Financial Instruments

9 Months Ended

Sep. 27, 2020

A. Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value using a Market Approach on a Recurring Basis and Fair Value Hierarchy:


	September 27, 2020						December 31, 2019
(MILLIONS OF DOLLARS)	Total		Level 1		Level 2		Total		Level 1		Level 2
Financial assets:
Short-term investments
Classified as equity securities with readily determinable fair values:
Money market funds(a)	$	12,273	$	—	$	12,273	$	705	$	—	$	705

Classified as available-for-sale debt securities:
Government and agency—non-U.S.	5,906		—		5,906		4,863		—		4,863
Government and agency—U.S.	582		—		582		811		—		811
Corporate and other	1,371		—		1,371		1,013		—		1,013
	7,859		—		7,859		6,687		—		6,687
Total short-term investments	20,132		—		20,132		7,392		—		7,392
Other current assets
Derivative assets:
Interest rate contracts	16		—		16		53		—		53
Foreign exchange contracts	321		—		321		413		—		413
Total other current assets	337		—		337		465		—		465
Long-term investments
Classified as equity securities with readily determinable fair values(b)	2,092		2,063		28		1,902		1,863		39

Classified as available-for-sale debt securities:

Government and agency—U.S.	142		—		142		303		—		303
Corporate and other	7		—		7		11		—		11
	149		—		149		315		—		315
Total long-term investments	2,241		2,063		178		2,216		1,863		354
Other noncurrent assets
Derivative assets:
Interest rate contracts	131		—		131		266		—		266
Foreign exchange contracts	100		—		100		261		—		261
Total derivative assets	231		—		231		526		—		526
Insurance contracts(c)	626		—		626		575		—		575
Total other noncurrent assets	857		—		857		1,102		—		1,102
Total assets	$	23,567	$	2,063	$	21,504	$	11,176	$	1,863	$	9,313

Financial liabilities:
Other current liabilities
Derivative liabilities:

Foreign exchange contracts	$	464	$	—	$	464	$	114	$	—	$	114
Total other current liabilities	464		—		464		114		—		114
Other noncurrent liabilities
Derivative liabilities:

Foreign exchange contracts	808		—		808		604		—		604
Total other noncurrent liabilities	808		—		808		604		—		604
Total liabilities	$	1,272	$	—	$	1,272	$	718	$	—	$	718

(a)As of September 27, 2020, $11.4 billion of proceeds from the Upjohn debt transactions (see Note 7D) are invested in money market funds and included in Restricted short-term investments in the condensed consolidated balance sheet.

(b)As of September 27, 2020, long-term equity securities of $181 million and as of December 31, 2019, long-term equity securities of $176 million were held in restricted trusts for employee benefit plans.

(c)Includes life insurance policies held in restricted trusts attributable to the funding of various U.S. non-qualified employee benefit plans. The underlying invested assets in these insurance contracts are marketable securities, which are carried at fair value, with changes in fair value recognized in Other (income)/deductions—net in the condensed consolidated statements of income (see Note 4).

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis


The following summarizes the financial liabilities not measured at fair value on a recurring basis, including the carrying values and estimated fair values using a market approach:
	September 27, 2020						December 31, 2019
	Carrying Value		Estimated Fair Value				Carrying Value		Estimated Fair Value
(MILLIONS OF DOLLARS)			Total		Level 2				Total		Level 2
Financial Liabilities
Long-term debt, excluding the current portion(a)	$	49,785	$	59,073	$	59,073	$	35,955	$	40,842	$	40,842

The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities, and short-term borrowings not measured at fair value on a recurring basis were not significant as of September 27, 2020 and December 31, 2019. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs. The fair value measurements of our private equity securities, which represent investments in the life sciences sector are based on Level 3 inputs using a market approach.

In addition, as of September 27, 2020 and December 31, 2019, we had long-term receivables whose fair value is based on Level 3 inputs; the differences between the estimated fair values and carrying values of these receivables were not significant.

