10-Q 1 pfe-9302012x10q.htm 10-Q PFE - 9/30/2012 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 1-3619

----
 
PFIZER INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)
 
235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 733-2323
(Registrant’s telephone number)
 
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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES   X 
NO ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES   X 
NO ___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated filer  X                 Accelerated filer  ___                  Non-accelerated filer  ___             Smaller reporting company  ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ____
NO   X 

At November 5, 2012, 7,362,573,528 shares of the issuer’s voting common stock were outstanding.



FORM 10-Q
 
For the Quarterly Period Ended
September 30, 2012
 
Table of Contents
Page
   
 
 
 
   
 
   
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and October 2, 2011
 
 
   
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and October 2, 2011
   
 
   
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
   
 
 
   
 

2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
September 30,
2012

 
October 2,
2011

 
September 30,
2012

 
October 2,
2011

Revenues
$
13,976

 
$
16,609

 
$
43,918

 
$
49,118

Costs and expenses:
 

 
 

 
 

 
 

Cost of sales(a)
2,665

 
3,409

 
8,162

 
10,449

Selling, informational and administrative expenses(a)
3,847

 
4,457

 
11,801

 
13,635

Research and development expenses(a)
1,981

 
2,176

 
5,734

 
6,487

Amortization of intangible assets
1,228

 
1,389

 
3,939

 
4,138

Restructuring charges and certain acquisition-related costs
302

 
1,090

 
1,089

 
2,458

Other deductions––net
962

 
547

 
3,283

 
1,802

Income from continuing operations before provision for taxes on income
2,991

 
3,541

 
9,910

 
10,149

Provision/(benefit) for taxes on income
(119
)
 
1,216

 
1,882

 
3,167

Income from continuing operations
3,110

 
2,325

 
8,028

 
6,982

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations––net of tax
104

 
96

 
249

 
303

Gain on sale of discontinued operations––net of tax

 
1,328

 

 
1,316

Discontinued operations––net of tax
104

 
1,424

 
249

 
1,619

Net income before allocation to noncontrolling interests
3,214

 
3,749

 
8,277

 
8,601

Less: Net income attributable to noncontrolling interests
6

 
11

 
22

 
31

Net income attributable to Pfizer Inc.
$
3,208

 
$
3,738

 
$
8,255

 
$
8,570

Earnings per common share––basic:(b)
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
$
0.42

 
$
0.30

 
$
1.07

 
$
0.88

Discontinued operations––net of tax
0.01

 
0.18

 
0.03

 
0.21

Net income attributable to Pfizer Inc. common shareholders
$
0.43

 
$
0.48

 
$
1.10

 
$
1.09

Earnings per common share––diluted:(b)
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
$
0.41


$
0.30

 
$
1.06

 
$
0.88

Discontinued operations––net of tax
0.01

 
0.18

 
0.03

 
0.20

Net income attributable to Pfizer Inc. common shareholders
$
0.43

 
$
0.48

 
$
1.09

 
$
1.08

Weighted-average shares––Basic
7,436

 
7,770

 
7,483

 
7,877

Weighted-average shares––Diluted
7,508

 
7,810

 
7,550

 
7,925

Cash dividends paid per common share
$
0.22

 
$
0.20

 
$
0.66

 
$
0.60

(a) 
Exclusive of amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.
(b) 
EPS amounts may not add due to rounding.

See Notes to Condensed Consolidated Financial Statements.

3


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
October 2,
2011

 
September 30,
2012

 
October 2,
2011

Net income before allocation to noncontrolling interests
 
$
3,214

 
$
3,749

 
$
8,277

 
$
8,601

Other Comprehensive Income/(Loss)
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
$
153

 
$

 
$
(1,565
)
 
$
2,546

Reclassification adjustments(a) 
 

 
(130
)
 

 
(137
)
 
 
153

 
(130
)
 
(1,565
)
 
2,409

Unrealized holding gains/(losses) on derivative financial instruments
 
446

 
(1,051
)
 
217

 
(516
)
Reclassification adjustments for realized (gains)/losses(a) 
 
(221
)
 
653

 
(95
)
 
(81
)
 
 
225

 
(398
)
 
122

 
(597
)
Unrealized holding gains/(losses) on available-for-sale securities
 
35

 
(74
)
 
127

 
(94
)
Reclassification adjustments for realized (gains)/losses(a) 
 
(9
)
 
23

 
24

 
32

 
 
26

 
(51
)
 
151

 
(62
)
Benefit plans: Actuarial gains/(losses)
 
(88
)
 
1

 
(592
)
 
4

Reclassification adjustments related to amortization(b) 
 
121

 
68

 
351

 
208

Reclassification adjustments related to curtailments and settlements, net(b)
 
48

 
85

 
160

 
258

Other
 
(36
)
 
(20
)
 
18

 
(164
)
 
 
45

 
134

 
(63
)
 
306

Benefit plans: Prior service credits/(costs) and other
 
(3
)
 

 
23

 
1

Reclassification adjustments related to amortization(b) 
 
(19
)
 
(17
)
 
(53
)
 
(52
)
Reclassification adjustments related to curtailments and settlements, net(b)
 
(4
)
 
(16
)
 
(86
)
 
(49
)
Other
 
4

 

 

 
(4
)
 
 
(22
)
 
(33
)
 
(116
)
 
(104
)
Other comprehensive income/(loss), before tax
 
427

 
(478
)
 
(1,471
)
 
1,952

Tax provision/(benefit) on other comprehensive income/(loss)(c) 
 
73

 
(216
)
 
72

 
(276
)
Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
354

 
$
(262
)
 
$
(1,543
)
 
$
2,228

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
 

 
 

 
 

 
 

Comprehensive income before allocation to noncontrolling interests
 
$
3,568

 
$
3,487

 
$
6,734

 
$
10,829

Less: Comprehensive income attributable to noncontrolling interests
 
5

 
7

 
3

 
35

Comprehensive income attributable to Pfizer Inc.
 
