10-Q 1 pfe-9282014x10q.htm 10-Q PFE - 9/28/2014 - 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 September 28, 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 November 3, 20146,300,657,237 shares of the issuer’s voting common stock were outstanding.



Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three and nine months ended September 28, 2014 and September 29, 2013
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 28, 2014 and September 29, 2013
 
 
Condensed Consolidated Balance Sheets as of September 28, 2014 and December 31, 2013
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2014 and September 29, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 28,
2014

 
September 29,
2013

 
September 28,
2014

 
September 29,
2013

Revenues
 
$
12,361

 
$
12,643

 
$
36,487

 
$
38,026

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales(a)
 
2,368

 
2,287

 
6,875

 
6,792

Selling, informational and administrative expenses(a)
 
3,556

 
3,395

 
10,116

 
10,203

Research and development expenses(a)
 
1,802

 
1,627

 
5,184

 
4,867

Amortization of intangible assets
 
972

 
1,117

 
3,090

 
3,476

Restructuring charges and certain acquisition-related costs
 
(19
)
 
233

 
120

 
547

Other (income)/deductions––net
 
94

 
411

 
665

 
(514
)
Income from continuing operations before provision for taxes on income
 
3,587

 
3,573

 
10,437

 
12,655

Provision for taxes on income
 
911

 
985

 
2,575

 
3,876

Income from continuing operations
 
2,676

 
2,588

 
7,862

 
8,779

Discontinued operations:
 
 
 
 
 
 
 
 
Income from discontinued operations––net of tax
 
(3
)
 
36

 

 
326

Gain on disposal of discontinued operations––net of tax
 

 
(25
)
 
70

 
10,393

Discontinued operations––net of tax
 
(3
)
 
11

 
70

 
10,719

Net income before allocation to noncontrolling interests
 
2,672

 
2,599

 
7,932

 
19,498

Less: Net income attributable to noncontrolling interests
 
6

 
9

 
25

 
63

Net income attributable to Pfizer Inc.
 
$
2,666

 
$
2,590

 
$
7,907

 
$
19,435

 
 
 
 
 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

 
 

 
 

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

 
$
0.39

 
$
1.23

 
$
1.26

Discontinued operations––net of tax
 

 

 
0.01

 
1.54

Net income attributable to Pfizer Inc. common shareholders
 
$
0.42

 
$
0.39

 
$
1.24

 
$
2.80

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

 
 

 
 

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

 
$
0.39

 
$
1.22

 
$
1.25

Discontinued operations––net of tax
 

 

 
0.01

 
1.52

Net income attributable to Pfizer Inc. common shareholders
 
$
0.42

 
$
0.39

 
$
1.23

 
$
2.77

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
6,330

 
6,581

 
6,363

 
6,938

Weighted-average shares––diluted
 
6,403

 
6,656

 
6,441

 
7,016

Cash dividends paid per common share
 
$
0.26

 
$
0.24

 
$
0.78

 
$
0.72

(a) 
Excludes amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.
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 28,
2014

 
September 29,
2013

 
September 28,
2014

 
September 29,
2013

Net income before allocation to noncontrolling interests
 
$
2,672

 
$
2,599

 
$
7,932

 
$
19,498

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments
 
$
(431
)
 
$
(21
)
 
$
(273
)
 
$
(1,068
)
Reclassification adjustments(a)
 

 

 
(62
)
 
171

 
 
(430
)
 
(21
)
 
(334
)
 
(897
)
Unrealized holding gains/(losses) on derivative financial instruments
 
(172
)
 
10

 
(229
)
 
143

Reclassification adjustments for realized (gains)/losses(b)
 
441

 
(339
)
 
527

 
(37
)
 
 
269

 
(329
)
 
298

 
106

Unrealized holding gains/(losses) on available-for-sale securities
 
(200
)
 
325

 
(107
)
 
137

Reclassification adjustments for realized (gains)/losses(b)
 
15

 
10

 
(163
)
 
(74
)
 
 
(185
)
 
335

 
(270
)
 
63

Benefit plans: actuarial gains/(losses), net
 
18

 
(13
)
 
13

 
34

Reclassification adjustments related to amortization(c)
 
48

 
137

 
146

 
438

Reclassification adjustments related to settlements, net(c)
 
19

 
54

 
58

 
147

Other
 
42

 
(28
)
 
16

 
112

 
 
127

 
150

 
233

 
731

Benefit plans: prior service credits and other
 

 

 

 
3

Reclassification adjustments related to amortization(c)
 
(19
)
 
(16
)
 
(55
)
 
(45
)
Reclassification adjustments related to curtailments, net(c)
 
1

 

 
12

 
(9
)
Other
 

 
2

 
(1
)
 
(4
)
 
 
(18
)
 
(14
)
 
(44
)
 
(55
)
Other comprehensive income/(loss), before tax
 
(238
)
 
121

 
(118
)
 
(52
)
Tax provision on other comprehensive income/(loss)(d)
 
83

 
80

 
71

 
443

Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
(320
)
 
$
41

 
$
(189
)
 
$
(495
)
 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
2,352

 
$
2,640

 
$
7,743

 
$
19,003

Less: Comprehensive income/(loss) attributable to noncontrolling interests
 
1

 
(32
)
 
32

 
(2
)
Comprehensive income attributable to Pfizer Inc.
 
