ITEM 6. Selected Financial Data
Warner-Lambert Company and Subsidiaries
Five-year Summary of Selected Financial Data
- ----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
RESULTS FOR YEAR:
Net sales $10,214 $8,180 $7,231 $7,040 $6,417
Cost of goods sold 2,629 2,408 2,347 2,428 2,155
Research and development
expense 877 672 555 501 456
Income before income taxes and
minority interests 1,766 1,233 1,177 1,149 1,005
Net income 1,254 870 787 740 694
Net income per common share*:
Basic 1.53 1.07 .97 .91 .86
Diluted 1.48 1.04 .95 .90 .86
- ----------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current assets $ 4,102 $3,297 $2,785 $2,778 $2,515
Current liabilities 3,230 2,537 2,137 2,425 2,353
Working capital 872 760 648 353 162
Property, plant and
equipment 2,775 2,427 2,168 2,006 1,846
Total assets 9,231 8,031 7,197 6,101 5,533
Long-term debt 1,260 1,831 1,720 634 535
Total debt 1,517 2,203 2,300 1,529 1,460
Shareholders' equity 3,612 2,836 2,581 2,246 1,816
- ----------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION*:
Average number of common
shares outstanding (in millions):
Basic 820.0 815.2 813.7 810.1 804.7
Diluted 849.1 839.2 827.1 817.8 810.0
Common stock price per share:
High $85 15/16 $50 7/8 $26 43/64 $16 21/64 $14 29/64
Low 39 3/8 23 11/64 14 7/8 12 15/64 10
Year-end 75 3/16 41 25/64 25 16 3/16 12 53/64
Book value per common share 4.40 3.47 3.17 2.75 2.25
Cash dividends per common share .64 .51 .46 .43 .41
- ----------------------------------------------------------------------------------------------
OTHER DATA:
Number of employees (in thousands) 41 40 38 37 36
Capital expenditures $721 $495 $389 $387 $406
Cash dividends paid 525 413 374 351 327
Depreciation and amortization 296 275 231 202 181
- ----------------------------------------------------------------------------------------------
*Amounts reflect a three-for-one stock split effective May 1998.
30
ITEM 8. Financial Statements and Supplementary Data
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Income and
Comprehensive Income
- ----------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
(Dollars in millions, except per share amounts)
NET INCOME
Net sales $10,213.7 $8,179.8 $7,231.4
- ----------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 2,629.3 2,407.6 2,346.9
Selling, general and
administrative 4,788.1 3,676.3 3,115.8
Research and development 877.2 672.2 554.8
Other expense (income), net 152.9 190.3 37.2
- ----------------------------------------------------------------------
Total costs and expenses 8,447.5 6,946.4 6,054.7
- ----------------------------------------------------------------------
Income before income taxes and
minority interests 1,766.2 1,233.4 1,176.7
Provision for income taxes 512.2 363.9 321.2
Minority interests - - 69.0
- ----------------------------------------------------------------------
Net income $ 1,254.0 $ 869.5 $ 786.5
- ----------------------------------------------------------------------
Net income per common share*:
Basic $ 1.53 $ 1.07 $ .97
Diluted $ 1.48 $ 1.04 $ .95
- ----------------------------------------------------------------------
Cash dividends per common share* $ .64 $ .51 $ .46
- ----------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 1,254.0 $ 869.5 $ 786.5
Other comprehensive income
(net of tax):
Foreign currency translation 57.7 (193.8) (19.9)
Other (18.1) (14.6) 6.4
- ----------------------------------------------------------------------
Total other comprehensive income 39.6 (208.4) (13.5)
- ----------------------------------------------------------------------
Comprehensive income $ 1,293.6 $ 661.1 $ 773.0
- ----------------------------------------------------------------------
*Amounts reflect a three-for-one stock split effective May 1998.
See notes to consolidated financial statements.
31
Warner-Lambert Company and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
(Dollars in millions)
Assets:
Cash and cash equivalents $ 911.3 $ 756.5
Accounts receivable, less allowances of
$29.9 in 1998 and $34.5 in 1997 1,398.6 1,160.2
Other receivables 296.2 210.3
Inventories 888.4 742.9
Prepaid expenses and other current assets 607.8 427.1
- ---------------------------------------------------------------------
Total current assets 4,102.3 3,297.0
Investments and other assets 625.8 593.8
Property, plant and equipment 2,775.3 2,427.0
Intangible assets 1,727.2 1,712.7
- ---------------------------------------------------------------------
$ 9,230.6 $ 8,030.5
- ---------------------------------------------------------------------
Liabilities and shareholders' equity:
Short-term debt $ 256.3 $ 372.1
Accounts payable, trade 1,575.2 1,025.6
Accrued compensation 225.1 186.6
Other current liabilities 927.6 759.0
Federal, state and foreign income taxes 245.8 193.6
- ---------------------------------------------------------------------
Total current liabilities 3,230.0 2,536.9
Long-term debt 1,260.3 1,831.2
Deferred income taxes and other
noncurrent liabilities 1,128.2 826.9
Shareholders' equity:
Preferred stock - none issued - -
Common stock issued:
1998 - 961,981,608 shares;
1997 - 320,660,536 shares 962.0 320.7
Capital in excess of par value 182.3 225.4
Retained earnings 4,254.9 3,892.6
Accumulated other comprehensive income (399.1) (438.7)
Treasury stock, at cost:
1998 - 140,429,452 shares;
1997 - 48,436,529 shares (1,388.0) (1,164.5)
- ---------------------------------------------------------------------
Total shareholders' equity 3,612.1 2,835.5
- ---------------------------------------------------------------------
$ 9,230.6 $ 8,030.5
- ---------------------------------------------------------------------
See notes to consolidated financial statements.
32
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
(Dollars in millions)
Operating Activities:
Net income $ 1,254.0 $ 869.5 $ 786.5
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 296.3 275.5 230.8
Gains on sales of businesses - - (75.2)
Minority interests - - 69.0
Deferred income taxes (169.5) (27.6) 70.7
Changes in assets and liabilities,
net of effects from acquisitions/
dispositions of businesses:
Receivables (295.8) (121.3) (211.3)
Inventories (133.1) (110.1) (23.9)
Accounts payable and accrued
liabilities 759.3 608.6 108.4
Other, net 274.2 69.2 67.3
- -------------------------------------------------------------------------
Net cash provided by operating
activities 1,985.4 1,563.8 1,022.3
- -------------------------------------------------------------------------
Investing Activities:
Purchases of investments (19.4) (17.2) (217.1)
Proceeds from maturities/sales of
investments 83.6 112.5 500.4
Capital expenditures (721.3) (494.8) (389.0)
Acquisitions of businesses - (229.0) (1,064.8)
Proceeds from dispositions of businesses 125.0 - 137.4
Other, net 62.3 (16.8) (80.4)
- -------------------------------------------------------------------------
Net cash used by investing activities (469.8) (645.3) (1,113.5)
- -------------------------------------------------------------------------
Financing Activities:
Proceeds from borrowings 787.7 1,564.7 2,165.2
Principal payments on borrowings (1,483.2) (1,609.4) (1,422.7)
Purchases of treasury stock (265.2) (135.2) (138.9)
Cash dividends paid (524.6) (413.1) (374.4)
Distributions paid to minority interests - - (102.4)
Proceeds from stock option exercises 104.8 71.9 64.1
- -------------------------------------------------------------------------
Net cash (used) provided by
financing activities (1,380.5) (521.1) 190.9
- -------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents 19.7 (31.7) (4.7)
- -------------------------------------------------------------------------
Net increase in cash and cash equivalents 154.8 365.7 95.0
Cash and cash equivalents at beginning
of year 756.5 390.8 295.8
- -------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 911.3 $ 756.5 $ 390.8
- -------------------------------------------------------------------------
See notes to consolidated financial statements.
33
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.
The company has consistently reported using a December 31 consolidated reporting
year end. Through December 31, 1995 international affiliates reported on a
fiscal-year basis ending November 30. Effective January 1, 1996, the company's
international operations 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 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.
Revenue recognition - Sales are recorded as product is shipped to customers.
Provisions for discounts, returns and other allowances are recorded in the same
period the related sales are recognized.
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
$904.4 in 1998, $819.8 in 1997, and $670.6 in 1996.
Newly issued accounting standard - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments. The
Statement, which is effective for the first quarter 2000, requires all
derivatives to be measured at fair value and recognized as either assets or
liabilities. The adoption of this Statement is not expected to have a material
effect on the company's consolidated financial position, liquidity, cash flows
or results of operations.
Note 2 - Net Income Per Common Share:
The EPS computations were as follows:
(Shares in thousands)
- ---------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
Basic EPS:
Net income $1,254.0 $869.5 $786.5
Average common shares outstanding 819,971 815,187 813,661
- ---------------------------------------------------------------------
$ 1.53* $ 1.07* $ .97*
- ---------------------------------------------------------------------
Diluted EPS:
Net income $1,254.0 $869.5 $786.5
Average common shares outstanding 819,971 815,187 813,661
Impact of potential future stock
option exercises, net of shares
repurchased 29,105 24,002 13,422
- ---------------------------------------------------------------------
Average common shares outstanding -
assuming dilution 849,076 839,189 827,083
- ---------------------------------------------------------------------
$ 1.48* $ 1.04* $ .95*
- ---------------------------------------------------------------------
*Amounts reflect a three-for-one stock split effective May 1998.
