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. When used in this report, the terms, "we," "us," "our," and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries. 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 six
months ended
June 30, 2019
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
. 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.
Amounts reported in millions within this report are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in dollars.
Subsequent Events
We evaluate events occurring after the date of our most recent accompanying
unaudited condensed consolidated balance sheet
for potential recognition or disclosure in our financial statements. Those items requiring disclosure (nonrecognized 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.
Accounting Standards Implemented Since December 31, 2018
ASC Update No. 2016-02
In February 2016, the Financial Accounting Standards Board (FASB) issued ASC Update No. 2016-02,
Leases
(
FASB ASC Topic 842,
Leases
). We adopted the standard as of January 1, 2019, using the modified retrospective approach and the transition method provided by ASC Update No. 2018-11,
Leases
(Topic 842): Targeted Improvements
. Under this method, we applied the new leasing rules on the date of adoption and recognized the cumulative effect of initially applying the standard as an adjustment to our opening balance sheet, rather than at the earliest comparative period presented in the financial statements. Prior periods presented are in accordance with the previous lease guidance under
FASB ASC Topic 840,
Leases
.
In addition, we applied the package of practical expedients permitted under
FASB ASC Topic 842
transition guidance to our entire lease portfolio at January 1, 2019. As a result, we were not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the classification of any expired or existing leases and (iii) the treatment of initial direct costs for any existing leases. Furthermore, we elected not to separate lease and non-lease components for the majority of our leases. Instead, for all applicable classes of underlying assets, we accounted for each separate lease component and the non-lease components associated with that lease component, as a single lease component.
As a result of adopting
FASB ASC Topic 842
on January 1, 2019, we recognized right-of-use assets of
$271 million
and corresponding liabilities of
$278 million
for our existing operating lease portfolio on our
unaudited condensed consolidated balance sheet
. Operating lease right-of-use assets are presented within
Other long-term assets
and corresponding liabilities are presented within
Other current liabilities
and
Other long-term liabilities
on our
unaudited condensed consolidated balance sheets
. Finance leases are immaterial to our
unaudited condensed consolidated financial statements
. Refer to
Note E – Borrowings and Credit Arrangements
for additional information. There was no material impact to our
unaudited condensed consolidated statements of operations
or
unaudited condensed consolidated statements of cash flows
. Please refer to
Note G – Leases
for information regarding our lease portfolio as of
June 30, 2019
as accounted for under
FASB ASC Topic 842
.
To meet the reporting and disclosure requirements of
FASB ASC Topic 842
, we implemented a new lease administration and lease accounting system in 2018 that tracks all of our material leasing arrangements. In addition, we designed and implemented new processes and internal controls during the first quarter of 2019 to ensure the completeness and accuracy of the transition adjustment and subsequent financial reporting under
FASB ASC Topic 842
. We also established monitoring controls to ensure we have appropriate mechanisms in place to identify material leases in a timely manner, particularly contracts that may contain embedded lease features.
NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS
Our
unaudited condensed consolidated financial statements
include the operating results for acquired entities from the respective date of acquisition. We have not presented pro forma financial information for acquisitions given their results are not material to our
unaudited condensed consolidated financial statements
. Transaction costs associated with these acquisitions were expensed as incurred and are not material for the
second
quarter and
first six months of
2019
and
2018
.
Proposed BTG Acquisition
On November 20, 2018, our board of directors and the board of directors of our wholly owned indirect subsidiary, Bravo Bidco Limited (Bidco), and BTG plc (BTG), a public company organized under the laws of England and Wales, issued an announcement (the Rule 2.7 Announcement) under Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers, disclosing the terms of a recommended cash offer to be made by Bidco for the entire issued and to be issued ordinary share capital of BTG (the
proposed BTG Acquisition
). BTG develops and commercializes products used in minimally-invasive procedures targeting cancer and vascular diseases, as well as acute care pharmaceuticals. In connection with the
proposed BTG Acquisition
, (i) we entered into a co-operation agreement with Bidco and BTG, (ii) certain shareholders and each BTG director owning shares of BTG delivered deeds of irrevocable undertakings to Bidco and (iii) we entered into a bridge credit agreement (Bridge Facility) that we terminated in February 2019 upon the closing of our senior notes offering. Refer to
Note E – Borrowings and Credit Arrangements
for further details.
On January 24, 2019, Bidco made such offer on the terms and subject to the conditions of the scheme document published on the same date. On February 28, 2019, a majority in number of BTG shareholders approved the scheme document published on January 24, 2019 (Scheme).
On February 14, 2019, both the Company and BTG received a request for additional information and documentary material from the United States Federal Trade Commission in connection with the
proposed BTG Acquisition
. The request for additional information related to our drug-eluting and bland embolic microsphere portfolio.
On July 2, 2019, BTG and Boston Scientific issued an announcement disclosing that we signed an agreement for the sale of our existing drug-eluting and bland embolic microsphere portfolio to Varian Medical Systems, Inc. The sale is subject to the satisfaction or waiver of customary closing conditions, including consummation of the
proposed BTG Acquisition
, and is expected to close immediately after completion of the
proposed BTG Acquisition
.
Under the terms of the
proposed BTG Acquisition
, BTG shareholders will receive
840 pence
in cash for each BTG share, which values the existing issued and to be issued ordinary share capital of BTG at approximately
£3.311 billion
(or approximately
$4.204 billion
based on the exchange rate of U.S.
$1.27
:
£1.00
as of June 28, 2019). We intend to implement the
proposed BTG Acquisition
by way of a court-sanctioned scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended. Subject to the satisfaction or waiver of all relevant conditions, we expect the
proposed BTG Acquisition
to be effective in August 2019.
2019 Acquisitions
Vertiflex, Inc.
On June 11, 2019, we announced the closing of our acquisition of Vertiflex, Inc. (Vertiflex), a privately-held company which has developed and commercialized the Superion™ Indirect Decompression System, a minimally-invasive device used to improve physical function and reduce pain in patients with lumbar spinal stenosis (LSS). The transaction price consists of an upfront cash payment of
$465 million
and contingent payments that are based on a percentage of Vertiflex sales growth in the first three years following the acquisition close. We estimate the sales-based contingent payments to be in a range of
zero
to
$100 million
; however, the payments are uncapped over the three year term. Vertiflex is part of our Neuromodulation business.
Millipede, Inc.
On January 29, 2019, we announced the closing of our acquisition of Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. We have been an investor in Millipede since the first quarter of 2018 as part of an investment and acquisition option agreement, whereby we purchased a portion of the outstanding shares of Millipede, along with newly issued shares of the company, for an upfront cash payment of
$90 million
. In the fourth quarter of 2018, upon the recent successful completion of a first-in-human clinical study, we exercised our option to acquire the remaining shares of Millipede. We held an interest of approximately
20 percent
immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. The transaction price for the remaining stake consists of an upfront cash payment of
$325 million
and up to an additional
$125 million
payment upon achievement of a commercial milestone. Millipede is part of our Interventional Cardiology business.
Purchase Price Allocation
We accounted for our 2019 acquisitions as business combinations, 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 dates. The aggregate preliminary purchase prices were comprised of the following components:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Payment for acquisition, net of cash acquired
|
$
|
763
|
|
|
Fair value of contingent consideration
|
131
|
|
|
Fair value of prior interest
|
103
|
|
|
|
$
|
997
|
|
The following summarizes the aggregate preliminary purchase price allocations for our 2019 acquisitions as of
June 30, 2019
:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Goodwill
|
$
|
540
|
|
|
Amortizable intangible assets
|
217
|
|
|
Indefinite-lived intangible assets
|
295
|
|
|
Other assets acquired
|
24
|
|
|
Liabilities assumed
|
(12
|
)
|
|
Net deferred tax liabilities
|
(68
|
)
|
|
|
$
|
997
|
|
We allocated a portion of the aggregate preliminary purchase prices to the 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
|
$
|
207
|
|
|
12
|
|
15%
|
|
Other intangible assets
|
10
|
|
|
12
|
|
15%
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
In-process research and development (IPR&D)
|
295
|
|
|
N/A
|
|
20%
|
|
|
$
|
512
|
|
|
|
|
|
2018 Acquisitions
We did not record any material purchase price adjustments to the preliminary or final purchase price allocations of the 2018 acquisitions in the
first six months of
2019
.
NxThera, Inc.
On April 30, 2018, we announced the closing of our acquisition of NxThera, Inc. (NxThera), a privately-held company that developed the Rezūm™ System, a minimally invasive therapy in a growing category of treatment options for patients with benign prostatic hyperplasia (BPH). We held a minority interest immediately prior to the acquisition date. The transaction price to acquire the remaining stake consists of an upfront cash payment of approximately
$240 million
and up to approximately
$85 million
in payments contingent upon commercial milestones over the next four years. NxThera is part of our Urology and Pelvic Health business.
nVision Medical Corporation
On April 16, 2018, we announced the closing of our acquisition of nVision Medical Corporation (nVision), a privately-held company focused on women’s health. nVision developed the first and only device cleared by the U.S. Food and Drug Administration (FDA) to collect cells from the fallopian tubes, offering a potential platform for earlier diagnosis of ovarian cancer. The transaction price consists of an upfront cash payment of
$150 million
and up to an additional
$125 million
in payments contingent upon clinical and commercial milestones over the next four years. nVision is part of our Urology and Pelvic Health business.
In addition, we completed other individually immaterial acquisitions in the
first six months of
2018
for total consideration of
$50 million
in cash at closing plus aggregate contingent consideration of up to
$10 million
.
