Full Press Release Details
H nenberg, Switzerland
2006 FINANCIAL REPORT
2006 FINANCIAL REPORT
| Page | |||
| Reference | |||
| Management's Report on Internal Control over Financial | 3 | ||
| Reporting | |||
| Reports of Independent Registered Public Accounting Firm | 4 | ||
| Consolidated Balance Sheets | 6 | ||
| Consolidated Statements of Earnings | 7 | ||
| Consolidated Statements of Shareholders' Equity and | |||
| Comprehensive Income | 8 | ||
| Consolidated Statements of Cash Flows | 9 | ||
| Notes to Consolidated Financial Statements | 10 | ||
| Report of the Group Auditors to the General Meeting of Alcon, | |||
| Inc., H nenberg | 45 | ||
| Swiss Disclosure Requirements | 46 | ||
| Report of the Statutory Auditors to the General Meeting of | |||
| Alcon, Inc., H nenberg | 49 | ||
| Balance Sheet | 50 | ||
| Statement of Earnings and Retained Earnings | 52 | ||
| Notes to the Financial Statements | 53 | ||
| Proposed Appropriation of Retained Earnings | 61 |
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Alcon, Inc.'s management is responsible for establishing and maintaining adequate internal control over financial reporting. Alcon, Inc.'s internal control system was designed to provide reasonable assurance to the Company's management regarding the reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Alcon, Inc.'s management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that, as of December 31, 2006, Alcon, Inc.'s internal control over financial reporting is effective based on those criteria.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited the accompanying consolidated balance sheets of Alcon, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alcon, Inc. and its subsidiaries as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in notes 1 and 12 to the consolidated financial statements, effective January 1, 2006, the Company implemented Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
As discussed in notes 1 and 16 to the consolidated financial statements, effective December 31, 2006, the Company implemented the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Alcon, Inc.'s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Alcon, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Alcon, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Alcon, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Alcon, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alcon, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 16, 2007 expressed an unqualified opinion on those consolidated financial statements.
ALCON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| (in millions, except share data) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,489.2 | $ | 1,457.2 | ||||
| Short term investments | 321.0 | 377.7 | ||||||
| Trade receivables, net | 912.8 | 725.4 | ||||||
| Inventories | 473.8 | 427.2 | ||||||
| Deferred income tax assets | 122.5 | 131.5 | ||||||
| Other current assets | 142.8 | 149.0 | ||||||
| Total current assets | 3,462.1 | 3,268.0 | ||||||
| Long term investments | 91.1 | 154.8 | ||||||
| Property, plant and equipment, net | 920.7 | 829.6 | ||||||
| Intangible assets, net | 95.2 | 293.7 | ||||||
| Goodwill | 553.2 | 550.0 | ||||||
| Long term deferred income tax assets | 235.7 | 77.5 | ||||||
| Other assets | 69.3 | 54.6 | ||||||
| Total assets | $ | 5,427.3 | $ | 5,228.2 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 168.9 | $ | 156.0 | ||||
| Short term borrowings | 926.5 | 1,021.5 | ||||||
| Current maturities of long term debt | 5.8 | 5.9 | ||||||
| Other current liabilities | 899.9 | 1,095.1 | ||||||
| Total current liabilities | 2,001.1 | 2,278.5 | ||||||
| Long term debt, net of current maturities | 49.0 | 56.0 | ||||||
| Long term deferred income tax liabilities | 10.1 | 15.8 | ||||||
| Other long term liabilities | 453.5 | 321.8 | ||||||
| Contingencies (note 18) | ||||||||
| Shareholders' equity: | ||||||||
