10-Q 1 pfe-6292014x10q.htm 10-Q PFE - 6/29/2014 - 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 June 29, 2014

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 August 4, 20146,340,863,126 shares of the issuer’s voting common stock were outstanding.



Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three and six months ended June 29, 2014 and June 30, 2013
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 29, 2014 and June 30, 2013
 
 
Condensed Consolidated Balance Sheets as of June 29, 2014 and December 31, 2013
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2014 and June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

Revenues
 
$
12,773

 
$
12,973

 
$
24,126

 
$
25,383

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales(a)
 
2,462

 
2,242

 
4,507

 
4,505

Selling, informational and administrative expenses(a)
 
3,520

 
3,591

 
6,560

 
6,808

Research and development expenses(a)
 
1,759

 
1,530

 
3,382

 
3,240

Amortization of intangible assets
 
1,001

 
1,140

 
2,118

 
2,359

Restructuring charges and certain acquisition-related costs
 
81

 
183

 
139

 
314

Other (income)/deductions––net
 
(53
)
 
(1,070
)
 
570

 
(925
)
Income from continuing operations before provision for taxes on income
 
4,003

 
5,357

 
6,850

 
9,082

Provision for taxes on income
 
1,082

 
1,782

 
1,664

 
2,891

Income from continuing operations
 
2,921

 
3,575

 
5,186

 
6,191

Discontinued operations:
 
 
 
 
 
 
 
 
Income from discontinued operations––net of tax
 
(2
)
 
141

 
3

 
290

Gain on disposal of discontinued operations––net of tax
 
2

 
10,418

 
70

 
10,418

Discontinued operations––net of tax
 

 
10,559

 
73

 
10,708

Net income before allocation to noncontrolling interests
 
2,921

 
14,134

 
5,259

 
16,899

Less: Net income attributable to noncontrolling interests
 
9

 
39

 
18

 
54

Net income attributable to Pfizer Inc.
 
$
2,912

 
$
14,095

 
$
5,241

 
$
16,845

 
 
 
 
 
 
 
 
 
Earnings per common share––basic(b):
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.46

 
$
0.51

 
$
0.81

 
$
0.87

Discontinued operations––net of tax
 

 
1.50

 
0.01

 
1.50

Net income attributable to Pfizer Inc. common shareholders
 
$
0.46

 
$
2.00

 
$
0.82

 
$
2.37

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted(b):
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.45

 
$
0.50

 
$
0.80

 
$
0.86

Discontinued operations––net of tax
 

 
1.48

 
0.01

 
1.49

Net income attributable to Pfizer Inc. common shareholders
 
$
0.45

 
$
1.98

 
$
0.81

 
$
2.34

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
6,368

 
7,042

 
6,379

 
7,115

Weighted-average shares––diluted
 
6,444

 
7,117

 
6,460

 
7,185

Cash dividends paid per common share
 
$
0.26

 
$
0.24

 
$
0.52

 
$
0.48

(a) 
Excludes 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
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

Net income before allocation to noncontrolling interests
 
$
2,921

 
$
14,134

 
$
5,259

 
$
16,899

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments
 
$
233

 
$
(755
)
 
$
158

 
$
(1,047
)
Reclassification adjustments(a) 
 

 
171

 
(62
)
 
171

 
 
233

 
(584
)
 
96

 
(876
)
Unrealized holding gains/(losses) on derivative financial instruments
 
1

 
529

 
(57
)
 
133

Reclassification adjustments for realized (gains)/losses(b)
 
74

 
(224
)
 
86

 
302

 
 
75

 
305

 
29

 
435

Unrealized holding gains/(losses) on available-for-sale securities
 
(15
)
 
(178
)
 
93

 
(188
)
Reclassification adjustments for realized (gains)/losses(b)
 
(79
)
 
74

 
(178
)
 
(84
)
 
 
(94
)
 
(104
)
 
(85
)
 
(272
)
Benefit plans: actuarial gains/(losses), net
 
(11
)
 
22

 
(5
)
 
44

Reclassification adjustments related to amortization(c)
 
49

 
150

 
98

 
301

Reclassification adjustments related to settlements, net(c)
 
18

 
41

 
39

 
96

Other
 
(9
)
 
43

 
(26
)
 
140

 
 
47

 
256

 
106

 
581

Benefit plans: prior service credits and other
 

 

 

 
3

Reclassification adjustments related to amortization(c)
 
(18
)
 
(13
)
 
(36
)
 
(29
)
Reclassification adjustments related to curtailments, net(c)
 
15

 

 
11

 
(9
)
Other
 

 
(4
)
 
(1
)
 
(6
)
 
 
(3
)
 
(17
)
 
(26
)
 
(41
)
Other comprehensive income/(loss), before tax
 
258

 
(144
)
 
120

 
(173
)
Tax provision/(benefit) on other comprehensive income/(loss)(d)
 
5

 
187

 
(12
)
 
363

Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
253

 
$
(331
)
 
$
132

 
$
(536
)
 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
3,174

 
$
13,803

 
$
5,391

 
$
16,363

Less: Comprehensive income attributable to noncontrolling interests
 
24

 
18

 
31

 
30

Comprehensive income attributable to Pfizer Inc.
 