Purchase Price Allocation
We accounted for our 2018 acquisitions as business combinations, and in accordance with
FASB ASC Topic 805
, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The components of the aggregate purchase prices are as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Payments for acquisitions, net of cash acquired
|
$
|
419
|
|
|
Fair value of contingent consideration
|
140
|
|
|
Fair value of prior interests
|
82
|
|
|
|
$
|
641
|
|
The following summarizes the aggregate purchase price allocations for our 2018 acquisitions as of
June 30, 2019
:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Goodwill
|
$
|
272
|
|
|
Amortizable intangible assets
|
418
|
|
|
Other assets acquired
|
11
|
|
|
Liabilities assumed
|
(5
|
)
|
|
Net deferred tax liabilities
|
(55
|
)
|
|
|
$
|
641
|
|
We allocated a portion of the aggregate purchase prices 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
|
$
|
411
|
|
|
10
|
-
|
13
|
|
17
|
%
|
-
|
23%
|
|
Other intangible assets
|
7
|
|
|
6
|
-
|
13
|
|
13
|
%
|
-
|
15%
|
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
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.
Goodwill was primarily established due to synergies expected to be gained from leveraging our existing operations as well as revenue and cash flow projections associated with future technologies and has been allocated to our reportable segments based on the relative expected benefit. Based on preliminary estimates updated for applicable regulatory changes, the goodwill recorded relating to our
2019
and
2018
acquisitions is not deductible for tax purposes.
Contingent Consideration
Changes in the fair value of our contingent consideration liability were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance as of December 31, 2018
|
$
|
347
|
|
|
Amount recorded related to current year acquisition
|
131
|
|
|
Contingent consideration expense (benefit)
|
(18
|
)
|
|
Contingent consideration payments
|
(67
|
)
|
|
Balance as of June 30, 2019
|
$
|
394
|
|
As of
June 30, 2019
, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately
$959 million
, which includes our estimate of maximum contingent payments of
$100 million
associated with the Vertiflex acquisition described above.
The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration Liability
|
Fair Value as of June 30, 2019
|
Valuation Technique
|
Unobservable Input
|
Range
|
Weighted Average (1)
|
|
R&D, Regulatory and Commercialization-based Milestones
|
$232 million
|
Discounted Cash Flow
|
Discount Rate
|
3%
|
3%
|
|
Probability of Payment
|
17
|
%
|
-
|
90%
|
82%
|
|
Projected Year of Payment
|
2019
|
|
-
|
2027
|
2021
|
|
Revenue-based Payments
|
$162 million
|
Discounted Cash Flow
|
Discount Rate
|
11
|
%
|
-
|
15%
|
13%
|
|
Probability of Payment
|
60
|
%
|
-
|
100%
|
99%
|
|
Projected Year of Payment
|
2019
|
|
-
|
2026
|
2021
|
|
|
|
|
(1)
|
Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
|
Projected contingent payment amounts related to some of our research and development (R&D), commercialization-based and revenue-based milestones are discounted back to the current period using a discounted cash flow model. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of
June 30, 2019
.
Strategic Investments
The aggregate carrying amount of our strategic investments was comprised of the following categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Equity method investments
|
$
|
243
|
|
|
$
|
303
|
|
|
Measurement alternative investments (1)
|
169
|
|
|
94
|
|
|
Publicly-held equity securities (2)
|
1
|
|
|
—
|
|
|
Notes receivable
|
3
|
|
|
26
|
|
|
|
$
|
415
|
|
|
$
|
424
|
|
|
|
|
|
(1)
|
Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured 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.
|
|
|
|
|
(2)
|
Publicly-held equity securities are measured at fair value with changes in fair value recognized currently in
Net income (loss)
.
|
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.
As of
June 30, 2019
, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by approximately
$278 million
, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.
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 June 30, 2019
|
|
As of December 31, 2018
|
|
(in millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization/ Write-offs
|
|
Gross Carrying Amount
|
|
Accumulated Amortization/ Write-offs
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
Technology-related
|
$
|
10,291
|
|
|
$
|
(5,425
|
)
|
|
$
|
10,197
|
|
|
$
|
(5,266
|
)
|
|
Patents
|
521
|
|
|
(401
|
)
|
|
520
|
|
|
(393
|
)
|
|
Other intangible assets
|
1,683
|
|
|
(1,018
|
)
|
|
1,666
|
|
|
(958
|
)
|
|
|
$
|
12,495
|
|
|
$
|
(6,844
|
)
|
|
$
|
12,383
|
|
|
$
|
(6,617
|
)
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
18,351
|
|
|
$
|
(9,900
|
)
|
|
$
|
17,811
|
|
|
$
|
(9,900
|
)
|
|
IPR&D
|
715
|
|
|
—
|
|
|
486
|
|
|
—
|
|
|
Technology-related
|
120
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
|
$
|
19,187
|
|
|
$
|
(9,900
|
)
|
|
$
|
18,417
|
|
|
$
|
(9,900
|
)
|
The following represents our goodwill balance by global reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
MedSurg
|
|
Rhythm and Neuro
|
|
Cardiovascular
|
|
Total
|
|
Balance as of December 31, 2018
|
$
|
2,063
|
|
|
$
|
1,924
|
|
|
$
|
3,925
|
|
|
$
|
7,911
|
|
|
Impact of foreign currency fluctuations and other changes in carrying amount
|
(1
|
)
|
|
—
|
|
|
2
|
|
|
1
|
|
|
Goodwill acquired
|
—
|
|
|
271
|
|
|
270
|
|
|
540
|
|
|
Balance as of June 30, 2019
|
$
|
2,061
|
|
|
$
|
2,194
|
|
|
$
|
4,196
|
|
|
$
|
8,451
|
|
Goodwill and Indefinite-Lived Intangible Asset Impairment Testing
We did not have any goodwill impairments in the
second
quarter and
first six months of
2019
or
2018
.
We test our goodwill balances in the second quarter of each year for impairment, or more frequently if impairment indicators are present or changes in circumstances suggest an impairment may exist. In the second quarter of
2019
, we performed our annual goodwill impairment test for all of our reporting units and concluded that the fair value of each reporting unit exceeded its carrying value.
In performing the goodwill impairment assessment, we utilized both the optional qualitative assessment and the quantitative approach prescribed under
FASB ASC Topic 350,
Intangibles - Goodwill and Other
. In 2019, we performed a qualitative assessment for our Urology and Pelvic Health, Neuromodulation and Endoscopy reporting units since their fair values have exceeded carrying value by greater than 100 percent. The remaining reporting units were quantitatively tested for impairment. For the reporting units subject to a qualitative assessment, if it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the quantitative approach of the goodwill impairment test is necessary. In 2019, for all reporting units tested using the qualitative assessment, we concluded that it was unnecessary to perform the quantitative impairment test. For all reporting units tested using the quantitative approach, we concluded that the fair value of each reporting unit exceeded its carrying value.
Intangible asset impairment charges
were
$37 million
in the
second
quarter of
2019
and
$105 million
in the
first six months of
2019
and were primarily associated with amortizable technology-related intangible assets.
Intangible asset impairment charges
were
$34 million
in the
second
quarter and
$35 million
in the
first six months of
2018
and were primarily associated with amortizable technology-related intangible assets.
We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If we determine it is more likely than not that the asset is impaired based on our qualitative assessment of impairment indicators, we test the intangible asset for recoverability. If the carrying value of the intangible asset or asset group exceeds the undiscounted cash flows expected to
result from the use and eventual disposition of the intangible asset or asset group, we will write the carrying value down to fair value in the period impairment is identified.
Refer to
Critical Accounting Policies and Estimates
within Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
contained in our most recent Annual Report on Form 10-K for further discussion of our annual goodwill and intangible asset impairment testing.
NOTE D – HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We address market risk from changes in foreign currency exchange rates and interest rates through risk management programs which include the use of derivative financial instruments. We operate these programs 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 to material risk, as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item.
We manage 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.
Currency Derivative Instruments
Risk Management Strategy
Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities, forecast 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.
The success of our currency risk management program depends, in part, on forecast transactions denominated primarily in British pound sterling, Euro, Japanese yen and Chinese renminbi. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Derivative Designations and Hedging Relationships
Certain of our currency derivative instruments are designated as cash flow hedges under
FASB ASC Topic 815
, Derivatives and Hedging
, and are intended to protect the U.S. dollar value of forecasted transactions. The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in the
Net change in derivative financial instruments
component of
Other comprehensive income (loss), net of tax (OCI)
on our
unaudited condensed consolidated statements of comprehensive income (loss)
until the underlying third-party transaction occurs. When the underlying third-party transaction occurs, we recognize the gain or loss in 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 occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the gains or losses within
Accumulated other comprehensive income (loss), net of tax (AOCI)
to earnings at that time.
We also designate certain forward currency contracts as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the Euro, Swiss franc, and Japanese yen. We have elected to use the spot method to assess effectiveness for our derivatives that are designated as net investment hedges. Under the spot method, the change in fair value attributable to changes in the spot rate is recorded in the
Foreign currency translation adjustment (CTA)
component of
OCI
. We have elected to exclude the spot-forward difference from the assessment of hedge effectiveness and are amortizing this amount separately, as calculated at the date of designation, on a straight-line basis over the term of the currency forward contracts. Amortization of the spot-forward difference is then reclassified from
AOCI
to current period earnings as a reduction to
Interest expense
on our
unaudited condensed consolidated statements of operations
.
We also use forward currency 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 rate risk related to monetary assets and liabilities and related forecast transactions. These non-designated 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 within the
Other, net
caption of our
unaudited condensed consolidated statements of operations
.
Certain of our non-designated forward currency contracts were entered into for the purpose of managing our exposure to currency exchange rate risk related to the purchase price of the
proposed BTG Acquisition
. As of
June 30, 2019
, we had
£3.311 billion
in aggregate notional amount outstanding of forward and deal-contingent forward currency contracts to hedge the full purchase price of the
proposed BTG Acquisition
. As of
December 31, 2018
, we had entered into
£2.000 billion
in aggregate notional amount of these contracts.
We recognized a
$151 million
loss in the
second
quarter of
2019
and a
$116 million
loss in the
first six months of
2019
in
Other, net
due to changes in fair value of the contracts, which are recognized in earnings until contract settlement.
Interest Rate Derivative Instruments
Risk Management Strategy
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 in accordance with
FASB ASC Topic 815
.
