PFE - 6/28/2015 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

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

For the quarterly period ended June 28, 2015

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 3, 2015, 6,167,347,758 shares of the issuer’s voting common stock were outstanding.


Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three and six months ended June 28, 2015 and June 29, 2014
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 28, 2015 and
June 29, 2014
 
 
Condensed Consolidated Balance Sheets as of June 28, 2015 and December 31, 2014
 
 
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 28, 2015 and June 29, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

Revenues
 
$
11,853

 
$
12,773

 
$
22,717

 
$
24,126

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales(a)
 
2,180

 
2,462

 
4,018

 
4,507

Selling, informational and administrative expenses(a)
 
3,386

 
3,520

 
6,491

 
6,560

Research and development expenses(a)
 
1,734

 
1,759

 
3,620

 
3,382

Amortization of intangible assets
 
872

 
1,001

 
1,811

 
2,118

Restructuring charges and certain acquisition-related costs
 
86

 
81

 
146

 
139

Other (income)/deductions––net
 
55

 
(53
)
 
9

 
570

Income from continuing operations before provision for taxes on income
 
3,539

 
4,003

 
6,621

 
6,850

Provision for taxes on income
 
905

 
1,082

 
1,610

 
1,664

Income from continuing operations
 
2,635

 
2,921

 
5,011

 
5,186

Discontinued operations––net of tax
 
1

 
—

 
6

 
73

Net income before allocation to noncontrolling interests
 
2,635

 
2,921

 
5,017

 
5,259

Less: Net income attributable to noncontrolling interests
 
9

 
9

 
14

 
18

Net income attributable to Pfizer Inc.
 
$
2,626

 
$
2,912

 
$
5,002

 
$
5,241

 
 
 
 
 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.43

 
$
0.46

 
$
0.81

 
$
0.81

Discontinued operations––net of tax
 
—

 
—

 
—

 
0.01

Net income attributable to Pfizer Inc. common shareholders
 
$
0.43

 
$
0.46

 
$
0.81

 
$
0.82

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

 
 

 
 

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

 
$
0.45

 
$
0.80

 
$
0.80

Discontinued operations––net of tax
 
—

 
—

 
—

 
0.01

Net income attributable to Pfizer Inc. common shareholders
 
$
0.42

 
$
0.45

 
$
0.80

 
$
0.81

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
6,159

 
6,368

 
6,181

 
6,379

Weighted-average shares––diluted
 
6,243

 
6,444

 
6,267

 
6,460

Cash dividends paid per common share
 
$
0.28

 
$
0.26

 
$
0.56

 
$
0.52

(a) 
Excludes amortization of intangible assets, except as disclosed in Note 9A. Identifiable Intangible Assets and Goodwill:Identifiable Intangible Assets.
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

3

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

Net income before allocation to noncontrolling interests
 
$
2,635

 
$
2,921

 
$
5,017

 
$
5,259

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments, net
 
$
(327
)
 
$
233

 
$
(1,635
)
 
$
158

Reclassification adjustments(a)
 
—

 
—

 
—

 
(62
)
 
 
(327
)
 
233

 
(1,635
)
 
96

Unrealized holding gains/(losses) on derivative financial instruments, net
 
452

 
1

 
137

 
(57
)
Reclassification adjustments for realized (gains)/losses(b)
 
(743
)
 
74

 
(510
)
 
86

 
 
(291
)
 
75

 
(373
)
 
29

Unrealized holding gains/(losses) on available-for-sale securities, net
 
(200
)
 
(15
)
 
(527
)
 
93

Reclassification adjustments for realized (gains)/losses(b)
 
498

 
(79
)
 
745

 
(178
)
 
 
299

 
(94
)
 
218

 
(85
)
Benefit plans: actuarial gains/(losses), net
 
(9
)
 
(11
)
 
22

 
(5
)
Reclassification adjustments related to amortization(c)
 
134

 
49

 
269

 
98

Reclassification adjustments related to settlements, net(c)
 
22

 
18

 
62

 
39

Other
 
(29
)
 
(9
)
 
130

 
(26
)
 
 
118

 
47

 
483

 
106

Benefit plans: prior service credits and other, net
 
507

 
—

 
506

 
—

Reclassification adjustments related to amortization(c)
 
(34
)
 
(18
)
 
(69
)
 
(36
)
Reclassification adjustments related to curtailments, net(c)
 
(7
)
 
15

 
(17
)
 
11

Other
 
(2
)
 
—

 
(2
)
 
(1
)
 
 
464

 
(3
)
 
418

 
(26
)
Other comprehensive income/(loss), before tax
 
263

 
258

 
(890
)
 
120

Tax provision/(benefit) on other comprehensive income/(loss)(d)
 
228

 
5

 
332

 
(12
)
Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
35

 
$
253

 
$
(1,222
)
 
$
132

 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
2,670

 
$
3,174

 
$
3,795

 
$
5,391

Less: Comprehensive income/(loss) attributable to noncontrolling interests
 
8

 
24

 
(3
)
 
31

Comprehensive income attributable to Pfizer Inc.
 
