NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of Boston Scientific Corporation and our wholly-owned subsidiaries, after the elimination of intercompany transactions. When used in this report, the terms "we," "us," "our" and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries. We assess the terms of our investment interests to determine if any of our investees meet the definition of a variable interest entity (VIE). For any VIEs, we perform an analysis to determine whether our variable interests give us a controlling financial interest in a VIE. The analysis identifies the primary beneficiary of a VIE as the enterprise that has both 1) the power to direct activities of a VIE that most significantly impact the entity’s economic performance and 2) the obligation to absorb losses of the entity or the right to receive benefits from the entity. Based on our assessments under the applicable guidance, we did not have controlling financial interests in any VIEs and, therefore, did not consolidate any VIEs for 2019, 2018 and 2017.
Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-K and Regulation S-X.
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.
Reportable Segments
Our seven core businesses are organized into three reportable segments: MedSurg, Rhythm and Neuro, and Cardiovascular. Following our acquisition of BTG plc (BTG), which closed during the third quarter of 2019, we have included BTG’s Interventional Medicine business within our Peripheral Interventions operating segment, within the Cardiovascular reportable segment. We present BTG’s Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.
Subsequent Events
We evaluate events occurring after the date of our accompanying consolidated balance sheets for potential recognition or disclosure in our consolidated financial statements. We did not identify any material subsequent events requiring adjustment to our accompanying consolidated financial statements (recognized subsequent events). Those items requiring disclosure (unrecognized subsequent events) in the consolidated financial statements have been disclosed accordingly. Refer to Note E – Contractual Obligations and Commitments and Note J – Commitments and Contingencies for further details.
Accounting Estimates
To prepare our consolidated financial statements in accordance with U.S. GAAP, management makes estimates and assumptions that may affect the reported amounts of our assets and liabilities, the disclosure of contingent liabilities as of the date of our consolidated financial statements and the reported amounts of our revenues and expenses during the reporting period. Our actual results may differ from these estimates. Refer to Critical Accounting Estimates included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report for further discussion.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash and Cash Equivalents
We record Cash and cash equivalents in our consolidated balance sheets at cost, which approximates fair value. Our policy is to invest excess cash in short-term marketable securities earning a market rate of interest without assuming undue risk of loss of principal amounts invested and we limit our direct exposure to securities in any one industry or issuer. We consider to be cash equivalents all short-term marketable securities with remaining days to maturity of 90 days or less from the purchase date that can be readily converted to cash.
Restricted Cash
Amounts included in restricted cash represent cash on hand required to be set aside by a contractual agreement related to receivable factoring arrangements and deferred compensation plans and are included in the Other current assets caption on our consolidated balance sheets. Generally, the restrictions related to the factoring arrangements lapse at the time we remit the customer payments collected by us as servicer of previously sold customer receivables to the purchaser. Restrictions for deferred compensation lapse when amounts are paid to the employee.
Restricted Cash Equivalents
Restricted cash equivalents primarily represent amounts paid into various qualified settlement funds related to our ongoing transvaginal surgical mesh litigation and current amounts related to our non-qualified pension plan and are included in the Other current assets caption on our consolidated balance sheets. The restrictions related to the various qualified settlement funds will lapse as we approve amounts payable to claimants, at which time we no longer have rights to a return of the amounts paid into the various qualified settlement funds. Restricted cash equivalents included in the Other long-term assets caption on our consolidated balance sheets are related to deferred compensation plans.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, derivative financial instruments and accounts and notes receivable. Our investment policy limits exposure to concentrations of credit risk and changes in market conditions. Counterparties to financial instruments expose us to credit-related losses in the event of nonperformance. We transact our financial instruments with a diversified group of major financial institutions with investment grade credit ratings and actively monitor their credit ratings and our outstanding positions to limit our credit exposure. In the normal course, our payment terms with customers, including hospitals, healthcare agencies, clinics, doctors' offices and other private and governmental institutions, are typically 30 days in the U.S. but may be longer in international markets and generally do not require collateral. We record our accounts receivable in our consolidated balance sheets at net realizable value. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses, based on historical information and management's best estimates. We write-off amounts determined to be uncollectible against this reserve. Write-offs of uncollectible accounts receivable were immaterial in 2019, 2018 and 2017. We are not dependent on any single institution, and no single customer accounted for more than ten percent of our net sales in 2019, 2018 and 2017; however, large group purchasing organizations, hospital networks, international distributors and dealers and other buying groups have become increasingly important to our business and represent a substantial portion of our net sales.
We closely monitor outstanding receivables for potential collection risks, including those that may arise from economic conditions, in both the U.S. and international economies. Our European sales to government-owned or supported customers in Southern Europe are subject to an increased number of days outstanding prior to payment relative to other countries. Historically, receivable balances with certain publicly-owned hospitals in these countries accumulated over a period of time and are then subsequently settled as large lump sum payments, sometimes at large discounts. While we believe our allowance for doubtful accounts in these countries is adequate as of December 31, 2019 and 2018, if significant changes were to occur in the payment practices of these European governments or if government funding becomes unavailable, we may not be able to collect on receivables due to us from these customers, and our write-offs of uncollectible accounts receivable may increase.
Revenue Recognition
In May 2014, the FASB issued FASB ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which was subsequently updated. We adopted the standard as of January 1, 2018, using the modified retrospective method. Under this method, we applied FASB ASC Topic 606 to contracts that were not complete as of January 1, 2018 and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018 are presented in accordance with FASB ASC Topic 606. Prior period amounts are not adjusted and are reported in accordance with legacy GAAP requirements in FASB ASC Topic 605, Revenue Recognition.
Due to the adoption of FASB ASC Topic 606, we recorded a net reduction to retained earnings of $177 million on January 1, 2018, primarily related to the cost of providing non-contractual post-implant support to certain customers, which we historically deemed immaterial in the context of the arrangement. Upon the adoption of FASB ASC Topic 606, when we sell a device with an implied non-contractual post-implant support obligation, we forward accrue the cost of the service within Selling, general and administrative expenses and recognize it at the point in time the associated revenue is earned. We release the accrual over the related service period. These costs were previously expensed as incurred due to such service obligation being non-contractual.
The impact of adopting FASB ASC Topic 606 on our consolidated balance sheets resulted in an increase in Other current liabilities of $59 million and an increase in Other long-term liabilities of $205 million as of December 31, 2018, as a result of accruing for our post-implant support obligation. We also recorded deferred tax assets primarily related to post-implant support, resulting in an increase in Other long-term assets of $12 million and a reduction in Deferred income taxes of $41 million as of December 31, 2018. The remaining impact of adopting FASB ASC Topic 606 was not material to our financial position or results of operations.
We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors or dealers. We consider revenue to be earned when all of the following criteria are met:
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We have a contract with a customer that creates enforceable rights and obligations,
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Promised products or services are identified,
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The transaction price, or the amount we expect to receive, is determinable and
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We have transferred control of the promised items to the customer.
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Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to provide additional services. We treat shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost and record these costs as a selling expense when incurred. We recognize revenue from consignment arrangements based on product usage, or implant, which indicates that the sale is complete. We recognize a receivable at the point in time we have an unconditional right to payment. Payment terms are typically 30 days in the U.S. but may be longer in international markets.
Deferred Revenue
We record a contract liability, or deferred revenue, when we have an obligation to provide a product or service to the customer and payment is received or due in advance of our performance. When we sell a device with a future service obligation, we defer revenue on the unfulfilled performance obligation and recognize this revenue over the related service period. Many of our Cardiac Rhythm Management product offerings combine the sale of a device with our LATITUDE™ Patient Management System, which represents a future service obligation. Generally, we do not have observable evidence of the standalone selling price related to our future service obligations; therefore, we estimate the selling price using an expected cost plus a margin approach. We allocate the transaction price using the relative standalone selling price method. The use of alternative estimates could result in a different amount of revenue deferral.
Contract liabilities are classified within Other current liabilities and Other long-term liabilities on our accompanying consolidated balance sheets. 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 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. We base our estimate for sales returns upon historical trends and record the amount 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. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect our estimates related to sales returns and could cause actual returns to differ from these estimates.
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. We estimate rebates for products where there is sufficient historical information available to predict the volume of expected future rebates. 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.
Capitalized Contract Costs
We capitalize commission fees related to contracts with customers when the associated revenue is expected to be earned over a period that exceeds one year. Deferred commissions are primarily related to the sale of devices enabled with our LATITUDE™ Patient Management System. We have elected to expense commission costs when incurred for contracts with an expected duration of one year or less. Capitalized commission fees are amortized over the period the associated products or services are transferred. Similarly, we capitalize certain recoverable costs related to the delivery of the LATITUDE Remote Monitoring Service. These fulfillment costs are amortized over the average service period. Our total capitalized contract costs are immaterial to our consolidated financial statements.
Post-Implant Services
We provide non-contractual services to customers to ensure the safe and effective use of certain implanted devices. Following our modified retrospective adoption of FASB ASC Topic 606 on January 1, 2018, because the revenue related to the immaterial services is recognized before they are delivered, we forward accrue the costs to provide these services at the time the devices are sold. We record these costs to Selling, general and administrative expenses. We estimate the amount of time spent by our representatives performing these services and their compensation throughout the device life to determine the service cost. Changes to our business practice or the use of alternative estimates could result in a different amount of accrued cost.
Warranty Obligations
We offer warranties on certain of our product offerings. The majority of our warranty liability relates to implantable devices offered by our Cardiac Rhythm Management business, which include implantable defibrillator and pacemaker systems. Our Cardiac Rhythm Management products come with a standard limited warranty covering the replacement of these devices. We offer a full warranty for a portion of the period post-implant and a partial warranty for a period of time thereafter. We estimate the costs that we may incur under our warranty programs based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim and record a liability equal to these estimated costs as cost of products sold at the time the product sale occurs. We assess the adequacy of our recorded warranty liabilities on a quarterly basis and adjust these amounts as necessary.
Inventories
We state inventories at the lower of first-in, first-out cost or net realizable value. We base our provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. Further, the industry in which we participate is characterized by rapid product development and frequent new product introductions. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect our estimates related to excess, expired and obsolete inventory. Approximately 32 percent of our finished goods inventory as of December 31, 2019 and approximately 40 percent as of December 31, 2018 was at customer locations pursuant to consignment arrangements or held by sales representatives.
Property, Plant and Equipment
We state property, plant, equipment and leasehold improvements at historical cost. We charge expenditures for maintenance and repairs to expense and capitalize additions and improvements that extend the life of the underlying asset. We provide for depreciation using the straight-line method at rates that approximate the estimated useful lives of the assets. We depreciate buildings over a maximum life of 40 years; building improvements over the remaining useful life of the building structure; equipment, furniture and fixtures over a three to seven year life; and leasehold improvements over the shorter of the useful life of the improvement or the term of the related lease.
Leases
In February 2016, the 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 January 1, 2019 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 (FASB ASC Topic 840).
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 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 consolidated balance sheets. Finance leases are immaterial to our consolidated financial statements. Refer to Note E – Contractual Obligations and Commitments for additional information. There was no material impact to our consolidated statements of operations or consolidated statements of cash flows as a result of adopting FASB ASC Topic 842. Please refer to Note F – Leases for information regarding our lease portfolio as of December 31, 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 have 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.
Valuation of Business Combinations
We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition, including identifiable intangible assets and in-process research and development (IPR&D), which either arise from a contractual or legal right or are separable from goodwill. We base the fair value of identifiable intangible assets acquired in a business combination, including IPR&D, on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. We allocate to goodwill any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs associated with these acquisitions are expensed as incurred through Selling, general and administrative expenses.
In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through Contingent consideration expense (benefit) on our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount rates, periods, timing and amount of projected revenue or timing or likelihood of achieving regulatory, revenue or commercialization-based milestones. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones after the acquisition date, including attaining specified revenue levels, achieving product development targets and/or obtaining regulatory approvals for products in development at the date of the acquisition.
Indefinite-lived Intangibles, including IPR&D
Our indefinite-lived intangible assets, which are not subject to amortization, include acquired balloon and other technology, which is foundational to our ongoing operations within the Cardiovascular market and other markets within interventional medicine and IPR&D intangible assets acquired in a business combination. Our IPR&D represents intangible assets that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. We classify IPR&D as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon completion of the associated research and development efforts, we will determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, we write-off the remaining carrying amount of the associated IPR&D intangible asset.
We test our indefinite-lived intangible assets at least annually during the third quarter for impairment and reassess their classification as indefinite-lived assets. In addition, we review our indefinite-lived intangible assets for classification and impairment more frequently if impairment indicators exist. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. If the carrying value exceeds the fair value of the indefinite-lived intangible asset, we write the carrying value down to the fair value.
We use the income approach to determine the fair values of our IPR&D. We base our revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected levels of market share. In arriving at the value of the in-process projects, we consider, among other factors, the in-process projects’ stage of completion, the complexity of the work completed as of the acquisition date, the costs already incurred, the projected costs to complete, the contribution of other acquired assets, the expected regulatory path and introduction dates by region and the estimated useful life of the technology. See Note C – Goodwill and Other Intangible Assets for more information related to indefinite-lived intangibles, including IPR&D.
For asset purchases outside of business combinations, we expense any purchased research and development assets as of the acquisition date.
Amortization and Impairment of Intangible Assets
We record definite-lived intangible assets at historical cost and amortize them over their estimated useful lives. We use a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. The approximate useful lives for amortization of our intangible assets are as follows: patents and licenses, two to 20 years; amortizable technology-related and customer relationships, five to 25 years; other intangible assets, various.
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. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. 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. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. 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.
We calculate fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the asset. In determining our estimated future cash flows associated with our intangible assets, we use estimates and assumptions about future revenue contributions, cost structures and remaining useful lives of the asset or asset group. See Note C – Goodwill and Other Intangible Assets for more information related to impairments of intangible assets.
For patents developed internally, we capitalize costs incurred to obtain patents, including attorney fees, registration fees, consulting fees and other expenditures directly related to securing the patent.
