes only and may not be representative of future calculations since the
estimated fair value of stock options would be amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997: dividend yield of 2.81 percent; expected volatility of
20.59 percent; risk free interest rate of 6.21 percent; and expected life of 5.9
years. Assumptions did not vary significantly for prior years.
Transactions involving stock options are summarized as follows:
- ---------------------------------------------------------------------
Weighted-
Number Average
of Exercise
Shares Price
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1994 18,594,644 $31.30
Granted 4,084,050 43.06
Exercised (2,356,620) 25.96
Forfeited (720,222) 34.96
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1995 19,601,852 34.27
Granted 4,044,440 59.53
Exercised (2,336,465) 27.42
Forfeited (480,714) 45.75
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1996 20,829,113 39.68
Granted 4,818,730 87.16
Exercised (2,390,549) 30.10
Forfeited (442,077) 63.15
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1997 22,815,217 50.26
- ---------------------------------------------------------------------
Weighted-average fair value of stock options:
Granted during 1995 9.99
Granted during 1996 13.81
Granted during 1997 20.97
Shares available for annual stock award
grants at:
December 31, 1995 15,757,512
December 31, 1996 5,290,898
December 31, 1997 5,737,352
- ----------------------------------------------------------------------
44
The following table summarizes outstanding and exercisable stock options as of
December 31, 1997:
- ----------------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable
- ----------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- ----------------------------------------------------------------------
$18-$45 14,448,817 5.6 $ 35.98 11,029,958 $34.98
46- 70 2,812,680 8.4 55.43 673,948 55.47
71- 95 5,418,705 9.1 83.87 225,984 72.38
96- 144 135,015 9.6 121.77 - -
- ----------------------------------------------------------------------
18- 144 22,815,217 6.8 50.26 11,929,890 36.85
- ----------------------------------------------------------------------
Note 17 - Contingencies and Environmental Liabilities:
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 management, 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 company's consolidated
financial position, liquidity, cash flows or results of operations for any year.
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 and similar legislation), various state environmental organizations
and other parties. The company is presently engaged in environmental remediation
at certain sites, including sites previously owned.
The company accrues costs for an estimated environmental liability when
management becomes aware that a liability is probable and is able to reasonably
estimate the company's share. Generally, that occurs no later than when
feasibility studies and related cost assessments of remedial techniques are
completed, and the extent to which other potentially responsible parties (PRPs)
can be expected to contribute is determined. For most sites, there are other
PRPs that may be jointly and severally liable to pay all cleanup costs. Outside
consultants are generally used to assess the costs of remediation. 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 environmental matters mentioned
above which are probable and reasonably estimable are adequately accrued.
Although it is not possible to predict with certainty the outcome of these
matters 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 flows or results of
operations for any year.
Note 18 - Segment Information:
Industry segments are comprised as follows: Pharmaceutical - consisting of
ethical pharmaceuticals, biologicals and empty hard-gelatin capsules; Consumer
Health Care - consisting of OTC, shaving and pet care products; Confectionery -
consisting of chewing gums and breath mints.
The company's pharmaceutical products are promoted primarily to health care
professionals and are sold either directly or through wholesalers. Consumer
Health Care products are promoted principally through consumer advertising and
promotional programs. They are sold principally to drug wholesalers, pharmacies,
food stores, mass merchandisers, physician supply houses and hospitals.
Confectionery products are promoted primarily through consumer advertising and
in-store promotions and are sold directly to food stores, pharmacies and mass
merchandisers which in turn sell to consumers.
45
In 1997, 60 percent of Pharmaceutical sales and 52 percent of Consumer Health
Care sales were from the U.S. and 48 percent of Confectionery sales were from
the Americas and Far East. The seven largest markets outside the U.S. were
Germany, Japan, France, Canada, the United Kingdom, Mexico and Brazil. Sales in
these markets accounted for approximately 60 percent of international sales with
no one country accounting for more than 12 percent.
