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Pfizer 10-Q 2012
a50269079.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 April 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 May 7, 2012, 7,488,136,070 shares of the issuer’s voting common stock were outstanding.
 
 
 

 
 
FORM 10-Q
 
For the Quarterly Period Ended
April 1, 2012
 
Table of Contents
 
Page
 
 
 
 
 
 
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76
 
 
 
76
 
 
 
77
 
 
 
77
 
 
 
77
   
 
77
 
 
 
77
 
 
78
 
 
 
2

 
 


PFIZER INC. AND SUBSIDIARY COMPANIES
(UNAUDITED)
 
   
Three Months Ended
 
(millions, except per common share data)
 
April 1,
2012
   
April 3,
2011
 
             
Revenues                                                                                                     
  $ 15,405     $ 16,502  
                 
Costs and expenses:
               
Cost of sales(a)
    2,974       3,693  
Selling, informational and administrative expenses(a)
    4,133       4,503  
Research and development expenses(a)
    2,072       2,091  
Amortization of intangible assets
    1,420       1,376  
Restructuring charges and certain acquisition-related costs
    596       894  
Other deductions––net
    1,657       827  
Income from continuing operations before provision for taxes on income
    2,553       3,118  
Provision for taxes on income
    750       894  
Income from continuing operations
    1,803       2,224  
Discontinued operations––net of tax
     ––       10  
Net income before allocation to noncontrolling interests
    1,803       2,234  
Less:  Net income attributable to noncontrolling interests
    9       12  
Net income attributable to Pfizer Inc.
  $ 1,794     $ 2,222  
                 
Earnings per common share––basic:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders
  $ 0.24     $ 0.28  
Discontinued operations––net of tax
     ––        ––  
Net income attributable to Pfizer Inc. common shareholders
  $ 0.24     $ 0.28  
                 
Earnings per common share––diluted:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders
  $ 0.24     $ 0.28  
Discontinued operations––net of tax
     ––        ––  
Net income attributable to Pfizer Inc. common shareholders
  $ 0.24     $ 0.28  
                 
Weighted-average shares––Basic
    7,537       7,982  
Weighted-average shares––Diluted
    7,598       8,035  
                 
Cash dividends paid per common share
  $ 0.22     $ 0.20  
(a)
Exclusive of amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.

 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
3

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
(UNAUDITED)

   
Three Months Ended
 
(millions of dollars)
 
April 1,
2012
   
April 3,
2011
 
             
Net income before allocation to noncontrolling interests
  $ 1,803     $ 2,234  
                 
Other Comprehensive Income
               
Foreign currency translation adjustments
  $ 263     $ 1,589  
Reclassification adjustments(a)
    ––       (7 )
      263       1,582  
                 
Unrealized holding gains/(losses) on derivative financial instruments
    427       307  
Reclassification adjustments for realized gains(a)
    (300 )     (510 )
      127       (203 )
                 
Unrealized holding gains/(losses) on available-for-sale securities
    80       (36 )
Reclassification adjustments for realized losses(a)
    17       10  
      97       (26 )
                 
Benefit plans: Actuarial gains/(losses)
    1        ––  
Reclassification adjustments related to amortization(b)
    117       70  
Reclassification adjustments related to curtailments and settlements, net(b)
    120       51  
Other
    15       (87 )
      253       34  
                 
Benefit plans: Prior service (costs)/credits and other
    ––       1  
Reclassification adjustments related to amortization(b)
    (19 )     (18 )
Reclassification adjustments related to curtailments and settlements, net(b)
    (9 )     (11 )
Other
    (2 )     (3 )
      (30 )     (31 )
                 
Other comprehensive income, before tax
    710       1,356  
Tax expense/(benefit) on other comprehensive income(c)
    204       (28 )
Other comprehensive income before allocation to noncontrolling interests
  $ 506     $ 1,384  
                 
Comprehensive Income                
Comprehensive income before allocation to noncontrolling interests
  $ 2,309     $ 3,618  
Less:  Comprehensive income attributable to noncontrolling interests
    8       16  
Comprehensive income attributable to Pfizer Inc.
  $ 2,301     $ 3,602  
(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 Research and development expenses in the Condensed Consolidated Statements of Income.
(c)
See Note 5B. Tax Matters: Taxes on Items of Other Comprehensive Income.

