FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
------- -------
Commission File Number 1-3608
WARNER-LAMBERT COMPANY
(Exact name of registrant as specified in its charter)
Delaware 22-1598912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Tabor Road, Morris Plains, New Jersey
(Address of principal executive offices)
07950
(Zip Code)
Registrant's telephone number, including area code: (201) 540-2000
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of
the issuer's classes of Common Stock, as of the latest
practicable date.
CLASS Outstanding at October 31, 1996
----- -------------------------------
Common Stock, $1 par value 271,248,009 *
*Reflects a two-for-one stock split of the Registrant's
Common Stock for stockholders of record as of May 3, 1996.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in millions)
ASSETS:
Cash and cash equivalents $ 437.7 $ 295.8
Short-term investments 199.3 267.4
Receivables 1,347.8 1,239.5
Inventories 668.8 645.7
Prepaid expenses and other current assets 372.9 329.6
--------- --------
Total current assets 3,026.5 2,778.0
Investments and other assets 536.4 654.3
Equity investments in affiliated companies 293.5 257.5
Property, plant and equipment 2,056.2 2,006.3
Intangible assets 1,463.9 404.8
--------- --------
Total assets $ 7,376.5 $6,100.9
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Commercial paper $ 448.5 $ 473.0
Notes payable - banks and other 427.2 421.6
Accounts payable, trade 531.2 523.8
Accrued compensation 191.7 166.3
Other current liabilities 597.3 671.2
Federal, state and foreign income taxes 210.2 169.3
--------- --------
Total current liabilities 2,406.1 2,425.2
Long-term obligations 1,713.3 634.5
Other noncurrent liabilities 745.1 740.4
Minority interests 12.5 54.7
Shareholders' equity:
Preferred stock - none issued - -
Common stock issued - (1996 - 320,660,536
shares, 1995 - 160,330,268 shares) 320.7 160.3
Capital in excess of par value 106.4 217.5
Retained earnings 3,358.8 3,042.9
Cumulative translation adjustments (253.3) (216.3)
Treasury stock, at cost: (1996 - 49,437,860
shares; 1995 - 24,731,378 shares) (1,033.1) (958.3)
--------- --------
Total shareholders' equity 2,499.5 2,246.1
--------- --------
Total liabilities and shareholders'
equity $ 7,376.5 $6,100.9
========= ========
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995** 1996 1995**
---- ---- ---- ----
(Dollars in millions, except per share amounts)
NET SALES $1,768.0 $1,775.7 $5,388.4 $5,179.9
COSTS AND EXPENSES:
Cost of goods sold 580.2 622.1 1,741.8 1,766.0
Selling, general and
administrative 778.6 785.8 2,297.8 2,161.9
Research and development 145.0 130.2 405.4 364.0
Other(income)expense, net 49.2 (93.6) 7.5 (58.7)
-------- -------- -------- --------
Total costs and expenses 1,553.0 1,444.5 4,452.5 4,233.2
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 215.0 331.2 935.9 946.7
Provision for income taxes 62.3 82.0 251.4 236.2
Minority interests - 35.2 69.0 94.1
-------- -------- -------- --------
NET INCOME $ 152.7 $ 214.0 $ 615.5 $ 616.4
======== ======== ======== ========
PER COMMON SHARE:
Net income $ .56 $ .79* $ 2.27 $ 2.29*
======== ======== ======== ========
Cash dividends paid $ .345 $ .325* $ 1.035 $ .975*
======== ======== ======== ========
Average number of common shares
outstanding (thousands) 271,248 270,321* 271,214 269,770*
*Restated for two-for-one stock split as described in Note J.