Goodwill Valuation
We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination to goodwill. We test our goodwill balances during the second quarter of each year for impairment or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. For our 2019, 2018 and 2017 annual impairment assessment, we identified the following reporting units: Interventional Cardiology, Peripheral Interventions (including the Interventional Medicine business acquired with BTG), Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic Health and Neuromodulation. In addition, following the BTG acquisition in the third quarter of 2019, we added Specialty Pharmaceuticals as an additional reporting unit. We aggregated the Cardiac Rhythm Management and Electrophysiology reporting units, components of the Rhythm Management operating segment, based on the criteria prescribed in FASB ASC Topic 350.
In performing the goodwill impairment assessments for 2019, 2018 and 2017, we utilized both the optional qualitative assessment and the quantitative approach prescribed under FASB ASC Topic 350. The qualitative assessment was used for testing certain reporting units where fair value has historically exceeded carrying value by greater than 100 percent. All other reporting units were tested using the quantitative approach described below. The qualitative assessment requires an evaluation of whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount based on an assessment of relevant events including macroeconomic factors, industry and market conditions, cost factors, overall financial performance and other entity-specific factors. After assessing the totality of events, if it is determined that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, no further steps are required. If it is determined that impairment is more likely than not, then we perform the quantitative impairment test.
When allocating goodwill from business combinations to our reporting units, we assign goodwill to the reporting units that we expect to benefit from the respective business combination at the time of acquisition. In addition, for purposes of performing our goodwill impairment tests, assets and liabilities, including corporate assets, which relate to a reporting unit’s operations, and would be considered in determining its fair value, are allocated to the individual reporting units. We allocate assets and liabilities not directly related to a specific reporting unit, but from which the reporting unit benefits, based primarily on the respective revenue contribution of each reporting unit.
For our 2019, 2018 and 2017 annual impairment assessments, for those reporting units for which a quantitative test was performed, we used only the income approach, specifically the Discounted Cash Flow method, to derive the fair value of each of our reporting units in preparing our goodwill impairment assessments. We selected this method as being the most meaningful in preparing our goodwill assessments because we believe the income approach most appropriately measures our income producing assets. We have considered using the market approach and cost approach but concluded they are not appropriate in valuing our reporting units given the lack of relevant market comparisons available for application of the market approach and the inability to replicate the value of the specific technology-based assets within our reporting units for application of the cost approach. Therefore, we believe that the income approach represents the most appropriate valuation technique for which sufficient data are available to determine the fair value of our reporting units.
In applying the income approach to our accounting for goodwill, we make assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within our Discounted Cash Flow analysis is based on our most recent operational budgets, long range strategic plans and other estimates. The terminal value growth rate reflects our best estimates for stable, perpetual growth of our reporting units. We use estimates of market-participant risk-adjusted weighted average cost of capital as a basis for determining the discount rates to apply to our reporting units’ future expected cash flows.
Refer to Note C – Goodwill and Other Intangible Assets to our consolidated financial statements for additional details related to our goodwill balances.
Investments in Publicly Traded and Privately Held Entities
In January 2016, the FASB issued ASC Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The purpose of Update No. 2016-01 is to improve financial reporting for financial instruments by reducing the number of items recorded to Other Comprehensive Income. We adopted Update No. 2016-01 in the first quarter of 2018, using both the modified retrospective and prospective methods. For publicly-held securities, we used the modified retrospective approach. Unrealized gains and losses previously recorded to Other comprehensive income (loss) were reclassified to retained earnings, and all future fair value changes will be recorded to Net income (loss). For privately-held securities of investee companies over which we do not have the ability to exercise significant influence, we elected the measurement alternative approach for our existing investments, which is applied prospectively upon adoption. This approach requires entities to measure their investments 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. The adoption of the standard did not have a material impact on our financial position or results of operations.
In 2017, we accounted for our publicly traded investments as available-for-sale securities based on the quoted market price at the end of the reporting period. Unrealized holding gains or losses during the period, net of tax, were recorded to Accumulated other comprehensive income (loss), net of tax. We computed realized gains and losses on sales of available-for-sale securities at fair value, adjusted for any other-than-temporary declines in fair value. We accounted for investments in privately-held entities in which we had less than a 20 percent ownership interest under the cost method of accounting if we did not have the ability to exercise significant influence over the investee in accordance with FASB ASC Topic 325, Investments - Other.
We account for investments in entities over which we have the ability to exercise significant influence under the equity method if we hold 50 percent or less of the voting stock and the entity is not a VIE in which we are the primary beneficiary in accordance with FASB ASC Topic 323, Investments - Equity Method and Joint Ventures. We record these investments initially at cost and adjust the carrying amount to reflect our share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. Lastly, we have notes receivable from certain companies that we account for in accordance with FASB ASC Topic 320, Investments - Debt and Equity Securities. Refer to Note B – Acquisitions and Strategic Investments for additional details on our investment balances.
Each reporting period, we evaluate our investments to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value if accounted for under measurement alternative. For our equity method investments, an impairment loss is recorded if we determine the impairment is other-than-temporary. We deem an impairment to be other-than-temporary unless available evidence indicates that the valuation is more likely than not to recover up to the carrying value of the investment in a reasonable period of time, and we have both the ability and intent to hold the investment for at least the period of time needed to recover the value. For other-than-temporary impairments, we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value. Impairment losses on our investments are included in Other, net in our consolidated statements of operations.
Income Taxes
In February 2018, the FASB issued ASC Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The purpose of Update No. 2018-02 is to allow an entity to reclassify the income tax effects of the Tax Cut and Jobs Act of 2017 (TCJA) on items within Accumulated other comprehensive income (loss), net of tax (AOCI) to retained earnings. Update No. 2018-02 is effective for all entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We adopted Update No. 2018-02 in the first quarter of 2019 and have not elected to reclassify the income tax effects of the TCJA from AOCI to retained earnings.
In October 2016, the FASB issued ASC Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of Update No. 2016-16 is to allow an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to waiting until the asset is sold to a third party, or impaired. Update No. 2016-16 was effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We adopted Update No. 2016-16 prospectively in the first quarter of 2018 and recognized a net reduction to retained earnings of $55 million for income tax consequences not previously recognized for intra-entity transfers of assets other than inventories. All future income tax consequences of intra-entity transfers of assets other than inventories will be recognized through Income tax expense (benefit).
We utilize the asset and liability method of accounting for income taxes. Under this method, we determine deferred tax assets and liabilities based on differences between the financial reporting and tax bases of our assets and liabilities. We measure deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider relevant evidence, both positive and negative, to determine the need for a valuation allowance. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities and tax carrybacks, as well as estimates of the impact of future taxable income and available prudent and feasible tax-planning strategies. We recognize interest and penalties related to income taxes as a component of income tax expense. As part of the TCJA, we are subject to a territorial tax system in which we are required to establish an accounting policy in providing for tax on Global Intangible Low Taxed Income (GILTI) earned by certain foreign subsidiaries. We have elected to treat the impact of GILTI as a period cost and will be reported as a part of continuing operations. See Note I – Income Taxes for further information and discussion of our income tax provision and balances including a discussion of the impacts of the TCJA.
Legal and Product Liability Costs
In the normal course of business, we are involved in various legal and regulatory proceedings, including intellectual property, breach of contract, securities litigation and product liability suits. In some cases, the claimants seek damages, as well as other relief, which, if granted, could require significant expenditures or impact our ability to sell our products. We are also the subject of certain governmental investigations, which could result in substantial fines, penalties and administrative remedies. 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. 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 our best estimate of the minimum amount of the range. We analyze litigation settlements to identify each element of the arrangement. We allocate arrangement consideration to patent licenses received based on estimates of fair value and capitalize these amounts as assets if the license will provide an ongoing future benefit. 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 charges (credits) in our consolidated statements of operations; all other legal and product liability charges, credits and costs are recorded within Selling, general and administrative expenses. See Note J – Commitments and Contingencies for discussion of our individual material legal proceedings.
Costs Associated with Exit Activities
We record employee termination costs in accordance with FASB ASC Topic 712, Compensation - Nonretirement and Postemployment Benefits, if we pay the benefits as part of an ongoing benefit arrangement, which includes benefits provided as part of our established severance policies or that we provide in accordance with international statutory requirements. We accrue employee termination costs associated with an ongoing benefit arrangement if the obligation is attributable to prior services rendered, the rights to the benefits have vested, the payment is probable and we can reasonably estimate the liability. We account for involuntary employee termination benefits that represent a one-time benefit in accordance with FASB ASC Topic 420, Exit or Disposal Cost Obligations. We record such costs into expense over the employee’s future service period, if any.
Other costs associated with exit activities may include contract termination costs and consulting fees, which are expensed in accordance with FASB ASC Topic 420 and are included in Restructuring charges (credits) in our consolidated statements of operations. Additionally, costs directly related to our active restructuring initiatives, including program management costs, accelerated depreciation, fixed asset write-offs and costs to transfer product lines among facilities and are included within Costs of products sold and Selling, general and administrative expenses in our consolidated statements of operations. Impairment of right of use lease assets and lease terminations directly related to our active restructuring initiatives are expensed in accordance with FASB ASC Topic 842 and included within Costs of products sold and Selling, general and administrative expenses in our consolidated statements of operations. See Note G – Restructuring-related Activities for further information and discussion of our restructuring plans.
Translation of Foreign Currency
We translate all assets and liabilities of foreign subsidiaries from the functional currency, which is generally the local currency, into U.S. dollars using the year-end exchange rate and translate revenues and expenses at the average exchange rates in effect during the year. We show the net effect of these translation adjustments in our consolidated financial statements as a component of Accumulated other comprehensive income (loss), net of tax. For any significant foreign subsidiaries located in highly inflationary economies, we would re-measure their financial statements as if the functional currency were the U.S. dollar.
Foreign currency transaction gains and losses are included in Other, net in our consolidated statements of operations, net of losses and gains from any related derivative financial instruments.
Financial Instruments
We recognize all derivative financial instruments in our consolidated financial statements at fair value in accordance with FASB ASC Topic 815, Derivatives and Hedging, and we present assets and liabilities associated with our derivative financial instruments on a gross basis in our financial statements. In accordance with FASB ASC Topic 815, for those derivative instruments that are designated and qualify as hedging instruments, the hedging instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies for, and has been designated as part of a hedging relationship, as well as on the type of hedging relationship. Our derivative instruments do not subject our earnings to material risk, as gains and losses on these derivatives generally offset gains and losses on the item being hedged, and we do not enter into derivative transactions for speculative purposes. Refer to Note D – Hedging Activities and Fair Value Measurements for more information on our hedging instruments.
Shipping and Handling Costs
We generally do not bill customers for shipping and handling of our products. We treat shipping and handling costs incurred after a customer obtains control of the good as a fulfillment cost and record in Selling, general and administrative expenses in our consolidated statements of operations. Shipping and handling costs were $144 million in 2019, $124 million in 2018 and $110 million in 2017.
Research and Development
We expense research and development costs, including new product development programs, regulatory compliance and clinical research as incurred. Refer to Indefinite-lived Intangibles, including In-Process Research and Development above for our policy regarding IPR&D acquired in connection with our business combinations and asset purchases.
Net Income (Loss) per Common Share
We base Net income (loss) per common share upon the weighted-average number of common shares and common stock equivalents outstanding during each year. Potential common stock equivalents are determined using the treasury stock method. We exclude stock options and stock awards whose effect would be anti-dilutive from the calculation.
NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS
Our consolidated financial statements include the operating results for acquired entities from the respective dates of acquisition. With the exception of the acquisition of BTG, which was completed on August 19, 2019, we have not presented supplemental pro forma financial information for acquisitions given their results are not material to our consolidated financial statements. Transaction costs for all acquisitions in 2019, 2018 and 2017 were immaterial to our consolidated financial statements and were expensed as incurred. In 2019, we recorded approximately $125 million of purchase price adjustments, of which $95 million related to BTG.
2019 Acquisitions
BTG plc
On August 19, 2019, we announced the closing of our acquisition of BTG, a public company organized under the laws of England and Wales. BTG had three key portfolios, the largest of which is its interventional medicine portfolio (Interventional Medicine) that encompasses interventional oncology therapeutic technologies for patients with liver and kidney cancers, as well as a vascular portfolio for treatment of deep vein thrombosis, pulmonary embolism, deep venous obstruction and superficial venous disease. Following the closing of the acquisition, we began to integrate BTG's Interventional Medicine business into our Peripheral Interventions division.
In addition to the Interventional Medicine product lines, the BTG portfolio also included a specialty pharmaceutical business (Specialty Pharmaceuticals) comprised of acute care antidotes to treat overexposure to certain medications and toxins and a licensing portfolio (Licensing arrangements) that generates net royalties related to BTG intellectual property and product license agreements. In connection with the acquisition, we acquired rights to future royalties associated with the Zytiga™ drug used to treat certain forms of prostate cancer. In the fourth quarter of 2019, we sold our rights to these royalties for $256 million in cash, included in Proceeds from royalty rights transfer. Refer to Note D – Hedging Activities and Fair Value Measurements for additional information.
The transaction price consisted of upfront cash in the aggregate amount of £3.312 billion (or $4.023 billion based on the exchange rate at closing on August 19, 2019) for the entire issued ordinary share capital of BTG, whereby BTG stockholders received 840 pence (or $10.20 based on the exchange rate at closing) in cash for each BTG share. The transaction price included $404 million of cash and cash equivalents acquired. We implemented our acquisition of BTG by way of a court-sanctioned scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended.
Purchase Price Allocation
We accounted for our acquisition of BTG as a business combination, and in accordance with FASB ASC Topic 805, Business Combinations (FASB ASC Topic 805), we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The preliminary purchase price was comprised of the amounts presented below, which represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the acquisition. The final determination of the fair value of certain assets and liabilities will be completed within the measurement period as required by FASB ASC Topic 805. As of December 31, 2019, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary, including the projection of the underlying cash flows used to determine the fair value of the identified tangible, intangible and financial assets and liabilities.
