a50368790.htm
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 July 1, 2012

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 6, 2012, 7,469,483,622 shares of the issuer’s voting common stock were outstanding.
 
 
 

 
 
FORM 10-Q
 
For the Quarterly Period Ended
July 1, 2012
 
Table of Contents
 
Page
   
 
 
 
   
 
3
   
 
4
   
5
   
 
6
   
 
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44
   
 
 
45
   
 
 
84
   
 
 
84
   
 
 
   
 
 
84
   
 
 
85
   
 
 
86
   
 
 
86
   
 
 
86
   
 
86
   
 
 
86
   
 
87
 
 
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)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
   
                       
Revenues
  $ 15,057     $ 16,485     $ 29,942     $ 32,509  
                                 
Costs and expenses:
                               
Cost of sales(a)
    2,752       3,571       5,497       7,040  
Selling, informational and administrative expenses(a)
    3,977       4,800       7,954       9,178  
Research and development expenses(a)
    1,699       2,231       3,753       4,311  
Amortization of intangible assets
    1,291       1,384       2,711       2,749  
Restructuring charges and certain acquisition-related costs
    190       478       787       1,368  
Other deductions––net
    664       423       2,321       1,255  
Income from continuing operations before provision for taxes on income
    4,484       3,598       6,919       6,608  
Provision for taxes on income
    1,290       1,077       2,001       1,951  
Income from continuing operations
    3,194       2,521       4,918       4,657  
Discontinued operations––net of tax
    66       97       145       195  
Net income before allocation to noncontrolling interests
    3,260       2,618       5,063       4,852  
Less: Net income attributable to noncontrolling interests
    7       8       16       20  
Net income attributable to Pfizer Inc.
  $ 3,253     $ 2,610     $ 5,047     $ 4,832  
                                 
Earnings per common share––basic:(b)
                               
Income from continuing operations attributable to Pfizer Inc.
common shareholders
  $ 0.43     $ 0.32     $ 0.65     $ 0.58  
Discontinued operations––net of tax
    0.01       0.01       0.02       0.02  
Net income attributable to Pfizer Inc. common shareholders
  $ 0.44     $ 0.33     $ 0.67     $ 0.61  
                                 
Earnings per common share––diluted:(b)
                               
Income from continuing operations attributable to Pfizer Inc.
common shareholders
  $ 0.42     $ 0.32     $ 0.65     $ 0.58  
Discontinued operations––net of tax
    0.01       0.01       0.02       0.02  
Net income attributable to Pfizer Inc. common shareholders
  $ 0.43     $ 0.33     $ 0.67     $ 0.61  
                                 
Weighted-average shares––Basic
    7,476       7,875       7,506       7,929  
Weighted-average shares––Diluted
    7,537       7,935       7,570       7,980  
                                 
Cash dividends paid per common share
  $ 0.22     $ 0.20     $ 0.44     $ 0.40  
(a)
Exclusive of amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.
(b)
EPS amounts may not add due to rounding.
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
3

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
   
Three Months Ended
   
Six Months Ended
 
(MILLIONS OF DOLLARS)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
   
                       
Net income before allocation to noncontrolling interests
  $ 3,260     $ 2,618     $ 5,063     $ 4,852  
                                 
Other Comprehensive Income/(Loss)
                               
Foreign currency translation adjustments
  $ (1,981 )   $ 956     $ (1,718 )   $ 2,546  
Reclassification adjustments(a) 
    ––       ––       ––       (7 )
      (1,981 )     956       (1,718 )     2,539  
                                 
Unrealized holding gains/(losses) on derivative financial instruments
    (657 )     228       (230 )     535  
Reclassification adjustments for realized (gains)/losses(a) 
    427       (224 )     127       (734 )
      (230 )     4       (103 )     (199 )
                                 
Unrealized holding gains/(losses) on available-for-sale securities
    12       17       92       (20 )
Reclassification adjustments for realized (gains)/losses(a) 
    16       (1 )     33       9  
      28       16       125       (11 )
                                 
Benefit plans: Actuarial gains/(losses)
    (505 )     3       (504 )     3  
Reclassification adjustments related to amortization(b) 
    113       70       230       140  
Reclassification adjustments related to curtailments and settlements, net(b)
    (8 )     122       112       173  
Other
    39       (57 )     54       (144 )
      (361 )     138       (108 )     172  
                                 
Benefit plans: Prior service credits and other
    26       ––       26       1  
Reclassification adjustments related to amortization(b) 
    (17 )     (17 )     (36 )     (35 )
Reclassification adjustments related to curtailments and settlements, net(b)
    (73 )     (22 )     (82 )     (33 )
Other
    ––       (1 )     (2 )     (4 )
      (64 )     (40 )     (94 )     (71 )
                                 
Other comprehensive income/(loss), before tax
    (2,608 )     1,074       (1,898 )     2,430  
Tax benefit on other comprehensive income/(loss)(c) 
    (205 )     (32 )     (1 )     (60 )
Other comprehensive income/(loss) before allocation to noncontrolling interests
  $ (2,403 )   $ 1,106     $ (1,897 )   $ 2,490  
                                 