**Restated (See Note M to the Consolidated Financial Statements).
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
------------------
1996 1995
------------------
(Dollars in millions)
OPERATING ACTIVITIES:
Net income $ 615.5 $ 616.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 165.7 151.4
Minority interests 69.0 94.1
Gain on sale of businesses (75.2) (117.0)
Changes in assets and liabilities, net of
effects from acquisitions/dispositions
of businesses:
Receivables (248.1) (166.8)
Inventories (49.7) (86.9)
Accounts payable and accrued liabilities 86.2 (117.1)
Other, net 16.1 4.5
--------- --------
Net cash provided by operating activities 579.5 378.6
--------- --------
INVESTING ACTIVITIES:
Purchases of investments (216.3) (364.8)
Proceeds from sales of investments 372.1 278.6
Capital expenditures (221.1) (263.2)
Acquisitions of businesses (1,058.9) (34.3)
Proceeds from disposition of business, net 137.4 136.1
Other, net (53.5) 19.9
--------- --------
Net cash used by investing activities (1,040.3) (227.7)
--------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings 2,159.5 1,073.1
Principal payments on borrowings (1,115.9) (885.1)
Purchases of treasury stock (98.7) (17.3)
Cash dividends paid (280.7) (263.0)
Distributions paid to minority interests (103.2) (60.8)
Proceeds from exercise of stock options 48.2 46.2
--------- --------
Net cash provided (used) by financing activities 609.2 (106.9)
--------- --------
Effect of exchange rate changes on cash
and cash equivalents (6.5) (6.8)
--------- --------
Net increase in cash and cash equivalents 141.9 37.2
Cash and cash equivalents at beginning of year 295.8 217.9
--------- --------
Cash and cash equivalents at end of period $ 437.7 $ 255.1
========= ========
See accompanying notes to consolidated financial statements
WARNER-LAMBERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A: The interim financial statements presented herein should be
read in conjunction with Warner-Lambert Company's 1995 Annual
Report.
NOTE B: The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE C: In the opinion of management, all adjustments considered
necessary for a fair presentation of the results for the
interim periods have been included in the consolidated
financial statements.
NOTE D: On June 30, 1996 Warner-Lambert Company purchased Glaxo
Wellcome plc's U.S. and European interests in the Warner
Wellcome over-the-counter joint venture operations. Purchase
agreements for Glaxo Wellcome plc's interests in Canada,
Australia, New Zealand and certain OTC assets in Mexico were
completed during the third quarter of 1996.
As of September 30, 1996 approximately $1.1 billion, including
estimated acquisition costs, has been classified as an
intangible asset pending final allocation among the intangible
asset categories and determination of related lives.
Estimates of proforma results indicate that the acquisition
did not have a material impact on consolidated earnings. The
transaction was financed with commercial paper which has been
classified as a long-term obligation due to the company's
intent and ability to refinance on a long-term basis.
NOTE E: Effective January 1, 1996 the company's international
operations that previously reported financial results on a
fiscal-year basis ending November 30 changed to a calendar-
year basis ending December 31. The change was made primarily
to reflect the results of these operations on a more timely
basis. The results of operations for those subsidiaries for
the month of December 1995 are included as a charge of $18.8
million against retained earnings.
NOTE F: Major classes of inventories were as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
(In millions)
Raw materials $131.7 $110.0
Finishing supplies 54.3 48.0
Work in process 101.5 89.1
Finished goods 381.3 398.6
------ ------
$668.8 $645.7
====== ======
NOTE G: Property, plant and equipment balances were as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
(In millions)
Property, plant and equipment $ 3,521.7 $ 3,416.6
Less accumulated depreciation (1,465.5) (1,410.3)
--------- ---------
Net $ 2,056.2 $ 2,006.3
========= =========
NOTE H: Intangible asset balances were as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
(In millions)
Patents, trademarks,
goodwill and other
intangibles $1,563.2 $484.8
Less accumulated amortization (99.3) (80.0)
-------- ------
Net $1,463.9 $404.8
======== ======
The September 30 intangible asset balance includes $1.1
billion related to the purchase of Glaxo Wellcome plc's
interests in the Warner Wellcome joint venture operations
discussed in Note D.
NOTE I: Included in Other (income) expense, net was interest expense
of $44.6 million and $31.3 million for the third quarters of
1996 and 1995, respectively. Interest expense for the first
nine months of 1996 and 1995 was $105.0 million and $93.5
million, respectively.
NOTE J: On April 23, 1996 the stockholders approved an increase in the
number of authorized shares of common stock from 300 million
to 500 million in order to effectuate a two-for-one stock
split. The additional shares were distributed on May 17, 1996
to stockholders of record on May 3, 1996. Par value remained
at $1.00 per share. The stock split was recorded by
increasing Common stock issued and reducing Capital in excess
of par value by $160.3 million. The average number of common
shares outstanding and all per share information have been
restated to reflect the stock split.
NOTE K: In March 1996, Warner-Lambert sold Warner Chilcott
Laboratories, its generic pharmaceutical business. Net
proceeds were approximately $137.4 million. The sale resulted
in a pretax gain of $75.2 million, which is included in Other
(income) expense, net for the nine months ended September 30,
1996. On an after tax basis, the gain was $45.7 million or
$.17 per share.
