NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A – BASIS OF PRESENTATION
The accompanying
unaudited condensed consolidated financial statements
of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the
three and nine
months ended
September 30, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our most recent Annual Report on Form 10-K.
Subsequent Events
We evaluate events occurring after the date of our most recent accompanying
unaudited condensed consolidated balance sheets
for potential recognition or disclosure in our financial statements. We did not identify any material subsequent events requiring adjustment to our accompanying
unaudited condensed consolidated financial statements
(recognized subsequent events) for the
three and nine
months ended
September 30, 2017
. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to
Note B – Acquisitions and Strategic Investments
and
Note I – Commitments and Contingencies
for more information.
NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS
2017 Acquisitions
Apama Medical Inc.
On October 10, 2017, we completed the acquisition of Apama Medical Inc. (Apama), a privately-held company developing the Apama™ Radiofrequency single-shot Balloon Catheter System for the treatment of atrial fibrillation. Total consideration was comprised of
$175 million
cash up-front and a maximum of
$125 million
in contingent payments based on the achievement of clinical and regulatory milestones. Apama will be integrated into our Rhythm Management segment.
Symetis SA
On May 16, 2017, we completed the acquisition of Symetis SA (Symetis), a privately-held Swiss structural heart company focused on minimally-invasive transcatheter aortic valve replacement devices, for approximately
$430 million
in cash. We are in the process of integrating Symetis into our Interventional Cardiology business and expect the integration to be substantially complete by the end of 2018.
Purchase Price Allocation
We accounted for the acquisition of Symetis as a business combination and, in accordance with
FASB ASC Topic 805
, Business Combinations
, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate preliminary purchase price are as follows (in millions):
|
|
|
|
|
Payment for acquisition, net of cash acquired
|
$
|
392
|
|
The following summarizes the preliminary purchase price allocation for the Symetis acquisition as of
September 30, 2017
(in millions):
|
|
|
|
|
Goodwill
|
$
|
191
|
|
Amortizable intangible assets
|
278
|
|
Other assets acquired
|
26
|
|
Liabilities assumed
|
(103
|
)
|
|
$
|
392
|
|
We allocated a portion of the purchase price to specific intangible asset categories as follows:
|
|
|
|
|
|
|
|
|
|
Amount Assigned
(in millions)
|
|
Amortization Period
(in years)
|
|
Risk-Adjusted Discount
Rates used in Purchase Price Allocation
|
Amortizable intangible assets:
|
|
|
|
|
|
Technology-related
|
$
|
268
|
|
|
13
|
|
24%
|
Other intangible assets
|
10
|
|
|
2-13
|
|
24%
|
|
$
|
278
|
|
|
|
|
|
Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets, and are amortizing them on a straight-line basis over their assigned estimated useful lives.
Contingent Consideration
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets and/or obtaining regulatory approvals for products in development at the date of the acquisition. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through a separate line item within our
unaudited condensed consolidated statements of operations
. We paid contingent consideration of
$45 million
during the
first nine months of
2017
and
$77 million
during the
first nine months of
2016
.
Changes in the fair value of our contingent consideration liabilities were as follows (in millions):
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
204
|
|
Fair value adjustments
|
(78
|
)
|
Contingent payments related to prior period acquisitions
|
(45
|
)
|
Balance as of September 30, 2017
|
$
|
81
|
|
As of
September 30, 2017
, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately
$1.261 billion
.
Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significant unobservable inputs:
|
|
|
|
|
|
Contingent Consideration Liabilities
|
Fair Value as of September 30, 2017
|
Valuation Technique
|
Unobservable Input
|
Range
|
R&D and Commercialization-based Milestones
|
$31 million
|
Discounted Cash Flow
|
Discount Rate
|
2%
|
Projected Year of Payment
|
2018 - 2021
|
Revenue-based Payments
|
$50 million
|
Discounted Cash Flow
|
Discount Rate
|
11% - 15%
|
Projected Year of Payment
|
2017 - 2026
|
Increases or decreases in the fair value of our contingent consideration liabilities can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or in the timing or likelihood of achieving R&D, commercialization-based, and revenue-based milestones. Projected contingent payment amounts related to some of our R&D, commercialization-based, and revenue-based milestones are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs together, or in isolation, may result in a significantly lower or higher fair value measurement.
Strategic Investments
On November 1, 2017, we entered into a definitive agreement with an investee company where we may be obligated to pay
$145 million
in cash up-front and a maximum of
$130 million
in contingent payments to acquire the investee. The agreement contains a provision, expiring October 31, 2019, allowing the investee company to sell the remaining equity interests of the investee company to us upon achievement of a regulatory milestone, and an option allowing us to acquire the remaining equity interests.
We account for certain of our strategic investments as equity method investments, in accordance with
FASB ASC Topic 323,
Investments - Equity Method and Joint Ventures
.
The aggregate carrying amount of our strategic investments were comprised of the following categories:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Equity method investments
|
|
$
|
204
|
|
|
$
|
265
|
|
Cost method investments
|
|
69
|
|
|
20
|
|
Available-for-sale securities
|
|
32
|
|
|
20
|
|
Notes receivable
|
|
44
|
|
|
42
|
|
|
|
$
|
349
|
|
|
$
|
347
|
|
These investments are classified as other long-term assets within our accompanying
unaudited condensed consolidated balance sheets
, in accordance with U.S. GAAP and our accounting policies.
During the second quarter of
2017
, we recorded a charge of
$53 million
for an other-than-temporary impairment loss equal to the difference between the carrying value of one of our investments and its fair value. The charge was recorded within the
Other, net
caption of our
unaudited condensed consolidated statements of operations
.
NOTE C – GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Gross Carrying
|
|
Accumulated
Amortization/
|
|
Gross
Carrying
|
|
Accumulated
Amortization/
|
(in millions)
|
Amount
|
|
Write-offs
|
|
Amount
|
|
Write-offs
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
Technology-related
|
$
|
9,388
|
|
|
$
|
(4,774
|
)
|
|
$
|
9,123
|
|
|
$
|
(4,468
|
)
|
Patents
|
514
|
|
|
(375
|
)
|
|
529
|
|
|
(374
|
)
|
Other intangible assets
|
1,625
|
|
|
(807
|
)
|
|
1,583
|
|
|
(722
|
)
|
|
$
|
11,527
|
|
|
$
|
(5,956
|
)
|
|
$
|
11,235
|
|
|
$
|
(5,564
|
)
|
Unamortizable intangible assets
|
|
|
|
|
|
|
|
Goodwill
|
$
|
16,782
|
|
|
$
|
(9,900
|
)
|
|
$
|
16,578
|
|
|
$
|
(9,900
|
)
|
In-process research and development (IPR&D)
|
92
|
|
|
—
|
|
|
92
|
|
|
—
|
|
Technology-related
|
120
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
$
|
16,994
|
|
|
$
|
(9,900
|
)
|
|
$
|
16,790
|
|
|
$
|
(9,900
|
)
|
Our technology-related intangible assets that are not subject to amortization represent technical processes, intellectual property and/or institutional understanding acquired through business combinations that are fundamental to the on-going operations of our business and have no limit to their useful life. Our technology-related intangible assets that are not subject to amortization are comprised primarily of certain acquired balloon and other technology, which is foundational to our continuing operations within the Cardiovascular market and other markets within interventional medicine. We assess our indefinite-lived intangible assets at least annually for impairment and reassess their classification as indefinite-lived assets. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with
FASB ASC Topic 350,
Intangibles - Goodwill and Other
.
In the third quarter of
2017
, we performed our annual impairment test of all IPR&D projects and our indefinite-lived core technology assets and determined that the assets were not impaired. In addition, we verified the classification as indefinite-lived assets continues to be appropriate.
The following represents our goodwill balance by global reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Cardiovascular
|
|
Rhythm Management
|
|
MedSurg
|
|
Total
|
Balance as of December 31, 2016
|
$
|
3,513
|
|
|
$
|
290
|
|
|
$
|
2,875
|
|
|
$
|
6,678
|
|
Impact of foreign currency fluctuations and other changes in carrying amount
|
11
|
|
|
1
|
|
|
1
|
|
|
13
|
|
Goodwill acquired
|
191
|
|
|
—
|
|
|
—
|
|
|
191
|
|
Balance as of September 30, 2017
|
$
|
3,715
|
|
|
$
|
291
|
|
|
$
|
2,876
|
|
|
$
|
6,882
|
|
Goodwill Impairment Testing
We test our goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest an impairment may exist. In the second quarter of
2017
, we performed our annual goodwill impairment test for all of our reporting units and concluded the fair value of each reporting unit exceeded its carrying value.