Comprehensive Income                                
Comprehensive income before allocation to noncontrolling interests
  $ 857     $ 3,724     $ 3,166     $ 7,342  
Less: Comprehensive income/(loss) attributable to noncontrolling interests
    (10 )     12       (2 )     28  
Comprehensive income attributable to Pfizer Inc.
  $ 867     $ 3,712     $ 3,168     $ 7,314  
(a)
Reclassified into Other deductions—net in the condensed consolidated statements of income.
(b)
Generally reclassified into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate in the condensed consolidated statements of income.
(c)
See Note 5B. Tax Matters: Taxes on Items of Other Comprehensive Income/(Loss).

 
See Notes to Condensed Consolidated Financial Statements.
 
 
4

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(millions of dollars)
 
July 1,
2012
   
Dec. 31,
2011
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 3,031     $ 3,182  
Short-term investments
    21,275       23,270  
Accounts receivable, less allowance for doubtful accounts
    12,882       13,058  
Inventories
    7,001       6,610  
Taxes and other current assets
    9,215       9,380  
Assets of discontinued operations and other assets held for sale
    5,361       5,317  
Total current assets
    58,765       60,817  
Long-term investments
    10,548       9,814  
Property, plant and equipment, less accumulated depreciation
    14,756       15,921  
Goodwill
    44,568       44,569  
Identifiable intangible assets, less accumulated amortization
    48,399       51,184  
Taxes and other noncurrent assets
    5,806       5,697  
Total assets
  $ 182,842     $ 188,002  
                 
Liabilities and Equity
               
Short-term borrowings, including current portion of long-term debt
  $ 7,703     $ 4,016  
Accounts payable
    3,165       3,678  
Dividends payable
    1,826       1,796  
Income taxes payable
    2,098       1,009  
Accrued compensation and related items
    1,493       2,120  
Other current liabilities
    13,215       15,066  
Liabilities of discontinued operations
    1,298       1,224  
Total current liabilities
    30,798       28,909  
                 
Long-term debt
    30,868       34,926  
Pension benefit obligations
    6,484       6,341  
Postretirement benefit obligations
    3,309       3,344  
Noncurrent deferred tax liabilities
    18,487       18,861  
Other taxes payable
    7,099       6,886  
Other noncurrent liabilities
    5,836       6,114  
Total liabilities
    102,881       105,381  
                 
Commitments and Contingencies
               
                 
Preferred stock
    42       45  
Common stock
    447       445  
Additional paid-in capital
    72,027       71,423  
Employee benefit trusts
    (2 )     (3 )
Treasury stock
    (34,863 )     (31,801 )
Retained earnings
    47,904       46,210  
Accumulated other comprehensive loss
    (6,008 )     (4,129 )
Total Pfizer Inc. shareholders’ equity
    79,547       82,190  
Equity attributable to noncontrolling interests
    414       431  
Total equity
    79,961       82,621  
Total liabilities and equity
  $ 182,842     $ 188,002  

 
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)
 
July 1,
2012
   
July 3,
2011
 
             
Operating Activities
           
Net income before allocation to noncontrolling interests
  $ 5,063     $ 4,852  
Adjustments to reconcile net income before allocation to noncontrolling interests to net
cash provided by operating activities:
               
Depreciation and amortization
    4,002       4,353  
Share-based compensation expense
    247       244  
Asset write-offs and impairment charges
    758       573  
Deferred taxes from continuing operations
    (120 )     505  
Other deferred taxes
 
14
   
(7
Benefit plan contributions in excess of expense
    (20 )     (249 )
Other non-cash adjustments, net
    (114 )     10  
Other changes in assets and liabilities, net of acquisitions and divestitures
    (3,035 )     259  
Net cash provided by operating activities
    6,795       10,540  
                 
Investing Activities
               
Purchases of property, plant and equipment
    (548 )     (608 )
Purchases of short-term investments
    (10,395 )     (6,559 )
Proceeds from redemptions and sales of short-term investments
    14,357       4,643  
Net proceeds from/(payments for) redemptions and sales of short-term investments with
original maturities of 90 days or less
    (999 )     8,327  
Purchases of long-term investments
    (2,317 )     (3,193 )
Proceeds from redemptions and sales of long-term investments
    304       1,572  
Acquisitions, net of cash acquired
    (782 )     (3,169 )
Other investing activities
    (56 )     73  
Net cash provided by/(used in) investing activities
    (436 )     1,086  
                 
Financing Activities
               
Proceeds from short-term borrowings
    3,764       4,868  
Principal payments on short-term borrowings
    (2 )     (2,483 )
Net payments on short-term borrowings with original maturities of 90 days or less
    (4,146 )     (2,452 )
Principal payments on long-term debt
    (7 )     (3,481 )
Purchases of common stock
    (2,999 )     (3,679 )
Cash dividends paid
    (3,283 )     (3,159 )
Other financing activities
    198       64  
Net cash used in financing activities
    (6,475 )     (10,322 )
Effect of exchange-rate changes on cash and cash equivalents
    (35 )     57  
Net increase/(decrease) in cash and cash equivalents
    (151 )     1,361  
Cash and cash equivalents, beginning
    3,182       1,735  
                 
Cash and cash equivalents, end
  $ 3,031     $ 3,096  
                 
Supplemental Cash Flow Information
               
Cash paid during the period for:
               
Income taxes
  $ 1,127     $ 737  
Interest
    1,194       1,337  

 
See Notes to Condensed Consolidated Financial Statements
 
 
6

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted.

Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three and six months ended May 27, 2012, and May 29, 2011. We have made certain reclassification adjustments to conform prior-period amounts to the current presentation, primarily related to certain inventories (see Note 8. Inventories) and the reclassification of certain investments (see Note 7. Financial Instruments).

We anticipate filing a registration statement with the SEC by mid-August for a potential initial public offering (IPO) of up to a 20% ownership stake in our Animal Health business, Zoetis, Inc. (Zoetis). If the IPO is successfully completed, which we are targeting for the first half of 2013, we will have a variety of options to achieve a potential full separation of Zoetis. The Animal Health business continues to be presented as a continuing operation in these condensed consolidated financial statements.

On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlé. As a result, beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. In addition, the assets and liabilities associated with this business are reported as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets (see Note 2B. Acquisitions and Divestitures: Divestitures). Prior period amounts have been restated.

On August 1, 2011, we completed the sale of our Capsugel business. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended July 3, 2011 (see Note 2B. Acquisitions and Divestitures: Divestitures).

As a result of our acquisition of King Pharmaceutical, Inc. (King) and in accordance with our domestic and international reporting periods, our condensed consolidated financial statements for the six months ended July 3, 2011 reflect approximately five months of King’s U.S. operations and approximately four months of King’s international operations (for additional information, see Note 2A. Acquisitions and Divestitures: Acquisitions).

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

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

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K.

B. Adoption of New Accounting Standards
 
The provisions of the following new accounting and disclosure standards were adopted as of January 1, 2012:

 
Presentation of comprehensive income in financial statements. As a result of adopting this new standard, we have presented separate Condensed Consolidated Statements of Comprehensive Income.
 
 
An amendment to the guidelines on the measurement and disclosure of fair value that is consistent between U.S. GAAP and International Financial Reporting Standards. The adoption of this new standard did not have a significant impact on our financial statements.
 
 
7

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

Note 2. Acquisitions and Divestitures

A. Acquisitions

Alacer Corp.

On February 26, 2012, we completed our acquisition of Alacer Corp., a privately owned 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 $247 million in Identifiable intangible assets, consisting primarily of the Emergen-C indefinite-lived brand, $94 million in net deferred tax liabilities and $151 million in Goodwill. The allocation of the consideration transferred has been finalized.

Ferrosan Holding A/S

On December 1, 2011, we completed our acquisition of the consumer healthcare business of Ferrosan Holding A/S (Ferrosan), a Danish company engaged in the sale of science-based consumer healthcare products, including dietary supplements and lifestyle products, primarily in the Nordic region and the emerging markets of Russia and Central and Eastern Europe. Due to the fact that financial information included in our fiscal year 2011 consolidated financial statements for our subsidiaries operating outside the U.S. is as of and for the year ended November 30, this acquisition is reflected in our condensed consolidated financials 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 acquisition, we recorded $483 million in Identifiable intangible assets, consisting of indefinite-lived and finite-lived brands, $124 million in net deferred tax liabilities and $231 million in Goodwill. The allocation of the consideration transferred has not been finalized.

King Pharmaceuticals, Inc.

On January 31, 2011 (the acquisition date), we completed a tender offer for the outstanding shares of common stock of King at a purchase price of $14.25 per share in cash and acquired approximately 92.5% of the outstanding shares. On February 28, 2011, we acquired all of the remaining shares of King for $14.25 per share in cash. As a result, the total fair value of consideration transferred for King was approximately $3.6 billion in cash ($3.2 billion, net of cash acquired).

King’s principal businesses consist of a prescription pharmaceutical business focused on delivering new formulations of pain treatments designed to discourage common methods of misuse and abuse; the Meridian auto-injector business for emergency drug delivery, which develops and manufactures the EpiPen; an established products portfolio; and an animal health business that offers a variety of feed-additive products for a wide range of species.
 