We accounted for BTG as a business combination, 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 date. The preliminary purchase price of BTG, was comprised of the following components as of December 31, 2019:
|
|
|
|
|
(in millions)
|
|
Payment for acquisition, net of cash acquired
|
$
|
3,619
|
|
The following summarizes the preliminary purchase price allocation for our acquisition of BTG as of December 31, 2019:
|
|
|
|
|
(in millions)
|
|
Goodwill
|
$
|
1,644
|
|
Trade accounts receivable, net
|
108
|
|
Inventories
|
232
|
|
Other current assets
|
252
|
|
Other intangible assets, net
|
1,785
|
|
Other long-term assets
|
537
|
|
Accrued expenses and other current liabilities
|
(308
|
)
|
Other long-term liabilities
|
(274
|
)
|
Deferred tax liability
|
(358
|
)
|
|
$
|
3,619
|
|
As a result of our acquisition of BTG, we recognized goodwill of $1.644 billion, which is attributable to the synergies expected to arise from the acquisition and revenue and cash flow projections associated with future technologies. The goodwill is not deductible for tax purposes. As of December 31, 2019, we have allocated $1.406 billion to our Peripheral Interventions reporting unit and $238 million to the Specialty Pharmaceuticals reporting unit.
We allocated a portion of the preliminary purchase price for our acquisition of BTG 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
|
$
|
1,709
|
|
|
10
|
-
|
18
|
|
11
|
%
|
-
|
12%
|
Other intangible assets
|
75
|
|
|
2
|
-
|
11
|
|
11%
|
|
$
|
1,785
|
|
|
|
|
|
|
|
|
|
Pro Forma Financial Information (unaudited)
BTG contributed $226 million to our Net sales and had an immaterial impact to our Net income (loss) for the period post acquisition through December 31, 2019.
The unaudited estimated pro forma results presented below include the effects of our acquisition of BTG as if it was consummated on January 1, 2018. In 2019, we incurred nonrecurring charges that we attributed to our acquisition of BTG, which are presented in our consolidated statements of operations for this period. These charges include acquisition-related costs, stock-based compensation expenses as a result of the change in control and retention bonuses and severance payments, adjusted for the related tax effects. We have reflected these nonrecurring charges as adjustments to the pro forma earnings presented below for 2019 and 2018.
Additionally, these pro forma amounts have been calculated after applying our accounting policies and adjusting the results of BTG to reflect the additional costs associated with fair value adjustments relating to inventories, property, plant, and equipment, and intangible assets as if the acquisition had occurred on January 1, 2018, with the consequential tax effects. Additionally, the pro forma amounts have been adjusted to reflect the amortization of deferred financing costs and interest expense associated with additional financing entered into as part of the acquisition. The pro forma results exclude BTG’s historical licensing revenue and related cost of sales, as these arrangements are accounted for as part of the acquisition as a financial asset and liability and are not accounted for within the scope of FASB ASC Topic 606.
The supplemental pro forma information presented below is for informational purposes only and should be read in conjunction with our historical financial statements. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited estimated pro forma financial information below is not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisition of BTG occurred as of January 1, 2018, nor are they indicative of future results of operations. We believe that the pro forma assumptions and adjustments are reasonable and appropriate under the circumstances and are factually supported based on information currently available.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions, except per share data) (Unaudited)
|
2019
|
|
2018
|
Net sales
|
$
|
11,142
|
|
|
$
|
10,429
|
|
Net income (loss)
|
$
|
4,585
|
|
|
$
|
1,244
|
|
Net income (loss) per common share — basic
|
$
|
3.30
|
|
|
$
|
0.90
|
|
Net income (loss) per common share — assuming dilution
|
$
|
3.25
|
|
|
$
|
0.89
|
|
Transaction with Varian Medical Systems, Inc.
On August 21, 2019, we completed the sale of our drug-eluting and bland embolic microsphere portfolio to Varian Medical Systems, Inc. (Varian) in connection with our acquisition of BTG. The transaction price consisted of an upfront cash payment of $90 million, a portion of which is allocated to the fair value of the services to be rendered under the Transition Services Agreement and Transition Manufacturing Agreement entered into with Varian as part of this transaction. Additionally, we transferred certain contingent consideration arrangements arising from our initial acquisition of the portfolio to Varian and agreed to indemnify Varian for any payments ultimately arising under the terms of the contingent consideration arrangement. Accordingly, as part of the disposal, we recorded a liability of $16 million to recognize the fair value of this guarantee based on our potential obligation resulting from the indemnifications. The maximum amount payable under this guarantee is $200 million in accordance with FASB ASC Topic 460, Guarantees, which is consistent with the contingent consideration arrangement executed with our initial acquisition of the portfolio in accordance with FASB ASC Topic 805.
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 consisted 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 earn-out period. Following the closing of the acquisition, we have integrated the Vertiflex business into our Neuromodulation division.
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 had previously 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 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 consisted of an upfront cash payment of $325 million and up to an additional $125 million of future payments upon achievement of a commercial milestone. Following the closing of the acquisition, we have integrated the Millipede business into our Interventional Cardiology division.
Purchase Price Allocation
We accounted for our 2019 acquisitions of Vertiflex and Millipede 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 preliminary purchase prices of our acquisitions of Vertiflex and Millipede, presented in aggregate, were comprised of the following components as of December 31, 2019:
|
|
|
|
|
(in millions)
|
|
Payments for acquisitions, net of cash acquired
|
$
|
763
|
|
Fair value of contingent consideration
|
127
|
|
Fair value of prior interests
|
102
|
|
|
$
|
992
|
|
The preliminary purchase price allocations of our acquisitions of Vertiflex and Millipede, presented in aggregate, were comprised of the following components as of December 31, 2019:
|
|
|
|
|
(in millions)
|
|
Goodwill
|
$
|
575
|
|
Amortizable intangible assets
|
220
|
|
Indefinite-lived intangible assets
|
240
|
|
Other assets acquired
|
24
|
|
Liabilities assumed
|
(12
|
)
|
Net deferred tax liabilities
|
(56
|
)
|
|
$
|
992
|
|
We allocated a portion of the preliminary purchase prices of our acquisitions of Vertiflex and Millipede, presented in aggregate, 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
|
$
|
210
|
|
|
12
|
|
15%
|
Other intangible assets
|
10
|
|
|
12
|
|
15%
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
In-process research and development
|
240
|
|
|
n/a
|
|
19%
|
|
$
|
461
|
|
|
|
|
|
2018 Acquisitions
Augmenix, Inc.
On October 16, 2018, we announced the closing of our acquisition of Augmenix, Inc. (Augmenix), a privately-held company that developed and commercialized the SpaceOAR™ Hydrogel System to help reduce common and debilitating side effects that men may experience after receiving radiotherapy to treat prostate cancer. The transaction price consisted of an upfront cash payment of $500 million and up to $100 million in payments contingent upon achieving certain revenue-based milestones. Following the closing of the acquisition, we have integrated the Augmenix business into our Urology and Pelvic Health division.
Claret Medical, Inc.
On August 2, 2018, we announced the closing of our acquisition of Claret Medical, Inc. (Claret), a privately-held company that has developed and commercialized the Sentinel™ Cerebral Embolic Protection System. The device is used to protect the brain during certain interventional procedures, predominately in patients undergoing transcatheter aortic valve replacement (TAVR). The transaction price consisted of an upfront cash payment of $220 million and an additional $50 million payment for achieving a reimbursement-based milestone that was achieved in the third quarter of 2018. Following the closing of the acquisition, we have integrated the Claret business into our Interventional Cardiology division.
Cryterion Medical, Inc.
On July 5, 2018, we announced the closing of our acquisition of Cryterion Medical, Inc. (Cryterion), a privately-held company developing a single-shot cryoablation platform for the treatment of atrial fibrillation. We had been an investor in Cryterion since 2016 and held an interest of approximately 35 percent immediately prior to the acquisition date. The transaction price to acquire the remaining stake consisted of an upfront cash payment of $202 million. Following the closing of the acquisition, we have integrated the Cryterion business into our Electrophysiology division.
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 consisted of an upfront cash payment of approximately $240 million and up to approximately $85 million in future potential payments contingent upon achieving commercial milestones over the four years following the date of acquisition. Following the closing of the acquisition, we have integrated the NxThera business into our Urology and Pelvic Health division.
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 consisted of an upfront cash payment of $150 million and up to an additional $125 million in future potential payments contingent upon achieving certain clinical and commercial milestones over the four years following the date of acquisition. Following the closing of the acquisition, we have integrated the nVision business into our Urology and Pelvic Health division.
Other Acquisitions
In addition, we completed other individually immaterial acquisitions in 2018 for total consideration of $158 million in cash at closing plus aggregate future potential contingent consideration of up to $62 million.
We recorded gains of $184 million in 2018 within Other, net on our consolidated statements of operations based on the difference between the book values and the fair values of our previously-held investments immediately prior to the acquisition dates. The aggregate fair value of our previously-held investments immediately prior to the acquisition dates was $251 million. We remeasured the fair value of each previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests.
Purchase Price Allocation
We accounted for these 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 for our 2018 acquisitions as of December 31, 2019:
|
|
|
|
|
(in millions)
|
|
Payments for acquisitions, net of cash acquired
|
$
|
1,449
|
|
Fair value of contingent consideration
|
248
|
|
Fair value of prior interests
|
251
|
|
|
$
|
1,948
|
|
The following summarizes the purchase price allocations for our 2018 acquisitions as of December 31, 2019:
|
|
|
|
|
(in millions)
|
|
Goodwill
|
$
|
939
|
|
Amortizable intangible assets
|
939
|
|
In-process research and development
|
213
|
|
Other assets acquired
|
38
|
|
Liabilities assumed
|
(19
|
)
|
Net deferred tax liabilities
|
(162
|
)
|
|
$
|
1,948
|
|
We allocated a portion of the 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
|
$
|
908
|
|
|
6
|
-
|
14
|
|
14
|
%
|
-
|
23%
|
Other intangible assets
|
31
|
|
|
6
|
-
|
13
|
|
13
|
%
|
-
|
15%
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
213
|
|
|
n/a
|
|
15%
|
|
$
|
1,153
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions
Apama Medical Inc.
On October 11, 2017, we announced the closing of our acquisition of Apama Medical Inc. (Apama), a privately-held company developing the Apama™ Radiofrequency single-shot Balloon Catheter System for the treatment of atrial fibrillation. The transaction price consisted of an upfront cash payment of approximately $175 million and up to approximately $125 million in future potential payments contingent upon achieving certain clinical and regulatory milestones. Following the closing of the acquisition, we have integrated the Apama business into our Electrophysiology division.
Symetis SA
On May 16, 2017, we announced the closing of our acquisition of Symetis SA (Symetis), a privately-held Swiss structural heart company focused on minimally-invasive TAVR devices, having developed the ACURATE neo™ Aortic Valve. The transaction price consisted of an upfront cash payment of approximately $430 million. Following the closing of the acquisition, we have integrated the Symetis business into our Interventional Cardiology division.
Purchase Price Allocation
We accounted for these 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 were as follows for our 2017 acquisitions:
|
|
|
|
|
(in millions)
|
|
Payment for acquisitions, net of cash acquired
|
$
|
560
|
|
Fair value of contingent consideration
|
72
|
|
|
$
|
632
|
|
The following summarizes the aggregate purchase price allocations for our 2017 acquisitions:
|
|
|
|
|
(in millions)
|
|
Goodwill
|
$
|
287
|
|
Amortizable intangible assets
|
278
|
|
Indefinite-lived intangible assets
|
186
|
|
Other assets acquired
|
44
|
|
Liabilities assumed
|
(61
|
)
|
Deferred tax liabilities
|
(102
|
)
|
|
$
|
632
|
|
We allocated a portion of the 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
|
$
|
268
|
|
|
13
|
|
24%
|
Other intangible assets
|
10
|
|
|
2
|
-
|
13
|
|
24%
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
186
|
|
|
n/a
|
|
15%
|
|
$
|
464
|
|
|
|
|
|
|
|
Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we intend to 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, 2018 and 2017 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, 2017
|
$
|
169
|
|
Amounts recorded related to current year acquisitions
|
248
|
|
Purchase price adjustments related to prior year acquisitions
|
(22
|
)
|
Contingent consideration expense (benefit)
|
(21
|
)
|
Contingent consideration payments
|
(28
|
)
|
Balance as of December 31, 2018
|
$
|
347
|
|
Amounts recorded related to current year acquisitions
|
127
|
|
Contingent consideration arrangements transferred to Varian
|
(16
|
)
|
Contingent consideration expense (benefit)
|
(35
|
)
|
Contingent consideration payments
|
(68
|
)
|
Balance as of December 31, 2019
|
$
|
354
|
|
As of December 31, 2019, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was $697 million, which includes our estimate of maximum contingent payments of $100 million associated with the Vertiflex acquisition described above. The maximum decreased $176 million compared to the amount as of December 31, 2018 due to the contingent consideration arrangement which is now accounted for as a guarantee in connection with our transaction with Varian as discussed in the BTG section above. In addition, the aggregated maximum decreased as a result of the expiration or full payment of certain contingent consideration arrangements in 2019, partially offset by the Millipede and Vertiflex arrangements entered into in 2019.
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 December 31, 2019
|
Valuation Technique
|
Unobservable Input
|
Range
|
Weighted Average (1)
|
R&D, Regulatory and Commercialization-based Milestones
|
$198 million
|
Discounted Cash Flow
|
Discount Rate
|
2
|
%
|
-
|
3%
|
3%
|
Probability of Payment
|
40
|
%
|
-
|
90%
|
82%
|
Projected Year of Payment
|
2020
|
|
-
|
2027
|
2021
|
Revenue-based Payments
|
$156 million
|
Discounted Cash Flow
|
Discount Rate
|
11
|
%
|
-
|
15%
|
13%
|
Probability of Payment
|
60
|
%
|
-
|
100%
|
99%
|
Projected Year of Payment
|
2020
|
|
-
|
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 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 December 31, 2019.