Industry Segments
- --------------------------------------------------------------------------------------------------
Research and
Net Sales (a) Operating Profit Development Expense
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Pharmaceutical $3,620 $2,505 $2,356 $1,386 $1,014(d) $ 822 $(573) $(465) $(408)
Consumer Health Care 2,691 2,797 2,788 612 697 767(c) (67) (61) (63)
Confectionery 1,869 1,929 1,896 224 293 293 (32) (29) (30)
------------------------
Research and develop-
ment expense (672) (555) (501) $(672) $(555) $(501)
- --------------------------------------------------------------------------------------------------
Net sales and
operating profit $8,180 $7,231 $7,040 1,550 1,449 1,381
- --------------------------------------------
Corporate expense (b) (316) (272) (232)
- --------------------- -------------------------
Income before income
taxes and minority
interests $1,234 $1,177 $1,149
- --------------------- -------------------------
- --------------------------------------------------------------------------------------------------
Depreciation and
Identifiable Assets Amortization Capital Expenditures
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Pharmaceutical $3,214 $2,513 $2,274 $122 $ 97 $ 95 $258 $185 $176
Consumer Health Care 2,686 2,795 1,766 96 79 56 112 85 88
Confectionery 1,192 1,240 1,100 49 46 41 81 102 100
- --------------------------------------------------------------------------------------------------
Subtotal 7,092 6,548 5,140 267 222 192 451 372 364
Corporate 939 649 961 8 9 10 44 17 23
- --------------------------------------------------------------------------------------------------
Total $8,031 $7,197 $6,101 $275 $231 $202 $495 $389 $387
- --------------------------------------------------------------------------------------------------
Geographic Areas
- --------------------------------------------------------------------------------------------------
Net Sales (a) Operating Profit Identifiable Assets
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------
United States $4,469 $3,342 $3,196 $1,106 $1,058(d)$ 909(c)$3,418 $2,940 $2,093
Europe, Middle East
and Africa 2,998 2,218 2,175 865 551 536 2,481 2,160 1,903
Americas and Far
East 2,112 2,150 2,097 350 430 432 1,343 1,499 1,160
Intergeographic area
elimination (e) (1,399) (479) (428) (99) (35) 5 (150) (51) (16)
- --------------------------------------------------------------------------------------------------
Subtotal 8,180 7,231 7,040 2,222 2,004 1,882 7,092 6,548 5,140
Research and develop-
ment expense (672) (555) (501)
- --------------------------------------------------------------------------------------------------
Total $8,180 $7,231 $7,040 $1,550 $1,449 $1,381 $7,092 $6,548 $5,140
- --------------------------------------------------------------------------------------------------
(a) Export sales and intersegment sales were not material. Intergeographic area
sales for the years ended December 31, 1997, 1996 and 1995, respectively
were: United States - $246, $169 and $173, Europe, Middle East and Africa -
$966, $219 and $195, and Americas and Far East - $187, $91 and $60.
(b) Corporate expense includes general corporate income and expense, corporate
investment income, interest expense and net foreign currency adjustments.
(c) Includes a $117 pretax gain on the sale of the PRO toothbrush business.
(d) Includes a $75 pretax gain on the sale of Warner Chilcott Laboratories.
(e) Products are transferred between geographic areas based on prevailing
economic and market factors.
46
Report by Management
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,
suppliers and society, and the creation of a corporate compliance program, which
is a formal system designed to oversee compliance with applicable laws,
regulations, policies and procedures on a worldwide basis.
Melvin R. Goodes Ernest J. Larini
Chairman and Chief Vice President and
Executive Officer Chief Financial Officer
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, of 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, 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.