$
2,351

 
$
2,672

 
$
7,711

 
$
19,005

(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 on Other Comprehensive Income/(Loss).
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

4


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
September 28,
2014

 
December 31,
2013

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,437

 
$
2,183

Short-term investments
 
31,009

 
30,225

Accounts receivable, less allowance for doubtful accounts: 2014—$388; 2013—$478
 
9,955

 
9,357

Inventories
 
6,355

 
6,166

Current deferred tax assets and other current tax assets
 
4,687

 
4,624

Other current assets
 
2,545

 
3,689

Total current assets
 
56,987

 
56,244

Long-term investments
 
18,451

 
16,406

Property, plant and equipment, less accumulated depreciation
 
12,032

 
12,397

Goodwill
 
42,724

 
42,519

Identifiable intangible assets, less accumulated amortization
 
36,374

 
39,385

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,373

 
1,554

Other noncurrent assets
 
3,421

 
3,596

Total assets
 
$
171,362

 
$
172,101

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
5,389

 
$
6,027

Accounts payable
 
2,973

 
3,234

Dividends payable
 

 
1,663

Income taxes payable
 
892

 
678

Accrued compensation and related items
 
1,841

 
1,792

Other current liabilities
 
8,824

 
9,972

Total current liabilities
 
19,920

 
23,366

 
 
 
 
 
Long-term debt
 
31,666

 
30,462

Pension benefit obligations, net
 
4,364

 
4,635

Postretirement benefit obligations, net
 
2,591

 
2,668

Noncurrent deferred tax liabilities
 
26,320

 
25,590

Other taxes payable
 
3,930

 
3,993

Other noncurrent liabilities
 
4,266

 
4,767

Total liabilities
 
93,057

 
95,481

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
30

 
33

Common stock
 
455

 
453

Additional paid-in capital
 
78,498

 
77,283

Treasury stock
 
(71,820
)
 
(67,923
)
Retained earnings
 
74,292

 
69,732

Accumulated other comprehensive loss
 
(3,467
)
 
(3,271
)
Total Pfizer Inc. shareholders’ equity
 
77,988

 
76,307

Equity attributable to noncontrolling interests
 
317

 
313

Total equity
 
78,305

 
76,620

Total liabilities and equity
 
$
171,362

 
$
172,101

Amounts may not add due to rounding.

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 28,
2014

 
September 29,
2013

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
7,932

 
$
19,498

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

 
 

Depreciation and amortization
 
4,206

 
4,921

Asset write-offs and impairments
 
414

 
908

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

 
(459
)
Gain on disposal of discontinued operations
 
(65
)
 
(10,501
)
Deferred taxes from continuing operations
 
766

 
1,667

Deferred taxes from discontinued operations
 

 
(23
)
Share-based compensation expense
 
424

 
418

Benefit plan contributions (in excess of)/less than expense
 
(208
)
 
242

Other adjustments, net
 
(464
)
 
38

Other changes in assets and liabilities, net of acquisitions and divestitures
 
(1,519
)
 
(4,749
)
Net cash provided by operating activities
 
11,485

 
11,960

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(845
)
 
(789
)
Purchases of short-term investments
 
(36,294
)
 
(33,927
)
Proceeds from redemptions and sales of short-term investments
 
32,883

 
29,008

Net (purchases of)/proceeds from redemptions/sales of investments with original maturities of 90 days or less
 
4,945

 
(2,177
)
Purchases of long-term investments
 
(9,254
)
 
(8,746
)
Proceeds from redemptions and sales of long-term investments
 
4,637

 
5,943

Acquisitions of businesses, net of cash acquired
 
(195
)
 
(15
)
Acquisitions of intangible assets
 
(342
)
 
(177
)
Other investing activities, net
 
325

 
194

Net cash used in investing activities
 
(4,140
)
 
(10,686
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
8

 
3,723

Principal payments on short-term borrowings
 
(3
)
 
(3,776
)
Net proceeds from/(payments on) short-term borrowings with original maturities of 90 days or less
 
(2,758
)
 