 
8

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The following table provides the assets acquired and liabilities assumed from King: 
(millions of dollars)
 
Amounts
Recognized as of
Acquisition Date
(Final)
 
Working capital, excluding inventories
  $ 155  
Inventories
    340  
Property, plant and equipment
    412  
Identifiable intangible assets, excluding in-process research and development
    1,806  
In-process research and development
    303  
Net tax accounts
    (328 )
All other long-term assets and liabilities, net
    102  
Total identifiable net assets
    2,790  
Goodwill(a)
    765  
Net assets acquired/total consideration transferred
  $ 3,555  
(a)
Goodwill recorded as of the acquisition date totaled $720 million for our three biopharmaceutical operating segments and $45 million for our Animal Health and Consumer Healthcare operating segment. (Since the acquisition of King, we have revised our operating segments. See Note 13A. Segment, Geographic and Other Revenue Information: Segment Information.)

As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $200 million, virtually all of which was expected to be collected.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of King includes the following:

the expected synergies and other benefits that we believed would result from combining the operations of King with the operations of Pfizer;

any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products; and

the value of the going-concern element of King’s existing businesses (the higher rate of return on the assembled collection of net assets versus if Pfizer had acquired all of the net assets separately).

Goodwill is not amortized and is not deductible for tax purposes (see Note 9A. Goodwill and Other Intangible Assets: Goodwill for additional information).

The assets and liabilities arising from contingencies recognized as of the acquisition date are not significant to Pfizer’s condensed consolidated financial statements.

The following table provides the actual financial results of King included in the condensed consolidated statement of income:
(millions of dollars)
 
King’s Operations
Included in Pfizer’s
Six-Month
2011 Results
 
Revenues(a)
  $ 581  
Loss from continuing operations attributable to Pfizer Inc. common shareholders(a), (b)
    (74 )
(a)
From January 31, 2011 (the acquisition date) through Pfizer’s second-quarter 2011 domestic and international quarter-ends.
(b)
Includes purchase accounting adjustments related to the fair value adjustments for acquisition-date inventory estimated to have been sold ($119 million pre-tax), amortization of identifiable intangible assets acquired from King ($71 million pre-tax) and restructuring and integration costs ($159 million pre-tax).

If the acquisition of King had occurred on January 1, 2011, the change to Pfizer’s Revenues, Income from continuing operations attributable to Pfizer Inc. common shareholders and Diluted earnings per share attributable to Pfizer Inc. common shareholders would not have been material.
 
 
9

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
B. Divestitures
 
On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlé for $11.85 billion in cash. The transaction is expected to close by the first half of 2013, assuming the receipt of the required regulatory clearances and satisfaction of other closing conditions. Beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. The transaction also includes the sale of certain prenatal multivitamins currently commercialized by the Pfizer Consumer Healthcare business unit. The operating results of this product line are also included in Discontinued operations––net of tax for all periods presented. In addition, 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, in the condensed consolidated balance sheets.
 
On August 1, 2011, we completed the sale of our Capsugel business for approximately $2.4 billion in cash. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended July 3, 2011.
 
The following table provides the components of Discontinued operations—net of tax:
   
Three Months Ended
   
Six Months Ended
 
(millions of dollars)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
Revenues(a)
  $ 581     $ 714     $ 1,101     $ 1,369  
Income from discontinued operations before provision for taxes
on income
  $ 119     $ 128     $ 237     $ 263  
Provision for taxes on income(b)
    (53 )     (31 )     (92 )     (68 )
Discontinued operations––net of tax(a)
  $ 66     $ 97     $ 145     $ 195  
(a)
Includes the Nutrition business for all periods presented and the Capsugel business for 2011 only.
(b)
Includes deferred tax expense (includes deferred taxes related to investments in certain foreign subsidiaries resulting from our intention not to hold these subsidiaries permanent in duration) of $22 million and a deferred tax benefit of $4 million for the three months ended July 1, 2012 and July 3, 2011, respectively, and a deferred tax expense of $14 million and a deferred tax benefit of $7 million for the six months ended July 1, 2012 and July 3, 2011, respectively.
 
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)
 
July 1,
2012
   
Dec. 31,
2011
 
Accounts receivable, less allowance for doubtful accounts
  $ 559     $ 550  
Inventories
    366       359  
Prepaid assets
    40       45  
Current deferred tax assets and other current assets
    44       15  
Property, plant and equipment, less accumulated depreciation
    1,138       1,118  
Goodwill
    495       498  
Identifiable intangible assets, less accumulated amortization
    2,620       2,648  
Deposits advances and other assets
    32       47  
Deferred charges
    21       23  
Noncurrent deferred tax assets and other noncurrent assets
    46       14  
Assets of discontinued operations and other assets held for sale
  $ 5,361     $ 5,317  
                 
Current liabilities
  $ 427     $ 385  
Other liabilities
    871       839  
Liabilities of discontinued operations
  $ 1,298     $ 1,224  
 
The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for any period presented.

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 and productivity initiatives. For example:

 
In connection with our cost-reduction and productivity initiatives, significant programs of which began in 2005, 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; and

 
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).
 
