PFE - 6/30/2013 - 10Q
Table of Contents

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 30, 2013

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 5, 2013, 6,620,299,870 shares of the issuer’s voting common stock were outstanding.

Table of Contents

FORM 10-Q
 
For the Quarterly Period Ended
June 30, 2013
 
Table of Contents
Page


 
 




Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and July 1, 2012




Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and July 1, 2012






 


 


 


 


 


 


 


 


 


 


 



2
Table of Contents

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 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

Revenues
 
$
12,973

 
$
13,968

 
$
25,383

 
$
27,813

Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales(a)
 
2,242

 
2,376

 
4,505

 
4,759

Selling, informational and administrative expenses(a)
 
3,591

 
3,665

 
6,808

 
7,343

Research and development expenses(a)
 
1,530

 
1,600

 
3,240

 
3,574

Amortization of intangible assets
 
1,140

 
1,275

 
2,359

 
2,678

Restructuring charges and certain acquisition-related costs
 
183

 
184

 
314

 
773

Other (income)/deductions––net
 
(1,070
)
 
688

 
(925
)
 
2,327

Income from continuing operations before provision for taxes on income
 
5,357

 
4,180

 
9,082

 
6,359

Provision for taxes on income
 
1,782

 
1,180

 
2,891

 
1,805

Income from continuing operations
 
3,575

 
3,000

 
6,191

 
4,554

Discontinued operations:
 
 
 
 
 
 
 
 
Income from discontinued operations––net of tax
 
141

 
260

 
290

 
509

Gain on disposal of discontinued operations––net of tax
 
10,418

 
—

 
10,418

 
—

Discontinued operations––net of tax
 
10,559

 
260

 
10,708

 
509

Net income before allocation to noncontrolling interests
 
14,134

 
3,260

 
16,899

 
5,063

Less: Net income attributable to noncontrolling interests
 
39

 
7

 
54

 
16

Net income attributable to Pfizer Inc.
 
$
14,095

 
$
3,253

 
$
16,845

 
$
5,047

 
 
 
 
 
 
 
 
 
Earnings per common share––basic(b):
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.51

 
$
0.40

 
$
0.87

 
$
0.60

Discontinued operations––net of tax
 
1.50

 
0.03

 
1.50

 
0.07

Net income attributable to Pfizer Inc. common shareholders
 
$
2.00

 
$
0.44

 
$
2.37

 
$
0.67

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted(b):
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.50


$
0.40

 
$
0.86

 
$
0.60

Discontinued operations––net of tax
 
1.48

 
0.03

 
1.49

 
0.07

Net income attributable to Pfizer Inc. common shareholders
 
$
1.98

 
$
0.43

 
$
2.34

 
$
0.67

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
7,042

 
7,476

 
7,115

 
7,506

Weighted-average shares––diluted
 
7,117

 
7,537

 
7,185

 
7,570

Cash dividends paid per common share
 
$
0.24

 
$
0.22

 
$
0.48

 
$
0.44

(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
Table of Contents

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

Net income before allocation to noncontrolling interests
 
$
14,134

 
$
3,260

 
$
16,899

 
$
5,063

 
 


 


 
 

 
 

Foreign currency translation adjustments
 
$
(755
)
 
$
(1,981
)
 
$
(1,047
)
 
$
(1,718
)
Reclassification adjustments(a) 
 
171

 
—

 
171

 
—

 
 
(584
)
 
(1,981
)
 
(876
)
 
(1,718
)
Unrealized holding gains/(losses) on derivative financial instruments
 
263

 
(657
)
 
(154
)
 
(230
)
Reclassification adjustments for realized (gains)/losses(b)
 
(132
)
 
427

 
249

 
127

 
 
131

 
(230
)
 
95

 
(103
)
Unrealized holding gains on available-for-sale securities
 
88

 
12

 
99

 
92

Reclassification adjustments for realized (gains)/losses(b)
 
(18
)
 
16

 
(31
)
 
33

 
 
70

 
28

 
68

 
125

Benefit plans: actuarial gains/(losses)
 
29

 
(505
)
 
47

 
(504
)
Reclassification adjustments related to amortization(c)
 
150

 
113

 
301

 
229

Reclassification adjustments related to curtailments/settlements, net(c)
 
34

 
(8
)
 
93

 
112

Foreign currency translation adjustments and other
 
43

 
39

 
140

 
55

 
 
256

 
(361
)
 
581

 
(108
)
Benefit plans: prior service (costs)/credits and other
 
—

 
26

 
3

 
26

Reclassification adjustments related to amortization(c)
 
(13
)
 
(17
)
 
(29
)
 
(34
)
Reclassification adjustments related to curtailments/settlements, net(c)
 
—

 
(73
)
 
(9
)
 
(82
)
Other
 
(4
)
 
—

 
(6
)
 
(4
)
 
 
(17
)
 
(64
)
 
(41
)
 
(94
)
Other comprehensive loss, before tax
 
(144
)
 
(2,608
)
 
(173
)
 
(1,898
)
Tax provision/(benefit) on other comprehensive loss(d)
 
187

 
(205
)
 
363

 
(1
)
Other comprehensive loss before allocation to noncontrolling interests
 
$
(331
)
 
$
(2,403
)
 
$
(536
)
 
$
(1,897
)
 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
13,803

 
$
857

 
$
16,363

 
$
3,166

Less: Comprehensive income/(loss) attributable to noncontrolling interests
 
18

 
(10
)
 
30

 
(2
)
Comprehensive income attributable to Pfizer Inc.
 
$
13,785

 
$
867

 
$
16,333

 
$
3,168

(a) 
Primarily 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: Taxes on Items of Other Comprehensive Loss.