1,831

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

 
6,618

Principal payments on long-term debt
 
(786
)
 
(2,396
)
Purchases of common stock
 
(3,801
)
 
(11,643
)
Cash dividends paid
 
(4,970
)
 
(5,026
)
Proceeds from exercise of stock options
 
704

 
1,370

Other financing activities, net
 
56

 
68

Net cash used in financing activities
 
(7,060
)
 
(9,231
)
Effect of exchange-rate changes on cash and cash equivalents
 
(30
)
 
(72
)
Net increase/(decrease) in cash and cash equivalents
 
255

 
(8,029
)
Cash and cash equivalents, beginning
 
2,183

 
10,081

Cash and cash equivalents, end
 
$
2,437

 
$
2,052

 
 
 

 
 

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
 
$
1,484

 
$
1,799

Interest
 
1,329

 
1,512

(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, Licensing Arrangements and Equity-Method Investments: Divestiture.
(b) 
See Note 2B. Acquisition, Divestiture, Licensing Arrangements and Equity-Method Investments: Divestiture.
(c) 
See Note 2D. Acquisition, Divestiture, Licensing Arrangements and Equity-Method Investments: Equity-Method Investments.
Amounts may not add due to rounding.
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 24, 2014 and August 25, 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.

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 nine months ended September 29, 2013. The operating results of this business through June 24, 2013, the date of disposal, are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the nine months ended September 29, 2013. For additional information, see Note 2B. Acquisition, Divestiture, Licensing Arrangements 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.

Certain amounts in the condensed consolidated financial statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts.

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).
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.

7

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

Note 2. Acquisition, Divestiture, Licensing Arrangements and Equity-Method Investments

A. Acquisition

InnoPharma, Inc. (InnoPharma)
On September 24, 2014, we completed our acquisition of InnoPharma, a privately-held pharmaceutical development company, for an upfront cash payment of $225 million and contingent consideration with an estimated acquisition-date fair value of approximately $67 million. The contingent consideration consists of up to $135 million in additional milestone payments based on application filing with and acceptance by the U.S. Food and Drug Administration (FDA), or approval of marketing applications related to certain pipeline products by the FDA. We believe this acquisition represents a potential innovative growth opportunity for our sterile injectables portfolio in areas such as oncology and central nervous disorders. In connection with this acquisition, we recorded $247 million in Identifiable intangible assets, consisting of $212 million in In-process research and development (IPR&D) and $35 million in Developed technology rights; $81 million in net deferred tax liabilities; and $125 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has not been finalized.

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 nine 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 nine months ended September 29, 2013.

The operating results of the Animal Health business through June 24, 2013, the date of disposal, are reported as Income from discontinued operations––net of tax in the condensed consolidated statements of income for the nine months ended September 29, 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
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 28,
2014

 
September 29,
2013

 
September 28,
2014

 
September 29,
2013

Revenues
 
$

 
$

 
$

 
$
2,201

Pre-tax income from discontinued operations(b)
 
(2
)
 
32

 
1

 
421

Provision for taxes on income(a)
 
1


(4
)

1


95

Income from discontinued operations––net of tax
 
(3
)
 
36

 

 
326

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

 
(38
)
 
65

 
10,501

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

 
(13
)
 
(4
)
 
108

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

 
(25
)
 
70

 
10,393

Discontinued operations––net of tax
 
$
(3
)
 
$
11

 
$
70

 
$
10,719

(a) 
Includes a deferred tax expense of $2 million and a deferred tax benefit of $4 million for the three months ended September 28, 2014 and September 29, 2013, respectively, and a deferred tax benefit of $23 million for the nine months ended September 29, 2013. Deferred taxes for the first nine months of 2014 were nil.
(b) 
For the three months and nine months ended September 28, 2014 and for the three months ended September 29, 2013, represents post-close adjustments.
(c) 
For the nine months ended September 29, 2013, 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 nine months ended September 29, 2013, except that financing activities include the cash proceeds from the issuance of senior notes by Zoetis.

C. Licensing Arrangements

Cellectis SA (Cellectis)
On June 18, 2014, we entered into a global strategic arrangement with Cellectis to develop Chimeric Antigen Receptor T-cell (CAR-T) immunotherapies in the field of oncology directed at select cellular surface antigen targets. In August 2014, we made an upfront payment of $80 million to Cellectis, which was recorded in Research and development expenses, and we will also fund research and development costs associated with the 15 Pfizer-selected targets and the four Cellectis-selected targets within the arrangement. Cellectis is eligible to receive development, regulatory and commercial milestone payments of up to $185 million per product that resulted from the Pfizer-selected targets. Cellectis is also eligible to receive tiered royalties on net sales of any products that are commercialized by Pfizer. In addition, in August 2014, we acquired approximately 10% of the Cellectis capital through the purchase of newly issued shares, for a total investment of approximately $35 million.