Derivative Designations and Hedging Relationships
We had no interest rate derivative instruments designated as cash flow hedges outstanding as of
June 30, 2019
and
$1.000 billion
outstanding as of
December 31, 2018
, which were intended to manage our earnings and cash flow exposure to changes in the benchmark interest rate in connection with the forecasted issuance of fixed-rate debt. For outstanding designated cash flow hedges, we record the changes in the fair value of the derivatives within
OCI
until the underlying hedged transaction occurs, at which time we recognize the gain or loss within
Interest expense
over the same period that the hedged items affect earnings, so long as the hedge relationship remains effective. If we determine the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the amount of gains or losses from
AOCI
to earnings at that time.
During the fourth quarter of 2018, we entered into interest rate derivative contracts designated as cash flow hedges having a notional amount of
$1.000 billion
to hedge interest rate risk. In the first quarter of 2019, we terminated these instruments in connection with our senior notes issuance in the same period as discussed in
Note E – Borrowings and Credit Arrangements
. We recognized an immaterial loss within
OCI
in the
first six months of
2019
and are reclassifying the amortization of the loss from
AOCI
into earnings as a component of
Interest expense
over the same period that the hedged item affects earnings, so long as the hedge relationship remains effective. We are also continuing to reclassify in a similar manner the amortization of the gains or losses of our other previously terminated interest rate derivative instruments that were designated as cash flow hedges. The balance of the deferred loss on our terminated cash flow hedges within
AOCI
was immaterial as of
June 30, 2019
and
December 31, 2018
. We recognized immaterial gains and losses in
Interest expense
relating to the amortization of our terminated cash flow hedges in the current and prior periods.
We had no interest rate derivative instruments designated as fair value hedges outstanding as of
June 30, 2019
and
December 31, 2018
. Prior to 2018, we terminated interest rate derivative instruments that were designated as fair value hedges and are continuing to recognize the amortization of the gains or losses originally recorded within the
Long-term debt
caption on our
unaudited condensed consolidated balance sheets
into earnings as a component of
Interest expense
over the same period that the discount or premium associated with the hedged items affects earnings. In the event that we designate outstanding interest rate derivative instruments as fair value hedges, we record the changes in the fair values of interest rate derivatives designated as fair value hedges and of the underlying hedged debt instruments in
Interest expense
, which generally offset. The balance of the deferred gains on our terminated fair value hedges within
Long-term debt
was immaterial as of
June 30, 2019
and
December 31, 2018
. We recognized immaterial gains in
Interest expense
relating to the amortization of the terminated fair value hedges in the current and prior periods.
The following table presents the contractual amounts of our derivative instruments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
FASB ASC Topic 815 Designation
|
|
As of
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Forward currency contracts
|
|
Cash flow hedge
|
|
$
|
4,269
|
|
|
$
|
3,962
|
|
|
Forward currency contracts
|
|
Net investment hedge
|
|
1,928
|
|
|
1,483
|
|
|
Forward currency contracts
|
|
Non-designated
|
|
7,921
|
|
|
5,880
|
|
|
Interest rate derivative contracts
|
|
Cash flow hedge
|
|
—
|
|
|
1,000
|
|
|
Total Notional Outstanding
|
|
|
|
$
|
14,118
|
|
|
$
|
12,326
|
|
The remaining time to maturity as of
June 30, 2019
is within
60
months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts.
The following presents the effect of our derivative instruments designated as cash flow and net investment hedges under
FASB ASC Topic 815
on our accompanying
unaudited condensed consolidated statements of operations
. Refer to
Note M – Changes in Other Comprehensive Income
for the total amounts relating to derivative instruments presented within the
unaudited condensed consolidated statements of comprehensive income (loss)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Hedging Relationships on Accumulated Other Comprehensive Income
|
|
|
Amount Recognized in OCI on Derivative
|
|
Unaudited Condensed Consolidated Statements of Operations (1)
|
|
Amount Reclassified from AOCI into Earnings
|
|
(in millions)
|
Pre-Tax Gain (Loss)
|
Tax Benefit (Expense)
|
Gain (Loss) Net of Tax
|
|
Location of Amount Reclassified
|
Total Amount of Line Item Presented
|
|
Pre-Tax (Gain) Loss
|
Tax (Benefit) Expense
|
(Gain) Loss Net of Tax
|
|
Three Months Ended June 30, 2019
|
|
Forward currency contracts
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
2
|
|
$
|
(1
|
)
|
$
|
2
|
|
|
Cost of products sold
|
$
|
758
|
|
|
$
|
(16
|
)
|
$
|
4
|
|
$
|
(12
|
)
|
|
Net investment hedges (2)
|
(5
|
)
|
1
|
|
(4
|
)
|
|
Interest expense
|
89
|
|
|
(10
|
)
|
2
|
|
(8
|
)
|
|
Interest rate derivative contracts
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
—
|
|
—
|
|
|
Interest expense
|
89
|
|
|
1
|
|
—
|
|
1
|
|
|
Three Months Ended June 30, 2018
|
|
Forward currency contracts
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
194
|
|
$
|
(44
|
)
|
$
|
151
|
|
|
Cost of products sold
|
$
|
739
|
|
|
$
|
10
|
|
$
|
(2
|
)
|
$
|
7
|
|
|
Net investment hedges (2)
|
21
|
|
(5
|
)
|
16
|
|
|
Interest expense
|
57
|
|
|
(7
|
)
|
2
|
|
(5
|
)
|
|
Six Months Ended June 30, 2019
|
|
Forward currency contracts
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
75
|
|
$
|
(17
|
)
|
$
|
58
|
|
|
Cost of products sold
|
$
|
1,488
|
|
|
$
|
(25
|
)
|
$
|
6
|
|
$
|
(19
|
)
|
|
Net investment hedges (2)
|
28
|
|
(6
|
)
|
22
|
|
|
Interest expense
|
198
|
|
|
(21
|
)
|
5
|
|
(16
|
)
|
|
Interest rate derivative contracts
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
—
|
|
—
|
|
|
Interest expense
|
198
|
|
|
2
|
|
—
|
|
1
|
|
|
Six Months Ended June 30, 2018
|
|
Forward currency contracts
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
77
|
|
$
|
(17
|
)
|
$
|
59
|
|
|
Cost of products sold
|
$
|
1,411
|
|
|
$
|
25
|
|
$
|
(6
|
)
|
$
|
19
|
|
|
Net investment hedges (2)
|
21
|
|
(5
|
)
|
16
|
|
|
Interest expense
|
119
|
|
|
(7
|
)
|
2
|
|
(5
|
)
|
|
|
|
|
(1)
|
In all periods presented in the table above, the pre-tax (gain) loss amounts reclassified from
AOCI
to earnings represent the effect of the hedging relationships on earnings. All other amounts included in earnings related to hedging relationships were immaterial.
|
|
|
|
|
(2)
|
For our outstanding net investment hedges, the net gain or loss reclassified from
AOCI
to earnings as a reduction of
Interest expense
represents the straight-line amortization of the excluded component as calculated at the date of designation. This initial value of the excluded component has been excluded from the assessment of effectiveness in accordance with
FASB ASC Topic 815
. In the current period, we did not recognize any gains or losses on the components included in the assessment of hedge effectiveness in
AOCI
or earnings.
|
As of
June 30, 2019
, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as cash flow and net investment hedges under
FASB ASC Topic 815
that may be reclassified from
AOCI
to earnings within the next twelve months are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Derivative Instrument
|
|
FASB ASC Topic 815 Designation
|
|
Location on Unaudited Condensed Consolidated Statements of Operations
|
|
Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
|
|
Forward currency contracts
|
|
Cash flow hedge
|
|
Cost of products sold
|
|
$
|
70
|
|
|
Forward currency contracts
|
|
Net investment hedge
|
|
Interest expense
|
|
48
|
|
|
Interest rate derivative contracts
|
|
Cash flow hedge
|
|
Interest expense
|
|
(5
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location on Unaudited Condensed Consolidated Statements of Operations
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net gain (loss) on currency hedge contracts (1)
|
|
Other, net
|
|
$
|
(152
|
)
|
|
$
|
32
|
|
|
$
|
(130
|
)
|
|
$
|
8
|
|
|
Net gain (loss) on currency transaction exposures
|
|
Other, net
|
|
(4
|
)
|
|
(33
|
)
|
|
2
|
|
|
(17
|
)
|
|
Net currency exchange gain (loss)
|
|
|
|
$
|
(156
|
)
|
|
$
|
(1
|
)
|
|
$
|
(127
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
(1)
|
Certain of our non-designated forward currency contracts were entered into for the purpose of managing our exposure to currency exchange rate risk related to the purchase price of the
proposed BTG Acquisition
.