Price Waterhouse LLP
- --------------------
4 Headquarters Plaza North
Morristown, New Jersey
January 26, 1998
47
Quarterly Financial Information:
(Dollars in millions, except per share amounts)
- ----------------------------------------------------------------------------
1997 Quarters
- ----------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
Net sales $1,777.4 $1,966.7 $2,108.3 $2,327.4
Gross profit 1,228.2 1,373.1 1,494.3 1,676.6
Net income 204.1 231.4 198.3 235.7
Net income per common share:
Basic .75 .85 .73 .87
Diluted .73 .83 .71 .84
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
1996 Quarters
- ----------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
Net sales $1,829.2 $1,791.2 $1,768.0 $1,843.0
Gross profit 1,239.6 1,219.2 1,187.8 1,237.9
Net income 249.5 213.3 152.7 171.0
Net income per common share:
Basic .92 .79 .56 .63
Diluted .91 .77 .55 .62
- ----------------------------------------------------------------------------
First quarter 1996 results include a gain from the sale of Warner Chilcott
Laboratories of $45.7 after tax or $.17 per share.
Market Prices of Common Stock and Dividends:
- ----------------------------------------------------------------------------
1997 Range of Prices 1996 Range of Prices
- ----------------------------------------------------------------------------
Dividends Dividends
High Low per Share High Low per Share
- ----------------------------------------------------------------------------
First quarter $ 93 1/4 $ 69 1/2 $.38 $54 $44 5/8 $.345
Second quarter 125 1/2 81 .38 57 3/4 52 1/8 .345
Third quarter 147 1/4 124 5/16 .38 66 1/8 49 3/8 .345
Fourth quarter 152 5/8 108 1/2 .38 80 61 7/8 .345
- ----------------------------------------------------------------------------
Research and development expenditures, presented in graphic format, were $464.9
in 1993, $456.0 in 1994, $501.2 in 1995, $554.8 in 1996 and $672.2 in 1997.
Net sales, presented in graphic format, were $5,793.7 in 1993, $6,416.8 in 1994,
$7,039.8 in 1995, $7,231.4 in 1996 and $8,179.8 in 1997.
48
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
NET SALES
- ---------
Sales in 1997 of $8,180 million were 13 percent higher than in 1996. Sales
increased 17 percent adjusting for the unfavorable impact of foreign exchange
rate changes. Unit volume grew by 16 percent with price increases adding 1
percent to sales growth.
Sales in 1996 of $7,231 million were 3 percent higher than in 1995. Sales
increased 5 percent excluding the impact of the divestitures of the company's
Warner Chilcott generic pharmaceutical business in the first quarter of 1996 and
PRO toothbrush business in the third quarter of 1995. Unit volume growth,
excluding the divestitures, was 6 percent and price increases added 2 percent.
Foreign exchange rate changes had an unfavorable impact of 3 percent.
On a geographic basis, U.S. sales increased $1,049 million or 33 percent to
$4,223 million in 1997. International sales decreased $101 million or 2 percent
to $3,957 million. At constant exchange rates, international sales increased 5
percent. U.S. sales in 1996 increased $150 million or 5 percent to $3,173
million from 1995. Adjusted for the Warner Chilcott divestiture, U.S. sales
increased 9 percent in 1996. International sales increased $41 million or 1
percent to $4,058 million in 1996, 6 percent at constant exchange rates.
Effective January 1, 1996, the company's international operations changed their
reporting period from a fiscal-year basis ending November 30 to a calendar-year
basis ending December 31 (See Note 1). References to 1997 and 1996 represent the
calendar years ended December 31 and references to 1995 represent the fiscal
year ended November 30.
Pharmaceutical Products
- -----------------------
(Dollars in millions) 1997 1996 1995
------------- ------------ -------
Net Sales $ 3,620 +45% $ 2,505 +6% $ 2,356
Pharmaceutical sales in the U.S. increased 84 percent to $2,170 million in 1997.
The sales increase was attributable to the successful 1997 launches of the
cholesterol-lowering agent LIPITOR and the type 2 diabetes drug REZULIN. Other
pharmaceutical products in the U.S., including the anticonvulsant DILANTIN, the
cardiovascular drug ACCUPRIL and the oral contraceptive LOESTRIN, experienced
sales declines due to an adjustment of wholesaler inventory levels during 1997.