$
3,563

 
$
3,480

 
$
6,731

 
$
10,794

(a) 
Reclassified into Other deductions—net in the condensed consolidated statements of income.
(b) 
Generally reclassified into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate in the condensed consolidated statements of income.
(c) 
See Note 5B. Tax Matters: Taxes on Items of Other Comprehensive Income/(Loss).

See Notes to Condensed Consolidated Financial Statements.

4


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
December 31,
2011


 
(Unaudited)
 

Assets
 

 

Cash and cash equivalents
 
$
4,506

 
$
3,182

Short-term investments
 
18,462

 
23,270

Accounts receivable, less allowance for doubtful accounts
 
12,523

 
13,058

Inventories
 
7,516

 
6,610

Taxes and other current assets
 
8,849

 
9,380

Assets of discontinued operations and other assets held for sale
 
5,271

 
5,317

Total current assets
 
57,127

 
60,817

Long-term investments
 
13,429

 
9,814

Property, plant and equipment, less accumulated depreciation
 
14,606

 
15,921

Goodwill
 
44,370

 
44,569

Identifiable intangible assets, less accumulated amortization
 
47,209

 
51,184

Taxes and other noncurrent assets
 
5,862

 
5,697

Total assets
 
$
182,603

 
$
188,002

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
7,774

 
$
4,016

Accounts payable
 
2,967

 
3,678

Dividends payable
 
1

 
1,796

Income taxes payable
 
1,788

 
1,009

Accrued compensation and related items
 
1,736

 
2,120

Other current liabilities
 
13,455

 
15,066

Liabilities of discontinued operations
 
1,410

 
1,224

Total current liabilities
 
29,131

 
28,909

 
 
 
 
 
Long-term debt
 
31,083

 
34,926

Pension benefit obligations
 
6,560

 
6,341

Postretirement benefit obligations
 
3,309

 
3,344

Noncurrent deferred tax liabilities
 
19,133

 
18,861

Other taxes payable
 
6,011

 
6,886

Other noncurrent liabilities
 
5,261

 
6,114

Total liabilities
 
100,488

 
105,381

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
41

 
45

Common stock
 
447

 
445

Additional paid-in capital
 
72,317

 
71,423

Employee benefit trusts
 
(2
)
 
(3
)
Treasury stock
 
(36,703
)
 
(31,801
)
Retained earnings
 
51,256

 
46,210

Accumulated other comprehensive loss
 
(5,653
)
 
(4,129
)
Total Pfizer Inc. shareholders’ equity
 
81,703

 
82,190

Equity attributable to noncontrolling interests
 
412

 
431

Total equity
 
82,115

 
82,621

Total liabilities and equity
 
$
182,603

 
$
188,002

 See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
October 2,
2011

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
8,277

 
$
8,601

Adjustments to reconcile net income before allocation to noncontrolling interests to net
cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
5,716

 
6,568

Share-based compensation expense
 
362

 
347

Asset write-offs and impairment charges
 
865

 
773

Gain on sale of discontinued operations
 

 
(1,683
)
Deferred taxes from continuing operations
 
97

 
693

Other deferred taxes
 
23

 
145

Benefit plan contributions (in excess of)/less than expense

 
86

 
(270
)
Other non-cash adjustments, net
 
(118
)
 
(93
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(3,510
)
 
(102
)
Net cash provided by operating activities
 
11,798

 
14,979

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(833
)
 
(1,062
)
Purchases of short-term investments
 
(14,587
)
 
(13,457
)
Proceeds from redemptions and sales of short-term investments
 
19,377

 
7,221

Net proceeds from redemptions and sales of short-term investments with
original maturities of 90 days or less
 
1,483

 
10,648

Purchases of long-term investments
 
(8,694
)
 
(3,646
)
Proceeds from redemptions and sales of long-term investments
 
3,357

 
2,001

Acquisitions, net of cash acquired
 
(782
)
 
(3,188
)
Proceeds from sale of business
 

 
2,376

Other investing activities
 
(4
)
 
408

Net cash provided by/(used in) investing activities
 
(683
)
 
1,301

 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
5,700

 
9,613

Principal payments on short-term borrowings
 
(3
)
 
(3,826
)
Net payments on short-term borrowings with original maturities of 90 days or less
 
(6,055
)
 
(6,243
)
Principal payments on long-term debt
 
(14
)
 
(3,486
)
Purchases of common stock
 
(4,834
)
 
(5,789
)
Cash dividends paid
 
(4,915
)
 
(4,710
)
Other financing activities
 
355

 
84

Net cash used in financing activities
 
(9,766
)
 
(14,357
)
Effect of exchange-rate changes on cash and cash equivalents
 
(25
)
 
48

Net increase in cash and cash equivalents
 
1,324

 
1,971

Cash and cash equivalents, beginning
 
3,182

 
1,735

 
 
 
 
 
Cash and cash equivalents, end
 
$
4,506

 
$
3,706

 
 
 
 
 
Supplemental Cash Flow Information
 
 

 
 

Cash paid during the period for:
 
 

 
 

Income taxes
 
$
1,895

 
$
1,539

Interest
 
1,675

 
1,872

See Notes to Condensed Consolidated Financial Statements

6

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted.

Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three and nine months ended August 26, 2012, and August 28, 2011. We have made certain reclassification adjustments to conform prior-period amounts to the current presentation, primarily related to certain inventories (see Note 8. Inventories) and the reclassification of certain investments (see Note 7. Financial Instruments).

On August 13, 2012, we filed a registration statement with the SEC for the potential initial public offering (IPO) of up to a 20% ownership stake in our Animal Health business, Zoetis Inc. (Zoetis).

On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlé. As a result, beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. In addition, the assets and liabilities associated with this business are reported as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets (see Note 2B. Acquisitions and Divestitures: Divestitures).

On August 1, 2011, we completed the sale of our Capsugel business. The operating results and the gain on the sale of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and nine months ended October 2, 2011 (see Note 2B. Acquisitions and Divestitures: Divestitures).

On January 31, 2011, we acquired King Pharmaceuticals, Inc. (King) and in accordance with our domestic and international reporting periods, our condensed consolidated financial statements for the nine months ended October 2, 2011 reflect approximately eight months of King’s U.S. operations and approximately seven months of King’s international operations (for additional information, see Note 2A. Acquisitions and Divestitures: Acquisitions).

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.

We are responsible for the unaudited financial statements included in this Quarterly Report on Form 10-Q. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and results of operations.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K.

B. Adoption of New Accounting Standards

The provisions of the following new accounting and disclosure standards were adopted as of January 1, 2012:

Presentation of comprehensive income in financial statements. As a result of adopting this new standard, we have presented separate Condensed Consolidated Statements of Comprehensive Income.
An amendment to the guidelines on the measurement and disclosure of fair value that is consistent between U.S. GAAP and International Financial Reporting Standards. The adoption of this new standard did not have a significant impact on our financial statements.


7

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

C. Fair Value

Our fair value methodologies depend on the following types of inputs:
Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).
Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.

Note 2. Acquisitions and Divestitures

A. Acquisitions

Nexium Over-the-Counter Rights

On August 13, 2012, we announced that we entered into an agreement with AstraZeneca for the over-the-counter (OTC) rights for Nexium, a leading prescription drug currently approved to treat the symptoms of gastroesophageal reflux disease. Under the terms of the agreement, we acquired the exclusive global rights to market Nexium for the approved OTC indications. We made an upfront payment of $250 million to AstraZeneca, and AstraZeneca is eligible to receive milestone payments of up to $550 million based on product launches and level of sales as well as royalty payments based on sales. The upfront payment was expensed and included in Research and development expenses in our condensed consolidated statements of income. A marketing authorization application for OTC Nexium in a 20 mg tablet form was filed with the European Medicines Agency in June 2012. A new drug application filing for OTC Nexium in the U.S. in a 20 mg delayed-release capsule is targeted for the first half of 2013.

Alacer Corp.

On February 26, 2012, we completed our acquisition of Alacer Corp., a privately owned company that manufactures, markets and distributes Emergen-C, a line of effervescent, powdered drink mix vitamin supplements that is the largest-selling branded vitamin C line in the U.S. In connection with this consumer healthcare acquisition, we recorded $247 million in Identifiable intangible assets, consisting primarily of the Emergen-C indefinite-lived brand, $94 million in net deferred tax liabilities and $151 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has been finalized.

Ferrosan Holding A/S

On December 1, 2011, we completed our acquisition of the consumer healthcare business of Ferrosan Holding A/S (Ferrosan), a Danish company engaged in the sale of science-based consumer healthcare products, including dietary supplements and lifestyle products, primarily in the Nordic region and the emerging markets of Russia and Central and Eastern Europe. Due to the fact that financial information included in our fiscal year 2011 consolidated financial statements for our subsidiaries operating outside the U.S. is as of and for the year ended November 30, this acquisition is reflected in our condensed consolidated financial statements beginning in the first fiscal quarter of 2012. Our acquisition of Ferrosan’s consumer healthcare business increases our presence in dietary supplements with a new set of brands and pipeline products. Also, we believe that the acquisition allows us to expand the marketing of Ferrosan’s brands through Pfizer’s global footprint and provide greater distribution and scale for certain Pfizer brands, such as Centrum and Caltrate, in Ferrosan’s key markets. In connection with this acquisition, we recorded $463 million in Identifiable intangible assets, consisting of indefinite-lived and finite-lived brands, $119 million in net deferred tax liabilities and $246 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has not been finalized.


8

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

King Pharmaceuticals, Inc.

On January 31, 2011 (the acquisition date), we completed a tender offer for the outstanding shares of common stock of King at a purchase price of $14.25 per share in cash and acquired approximately 92.5% of the outstanding shares. On February 28, 2011, we acquired all of the remaining shares of King for $14.25 per share in cash. As a result, the total fair value of consideration transferred for King was approximately $3.6 billion in cash ($3.2 billion, net of cash acquired).

King’s principal businesses consist of a prescription pharmaceutical business focused on delivering new formulations of pain treatments designed to discourage common methods of misuse and abuse; the Meridian auto-injector business for emergency drug delivery, which develops and manufactures the EpiPen; an established products portfolio; and an animal health business that offers a variety of feed-additive products for a wide range of species.