Strategic Investments
The aggregate carrying amount of our strategic investments was comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Equity method investments
|
$
|
264
|
|
|
$
|
303
|
|
Measurement alternative investments(1)
|
171
|
|
|
94
|
|
Publicly-held securities(2)
|
1
|
|
|
—
|
|
Notes receivable
|
23
|
|
|
26
|
|
|
$
|
458
|
|
|
$
|
424
|
|
|
|
(1)
|
Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost less 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 Other, net on our accompanying consolidated statements of operations.
|
These investments are classified as Other long-term assets within our accompanying consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.
As of December 31, 2019, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $314 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 December 31, 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
|
$
|
12,020
|
|
|
$
|
(5,706
|
)
|
|
$
|
10,197
|
|
|
$
|
(5,266
|
)
|
Patents
|
525
|
|
|
(408
|
)
|
|
520
|
|
|
(393
|
)
|
Other intangible assets
|
1,754
|
|
|
(1,081
|
)
|
|
1,666
|
|
|
(958
|
)
|
|
$
|
14,299
|
|
|
$
|
(7,195
|
)
|
|
$
|
12,383
|
|
|
$
|
(6,617
|
)
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
Goodwill
|
$
|
20,076
|
|
|
$
|
(9,900
|
)
|
|
$
|
17,811
|
|
|
$
|
(9,900
|
)
|
In-process research and development (IPR&D)
|
662
|
|
|
—
|
|
|
486
|
|
|
—
|
|
Technology-related
|
120
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
$
|
20,858
|
|
|
$
|
(9,900
|
)
|
|
$
|
18,417
|
|
|
$
|
(9,900
|
)
|
In the third quarter of 2019, we performed our annual impairment test of all IPR&D projects and our indefinite-lived core technology assets and determined that the assets were not impaired. In addition, we verified the classification as indefinite-lived assets continues to be appropriate.
Intangible asset impairment charges were $105 million in 2019, $35 million in 2018 and $4 million in 2017. Refer to Note A - Significant Accounting Policies for a discussion of key assumptions used in our goodwill and intangible asset impairment testing.
Effective January 1, 2018, we reclassified our Neuromodulation operating segment and associated goodwill balance from our MedSurg reportable segment to our Rhythm and Neuro reportable segment. This change did not impact our total goodwill carrying value.
Our seven core businesses are organized into three reportable segments: MedSurg, Rhythm and Neuro, and Cardiovascular. Following our acquisition of BTG, which closed during the third quarter of 2019, we have included BTG’s Interventional Medicine business within our Peripheral Interventions operating segment, within the Cardiovascular reportable segment. We present BTG’s Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.
The following represents our goodwill balance by global reportable segment and our separately reported Specialty Pharmaceuticals operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
MedSurg
|
|
Rhythm and Neuro
|
|
Cardiovascular
|
|
Specialty Pharmaceuticals
|
|
Total
|
Balance as of December 31, 2017
|
$
|
2,877
|
|
|
$
|
417
|
|
|
$
|
3,704
|
|
|
$
|
—
|
|
|
$
|
6,998
|
|
Reportable segment revisions
|
(1,379
|
)
|
|
1,379
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency fluctuations and other changes
|
(3
|
)
|
|
(22
|
)
|
|
(3
|
)
|
|
—
|
|
|
(29
|
)
|
Goodwill acquired
|
568
|
|
|
150
|
|
|
224
|
|
|
—
|
|
|
942
|
|
Balance as of December 31, 2018
|
$
|
2,063
|
|
|
$
|
1,924
|
|
|
$
|
3,925
|
|
|
$
|
—
|
|
|
$
|
7,911
|
|
Foreign currency fluctuations and other changes
|
(1
|
)
|
|
—
|
|
|
58
|
|
|
9
|
|
|
66
|
|
Goodwill acquired
|
—
|
|
|
268
|
|
|
1,712
|
|
|
238
|
|
|
2,218
|
|
Goodwill divested
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
(19
|
)
|
Balance as of December 31, 2019
|
$
|
2,061
|
|
|
$
|
2,192
|
|
|
$
|
5,676
|
|
|
$
|
247
|
|
|
$
|
10,176
|
|
We did not have any goodwill impairments in 2019, 2018 or 2017.
Estimated Amortization expense for each of the five succeeding fiscal years based upon our amortizable intangible asset portfolio as of December 31, 2019 is as follows (in millions):
|
|
|
|
|
Fiscal Year
|
|
2020
|
$
|
787
|
|
2021
|
750
|
|
2022
|
722
|
|
2023
|
708
|
|
2024
|
672
|
|
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 and nonderivative 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 Hedging 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, net investments in certain subsidiaries and the purchase price of any acquisition that is denominated in a currency other than the U.S. dollar. 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 and nonderivative 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 Euro, Japanese yen, Chinese renminbi and British pound sterling. 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.
Hedge Designations and Relationships
Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging (FASB ASC Topic 815), 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 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 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 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, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. We 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 component of Interest expense on our consolidated statements of operations. In November 2019, we terminated and settled all of our outstanding forward currency contracts designated as net investment hedges in our entities with Euro-denominated functional currencies and recognized a gain of $95 million presented in the CTA component of OCI on our consolidated statements of comprehensive income (loss).
We also completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027. The Euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional entities. As of December 31, 2019, the notional value of our outstanding net investment hedges was $1.950 billion, which includes our derivative and nonderivative instruments designated as net investment hedges.
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 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 GBP-denominated purchase price of BTG. In 2019, we settled all outstanding contracts, resulting in a cumulative loss on the contracts of $294 million that was recognized over time in earnings as we adjusted for changes in fair value until the final fair value was determined at maturity. As of December 31, 2018, the notional value of the contracts was $2.550 billion, and we entered into additional contracts in 2019. Upon settlement in 2019, we received £3.312 billion of cash to fund our acquisition of BTG, which translated into $4.303 billion based on hedged currency exchange rates. We recognized a $323 million loss in 2019 and a $29 million gain in 2018 within Other, net due to changes in fair value of the contracts.
Interest Rate Hedging 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 mitigate the risk to our earnings and cash flows associated with 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.
Hedge Designations and Relationships
We had no interest rate derivative instruments designated as cash flow hedges outstanding as of December 31, 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 – Contractual Obligations and Commitments. We recognized an immaterial loss within OCI in 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 amounts on our terminated cash flow hedges within AOCI was a $34 million loss as of December 31, 2019 and a $7 million gain 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 December 31, 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 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 December 31, 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 hedging instruments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
FASB ASC Topic 815 Designation
|
|
As of December 31,
|
|
2019
|
|
2018
|
Forward currency contracts
|
|
Cash flow hedge
|
|
$
|
3,891
|
|
|
$
|
3,962
|
|
Forward currency contracts
|
|
Net investment hedge
|
|
953
|
|
|
1,483
|
|
Foreign currency-denominated debt(1)
|
|
Net investment hedge
|
|
997
|
|
|
—
|
|
Forward currency contracts
|
|
Non-designated
|
|
4,377
|
|
|
5,880
|
|
Interest rate derivative contracts
|
|
Cash flow hedge
|
|
—
|
|
|
1,000
|
|
Total Notional Outstanding
|
|
|
|
$
|
10,218
|
|
|
$
|
12,326
|
|
|
|
(1)
|
The €900 million (approximately $1.000 billion) debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional subsidiaries.
|
The remaining time to maturity as of December 31, 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 Euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.
The following presents the effect of our derivative and nonderivative instruments designated as cash flow and net investment hedges under FASB ASC Topic 815 on our accompanying consolidated statements of operations. Refer to Note P – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative instruments presented within the consolidated statements of comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Hedging Relationships on Accumulated Other Comprehensive Income
|
|
Amount Recognized in OCI on Hedges
|
|
Consolidated Statements of Operations (1)
|
|
Amount Reclassified from AOCI into Earnings
|
|
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
|
Year Ended December 31, 2019
|
Forward currency contracts
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
150
|
|
$
|
(34
|
)
|
$
|
117
|
|
|
Cost of products sold
|
$
|
3,116
|
|
|
$
|
(73
|
)
|
$
|
16
|
|
$
|
(56
|
)
|
Net investment hedges (2)
|
68
|
|
(15
|
)
|
53
|
|
|
Interest expense
|
473
|
|
|
(43
|
)
|
10
|
|
(33
|
)
|
Foreign currency-denominated debt
|
|
|
|
|
|
|
|
Net investment hedges
|
(14
|
)
|
3
|
|
(11
|
)
|
|
Interest expense
|
473
|
|
|
—
|
|
—
|
|
—
|
|
Interest rate derivative contracts
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
—
|
|
—
|
|
|
Interest expense
|
473
|
|
|
3
|
|
(1
|
)
|
2
|
|
Year Ended December 31, 2018
|
Forward currency contracts
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
167
|
|
$
|
(38
|
)
|
$
|
130
|
|
|
Cost of products sold
|
$
|
2,813
|
|
|
$
|
19
|
|
$
|
(4
|
)
|
$
|
15
|
|
Net investment hedges (2)
|
56
|
|
(13
|
)
|
43
|
|
|
Interest expense
|
241
|
|
|
(27
|
)
|
6
|
|
(21
|
)
|
Interest rate derivative contracts
|
|
|
|
|
|
|
|
Cash flow hedges
|
(44
|
)
|
10
|
|
(34
|
)
|
|
Interest expense
|
241
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
Year Ended December 31, 2017
|
Forward currency contracts
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
(101
|
)
|
$
|
37
|
|
$
|
(65
|
)
|
|
Cost of products sold
|
$
|
2,593
|
|
|
$
|
(64
|
)
|
$
|
23
|
|
$
|
(41
|
)
|
Interest rate derivative contracts
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
—
|
|
—
|
|
|
Interest expense
|
229
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|
|
(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 forward currency contracts designated as 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 earnings.
|
As of December 31, 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 Hedging Instrument
|
|
FASB ASC Topic 815 Designation
|
|
Location on 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
|
|
$
|
77
|
|
Forward currency contracts
|
|
Net investment hedge
|
|
Interest expense
|
|
24
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Location on Consolidated Statements of Operations
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Net gain (loss) on currency hedge contracts
|
|
Other, net
|
|
$
|
(343
|
)
|
|
$
|
41
|
|
|
$
|
(25
|
)
|
Net gain (loss) on currency transaction exposures
|
|
Other, net
|
|
(15
|
)
|
|
(30
|
)
|
|
10
|
|
Net currency exchange gain (loss)
|
|
|
|
$
|
(358
|
)
|
|
$
|
11
|
|
|
$
|
(15
|
)
|
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 GBP-denominated purchase price of BTG. In 2019, we settled all outstanding contracts. We recognized a $323 million loss in 2019 and a $29 million gain in 2018 within Net gain (loss) on currency hedge contracts due to changes in fair value of the contracts.
Fair Value Measurements
FASB ASC Topic 815 requires all derivative and nonderivative 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 and nonderivative 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 with respect to 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 and nonderivative 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 and nonderivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Location on Consolidated Balance Sheets (1)
|
|
As of December 31,
|
|
2019
|
|
2018
|
Derivative and Nonderivative Assets:
|
|
|
|
|
|
|
Designated Hedging Instruments
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current assets
|
|
$
|
72
|
|
|
$
|
55
|
|
Forward currency contracts
|
|
Other long-term assets
|
|
216
|
|
|
183
|
|
|
|
|
|
288
|
|
|
237
|
|
Non-Designated Hedging Instruments
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current assets
|
|
33
|
|
|
67
|
|
Total Derivative and Nonderivative Assets
|
|
|
|
$
|
321
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
Derivative and Nonderivative Liabilities:
|
|
|
|
|
|
|
Designated Hedging Instruments
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current liabilities
|
|
$
|
3
|
|
|
$
|
2
|
|
Forward currency contracts
|
|
Other long-term liabilities
|
|
8
|
|
|
3
|
|
Foreign currency-denominated debt
|
|
Other long-term liabilities
|
|
998
|
|
|
—
|
|
Interest rate contracts
|
|
Other current liabilities
|
|
—
|
|
|
44
|
|
|
|
|
|
1,009
|
|
|
49
|
|
Non-Designated Hedging Instruments
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current liabilities
|
|
29
|
|
|
31
|
|
Total Derivative and Nonderivative Liabilities
|
|
$
|
1,037
|
|
|
$
|
80
|
|
|
|
(1)
|
We classify derivative and nonderivative assets and liabilities as current when the settlement date of the 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
|
|
December 31, 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
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Publicly-held securities
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Hedging instruments
|
—
|
|
|
321
|
|
|
—
|
|
|
321
|
|
|
—
|
|
|
304
|
|
|
—
|
|
|
304
|
|
Licensing arrangements
|
—
|
|
|
—
|
|
|
518
|
|
|
518
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
51
|
|
|
$
|
321
|
|
|
$
|
518
|
|
|
$
|
890
|
|
|
$
|
14
|
|
|
$
|
304
|
|
|
$
|
—
|
|
|
$
|
318
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments
|
$
|
—
|
|
|
$
|
1,037
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
80
|
|
Contingent consideration liability
|
—
|
|
|
—
|
|
|
354
|
|
|
354
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
347
|
|
Licensing arrangements
|
—
|
|
|
—
|
|
|
571
|
|
|
571
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
|
$
|
925
|
|
|
$
|
1,963
|
|
|
$
|
—
|
|
|
$
|
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 consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In addition to $50 million invested in money market and government funds as of December 31, 2019, we had $165 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 relates 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.
In addition, our recurring fair value measurements using Level 3 inputs relate to our licensing arrangements. In connection with our acquisition of BTG, we acquired intellectual property and related licensing arrangements, principally relating to Zytiga™, as a result of our acquisition of BTG that provides the contractual right to receive future royalty payments.
In the fourth quarter of 2019, we entered into a royalty purchase agreement with the Ontario Municipal Employees Retirement System (OMERS), whereby we sold to OMERS our remaining 50 percent of the future Zytiga™ royalty stream. The purchase price for these royalty interests consisted of an upfront cash payment of $256 million. Prior to our acquisition of BTG, BTG agreed to pay 50 percent of the Zytiga™ royalty stream, net of certain offsets, to the inventors associated with the intellectual property. As such, we do not expect to receive any future cash benefit from Zytiga™ royalties subsequent to our transaction with OMERS. In accordance with FASB ASC Topic 860, Transfers and Servicing, we are accounting for the transfer as a secured borrowing and continue to recognize the financial asset and financial liability in our consolidated balance sheets.
We have elected the fair value option to account for the licensing arrangements' financial asset and financial liability in accordance with FASB ASC Topic 825, Financial Instruments. As of December 31, 2019, we have recorded the fair values of the financial asset and financial liability using a discounted cash flow approach considering the probability-weighted expected future cash flows to be generated by the royalty stream. The fair value of the financial liability also considers the related contractual provisions that govern our payment obligations.
In connection with our preliminary purchase price allocation of BTG as of the acquisition date, the amount recognized for the financial asset was $567 million in aggregate, comprised of $195 million included in Other current assets and $373 million included in Other long-term assets. The amount recognized for the financial liability was $370 million, comprised of $54 million included in Accounts payable, $104 million included in Other current liabilities and $212 million included in Other long-term liabilities. The amounts above were valued using the fair value option with the exception of the Accounts payable, which was settled in the third quarter. During the fourth quarter, we also recorded the $256 million proceeds received from the sale of the Zytiga royalty stream as an increase in the fair value of the financial liability now accounted for as a secured borrowing, as discussed above. Refer to Note B – Acquisitions and Strategic Investments for further information on the preliminary purchase price allocation of BTG.
The recurring Level 3 fair value measurements of our licensing arrangements recognized in our consolidated balance sheets as of December 31, 2019 include the following significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
Licensing Arrangements
|
Fair Value as of December 31, 2019
|
Valuation Technique
|
Unobservable Input
|
Range
|
Weighted Average (1)
|
Financial Asset
|
$518 million
|
Discounted Cash Flow
|
Discount Rate
|
11
|
%
|
-
|
19%
|
19%
|
Projected Year of Payment
|
2020
|
|
-
|
2028
|
2024
|
Financial Liability
|
$571 million
|
Discounted Cash Flow
|
Discount Rate
|
19%
|
19%
|
Projected Year of Payment
|
2020
|
|
-
|
2027
|
2023
|
|
|
(1)
|
Unobservable inputs relate to a single financial asset and liability. As such, unobservable inputs were not weighted by the relative fair value of the instruments. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
|
Significant increases or decreases in projected cash flows of the royalty stream and the related contractual provisions that govern our payment obligations, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement of the licensing arrangements' financial asset and liability as of December 31, 2019. However, increases or decreases in the financial asset would be substantially offset by increases or decreases in the financial liability, as such our earnings are not subject to material gains or losses from the licensing arrangement.
Changes in the fair value of our licensing arrangements' financial asset was as follows:
|
|
|
|
|
(in millions)
|
|
Balance as of December 31, 2018
|
$
|
—
|
|
Amounts recorded related to current year acquisition
|
567
|
|
Proceeds from royalty rights
|
(52
|
)
|
Fair value adjustment (expense) benefit
|
3
|
|
Balance as of December 31, 2019
|
$
|
518
|
|
Changes in the fair value of our licensing arrangements' financial liability was as follows:
|
|
|
|
|
(in millions)
|
|
Balance as of December 31, 2018
|
$
|
—
|
|
Amounts recorded related to current year acquisition
|
315
|
|
Proceeds from secured borrowings relating to royalty arrangements
|
256
|
|
Balance as of December 31, 2019
|
$
|
571
|
|
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 as of December 31, 2019 was $11.020 billion, of which $1.004 billion relates to the Euro-denominated December 2027 Notes, and as of December 31, 2018 was $7.239 billion. We determined fair value by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy, and face value for commercial paper, term loans and credit facility borrowings outstanding. Refer to Note E – Contractual Obligations and Commitments for a discussion of our debt obligations.
NOTE E – CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Borrowings and Credit Arrangements
We had total debt of $10.008 billion as of December 31, 2019 and $7.056 billion as of December 31, 2018. The debt maturity schedule for our long-term debt obligations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Maturity Date
|
|
As of December 31,
|
|
Stated Interest Rate
|
(in millions, except interest rates)
|
|
|
|
2019
|
|
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%
|
August 2022 Term Loan
|
|
August 2019
|
|
August 2022
|
|
1,000
|
|
|
—
|
|
|
|
October 2023 Notes
|
|
August 2013
|
|
October 2023
|
|
244
|
|
|
450
|
|
|
4.125%
|
March 2024 Notes
|
|
February 2019
|
|
March 2024
|
|
850
|
|
|
—
|
|
|
3.450%
|
May 2025 Notes
|
|
May 2015
|
|
May 2025
|
|
523
|
|
|
750
|
|
|
3.850%
|
March 2026 Notes
|
|
February 2019
|
|
March 2026
|
|
850
|
|
|
—
|
|
|
3.750%
|
December 2027 Notes
|
|
November 2019
|
|
December 2027
|
|
1,011
|
|
|
—
|
|
|
0.625%
|
March 2028 Notes
|
|
February 2018
|
|
March 2028
|
|
434
|
|
|
1,000
|
|
|
4.000%
|
March 2029 Notes
|
|
February 2019
|
|
March 2029
|
|
850
|
|
|
—
|
|
|
4.000%
|
November 2035 Notes (1)
|
|
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
|
|
(83
|
)
|
|
(29
|
)
|
|
|
Unamortized Gain on Fair Value Hedges
|
|
|
|
2020-2023
|
|
7
|
|
|
26
|
|
|
|
Finance Lease Obligation (2)
|
|
|
|
Various
|
|
6
|
|
|
6
|
|
|
|
Long-term debt
|
|
|
|
|
|
$
|
8,592
|
|
|
$
|
4,803
|
|
|
|
Note: The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges.
|
|
(1)
|
Corporate credit rating improvements may result in a decrease in the adjusted interest rate on our November 2035 Notes to the extent that our lowest credit rating is above BBB- or Baa3. The interest rates on our November 2035 Notes will be permanently reinstated to the issuance rate if the lowest credit ratings assigned to these senior notes is either A- or A3 or higher.
|
|
|
(2)
|
Effective January 1, 2019, we adopted FASB ASC Topic 842, which requires that we recognize finance lease obligations in our consolidated balance sheets. 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 – Significant Accounting Policies for additional information.
|
Revolving Credit Facility
On December 19, 2018, we entered into a $2.750 billion revolving credit facility (the 2018 Facility) with a global syndicate of commercial banks and terminated our previous $2.250 billion revolving credit facility (the 2017 Facility), which was scheduled to mature in August 2022. The 2018 Facility will mature on December 19, 2023 with one-year extension options subject to certain conditions. Eurodollar and multicurrency loans bear interest at the Eurocurrency Rate determined for the interest period plus the applicable margin, based on our corporate credit ratings (1.02 percent as of December 31, 2019). ABR loans bear interest at ABR plus the applicable margin of up to 0.40 percent, based on our corporate credit ratings. Under the credit agreement for the 2018 Facility (the 2018 Credit Agreement), we are required to pay a facility fee (0.11 percent as of December 31, 2019) based on our credit ratings and the total amount of revolving credit commitment, regardless of usage of the 2018 Facility. This facility provides backing for the commercial paper program described below. The 2018 Credit Agreement for the 2018 Facility requires that we comply with certain covenants, including financial covenants as described below. There were no amounts borrowed under our current or prior revolving credit facilities as of December 31, 2019 or December 31, 2018.
Term Loans
On December 5, 2019, we entered into a $700 million term loan credit agreement scheduled to mature on December 3, 2020 (2020 Term Loan). The 2020 Term Loan bears interest at an annual rate of LIBOR plus a margin of 0.65%. In addition, we pay customary expenses. The credit agreement contains covenants, as described below, and also contains customary events of default, which may result in the acceleration of any outstanding commitments. As of December 31, 2019, we had $700 million outstanding under the 2020 Term Loan, which is presented within Current debt obligations on our consolidated balance sheet. We used the proceeds from the 2020 Term Loan to repay a portion of the Two-Year Delayed Draw Term Loan, described below. In January 2020, we repaid $300 million of the outstanding balance of the 2020 Term Loan with proceeds from our commercial paper program.
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 is presented within Current debt obligations on our consolidated balance sheet.
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 our acquisition of BTG (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 our acquisition of BTG (Three-Year Delayed Draw Term Loan). In 2019, we used the proceeds from the Two-Year and Three-Year Delayed Draw Term Loan facilities to refinance the Bridge Facility, as described below, and fund a portion of our acquisition of BTG. On November 27, 2019, we repaid $200 million of the Two-Year Delayed Draw Term Loan with proceeds from the sale of the Zytiga-related royalty interests obtained through the acquisition of BTG and extinguished the facility. On December 5, 2019, we repaid the remaining $800 million with proceeds from the 2020 Term Loan and commercial paper and terminated the Two-Year Delayed Draw Term Loan. Borrowings of the Three-Year Delayed Draw Term Loan 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 (1.13 percent as of December 31, 2019). The facility contains customary events of default, which may result in the acceleration of any outstanding commitments. As of December 31, 2018, we had no amounts borrowed under the Two-Year Delayed Draw Term Loan or the Three-Year Delayed Draw Term Loan. As of December 31, 2019, we had $1.000 billion outstanding under the Three-Year Delayed Draw Term Loan.
Debt Covenants
As of and through December 31, 2019, we were in compliance with all the required covenants related to our debt obligations.
All existing credit arrangements described above require that we maintain certain financial covenants, as follows:
|
|
|
|
|
|
Covenant
Requirement as of December 31, 2019
|
|
Actual as of December 31, 2019
|
Maximum leverage ratio (1)
|
4.75 times
|
|
3.83 times
|
(1) Ratio of total debt to consolidated EBITDA, as defined by the credit 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. On August 19, 2019, we announced the closing of our acquisition of BTG, a Qualified Acquisition, and our maximum leverage ratio was 4.75 times as of December 31, 2019. Refer to Note B – Acquisitions and Strategic Investments for more information.
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 December 31, 2019, we had $270 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 does not exceed $2.624 billion in the aggregate. As of December 31, 2019, we had $1.199 billion of the litigation exclusion remaining.
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
Our commercial paper program is backed by the 2018 Facility, as discussed above. Outstanding commercial paper directly reduces borrowing capacity under the 2018 Facility.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions, except maturity and yield)
|
2019
|
|
2018
|
Commercial paper outstanding
|
$
|
711
|
|
|
$
|
1,248
|
|
Maximum borrowing capacity
|
2,750
|
|
|
2,750
|
|
Borrowing capacity available
|
2,039
|
|
|
1,502
|
|
Weighted average maturity
|
55 days
|
|
|
27 days
|
|
Weighted average yield
|
2.21
|
%
|
|
3.04
|
%
|
Senior Notes
We had senior notes outstanding of $7.661 billion as of December 31, 2019 and $4.800 billion as of December 31, 2018.
In November 2019, we completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027. The Euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional entities. Refer to Note D – Hedging Activities and Fair Value Measurements for additional information. We used a portion of the net proceeds from our November 2019 senior notes offering to repay certain outstanding principal amounts of our senior notes including $206 million of our $450 million 4.125% senior notes due 2023, $566 million of our $1.000 billion 4.000% senior notes due 2028 and $227 million of our $750 million 3.850% senior notes due 2025 and pay accrued and unpaid interest, premiums, fees and expenses in connection with the transaction. In 2019, we incurred associated debt extinguishment charges of $86 million presented in Other, net on our consolidated statements of operations.
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. In 2019, the remaining proceeds were used to finance a portion of our acquisition of BTG.
In February 2018, we completed an offering of $1.000 billion in aggregate principal amount of 4.000% senior notes, due March 2028. We used a portion of the net proceeds from the offering to repay the $600 million plus accrued interest of our 2.650% senior notes due in October 2018, which were classified as short-term debt as of December 31, 2017. The remaining proceeds were used to repay a portion of our outstanding commercial paper.
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).
Our $7.311 billion of senior notes issued in 2009, 2013, 2015, 2018 and 2019 contain a change-in-control provision, which provides that each holder of the senior notes may require us to repurchase all or a portion of the notes at a price equal to 101 percent of the aggregate repurchased principal, plus accrued and unpaid interest, if a rating event, as defined in the indenture, occurs as a result of a change-in-control, as defined in the indenture. Any other credit rating changes may impact our borrowing cost, but do not require us to repay any borrowings.
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 consolidated balance sheets, are aggregated by contract denominated currency below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
Factoring Arrangements
|
Amount
De-recognized
|
|
Weighted Average Interest Rate
|
|
Amount
De-recognized
|
|
Weighted Average Interest Rate
|
Euro denominated
|
$
|
171
|
|
|
1.4
|
%
|
|
$
|
165
|
|
|
2.7
|
%
|
Yen denominated
|
226
|
|
|
0.6
|
%
|
|
195
|
|
|
0.9
|
%
|
BTG Revolving Credit Facility
After closing our acquisition of BTG, we terminated BTG's revolving credit facility with a borrowing capacity of £150 million (or approximately $184 million based on the exchange rate at termination on August 27, 2019), which contained an option to increase the facility by £150 million and was scheduled to expire in November 2020. The termination was effective on August 27, 2019, and there were no amounts outstanding at the time of close of the acquisition.
Other Contractual Obligations and Commitments
We had outstanding letters of credit of $105 million as of December 31, 2019 and $111 million as of December 31, 2018, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of December 31, 2019 and December 31, 2018, none of the beneficiaries had drawn upon the letters of credit or guarantees, accordingly, we have not recognized a related liability for our outstanding letters of credit in our consolidated balance sheets as of December 31, 2019 and December 31, 2018.
Future minimum purchase obligations as of December 31, 2019 were as follows (in millions):
|
|
|
|
|
Fiscal Year
|
Unrecorded Purchase Obligations
|
2020
|
$
|
334
|
|
2021
|
20
|
|
2022
|
7
|
|
2023
|
3
|
|
2024
|
1
|
|
Thereafter
|
1
|
|
|
$
|
366
|
|
The amounts in the table above with respect to purchase obligations relate primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business.
NOTE F – LEASES
We have operating and finance leases for real estate including corporate offices, land, warehouse space, and 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. Effective January 1, 2019, we adopted FASB ASC Topic 842 as discussed in Note A – Significant Accounting Policies. Beginning in 2019, 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 December 31, 2019
|
Assets
|
|
Operating lease right-of-use assets in Other long-term assets
|
$
|
336
|
|
Liabilities
|
|
Operating lease liabilities in Other current liabilities
|
67
|
|
Operating lease liabilities in Other long-term liabilities
|
276
|
|
The following table presents the weighted average remaining lease term and discount rate information related to our operating leases:
|
|
|
|
As of December 31, 2019
|
Weighted average remaining lease term
|
5.8 years
|
Weighted average discount rate
|
3.7%
|
Our operating lease cost under FASB ASC Topic 842 was $80 million in 2019. Rent expense under FASB ASC Topic 840 amounted to $92 million in 2018 and $88 million in 2017.
The following table presents supplemental cash flow information related to our operating leases:
|
|
|
|
|
|
Year Ended
|
(in millions)
|
December 31, 2019
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
Operating cash flows from operating leases
|
$
|
77
|
|
Right-of-use assets obtained in exchange for operating lease obligations were $137 million as of December 31, 2019.
The following table presents the maturities of our operating lease liabilities as of December 31, 2019 (in millions):
|
|
|
|
|
Fiscal year
|
Operating Leases
|
2020
|
$
|
84
|
|
2021
|
71
|
|
2022
|
59
|
|
2023
|
48
|
|
2024
|
41
|
|
Thereafter
|
79
|
|
Total future minimum operating lease payments
|
382
|
|
Less: imputed interest
|
39
|
|
Present value of operating lease liabilities
|
$
|
343
|
|
As of December 31, 2019, we have additional leases for office space and warehouse space, that have not yet commenced, of approximately $70 million. These leases will commence in 2020, with lease terms of up to 15 years.
Future minimum rental commitments as of December 31, 2018, under all noncancellable lease agreements, including capital leases, were as follows:
|
|
|
|
|
Fiscal year
|
Future Minimum Rental Commitments
|
2019
|
$
|
73
|
|
2020
|
61
|
|
2021
|
47
|
|
2022
|
39
|
|
2023
|
31
|
|
Thereafter
|
111
|
|
|
$
|
362
|
|
NOTE G – RESTRUCTURING-RELATED ACTIVITIES
2019 Restructuring Plan
On November 15, 2018, the Board of Directors approved, and we committed to a new global restructuring program (the 2019 Restructuring Plan). The 2019 Restructuring Plan is intended to support our effort to improve operating performance and meet anticipated market demands by ensuring that we are appropriately structured and resourced to deliver sustainable value to patients and customers. Key activities under the 2019 Restructuring Plan include supply chain network optimization intended to maximize our global manufacturing and distribution network capacity and building functional capabilities that support business growth. These activities were initiated in 2019, with the majority of activity expected to be complete by the end of 2021.
The following table provides a summary of our estimates of total pre-tax charges associated with the 2019 Restructuring Plan by major type of cost:
|
|
|
|
|
|
|
Type of Cost
|
Total Estimated Amount Expected to be Incurred
|
Restructuring charges:
|
|
|
|
Termination benefits
|
|
$75
|
million
|
to
|
$100 million
|
Other (1)
|
|
$25
|
million
|
to
|
$50 million
|
Restructuring-related expenses:
|
|
|
|
Other (2)
|
|
$100
|
million
|
to
|
$150 million
|
|
|
$200
|
million
|
to
|
$300 million
|
|
|
(1)
|
Consists primarily of consulting fees and costs associated with contractual cancellations.
|
|
|
(2)
|
Comprised of other costs directly related to the restructuring program, including program management, accelerated depreciation, fixed asset write-offs, and costs to transfer product lines among facilities.
|
Approximately $180 million to $280 million of these charges are expected to result in cash outlays.
2016 Restructuring Plan
On June 6, 2016, our Board of Directors approved, and we committed to a restructuring initiative (the 2016 Restructuring Plan). The 2016 Restructuring Plan was intended to develop global commercialization, technology and manufacturing capabilities in key growth markets, build on our Plant Network Optimization (PNO) strategy which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and expand operational efficiencies in support of our operating income margin goals. Key activities under the 2016 Restructuring Plan included strengthening global infrastructure through evolving global real estate assets and workplaces, developing global commercial and technical competencies, enhancing manufacturing and distribution expertise in certain regions and continuing implementation of our PNO strategy. These activities were initiated in the second quarter of 2016 and substantially completed in 2019.
The following table provides a summary of total pre-tax charges associated with the 2016 Restructuring Plan by major type of cost:
|
|
|
|
|
Type of cost
|
Total Amount Incurred
|
Restructuring charges:
|
|
Termination benefits
|
$
|
86
|
million
|
Other (1)
|
21
|
million
|
Restructuring-related expenses:
|
|
Other (2)
|
164
|
million
|
|
$
|
271
|
million
|
|
|
(1)
|
Consists primarily of consulting fees and costs associated with contract cancellations.
|
|
|
(2)
|
Comprised of other costs directly related to the 2016 Restructuring Plan, including program management, accelerated depreciation, fixed asset write-offs and costs to transfer product lines among facilities.
|
Approximately $255 million of these charges are expected to result in cash outlays; the majority of which were completed as of December 31, 2019.
The following presents the restructuring and restructuring-related charges (credits) by major type and line item within our accompanying consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Termination
Benefits
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Selling, general and administrative expenses
|
—
|
|
|
—
|
|
|
13
|
|
|
13
|
|
|
—
|
|
|
32
|
|
|
13
|
|
|
44
|
|
|
$
|
38
|
|
|
$
|
32
|
|
|
$
|
13
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
Termination
Benefits
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
36
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
47
|
|
|
—
|
|
|
47
|
|
Selling, general and administrative expenses
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
|
—
|
|
|
47
|
|
|
12
|
|
|
59
|
|
|
$
|
32
|
|
|
$
|
47
|
|
|
$
|
16
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
Termination
Benefits
|
|
Transfer Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
37
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
45
|
|
|
—
|
|
|
45
|
|
Selling, general and administrative expenses
|
—
|
|
|
—
|
|
|
13
|
|
|
13
|
|
|
—
|
|
|
45
|
|
|
13
|
|
|
58
|
|
|
$
|
25
|
|
|
$
|
45
|
|
|
$
|
25
|
|
|
$
|
95
|
|
The following table presents cumulative restructuring and restructuring-related charges incurred as of December 31, 2019, related to our Restructuring Plans by major type:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016 Restructuring Plan
|
|
2019 Restructuring Plan
|
|
Total
|
Termination benefits
|
$
|
86
|
|
|
$
|
30
|
|
|
$
|
115
|
|
Other (1)
|
21
|
|
|
2
|
|
|
23
|
|
Total restructuring charges
|
106
|
|
|
32
|
|
|
138
|
|
Transfer costs
|
126
|
|
|
13
|
|
|
139
|
|
Other (2)
|
39
|
|
|
2
|
|
|
41
|
|
Restructuring-related charges
|
164
|
|
|
15
|
|
|
180
|
|
|
$
|
271
|
|
|
$
|
47
|
|
|
$
|
318
|
|
|
|
(1)
|
Consists primarily of consulting fees and costs associated with contract cancellations.
|
|
|
(2)
|
Comprised of other costs directly related to our Restructuring Plans, including program management, accelerated depreciation, and fixed asset write-offs.
|
Cash payments associated with our Restructuring Plans were made using cash generated from operations and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016 Restructuring Plan
|
|
2019 Restructuring Plan
|
|
Total
|
Year Ended December 31, 2019
|
|
|
|
|
|
Termination benefits
|
$
|
13
|
|
|
$
|
6
|
|
|
$
|
18
|
|
Transfer costs
|
18
|
|
|
13
|
|
|
32
|
|
Other
|
10
|
|
|
4
|
|
|
14
|
|
|
$
|
41
|
|
|
$
|
23
|
|
|
$
|
64
|
|
NOTE H – SUPPLEMENTAL BALANCE SHEET INFORMATION
Components of selected captions in our accompanying consolidated balance sheets are as follows:
Trade accounts receivable, net
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Accounts receivable
|
$
|
1,902
|
|
|
$
|
1,676
|
|
Allowance for doubtful accounts
|
(74
|
)
|
|
(68
|
)
|
|
$
|
1,828
|
|
|
$
|
1,608
|
|
The following is a rollforward of our allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
68
|
|
|
$
|
68
|
|
|
$
|
73
|
|
Net charges to expenses
|
23
|
|
|
19
|
|
|
14
|
|
Utilization of allowances
|
(17
|
)
|
|
(19
|
)
|
|
(18
|
)
|
Ending balance
|
$
|
74
|
|
|
$
|
68
|
|
|
$
|
68
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Finished goods
|
$
|
971
|
|
|
$
|
760
|
|
Work-in-process
|
192
|
|
|
100
|
|
Raw materials
|
416
|
|
|
306
|
|
|
$
|
1,579
|
|
|
$
|
1,166
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Restricted cash and restricted cash equivalents
|
$
|
346
|
|
|
$
|
655
|
|
Derivative assets
|
105
|
|
|
122
|
|
Licensing arrangements
|
186
|
|
|
—
|
|
Taxes receivable
|
105
|
|
|
37
|
|
Other
|
138
|
|
|
107
|
|
|
$
|
880
|
|
|
$
|
921
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Land
|
$
|
117
|
|
|
$
|
97
|
|
Buildings and improvements
|
1,198
|
|
|
1,100
|
|
Equipment, furniture and fixtures
|
3,411
|
|
|
3,224
|
|
Capital in progress
|
442
|
|
|
319
|
|
|
5,169
|
|
|
4,740
|
|
Less: accumulated depreciation
|
3,089
|
|
|
2,958
|
|
|
$
|
2,079
|
|
|
$
|
1,782
|
|
Depreciation expense was $311 million in 2019, $296 million in 2018 and $279 million in 2017.
Other long-term assets
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Restricted cash equivalents
|
$
|
43
|
|
|
$
|
27
|
|
Operating lease right-of-use assets
|
336
|
|
|
—
|
|
Derivative assets
|
216
|
|
|
183
|
|
Investments
|
458
|
|
|
424
|
|
Licensing arrangements
|
332
|
|
|
—
|
|
Other
|
144
|
|
|
211
|
|
|
$
|
1,529
|
|
|
$
|
845
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Legal reserves
|
$
|
470
|
|
|
$
|
712
|
|
Payroll and related liabilities
|
708
|
|
|
630
|
|
Accrued contingent consideration
|
56
|
|
|
138
|
|
Rebates
|
298
|
|
|
229
|
|
Other
|
576
|
|
|
538
|
|
|
$
|
2,109
|
|
|
$
|
2,246
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Deferred revenue
|
$
|
144
|
|
|
$
|
115
|
|
Licensing arrangements
|
197
|
|
|
—
|
|
Taxes payable
|
265
|
|
|
125
|
|
Other
|
195
|
|
|
173
|
|
|
$
|
800
|
|
|
$
|
412
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Accrued income taxes
|
$
|
667
|
|
|
$
|
739
|
|
Legal reserves
|
227
|
|
|
217
|
|
Accrued contingent consideration
|
299
|
|
|
209
|
|
Licensing arrangements
|
374
|
|
|
—
|
|
Operating lease liabilities
|
276
|
|
|
—
|
|
Other
|
792
|
|
|
717
|
|
|
$
|
2,635
|
|
|
$
|
1,882
|
|
NOTE I – INCOME TAXES
Our Income (loss) before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
(1,145
|
)
|
|
$
|
35
|
|
|
$
|
(408
|
)
|
Foreign
|
1,832
|
|
|
1,387
|
|
|
1,341
|
|
|
$
|
687
|
|
|
$
|
1,422
|
|
|
$
|
933
|
|
The related benefit for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
120
|
|
|
$
|
(221
|
)
|
|
$
|
320
|
|
State
|
54
|
|
|
(27
|
)
|
|
9
|
|
Foreign
|
101
|
|
|
160
|
|
|
255
|
|
|
275
|
|
|
(87
|
)
|
|
584
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
(146
|
)
|
|
(124
|
)
|
|
272
|
|
State
|
(18
|
)
|
|
4
|
|
|
1
|
|
Foreign
|
(4,124
|
)
|
|
(42
|
)
|
|
(28
|
)
|
|
(4,288
|
)
|
|
(162
|
)
|
|
244
|
|
|
$
|
(4,013
|
)
|
|
$
|
(249
|
)
|
|
$
|
828
|
|
The reconciliation of income taxes at the federal statutory rate to the actual benefit for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
(reclassified)(1)
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
6.7
|
%
|
|
0.4
|
%
|
|
(1.0
|
)%
|
Domestic taxes on foreign earnings
|
21.9
|
%
|
|
0.5
|
%
|
|
0.4
|
%
|
Effect of foreign taxes
|
(47.6
|
)%
|
|
(8.3
|
)%
|
|
(38.9
|
)%
|
Acquisition-related
|
12.2
|
%
|
|
2.1
|
%
|
|
(1.7
|
)%
|
Research credit
|
(4.2
|
)%
|
|
(2.6
|
)%
|
|
(2.6
|
)%
|
Valuation allowance
|
1.1
|
%
|
|
(5.2
|
)%
|
|
(4.1
|
)%
|
Compensation-related
|
(0.3
|
)%
|
|
(1.0
|
)%
|
|
(2.5
|
)%
|
Non-deductible expenses
|
3.3
|
%
|
|
0.3
|
%
|
|
2.2
|
%
|
Uncertain tax positions
|
1.4
|
%
|
|
(22.0
|
)%
|
|
10.7
|
%
|
TCJA net impact
|
—
|
%
|
|
(4.7
|
)%
|
|
91.4
|
%
|
Intra-entity intangible asset transfers
|
(597.0
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other, net
|
(2.5
|
)%
|
|
1.8
|
%
|
|
(0.2
|
)%
|
|
(584.0
|
)%
|
|
(17.5
|
)%
|
|
88.8
|
%
|
|
|
(1)
|
Due to the inclusion of new tax provisions in 2018 created by the TJCA, we have reclassified select items in prior years to align with the new categories established in 2018, domestic taxes on foreign earnings and uncertain tax positions.