Nexium Over-the-Counter Rights
In connection with our August 2012 agreement with AstraZeneca PLC (AstraZeneca) for the exclusive, global, over-the-counter rights for Nexium, a leading prescription drug currently approved to treat the symptoms of gastroesophageal reflux disease, (i) on May 27, 2014, we launched Nexium 24HR in the U.S., and on July 11, 2014, we paid AstraZeneca a related $200 million product launch milestone payment and (ii) on August 1, 2014, we launched Nexium Control in Europe, and on September 15, 2014, we paid AstraZeneca a related $50 million product launch milestone payment. The milestone payments for this Consumer Healthcare asset acquisition have been recorded in Identifiable intangible assets, less accumulated amortization in the condensed consolidated balance sheet and will be amortized over their estimated useful lives. AstraZeneca is eligible to receive future milestone payments of up to $300 million, based on product launches outside the U.S. and level of worldwide sales and is eligible to receive royalty payments, based on worldwide sales.

D. Equity-Method Investments

Investment in Laboratório Teuto Brasileiro (Teuto)

We have an option to acquire the remaining 60% of Teuto, a 40%-owned generics company in Brazil, beginning in 2014, and Teuto’s majority shareholders have an option to sell their 60% stake to us beginning in 2015.

9

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

In the third quarter and first nine months of 2013, we recorded an estimated loss of approximately $223 million related to the net call/put option and an impairment loss of $32 million related to our equity-method investment, both of which were recorded in Other (income)/deductions––net.
In the third quarter and first nine months of 2014, we recorded income of approximately $90 million resulting from a decline in the estimated loss from the aforementioned option, which was recorded in Other (income)/deductions––net.

Investment in ViiV Healthcare Limited (ViiV)
Our minority ownership interest in ViiV, a company formed by Pfizer and GlaxoSmithKline plc (GSK) to focus solely on research, development and commercialization of human immunodeficiency virus (HIV) medicines, was impacted by the following events:
The January 21, 2014 European Commission approval of Tivicay (dolutegravir), a product for the treatment of HIV-1 infection, developed by ViiV. This approval triggered a reduction in our equity interest in ViiV from 12.6% to 11.7%, effective April 1, 2014. As a result, in the first nine months of 2014, we recognized a loss of approximately $30 million in Other (income)/deductions––net; and
The August 12, 2013 FDA approval of Tivicay (dolutegravir). This approval triggered a reduction in our interest in ViiV from 13.5% to 12.6%, effective October 1, 2013. As a result, in the third quarter and first nine months of 2013, we recognized a loss of approximately $31 million in Other (income)/deductions––net.

Investment in Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer)
In connection with the September 6, 2012 formation of Hisun Pfizer in conjunction with Zhejiang Hisun Pharmaceuticals Co., Ltd. (Hisun), a leading pharmaceutical company in China, in the first quarter of 2013, we and Hisun contributed certain assets to Hisun Pfizer. Hisun Pfizer is 49% owned by Pfizer and 51% owned by Hisun. Our contributions constituted a business, as defined by U.S. GAAP, and in the first nine 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.
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/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 eight sites over the next several years (down from 10 sites, previously, as two sites have been sold). In connection with these activities, during 2014-2016, we expect to incur costs of approximately $400 million associated with prior acquisition activity and costs of approximately $1.4 billion associated with new non-acquisition-related cost-reduction initiatives.

10

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

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 $850 million.
The costs expected to be incurred during 2014-2016, of approximately $3.0 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 nine months of 2014, we incurred approximately $531 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.
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 28,
2014

 
September 29,
2013

 
September 28,
2014

 
September 29,
2013

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
(51
)
 
$
174

 
$
(4
)
 
$
289

Asset impairments
 
9

 

 
28

 
115

Exit costs
 
4

 
21

 
44

 
36

Total restructuring charges
 
(38
)
 
195

 
68

 
440

Integration costs(b)
 
19

 
38

 
53

 
107

Restructuring charges and certain acquisition-related costs
 
(19
)
 
233

 
120

 
547

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

 
 

 
 

 
 

Cost of sales
 
52

 
43

 
199

 
134

Selling, informational and administrative expenses
 

 

 
1

 
19

Research and development expenses
 
1

 

 
30

 
94

Total additional depreciation––asset restructuring
 
54

 
43

 
230

 
247

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

 
 

 
 

 
 

Cost of sales
 
24

 
16

 
52

 
27

Selling, informational and administrative expenses
 
36

 
30

 
89

 
95

Research and development expenses
 
12

 
1

 
40

 
10

Total implementation costs
 
73

 
47

 
181

 
132

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
108

 
$
323

 
$
531

 
$
926

(a) 
In the nine months ended September 28, 2014, Employee terminations represent the expected reduction of the workforce by approximately 100 employees, mainly in manufacturing and sales.