NOTE L: In the third quarter of 1995, the company sold its Pro
toothbrush business, which manufactures and markets
toothbrushes primarily in Latin America. Net proceeds were
approximately $136.1 million resulting in a pre-tax gain of
$117.0 million, which is included in Other (income)expense,
net. On an after tax basis, the gain was $82.4 million or
$.31 per share.
NOTE M: Commencing with the financial statements for the third quarter
and the nine-month period, marketing expense and
administrative and general expense categories have been
combined in one line item - Selling, general and
administrative. Additionally, intangible amortization and
certain other expenses have been reported in Other (income)
expense, net. Previously, these items were reported in
administrative and general expense. Reclassifications have
been made to the prior year financial statements to conform to
the current presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
- ------------------------------------------------------
COMPARED WITH CORRESPONDING PERIOD IN 1995
- ------------------------------------------
NET SALES
- ---------
Sales for the third quarter of 1996 of $1,768 million were virtually
equal to last year's third quarter sales. For the first nine months of
1996 sales rose 4 percent to $5,388 million. Excluding the impact of
the divestitures of the company's PRO toothbrush and Warner Chilcott
generic pharmaceutical businesses and the change in the recording of
sales of ZOVIRAX cold sore cream (see below), worldwide sales increased
3 percent and 6 percent for the third quarter and nine-month period,
respectively. Unit volume growth, excluding the divestitures, was 5
percent for the third quarter and 7 percent for the nine months and
price increases added 1 percent and 2 percent, respectively. Foreign
exchange rate changes had an unfavorable impact of 3 percent for each
period. Sales of ZANTAC 75, an OTC version of Glaxo Wellcome's
prescription drug ZANTAC, are not reflected in the company's reported
sales since the company uses the equity method of accounting for the
joint venture that markets this product (see below). If these sales had
been consolidated, sales would have increased an additional 2 percent in
each period.
U.S. sales increased $5 million or 1 percent to $808 million for the
third quarter and $118 million or 5 percent to $2,366 million for the
first nine months of 1996. Adjusted for the Warner Chilcott
divestiture, U.S. sales increased 5 percent and 9 percent, respectively.
If sales of ZANTAC 75 were also included, U.S. sales would have
increased an additional 4 percent and 6 percent, respectively.
International sales decreased $13 million or 1 percent to $960 million
for the third quarter and increased $91 million or 3 percent to $3,022
million for the first nine months of 1996. At constant exchange rates,
international sales increased 5 percent and 9 percent, respectively.
Effective January 1, 1996 the company's international operations changed
their reporting period from a fiscal-year basis ending November 30 to a
calendar-year basis ending December 31. (See Note E.) All references to
the nine-month period include the calendar nine-month period ended
September 30, 1996 and the fiscal nine-month period ended August 31,
1995 for international operations. Similarly, all references to the
third quarter include the calendar three-month period ended September
30, 1996 and the fiscal three-month period ended August 31, 1995 for
international operations.
SEGMENT SALES Three months ended Nine months ended
September 30, September 30,
(Dollars in --------------------------- ------------------------
Millions) Percent
Increase/ Percent
1996 1995 (Decrease) 1996 1995 Increase
---- ---- --------- ---- ---- --------
Pharmaceutical $ 604 $ 558 8% $1,880 $1,778 6 %
Consumer Health
Care 691 731 (5) 2,101 2,049 3
Confectionery 473 487 (3) 1,407 1,353 4
---- ---- ----- -----
Consolidated
Net Sales $1,768 $1,776 0 % $5,388 $5,180 4 %
====== ====== ====== ======
Pharmaceutical sales in the U.S. increased 16 percent to $290 million
for the third quarter and increased 7 percent to $892 million for the
nine-month period. In March 1996 Warner-Lambert sold its Warner Chilcott
generic pharmaceutical business. (See Note K.) Sales of this business
for the twelve months of 1995 were approximately $125 million. Excluding
the impact of the Warner Chilcott divestiture, sales increased 32
percent and 18 percent for the third quarter and nine-month period,
respectively. Products with significant sales growth for both reporting
periods included the add-on epilepsy therapy NEURONTIN, the
cardiovascular drug ACCUPRIL and the oral contraceptive LOESTRIN. The
company received U.S. Food and Drug Administration (FDA) clearance to
market the anticonvulsant treatment CEREBYX in August and the oral
contraceptive ESTROSTEP in October.