|
Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2019
|
|
2018
|
Deferred Tax Assets:
|
|
|
|
Inventory costs and related reserves
|
$
|
—
|
|
|
$
|
18
|
|
Tax benefit of net operating loss and credits
|
545
|
|
|
450
|
|
Reserves and accruals
|
258
|
|
|
258
|
|
Restructuring-related charges
|
20
|
|
|
12
|
|
Litigation and product liability reserves
|
168
|
|
|
221
|
|
Investment write-down
|
42
|
|
|
28
|
|
Compensation related
|
121
|
|
|
106
|
|
Federal benefit of uncertain tax positions
|
10
|
|
|
10
|
|
Intangible assets
|
3,447
|
|
|
—
|
|
Other
|
—
|
|
|
37
|
|
|
4,611
|
|
|
1,140
|
|
Less: valuation allowance
|
(915
|
)
|
|
(344
|
)
|
|
3,696
|
|
|
796
|
|
Deferred Tax Liabilities:
|
|
|
|
Property, plant and equipment
|
16
|
|
|
25
|
|
Unrealized gains and losses on derivative financial instruments
|
52
|
|
|
44
|
|
Intangible assets
|
—
|
|
|
968
|
|
Inventory costs and related services
|
2
|
|
|
—
|
|
Other
|
25
|
|
|
—
|
|
|
95
|
|
|
1,037
|
|
Net Deferred Tax Assets / (Liabilities)
|
3,601
|
|
|
(241
|
)
|
Prepaid on intercompany profit
|
195
|
|
|
161
|
|
Net Deferred Tax Assets / (Liabilities) and Prepaid on Intercompany Profit
|
$
|
3,796
|
|
|
$
|
(80
|
)
|
Our deferred tax assets, deferred tax liabilities and prepaid on intercompany profit, are included in the following locations within our accompanying consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
Location on Consolidated Balance Sheets
|
As of December 31,
|
Component
|
2019
|
|
2018
|
Prepaid on intercompany profit
|
Prepaid income taxes
|
$
|
195
|
|
|
$
|
161
|
|
Non-current deferred tax asset
|
Deferred tax assets
|
4,196
|
|
|
87
|
|
Deferred Tax Assets and Prepaid on Intercompany Profit
|
|
4,391
|
|
|
249
|
|
|
|
|
|
|
Non-current deferred tax liability
|
Deferred income taxes
|
595
|
|
|
328
|
|
Deferred Tax Liabilities
|
|
595
|
|
|
328
|
|
|
|
|
|
|
Net Deferred Tax Assets (Liabilities) and Prepaid on Intercompany Profit
|
$
|
3,796
|
|
|
$
|
(80
|
)
|
As of December 31, 2019, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $449 million. As of December 31, 2018, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $416 million. In addition, we had foreign tax net operating loss carryforwards and tax credits, the tax effect of which was $105 million as of December 31, 2019, as compared to $42 million as of December 31, 2018. These tax attributes expire periodically beginning in 2020.
During the fourth quarter of 2019, we completed intra-entity asset transfers of certain intellectual property rights among various wholly-owned subsidiaries. These transactions occurred to more closely align the global economic ownership of our intellectual property rights with our current and future business operations. These transactions did not result in a taxable gain in any jurisdiction,
however, some of the transactions did create a step-up in the tax-deductible basis in the transferred intellectual property rights in certain jurisdictions. As a result, we recorded deferred tax assets in the amount of $4.102 billion, which represents the book and tax basis differences measured at applicable statutory tax rates, net of a valuation allowance of $542 million.
After consideration of all positive and negative evidence, we believe that it is more likely than not that a portion of our deferred tax assets will not be realized. As a result, we established a valuation allowance of $915 million as of December 31, 2019 and $344 million as of December 31, 2018, representing an increase of $571 million. The increase in the valuation allowance as of December 31, 2019, as compared to December 31, 2018, is primarily attributable to an intra-entity transfer of certain intellectual property. The income tax impact of the unrealized gain or loss component of other comprehensive income and stockholders' equity was a charge of $13 million in 2019, a charge of $37 million in 2018 and a benefit of $63 million in 2017.
We obtain tax incentives through Free Trade Zone Regime offered in Costa Rica which allows 100.0 percent exemption from income tax in the first eight years of operations and 50.0 percent exemption in the following four years. This tax incentive resulted in income tax savings of $173 million for 2019, $146 million for 2018 and $127 million for 2017. The tax incentive for 100.0 percent exemption from income tax was renewed during 2019 and is expected to expire in 2027. The impact on per share earnings was $0.12 for 2019 and $0.10 for 2018 and $0.09 for 2017. Additionally, we benefit from tax incentives in Puerto Rico. The income tax savings from Puerto Rico were immaterial for 2019, 2018 and 2017.
As of December 31, 2019, we had $455 million of gross unrecognized tax benefits, of which a net $355 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. As of December 31, 2017, we had $1.238 billion of gross unrecognized tax benefits, of which a net $1.150 billion, if recognized, would affect our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Beginning Balance
|
$
|
427
|
|
|
$
|
1,238
|
|
|
$
|
1,095
|
|
Additions based on positions related to the current year
|
30
|
|
|
79
|
|
|
134
|
|
Additions based on positions related to prior years
|
45
|
|
|
4
|
|
|
16
|
|
Reductions for tax positions of prior years
|
(34
|
)
|
|
(433
|
)
|
|
(3
|
)
|
Settlements with taxing authorities
|
(4
|
)
|
|
(459
|
)
|
|
(2
|
)
|
Statute of limitation expirations
|
(9
|
)
|
|
(3
|
)
|
|
(2
|
)
|
Ending Balance
|
$
|
455
|
|
|
$
|
427
|
|
|
$
|
1,238
|
|
We are subject to U.S. Federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters through 2013, with the exception of select issues in 2011 and substantially all material state and local income tax matters through 2010. We have concluded all foreign income tax matters through 2013, with the exception of issues for Italy, which have concluded through 2002.
In the second quarter of 2018, a decision was entered by the U.S. Tax Court resolving all disputes for Guidant Corporation for its 2001 through 2006 tax years and our 2006 and 2007 tax years as well as the tax issues related to our 2006 transaction with Abbott Laboratories. Additionally, we resolved all issues with the IRS Office of Appeals for our 2008 through 2010 tax years. The final settlement calculation resulted in a final net tax payment of $303 million plus $307 million of estimated interest, which was remitted in the second quarter of 2018. Due to the final settlement of these disputes, we recorded a net tax benefit of $250 million in 2018 to remove a reserve related to these years.
In the fourth quarter of 2018, we received a Revenue Agent Report (RAR) from the IRS for our 2011 through 2013 tax years. We remitted $93 million to the IRS in the fourth quarter of 2018 reflecting the net balance of tax and interest due for these years after consideration of amounts owed to us by the IRS. Due to the resolution of these tax years, we recorded a net tax benefit of $90 million to remove a reserve related to these years.
We recognize interest and penalties related to income taxes as a component of income tax expense. We had $19 million accrued for gross interest and penalties as of December 31, 2019 and $11 million as of December 31, 2018. We recognized a benefit of $643 million of gross interest and penalties in our consolidated statements of operations in 2018 primarily related to reaching settlements with the taxing authorities. We recognized net tax benefit related to interest and penalties of $1 million in 2019, as compared to a net tax benefit of $498 million in 2018 and a net tax expense of $154 million in 2017. The decrease in our net tax benefit related to interest and penalties as of December 31, 2019, as compared to December 31, 2018, is related to reaching settlements with the taxing authorities.
It is reasonably possible that within the next 12 months we will resolve transactional- related issues with foreign and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $98 million.
During 2018, we completed our analysis and recording of all tax effects related to the Tax Cuts and Jobs Act, as required under SAB 118, and recorded a net benefit of $67 million, exclusive of the one-time transition tax adjustment described below.
For the year ended December 31, 2017, we were required under the Tax Cuts and Jobs Act (TCJA) to calculate a one-time transition tax based on our total post-1986 foreign subsidiaries' earnings and profits (E&P) that we previously deferred from U.S. income taxes. As a result of settling our various tax audits, the revised amount of transition tax is approximately $856 million as of December 31, 2018 as compared to the preliminary amount recorded of approximately $1.044 billion as of December 31, 2017. We anticipate offsetting this liability against existing tax attributes reducing the required payment to approximately $499 million, which will be remitted over an eight-year period. We have begun remitting the required installment payments, with a balance remaining of $420 million as of December 31, 2019. In addition, we have provided for U.S. state income taxes of $18 million on all U.S. dollar-denominated E&P accumulated through December 31, 2017, which constitutes the preponderance of our foreign subsidiaries' accumulated E&P through December 31, 2017. We intend to indefinitely reinvest the unremitted foreign earnings of all other subsidiaries as of December 31, 2017, as well as all subsequent earnings generated by all of our foreign subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings and additional outside basis difference in these entities is not practicable.
We are subject to a territorial tax system under the TCJA, in which we are required to provide for tax on Global Intangible Low Taxed Income (GILTI) earned by certain foreign subsidiaries. We have established an accounting policy election to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.
NOTE J – COMMITMENTS AND CONTINGENCIES
The medical device market in which we 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 $697 million as of December 31, 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 our restricted cash and restricted cash equivalent balances in Other current assets of $346 million as of December 31, 2019 and $655 million as of December 31, 2018, as discussed in Note A – Significant Accounting Policies.
We recorded litigation-related net charges of $115 million in 2019, $103 million in 2018 and $285 million in 2017. These included litigation-related net charges included a net charge of $223 million in the fourth quarter of 2019, primarily related to litigation with Channel Medsystems, Inc., net charges of $25 million in the third quarter of 2019 and $15 million in the second quarter of 2019, primarily related to transvaginal surgical mesh product liability litigation, and a gain of $148 million recorded in the first quarter of 2019, which represents a portion of the total $180 million one-time settlement payment received from Edwards Lifesciences Corporation (Edwards) in January 2019. 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 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 the Edwards settlement was recorded in Selling, general and administrative expenses on our 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 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 October 28, 2015, BSC filed suit against Cook Group Limited and Cook Medical LLC (collectively, “Cook”) in the District Court for the District of Delaware (1:15-cv-00980) alleging infringement of certain Company patents regarding Cook’s Instinct Endoscopic Hemoclip. The case was transferred to the District Court for the S.D. Indiana. Cook filed seven Inter Partes Review (“IPR”) requests with the U.S. Patent and Trademark Office against the four asserted patents. All IPRs have concluded with claims confirmed in each patent. Cook and Boston Scientific have both appealed the Patent Office’s IPR decisions to the Federal Circuit Court of Appeals. The district court had stayed the case pending the appeals court decision on the IPRs.
On November 29, 2016 Nevro Corp. (Nevro) filed a patent infringement action against us and one of our subsidiaries, Boston Scientific Neuromodulation Corporation, in the U.S. District Court for the Northern District of California alleging that six U.S. patents (Alataris) owned by Nevro are infringed by our spinal cord stimulation systems. On June 29, 2017, Nevro amended the complaint to add an additional patent (Fang). On July 24, 2018, summary judgment was entered in favor of the Company and on July 31, 2018, we received final judgment and dismissal of the action. On July 31, 2018, Nevro filed an appeal.
On December 9, 2016, the Company and Boston Scientific Neuromodulation Corporation filed a patent infringement action against Nevro in U.S. District Court for the District of Delaware alleging that ten U.S. patents owned by Boston Scientific Neuromodulation Corporation are infringed by Nevro’s Senza™ Spinal Cord Stimulation System.
On November 20, 2017, The Board of Regents, University of Texas System (UT) and TissueGen. Inc., served a lawsuit against us in the Western District of Texas. The complaint against us alleges patent infringement of two U.S. patents owned by UT, relating to “Drug Releasing Biodegradable Fiber Implant” and “Drug Releasing Biodegradable Fiber for Delivery of Therapeutics,” and affects the manufacture, use and sale of our Synergy™ Stent System. On March 12, 2018, the District Court for the Western District of Texas dismissed the action and transferred it to the United States District Court for the District of Delaware. On September 5, 2019, the Court of Appeals for the Federal Circuit affirmed the dismissal of the District Court for the Western District of Texas.
On April 21, 2018, the Company and Boston Scientific Neuromodulation Corporation filed a patent infringement, theft of trade secrets and tortious interference with a contract action against Nevro in U.S. District Court for the District of Delaware, and
amended the complaint on July 18, 2018, alleging that nine U.S. patents owned by Boston Scientific Neuromodulation Corporation are infringed by Nevro’s Senza™ I and Senza™ II Spinal Cord Stimulation Systems. On December 9, 2019, Nevro filed an answer and counterclaims, in which it alleged that our Spinal Cord Stimulation systems infringe 5 Nevro patents.
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 January 29, 2020, approximately 54,000 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. As of January 29, 2020, 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 46,000 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. 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. 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 were 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. On December 12, 2019 the Mississippi Attorney General filed suit against BSC in State Court alleging violations of the Mississippi Consumer Protection Act which the Company plans to vigorously defend. There were also fewer than 25 cases in Canada, inclusive of one certified class action and fewer than 25 claims in the United Kingdom. We have reached an agreement to settle the Canadian class action pending Court approval.
We have established a product liability accrual for known and estimated future cases and claims asserted against us as well as with respect to the actions that have resulted in verdicts against us and the costs of defense thereof associated with our transvaginal surgical mesh products. While we believe that our accrual associated with this matter is adequate, changes to this accrual may be required in the future as additional information becomes available. While we continue to engage in discussions with plaintiffs’ counsel regarding potential resolution of pending cases and claims and intend to vigorously contest the cases and claims asserted against us, that do not settle, the final resolution of the cases and claims is uncertain and could have a material impact on our results of operations, financial condition and/or liquidity. Initial trials involving our transvaginal surgical mesh products have resulted in both favorable and unfavorable judgments for us. We do not believe that the judgment in any one trial is representative of potential outcomes of all cases or claims related to our transvaginal surgical mesh products.
