Why did reported earnings fall in 1993 even though sales grew?

The decline was driven mainly by a $750 million pre-tax ($525 million after-tax) charge for worldwide restructuring and unusual items recorded in the third quarter of 1993. Excluding this and other divestiture-related items, earnings grew about 15%, and per-share income would have been $3.70 rather than $2.05.

What are the main risks to Pfizer's U.S. pharmaceutical business?

Health care reform proposals such as the Administration's Health Security Act could require Medicare rebates and allow the government to exclude or restrict coverage for drugs it deems excessively priced. Generic competition is also expected for Feldene, which is already facing it, and for Glucotrol in 1994. Growing managed care and Medicaid rebate requirements add further pricing pressure.

What is Pfizer's exposure to the Shiley heart valve litigation?

Numerous claims involve Shiley C/C heart valves, including a worldwide Bowling settlement class covering valve recipients. Management believes most settlement costs will be covered by insurance and by proceeds from the 1992 sale of certain Shiley product lines, and believes the cases should not have a material adverse effect on financial position or results. Insurance coverage disputes with excess carriers are also pending.

Will Pfizer's tax rate rise in 1994?

Yes. The 1993 Omnibus Budget Reconciliation Act reduces the U.S. tax benefit from Puerto Rico operations, and the company expects its effective tax rate to increase from about 26% to about 30% in 1994. The corporate tax rate also rose from 34% to 35%, retroactive to January 1, 1993.

How is Pfizer funding its shareholder returns and balance sheet changes?

Pfizer paid $536.1 million in dividends in 1993 and repurchased shares, including completing a 20 million share program. It also transferred 10 million treasury shares to an Employee Benefit Trust in exchange for a roughly $600 million promissory note. These actions reduced shareholders' equity and raised debt to total capitalization to 31% from 28%.

PFE 10-K FY1993 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 25, 1994. Cited figures are marked; the original filing is the authoritative source.

Pfizer's 1993 Form 10-K shows a company in transition.

Reported net sales rose 3% to $7.48 billion^a, but reported net income fell 19% to $657.5 million ($2.05 per share), down from $810.9 million ($2.41) in 1992. The decline was driven by a $750 million pre-tax ($525 million after-tax) restructuring and unusual-items charge taken in the third quarter of 1993, which is designed to cut at least $130 million in annual operating costs and reduce the workforce by about 3,000 employees. Excluding divestitures, restructuring, and unusual items, Pfizer's net income would have been $1,183.9 million ($3.70 per share), up 15% from ongoing 1992 results, and ongoing net sales grew 9%.

Growth was concentrated in pharmaceuticals, which reached 69%^b of consolidated sales, led by Norvasc, Zoloft, Zithromax, Diflucan, and Procardia XL. Investors should weigh several risks. Health care reform proposals, including the Administration's Health Security Act, could pressure U.S. drug pricing, and near-term generic competition is expected for Feldene and Glucotrol.

Pfizer also faces significant product liability exposure from Shiley C/C heart valve litigation, although management believes it is covered largely by insurance and reserves. The tax picture is also changing: the 1993 Omnibus Budget Reconciliation Act reduces the Puerto Rico tax credit benefit and is expected to raise the effective tax rate from 26% to about 30% in 1994. Balance sheet strength remains a positive, with Aaa/AAA senior debt ratings, $1.2 billion^c of cash and short-term investments, and $1.2 billion of unused credit lines.

Debt to total capitalization rose to 31% after share repurchases and the $600 million^d Employee Benefit Trust transaction. On the outlook side, management plans to spend more than $1.1 billion on R&D in 1994, and it has said the U.S. pharmaceutical price increase will be under 2.5% for 1994. The company's 1994 dividend was $0.47 per share, payable in the first quarter.

02—Key points

Key Highlights

Net sales rose 3% to $7,477.7 million in 1993; ongoing net sales (excluding divested businesses) grew 9%.
Reported net income fell 19% to $657.5 million ($2.05 per share) after a $750 million pre-tax restructuring and unusual items charge in Q3 1993.
Excluding divestitures, restructuring, and unusual items, net income would have been $1,183.9 million ($3.70 per share), up 15%.
Pharmaceuticals grew to 69% of consolidated net sales (from 54% in 1991), with Cardiovascular at 27% and Anti-infectives at 22%.
The restructuring is expected to cut annual operating costs by at least $130 million and reduce the workforce by about 3,000 employees.
Senior debt is rated Aaa by Moody's and AAA by S&P, with about $1.2 billion of cash and short-term investments and $1.2 billion of unused credit lines.
Dividends rose 14% to $1.68 per share, and the company repurchased about 12.5 million shares in 1993 for about $804 million.

03—Questions

Frequently Asked Questions

Why did reported earnings fall in 1993 even though sales grew?
The decline was driven mainly by a $750 million pre-tax ($525 million after-tax) charge for worldwide restructuring and unusual items recorded in the third quarter of 1993. Excluding this and other divestiture-related items, earnings grew about 15%, and per-share income would have been $3.70 rather than $2.05.
What are the main risks to Pfizer's U.S. pharmaceutical business?
Health care reform proposals such as the Administration's Health Security Act could require Medicare rebates and allow the government to exclude or restrict coverage for drugs it deems excessively priced. Generic competition is also expected for Feldene, which is already facing it, and for Glucotrol in 1994. Growing managed care and Medicaid rebate requirements add further pricing pressure.
What is Pfizer's exposure to the Shiley heart valve litigation?
Numerous claims involve Shiley C/C heart valves, including a worldwide Bowling settlement class covering valve recipients. Management believes most settlement costs will be covered by insurance and by proceeds from the 1992 sale of certain Shiley product lines, and believes the cases should not have a material adverse effect on financial position or results. Insurance coverage disputes with excess carriers are also pending.
Will Pfizer's tax rate rise in 1994?
Yes. The 1993 Omnibus Budget Reconciliation Act reduces the U.S. tax benefit from Puerto Rico operations, and the company expects its effective tax rate to increase from about 26% to about 30% in 1994. The corporate tax rate also rose from 34% to 35%, retroactive to January 1, 1993.
How is Pfizer funding its shareholder returns and balance sheet changes?
Pfizer paid $536.1 million in dividends in 1993 and repurchased shares, including completing a 20 million share program. It also transferred 10 million treasury shares to an Employee Benefit Trust in exchange for a roughly $600 million promissory note. These actions reduced shareholders' equity and raised debt to total capitalization to 31% from 28%.

04—Continue

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