The company entered into a ten-year marketing agreement with Pfizer Inc.
to co-promote the cholesterol-lowering agent atorvastatin in the U.S.
and on a broad basis in the international marketplace. The terms of the
agreement call for milestone payments, some of which are being made this
year, as well as a sharing of promotional expenses and the cost of long-
term research and development studies. Pfizer will receive a portion of
the profits based on the drug achieving and then exceeding certain sales
targets. A New Drug Application (NDA) for atorvastatin was submitted to
the FDA and a number of international regulatory agencies in June 1996.
Warner-Lambert submitted a NDA in July 1996 to the FDA for the diabetes
drug troglitazone for non-insulin dependent diabetes mellitus patients
inadequately controlled by insulin. In September, the company signed a
letter of intent to establish a joint venture partnership in the U.S.
with Sankyo Company, Ltd., from whom Warner-Lambert licensed the product
for North America and other areas, and will enter an agreement with the
joint venture to co-promote troglitazone and ACCUPRIL. Warner-Lambert
also received rights to market or co-promote troglitazone in additional
markets including Mexico, Central America, South America, Australia, New
Zealand and the Philippines. In addition, Warner-Lambert will have the
opportunity to co-promote in the United States Sankyo products that
Sankyo intends to market in the U.S. through a co-promotion agreement.
The joint venture is subject to the completion of final agreements which
should be signed later this year.
International pharmaceutical sales increased 2 percent to $314 million
for the third quarter and 5 percent to $988 million for the nine-month
period. At constant exchange rates, international sales increased 8
percent and 9 percent, respectively. Major contributors to
international sales growth for both reporting periods were ACCUPRIL and
NEURONTIN.
Consumer health care segment sales reflect the January 1996 reclassifi-
cation of HALLS cough tablets to the confectionery segment in both 1996
and 1995. Consumer health care product sales in the U.S. fell 5 percent
to $362 million for the third quarter reflecting, in part, the launch of
COOLMINT LISTERINE toothpaste in August 1995. For the nine-month period
U.S. consumer health care sales rose 6 percent to $1,050 million
primarily due to sales growth of LISTERINE Antiseptic mouthwash, NIX
head lice medication, SUDAFED cold medication, COOLMINT LISTERINE
toothpaste and the company's wet-shaving products. If sales of ZANTAC 75
were included, U.S. sales would have increased an additional 9 percent
in the third quarter and 12 percent for the nine-month period.
International sales decreased 6 percent to $329 million for the third
quarter and 1 percent to $1,051 million for the nine-month period. At
constant exchange rates, international sales were unchanged for the
third quarter and increased 4 percent for the nine-month period.
Warner-Lambert no longer reports ZOVIRAX sales in its consolidated sales
since the company uses the equity method of accounting for the Glaxo
Wellcome Warner-Lambert joint venture (see below). Adjusted for the PRO
divestiture, lack of consolidating ZOVIRAX sales and the impact of
exchange, international consumer health care sales increased 7 percent
for both the third quarter and the nine-month period.
In December 1993 Warner-Lambert signed separate agreements with both
Wellcome plc (Wellcome) and Glaxo plc (Glaxo) governing the
establishment of joint ventures in various countries to develop and
market a broad range of nonprescription consumer health care products.
Glaxo acquired Wellcome in 1995 and changed the name of the combined
company to Glaxo Wellcome plc.
Warner-Lambert's agreement with Wellcome called for both companies to
contribute to the Warner Wellcome joint venture operations current and
future over-the-counter (OTC) products. Joint venture operations formed
pursuant to a global principles agreement began in 1994 in the U.S.,
Canada, Australia, New Zealand and certain countries in Europe. Warner-
Lambert has consolidated the financial results of the Warner Wellcome
joint venture operations. On June 30, 1996 the company purchased Glaxo
Wellcome's U.S. and European interests in the Warner Wellcome joint
venture operations. In September the company purchased Glaxo Wellcome's
interest in the Warner Wellcome joint venture operations in Canada,
Australia and New Zealand and certain OTC assets in Mexico, effectively
ending this joint venture with Glaxo Wellcome. The purchase price for
the entire transaction was approximately $1.1 billion.