| Common shares, par value CHF 0.20 per share, 336,975,000 | ||||||||
| shares authorized; 317,343,982 shares issued and | ||||||||
| 301,182,404 shares outstanding at December 31, 2006; | ||||||||
| 314,559,103 shares issued and 306,485,298 shares | ||||||||
| outstanding at December 31, 2005 | 43.9 | 43.4 | ||||||
| Additional paid-in capital | 1,064.5 | 806.3 | ||||||
| Accumulated other comprehensive income | 127.3 | 90.9 | ||||||
| Retained earnings | 3,201.9 | 2,282.3 | ||||||
| Treasury shares, at cost; 16,161,578 shares at December 31, 2006; | ||||||||
| and 8,073,805 shares at December 31, 2005 | (1,524.0 | ) | (666.8 | ) | ||||
| Total shareholders' equity | 2,913.6 | 2,556.1 | ||||||
| Total liabilities and shareholders' equity | $ | 5,427.3 | $ | 5,228.2 | ||||
| See accompanying notes to consolidated financial statements. |
ALCON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
| Years ended December 31, | |||||||||||
| 2006 | 2005 | 2004 | |||||||||
| (in millions, except share data) | |||||||||||
| Sales | $ | 4,896.6 | $ | 4,368.5 | $ | 3,913.6 | |||||
| Cost of goods sold | 1,215.1 | 1,078.4 | 1,081.6 | ||||||||
| Gross profit | 3,681.5 | 3,290.1 | 2,832.0 | ||||||||
| Selling, general and administrative | 1,398.5 | 1,594.7 | 1,237.3 | ||||||||
| Research and development | 512.1 | 421.8 | 390.4 | ||||||||
| Amortization of intangibles | 198.8 | 85.7 | 72.5 | ||||||||
| Operating income | 1,572.1 | 1,187.9 | 1,131.8 | ||||||||
| Other income (expense): | |||||||||||
| Gain (loss) from foreign currency, net | (7.9 | ) | 0.7 | (2.2 | ) | ||||||
| Interest income | 74.1 | 48.7 | 23.3 | ||||||||
| Interest expense | (42.6 | ) | (38.8 | ) | (26.9 | ) | |||||
| Other, net | 21.2 | 4.4 | (0.3 | ) | |||||||
| Earnings before income taxes | 1,616.9 | 1,202.9 | 1,125.7 | ||||||||
| Income taxes | 268.8 | 271.9 | 253.9 | ||||||||
| Net earnings | $ | 1,348.1 | $ | 931.0 | $ | 871.8 | |||||
| Basic earnings per common share | $ | 4.43 | $ | 3.04 | $ | 2.85 | |||||
| Diluted earnings per common share | $ | 4.37 | $ | 2.98 | $ | 2.80 | |||||
| Basic weighted average common shares | 304,279,489 | 306,036,089 | 305,761,128 | ||||||||
| Diluted weighted average common shares | 308,671,707 | 311,903,177 | 310,837,194 | ||||||||
| See accompanying notes to consolidated financial statements. |
ALCON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years Ended December 31, 2006, 2005 and 2004
| Common Shares | Accumulated | |||||||||||||||||||||||||
| Number | Additional | Other | ||||||||||||||||||||||||
| of Shares | Paid-in | Comprehensive | Deferred | Retained | Treasury | |||||||||||||||||||||
| Outstanding | Amount | Capital | Income | Compensation | Earnings | Shares | Total | |||||||||||||||||||
| (in millions, except share data) | ||||||||||||||||||||||||||
| Balance, December 31, 2003 | 308,519,051 | $ | 42.5 | $ | 512.0 | $ | 135.8 | $ | (7.5 | ) | $ | 951.2 | $ | (42.5 | ) | $ | 1,591.5 | |||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net earnings | -- | -- | -- | -- | -- | 871.8 | -- | 871.8 | ||||||||||||||||||
| Change in net unrealized losses | ||||||||||||||||||||||||||
| on investments | -- | -- | -- | (1.5 | ) | -- | -- | -- | (1.5 | ) | ||||||||||||||||
| Minimum pension liability | ||||||||||||||||||||||||||
| adjustment, net of taxes | -- | -- | -- | (1.5 | ) | -- | -- | -- | (1.5 | ) | ||||||||||||||||
| Foreign currency translation | ||||||||||||||||||||||||||
| adjustments | -- | -- | -- | 92.6 | -- | -- | -- | 92.6 | ||||||||||||||||||
| Total comprehensive income | 961.4 | |||||||||||||||||||||||||
| Share award transactions | 757,803 | 0.2 | 26.0 | -- | -- | -- | 0.3 | 26.5 | ||||||||||||||||||
| Tax benefits on share award | ||||||||||||||||||||||||||
| transactions | -- | -- | 9.3 | -- | -- | -- | -- | 9.3 | ||||||||||||||||||
| Treasury shares acquired | (3,622,400 | ) | -- | -- | -- | -- | -- | (236.3 | ) | (236.3 | ) | |||||||||||||||
| Compensation expense | -- | -- | -- | -- | 4.9 | -- | -- | 4.9 | ||||||||||||||||||