$
3,150

 
$
13,785

 
$
5,360

 
$
16,333

(a) 
Reclassified into Gain on disposal of discontinued operations—net of tax in the condensed consolidated statements of income.
(b) 
Reclassified into Other (income)/deductions—net in the condensed consolidated statements of income.
(c) 
Generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated statements of income. For additional information, see Note 10. Pension and Postretirement Benefit Plans.
(d) 
See Note 5C. Tax Matters: Tax Provision/(Benefit) on Other Comprehensive Income/(Loss).


See Notes to Condensed Consolidated Financial Statements.

4


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
December 31,
2013

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
3,406

 
$
2,183

Short-term investments
 
30,648

 
30,225

Accounts receivable, less allowance for doubtful accounts
 
10,388

 
9,357

Inventories
 
6,249

 
6,166

Current deferred tax assets and other current tax assets
 
4,869

 
4,624

Other current assets
 
2,727

 
3,689

Total current assets
 
58,287

 
56,244

Long-term investments
 
17,168

 
16,406

Property, plant and equipment, less accumulated depreciation
 
12,179

 
12,397

Goodwill
 
42,661

 
42,519

Identifiable intangible assets, less accumulated amortization
 
37,360

 
39,385

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,383

 
1,554

Other noncurrent assets
 
3,574

 
3,596

Total assets
 
$
172,612

 
$
172,101

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
5,561

 
$
6,027

Accounts payable
 
2,990

 
3,234

Dividends payable
 
1,650

 
1,663

Income taxes payable
 
760

 
678

Accrued compensation and related items
 
1,631

 
1,792

Other current liabilities
 
9,346

 
9,972

Total current liabilities
 
21,938

 
23,366

 
 
 
 
 
Long-term debt
 
32,267

 
30,462

Pension benefit obligations, net
 
4,483

 
4,635

Postretirement benefit obligations, net
 
2,621

 
2,668

Noncurrent deferred tax liabilities
 
26,309

 
25,590

Other taxes payable
 
3,800

 
3,993

Other noncurrent liabilities
 
4,238

 
4,767

Total liabilities
 
95,656

 
95,481

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
31

 
33

Common stock
 
454

 
453

Additional paid-in capital
 
78,208

 
77,283

Treasury stock
 
(70,535
)
 
(67,923
)
Retained earnings
 
71,627

 
69,732

Accumulated other comprehensive loss
 
(3,152
)
 
(3,271
)
Total Pfizer Inc. shareholders’ equity
 
76,633

 
76,307

Equity attributable to noncontrolling interests
 
323

 
313

Total equity
 
76,956

 
76,620

Total liabilities and equity
 
$
172,612

 
$
172,101


See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
June 30,
2013

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
5,259

 
$
16,899

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

 
 

Depreciation and amortization
 
2,880

 
3,400

Asset write-offs, impairments and related charges
 
189

 
648

Gain associated with the transfer of certain product rights to an equity-method investment
 

 
(459
)
Gain on disposal of discontinued operations
 
(66
)
 
(10,539
)
Deferred taxes from continuing operations
 
853

 
1,254

Deferred taxes from discontinued operations
 
(2
)
 
(19
)
Share-based compensation expense
 
281

 
292

Benefit plan contributions (in excess of)/less than expense
 
(124
)
 
149

Other non-cash adjustments, net
 
(299
)
 
(101
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(1,949
)
 
(5,464
)
Net cash provided by operating activities
 
7,022

 
6,060

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(570
)
 
(511
)
Purchases of short-term investments
 
(21,081
)
 
(21,663
)
Proceeds from redemptions and sales of short-term investments
 
20,795

 
14,502

Net (purchases of)/proceeds from redemptions/sales of investments with original maturities of 90 days or less
 
1,399

 
(401
)
Purchases of long-term investments
 
(5,327
)
 
(5,233
)
Proceeds from redemptions and sales of long-term investments
 
2,947

 
3,194

Acquisitions of businesses, net of cash acquired
 

 
(15
)
Acquisitions of intangible assets
 
(56
)
 
(127
)
Other investing activities
 
288

 
171

Net cash used in investing activities
 
(1,605
)
 
(10,083
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
1

 
2,334

Principal payments on short-term borrowings
 
(7
)
 
(2,333
)
Net proceeds from/(payments on) short-term borrowings with original maturities of 90 days or less
 
(2,692
)
 
2,251

Proceeds from issuance of long-term debt(a)
 
4,491

 
6,618

Principal payments on long-term debt
 
(752
)
 
(2,394
)
Purchases of common stock
 
(2,520
)
 
(7,889
)
Cash dividends paid
 
(3,320
)
 
(3,436
)
Proceeds from exercise of stock options
 
583

 
1,175

Other financing activities
 
43

 
74

Net cash used in financing activities
 
(4,173
)
 
(3,600
)
Effect of exchange-rate changes on cash and cash equivalents
 
(21
)
 
(22
)
Net increase/(decrease) in cash and cash equivalents
 
1,223

 
(7,645
)
Cash and cash equivalents, beginning
 
2,183

 
10,081

Cash and cash equivalents, end
 
$
3,406

 
$
2,436

 
 
 

 
 

Supplemental Cash Flow Information
 
 
 
 
Non-cash transactions:
 
 
 
 
Sale of subsidiary common stock (Zoetis) for Pfizer common stock(b)
 
$

 
$
11,408

Exchange of subsidiary common stock (Zoetis) for the retirement of Pfizer commercial paper issued in 2013(b)
 

 
2,479

Exchange of subsidiary senior notes (Zoetis) for the retirement of Pfizer commercial paper issued in 2012(b)
 

 
992

Transfer of certain product rights to an equity-method investment (Hisun Pfizer)(c)
 

 
1,233

Cash paid during the period for:
 
 

 
 

Income taxes
 
$
1,068

 
$
1,305

Interest
 
996

 
1,103

(a) 
In 2013, includes $2.6 billion from the issuance of senior notes by Zoetis (our former Animal Health subsidiary), net of the $1.0 billion non-cash exchange of Zoetis senior notes for the retirement of Pfizer commercial paper issued in 2012. See Note 2B. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Divestiture.
(b) 
See Note 2B. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Divestiture.
(c) 
See Note 2D. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Equity-Method Investments.