11

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

The restructuring charges in 2014 are associated with the following:
For the third quarter of 2014, the Global Innovative Pharmaceutical segment (GIP) ($4 million); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($10 million); the Global Established Pharmaceutical segment (GEP) ($4 million); Worldwide Research and Development and Medical ($2 million); manufacturing operations ($21 million); and Corporate ($14 million) as well as $92 million of income related to the partial reversal of prior-period restructuring charges, not directly associated with the new individual segments, and reflecting a change in estimate with respect to our sales force restructuring plans.
For the first nine months of 2014, the Global Innovative Pharmaceutical segment (GIP) ($14 million); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($16 million); the Global Established Pharmaceutical segment (GEP) ($34 million); Worldwide Research and Development and Medical ($11 million); manufacturing operations ($59 million); and Corporate ($25 million), as well as $92 million of income related to the partial reversal of prior-period restructuring charges, not directly associated with the new individual segments, and reflecting a change in estimate with respect to our sales force restructuring plans.
The restructuring charges in 2013 are associated with the following:
For the third quarter of 2013, total operating segments ($39 million); manufacturing operations ($112 million); and Corporate ($44 million).
For the first nine months of 2013, total operating segments ($106 million); Worldwide Research and Development and Medical ($15 million); manufacturing operations ($194 million); and Corporate ($125 million).
At the beginning of fiscal 2014, we revised our operating segments and are unable to directly associate these prior-period restructuring charges with 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.
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
 
(4
)
 
28

 
44

 
68

Utilization and other(b)
 
(373
)
 
(28
)
 
(75
)
 
(476
)
Balance, September 28, 2014(c)
 
$
1,308

 
$

 
$
63

 
$
1,371

(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 ($851 million) and Other noncurrent liabilities ($520 million).


12

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

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 28,
2014

 
September 29,
2013

 
September 28,
2014

 
September 29,
2013

Interest income(a)
 
$
(108
)
 
$
(94
)
 
$
(303
)
 
$
(291
)
Interest expense(a)
 
343

 
340

 
1,007

 
1,067

Net interest expense
 
235

 
246

 
703

 
776

Royalty-related income(b)
 
(251
)
 
(122
)
 
(737
)
 
(305
)
Patent litigation settlement income(c)
 

 
9

 

 
(1,342
)
Other legal matters, net(d)
 
28

 
1

 
720

 
(94
)
Gain associated with the transfer of certain product rights(e)
 

 

 

 
(459
)
Net gains on asset disposals(f)
 
(53
)
 
(46
)
 
(267
)
 
(100
)
Certain asset impairments(g)
 
243

 
220

 
358

 
745

Costs associated with the Zoetis IPO(h)
 

 

 

 
18

Other, net(i)
 
(108
)
 
104

 
(113
)
 
247

Other (income)/deductions––net
 
$
94

 
$
411

 
$
665

 
$
(514
)
(a) 
Interest income increased in the third quarter and first nine months of 2014 due to higher cash equivalents and investment balances. Interest expense increased in the third quarter of 2014 due to the addition of new fixed rate debt in the second quarter of 2014 and interest expense decreased in the first nine 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 third quarter and first nine 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 thereafter.
(c) 
In the first nine months of 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 September 28, 2014, approximately $128 million is not yet due and is included in Other current assets.
(d) 
In the first nine months of 2014, primarily includes approximately $610 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 nine 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 nine months of 2013, represents the gain associated with the transfer of certain product rights to Hisun Pfizer. For additional information, see Note 2D. Acquisition, Divestiture, Licensing Arrangements and Equity-Method Investments: Equity-Method Investments.
(f) 
In the first nine months of 2014, primarily includes gains on sales/out-licensing of product and compound rights (approximately $128 million) and gains on sales of investments in equity securities (approximately $114 million).
(g) 
In the third quarter of 2014, includes intangible asset impairment charges of $242 million, reflecting (i) $144 million related to developed technology rights; (ii) $79 million related to an in-process research and development (IPR&D) compound for the treatment of skin fibrosis; and (iii) $18 million related to an indefinite-lived brand. The intangible asset impairment charges for the third quarter of 2014 are associated with the following: the Global Established Pharmaceutical segment (GEP) ($163 million) and Worldwide Research and Development ($79 million).
In the first nine months of 2014, includes intangible asset impairment charges of $356 million, reflecting (i) $190 million for an IPR&D compound for the treatment of skin fibrosis (full write-off); (ii) $147 million related to developed technology rights; and (iii) $18 million related to an indefinite-lived brand. The intangible asset impairment charges for the first nine months of 2014 are primarily associated with the following: the Global Established Pharmaceutical segment (GEP) ($166 million) and Worldwide Research and Development ($190 million).
The intangible asset impairment charges for 2014 reflect, among other things, updated commercial forecasts; and with regard to IPR&D, the impact of changes to the development program and new scientific findings.
In the third quarter of 2013, includes intangible asset impairment charges of $185 million, primarily reflecting (i) $95 million of indefinite-lived brands, primarily related to our biopharmaceutical indefinite-lived brand, Xanax; and (ii) $90 million related to one IPR&D compound (full write-off). The intangible asset impairment charges for the third quarter of 2013 are associated with the Global Established Pharmaceutical segment (GEP). In addition, the third quarter of 2013 includes an impairment charge of approximately $32 million related to our investment in Teuto.
In the first nine months of 2013, includes intangible asset impairment charges of $674 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; (ii)