$
2,663

 
$
3,150

 
$
3,797

 
$
5,360

(a) 
Reclassified into Discontinued operations—net of tax in the condensed consolidated statements of income.
(b) 
Reclassified into Other (income)/deductions—net in the condensed consolidated statements of income.
(c) 
Generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated statements of income. For additional information, see Note 10. Pension and Postretirement Benefit Plans.
(d) 
See Note 5C. Tax Matters: Tax Provision/(Benefit) on Other Comprehensive Income/(Loss).
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

4

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
December 31,
2014

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
3,670

 
$
3,343

Short-term investments
 
26,586

 
32,779

Trade accounts receivable, less allowance for doubtful accounts: 2015—$397; 2014—$412
 
8,951

 
8,401

Inventories
 
5,796

 
5,663

Current deferred tax assets and other current tax assets
 
4,263

 
4,498

Other current assets
 
2,449

 
3,019

Total current assets
 
51,715

 
57,702

Long-term investments
 
17,650

 
17,518

Property, plant and equipment, less accumulated depreciation
 
11,432

 
11,762

Identifiable intangible assets, less accumulated amortization
 
33,424

 
35,166

Goodwill
 
41,571

 
42,069

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,450

 
1,544

Other noncurrent assets
 
3,635

 
3,513

Total assets
 
$
160,878

 
$
169,274

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
8,394

 
$
5,141

Trade accounts payable
 
2,930

 
3,210

Dividends payable
 
1,726

 
1,711

Income taxes payable
 
1,057

 
531

Accrued compensation and related items
 
1,646

 
1,841

Other current liabilities
 
8,390

 
9,197

Total current liabilities
 
24,143

 
21,631

 
 
 
 
 
Long-term debt
 
26,729

 
31,541

Pension benefit obligations, net
 
6,529

 
7,885

Postretirement benefit obligations, net
 
1,969

 
2,379

Noncurrent deferred tax liabilities
 
24,659

 
24,981

Other taxes payable
 
4,359

 
4,353

Other noncurrent liabilities
 
5,310

 
4,883

Total liabilities
 
93,698

 
97,652

 
 
 
 
 
 
 
 
 
 
Preferred stock
 
28

 
29

Common stock
 
458

 
455

Additional paid-in capital
 
80,407

 
78,977

Treasury stock
 
(79,098
)
 
(73,021
)
Retained earnings
 
73,620

 
72,176

Accumulated other comprehensive loss
 
(8,521
)
 
(7,316
)
Total Pfizer Inc. shareholders’ equity
 
66,894

 
71,301

Equity attributable to noncontrolling interests
 
286

 
321

Total equity
 
67,180

 
71,622

Total liabilities and equity
 
$
160,878

 
$
169,274

Amounts may not add due to rounding.

See Notes to Condensed Consolidated Financial Statements.

5

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
June 29,
2014

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
5,017

 
$
5,259

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

 
 

Depreciation and amortization
 
2,461

 
2,880

Asset write-offs and impairments
 
42

 
189

Adjustment to gain on disposal of discontinued operations
 
—

 
(66
)
Deferred taxes from continuing operations
 
(183
)
 
853

Deferred taxes from discontinued operations
 
—

 
(2
)
Share-based compensation expense
 
347

 
281

Benefit plan contributions in excess of expense
 
(842
)
 
(124
)
Other adjustments, net
 
(194
)
 
(299
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(1,873
)
 
(1,949
)
Net cash provided by operating activities
 
4,775

 
7,022

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(497
)
 
(570
)
Purchases of short-term investments
 
(16,029
)
 
(21,081
)
Proceeds from redemptions/sales of short-term investments
 
20,483

 
20,795

Net proceeds from redemptions/sales of short-term investments with original maturities of 90 days or less
 
3,020

 
1,399

Purchases of long-term investments
 
(5,422
)
 
(5,327
)
Proceeds from redemptions/sales of long-term investments
 
3,291

 
2,947

Acquisitions of businesses, net of cash acquired
 
(679
)
 
—

Acquisitions of intangible assets
 
(12
)
 
(56
)
Other investing activities, net
 
333

 
288

Net cash provided by/(used in) investing activities
 
4,487

 
(1,605
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
2,022

 
1

Principal payments on short-term borrowings
 
(10
)
 
(7
)
Net proceeds from/(payments on) short-term borrowings with original maturities of 90 days or less
 
481

 
(2,692
)
Proceeds from issuance of long-term debt
 
—

 
4,491

Principal payments on long-term debt
 
(3,002
)
 
(752
)
Purchases of common stock
 
(6,000
)
 
(2,520
)
Cash dividends paid
 
(3,483
)
 
(3,320
)
Proceeds from exercise of stock options
 
981

 
583

Other financing activities, net
 
154

 
43

Net cash used in financing activities
 
(8,857
)
 
(4,173
)
Effect of exchange-rate changes on cash and cash equivalents
 
(78
)
 
(21
)
Net increase in cash and cash equivalents
 
327

 
1,223

Cash and cash equivalents, beginning
 
3,343

 
2,183

Cash and cash equivalents, end
 
$
3,670

 
$
3,406

 
 
 

 
 

Supplemental Cash Flow Information
 
 
 
 
Cash paid during the period for:
 
 

 
 

Income taxes
 
$
1,124

 
$
1,068

Interest
 
914

 
996

Amounts may not add due to rounding.

See Notes to Condensed Consolidated Financial Statements.

6

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


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the United States (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 24, 2015 and May 25, 2014.

In the condensed consolidated balance sheet as of December 31, 2014, we performed certain reclassifications to conform to current period presentation, none of which were material to our financial statements.

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to Pfizer Inc. and its subsidiaries.

On February 5, 2015, we announced that we entered into a definitive merger agreement under which we agreed to acquire Hospira, Inc. (Hospira), the world’s leading provider of injectable drugs and infusion technologies and a global leader in biosimilars, for $90 per share in cash, for a total enterprise value of approximately $17 billion. We expect to finance the transaction through a combination of existing cash and new debt, with approximately two-thirds of the value financed from cash and one-third from debt. The transaction is subject to customary closing conditions, including regulatory approvals in several jurisdictions, and is expected to close in the second half of 2015. On May 13, 2015, Hospira shareholders voted in favor of the proposal to adopt the merger agreement, which was also a condition to closing the transaction. On August 4, 2015, the European Commission approved the transaction under the European Union (EU) Merger Regulation. The European Commission’s decision includes our commitment to divest certain assets in the EU.

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 2014 Annual Report on Form 10-K.

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

B. Adoption of New Accounting Standard

We adopted a new accounting and disclosure standard as of January 1, 2015 that limits the presentation of discontinued operations to when the disposal of the business operation represents a strategic shift that has had or will have a major effect on our operations and financial results. This new standard is applied prospectively to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. We did not have any disposals within the scope of this new standard and, therefore, there were no impacts to our condensed consolidated financial statements.

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 inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs).
•
Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.

7

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

Note 2. Acquisition, Collaborative Arrangements, Equity-Method Investment and Cost-Method Investment

A. Acquisition

Marketed Vaccines Business of Baxter International Inc. (Baxter)
On December 1, 2014 (which falls in the first fiscal quarter of 2015 for our international operations), we completed the acquisition of Baxter’s portfolio of marketed vaccines for a final purchase price of $648 million. The portfolio that was acquired consists of NeisVac-C and FSME-IMMUN/TicoVac. NeisVac-C is a vaccine that helps protect against meningitis caused by group C meningococcal meningitis and FSME-IMMUN/TicoVac is a vaccine that helps protect against tick-borne encephalitis. In connection with this acquisition, we recorded $376 million in Identifiable intangible assets, primarily consisting of $371 million in Developed technology rights. We also recorded $194 million of Inventories and $12 million in Goodwill. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.

B. Collaborative Arrangements

Collaboration with Eli Lilly & Company (Lilly)

In October 2013, we entered into a collaboration agreement with Lilly to jointly develop and globally commercialize Pfizer’s tanezumab, which provides that Pfizer and Lilly will equally share product-development expenses as well as potential revenues and certain product-related costs. On March 23, 2015, Pfizer and Lilly announced that the companies are preparing to resume the Phase 3 clinical program for tanezumab. As a result, on March 27, 2015, we received a $200 million upfront payment from Lilly in accordance with the collaboration agreement between Pfizer and Lilly, which is recorded as deferred income in our condensed consolidated balance sheet and is being recognized into Other (income)/deductions––net over a multi-year period beginning in the second quarter of 2015. This announcement followed a decision by the U.S. Food and Drug Administration (FDA) to lift the partial clinical hold on the tanezumab development program after a review of nonclinical data characterizing the sympathetic nervous system response to tanezumab. Under the collaboration agreement with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.

Collaboration with OPKO Health, Inc. (OPKO)
On December 13, 2014, we entered into a collaborative agreement with OPKO to develop and commercialize OPKO’s long-acting human growth hormone (hGH-CTP) for the treatment of growth hormone deficiency (GHD) in adults and children, as well as for the treatment of growth failure in children born small for gestational age (SGA) who fail to show catch-up growth by two years of age. hGH-CTP has the potential to reduce the required dosing frequency of human growth hormone to a single weekly injection from the current standard of one injection per day. We have received the exclusive license to commercialize hGH-CTP worldwide. OPKO will lead the clinical activities and will be responsible for funding the development programs for the key indications, which include Adult and Pediatric GHD and Pediatric SGA. We will be responsible for all development costs for additional indications, all postmarketing studies, manufacturing and commercialization activities for all indications, and we will lead the manufacturing activities related to product development. The transaction closed on January 28, 2015, upon termination of the waiting period under the Hart-Scott-Rodino Act. In February 2015, we made an upfront payment of $295 million to OPKO, which was recorded in Research and development expenses, and OPKO is eligible to receive up to an additional $275 million upon the achievement of certain regulatory milestones. OPKO is also eligible to receive royalty payments associated with the commercialization of hGH-CTP for Adult GHD, which is subject to regulatory approval. Upon the launch of hGH-CTP for Pediatric GHD, which is subject to regulatory approval, the royalties will transition to tiered gross profit sharing for both hGH-CTP and our product, Genotropin.

C. Equity-Method Investment

Investment in ViiV Healthcare Limited (ViiV)
Our minority ownership interest in ViiV, a company formed in 2009 by Pfizer and GlaxoSmithKline plc (GSK) to focus solely on research, development and commercialization of human immunodeficiency virus (HIV) medicines, was impacted by the January 21, 2014 European Commission approval of Tivicay (dolutegravir), a product for the treatment of HIV-1 infection, developed by ViiV. This approval triggered a reduction in our equity interest in ViiV from 12.6% to 11.7%, effective April 1, 2014. As a result, in the first six months of 2014, we recognized a loss of approximately $28 million in Other (income)/deductions––net.


8

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

D. Cost-Method Investment

AM-Pharma B.V. (AM-Pharma)

On April 9, 2015, we acquired a minority equity interest in AM-Pharma, a privately held Dutch biopharmaceutical company focused on the development of recombinant human Alkaline Phosphatase (recAP) for inflammatory diseases, and secured an exclusive option to acquire the remaining equity in the company. The option becomes exercisable upon delivery of the clinical trial report after completion of a Phase II trial of recAP in the treatment of Acute Kidney Injury related to sepsis. Results from the current Phase II trial for recAP are expected in the second half of 2016. Under the terms of the agreement, we paid $87.5 million for both the exclusive option and the minority equity interest, which was recorded as a cost-method investment in Long-term investments, and we may make additional payments of up to $512.5 million upon exercise of the option and potential launch of any product that may result from this investment.
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 (R&D), as well as groups such as information technology, shared services and corporate operations.

In early 2014, we announced that we would be incurring costs in 2014-2016 related to new programs: our new global commercial structure reorganization and additional cost-reduction/productivity initiatives.

We have the following initiatives underway:
•
Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of five sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $300 million associated with prior acquisition activity and costs of approximately $1.3 billion associated with new non-acquisition-related cost-reduction initiatives. Through June 28, 2015, we incurred approximately $252 million and $340 million, respectively, associated with these initiatives.
•
New global commercial structure reorganization, which primarily includes the streamlining of certain functions, the realignment of regional locations and colleagues to support the businesses, as well as implementing the necessary system changes to support future reporting requirements. In connection with this reorganization, during 2014-2016, we expect to incur costs of approximately $300 million. Through June 28, 2015, we incurred approximately $191 million associated with this reorganization.
•
Other new cost-reduction/productivity initiatives, primarily related to commercial property rationalization and consolidation. In connection with these cost-reduction activities, during 2014-2016, we expect to incur costs of approximately $900 million. Through June 28, 2015, we incurred approximately $263 million associated with these initiatives.
The costs expected to be incurred during 2014-2016, of approximately $2.8 billion in total, include restructuring charges, integration costs, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about a quarter of the charges will be non-cash.

Current-Period Key Activities

In the first six months of 2015, we incurred approximately $280 million in cost-reduction and acquisition-related costs (excluding transaction costs) in connection with the aforementioned programs, primarily associated with our manufacturing and sales operations.

9

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

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
34

 
$
17

 
$
65

 
$
47

Asset impairments
 
5

 
13

 
11

 
19

Exit costs
 
4

 
36

 
10

 
40

Total restructuring charges
 
43

 
66

 
85

 
106

Transaction costs(b)
 
1

 
—

 
6

 
—

Pre-integration/integration costs(c)
 
42

 
15

 
54

 
33

Restructuring charges and certain acquisition-related costs
 
86

 
81

 
146

 
139

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

 
 

 
 

 
 

Cost of sales
 
28

 
72

 
45

 
146

Selling, informational and administrative expenses
 
—

 
1

 
—

 
1

Research and development expenses
 
1

 
29

 
2

 
29

Total additional depreciation––asset restructuring
 
28

 
102

 
47

 
176

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

 
 

 
 

 
 

Cost of sales
 
28

 
22

 
41

 
28

Selling, informational and administrative expenses
 
13

 
38

 
39

 
53

Research and development expenses
 
3

 
16

 
12

 
27

Other (income)/deductions––net
 
1

 
—

 
1

 
—

Total implementation costs
 
45

 
76

 
93

 
108

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
159

 
$
259

 
$
286

 
$
423

(a) 
In the six months ended June 28, 2015, Employee terminations represent the expected reduction of the workforce by approximately 500 employees, mainly in sales.
The restructuring charges for 2015 are associated with the following:
•
For the second quarter of 2015, the Global Innovative Pharmaceutical segment (GIP) ($7 million); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($14 million); the Global Established Pharmaceutical segment (GEP) ($2 million income); Worldwide Research and Development and Medical (WRD/M) ($4 million); manufacturing operations ($14 million); and Corporate ($6 million).
•
For the first six months of 2015, GIP ($19 million); VOC ($27 million); GEP ($8 million); WRD/M ($16 million); manufacturing operations ($8 million income); and Corporate ($24 million).
The restructuring charges for 2014 are associated with the following:
•
For the second quarter of 2014, GIP ($9 million); VOC ($6 million); GEP ($24 million); WRD/M ($8 million); manufacturing operations ($12 million); and Corporate ($7 million).
•
For the first six months of 2014, GIP ($11 million); VOC ($6 million); GEP ($31 million); WRD/M ($9 million); manufacturing operations ($38 million); and Corporate ($11 million).
(b) 
Transaction costs represent external costs directly related to acquired businesses and primarily include expenditures for banking, legal, accounting and other similar services.
(c) 
Pre-integration costs represent external, incremental costs directly related to our pending acquisition with Hospira. 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.
(d) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(e) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.

10

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

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

 
Asset
Impairment
Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2014(a)
 
$
1,114

 
$
—

 
$
52

 
$
1,166

Provision
 
65

 
11

 
10

 
85

Utilization and other(b)
 
(197
)
 
(11
)
 
(36
)
 
(244
)
Balance, June 28, 2015(c)
 
$
982

 
$
—

 
$
26

 
$
1,008

(a) 
Included in Other current liabilities ($735 million) and Other noncurrent liabilities ($431 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($575 million) and Other noncurrent liabilities ($433 million).

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

Interest income(a)
 
$
(119
)
 
$
(104
)
 
$
(211
)
 
$
(196
)
Interest expense(a)
 
278

 
343

 
587

 
664

Net interest expense
 
159

 
239

 
375

 
468

Royalty-related income
 
(257
)
 
(239
)
 
(479
)
 
(487
)
Certain legal matters, net(b)
 
99

 
(2
)
 
99

 
692

Net gains on asset disposals(c)
 
(19
)
 
(33
)
 
(195
)
 
(214
)
Certain asset impairments(d)
 
25

 
—

 
25

 
115

Business and legal entity alignment costs(e)
 
63

 
39

 
164

 
67

Other, net
 
(15
)
 
(57
)
 
20

 
(71
)
Other (income)/deductions––net
 
$
55

 
$
(53
)
 
$
9

 
$
570

(a) 
Interest income increased in the second quarter and first six months of 2015, primarily due to higher investment returns. Interest expense decreased in the second quarter and first six months of 2015, primarily due to lower interest rates on new fixed rate debt added in the second quarter of 2014, the repayment of some long-term debt in the first quarter of 2015 and the benefit of the effective conversion of some fixed-rate liabilities to floating-rate liabilities.
(b) 
In the first six months of 2014, primarily includes approximately $620 million for Neurontin-related matters (including off-label promotion actions and antitrust actions) and approximately $55 million for an Effexor-related matter.
(c) 
In the first six months of 2015, primarily includes gains on sales/out-licensing of product and compound rights (approximately $69 million) and gains on sales of investments in equity securities (approximately $125 million). In the first six months of 2014, primarily includes gains on sales/out-licensing of product and compound rights (approximately $96 million) and gains on sales of investments in equity securities (approximately $98 million).
(d) 
In the first six months of 2014, includes intangible asset impairment charges of $114 million, virtually all of which relates to an in-process research and development (IPR&D) compound for the treatment of skin fibrosis. The intangible asset impairment charge for the first six months of 2014 is associated with Worldwide Research and Development and reflects, among other things, the impact of changes to the development program.
(e) 
In the second quarter and first six months of 2015 and 2014, represents expenses for planning and implementing changes to our infrastructure to align our operations and reporting for our business segments established in 2014.

Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was 25.6% for the second quarter of 2015, compared to 27.0% for the second quarter of 2014, and was 24.3% for both the first six months of 2015 and the first six months of 2014.
The lower effective tax rate for the second quarter of 2015 in comparison with the same period in 2014 was primarily due to:
•
the favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business,

11

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

partially offset by:
•
a decline in tax benefits associated with the resolution of certain tax positions pertaining to prior years, with various foreign tax authorities, and the expiration of certain statutes of limitations.
The effective tax rate for the first six months of 2015 was comparable to the first six months of 2014, primarily reflecting:
•
the favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business,
offset by:
•
a decline in tax benefits associated with the resolution of certain tax positions pertaining to prior years, primarily with various foreign tax authorities, and the expiration of certain statutes of limitations.

B. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.
The U.S. 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., the IRS has issued a Revenue Agent’s Report (RAR) for tax years 2009-2010. We are not in agreement with the RAR and are currently assessing the procedural options; it is likely that Pfizer will appeal certain disputed issues. Tax years 2011-2013 are currently under audit. Tax years 2014 and 2015 are open, but not under audit. All other tax years are closed.
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2004-2015), Japan (2013-2015), Europe (2007-2015, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2015, primarily reflecting Brazil) and Puerto Rico (2010-2015).

12

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

C. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)
The following table provides the components of Tax provision/(benefit) on other comprehensive income/(loss):
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net(a)
 
$
12

 
$
(3
)
 
$
97

 
$
(10
)
Unrealized holding gains/(losses) on derivative financial instruments, net
 
120

 
1

 
(103
)
 
(16
)
Reclassification adjustments for realized (gains)/losses
 
(155
)
 
9

 
28

 
8

 
 
(34
)
 
10

 
(75
)
 
(8
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
(37
)
 
(4
)
 
(69
)
 
23

Reclassification adjustments for realized (gains)/losses
 
63

 
(11
)
 
62

 
(40
)
 
 
25

 
(15
)
 
(7
)
 
(17
)
Benefit plans: actuarial gains/(losses), net
 
(4
)
 
(3
)
 
8

 
(2
)
Reclassification adjustments related to amortization
 
45

 
16

 
90

 
32

Reclassification adjustments related to settlements, net
 
8

 
7

 
23

 
15

Other
 
1

 
5

 
38

 
(7
)
 
 
49

 
25

 
159

 
38

Benefit plans: prior service credits and other, net
 
192

 
—

 
191

 
—

Reclassification adjustments related to amortization
 
7

 
(7
)
 
(6
)
 
(14
)
Reclassification adjustments related to curtailments, net
 
(22
)
 
2

 
(26
)
 
1

Other
 
(1
)
 
(7
)
 
(1
)
 
(2
)
 
 
176

 
(12
)
 
159

 
(15
)
Tax provision/(benefit) on other comprehensive income/(loss)
 
$
228

 
$
5

 
$
332

 
$
(12
)
(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
 
 
Net Unrealized Gains/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Foreign Currency Translation Adjustments

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/Credits and Other

 
Accumulated Other Comprehensive Loss

Balance, December 31, 2014
 
$
(2,689
)
 
$
517

 
$
(222
)
 
$
(5,654
)
 
$
733

 
$
(7,316
)
Other comprehensive income/(loss)(a)
 
(1,715
)
 
(298
)
 
225

 
324

 
259

 
(1,205
)
Balance, June 28, 2015
 
$
(4,404
)
 
$
219

 
$
3

 
$
(5,330
)
 
$
992

 
$
(8,521
)
(a) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $17 million loss for the first six months of 2015.

As of June 28, 2015, with respect to derivative financial instruments, the amount of unrealized pre-tax gains estimated to be reclassified into income within the next 12 months is $128 million (which is expected to be offset primarily by losses resulting from reclassification adjustments related to available-for-sale securities).

13

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 28,
2015

 
December 31,
2014

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading funds and securities(b)
 
$
297

 
$
105

Available-for-sale debt securities(c)
 
40,150

 
39,762

Available-for-sale money market funds
 
894

 
2,174

Available-for-sale equity securities, excluding money market funds(c)
 
344

 
397

Derivative financial instruments in a receivable position(d):
 
 

 
 

Interest rate swaps
 
668

 
801

Foreign currency swaps
 
611

 
593

Foreign currency forward-exchange contracts
 
317

 
547

 
 
43,282

 
44,379

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
2,133

 
7,255

Private equity securities, carried at equity-method or at cost(e), (f)
 
1,829

 
1,993

 
 
3,962

 
9,248

Total selected financial assets
 
$
47,244

 
$
53,627

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

 
 

Derivative financial instruments in a liability position(g):
 
 

 
 

Interest rate swaps
 
$
380

 
$
17

Foreign currency swaps
 
1,327

 
594

Foreign currency forward-exchange contracts
 
266

 
78

 
 
1,973

 
689

Other selected financial liabilities(h)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(e)
 
8,394

 
5,141

Long-term debt, carried at historical proceeds, as adjusted(i), (j)
 
26,729

 
31,541

 
 
35,123

 
36,682

Total selected financial liabilities
 
$
37,095

 
$
37,371

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see Note 1C. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 1% that use Level 1 inputs.
(b) 
As of June 28, 2015, trading funds and securities are composed of $90 million of trading equity funds, $120 million of trading debt funds, and $86 million of trading equity securities. As of December 31, 2014, trading securities of $105 million is composed of debt and equity securities. The trading equity securities as of June 28, 2015 and the trading debt and equity securities as of December 31, 2014 are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $76 million as of June 28, 2015; and foreign currency forward-exchange contracts with fair values of $159 million as of December 31, 2014.
(e) 
Short-term borrowings includes foreign currency short-term borrowings with fair values of $536 million as of June 28, 2015, which are used as hedging instruments. 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 28, 2015 or December 31, 2014. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs, using a market approach. The fair value measurements of our private equity securities carried at cost are based on Level 3 inputs.
(f) 
Our private equity securities represent investments in the life sciences sector.
(g) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $208 million and foreign currency forward-exchange contracts with fair values of $95 million as of June 28, 2015; and foreign currency swaps with fair values of $121 million and foreign currency forward-exchange contracts with fair values of $54 million as of December 31, 2014.
(h) 
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of hedging the interest rate fair value risk associated with certain financial liabilities by interest rate swaps.
(i) 
Includes foreign currency debt with fair value of $560 million as of December 31, 2014, which are used as hedging instruments.
(j) 
The fair value of our long-term debt (not including the current portion of long-term debt) was $30.8 billion as of June 28, 2015 and $36.6 billion as of December 31, 2014. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach. Generally, the difference between the fair value of our long-term debt and the amount reported on the condensed consolidated balance sheet is due to a decline in relative market interest rates since the debt issuance.

14

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

The following table provides the classification of these selected financial assets and liabilities in our condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
December 31,
2014

Assets
 
 
 
 
Cash and cash equivalents
 
$
1,412

 
$
1,389

Short-term investments
 
26,586

 
32,779

Long-term investments
 
17,650

 
17,518

Other current assets(a)
 
831

 
1,059

Other noncurrent assets(b)
 
765

 
881

 
 
$
47,244

 
$
53,627

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
8,394

 
$
5,141

Other current liabilities(c)
 
858

 
93

Long-term debt
 
26,729

 
31,541

Other noncurrent liabilities(d)
 
1,114

 
596

 
 
$
37,095

 
$
37,371

(a) 
As of June 28, 2015, derivative instruments at fair value include interest rate swaps ($16 million), foreign currency swaps ($520 million) and foreign currency forward-exchange contracts ($294 million) and, as of December 31, 2014, include interest rate swaps ($34 million), foreign currency swaps ($494 million) and foreign currency forward-exchange contracts ($531 million).
(b) 
As of June 28, 2015, derivative instruments at fair value include interest rate swaps ($652 million), foreign currency swaps ($91 million) and foreign currency forward-exchange contracts ($23 million) and, as of December 31, 2014, include interest rate swaps ($767 million), foreign currency swaps ($99 million) and foreign currency forward-exchange contracts ($15 million).
(c) 
As of June 28, 2015, derivative instruments at fair value include interest rate swaps ($4 million), foreign currency swaps ($589 million) and foreign currency forward-exchange contracts ($265 million) and, as of December 31, 2014, include interest rate swaps ($1 million), foreign currency swaps ($13 million) and foreign currency forward-exchange contracts ($78 million).
(d) 
As of June 28, 2015, derivative instruments at fair value include interest rate swaps ($376 million), foreign currency swaps ($737 million) and foreign currency forward-exchange contracts ($1 million) and, as of December 31, 2014, include interest rate swaps ($16 million) and foreign currency swaps ($581 million).

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


15

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

B. Investments in Debt Securities
The following table provides the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
June 28,
2015

(MILLIONS OF DOLLARS)
 
Within 1

 
Over 1
to 5

 
Over 5
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Western European, Asian and other government debt(a)
 
$
13,586

 
$
2,063

 
$
—

 
$
—

 
$
15,649

Corporate debt(b)
 
4,405

 
4,662

 
2,008

 
43

 
11,118

Western European, Scandinavian and other government agency debt(a)
 
2,264

 
324

 
—

 
—

 
2,588

U.S. government debt
 
377

 
1,713

 
66

 
—

 
2,155

Supranational debt(a)
 
1,596

 
526

 
—

 
—

 
2,122

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 
15

 
2,033

 
51

 
—

 
2,100

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
189

 
721

 
—

 
—

 
910

Other asset-backed debt(c)
 
893

 
959

 
3

 
—

 
1,855

Reverse repurchase agreements(d)
 
1,652

 
—

 
—

 
—

 
1,652

Held-to-maturity debt securities
 
 
 
 
 
 

 
 
 
 

Time deposits, corporate debt and other(a)
 
1,623

 
6

 
—

 
—

 
1,629

Western European government debt(a)
 
504

 
—

 
—

 
—

 
504

Total debt securities
 
$
27,105

 
$
13,008

 
$
2,128

 
$
43

 
$
42,284

(a) 
Issued by governments, government agencies or supranational entities, as applicable, all of which are investment-grade.
(b) 
Issued by a diverse group of corporations, largely consisting of financial institutions, virtually all of which are investment-grade.
(c) 
Includes loan-backed, receivable-backed, and mortgage-backed securities, all of which are investment-grade and in senior positions in the capital structure of the security. Loan-backed securities are collateralized by senior secured obligations of a diverse pool of companies or student loans, and receivable-backed securities are collateralized by credit cards receivables. Mortgage-backed securities are collateralized by diversified pools of residential and commercial mortgages.
(d) 
Involving U.S. securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $3.6 billion as of June 28, 2015 and $570 million as of December 31, 2014.

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of June 28, 2015, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures was $36.1 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 June 28, 2015, the aggregate notional amount of interest rate derivative financial instruments was $20.9 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.


16

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

The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:
 
 
Amount of
Gains/(Losses)
Recognized in OID(a), (b), (c)
 
Amount of
Gains/(Losses)
Recognized in OCI
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

 
June 28,
2015

 
June 29,
2014

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

 
$
—

 
$
234

 
$
(3
)
 
$
240

 
$
2

Foreign currency forward-exchange contracts
 
—

 
—

 
204

 
4

 
502

 
(76
)
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 
—

 
—

 
—

 
(3
)
 
—

 
—

Foreign currency forward-exchange contracts
 
—

 
—

 
10

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(73
)
 
32

 
—

 
—

 
—

 
—

Foreign currency swaps
 
(2
)
 
3

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency short-term borrowings
 
—

 
—

 
21

 
—

 
—

 
—

Foreign currency long-term debt
 
—

 
—

 
—

 
(8
)
 
—

 
—

All other net
 
—

 
—

 
14

 
—

 
—

 
—

 
 
$
(75
)
 
$
35

 
$
483

 
$
(10
)
 
$
743

 
$
(74
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 

 
 

 
 

 
 

 
 

 
 

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

 
$
—

 
$
(498
)
 
$
(18
)
 
$
(365
)
 
$
11

Foreign currency forward-exchange contracts
 
—

 
—

 
621

 
(39
)
 
875

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

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 
—

 
—

 
—

 
(11
)
 
—

 
—

Foreign currency forward-exchange contracts
 
2

 
—

 
259

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(113
)
 
—

 
—

 
—

 
—

 
—

Foreign currency swaps
 
(2
)
 
20

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency short-term borrowings
 
—

 
—

 
19

 
—

 
—

 
—

Foreign currency long-term debt
 
—

 
—

 
—

 
(22
)
 
—

 
—

All other net
 
—

 
(3
)
 
14

 
—

 
—

 
—

 
 
$
(113
)
 
$
17

 
$
416

 
$
(90
)
 
$
510

 
$
(86
)
(a) 
OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.
(b) 
Also, includes gains and losses attributable to derivative instruments designated and qualifying as fair value hedges, as well as the offsetting gains and losses attributable to the hedged items in such hedging relationships.
(c) 
There was no significant ineffectiveness for any period presented.
(d) 
For derivative financial instruments in cash flow hedge relationships, the effective portion is included in Other comprehensive income/(loss)––Unrealized holding gains/(losses) on derivative financial instruments, net. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive income/(loss)––Foreign currency translation adjustments, net.


17

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

For information about the fair value of our derivative financial instruments, and the impact on our condensed consolidated balance sheets, see Note 7A. Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce our counterparties’ exposure to our risk of defaulting on amounts owed. As of June 28, 2015, the aggregate fair value of these derivative instruments that are in a net liability position was $933 million, for which we have posted collateral of $922 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a downgrade in our debt ratings. If there had been a downgrade to below an A rating by Standard and Poor’s (S&P) or the equivalent rating by Moody’s Investors Service, on June 28, 2015, we would have been required to post an additional $14 million of collateral to our counterparties. The collateral advanced receivables are reported in Short-term investments.

E. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty. As of June 28, 2015, we had $2.6 billion due from a well-diversified, highly rated group (S&P ratings of mostly A or better) of bank counterparties around the world. For details about our investments, see Note 7B above.

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under master netting agreements with financial institutions and these agreements contain provisions that provide for the ability for collateral payments, depending on levels of exposure, our credit rating and the credit rating of the counterparty. As of June 28, 2015, we received cash collateral of $994 million from various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, which is included in Cash and cash equivalents, the obligations are reported in Short-term borrowings, including current portion of long-term debt.

Note 8. Inventories
The following table provides the components of Inventories:
(MILLIONS OF DOLLARS)
 
June 28,
2015

 
December 31,
2014

Finished goods
 
$
1,824

 
$
1,905

Work-in-process
 
3,458

 
3,248

Raw materials and supplies
 
514

 
510

Inventories
 
$
5,796

 
$
5,663

Noncurrent inventories not included above(a)
 
$
478

 
$
425

(a) 
Included in Other noncurrent assets. There are no recoverability issues associated with these amounts.



18

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

Note 9. Identifiable Intangible Assets and Goodwill

A. Identifiable Intangible Assets

Balance Sheet Information
The following table provides the components of Identifiable intangible assets:
 
 
June 28, 2015
 
December 31, 2014
(MILLIONS OF DOLLARS)
 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Identifiable
Intangible
Assets, less
Accumulated
Amortization

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Identifiable
Intangible
Assets, less
Accumulated
Amortization

Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology rights
 
$
70,226

 
$
(45,611
)
 
$
24,615

 
$
70,946

 
$
(44,694
)
 
$
26,252

Brands
 
1,905

 
(890
)
 
1,015

 
1,951

 
(855
)
 
1,096

Licensing agreements and other
 
1,054

 
(902
)
 
152

 
991

 
(832
)
 
159

 
 
73,186

 
(47,403
)
 
25,782

 
73,887

 
(46,381
)
 
27,506

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Brands and other
 
7,208

 


 
7,208

 
7,273

 


 
7,273

In-process research and development
 
434

 


 
434

 
387

 


 
387

 
 
7,642

 


 
7,642

 
7,660

 


 
7,660

Identifiable intangible assets(a)
 
$
80,827

 
$
(47,403
)
 
$
33,424

 
$
81,547

 
$
(46,381
)
 
$
35,166

(a) 
The decrease in identifiable intangible assets, less accumulated amortization, is primarily related to amortization, partially offset by assets acquired as part of the acquisition of Baxter’s portfolio of marketed vaccines. For information about the assets acquired as part of the acquisition of Baxter’s portfolio of marketed vaccines, see Note 2A.
Our identifiable intangible assets are associated with the following segments, as a percentage of total identifiable intangible assets, less accumulated amortization:
 
 
June 28, 2015
 
 
GIP
 
VOC
 
GEP
Developed technology rights
 
31
%
 
36
%
 
33
%
Brands, finite-lived
 
—
%
 
80
%
 
20
%
Brands, indefinite-lived
 
—
%
 
69
%
 
31
%
In-process research and development
 
7
%
 
38
%