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 six months ended May 25, 2014 and May 26, 2013.

In the condensed consolidated statements of comprehensive income, we have revised the presentation of other comprehensive income/(loss) shown in prior periods for derivative financial instruments and available-for-sale securities, as certain items had been reported net. In the condensed consolidated statements of cash flows, we have revised the classification of certain items shown in prior periods, none of which had a significant impact.

During April and May 2014, Pfizer issued a number of announcements pursuant to Rule 2.4 of the U.K. City Code on Takeovers and Mergers (the Code) regarding its consideration of a possible offer for AstraZeneca PLC (AstraZeneca) and proposals made to the board of AstraZeneca in connection therewith. Pfizer announced on May 26, 2014 that it did not intend to make an offer for AstraZeneca. The announcement was made in accordance with Rule 2.8 of the Code. As a result of this announcement, Pfizer, together with any party acting in concert with Pfizer, is bound by the restrictions contained in Rule 2.8 of the Code.

On June 24, 2013, we completed the full disposition of our Animal Health business, Zoetis Inc. (Zoetis), and recognized a gain of approximately $10.4 billion, net of tax, in Gain on disposal of discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended June 30, 2013. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended June 30, 2013. For additional information, see Note 2B. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Divestiture.

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 condensed consolidated balance sheets and condensed consolidated statements of income.

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 2013 Annual Report on Form 10-K.

B. Adoption of New Accounting Standards

We adopted the following new accounting and disclosure standards as of January 1, 2014 and there were no impacts to our condensed consolidated financial statements:
A new standard that clarified the accounting for cumulative translation adjustment (CTA) upon derecognition of a group of assets that is a business or an equity-method investment within a foreign entity.
A new standard regarding the measurement of obligations resulting from joint and several liability arrangements that may include debt agreements, other contractual obligations and settled litigation or judicial rulings.

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).

7


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

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. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments

A. Acquisition

Nexium Over-the-Counter Rights
In August 2012, we entered into an agreement with AstraZeneca for the exclusive, global, over-the-counter (OTC) rights for Nexium, a leading prescription drug currently approved to treat the symptoms of gastroesophageal reflux disease. At that time, we made an upfront payment of $250 million to AstraZeneca, which was expensed. On March 28, 2014, the FDA approved Nexium 24HR (esomeprazole 20mg) for OTC use. Pfizer launched the product in the U.S. on May 27, 2014 and subsequently on July 11, 2014, we paid AstraZeneca a $200 million product launch milestone in accordance with the terms of the agreement. The milestone for this Consumer Healthcare asset acquisition has been recorded in Identifiable intangible assets, less accumulated amortization in the condensed consolidated balance sheet and will be amortized over its estimated useful life. AstraZeneca is eligible to receive future milestone payments of up to $350 million, based on product launches outside the U.S. and level of worldwide sales, as well as royalty payments, based on worldwide sales.

B. Divestiture

Animal Health Business—(Zoetis)

On June 24, 2013, we completed the full disposition of Zoetis. The full disposition was completed through a series of steps, including, in the first quarter of 2013, the formation of Zoetis and an initial public offering (IPO) of an approximate 19.8% interest in Zoetis and, in the second quarter of 2013, an exchange offer for the remaining 80.2% interest.

With respect to the formation and disposition of Zoetis, in the first six months of 2013:
Formation of ZoetisOn January 28, 2013, our then wholly owned subsidiary, Zoetis, issued $3.65 billion aggregate principal amount of senior notes. Also, on January 28, 2013, we transferred to Zoetis substantially all of the assets and liabilities of our Animal Health business in exchange for all of the Class A and Class B common stock of Zoetis, $1.0 billion of the $3.65 billion of Zoetis senior notes, and an amount of cash equal to substantially all of the cash proceeds received by Zoetis from the remaining $2.65 billion of senior notes issued. The $1.0 billion of Zoetis senior notes received by Pfizer were exchanged by Pfizer for the retirement of Pfizer commercial paper issued in 2012, and the cash proceeds received by Pfizer of approximately $2.6 billion were used for dividends and stock buybacks.
Initial Public Offering (19.8% Interest)On February 6, 2013, an IPO of the Class A common stock of Zoetis was completed, pursuant to which we sold 99.015 million shares of Class A common stock of Zoetis (all of the Class A common stock, including shares sold pursuant to the underwriters' option to purchase additional shares, which was exercised in full) in exchange for the retirement of approximately $2.5 billion of Pfizer commercial paper issued in 2013. The Class A common stock sold in the IPO represented approximately 19.8% of the total outstanding Zoetis shares. The excess of the consideration received over the net book value of our divested interest was approximately $2.3 billion and was recorded in Additional paid-in capital.
Exchange Offer (80.2% Interest)On June 24, 2013, we exchanged all of our remaining interest in Zoetis for Pfizer common stock and recognized a gain on sale of approximately $10.4 billion, net of income taxes resulting from certain legal entity reorganizations, which was recorded in Gain on disposal of discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended June 30, 2013.