The following is a rollforward of accumulated goodwill write-offs by global reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Cardiovascular
|
|
Rhythm Management
|
|
MedSurg
|
|
Total
|
Accumulated write-offs as of December 31, 2016
|
$
|
(1,479
|
)
|
|
$
|
(6,960
|
)
|
|
$
|
(1,461
|
)
|
|
$
|
(9,900
|
)
|
Goodwill written off
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accumulated write-offs as of September 30, 2017
|
$
|
(1,479
|
)
|
|
$
|
(6,960
|
)
|
|
$
|
(1,461
|
)
|
|
$
|
(9,900
|
)
|
NOTE D – FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We address market risk from changes in foreign currency exchange rates and interest rates through a risk management program which includes the use of derivative financial instruments. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings or cash flows to material risk as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item. We manage our concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
The success of our risk management program depends, in part, on forecasted transactions denominated primarily in British pound sterling, Euro and Japanese yen. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecasted. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities, forecasted intercompany and third-party transactions, and net investments in certain subsidiaries. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.
Certain of our currency derivative instruments designated as cash flow hedges under
FASB ASC Topic 815
, Derivatives and Hedging
are intended to protect the U.S. dollar value of forecasted transactions. The effective portion of gains or losses on a derivative instrument designated as a cash flow hedge is recorded in other comprehensive income (OCI), net of tax, until the underlying third-party transaction occurs. When the related third-party transaction occurs we recognize the gain or loss to earnings within the
Cost of products sold
caption of our
unaudited condensed consolidated statements of operations
. In the event the hedging relationship is no longer effective, or if the hedged forecasted transaction becomes no longer probable, we reclassify the amount of gains or losses on the derivative instrument designated as a cash flow hedge to earnings at that time.
We also use currency forward contracts that are not part of designated hedging relationships under
FASB ASC Topic 815
as a part of our strategy to manage our exposure to currency exchange risk related to monetary assets and liabilities and related forecasted transactions. These currency forward contracts have an original time to maturity consistent with the hedged currency transaction exposures, generally less than one year and are marked-to-market with changes in fair value recorded to earnings and reflected within the
Other, net
caption of our
unaudited condensed consolidated statements of operations
.
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We use interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates. Under these agreements we and the counterparty, at specified intervals, exchange the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. We designate these derivative instruments either as fair value or cash flow hedges under
FASB ASC Topic 815
.
The changes in the fair value of interest rate derivatives designated as fair value hedges and the changes in the fair value of the underlying hedged debt instrument generally offset and are recorded within the
Interest expense
caption of our
unaudited condensed consolidated statements of operations
. To the extent the hedge relationship is effective, we record the changes in the fair value of interest rate derivatives designated as cash flow hedges within the
Accumulated other comprehensive income, net of tax,
caption of our
unaudited condensed consolidated balance sheets
until the underlying hedged item occurs, at which time we recognize the gain or loss within interest expense. We record the ineffective portion, if any, of our interest rate derivatives designated as cash flow hedges directly to earnings within interest expense and in the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur we reclassify the amount of gains or losses to earnings at that time.
We are amortizing the realized gains or losses from interest rate derivative instruments previously designated as fair value hedges and the effective portion of gains or losses from interest rate derivative contracts previously designated as cash flow hedges into earnings as a component of interest expense over the remaining term of the hedged item, in accordance with
FASB ASC Topic 815
.
The following table presents the contractual amounts of our derivative instruments outstanding:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Topic 815 designation
|
As of
|
September 30, 2017
|
|
December 31, 2016
|
Forward currency contracts
|
Cash flow hedge
|
$
|
3,218
|
|
|
$
|
2,271
|
|
Forward currency contracts
|
Non-designated
|
2,111
|
|
|
1,830
|
|
Total Notional Outstanding
|
|
$
|
5,329
|
|
|
$
|
4,101
|
|
The remaining time to maturity as of
September 30, 2017
is within
60
months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts. We had no interest rate derivative instruments outstanding as of
September 30, 2017
and
December 31, 2016
.
The following presents the effect of our derivative instruments designated as cash flow hedges under
FASB ASC Topic 815
on our accompanying
unaudited condensed consolidated statements of operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Location in Unaudited Condensed Consolidated Statements of Operations
|
|
Effective Amount
Recognized in OCI
|
|
Effective Amount Reclassified from OCI into Earnings
|
|
|
Pre-Tax Gain (Loss)
|
Tax Benefit (Expense)
|
Gain (Loss) Net of Tax
|
|
Pre-Tax (Gain) Loss
|
Tax Benefit (Expense)
|
(Gain) Loss Net of Tax
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Cost of products sold
|
|
$
|
(24
|
)
|
$
|
9
|
|
$
|
(15
|
)
|
|
$
|
(14
|
)
|
$
|
5
|
|
$
|
(9
|
)
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Cost of products sold
|
|
$
|
(22
|
)
|
$
|
8
|
|
$
|
(14
|
)
|
|
$
|
(27
|
)
|
$
|
10
|
|
$
|
(17
|
)
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Cost of products sold
|
|
$
|
(88
|
)
|
$
|
32
|
|
$
|
(56
|
)
|
|
$
|
(68
|
)
|
$
|
25
|
|
$
|
(43
|
)
|
Interest rate derivative contracts
|
|
Interest expense
|
|
—
|
|
—
|
|
—
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|
|
|
|
$
|
(88
|
)
|
$
|
32
|
|
$
|
(56
|
)
|
|
$
|
(69
|
)
|
$
|
25
|
|
$
|
(44
|
)
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Cost of products sold
|
|
$
|
(180
|
)
|
$
|
65
|
|
$
|
(115
|
)
|
|
$
|
(107
|
)
|
$
|
38
|
|
$
|
(69
|
)
|
As of
September 30, 2017
, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as currency hedge contracts under
FASB ASC Topic 815
that may be reclassified to earnings within the next twelve months are presented below:
|
|
|
|
|
|
|
|
(in millions)
|
|
Location in Unaudited Condensed Consolidated Statements of Operations
|
|
Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
|
Fair value hedge contracts
|
|
Interest expense
|
|
$
|
12
|
|
Cash flow hedge contracts
|
|
Interest expense
|
|
1
|
|
Cash flow hedge contracts
|
|
Cost of products sold
|
|
(30
|
)
|
Net gains and losses on currency hedge contracts not designated as hedging instruments offset by net gains and losses from currency transaction exposures are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Location in Unaudited Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net gain (loss) on currency hedge contracts
|
|
Other, net
|
|
$
|
(13
|
)
|
|
$
|
(7
|
)
|
|
$
|
(25
|
)
|
|
$
|
(74
|
)
|
Net gain (loss) on currency transaction exposures
|
|
Other, net
|
|
9
|
|
|
1
|
|
|
13
|
|
|
64
|
|
Net currency exchange gain (loss)
|
|
|
|
$
|
(4
|
)
|
|
$
|
(6
|
)
|
|
$
|
(12
|
)
|
|
$
|
(10
|
)
|
Fair Value Measurements
FASB ASC Topic 815
requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by
FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, by considering the estimated amount we would receive or pay to transfer these instruments at the reporting date when taking into account current currency exchange rates and interest rates, the creditworthiness of the counterparty for unrealized gain positions and our own creditworthiness for unrealized loss positions. In certain instances, we may utilize financial models to measure fair value of our derivative instruments. In doing so, we use inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and inputs derived principally from, or corroborated by, observable market data by correlation or other means.
The following are the balances of our derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Location in Unaudited Condensed Consolidated Balance Sheets
(1)
|
As of
|
|
September 30,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Derivative Assets:
|
|
|
|
|
Designated Derivative Instruments
|
|
|
|
Forward currency contracts
|
Other current assets
|
$
|
7
|
|
|
$
|
98
|
|
Forward currency contracts
|
Other long-term assets
|
59
|
|
|
65
|
|
|
|
66
|
|
|
163
|
|
Non-Designated Derivative Instruments
|
|
|
|
|
Forward currency contracts
|
Other current assets
|
17
|
|
|
36
|
|
Total Derivative Assets
|
|
$
|
83
|
|
|
$
|
199
|
|
|
|
|
|
|
Derivative Liabilities:
|
|
|
|
|
Designated Derivative Instruments
|
|
|
|
Forward currency contracts
|
Other current liabilities
|
$
|
38
|
|
|
$
|
3
|
|
Forward currency contracts
|
Other long-term liabilities
|
25
|
|
|
4
|
|
|
|
63
|
|
|
7
|
|
Non-Designated Derivative Instruments
|
|
|
|
|
Forward currency contracts
|
Other current liabilities
|
29
|
|
|
19
|
|
Total Derivative Liabilities
|
|
$
|
92
|
|
|
$
|
26
|
|
|
|
(1)
|
We classify derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less.
|
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value.