International pharmaceutical sales increased 10 percent to $1,450 million in
1997, 19 percent at constant exchange rates. The increase was attributable to
the 1997 launch of LIPITOR in several countries and the May 1997 acquisition of
the remaining 66 percent of the Jouveinal group that the company did not already
own. Jouveinal sales of $105 million are included in the company's 1997 sales.
Prior to April 30, 1997 Jouveinal sales were not reflected in reported
Warner-Lambert sales results since the company's 34 percent interest in the
Jouveinal group was accounted for using the equity method.
LIPITOR achieved worldwide sales of $865 million during 1997. The company began
marketing LIPITOR in the U.S. in February 1997 and by year-end in several
additional countries including Canada, the United Kingdom and Germany. The
company expects to begin selling LIPITOR in several additional countries during
1998, including France. Warner-Lambert co- promotes LIPITOR through a ten-year
marketing agreement with Pfizer Inc. The agreement includes a quid-pro-quo
provision giving Warner-Lambert the right to co-promote one of Pfizer's
products.
REZULIN achieved worldwide sales of $420 million during 1997. Warner- Lambert
markets REZULIN with Sankyo Company, Ltd., from whom the company licenses the
product for North America and other areas. REZULIN was first marketed in March
1997 in the U.S. for treatment of type 2 diabetes patients inadequately
controlled by insulin. On August 4, 1997, the company announced that REZULIN
received clearance by the Food and Drug Administration (FDA) for use as either
monotherapy or combination therapy with other commonly used agents which made
REZULIN available to a broad range of type 2 diabetes patients. On November 3,
1997, the company initiated changes in the prescribing information for REZULIN.
These changes were made in response to rare reports during marketed use of
hepatic injuries, which are usually reversible, and extremely rare reports of
hepatic failures, which could result in liver transplants or death. The company
continued to review the safety experience with REZULIN (including worldwide
reports of adverse events) following the November 3rd announcement. Based on
this review, on December 1, 1997, the company announced additional labeling
changes for REZULIN which prominently recommend that physicians monitor patients
more frequently for signs of liver dysfunction. While the reports to date (both
prior to the December 1st announcement and thereafter) do not indicate a greater
incidence of hepatic events than was seen in the clinical trials which resulted
in priority review and approval by the FDA, the labeling changes were made to
minimize as much as
49
possible the risk for these very rare but potentially serious adverse liver
events. The company does not believe that the labeling changes will appreciably
diminish the population of patients eligible for this important medication.
With the growth of these new products, pharmaceutical segment sales will
represent a significantly greater percentage of the company's total sales,
particularly in the U.S. and to a lesser degree in international markets.
Pharmaceutical segment sales in the U.S. increased 10 percent to $1,181 million
in 1996. In March 1996, Warner-Lambert sold its Warner Chilcott generic
pharmaceutical business (See Note 4). Excluding the impact of this divestiture,
sales increased 22 percent. Products with significant sales growth in 1996
included the add-on antiepileptic NEURONTIN, LOESTRIN, ACCUPRIL and DILANTIN.
International pharmaceutical sales increased 4 percent to $1,324 million in
1996. At constant exchange rates, international sales increased 8 percent. Major
contributors to international sales growth in 1996 were ACCUPRIL and NEURONTIN.
Consumer Health Care Products
- -----------------------------
(Dollars in millions) 1997 1996 1995
------------- ------------- -------
Net Sales $ 2,691 -4% $ 2,797 -% $ 2,788
Consumer health care sales in the U.S. of $1,411 million were essentially
unchanged for 1997. U.S. shaving products sales increased 22 percent to
$199 million in 1997 due to the launch of the PROTECTOR shaving system and
the newly designed SLIM TWIN disposable razor.
International consumer health care sales fell 8 percent to $1,280 million for
1997, or 1 percent at constant exchange rates. In mid-1996 the Glaxo Wellcome
Warner-Lambert joint venture agreement was revised to include ZOVIRAX cold sore
cream. Therefore, ZOVIRAX sales are no longer recorded in the company's
consolidated sales since the company uses the equity method of accounting for
this joint venture. If international sales of the Glaxo Wellcome Warner-Lambert
joint venture were consolidated, the decline in international sales would have
been positively impacted by 2 percentage points.