See Notes to Condensed Consolidated Financial Statements.

4
Table of Contents

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
December 31,
2012


 
(Unaudited)
 

Assets
 

 

Cash and cash equivalents
 
$
2,436

 
$
10,081

Short-term investments
 
31,275

 
22,318

Accounts receivable, less allowance for doubtful accounts
 
11,523

 
11,456

Inventories
 
6,282

 
6,076

Taxes and other current assets
 
9,819

 
8,956

Assets of discontinued operations and other assets held for sale
 
100

 
5,944

Total current assets
 
61,435

 
64,831

Long-term investments
 
16,107

 
14,149

Property, plant and equipment, less accumulated depreciation
 
12,443

 
13,213

Goodwill
 
42,431

 
43,661

Identifiable intangible assets, less accumulated amortization
 
41,776

 
45,146

Taxes and other noncurrent assets
 
5,143

 
4,798

Total assets
 
$
179,335

 
$
185,798

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
5,214

 
$
6,424

Accounts payable
 
1,978

 
2,921

Dividends payable
 
1,685

 
1,733

Income taxes payable
 
904

 
979

Accrued compensation and related items
 
1,430

 
1,875

Other current liabilities
 
12,218

 
13,812

Liabilities of discontinued operations
 
21

 
1,442

Total current liabilities
 
23,450

 
29,186

 
 
 
 
 
Long-term debt
 
31,532

 
31,036

Pension benefit obligations
 
7,534

 
7,782

Postretirement benefit obligations
 
3,454

 
3,491

Noncurrent deferred tax liabilities
 
22,338

 
21,193

Other taxes payable
 
6,819

 
6,581

Other noncurrent liabilities
 
5,231

 
4,851

Total liabilities
 
100,358

 
104,120

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
36

 
39

Common stock
 
451

 
448

Additional paid-in capital
 
76,412

 
72,608

Treasury stock
 
(59,515
)
 
(40,122
)
Retained earnings
 
67,628

 
54,240

Accumulated other comprehensive loss
 
(6,465
)
 
(5,953
)
Total Pfizer Inc. shareholders’ equity
 
78,547

 
81,260

Equity attributable to noncontrolling interests
 
430

 
418

Total equity
 
78,977

 
81,678

Total liabilities and equity
 
$
179,335

 
$
185,798


See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
July 1,
2012

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
16,899

 
$
5,063

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

 
 

Depreciation and amortization
 
3,297

 
3,892

Share-based compensation expense
 
292

 
247

Gain associated with the transfer of certain product rights to an equity-method investment
 
(459
)
 
—

Asset write-offs and impairment charges
 
648

 
758

Gain on disposal of discontinued operations
 
(10,539
)
 
—

Deferred taxes from continuing operations
 
1,254

 
(126
)
Deferred taxes from discontinued operations
 
(19
)
 
20

Benefit plan contributions (in excess of)/less than expense
 
164

 
(20
)
Other non-cash adjustments, net
 
(192
)
 
(114
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(5,274
)
 
(2,925
)
Net cash provided by operating activities
 
6,071

 
6,795

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(511
)
 
(548
)
Purchases of short-term investments
 
(21,663
)
 
(10,395
)
Proceeds from redemptions and sales of short-term investments
 
14,502

 
14,357

Net purchases of short-term investments with original maturities of 90 days or less
 
(401
)
 
(999
)
Purchases of long-term investments
 
(5,233
)
 
(2,317
)
Proceeds from redemptions and sales of long-term investments
 
3,194

 
304

Acquisitions, net of cash acquired
 
(15
)
 
(782
)
Other investing activities
 
33

 
(56
)
Net cash used in investing activities
 
(10,094
)
 
(436
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
2,334

 
3,764

Principal payments on short-term borrowings
 
(2,333
)
 
(3,799
)
Net proceeds from/(payments on) short-term borrowings with original maturities of 90 days or less
 
2,251

 
(349
)
Proceeds from issuance of long-term debt(a)
 
6,618

 
—

Principal payments on long-term debt
 
(2,394
)
 
(7
)
Purchases of common stock
 
(7,889
)
 
(2,999
)
Cash dividends paid
 
(3,436
)
 
(3,283
)
Proceeds from exercise of stock options and other financing activities
 
1,249

 
198

Net cash used in financing activities
 
(3,600
)
 
(6,475
)
Effect of exchange-rate changes on cash and cash equivalents
 
(22
)
 
(35
)
Net decrease in cash and cash equivalents
 
(7,645
)
 
(151
)
Cash and cash equivalents, beginning
 
10,081

 
3,182

Cash and cash equivalents, end
 
$
2,436

 
$
3,031

 
 
 
 
 
Supplemental Cash Flow Information
 
 

 
 

Non-cash transactions:
 
 
 
 
Sale of Zoetis (our Animal Health business) for Pfizer common stock(b)
 
$
11,408

 
$
—

Exchange of Zoetis common stock for the retirement of Pfizer commercial paper issued in 2013(b)
 
2,479

 
—

Exchange of Zoetis senior notes for the retirement of Pfizer commercial paper issued in 2012(b)
 
992

 
—

Transfer of certain product rights to an equity-method investment(c)
 
1,233

 
—

Cash paid during the period for:
 
 

 
 

Income taxes
 
$
1,305

 
$
1,127

Interest
 
1,103

 
1,194

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

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents
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 26, 2013 and May 27, 2012.