 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
4

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES

(millions of dollars)
 
April 1,
2012
   
Dec. 31,
2011
 
   
(Unaudited)
 
Assets
           
Cash and cash equivalents
  $ 2,934     $ 3,182  
Short-term investments
    21,038       23,270  
Accounts receivable, less allowance for doubtful accounts
    14,182       13,608  
Inventories
    7,189       6,969  
Taxes and other current assets
    9,361       9,441  
Assets of discontinued operations and other assets held for sale
    159       101  
Total current assets
    54,863       56,571  
Long-term investments
    10,632       9,814  
Property, plant and equipment, less accumulated depreciation
    16,192       16,938  
Goodwill
    45,252       45,067  
Identifiable intangible assets, less accumulated amortization
    52,801       53,833  
Taxes and other noncurrent assets
    5,943       5,779  
Total assets
  $ 185,683     $ 188,002  
                 
Liabilities and Shareholders’ Equity
               
Short-term borrowings, including current portion of long-term debt
  $ 5,526     $ 4,018  
Accounts payable
    3,091       3,836  
Dividends payable
    1       1,796  
Income taxes payable
    1,930       1,013  
Accrued compensation and related items
    1,752       2,169  
Other current liabilities
    14,794       15,237  
Total current liabilities
    27,094       28,069  
                 
Long-term debt
    33,543       34,931  
Pension benefit obligations
    6,181       6,355  
Postretirement benefit obligations
    3,346       3,344  
Noncurrent deferred tax liabilities
    19,739       19,597  
Other taxes payable
    6,984       6,886  
Other noncurrent liabilities
    5,119       6,199  
Total liabilities
    102,006       105,381  
                 
Commitments and Contingencies
               
                 
Preferred stock
    43       45  
Common stock
    446       445  
Additional paid-in capital
    71,786       71,423  
Employee benefit trusts
    (2 )     (3 )
Treasury stock
    (33,519 )     (31,801 )
Retained earnings
    48,124       46,210  
Accumulated other comprehensive loss
    (3,622 )     (4,129 )
Total Pfizer Inc. shareholders’ equity
    83,256       82,190  
Equity attributable to noncontrolling interests
    421       431  
Total shareholders’ equity
    83,677       82,621  
Total liabilities and shareholders’ equity
  $ 185,683     $ 188,002  
 

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
5

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
(UNAUDITED)
 
   
Three Months Ended
 
(millions of dollars)
 
April 1,
2012
   
April 3,
2011
 
             
Operating Activities:
           
Net income before allocation to noncontrolling interests
  $ 1,803     $ 2,234  
Adjustments to reconcile net income before allocation to noncontrolling interests to net
cash provided by operating activities:
               
Depreciation and amortization
    2,252       2,104  
Share-based compensation expense
    130       122  
Asset write-offs and impairment charges
    650       182  
Deferred taxes from continuing operations
    (404 )     (120 )
Benefit plan contributions in excess of expense
    (71 )     (383 )
Other non-cash adjustments, net
    (28 )     (19 )
Other changes in assets and liabilities, net of acquisitions and divestitures
    (1,558 )     522  
Net cash provided by operating activities
    2,774       4,642  
                 
Investing Activities:
               
Purchases of property, plant and equipment
    (254 )     (250 )
Purchases of short-term investments
    (6,344 )     (3,352 )
Proceeds from redemptions and sales of short-term investments
    8,119       2,553  
Net proceeds from redemptions and sales of short-term investments with original
maturities of 90 days or less
    623       5,983  
Purchases of long-term investments
    (1,184 )     (1,932 )
Proceeds from redemptions and sales of long-term investments
    302       888  
Acquisitions, net of cash acquired
    (782 )     (3,169 )
Other investing activities
    (29 )     4  
Net cash provided by investing activities
    451       725  
                 
Financing Activities:
               
Proceeds from short-term borrowings
    1,561       2,682  
Principal payments on short-term borrowings
    ––       (1,636 )
Net payments on short-term borrowings with original maturities of
90 days or less
    (1,791 )     (584 )
Principal payments on long-term debt
    (3 )     (3,878 )
Purchases of common stock
    (1,659 )     (1,430 )
Cash dividends paid
    (1,650 )     (1,591 )
Other financing activities
    35       33  
Net cash used in financing activities
    (3,507 )     (6,404 )
Effect of exchange-rate changes on cash and cash equivalents
    34       32  
Net decrease in cash and cash equivalents
    (248 )     (1,005 )
Cash and cash equivalents at beginning of period
    3,182       1,735  
                 
Cash and cash equivalents at end of period
  $ 2,934     $ 730  
                 
Supplemental Cash Flow Information:                
Cash paid/(refunded) during the period for:
               
Income taxes
  $ 451     $ (134 )
Interest
    508       687  
 

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
6

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
(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 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-month periods ended February 26, 2012, and February 27, 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).

On August 1, 2011, we completed the sale of our Capsugel business. In connection with our decision to sell our Capsugel business, we show the operating results of Capsugel as Discontinued operations––net of tax for the three months ended April 3, 2011 (see Note 2B. Acquisitions and Divestitures: Divestitures).

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

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.

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 Annual Report on Form 10-K for the year ended December 31, 2011.

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 a separate Condensed Consolidated Statement 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.

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 acquisition, we recorded approximately $250 million in Identifiable intangible assets, consisting primarily of the Emergen-C indefinite-lived brand, $86 million in net deferred tax liabilities and approximately $130 million in Goodwill. The allocation of the consideration transferred has not been finalized.
 
 
 
7

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

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 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 approximately $480 million in Identifiable intangible assets, consisting of indefinite-lived and finite-lived brands, $124 million in net deferred tax liabilities, and approximately $230 million in Goodwill. The allocation of the consideration transferred has not been finalized.

B. Divestitures
 
On August 1, 2011, we completed the sale of our Capsugel business for approximately $2.4 billion in cash. In connection with the decision to sell, the operating results associated with the Capsugel business are classified as Discontinued operations––net of tax in the condensed consolidated statements of income for the three months ended April 3, 2011.
 
The components of Discontinued operations—net of tax, virtually all of which relate to our former Capsugel business, follow:
   
Three Months Ended
(millions of dollars)
 
April 3,
2011
 
Revenues
  $ 177  
Pre-tax income from discontinued operations
  $ 28  
Provision for taxes on income(a)
    (18 )
Income from discontinued operations––net of tax
  $ 10  
Discontinued operations––net of tax
  $ 10  
(a)
Deferred tax amounts are not significant.
 
The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for the three months ended April 3, 2011.

Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring businesses and restructuring and integrating acquired businesses and in connection with our global cost-reduction and productivity initiatives. For example:

 
for our cost-reduction and 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; and

 
for our acquisition activity, we typically incur costs that can include transaction costs, integration costs (such as expenditures for consulting and the integration of systems and processes) and restructuring charges, related to employees, assets and activities that will not continue in the combined company.

All of our businesses and functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as functions 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 overall 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.
 
 
8

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

 
The components of costs associated with cost-reduction/productivity initiatives and acquisition activity follow:
   
Three Months Ended
 
(millions of dollars)
 
April 1,
2012
   
April 3,
2011
 
             
Transaction costs(a)
  $ ––     $ 10  
Integration costs(b)
    100       179  
Restructuring charges(c):
               
Employee termination costs
    267       667  
Asset impairments
    218       25  
Other
    11       13  
Restructuring charges and certain acquisition-related costs
    596       894  
 
Additional depreciation––asset restructuring, recorded in our condensed consolidated statements of income as follows(d):
               
Cost of sales
    79       172  
Selling, informational and administrative expenses
    2       7  
Research and development expenses
    259       64  
Total additional depreciation––asset restructuring
    340       243  
 
Implementation costs, recorded in our condensed consolidated statements of income as follows(e):
               
Selling, informational and administrative expenses
    15       ––  
Research and development expenses
    48       10  
Total implementation costs
    63       10  
Total costs associated with cost-reduction initiatives and acquisition activity
  $ 999     $ 1,147  
(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 April 1, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 59,400 employees, mainly in manufacturing and sales and research, of which approximately 46,300 employees have been terminated as of April 1, 2012. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits, many of which may be paid out during periods after termination. Asset impairments primarily include charges to write down property, plant and equipment to fair value. Other primarily includes costs to exit certain assets and activities.

 
The restructuring charges for the three months ended April 1, 2012 are associated with the following:

 
Primary Care operating segment ($3 million), Specialty Care and Oncology operating segment ($3 million), Established Products and Emerging Markets operating segment ($3 million), Animal Health and Consumer Healthcare operating segment ($5 million),  research and development operations ($12 million), manufacturing operations ($152 million) and Corporate ($318 million).

 
The restructuring charges for the three months ended April 3, 2011 are associated with the following:

 
Primary Care operating segment ($46 million), Specialty Care and Oncology operating segment ($35 million), Established Products and Emerging Markets operating segment ($4 million), Animal Health and Consumer Healthcare operating segment ($10 million), Nutrition operating segment ($2 million), research and development operations ($422 million), manufacturing operations ($75 million) and Corporate ($111 million).

(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 asset impairment charges included in restructuring charges in the first quarter of 2012 are based on an estimate of fair value for the related assets. A description follows:
         
Fair Value(a)
     
(millions of dollars)
 
April 1,
2012
   
Level 1
 
Level 2
   
Level 3
 
Impairment
 
                           
Long-lived assets held-for-sale (b)
  $ 112   $   $ 112     $ 218  
(a)
See 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 $112 million, less costs to sell of $2 million (a net of $110 million), in the first quarter of 2012. The impairment charges of $218 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.
 
 
9

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

 
The components of restructuring charges follow:
   
Costs Incurred
   
Activity
   
Accrual
 
(millions of dollars)
    2005-2012    
Through
April 1,
2012(a)
   
As of
April 1,
2012(b)
 
                     
Employee termination costs
  $ 10,869     $ 8,638     $ 2,231  
Asset impairments
    2,782       2,782       ––  
Other
    1,033       949       84  
Total restructuring charges
  $ 14,684     $ 12,369     $ 2,315  
(a)
Includes adjustments for foreign currency translation.
(b)
Included in Other current liabilities ($1.4 billion) and Other noncurrent liabilities ($891 million).

Note 4. Other Deductions—Net

The components of Other deductions––net follow:
   
Three Months Ended
 
(millions of dollars)
 
April 1,
2012
   
April 3,
2011
 
             
Interest income(a)
  $ (81 )   $ (105 )
Interest expense(a)
    390       458  
Net interest expense
    309       353  
Royalty-related income
    (97 )     (171 )
Net gains on asset disposals
    (7 )     (12 )
Certain legal matters, net(b)
    814       501  
Certain asset impairment charges(c)
    432       157  
Other, net
    206       (1 )
Other deductions––net
  $ 1,657     $ 827  
(a)
Interest income decreased in 2012 due to lower interest rates earned on investments. Interest expense decreased in 2012 due to lower long- and short-term debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities by using interest rate swaps.
(b)
In 2012, primarily relates to a $450 million charge in connection with an agreement-in-principle to settle a lawsuit by Brigham Young University related to Celebrex and charges for hormone-replacement therapy litigation. In 2011, primarily relates to charges for hormone-replacement therapy litigation (see Note 12. Commitments and Contingencies).
(c)
In 2012, primarily includes intangible asset impairments of approximately $395 million reflecting (i) $297 million of in-process research and development (IPR&D) that targeted autoimmune and inflammatory diseases, (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, and (iii) $53 million of developed technology rights comprising the impairments of two assets. See also the table below. In 2011, relates to IPR&D for the treatment of a certain autoimmune and inflammatory disease. The impairment charges reflect, among other things, the impact of new scientific findings for IPR&D, and an increased competitive environment for Robitussin.

The intangible asset impairment charges included in Other deductions––net in the first quarter of 2012 are based on an estimate of fair value for the related assets. A description follows:
         
Fair Value(a)
       
(millions of dollars)
 
April 1,
2012
   
Level 1
   
Level 2
   
Level 3
   
Impairment
 
                               
Intangible assets – IPR&D
  $ ––     $ ––     $ ––     $ ––     $ 297  
Intangible assets Other
    516       ––       ––       516       98  
Total(b)(c)
  $ 516     $ ––     $ ––     $ 516     $ 395  
(a)
See Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b)
Reflects intangible assets written down to their fair value of $516 million in the first quarter of 2012. The impairment charges of $395 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 in-process research and development 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.
(c)
Included in Identifiable intangible assets, less accumulated amortization.
 
 
10

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was 29.4% for the first quarter of 2012, compared to 28.7% for the first quarter of 2011. The higher tax rate for the first quarter of 2012 is primarily due to a change in the jurisdictional mix of earnings and the impact of the expiration of the U.S. research and development tax credit.