The operating results of the Animal Health business are reported as Income from discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended June 30, 2013.


8


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

Total Discontinued Operations
The following table provides the components of Discontinued operations—net of tax, virtually all of which relates to Zoetis:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

Revenues
 
$

 
$
1,112

 
$

 
$
2,201

Pre-tax income from discontinued operations
 
(3
)
 
189

 
2

 
389

Provision for taxes on income(a)
 
(1
)

48


(1
)

99

Income from discontinued operations––net of tax
 
(2
)
 
141

 
3

 
290

Pre-tax gain on disposal of discontinued operations(b)
 
2

 
10,539

 
66

 
10,539

Provision for taxes on income(b), (c)
 

 
121

 
(4
)
 
121

Gain on disposal of discontinued operations––net of tax(b)
 
2

 
10,418

 
70

 
10,418

Discontinued operations––net of tax
 
$

 
$
10,559

 
$
73

 
$
10,708

(a) 
Includes deferred tax benefits of $2 million and $26 million for the three months ended June 29, 2014 and June 30, 2013, respectively, and deferred tax benefits of $2 million and $19 million for the six months ended June 29, 2014 and June 30, 2013, respectively.
(b) 
For the three and six months ended June 29, 2014, represents post-close adjustments.
(c) 
Reflects income taxes resulting from certain legal entity reorganizations.

The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for the six months ended June 30, 2013, except that financing activities include the cash proceeds from the issuance of senior notes by Zoetis.

C. Collaborative Arrangement

Collaboration with Cellectis SA (Cellectis)

On June 18, 2014, we entered into a global strategic collaboration with Cellectis to develop Chimeric Antigen Receptor T-cell (CAR-T) immunotherapies in the field of oncology directed at select cellular surface antigen targets. Cellectis received an upfront payment of $80 million in August 2014, and will receive funding for research and development costs associated with Pfizer-selected targets and the four Cellectis-selected targets within the collaboration. Cellectis is eligible to receive development, regulatory and commercial milestone payments of up to $185 million per Pfizer product within the collaboration. Cellectis is also eligible to receive tiered royalties on net sales of any products that are commercialized by Pfizer. Additionally, we entered into an agreement to acquire approximately 10% of the Cellectis capital through the purchase of newly issued shares at 9.25 Euro per share, for a total investment of approximately $35 million.

D. Equity-Method Investments

Investment in Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer)

On September 6, 2012, we and Zhejiang Hisun Pharmaceuticals Co., Ltd. (Hisun), a leading pharmaceutical company in China, formed a new company, Hisun Pfizer, 49% owned by Pfizer and 51% owned by Hisun, to develop, manufacture, market and sell pharmaceutical products, primarily branded generic products, predominately in China. In the first quarter of 2013, we and Hisun contributed certain assets to Hisun Pfizer. Our contributions constituted a business, as defined by U.S. GAAP, and in the first six months of 2013, we recognized a pre-tax gain of approximately $459 million in Other (income) deductions––net, reflecting the transfer of the business to Hisun Pfizer (including an allocation of goodwill from our former Emerging Markets reporting unit as part of the carrying amount of the business transferred). Since we hold a 49% interest in Hisun Pfizer, we had an indirect retained interest in the contributed assets. As such, 49% of the gain, or $225 million, represented the portion of the gain associated with that indirect retained interest.

Investment in ViiV Healthcare Limited

On January 21, 2014, the European Commission approved Tivicay (dolutegravir), a product for the treatment of HIV-1 infection, developed by ViiV Healthcare Limited (ViiV), an equity method investee. This approval, in accordance with the agreement between GlaxoSmithKline plc and Pfizer, triggered a reduction in our equity interest in ViiV from 12.6% to 11.7%

9


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

and an increase in GlaxoSmithKline plc’s equity interest in ViiV from 77.4% to 78.3%, effective April 1, 2014. As a result, in the first six months of 2014, we recognized a loss of approximately $28 million in Other (income)/deductions––net.

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

We can incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction/productivity initiatives. For example:
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); and
In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization and optimization actions, workforce reductions and the expansion of shared services, including the development of global systems.

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development (R&D), as well as groups such as information technology, shared services and corporate operations.

At the end of 2013, we had substantially completed many of the initiatives launched in prior periods. In early 2014, we announced that we would be incurring costs in 2014-2016 related to new programs: our new global commercial structure reorganization and additional cost-reduction/productivity initiatives.

In 2014, we have the following initiatives underway:
Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of ten sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $450 million associated with prior acquisition activity and costs of approximately $1.5 billion associated with new non-acquisition-related cost-reduction initiatives.
New global commercial structure reorganization, which primarily includes the streamlining of certain functions, the realignment of regional locations and colleagues to support the businesses, as well as implementing the necessary system changes to support future reporting requirements. In connection with this reorganization, during 2014-2016, we expect to incur costs of approximately $350 million.
Other new cost-reduction/productivity initiatives, primarily related to commercial property rationalization and consolidation. In connection with these cost-reduction activities, during 2014-2016, we expect to incur costs of approximately $900 million.
The costs expected to be incurred during 2014-2016, of approximately $3.2 billion in total, include restructuring charges, integration costs, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about a quarter of the charges will be non-cash.