 
10

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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, 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 with the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
   
Three Months Ended
   
Six Months Ended
 
(millions of dollars)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
                         
Transaction costs(a)
  $ 1     $ 13     $ 1     $ 23  
Integration costs(b)
    108       199       208       378  
Restructuring charges(c):
                               
Employee termination costs
    44       189       311       853  
Asset impairments
    29       33       247       58  
Exit costs
    8       44       20       56  
Restructuring charges and certain acquisition-related costs
    190       478       787       1,368  
Additional depreciation––asset restructuring recorded in our
condensed consolidated statements of income as follows(d):
                               
Cost of sales
    57       171       136       343  
Selling, informational and administrative expenses
    5       22       6       29  
Research and development expenses
    ––       167       259       230  
Total additional depreciation––asset restructuring
    62       360       401       602  
Implementation costs recorded in our condensed consolidated
statements of income as follows(e):
                               
Cost of sales
    4       ––       4       ––  
Selling, informational and administrative expenses
    15       ––       31       ––  
Research and development expenses
    37       10       85       20  
Total implementation costs
    56       10       120       20  
Total costs associated with acquisitions and cost-reduction/
productivity initiatives
  $ 308     $ 848     $ 1,308     $ 1,990  
(a)
Transaction costs represent external costs directly related to acquired businesses and primarily include expenditures for banking, legal, accounting and other similar services.
(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)
From the beginning of our cost-reduction and transformation initiatives in 2005 through July 1, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 60,000 employees, mainly in manufacturing and sales and research, of which approximately 47,900 employees have been terminated as of July 1, 2012. For the six months ended July 1, 2012, the increase represents additional accruals with respect to reserves for approximately 2,600 employees.
 
 
The restructuring charges in 2012 are associated with the following:
 
 
For the three months ended July 1, 2012, Primary Care operating segment ($35 million income), Specialty Care and Oncology operating segment ($16 million), Established Products and Emerging Markets operating segment ($1 million), Animal Health and Consumer Healthcare operating segment ($13 million), research and development operations ($13 million), manufacturing operations ($14 million) and Corporate ($59 million).

 
For the six months ended July 1, 2012, Primary Care operating segment ($32 million income), Specialty Care and Oncology operating segment ($19 million), Established Products and Emerging Markets operating segment ($4 million), Animal Health and Consumer Healthcare operating segment ($18 million), research and development operations ($25 million), manufacturing operations ($166 million) and Corporate ($378 million).

 
The restructuring charges in 2011 are associated with the following:

 
For the three months ended July 3, 2011, Primary Care operating segment ($87 million), Specialty Care and Oncology operating segment ($7 million), Established Products and Emerging Markets operating segment ($12 million), Animal Health and Consumer Healthcare operating segment ($4 million), research and development operations ($51 million), manufacturing operations ($81 million) and Corporate ($24 million).

 
For the six months ended July 3, 2011, Primary Care operating segment ($133 million), Specialty Care and Oncology operating segment ($42 million), Established Products and Emerging Markets operating segment ($15 million), Animal Health and Consumer Healthcare operating segment ($14 million), research and development operations ($473 million), manufacturing operations ($155 million) and Corporate ($135 million).
 
 
11

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(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 and productivity initiatives.
 
The following table provides the components of and changes in our restructuring accruals:
(millions of dollars)
 
Employee
Termination
Costs(a)
   
Asset
Impairment
Charges
   
Exit Costs
   
Accrual
 
                         
Balance, December 31, 2011
  $ 2,425     $ ––     $ 92     $ 2,517  
Provision
    311       247       20       578  
Utilization and other(b)
    (784 )     (247 )     (20 )     (1,051 )
Balance, July 1, 2012(c)
  $ 1,952     $ ––     $ 92     $ 2,044  
(a)
For the six months ended July 1, 2012 Provision includes additional accruals with respect to reserves for approximately 2,600 employees.
(b)
Includes adjustments for foreign currency translation.
(c)
Included in Other current liabilities ($1.2 billion) and Other noncurrent liabilities ($853 million).

The asset impairment charges included in restructuring charges for the six months ended July 1, 2012 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 held-for-sale that were impaired in 2012:
     Fair Value(a)    
Six Months Ended
July 1, 2012
 
(millions of dollars)
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Impairment
 
                               
Long-lived assets held-for-sale(b)
  $ 99     $ ––     $ 99     $ ––     $ 227  
(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 assets written down to their fair value of $99 million, less costs to sell of $2 million (a net of $97 million), in the first six months of 2012. The impairment charges of $227 million are included in Restructuring charges and certain acquisition-related costs. Fair value is determined primarily using a market approach, with various inputs, such as recent sales transactions.