34
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.
Note 3 - Interest Income and Interest Expense:
Interest income and interest expense are included in Other expense (income),
net. Interest income totaled $51.6, $41.7 and $54.8 and interest expense totaled
$113.3, $167.0 and $145.9 in 1998, 1997 and 1996, respectively. Total interest
paid was $102.9, $151.9 and $140.7 and interest costs of $19.2, $8.3 and $9.6
have been capitalized and included in Property, plant and equipment for those
respective periods.
Note 4 - Acquisitions and Divestitures:
On January 26, 1999, Warner-Lambert announced a definitive agreement to acquire
Agouron Pharmaceuticals, Inc., an integrated pharmaceutical company committed to
the discovery and development of innovative therapeutic products for treatment
of cancer, AIDS and other serious diseases. Agouron achieved total revenues of
$466.5 million for the fiscal year ended June 30, 1998. Under the terms of the
agreement, which is valued at approximately $2.1 billion, each share of Agouron
stock will be exchanged for a certain amount of Warner-Lambert common stock. The
exact exchange ratio will be based on the average price of Warner-Lambert stock
prior to closing. The transaction will be accounted for as a pooling of
interests and will require the approval of Agouron's shareholders and customary
regulatory approvals. The transaction will not require Warner-Lambert
shareholder approval.
On December 31, 1998, Warner-Lambert Company and certain of its affiliates and
Glaxo Wellcome plc and certain of its affiliates (Glaxo Wellcome) entered into
transactions in various countries whereby Glaxo Wellcome transferred to
Warner-Lambert rights to over-the-counter (OTC) ZANTAC products in the
United States and Canada, and Warner-Lambert principally transferred to Glaxo
Wellcome its rights to OTC ZANTAC products in all other markets and its
rights to OTC ZOVIRAX, OTC BECONASE and future Glaxo Wellcome prescription to
OTC switch products in all markets. These OTC products had been
marketed through joint ventures between Warner-Lambert and Glaxo Wellcome which
were formed to develop, seek approval of and market OTC versions of Glaxo
Wellcome prescription drugs. These joint ventures were accounted for as equity
method investments. For financial reporting purposes, the December 31, 1998
transactions, which ended the joint venture relationships between Warner-Lambert
and Glaxo Wellcome, were accounted for as a nonmonetary exchange of similar
assets with no gain or loss recognized.
On May 21, 1997, Warner-Lambert purchased the remaining 66 percent of the
Jouveinal group it did not already own. Consideration for this acquisition,
including estimated acquisition costs, net of cash acquired and proceeds from
the sale of certain acquired assets, was approximately $117. 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.
In addition, the company acquired two Irish manufacturing facilities from
Hickson Pharmachem Limited and Plaistow Limited, respectively, during the second
quarter of 1997 for approximately $118. The consideration for these three
acquisitions was primarily charged to intangible assets and is being amortized
over periods of 40 years for goodwill and 5 to 20 years for trademarks and other
intangibles. The transactions were financed with a long-term credit facility.
In 1996, Warner-Lambert purchased Glaxo Wellcome'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, which was charged
primarily to goodwill and trademarks and is being amortized primarily over 40
years. 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 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.
All completed acquisitions, except the rights exchange with Glaxo Wellcome, 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 completed acquisitions did not have a material pro forma impact on
consolidated earnings.
35
In the first quarter of 1998, the company sold its Rochester, Michigan
pharmaceutical manufacturing plant as well as certain minor prescription
products for approximately $125.0. The resulting pretax gain of $66.6 was offset
by costs related to the company's plans to close two of its foreign
manufacturing facilities. The results of these transactions are recorded in
Other expense (income), net for the year ended December 31, 1998.
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 $.06
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 $13.6,
$(18.2) and $7.6 in 1998, 1997 and 1996, respectively. The cumulative
translation adjustments component of shareholders' equity was charged (credited)
with $(57.7), $193.8 and $19.9 in 1998, 1997 and 1996, respectively.
Note 6 - Inventories:
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
Raw materials $145.1 $167.7
Finishing supplies 48.8 53.1
Work in process 229.3 95.6
Finished goods 465.2 426.5
- ---------------------------------------------------------------------
$888.4 $742.9
- ---------------------------------------------------------------------
Note 7 - Property, Plant and Equipment:
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
Land $ 45.7 $ 38.6
Buildings 1,387.0 1,245.7
Machinery, furniture and fixtures 3,032.0 2,684.6
- ---------------------------------------------------------------------
4,464.7 3,968.9
Less accumulated depreciation (1,689.4) (1,541.9)
- ---------------------------------------------------------------------
$ 2,775.3 $ 2,427.0
- ---------------------------------------------------------------------
Depreciation expense totaled $236.5, $218.8 and $199.1 in 1998, 1997 and 1996,
respectively. Depreciation expense is charged to various income statement line
items based upon the functions utilizing subject assets.
Note 8 - Intangible Assets:
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
Goodwill $1,299.0 $1,267.5
Trademarks and other intangibles 662.2 602.3
- ---------------------------------------------------------------------
1,961.2 1,869.8
Less accumulated amortization (234.0) (157.1)
- ---------------------------------------------------------------------
$1,727.2 $1,712.7
- ---------------------------------------------------------------------
Amortization expense, which is reflected in Other expense (income), net, totaled
$59.8, $56.7 and $31.7 in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, Goodwill is being amortized primarily over 40
years and Trademarks and other intangibles are being amortized over a weighted
average of approximately 33 years.
Note 9 - Debt:
The components of Short-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
Notes payable $238.9 $209.7
Current portion of long-term debt 17.4 162.4
- ---------------------------------------------------------------------
$256.3 $372.1
- ---------------------------------------------------------------------
The weighted-average interest rate for notes payable outstanding at December 31,
1998 and 1997 was 6.9 percent and 6.2 percent, respectively. The company has
lines-of-credit arrangements with numerous banks with interest rates generally
36
equal to the best prevailing rate. At December 31, 1998, worldwide unused lines
of credit amounted to $1.4 billion. The 1997 current portion of long-term debt
included $150.0 notes due 1998.
The components of Long-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
Commercial paper $ 383.4 $ 990.0
Variable rate term loan - 354.7
Variable rate master note 100.0 200.0
6 5/8% notes due 2002 199.8 199.7
5 3/4% notes due 2003 250.0 -
6% notes due 2008 249.5 -
7.6% industrial revenue bonds due 2014 24.5 24.6
Other 53.1 62.2
- ---------------------------------------------------------------------
$1,260.3 $1,831.2
- ---------------------------------------------------------------------
At December 31, 1998, 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, 1998, the weighted-average interest rate was 5.2 percent
for commercial paper outstanding. The interest rate on the master note at
December 31, 1998 was 5.4 percent.
In January 1998, the company refinanced certain debt, primarily commercial
paper, by issuing $250.0 of 5 3/4 percent notes due 2003 and $249.5 of 6 percent
notes due 2008. In addition, the variable rate term loan was paid during 1998.
The aggregate annual maturities of long-term debt at December 31, 1998, payable
in each of the years 2000 through 2003, excluding short-term borrowings
reclassified to long-term are $14.2, $16.6, $207.5 and $256.5, respectively.
Note 10 - Financial Instruments:
The estimated fair values of financial instruments were as follows:
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
( ) = Liability Amount Value Amount Value
- ---------------------------------------------------------------------
Investment securities $ 94.7 $ 94.5 $ 168.3 $ 168.7
Long-term debt (1,260.3) (1,288.3) (1,831.2) (1,836.9)
Foreign exchange
contracts .3 (8.5) (.7) 12.5
- ---------------------------------------------------------------------
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, 1998 1997
- -------------------------------------------------------------------
Cash and cash equivalents $ 8.6 $ 28.8
Prepaid expenses and other
current assets 14.5 16.0
Investments and other assets 71.6 123.5
- -------------------------------------------------------------------
$94.7 $168.3
- -------------------------------------------------------------------
The investment securities portfolio was primarily comprised of negotiable
certificates of deposit, U.S. and Puerto Rico government securities, guaranteed
collateralized mortgage obligations and Ginnie Mae certificates as of year-end
1998 and 1997. These securities are classified as "held-to-maturity." Equity
securities, categorized as "available-for-sale," were immaterial.
As of December 31, 1998, the long-term investments of $71.6 included a $4.1
interest-bearing, mortgage-backed security 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
37
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, 1998 and 1997, the company had forward or purchased option
foreign exchange contracts with contractual amounts of $552.0 and $514.2,
respectively. These contracts principally exchange Japanese yen, Australian
dollars and Portuguese escudos for U.S. dollars; Canadian dollars for U.S.
dollars and Irish punts; Australian dollars for Irish punts; and U.S. dollars
for German marks in 1998; and 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.
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 1998 or 1997.
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 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
$113.0, $92.1 and $82.6 in 1998, 1997 and 1996, respectively.