International shaving products sales decreased 6 percent to $540 million in 1997
but increased 2 percent at constant rates. The negative currency impact related
to shaving products sales is due to weakness in the Japanese yen and the German
mark. International sales of the company's TETRA pet care products business fell
17 percent to $118 million, or 7 percent at constant exchange rates. This
decline was primarily attributable to Japan, where sales fell due to market
weakness and the decrease in the value of the yen.
Consumer health care sales in the U.S. rose 3 percent to $1,403 million in 1996.
Products with significant sales growth in the U.S. included SUDAFED cold
medication, NIX head lice medication and the company's shaving products.
International consumer health care sales decreased 2 percent in 1996 to $1,394
million. Adjusted for the PRO divestiture in the third quarter of 1995 and the
impact of exchange, sales increased 4 percent in 1996. Products with significant
international sales growth included the company's shaving products, LISTERINE
antiseptic mouthwash, NIX and ACTIFED cold medication.
Confectionery Products
- ----------------------
(Dollars in millions) 1997 1996 1995
------------- ------------- -------
Net Sales $ 1,869 -3% $ 1,929 +2% $ 1,896
Confectionery sales in the U.S. increased 9 percent to $642 million in 1997
primarily due to the launches of DENTYNE Ice chewing gum, HALLS Zinc Defense
cold season dietary supplement and CERTS Powerful Mints breath freshener.
International confectionery sales were $1,227 million in 1997, a decrease of 8
percent or 4 percent at constant exchange rates. The international sales decline
was primarily attributable to Japan, where sales fell due to intense
competition, market weakness and the decrease in the value of the yen and was
partly attributable to the weakness in most European currencies.
Confectionery sales in the U.S. increased 1 percent to $589 million in
1996.
International confectionery sales increased 2 percent in 1996 to $1,340 million
or 9 percent at constant exchange rates. The decline in the value of foreign
currencies, particularly the Mexican peso and the Japanese yen, adversely
impacted this segment's sales by $86 million. Products with strong international
sales growth included HALLS cough tablets, CHICLETS candy-coated gum and DENTYNE
chewing gum.
COSTS AND EXPENSES
- ------------------
Cost of goods sold increased 3 percent in 1997 and fell 3 percent in 1996. As a
percentage of net sales, cost of goods sold fell to 29.4% from 32.5% in 1996 and
34.5% in 1995. The improvement in the ratio was partly attributable to an
increase in pharmaceutical segment product sales, with generally higher margins
than consumer health care or confectionery products, as a percentage of total
company sales. Also contributing to the improvement in the ratio was a favorable
product mix within the pharmaceutical segment. The ratio fell in 1996 compared
to 1995 due to productivity improvement and a favorable product mix. The most
notable improvement in 1996 was in the pharmaceutical segment in the U.S. due to
the absence of the Warner Chilcott business and an increase in sales of
higher-margin products.
50
Selling, general and administrative expense in 1997 and 1996 increased 18
percent and 5 percent, respectively. Pharmaceutical segment expenses
significantly increased in 1997 to support new products. Quarterly settlements
of co-promotion agreements related to LIPITOR and REZULIN are recorded in
selling expense. International pharmaceutical segment expenses also increased
partly due to the May 1997 Jouveinal acquisition. Increased expenses in 1996
were attributable to the pharmaceutical segment, primarily in the U.S., due to
higher sales incentives and increased advertising and promotion to support
NEURONTIN, ACCUPRIL, LOESTRIN and pre-launch spending on new products. As a
percentage of net sales, selling, general and administrative expense was 44.9%
compared with 43.1% in 1996 and 42.3% in 1995.
Research and development expense increased 21 percent and 11 percent in 1997 and
1996, respectively. As a percentage of net sales, research and development
expense was 8.2% in 1997, 7.7% in 1996 and 7.1% in 1995. For 1998 the company
plans to invest $790 million in research and development, a projected increase
of 18 percent compared with 1997.