We recognized a
$151 million
loss in the
second
quarter of
2019
and a
$116 million
loss in the
first six months of
2019
in
Net gain (loss) on currency hedge contracts
due to changes in fair value of the contracts, which are recognized in earnings until contract settlement.
|
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
and considering the estimated amount we would receive or pay to transfer these instruments at the reporting date given the applicable current currency exchange rates, 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location on Unaudited Condensed Consolidated Balance Sheets (1)
|
|
As of
|
|
(in millions)
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Derivative Assets:
|
|
|
|
|
|
|
|
Designated Derivative Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current assets
|
|
$
|
65
|
|
|
$
|
55
|
|
|
Forward currency contracts
|
|
Other long-term assets
|
|
253
|
|
|
183
|
|
|
|
|
|
|
318
|
|
|
237
|
|
|
Non-Designated Derivative Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current assets
|
|
30
|
|
|
67
|
|
|
Total Derivative Assets
|
|
|
|
$
|
348
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
Designated Derivative Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current liabilities
|
|
$
|
3
|
|
|
$
|
2
|
|
|
Forward currency contracts
|
|
Other long-term liabilities
|
|
9
|
|
|
3
|
|
|
Interest rate contracts
|
|
Other current liabilities
|
|
—
|
|
|
44
|
|
|
|
|
|
|
11
|
|
|
49
|
|
|
Non-Designated Derivative Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current liabilities
|
|
116
|
|
|
31
|
|
|
Total Derivative Liabilities
|
|
|
|
$
|
128
|
|
|
$
|
80
|
|
|
|
|
|
(1)
|
We classify derivative assets and liabilities as current when the settlement date of the derivative contract is one year or less.
|
Recurring Fair Value Measurements
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices. 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 category of a financial asset or a financial liability 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
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and government funds
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
Publicly-held equity securities
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Derivative instruments
|
—
|
|
|
348
|
|
|
—
|
|
|
348
|
|
|
—
|
|
|
304
|
|
|
—
|
|
|
304
|
|
|
|
$
|
25
|
|
|
$
|
348
|
|
|
$
|
—
|
|
|
$
|
374
|
|
|
$
|
14
|
|
|
$
|
304
|
|
|
$
|
—
|
|
|
$
|
318
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
128
|
|
|
$
|
—
|
|
|
$
|
128
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
394
|
|
|
394
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
347
|
|
|
|
$
|
—
|
|
|
$
|
128
|
|
|
$
|
394
|
|
|
$
|
522
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
347
|
|
|
$
|
427
|
|
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
$25 million
invested in money market and government funds as of
June 30, 2019
, we had
$97 million
in interest bearing and non-interest-bearing bank accounts. In addition to
$13 million
invested in money market and government funds as of
December 31, 2018
, we had
$133 million
in interest bearing and non-interest-bearing bank accounts.
Our recurring fair value measurements using Level 3 inputs 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.
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods after initial recognition. The fair value of a measurement alternative 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.
Refer to
Note C – Goodwill and Other Intangible Assets
for a discussion of the fair values.
The fair value of our outstanding debt obligations was
$10.421 billion
as of
June 30, 2019
and
$7.239 billion
as of
December 31, 2018
. We determined fair value by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy, amortized cost for commercial paper and face value for term loans and credit facility borrowings outstanding. 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
$9.541 billion
as of
June 30, 2019
and
$7.056 billion
as of
December 31, 2018
. The debt maturity schedule for our long-term debt obligations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rates)
|
|
Issuance Date
|
|
Maturity Date
|
|
As of
|
|
Semi-annual Coupon Rate
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
January 2020 Notes
|
|
December 2009
|
|
January 2020
|
|
$
|
—
|
|
|
$
|
850
|
|
|
6.000%
|
|
May 2020 Notes
|
|
May 2015
|
|
May 2020
|
|
—
|
|
|
600
|
|
|
2.850%
|
|
May 2022 Notes
|
|
May 2015
|
|
May 2022
|
|
500
|
|
|
500
|
|
|
3.375%
|
|
October 2023 Notes
|
|
August 2013
|
|
October 2023
|
|
450
|
|
|
450
|
|
|
4.125%
|
|
March 2024 Notes
|
|
February 2019
|
|
March 2024
|
|
850
|
|
|
—
|
|
|
3.450%
|
|
May 2025 Notes
|
|
May 2015
|
|
May 2025
|
|
750
|
|
|
750
|
|
|
3.850%
|
|
March 2026 Notes
|
|
February 2019
|
|
March 2026
|
|
850
|
|
|
—
|
|
|
3.750%
|
|
March 2028 Notes
|
|
February 2018
|
|
March 2028
|
|
1,000
|
|
|
1,000
|
|
|
4.000%
|
|
March 2029 Notes
|
|
February 2019
|
|
March 2029
|
|
850
|
|
|
—
|
|
|
4.000%
|
|
November 2035 Notes
|
|
November 2005
|
|
November 2035
|
|
350
|
|
|
350
|
|
|
7.000%
|
|
March 2039 Notes
|
|
February 2019
|
|
March 2039
|
|
750
|
|
|
—
|
|
|
4.550%
|
|
January 2040 Notes
|
|
December 2009
|
|
January 2040
|
|
300
|
|
|
300
|
|
|
7.375%
|
|
March 2049 Notes
|
|
February 2019
|
|
March 2049
|
|
1,000
|
|
|
—
|
|
|
4.700%
|
|
Unamortized Debt Issuance Discount
and Deferred Financing Costs
|
|
|
|
2020 - 2049
|
|
(80
|
)
|
|
(29
|
)
|
|
|
|
Unamortized Gain on Fair Value Hedges
|
|
|
|
2020 - 2023
|
|
15
|
|
|
26
|
|
|
|
|
Finance Lease Obligation (1)
|
|
|
|
Various
|
|
6
|
|
|
6
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
$
|
7,591
|
|
|
$
|
4,803
|
|
|
|
Note:
The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges.
|
|
|
|
(1)
|
Effective January 1, 2019, we adopted
FASB ASC Topic 842
, which requires that we recognize finance lease obligations in our
unaudited condensed consolidated balance sheet
. As of December 31, 2018, these leases were referred to as capital lease obligations in accordance with
FASB ASC Topic 840
. Please refer to
Note A – Basis of Presentation
for additional information.
|
Revolving Credit Facility
As of
June 30, 2019
and
December 31, 2018
, we maintained a
$2.750 billion
revolving credit facility (2018 Facility) with a global syndicate of commercial banks that matures on December 19, 2023 with one-year extension options subject to certain conditions.
This facility provides backing for the commercial paper program. The 2018 Credit Agreement for the 2018 Facility requires that we comply with certain covenants, including financial covenants as described within
Debt Covenants
below.
There were no amounts outstanding under our revolving credit facility as of
June 30, 2019
and
December 31, 2018
.
Term Loans
On February 25, 2019, upon the closing of our senior notes offering in aggregate principal amount of
$4.300 billion
described below, we terminated the
$1.000 billion
Term Loan Credit Agreement, entered into on August 20, 2018 and amended on December 19, 2018 (
August 2019 Term Loan
). The
August 2019 Term Loan
was scheduled to mature on August 19, 2019. As of
December 31, 2018
, we had
$1.000 billion
outstanding under our
August 2019 Term Loan
, which was presented within
Current debt obligations
on our accompanying
unaudited condensed consolidated balance sheets
.
On December 19, 2018, we entered into a
$2.000 billion
senior unsecured delayed-draw term loan facility consisting of a
$1.000 billion
two-year delayed draw term loan credit facility maturing in two years from the date of the closing of the
proposed BTG Acquisition
(Two-Year Delayed Draw Term Loan) and a
$1.000 billion
three-year delayed draw term loan credit facility maturing in three years from the date of the closing of the
proposed BTG Acquisition
(Three-Year Delayed Draw Term Loan).
Borrowings are available in U.S. dollars and bear interest at LIBOR or a base rate, in each case plus an applicable margin based on our public debt ratings. We are required to pay customary ticking fees on the average daily unused commitments based on our public debt ratings. The facilities contain customary representations and covenants, as described within
Debt Covenants
below. The facilities
contain customary events of default, which may result in the acceleration of any outstanding commitments, and also contain customary U.K. certain funds provisions. Any proceeds from the facilities will be available to finance the
proposed BTG Acquisition
and pay related transaction costs, as defined by the facilities. As of
June 30, 2019
and
December 31, 2018
, we had no amounts borrowed under the Two-Year Delayed Draw Term Loan or the Three-Year Delayed Draw Term Loan.
If the
proposed BTG Acquisition
has not closed by August 20, 2019, the commitment from the lenders as part of the
$2.000 billion
senior unsecured delayed-draw term loan facility would terminate unless an amendment is secured extending this date. While we expect to be able to secure an amendment, if required, our ability to secure such amendment is not certain.
Debt Covenants
As of and through
June 30, 2019
, 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 E – Borrowings and Credit Arrangements
to our consolidated financial statements in our most recent Annual Report on Form 10-K.
All existing credit arrangements described above require that we maintain certain financial covenants, as follows:
|
|
|
|
|
|
|
|
|
|
|
Covenant Requirement
|
|
Actual
|
|
|
|
as of June 30, 2019
|
|
as of June 30, 2019
|
|
Maximum leverage ratio (1)
|
|
3.75 times
|
|
2.72 times
|
|
|
|
|
(1)
|
Ratio of total debt to consolidated EBITDA, as defined by the agreements, for the preceding four consecutive fiscal quarters.
|
Our covenants require that we maintain a maximum leverage ratio of
3.75 times
, provided, however, that for the two consecutive fiscal quarters ended immediately following the consummation of a Qualified Acquisition, as defined by each agreement, the maximum leverage ratio shall be
4.75 times
, and then subject to a step-down for each succeeding fiscal quarter end to
4.50 times
,
4.25 times
,
4.00 times
and then back to
3.75 times
for each fiscal quarter end thereafter. Our covenants provide for an exclusion from the calculation of consolidated EBITDA, as defined by the agreements, through 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
June 30, 2019
, we had
$328 million
of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the agreements, are excluded from the calculation of consolidated EBITDA, as defined by the agreements, provided that the sum of any excluded net cash litigation payments do not exceed
$2.624 billion
in the aggregate. As of
June 30, 2019
, we had
$1.311 billion
of the litigation exclusion remaining. Our covenants also provide for an exclusion of any debt incurred to prefund a Qualified Acquisition, as defined by each agreement, until the earlier of the acquisition close date or date of abandonment, termination or expiration of the acquisition agreement. As of
June 30, 2019
, we excluded
$2.298 billion
of debt incurred from our leverage ratio calculation in connection with the
proposed BTG Acquisition
.
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 on terms acceptable to us. In this case, all credit facility commitments would terminate, and any amounts borrowed under the facility would become immediately due and payable. Furthermore, any termination of our credit facility may negatively impact the credit ratings assigned to our commercial paper program which may impact our ability to refinance any then outstanding commercial paper as it becomes due and payable
.
Commercial Paper
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions, except maturity and yield)
|
June 30, 2019
|
|
December 31, 2018
|
|
Commercial paper outstanding
|
$
|
1,946
|
|
|
$
|
1,248
|
|
|
Maximum borrowing capacity
|
2,750
|
|
|
2,750
|
|
|
Borrowing capacity available
|
804
|
|
|
1,502
|
|
|
Weighted average maturity
|
60 days
|
|
|
27 days
|
|
|
Weighted average yield
|
2.90
|
%
|
|
3.04
|
%
|
Senior Notes
We had senior notes outstanding of
$7.650 billion
as of
June 30, 2019
and
$4.800 billion
as of
December 31, 2018
.