The future minimum rental commitments under noncancellable capital and operating
leases at December 31, 1998 are summarized below:
- --------------------------------------------------------------------
Capital Operating
- --------------------------------------------------------------------
1999 $ 6.2 $ 69.0
2000 1.5 46.4
2001 2.9 25.8
2002 .5 18.1
2003 .6 14.8
Remaining years 2.8 105.2
- --------------------------------------------------------------------
Total minimum lease payments 14.5 279.3
Less minimum sublease income - (29.9)
------------------------
Net minimum lease payments 14.5 $249.4
-------
Less amount representing interest (3.0)
- -----------------------------------------------------
Present value of minimum lease payments $11.5
- -----------------------------------------------------
Property, plant and equipment included capitalized leases of $63.2, less
accumulated depreciation of $2.8, at December 31, 1998 and $30.2, less
accumulated
38
depreciation of $3.5, at December 31, 1997. Long-term debt included capitalized
lease obligations of $6.2 and $24.2 at those respective dates.
Note 12 - Pensions and Other Postretirement Benefits:
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes and combines the
disclosures for pensions and other postretirement benefits. The Statement was
effective December 31, 1998.
The company has various pension plans covering substantially all of its
employees in the U.S. and certain foreign subsidiaries.
The company provides other postretirement benefits, primarily health insurance,
to qualifying domestic retirees and their dependents. These plans are currently
noncontributory for domestic employees who retired prior to January 1, 1992.
Effective January 1, 1998 the company expanded the health insurance program by
offering contributory benefits to all domestic employees who have retired after
December 31, 1991 and their dependents, and future retirees meeting minimum age
and service requirements. This amendment increased the accumulated
postretirement benefit obligation by $88.8 million as of December 31, 1997. This
amount is being amortized to expense over the average remaining employee service
period of six years to reach eligibility at age 55. Postretirement benefits for
foreign subsidiary employees are not material.
The following tables present the benefit obligation and funded status of the
plans:
- ----------------------------------------------------------------------
Pension Postretirement
- ----------------------------------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $2,276.6 $2,144.5 $ 273.1 $ 186.0
Service cost 60.0 53.5 6.2 .4
Interest cost 160.1 156.0 19.9 14.0
Plan participants' contributions 2.4 2.0 .2 -
Amendments 11.6 1.7 (3.5) 88.8
Actuarial loss 221.7 46.4 10.5 3.6
Benefits paid (138.9) (127.5) (22.7) (19.7)
- ----------------------------------------------------------------------
Benefit obligation
at end of year $2,593.5 $2,276.6 $ 283.7 $ 273.1
- ----------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $2,276.6 $2,052.3 $ - $ -
Actual return on plan assets 230.1 287.6 - -
Company contributions 53.6 62.2 22.7 19.7
Plan participants' contributions 2.4 2.0 - -
Benefits paid (138.9) (127.5) (22.7) (19.7)
- ----------------------------------------------------------------------
Fair value of plan assets at
end of year $2,423.8 $2,276.6 $ - $ -
- ----------------------------------------------------------------------
Funded status $ (169.7) $ - $(283.7) $(273.1)
Unrecognized actuarial loss 197.3 32.6 59.8 51.6
Unrecognized prior service
cost 40.9 39.1 78.1 96.5
Unrecognized net transition
obligation (1.9) (.7) - -
- ----------------------------------------------------------------------
Net amount recognized $ 66.6 $ 71.0 $(145.8) $(125.0)
- ----------------------------------------------------------------------
Amounts recognized in the
Consolidated Balance Sheets
consist of:
Prepaid benefit cost $ 197.7 $ 184.0 $ - $ -
Accrued benefit liability (154.7) (131.3) (145.8) (125.0)
Intangible asset 1.8 3.3 - -
Accumulated other
comprehensive income 21.8 15.0 - -
- ----------------------------------------------------------------------
Net amount recognized $ 66.6 $ 71.0 $(145.8) $(125.0)
- ----------------------------------------------------------------------
Foreign pension plan assets at fair value included in the preceding table were
$757.5 in 1998 and $760.0 in 1997. The foreign pension plan projected benefit
obligation was $784.0 in 1998 and $710.6 in 1997.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $457.1, $392.6 and $270.6, respectively as of
December 31, 1998, and $163.2, $136.5 and $22.6, respectively as of December 31,
1997.
39
The following table presents the annual cost related to the plans:
- ------------------------------------------------------------------------
Pension Postretirement
- ------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------
COMPONENTS OF NET PENSION
AND POSTRETIREMENT
COSTS
Service cost $ 60.0 $ 53.5 $ 52.4 $ 6.2 $ .4 $ .5
Interest cost 160.1 156.0 153.3 19.9 14.0 13.7
Expected return on plan
assets (187.3) (175.5) (170.2) - - -
Amortization of prior
service cost and net
transition obligation 7.5 7.2 7.7 14.7 .6 (.2)
Recognized actuarial loss 3.6 4.0 8.7 2.6 2.5 3.0
Curtailment and special
benefit charge 5.3 - - - - -
- ------------------------------------------------------------------------
Net pension and post-
retirement costs $ 49.2 $ 45.2 $ 51.9 $43.4 $17.5 $17.0
- ------------------------------------------------------------------------
The sale of the Rochester plant, as discussed in Note 4, resulted in a
curtailment and special benefit charge of $5.3 in 1998.
The assumptions for the U.S. pension and postretirement plans included an
expected increase in salary levels of 4.0 percent for each of the years ended
December 31, 1998, 1997 and 1996. The weighted-average discount rate was 7.25
percent, 7.75 percent and 8.0 percent for 1998, 1997 and 1996, respectively. The
expected long-term rate of return on U.S. pension plan assets was 10.5 percent
for each of the years ended December 31, 1998, 1997 and 1996. Assumptions for
foreign pension plans did not vary significantly from the U.S. plans. Foreign
postretirement plans for 1998, 1997 and 1996 were not material and are not
included in the preceding table.
Net pension expense attributable to foreign plans included in the preceding
table was $15.0, $14.8 and $17.5 in 1998, 1997 and 1996, respectively.
Separate assumed health care cost trend rates have been used in the valuation of
postretirement health insurance benefits. For those employees retiring before
January 1, 1992, the assumed health care cost trend rate was 9.2 percent in 1998
declining to 5.5 percent in 2005 for retirees under age 65. For those 65 and
over, a rate of 5.9 percent was used in 1998 declining to 5.5 percent in 2000.
For those employees retiring after December 31, 1991, rates of either 8.8
percent or 6.7 percent were used in 1998 depending on coverage option, with both
rates declining to 5.0 percent in 2004. A one percentage point increase in
health care cost trend rates in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1998 by $14.6 and the net
periodic postretirement benefit cost by $1.8. A one percentage point decrease in
the health care cost trend rates in each year would decrease the accumulated
postretirement benefit obligation as of December 31, 1998 by $14.5 and the net
periodic postretirement benefit cost for 1998 by $1.7.
Other postretirement benefits for foreign plans expensed under the cash method
in 1998, 1997 and 1996 were not material.
Note 13- Income Taxes:
The components of income before income taxes and minority interests were:
- ---------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
U.S. and Puerto Rico $ 925.9 $ 560.5 $ 515.1
Foreign 840.3 672.9 661.6
- ---------------------------------------------------------------------
$1,766.2 $1,233.4 $1,176.7
- ---------------------------------------------------------------------
The Provision for income taxes consisted of:
- ----------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
Current:
Federal $ 342.4 $132.9 $ 39.2
Foreign 290.6 219.5 195.9
State and Puerto Rico 48.7 39.1 15.4
- ----------------------------------------------------------------------
681.7 391.5 250.5
- ----------------------------------------------------------------------
Deferred:
Federal (105.7) (26.7) 25.8
Foreign (60.8) (1.9) 39.5
State and Puerto Rico (3.0) 1.0 5.4
- ----------------------------------------------------------------------
(169.5) (27.6) 70.7
- ----------------------------------------------------------------------
Provision for income taxes $ 512.2 $363.9 $321.2
- ----------------------------------------------------------------------
40
The tax effects of significant temporary differences which comprise the deferred
tax assets and liabilities were as follows:
- ----------------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------
Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------
Restructuring reserves $ 30.3 $ - $ 62.4 $ -
Compensation/benefits 118.0 - 103.4 -
Postretirement/post-
employment obligations 69.6 - 60.3 -
Inventory 125.3 13.1 42.2 10.8
Foreign tax loss and
other carryforwards 52.7 - 42.2 -
Research tax credit carry-
forwards 35.6 - 30.2 -
Pensions 13.2 65.9 14.2 61.0
Property, plant and equip-
ment 33.9 216.2 30.3 200.0
Intangibles 52.4 93.3 27.6 80.0
Other 255.5 84.9 130.9 60.4
- ----------------------------------------------------------------------
786.5 473.4 543.7 412.2
Valuation allowances (34.4) - (28.9) -
- ----------------------------------------------------------------------
$752.1 $473.4 $514.8 $412.2
- ----------------------------------------------------------------------
The research tax credit carryforwards of $35.6 expire in 2010 through 2018.