Total Short-Term and Long-Term Investments and Equity-Method Investments


The following summarizes our investments by classification type:
(MILLIONS OF DOLLARS)	September 27, 2020		December 31, 2019
Short-term investments
Equity securities with readily determinable fair values(a)	$	12,273	$	705
Available-for-sale debt securities	7,859		6,687
Held-to-maturity debt securities	193		1,133
Total Short-term investments	$	20,325	$	8,525

Long-term investments
Equity securities with readily determinable fair values	$	2,092	$	1,902

Available-for-sale debt securities	149		315
Held-to-maturity debt securities	37		42
Private equity securities at cost	780		756
Total Long-term investments	$	3,059	$	3,014
Equity-method investments	15,949		17,133
Total long-term investments and equity-method investments	$	19,008	$	20,147
Held-to-maturity cash equivalents	$	130	$	163

(a)As of September 27, 2020 and December 31, 2019, included money market funds primarily invested in U.S. Treasury and government debt. As of September 27, 2020, $11.4 billion of proceeds from the Upjohn debt transactions (see Note 7D) are invested in money market funds and included in Restricted short-term investments in the condensed consolidated balance sheet.

B. Investments

Debt Securities


At September 27, 2020, our investment securities portfolio consisted of debt securities that were virtually all investment-grade. Information on investments in debt securities at September 27, 2020 and December 31, 2019 is as follows, including the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities as of September 27, 2020:
	September 27, 2020																December 31, 2019
			Gross Unrealized						Maturities (in Years)										Gross Unrealized
(MILLIONS OF DOLLARS)	Amortized Cost		Gains		Losses		Fair Value		Within 1		Over 1 to 5		Over 5		Total		Amortized Cost		Gains		Losses		Fair Value
Available-for-sale debt securities
Government and agency––non-U.S.	$	5,743	$	164	$	(1)	$	5,906	$	5,906	$	—	$	—	$	5,906	$	4,895	$	6	$	(38)	$	4,863
Government and agency––U.S.	726		—		(1)		725		582		142		—		725		1,120		—		(6)		1,114
Corporate and other(a)	1,379		3		(5)		1,378		1,371		7		—		1,378		1,027		—		(2)		1,025
Held-to-maturity debt securities
Time deposits and other	290		—		—		290		258		10		23		290		535		—		—		535
Government and agency––non-U.S.	70		—		—		70		65		—		5		70		803		—		—		803
Total debt securities	$	8,208	$	168	$	(7)	$	8,369	$	8,182	$	159	$	28	$	8,369	$	8,380	$	6	$	(47)	$	8,340

(a)Primarily issued by a diverse group of corporations.

For our portfolio of available-for-sale and held-to-maturity debt securities, any expected credit losses would be immaterial to the financial statements.

Equity Securities


The following presents the calculation of the portion of unrealized (gains)/losses that relates to equity securities, excluding equity method investments, still held at the reporting date:
	Three Months Ended				Nine Months Ended
(MILLIONS OF DOLLARS)	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Net (gains)/losses recognized during the period on equity securities(a)	$	70	$	(6)	$	(408)	$	(153)
Less: Net (gains)/losses recognized during the period on equity securities sold during the period	2		(3)		(16)		(13)
Net unrealized (gains)/losses during the reporting period on equity securities still held at the reporting date(b)	$	68	$	(3)	$	(391)	$	(140)

(a)Reported in Other (income)/deductions––net. See Note 4.

(b)Included in net unrealized gains are observable price changes on equity securities without readily determinable fair values. Since January 1, 2018, there were cumulative impairments and downward adjustments of $82 million and upward adjustments of $63 million. Impairments, downward and upward adjustments were not significant in the third quarters and the first nine months of 2020 and 2019.