| Dividends on common shares | -- | -- | -- | -- | -- | (169.4 | ) | -- | (169.4 | ) | ||||||||||||||||
| Balance, December 31, 2004 | 305,654,454 | 42.7 | 547.3 | 225.4 | (2.6 | ) | 1,653.6 | (278.5 | ) | 2,187.9 | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net earnings | -- | -- | -- | -- | -- | 931.0 | -- | 931.0 | ||||||||||||||||||
| Change in net unrealized losses | ||||||||||||||||||||||||||
| on investments | -- | -- | -- | 1.9 | -- | -- | -- | 1.9 | ||||||||||||||||||
| Minimum pension liability | ||||||||||||||||||||||||||
| adjustment, net of taxes | -- | -- | -- | 4.0 | -- | -- | -- | 4.0 | ||||||||||||||||||
| Foreign currency translation | ||||||||||||||||||||||||||
| adjustments | -- | -- | -- | (140.4 | ) | -- | -- | -- | (140.4 | ) | ||||||||||||||||
| Total comprehensive income | 796.5 | |||||||||||||||||||||||||
| Share award transactions | 4,552,198 | 0.7 | 148.6 | -- | -- | -- | 3.6 | 152.9 | ||||||||||||||||||
| Tax benefits on share award | ||||||||||||||||||||||||||
| transactions | -- | -- | 110.1 | -- | -- | -- | -- | 110.1 | ||||||||||||||||||
| Treasury shares acquired | (3,721,354 | ) | -- | -- | -- | -- | -- | (391.9 | ) | (391.9 | ) | |||||||||||||||
| Compensation expense | -- | -- | -- | -- | 2.6 | -- | -- | 2.6 | ||||||||||||||||||
| Dividends on common shares | -- | -- | 0.3 | -- | -- | (302.3 | ) | -- | (302.0 | ) | ||||||||||||||||
| Balance, December 31, 2005 | 306,485,298 | 43.4 | 806.3 | 90.9 | -- | 2,282.3 | (666.8 | ) | 2,556.1 | |||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net earnings | -- | -- | -- | -- | -- | 1,348.1 | -- | 1,348.1 | ||||||||||||||||||
| Change in net unrealized gains | ||||||||||||||||||||||||||
| (losses) on investments | -- | -- | -- | 7.9 | -- | -- | -- | 7.9 | ||||||||||||||||||
| Foreign currency translation | ||||||||||||||||||||||||||
| adjustments | -- | -- | -- | 90.4 | -- | -- | -- | 90.4 | ||||||||||||||||||
| Total comprehensive income | 1,446.4 | |||||||||||||||||||||||||
| Adjustment to initially apply FASB | ||||||||||||||||||||||||||
| Statement No. 158, net of taxes | -- | -- | -- | (61.9 | ) | -- | -- | -- | (61.9 | ) | ||||||||||||||||
| Share-based payments | -- | -- | 83.0 | -- | -- | -- | -- | 83.0 | ||||||||||||||||||
| Share award transactions | 3,175,731 | 0.5 | 79.1 | -- | -- | (0.9 | ) | 31.2 | 109.9 | |||||||||||||||||
| Tax benefits on share award | ||||||||||||||||||||||||||
| transactions | -- | -- | 96.1 | -- | -- | -- | -- | 96.1 | ||||||||||||||||||
| Treasury shares acquired | (8,478,625 | ) | -- | -- | -- | -- | -- | (899.2 | ) | (899.2 | ) | |||||||||||||||
| Share cancellation | -- | -- | (0.2 | ) | -- | -- | (10.6 | ) | 10.8 | -- | ||||||||||||||||
| Dividends on common shares | -- | -- | 0.2 | -- | -- | (417.0 | ) | -- | (416.8 | ) | ||||||||||||||||
| Balance, December 31, 2006 | 301,182,404 | $ | 43.9 | $ | 1,064.5 | $ | 127.3 | $ | -- | $ | 3,201.9 | $ | (1,524.0 | ) | $ | 2,913.6 | ||||||||||
| See accompanying notes to consolidated financial statements. |
ALCON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| (in millions) | ||||||||||||
| Cash provided by (used in) operating activities: | ||||||||||||
| Net earnings | $ | 1,348.1 | $ | 931.0 | $ | 871.8 | ||||||
| Adjustments to reconcile net earnings to cash provided | ||||||||||||
| from operating activities: | ||||||||||||
| Depreciation | 158.5 | 124.9 | 120.7 | |||||||||
| Amortization of intangibles | 198.8 | 85.7 | 72.5 | |||||||||
| Amortization of deferred compensation | -- | 2.6 | 4.9 | |||||||||
| Share-based payments | 81.2 | -- | -- | |||||||||
| Tax benefit from share-based compensation | -- | 110.1 | 9.3 | |||||||||
| Deferred income taxes | (105.9 | ) | (22.5 | ) | (39.0 | ) | ||||||
| Loss (gain) on sale of assets | 2.6 | 2.7 | 2.7 | |||||||||
| Provisions for losses (note 18) | (120.3 | ) | 248.7 | -- | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Trading securities | 74.0 | (213.3 | ) | -- | ||||||||