FASB ASC Topic 820
establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
|
|
•
|
Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
|
|
|
•
|
Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
|
|
|
•
|
Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
|
Assets and liabilities measured at fair value on a recurring basis consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2017
|
|
December 31, 2016
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and government funds
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42
|
|
Available-for-sale securities
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Forward currency contracts
|
—
|
|
|
83
|
|
|
—
|
|
|
83
|
|
|
—
|
|
|
199
|
|
|
—
|
|
|
199
|
|
|
$
|
59
|
|
|
$
|
83
|
|
|
$
|
—
|
|
|
$
|
142
|
|
|
$
|
62
|
|
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
261
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
26
|
|
Accrued contingent consideration
|
—
|
|
|
—
|
|
|
81
|
|
|
81
|
|
|
—
|
|
|
—
|
|
|
204
|
|
|
204
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
81
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
204
|
|
|
$
|
230
|
|
Our investments in money market and government funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as cash and cash equivalents within our accompanying
unaudited condensed consolidated balance sheets
, in accordance with U.S. GAAP and our accounting policies. In addition to
$27 million
invested in money market and government funds as of
September 30, 2017
, we had
$183 million
in interest bearing and non-interest bearing bank accounts. In addition to
$42 million
invested in money market and government funds as of
December 31, 2016
, we had
$19 million
in short-term deposits and
$135 million
in interest bearing and non-interest bearing bank accounts.
Our recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to our contingent consideration liability. Refer to
Note B – Acquisitions and Strategic Investments
for a discussion of the changes in the fair value of our contingent consideration liability.
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Refer to
Note B – Acquisitions and Strategic Investments
for a discussion of our strategic investments.
The fair value of our outstanding debt obligations was
$6.032 billion
as of
September 30, 2017
and
$5.739 billion
as of
December 31, 2016
, which was determined by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy. Refer to
Note E – Borrowings and Credit Arrangements
for a discussion of our debt obligations.
NOTE E – BORROWINGS AND CREDIT ARRANGEMENTS
We had total debt of
$5.682 billion
as of
September 30, 2017
and
$5.484 billion
as of
December 31, 2016
. The debt maturity schedule for the significant components of our long-term debt obligations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
in millions, except interest rates
|
|
Maturity Date
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
January 2017 5.125% Notes
|
|
January 2017
|
|
$
|
—
|
|
|
$
|
250
|
|
October 2018 2.650% Notes
|
|
October 2018
|
|
600
|
|
|
600
|
|
January 2020 6.000% Notes
|
|
January 2020
|
|
850
|
|
|
850
|
|
May 2020 2.850% Notes
|
|
May 2020
|
|
600
|
|
|
600
|
|
May 2022 3.375% Notes
|
|
May 2022
|
|
500
|
|
|
500
|
|
May 2025 3.850% Notes
|
|
May 2025
|
|
750
|
|
|
750
|
|
October 2023 4.125% Notes
|
|
October 2023
|
|
450
|
|
|
450
|
|
November 2035 6.250% Notes
|
|
November 2035
|
|
350
|
|
|
350
|
|
January 2040 7.375% Notes
|
|
January 2040
|
|
300
|
|
|
300
|
|
August 2018 Term Loan
|
|
August 2018
|
|
—
|
|
|
150
|
|
August 2020 Term Loan
|
|
2018 - 2020
|
|
—
|
|
|
600
|
|
Debt Discount
|
|
2018 - 2040
|
|
(7
|
)
|
|
(8
|
)
|
Deferred Financing Costs
|
|
2018 - 2040
|
|
(20
|
)
|
|
(24
|
)
|
Interest Rate Swaps
|
|
2020 - 2023
|
|
42
|
|
|
51
|
|
Capital Lease Obligation
|
|
2018 - 2020
|
|
1
|
|
|
1
|
|
Long-term debt
|
|
|
|
$
|
4,416
|
|
|
$
|
5,420
|
|
|
|
|
Note:
|
The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges.
|
Revolving Credit Facility
On August 4, 2017, we entered into a
$2.250 billion
revolving credit facility (the 2017 Facility) with a global syndicate of commercial banks and terminated our previous
$2.000 billion
revolving credit facility (the 2015 Facility), which was scheduled to mature April 2020. The 2017 Facility matures on August 4, 2022. Eurodollar and multicurrency loans under the 2017 Facility bear interest at LIBOR plus an interest margin of between
0.90 percent
and
1.50 percent
, based on our corporate credit ratings and consolidated leverage ratio (
1.10 percent
as of
September 30, 2017
). Under the credit agreement for the 2017 Facility (the 2017 Credit Agreement), we are required to pay a facility fee (
0.15 percent
as of
September 30, 2017
) based on our credit ratings and the total amount of revolving credit commitment, regardless of usage of the 2017 Facility. This facility provides backing for the commercial paper program described below. There were no borrowings outstanding under the 2017 Facility as of
September 30, 2017
and no borrowings outstanding under the 2015 Facility as of
December 31, 2016
.
The 2017 Facility agreement in place requires that we maintain certain financial covenants, as follows:
|
|
|
|
|
|
Covenant Requirement
as of September 30, 2017
|
|
Actual as of
September 30, 2017
|
Maximum leverage ratio (1)
|
3.5 times
|
|
2.3 times
|
|
|
(1)
|
Ratio of total debt to consolidated EBITDA, as defined by the credit agreement, for the preceding four consecutive fiscal quarters.
|
The 2017 Credit Agreement provides for an exclusion from the calculation of consolidated EBITDA, as defined by such agreement, through the agreed maturity, of any non-cash charges and up to
$500 million
in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of
September 30, 2017
, we had
$476 million
of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the 2017 Credit Agreement, are excluded from the calculation of consolidated EBITDA and any new debt issued to fund any tax deficiency payments is excluded from consolidated total debt, as defined in the 2017 Credit Agreement, provided that the sum of any excluded net cash litigation payments and any new debt issued to fund any tax deficiency payments does not exceed
$2.624 billion
in the aggregate. As of
September 30, 2017
, we had
$2.358 billion
of the combined legal and debt exclusion remaining.
As of and through
September 30, 2017
, we were in compliance with the required covenants.
Any inability to maintain compliance with these covenants could require us to seek to renegotiate the terms of our credit facility or seek waivers from compliance with these covenants, both of which could result in additional borrowing costs. Further, there can be no assurance that our lenders would agree to such new terms or grant such waivers.
Commercial Paper
In June 2017, we launched a commercial paper program that allowed the Company to have a maximum of
$2.000 billion
in commercial paper outstanding. In August 2017, we increased our commercial paper program’s maximum to
$2.250 billion
, in line with the increased size of the 2017 Facility. As of
September 30, 2017
there was
$1.260 billion
of commercial paper outstanding. The commercial paper program is backed by the 2017 Facility. Commercial paper issued as of
September 30, 2017
had a weighted average maturity of
29
days and a weighted average yield of
1.65 percent
.
Term Loans
As of
September 30, 2017
, we had no amounts
outstanding under our unsecured term loan facilities and
$750 million
outstanding as of
December 31, 2016
. These facilities include an unsecured term loan facility maturing August 2018 (August 2018 Term Loan) and an unsecured term loan facility maturing August 2020 (August 2020 Term Loan). The August 2018 Term Loan had
$150 million
outstanding as of
December 31, 2016
and was fully repaid as of June 30, 2017. The August 2020 Term Loan had
$600 million
outstanding as of
December 31, 2016
and was fully repaid as of
September 30, 2017
.
Senior Notes
We had senior notes outstanding of
$4.400 billion
as of
September 30, 2017
and
$4.650 billion
as of
December 31, 2016
.
On January 12, 2017, we used our existing credit facilities to repay the
$250 million
plus interest of our senior notes due in January 2017.
Our senior notes were issued in public offerings, are redeemable prior to maturity and are not subject to any sinking fund requirements. Our senior notes are unsecured, unsubordinated obligations and rank on parity with each other. These notes are effectively junior to borrowings under our credit and security facility and to the extent borrowed by our subsidiaries, to liabilities of our subsidiaries (see
Other Arrangements
below).
Other Arrangements
As of
December 31, 2016
, we maintained a
$300 million
credit and security facility secured by our U.S. trade receivables maturing on June 9, 201
7.
On February 7, 2017, we amended the terms of this credit and security facility, including increasing the facility size to
$400 million
and extending the facility maturity date to February 2019
. We had no borrowings outstanding under this facility as of
September 30, 2017
and
$60 million
as of
December 31, 2016
.
We have accounts receivable factoring programs in certain European countries that we account for as sales under
FASB ASC Topic 860,
Transfers and Servicing
.
These agreements provide for the sale of accounts receivable to third parties, without recourse, of up to
$449 million
as of
September 30, 2017
. We have no retained interests in the transferred receivables, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. We de-recognized
$167 million
of receivables as of
September 30, 2017
at an average interest rate of
1.6 percent
and
$152 million
as of
December 31, 2016
at an average interest rate of
1.8 percent
.
In addition, we have uncommitted credit facilities with a commercial Japanese bank that provide for borrowings, promissory notes discounting and receivables factoring of up to
22.0 billion
Japanese yen (approximately
$196 million
as of
September 30, 2017
). We de-recognized
$162 million
of notes receivable and factored receivables as of
September 30, 2017
at an average interest rate of
1.3 percent
and
$149 million
of notes receivable as of
December 31, 2016
at an average interest rate of
1.6 percent
. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying
unaudited condensed consolidated balance sheets
.
We had outstanding letters of credit of
$37 million
as of
September 30, 2017
and
$44 million
as of
December 31, 2016
, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of
September 30, 2017
and
December 31, 2016
, none of the beneficiaries had drawn upon the letters of credit or guarantees; accordingly, we did not recognize a related liability for our outstanding letters of credit in our consolidated balance sheets as of
September 30, 2017
or
December 31, 2016
. We believe we will generate sufficient cash from operations to fund these arrangements and intend to fund these arrangements without drawing on the letters of credit.
As of and through
September 30, 2017
, we were in compliance with all the required covenants related to our debt obligations. For additional information regarding the terms of our debt agreements, refer to
Note F - Borrowings and Credit Arrangements
of the consolidated financial statements in our most recent Annual Report on Form 10-K.
NOTE F – RESTRUCTURING-RELATED ACTIVITIES
2016 Restructuring Plan
On June 6, 2016, our Board of Directors approved and we committed to a restructuring initiative (the 2016 Restructuring Plan). The 2016 Restructuring Plan is intended to develop global commercialization, technology and manufacturing capabilities in key growth markets, build on our Plant Network Optimization (PNO) strategy, which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and expanding operational efficiencies in support of our operating income margin goals. Key activities under the 2016 Restructuring Plan include strengthening global infrastructure through evolving global real estate assets and workplaces, developing global commercial and technical competencies, enhancing manufacturing and distribution expertise in certain regions and continuing implementation of our ongoing PNO strategy. These activities were initiated in the second quarter of 2016 and are expected to be substantially completed by the end of 2018.
The 2016 Restructuring Plan is expected to result in total pre-tax charges of approximately
$175 million
to
$225 million
and approximately
$160 million
to
$210 million
of these charges are estimated to result in cash outlays.
We have recorded related costs of
$108 million
since the inception of the plan through
September 30, 2017
and recorded a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.
The following table provides a summary of our estimates of costs associated with the 2016 Restructuring Plan through the end of 2018 by major type of cost:
|
|
|
Type of cost
|
Total Estimated Amount Expected to be Incurred
|
Restructuring charges:
|
|
Termination benefits
|
$65 million to $75 million
|
Other (1)
|
$5 million to $15 million
|
Restructuring-related expenses:
|
|
Other (2)
|
$105 million to $135 million
|
|
$175 million to $225 million
|
(1) Consists primarily of consulting fees and costs associated with contract cancellations.
(2) Comprised of other costs directly related to the 2016 Restructuring Plan, including program management, accelerated depreciation and costs to transfer product lines among facilities.
We recorded restructuring charges pursuant to our restructuring plans of
$12 million
in the
third
quarter of
2017
,
$5 million
in the
third
quarter of
2016
,
$17 million
in the
first nine months of
2017
and
$22 million
in the
first nine months of
2016
.
In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of
$14 million
in the
third
quarter of
2017
,
$12 million
in the
third
quarter of
2016
,
$44 million
in the
first nine months of
2017
and
$33 million
in the
first nine months of
2016
.
The following presents these costs (credits) by major type and line item within our accompanying
unaudited condensed consolidated statements of operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
12
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Selling, general and administrative expenses
|
—
|
|
|
2
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
—
|
|
|
2
|
|
|
11
|
|
|
1
|
|
|
14
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
26
|
|
All charges incurred in the
third
quarter of
2017
were related to the 2016 Restructuring Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Transfer
Costs
|
|
Fixed Asset
Write-offs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
5
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Selling, general and administrative expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
4
|
|
|
12
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Transfer
Costs
|
|
Fixed Asset
Write-offs
|
|
Other
|
|
Total
|
2016 Restructuring Plan
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
7
|
|
2014 Restructuring Plan
|
—
|
|
|
5
|
|
|
2
|
|
|
3
|
|
|
10
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
17
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
Selling, general and administrative expenses
|
—
|
|
|
5
|
|
|
—
|
|
|
4
|
|
|
9
|
|
|
—
|
|
|
5
|
|
|
35
|
|
|
4
|
|
|
44
|
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
35
|
|
|
$
|
7
|
|
|
$
|
61
|
|
All charges incurred in the
first nine months of
2017
were related to the 2016 Restructuring Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Fixed Asset
Write-offs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
22
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Selling, general and administrative expenses
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
13
|
|
|
—
|
|
|
4
|
|
|
20
|
|
|
—
|
|
|
9
|
|
|
33
|
|
|
$
|
16
|
|
|
$
|
4
|
|
|
$
|
20
|
|
|
$
|
2
|
|
|
$
|
13
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Fixed Asset
Write-offs
|
|
Other
|
|
Total
|
2016 Restructuring Plan
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
25
|
|
2014 Restructuring Plan
|
(3
|
)
|
|
4
|
|
|
16
|
|
|
2
|
|
|
11
|
|
|
30
|
|
|
$
|
16
|
|
|
$
|
4
|
|
|
$
|
20
|
|
|
$
|
2
|
|
|
$
|
13
|
|
|
$
|
55
|
|
Termination benefits represent amounts incurred pursuant to our ongoing benefit arrangements and amounts for “one-time” involuntary termination benefits and have been recorded in accordance with
FASB ASC Topic 712
,
Compensation - Nonretirement Postemployment Benefits
and
FASB
ASC Topic 420
,
Exit or Disposal Cost Obligations
. Other restructuring costs, which represent primarily consulting fees and costs related to contract cancellations, are being recorded as incurred in accordance with
FASB ASC Topic 420
. Accelerated depreciation is being recorded over the adjusted remaining useful life of the related assets and program management and production line transfer costs are being recorded as incurred.
As of
September 30, 2017
, we incurred cumulative restructuring charges related to our 2016 Restructuring Plan of
$45 million
and restructuring-related charges of
$63 million
since we committed to the plan. The following presents these costs by major type:
|
|
|
|
|
(in millions)
|
2016 Restructuring Plan
|
Termination benefits
|
$
|
38
|
|
Other
|
7
|
|
Total restructuring charges
|
45
|
|
Accelerated depreciation
|
7
|
|
Transfer costs
|
50
|
|
Other
|
6
|
|
Restructuring-related expenses
|
63
|
|
|
$
|
108
|
|
We made cash payments of
$51 million
in the
first nine months of
2017
associated with our 2016 Restructuring Plan, and as of
September 30, 2017
, we had made total cash payments of
$78 million
related to our 2016 Restructuring Plan since committing to the plan. These payments were made using cash generated from operations and are comprised of the following:
|
|
|
|
|
(in millions)
|
2016 Restructuring Plan
|
Nine Months Ended September 30, 2017
|
|
Termination benefits
|
$
|
12
|
|
Transfer costs
|
35
|
|
Other
|
4
|
|
|
$
|
51
|
|
|
|
Program to Date
|
|
Termination benefits
|
$
|
20
|
|
Transfer costs
|
50
|
|
Other
|
8
|
|
|
$
|
78
|
|
Our restructuring liability is primarily comprised of accruals for termination benefits. The following is a rollforward of the termination benefit liability associated with our 2016 Restructuring Plan, which is reported as a component of accrued expenses included in our accompanying
unaudited condensed consolidated balance sheets
:
|
|
|
|
|
(in millions)
|
2016 Restructuring Plan
|
Accrued as of December 31, 2016
|
$
|
16
|
|
Charges (credits)
|
14
|
|
Cash payments
|
(12
|
)
|
Accrued as of September 30, 2017
|
$
|
18
|
|
In addition to our accrual for termination benefits, we had an
$8 million
liability as of
September 30, 2017
and
$6 million
as of
December 31, 2016
for other restructuring-related items.
NOTE G – SUPPLEMENTAL BALANCE SHEET INFORMATION
Components of selected captions in our accompanying
unaudited condensed consolidated balance sheets
are as follows:
Trade accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Accounts receivable
|
|
$
|
1,580
|
|
|
$
|
1,579
|
|
Less: allowance for doubtful accounts
|
|
(81
|
)
|
|
(73
|
)
|
Less: allowance for sales returns
|
|
(29
|
)
|
|
(34
|
)
|
|
|
$
|
1,470
|
|
|
$
|
1,472
|
|
The following is a rollforward of our allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
74
|
|
|
$
|
80
|
|
|
$
|
73
|
|
|
$
|
75
|
|
Net charges to expenses
|
|
9
|
|
|
(1
|
)
|
|
14
|
|
|
5
|
|
Utilization of allowances
|
|
(2
|
)
|
|
(4
|
)
|
|
(6
|
)
|
|
(5
|
)
|
Ending balance
|
|
$
|
81
|
|
|
$
|
75
|
|
|
$
|
81
|
|
|
$
|
75
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Finished goods
|
|
$
|
674
|
|
|
$
|
625
|
|
Work-in-process
|
|
108
|
|
|
94
|
|
Raw materials
|
|
295
|
|
|
236
|
|
|
|
$
|
1,077
|
|
|
$
|
955
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Prepaid expenses
|
|
$
|
72
|
|
|
$
|
58
|
|
Restricted cash
|
|
449
|
|
|
243
|
|
Other
|
|
124
|
|
|
240
|
|
|
|
$
|
645
|
|
|
$
|
541
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Land
|
|
$
|
93
|
|
|
$
|
91
|
|
Buildings and improvements
|
|
1,056
|
|
|
981
|
|
Equipment, furniture and fixtures
|
|
3,139
|
|
|
2,955
|
|
Capital in progress
|
|
297
|
|
|
338
|
|
|
|
4,585
|
|
|
4,365
|
|
Less: accumulated depreciation
|
|
2,907
|
|
|
2,735
|
|
|
|
$
|
1,678
|
|
|
$
|
1,630
|
|
Depreciation expense was
$71 million
for the
third
quarter of
2017
,
$67 million
for the
third
quarter of
2016
,
$198 million
for the
first nine months of
2017
and
$193 million
for the
first nine months of
2016
.
Accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Legal reserves
|
|
$
|
1,355
|
|
|
$
|
1,062
|
|
Payroll and related liabilities
|
|
560
|
|
|
572
|
|
Accrued contingent consideration
|
|
28
|
|
|
63
|
|
Other
|
|
608
|
|
|
615
|
|
|
|
$
|
2,551
|
|
|
$
|
2,312
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Accrued income taxes
|
|
$
|
842
|
|
|
$
|
781
|
|
Legal reserves
|
|
335
|
|
|
961
|
|
Accrued contingent consideration
|
|
53
|
|
|
141
|
|
Other
|
|
508
|
|
|
455
|
|
|
|
$
|
1,738
|
|
|
$
|
2,338
|
|
Accrued warranties
We offer warranties on certain of our product offerings. The majority of our warranty liability relates to implantable devices offered by our Cardiac Rhythm Management (CRM) business, which include defibrillator and pacemaker systems. Our CRM products come with a standard limited warranty covering the replacement of these devices. We offer a full warranty for a portion of the period post-implant and a partial warranty for a period of time thereafter. We estimate the costs that we may incur under our warranty programs based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim and record a liability equal to these estimated costs as cost of products sold at the time the product sale occurs. We reassess the adequacy of our recorded warranty liabilities on a quarterly basis and adjust these amounts as necessary. The current portion of our warranty accrual is included in other accrued expenses in the table above and the non-current portion of our warranty accrual is included in other long-term liabilities in the table above. Changes in our product warranty accrual consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(in millions)
|
|
2017
|
|
2016
|
Beginning Balance
|
|
$
|
22
|
|
|
$
|
23
|
|
Provision
|
|
20
|
|
|
16
|
|
Settlements/reversals
|
|
(18
|
)
|
|
(19
|
)
|
Ending Balance
|
|
$
|
24
|
|
|
$
|
20
|
|
NOTE H – INCOME TAXES
Our effective tax rate from continuing operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Effective tax rate from continuing operations
|
|
8.5
|
%
|
|
11.2
|
%
|
|
(2.0
|
)%
|
|
(152.4
|
)%
|
The change in our reported tax rates for the
third
quarter and
first nine months of
2017
, as compared to the same periods in
2016
, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate, including intangible asset impairment charges, acquisition-related items, restructuring and restructuring-related items, investment impairment-related items, litigation-related items and amortization expense, as well as the impact of certain discrete tax items.
As of
September 30, 2017
, we had
$1.128 billion
of gross unrecognized tax benefits, of which a net
$1.039 billion
, if recognized, would affect our effective tax rate. As of
December 31, 2016
, we had
$1.095 billion
of gross unrecognized tax benefits, of which a net
$1.006 billion
, if recognized, would affect our effective tax rate.
We have received Notices of Deficiency from the Internal Revenue Service (IRS) reflecting proposed audit adjustments for Guidant Corporation for its 2001 through 2006 tax years and for Boston Scientific Corporation for its 2006 and 2007 tax years. The total incremental tax liability asserted by the IRS for the applicable periods is
$1.162 billion
plus interest. The primary issue in dispute for all years is the transfer pricing associated with the technology license agreements between domestic and foreign subsidiaries of Guidant. In addition, the IRS has proposed adjustments in connection with the financial terms of our Transaction Agreement with Abbott Laboratories pertaining to the sale of Guidant's vascular intervention business to Abbott in April 2006. During 2014, we received a Revenue Agent Report from the IRS reflecting significant proposed audit adjustments to our 2008, 2009 and 2010 tax years based upon the same transfer pricing methodologies that the IRS applied to our 2001 through 2007 tax years.
We do not agree with the transfer pricing methodologies applied by the IRS or its resulting assessment. We have filed petitions with the U.S. Tax Court (Tax Court) contesting the Notices of Deficiency for the 2001 through 2007 tax years in challenge and submitted a letter to the IRS Office of Appeals (IRS Appeals) protesting the Revenue Agent Report for the 2008 through 2010 tax years and requesting an administrative appeal hearing. The issues in dispute were scheduled to be heard in Tax Court in late July 2016. On July 19, 2016, we entered into a Stipulation of Settled Issues with the IRS intended to resolve all of the aforementioned transfer pricing issues, as well as the issues related to our transaction with Abbott, for the 2001 through 2007 tax years. The Stipulation of Settled Issues is contingent upon IRS Office of Appeals applying the same basis of settlement to all transfer pricing issues for the Company’s 2008, 2009 and 2010 tax years as well as review by the United States Congress Joint Committee on Taxation. In October 2016, we reached an agreement in principle with the IRS Appeals as to the resolution of transfer pricing issues in 2008, 2009 and 2010 tax years, subject to additional calculations of tax as well as documentation to memorialize our agreement.
In the event that the conditions in the Stipulation of Settled Items are satisfied, we expect to make net tax payments of approximately
$275 million
, plus interest, through the date of payment. If finalized, payments related to the resolution are expected in the next nine months. We believe that our income tax reserves associated with these matters are adequate as of
September 30, 2017
and we do not expect to recognize any additional charges related to the resolution of this controversy. However, the final resolution of these issues is contingent and if the Stipulation of Settled Issues is not finalized, it could have a material impact on our financial condition, results of operations, or cash flows.
We recognize interest and penalties related to income taxes as a component of income tax expense. We had
$633 million
accrued for gross interest and penalties as of
September 30, 2017
and
$572 million
as of
December 31, 2016
. We recognized net tax expense related to interest and penalties of
$14 million
during the
third
quarter of
2017
and
$13 million
in the
third
quarter of
2016
,
$40 million
during the
first nine months of
2017
and
$35 million
during the
first nine months of
2016
.
It is reasonably possible that within the next 12 months we will resolve multiple issues including transfer pricing and transactional-related issues with foreign, federal and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately
$757 million
.
NOTE I – COMMITMENTS AND CONTINGENCIES
The medical device market in which we primarily participate is largely technology driven. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. Over the years, there has been litigation initiated against us by others, including our competitors, claiming that our current or former product offerings infringe patents owned or licensed by them. Intellectual property litigation is inherently complex and unpredictable. In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding or in a series of related proceedings or litigate multiple features of a single class of devices. These forces frequently drive settlement not only for individual cases, but also for a series of pending and potentially related and unrelated cases. Although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.
During recent years, we successfully negotiated closure of several long-standing legal matters and have received favorable rulings in several other matters, however, there continues to be outstanding intellectual property litigation. Adverse outcomes in one or more of these matters could have a material adverse effect on our ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.
In the normal course of business, product liability, securities and commercial claims are asserted against us. Similar claims may be asserted against us in the future related to events not known to management at the present time. We maintain an insurance policy providing limited coverage against securities claims and we are substantially self-insured with respect to product liability claims and fully self-insured with respect to intellectual property infringement claims. The absence of significant third-party insurance coverage increases our potential exposure to unanticipated claims or adverse decisions. Product liability claims, securities and commercial litigation and other legal proceedings in the future, regardless of their outcome, could have a material adverse effect on our financial position, results of operations and/or liquidity.
In addition, like other companies in the medical device industry, we are subject to extensive regulation by national, state and local government agencies in the United States and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.
In accordance with
FASB ASC Topic 450,
Contingencies
, we accrue anticipated costs of settlement, damages, losses for product liability claims and, under certain conditions, costs of defense, based on historical experience or to the extent specific losses are probable and estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.
Our accrual for legal matters that are probable and estimable was
$1.690 billion
as of
September 30, 2017
and
$2.023 billion
as of
December 31, 2016
and includes certain estimated costs of settlement, damages and defense. The net litigation-related charges recorded in the first nine months of 2017 and 2016 primarily include amounts related to transvaginal surgical mesh product liability cases and claims. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with our debt covenants.
In management's opinion, we are not currently involved in any legal proceedings other than those disclosed in our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the Quarters ended March 31, 2017 and June 30, 2017, and those specifically identified below, which, individually or in the aggregate, could have a material adverse effect on our financial condition, operations and/or cash flows. Unless included in our legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding cannot be estimated.
Patent Litigation
On May 19, 2005, G. David Jang, M.D. filed suit against us alleging breach of contract relating to certain patent rights covering stent technology. The suit was filed in the U.S. District Court for the Central District of California seeking monetary damages and rescission of contract. After a Markman ruling relating to the Jang patent rights, Dr. Jang stipulated to the dismissal of certain claims alleged in the complaint with a right to appeal and the parties subsequently agreed to settle the other claims. In May 2007, Dr. Jang filed an appeal with respect to the remaining patent claims and in July 2008, the Court of Appeals vacated the District Court's consent judgment and remanded the case back to the District Court for further clarification. In August 2011, the District Court entered a stipulated judgment that we did not infringe the Jang patent. Dr. Jang filed an appeal on September 21, 2011 and on August 22, 2012, the Court of Appeals vacated the District Court's judgment and remanded the case to the District Court for further proceedings. On July 8, 2015, a jury found that our Express™ Stent family did not literally infringe a Jang patent, but that the stents infringed under the doctrine of equivalents. The court reserved judgment until the conclusion of further proceedings related to the doctrine of equivalents finding. On September 29, 2015, the court ruled that our Express™ Stent family did not infringe under the doctrine of equivalents and, on October 30, 2015, the court entered judgment in our favor. On November 25, 2015, Dr. Jang filed a motion for judgment as a matter of law on literal infringement and/or for a new trial. On February 3, 2016, the court denied Dr. Jang’s motion for a new trial and judgment as a matter of law. Dr. Jang filed a notice of appeal. On September 29, 2017, the United States Court of Appeals for the Federal Circuit affirmed the judgment that our Express Stent did not infringe the Jang patents and the Company did not owe Dr. Jang any payments.
On April 19, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation in the United States District Court for the Central District of California for patent infringement. We allege that Edwards’ aortic valve delivery systems infringe eight of our catheter related patents. On October 13, 2016, Edwards filed a petition for inter partes review of one asserted patent with the USPTO, Patent Trial and Appeal Board. On April 21, 2017, the USPTO denied the petition. On April 19 and 20, 2017, Edwards filed multiple inter partes review petitions against the patents in suit. On September 8, 2017, the court granted a stay of the action pending an inter partes review of the patents in suit.
Product Liability Litigation
As of
October 25, 2017
, approximately
48,500
product liability cases or claims related to transvaginal surgical mesh products designed to treat stress urinary incontinence and pelvic organ prolapse have been asserted against us. The pending cases are in various federal and state courts in the United States and include
eight
putative class actions. There were also approximately
20
cases in Canada, inclusive of
one
certified and
three
putative class actions, and fewer than
25
claims in the United Kingdom. Generally, the plaintiffs allege personal injury associated with use of our transvaginal surgical mesh products. The plaintiffs assert design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. Over
3,100
of the cases have been specially assigned to one judge in state court in Massachusetts. On February 7, 2012, the Judicial Panel on Multi-District Litigation (MDL) established MDL-2326 in the United States District Court for the Southern District of West Virginia and transferred the federal court transvaginal surgical mesh cases to MDL-2326 for coordinated pretrial proceedings. During the fourth quarter of 2013, we received written discovery requests from certain state attorneys general offices regarding our transvaginal surgical mesh products. We have responded to those requests. As of
October 25, 2017
, we have entered into master settlement agreements in principle or are in final stages of entering one with certain plaintiffs' counsel to resolve an aggregate of approximately
44,000
cases and claims. These master settlement agreements provide that the settlement and distribution of settlement funds to participating claimants are conditional upon, among other things, achieving minimum required claimant participation thresholds. Of the approximately
44,000
cases and claims, approximately
15,500
have met the conditions of the settlement and are final. All settlement agreements were entered into solely by way of compromise and without any admission or concession by us of any liability or wrongdoing.
We have established a product liability accrual for known and estimated future cases and claims asserted against us as well as with respect to the actions that have resulted in verdicts against us and the costs of defense thereof associated with our transvaginal surgical mesh products. While we believe that our accrual associated with this matter is adequate, changes to this accrual may be required in the future as additional information becomes available. While we continue to engage in discussions with plaintiffs’ counsel regarding potential resolution of pending cases and claims and intend to vigorously contest the cases and claims asserted against us that do not settle, the final resolution of the cases and claims is uncertain and could have a material impact on our results of operations, financial condition and/or liquidity. Initial trials involving our transvaginal surgical mesh products have resulted in both favorable and unfavorable judgments for us. We do not believe that the judgment in any one trial is representative of potential outcomes of all cases or claims related to our transvaginal surgical mesh products.
Governmental Investigations and Qui Tam Matters
On May 5, 2014, we were served with a subpoena from the United States Department of Health and Human Services, Office of the Inspector General. The subpoena seeks information relating to the launch of the Cognis™ and Teligen™ line of devices in 2008, the performance of those devices from 2007 to 2009 and the operation of the Physician Guided Learning Program. We are cooperating with this request. On May 6, 2016, a qui tam lawsuit in this matter was unsealed in the United States District Court for the District of Minnesota. At the same time, we learned that the U.S. government and the State of California had earlier declined to intervene in that lawsuit on April 15, 2016. The complaint was served on us on July 21, 2016. On October 7, 2016, the plaintiff/relator served an amended complaint that dropped the allegations relating to the Physician Guided Learning Program. We filed a motion to dismiss the amended complaint on December 7, 2016 and the court heard our motion to dismiss on April 5, 2017. On August 29, 2017, the Court granted the motion to dismiss, without prejudice, and on September 19, 2017, the relator filed a Second Amended Complaint.
Other Proceedings
In June of 2016, Guidant asserted three arbitrations claims, two of which remain pending, related to three insurance policies for indemnity arising out of previously incurred and satisfied liabilities tied to allegedly defective cardiac rhythm management devices, which Guidant had manufactured. Guidant has claimed indemnities against such liabilities under insurance policies which it purchased for the 2004 policy year. One of these claims was resolved in September 2017.
Matters Concluded Since December 31, 2016
On September 27, 2010, Boston Scientific Scimed, Inc., Boston Scientific Ltd., Endovascular Technologies, Inc. and we filed suit against Taewoong Medical, Co., Ltd., Standard Sci-Tech, Inc., EndoChoice, Inc. and Sewoon Medical Co., Ltd for infringement of three patents on stents for use in the GI system (the Pulnev and Hankh patents) and against Cook Medical Inc. (and related entities) for infringement of the same three patents and an additional patent (the Thompson patent). The suit was filed in the United States District Court for the District of Massachusetts seeking monetary damages and injunctive relief. In December 2010, we amended our complaint to add infringement of six additional Pulnev patents. In January 2011, the defendants filed a counterclaim of invalidity and unenforceability. In September 2011, we amended the complaint to add Chek-Med Systems d/b/a GI Supply as a defendant. On December 22, 2016 the following defendants were dismissed: Taewoong Medical Co., Ltd., GI Supply, Inc., Standard Sci-Tech, Inc., EndoChoice, Inc. and Sewoon Medical Co. The remaining parties reached a settlement and on March 21, 2017, the case was dismissed.
NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Weighted average shares outstanding - basic
|
|
1,372.0
|
|
|
1,360.6
|
|
|
1,369.1
|
|
|
1,356.1
|
|
|
Net effect of common stock equivalents
|
|
22.1
|
|
|
19.1
|
|
|
22.7
|
|
|
18.8
|
|
|
Weighted average shares outstanding - assuming dilution
|
|
1,394.1
|
|
|
1,379.7
|
|
|
1,391.8
|
|
|
1,374.9
|
|
|
The impact of stock options outstanding with exercise prices greater than the average fair market value of our common stock was immaterial for all periods presented.
We issued approximately
two million
shares of our common stock in the
third
quarter of
2017
,
three million
shares of our common stock in the
third
quarter of
2016
,
11 million
shares of our common stock in the
first nine months of
2017
and
15 million
shares of our common stock in the
first nine months of
2016
, following the exercise of underlying stock options, vesting of deferred stock units or purchases under our employee stock purchase plan. We did not repurchase any shares of our common stock during the
first nine months of
2017
or
2016
.
NOTE K – SEGMENT REPORTING
We have
three
reportable segments comprised of Cardiovascular, Rhythm Management and MedSurg, which represent an aggregation of our operating segments.
Each of our reportable segments generates revenue from the sale of medical devices. We measure and evaluate our reportable segments based on segment net sales and operating income, excluding the impact of changes in foreign currency. Sales generated from reportable segments, as well as operating results of reportable segments and corporate expenses, are calculated based on internally-derived standard currency exchange rates, which may differ from year to year and do not include intersegment profits.
We restated segment information for the prior period based on our internally-derived standard currency exchange rates as of January 1, 2017, used for the current period in order to remove the impact of foreign currency exchange fluctuation. We exclude from segment operating income certain corporate-related expenses and certain transactions or adjustments that our chief operating decision maker considers to be non-operational, such as intangible asset impairment charges, acquisition-related items, restructuring and restructuring-related items, litigation-related items and amortization expense. Although we exclude these amounts from segment operating income, they are included in reported consolidated operating income (loss) and are included in the reconciliation below.
A reconciliation of the totals reported for the reportable segments to the applicable line items in our accompanying
unaudited condensed consolidated statements of operations
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
(restated)
|
|
|
|
(restated)
|
Net sales
|
|
|
|
|
|
|
|
|
Interventional Cardiology
|
|
$
|
589
|
|
|
$
|
565
|
|
|
$
|
1,806
|
|
|
$
|
1,705
|
|
Peripheral Interventions
|
|
268
|
|
|
256
|
|
|
812
|
|
|
764
|
|
Cardiovascular
|
|
857
|
|
|
821
|
|
|
2,618
|
|
|
2,469
|
|
|
|
|
|
|
|
|
|
|
Cardiac Rhythm Management
|
|
461
|
|
|
465
|
|
|
1,417
|
|
|
1,380
|
|
Electrophysiology
|
|
71
|
|
|
60
|
|
|
203
|
|
|
180
|
|
Rhythm Management
|
|
532
|
|
|
525
|
|
|
1,620
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
|
402
|
|
|
365
|
|
|
1,194
|
|
|
1,065
|
|
Urology and Pelvic Health
|
|
272
|
|
|
247
|
|
|
819
|
|
|
732
|
|
Neuromodulation
|
|
153
|
|
|
138
|
|
|
449
|
|
|
395
|
|
MedSurg
|
|
827
|
|
|
750
|
|
|
2,462
|
|
|
2,192
|
|
Net sales allocated to reportable segments
|
|
2,216
|
|
|
2,096
|
|
|
6,700
|
|
|
6,221
|
|
Impact of foreign currency fluctuations
|
|
6
|
|
|
9
|
|
|
(60
|
)
|
|
(26
|
)
|
|
|
$
|
2,222
|
|
|
$
|
2,105
|
|
|
$
|
6,640
|
|
|
$
|
6,195
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
Cardiovascular
|
|
$
|
243
|
|
|
$
|
247
|
|
|
$
|
756
|
|
|
$
|
751
|
|
Rhythm Management
|
|
103
|
|
|
90
|
|
|
319
|
|
|
231
|
|
MedSurg
|
|
272
|
|
|
234
|
|
|
781
|
|
|
682
|
|
Operating income allocated to reportable segments
|
|
618
|
|
|
571
|
|
|
1,856
|
|
|
1,664
|
|
Corporate expenses and currency exchange
|
|
(60
|
)
|
|
(60
|
)
|
|
(215
|
)
|
|
(162
|
)
|
Intangible asset impairment charges, acquisition-related, restructuring- and restructuring-related, and litigation-related net credits (charges)
|
|
(42
|
)
|
|
(27
|
)
|
|
(250
|
)
|
|
(787
|
)
|
Amortization expense
|
|
(139
|
)
|
|
(136
|
)
|
|
(424
|
)
|
|
(408
|
)
|
Operating income (loss)
|
|
377
|
|
|
348
|
|
|
967
|
|
|
307
|
|
Other expense, net
|
|
(68
|
)
|
|
(91
|
)
|
|
(261
|
)
|
|
(219
|
)
|
Income (loss) before income taxes
|
|
$
|
309
|
|
|
$
|
257
|
|
|
$
|
706
|
|
|
$
|
88
|
|
NOTE L – CHANGES IN OTHER COMPREHENSIVE INCOME
The following table provides the reclassifications out of other comprehensive income. Amounts in the chart below are presented net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/Losses on Derivative Financial Instruments
|
|
Unrealized Gains/Losses on Available-for-Sale Securities
|
|
Defined Benefit Pension Items/Other
|
|
Total
|
Balance as of June 30, 2017
|
|
$
|
(58
|
)
|
|
$
|
31
|
|
|
$
|
(4
|
)
|
|
$
|
(22
|
)
|
|
$
|
(53
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
25
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
10
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(9
|
)
|
|
1
|
|
|
—
|
|
|
(8
|
)
|
Net current-period other comprehensive income
|
|
25
|
|
|
(24
|
)
|
|
1
|
|
|
—
|
|
|
2
|
|
Balance as of September 30, 2017
|
|
$
|
(33
|
)
|
|
$
|
7
|
|
|
$
|
(3
|
)
|
|
$
|
(22
|
)
|
|
$
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/Losses on Derivative Financial Instruments
|
|
Defined Benefit Pension Items/Other
|
|
Total
|
Balance as of June 30, 2016
|
|
$
|
(59
|
)
|
|
$
|
(1
|
)
|
|
$
|
(10
|
)
|
|
$
|
(70
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
2
|
|
|
(14
|
)
|
|
(1
|
)
|
|
(13
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(17
|
)
|
|
1
|
|
|
(16
|
)
|
Net current-period other comprehensive income
|
|
2
|
|
|
(31
|
)
|
|
—
|
|
|
(29
|
)
|
Balance as of September 30, 2016
|
|
$
|
(57
|
)
|
|
$
|
(32
|
)
|
|
$
|
(10
|
)
|
|
$
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/Losses on Derivative Financial Instruments
|
|
Unrealized Gains/Losses on Available-for-Sale Securities
|
|
Defined Benefit Pension Items/Other
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
(79
|
)
|
|
$
|
107
|
|
|
$
|
(6
|
)
|
|
$
|
(21
|
)
|
|
$
|
1
|
|
Other comprehensive income (loss) before reclassifications
|
|
46
|
|
|
(56
|
)
|
|
—
|
|
|
(2
|
)
|
|
(12
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(44
|
)
|
|
3
|
|
|
1
|
|
|
(40
|
)
|
Net current-period other comprehensive income
|
|
46
|
|
|
(100
|
)
|
|
3
|
|
|
(1
|
)
|
|
(52
|
)
|
Balance as of September 30, 2017
|
|
$
|
(33
|
)
|
|
$
|
7
|
|
|
$
|
(3
|
)
|
|
$
|
(22
|
)
|
|
$
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/Losses on Derivative Financial Instruments
|
|
Defined Benefit Pension Items/Other
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
(54
|
)
|
|
$
|
152
|
|
|
$
|
(10
|
)
|
|
$
|
88
|
|
Other comprehensive income (loss) before reclassifications
|
|
(3
|
)
|
|
(115
|
)
|
|
(4
|
)
|
|
(122
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(69
|
)
|
|
4
|
|
|
(65
|
)
|
Net current-period other comprehensive income
|
|
(3
|
)
|
|
(184
|
)
|
|
—
|
|
|
(187
|
)
|
Balance as of September 30, 2016
|
|
$
|
(57
|
)
|
|
$
|
(32
|
)
|
|
$
|
(10
|
)
|
|
$
|
(99
|
)
|
Refer to
Note D – Fair Value Measurements
in this Quarterly Report on Form 10-Q for further detail on the reclassifications related to derivatives.
The income tax impact of the amounts in other comprehensive income for defined benefit and pension items before reclassification were immaterial for the
third
quarter and
first nine months of
2017
and
2016
. The gains and losses on defined benefit and pension related items reclassified from accumulated other comprehensive income were reduced by immaterial income tax impacts for the
third
quarter and
first nine months of
2017
and
2016
. The gains and losses on available-for-sale securities were reduced by immaterial income tax impacts for the
third
quarter and
first nine months of
2017
.
NOTE M – NEW ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, we evaluate the pronouncements to determine the potential effects of adoption on our unaudited condensed consolidated financial statements.
Standards Implemented since December 31, 2016
ASC Update No. 2016-09
In March 2016, the FASB issued ASC Update No. 2016-09,
Compensation - Stock Compensation
(Topic 718)
: Improvements to Employee Share-Based Payment Accounting
. The purpose of Update No. 2016-09 is to simplify accounting for share-based payment transactions, such as, the accounting for income taxes, statutory tax withholding requirements, forfeitures and statements of cash flows presentation. Update No. 2016-09 was effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods.