On June 24, 2013, we completed the full disposition of our Animal Health business (Zoetis), and recognized a gain of approximately $10.4 billion, net of tax, related to the disposal of this business 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 Income from discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. In addition, in the condensed consolidated balance sheet as of December 31, 2012, the assets and liabilities associated with this business are classified as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate. Prior period financial statements have been restated. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

On November 30, 2012, we completed the sale of our Nutrition business to Nestlé. The operating results of this 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 July 1, 2012. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

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

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

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2012 Annual Report on Form 10-K/A.

B. Adoption of New Accounting Standards

There were no new accounting and disclosure standards adopted in 2013.

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.


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

Note 2. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment

A. Acquisitions

NextWave Pharmaceuticals, Inc.
In the first quarter of 2013, we finalized the allocation of the consideration transferred to the assets acquired and the liabilities assumed in the acquisition of NextWave Pharmaceuticals Incorporated (NextWave), completed on November 27, 2012. The total consideration for the acquisition was approximately $442 million, and we recorded $519 million in Identifiable intangible assets, consisting of $474 million in Developed technology rights and $45 million in In-process research and development; $166 million in net deferred tax liabilities; and $89 million in Goodwill.

Alacer Corp.

On February 26, 2012, we completed our acquisition of Alacer Corp., a company that manufactures, markets and distributes Emergen-C, a line of effervescent, powdered drink mix vitamin supplements that is the largest-selling branded vitamin C line in the U.S. In connection with this Consumer Healthcare acquisition, we recorded $181 million in Identifiable intangible assets, consisting primarily of the Emergen-C indefinite-lived brand; $69 million in net deferred tax liabilities; and $192 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has been finalized.

Ferrosan Holding A/S

On December 1, 2011, we completed our acquisition of the consumer healthcare business of Ferrosan Holding A/S (Ferrosan), a Danish company engaged in the sale of science-based consumer healthcare products, including dietary supplements and lifestyle products, primarily in the Nordic region and the emerging markets of Russia and Central and Eastern Europe. This acquisition is reflected in our condensed consolidated financial statements beginning in the first fiscal quarter of 2012. Our acquisition of Ferrosan’s consumer healthcare business increases our presence in dietary supplements with a new set of brands and pipeline products. Also, we believe that the acquisition allows us to expand the marketing of Ferrosan’s brands through Pfizer’s global footprint and provide greater distribution and scale for certain Pfizer brands, such as Centrum and Caltrate, in Ferrosan’s key markets. In connection with this Consumer Healthcare acquisition, we recorded $362 million in Identifiable intangible assets, consisting of indefinite-lived and finite-lived brands; $94 million in net deferred tax liabilities; and $322 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has been finalized.

B. Divestitures

Animal Health Business—Zoetis Inc.

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

Formation of Zoetis—On 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' overallotment 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

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

consideration received over the net book value of our divested interest was approximately $2.3 billion and was recorded in Additional paid-in capital. For additional information, see Note 6. Certain Changes in Total Equity.

Exchange Offer (80.2% Interest)—On June 24, 2013, we exchanged all of our remaining interest in Zoetis, 400.985 million shares of Class A common stock of Zoetis (after converting all of our Class B common stock into Class A common stock, representing approximately 80.2% of the total outstanding Zoetis shares), for approximately 405.117 million outstanding shares of Pfizer common stock on a tax-free basis pursuant to an exchange offer made to Pfizer shareholders. The $11.4 billion of Pfizer common stock received in the exchange transaction was recorded in Treasury stock and was valued using the opening price of Pfizer common stock on June 24, 2013, the date we accepted the Zoetis shares for exchange. For additional information, see Note 6. Certain Changes in Total Equity. The gain on the sale of the remaining interest in Zoetis was approximately $10.4 billion, net of income taxes resulting from certain legal entity reorganizations, and 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.

In summary, as a result of the above transactions, we received approximately $6.1 billion of cash and Treasury stock valued at $11.4 billion.

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 all periods presented. In addition, in the condensed consolidated balance sheet as of December 31, 2012, the assets and liabilities associated with this business are classified as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate. Prior period financial statements have been restated.

In connection with the above transactions, we entered into a transitional services agreement (TSA) and manufacturing and supply agreements (MSAs) with Zoetis that are designed to facilitate the orderly transfer of business operations to the standalone Zoetis entity. The TSA relates primarily to administrative services, which are generally to be provided within 24 months. Under the MSAs, we will manufacture and supply certain animal health products to Zoetis for a transitional period of up to 5 years, with an ability to extend, if necessary, upon mutual agreement of both parties. These agreements are not material and none confers upon us the ability to influence the operating and/or financial policies of Zoetis subsequent to June 24, 2013, the full disposition date.

Nutrition Business

On November 30, 2012, we completed the sale of our Nutrition business to Nestlé for $11.85 billion in cash, and recognized a gain of approximately $4.8 billion, net of tax. The divested business includes:
•
our former Nutrition operating segment and certain prenatal vitamins previously commercialized by the Pfizer Consumer Healthcare operating segment; and
•
other associated amounts, such as direct manufacturing costs, enabling support functions and other costs not charged to the business, purchase-accounting impacts, acquisition-related costs, impairment charges, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives, all of which are reported outside our operating segment results.

The operating results of this business are classified as Income from discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended July 1, 2012.