| Trade receivables | (148.7 | ) | (81.2 | ) | (36.8 | ) | ||||||
| Inventories | (11.5 | ) | (18.6 | ) | 23.9 | |||||||
| Other assets | (5.7 | ) | (37.4 | ) | (31.1 | ) | ||||||
| Accounts payable and other current liabilities | (93.9 | ) | 80.9 | 37.4 | ||||||||
| Other long term liabilities | 28.7 | 21.4 | 11.5 | |||||||||
| Net cash from operating activities | 1,405.9 | 1,235.0 | 1,047.8 | |||||||||
| Cash provided by (used in) investing activities: | ||||||||||||
| Proceeds from sale of assets | 1.5 | 3.7 | 1.6 | |||||||||
| Purchases of property, plant and equipment | (222.3 | ) | (162.2 | ) | (146.2 | ) | ||||||
| Purchases of intangible assets | -- | (43.2 | ) | (69.9 | ) | |||||||
| Net sales (purchases) of available-for-sale investments | 54.7 | (180.6 | ) | (41.0 | ) | |||||||
| Net cash from investing activities | (166.1 | ) | (382.3 | ) | (255.5 | ) | ||||||
| Cash provided by (used in) financing activities: | ||||||||||||
| Net proceeds from (repayment of) short term debt | (108.3 | ) | 123.9 | (434.5 | ) | |||||||
| Repayment of long term debt | (6.3 | ) | (16.1 | ) | (9.3 | ) | ||||||
| Dividends on common shares | (416.8 | ) | (302.0 | ) | (169.4 | ) | ||||||
| Acquisition of treasury shares | (899.2 | ) | (391.9 | ) | (236.3 | ) | ||||||
| Proceeds from exercise of stock options | 109.8 | 153.1 | 26.8 | |||||||||
| Tax benefits from share-based payment | ||||||||||||
| arrangements | 96.1 | -- | -- | |||||||||
| Net cash from financing activities | (1,224.7 | ) | (433.0 | ) | (822.7 | ) | ||||||
| Effect of exchange rates on cash and cash equivalents | 16.9 | (55.9 | ) | 37.8 | ||||||||
| Net increase in cash and cash equivalents | 32.0 | 363.8 | 7.4 | |||||||||
| Cash and cash equivalents, beginning of year | 1,457.2 | 1,093.4 | 1,086.0 | |||||||||
| Cash and cash equivalents, end of year | $ | 1,489.2 | $ | 1,457.2 | $ | 1,093.4 | ||||||
| See accompanying notes to consolidated financial statements. |
ALCON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share data)
Alcon, Inc. ("Alcon"), a Swiss corporation, is a majority owned subsidiary of Nestl S.A. ("Nestl "). The principal business of Alcon and all of its subsidiaries (collectively, the "Company") is the development, manufacture and marketing of pharmaceuticals, surgical equipment and devices, contact lens care and other vision care products that treat eye diseases and disorders and promote the general health and function of the human eye. Due to the nature of the Company's worldwide operations, it is not subject to significant concentration risks.
The consolidated financial statements include the accounts of the Company. All significant balances and transactions among the consolidated entities have been eliminated in consolidation. All consolidated entities are included on the basis of a calendar year.
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Actual results could differ from those estimates.
The reporting currency of the Company is the United States dollar. The financial position and results of operations of the Company's foreign subsidiaries are generally determined using the local currency as the functional currency. Assets and liabilities of these subsidiaries have been translated at the rate of exchange at the end of each period. Revenues and expenses have been translated at the weighted average rate of exchange in effect during the period. Gains and losses resulting from translation adjustments are included in accumulated other comprehensive income (loss) in shareholders' equity. The impact of subsidiaries located in countries whose economies are considered highly inflationary is insignificant. Gains and losses resulting from foreign currency transactions are included in nonoperating earnings. Under Swiss corporate law, Alcon is required to declare any dividends on its common shares in
Cash equivalents include demand deposits and all highly liquid investments with original maturities of three months or less.