Other expense (income), net in 1997 included increases in intangible
amortization of $25 million and net interest expense of $34 million. These
increases resulted primarily from the company's purchase of Glaxo Wellcome's
interest in the Warner Wellcome joint venture operations in mid-1996 and, to a
lesser degree, the May 1997 Jouveinal acquisition. Other expense (income), net
in 1996 included milestone payments received from Pfizer Inc. of $83 million
related to the LIPITOR co-promotion agreement, a gain of $75 million on the sale
of the Warner Chilcott business and in 1995 included a gain of $117 million from
the sale of the company's PRO toothbrush business. Other expense (income), net
in 1996 was unfavorable compared to 1995 primarily due to greater interest
expense and intangible amortization.
The company is actively addressing its information technology infrastructure,
including hardware, software and facilities, with the goal of achieving year
2000 compliance in all areas of operations, including, to the extent
practicable, relationships with vendors, suppliers and customers. The company
has created a task force of company professionals and outside experts to
coordinate worldwide year 2000 compliance efforts. The task force has oversight
responsibility for monitoring all year 2000 compliance efforts, including
replacement or modification of current systems, which are expected to be
completed during 1999. Maintenance or modification costs will be expensed as
incurred, while the costs of new information technology will be capitalized and
amortized in accordance with company policy. Although management does not expect
the associated incremental costs to have a material impact on the company's
consolidated financial position, liquidity, cash flows or results of operations,
currently unforeseen developments or delays could cause this expectation to
change. Also, there is no guarantee that the vendors, suppliers and customers
with whom the company does business will achieve timely year 2000 compliance, or
that such failure would not have a material adverse impact on the company.
INCOME TAXES
- ------------
1997 1996 1995
---- ---- ----
Effective tax rate:
As reported 29.5% 27.3% 24.3%
After minority interests 29.5% 29.0% 27.4%
The company's tax rate on a reported basis increased 2.2 percentage points. An
increase of 1.7 percentage points resulted from the absence of minority
interests in 1997. In addition, a net increase of .5 percentage points is
related to a 1996 tax law change that subjects a greater amount of income in
Puerto Rico to taxation as well as to increased taxes on income generated in
high tax jurisdictions. These increases are partly offset by the absence of
higher taxes on the 1996 gain from the sale of the Warner Chilcott business, the
favorable impact of the extension of the U.S. research tax credit enacted in
August 1997 and the favorable impact of the liquidation of a foreign affiliate.
In 1996 the increases in the company's effective tax rates on a reported basis
and after minority interests were principally due to taxes associated with the
gain on the sale of Warner Chilcott and changes in the company's global profit
composition. These increases were partially offset by greater tax benefits from
operations in Puerto Rico.
The company anticipates a decrease in its effective tax rate in 1998 of
approximately .5 percentage points. The projected decrease is primarily due to
increased income generated in foreign jurisdictions with lower tax rates,
partially offset by the absence of the favorable impact of the foreign affiliate
liquidation in 1997.
NET INCOME
- ----------
In 1997 net income of $870 million increased 11 percent and basic earnings per
share of $3.20 increased 10 percent. In 1996 both net income of $787 million and
basic earnings per share of $2.90 increased 6 percent over 1995. The sale of
Warner Chilcott in 1996 resulted in an after-tax gain of $46 million or $.17 per
share and the sale of the PRO toothbrush business in 1995 resulted in an
after-tax gain of $82 million or $.31 per share.
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 in the principal foreign
countries in which the company maintains operations.
51
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Selected data:
(Dollars in millions)
1997 1996 1995
------ ------ ----
Net debt $1,347 $1,712 $741
Net debt to net capital (equity
and net debt) 32% 40% 25%
Return on average shareholders'
equity 32% 33% 36%
Return on average total assets 11% 12% 13%
Net debt (total debt less cash and cash equivalents and other nonequity
securities) decreased $365 million from December 31, 1996. Cash and cash
equivalents were $757 million at December 31, 1997, an increase of $366 million
from December 31, 1996. The company also held $100 million in nonequity
securities, included in short-term investments and investments and other assets,
that management views as cash equivalents, representing a decrease of $97
million from 1996. This net increase of $269 million is primarily attributable
to an increase in cash provided by operating activities which was partly
attributable to the timing of new product co-promotion payments which are made
subsequent to the end of each quarter. Total debt of $2,203 million at December
31, 1997 decreased $96 million from December 31, 1996.