B. Taxes on Items of Other Comprehensive Income

The components of taxes on Other comprehensive income follow:
   
Three Months Ended
 
(millions of dollars)
 
April 1,
2012
   
April 3,
2011
 
             
Taxes on Other Comprehensive Income
               
Foreign currency translation adjustments(a)
  67     40  
                 
Unrealized holding gains/(losses) on derivative financial instruments
    159       126  
Reclassification adjustments for realized gains
    (115 )     (194 )
      44       (68 )
                 
Unrealized gains/(losses) on available-for-sale securities
    14       (3 )
Reclassification adjustments for realized losses
    7       1  
      21       (2 )
                 
Benefit plans: Actuarial gains/(losses)
    ––       ––  
Reclassification adjustments related to amortization
    44       25  
Reclassification adjustments related to curtailments and settlements, net
    43       19  
Other
    (1 )     (27 )
      86       17  
                 
Benefit plan: Prior service (costs)/credits and other
    ––       ––  
Reclassification adjustments related to amortization
    (8 )     (7 )
Reclassification adjustments related to curtailments and settlements, net
    (4 )     (4 )
Other
    (2 )     (4 )
      (14 )     (15 )
                 
Tax expense/(benefit) on other comprehensive income
  $ 204     $ (28 )
(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, as we treat these events as discrete items in the period of resolution.

The United States is one of our major tax jurisdictions and we are regularly audited by the 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 yet under audit. All other tax years are closed.
 
 
11

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.

 
With respect to King Pharmaceuticals, Inc. (King), tax year 2008 is currently under audit, and for Alpharma Inc. (a subsidiary of King) tax years 2005-2007 are currently under audit. 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 (1998-2012), Japan (2006-2012), Europe (2002-2012, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany) and Puerto Rico (2007-2012).
 
Note 6. Accumulated Other Comprehensive Income/(Expense), Excluding Noncontrolling Interests

Changes, net of tax, in accumulated other comprehensive income/(expense) follow:
   
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
Income/(Expense)
 
                                                 
Balance, January 1, 2012
  $ 944     $ (361 )   $ 46     $ (5,120 )   $ 362     $ (4,129 )
Other comprehensive income/(expense)(a)
    197       83       76       167       (16 )     507  
Balance, April 1, 2012
  $ 1,141     $ (278 )   $ 122     $ (4,953 )   $ 346     $ (3,622 )
(a)
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $1 million loss for the first quarter of 2012.

Note 7. Financial Instruments

A. Selected Financial Assets and Liabilities

Information about certain of our financial assets and liabilities follows:
(millions of dollars)
 
April 1,
2012
   
Dec. 31,
2011
 
Selected financial assets measured at fair value on a recurring basis(a) :
           
Trading securities(b)
  $ 138     $ 154  
Available-for-sale debt securities(c)
    27,855       29,179  
Available-for-sale money market funds(d)
    1,639       1,727  
Available-for-sale equity securities, excluding money market funds(c)
    371       317  
Derivative financial instruments in receivable positions(e):
               
Interest rate swaps
    825       1,033  
Foreign currency forward-exchange contracts
    240       349  
Foreign currency swaps
    93       17  
Total
    31,161       32,776  
Other selected financial assets(f):
               
Held-to-maturity debt securities, carried at amortized cost(c)
    1,591       1,587  
Private equity securities, carried at equity method or at cost(g)
    1,010       1,020  
Total
    2,601       2,607  
Total selected financial assets
  $ 33,762     $ 35,383  
 
Financial liabilities measured at fair value on a recurring basis(a):
               
Derivative financial instruments in a liability position(h):
               
Foreign currency swaps
  $ 539     $ 1,396  
Foreign currency forward-exchange contracts
    278       355  
Interest rate swaps
    26       14  
Total
    843       1,765  
Other financial liabilities(i):
               
Short-term borrowings, carried at historical proceeds, as adjusted(f)
    5,526       4,018  
Long-term debt, carried at historical proceeds, as adjusted(j), (k)
    33,543       34,931  
Total
    39,069       38,949  
Total selected financial liabilities
  $ 39,912     $ 40,714  
(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 that included in available-for-sale equity securities, excluding money market funds, are $131 million as of April 1, 2012 and $85 million as of December 31, 2011 of investments that use Level 1 inputs in the calculation of fair value, and $16 million as of April 1, 2012 and $25 million as of December 31, 2011 that use Level 3 inputs.
 