Valuation allowances on deferred tax assets are provided if it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Income taxes of $287.6, $246.5 and $205.1 were paid during 1998, 1997 and 1996,
respectively. Prepaid expenses and other current assets included deferred income
taxes of $336.5 and $206.4 at December 31, 1998 and 1997, 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, 1998.
Earnings of foreign subsidiaries considered to be reinvested for an indefinite
period at December 31, 1998 were approximately $1.8 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, 1998, 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, 1998 1997 1996
- --------------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 35.0%
Benefit from U.S. possession tax credit (1.8) (3.3) (6.2)
Foreign income subject to increased
(reduced) tax rates including
taxes on repatriation (3.4) .9 .5
U.S. research tax credit, net (1.3) (1.2) (.6)
State and local taxes, net 1.0 1.0 1.0
Other items, net (.5) (2.9) (.7)
Effect of minority interests - - (1.7)
- --------------------------------------------------------------------
Effective tax rate 29.0% 29.5% 27.3%
- --------------------------------------------------------------------
Note 14 - 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.
On April 28, 1998 the stockholders approved an increase in the number of
authorized shares of common stock from 500 million to 1.2 billion in order to
effectuate a three-for-one stock split effective May 8, 1998. Par value remained
at $1.00 per share. The stock split was recorded by increasing Common stock
issued by $641.3 and reducing Capital in excess of par value by $274.2 and
Retained earnings by $367.1. In addition, the average number of common shares
outstanding and all per share information have been restated to reflect the
stock split.
Common stock issued was $962.0, $320.7 and $320.7 at December 31, 1998, 1997 and
1996, respectively.
41
Changes in certain components of shareholders' equity are summarized as follows:
- -------------------------------------------------------------------------
Treasury Stock
Capital in --------------------
Excess of Shares in Retained
Par Value Thousands Cost Earnings
- --------------------------------------------------------------------------
Balance at December 31, 1995 $ 218.0 (24,731) $ (958.3) $3,042.9
Two-for-one stock split (160.3) (24,731) - -
Shares repurchased, at cost - (2,423) (138.9) -
Employee benefit plans 62.2 2,429 31.7 -
Net income - - - 786.5
Cash dividends paid - - - (374.4)
International operations
year-end change (Note 1) - - - (18.8)
- --------------------------------------------------------------------------
Balance at December 31, 1996 119.9 (49,456) (1,065.5) 3,436.2
Shares repurchased, at cost - (1,436) (135.2) -
Employee benefit plans 105.5 2,455 36.2 -
Net income - - - 869.5
Cash dividends paid - - - (413.1)
- --------------------------------------------------------------------------
Balance at December 31, 1997 225.4 (48,437) (1,164.5) 3,892.6
Three-for-one stock split (274.2) (96,873) - (367.1)
Shares repurchased, at cost - (4,050) (265.2) -
Employee benefit plans 231.1 8,931 41.7 -
Net income - - - 1,254.0
Cash dividends paid - - - (524.6)
- --------------------------------------------------------------------------
Balance at December 31, 1998 $ 182.3 (140,429) $(1,388.0) $4,254.9
- --------------------------------------------------------------------------
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 $.003 per right by the Board of
Directors prior to the time the rights become exercisable.
Tax benefits credited to Capital in excess of par for employee stock options
exercised were $165.2 and $64.8 for the years ended December 31, 1998 and 1997,
respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires reporting the components of comprehensive income in a financial
statement as part of a full set of general purpose financial statements. Total
comprehensive income includes net income and other comprehensive income, which
consists of foreign currency translation adjustments, unrealized net gains
(losses) on investments and minimum pension liability adjustments. The
components of other comprehensive income were as follows:
- -----------------------------------------------------------------------
Foreign Other Accumulated
Currency Items, Other
Translation Net of Comprehensive
Adjustments Tax Income
- -----------------------------------------------------------------------
Balance at December 31, 1995 $(216.3) $ (.5) $(216.8)
Current period change (19.9) 6.4 (13.5)
- -----------------------------------------------------------------------
Balance at December 31, 1996 (236.2) 5.9 (230.3)
Current period change (193.8) (14.6) (208.4)
- -----------------------------------------------------------------------
Balance at December 31, 1997 (430.0) (8.7) (438.7)
Current period change 57.7 (18.1) 39.6
- -----------------------------------------------------------------------
Balance at December 31, 1998 $(372.3) $(26.8) $(399.1)
- -----------------------------------------------------------------------
In the above table, "Other Items" includes an adjustment for the realization of
an after-tax gain of approximately $23.0 on the sale of an investment security
in 1998.
In 1998, cumulative translation adjustments, and certain other equity
adjustments which were previously reported in Capital in excess of par, have
been combined in one line item, Accumulated other comprehensive income, in the
Consolidated Balance Sheets.
Note 15 - Stock Options and Awards:
Warner-Lambert has stock awards outstanding at December 31, 1998 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
42
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 $17.0, $13.3 and $9.2 for restricted stock
and performance awards was charged to income in 1998, 1997 and 1996,
respectively. Had compensation cost been recorded as an alternative provided by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," for options
granted in 1998, 1997 and 1996, the company's net income and basic earnings per
share would have been reduced by $44.4 or $.05 per share in 1998, by $29.2 or
$.04 per share in 1997 and by $10.7 or $.01 per share in 1996. 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 1998: dividend yield of 2.37 percent; expected
volatility of 24.21 percent; risk free interest rate of 5.55 percent; and
expected life of 5.9 years. Assumptions did not vary significantly for prior
years.
Transactions involving stock options are summarized as follows:
- ---------------------------------------------------------------------
Number Weighted-
of Average
Shares Exercise
(in thousands) Price
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1995 58,806 $11.42
Granted 12,133 19.84
Exercised (7,009) 9.14
Forfeited (1,442) 15.25
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1996 62,488 13.23
Granted 14,456 29.05
Exercised (7,172) 10.03
Forfeited (1,326) 21.05
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1997 68,446 16.75
Granted 8,141 49.03
Exercised (8,832) 11.87
Forfeited (1,131) 25.69
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1998 66,624 21.19
- ---------------------------------------------------------------------
Weighted-average fair value of stock options:
Granted during 1996 4.60
Granted during 1997 6.99
Granted during 1998 12.79
Shares available for annual stock award grants at:
December 31, 1996 15,873
December 31, 1997 17,212
December 31, 1998 25,366
- -----------------------------------------------------------
The following table summarizes outstanding and exercisable stock options as of
December 31, 1998:
- ----------------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable
- ----------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (in thousands) Life (years) Price (in thousands) Price
- ----------------------------------------------------------------------
$ 8 - $24 45,402 5.4 $14.23 35,876 $13.34
25 - 44 13,325 8.2 29.05 3,052 28.82
45 - 62 7,767 9.1 47.57 9 46.01
63 - 80 130 9.7 72.70 - -
- ----------------------------------------------------------------------
8 - 80 66,624 6.4 21.19 38,937 14.56
- ----------------------------------------------------------------------
43
Note 16 - 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. As of
December 31, 1998 and 1997, the accrual for environmental liabilities was
approximately $34 covering 50 and 48 sites, respectively. Outside consultants
are generally used to assess the costs of remediation. Accruals are established
based on current technology and are not discounted. While it is reasonably
possible that additional costs may be incurred beyond the amounts accrued as a
result of new information, those costs, if any, cannot be estimated currently.
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 17 - Segment Information:
In 1998 the company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires reporting certain financial
information according to the "management approach." This approach requires
reporting information regarding operating segments on the basis used internally
by management to evaluate segment performance. SFAS 131 also requires
disclosures about products and services, geographic areas and major customers.
The Statement was effective December 31, 1998 and has been adopted for all
periods presented.
The accounting policies of the segments are the same as those described in the
"Significant Accounting Policies." Segments are determined based on product
categories. The company evaluates performance based on profit or loss before
income taxes.
Reportable 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, breath mints and cough tablets.
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.
44
Reportable Segment Data
Net Sales Income Before Taxes
------------------------ ------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
Pharmaceutical $ 5,604 $3,620 $2,505 $1,474 $ 830 $ 478
Consumer Health Care 2,722 2,691 2,797 510 549 527
Confectionery 1,888 1,869 1,929 159 185 260
------- ------ ------ ------ ------ ------
Total Segments 10,214 8,180 7,231 2,143 1,564 1,265
Corporate (1) - - - (377) (331) (157)
------- ------ ------ ------ ------ ------
Consolidated Total $10,214 $8,180 $7,231 $1,766 $1,233 $1,108
======= ====== ====== ====== ====== ======
Segment Assets (2) Depreciation/Amortization Capital Expenditures
------------------------ ------------------------- ------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
Pharmaceutical $3,184 $2,624 $1,874 $ 127 $ 113 $ 88 $ 491 $ 251 $ 177
Consumer Health Care 2,471 2,384 2,433 85 83 67 90 108 82
Confectionery 960 908 1,070 49 51 48 78 80 102
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Segments 6,615 5,916 5,377 261 247 203 659 439 361
Corporate (3) 2,616 2,115 1,820 35 28 28 62 56 28
------ ------ ------ ------ ------ ------ ------ ------ ------
Consolidated Total $9,231 $8,031 $7,197 $ 296 $ 275 $ 231 $ 721 $ 495 $ 389
====== ====== ====== ====== ====== ====== ====== ====== ======
(1) Corporate expense includes general corporate income and expense, corporate
investment income and interest expense. Corporate expense in 1998 includes a
pretax gain on the sale of the company's Rochester, Michigan manufacturing
plant and certain minor prescription products of $67 which was offset by
costs related to the company's plans to close two foreign manufacturing
facilities. Corporate expense in 1996 includes a $75 pretax gain on the sale
of Warner Chilcott Laboratories.
(2) Segment assets consist of Accounts receivable, Inventories, Intangible
assets, Other investments and Property, plant and equipment.
(3) Corporate assets include Cash and cash equivalents, and other unallocated
assets.
Geographic Data
1998 1997 1996 1998 1997 1996
---- ----- ----- ---- ---- ----
Net Sales: (a) Long-Lived Assets:
United States $ 5,887 $4,200 $3,185 United States $ 1,515 $1,405 $1,249
Foreign 4,327 3,980 4,046 Ireland 311 125 38
------- ------ ------ Germany 248 205 144
Total $10,214 $8,180 $7,231 All other foreign 701 692 737
======= ====== ====== ------- ------ ------
Total $ 2,775 $2,427 $2,168
======= ====== ======
(a) Net sales are attributed to countries based on location of customer. No
single foreign country was material to consolidated Net sales.
45
Note 18 - Restructuring and Plant Closures:
In 1993 and 1991, the company recorded, as a separate income statement
component, restructuring charges of $525.2 ($360.4 after tax or $.45 per share)
and $544.0 ($418.0 after tax or $.52 per share), respectively. The total of
$1,069.2 was recorded for worldwide rationalization of manufacturing and
distribution facilities and for organizational restructuring and related
workforce reductions of about 5,500 positions. These rationalization programs
were prompted by changes in the company's competitive environment, including the
growing impact of managed health care, cost containment efforts in the U.S.,
cost regulations in Europe, the elimination of trade barriers throughout the
world and changes in U.S. tax law. As of December 31, 1998, 24 manufacturing
sites were closed and workforce reductions of approximately 4,400 positions were
made primarily in the U.S. sales force, Puerto Rico manufacturing, worldwide
administrative operations and European research. Activities still to be
completed include closing 2 facilities, worldwide work-systems redesign and
severance associated with these projects.
Initial 1993 and 1991 provisions and the subsequent utilization by major
components are summarized in the table below:
- ------------------------------------------------------------------------------------------
Amounts Reserve
1993 & 1991 Utilized Amounts Balance at
Restructuring Through Utilized in 1996, December
Provisions 1995 1997 and 1998 31, 1998
- ------------------------------------------------------------------------------------------
Severance and related costs $ 468.0 $315.5 $136.9 $15.6
Plant closures and related costs 161.5 120.5 38.4 2.6
Work-systems redesign 71.5 9.9 40.9 20.7
Operating losses during
phase-out period 35.3 35.3 - -
Other 107.3 95.0 11.5 .8
Asset write-offs 225.6 225.6 - -
- ------------------------------------------------------------------------------------------
Total $1,069.2 $801.8 $227.7 $39.7
- ------------------------------------------------------------------------------------------
Amounts utilized include redistribution among categories based on actual
restructuring actions and project forecasts. The company reduced reserve
balances designated for severance and related costs by
$110.0 and increased balances for plant closures and related costs by $69.2,
work-systems redesign by $29.8 and other costs by $11.0. These redistributions
were necessary due to delays in completion, higher projected costs for plant
closures and the acceleration of the work-systems redesign projects enabling
some positions to be eliminated through attrition rather than severance. The
original scopes of the restructuring projects and the number of positions to be
eliminated remain substantially unchanged.
Reserves are considered utilized when specific restructuring criteria are
completed or benefits paid. As of December 31, 1998, Other current liabilities
included $31.5 and Other noncurrent liabilities included $8.2 of the remaining
restructuring reserve balance to be utilized. The company has determined that
the 1991 and 1993 restructuring reserve balance is adequate to cover the
remaining restructuring actions and that these restructuring programs will be
completed by the fourth quarter of 1999, with spending occurring
evenly throughout the year. The payment of the remaining reserves will be funded
from operations and will not have a material impact on earnings.
In the first quarter of 1998, the company committed to a plan to close two
foreign manufacturing facilities and committed to closing a third foreign
manufacturing facility in the third quarter of 1998. The planned closures are
due to a consolidation of certain product manufacturing resources in Europe. The
costs of the three closings consist primarily of $47 for severance and related
expenses, $35 for asset write-offs and $11 for other costs. The provisions for
these costs are reflected in Other expense (income), net for the year ended
December 31, 1998. The charges will be funded by operations and will not have a
material impact on liquidity. The three closures will result in a workforce
reduction of approximately 450 positions. As of December 31, 1998 the severance
and other amounts have not been expended and $45 is reflected in other current
liabilities and $13 is reflected in other long-term liabilities. The $35 in
asset write-offs has been reflected as a reduction of property, plant and
equipment. Management expects expenditures to occur throughout 1999 with
substantially all amounts expended by the end of 1999. Completion of these
closures is expected in the first quarter 2000. Cost savings associated with
these closures which is expected to be partially realized in 1999 and fully
realized in 2000, is estimated to be approximately $28 annually. Management
plans to sell the plants following the closures. Proceeds on the sales are not
expected to be material.
46A
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. PricewaterhouseCoopers 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
PRICEWATERHOUSECOOPERS 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 comprehensive income
and of cash flows present fairly, in all material respects, the financial
position of Warner-Lambert Company and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
- --------------------
400 Campus Drive
Florham Park, New Jersey
January 25, 1999
46
Quarterly Financial Information:
(Dollars in millions, except per share amounts)
- ----------------------------------------------------------------------------
1998 Quarters
- ----------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
Net sales $2,218.9 $2,556.7 $2,560.2 $2,877.9
Gross profit 1,614.3 1,900.9 1,913.8 2,155.4
Net income 279.3 338.1 295.5 341.1
Net income per common share*:
Basic .34 .41 .36 .42
Diluted .33 .40 .35 .40
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
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 .25 .28 .24 .29
Diluted .24 .28 .24 .28
- ----------------------------------------------------------------------------
*Amounts reflect a three-for-one stock split effective May 1998.
Market Prices of Common Stock and Dividends*:
- ----------------------------------------------------------------------------
1998 Range of Prices 1997 Range of Prices
- ----------------------------------------------------------------------------
Dividends Dividends
High Low per Share High Low per Share
- ----------------------------------------------------------------------------
First quarter $56 7/8 $39 3/8 $.16 $31 5/64 $23 11/64 $.13
Second quarter 71 9/16 55 .16 41 53/64 27 7/8 .13
Third quarter 85 15/16 64 3/4 .16 49 5/64 41 7/16 .13
Fourth quarter 82 60 1/8 .16 50 7/8 36 11/64 .13
- ----------------------------------------------------------------------------
*Amounts reflect a three-for-one stock split effective May 1998.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
NET SALES
- ---------
Sales in 1998 of $10.2 billion were 25 percent higher than in 1997. Sales
increased 28 percent adjusting for the unfavorable impact of foreign exchange
rate changes. Unit volume grew by 29 percent offset by price decreases of 1
percent.
Sales in 1997 of $8.2 billion 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.
On a geographic basis, U.S. sales increased $1.7 billion or 40 percent to $5.9
billion in 1998. International sales increased $347 million or 9 percent to $4.3
billion. At constant exchange rates, international sales increased 15 percent.
U.S. sales in 1997 increased $1.0 billion or 32 percent to $4.2 billion from
1996. International sales decreased $66 million or 2 percent to $4.0 billion in
1997. At constant exchange rates, international sales increased 6 percent.
Pharmaceutical Products
- -----------------------
(Dollars in millions) 1998 1997 1996
------------- ------------- --------
Net Sales $ 5,604 +55% $ 3,620 +45% $ 2,505
Worldwide pharmaceutical sales increased 55 percent to $5.6 billion in 1998
compared to 1997. The sales increase was primarily attributable to the continued
growth of the cholesterol-lowering agent LIPITOR, the oral agent for the
treatment of type 2 diabetes REZULIN, the anticonvulsant NEURONTIN and the
antihypertensive ACCUPRIL which achieved worldwide sales as follows:
Year ended Year ended
December 31, 1998 December 31, 1997
(Dollars in millions) ----------------- -----------------
LIPITOR $ 2,185 $ 865
REZULIN 748 420
NEURONTIN 514 292
ACCUPRIL 454 378
With the growth of these products, pharmaceutical segment sales now represent a
significantly greater percentage of the company's total sales and profits,
particularly in the U.S. and to a lesser degree in international markets.
Pharmaceutical sales in the U.S. increased 75 percent to $3.8 billion in 1998.
International pharmaceutical sales increased 26 percent to $1.8 billion in 1998
or 32 percent at constant exchange rates.