The following table provides the assets acquired and liabilities assumed from King: 
(MILLIONS OF DOLLARS)
 
Amounts
Recognized as of
Acquisition Date
(Final)

Working capital, excluding inventories
 
$
155

Inventories
 
340

Property, plant and equipment
 
412

Identifiable intangible assets, excluding in-process research and development
 
1,806

In-process research and development
 
303

Net tax accounts
 
(328
)
All other long-term assets and liabilities, net
 
102

Total identifiable net assets
 
2,790

Goodwill(a)
 
765

Net assets acquired/total consideration transferred
 
$
3,555

(a) 
Goodwill recorded as of the acquisition date totaled $720 million for our three biopharmaceutical operating segments and $45 million for our Animal Health operating segment. (Since the acquisition of King, we have revised our operating segments. See Note 13A. Segment, Geographic and Other Revenue Information: Segment Information.)

As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $200 million, virtually all of which was expected to be collected.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of King includes the following:
the expected synergies and other benefits that we believed would result from combining the operations of King with the operations of Pfizer;
any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products; and
the value of the going-concern element of King’s existing businesses (the higher rate of return on the assembled collection of net assets versus if Pfizer had acquired all of the net assets separately).

Goodwill is not amortized and is not deductible for income tax purposes (see Note 9A. Goodwill and Other Intangible Assets: Goodwill for additional information).

The assets and liabilities arising from contingencies recognized as of the acquisition date are not significant to Pfizer’s condensed consolidated financial statements.


9

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Revenues from King are included in Pfizer's condensed consolidated statements of income from the acquisition date, January 31, 2011, through Pfizer’s domestic and international quarter-ends and were $938 million in the first nine months of 2011. We are not able to provide the results of operations attributable to King in the first nine months of 2011 as those operations had been substantially integrated into the larger Pfizer operation shortly after the acquisition.

If the acquisition of King had occurred on January 1, 2011, the change to Pfizer’s Revenues, Income from continuing operations attributable to Pfizer Inc. common shareholders and Diluted earnings per share attributable to Pfizer Inc. common shareholders for the first nine months of 2011 would not have been significant.

B. Divestitures

On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlé for $11.85 billion in cash. The transaction is expected to close in the next few months, assuming the receipt of the required regulatory clearances and satisfaction of other closing conditions. Beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. The transaction also includes the sale of certain prenatal multivitamins currently commercialized by the Pfizer Consumer Healthcare business unit. The operating results of this product line are also included in Discontinued operations––net of tax for all periods presented. In addition, the assets and liabilities associated with the discontinued operations are classified as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets.

On August 1, 2011, we completed the sale of our Capsugel business for approximately $2.4 billion in cash. The operating results and the gain on the sale of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and nine months ended October 2, 2011.

The following table provides the components of Discontinued operations—net of tax:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
October 2,
2011

 
September 30,
2012

 
October 2,
2011

Revenues(a)
 
$
564

 
$
699

 
$
1,665

 
$
2,068

Pre-tax income from discontinued operations
 
$
129

 
$
121

 
$
365

 
$
397

Provision for taxes on income(b)
 
25


25


116


94

Income from discontinued operations––net of tax
 
104

 
96

 
249

 
303

Pre-tax gain on sale of discontinued operations
 

 
1,695

 

 
1,683

Provision for taxes on income(c)
 

 
367

 

 
367

Gain on sale of discontinued operations––net of tax
 

 
1,328

 

 
1,316

Discontinued operations––net of tax(a)
 
$
104

 
$
1,424

 
$
249

 
$
1,619

(a) 
Includes the Nutrition business for all periods presented and the Capsugel business for 2011 only.
(b) 
Includes deferred tax expense of $9 million and a deferred tax benefit of $10 million for the three months ended September 30, 2012 and October 2, 2011, respectively, and a deferred tax expense of $23 million and a deferred tax benefit of $17 million for the nine months ended September 30, 2012 and October 2, 2011, respectively. These deferred tax provisions include deferred income taxes related to investments in certain foreign subsidiaries resulting from our intention not to hold these subsidiaries permanently.
(c) 
Includes deferred tax expense of $162 million for the three and nine months ended October 2, 2011. These deferred tax provisions include deferred taxes on certain current-year funds earned outside the U.S. that will not be permanently reinvested overseas.











10

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides the components of Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations:
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
December 31,
2011

Accounts receivable, less allowance for doubtful accounts
 
$
523

 
$
550

Other current assets
 
433

 
419

Property, plant and equipment, less accumulated depreciation
 
1,046

 
1,118

Goodwill
 
492

 
498

Identifiable intangible assets, less accumulated amortization
 
2,652

 
2,648

Other noncurrent assets
 
125

 
84

Assets of discontinued operations and other assets held for sale
 
$
5,271

 
$
5,317

 
 
 
 
 
Current liabilities
 
$
554

 
$
385

Other liabilities
 
856

 
839

Liabilities of discontinued operations
 
$
1,410

 
$
1,224


The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for any period presented.

Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction and productivity initiatives. For example:
In connection with our cost-reduction and productivity initiatives, significant programs of which began in 2005, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and
In connection with acquisition activity, we typically incur costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company).
 
All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as groups such as information technology, shared services and corporate operations.

Since the acquisition of Wyeth on October 15, 2009, our cost-reduction initiatives announced on January 26, 2009, but not completed as of December 31, 2009, were incorporated into a comprehensive plan to integrate Wyeth’s operations to generate cost savings and to capture synergies across the combined company. In addition, on February 1, 2011, we announced a new productivity initiative to accelerate our strategies to improve innovation and productivity in R&D by prioritizing areas with the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.