C. Short-Term Borrowings


Short-term borrowings include:
(MILLIONS OF DOLLARS)	September 27, 2020		December 31, 2019
Commercial paper	$	10,990	$	13,915
Current portion of long-term debt, principal amount	2,152		1,458
Other short-term borrowings, principal amount(a)	226		860
Total short-term borrowings, principal amount	13,367		16,233
Net fair value adjustments related to hedging and purchase accounting	—		5
Net unamortized discounts, premiums and debt issuance costs	(4)		(43)
Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted	$	13,363	$	16,195

(a)Other short-term borrowings primarily include cash collateral. See Note 7E.

D. Long-Term Debt

New Issuances


In the second quarter of 2020, we issued the following senior unsecured notes:
(MILLIONS OF DOLLARS)
		Principal
Interest Rate	Maturity Date	As of September 27, 2020
Pfizer Inc.(a)
0.800%	May 28, 2025	$	750
1.700%	May 28, 2030	1,000
2.550%	May 28, 2040	1,000
2.700%	May 28, 2050	1,250
		$	4,000
Upjohn Inc., a wholly-owned subsidiary of Pfizer Inc.(b)
1.125%	June 22, 2022	$	1,000
1.650%	June 22, 2025	750
2.300%	June 22, 2027	750
2.700%	June 22, 2030	1,450
3.850%	June 22, 2040	1,500
4.000%	June 22, 2050	2,000
		$	7,450
Upjohn Finance B.V., a wholly-owned subsidiary of Upjohn Inc.(b)
0.816%	June 23, 2022	€	750
1.023%	June 23, 2024	750
1.362%	June 23, 2027	850
1.908%	June 23, 2032	1,250
		€	3,600

(a)The notes may be redeemed by us at any time, in whole, or in part, at varying redemption prices plus accrued and unpaid interest. The weighted-average effective interest rate for the notes at issuance was 2.11%.

(b)In June 2020, Upjohn Inc. and Upjohn Finance B.V. completed privately placed debt offerings in connection with the previously announced proposed Reverse Morris Trust transaction that will ultimately combine Upjohn and Mylan to form a new company, Viatris. The notes may be redeemed by Upjohn Inc. and Upjohn Finance B.V., as applicable, at any time, in whole, or in part, at varying redemption prices plus accrued and unpaid interest. The weighted-average effective interest rates at issuance were 2.95% for the $7.45 billion notes and 1.37% for the €3.60 billion notes. If the proposed transaction with Mylan does not close on or prior to February 1, 2021, or if, prior to such date, Upjohn Inc. and Mylan notify the trustee that the business combination agreement for the proposed transaction with Mylan is terminated, or the transaction will not otherwise be pursued, the notes must be redeemed at redemption prices equal to 101% of their respective principal amounts, plus accrued and unpaid interest. Pfizer has guaranteed these notes, and such guarantees will automatically and unconditionally terminate without the consent of holders of the notes upon the proposed distribution to Pfizer’s stockholders of all of the issued and outstanding shares of Upjohn Inc.’s common stock held by Pfizer (the Distribution). Upjohn Inc. has guaranteed the notes issued by Upjohn Finance B.V., and Upjohn Inc. will remain a guarantor of such notes post Distribution. Following the separation, Upjohn Inc. and Upjohn Finance B.V., as applicable, will remain the obligor. The proceeds from the financings will be used in part to fund a cash distribution from Upjohn Inc. to Pfizer immediately prior to the Distribution. In the interim, the $11.4 billion of proceeds are classified as Restricted short-term investments in the condensed consolidated balance sheet as of September 27, 2020 pursuant to the terms of the transaction agreements.

In the first quarter of 2020, we issued the following senior unsecured notes at a weighted average effective interest rate of 2.67%:

(MILLIONS OF DOLLARS)

Principal

Interest Rate

Maturity Date

As of
September 27, 2020

2.625%(a)

April 1, 2030

1,250

(a)The notes may be redeemed by us at any time, in whole, or in part, at a redemption price plus accrued and unpaid interest.


