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, 1998
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: (973) 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, 1998
----- -------------------------------
Common Stock, $1 par value *821,409,631
* Reflects a three-for-one stock split of the Registrant's
Common Stock for stockholders of record as of May 8, 1998.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
------------- -----------
(Dollars in millions)
ASSETS:
Cash and cash equivalents $ 684.7 $ 756.5
Receivables 1,555.0 1,370.5
Inventories 923.9 742.9
Prepaid expenses and other current assets 558.4 427.1
--------- ---------
Total current assets 3,722.0 3,297.0
Investments and other assets 594.8 593.8
Property, plant and equipment 2,568.2 2,427.0
Intangible assets 1,691.1 1,712.7
--------- ---------
Total assets $ 8,576.1 $ 8,030.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term debt $ 278.8 $ 372.1
Accounts payable, trade 1,024.4 890.6
Accrued compensation 245.6 186.6
Other current liabilities 1,113.0 894.0
Federal, state and foreign income taxes 365.8 245.6
--------- ---------
Total current liabilities 3,027.6 2,588.9
Long-term debt 1,282.3 1,831.2
Other noncurrent liabilities 834.9 774.9
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 106.1 225.4
Retained earnings 4,045.3 3,892.6
Treasury stock, at cost: (1998 - 141,360,669
shares; 1997 - 48,436,529 shares) (1,294.1) (1,164.5)
Accumulated other comprehensive income (388.0) (438.7)
--------- ---------
Total shareholders' equity 3,431.3 2,835.5
--------- ---------
Total liabilities and shareholders'
equity $ 8,576.1 $ 8,030.5
========= =========
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,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions, except per share amounts)
NET SALES $2,560.2 $2,108.3 $7,335.8 $5,852.4
COSTS AND EXPENSES:
Cost of goods sold 646.4 614.0 1,906.8 1,756.8
Selling, general and
administrative 1,202.9 968.5 3,384.2 2,588.3
Research and development 224.4 182.0 613.6 474.1
Other expense (income), net 70.3 60.5 145.4 127.8
-------- -------- -------- --------
Total costs and expenses 2,144.0 1,825.0 6,050.0 4,947.0
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 416.2 283.3 1,285.8 905.4
Provision for income taxes 120.7 85.0 372.9 271.6
-------- -------- -------- --------
NET INCOME $ 295.5 $ 198.3 $ 912.9 $ 633.8
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic* $ .36 $ .24 $ 1.11 $ .78
Diluted* $ .35 $ .24 $ 1.08 $ .76
DIVIDENDS PER COMMON SHARE* $ .16 $ .13 $ .48 $ .38
* Amounts reflect a three-for-one stock split as described in NOTE F.
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
-------------------
1998 1997
---- ----
(Dollars in millions)
OPERATING ACTIVITIES:
Net income $ 912.9 $ 633.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 215.6 195.7
Changes in assets and liabilities, net of
effects from acquisition/disposition
of businesses:
Receivables (209.3) (198.1)
Inventories (179.3) (116.4)
Accounts payable and accrued liabilities 562.7 340.6
Other, net (44.6) (26.7)
--------- ---------
Net cash provided by operating activities 1,258.0 828.9
--------- ---------
INVESTING ACTIVITIES:
Purchases of investments (16.3) (12.6)
Proceeds from maturities/sales of investments 47.8 107.0
Capital expenditures (431.4) (242.6)
Acquisitions of businesses - (293.0)
Proceeds from disposition of business 125.0 -
Other, net 54.3 (8.6)
--------- ---------
Net cash used by investing activities (220.6) (449.8)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings 823.6 1,369.8
Principal payments on borrowings (1,465.4) (1,069.7)
Purchases of treasury stock (160.7) (106.3)
Cash dividends paid (393.2) (309.6)
Proceeds from stock option exercises 76.1 57.5
--------- ---------
Net cash used by financing activities (1,119.6) (58.3)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 10.4 (27.9)
--------- ---------
Net (decrease) increase in cash
and cash equivalents (71.8) 292.9
Cash and cash equivalents at beginning of year 756.5 390.8
--------- ---------
Cash and cash equivalents at end of period $ 684.7 $ 683.7
========= =========
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share amounts)
NOTE A: The interim financial statements presented herein should be read
in conjunction with Warner-Lambert Company's 1997 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: Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE E: On July 31, 1998, Warner-Lambert signed a letter of intent to
acquire Glaxo Wellcome's (Glaxo) rights to over-the-counter (OTC)
Zantac [R] products in the United States and Canada in exchange
principally for Warner-Lambert's rights to OTC Zantac [R]
products in all other markets, OTC Zovirax [R] and OTC
Beconase [R], and future Glaxo prescription to OTC switch
products. These products are currently marketed through joint
ventures between Warner-Lambert and Glaxo, which were
formed to develop, seek approval of and market OTC versions of
Glaxo prescription drugs. This transaction, which will
effectively end these joint ventures, is subject to negotiation
and completion of final agreements and the receipt of required
corporate and regulatory approvals.