Inventories are stated at the lower of cost or market. Cost is determined primarily using the first-in, first-out method.
The Company holds investments of various types, maturities and classifications.
Trading Securities. Trading securities are stated at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. Gains or losses from changes in fair value of these securities are included in the consolidated statements of earnings in other, net.
Available-for-Sale Investments. Investments designated as available-for-sale include marketable debt and equity securities. Investments designated as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in shareholders' equity. The cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of these securities are recorded in the consolidated statements of earnings in
ALCON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share data)
other, net. Should the decline in value of any investment be deemed to be other-than-temporary, the investment basis would be written down to fair value and the write-down would be recorded to earnings as a loss.
Held-to-Maturity Investments. The Company holds no investments classified as held-to-maturity.
Short Term/Long Term Classification. The Company considers all liquid interest-earning investments with a maturity of three months or less to be cash equivalents. Debt securities with maturities greater than three months and less than one year are classified as short term investments. Generally, debt securities with remaining maturities greater than one year are classified as long term investments. However, investments with maturities greater than one year may be classified as short term based on their highly liquid nature and because they represent the investment of cash that is available for current operations.
The Company uses various derivative financial instruments on a limited basis as part of a strategy to manage the Company's exposure to certain market risks associated with interest rate and foreign currency exchange rate fluctuations expected to occur within the next twelve months. The Company evaluates the use of interest rate swaps and periodically uses such arrangements to manage its interest risk on selected debt instruments.
The Company regularly uses foreign currency forward exchange contracts to reduce the effect of exchange rate changes on certain foreign currency denominated intercompany and third-party transactions. The forward exchange contracts establish the exchange rates at which the Company purchases or sells the contracted amount of foreign currencies for specified local currencies at a future date. The Company uses forward contracts, which are short term in nature, and receives or pays the difference between the contracted forward rate and the exchange rate at the settlement date.
All of the Company's derivative financial instruments are recorded at fair value. For derivative instruments designated and qualifying as fair value hedges, the gain or loss on these hedges is recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged. For derivative instruments designated and qualifying as cash flow hedges, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (loss) in shareholders' equity, and is reclassified into earnings when the hedged transaction affects earnings.
Property, plant and equipment are stated at historical cost. Additions, major renewals and improvements are capitalized while repairs and maintenance costs are expensed. Upon disposition, the book value of assets and related accumulated depreciation is relieved and the resulting gains or losses are reflected in earnings.
Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets, which are as follows:
| Land improvements | 25 years |
| Buildings and improvements | 12-50 years |
| Machinery, other equipment and software | 3-12 years |
Goodwill is not amortized, but instead is tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their residual values and reviewed for recoverability upon the occurrence of an event that might indicate conditions for impairment could exist.
Intangible assets, net, consist of acquired customer base, trademarks, patents and licensed technology. The cost of these intangible assets is amortized on a straight-line basis over the estimated useful lives of the respective assets, which are 4 to 20 years.
ALCON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share data)
Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company sponsors several defined contribution plans, defined benefit retirement plans and a postretirement health care plan.
The Company provides for the benefits payable to employees on retirement by charging current service costs to income systematically over the expected service lives of employees who participate in defined benefit plans. An actuarially computed amount is determined at the beginning of each year by using valuation methods that attribute the cost of the retirement benefits to periods of employee service. Such valuation methods incorporate assumptions concerning employees' projected compensation and health care cost trends. Prior service costs for plan amendments are generally charged to income systematically over the remaining expected service lives of participating employees.
Effective December 31, 2006, the Company adopted the recognition and related disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)." Under SFAS No. 158, the overfunded or underfunded status of defined benefit postretirement plans (other than multiemployer plans) must be shown as an asset or liability in the balance sheet and changes in the funded status are recognized in the year in which the changes occur through other comprehensive income. The Company has elected to delay adoption of the provision to measure the funded status of a plan as of the date of its year-end balance sheet. The requirement to measure plan assets and benefit obligations as of the fiscal year-end date is required for fiscal years ending after December 15,
2008. Under SFAS No. 158, retrospective application is not permitted. Therefore, the amount of accumulated other comprehensive income (loss) at December 31, 2006 is not directly comparable to those amounts in the prior years.