11

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
October 2,
2011

 
September 30,
2012

 
October 2,
2011

Transaction costs(a)
 
$

 
$
5

 
$
1

 
$
28

Integration costs(b)
 
87

 
184

 
295

 
562

Restructuring charges(c):
 
 

 
 

 
 

 
 

Employee termination costs
 
113

 
762

 
424

 
1,615

Asset impairments
 
35

 
99

 
282

 
157

Exit costs
 
67

 
40

 
87

 
96

Restructuring charges and certain acquisition-related costs
 
302

 
1,090

 
1,089

 
2,458

Additional depreciation––asset restructuring recorded in our
condensed consolidated statements of income as follows(d):
 
 

 
 

 
 

 
 

Cost of sales
 
78

 
68

 
214

 
410

Selling, informational and administrative expenses
 
3

 
39

 
8

 
68

Research and development expenses
 

 
146

 
259

 
379

Total additional depreciation––asset restructuring
 
81

 
253

 
481

 
857

Implementation costs recorded in our condensed consolidated
statements of income as follows(e):
 
 

 
 

 
 

 
 

Cost of sales
 
19

 

 
23

 

Selling, informational and administrative expenses
 
45

 
12

 
77

 
12

Research and development expenses
 
47

 
10

 
132

 
28

Total implementation costs
 
111

 
22

 
232

 
40

Total costs associated with acquisitions and cost-reduction/
productivity initiatives
 
$
494

 
$
1,365

 
$
1,802

 
$
3,355

(a) 
Transaction costs represent external costs directly related to acquired businesses and primarily include expenditures for banking, legal, accounting and other similar services.
(b) 
Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes.
(c) 
From the beginning of our cost-reduction and transformation initiatives in 2005 through September 30, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 59,700 employees, mainly in manufacturing and sales and research, of which approximately 49,300 employees have been terminated as of September 30, 2012. For the nine months ended September 30, 2012, the amount of employee termination costs represents additional accruals with respect to reserves for approximately 2,300 employees.
The restructuring charges in 2012 are associated with the following:
For the three months ended September 30, 2012, Primary Care operating segment ($83 million), Specialty Care and Oncology operating segment ($60 million), Established Products and Emerging Markets operating segment ($16 million), other operating segments ($8 million), research and development operations ($39 million income), manufacturing operations ($27 million) and Corporate ($60 million).
For the nine months ended September 30, 2012, Primary Care operating segment ($51 million), Specialty Care and Oncology operating segment ($79 million), Established Products and Emerging Markets operating segment ($20 million), other operating segments ($26 million), research and development operations ($14 million income), manufacturing operations ($193 million) and Corporate ($438 million).
The restructuring charges in 2011 are associated with the following:
For the three months ended October 2, 2011, Primary Care operating segment ($473 million), Specialty Care and Oncology operating segment ($186 million), Established Products and Emerging Markets operating segment ($64 million), other operating segments ($30 million), research and development operations ($46 million income), manufacturing operations ($41 million) and Corporate ($153 million).

12

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

For the nine months ended October 2, 2011, Primary Care operating segment ($606 million), Specialty Care and Oncology operating segment ($228 million), Established Products and Emerging Markets operating segment ($80 million), other operating segments ($44 million), research and development operations ($426 million), manufacturing operations ($196 million) and Corporate ($288 million).

(d) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(e) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction and productivity initiatives.

The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS)
 
Employee
Termination
Costs

 
Asset
Impairment
Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2011
 
$
2,425

 
$

 
$
92

 
$
2,517

Provision(a)
 
424

 
282

 
87

 
793

Utilization and other(b)
 
(1,270
)
 
(282
)
 
(69
)
 
(1,621
)
Balance, September, 2012(c)
 
$
1,579

 
$

 
$
110

 
$
1,689

(a) 
For the nine months ended September 30, 2012, Provision includes additional accruals with respect to reserves for approximately 2,300 employees.
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($949 million) and Other noncurrent liabilities ($740 million).

The asset impairment charges included in restructuring charges for the nine months ended September 30, 2012 primarily relate to assets held for sale and are based on an estimate of fair value, which was determined to be lower than the carrying value of the assets prior to the impairment charge.

The following table provides additional information about the long-lived assets held-for-sale that were impaired in 2012:
 
 
 Fair Value(a)
 
Nine Months Ended September 30, 2012
(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Long-lived assets held-for-sale(b)
 
$
96

 
$

 
$
96

 
$

 
$
220

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects property, plant and equipment and other long-lived assets written down to their fair value of $96 million, less costs to sell of $2 million (a net of $94 million), in the first nine months of 2012. The impairment charges of $220 million are included in Restructuring charges and certain acquisition-related costs. Fair value is determined primarily using a market approach, with various inputs, such as recent sales transactions.


13

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 4. Other Deductions—Net

The following table provides components of Other deductions––net:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
October 2,
2011

 
September 30,
2012

 
October 2,
2011

Interest income(a)
 
$
(108
)
 
$
(109
)
 
$
(275
)
 
$
(331
)
Interest expense(a)
 
382

 
423

 
1,151

 
1,285

Net interest expense
 
274

 
314

 
876

 
954

Royalty-related income
 
(132
)
 
(136
)
 
(353
)
 
(447
)
Net gain on asset disposals
 
(19
)
 
(21
)
 
(45
)
 
(47
)
Certain legal matters, net(b)
 
726

 
132

 
2,014

 
619

Certain asset impairment charges(c)
 
49

 
145

 
561

 
625

Costs associated with the potential separation of the Animal Health business(d)
 
32

 

 
93

 