Current-Period Key Activities

In the first six months of 2014, we incurred approximately $423 million in cost-reduction and acquisition-related costs (excluding transaction costs) in connection with the aforementioned programs, primarily associated with our manufacturing and sales operations.

10


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
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
17

 
$
136

 
$
47

 
$
115

Asset impairments
 
13

 
12

 
19

 
115

Exit costs
 
36

 
2

 
40

 
15

Total restructuring charges
 
66

 
150

 
106

 
245

Integration costs(b)
 
15

 
33

 
33

 
69

Restructuring charges and certain acquisition-related costs
 
81

 
183

 
139

 
314

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

 
 

 
 

 
 

Cost of sales
 
72

 
58

 
146

 
91

Selling, informational and administrative expenses
 
1

 
8

 
1

 
19

Research and development expenses
 
29

 
3

 
29

 
94

Total additional depreciation––asset restructuring
 
102

 
69

 
176

 
204

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

 
 

 
 

 
 

Cost of sales
 
22

 
5

 
28

 
11

Selling, informational and administrative expenses
 
38

 
34

 
53

 
65

Research and development expenses
 
16

 
7

 
27

 
9

Total implementation costs
 
76

 
46

 
108

 
85

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
259

 
$
298

 
$
423

 
$
603

(a) 
In the six months ended June 29, 2014, Employee terminations represent the expected reduction of the workforce by approximately 300 employees, mainly in manufacturing and sales.
The restructuring charges in 2014 are associated with the following:
For the three months ended June 29, 2014, the Global Innovative Pharmaceutical segment (GIP) ($9 million), the Global Established Pharmaceutical segment (GEP) ($24 million), the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($6 million), Worldwide Research and Development and Medical ($8 million), manufacturing operations ($12 million) and Corporate ($7 million).
For the six months ended June 29, 2014, the Global Innovative Pharmaceutical segment (GIP) ($11 million), the Global Established Pharmaceutical segment (GEP) ($31 million), the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($6 million), Worldwide Research and Development and Medical ($9 million), manufacturing operations ($38 million) and Corporate ($11 million).
The restructuring charges in 2013 are associated with the following:
For the three months ended June 30, 2013, total operating segments ($54 million), Worldwide Research and Development and Medical ($12 million), manufacturing operations ($80 million) and Corporate ($4 million).
For the six months ended June 30, 2013, total operating segments ($67 million), Worldwide Research and Development and Medical ($15 million), manufacturing operations ($82 million) and Corporate ($81 million).
At the beginning of fiscal 2014, we revised our operating segments and are unable to identify these prior-period restructuring charges to the new individual segments.
(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)
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(d)
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.

11


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

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, 2013(a)
 
$
1,685

 
$

 
$
94

 
$
1,779

Provision
 
47

 
19

 
40

 
106

Utilization and other(b)
 
(239
)
 
(19
)
 
(69
)
 
(327
)
Balance, June 29, 2014(c)
 
$
1,493

 
$

 
$
65

 
$
1,558

(a) 
Included in Other current liabilities ($1.0 billion) and Other noncurrent liabilities ($767 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($1.0 billion) and Other noncurrent liabilities ($550 million).

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

Interest income
 
$
(104
)
 
$
(102
)
 
$
(196
)
 
$
(197
)
Interest expense(a)
 
343

 
356

 
664

 
727

Net interest expense
 
239

 
254

 
468

 
530

Royalty-related income(b)
 
(239
)
 
(120
)
 
(487
)
 
(183
)
Patent litigation settlement income(c)
 

 
(1,351
)
 

 
(1,351
)
Other legal matters, net(d)
 
(2
)
 
(12
)
 
692

 
(95
)
Gain associated with the transfer of certain product rights(e)
 

 
31

 

 
(459
)
Net gains on asset disposals(f)
 
(33
)
 
(28
)
 
(214
)
 
(54
)
Certain asset impairments and related charges(g)
 

 
127

 
115

 
525

Costs associated with the Zoetis IPO(h)
 

 

 

 
18

Other, net
 
(18
)
 
29

 
(4
)
 
144

Other (income)/deductions––net
 
$
(53
)
 
$
(1,070
)
 
$
570

 
$
(925
)
(a) 
Interest expense decreased in the second quarter and first six months of 2014 primarily due to the benefit of the effective conversion of some fixed-rate liabilities to floating-rate liabilities.
(b) 
Royalty-related income increased in the second quarter and first six months of 2014 primarily due to royalties earned on sales of Enbrel in the U.S. and Canada after October 31, 2013. On that date, the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada expired, and Pfizer became entitled to royalties for a 36-month period.
(c) 
In 2013, reflects income from a litigation settlement with Teva Pharmaceuticals Industries Ltd. (Teva) and Sun Pharmaceutical Industries Ltd. (Sun) for patent-infringement damages resulting from their "at-risk" launches of generic Protonix in the U.S. As of June 29, 2014, approximately $256 million is not yet due and is included in Other current assets.
(d) 
In the first six months of 2014, primarily includes approximately $620 million for Neurontin-related matters (including off-label promotion actions and antitrust actions) and approximately $55 million for an Effexor-related matter. In the first six months of 2013, primarily includes an $80 million insurance recovery related to a certain litigation matter. For additional information, see Note 12A. Commitments and Contingencies: Legal Proceedings.
(e) 
In the first six months of 2013, represents the gain associated with the transfer of certain product rights to Hisun Pfizer, our 49%-owned equity-method investment in China. For additional information, see Note 2D. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Equity-Method Investments.
(f) 
In the first six months of 2014, primarily includes gains on sales of product rights (approximately $96 million) and gains on sales of investments in equity securities (approximately $98 million).
(g) 
In the first six months of 2014, includes intangible asset impairment charges of $114 million, virtually all of which relates to an in-process research and development (IPR&D) compound for the treatment of skin fibrosis. The intangible asset impairment charge for the first six months of 2014 is associated with Worldwide Research and Development and reflects, among other things, the impact of changes to the development program. In the first six months of 2013, includes intangible asset impairment charges of $489 million, primarily reflecting (i) $394 million of developed technology rights (for use in the development of bone and cartilage) acquired in connection with our acquisition of Wyeth, and (ii) $81 million related to two IPR&D compounds. The intangible asset impairment charges for 2013 reflect, among other things, updated commercial forecasts. The impairment charges for the first six months of 2013 are associated with the following: Global