 
12

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(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 April 1, 2012 and December 31, 2011 of money market funds 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 $372 million as of April 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 $123 million and foreign currency swaps with fair values of $16 million at April 1, 2012; and foreign currency forward-exchange contracts with fair values of $169 million and interest rate swaps with fair values of $8 million at December 31, 2011.
(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 April 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 forward-exchange contracts with fair values of $190 million and foreign currency swaps with fair values of $99 million at April 1, 2012; and foreign currency forward-exchange contracts with fair values of $141 million and foreign currency swaps with fair values of $123 million at 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 $855 million at April 1, 2012 and $919 million at December 31, 2011, which are used as hedging instruments.
(k)
The fair value of our long-term debt is $38.6 billion at April 1, 2012 and $40.1 billion at December 31, 2011.

These selected financial assets and liabilities are presented in the Condensed Consolidated Balance Sheets as follows:
(millions of dollars)
 
April 1,
2012
   
Dec. 31,
2011
 
Assets:
           
Cash and cash equivalents
  $ 934     $ 900  
Short-term investments
    21,038       23,270  
Long-term investments
    10,632       9,814  
Taxes and other current assets(a)
    294       357  
Taxes and other noncurrent assets(b)
    864       1,042  
Total
  $ 33,762     $ 35,383  
Liabilities:
               
Short-term borrowings, including current portion of long-term debt
  $ 5,526     $ 4,018  
Other current liabilities(c)
    283       459  
Long-term debt
    33,543       34,931  
Other noncurrent liabilities(d)
    560       1,306  
Total
  $ 39,912     $ 40,714  
(a)
As of April 1, 2012, derivative instruments at fair value include foreign currency forward-exchange contracts ($240 million), foreign currency swaps ($33 million) and interest rate swaps ($21 million) and, at December 31, 2011, include foreign currency forward-exchange contracts ($349 million) and interest rate swaps ($8 million).
(b)
As of April 1, 2012, derivative instruments at fair value include interest rate swaps ($804 million) and foreign currency swaps ($60 million) and, at December 31, 2011, include interest rate swaps ($1.0 billion) and foreign currency swaps ($17 million).
(c)
At April 1, 2012, derivative instruments at fair value include foreign currency forward-exchange contracts ($278 million) and foreign currency swaps ($5 million) and, at December 31, 2011, include foreign currency forward-exchange contracts ($355 million) and foreign currency swaps ($104 million).
(d)
At April 1, 2012, derivative instruments at fair value include foreign currency swaps ($534 million) and interest rate swaps ($26 million) and, at December 31, 2011, include foreign currency swaps ($1.3 billion) and interest rate swaps ($14 million).

There were no significant impairments of financial assets recognized in the first three months of 2012 or 2011.
 
 
13

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

The contractual maturities of the available-for-sale and held-to-maturity debt securities follow:
   
Years
       
(millions of dollars)
 
Within 1
   
Over 1
to 5
   
Over 5
to 10
   
Total as of
April 1,
2012
 
Available-for-sale debt securities:
                       
Western European, Scandinavian and other government debt
  $ 9,744     $ 1,567     $ ––     $ 11,311  
Corporate debt(a)
    2,606       2,546       382       5,534  
U.S. Government debt
    4,395       ––       257       4,652  
Western European, Scandinavian and other government agency debt
    2,195       305       ––       2,500  
Federal Home Loan Mortgage Corporation and Federal National
Mortgage Association asset-backed securities
    ––       2,270       1       2,271  
Supranational debt
    1,149       438       ––       1,587  
Held-to-maturity debt securities:
                               
Certificates of deposit and other
    1,202       381       8       1,591  
Total debt securities
  $ 21,291     $ 7,507     $ 648     $ 29,446  
(a)
Largely issued by above-investment-grade institutions in the financial services sector.

C. Short-Term Borrowings

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

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of April 1, 2012, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $46.8 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 April 1, 2012, the aggregate notional amount of interest rate derivative financial instruments is $12.3 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.
 