Other, net
 
32

 
113

 
137

 
98

Other deductions––net
 
$
962

 
$
547

 
$
3,283

 
$
1,802

(a) 
Interest income decreased slightly in the third quarter of 2012 due to lower investment balances mostly offset by higher interest rates earned on investments. Interest income decreased in the first nine months of 2012 due to lower interest rates earned on investments. Interest expense decreased in both periods in 2012 due to lower debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities.
(b) 
In the third quarter of 2012, primarily includes a $491 million charge, not deductible for income tax purposes, resulting from an agreement-in-principle with the U.S. Department of Justice (DOJ) to resolve an investigation into Wyeth's historical promotional practices in connection with Rapamune. In the first nine months of 2012, primarily includes the aforementioned $491 million charge related to Rapamune, a $450 million settlement of a lawsuit by Brigham Young University related to Celebrex, and charges related to hormone-replacement therapy litigation. In 2011, primarily includes charges related to hormone-replacement therapy litigation. (See Note 12. Commitments and Contingencies.)
(c) 
In the first nine months of 2012, includes intangible asset impairment charges of $494 million reflecting (i) $314 million of in-process research and development (IPR&D), substantially all related to compounds that targeted autoimmune and inflammatory diseases (full write-off), (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, and (iii) $135 million related to three developed technology rights. The intangible asset impairment charges for 2012 reflect, among other things, the impact of new scientific findings, updated commercial forecasts, an increased competitive environment and declining gross margins. The impairment charges for the nine months of 2012 are associated with the following: Worldwide Research and Development ($297 million); Consumer Healthcare ($45 million); Established Products ($45 million); Primary Care ($52 million); Animal Health ($36 million) and Specialty Care ($19 million). In addition, the first nine months of 2012 include charges of approximately $67 million for certain investments. These investment impairment charges reflect the difficult global economic environment.

In the first nine months of 2011, includes intangible asset impairment charges of approximately $585 million, reflecting approximately $440 million impairment of IPR&D assets, primarily related to two compounds for the treatment of certain autoimmune and inflammatory diseases, and approximately $145 million impairment of developed technology rights. Substantially all of these impairment charges relate to intangible assets that were acquired as part of our acquisition of Wyeth. The intangible asset impairment charges for 2011 reflect, among other things, the impact of new scientific findings and updated commercial forecasts. The impairment charges for the nine months of 2011 are associated with the following: Worldwide Research and Development ($394 million); Specialty Care ($126 million); Oncology ($56 million) and Animal Health ($9 million).
(d) 
Costs incurred in connection with the potential initial public offering of up to a 20% ownership stake in our Animal Health business, Zoetis. Includes expenditures for banking, legal, accounting and similar services related to the potential transaction.

The asset impairment charges included in Other deductions––net for the first nine months of 2012 primarily relate to identifiable intangible assets and are based on estimates of fair value.


14

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides additional information about the intangible assets that were impaired in 2012:
 
 
Fair Value(a)
 
Nine Months Ended September 30, 2012

(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––IPR&D(b)
 
$
44

 
$

 
$

 
$
44

 
$
314

Intangible assets––Other(b)
 
573

 

 

 
573

 
180

Total
 
$
617

 
$

 
$

 
$
617

 
$
494

(a) 
Fair value as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects intangible assets written down to their fair value of $617 million in the first nine months of 2012. The impairment charges of $494 million are included in Other deductions––net. When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the projections and the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

During the third quarter of 2012, we reached a settlement with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Pfizer Inc. tax returns for the years 2006 through 2008. The IRS concluded the examination of the aforementioned tax years and issued a final Revenue Agent's Report (RAR). We agreed with all the adjustments and computations contained in the RAR. As a result of settling these audit years, in the third quarter of 2012 we recorded a tax benefit of approximately $1.1 billion representing tax and interest.

Our effective tax rate for continuing operations was (4.0)% for the third quarter of 2012, compared to 34.3% for the third quarter of 2011, and in the first nine months of 2012 was 19.0%, compared to 31.2% in the first nine months of 2011. The effective tax rates for the third quarter and first nine months of 2012 were favorably impacted by the aforementioned settlement with the IRS. The tax rates in both periods in 2012 compared to the same periods in 2011 were also favorably impacted by the resolution of foreign audits pertaining to multiple tax years and the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, partially offset by the unfavorable impact of the non-deductibility of a $491 million charge resulting from an agreement-in-principle with the DOJ to resolve an investigation into Wyeth's historical promotional practices in connection with Rapamune, as well as the expiration of the U.S. research and development tax credit.




15

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

B. Taxes on Items of Other Comprehensive Income/(Loss)

The following table provides the components of tax benefit on Other comprehensive income/(loss):
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
October 2,
2011

 
September 30,
2012

 
October 2,
2011

Tax Expense/(Benefit) on Other Comprehensive Income/(Loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments(a)
 
$
(23
)
 
$
(60
)
 
$
14

 
$
(70
)
Unrealized holding gains/(losses) on derivative financial instruments
 
137

 
(419
)
 
80

 
(212
)
Reclassification adjustments for realized (gains)/losses
 
(52
)
 
250

 
(34
)
 
(31
)
 
 
85

 
(169
)
 
46

 
(243
)
Unrealized gains/(losses) on available-for-sale securities
 
4

 
(18
)
 
17

 
(18
)
Reclassification adjustments for realized losses
 
3

 
3

 
8

 
4

 
 
7

 
(15
)
 
25

 
(14
)
Benefit plans: Actuarial gains/(losses)
 
(39
)
 
1

 
(157
)
 
1

Reclassification adjustments related to amortization
 
44

 
24

 
129

 
74

Reclassification adjustments related to curtailments and settlements, net
 
20

 
28

 
59

 
89

Other
 
(12
)
 
(12
)
 
5

 
(71
)
 
 
13

 
41

 
36

 
93

Benefit plan: Prior service (costs)/credits and other
 
(2
)
 

 
6

 

Reclassification adjustments related to amortization
 
(7
)
 
(7
)
 
(21
)
 
(21
)
Reclassification adjustments related to curtailments and settlements, net
 
(2
)
 
(7
)
 
(34
)
 
(20
)
Other
 
2

 
1

 

 
(1
)
 
 
(9
)
 
(13
)
 
(49
)
 
(42
)
Tax provision/(benefit) on other comprehensive income/(loss)
 
$
73

 
$
(216
)
 
$
72

 
$
(276
)
(a) 
Taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries.

C. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. We treat these events as discrete items in the period of resolution.

The United States is our primary tax jurisdiction and we are regularly audited by the U.S. Internal Revenue Service (IRS):
During the third quarter of 2012, we reached a settlement with the IRS with respect to the audits of the Pfizer Inc. tax returns for the years 2006 through 2008. The IRS concluded the examination of the aforementioned tax years and issued a final Revenue Agent's Report (RAR). We agreed with all the adjustments and computations contained in the RAR. As a result of settling these audit years, in the third quarter of 2012 we recorded a tax benefit of approximately $1.1 billion representing tax and interest.
With respect to Pfizer Inc., tax years 2009-2010 are currently under audit. Tax years 2011-2012 are not under audit. All other tax years are closed.

16

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.
With respect to King, the audit for tax year 2008 has been effectively settled, and for Alpharma Inc. (a subsidiary of King), tax years 2005-2007 are currently under audit. For King, tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. All other tax years are closed. The open tax years and audits for King and its subsidiaries are not considered material to Pfizer.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2012), Japan (2007-2012), Europe (2007-2012, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), and Puerto Rico (2007-2012).
 
Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests

The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
 
 
Net Unrealized Gain/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Currency Translation Adjustment And Other

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/ Credits And Other

 
Accumulated Other Comprehensive Loss

Balance, December 31, 2011
 
$
944

 
$
(361
)
 
$
46

 
$
(5,120
)
 
$
362

 
$
(4,129
)
Other comprehensive income/(loss)(a)
 
(1,560
)
 
76

 
126

 
(99
)
 
(67
)
 
(1,524
)
Balance, September 30, 2012
 
$
(616
)
 
$
(285
)
 
$
172

 
$
(5,219
)
 
$
295

 
$
(5,653
)
(a) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $19 million loss for the first nine months of 2012.



17

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7. Financial Instruments

A. Selected Financial Assets and Liabilities

The following table provides additional information about certain of our financial assets and liabilities:
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
December 31,
2011

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
141

 
$
154

Available-for-sale debt securities(c)
 
28,187

 
29,179

Available-for-sale money market funds(d)
 
1,429

 
1,727

Available-for-sale equity securities, excluding money market funds(c)
 
299

 
317

Derivative financial instruments in receivable positions(e):
 
 

 
 

Interest rate swaps
 
1,029

 
1,033

Foreign currency forward-exchange contracts
 
178

 
349

Foreign currency swaps
 
76

 
17

 
 
31,339

 
32,776

Other selected financial assets(f)
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c)
 
3,029

 
1,587

Private equity securities, carried at equity method or at cost(g)
 
1,118

 
1,020

 
 
4,147

 
2,607

Total selected financial assets
 
$
35,486

 
$
35,383

 
Financial liabilities measured at fair value on a recurring basis(a)
 
 

 
 

Derivative financial instruments in a liability position(h):
 
 

 
 

Foreign currency swaps
 
$
1,172

 
$
1,396

Foreign currency forward-exchange contracts
 
165

 
355

Interest rate swaps
 
29

 
14

 
 
1,366

 
1,765

Other financial liabilities(i)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(f)
 
7,774

 
4,016

Long-term debt, carried at historical proceeds, as adjusted(j), (k)
 
31,083

 
34,926

 
 
38,857

 
38,942

Total selected financial liabilities
 
$
40,223

 
$
40,707

(a) 
We use a market approach in valuing financial instruments on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 1% that use Level 1 or Level 3 inputs.
(b) 
Trading securities are held in trust for legacy business acquisition severance benefits.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Includes approximately $625 million as of December 31, 2011 of money market funds that were released from restriction in the second quarter of 2012 and classified as part of Short-term investments. Such money market funds were held in escrow to secure certain of Wyeth’s payment obligations under its 1999 Nationwide Class Action Settlement Agreement, which relates to litigation against Wyeth concerning its former weight-loss products, Redux and Pondimin. The amount also includes $397 million as of September 30, 2012 and $357 million as of December 31, 2011 of money market funds held in trust in connection with the asbestos litigation involving Quigley Company, Inc., a wholly owned subsidiary.
(e) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $25 million as of September 30, 2012; and foreign currency forward-exchange contracts with fair values of $169 million and interest rate swaps with fair values of $8 million as of December 31, 2011.
(f) 
The differences between the estimated fair values and carrying values of these financial assets and liabilities not measured at fair value on a recurring basis were not significant as of September 30, 2012 or December 31, 2011. Held-to-maturity debt securities and our short-term and long-term debt fair value are based on Level 2 valuations using a market approach. Fair value measurements for private equity securities carried at cost are based on Level 3 valuations using a market approach.
(g) 
Our private equity securities represent investments in the life sciences sector.