The following summarizes the aggregate principal amount of our senior unsecured long-term debt, and adjustments to report our aggregate long-term debt:
(MILLIONS OF DOLLARS)	September 27, 2020		December 31, 2019
Total long-term debt, principal amount(a)	$	48,473	$	34,820
Net fair value adjustments related to hedging and purchase accounting	1,621		1,305
Net unamortized discounts, premiums and debt issuance costs	(314)		(176)
Other long-term debt	5		5
Total long-term debt, carried at historical proceeds, as adjusted	$	49,785	$	35,955
Current portion of long-term debt, carried at historical proceeds, as adjusted (not included above)	$	2,149	$	1,462

(a)As of September 27, 2020, $11.4 billion of proceeds from the Upjohn debt transactions are invested in money market funds and included in Restricted short-term investments in the condensed consolidated balance sheet.

Retirements

In March 2020, we repurchased at par all $1.065 billion principal amount outstanding of our senior unsecured notes that were due in 2047 before the maturity date, which did not have a material impact on our condensed consolidated financial statements.

E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. We manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. We also manage our foreign exchange risk through the use of derivative financial instruments and foreign currency debt. These financial instruments serve to mitigate the impact on net income as a result of remeasurement into another currency, or against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.

The derivative financial instruments primarily hedge or offset exposures in the euro, U.K. pound, Japanese yen, Swedish krona and Chinese renminbi.

As a part of our cash flow hedging program, we designate foreign exchange contracts to hedge a portion of our forecasted euro, Japanese yen, Chinese renminbi, Canadian dollar, U.K. pound and Australian dollar-denominated intercompany inventory sales expected to occur no more than two years from the date of each hedge.

Interest Rate Risk

Our interest-bearing investments and borrowings are subject to interest rate risk. From time to time, depending on market conditions, we will change the profile of our outstanding debt or investments by entering into derivative financial instruments like interest rate swaps, either to hedge or offset the exposure to changes in the fair value of hedged items with fixed interest rates, or to convert variable rate debt (or investments) to fixed rates. The derivative financial instruments primarily hedge U.S. dollar fixed-rate debt.


The following summarizes the fair value of the derivative financial instruments and the notional amounts:
(MILLIONS OF DOLLARS)	September 27, 2020						December 31, 2019
			Fair Value						Fair Value
	Notional		Asset		Liability		Notional		Asset		Liability
Derivatives designated as hedging instruments:
Foreign exchange contracts(a)	$	24,545	$	346	$	1,187	$	25,193	$	591	$	662
Interest rate contracts	1,995		147		—		6,645		318		—
			493		1,187				909		662

Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	16,084	75		85		$	19,623	82		55

Total			$	568	$	1,272			$	992	$	718

(a)The notional amount of outstanding foreign currency forward-exchange contracts hedging our intercompany forecasted inventory sales was $5.1 billion as of September 27, 2020 and $5.9 billion as of December 31, 2019.


The following summarizes 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)				Amount of Gains/(Losses) Recognized in OCI(a), (b)				Amount of Gains/(Losses) Reclassified from OCI into OID and COS(a)
(MILLIONS OF DOLLARS)	Sept. 27, 2020		Sept. 29, 2019		Sept. 27, 2020		Sept. 29, 2019		Sept. 27, 2020		Sept. 29, 2019
Three Months Ended
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(c)	$	—	$	—	$	(379)	$	131	$	(149)	$	7
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach(d)	—		—		7		21		7		22
Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	(9)		378		—		—		—		—
Hedged item	9		(378)		—		—		—		—


Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		(257)		112		—		—
The portion on foreign exchange contracts excluded from the assessment of hedge effectiveness(d)	—		—		9		43		38		45
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign currency short-term borrowings(e)	—		—		—		45		—		—
Foreign currency long-term debt(e)	—		—		(72)		79		—		—
Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	255		(77)		—		—		—		—
All other net(d)	—		—		—		(1)		—		—
	$	255	$	(77)	$	(692)	$	429	$	(104)	$	74