 
14

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk follows:
   
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)
 
April 1,
2012
   
April 3,
2011
   
April 1,
2012
   
April 3,
2011
   
April 1,
2012
   
April 3,
2011
 
Three Months Ended
                                   
                                     
Derivative Financial Instruments in Cash
Flow Hedge Relationships
                                   
Foreign currency swaps
  $ ––     $ ––     $ 428     $ 305     $ 300     $ 506  
                                                 
Derivative Financial Instruments in Net
Investment Hedge Relationships
                                               
Foreign currency swaps
    (1 )     2       125       33       ––       ––  
                                                 
Derivative Financial Instruments Not
Designated as Hedges
                                               
Foreign currency forward-exchange contracts
    (127 )     (197 )     ––       ––       ––       ––  
Foreign currency swaps
    (23 )     30       ––       ––       ––       ––  
                                                 
Non-Derivative Financial Instruments in
Net Investment Hedge Relationships
                                               
Foreign currency short-term borrowings
    ––       ––       ––       43       ––       ––  
Foreign currency long-term debt
    ––       ––       50       28       ––       ––  
All other net
    (1 )     (1 )     9       2       ––       4  
Total
  $ (152 )   $ (166 )   $ 612     $ 411     $ 300     $ 510  
(a)
OID = Other (income)/deductions—net, included in the income statement account, Other deductions—net. OCI = Other comprehensive income/(loss), included in the balance sheet account Accumulated other comprehensive loss.
(b)
Also includes gains and losses attributable to the hedged risk in fair value hedge relationships.
(c)
There was no significant ineffectiveness in the first quarters of 2012 or 2011.
(d)
Amounts presented represent the effective portion of the gain or loss. 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. 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.

For information about the fair value of our derivative financial instruments, and the impact on our Condensed Consolidated Balance Sheets, see Note 7A. Financial Instruments: Selected Financial Assets and Liabilities above. 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 April 1, 2012, the aggregate fair value of these derivative instruments that are in a liability position is $287 million, for which we have posted collateral of $297 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 S&P or the equivalent rating by Moody’s Investors Service, on April 1, 2012, we would have been required to post an additional $111 million of collateral to our counterparties. The collateral advanced receivables are reported in Cash and cash equivalents.

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 April 1, 2012, we had $2.8 billion due from a well-diversified, highly rated group (S&P ratings of mostly A+ or better) of bank counterparties around the world. See Note 7B. Financial Instruments: Investments in Debt Securities above for a distribution of our investments.
 
In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under master netting agreements with financial institutions. 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 April 1, 2012, we received cash collateral of $460 million against various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, the obligations are reported in Short-term borrowings, including current portion of long-term debt.
 
 
15

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 8. Inventories

The components of inventories follow:
(millions of dollars)
 
April 1,
2012
   
Dec. 31,
2011
 
             
Finished goods
  $ 2,939     $ 2,543  
Work-in-process
    3,315       3,541  
Raw materials and supplies
    935       885  
Total inventories
  $ 7,189     $ 6,969  
Noncurrent portion not included above(a)
  $ 755     $ 800  
(a)
Included in Taxes and other noncurrent assets. There are no recoverability issues associated with these amounts.

Note 9. Goodwill and Other Intangible Assets
 
A. Goodwill
 
The components and changes in the carrying amount of goodwill follow:
(millions of dollars)
 
Primary
Care
   
Specialty
Care and
Oncology
   
Established
Products and
Emerging
Markets
   
Animal
Health and
Consumer
Healthcare
   
Nutrition
   
Total
 
                                                 
Balance, December 31, 2011
  $ 6,229     $ 17,097     $ 18,746     $ 2,497     $ 498     $ 45,067  
Additions(a)
                      361             361  
Other(b)
    (24 )     (66 )     (73 )     (17 )     4       (176 )
Balance, April 1, 2012
  $ 6,205     $ 17,031     $ 18,673     $ 2,841     $ 502     $ 45,252  
(a)
Related to our acquisitions of Alacer and Ferrosan, see Note 2A. Acquisitions and Divestitures: Acquisitions.
(b)
Primarily reflects the impact of foreign exchange.

B. Other Intangible Assets
 
Balance Sheet Information

The components of identifiable intangible assets follow:
   
April 1, 2012
   
December 31, 2011
 
(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
  $ 73,127     $ (33,447 )   $ 39,680     $ 73,088     $ (32,013 )   $ 41,075  
Brands
    1,938       (709 )     1,229       1,678       (687 )     991  
License agreements
    440       (246 )     194       425       (215 )     210  
Other
    651       (398 )     253       623       (362 )     261  
Total finite-lived intangible assets
    76,156       (34,800 )     41,356       75,814       (33,277 )     42,537  
Indefinite-lived intangible assets:
                                               
Brands
    10,480             10,480       10,027