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

The following table provides the components of Discontinued operations—net of tax:
 
 
Three Months Ended(a)
 
Six Months Ended(a)
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

Revenues
 
$
1,112

 
$
1,675

 
$
2,201

 
$
3,230

Pre-tax income from discontinued operations
 
$
189

 
$
422

 
$
389

 
$
796

Provision for taxes on income(b)
 
48


162


99


287

Income from discontinued operations––net of tax
 
141

 
260

 
290

 
509

Pre-tax gain on disposal of discontinued operations
 
10,539

 
—

 
10,539

 
—

Provision for taxes on income(c)
 
121

 
—

 
121

 
—

Gain on disposal of discontinued operations––net of tax
 
10,418

 
—

 
10,418

 
—

Discontinued operations––net of tax
 
$
10,559

 
$
260

 
$
10,708

 
$
509

(a) 
Includes the Animal Health (Zoetis) business for all periods presented and the Nutrition business for the three and six months ended July 1, 2012.
(b) 
Includes a deferred tax benefit of $26 million and a deferred tax expense of $41 million for the three months ended June 30, 2013 and July 1, 2012, respectively, and a deferred tax benefit of $19 million and a deferred tax expense of $20 million for the six months ended June 30, 2013 and July 1, 2012, respectively. These deferred tax provisions include deferred taxes related to investments in certain foreign subsidiaries resulting from our intention not to hold these subsidiaries indefinitely.
(c) 
Reflects income taxes resulting from certain legal entity reorganizations.

The following table provides the components of Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations:
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
December 31,
2012

Accounts receivable, less allowance for doubtful accounts
 
$
—

 
$
922

Inventories
 
—

 
1,137

Other current assets
 
—

 
550

Property, plant and equipment, less accumulated depreciation
 
100

 
1,318

Goodwill
 
—

 
1,011

Identifiable intangible assets, less accumulated amortization
 
—

 
867

Other noncurrent assets
 
—

 
139

Assets of discontinued operations and other assets held for sale
 
$
100

 
$
5,944

Current liabilities
 
$
—

 
$
874

Other liabilities
 
21

 
568

Liabilities of discontinued operations
 
$
21

 
$
1,442


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 and July 1, 2012.

C. Collaborative Arrangement

Collaboration for ertugliflozin

On April 29, 2013, we announced that we had entered into a worldwide, except Japan, collaboration agreement with Merck & Co., Inc. (Merck) for the development and commercialization of Pfizer's ertugliflozin (PF-04971729), an investigational oral sodium glucose cotransporter (SGLT2) inhibitor being evaluated for the treatment of type 2 diabetes. Under the terms of the agreement, we will collaborate with Merck on the clinical development and commercialization of ertugliflozin, and ertugliflozin-containing fixed-dose combinations with metformin and Januvia (sitagliptin) tablets. Merck will continue to retain the rights to its existing portfolio of sitagliptin-containing products. Through June 30, 2013, we received payments totaling $60 million and we will be eligible for additional payments associated with the achievement of future clinical, regulatory and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

commercial milestones. The payments received to date have been deferred and will be recognized in Other (income)/deductions––net over a multi-year period. We will share potential revenues and certain costs with Merck on a 60%/40% basis, with Pfizer having the 40% share. Each party has the right to terminate the agreement at certain times under certain circumstances, with various resulting rights and obligations depending on the nature of the termination. In addition, Merck has the right to terminate the agreement at any time up to the commencement of the first Phase III clinical trial.

D. Equity-Method Investment

Investment in Hisun Pfizer Pharmaceuticals Company Limited

On September 6, 2012, we and Zhejiang Hisun Pharmaceuticals Co., Ltd., a leading pharmaceutical company in China, formed a new company, Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer), to develop, manufacture, market and sell pharmaceutical products, primarily branded generic products, predominately in China. Hisun Pfizer was established with registered capital of $250 million, of which our portion was $122.5 million. On January 1, 2013, both parties transferred selected employees to Hisun Pfizer and contributed, among other things, certain rights to commercialized products and products in development, intellectual property rights, and facilities, equipment and distribution/customer contracts. Our contributions in 2013 constituted a business, as defined by U.S. GAAP, and included, among other things, the China rights to certain commercialized products and other products not yet commercialized and all associated intellectual property rights. As a result of the contributions from both parties, Hisun Pfizer holds a broad portfolio of branded generics covering cardiovascular disease, infectious disease, oncology, mental health, and other therapeutic areas. We hold a 49% equity interest in Hisun Pfizer.

We also entered into certain transition agreements designed to ensure and facilitate the orderly transfer of the business operations to Hisun Pfizer, primarily the Pfizer Products Transition Period Agreement and a related supply and promotional services agreement. These agreements provide for a profit margin on the manufacturing services provided by Pfizer to Hisun Pfizer and govern the supply, promotion and distribution of Pfizer products until Hisun Pfizer begins its own manufacturing and distribution. While intended to be transitional, these agreements may be extended by mutual agreement of the parties for several years and, possibly, indefinitely. These agreements are not material to Pfizer, and none confers upon us any additional ability to influence the operating and/or financial policies of Hisun Pfizer.

In connection with our contributions in the first quarter 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 Emerging Markets reporting unit as part of the carrying amount of the business transferred). Since we hold a 49% interest in Hisun Pfizer, we have an indirect retained interest in the contributed assets; as such, 49% of the gain, or $225 million, represents the portion of the gain associated with that indirect retained interest.

In valuing our investment in Hisun Pfizer (which includes the indirect retained interest in the contributed assets), we used discounted cash flow techniques, utilizing a 11.5% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which include the expected impact of competitive, legal and/or regulatory forces on the products; the long-term growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various risks inherent in the projected cash flows, including country risk.