Note 4. Other Deductions—Net

The following table provides components of Other deductions––net:
   
Three Months Ended
   
Six Months Ended
 
(millions of dollars)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
                         
Interest income(a)
  $ (86 )   $ (117 )   $ (167 )   $ (222 )
Interest expense(a)
    379       404       769       862  
Net interest expense
    293       287       602       640  
Royalty-related income
    (124 )     (140 )     (221 )     (311 )
Net gains on asset disposals
    (17 )     (14 )     (24 )     (26 )
Certain legal matters, net(b)
    474       (14 )     1,287       487  
Certain asset impairment charges(c)
    77       320       510       480  
Other, net
    (39 )     (16 )     167       (15 )
Other deductions––net
  $ 664     $ 423     $ 2,321     $ 1,255  
(a)
Interest income decreased in both periods in 2012 due to lower interest rates earned on investments. Interest expense decreased in both periods in 2012 due to lower debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities.
(b)
In the second quarter and first six months of 2012, primarily includes charges for hormone-replacement therapy litigation. The first six months of 2012 also includes $450 million in settlement of a lawsuit by Brigham Young University related to Celebrex. In 2011, primarily includes charges for hormone-replacement therapy litigation. (See Note 12. Commitments and Contingencies.)
(c)
In the second quarter of 2012, includes intangible asset impairment charges of approximately $53 million, primarily reflecting a $45 million impairment of developed technology rights. In the first six months of 2012, includes intangible asset impairment charges of $449 million reflecting (i) $305 million of in-process research and development (IPR&D), substantially all related to compounds that targeted autoimmune and inflammatory diseases (full write-off), (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, and (iii) $99 million related to three developed technology 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 specifically for Robitussin. The impairment charges for the six months of 2012 are associated with the following: Worldwide Research and Development ($297 million); Consumer Healthcare ($45 million); Established Products ($45 million); Primary Care ($43 million) and Specialty Care ($19 million). In addition, the second quarter and first six months of 2012 also include charges of approximately $24 million and $61 million, respectively, for certain investments. These investment impairment charges reflect the difficult global economic environment.
 
 
12

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
In the second quarter of 2011, includes intangible asset impairment charges of approximately $320 million, reflecting a $200 million impairment of IPR&D assets, primarily related to a single compound for the treatment of certain autoimmune and inflammatory diseases, and a $120 million impairment of developed technology rights. In the first six months of 2011, includes intangible asset impairment charges of approximately $480 million, reflecting a $360 million impairment of IPR&D assets, primarily related to two compounds for the treatment of certain autoimmune and inflammatory diseases, and a $120 million impairment of developed technology rights. The intangible asset impairment charges for 2011 reflect, among other things, the impact of new scientific findings and updated commercial forecasts. The impairment charges for the six months of 2011 are associated with the following: Worldwide Research and Development ($355 million); Specialty Care ($116 million) and Animal Health ($9 million).
 
The asset impairment charges included in Other deductions––net income for the first six months of 2012 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 in 2012:
    Fair Value(a)    
Six Months Ended July 1, 2012
 
(millions of dollars)
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Impairment
 
Intangible assets––IPR&D(b)
  $ 52     $ ––     $ ––     $ 52     $ 305  
Intangible assets––Other(b)
    551       ––       ––       551       144  
Total
  $ 603     $ ––     $ ––     $ 603     $ 449  
(a)
Fair value 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 of $603 million in the first six months of 2012. The impairment charges of $449 million are included in Other deductions––net. When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply 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 projections and the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; 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 28.8% for the second quarter of 2012, compared to 29.9% for the second quarter of 2011, and in the first six months of 2012 was 28.9%, compared to 29.5% in the first six months of 2011. The decreases in the tax rates for the second quarter and first six months of 2012 were primarily due to a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, partially offset by the unfavorable impact of the expiration of the U.S. research and development tax credit.
 
 
13

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
B. Taxes on Items of Other Comprehensive Income/(Loss)

The following table provides the components of tax benefit on Other comprehensive income/(loss):
   
Three Months Ended
   
Six Months Ended
 
(millions of dollars)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
Tax Expense/(Benefit) on Other Comprehensive Income/(Loss)
                       
Foreign currency translation adjustments(a)
  $ (30 )   $ (50 )   $ 37     $ (10 )
                                 
Unrealized holding gains/(losses) on derivative financial instruments
    (216 )     81       (57 )     207  
Reclassification adjustments for realized (gains)/losses
    133       (87 )     18       (281 )
      (83 )     (6 )     (39 )     (74 )
                                 
Unrealized gains/(losses) on available-for-sale securities
    (1 )     3       13       ––  
Reclassification adjustments for realized (gains)/losses
    (2 )     ––       5       1  
      (3 )     3       18       1  
                                 
Benefit plans: Actuarial gains/(losses)
    (118 )     ––       (118 )     ––  
Reclassification adjustments related to amortization
    41       25       85       50  
Reclassification adjustments related to curtailments and settlements, net
    (4 )     42       39       61  
Other
    18       (32 )     17       (59 )
      (63 )     35       23       52  
                                 
Benefit plan: Prior service (costs)/credits and other
    8       ––       8       ––  
Reclassification adjustments related to amortization
    (6 )     (7 )     (14 )     (14 )
Reclassification adjustments related to curtailments and settlements, net
    (28 )     (9 )     (32 )     (13 )
Other
    ––       2       (2 )     (2 )
      (26 )     (14 )     (40 )     (29 )
                                 
Tax benefit on other comprehensive income/(loss)
  $ (205 )   $ (32 )   $ (1 )   $ (60 )
(a)   Taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries.