13

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

$171 million related to three IPR&D compounds; and (iii) $109 million of indefinite lived brands, primarily related to our biopharmaceutical indefinite-lived brand, Xanax/Xanax XR. The impairment charges for the first nine months of 2013 are associated with the following: Global Innovative Pharmaceutical segment ($432 million); Global Established Pharmaceutical segment ($185 million); Worldwide Research and Development ($43 million); and Consumer Healthcare ($14 million). In addition, the first nine months of 2013 include an impairment charge of approximately $39 million for certain private company investments and an impairment charge of $32 million related to Teuto.
The intangible asset impairment charges for 2013 reflect, among other things, updated commercial forecasts, and with regard to IPR&D, the impact of new scientific findings.
(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, Licensing Arrangements and Equity-Method Investments: Divestiture.
(i) 
Includes the following: (i) in the third quarter and first nine months of 2014, the gain of approximately $46 million reflecting the change in the fair value of the contingent consideration associated with our acquisition of NextWave Pharmaceuticals, Inc. (NextWave) and the gain of approximately $56 million reflecting the change in the fair value of the contingent consideration associated with our acquisition of Excaliard Pharmaceuticals, Inc.; (ii) in the third quarter and first nine months of 2013, the gain of approximately $128 million and $109 million, respectively, reflecting the change in the fair value of the contingent consideration associated with our acquisition of NextWave; (iii) in the third quarter and first nine months of 2013, an estimated loss of $223 million related to an option to acquire the remaining interest in Teuto, and in the third quarter and first nine months of 2014, income of $90 million resulting from a decline in the estimated loss from the aforementioned option; and (iv) in the first nine months of 2014, a loss of $30 million due to a change in our ownership interest in ViiV and in the third quarter and first nine months of 2013, a loss of $31 million due to a change in our ownership interest in ViiV. For additional information concerning Teuto and ViiV, see Note 2D. Acquisition, Divestiture, Licensing Arrangements and Equity-Method Investments: Equity-Method Investments.

The asset impairment charges included in Other (income)/deductions––net for the first nine 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 nine months of 2014 in Other (income)/deductions––net:
 
 
Fair Value(a)
 
Nine Months Ended September 28, 2014

(MILLIONS OF DOLLARS)
 
Amount

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

 
$

 
$

 
$

 
$
190

Intangible assets––Developed technology rights(b)
 
233

 

 

 
233

 
147

Intangible assets––Indefinite-lived brands(b)
 
242

 

 

 
242

 
18

Total
 
$
475

 
$

 
$

 
$
475

 
$
356

(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 nine 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 25.4% for the third quarter of 2014, compared to 27.6% for the third quarter of 2013, and was 24.7% for the first nine months of 2014, compared to 30.6% for the first nine months of 2013.

The lower effective tax rate for the third quarter of 2014, in comparison with the same period in 2013, was primarily due to:
the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business; and
a decline in the non-tax deductible estimated loss recorded in the third quarter of 2013 related to an option to acquire the remaining interest in Teuto, since we expect to retain the investment indefinitely,

14

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

partially offset by:
the non-tax deductible charge to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued in the third quarter of 2014 by the U.S. Internal Revenue Service (IRS).
The lower effective tax rate for the first nine months of 2014, in comparison with the same period in 2013, was primarily due to:
the favorable impact of the resolution in the first nine 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 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 Hisun Pfizer in the first nine months of 2013;
the non-recurrence of the unfavorable impact of the tax rate associated with the patent litigation settlement income in the first nine months of 2013;
the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business; and
a decline in the non-tax deductible estimated loss recorded in the third quarter of 2013 related to an option to acquire the remaining interest in Teuto, since we expect to retain the investment indefinitely,
partially offset by:
the non-tax deductible charge to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued in the third quarter of 2014 by the IRS; and
the expiration of the U.S. R&D tax credit on December 31, 2013.