NOTE F: 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.
NOTE G: 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 nine months ended September
30, 1998.
NOTE H: 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. Management is in the process of reviewing this new
pronouncement and currently does not expect adoption of this
Statement to have a material effect on the company's consolidated
financial position, liquidity, cash flows or results of
operations.
NOTE I: In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which requires reporting the components of
comprehensive income in a financial statement, on an annual
basis, as part of a full set of general purpose financial
statements. This Statement became effective in the first quarter
1998. Total comprehensive income includes net income and other
comprehensive income which consists primarily of foreign currency
translation adjustments. Total comprehensive income was $379.2
and $135.5 for the third quarters of 1998 and 1997, respectively.
Total comprehensive income for the nine-month periods ended
September 30, 1998 and 1997 was $963.6 and $468.8, respectively.
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 accompanying Condensed
Consolidated Balance Sheets.
NOTE J: The Net income per common share computations were as follows:
(Shares in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Basic:
Net income $295.5 $198.3 $912.9 $633.8
Average common shares
outstanding 820,639 815,590 819,408 814,669
------- ------- ------- -------
$.36* $.24* $1.11* $.78*
======= ======= ======= =======
Diluted:
Net income $295.5 $198.3 $912.9 $633.8
Average common shares
outstanding 820,639 815,590 819,408 814,669
Impact of potential future
stock option exercises,
net of shares repurchased 30,749 27,428 28,845 23,198
------- ------- ------- -------
Average common shares
outstanding - assuming
dilution 851,388 843,018 848,253 837,867
------- ------- ------- -------
$.35* $.24* $1.08* $.76*
======= ======= ======= =======
* Amounts reflect a three-for-one stock split as described in
NOTE F.
NOTE K: Major classes of inventories were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $152.9 $167.7
Finishing supplies 48.4 53.1
Work in process 223.3 95.6
Finished goods 499.3 426.5
------ ------
$923.9 $742.9
====== ======
NOTE L: Property, plant and equipment balances were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Property, plant and equipment $ 4,246.9 $ 3,968.9
Less accumulated depreciation (1,678.7) (1,541.9)
--------- ---------
Net $ 2,568.2 $ 2,427.0
========= =========
NOTE M: Intangible asset balances were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Goodwill $1,291.1 $1,267.5
Trademarks and other
intangibles 604.1 602.3
Less accumulated amortization (204.1) (157.1)
-------- --------
Net $1,691.1 $1,712.7
======== ========
NOTE N: Included in Other expense (income), net was interest expense of
$25.6 and $43.0 for the third quarters of 1998 and 1997,
respectively. Interest expense for the first nine months of 1998
and 1997 was $87.6 and $129.7, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
- -------------------------------------------------
COMPARED WITH CORRESPONDING PERIODS IN 1997
- -------------------------------------------
NET SALES
- ---------
Sales for the third quarter of 1998 of $2.56 billion were 21
percent above 1997 third quarter sales. For the first nine months
of 1998 sales rose 25 percent to $7.34 billion compared to the same
period one year ago. Adjusting for the unfavorable impact of
foreign exchange rate changes sales increased 25 percent for the
quarter and 29 percent for the nine month period. Sales growth was
driven by unit volume growth of 25 percent for the third quarter and
31 percent for the first nine months of 1998.