In 1993 Warner-Lambert and Glaxo formed a joint venture in the U.S.
(referred to as Glaxo Wellcome Warner-Lambert) to develop, seek approval
of and market OTC versions of Glaxo prescription drugs in the U.S. On
June 30, 1996 the Glaxo Wellcome Warner-Lambert joint venture was
restructured so that in addition to developing and marketing OTC
versions of Glaxo prescription drugs, it will also develop and market
Wellcome's OTC switch products, including ZOVIRAX cold sore cream. With
the restructuring of the Glaxo Wellcome Warner-Lambert joint venture,
Warner-Lambert no longer records sales of ZOVIRAX in its consolidated
sales since the company uses the equity method of accounting for the
Glaxo Wellcome Warner-Lambert joint venture. Due to the substantial
marketing expenses that were incurred with the U.S. launch of ZANTAC 75
the company has been incurring losses from the joint venture.
Confectionery sales in 1996 and 1995 reflect the reclassification of
HALLS from the consumer health care segment. Confectionery sales in the
U.S. fell 9 percent to $156 million in the third quarter but increased 1
percent to $424 million for the nine-month period. International sales
for the third quarter increased 1 percent to $317 million from the
prior-year quarter and 5 percent to $983 million for the nine-month
period. At constant exchange rates, international sales increased 7
percent and 13 percent, respectively. The decline in the value of
foreign currencies, particularly the Mexican peso and the Japanese yen,
adversely impacted this segment's sales by $72 million for the first
nine months of 1996. Products with strong international sales growth for
both reporting periods included HALLS, CHICLETS candy-coated gum,
DENTYNE chewing gum, TRIDENT sugarless chewing gum and CERTS breath
mints.
COSTS AND EXPENSES
- ------------------
Cost of goods sold in the third quarter fell 7 percent compared with the
third quarter of 1995 and 1 percent in the first nine months of 1996
compared with the first nine months of 1995. As a percentage of net
sales, cost of goods sold fell to 32.8% in the third quarter from 35.0%
in the third quarter of 1995 and to 32.3% for the first nine months of
1996 from 34.1% in the same period one year ago. The ratios improved in
each of the company's segments in both the third quarter and the nine-
month period, with the most notable improvement in the pharmaceutical
segment. This segment's ratio significantly improved in the U.S. due to
the absence of the Warner Chilcott business and a favorable product mix.
Commencing with the financial statements for the third quarter and the
nine-month period, marketing expense and administrative and general
expense categories have been combined in one line item - selling,
general and administrative expense. Additionally, intangible
amortization and certain other expenses have been reported in other
(income)expense, net. Previously, these items were reported in
administrative and general expense. Appropriate reclassifications have
been made to the prior year financial statements to conform to the
current presentation.
Selling, general and administrative expense in the third quarter of 1996
fell 1 percent with lower expenses in the consumer health care segment
partially offset by higher expenses in the pharmaceutical segment. In
the consumer health care segment lower expenses reflected the launch of
COOLMINT LISTERINE toothpaste in the U.S. in the third quarter of 1995.
Selling, general and administrative expense for the first nine months of
1996 increased 6 percent, with increased expenses in each segment.
Pharmaceutical segment expenses increased primarily in the U.S. due to
higher sales incentives and increased advertising and promotion to
support NEURONTIN, ACCUPRIL and LOESTRIN. In the confectionery segment
expenses increased primarily in the U.S. and South America. In the
consumer health care segment expenses increased worldwide to support the
company's wet-shaving products, partially offset by lower expenses in
the U.S. for most other products. Additionally, for the third quarter
and the first nine months of 1996 the company's pension expense
increased, primarily resulting from a lower discount rate. As a
percentage of net sales, selling, general and administrative expense for
the quarter declined to 44.0% compared with 44.3% for the same quarter
last year and for the first nine months of 1996 the ratio increased to
42.6% compared with 41.7% for the same time period last year.
Research and development expense in the third quarter and first nine
months of 1996 increased 11 percent reflecting higher spending on Phase
III clinical trials. As a percentage of net sales, research and
development expense in the third quarter of 1996 was 8.2% compared with
7.3% in the prior-year quarter, and for the nine-month period the ratio
was 7.5% versus 7.0% one year ago.