12


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

Innovative Pharmaceutical segment ($432 million), Worldwide Research and Development ($43 million) and Consumer Healthcare ($14 million). In addition, the first six months of 2013 also includes charges of approximately $36 million for certain private equity securities.
(h) 
Represents costs incurred in connection with the IPO of an approximate 19.8% ownership interest in Zoetis. Includes expenditures for banking, legal, accounting and similar services. For additional information, see Note 2B. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Divestiture.

The asset impairment charges included in Other (income)/deductions––net for the first six months of 2014 virtually all relate to identifiable intangible assets and are based on estimates of fair value.
The following table provides additional information about the intangible assets that were impaired during the first six months of 2014 in Other (income)/deductions––net:
 
 
Fair Value(a)
 
Six Months Ended June 29, 2014

(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––IPR&D(b)
 
$
79

 
$

 
$

 
$
79

 
$
114

Total
 
$
79

 
$

 
$

 
$
79

 
$
114

(a) 
The fair value amount is presented as of the date of impairment, as this asset is 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 fair value in the first six months of 2014. Fair value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We started with a forecast of all the expected net cash flows associated with the asset and then we applied 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 product and the impact of technological risk associated with IPR&D assets; 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

Our effective tax rate for continuing operations was 27.0% for the second quarter of 2014, compared to 33.3% for the second quarter of 2013, and was 24.3% for the first six months of 2014, compared to 31.8% for the first six months of 2013.

The lower effective tax rate for the second quarter of 2014, in comparison with the same period in 2013, was primarily due to:
the non-recurrence in the second quarter of 2014 of the unfavorable impact of the tax rate associated with the patent litigation settlement income in the second quarter of 2013;
the favorable impact of the resolution in the second quarter of 2014 of certain tax positions, pertaining to prior years with various foreign tax authorities, and from the expiration of certain statutes of limitations; 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 expiration of the U.S. research and development (R&D) tax credit on December 31, 2013.
The lower effective tax rate for the first six months of 2014, in comparison with the same period in 2013, was primarily due to:
the favorable impact of the resolution in the first six months of 2014 of certain tax positions, pertaining to prior years primarily with various foreign tax authorities, and from the expiration of certain statutes of limitations;
the non-recurrence in the first six months of 2014 of the unfavorable tax impact associated with the non-deductibility of the goodwill derecognized and the jurisdictional mix of the other intangible assets divested as part of the transfer of certain product rights to our 49%-owned equity-method investment with Hisun in China in the first six months of 2013;
the non-recurrence in the first six months of 2014 of the unfavorable impact of the tax rate associated with the patent litigation settlement income in the first six months of 2013; 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 expiration of the U.S. R&D tax credit on December 31, 2013.

13


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

For information about the transfer of certain product rights in 2013, see Note 2D. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Equity-Method Investments. For information about the patent litigation settlement income in 2013, see Note 4. Other (Income)/Deductions—Net.

B. 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, as we treat these events as discrete items in the period of resolution.

The United States is one of our major tax jurisdictions, and we are regularly audited by the U.S. Internal Revenue Service (IRS):
With respect to Pfizer Inc., tax years 2009 and 2010 are currently under audit. Tax years 2011-2014 are open, but not under audit. All other tax years are closed.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2004-2014), Japan (2013-2014), Europe (2007-2014, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2014, primarily reflecting Brazil and Mexico) and Puerto Rico (2009-2014).

C. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)
The following table provides the components of the tax provision/(benefit) on Other comprehensive income/(loss):
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments(a)
 
$
(3
)
 
$
19

 
$
(10
)
 
$
90

Unrealized holding gains/(losses) on derivative financial instruments
 
1

 
135

 
(16
)
 
(20
)
Reclassification adjustments for realized (gains)/losses
 
9

 
(89
)
 
8

 
78

 
 
10

 
46

 
(8
)
 
58

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

 
23

 
15

Reclassification adjustments for realized (gains)/losses
 
(11
)
 
31

 
(40
)
 
6

 
 
(15
)
 
35

 
(17
)
 
21

Benefit plans: actuarial gains/(losses), net
 
(3
)
 
5

 
(2
)
 
11

Reclassification adjustments related to amortization
 
16

 
52

 
32

 
106

Reclassification adjustments related to settlements, net
 
7

 
16

 
15

 
36

Other
 
5

 
21

 
(7
)
 
58

 
 
25

 
94

 
38

 
211

Benefit plans: prior service credits and other
 

 
2

 

 
1

Reclassification adjustments related to amortization
 
(7
)
 
(6
)
 
(14
)
 
(12
)
Reclassification adjustments related to curtailments, net
 
2

 
(1
)
 
1

 
(4
)
Other
 
(7
)
 
(2
)
 
(2
)
 
(2
)
 
 
(12
)
 
(7
)
 
(15
)
 
(17
)
Tax provision/(benefit) on other comprehensive income/(loss)
 
$
5

 
$
187

 
$
(12
)
 
$
363

(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.