We are accounting for our interest in Hisun Pfizer as an equity-method investment, due to the significant influence we have over the operations of Hisun Pfizer through our board representation, minority veto rights and 49% voting interest. Our investment in Hisun Pfizer is reported as a private equity investment in Long-term investments, and our share of Hisun Pfizer's income and expenses is recorded in Other (income)/deductions––net. As of June 30, 2013, the carrying value of our investment in Hisun Pfizer is approximately $1.4 billion, and the amount of our underlying equity in the net assets of Hisun Pfizer is approximately $700 million. The excess of the carrying value of our investment over our underlying equity in the net assets of Hisun Pfizer has been allocated, within the investment account, to goodwill and other intangible assets. The amount allocated to other intangible assets is being amortized into Other (income)/deductions––net over an average estimated useful life of 25 years.


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

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

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 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
136

 
$
43

 
$
115

 
$
307

Asset impairments
 
12

 
28

 
115

 
246

Exit costs
 
2

 
8

 
15

 
20

Total restructuring charges
 
150

 
79

 
245

 
573

Integration costs(b)
 
33

 
105

 
69

 
200

Restructuring charges and certain acquisition-related costs
 
183

 
184

 
314

 
773

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

 
 

 
 

 
 

Cost of sales
 
58

 
54

 
91

 
130

Selling, informational and administrative expenses
 
8

 
5

 
19

 
6

Research and development expenses
 
3

 
—

 
94

 
259

Total additional depreciation––asset restructuring
 
69

 
59

 
204

 
395

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

 
 

 
 

 
 

Cost of sales
 
5

 
4

 
11

 
4

Selling, informational and administrative expenses
 
34

 
14

 
65

 
30

Research and development expenses
 
7

 
37

 
9

 
85

Total implementation costs
 
46

 
55

 
85

 
119

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
298

 
$
298

 
$
603

 
$
1,287

(a) 
From the beginning of our cost-reduction/productivity initiatives in 2005 through June 30, 2013, Employee termination costs represent the expected reduction of the workforce by approximately 63,300 employees, mainly in manufacturing and sales and research, of which

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

approximately 56,000 employees have been terminated as of June 30, 2013. For the six months ended June 30, 2013, substantially all employee termination costs represents additional costs with respect to approximately 1,100 employees.
The restructuring charges in 2013 are associated with the following:
•
For the three months ended June 30, 2013, Primary Care operating segment ($21 million), Specialty Care and Oncology operating segment ($13 million), Established Products and Emerging Markets operating segment ($19 million), Consumer Healthcare operating segment ($1 million), research and development operations ($12 million), manufacturing operations ($80 million) and Corporate ($4 million).
•
For the six months ended June 30, 2013, Primary Care operating segment ($17 million), Specialty Care and Oncology operating segment ($19 million), Established Products and Emerging Markets operating segment ($30 million), Consumer Healthcare operating segment ($1 million), research and development operations ($15 million), manufacturing operations ($82 million) and Corporate ($81 million).
The restructuring charges in 2012 are associated with the following:
•
For the three months ended July 1, 2012, Primary Care operating segment ($35 million income), Specialty Care and Oncology operating segment ($16 million), Established Products and Emerging Markets operating segment ($1 million), Consumer Healthcare operating segment ($9 million), research and development operations ($13 million), manufacturing operations ($15 million) and Corporate ($60 million).
•
For the six months ended July 1, 2012, Primary Care operating segment ($32 million income), Specialty Care and Oncology operating segment ($19 million), Established Products and Emerging Markets operating segment ($4 million), Consumer Healthcare operating segment ($13 million), research and development operations ($25 million), manufacturing operations ($166 million) and Corporate ($378 million).
(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, 2012(a)
 
$
1,734

 
$
—

 
$
152

 
$
1,886

Provision
 
115

 
115

 
15

 
245

Utilization and other(b)
 
(529
)
 
(115
)
 
(53
)
 
(697
)
Balance, June 30, 2013(c)
 
$
1,320

 
$
—

 
$
114

 
$
1,434

(a) 
Included in Other current liabilities ($1.2 billion) and Other noncurrent liabilities ($720 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($823 million) and Other noncurrent liabilities ($611 million).

Total restructuring charges incurred from the beginning of our cost-reduction/productivity initiatives in 2005 through June 30, 2013 were $15.9 billion.

The asset impairment charges included in restructuring charges for the six months ended June 30, 2013 primarily relate to assets held for sale and are based on an estimate of fair value, which was determined to be lower than the carrying value of the assets prior to the impairment charge.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides additional information about the long-lived assets that were impaired during the first six months of 2013 in Restructuring charges and certain acquisition-related costs:
 
 
 Fair Value(a)
 
Six Months Ended June 30,
2013
(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Assets held for sale(b)
 
$
84

 
$
—

 
$
84

 
$
—

 
$
64

Assets abandoned/demolished
 
—

 
—

 
—

 
—

 
51

Long-lived assets
 
$
84

 
$
—

 
$
84

 
$
—

 
$
115

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects property, plant and equipment and other long-lived held-for-sale assets written down to their fair value, less costs to sell of $2 million (a net of $82 million), in the first six months of 2013. Fair value was determined primarily using a market approach, with various inputs, such as recent sales transactions.

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 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

Interest income(a)
 
$
(102
)
 
$
(85
)
 
$
(197
)
 
$
(166
)
Interest expense(a)
 
356

 
378

 
727

 
768

Net interest expense
 
254

 
293

 
530

 
602

Royalty-related income
 
(120
)
 
(103
)
 
(183
)
 
(194
)
Patent litigation settlement income(b)
 
(1,351
)
 
—

 
(1,351
)
 
—

Other legal matters, net(c)
 
(12
)
 
473

 
(95
)
 
1,287

Gain associated with the transfer of certain product rights to an equity-method investment(d)
 
31

 
—

 
(459
)
 
—

Net gain on asset disposals
 
(28
)
 
(17
)
 
(54
)
 
(24
)
Certain asset impairment charges(e)
 
127

 
78

 
525

 
510

Costs associated with the Zoetis IPO(f)
 
—

 
29

 
18

 
61

Other, net
 
29

 
(65
)
 
144

 
85

Other (income)/deductions––net
 
$
(1,070
)
 
$
688

 
$
(925
)
 
$
2,327

(a) 
Interest income increased in the second quarter and first six months of 2013 due to higher cash and investment balances. Interest expense decreased in the second quarter and first six months of 2013 due to lower debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities.
(b) 
Reflects income from a litigation settlement with Teva Pharmaceuticals Industries Ltd. (Teva) and Sun Pharmaceutical Industries, Limited (Sun) for patent-infringement damages resulting from their "at-risk" launches of generic Protonix in the United States. As of June 30, 2013, the receivables from Teva and Sun are included in Taxes and other current assets ($1.7 billion) and Taxes and other noncurrent assets ($128 million). In addition, we have recorded an associated payable to Takeda Pharmaceutical Company Limited (Takeda) in Other current liabilities ($460 million) as certain payments due to Takeda will be sent to us on their behalf. For additional information, see Note 12A1. Commitments and Contingencies: Legal Proceedings––Patent Litigation.
(c) 
In the first six months of 2013, primarily includes an $80 million insurance recovery related to a certain litigation matter. In the second quarter and first six months of 2012, primarily includes charges for hormone-replacement therapy litigation. The first six months of 2012 also includes a $450 million charge in connection with an agreement-in-principle to settle a lawsuit by Brigham Young University related to Celebrex (which was ultimately settled for that amount). For additional information, see Note 12. Commitments and Contingencies.
(d) 
In the first six months of 2013, represents the gain associated with the transfer of certain product rights to our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.
(e) 
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 in-process research and development (IPR&D) compounds. The intangible asset impairment charges for

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2013 reflect, among other things, updated commercial forecasts. The impairment charges for the first six months of 2013 are associated with the following: Specialty Care ($394 million), Worldwide Research and Development ($43 million), Primary Care ($38 million) and Consumer Healthcare ($14 million). In addition, the first six months of 2013 includes charges of approximately $36 million for certain private company investments.
In the first six months of 2012, includes intangible asset impairment charges of $449 million, reflecting (i) $305 million of IPR&D, substantially all related to assets that targeted autoimmune and inflammatory diseases (full write-off), (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, a cough suppressant, and (iii) $99 million related to three developed technology rights. Most of these impairment charges relate to intangible assets that were acquired as part of our acquisition of Wyeth. The intangible asset impairment charges for 2012 reflect, among other things, the impact of new scientific findings, updated commercial forecasts and an increased competitive environment specifically for Robitussin. The impairment charges for the first six months of 2012 are associated with the following: Worldwide Research and Development ($297 million); Consumer Healthcare ($45 million); Established Products ($45 million); Primary Care ($43 million) and Specialty Care ($19 million). In addition, the first six months of 2012 includes charges of approximately $61 million for certain investments. These investment impairment charges reflect the difficult global economic environment.
(f) 
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. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

The asset impairment charges included in Other (income)/deductions––net for the first six months of 2013 primarily relate to identifiable intangible assets and are based on estimates of fair value.

The following table provides additional information about the significant intangible assets that were impaired during the first six months of 2013 in Other (income)/deductions––net:
 
 
Fair Value(a)
 
Six Months Ended June 30,
2013
(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––Developed technology rights(b)
 
$
564

 
$
—

 
$
—

 
$
564

 
$
394

Intangible assets––IPR&D(b)
 
220

 
—

 
—

 
220

 
81

Total
 
$
784

 
$
—

 
$
—

 
$
784

 
$
475

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects intangible assets written down to their fair value in the first six months of 2013. 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 33.3% for the second quarter of 2013, compared to 28.2% for the second quarter of 2012, and was 31.8% for the first six months of 2013, compared to 28.4% for the first six months of 2012. The effective tax rate for the second quarter of 2013 was unfavorably impacted by (i) the tax rate associated with the patent litigation settlement income and (ii) the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, partially offset by the extension of the U.S. R&D tax credit, which was signed into law in January 2013 (U.S. R&D tax credit). The effective tax rate for the first six months of 2013 was unfavorably impacted by (i) the tax rate associated with the patent litigation settlement income, (ii) 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 equity-method investment in China and (iii) the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, partially offset by the extension of the U.S. R&D tax credit (resulting in the full-year benefit of the 2012 R&D tax credit and a portion of the 2013 R&D tax credit being recorded in the first six months of 2013). For additional information about the patent litigation settlement income, see Note 12A1. Commitments and Contingencies: Legal Proceedings––Patent Litigation. For additional information about the transfer of certain product rights to our equity-method

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

investment in China, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.

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. 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 2011-2013 are open, but not under audit. All other tax years are closed.
•
With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.
•
With respect to King, tax years 2009 and 2010 are currently under audit. Tax year January 1, 2011 through the date of acquisition (January 31, 2011) is open, but not under audit. All other tax years are closed. The open tax years and audits for King and its subsidiaries are not material to Pfizer Inc.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2013), Japan (2007-2013), Europe (2007-2013, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2013, primarily reflecting Brazil and Mexico) and Puerto Rico (2007-2013).