Other (income)expense, net in the third quarter of 1996 included an
increase in intangible amortization of $9 million and net interest
expense of $11 million primarily resulting from the Company's purchase
of Glaxo Wellcome's interests in the Warner Wellcome joint venture
operations. Other (income)expense, net in the third quarter of 1996 also
included the receipt of a milestone payment of $20 million related to
the co-promotion agreement with Pfizer. The third quarter of 1995
included a $117 million gain on the sale of the PRO toothbrush business.
Other (income)expense, net for the first nine months of 1996 included a
gain of $75 million on the sale of the Warner Chilcott business and the
receipt of $45 million related to the co-promotion agreement with
Pfizer.
INCOME TAXES Three Months Nine Months
- ------------ Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
Effective tax rate:
As reported 29.0% 24.7% 26.9% 24.9%
After minority interests 29.0% 27.7% 29.0% 27.7%
The increase in the company's effective tax rates on a reported basis
and after minority interests in the first nine months of 1996 compared
with the same period in 1995 is primarily due to taxes associated with
the gain on the sale of Warner Chilcott.
NET INCOME
- ----------
Net income and earnings per share for the third quarter 1996 increased
16 percent and 17 percent, respectively, over last year's third quarter,
excluding a one-time gain of $117 million, or $82 million after tax,
from the sale of the PRO toothbrush business in the third quarter of
1995. As reported, both net income and earnings per share for the third
quarter of 1996 fell 29 percent from last year's third quarter. Net
income and earnings per share for the first nine months of 1996 rose 7
percent to $570 million and 6 percent to $2.10, respectively, excluding
the gain from the sale of the PRO toothbrush business and the gain of
$75 million, or $46 million after tax, which resulted from the sale of
Warner Chilcott in the first quarter of 1996. As reported net income was
unchanged and earnings per share decreased 1 percent for the first nine
months of 1996 as compared to the same period in the prior year.
RESTRUCTURING
- -------------
In 1993 and 1991, the company recorded net restructuring charges of $525
million and $544 million, respectively. The company had reserve
balances related to these programs of $179 million at September 30,
1996. The company is unaware of any event that would significantly
change spending or anticipated savings with respect to the 1993 and 1991
restructuring actions.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Cash and cash equivalents amounted to $438 million at September 30,
1996, an increase of $142 million from December 31, 1995. The company
also holds $325 million in short-term investments and other nonequity
securities (included in investments and other assets) that do not
qualify as cash equivalents, representing a decrease of $168 million
since December 31, 1995. Net debt (total debt less cash and cash
equivalents, short-term investments and other nonequity securities) of
$1,827 million at September 30, 1996 increased by $1,086 million from
December 31, 1995, reflecting the amounts borrowed to complete the Glaxo
Wellcome transaction. This increase in leverage resulted in a ratings
downgrade by both Standard and Poor's Corporation (AA to AA-) and
Moody's Investor Services (Aa3 to A1). Management is confident that the
company's cash flow will be adequate to repay this financing without
requiring the disposition of any significant strategic core business or
asset and still allow the company to continue to pay dividends and
maintain its ongoing commitment to research and development, marketing
and capital expenditures.
Capital expenditures for the first nine months of 1996 fell $42 million
from the same period one year ago due to the timing of project
expenditures. Capital expenditures for 1996 are estimated to be $400
million. These expenditures include the consolidation and upgrading of
manufacturing facilities in connection with the company's restructuring
plans announced in 1993 and 1991, plant expansions and improvements.
All product names appearing in capital letters are registered trademarks
of Warner-Lambert Company, its affiliates, related companies or its
licensors. ZANTAC, ZANTAC 75 and ZOVIRAX are registered trademarks of
Glaxo Wellcome or its affiliates.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
In 1993, Warner-Lambert received a Complaint and Compliance Order
from the Environmental Protection Agency (the "EPA") seeking
penalties of $268,000 for alleged violations of the Resource
Conservation and Recovery Act, Boilers and Industrial Furnace
regulations. Warner-Lambert is contesting the allegations contained
within the Complaint and has entered into negotiations with the EPA
in an attempt to resolve these issues. Although it is too early to
predict the outcome of this action, Warner-Lambert does not at
present expect this litigation to have a material adverse effect on
its financial position, liquidity, cash flow or results of
operations.