	Amount of Gains/(Losses) Recognized in OID(a)				Amount of Gains/(Losses) Recognized in OCI(a), (b)				Amount of Gains/(Losses) Reclassified from OCI into OID and COS(a)
(MILLIONS OF DOLLARS)	Sept. 27, 2020		Sept. 29, 2019		Sept. 27, 2020		Sept. 29, 2019		Sept. 27, 2020		Sept. 29, 2019
Nine Months Ended
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(c)	$	—	$	—	$	(721)	$	137	$	(23)	$	265
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach(d)	—		—		49		105		48		108

Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	383		1,191		—		—		—		—
Hedged item	(383)		(1,191)		—		—		—		—



Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		(17)		87		—		—
The portion of foreign exchange contracts excluded from the assessment of hedge effectiveness(d)	—		—		185		136		122		99

Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign currency short-term borrowings(e)	—		—		8		65		—		—
Foreign currency long-term debt(e)	—		—		(69)		89		—		—

Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	205		(201)		—		—		—		—
All other net(d)	—		—		12		—		(1)		—
	$	205	$	(201)	$	(553)	$	617	$	147	$	472

(a)OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. COS = Cost of Sales, included in Cost of sales in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.

(b)For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the gains and losses are included in Other comprehensive income/(loss)––Foreign currency translation adjustments, net.

(c)The amounts reclassified from OCI into COS were:

•a net gain of $34 million in the third quarter of 2020;

•a net gain of $184 million in the first nine months of 2020;

•a net gain of $66 million in the third quarter of 2019; and

•a net gain of $169 million in the first nine months of 2019.

The remaining amounts were reclassified from OCI into OID. Based on quarter-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax loss of $192 million within the next 12 months into income. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $1.8 billion U.K. pound debt maturing in 2043.

(d)The amounts reclassified from OCI were reclassified into OID.

(e)Long-term debt includes foreign currency borrowings with carrying values of $2.0 billion as of September 27, 2020, which are used as hedging instruments in net investment hedge relationships.


The following summarizes the amounts recorded in our condensed consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
	September 27, 2020						December 31, 2019
			Cumulative Amount of Fair Value Hedging Adjustment Increase/(Decrease) to Carrying Amount						Cumulative Amount of Fair Value Hedging Adjustment Increase/(Decrease) to Carrying Amount
(MILLIONS OF DOLLARS)	Carrying Amount of Hedged Assets/Liabilities(a)		Active Hedging Relationships		Discontinued Hedging Relationships		Carrying Amount of Hedged Assets/Liabilities(a)		Active Hedging Relationships		Discontinued Hedging Relationships
Short-term investments	$	45	$	—	$	—	$	—	$	—	$	—
Long-term investments	—		—		—		45		—		—

Long-term debt	2,019		131		1,165		7,092		266		690

(a)Carrying amounts exclude the cumulative amount of fair value hedging adjustments.

Certain of our derivative financial instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce both counterparties’ exposure to risk of defaulting on amounts owed by the other party. As of September 27, 2020, the aggregate fair value of these derivative financial instruments that are in a net liability position was $1.1 billion, for which we have posted collateral of $1.2 billion in the normal course of business. If there had been a downgrade by S&P or Moody’s, we would not have been required to post any additional collateral.

As of September 27, 2020, we received cash collateral of $169 million from various counterparties that fully supports the approximate fair value of our derivative contracts and is reported in Short-term borrowings, including current portion of long-term debt.

F. 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. For additional information about concentrations of certain credit risk related to certain significant customers, see Notes to Consolidated Financial Statements––Note 17C. Segment, Geographic and Other Revenue Information: Other Revenue Information in Pfizer’s 2019 Financial Report. As of September 27, 2020, we had $1.4 billion due from a well-diversified, high quality group of banks from around the world. For details about our investments, see Note 7B.

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under credit-support agreements that provide for the ability to request to receive cash collateral, depending on levels of exposure, our credit rating and the credit rating of the counterparty.