U.S. sales increased $351 million or 31 percent to $1.49 billion for
the quarter and $1.27 billion or 43 percent to $4.20 billion for the
first nine months of 1998 compared to the same periods one year ago.
International sales increased $101 million or 10 percent to $1.07
billion for the third quarter and increased $213 million or 7
percent to $3.14 billion for the first nine months of 1998 compared
to the same periods one year ago. At constant exchange rates,
international sales increased 17 percent and 15 percent for the
third quarter and first nine months of 1998, respectively.
SEGMENT SALES Three Months Ended Nine Months Ended
(Dollars in September 30, September 30,
millions) ----------------------- -----------------------
Percent Percent
Increase/ Increase/
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- -------- ---- ---- --------
Pharmaceutical $1,400 $ 948 48 % $3,938 $2,459 60 %
Consumer Health
Care 690 672 3 2,015 2,009 -
Confectionery 470 488 (4) 1,383 1,384 -
------ ------ ------ ------
Consolidated
Net Sales $2,560 $2,108 21 % $7,336 $5,852 25 %
====== ====== ====== ======
Worldwide pharmaceutical sales increased 48 percent to $1.40 billion
in the third quarter of 1998 and increased 60 percent to $3.94
billion for the first nine months of 1998 compared to the same
periods one year ago. The sales increase was primarily attributable
to the continued growth of the cholesterol-lowering agent LIPITOR,
the type 2 diabetes drug REZULIN, the add-on epilepsy therapy
NEURONTIN and the cardiovascular drug ACCUPRIL which achieved
worldwide sales as follows:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
(Dollars in millions) ---- ---- ---- ----
LIPITOR $569 $257 $1,480 $457
REZULIN 181 137 545 242
NEURONTIN 132 78 350 222
ACCUPRIL 120 81 338 286
Pharmaceutical sales in the U.S. increased 61 percent to $950
million in the third quarter of 1998 and 84 percent to $2.63 billion
for the first nine months of 1998 compared to the same periods one
year ago. International pharmaceutical sales increased 25 percent
to $450 million or 32 percent at constant exchange rates in the
third quarter. For the first nine months of 1998 international
pharmaceutical sales increased 27 percent to $1.31 billion or 35
percent at constant exchange rates.
Worldwide sales of LIPITOR more than doubled to $569 million for the
quarter compared to the same period one year ago. 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 36 percent share of new
prescriptions in the U.S. cholesterol lowering market. During the
third quarter a new drug application seeking marketing clearance for
LIPITOR was submitted to regulatory authorities in Japan.
In the quarter, REZULIN sales increased $44 million or 32 percent to
$181 million compared to the same period one year ago. REZULIN, the
first in a new class of drugs known as PPAR-gamma activators,
targets insulin resistance - an underlying cause of type 2 diabetes.
Since its launch in March 1997, more than 1.2 million Americans with
type 2 diabetes have initiated treatment with REZULIN.
To sustain growth in currently marketed drugs including LIPITOR,
REZULIN and NEURONTIN, the company has initiated aggressive life-
cycle management programs exploring new indications and patient
populations.
During the third quarter of 1998, the company introduced two new
pharmaceutical products, OMNICEF (cefdinir) and Celexa [R]
(citalopram). OMNICEF is a new, broad spectrum cephalosporin
antibiotic for the treatment of a wide variety of community-acquired
infections. Celexa [R] is a selective serotonin reuptake inhibitor
for the treatment of depression. Warner-Lambert is co-promoting
Celexa [R] in the United States with Forest Laboratories, Inc.
Celexa [R] was developed in the U.S. by Forest Laboratories under
license from H. Lundbeck A/S. In 1998, the U.S. market for
antidepressants is expected to reach $6 billion.
Consumer health care segment sales in the U.S. increased 3 percent
to $378 million in the third quarter of 1998 and 6 percent to $1.10
billion for the first nine months of 1998 compared to the same
periods one year ago. Within the segment, U.S. shaving products
sales increased 14 percent to $60 million for the third quarter and
25 percent to $174 million for the first nine months of 1998. The
increase is due to the launch 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 increased 2 percent
to $312 million for the third quarter but decreased 5 percent to
$918 million for the first nine months of 1998 compared to the same
periods one year ago. The nine month decrease reflects the impact
of the overall economic weakness in Asian markets. At constant
exchange rates, international segment sales increased 9 percent for
the third quarter and increased 2 percent for the nine-month period.
Within the consumer health care segment, international sales of the
company's shaving products increased 1 percent to $133 million or 6
percent at constant exchange rates for the third quarter of 1998.
For the first nine months of 1998 international shaving products
sales fell 7 percent to $382 million, or 1 percent at constant
exchange rates compared to the same period one year ago.
International sales of the company's TETRA pet care products
business also fell 10 percent to $25 million or 5 percent at
constant exchange rates for the third quarter of 1998 and fell 11
percent to $82 million, or 5 percent at constant exchange rates for
the first nine months of 1998 compared to the same periods one year
ago. 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 the company introduced the new QUANTERRA
line of standardized herbal supplements. 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. 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.
On July 31, 1998, Warner-Lambert signed a letter of intent to acquire
Glaxo Wellcome's (Glaxo) rights to over-the-counter (OTC) Zantac [R]
products in the United States and Canada in exchange principally for
Warner-Lambert's rights to OTC Zantac [R] products in all other
markets, OTC Zovirax [R] and OTC Beconase [R], and future Glaxo
prescription to OTC switch products. These products are currently
marketed through joint ventures between Warner-Lambert and Glaxo,
which were formed to develop, seek approval of and market OTC
versions of Glaxo prescription drugs. This transaction, which will
effectively end these joint ventures, is subject to negotiation and
completion of final agreements and the receipt of required corporate
and regulatory approvals. Sales of the joint ventures are not
currently reflected in reported sales results since the joint
ventures are accounted for on an equity basis. Through nine months
in 1998 the joint ventures recorded Zantac 75 [R] sales of $124
million in the United States and Canada.
Confectionery sales in the U.S. decreased 12 percent to $162 million
for the third quarter of 1998 and increased 2 percent to $468
million for the first nine months of 1998 compared to the same
periods one year ago. Third quarter factory shipments were
negatively impacted by inventory reductions at the trade level.
U.S. market shares have remained stable as consumption increased
compared to prior years.
International confectionery sales were $308 million for the third
quarter of 1998, an increase of 1 percent, or 9 percent at constant
exchange rates. Sales were $915 million for the first nine months
of 1998, a decrease of 1 percent, or an increase of 7 percent at
constant exchange rates compared to the same periods one year ago.
The international sales 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 nine months was most
significant in Brazil, Japan, Colombia and Canada.
COSTS AND EXPENSES
- ------------------
As a percentage of net sales, cost of goods sold fell to 25.2% in
the third quarter of 1998 from 29.1% in the third quarter of 1997
and to 26.0% for the first nine months of 1998 from 30.0% in the
same period one year ago. The improvement in the ratio for both
reporting periods is 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 is a favorable product mix within the pharmaceutical segment.
Selling, general and administrative expense in the third quarter of
1998 increased 24 percent compared with the third quarter of 1997
and 31 percent for the first nine months of 1998 compared with the
nine month period one year ago. As a percentage of net sales,
selling, general and administrative expense for the quarter
increased to 47.0% compared with 45.9% for the same quarter last
year and for the first nine months of 1998 increased to 46.1%
compared with 44.2% for the same time period last year.
Pharmaceutical segment expenses significantly increased for the
third quarter and the nine month period to support the new products.
Quarterly settlements of co-promotion agreements related to LIPITOR
and REZULIN are recorded in selling expense. Expenses increased in
the consumer health care and confectionery segments for the first
nine months of 1998 compared to the same period in the prior year.
Management expects that selling, general and administrative expense
will remain at or slightly above this level as a percent of sales
for the full year.
Research and development expense in the third quarter and first nine
months of 1998 increased 23 percent and 29 percent, respectively,
over the same periods one year ago. However, as a percentage of net
sales, research and development expense has remained constant at
approximately 8%. For 1998 the company plans to invest
approximately $850 million in research and development, a projected
increase of 26 percent compared with 1997.
Other expense (income), net in the third quarter and first nine
months of 1998 compared unfavorably by $10 million and $18 million
from the same periods in 1997. The unfavorability is primarily
attributable to an increase in realized net foreign currency
transaction losses of $19 million for the nine months of 1998
compared to the same period in 1997. 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 costs related to the company's
plans to close two foreign manufacturing facilities. Also included
in Other expense (income) is a gain on the sale of certain
investment securities of $24 million which is principally offset by
costs related to the closing of another foreign manufacturing
facility.
INCOME TAXES
- ------------
The effective tax rate for the third quarter and first nine months
of 1998 decreased to 29.0% from 30.0% in the same periods in 1997.
The decrease of 1.0 percentage point is primarily due to increased
income generated in foreign jurisdictions with lower tax rates.
NET INCOME
- ----------
Net income increased 49 percent and 44 percent for the third quarter
and the first nine months of 1998, respectively compared to the same
periods one year ago.
Diluted earnings per share for the third quarter of 1998 increased
from $0.24 to $0.35 on a post-split basis compared to the same
period one year ago. Diluted earnings per share for the first nine
months of 1998 increased from $0.76 to $1.08. Based on current
planning assumptions, the company expects to increase earnings per
share by more than 40 percent this year.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Selected data:
September 30, December 31,
1998 1997
---- ----
Net debt (in millions) $791 $1,347
Net debt to net capital(equity
and net debt) 19% 32%
Net debt (total debt less cash and cash equivalents and other
nonequity securities) decreased $556 million from December 31, 1997.
Cash and cash equivalents were $685 million at September 30, 1998, a
decrease of $72 million from December 31, 1997. The company also
held $85 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 $14 million from
December 31, 1997. The total decrease in cash and cash equivalents
of $86 million is more than offset by a decrease in total debt of
$642 million.
Cash provided by operating activities for the first nine months of
1998 of $1.26 billion was more than sufficient to fund capital
expenditures of $431 million and pay dividends of $393 million.
Cash flow in the first nine months of 1998 also includes proceeds of
$125 million from the sale of the Rochester, Michigan pharmaceutical
manufacturing plant.
Planned capital expenditures for 1998 are estimated to be $800
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.
OTHER MATTERS
- -------------
On January 1, 1999, eleven European Union member countries will
adopt the euro as their common currency. 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 been actively preparing for the advent of the single European
currency. Modifications to information systems are currently being
tested and are expected to be in place to conduct business using the
euro in January 1999. 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 is
also taking steps such as testing of data interfaces with third
parties to ensure that systems operated by others do not have
negative effects on operations.
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 are currently being addressed in our normal business
planning process. On a total company basis pricing issues are
expected to have a neutral impact on our business.
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.
The company has adopted a 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 non-compliant 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 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 immediate 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. The company has substantially completed
its inventory and assessment of its mission critical systems (Steps
1 and 2) and is currently focusing primarily on remediation and
testing (Steps 3 and 4). The company has completed its testing of
some systems and is monitoring them for ongoing compliance (Step 5).
To verify its progress, the company has an active internal audit
program in place, utilizing internal resources and external
consultants. The company currently anticipates that the majority of
its mission critical projects will be completed by December 31,
1998, except for ongoing monitoring, and that the remaining mission
critical and its non-mission critical projects will be completed no
later than the third quarter of 1999.
The company also has adopted a 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 on-going 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 immediate 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, assessment and verification, to the extent
possible or permitted, of its business stakeholders by mid-1999.
On-going monitoring and any necessary audits will continue
throughout 1999.
Management is in the process of assessing 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, identification of alternate suppliers,
and development of various backup procedures. Management expects to
implement specific contingency plans which it determines to be both
prudent and cost effective.
Year 2000-related maintenance or modification costs will be expensed
as incurred, while the costs of new information technology will be
capitalized and amortized in accordance with company policy.
Management currently estimates that approximately $120 million will
be expended in addressing and remediating Year 2000 compliance
issues. It is expected that the majority of spending will occur in
the remediation and testing steps of the company's strategy.
Management does not expect these incremental expenditures to have a
material impact on the company's consolidated financial position,
liquidity, cash flows or results of operations on an annual basis.
However, currently unforeseen developments or delays could cause
this cost estimate and expectation 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 non-compliance will
not have a material adverse impact on the company.
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, 1997 Form 10-K
filed with the Securities and Exchange Commission. Exhibit 99 to
the Form 10-K is incorporated by reference herein.
All product names appearing in capital letters are registered
trademarks of Warner-Lambert Company, its affiliates, related
companies or its licensors. Zantac [R], Zantac 75 [R], Zovirax [R],
and Beconase [R] are registered trademarks of Glaxo Wellcome, its
affiliates, related companies or licensors. Celexa [R] is a
registered trademark of Forest Laboratories Inc., its affiliates,
related companies or its licensors.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
In late 1993, Warner-Lambert, along with numerous other
pharmaceutical manufacturers and wholesalers, was sued in a number
of state and federal antitrust lawsuits seeking damages (including
trebled and statutory damages, where applicable) and injunctive
relief. These actions arose from allegations that the defendant
drug companies, acting alone or in concert, engaged in differential
pricing whereby they favored institutions, managed care entities,
mail order pharmacies and other buyers with lower prices for brand
name prescription drugs than those afforded to retailer pharmacies.
The federal cases, which were brought by retailers, 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. In June 1996, the Court
approved Warner-Lambert's agreement to settle part of the
consolidated federal cases, specifically, the class action
conspiracy lawsuit, for a total of $15.1 million. This settlement
also contains certain commitments regarding Warner-Lambert's pricing
of brand name prescription drugs. Appeals of the District Court's
approval of this settlement were unsuccessful, and the commitments
have become effective. Certain other rulings of the judge presiding
in this case were also appealed, and the judge was reversed on all
rulings. The cases have been remanded to the District Court, and
trial of the class action conspiracy action against the non-settling
defendant pharmaceutical manufacturers and wholesalers has
commenced.
In addition, the Company has settled the vast majority of the
Robinson-Patman Act lawsuits brought by those retail pharmacies
which opted out of the class action conspiracy lawsuit. The amount
of these settlements is not material.
In April 1997, after execution of the federal class settlement
referred to above but prior to the formal effectiveness of its
pricing commitments, the same plaintiff-class members brought a new
purported class action relating to the time period subsequent to the
execution of the settlement. This new class suit sought only
injunctive relief. At present, Warner-Lambert cannot predict the
outcome of this and the other remaining federal lawsuits in which it
is a defendant.
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 filed in
Alabama, Minnesota, Mississippi and Wisconsin brought by classes of
pharmacies, each arising from the same allegations of differential
pricing. With its co-defendants, the Company has settled the
Minnesota and Wisconsin actions. The Company's share of these
settlements, which have been approved, are not material. In
addition, the Company is named in class action complaints filed in
Alabama, Arizona, Florida, Kansas, Maine, Michigan, Minnesota, New
York, North Carolina, Tennessee, Wisconsin and the District of
Columbia, brought by classes of consumers who purchased brand name
prescription drugs at retail pharmacies. With its co-defendants,
the Company has agreed to settle these state consumer class actions.
The Company's share of these settlements, which are subject to court
approval in their respective jurisdictions, is not material.
The Company has also recently been made a party to another class
action in Tennessee, purportedly on behalf of consumers in Alabama,
Arizona, Florida, Kansas, Maine, Michigan, Minnesota, New Mexico,
North Carolina, North Dakota, South Dakota, Tennessee, West Virginia
and Wisconsin, who purchased brand name prescription drugs from
retail pharmacies. Although it is not possible at this early stage
to predict the outcome of this lawsuit, it is unlikely that its
ultimate disposition will have a material adverse effect on Warner-
Lambert's financial position, liquidity, cash flows or results of
operations.
The Federal Trade Commission (the "FTC") 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 was served with and responded to two
subpoenas from the FTC in 1996 and 1997, respectively, and is
continuing to cooperate with this investigation. Warner-Lambert
cannot at present predict the outcome of this investigation.
Warner-Lambert is also involved in various administrative or
judicial proceedings related to environmental actions initiated by
the Environmental Protection Agency 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 flows 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 flows 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
-------------------
Warner-Lambert has not filed any reports on
Form 8-K for the quarter ended September 30,
1998.
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, 1998 By: Ernest J. Larini
----------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 1998 By: Joseph E. Lynch
---------------
Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
- ----------- -------
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule (filed electronically).
<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, 1998 1997 1996 1995 1994 1993
------------------- ---- ---- ---- ---- ----
Earnings before income taxes and
accounting changes (less
<S> <C> <C> <C> <C> <C> <C>
minority interests) $1,285.8 $1,233.4 $1,107.7 $1,018.6 $ 913.1 $318.5
Add:
Interest on indebtedness-
excluding amount capitalized 87.6 167.0 145.9 122.7 93.7 64.2
Amortization of debt expense .6 .4 .5 .4 .4 .5
Interest factor in rent
expense (a) 23.0 30.7 27.5 26.9 26.2 25.4
-------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Adjusted earnings $1,397.0 $1,431.5 $1,281.6 $1,168.6 $1,033.4 $408.6
======== ======== ======== ======== ======== ======
Fixed Charges:
Interest on indebtedness $ 87.6 $ 167.0 $ 145.9 $ 122.7 $ 93.7 $ 64.2
Capitalized interest 14.4 8.3 9.6 10.1 9.4 8.6
Amortization of debt expense .6 .4 .5 .4 .4 .5
Interest factor in rent
expense (a) 23.0 30.7 27.5 26.9 26.2 25.4
-------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Total fixed charges $ 125.6 $ 206.4 $ 183.5 $ 160.1 $ 129.7 $ 98.7
======== ======== ======== ======== ======== ======
Ratio of earnings to fixed charges 11.1 6.9 7.0 7.3 8.0 4.1(b)
======== ======== ======== ======== ======== ======
(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 charges of $525.2.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND FROM THE RELATED
CONSOLIDATED STATEMENT OF INCOME FOR THE 9 MONTH PERIOD ENDED SEPTEMBER 30,1998
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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 685
<SECURITIES> 0
<RECEIVABLES> 1,555
<ALLOWANCES> 0
<INVENTORY> 924
<CURRENT-ASSETS> 3,722
<PP&E> 4,247
<DEPRECIATION> 1,679
<TOTAL-ASSETS> 8,576
<CURRENT-LIABILITIES> 3,028
<BONDS> 1,282
0
0
<COMMON> 962
<OTHER-SE> 2,469
<TOTAL-LIABILITY-AND-EQUITY> 8,576
<SALES> 7,336
<TOTAL-REVENUES> 7,336
<CGS> 1,907
<TOTAL-COSTS> 1,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> 1,286
<INCOME-TAX> 373
<INCOME-CONTINUING> 913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 913
<EPS-PRIMARY> 1.11<F1>
<EPS-DILUTED> 1.08
<FN>
<F1>Amount represents basic earnings per share.
</FN>
</TABLE>