Beginning in late 1993, Warner-Lambert, along with numerous other
pharmaceutical manufacturers and wholesalers, has been sued in a
number of state and federal antitrust lawsuits by retail pharmacies
seeking treble damages and injunctive relief. These actions arise
from alleged price discrimination by which the defendant drug
companies, acting alone or in concert, are alleged to have favored
institutions, managed care entities, mail order pharmacies and other
buyers with lower prices for brand name prescription drugs than
those afforded to plaintiff retailers. The federal cases have been
consolidated by the Judicial Panel on Multidistrict Litigation and
transferred to the U.S. District Court for the Northern District of
Illinois for pre-trial proceedings. Warner-Lambert agreed to settle
part of the consolidated federal cases, specifically, the class
action conspiracy lawsuit, for a total of $15.1 million, to be paid
in four equal installments of $3.775 million in February of 1996,
1997, 1998 and 1999, respectively. This settlement was denied
approval by the U.S. District Court for the Northern District of
Illinois because the settlement did not include injunctive relief.
Thereafter, Warner-Lambert agreed to an amendment of the original
settlement agreement, which provides for the same payments, namely
$15.1 million, and obligates Warner-Lambert, among other things, not
to refuse to discount its drugs to retail pharmacies solely based on
their status as retailers and to provide retail pharmacies the
opportunity to negotiate and earn discounts comparable to those
given to managed care entities if they can demonstrate an ability to
affect market share in the same or similar manner that such managed
care entities can. This amended settlement was recently approved by
the Court. The amended settlement has been appealed by three groups
of plantiff-class members and such appeal is pending. Certain other
rulings of the judge presiding in this case have also been appealed.
At present, Warner-Lambert cannot predict the outcome of the
remaining federal lawsuits.
The state cases pending in California, brought by classes of
pharmacies and consumers, have been coordinated in the Superior
Court of California, County of San Francisco. Warner-Lambert has
also been named as a defendant in actions in state courts in
Alabama, Minnesota and Wisconsin brought by classes of pharmacies,
each arising from the same allegations of price discrimination. In
addition, the Company is named in class action complaints filed in
the states of Alabama, Arizona, Colorado, Maine, Michigan,
Minnesota, New York, Washington and Wisconsin and in the District of
Columbia, brought by classes of consumers who purchased brand name
prescription drugs at retail pharmacies. These cases also arise
from the same allegations of price discrimination. Warner-Lambert
believes that these actions are without merit and will defend itself
vigorously. Although it is too early to predict the outcome of the
remaining actions, Warner-Lambert does not at present expect this
litigation to have a material adverse effect on its financial
position, liquidity, cash flow or results of operations.
Warner-Lambert has been served with and has responded to a subpoena
by the Federal Trade Commission which is conducting an investigation
to determine whether Warner-Lambert and twenty-one other
pharmaceutical manufacturers have engaged in concerted activities to
raise the prices of pharmaceutical products in the United States.
Warner-Lambert is cooperating with this investigation and cannot at
present predict its outcome.
In 1994, Warner-Lambert received a civil enforcement action letter
and draft complaint from the Department of Justice (the
"Department") alleging violation of the Clean Water Act with regard
to the operation of the wastewater treatment plant at its Vega Baja,
Puerto Rico facility. Warner-Lambert is negotiating a resolution of
this matter with the Department and is continuing to work with the
Environmental Protection Agency, Region II, to maintain the
facility's compliance with the Clean Water Act. The Company cannot
predict the outcome of this matter at this time.
In addition, the Environmental Crimes Section of the Department is
conducting an inquiry of Warner-Lambert and certain present and
former employees, relating to historical compliance of the Vega
Baja, Puerto Rico wastewater treatment facility with the Clean Water
Act and the discharge permit issued to the facility. Warner-Lambert
is cooperating fully with this inquiry and cannot predict its
outcome at this time.
Warner-Lambert is also involved in various administrative or
judicial proceedings related to environmental actions initiated by
the EPA under the Comprehensive Environmental Response, Compensation
and Liability Act (also known as Superfund) or by state authorities
under similar state legislation, or by third parties. While it is
not possible to predict with certainty the outcome of such matters
or the total cost of remediation, Warner-Lambert believes it is
unlikely that their ultimate disposition will have a material
adverse effect on Warner-Lambert's financial position, liquidity,
cash flow or results of operations for any year.
Warner-Lambert Inc., a wholly-owned subsidiary of Warner-Lambert,
has been named as a defendant in class actions filed in Puerto Rico
Superior Court by current and former employees from the Vega Baja,
Carolina and Fajardo plants, as well as Kelly Services temporary
employees assigned to those plants. The lawsuits seek monetary
relief for alleged violations of local statutes and decrees relating
to meal period payments, minimum wage, overtime and vacation pay.