For information about the transfer of certain product rights in 2013 and the option to acquire the remaining interest in Teuto, see Note 2D. Acquisition, Divestiture, Licensing Arrangements 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 IRS:
With respect to Pfizer Inc., tax years 2009 and 2010 are currently under audit. Tax years 2011-2014 are open, but not yet 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).

15

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

C. Tax Provision on Other Comprehensive Income/(Loss)
The following table provides the components of the tax provision on Other comprehensive income/(loss):
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 28,
2014

 
September 29,
2013

 
September 28,
2014

 
September 29,
2013

 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments(a)
 
$
23

 
$
(2
)
 
$
13

 
$
88

Unrealized holding gains/(losses) on derivative financial instruments
 
(117
)
 
125

 
(133
)
 
107

Reclassification adjustments for realized (gains)/losses
 
175

 
(116
)
 
183

 
(15
)
 
 
58

 
9

 
50

 
92

Unrealized holding gains/(losses) on available-for-sale securities
 
(27
)
 
47

 
(4
)
 
60

Reclassification adjustments for realized (gains)/losses
 
2

 
(13
)
 
(38
)
 
(30
)
 
 
(25
)
 
34

 
(42
)
 
30

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

 
(1
)
 
3

 
10

Reclassification adjustments related to amortization
 
15

 
49

 
47

 
155

Reclassification adjustments related to settlements, net
 
6

 
18

 
21

 
54

Other
 
3

 
(23
)
 
(4
)
 
35

 
 
30

 
43

 
68

 
254

Benefit plans: prior service credits and other
 

 

 

 
1

Reclassification adjustments related to amortization
 
(7
)
 
(5
)
 
(21
)
 
(17
)
Reclassification adjustments related to curtailments, net
 
1

 

 
2

 
(4
)
Other
 
2

 
1

 

 
(1
)
 
 
(4
)
 
(4
)
 
(19
)
 
(21
)
Tax provision on other comprehensive income/(loss)
 
$
83

 
$
80

 
$
71

 
$
443

(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
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)
 
(355
)
 
248

 
(229
)
 
165

 
(26
)
 
(196
)
Balance, September 28, 2014
 
$
(945
)
 
$
327

 
$
(78
)
 
$
(3,058
)
 
$
288

 
$
(3,467
)
(a) 
Amounts do not include foreign currency translation income of $8 million attributable to noncontrolling interests for the first nine months of 2014.

As of September 28, 2014, with respect to derivative financial instruments, the amount of unrealized pre-tax gains estimated to be reclassified into income within the next 12 months is $173 million (which is expected to be offset by losses resulting from reclassification adjustments related to available-for-sale securities).


16

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 28,
2014

 
December 31,
2013

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
104

 
$
126

Available-for-sale debt securities(c)
 
39,547

 
34,899

Available-for-sale money market funds
 
1,526

 
945

Available-for-sale equity securities, excluding money market funds(c)
 
343

 
356

Derivative financial instruments in a receivable position(d):
 
 

 
 

Interest rate swaps
 
468

 
468

Foreign currency swaps
 
511

 
871

Foreign currency forward-exchange contracts
 
227

 
172

 
 
42,726

 
37,837

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
7,294

 
9,139

Private equity securities, carried at equity-method or at cost(e), (f)
 
2,109

 
2,270

 
 
9,403

 
11,409

Total selected financial assets
 
$
52,128

 
$
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
 
$
65

 
$
301

Foreign currency swaps
 
478

 
110

Foreign currency forward-exchange contracts
 
34

 
219

 
 
577

 
630

Other selected financial liabilities(h)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(e)
 
5,389

 
6,027

Long-term debt, carried at historical proceeds, as adjusted(i), (j)
 
31,666

 
30,462

 
 
37,055

 
36,489

Total selected financial liabilities
 
$
37,632

 
$
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.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $69 million as of September 28, 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 September 28, 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 carried 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 $239 million and foreign currency forward-exchange contracts with fair values of $29 million as of September 28, 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 $614 million as of September 28, 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 $36.4 billion as of September 28, 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.