14


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

Note 6. Accumulated Other Comprehensive Loss
The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
 
 
Net Unrealized Gains/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Foreign Currency Translation Adjustments

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/Credits and Other

 
Accumulated Other Comprehensive Loss

Balance, December 31, 2013
 
$
(590
)
 
$
79

 
$
150

 
$
(3,223
)
 
$
313

 
$
(3,271
)
Other comprehensive income/(loss)(a)
 
93

 
37

 
(68
)
 
68

 
(11
)
 
119

Balance, June 29, 2014
 
$
(497
)
 
$
116

 
$
82

 
$
(3,155
)
 
$
302

 
$
(3,152
)
(a) 
Amounts do not include foreign currency translation income of $13 million attributable to noncontrolling interests for the first six months of 2014.

As of June 29, 2014, with respect to derivative financial instruments, the amount of unrealized pre-tax gains and/or losses estimated to be reclassified into income within the next 12 months is not significant.

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)
 
June 29,
2014

 
December 31,
2013

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
105

 
$
126

Available-for-sale debt securities(c)
 
36,189

 
34,899

Available-for-sale money market funds
 
1,474

 
945

Available-for-sale equity securities, excluding money market funds(c)
 
306

 
356

Derivative financial instruments in receivable positions(d):
 
 

 
 

Interest rate swaps
 
555

 
468

Foreign currency swaps
 
637

 
871

Foreign currency forward-exchange contracts
 
122

 
172

 
 
39,388

 
37,837

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
9,001

 
9,139

Private equity securities, carried at equity-method or at cost(e), (f)
 
2,171

 
2,270

 
 
11,172

 
11,409

Total selected financial assets
 
$
50,560

 
$
49,246

Selected financial liabilities measured at fair value on a recurring basis(a)
 
 

 
 

Derivative financial instruments in a liability position(g):
 
 

 
 

Interest rate swaps
 
$
90

 
$
301

Foreign currency swaps
 
182

 
110

Foreign currency forward-exchange contracts
 
119

 
219

 
 
391

 
630

Other selected financial liabilities(h)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(e)
 
5,561

 
6,027

Long-term debt, carried at historical proceeds, as adjusted(i), (j)
 
32,267

 
30,462

 
 
37,828

 
36,489

Total selected financial liabilities
 
$
38,219

 
$
37,119

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see 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 inputs.
(b) 
Trading securities are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.

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

(c) 
Gross unrealized gains and losses are not significant.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $14 million and foreign currency forward-exchange contracts with fair values of $61 million as of June 29, 2014; and interest rate swaps with fair values of $38 million, foreign currency swaps with fair values of $30 million and foreign currency forward-exchange contracts with fair values of $66 million as of December 31, 2013.
(e) 
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities at cost and short-term borrowings not measured at fair value on a recurring basis were not significant as of June 29, 2014 or December 31, 2013. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs, using a market approach. The fair value measurements of our private equity securities at cost are based on Level 3 inputs.
(f) 
Our private equity securities represent investments in the life sciences sector.
(g) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $90 million and foreign currency forward-exchange contracts with fair values of $57 million as of June 29, 2014; and foreign currency swaps with fair values of $76 million and foreign currency forward-exchange contracts with fair values of $77 million as of December 31, 2013.
(h) 
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of hedging the interest rate fair value risk associated with certain financial liabilities by interest rate swaps.
(i) 
Includes foreign currency debt with fair values of $669 million as of June 29, 2014 and $651 million as of December 31, 2013, which are used as hedging instruments.
(j) 
The fair value of our long-term debt (not including the current portion of long-term debt) is $37.0 billion as of June 29, 2014 and $35.1 billion as of December 31, 2013. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach. Generally, the difference between the fair value of our long-term debt and the amount reported on the condensed consolidated balance sheet is due to a decline in relative market interest rates since the debt issuance.
The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
June 29,
2014

 
December 31,
2013

Assets
 
 
 
 
Cash and cash equivalents
 
$
1,430

 
$
1,104

Short-term investments
 
30,648

 
30,225

Long-term investments
 
17,168

 
16,406

Other current assets(a)
 
203

 
286

Other noncurrent assets(b)
 
1,111

 
1,225

 
 
$
50,560

 
$
49,246

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
5,561

 
$
6,027

Other current liabilities(c)
 
215

 
303

Long-term debt
 
32,267

 
30,462

Other noncurrent liabilities(d)
 
176

 
327

 
 
$
38,219

 
37,119

(a) 
As of June 29, 2014, derivative instruments at fair value include interest rate swaps ($73 million), foreign currency swaps ($8 million) and foreign currency forward-exchange contracts ($122 million) and, as of December 31, 2013, include interest rate swaps ($90 million), foreign currency swaps ($24 million) and foreign currency forward-exchange contracts ($172 million).
(b) 
As of June 29, 2014, derivative instruments at fair value include interest rate swaps ($482 million) and foreign currency swaps ($629 million) and, as of December 31, 2013, include interest rate swaps ($378 million) and foreign currency swaps ($847 million).
(c) 
As of June 29, 2014, derivative instruments at fair value include interest rate swaps ($2 million), foreign currency swaps ($94 million) and foreign currency forward-exchange contracts ($119 million) and, as of December 31, 2013, include foreign currency swaps ($84 million) and foreign currency forward-exchange contracts ($219 million).
(d) 
As of June 29, 2014, derivative instruments at fair value include interest rate swaps ($88 million) and foreign currency swaps ($88 million) and, as of December 31, 2013, include interest rate swaps ($301 million) and foreign currency swaps ($26 million).