Warner-Lambert believes that these actions are without merit and
will defend these actions vigorously. Although it is too early to
predict the outcome of these actions, Warner-Lambert does not at
present expect these lawsuits to have a material adverse effect on
the Company's financial position, liquidity, cash flow or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K, dated June 30, 1996,
was filed with the Securities and Exchange
Commission during the quarter ended September 30,
1996, in connection with the Company's purchase of
Glaxo Wellcome plc's U.S. and European interests in
the Warner Wellcome over-the-counter joint venture
operations and the restructuring of the Company's
joint venture arrangements with Glaxo Wellcome to
market Glaxo Wellcome's Rx to OTC switch products.
S I G N A T U R E S
-------------------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WARNER-LAMBERT COMPANY
(Registrant)
Date: November 11, 1996 By: Ernest J. Larini
----------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 1996 By: Joseph E. Lynch
---------------
Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Page No.
- ----------- ------- --------
(12) Computation of Ratio of Earnings
to Fixed Charges.
(27) Financial Data Schedule (EDGAR
filing only).
<TABLE>
EXHIBIT 12
WARNER-LAMBERT COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Years Ended December 31,
Nine Months Ended --------------------------------------------
September 30, 1996 1995 1994 1993 1992 1991
------------------- ---- ---- ---- ---- ----
Earnings before income taxes and
accounting changes (less
<S> <C> <C> <C> <C> <C> <C>
minority interests) $866.9 $1,018.6 $ 913.1 $ 318.5 $ 858.2 $ 221.5
Add:
Interest on indebtedness-
excluding amount capitalized 105.0 122.7 93.7 64.2 80.8 58.2
Amortization of debt expense .2 .4 .4 .5 .6 .4
Interest factor in rent
expense (a) 20.2 26.9 26.2 25.4 23.4 22.3
------ -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjusted earnings $992.3 $1,168.6 $1,033.4 $ 408.6 $ 963.0 $ 302.4
====== ======== ======= ======= ======= =======
Fixed Charges:
Interest on indebtedness $105.0 $ 122.7 $ 93.7 $ 64.2 $ 80.8 $ 58.2
Capitalized interest 7.1 10.1 9.4 8.6 8.1 9.4
Amortization of debt expense .2 .4 .4 .5 .6 .4
Interest factor in rent
expense (a) 20.2 26.9 26.2 25.4 23.4 22.3
------ -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total fixed charges $132.5 $ 160.1 $ 129.7 $ 98.7 $ 112.9 $ 90.3
====== ======== ======= ======= ======= =======
Ratio of earnings to fixed charges 7.5 7.3 8.0 4.1(b) 8.5 3.3(c)
====== ======== ======= ======= ======= =======
(a) Represents one third of rental expense, which the company believes is a reasonable
approximation.
(b) The company's ratio of earnings to fixed charges for 1993 would have been 9.5 excluding the
restructuring charge of $525.2 million.
(c) The company's ratio of earnings to fixed charges for 1991 would have been 9.4 excluding the
restructuring charge of $544.0 million.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1996 AND FROM THE RELATED
CONSOLIDATED STATEMENT OF INCOME FOR THE 9 MONTH PERIOD ENDED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 438
<SECURITIES> 199
<RECEIVABLES> 1,348
<ALLOWANCES> 0
<INVENTORY> 669
<CURRENT-ASSETS> 3,027
<PP&E> 3,522
<DEPRECIATION> 1,466
<TOTAL-ASSETS> 7,376
<CURRENT-LIABILITIES> 2,406
<BONDS> 1,713
0
0
<COMMON> 321
<OTHER-SE> 2,179
<TOTAL-LIABILITY-AND-EQUITY> 7,376
<SALES> 5,388
<TOTAL-REVENUES> 5,388
<CGS> 1,742
<TOTAL-COSTS> 1,742
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 936
<INCOME-TAX> 251
<INCOME-CONTINUING> 616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 616
<EPS-PRIMARY> 2.27<F1>
<EPS-DILUTED> 0
<FN>
<F1>Reflects two-for-one stock split effective May 3, 1996. Prior period
financial data schedules have not been restated for this recapitalization.
</FN>
</TABLE>