C. 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 our primary tax jurisdiction and we are regularly audited by the U.S. Internal Revenue Service (IRS):

 
With respect to Pfizer Inc., tax years 2006-2010 are currently under audit. Tax years 2011-2012 are 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, the audit for tax year 2008 has been effectively settled, and for Alpharma Inc. (a subsidiary of King), tax years 2005-2007 are currently under audit. For King, tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. All other tax years are closed. The open tax years and audits for King and its subsidiaries are not considered material to Pfizer.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2012), Japan (2007-2012), Europe (2002-2012, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), and Puerto Rico (2007-2012).
 
 
14

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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 Gain/(Losses)
   
Benefit Plans
       
(millions of dollars)
 
Currency
Translation
Adjustment
And Other
   
Derivative
Financial
Instruments
   
Available
For-Sale
Securities
   
Actuarial
Gains/(Losses)
   
Prior Service
(Costs)/
Credits And
Other
   
Accumulated
Other
Comprehensive
Loss
 
Balance, December 31, 2011
  $ 944     $ (361 )   $ 46     $ (5,120 )   $ 362     $ (4,129 )
Other comprehensive income/(loss)(a)
    (1,737 )     (64 )     107       (131 )     (54 )     (1,879 )
Balance, July 1, 2012
  $ (793 )   $ (425 )   $ 153     $ (5,251 )   $ 308     $ (6,008 )
(a)
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $18 million loss for the first six month of 2012.

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)
 
July 1,
2012
   
Dec. 31,
2011
 
Selected financial assets measured at fair value on a recurring basis(a)
           
Trading securities(b)
  $ 137     $ 154  
Available-for-sale debt securities(c)
    27,653       29,179  
Available-for-sale money market funds(d)
    1,994       1,727  
Available-for-sale equity securities, excluding money market funds(c)
    272       317  
Derivative financial instruments in receivable positions(e):
               
Interest rate swaps
    1,147       1,033  
Foreign currency forward-exchange contracts
    406       349  
Foreign currency swaps
    69       17  
      31,678       32,776  
Other selected financial assets(f)
               
Held-to-maturity debt securities, carried at amortized cost(c)
    1,587       1,587  
Private equity securities, carried at equity method or at cost(g)
    1,072       1,020  
      2,659       2,607  
Total selected financial assets
  $ 34,337     $ 35,383  
 
Financial liabilities measured at fair value on a recurring basis(a)
               
Derivative financial instruments in a liability position(h):
               
Foreign currency swaps
  $ 1,743     $ 1,396  
Foreign currency forward-exchange contracts
    285       355  
Interest rate swaps
    20       14  
      2,048       1,765  
Other financial liabilities(i)
               
Short-term borrowings, carried at historical proceeds, as adjusted(f)
    7,703       4,016  
Long-term debt, carried at historical proceeds, as adjusted(j), (k)
    30,868       34,926  
      38,571       38,942  
Total selected financial liabilities
  $ 40,619     $ 40,707  
(a)
We use a market approach in valuing financial instruments on a recurring basis. See also 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 approximately $625 million as of July 1, 2012 and December 31, 2011 of money market funds that were released from restriction in the second quarter of 2012 and classified as part of Short-term investments. Such money market funds were held in escrow to secure certain of Wyeth’s payment obligations under its 1999 Nationwide Class Action Settlement Agreement, which relates to litigation against Wyeth concerning its former weight-loss products, Redux and Pondimin. The amount also includes $384 million as of July 1, 2012 and $357 million as of December 31, 2011 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 foreign currency contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $290 million as of July 1, 2012; and foreign currency forward-exchange contracts with fair values of $169 million and interest rate swaps with fair values of $8 million as of December 31, 2011.
 
 
15

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(f)
The differences between the estimated fair values and carrying values of these financial assets and liabilities not measured at fair value on a recurring basis were not significant as of July 1, 2012 or December 31, 2011. Held-to-maturity debt securities and our short-term and long-term debt fair value are based on Level 2 valuations using a market approach. Fair value measurements for private equity securities are based on Level 3 valuations using a market approach.
(g)
Our private equity securities represent investments in the life sciences sector.
(h)
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $200 million and foreign currency forward-exchange contracts with fair values of $163 million as of July 1, 2012; and foreign currency forward-exchange contracts with fair values of $141 million and foreign currency swaps with fair values of $123 million as of December 31, 2011.
(i)
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.
(j)
Includes foreign currency debt with fair values of $885 million as of July 1, 2012 and $919 million as of December 31, 2011, which are used as hedging instruments.
(k)
The fair value of our long-term debt is $35.5 billion as of July 1, 2012 and $40.1 billion as of December 31, 2011.