Worldwide sales of LIPITOR more than doubled to $2.2 billion in 1998 compared to
1997. LIPITOR has recently received additional indications for types III
(dysbetalipoproteinemia) and IV (isolated hypertriglyceridemia) lipid disorders.
As a result, LIPITOR continues to be the cholesterol-lowering medication
indicated for the broadest range of lipid abnormalities. LIPITOR now holds a 38
percent share of new prescriptions in the U.S. cholesterol-lowering market. In
most countries Warner-Lambert promotes and markets LIPITOR with Pfizer Inc. The
agreements with Pfizer consist of three broad categories: markets in which
Warner-Lambert and Pfizer co-promote Lipitor under a single brand name, markets
in which the two companies co-market the product under separate brand names in
competition with each other, and markets in which Pfizer has exclusive rights.
Pfizer does not have rights to the product in France and Japan. The co-promotion
agreement applies in most major markets, including the U.S., Canada, Germany and
the U.K. Under the agreement, the parties generally share certain product
expenses and sales force efforts. Pfizer is compensated on a sliding percentage
of sales basis depending on achieving certain sales objectives. The agreements
generally run, on a country by country basis, for ten years from the date of
product launch in the respective country. The agreement includes a provision
giving Warner-Lambert the right to co-promote one of Pfizer's products.
REZULIN achieved worldwide sales of $748 million during 1998. Warner-Lambert
markets REZULIN with Sankyo Company, Ltd., from whom the company licenses the
product for North America and other areas. Since its launch in March 1997, more
than 1.4 million Americans with type 2 diabetes have initiated treatment with
REZULIN.
Warner-Lambert and the FDA have been discussing reports of rare adverse liver
events (including liver-related deaths) associated with REZULIN. The company has
modified the labeling of the product to provide for the monitoring of liver
enzymes in an effort to reduce the occurrence of these rare events. The FDA held
a public meeting of the Endocrinologic and Metabolic Drugs Advisory Committee on
March 26, 1999 to discuss the REZULIN post-marketing safety data as well as the
company's supplemental new drug application for combination therapy with
metformin and a sulfonylurea. The Committee members voted 11-1 that the benefits
of REZULIN outweigh its risks when used in combination with insulin. The
Committee members also voted 12-0 that the benefits of REZULIN outweigh its
risks when used in combination with sulfonylureas. In addition, at least half of
the members voted that the benefits of REZULIN as monotherapy do not outweigh
its risks with current labeling. Warner-Lambert believes that sales of REZULIN
for monotherapy approximate 15% of total REZULIN sales. The Advisory Committee
did not vote on whether any restrictions or limitations should be imposed on
future REZULIN sales, but some members commented that changes to the current
labeling could be made that would serve to improve the benefit to risk ratio and
some members expressed the view that REZULIN sales should be limited to patients
whose diabetes cannot be controlled by other drugs. The FDA is not bound by the
findings of the Advisory Committee. While the company remains convinced of the
favorable risk/benefit profile of the drug, it cannot predict what action, if
any, the FDA may take with respect thereto. Such action can include further
labeling changes, additional monitoring, warnings to patients or limitations in
the patient population. The FDA also has the power to order the removal of
REZULIN from the market. Any such FDA action could adversely affect the sales of
REZULIN and the profits and stock price of the company. In addition, competitive
drugs will be reviewed at upcoming FDA Advisory Committee meetings in April. If
approved, such drugs could have an adverse effect on the sales of REZULIN and
the profits and stock price of the company.
48
During the third quarter of 1998, the company introduced two new pharmaceutical
products, OMNICEF (cefdinir) and CELEXA (citalopram). OMNICEF is a new, broad
spectrum cephalosporin antibiotic for the treatment of common respiratory tract
infections in adults and adolescents and uncomplicated skin and skin structure
infections. CELEXA is a selective serotonin reuptake inhibitor for the treatment
of depression that participates in the $6 billion U.S. market for
antidepressants. Warner-Lambert co-promotes CELEXA in the United States with
Forest Laboratories, Inc. CELEXA was developed in the U.S. by Forest
Laboratories, Inc. who has the manufacturing and marketing rights under license
from H. Lundbeck A/S. The co-promotion agreement requires each company to
provide agreed upon sales force efforts. Warner-Lambert will receive a quarterly
settlement from Forest Laboratories, Inc. based on a percentage of the profits
from the sales of CELEXA.
Pharmaceutical segment sales in the U.S. increased 83 percent to $2.1 billion in
1997. The sales increase was attributable to the successful 1997 launches of
LIPITOR and REZULIN generating sales of $739 million and $416 million,
respectively. Other pharmaceutical products in the U.S., including the
anticonvulsant DILANTIN, ACCUPRIL and the oral contraceptive LOESTRIN,
experienced sales declines of $55 million, $32 million and $31 million,
respectively due to an adjustment of wholesaler inventory levels during 1997.
International pharmaceutical sales increased 10 percent to $1.5 billion in 1997,
20 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.
Consumer Health Care Products
- -----------------------------
(Dollars in millions) 1998 1997 1996
------------- ------------- --------
Net Sales $ 2,722 +1% $ 2,691 -4% $ 2,797
Consumer health care segment sales in the U.S. increased 5 percent to $1.5
billion in 1998. Within the segment, U.S. shaving products sales increased 14
percent to $226 million for the year. The increase is due to strong sales of the
PROTECTOR shaving system and the newly designed SLIM TWIN disposable razor. Also
contributing to the sales growth within the segment were increased U.S. sales of
SUDAFED cold/sinus medication, BENADRYL allergy medication and LISTERINE
mouthwash and the launch of LUBRIDERM UV moisturizing and sun protection lotion.
International consumer health care segment sales decreased 3 percent to $1.2
billion in 1998. The decrease reflects the impact of the overall economic
weakness in Asian markets coupled with the unfavorable impact of exchange in
Canada and Australia. At constant exchange rates, international segment sales
increased 3 percent for the year.
Within the consumer health care segment, international sales of the company's
shaving products decreased 4 percent to $518 million and was unchanged at
constant exchange rates in 1998. International sales of the company's TETRA pet
care products business also fell 5 percent to $114 million and 2 percent at
constant exchange rates for the year. Both the shaving products and TETRA pet
care divisions were significantly impacted by the broad economic downturn in
Southeast Asia and Japan.
During the third quarter of 1998 the company introduced the new QUANTERRA line
of standardized herbal supplements in the U.S.
QUANTERRA Mental Sharpness, with Ginkgo Biloba, and QUANTERRA Prostate, with
Saw Palmetto, represent the first two products in a new line of clinically
proven herbal supplements. In January1999 the company introduced QUANTERRA
Emotional Balance with St. John's Wort. "Clinically proven" reflects the
fact that the extracts contained in the products have been the subject of
numerous clinical studies. These products are regulated as dietary supplements
according to the Dietary Supplement and Health Education Act of 1994. Under
the Act there is no pre-approval required for dietary supplements. The
products' labels are required to carry a disclaimer stating "These statements
have not been evaluated by the Food and Drug Administration. This product is
not intended to diagnose, treat, cure, or prevent any disease." These products
address the rapidly growing demand for complementary medicines - a market driven
by strong consumer interest and the increasing integration of complementary
medicines into clinical practice by health care professionals.
Net sales, presented in graphic format, were $6,416.8 million in 1994, $7,039.8
million in 1995, $7,231.4 million in 1996, $8,179.8 million in 1997 and
$10,213.7 million in 1998.
49
On December 31, 1998, Warner-Lambert Company and certain of its affiliates and
Glaxo Wellcome plc and certain of its affiliates (Glaxo Wellcome) entered into
transactions in various countries whereby Glaxo Wellcome transferred to
Warner-Lambert rights to OTC ZANTAC products in the United States and Canada,
and Warner-Lambert principally transferred to Glaxo Wellcome its rights to OTC
ZANTAC products in all other markets and its rights to OTC ZOVIRAX, OTC BECONASE
and future Glaxo Wellcome prescription to OTC switch products in all markets.
These OTC products had been marketed through joint ventures between
Warner-Lambert and Glaxo Wellcome which were formed to develop, seek approval of
and market OTC versions of Glaxo Wellcome prescription drugs. These joint
ventures were accounted for as equity method investments and therefore none of
the sales are currently reflected in reported sales. For financial reporting
purposes, the December 31, 1998 transactions, which ended the joint venture
relationships between Warner-Lambert and Glaxo Wellcome, were accounted for as a
nonmonetary exchange of similar assets with no gain or loss recognized. In 1998
the joint ventures recorded ZANTAC 75 sales of $170 million in the United States
and Canada.
Consumer health care sales in the U.S. of $1.4 billion 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 $1.3 billion 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.
Net income per share - diluted, presented in graphic format, was $.86 in 1994,
$.90 in 1995, $.95 in 1996, $1.04 in 1997 and $1.48 in 1998. These amounts
reflect a three-for-one stock split effective May 1998.
International shaving products sales decreased 6 percent to $540 million in 1997
but increased 3 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
16 percent to $121 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.