18

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(h) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $179 million and foreign currency forward-exchange contracts with fair values of $129 million as of September 30, 2012; and foreign currency forward-exchange contracts with fair values of $141 million and foreign currency swaps with fair values of $123 million as of December 31, 2011.
(i) 
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.
(j) 
Includes foreign currency debt with fair values of $898 million as of September 30, 2012 and $919 million as of December 31, 2011, which are used as hedging instruments.
(k) 
The fair value of our long-term debt (not including the current portion of long term debt) is $36.5 billion as of September 30, 2012 and $40.1 billion as of December 31, 2011.

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
September 30,
2012

 
December 31,
2011

Assets
 
 
 
 
Cash and cash equivalents
 
$
2,312

 
$
900

Short-term investments
 
18,462

 
23,270

Long-term investments
 
13,429

 
9,814

Taxes and other current assets(a)
 
210

 
357

Taxes and other noncurrent assets(b)
 
1,073

 
1,042

 
 
$
35,486

 
$
35,383

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
7,774

 
$
4,016

Other current liabilities(c)
 
395

 
459

Long-term debt
 
31,083

 
34,926

Other noncurrent liabilities(d)
 
971

 
1,306

 
 
$
40,223

 
$
40,707

(a) 
As of September 30, 2012, derivative instruments at fair value include foreign currency forward-exchange contracts ($178 million), foreign currency swaps ($20 million) and interest rate swaps ($12 million) and, as of December 31, 2011, include foreign currency forward-exchange contracts ($349 million) and interest rate swaps ($8 million).
(b) 
As of September 30, 2012, derivative instruments at fair value include interest rate swaps ($1.0 billion) and foreign currency swaps ($56 million) and, as of December 31, 2011, include interest rate swaps ($1 billion) and foreign currency swaps ($17 million).
(c) 
At September 30, 2012, derivative instruments at fair value include foreign currency swaps ($230 million) and foreign currency forward-exchange contracts ($165 million) and, as of December 31, 2011, include foreign currency forward-exchange contracts ($355 million) and foreign currency swaps ($104 million).
(d) 
At September 30, 2012, derivative instruments at fair value include foreign currency swaps ($942 million) and interest rate swaps ($29 million) and, as of December 31, 2011, include foreign currency swaps ($1.3 billion) and interest rate swaps ($14 million).
















19

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

B. Investments in Debt Securities

The following table provides the contractual maturities of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
 
 
 
 

 
Over 1

 
Over 5

 
September 30,
2012

(MILLIONS OF DOLLARS)
 
Within 1

 
to 5

 
to 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
Western European, Asian and other government debt(a)
 
$
11,079

 
$
1,810

 
$
6

 
$
12,895

Corporate debt(b)
 
1,368

 
4,302

 
1,799

 
7,469

Western European, Scandinavian and other government agency debt(a)
 
1,927

 
415

 

 
2,342

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 

 
2,308

 
25

 
2,333

U.S. government debt
 
1,912

 
171

 

 
2,083

Supranational debt(a)
 
310

 
345

 

 
655

Reverse repurchase agreements(c)
 
410

 

 

 
410

Held-to-maturity debt securities
 
 

 
 

 
 

 
 

Certificates of deposit and other
 
2,734

 
287

 
8

 
3,029

Total debt securities
 
$
19,740

 
$
9,638

 
$
1,838

 
$
31,216

(a) 
All issued by above-investment-grade governments, government agencies or supranational entities, as applicable.
(b) 
Largely issued by above-investment-grade institutions in the financial services sector.
(c) 
Involving U.S. government securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $2.7 billion as of September 30, 2012 and December 31, 2011, respectively.

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of September 30, 2012, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $43.9 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen and U.K. pound. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.4 billion U.K. pound debt maturing in 2038.
 
Interest Rate Risk
 
As of September 30, 2012, the aggregate notional amount of interest rate derivative financial instruments is $13.0 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.












20

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:
 
 
Amount of
Gains/(Losses)
Recognized in OID(a), (b), (c)
 
Amount of
Gains/(Losses)
Recognized in OCI
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
Sep 30,
2012

 
Oct 2,
2011

 
Sep 30,
2012

 
Oct 2,
2011

 
Sep 30,
2012

 
Oct 2,
2011

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Cash Flow Hedge Relationships
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
$

 
$

 
$
455

 
$
(1,047
)
 
$
221

 
$
(654
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 

 
(1
)
 
(40
)
 
(118
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(201
)
 
(75
)
 

 

 

 

Foreign currency swaps
 
10

 
29

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency short-term borrowings
 

 

 

 

 

 

Foreign currency long-term debt
 

 

 
(20
)
 
(42
)
 

 

All other net
 

 
(1
)
 

 
1

 

 
1

 
 
$
(191
)
 
$
(48
)
 
$
395

 
$
(1,206
)
 
$
221

 
$
(653
)
Nine Months Ended
 
 

 
 

 
 

 
 

 
 

 
 

Derivative Financial Instruments in Cash Flow Hedge Relationships
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 
$

 
$

 
$
238

 
$
(516
)
 
$
89

 
$
76

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 
(3
)
 
14

 
33

 
(1,076
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(137
)
 
(392
)
 

 

 

 

Foreign currency swaps
 
(7
)
 
72

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency short-term borrowings
 

 

 

 
940

 

 

Foreign currency long-term debt
 

 

 
3

 
(47
)
 

 

All other net
 
1

 
(1
)
 
5

 
4

 
6

 
5

 
 
$
(146
)
 
$
(307
)
 
$
279

 
$
(695
)
 
$
95