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Company determined the impact of this act and adopted FSP No. FAS 106-2 during the second quarter of 2004. See note 16 for further discussion.
The cost recognized for defined contribution plans is based upon the contribution required for the period.
The Company recognizes revenue on product sales when the customer takes title and assumes risk of loss except for surgical equipment sales. If the customer takes title and assumes risk of loss upon shipment, revenue is recognized on the shipment date. If the customer takes title and assumes risk of loss upon delivery, revenue is recognized on the delivery date. Revenue is recognized as the net amount to be received after deducting estimated amounts for rebates and product returns.
The Company recognizes revenue on surgical equipment sales when the customer takes title and assumes risk of loss and when installation and any required training have been completed. Per procedure technology fees related to refractive laser systems are recognized in the period when the procedure is performed.
The Company recognizes revenue in accordance with the United States Securities and Exchange Commission Staff Accounting Bulletin No. 104.
When the Company recognizes revenue from the sale of products, certain items, such as cash discounts, allowances and rebates, which are known and estimable at the time of sale, are recorded as a reduction of sales in accordance with
ALCON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share data)
Emerging Issues Task Force Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." To the extent the customer will, or is expected to, reduce its payment on the related invoice amounts, these items are reflected as a reduction of accounts receivable and sales.
In accordance with certain government rebate requirements (such as those under U.S. Medicaid and Medicare) and with certain contractual agreements, the Company is required to pay rebates to customers, their customers or government agencies under provisions that limit the amounts that may be paid for pharmaceuticals and surgical devices. The amount of accrued product rebates is included in other current liabilities.
The Company records a reduction of sales for estimated discounts, allowances and rebates in the period in which the related sales occur, based upon historical experience of amounts paid and amounts as a percentage of sales. The Company also considers the effects of changes in product pricing, in sales trends, in contract terms and in laws and regulations.
Value added taxes and other sales taxes are excluded from sales.
Internal research and development are expensed as incurred. Third-party research and development costs are expensed as the contracted work is performed or as milestone results have been achieved.
Advertising costs are expensed as incurred. Advertising costs amounted to $130.4, $128.8 and $124.7 in 2006, 2005 and 2004, respectively.
Shipping and handling costs amounted to $56.6, $49.1 and $39.3 in 2006, 2005 and 2004, respectively.
Legal costs are expensed during the period incurred.
The Company recognizes deferred income tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets, liabilities and expected benefits of utilizing net operating loss and credit carryforwards. The impact on deferred income taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment. Withholding taxes have been provided on unremitted earnings of subsidiaries which are not reinvested indefinitely in such operations. Dividends paid by subsidiaries to Alcon, Inc. do not result in Swiss income taxes.
Basic earnings per common share were computed by dividing net earnings by the weighted average number of common shares outstanding for the relevant period. The unvested portion of restricted common shares was excluded in the calculation of basic weighted average common shares outstanding. Diluted weighted average common shares reflect the potential dilution, using the treasury stock method, that could occur if employee stock options for the issuance of common shares and share-settled stock appreciation rights were exercised and if share-settled restricted share units and contingent restricted common shares granted to employees were vested.
ALCON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share data)
The following table reconciles the weighted average shares of the basic and diluted share computations:
| 2006 | 2005 | 2004 | |||||||||
| Basic weighted average common shares outstanding | 304,279,489 | 306,036,089 | 305,761,128 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Employee stock options | 4,359,828 | 5,580,253 | 4,543,823 | ||||||||
| Share-settled stock appreciation rights | 859 | -- | -- | ||||||||
| Share-settled restricted share units | 2,853 | -- | -- | ||||||||
| Contingent restricted common shares | 28,678 | 286,835 | 532,243 | ||||||||
| Diluted weighted average common shares outstanding | 308,671,707 | 311,903,177 | 310,837,194 |
At December 31, 2006, 179,984 stock options and 1,315,645 share-settled stock appreciation rights were not included in the computation of diluted earnings per share, as their exercise prices were greater than the average market price of the common shares. Their effect would have been anti-dilutive.
Comprehensive income consists of net earnings, foreign currency translation adjustments, unrealized gains (losses) on investments and, in 2005 and 2004, minimum pension liability adjustments and is presented in the consolidated statements of shareholders' equity and comprehensive income.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment." This statement replaced SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, based on estimated "fair values."
The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized in the year ended December 31, 2006 included: