PFE - 9/29/2013 - 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 September 29, 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 November 4, 2013, 6,481,070,845 shares of the issuer’s voting common stock were outstanding.

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Condensed Consolidated Statements of Income for the three and nine months ended September 29, 2013 and September 30, 2012


Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 2013 and September 30, 2012


Condensed Consolidated Balance Sheets as of September 29, 2013 and December 31, 2012


Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2013 and September 30, 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
 
Nine Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
September 29,
2013

 
September 30,
2012

 
September 29,
2013

 
September 30,
2012

Revenues
 
$
12,643

 
$
12,953

 
$
38,026

 
$
40,766

Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales(a)
 
2,287

 
2,309

 
6,792

 
7,068

Selling, informational and administrative expenses(a)
 
3,395

 
3,491

 
10,203

 
10,834

Research and development expenses(a)
 
1,627

 
1,887

 
4,867

 
5,461

Amortization of intangible assets
 
1,117

 
1,211

 
3,476

 
3,889

Restructuring charges and certain acquisition-related costs
 
233

 
312

 
547

 
1,085

Other (income)/deductions––net
 
411

 
937

 
(514
)
 
3,264

Income from continuing operations before provision for taxes on income
 
3,573

 
2,806

 
12,655

 
9,165

Provision/(benefit) for taxes on income
 
985

 
(183
)
 
3,876

 
1,622

Income from continuing operations
 
2,588

 
2,989

 
8,779

 
7,543

Discontinued operations:
 
 
 
 
 
 
 
 
Income from discontinued operations––net of tax
 
36

 
225

 
326

 
734

Gain on disposal of discontinued operations––net of tax
 
(25
)
 
—

 
10,393

 
—

Discontinued operations––net of tax
 
11

 
225

 
10,719

 
734

Net income before allocation to noncontrolling interests
 
2,599

 
3,214

 
19,498

 
8,277

Less: Net income attributable to noncontrolling interests
 
9

 
6

 
63

 
22

Net income attributable to Pfizer Inc.
 
$
2,590

 
$
3,208

 
$
19,435

 
$
8,255

 
 
 
 
 
 
 
 
 
Earnings per common share––basic(b):
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.39

 
$
0.40

 
$
1.26

 
$
1.00

Discontinued operations––net of tax
 
—

 
0.03

 
1.54

 
0.10

Net income attributable to Pfizer Inc. common shareholders
 
$
0.39

 
$
0.43

 
$
2.80

 
$
1.10

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted(b):
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.39


$
0.40

 
$
1.25

 
$
1.00

Discontinued operations––net of tax
 
—

 
0.03

 
1.52

 
0.10

Net income attributable to Pfizer Inc. common shareholders
 
$
0.39

 
$
0.43

 
$
2.77

 
$
1.09

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
6,581

 
7,436

 
6,938

 
7,483

Weighted-average shares––diluted
 
6,656

 
7,508

 
7,016

 
7,550

Cash dividends paid per common share
 
$
0.24

 
$
0.22

 
$
0.72

 
$
0.66

(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
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PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
September 30,
2012

 
September 29,
2013

 
September 30,
2012

Net income before allocation to noncontrolling interests
 
$
2,599

 
$
3,214

 
$
19,498

 
$
8,277

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments
 
$
(21
)
 
$
153

 
$
(1,068
)
 
$
(1,565
)
Reclassification adjustments(a) 
 
—

 
—

 
171

 
—

 
 
(21
)
 
153

 
(897
)
 
(1,565
)
Unrealized holding gains on derivative financial instruments
 
490

 
455

 
336

 
242

Reclassification adjustments for realized gains(b)
 
(313
)
 
(221
)
 
(64
)
 
(94
)
 
 
177

 
234

 
272

 
148

Unrealized holding gains/(losses) on available-for-sale securities
 
(156
)
 
26

 
(57
)
 
101

Reclassification adjustments for realized (gains)/losses(b)
 
(15
)
 
(9
)
 
(46
)
 
24

 
 
(171
)
 
17

 
(103
)
 
125

Benefit plans: actuarial gains/(losses), net
 
(13
)
 
(88
)
 
34

 
(592
)
Reclassification adjustments related to amortization(c)
 
137

 
122

 
438

 
351

Reclassification adjustments related to curtailments/settlements, net(c)
 
54

 
48

 
147

 
160

Foreign currency translation adjustments and other
 
(28
)
 
(37
)
 
112

 
18

 
 
150

 
45

 
731

 
(63
)
Benefit plans: prior service (costs)/credits and other
 
—

 
(3
)
 
3

 
23

Reclassification adjustments related to amortization(c)
 
(16
)
 
(20
)
 
(45
)
 
(54
)
Reclassification adjustments related to curtailments/settlements, net(c)
 
—

 
(4
)
 
(9
)
 
(86
)
Other
 
2

 
5

 
(4
)
 
1

 
 
(14
)
 
(22
)
 
(55
)
 
(116
)
Other comprehensive income/(loss), before tax
 
121

 
427

 
(52
)
 
(1,471
)
Tax provision on other comprehensive income/(loss)(d)
 
80

 
73

 
443

 
72

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

 
$
354

 
$
(495
)
 
$
(1,543
)
 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
2,640

 
$
3,568

 
$
19,003

 
$
6,734

Less: Comprehensive income/(loss) attributable to noncontrolling interests
 
(32
)
 
5

 
(2
)
 
3

Comprehensive income attributable to Pfizer Inc.
 
$
2,672

 
$
3,563

 
$
19,005

 
$
6,731

(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 Income/(Loss).

See Notes to Condensed Consolidated Financial Statements.

4
Table of Contents

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
December 31,
2012

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,052

 
$
10,081

Short-term investments
 
31,627

 
22,318

Accounts receivable, less allowance for doubtful accounts
 
11,371

 
11,456

Inventories
 
6,482

 
6,076

Taxes and other current assets
 
7,835

 
8,956

Assets of discontinued operations and other assets held for sale
 
133

 
5,944

Total current assets
 
59,500

 
64,831

Long-term investments
 
15,731

 
14,149

Property, plant and equipment, less accumulated depreciation
 
12,359

 
13,213

Goodwill
 
42,400

 
43,661

Identifiable intangible assets, less accumulated amortization
 
40,549

 
45,146

Taxes and other noncurrent assets
 
4,982

 
4,798

Total assets
 
$
175,521

 
$
185,798

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
4,738

 
$
6,424

Accounts payable
 
2,287

 
2,921

Dividends payable
 
1

 
1,733

Income taxes payable
 
802

 
979

Accrued compensation and related items
 
1,750

 
1,875

Other current liabilities
 
10,774

 
13,812

Liabilities of discontinued operations
 
21

 
1,442

Total current liabilities
 
20,373

 
29,186

 
 
 
 
 
Long-term debt
 
31,812

 
31,036

Pension benefit obligations
 
7,588

 
7,782

Postretirement benefit obligations
 
3,423

 
3,491

Noncurrent deferred tax liabilities
 
22,432

 
21,193

Other taxes payable
 
7,024

 
6,581

Other noncurrent liabilities
 
4,515

 
4,851

Total liabilities
 
97,167

 
104,120

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
35

 
39

Common stock
 
452

 
448

Additional paid-in capital
 
76,756

 
72,608

Treasury stock
 
(63,272
)
 
(40,122
)
Retained earnings
 
70,381

 
54,240

Accumulated other comprehensive loss
 
(6,383
)
 
(5,953
)
Total Pfizer Inc. shareholders’ equity
 
77,969

 
81,260

Equity attributable to noncontrolling interests
 
385

 
418

Total equity
 
78,354

 
81,678

Total liabilities and equity
 
$
175,521

 
$
185,798


See Notes to Condensed Consolidated Financial Statements.

5
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PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
September 30,
2012

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
19,498

 
$
8,277

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

 
 

Depreciation and amortization
 
4,818

 
5,548

Share-based compensation expense
 
418

 
362

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

Asset write-offs and impairment charges
 
926

 
865

Gain on disposal of discontinued operations
 
(10,501
)
 
—

Deferred taxes from continuing operations
 
1,667

 
130

Deferred taxes from discontinued operations
 
(23
)
 
(10
)
Benefit plan expense in excess of contributions
 
258

 
86

Other non-cash adjustments, net
 
(311
)
 
(118
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(4,312
)
 
(3,342
)
Net cash provided by operating activities
 
11,979

 
11,798

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(789
)
 
(833
)
Purchases of short-term investments
 
(33,927
)
 
(14,587
)
Proceeds from redemptions and sales of short-term investments
 
29,008

 
19,377

Net (purchases of)/proceeds from redemptions and sales of short-term investments with original maturities of 90 days or less
 
(2,177
)
 
1,483

Purchases of long-term investments
 
(8,746
)
 
(8,694
)
Proceeds from redemptions and sales of long-term investments
 
5,943

 
3,357

Acquisitions, net of cash acquired
 
(15
)
 
(782
)
Other investing activities
 
(2
)
 
(4
)
Net cash used in investing activities
 
(10,705
)
 
(683
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
3,723

 
5,700

Principal payments on short-term borrowings
 
(3,776
)
 
(5,882
)
Net proceeds from/(payments on) short-term borrowings with original maturities of 90 days or less
 
1,831

 
(176
)
Proceeds from issuance of long-term debt(a)
 
6,618

 
—

Principal payments on long-term debt
 
(2,396
)
 
(14
)
Purchases of common stock
 
(11,643
)
 
(4,834
)
Cash dividends paid
 
(5,026
)
 
(4,915
)
Proceeds from exercise of stock options and other financing activities
 
1,438

 
355

Net cash used in financing activities
 
(9,231
)
 
(9,766
)
Effect of exchange-rate changes on cash and cash equivalents
 
(72
)
 
(25
)
Net increase/(decrease) in cash and cash equivalents
 
(8,029
)
 
1,324

Cash and cash equivalents, beginning
 
10,081

 
3,182

Cash and cash equivalents, end
 
$
2,052

 
$
4,506

 
 
 
 
 
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
 
$
1,799

 
$
1,895

Interest
 
1,512

 
1,675

(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 Investments: 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 Investments: Equity-Method Investments.
See Notes to Condensed Consolidated Financial Statements.

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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 25, 2013 and August 26, 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 nine months ended September 29, 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 the nine months ended September 29, 2013 and for the three and nine months ended September 30, 2012. 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 Investments: 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 nine months ended September 30, 2012. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investments: 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 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 2012 Annual Report on Form 10-K/A.

B. Adoption of New Accounting Standards

There were no new accounting and disclosure standards adopted in the nine months ended September 29, 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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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

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), a privately held, specialty pharmaceutical company, completed on November 27, 2012. The total consideration for the acquisition was approximately $442 million, which consisted of upfront payments to NextWave's shareholders of approximately $278 million and contingent consideration with an estimated acquisition-date fair value of approximately $164 million. 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. In the third quarter and the first nine months of 2013, as a result of lowered commercial forecasts, the fair value of the contingent consideration decreased and we recognized a pre-tax gain of approximately $128 million and $109 million, respectively, in Other (income)/deductions––net.

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.

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.

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

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

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. 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 nine months ended September 29, 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 the nine months ended September 29, 2013 (through the disposal date) and for the three and nine months ended September 30, 2012. 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 nine months ended September 30, 2012.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Total Discontinued Operations

The following table provides the components of Discontinued operations—net of tax:
 
 
Three Months Ended(a)
 
Nine Months Ended(a)
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
September 30,
2012

 
September 29,
2013

 
September 30,
2012

Revenues
 
$
—

 
$
1,587

 
$
2,201

 
$
4,817

Pre-tax income from discontinued operations(a)
 
$
32

 
$
314

 
$
421

 
$
1,110

Provision for taxes on income(b)
 
(4
)

89


95


376

Income from discontinued operations––net of tax
 
36

 
225

 
326

 
734

Pre-tax gain on disposal of discontinued operations
 
(38
)
 
—

 
10,501

 
—

Provision for taxes on income(c)
 
(13
)
 
—

 
108

 
—

Gain on disposal of discontinued operations––net of tax
 
(25
)
 
—

 
10,393

 
—

Discontinued operations––net of tax
 
$
11

 
$
225

 
$
10,719

 
$
734

(a) 
Includes the Animal Health (Zoetis) business for the nine months ended September 29, 2013 (through the disposal date) and for the three and nine months ended September 30, 2012, and the Nutrition business for the three and nine months ended September 30, 2012. For the three months ended September 29, 2013, includes certain post-close adjustments.
(b) 
Includes a deferred tax benefit of $4 million and $30 million for the three months ended September 29, 2013 and September 30, 2012, respectively, and a deferred tax benefit of $23 million and $10 million for the nine months ended September 29, 2013 and September 30, 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) 
For the nine months ended September 29, 2013, primarily 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)
 
September 29,
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
 
133

 
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
 
$
133

 
$
5,944

Current liabilities
 
$
21

 
$
874

Other liabilities
 
—

 
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 nine months ended September 29, 2013 and September 30, 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 currently in Phase 3 development 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,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 September 29, 2013, we received payments totaling $60 million and we will be eligible for additional payments associated with the achievement of future clinical, regulatory and commercial milestones. The payments received to date have been deferred and are being 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.

D. Equity-Method Investments

Investment in ViiV Healthcare Limited
On August 12, 2013, the U.S. Food and Drug Administration (FDA) approved Tivicay (dolutegravir), a product for the treatment of HIV-1 infection, developed by ViiV Healthcare Limited (ViiV), an equity-method investee. This approval, in accordance with the agreement between GlaxoSmithKline plc and Pfizer, triggered a reduction in our interest in ViiV from 13.5% to 12.6% and an increase in GlaxoSmithKline plc's equity interest in ViiV from 76.5% to 77.4% effective October 1, 2013. As a result, in the third quarter of 2013, we recognized a loss of approximately $31 million in Other (income)/deductions––net. We continue to account for our investment in ViiV under the equity method due to the significant influence that we continue to have through our board representation and minority veto rights.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

investment in Hisun Pfizer is reported as a private equity investment in Long-term investments, and our share of Hisun Pfizer's net income is recorded in Other (income)/deductions––net. As of September 29, 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 $750 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.
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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
September 30,
2012

 
September 29,
2013

 
September 30,
2012

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
174

 
$
132

 
$
289

 
$
439

Asset impairments
 
—

 
33

 
115

 
279

Exit costs
 
21

 
68

 
36

 
88

Total restructuring charges
 
195

 
233

 
440

 
806

Integration costs(b)
 
38

 
79

 
107

 
279

Restructuring charges and certain acquisition-related costs
 
233

 
312

 
547

 
1,085

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

 
 

 
 

 
 

Cost of sales
 
43

 
75

 
134

 
205

Selling, informational and administrative expenses
 
—

 
1

 
19

 
7

Research and development expenses
 
—

 
—

 
94

 
259

Total additional depreciation––asset restructuring
 
43

 
76

 
247

 
471

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

 
 

 
 

 
 

Cost of sales
 
16

 
18

 
27

 
22

Selling, informational and administrative expenses
 
30

 
47

 
95

 
77

Research and development expenses
 
1

 
47

 
10

 
132

Total implementation costs
 
47

 
112

 
132

 
231

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
323

 
$
500

 
$
926

 
$
1,787

(a) 
From the beginning of our cost-reduction/productivity initiatives in 2005 through September 29, 2013, Employee terminations represent the expected reduction of the workforce by approximately 63,500 employees, mainly in manufacturing, sales and research, of which approximately 57,000 employees have been terminated as of September 29, 2013. For the nine months ended September 29, 2013, substantially all employee termination costs represent additional costs with respect to approximately 1,300 employees.
The restructuring charges in 2013 are associated with the following:
•
For the three months ended September 29, 2013, Primary Care operating segment ($12 million), Specialty Care and Oncology operating segment ($18 million), Established Products and Emerging Markets operating segment ($4 million), Consumer Healthcare operating segment ($5 million), manufacturing operations ($112 million) and Corporate ($44 million).
•
For the nine months ended September 29, 2013, Primary Care operating segment ($29 million), Specialty Care and Oncology operating segment ($37 million), Established Products and Emerging Markets operating segment ($34 million), Consumer Healthcare operating segment ($6 million), research and development operations ($15 million), manufacturing operations ($194 million) and Corporate ($125 million).
The restructuring charges in 2012 are associated with the following:
•
For the three months ended September 30, 2012, Primary Care operating segment ($83 million), Specialty Care and Oncology operating segment ($60 million), Established Products and Emerging Markets operating segment ($16 million), Consumer Healthcare operating segment ($5 million), research and development operations ($39 million income), manufacturing operations ($48 million) and Corporate ($60 million).
•
For the nine months ended September 30, 2012, Primary Care operating segment ($51 million), Specialty Care and Oncology operating segment ($79 million), Established Products and Emerging Markets operating segment ($20 million), Consumer Healthcare operating segment ($18 million), research and development operations ($14 million income), manufacturing operations ($214 million) and Corporate ($438 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(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
 
289

 
115

 
36

 
440

Utilization and other(b)
 
(741
)
 
(115
)
 
(109
)
 
(965
)
Balance, September 29, 2013(c)
 
$
1,282

 
$
—

 
$
79

 
$
1,361

(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 ($717 million) and Other noncurrent liabilities ($644 million).

Total restructuring charges incurred from the beginning of our cost-reduction/productivity initiatives in 2005 through September 29, 2013 were $16.1 billion.

The asset impairment charges included in restructuring charges for the nine months ended September 29, 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.

The following table provides additional information about the long-lived assets that were impaired during the first nine months of 2013 in Restructuring charges and certain acquisition-related costs:
 
 
 Fair Value(a)
 
Nine Months Ended September 29,
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 nine months of 2013. Fair value was determined primarily using a market approach, with various inputs, such as recent sales transactions.


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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 29,
2013

 
September 30,
2012

 
September 29,
2013

 
September 30,
2012

Interest income(a)
 
$
(94
)
 
$
(109
)
 
$
(291
)
 
$
(275
)
Interest expense(a)
 
340

 
381

 
1,067

 
1,149

Net interest expense
 
246

 
272

 
776

 
874

Royalty-related income
 
(122
)
 
(149
)
 
(305
)
 
(343
)
Patent litigation settlement income(b)
 
9

 
—

 
(1,342
)
 
—

Other legal matters, net(c)
 
1

 
727

 
(94
)
 
2,014

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

 
—

 
(459
)
 
—

Net gain on asset disposals
 
(46
)
 
(21
)
 
(100
)
 
(45
)
Certain asset impairments and related charges(e)
 
443

 
14

 
968

 
524

Costs associated with the Zoetis IPO(f)
 
—

 
32

 
18

 
93

Other, net(g)
 
(120
)
 
62

 
24

 
147

Other (income)/deductions––net
 
$
411

 
$
937

 
$
(514
)
 
$
3,264

(a) 
Interest income decreased in the third quarter of 2013 as portfolio maturities were invested at lower rates; however, during the first nine months of 2013, interest income increased due to higher cash and investment balances. Interest expense decreased in the third quarter and first nine months of 2013 due to lower outstanding debt, refinancings and lower rates, and the benefit of the conversion of some fixed-rate liabilities to floating-rate liabilities.
(b) 
In the first nine months of 2013, reflects income from a litigation settlement with Teva Pharmaceutical Industries Ltd. (Teva) and Sun Pharmaceutical Industries Ltd. (Sun) for patent-infringement damages resulting from their "at-risk" launches of generic Protonix in the United States. As of September 29, 2013, the remaining receivables from Teva are included in Taxes and other current assets ($474 million) and Taxes and other noncurrent assets ($128 million). For additional information, see Note 12A5. Commitments and Contingencies: Legal Proceedings––Certain Matters Resolved During the First Nine Months of 2013.
(c) 
In the first nine months of 2013, primarily includes an $80 million insurance recovery related to a certain litigation matter. In the third quarter of 2012, primarily includes a $491 million charge relating to the resolution of an investigation by the U.S. Department of Justice (DOJ) into Wyeth's historical promotional practices in connection with Rapamune. In the first nine months of 2012, primarily includes the aforementioned $491 million charge related to Rapamune, a $450 million settlement of a lawsuit by Brigham Young University related to Celebrex, and charges for hormone-replacement therapy litigation. For additional information, see Note 12. Commitments and Contingencies.
(d) 
In the first nine months of 2013, represents the gain associated with the transfer of certain product rights to Hisun Pfizer, our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investments: Equity-Method Investments.
(e) 
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), as well as a loss of $223 million related to an option to acquire the remaining interest in Laboratório Teuto Brasileiro S.A. (Teuto), a 40%-owned generics company in Brazil (an equity-method investment). In addition, the third quarter of 2013 includes an impairment charge of approximately $32 million related to the aforementioned equity-method investment in Brazil.
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) $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. 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. The intangible asset impairment charges for the first nine months of 2013 are associated with the following: Specialty Care ($394 million), Established Products ($185 million), Worldwide Research and Development ($43 million), Primary Care ($38 million), and Consumer Healthcare ($14 million). In addition, the first nine months of 2013 include a loss of $223 million related to an option to acquire the remaining interest Teuto, a 40%-owned generics company in Brazil (an equity-method investment), an impairment charge of approximately $39 million for certain private company investments and an impairment charge of $32 million related to the aforementioned equity-method investment in Brazil, Teuto.
In the first nine months of 2012, includes intangible asset impairment charges of $457 million reflecting (i) $314 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) $98 million related to three developed technology

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

rights. 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. The impairment charges for the first nine months of 2012 are associated with the following: Worldwide Research and Development ($297 million); Consumer Healthcare ($45 million); Established Products ($44 million); Primary Care ($52 million) and Specialty Care ($19 million). In addition, the first nine months of 2012 includes charges of approximately $67 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 Investments: Divestitures.
(g) In the third quarter and first nine months of 2013, includes 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. For additional information, see Note 2A. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investments: Acquisitions.

The asset impairment charges included in Other (income)/deductions––net for the first nine 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 intangible assets that were impaired during the first nine months of 2013 in Other (income)/deductions––net:
 
 
Fair Value(a)
 
Nine Months Ended September 29,
2013

(MILLIONS OF DOLLARS)
 
Amount

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

 
$
—

 
$
—

 
$
564

 
$
394

Intangible assets––Brands(b)
 
1,499

 
—

 
—

 
1,499

 
109

Intangible assets––IPR&D(b)
 
220

 
—

 
—

 
220

 
171

Total
 
$
2,283

 
$
—

 
$
—

 
$
2,283

 
$
674

(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 nine 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 27.6% for the third quarter of 2013, compared to (6.5)% for the third quarter of 2012, and was 30.6% for the first nine months of 2013, compared to 17.7% for the first nine months of 2012.

The unfavorable change in the effective tax rate for both periods reflects favorable audit settlements in the third quarter and first nine months of 2012; specifically, (i) a tax benefit of approximately $1.1 billion (representing tax and interest) recorded in connection with a settlement with the U.S. Internal Revenue Service (IRS) related to audits for multiple tax years (2006-2008), as well as (ii) a tax benefit recorded for the resolution of foreign audits pertaining to multiple tax years.

In addition, the unfavorable comparison of the first nine months of 2013 to the first nine months of 2012 reflects, to a lesser extent, (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 non-deductibility of the loss on an option to acquire the remaining interest in Teuto, a 40%-owned generics company in Brazil, since we expect to retain the investment indefinitely, partially offset by (i) the extension of the U.S. R&D tax credit (resulting in the full-year benefit of the 2012 R&D tax credit and the year-to-date 2013 R&D tax credit being recorded in the first nine months of 2013) and (ii) the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business. For additional information about the patent litigation settlement income, see Note 12A5. Commitments and Contingencies: Legal Proceedings––Certain Matters Resolved

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the First Nine Months of 2013. For additional information about the transfer of certain product rights to our equity-method investment in China, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investments: Equity-Method Investments.

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. 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 Pharmaceuticals, Inc. (King), the audit for tax years 2009 and 2010 has been effectively settled in the third quarter of 2013. The 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 year for King and its subsidiaries is 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 (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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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

C. Taxes on Items of Other Comprehensive Loss

The following table provides the components of tax provision on Other comprehensive income/(loss):
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
September 30,
2012

 
September 29,
2013

 
September 30,
2012

 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments(a)
 
$
(2
)
 
$
(23
)
 
$
88

 
$
14

Unrealized holding gains on derivative financial instruments
 
205

 
137

 
152

 
80

Reclassification adjustments for realized gains
 
(132
)
 
(52
)
 
(43
)
 
(34
)
 
 
73

 
85

 
109

 
46

Unrealized holding gains/(losses) on available-for-sale securities
 
(16
)
 
4

 
32

 
17

Reclassification adjustments for realized (gains)/losses
 
(14
)
 
3

 
(19
)
 
8

 
 
(30
)
 
7

 
13

 
25

Benefit plans: actuarial gains/(losses), net
 
(1
)
 
(39
)
 
10

 
(157
)
Reclassification adjustments related to amortization
 
49

 
44

 
155

 
129

Reclassification adjustments related to curtailments/settlements, net
 
18

 
20

 
54

 
59

Foreign currency translation adjustments and other
 
(23
)
 
(12
)
 
35

 
5

 
 
43

 
13

 
254

 
36

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

 
(2
)
 
1

 
6

Reclassification adjustments related to amortization
 
(5
)
 
(7
)
 
(17
)
 
(21
)
Reclassification adjustments related to curtailments/settlements, net
 
—

 
(2
)
 
(4
)
 
(34
)
Other
 
1

 
2

 
(1
)
 
—

 
 
(4
)
 
(9
)
 
(21
)
 
(49
)
Tax provision on other comprehensive income/(loss)
 
$
80

 
$
73

 
$
443

 
$
72

(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 nine 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 Investments: Divestitures.

The change in Treasury stock in the first nine months of 2013 reflects, among other things, an increase of approximately $11.6 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 Investments: 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)
 
(920
)
 
163

 
(116
)
 
477

 
(34
)
 
(430
)
Balance, September 29, 2013
 
$
(1,097
)
 
$
75

 
$
47

 
$
(5,633
)
 
$
225

 
$
(6,383
)
(a) 
Amounts do not include foreign currency translation loss of $65 million attributable to noncontrolling interests for the first nine 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)
 
September 29,
2013

 
December 31,
2012

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
122

 
$
142

Available-for-sale debt securities(c)
 
42,534

 
32,584

Available-for-sale money market funds(d)
 
1,533

 
1,727

Available-for-sale equity securities, excluding money market funds(c)
 
379

 
263

Derivative financial instruments in receivable positions(e):
 
 

 
 

Interest rate swaps
 
495

 
1,036

Foreign currency swaps
 
524

 
194

Foreign currency forward-exchange contracts
 
143

 
152

 
 
45,730

 
36,098

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (f)
 
1,465

 
1,459

Private equity securities, carried at equity-method or at cost(f), (g)
 
2,250

 
1,239

 
 
3,715

 
2,698

Total selected financial assets
 
$
49,445

 
$
38,796

Financial liabilities measured at fair value on a recurring basis(a)
 
 
 
 
Derivative financial instruments in a liability position(h):
 
 
 
 
Interest rate swaps
 
$
200

 
$
33

Foreign currency swaps
 
188

 
428

Foreign currency forward-exchange contracts
 
208

 
243

 
 
596

 
704

Other financial liabilities(i)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(f)
 
4,738

 
6,424

Long-term debt, carried at historical proceeds, as adjusted(j), (k)
 
31,812

 
31,036

 
 
36,550

 
37,460

Total selected financial liabilities
 
$
37,146

 
$
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 $447 million as of September 29, 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 swaps with fair values of $14 million and foreign currency forward-exchange contracts with fair values of $65 million as of September 29, 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 September 29, 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 Investments: Equity-Method Investments.

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

(h) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $97 million and foreign currency forward-exchange contracts with fair values of $83 million as of September 29, 2013; and, foreign currency swaps with fair values of $129 million and foreign currency forward-exchange contracts with fair values of $141 million as of December 31, 2012.
(i) 
Some carrying amounts 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 $697 million as of September 29, 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 $36.4 billion as of September 29, 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)
 
September 29,
2013

 
December 31,
2012

Assets
 
 
 
 
Cash and cash equivalents
 
$
925

 
$
947

Short-term investments
 
31,627

 
22,318

Long-term investments
 
15,731

 
14,149

Taxes and other current assets(a)
 
200

 
296

Taxes and other noncurrent assets(b)
 
962

 
1,086

 
 
$
49,445

 
$
38,796

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
4,738

 
$
6,424

Other current liabilities(c)
 
222

 
330

Long-term debt
 
31,812

 
31,036

Other noncurrent liabilities(d)
 
374

 
374

 
 
$
37,146

 
$
38,164

(a) 
As of September 29, 2013, derivative instruments at fair value include interest rate swaps ($35 million), foreign currency swaps ($22 million) and foreign currency forward-exchange contracts ($143 million) and, as of December 31, 2012, include foreign currency swaps ($144 million) and foreign currency forward-exchange contracts ($152 million).
(b) 
As of September 29, 2013, derivative instruments at fair value include interest rate swaps ($460 million) and foreign currency swaps ($502 million) and, as of December 31, 2012, include interest rate swaps ($1.0 billion) and foreign currency swaps ($50 million).
(c) 
As of September 29, 2013, derivative instruments at fair value include foreign currency swaps ($14 million) and foreign currency forward-exchange contracts ($208 million) and, as of December 31, 2012, include foreign currency swaps ($87 million) and foreign currency forward-exchange contracts ($243 million).
(d) 
As of September 29, 2013, derivative instruments at fair value include interest rate swaps ($200 million) and foreign currency swaps ($174 million) and, as of December 31, 2012, include interest rate swaps ($33 million) and foreign currency swaps ($341 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 September 29, 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

 
 
 
September 29,
2013

(MILLIONS OF DOLLARS)
 
Within 1

 
to 5

 
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Western European, Scandinavian and other government debt(a)
 
$
20,409

 
$
2,225

 
$
—

 
$
—

 
$
22,634

Corporate debt(b)
 
2,152

 
4,479

 
1,097

 
348

 
8,076

Western European, Scandinavian and other government agency debt(a)
 
2,955

 
440

 
—

 
—

 
3,395

Reverse repurchase agreements(c)
 
2,270

 
—

 
—

 
—

 
2,270

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
663

 
873

 
11

 
524

 
2,071

Supranational debt(a)
 
1,086

 
919

 
—

 
—

 
2,005

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

 
1,668

 
—

 
16

 
1,684

U.S. government debt
 
77

 
273

 
49

 
—

 
399

Held-to-maturity debt securities
 
 

 
 

 
 
 
 

 
 

Certificates of deposit and other
 
1,398

 
67

 
—

 
—

 
1,465

Total debt securities
 
$
31,010

 
$
10,944

 
$
1,157

 
$
888

 
$
43,999

(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. and U.K. government securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $1.3 billion and $2.7 billion as of September 29, 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
September 29,

(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


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

(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.
(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 September 29, 2013:
(MILLIONS OF DOLLARS)
 
2014

 
2015

 
2016

 
2017

 
After 2017

 
Total

Maturities
 
$
1,259

 
$
3,026

 
$
4,439

 
$
2,653

 
$
20,435

 
$
31,812


E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of September 29, 2013, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $41.7 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 29, 2013, the aggregate notional amount of interest rate derivative financial instruments is $16.5 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 OCI
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
Sep 29,
2013

 
Sep 30,
2012

 
Sep 29,
2013

 
Sep 30,
2012

 
Sep 29,
2013

 
Sep 30,
2012

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

 
$
—

 
$
489

 
$
455

 
$
313

 
$
221

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
—

 
—

 
(2
)
 
(40
)
 
—

 
—

Foreign currency forward-exchange contracts
 
(4
)
 
—

 
(1
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(81
)
 
(201
)
 
—

 
—

 
—

 
—

Foreign currency swaps
 
(15
)
 
10

 
—

 
—

 
—

 
—