In February 2019, we completed an offering of
$4.300 billion
in aggregate principal amount of senior notes
comprised of
$850 million
of
3.450%
senior notes due
March 2024
,
$850 million
of
3.750%
senior notes due
March 2026
,
$850 million
of
4.000%
senior notes due
March 2029
,
$750 million
of
4.550%
senior notes due
March 2039
and
$1.000 billion
of
4.700%
senior notes due
March 2049
. We used a portion of the net proceeds from the offering to repay the
$850 million
plus accrued interest and premium of our
6.000%
senior notes due in
January 2020
, the
$600 million
plus accrued interest and premium of our
2.850%
senior notes due in
May 2020
and the
$1.000 billion
plus accrued interest of our
August 2019 Term Loan
. As of
June 30, 2019
, the remaining proceeds were intended to be used to finance a portion of the
proposed BTG Acquisition
and included in our restricted cash in
Other current assets
until the closing date of the
proposed BTG Acquisition
. As of
June 30, 2019
, the balance of our restricted cash in
Other current assets
relating to the
proposed BTG Acquisition
was
$2.298 billion
.
In the event that the
proposed BTG Acquisition
, in accordance with its terms, has not become effective on or prior to August 20, 2019 or such later date as may otherwise be agreed upon by the parties (Long Stop Date) or if, prior to becoming effective, the
proposed BTG Acquisition
lapses, is withdrawn or terminates, then we will be required to redeem all outstanding
March 2024 Notes
and
March 2026 Notes
on the special mandatory redemption date at a special mandatory redemption price equal to
101 percent
of the principal amount, plus any accrued and unpaid interest. The special mandatory redemption date is defined as
30 days
, or first business day thereafter, following the earlier of the Long Stop Date or the lapse, withdrawal or termination of the
proposed BTG Acquisition
in accordance with its terms.
Our senior notes were issued in public offerings, are redeemable prior to maturity and are not subject to sinking fund requirements. Our senior notes are unsecured, unsubordinated obligations and rank on parity with each other. These notes are effectively junior to liabilities of our subsidiaries (see
Other Arrangements
below).
Bridge Facility
On February 25, 2019, upon the closing of our senior notes offering in aggregate principal amount of
$4.300 billion
described above, we terminated the Bridge Facility entered into on November 20, 2018. The termination was pursuant to the terms of the Bridge Facility, which required full termination upon the refinancing of the
January 2020 Notes
and
May 2020 Notes
discussed above. There were no amounts borrowed under the Bridge Facility as of December 31, 2018.
Other Arrangements
We have accounts receivable factoring programs in certain European countries and with commercial banks in Japan which include promissory notes discounting programs. We account for our factoring programs as sales under
FASB ASC Topic 860,
Transfers and Servicing
. We have no retained interest in the transferred receivables, other than collection and administration, and once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. Amounts de-recognized for accounts and notes receivable, which are excluded from
Trade accounts receivable, net
in the accompanying
unaudited condensed consolidated balance sheets
, are aggregated by contract denominated currency below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factoring Arrangements
|
As of June 30, 2019
|
|
As of December 31, 2018
|
|
Amount
De-recognized
|
|
Average
Interest Rate
|
|
Amount
De-recognized
|
|
Average
Interest Rate
|
|
Euro denominated
|
$
|
180
|
|
|
1.9
|
%
|
|
$
|
165
|
|
|
2.7
|
%
|
|
Yen denominated
|
194
|
|
|
0.6
|
%
|
|
195
|
|
|
0.9
|
%
|
Refer to
Note E – Borrowing and Credit Arrangements
to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information on our borrowings and credit agreements.
NOTE F – SUPPLEMENTAL BALANCE SHEET INFORMATION
Components of selected captions in our accompanying
unaudited condensed consolidated balance sheets
are as follows:
Cash, cash equivalents, restricted cash and restricted cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
$
|
123
|
|
|
$
|
146
|
|
|
Restricted cash and restricted cash equivalents in
Other current assets
:
|
|
|
|
|
Restricted cash related to the proposed BTG Acquisition (1)
|
2,298
|
|
|
—
|
|
|
Other restricted cash and restricted cash equivalents
|
360
|
|
|
655
|
|
|
|
2,657
|
|
|
655
|
|
|
Restricted cash equivalents in
Other long-term assets
|
42
|
|
|
27
|
|
|
|
$
|
2,823
|
|
|
$
|
829
|
|
|
|
|
|
(1)
|
Refer to
Note B – Acquisitions and Strategic Investments
and
Note E – Borrowings and Credit Arrangements
for additional information regarding the
proposed BTG Acquisition
.
|
Trade accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Accounts receivable
|
$
|
1,785
|
|
|
$
|
1,676
|
|
|
Allowance for doubtful accounts
|
(73
|
)
|
|
(68
|
)
|
|
|
$
|
1,712
|
|
|
$
|
1,608
|
|
The following is a rollforward of our allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Beginning balance
|
$
|
72
|
|
|
$
|
67
|
|
|
$
|
68
|
|
|
$
|
68
|
|
|
Net charges to expenses
|
4
|
|
|
4
|
|
|
11
|
|
|
8
|
|
|
Utilization of allowances
|
(4
|
)
|
|
(8
|
)
|
|
(6
|
)
|
|
(14
|
)
|
|
Ending balance
|
$
|
73
|
|
|
$
|
63
|
|
|
$
|
73
|
|
|
$
|
63
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Finished goods
|
$
|
819
|
|
|
$
|
760
|
|
|
Work-in-process
|
113
|
|
|
100
|
|
|
Raw materials
|
367
|
|
|
306
|
|
|
|
$
|
1,300
|
|
|
$
|
1,166
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Land
|
$
|
97
|
|
|
$
|
97
|
|
|
Buildings and improvements
|
1,119
|
|
|
1,100
|
|
|
Equipment, furniture and fixtures
|
3,312
|
|
|
3,224
|
|
|
Capital in progress
|
332
|
|
|
319
|
|
|
|
4,861
|
|
|
4,740
|
|
|
Less: accumulated depreciation
|
3,040
|
|
|
2,958
|
|
|
|
$
|
1,820
|
|
|
$
|
1,782
|
|
Depreciation expense was
$73 million
for the
second
quarter of
2019
,
$70 million
for the
second
quarter of
2018
,
$142 million
for the
first six months of
2019
and
$137 million
for the
first six months of
2018
.
Accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Legal reserves
|
$
|
470
|
|
|
$
|
712
|
|
|
Payroll and related liabilities
|
582
|
|
|
630
|
|
|
Rebates
|
235
|
|
|
229
|
|
|
Contingent consideration
|
101
|
|
|
138
|
|
|
Other
|
543
|
|
|
538
|
|
|
|
$
|
1,932
|
|
|
$
|
2,246
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Income taxes
|
$
|
684
|
|
|
$
|
739
|
|
|
Legal reserves
|
134
|
|
|
217
|
|
|
Contingent consideration
|
293
|
|
|
209
|
|
|
Other
|
916
|
|
|
717
|
|
|
|
$
|
2,027
|
|
|
$
|
1,882
|
|
NOTE G – LEASES
We have operating and finance leases for real estate including corporate offices, land, warehouse space, vehicles and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). We recognize lease expense on a straight-line basis over the lease term for short-term leases that we do not record on our balance sheet. If there is a change in our assessment of the lease term, and as a result, the remaining lease term extends more than 12 months from the end of the previously determined lease term, or we subsequently become reasonably certain that we will exercise an option to purchase the underlying asset, the lease no longer meets the definition of a short-term lease and is accounted for as either an operating or finance lease and recognized on the balance sheet. For leases executed in 2019 and later, we account for the lease components and the non-lease components as a single lease component, with the exception of our warehouse leases. Our leases have remaining lease terms of less than
1 year
to approximately
60 years
, some of which may include options to extend the leases for up to
10 years
. If we are reasonably certain we will exercise an option to extend the lease, the time period covered by the extension option is included in the lease term.
We determine whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of the arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable.
As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
The following table presents supplemental balance sheet information related to our operating leases:
|
|
|
|
|
|
|
|
(in millions)
|
As of June 30, 2019
|
|
Assets
|
|
|
Operating lease right-of-use assets in
Other long-term assets
|
$
|
252
|
|
|
Liabilities
|
|
|
Operating lease liabilities in
Other current liabilities
|
$
|
56
|
|
|
Operating lease liabilities in
Other long-term liabilities
|
$
|
205
|
|
The following table presents the weighted average remaining lease term and discount rate information related to our operating leases:
|
|
|
|
|
|
|
As of June 30, 2019
|
|
Weighted average remaining lease term
|
5.33 years
|
|
Weighted average discount rate
|
3.62%
|
Our operating lease cost was
$18 million
in the
second
quarter of
2019
and
$36 million
for the
first six months of
2019
.
The following table presents supplemental cash flow information related to our operating leases:
|
|
|
|
|
|
|
|
(in millions)
|
Six Months Ended June 30, 2019
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
|
Operating cash flows from operating leases
|
$
|
35
|
|
Right-of-use assets obtained in exchange for operating lease obligations were immaterial for
the
first six months of
2019
.
The following table presents the maturities of our operating lease liabilities as of
June 30, 2019
:
|
|
|
|
|
|
|
|
Fiscal year
|
Operating Leases
(in millions)
|
|
2019 (excluding the first six months of 2019)
|
$
|
37
|
|
|
2020
|
64
|
|
|
2021
|
52
|
|
|
2022
|
41
|
|
|
2023
|
31
|
|
|
Thereafter
|
65
|
|
|
Total future minimum operating lease payments
|
289
|
|
|
Less: imputed interest
|
28
|
|
|
Present value of operating lease liabilities
|
$
|
261
|
|
As of
June 30, 2019
, we have additional leases for office space and R&D space, that have not yet commenced, of approximately
$63 million
. These leases will commence during the second half of
2019
and
2020
, with lease terms of
5 months
to
15 years
.
NOTE H – INCOME TAXES
Our effective tax rate from continuing operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Effective tax rate from continuing operations
|
(5.9
|
)%
|
|
(60.3
|
)%
|
|
4.0
|
%
|
|
(27.3
|
)%
|
The change in our reported tax rates for the
second
quarter and
first six months of
2019
, as compared to the same periods in
2018
, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate. These receipts and charges include intangible asset impairment charges, acquisition-related items, restructuring items, litigation-related items as well as certain discrete tax items primarily related to share-based payments and the 2018 settlement of our transfer pricing dispute with the Internal Revenue Service (IRS) for the 2001 through 2010 tax years.
As of
June 30, 2019
, we had
$413 million
of gross unrecognized tax benefits, of which a net
$316 million
, if recognized, would affect our effective tax rate. As of
December 31, 2018
, we had
$427 million
of gross unrecognized tax benefits, of which a net
$332 million
, if recognized, would affect our effective tax rate. The change in our gross unrecognized tax benefit is primarily related to concluding settlements with tax authorities.
It is reasonably possible that within the next 12 months we will resolve multiple issues with foreign, federal and state taxing authorities, resulting in a reduction in our balance of unrecognized tax benefits of up to approximately
$99 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 dynamics 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 U.S. 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
$604 million
as of
June 30, 2019
and
$929 million
as of
December 31, 2018
and includes certain estimated costs of settlement, damages and defense. The decrease in our legal accrual was mainly due to settlement payments associated with product liability cases or claims related to transvaginal surgical mesh products. A portion of our legal accrual is already funded through our qualified settlement fund (QSF), which is included in other restricted cash and restricted cash equivalents balance of
$360 million
as of
June 30, 2019
and
$655 million
as of
December 31, 2018
. Refer to
Note F – Supplemental Balance Sheet Information
for additional information.
We recorded litigation-related net charges of
$15 million
in the
second
quarter of
2019
and litigation-related net credits of
$133 million
in the
first six months of
2019
.
In the first quarter of
2019
, we recorded
$148 million
of the total
$180 million
one-time settlement payment received from Edwards Lifesciences Corporation in January 2019 to
Litigation-related net charges (credits)
on our
unaudited condensed consolidated financial statements
.
We record certain legal and product liability charges, credits and costs of defense, which we consider to be unusual or infrequent and significant as
Litigation-related net charges (credits)
in our
unaudited condensed consolidated financial statements
. All other legal and product liability charges, credits and costs are recorded within
Selling, general and administrative expenses
.
As such, a portion of the related gain from this settlement was recorded in
Selling, general and administrative expenses
on our
unaudited condensed consolidated statements of operations
. 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 Report on Form 10-Q for the period ended March 31, 2019 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 April 30, 2019, Tissue Anchor Innovations filed a complaint for patent infringement in the United States District Court Central District of California against Fountain Valley Regional Hospital and Medical Center, Los Alamitos Medical Center and us. The complaint alleges that the Solyx™ Sling System infringes US Patent 6,506,190.
Product Liability Litigation
As of
July 23, 2019
, approximately
53,000
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. On April 16, 2019, the U.S. Food and Drug Administration (FDA) ordered that all manufacturers of surgical mesh products indicated for the transvaginal repair of pelvic organ prolapse stop selling and distributing their products in the United States immediately, stemming from the FDA’s 2016 reclassification of these devices to class III (high risk) devices, and as a result, the Company ceased global sales and distribution of surgical mesh products indicated for transvaginal pelvic organ prolapse. The pending cases are in various federal and state courts in the U.S. and include
eight
putative class actions. There were also fewer than
25
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 U.S. 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
July 23, 2019
, we have entered into master settlement agreements in principle or are in the final stages of entering one with certain plaintiffs' counsel to resolve an aggregate of approximately
52,000
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
52,000
cases and claims, approximately
42,000
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 August 3, 2012, we were served with a qui tam complaint that had previously been filed under seal against Boston Scientific Neuromodulation Corporation in the U.S. District Court for the District of New Jersey on March 2, 2011. On August 8, 2012, we learned that the federal government had previously declined to intervene in this matter. The relators’ complaint, now unsealed, alleges that Boston Scientific Neuromodulation Corporation violated the federal and various states' false claims acts through submission of fraudulent bills for implanted devices, under-reporting of certain adverse events and promotion of off-label uses. On September 10, 2012, the relators filed an amended complaint revising and restating certain of the claims in the original complaint. Our motion to dismiss, filed subsequently, was denied on May 31, 2013 and on June 28, 2013, we answered the amended complaint and brought certain counterclaims arising from relators’ unauthorized removal of documents from the business during their employments, which the relators moved to dismiss on July 22, 2013. The Court denied relators’ motion to dismiss the counterclaims on September 4, 2014. Following the completion of fact and expert discovery, we filed a motion for summary judgment against all claims on January 27, 2017, relators filed their own motion for summary judgment against our counterclaims that same date and the parties await the Court’s rulings on the motions. On December 15, 2017, the Court denied both motions for summary judgment. The parties reached a settlement on May 2, 2019, and the Court subsequently ordered the case dismissed, except for any claim by relators to recover attorneys’ fees.
Other Proceedings
On November 1, 2017 we entered into a definitive agreement with Channel Medsystems, Inc. (Channel) where we could have been obligated to pay
$145 million
in cash up-front and a maximum of
$130 million
in contingent payments to acquire Channel. The agreement contained a provision allowing Channel to sell the remaining equity interests of the company to us upon achievement of a regulatory milestone and an option allowing us to acquire the remaining equity interests. We sent a notice of termination of that agreement to Channel in the second quarter of 2018. On September 12, 2018, Channel filed a complaint in Delaware Chancery Court against us for alleged breach of the agreement. Channel alleges that we breached the agreement by terminating it. We have answered the complaint, denied the claims by Channel and have counterclaimed to recover part of our investment in Channel, alleging fraud in the inducement. On April 2, 2019, Channel announced its receipt of FDA approval of the Cerene™ Cryotherapy Device. Trial testimony was taken in April 2019, and post-trial proceedings are concluding.
Proposed Acquisition
Refer to
Note B – Acquisitions and Strategic Investments
,
Note D – Hedging Activities and Fair Value Measurements
and
Note E – Borrowings and Credit Arrangements
for information regarding the proposed BTG Acquisition.
Matters Concluded Since December 31, 2018
On January 15, 2019, we announced that we reached an agreement with Edwards Lifesciences Corporation (Edwards) to settle all outstanding patent disputes between us and Edwards in all venues around the world. All pending cases or appeals in courts and patent offices between the two companies will be dismissed, and the parties will not litigate patent disputes related to current portfolios of transcatheter aortic valves, certain mitral valve repair devices, and left atrial appendage closure devices. Any injunctions currently in place will be lifted. Under the terms of the agreement, Edwards made a one-time payment to us of
$180 million
. No further royalties will be owed by either party under the agreement. All other terms remain confidential. The previously disclosed matters that have been resolved as a result of this settlement include:
|
|
|
|
•
|
On October 30, 2015, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation and Edwards Lifesciences Services GmbH in Düsseldorf District Court in Germany for patent infringement. We allege that Edwards’ SAPIEN 3™ Heart Valve infringes our patent related to adaptive sealing technology. On February 25, 2016, we extended the action to allege infringement of a second patent related to adaptive sealing technology. The trial began on February 7, 2017. On March 9, 2017, the court found that Edwards infringed both patents and Edwards appealed.
|
|
|
|
|
•
|
On November 9, 2015, Edwards Lifesciences, LLC filed an invalidity claim against one of our subsidiaries, Sadra Medical, Inc. (Sadra), in the High Court of Justice, Chancery Division Patents Court in the United Kingdom, alleging that a European patent owned by Sadra relating to a repositionable heart valve is invalid. On January 15, 2016, we filed our defense and counterclaim for a declaration that our European patent is valid and infringed by Edwards. On February 25, 2016, we amended our counterclaim to allege infringement of a second patent related to adaptive sealing technology. A trial was held from January 18 to January 27, 2017. On March 3, 2017, the court found one of our patents valid and infringed and some claims of the second patent invalid and the remaining claims not infringed. Both parties have filed an appeal. On March 28, 2018, the Court of Appeals affirmed the decision of the High Court.
|
|
|
|
|
•
|
On November 23, 2015, Edwards Lifesciences PVT, Inc. filed a patent infringement action against us and one of our subsidiaries, Boston Scientific Medizintechnik GmbH, in the District Court of Düsseldorf, Germany alleging a European patent (Spenser '672) owned by Edwards is infringed by our Lotus™ Valve System. The trial began on February 7, 2017. On March 9, 2017, the court found that we did not infringe the Spenser '672 patent. Edwards filed an appeal.
|
|
|
|
|
•
|
On November 23, 2015, Edwards Lifesciences Corporation filed a patent infringement action against us and Boston Scientific Medizintechnik GmbH in the District Court of Düsseldorf, Germany alleging an European patent (Bourang) owned by Edwards is infringed by our Lotus Valve System. The trial began on February 7, 2017. On March 28, 2017, the European Patent Office revoked the Bourang patent and on April 3, 2017, the court suspended the infringement action pending Edwards' appeal of the revocation of the patent at the European Patent Office.
|
|
|
|
|
•
|
On April 19, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation (Edwards) in the U.S. District Court for the District of Delaware for patent infringement. We allege that Edwards’ SAPIEN 3™ Valve infringes a patent related to adaptive sealing technology. On June 9, 2016, Edwards filed a counterclaim alleging that our Lotus™ Valve System infringes three patents owned by Edwards. On October 12, 2016, Edwards filed a petition for inter partes review of our patent with the U.S. Patent and Trademark Office (USPTO), Patent Trial and Appeal Board. On March 29, 2017, the USPTO granted the inter partes review request. On April 18, 2017, Edwards filed a second petition for inter partes review of our patent with the USPTO. On March 23, 2018, the USPTO found our patent invalid. The Company filed an appeal before the United States Court of Appeals for the Federal Circuit on May 24, 2018.