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

C. Taxes on Items of Other Comprehensive Loss

The following table provides the components of tax provision/(benefit) on Other comprehensive loss:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

 
 

 

 
 
 
 
Foreign currency translation adjustments(a)
 
$
19

 
$
(30
)
 
$
90

 
$
37

Unrealized holding gains/(losses) on derivative financial instruments
 
104

 
(216
)
 
(53
)
 
(57
)
Reclassification adjustments for realized (gains)/losses
 
(55
)
 
133

 
89

 
18

 
 
49

 
(83
)
 
36

 
(39
)
Unrealized holding gains/(losses) on available-for-sale securities
 
35

 
(1
)
 
48

 
13

Reclassification adjustments for realized (gains)/losses
 
(3
)
 
(2
)
 
(5
)
 
5


 
32

 
(3
)
 
43

 
18

Benefit plans: actuarial gains/(losses)
 
5

 
(118
)
 
11

 
(118
)
Reclassification adjustments related to amortization
 
52

 
41

 
106

 
85

Reclassification adjustments related to curtailments/settlements, net
 
16

 
(4
)
 
36

 
39

Foreign currency translation adjustments and other
 
21

 
18

 
58

 
17


 
94

 
(63
)
 
211

 
23

Benefit plans: prior service (costs)/credits and other
 
2

 
8

 
1

 
8

Reclassification adjustments related to amortization
 
(6
)
 
(6
)
 
(12
)
 
(14
)
Reclassification adjustments related to curtailments/settlements, net
 
(1
)
 
(28
)
 
(4
)
 
(32
)
Other
 
(2
)
 
—

 
(2
)
 
(2
)

 
(7
)
 
(26
)
 
(17
)
 
(40
)
Tax provision/(benefit) on other comprehensive loss
 
$
187

 
$
(205
)
 
$
363

 
$
(1
)
(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
 
Note 6. Certain Changes in Total Equity

The change in Additional paid-in capital in the first six months of 2013 reflects, among other things, the impact of share-based payment transactions and an increase of approximately $2.3 billion related to the completion of an IPO for a 19.8% interest in Zoetis, our former Animal Health subsidiary, in the first quarter of 2013. The Zoetis-related increase represents the excess of the consideration received over the book value of our divested interest, which was recorded in Additional paid-in capital as we retained control over Zoetis immediately after the IPO transaction. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

The change in Treasury stock in the first six months of 2013 reflects, among other things, an increase of approximately $7.9 billion related to common stock acquired for cash and an increase of approximately $11.4 billion related to the divestment of the remaining 80.2% interest in Zoetis in the second quarter of 2013 through an exchange offer. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.



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

The following table provides the changes, net of tax, in Accumulated other comprehensive loss, excluding noncontrolling interests:
 
 
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, 2012
 
$
(177
)
 
$
(88
)
 
$
163

 
$
(6,110
)
 
$
259

 
$
(5,953
)
Other comprehensive income/(loss)(a)
 
(942
)
 
59

 
25

 
370

 
(24
)
 
(512
)
Balance, June 30, 2013
 
$
(1,119
)
 
$
(29
)
 
$
188

 
$
(5,740
)
 
$
235

 
$
(6,465
)
(a) 
Amounts do not include foreign currency translation loss of $24 million attributable to noncontrolling interests for the first six months of 2013.



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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)
 
June 30,
2013

 
December 31,
2012

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
118

 
$
142

Available-for-sale debt securities(c)
 
41,397

 
32,584

Available-for-sale money market funds(d)
 
2,457

 
1,727

Available-for-sale equity securities, excluding money market funds(c)
 
413

 
263

Derivative financial instruments in receivable positions(e):
 
 

 
 

Interest rate swaps
 
653

 
1,036

Foreign currency swaps
 
354

 
194

Foreign currency forward-exchange contracts
 
294

 
152


 
45,686

 
36,098

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (f)
 
1,387

 
1,459

Private equity securities, carried at equity-method or at cost(f), (g)
 
2,374

 
1,239


 
3,761

 
2,698

Total selected financial assets
 
$
49,447

 
$
38,796

Financial liabilities measured at fair value on a recurring basis(a)
 
 
 
 
Derivative financial instruments in a liability position(h):
 
 
 
 
Foreign currency swaps
 
$
704

 
$
428

Interest rate swaps
 
196

 
33

Foreign currency forward-exchange contracts
 
60

 
243


 
960

 
704

Other financial liabilities(i)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(f)
 
5,214

 
6,424

Long-term debt, carried at historical proceeds, as adjusted(j), (k)
 
31,532

 
31,036


 
36,746

 
37,460

Total selected financial liabilities
 
$
37,706

 
$
38,164

(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 or Level 3 inputs.
(b) 
Trading securities are held in trust for legacy business acquisition severance benefits.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Includes $434 million as of June 30, 2013 and $408 million as of December 31, 2012 of money market funds held in trust in connection with the asbestos litigation involving Quigley Company, Inc., a wholly owned subsidiary.
(e) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $116 million as of June 30, 2013; and, foreign currency forward-exchange contracts with fair values of $102 million as of December 31, 2012.
(f) 
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 30, 2013 or December 31, 2012. 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, using a market approach.
(g) 
Our private equity securities represent investments in the life sciences sector. The increase in 2013 primarily reflects an increased investment in our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(h) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $162 million and foreign currency forward-exchange contracts with fair values of $52 million as of June 30, 2013; and, foreign currency forward-exchange contracts with fair values of $141 million and foreign currency swaps with fair values of $129 million as of December 31, 2012.
(i) 
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.
(j) 
Includes foreign currency debt with fair values of $699 million as of June 30, 2013 and $809 million as of December 31, 2012, which are used as hedging instruments.
(k) 
The fair value of our long-term debt (not including the current portion of long-term debt) is $36.6 billion as of June 30, 2013 and $37.5 billion as of December 31, 2012. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach.