Cash and cash equivalents were $391 million at December 31, 1996, an increase of
$95 million from December 31, 1995. The company also held $197 million in
nonequity securities, included in short-term investments and investments and
other assets representing a decrease of $295 million from 1995. Net debt
increased $971 million from December 31, 1995, reflecting the purchase of Glaxo
Wellcome's interest in the Warner Wellcome joint venture operations. The
purchase was financed with commercial paper, which was classified as long-term
debt due to the company's intent and ability to refinance on a long-term basis.
In 1997 cash provided by operating activities of $1,564 million was primarily
used to fund capital expenditures of $495 million, to pay dividends of $413
million and for business acquisitions of $229 million. In 1996 cash provided by
operating activities of $1,022 million increased $223 million compared to 1995
and was primarily used to fund capital expenditures of $389 million and pay
dividends of $374 million.
Capital expenditures are expected to increase approximately 60 percent in 1998
in support of additional manufacturing operations and expanded research
facilities. The company intends to fund capital expenditures with cash provided
by operations.
The company has readily available financial resources, including unused
worldwide lines of credit totaling $2.4 billion. The company has the ability to
issue commercial paper at favorable rates. The lines of credit support
commercial paper and bank borrowing arrangements. As of December 31, 1997 the
company had shelf registrations filed with the Securities and Exchange
Commission under which it could issue up to $850 million of debt securities for
general corporate purposes. In January 1998 the company refinanced certain other
debt by issuing $250 million of 5 3/4% notes due 2003 and $250 million of 6%
notes due 2008 leaving $350 million of debt registered under the shelf
registration.
In November 1997 the Board of Directors voted in favor of a three-for-one split
of Warner-Lambert common stock. The stock split is subject to shareholder
approval of an increase in the number of authorized common shares from 500
million to 1.2 billion. If approved, this stock split would occur on May 8, 1998
and the quarterly dividend rate would be proportionately adjusted.
In January 1998 the Board of Directors approved a 26 percent increase in the
quarterly dividend to $.48 per share payable in the first quarter of 1998. The
company anticipates that the quarterly dividend rate will remain $.48 per share
on a pre-split basis during 1998 and that dividends will be paid with cash
provided by operations.
MARKET RISK
- -----------
The company's primary market risk exposures consist of interest rate risk and
foreign currency exchange risk. See Note 10 "Financial Instruments" to the
consolidated financial statements for the company's objectives and strategies
for managing potential exposures related to these risks.
Management primarily uses derivative instruments, the majority of which are
forward exchange contracts involving multiple currencies, to hedge exposures to
certain foreign currency fluctuations as described in Note 10. As hedges, gains
and losses on forward contracts are offset by the effects of currency movements
on respective underlying hedged transactions. Therefore, with respect to
derivative instruments outstanding at December 31, 1997, a change of 10 percent
in currency rates would not have a material effect on the company's consolidated
financial position, liquidity, cash flows or results of operations.
The company holds certain instruments, primarily debt obligations, which are
sensitive to changes in market interest rates. At December 31, 1997 the majority
of the company's variable rate debt consisted of short-term commercial paper
which is subject to changes in market interest rates. However, at December 31,
1997, a change of 10 percent in interest rates would not have a material effect
on the company's consolidated financial position, liquidity, cash flows or
results of operations.
52
Product names appearing in capital letters are registered trademarks of
Warner-Lambert Company, its affiliates, related companies or its licensors.
ZOVIRAX is a registered trademark of Glaxo Wellcome plc, its affiliates or
related companies. PRO is a registered trademark of The Gillette Company.