|
|
|
|
|
•
|
On April 19, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation in the U.S. 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.
|
|
|
|
|
•
|
On April 26, 2016, Edwards Lifesciences PVT, Inc. filed a patent infringement action against us and one of our subsidiaries, Boston Scientific Medizintechnik GmbH, in the District Court of Düsseldorf, Germany alleging a European patent (Spenser '550) owned by Edwards is infringed by our Lotus Transcatheter Heart Valve System. The trial began on February 7, 2017. On March 9, 2017, the court found that we infringed the Spenser '550 patent. The Company filed an appeal. On April 13, 2018, the ‘550 patent was revoked by the European Patent Office.
|
|
|
|
|
•
|
On October 27, 2016, Edwards Lifesciences PVT, Inc. filed a patent infringement action against us and one of our subsidiaries, Boston Scientific, LTD, in the Federal Court of Canada alleging that three Canadian patents (Spenser) owned by Edwards are infringed by our Lotus Transcatheter Heart Valve System.
|
|
|
|
|
•
|
On December 22, 2016, Edwards Lifesciences PVT, Inc. and Edwards Lifesciences SA (AG) filed a plenary summons against Boston Scientific Limited and Boston Scientific Group Public Company in the High Court of Ireland alleging that a European patent (Spenser) owned by Edwards is infringed by our Lotus™ Valve System. On April 13, 2018, the ‘550 patent was revoked by the European Patent Office.
|
|
|
|
|
•
|
On August 1, 2018, the Company filed a patent infringement action on the merits in Dusseldorf, Germany against Edwards Lifesciences Corporation and Edwards Lifesciences GmbH (collectively Edwards) alleging that the Sapien 3™ Device and Sapien 3 Ultra Device infringed a patent owned by the Company.
|
|
|
|
|
•
|
On August 3, 2018, the Company filed a preliminary injunction request in Dusseldorf, Germany against Edwards Lifesciences Corporation and Edwards Lifesciences GmbH (collectively Edwards) alleging that the Sapien 3 Ultra Device infringed a patent owned by the Company. On October 23, 2018, the court found that the Sapien 3 Ultra Device infringed the patent. Edwards had the right to appeal.
|
|
|
|
|
•
|
On August 22, 2018, Edwards Lifesciences LLC filed a patent infringement action against Boston Scientific Corporation, in the U. S. District Court of Delaware, alleging that two U.S. patents (Schweich) owned by them are infringed by our Watchman™ Left Atrial Appendage Closure Device, Watchman Delivery System and Watchman Access System.
|
On December 14, 2016, we learned that the Associacao Brasileira de Medicina de Grupo d/b/a ABRAMGE filed a complaint against us, Arthrex and Zimmer Biomet Holdings, in the U.S. District Court for the District of Delaware. This complaint, which ABRAMGE never served against us, alleges that the defendants or their agents paid kickbacks to health care providers in order to increase sales and prices and are liable under a variety of common law theories. On February 6, 2017, ABRAMGE filed and served an amended complaint on us and the other defendants. The amended complaint does not contain any material changes in the allegations against us. Subsequently, on March 2, 2017, ABRAMGE filed a motion to consolidate this lawsuit with two other similar suits that it had brought against Stryker and Abbott Laboratories, in a multidistrict litigation proceeding. On April 13, 2017, we filed a motion to dismiss the amended complaint, as well as a separate opposition to the multidistrict litigation motion and on May 31, 2017, the Joint Panel on Multi-District Litigation denied ABRAMGE’s motion for the multidistrict litigation. On September 1, 2017, ABRAMGE filed a motion for leave to file a Second Amended Complaint, while our motion to dismiss the Amended Complaint remained pending. On September 15, 2017, we filed an opposition to the motion seeking leave to amend. Both our motion to dismiss and the motion seeking leave to amend remain pending. On November 8, 2018, the Court granted ABRAMGE’s motion for leave to file a Second Amended Complaint, while also granting us leave to renew our motion to dismiss. We filed our motion to dismiss the Second Amended Complaint on January 18, 2019. On February 28, 2019, ABRAMGE dismissed its Second Amended Complaint, concluding the lawsuit.
On or about January 12, 2016, Teresa L. Stevens filed a claim against us and three other defendants asserting, for herself and on behalf of a putative class of similarly situated women, that she was harmed by a vaginal mesh implant that she alleges contained a counterfeit or adulterated resin product that we imported from China. The complaint was filed in the U.S. District Court for the Southern District of West Virginia, before the same Court that is hearing the mesh MDL. The complaint, which alleges Racketeer Influenced and Corrupt Organizations Act (RICO) violations, fraud, misrepresentation, deceptive trade practices and unjust enrichment, seeks both equitable relief and damages under state and federal law. On January 26, 2016, the Court issued an order staying the case and directing the plaintiff to submit information to allow the FDA to issue a determination with respect to her allegations. In addition, we were in contact with the U.S. Attorney’s Office for the Southern District of West Virginia and responded voluntarily to their requests in connection with that office’s review of the allegations concerning the use of mesh resin in the complaint. We reached a settlement on this matter and this case was dismissed on May 13, 2019.
On February 27, 2017, Carolyn Turner filed a complaint against us and five other defendants asserting for herself and on behalf of a putative class of similarly situated women, that she was harmed by a vaginal mesh implant that she alleges contained a counterfeit or adulterated resin product that we imported from China. The complaint was filed in the U.S. District Court for the Middle District of Florida, Orlando Division and alleges violations of the RICO, negligence, strict liability, breach of an express or implied warranty, intentional and negligent misrepresentation, fraud and unjust enrichment. Ms. Turner served this complaint against us on April 7, 2017. As of April 27, 2017, this case was stayed, pending resolution of the transfer petition to the mesh multidistrict litigation. We reached a settlement on this matter and this case was dismissed on February 25, 2019.
NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Weighted average shares outstanding - basic
|
1,391.0
|
|
|
1,380.5
|
|
|
1,389.4
|
|
|
1,378.5
|
|
|
Net effect of common stock equivalents
|
17.6
|
|
|
18.3
|
|
|
19.1
|
|
|
19.3
|
|
|
Weighted average shares outstanding - assuming dilution
|
1,408.6
|
|
|
1,398.9
|
|
|
1,408.5
|
|
|
1,397.8
|
|
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
one million
shares of our common stock in the
second
quarter of
2019
, approximately
two million
shares of our common stock in the
second
quarter of
2018
, approximately
seven million
shares of our common stock in the
first six months of
2019
and approximately
eight million
shares of our common stock in the
first six months of
2018
, following the exercise of 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 in the
first six months of
2019
or
2018
.
NOTE K – SEGMENT REPORTING
We have
three
reportable segments comprised of MedSurg, Rhythm and Neuro, and Cardiovascular, which represent an aggregation of our operating segments.
Each of our reportable segments generates revenues from the sale of medical devices. We measure and evaluate our reportable segments based on reportable segment net sales, operating income of reportable segments, excluding intersegment profits, and reportable segment operating income as a percentage of reportable segment net sales. Reportable segment operating income as a percentage of reportable segment net sales is defined as operating income of reportable segments divided by reportable segment net sales. Our presentation of reportable segment net sales and operating income of reportable segments includes the impact of foreign currency fluctuations, since our chief operating decision maker (CODM) reviews operating results both including and excluding the impact of foreign currency fluctuations, and the following presentation more closely aligns to our
unaudited condensed consolidated financial statements
. We exclude from operating income of reportable segments certain corporate-related expenses and certain transactions or adjustments that our CODM considers to be non-operational, such as amounts related to amortization expense, intangible asset impairment charges, acquisition-related items, restructuring and restructuring-related items and litigation-related items. Although we exclude these amounts from operating income of reportable segments, they are included in
Income (loss) before income taxes
on the
unaudited condensed consolidated statements of operations
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 (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Net sales
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
MedSurg
|
$
|
818
|
|
|
$
|
751
|
|
|
$
|
1,584
|
|
|
$
|
1,462
|
|
|
Rhythm and Neuro
|
786
|
|
|
775
|
|
|
1,543
|
|
|
1,512
|
|
|
Cardiovascular
|
1,026
|
|
|
965
|
|
|
1,998
|
|
|
1,898
|
|
|
|
$
|
2,631
|
|
|
$
|
2,490
|
|
|
$
|
5,124
|
|
|
$
|
4,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Income (loss) before income taxes
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
MedSurg
|
$
|
295
|
|
|
$
|
273
|
|
|
$
|
551
|
|
|
$
|
532
|
|
|
Rhythm and Neuro
|
167
|
|
|
160
|
|
|
322
|
|
|
313
|
|
|
Cardiovascular
|
301
|
|
|
300
|
|
|
577
|
|
|
590
|
|
|
Operating income of reportable segments
|
763
|
|
|
734
|
|
|
1,449
|
|
|
1,436
|
|
|
Corporate expenses, including hedging activities
|
(91
|
)
|
|
(100
|
)
|
|
(140
|
)
|
|
(200
|
)
|
|
Intangible asset impairment charges, acquisition-related, restructuring- and restructuring-related and litigation-related net (charges) credits
|
(127
|
)
|
|
(95
|
)
|
|
(64
|
)
|
|
(149
|
)
|
|
Amortization expense
|
(161
|
)
|
|
(147
|
)
|
|
(321
|
)
|
|
(288
|
)
|
|
Operating income (loss)
|
384
|
|
|
392
|
|
|
925
|
|
|
799
|
|
|
Other expense, net
|
(239
|
)
|
|
(45
|
)
|
|
(323
|
)
|
|
(129
|
)
|
|
Income (loss) before income taxes
|
$
|
145
|
|
|
$
|
347
|
|
|
$
|
602
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segment operating income as a percentage of reportable segment net sales
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
MedSurg
|
36.1
|
%
|
|
36.4
|
%
|
|
34.8
|
%
|
|
36.4
|
%
|
|
Rhythm and Neuro
|
21.2
|
%
|
|
20.6
|
%
|
|
20.9
|
%
|
|
20.7
|
%
|
|
Cardiovascular
|
29.3
|
%
|
|
31.1
|
%
|
|
28.9
|
%
|
|
31.1
|
%
|
NOTE L – REVENUE
We generate revenue primarily from the sale of single-use medical devices and present revenue net of sales taxes in our
unaudited condensed consolidated statements of operations
. The following tables disaggregate our revenue from contracts with customers by business and geographic region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Businesses
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Endoscopy
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
270
|
|
|
$
|
245
|
|
|
$
|
523
|
|
|
$
|
477
|
|
|
International
|
200
|
|
|
197
|
|
|
387
|
|
|
384
|
|
|
Worldwide
|
470
|
|
|
442
|
|
|
910
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
Urology and Pelvic Health
|
|
|
|
|
|
|
|
|
U.S.