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
December 31,
2012

Assets
 
 
 
 
Cash and cash equivalents
 
$
764

 
$
947

Short-term investments
 
31,275

 
22,318

Long-term investments
 
16,107

 
14,149

Taxes and other current assets(a)
 
383

 
296

Taxes and other noncurrent assets(b)
 
918

 
1,086

 
 
$
49,447

 
$
38,796

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
5,214

 
$
6,424

Other current liabilities(c)
 
72

 
330

Long-term debt
 
31,532

 
31,036

Other noncurrent liabilities(d)
 
888

 
374

 
 
$
37,706

 
$
38,164

(a) 
As of June 30, 2013, derivative instruments at fair value include foreign currency forward-exchange contracts ($294 million), interest rate swaps ($74 million), and foreign currency swaps ($15 million) and, as of December 31, 2012, include foreign currency forward-exchange contracts ($152 million) and foreign currency swaps ($144 million).
(b) 
As of June 30, 2013, derivative instruments at fair value include interest rate swaps ($579 million) and foreign currency swaps ($339 million) and, as of December 31, 2012, include interest rate swaps ($1 billion) and foreign currency swaps ($50 million).
(c) 
At June 30, 2013, derivative instruments at fair value include foreign currency forward-exchange contracts ($60 million) and foreign currency swaps ($12 million) and, as of December 31, 2012, include foreign currency forward-exchange contracts ($243 million) and foreign currency swaps ($87 million).
(d) 
At June 30, 2013, derivative instruments at fair value include foreign currency swaps ($692 million) and interest rate swaps ($196 million) and, as of December 31, 2012, include foreign currency swaps ($341 million) and interest rate swaps ($33 million).

In addition, we have long-term receivables where the determination of fair value employs discounted future cash flows, using current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The differences between the estimated fair values and carrying values of these receivables were not significant as of June 30, 2013 or December 31, 2012.

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


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

B. Investments in Debt Securities

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

 
Over 1

 
Over 5

 
June 30,
2013

(MILLIONS OF DOLLARS)
 
Within 1

 
to 5

 
to 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
Western European, Scandinavian and other government debt(a)
 
$
19,293

 
$
2,082

 
$
—

 
$
21,375

Corporate debt(b)
 
1,976

 
4,019

 
1,621

 
7,616

Western European, Scandinavian, Australian and other government agency debt(a)
 
2,983

 
393

 
—

 
3,376

Reverse repurchase agreements(c)
 
2,097

 
—

 
—

 
2,097

Supranational debt(a)
 
1,071

 
762

 
—

 
1,833

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 
14

 
1,733

 
—

 
1,747

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
326

 
1,045

 
330

 
1,701

U.S. government debt
 
1,187

 
449

 
16

 
1,652

Held-to-maturity debt securities
 
 

 
 

 
 

 
 

Certificates of deposit and other
 
1,059

 
327

 
1

 
1,387

Total debt securities
 
$
30,006

 
$
10,810

 
$
1,968

 
$
42,784

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

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $1.3 billion and $2.7 billion as of June 30, 2013 and December 31, 2012, respectively.

D. Long-Term Debt

On June 3, 2013, we completed a public offering of $4.0 billion aggregate principal amount of senior unsecured notes. In addition, we repaid at maturity our 3.625% senior unsecured notes that were due June 2013, which had a balance of $2.4 billion at December 31, 2012.

The following table provides the components of the senior unsecured long-term debt issued in the second quarter of 2013:
 
 
 
 
As of

 
 
 
 
June 30,

(MILLIONS OF DOLLARS)
 
Maturity Date
 
2013

1.50%(a)
 
June 2018
 
$
1,000

3.00%(b)
 
June 2023
 
1,000

0.90%(a)
 
January 2017
 
750

4.30%(b)
 
June 2043
 
750

Three-month London Interbank Offering Rate (LIBOR) plus 0.30%
 
June 2018
 
500

Total long-term debt issued in the second quarter of 2013
 
 
 
$
4,000

(a) 
Instrument is callable by us at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate, plus 0.10% plus, in each case, accrued and unpaid interest.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(b) 
Instrument is callable by us at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate, plus 0.15% plus, in each case, accrued and unpaid interest.

The following table provides the maturity schedule of our Long-term debt outstanding as of June 30, 2013:
(MILLIONS OF DOLLARS)
 
2014

 
2015

 
2016

 
2017

 
After 2017

 
Total

Maturities

$
1,247

 
$
2,934

 
$
4,395

 
$
2,654

 
$
20,302


$
31,532


E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of June 30, 2013, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $42.2 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen, U.K. pound, Canadian dollar and Swiss franc. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.3 billion U.K. pound debt maturing in 2038.
 
Interest Rate Risk
 
As of June 30, 2013, the aggregate notional amount of interest rate derivative financial instruments is $15.9 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.


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

The following table provides information about the gains/(losses) recognized 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 OCL
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCL into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
June 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

 
June 30,
2013

 
July 1,
2012

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

 
$
—

 
$
262

 
$
(646
)
 
$
132

 
$
(432
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 
—

 
(1
)
 
16

 
(53
)
 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(21
)
 
190

 
—

 
—

 
—

 
—

Foreign currency swaps
 
5

 
6

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 
—

 
—

 
34

 
(27
)
 
—

 
—

All other net
 
—

 
3

 
1

 
(4
)
 
—

 
5


 
$
(16
)
 
$
198

 
$
313

 
$
(730
)
 
$
132

 
$
(427
)
Six Months Ended