We adopted Update No. 2016-09 prospectively in the first quarter of 2017 and, as such, no prior periods were adjusted. We previously recorded income tax benefits or deficiencies to additional paid-in capital; however, Update No. 2016-09 requires that all tax benefits or deficiencies be recorded to the provision for income taxes. In the
first nine months of
2017
, we recorded an income tax benefit of
$37 million
. The actual impact to future periods will depend on the price of our stock, number of stock options exercised and other factors that are difficult to predict. In the first quarter of 2017, a cumulative effect adjustment of
$76 million
was recorded to retained earnings upon adoption for windfall tax benefits not previously recognized.
ASC Update No. 2016-17
In October 2016, the FASB issued ASC Update No. 2016-17,
Consolidation
(Topic 810)
: Interests Held through Related Parties That Are under Common Control
. The purpose of Update No. 2016-17 is to amend the consolidation guidance from Update No. 2015-02 on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendment requires that a single decision maker include those indirect interests held through related parties that are under common control with the single decision maker on a proportionate basis consistent with indirect interests held through other related parties. Update No. 2016-17 was effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. We adopted Update No. 2016-17 in the first quarter of 2017. The adoption of Update No. 2016-17 did not have a material impact on our financial position or results of operations.
ASC Update No. 2016-19
In December 2016, the FASB issued ASC Update No. 2016-19,
Technical Corrections and Improvements.
The purpose of Update No. 2016-19 is to clarify or correct unintended applications of guidance that affect a wide variety of topics in the ASC. Most of the amendments in this Update did not require transition guidance and were effective immediately. Six amendments in this update clarified guidance or corrected references in the ASC and were effective for annual periods beginning after December 15, 2016, including interim periods within these annual periods. We adopted these amendments in the first quarter of 2017. The adoption of Update No. 2016-19 did not have a material impact on our financial position or results of operations.
ASC Update No. 2017-04
In January 2017, the FASB issued ASC Update No. 2017-04,
Intangibles - Goodwill and Other Topics
(Topic 350)
: Simplifying the Test for Goodwill Impairment
. The purpose of Update No. 2017-04 is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the impaired fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. We elected to early adopt Update No. 2017-04 prospectively in the first quarter of 2017. The adoption of Update No. 2017-04 did not have a material impact on our financial position or results of operations.
Standards to be Implemented
ASC Update No. 2014-09
In May 2014, the FASB issued ASC Update No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), which has been subsequently updated. The purpose of Update No. 2014-09 is to provide enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies using U.S. GAAP and International Financial Reporting Standards. The core principle requires entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. Topic 606, as amended, becomes effective for annual periods beginning after December 15, 2017, at which point we plan to adopt the standard. We currently plan to adopt the standard using the “modified retrospective method.” Under that method, we will apply the rules to contracts that are not completed as of January 1, 2018, and recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings.
We have reached conclusions on our key accounting assessments related to the standard and are finalizing our accounting policies. Based on our initial assessment, we believe the timing of revenue recognition for our primary revenue stream, single-use medical device sales, will not materially change. We are still finalizing our accounting policies related to variable consideration and assessing disclosure requirements. Upon adopting Topic 606
,
we will provide additional disclosures in the notes to the consolidated financial statements, specifically related to disaggregated revenue, contract balances and performance obligations.
In 2017, we are implementing new internal controls as part of our efforts to adopt the new revenue recognition standard. In the third quarter of 2017, we provided global training to our finance team on Topic 606. In the fourth quarter of 2017, we will perform a simulation of our new accounting processes and procedures to prepare our team for the month-end close process upon adoption of Topic 606. We will require new internal controls to address risks associated with applying the five-step model, specifically related to judgments made in connection to variable consideration and applying the constraint. Additionally, we will establish monitoring controls to identify new sales arrangements and changes in our business environment that could impact our current accounting assessment. During the fourth quarter of 2017, we expect to finalize our impact assessment and redesign impacted processes, policies and controls.
ASC Update No. 2016-01
In January 2016, the FASB issued ASC Update No. 2016-01,
Financial Instruments - Overall
(Subtopic 825-10)
: Recognition and Measurement of Financial Assets and Financial Liabilities.
The purpose of Update No. 2016-01 is to improve financial reporting for financial instruments by reducing the number of items recorded to other comprehensive income. It requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. It also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and liability. Update No. 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption of certain provisions is permitted. We are unable to determine the effect that the adoption will have on our financial position and results of operations, as it will depend on our equity investments at the adoption date and their future performance.
ASC Update No. 2016-02
In February 2016, the FASB issued ASC Update No. 2016-02,
Leases
(Topic 842)
.
The purpose of Update No. 2016-02 is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet, including those previously classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. Update No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, and a modified retrospective approach is required for adoption. While we are still in the process of determining the effect that the new standard will have on our financial position and results of operations, we expect to recognize additional assets and corresponding liabilities on our consolidated balance sheets, as a result of our operating lease portfolio as disclosed in
Note G - Lease and Other Purchase Obligations
in our most recent Annual Report on Form 10-K.
ASC Update No. 2016-13
In June 2016, the FASB issued ASC Update No. 2016-13,
Financial Instruments - Credit Losses
(Topic 326)
: Measurement of Credit Losses on Financial Instruments
. The purpose of Update No. 2016-13 is to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. Update No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018. We are in the process of determining the effect that the adoption will have on our financial position and results of operations.
ASC Update No. 2016-15
In August 2016, the FASB issued ASC Update No. 2016-15,
Statement of Cash Flows
(Topic 230)
: Classification of Certain Cash Receipts and Cash Payments.
The purpose of Update No. 2016-15 is to reduce the diversity in practice in presentation and classification of the following items within the statement of cash flows: debt prepayments or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investments and beneficial interests in securitization transactions. It also addresses classification of transactions that have characteristics of more than one class of cash flows. Update No. 2016-15 is effective for annual periods beginning after December 15, 2017, and a retrospective transition method is required. We intend to early adopt the standard in the fourth quarter of 2017. Upon adoption, we expect our 2015 cash provided by operating activities to increase by approximately $45 million with a corresponding decrease in our cash provided by financing activities related to classification of debt repayment costs incurred in connection with our 2015 debt financing activities. We do not expect the adoption to have a material impact on our consolidated statements of cash flows for 2016 or 2017.
ASC Update No. 2016-16
In October 2016, the FASB issued ASC Update No. 2016-16,
Income Taxes
(Topic 740)
: Intra-Entity Transfers of Assets Other Than Inventory
. The purpose of Update No. 2016-16 is to allow an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to waiting until the asset is sold to a third party, or impaired. Update No. 2016-16 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. We are in the process of determining the effect that adoption will have on our financial position and results of operations.
ASC Update No. 2016-18
In November 2016, the FASB issued ASC Update No. 2016-18,
Statement of Cash Flows
(Topic 230)
: Restricted Cash.
The purpose of Update No. 2016-18 is to clar
ify guidance and presentation related to restricted cash in the statements of cash flows as well as increased disclosure requirements. It requires beginning-of-period and end-of-period total amounts shown on the statements of cash flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents
. Update No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual periods. Early adoption is permitted. We are in the process of determining the effect the adoption will have on our consolidated statements of cash flows.
ASC Update No. 2017-01
In January 2017, the FASB issued ASC Update No. 2017-01,
Business Combinations
(Topic 805)
: Clarifying the Definition of a Business
. The purpose of Update No. 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Update No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual or interim period for which financial statements have not been issued or made available for issuance. The adoption of Update No. 2017-01 is not expected to have a material impact on our financial position or results of operations.
ASC Update No. 2017-09
In May 2017, the FASB issued ASC Update No. 2017-09,
Compensation - Stock Compensation
(Topic 718)
: Scope of Modification Accounting
. The purpose of Update No. 2017-09 is to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Update No. 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual or interim period for which financial statements have not been issued or made available for issuance. The adoption of Update No. 2017-09 is not expected to have a material impact on our financial position or results of operations.
ASC Update No. 2017-10
In May 2017, the FASB issued ASC Update No. 2017-10,
Service Concession Arrangements
(Topic 853)
: Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force)
. The purpose of Update No. 2017-10 is to address the diversity in practice as to how an operating entity determines the customer of the operation services in a service concession agreement. Update No. 2017-10 is effective the same time as
FASB ASC Topic 606
and requires the same transition method elected for
FASB ASC Topic 606
. The adoption of Update No. 2017-10 is not expected to have a material impact on our financial position or results of operations.
ASC Update No. 2017-12
In August 2017, the FASB issued ASC Update No. 2017-12,
Derivatives and Hedging
(Topic 815)
: Targeted Improvements to Accounting for Hedging Activities
. The purpose of Update No. 2017-12 is to simplify the application of hedge accounting and better align financial reporting of hedging relationships with risk management objectives. Update No. 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The adoption of Update No. 2017-12 is not expected to have a material impact on our financial position or results of operations.
No other new accounting pronouncements, issued or effective, during the period had, or are expected to have, a material impact on our condensed consolidated financial statements.