Confectionery Products
- ----------------------
(Dollars in millions) 1998 1997 1996
------------- ------------ -------
Net Sales $ 1,888 +1% $ 1,869 -3% $ 1,929
Confectionery sales in the U.S. increased 3 percent to $659 million in 1998 due
to strong sales of DENTYNE ICE and TRIDENT chewing gum and CERTS COOL MINT DROPS
and CERTS Powerful Mints breath fresheners.
International confectionery sales of $1.2 billion in 1998 were virtually
unchanged compared to 1997 but increased 7 percent at constant exchange rates.
The increase at constant exchange rates is primarily due to strong sales in
Mexico, where sales increased across all gum brands, and successful product
launches in Japan. The negative impact of exchange for the year was most
significant in Brazil, Japan, Colombia and Canada.
Confectionery sales in the U.S. increased 7 percent to $641 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 $1.2 billion in 1997, a decrease of 7
percent or 2 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.
50
COSTS AND EXPENSES
- ------------------
Cost of goods sold increased 9 percent in 1998 and 3 percent in 1997. As a
percentage of net sales, cost of goods sold fell to 25.7% from 29.4% in 1997 and
32.5% in 1996. 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.
Selling, general and administrative expense in 1998 and 1997 increased $1.1
billion and $561 million or 30 percent and 18 percent, respectively.
Pharmaceutical segment expenses significantly increased in 1998 and 1997 to
support new products. Quarterly settlements of co-promotion agreements related
to LIPITOR and REZULIN that are recorded in selling, general and administrative
expense increased $505 million and $198 million for the year ended December 31,
1998 and 1997, respectively, compared to the same periods a year ago. In 1997,
international pharmaceutical segment expenses also increased partly due to the
May 1997 Jouveinal acquisition. As a percentage of net sales, selling, general
and administrative expense was 46.9% compared with 44.9% in 1997 and 43.1% in
1996.
Research and development expense increased 30 percent and 21 percent in 1998 and
1997, respectively. As a percentage of net sales, research and development
expense was 8.6% in 1998, 8.2% in 1997 and 7.7% in 1996. For 1999 the company
plans to invest over $1 billion in research and development, a projected
increase of over 20 percent compared with 1998.
In 1993 and 1991, the company recorded as a separate income statement
component, restructuring charges of $525 million ($360 million after tax or
$.45 per share) and $544 million ($418 milion after tax or $.52 per share),
respectively, as described in Note 18 to the consolidated financial statements.
These restructuring charges include worldwide pharmeceutical manufacturing
rationalizations, which include extensive product relocations requiring
regulatory approvals. The time involved in completion of these activities
requires strategic planning and systematic executions of the tranfers of
manufacturing operations to other locations. The product relocations have
been phased in with the related approval processes taking approximately two
years for each relocation. Charges of $38 million, $60 million and $129
million were recorded against the reserves during the years 1998, 1997 and
1996, respectively. The charges during this period represent costs associated
with the closing of nine manufacturing sites, the elimination of approximately
1,000 positions and the cost of work-systems redesign. Work-systems redesign
costs primarily relate to reengineering efforts surrounding the replacement of
systems and simplification of work processes which will enable the company to
conduct its businesses, as restructured, with fewer employees. The reserve
balance at December 31, 1998 is $40 million. All remaining activities will be
completed by the fourth quarter of 1999. The remaining costs include the cost
of closing two facilities with the elimination of approximately 575 positions
and the completion of work-systems redesign activities including the elimination
of an additional 525 positions.
In 1993 the company estimated that the 1993 restructuring actions would
generate average annual pretax savings compared with pre-restructuring
spending levels of approximately $150 million upon completion of the project.
In 1998, the company has realized actual annual pretax savings of
$135 million. Similarly, in 1991, the company estimated that the 1991
restructuring actions would generate approximately $1 billion in cumulative
pretax savings upon completion of the activities. Through 1998, the company
has realized actual annual pretax savings of approximately $900 million. The
company expects the original estimated savings level for both projects to be
attained by the end of 1999.
Other expense (income), net in 1998 compared favorably by $37 million to 1997.
The favorability is primarily attributable to income of $29 million realized
from the Glaxo Wellcome Warner-Lambert joint venture in 1998 as compared to a
loss in 1997 of $14 million. Other expense (income), net in 1998 includes a gain
on the sale of the company's Rochester, Michigan manufacturing plant and certain
minor prescription products of $67 million which was offset by charges of $52
million and $20 million related to the company's plans to close two of its
European manufacturing facilities. The costs of the two closings consist
primarily of $30 million for asset write-offs and $33 million for severance and
related expenses. The two closures will result in a workforce reduction of
approximately 320 positions. Due to the time required for regulatory approval
and implementation planning, as of December 31, 1998 none of the amounts have
been expended. The plant closings are expected to be substantially completed
during 1999 and all amounts expended by that time. Also included in other
expense (income), net is a gain on the sale of certain investment securities of
$24 million which is principally offset by a $21 million provision for the
closing of another European manufacturing facility. The costs consist primarily
of $5 million for asset write-offs and $14 million for severance and related
expenses. The closure will result in a workforce reduction of approximately 130
positions. Due to the time required for regulatory approval and implementation
planning, as of December 31, 1998 none of the amounts have been expended. The
plant closing is expected to be substantially completed during 1999 and all
amounts expended by that time.
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.
INCOME TAXES
- ------------
1998 1997 1996
---- ---- ----
Effective tax rate:
As reported 29.0% 29.5% 27.3%
After minority interests 29.0% 29.5% 29.0%
The company's 1998 tax rate on a reported basis decreased .5 percentage points
due to increased income generated in foreign jurisdictions with lower tax rates,
partially offset by reduced U.S. possession tax credits.
The company's 1997 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.
The company anticipates a slight decrease in its effective tax rate in 1999. The
projected decrease is primarily due to increased income generated in foreign
jurisdictions with lower tax rates.
NET INCOME
- ----------
In 1998 net income of $1.3 billion increased 44 percent and diluted earnings per
share of $1.48 increased 42 percent. In 1997 net income of $870 million
increased 11 percent and diluted earnings per share of $1.04 increased 9
percent. Based on current planning assumptions, the company expects to increase
earnings per share by 30 percent in 1999.
Research and development expenditures, presented in graphic format, were $456.0
million in 1994, $501.2 million in 1995, $554.8 million in 1996, $672.2 million
in 1997 and $877.2 million in 1998.
51
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Selected data:
(Dollars in millions)
1998 1997 1996
------- ------- -------
Net debt $531 $1,347 $1,712
Net debt to net capital(equity
and net debt) 13% 32% 40%
Return on average shareholders'
equity 39% 32% 33%
Return on average total assets 15% 11% 12%
Net debt (total debt less cash and cash equivalents and other nonequity
securities) decreased $816 million from December 31, 1997. Cash and cash
equivalents were $911 million at December 31, 1998, an increase of $155 million
from December 31, 1997.
The company also held $75 million in nonequity securities, included in other
asset categories, that management views as cash equivalents for purposes of
calculating net debt, representing a decrease of $26 million from December 31,
1997. The total increase in cash and cash equivalents of $129 million combined
with a decrease in total debt of $687 million accounts for the total decrease in
net debt.
Net debt decreased $365 million in 1997 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 $2.2 billion at December
31, 1997, decreased $96 million from December 31, 1996.
In 1998 cash provided by operating activities of $2.0 billion was primarily used
to fund capital expenditures of $721 million, to reduce total debt by $687
million and to pay dividends of $525 million. 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.
Planned capital expenditures for 1999 are estimated to be $990 million in
support of additional manufacturing operations and expanded research facilities.
Over the next four years the company plans to invest nearly $1 billion in
pharmaceutical research and manufacturing infrastructure alone. The company
believes that the amounts available from operating cash flow and future
borrowings will be sufficient to meet expected operating needs and planned
capital expenditures for the foreseeable future.
The company has readily available financial resources, including unused
worldwide lines of credit totaling $1.4 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 January 1999, the Board of Directors approved a 25 percent increase in the
quarterly dividend to $.20 per share payable in the first quarter of 1999. The
company anticipates that the quarterly dividend rate will remain $.20 per share
during 1999 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. The company's financial
instrument holdings were analyzed to determine their sensitivity to changes in
market rates. The model used to assess sensitivity assumed a 10% hypothetical
rate change on all instruments. All other factors were held constant in the
analysis. The parameters of the analysis included all instruments subject to
changes in market rates including foreign denominated assets and liabilities
hedged by foreign exchange contracts. Unhedged foreign currency denominated
assets and liabilities were not significant at December 31, 1998.
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, 1998, using a sensitivity
analysis, 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.
52
The company holds certain instruments, primarily debt obligations, which are
sensitive to changes in market interest rates. At December 31, 1998, 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, 1998, using a sensitivity analysis, 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.
OTHER MATTERS
- -------------
Euro
On January 1, 1999, the euro was introduced as the common currency in the 11
European Union member states participating in the Economic and Monetary Union.