There were no significant impairments of financial assets recognized in any period presented.


16


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
 
June 29, 2014

(MILLIONS OF DOLLARS)
 
Within 1

 
Over 1
to 5

 
Over 5
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Western European, Japanese and other government debt(a)
 
$
12,844

 
$
2,406

 
$

 
$
1

 
$
15,251

Corporate debt(b)
 
2,306

 
5,018

 
1,581

 
265

 
9,170

U.S. government debt
 
2,151

 
782

 
10

 

 
2,943

Western European, Scandinavian, Australian and other government agency debt(a)
 
1,965

 
367

 

 

 
2,332

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

 
1,924

 

 

 
1,924

Reverse repurchase agreements(c)
 
1,767

 

 

 

 
1,767

Supranational debt(a)
 
638

 
1,040

 

 

 
1,678

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
18

 
775

 

 
331

 
1,124

Held-to-maturity debt securities
 
 
 
 
 
 

 
 
 
 

Western European, Scandinavian and other government debt(a)
 
5,547

 

 

 

 
5,547

Western European, Scandinavian and other government agency debt,(a) time deposits and other
 
3,368

 
63

 
23

 

 
3,454

Total debt securities
 
$
30,604

 
$
12,375

 
$
1,614

 
$
597

 
$
45,190

(a) 
Issued by governments, government agencies or supranational entities, as applicable, all of which are investment-grade.
(b) 
Issued by a diverse group of corporations, largely consisting of financial institutions, virtually all of which are investment-grade.
(c) 
Involving U.S. securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $3.0 billion as of December 31, 2013. There were no commercial paper borrowings as of June 29, 2014.

D. Long-Term Debt

On May 15, 2014, we completed a public offering of $4.5 billion aggregate principal amount of senior unsecured notes.
The following table provides the components of the senior unsecured long-term debt issued in the second quarter of 2014:

(MILLIONS OF DOLLARS)
 
Maturity Date
 
As of
June 29,
2014

 
 
 
 
 
1.1% Notes(a), (b)
 
May 2017
 
$
1,000

2.1% Notes(a), (b)
 
May 2019
 
1,500

3.4% Notes(a), (b)
 
May 2024
 
1,000

4.4% Notes(a), (b)
 
May 2044
 
500

Three-month U.S. dollar London Interbank Offering Rate (LIBOR) plus 0.15% Notes(c)
 
May 2017
 
500

Total long-term debt issued in the second quarter of 2014
 
 
 
$
4,500

(a) 
Interest is payable semi-annually beginning November 15, 2014.
(b) 
The notes are redeemable, in whole or in part, at any time at Pfizer's option, at a redemption price equal to the greater of 100% of the principal amount of the notes being redeemed on the redemption date, or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate plus an incremental percentage, depending on the issuance; plus, in each case, accrued and unpaid interest.
(c) 
Interest is payable quarterly beginning August 15, 2014.

17


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

The following table provides the maturity schedule of our Long-term debt outstanding as of June 29, 2014:
(MILLIONS OF DOLLARS)
 
2015

 
2016

 
2017

 
2018

 
After 2018

 
TOTAL

Maturities
 
$

 
$
4,394

 
$
4,136

 
$
2,412

 
$
21,325

 
$
32,267


E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of June 29, 2014, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $40.0 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen, U.K. pound and Swiss franc. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.6 billion U.K. pound debt maturing in 2038.

Interest Rate Risk

As of June 29, 2014, the aggregate notional amount of interest rate derivative financial instruments is $16.6 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.


18


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)
 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

 
June 29,
2014

 
June 30,
2013

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

 
$

 
$
(3
)
 
$
268

 
$
2

 
$
131

Foreign currency forward-exchange contracts
 

 

 
4

 
261

 
(76
)
 
93

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 

 

 
(3
)
 
16

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
32

 
(21
)
 

 

 

 

Foreign currency swaps
 
3

 
5

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 

 

 
(8
)
 
34

 

 

 
 
$
35

 
$
(16
)
 
$
(10
)
 
$
579

 
$
(74
)
 
$
224

Six Months Ended
 
 

 
 

 
 

 
 

 
 

 
 

Derivative Financial Instruments in Cash Flow Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
$

 
$

 
$
(18
)
 
$
(181
)
 
$
11

 
$
(251
)
Foreign currency forward-exchange contracts
 

 

 
(39
)
 
314

 
(97
)
 
(51
)
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 

 
(3
)
 
(11
)
 
139

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
20

 
128

 

 

 

 

Foreign currency swaps
 

 
1

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 

 

 
(22
)
 
97

 

 

All other net
 
(3
)
 

 

 

 

 

 
 
$
17

 
$
126