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(millions of dollars)
 
July 1,
2012
   
Dec. 31,
2011
 
Assets
           
Cash and cash equivalents
  $ 892     $ 900  
Short-term investments
    21,275       23,270  
Long-term investments
    10,548       9,814  
Taxes and other current assets(a)
    472       357  
Taxes and other noncurrent assets(b)
    1,150       1,042  
    $ 34,337     $ 35,383  
Liabilities
               
Short-term borrowings, including current portion of long-term debt
  $ 7,703     $ 4,016  
Other current liabilities(c)
    545       459  
Long-term debt
    30,868       34,926  
Other noncurrent liabilities(d)
    1,503       1,306  
    $ 40,619     $ 40,707  
(a)
As of July 1, 2012, derivative instruments at fair value include foreign currency forward-exchange contracts ($406 million), interest rate swaps ($36 million) and foreign currency swaps ($30 million) and, as of December 31, 2011, include foreign currency forward-exchange contracts ($349 million) and interest rate swaps ($8 million).
(b)
As of July 1, 2012, derivative instruments at fair value include interest rate swaps ($1.1 billion) and foreign currency swaps ($39 million) and, as of December 31, 2011, include interest rate swaps ($1 billion) and foreign currency swaps ($17 million).
(c)
At July 1, 2012, derivative instruments at fair value include foreign currency swaps ($260 million) and foreign currency forward-exchange contracts ($285 million) and, as of December 31, 2011, include foreign currency forward-exchange contracts ($355 million) and foreign currency swaps ($104 million).
(d)
At July 1, 2012, derivative instruments at fair value include foreign currency swaps ($1.5 billion) and interest rate swaps ($20 million) and, as of December 31, 2011, include foreign currency swaps ($1.3 billion) and interest rate swaps ($14 million).
 
 
16

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
B. Investments in Debt Securities

The following table provides the contractual maturities of the available-for-sale and held-to-maturity debt securities:
   
Years
       
         
Over 1
   
Over 5
   
July 1,
2012
 
(millions of dollars)
 
Within 1
   
to 5
   
to 10
   
Total
 
Available-for-sale debt securities
                       
Western European, Asian and other government debt(a)
  $ 8,828     $ 1,973     $ 5     $ 10,806  
Corporate debt(b)
    1,510       2,415       788       4,713  
U.S. government debt
    4,159       ––       258       4,417  
Reverse repurchase agreements(c)
    2,470       ––       ––       2,470  
Federal Home Loan Mortgage Corporation and Federal National
Mortgage Association asset-backed securities
    ––       2,370       ––       2,370  
Western European, Scandinavian and other government agency debt(a)
    1,911       391       ––       2,302  
Supranational debt(a)
    130       445       ––       575  
Held-to-maturity debt securities
                               
Certificates of deposit and other
    1,288       291       8       1,587  
Total debt securities
  $ 20,296     $ 7,885     $ 1,059     $ 29,240  
(a)
All issued by above-investment-grade governments, government agencies or supranational entities, as applicable, except for certain holdings that are immaterial.
(b)
Largely issued by above-investment-grade institutions in the financial services sector.
(c)
Involving U.S. and Germany government securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $2.7 billion as of July 1, 2012 and December 31, 2011, respectively.

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of July 1, 2012, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $42.5 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen and U.K. pound. 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 July 1, 2012, the aggregate notional amount of interest rate derivative financial instruments is $12.8 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.
 
 
17

 
 
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)
 
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
Three Months Ended
                                   
Derivative Financial Instruments in Cash
Flow Hedge Relationships
                                   
Foreign currency swaps
  $ ––     $ ––     $ (646 )   $ 227     $ (432 )   $ 224  
                                                 
Derivative Financial Instruments in Net
Investment Hedge Relationships
                                               
Foreign currency swaps
    (1 )     14       (53 )     (991 )     ––       ––  
                                                 
Derivative Financial Instruments Not
Designated as Hedges
                                               
Foreign currency forward-exchange contracts
    190       (158 )     ––       ––       ––       ––  
Foreign currency swaps
    6       13       ––       ––       ––       ––  
                                                 
Non-Derivative Financial Instruments in
Net Investment Hedge Relationships
                                               
Foreign currency short-term borrowings
    ––       ––       ––       897       ––       ––  
Foreign currency long-term debt
    ––       ––       (27 )     (34 )     ––       ––  
All other net
    3       ––       (4 )     1       5       ––  
    $ 198     $ (131 )   $ (730 )   $ 100     $ (427 )   $ 224  
                                                 
Six Months Ended
                                               
Derivative Financial Instruments in Cash
Flow Hedge Relationships
                                               
Foreign currency swaps
  $ ––     $ ––     $ (218 )   $ 531     $ (132 )   $ 730  
                                                 
Derivative Financial Instruments in Net
Investment Hedge Relationships
                                               
Foreign currency swaps
    (3 )     15       73       (958 )     ––       ––  
                                                 
Derivative Financial Instruments Not
Designated as Hedges
                                               
Foreign currency forward-exchange contracts
    64       (317 )     ––       ––       ––       ––  
Foreign currency swaps
    (17 )     43