The conversion to the euro provides for a three-year transition period during
which transactions may be conducted using either the euro or the legacy currency
of the participating country. Effective January 1, 2002, only the euro will be
legal tender in these countries. The company has proactively prepared for the
advent of the single European currency. Modifications to information systems
have proven to be effective in processing business transactions. Further steps
toward the adoption of the euro as the sole currency in these countries will be
taken during the transition period to meet the January 2002 deadline. The
company has invested and continues to invest in a training and communication
program to enable its colleagues to understand, address and communicate the
implications of the single currency.
Increased price transparency resulting from conversion to a single currency is
not expected to have a material impact on the pharmaceutical business because
individual European countries closely regulate pricing of pharmaceutical
products. Pricing issues in the consumer health care and confectionery
businesses have been identified and incorporated into our normal business
planning process. On a total company basis pricing issues are expected to have a
neutral impact on our business.
Year 2000
In early 1995 the company embarked on a reengineering initiative to replace
certain of its information systems and related technology infrastructure which
also addressed Year 2000 issues. The company began specifically addressing its
Year 2000 issues in 1996 and expanded its efforts in 1997 by creating a
multi-disciplinary Year 2000 Task Force to coordinate the company's Year 2000
compliance activities. The Year 2000 Task Force is chaired by the company's Vice
President and Associate General Counsel, Worldwide Corporate Compliance, who
reports on all Year 2000 and Task Force issues to the company's Office of the
Chairman. The Task Force makes regular reports on the status and progress of the
company's Year 2000 compliance program to the Office of the Chairman and the
Audit Committee of the company's Board of Directors.
Within the business units of the company, senior managers have been assigned
responsibility for directing the Year 2000 compliance efforts of each business
and these managers have formed teams to assist them in doing so. In addition,
the company has retained external consultants for critical and specialized
aspects of its compliance strategy. The company's Year 2000 compliance efforts
are directed toward all aspects of its worldwide operations, including office
systems, manufacturing and processing, quality control and assurance,
distribution, sales and marketing, finance and administration, research and
development, and facilities. These efforts apply to both information and
embedded technology systems.
The company has made considerable progress towards achieving Year 2000
compliance. It is pursuing compliance by addressing both its internal technology
systems and its business stakeholders, whose own technology systems must also be
compliant.
Dividends per share, presented in graphic format, were $.41 in 1994, $.43 in
1995, $.46 in 1996, $.51 in 1997 and $.64 in 1998. These amounts reflect a
three-for-one stock split effective May 1998. A 26 percent dividend increase in
1998 marked the 47th consecutive year of dividend increases.
The company continues to follow its 5-step approach for resolving Year 2000
issues regarding its internal technology systems. The five steps are: (1)
inventory of all date-dependent systems; (2) assessment of inventoried systems
to identify the systems that are non-Year 2000 compliant; (3) remediation of
noncompliant systems; (4) testing of remediated and compliant systems to verify
Year 2000 compliance; and (5) implementation and monitoring of remediated
systems for ongoing compliance. The company has been assisted by its external
consultants in
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performing its inventory and assessment, in developing and implementing
remediation strategies and in developing test protocols and strategies.
In pursuing this strategy, the company has identified its "mission critical"
information and embedded technology systems, and is giving its primary attention
to those systems. A mission critical system is a high priority system whose
failure would adversely impact other systems or cause material loss or
disruption of business for the company or third parties. A majority of the
company's mission critical projects have been completed and are being monitored
on an ongoing basis. The company plans to complete its mission critical projects
and non-mission critical projects by the third quarter of 1999. To verify its
progress, the company has an active internal audit program in place, utilizing
internal resources and external consultants.
The company also continues to follow its 5-step approach for addressing the Year
2000 compliance of its business stakeholders (the suppliers, vendors, customers,
distributors, business partners, government agencies, public utilities, etc. on
which the company relies in doing business). The five steps are: (1) inventory,
or identification, and prioritization of all business stakeholders; (2)
assessment of Year 2000 readiness of the business stakeholders; (3) monitoring
of the ongoing Year 2000 efforts of the business stakeholders; (4) verification
of business stakeholder assurances of Year 2000 compliance; and (5) auditing of
business stakeholders, if possible and as necessary.
In addition to prioritizing business stakeholders, the company has identified
those business stakeholders it considers mission critical and is giving its
primary attention to them. The company has substantially completed its inventory
of its mission critical business stakeholders (Step 1) and has assessed the
majority of them (Step 2) and is monitoring their Year 2000 compliance progress
through the use of written questionnaires, oral inquiries, on-site visits and
other means (Step 3). In some cases, the company has completed the verification
and auditing steps (4 and 5). With respect to business stakeholders, the company
currently anticipates completing its inventory and assessment, and substantially
completing verification, to the extent possible or permitted, of its business
stakeholders by mid-1999. Ongoing monitoring, verification and any necessary
audits will continue throughout 1999.
Year-end stock price, presented in graphic format, was $12 53/64 in 1994, $16
3/16 in 1995, $25 in 1996, $41 25/64 in 1997 and 75 3/16 in 1998. These amounts
reflect a three-for-one stock split effective May 1998. The value of
Warner-Lambert stock has increased 568 percent in the last five years or 646
percent with dividends reinvested.
Management continues to assess the business risks associated with Year 2000
compliance issues and is developing contingency plans, as needed, to address the
potential Year 2000 failure of mission critical internal information and
embedded technology systems and business stakeholders. If such failures should
occur, they could potentially cause the company to experience delays in receipt
of raw materials for manufacturing, interruptions in manufacturing resulting
from possible third party or internal systems compliance issues, delayed
shipments of finished product and non-provision of critical services, such as
utility services, among other issues. Contingency plans being developed include
increases in certain inventory levels, use of alternate suppliers, and other
backup procedures. Management expects to implement specific contingency plans
which it determines to be both prudent and cost effective.
Year 2000-related maintenance and modification costs will be expensed as
incurred, while the costs of new information technology will be capitalized and
amortized in accordance with company policy. Management currently estimates
incremental expenditures of approximately $120 million will be necessary to
address and remediate Year 2000 compliance issues, of which approximately $50
million has been incurred as of December 31, 1998. Currently unforeseen
developments or delays could cause this cost estimate to change.
Although management believes that its Year 2000 compliance program reduces the
risk of an internal compliance failure and is taking a proactive approach with
business stakeholders, there can be no assurances that the company or its
business stakeholders will achieve timely Year 2000 compliance or that such
noncompliance will not have a material adverse impact on the company.
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ACQUISITION
On January 26, 1999, the company announced a definitive agreement to acquire
Agouron Pharmaceuticals, Inc., an integrated pharmaceutical company committed to
the discovery and development of innovative therapeutic products for treatment
of cancer, AIDS and other serious diseases. Agouron achieved total revenues of
$467 million for the fiscal year ended June 30, 1998. Under the terms of the
agreement, which is valued at approximately $2.1 billion, each share of Agouron
stock will be exchanged for a certain amount of Warner-Lambert stock. The exact
exchange ratio will be based on the average price of Warner-Lambert stock prior
to closing. The transaction will be accounted for as a pooling of interests and
will require the approval of Agouron's shareholders and customary regulatory
approvals. The transaction will not require Warner-Lambert shareholder approval.
ENVIRONMENTAL
The company is involved in various administrative or judicial proceedings
related to environmental actions initiated by the Environmental Protection
Agency (EPA) under the Comprehensive Environmental Response, Compensation and
Liability Act (also know as Superfund) or by state authorities under similar
state legislation, or by third parties. 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. While it is
reasonably possible that additional costs may be incurred beyond the amounts
accrued as a result of new information, those costs, if any, cannot be estimated
currently. As of December 31, 1998 and 1997 the accrual for environmental
liabilities was $34 million covering 50 and 48 sites, respectively. For 11
sites, generally those which the company currently owns or previously owned, the
company may be the sole party responsible for clean-up costs. For other sites,
other parties (defined as potentially responsible parties) may be jointly and
severally responsible, along with Warner-Lambert, to pay remediation and other
related expenses. Warner Lambert's share of costs at a given site is determined
through an allocation process which takes into account many factors including
volume and the nature of a company's waste. Once established, remediation costs
for a given site may be paid out over several years. While it is not possible to
predict with certainty the outcome of such matters or the total cost of
remediation, management believes it is unlikely that their ultimate disposition
will have a material adverse effect on the company's financial position,
liquidity, cash flows or results of operations for any year.
Statements made in this report that state "we believe," "we expect" or otherwise
state the company's predictions for the future are forward-looking statements.
Actual results might differ materially from those projected in the
forward-looking statements. Additional information concerning factors that could
cause actual results to materially differ from those in the forward-looking
statements is contained in Exhibit 99 of the company's December 31, 1998 Form
10-K filed with the Securities and Exchange Commission. Exhibit 99 to the Form
10-K is incorporated by reference herein.
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Product names appearing in capital letters are trademarks of Warner-Lambert
Company, its affiliates, related companies or its licensors. ZANTAC, ZANTAC 75,
ZOVIRAX and BECONASE are registered trademarks of Glaxo Wellcome, its
affiliates, related companies or licensors. CELEXA is a registered trademark of
Forest Laboratories Inc., its affiliates, related companies or its licensors.
OMNICEF is a registered trademark of Fujisawa Pharmaceutical Co., Ltd.
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