|
248
|
|
|
213
|
|
|
479
|
|
|
409
|
|
|
International
|
100
|
|
|
96
|
|
|
195
|
|
|
192
|
|
|
Worldwide
|
348
|
|
|
308
|
|
|
674
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Rhythm Management
|
|
|
|
|
|
|
|
|
U.S.
|
288
|
|
|
290
|
|
|
576
|
|
|
580
|
|
|
International
|
210
|
|
|
204
|
|
|
413
|
|
|
407
|
|
|
Worldwide
|
498
|
|
|
494
|
|
|
989
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
Electrophysiology
|
|
|
|
|
|
|
|
|
U.S.
|
39
|
|
|
39
|
|
|
75
|
|
|
74
|
|
|
International
|
46
|
|
|
40
|
|
|
89
|
|
|
79
|
|
|
Worldwide
|
84
|
|
|
79
|
|
|
164
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
Neuromodulation
|
|
|
|
|
|
|
|
|
U.S.
|
160
|
|
|
160
|
|
|
304
|
|
|
291
|
|
|
International
|
44
|
|
|
42
|
|
|
86
|
|
|
79
|
|
|
Worldwide
|
204
|
|
|
202
|
|
|
390
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
Interventional Cardiology
|
|
|
|
|
|
|
|
|
U.S.
|
318
|
|
|
296
|
|
|
614
|
|
|
577
|
|
|
International
|
388
|
|
|
366
|
|
|
753
|
|
|
730
|
|
|
Worldwide
|
706
|
|
|
662
|
|
|
1,367
|
|
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
Peripheral Interventions
|
|
|
|
|
|
|
|
|
U.S.
|
155
|
|
|
152
|
|
|
311
|
|
|
297
|
|
|
International
|
165
|
|
|
152
|
|
|
320
|
|
|
294
|
|
|
Worldwide
|
320
|
|
|
304
|
|
|
631
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
U.S.
|
1,478
|
|
|
1,394
|
|
|
2,881
|
|
|
2,704
|
|
|
International
|
1,153
|
|
|
1,096
|
|
|
2,243
|
|
|
2,166
|
|
|
Net Sales
|
$
|
2,631
|
|
|
$
|
2,490
|
|
|
$
|
5,124
|
|
|
$
|
4,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Geographic Regions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
U.S.
|
$
|
1,478
|
|
|
$
|
1,394
|
|
|
$
|
2,881
|
|
|
$
|
2,704
|
|
|
EMEA (Europe, Middle East and Africa)
|
571
|
|
|
558
|
|
|
1,132
|
|
|
1,121
|
|
|
APAC (Asia-Pacific)
|
481
|
|
|
442
|
|
|
918
|
|
|
857
|
|
|
Latin America and Canada
|
101
|
|
|
96
|
|
|
192
|
|
|
188
|
|
|
|
$
|
2,631
|
|
|
$
|
2,490
|
|
|
$
|
5,124
|
|
|
$
|
4,870
|
|
|
|
|
|
|
|
|
|
|
|
Emerging Markets
†
|
$
|
318
|
|
|
$
|
283
|
|
|
$
|
614
|
|
|
$
|
545
|
|
†
We define Emerging Markets as the
20
countries that we believe have strong growth potential based on their economic conditions, healthcare sectors and our global capabilities.
Periodically, we assess our list of Emerging Markets; effective January 1, 2019, we updated our list of Emerging Market countries.
Our current list is comprised of the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, Saudi Arabia, Slovakia, South Africa, South Korea, Thailand, Turkey and Vietnam.
We have revised prior year amounts to the current year’s presentation.
The revision had an immaterial impact on prior year Emerging Markets sales.
Deferred Revenue
Contract liabilities are classified within
Other current liabilities
and
Other long-term liabilities
on our accompanying
unaudited condensed consolidated balance sheets
. Our deferred revenue balance was
$368 million
as of
June 30, 2019
and
$373 million
as of
December 31, 2018
. Our contractual liabilities are primarily composed of deferred revenue related to the LATITUDE™ Patient Management System. Revenue is recognized over the average service period which is based on device and patient longevity. We recognized revenue of
$36 million
in the
second
quarter of
2019
and
$72 million
in the
first six months of
2019
that was included in the above
December 31, 2018
contract liability balance. We have elected not to disclose the transaction price allocated to unsatisfied performance obligations when the original expected contract duration is one year or less. In addition, we have not identified material unfulfilled performance obligations for which revenue is not currently deferred.
Variable Consideration
We generally allow our customers to return defective, damaged and, in certain cases, expired products for credit and record the amount for estimated sales returns as a reduction to revenue when we sell the initial product. In addition, we may allow customers to return previously purchased products for next-generation product offerings. For these transactions, we defer recognition of revenue on the sale of the earlier generation product based upon an estimate of the amount of product to be returned when the next-generation products are shipped to the customer.
We also offer sales rebates and discounts to certain customers. We treat sales rebates and discounts as a reduction of revenue and classify the corresponding liability as current. If we are unable to reasonably estimate the expected rebates, we record a liability for the maximum rebate percentage offered. We have entered certain agreements with group purchasing organizations to sell our products to participating hospitals at negotiated prices. We recognize revenue from these agreements following the same revenue recognition criteria discussed above.
NOTE M – CHANGES IN OTHER COMPREHENSIVE INCOME
The following tables provide the reclassifications out of
Other comprehensive income (loss), net of tax
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
Net Change in Available-for-Sale Securities
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of March 31, 2019
|
$
|
(46
|
)
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
87
|
|
|
Other comprehensive income (loss) before reclassifications
|
8
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(8
|
)
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
Total other comprehensive income (loss)
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
Balance as of June 30, 2019
|
$
|
(46
|
)
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
Net Change in Available-for-Sale Securities
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of March 31, 2018
|
$
|
(22
|
)
|
|
$
|
(79
|
)
|
|
$
|
—
|
|
|
$
|
(27
|
)
|
|
$
|
(128
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(40
|
)
|
|
151
|
|
|
—
|
|
|
—
|
|
|
111
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(5
|
)
|
|
7
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Total other comprehensive income (loss)
|
(45
|
)
|
|
158
|
|
|
—
|
|
|
—
|
|
|
112
|
|
|
Balance as of June 30, 2018
|
$
|
(68
|
)
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
(27
|
)
|
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
Net Change in Available-for-Sale Securities
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of December 31, 2018
|
$
|
(53
|
)
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
(25
|
)
|
|
$
|
33
|
|
|
Other comprehensive income (loss) before reclassifications
|
22
|
|
|
58
|
|
|
—
|
|
|
(1
|
)
|
|
79
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(16
|
)
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
(34
|
)
|
|
Total other comprehensive income (loss)
|
7
|
|
|
40
|
|
|
—
|
|
|
(1
|
)
|
|
45
|
|
|
Balance as of June 30, 2019
|
$
|
(46
|
)
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
Net Change in Available-for-Sale Securities
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of December 31, 2017
|
$
|
(32
|
)
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
(27
|
)
|
|
$
|
(59
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(31
|
)
|
|
59
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(5
|
)
|
|
19
|
|
|
1
|
|
|
—
|
|
|
15
|
|
|
Total other comprehensive income (loss)
|
(36
|
)
|
|
78
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
Balance as of June 30, 2018
|
$
|
(68
|
)
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
(27
|
)
|
|
$
|
(16
|
)
|
Refer to
Note D – Hedging Activities and Fair Value Measurements
for further detail on our net investment hedges recorded in
Foreign currency translation adjustments
and our cash flow hedges recorded in
Net change in derivative financial instruments
.
As a result of adopting ASC Update No. 2016-01 in the first quarter of 2018, we recorded a cumulative effect adjustment to retained earnings to reclassify unrealized gains and losses from our equity investments previously recorded to
Accumulated other comprehensive income (loss), net of tax
. These equity investments were classified as available-for-sale securities under the former accounting guidance, and we now refer to these investments as publicly-held equity securities. Please refer to
Note A – Significant Accounting Policies
included in Item 8 of our most recent Annual Report on Form 10-K for more information.
The
Net change in defined benefit pensions and other items
before reclassifications and reclassified from
Accumulated other comprehensive income (loss), net of tax
were reduced by immaterial income tax impacts in the
second
quarter and
first six months of
2019
and
2018
.
NOTE N – NEW ACCOUNTING PRONOUNCEMENTS
Periodically, 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 to be Implemented
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 plan to adopt Update No. 2016-13 in the first quarter of 2020, and 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. 2018-15
In August 2018, the FASB issued ASC Update No. 2018-15,
Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40)
:
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. The purpose of Update No. 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Update No. 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period. We plan to adopt Update No. 2018-15 in the first quarter of 2020, and we are in the process of determining the effect that the adoption will have on our financial position and results of operations.
No other new accounting pronouncements issued or effective in the period had or are expected to have a material impact on our
unaudited condensed consolidated financial statements
.