17

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

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
September 28,
2014

 
December 31,
2013

Assets
 
 
 
 
Cash and cash equivalents
 
$
1,463

 
$
1,104

Short-term investments
 
31,009

 
30,225

Long-term investments
 
18,451

 
16,406

Other current assets(a)
 
274

 
286

Other noncurrent assets(b)
 
932

 
1,225

 
 
$
52,128

 
$
49,246

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
5,389

 
$
6,027

Other current liabilities(c)
 
216

 
303

Long-term debt
 
31,666

 
30,462

Other noncurrent liabilities(d)
 
361

 
327

 
 
$
37,632

 
$
37,119

(a) 
As of September 28, 2014, derivative instruments at fair value include interest rate swaps ($27 million), foreign currency swaps ($21 million) and foreign currency forward-exchange contracts ($226 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 September 28, 2014, derivative instruments at fair value include interest rate swaps ($441 million) and foreign currency swaps ($490 million) and foreign currency forward-exchange contracts ($1 million) and, as of December 31, 2013, include interest rate swaps ($378 million) and foreign currency swaps ($847 million).
(c) 
As of September 28, 2014, derivative instruments at fair value include interest rate swaps ($2 million), foreign currency swaps ($180 million) and foreign currency forward-exchange contracts ($34 million) and, as of December 31, 2013, include foreign currency swaps ($84 million) and foreign currency forward-exchange contracts ($219 million).
(d) 
As of September 28, 2014, derivative instruments at fair value include interest rate swaps ($63 million) and foreign currency swaps ($298 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.


18

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

B. Investments in Debt Securities
The following table provides the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
September 28,
2014

(MILLIONS OF DOLLARS)
 
Within 1

 
Over 1
to 5

 
Over 5
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Western European, Asian, Scandinavian and other government debt(a)
 
$
14,013

 
$
2,287

 
$

 
$

 
$
16,300

Corporate debt(b)
 
2,790

 
4,110

 
1,407

 
39

 
8,345

U.S. government debt
 
757

 
2,228

 
5

 

 
2,990

Western European and other government agency debt(a)
 
2,430

 
436

 

 

 
2,865

Supranational debt(a)
 
1,325

 
999

 

 

 
2,324

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 
3

 
1,768

 
127

 

 
1,898

Reverse repurchase agreements(c)
 
1,645

 

 

 

 
1,645

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
14

 
1,044

 
28

 

 
1,086

Other asset-backed debt(d)

 
707

 
1,376

 
9

 

 
2,092

Held-to-maturity debt securities
 
 
 
 
 
 

 
 
 
 

Western European and other government debt(a)
 
4,765

 

 

 

 
4,765

 Western European and Scandinavian government agency debt,(a) time deposits and other
 
2,496

 
7

 
26

 

 
2,528

Total debt securities
 
$
30,946

 
$
14,254

 
$
1,602

 
$
39

 
$
46,840

(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.
(d) 
Includes loan-backed, receivable-backed, and mortgage-backed securities, all of which are investment-grade and in senior positions in the capital structure of the security. Loan-backed securities are collateralized by senior secured obligations of a diverse pool of companies or student loans, and receivable-backed securities are collateralized by credit cards receivables. Mortgage-backed securities are collateralized by diversified pools of residential and commercial mortgages. These securities are valued by third party models that use significant inputs derived from observable market data like prepayment rates, default rates, and recovery rates.

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 September 28, 2014.


19

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

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
September 28,
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.
The following table provides the maturity schedule of our Long-term debt outstanding as of September 28, 2014:
(MILLIONS OF DOLLARS)
 
2015

 
2016

 
2017

 
2018

 
After 2018

 
TOTAL

Maturities
 
$

 
$
4,162

 
$
4,035

 
$
2,399

 
$
21,070

 
$
31,666


E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of September 28, 2014, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $35.8 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 $2.4 billion U.K. pound debt maturing in 2038.

Interest Rate Risk

As of September 28, 2014, the aggregate notional amount of interest rate derivative financial instruments is $17 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 28,
2014

 
Sep 29,
2013

 
Sep 28,
2014

 
Sep 29,
2013

 
Sep 28,
2014

 
Sep 29,
2013

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

 
$

 
$
(383
)
 
$
489

 
$
(474
)
 
$
314

Foreign currency forward-exchange contracts
 

 

 
212

 
(479
)
 
33

 
25

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 

 

 
21

 
(2
)
 

 

Foreign currency forward-exchange contracts
 

 
(4
)
 

 
(1
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
30

 
(81
)
 

 

 

 

Foreign currency swaps
 

 
(15
)
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 

 

 
46

 
(4
)
 

 

 
 
$
31

 
$
(100
)
 
$
(104
)
 
$
3

 
$
(441
)
 
$
339

Nine Months Ended
 
 

 
 

 
 

 
 

 
 

 
 

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

 
$

 
$
(409
)
 
$
308

 
$
(471
)
 
$
63

Foreign currency forward-exchange contracts
 

 

 
180

 
(165
)
 
(56
)
 
(26
)
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 

 
(3
)
 
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