Governmental Investigations and Qui Tam Matters
On May 5, 2014, we were served with a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General. The subpoena seeks information relating to the launch of the Cognis™ and Teligen™ line of devices in 2008, the performance of those devices from 2007 to 2009 and the operation of the Physician Guided Learning Program. We are cooperating with this request. On May 6, 2016, a qui tam lawsuit in this matter was unsealed in the U.S. District Court for the District of Minnesota. At the same time, we learned that the U.S. government and the State of California had earlier declined to intervene in that lawsuit on April 15, 2016. The complaint was served on us on July 21, 2016. On October 7, 2016, the plaintiff/relator served an amended complaint that dropped the allegations relating to the Physician Guided Learning Program. We filed a motion to dismiss the amended complaint on December 7, 2016 and the court heard our motion to dismiss on April 5, 2017. On August 29, 2017, the Court granted the motion to dismiss, without prejudice and on September 19, 2017, the relator filed a Second Amended Complaint. We filed a motion to dismiss the Second Amended Complaint on October 10, 2017 and the Court denied that motion on December 13, 2017. On July 31, 2018, the relator filed a motion seeking leave to file a Third Amended Complaint. The Court denied the motion on October 30, 2018.
On February 23, 2015, a judge for the Court of Modena (Italy) ordered a trial for Boston Scientific and three of its employees, as well as numerous other defendants charged in criminal proceedings. The charges arise from allegations that the defendants made improper donations to certain healthcare providers and other employees of the Hospital of Modena in order to induce them to conduct unauthorized clinical trials, as well as related government fraud in relation to the financing of such clinical trials. A trial began on February 24, 2016. On November 10, 2017, the Court issued a ruling that convicted one Boston Scientific employee but acquitted two others and levied a fine of €245 thousand against us and imposed joint and several civil damages of €620 thousand on all defendants. We continue to deny these allegations, timely appealed the decision on May 10, 2018 and intend to continue to defend ourselves vigorously.
On December 1, 2015, the Brazilian governmental entity known as CADE (the Administrative Council of Economic Defense), served a search warrant on the offices of our Brazilian subsidiary, as well as on the Brazilian offices of several other major medical device makers who do business in Brazil, in furtherance of an investigation into alleged anti-competitive activity with respect to certain tender offers for government contracts. On June 20, 2017, CADE, through the publication of a “technical note,” announced that it was launching a formal administrative proceeding against Boston Scientific’s Brazilian subsidiary, Boston Scientific do Brasil Ltda., as well as against the Brazilian operations of Medtronic, Biotronik and St. Jude Medical, two Brazilian associations, ABIMED and AMBIMO and 29 individuals for alleged anti-competitive behavior. We deny the allegations and intend to defend ourselves vigorously.
Other Proceedings
On May 16, 2018, Arthur Rosenthal et al., filed a plenary summons against Boston Scientific Corporation and Boston Scientific Limited with the High Court of Ireland alleging that payments are due pursuant a transaction agreement regarding Labcoat Limited.
On September 6, 2019, Boston Scientific Corporation, Boston Scientific Scimed, Inc., and Fortis Advisors, LLC, as a Securityholder Representative for the former Securityholders of nVision Medical Corp. filed a declaratory judgment action against BioCardia, Inc. in the United States District Court for the Northern District of California to address threats and allegations by BioCardia challenging inventorship and ownership of various patents that Boston Scientific Corporation acquired through an April 13, 2018 merger with nVision as well as related threats and allegations by BioCardia of trade secret misappropriation and unjust enrichment. On December 11, 2019, BioCardia filed an amended answer and counterclaims.
On April 18, 2019, Blue Cross & Blue Shield of Louisiana and HMO Louisiana, Inc. filed a class action complaint against Janssen Biotech, Inc, Janssen Oncology, Inc, Janssen Research & Development, LLC and BTG International Limited in the United States District Court for the Eastern District of Virginia. The complaint alleges that the defendants violated the Sherman Act and the antitrust and consumer protections laws of several states by pursuing patent litigation relating to ZYTIGA™ in order to delay generic entry. On June 21, 2019, the case was transferred to the United States District Court for the District of New Jersey and has been consolidated with similar complaints.
On December 21, 2017, Janssen Biotech, Inc., Janssen Oncology, Inc, Janssen Research & Development, LLC, and Johnson & Johnson (collectively, Janssen) were served with a qui tam complaint filed on behalf of the United States, 28 states, and the District of Columbia. The complaint, which was filed in the United States District Court for the Northern District of California, alleges that Janssen violated the federal False Claims Act and state law when providing pricing information for ZYTIGA to the government in connection with direct government sales and government-funded drug reimbursement programs. The case has been transferred to United States District Court for the District of New Jersey. On June 20, 2019, the complaint was amended to include BTG International Limited as a defendant.
Refer to Note I – Income Taxes for information regarding our tax litigation.
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:
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•
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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’
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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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. 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.
On April 24, 2019, a class action complaint was filed in the U.S. District Court for the Southern District of New York against Boston Scientific Corporation, Michael F. Mahoney, our Chief Executive Officer, and Daniel J. Brennan, our Chief Financial Officer. The complaint alleges violations of federal securities laws based on false and/or misleading statements and failure to disclose facts related to the Company’s transvaginal surgical mesh products. On September 20, 2019, the case was dismissed with prejudice.
On March 10, 2017, Imran Niazi filed a patent infringement action against us in the U.S. District Court for the Western District of Wisconsin alleging that a U.S. patent owned by him is infringed by our Acuity™ Lead Delivery System. On June 30, 2017, we filed a motion to dismiss for improper venue and on November 7, 2017 the Wisconsin Court granted the motion to dismiss. On November 13, 2017 Niazi refiled the same action in the U.S. District of Minnesota. We reached a confidential settlement on this matter on February 3, 2020 pursuant to which we anticipate the court will dismiss the pending action.
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. 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.
On November 1, 2017, we entered into a definitive agreement with Channel Medsystems, Inc. (Channel) pursuant to which 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 Channel 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 alleged that we breached the agreement by terminating it. We have answered the complaint, denied the claims by Channel and 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 the post-trial briefing and hearing have been completed. During the third quarter of 2019, Channel notified us that they were exercising their option to sell the remaining equity interests in Channel to us. We responded to the notification that we did not intend to purchase Channel since the previous agreement had been terminated. On December 18, 2019, the Chancery Court ruled that Boston Scientific was in breach of the agreement and granted Channel's request for specific performance to require the Company to complete the purchase. On January 10, 2020, we filed a Notice of Appeal of the Chancery Court’s decision to the Delaware Supreme Court. On February 4, 2020, the Company settled the dispute with Channel resulting in termination of the agreement, payment by the Company of an undisclosed sum and surrender of the Company's equity interest in Channel.
NOTE K – STOCKHOLDERS' EQUITY
Preferred Stock
We are authorized to issue 50 million shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative participating, option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by our stockholders. As of December 31, 2019 and 2018, we had no shares of preferred stock issued or outstanding.
Common Stock
We are authorized to issue 2.000 billion shares of common stock, $0.01 par value per share. Holders of common stock are entitled to one vote per share. Holders of common stock are entitled to receive dividends, if and when declared by our Board of Directors and to share ratably in our assets legally available for distribution to our stockholders in the event of liquidation. Holders of common stock have no preemptive, subscription, redemption, or conversion rights. The holders of common stock do not have cumulative voting rights. The holders of a majority of the shares of common stock can elect all of the directors and can control our management and affairs.
On January 25, 2013, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $1.000 billion of our common stock. Repurchased shares are available for reissuance under our equity incentive plans and for general corporate purposes, including acquisitions. We did not repurchase any shares of our common stock during 2019, 2018 or 2017. As of December 31, 2019, we had remaining $535 million authorized under our 2013 share repurchase program. There were approximately 248 million shares in treasury as of December 31, 2019 and December 31, 2018.
NOTE L – STOCK INCENTIVE AND OWNERSHIP PLANS
Employee and Director Stock Incentive Plans
In 2011, our Board of Directors and stockholders approved our 2011 Long-Term Incentive Plan (the 2011 LTIP), authorizing for issuance up to 146 million shares of our common stock. The 2011 LTIP covers officers, directors, employees and consultants and provides for the grant of restricted or unrestricted common stock, deferred stock units (DSU), options to acquire our common stock, stock appreciation rights, performance awards (market-based and performance-based DSUs) and other stock and non-stock awards. Shares reserved under our current and former stock incentive plans totaled approximately 124 million as of December 31, 2019. The Executive Compensation and Human Resources Committee (the Committee) of the Board of Directors, consisting of independent, non-employee directors may authorize the issuance of common stock and cash awards under the 2011 LTIP in recognition of the achievement of long-term performance objectives established by the Committee.
Non-qualified options issued to employees are generally granted with an exercise price equal to the market price of our stock on the grant date, vest over a four-year service period and have a ten-year contractual life. In the case of qualified options, if the recipient owns more than ten percent of the voting power of all classes of stock, the option granted will be at an exercise price of 110 percent of the fair market value of our common stock on the date of grant and will expire over a period not to exceed five years. Non-vested stock awards, including restricted stock awards and DSUs, issued to employees are generally granted with an exercise price of zero and typically vest in four or five equal annual installments. These awards represent our commitment to issue shares to recipients after the vesting period. Upon each vesting date, such awards are no longer subject to risk of forfeiture and we issue shares of our common stock to the recipient.
The following presents the impact of stock-based compensation on our consolidated statements of operations:
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Year Ended December 31,
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(in millions, except per share data)
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2019
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|
2018
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|
2017
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Cost of products sold
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$
|
8
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|
|
$
|
7
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|
|
$
|
7
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Selling, general and administrative expenses
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120
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|
|
109
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|
|
98
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Research and development expenses
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28
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|
|
24
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|
|
23
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|
|
157
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|
|
140
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|
|
127
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Income tax (benefit) expense
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(24
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)
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(21
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)
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(32
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)
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$
|
133
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$
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119
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|
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$
|
96
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Net impact per common share - basic
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$
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0.10
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|
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$
|
0.09
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$
|
0.07
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Net impact per common share - assuming dilution
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$
|
0.09
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|
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$
|
0.08
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|
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$
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0.07
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Stock Options
We use the Black-Scholes option-pricing model to calculate the grant-date fair value of stock options granted to employees under our stock incentive plans. We calculated the fair value for options granted using the following estimated weighted-average assumptions:
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Year Ended December 31,
|
|
2019
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2018
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|
2017
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Options granted (in thousands)
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2,992
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|
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3,491
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|
|
4,439
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Weighted-average exercise price
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$
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40.20
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|
|
$
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27.26
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|
|
$
|
24.70
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Weighted-average grant-date fair value
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$
|
11.76
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|
|
$
|
8.55
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|
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$
|
7.16
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Black-Scholes Assumptions
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|
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Expected volatility
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24
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%
|
|
26
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%
|
|
25
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%
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Expected term (in years, weighted)
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6.1
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|
|
6.0
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|
|
6.1
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Risk-free interest rate
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1.38
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%
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-
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2.61%
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|
2.61
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%
|
-
|
3.01%
|
|
2.03
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%
|
-
|
2.21%
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Expected Volatility
We use our historical volatility and implied volatility as a basis to estimate expected volatility in our valuation of stock options.
Expected Term
We estimate the expected term of options using historical exercise and forfeiture data. We believe that this historical data provides the best estimate of the expected term of new option grants.
Risk-Free Interest Rate
We use yield rates on U.S. Treasury securities for a period approximating the expected term of the award to estimate the risk-free interest rate in our grant-date fair value assessment.
Expected Dividend Yield
We have not historically paid cash dividends to our stockholders and currently do not intend to pay cash dividends. Therefore, we have assumed an expected dividend yield of zero in our grant-date fair value assessment.
Information related to stock options under stock incentive plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding as of December 31, 2016
|
26,644
|
|
|
$
|
11
|
|
|
|
|
|
Granted
|
4,439
|
|
|
25
|
|
|
|
|
|
Exercised
|
(3,922
|
)
|
|
10
|
|
|
|
|
|
Cancelled/forfeited
|
(445
|
)
|
|
17
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
26,716
|
|
|
$
|
13
|
|
|
|
|
|
Granted
|
3,491
|
|
|
27
|
|
|
|
|
|
Exercised
|
(4,385
|
)
|
|
11
|
|
|
|
|
|
Cancelled/forfeited
|
(519
|
)
|
|
22
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
25,304
|
|
|
$
|
16
|
|
|
|
|
|
Granted
|
2,992
|
|
|
40
|
|
|
|
|
|
Exercised
|
(4,872
|
)
|
|
12
|
|
|
|
|
|
Cancelled/forfeited
|
(359
|
)
|
|
24
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
23,065
|
|
|
$
|
19
|
|
|
5.5
|
|
$
|
594
|
|
Exercisable as of December 31, 2019
|
15,091
|
|
|
$
|
14
|
|
|
4.1
|
|
$
|
476
|
|
Expected to vest as of December 31, 2019
|
7,617
|
|
|
30
|
|
|
8.0
|
|
114
|
|
Total vested and expected to vest as of December 31, 2019
|
22,707
|
|
|
$
|
19
|
|
|
5.3
|
|
$
|
590
|
|
The total intrinsic value of stock options exercised was $140 million in 2019, $90 million in 2018 and $64 million in 2017.
Non-Vested Stock
We value restricted stock awards and DSUs based on the closing trading value of our shares on the date of grant. Information related to non-vested stock awards is as follows:
|
|
|
|
|
|
|
|
|
Non-Vested
Stock Award Units
(in thousands)
|
|
Weighted Average
Grant-Date
Fair Value
|
Balance as of December 31, 2016
|
18,797
|
|
|
$
|
14
|
|
Granted
|
4,798
|
|
|
24
|
|
Vested (1)
|
(7,663
|
)
|
|
11
|
|
Forfeited
|
(683
|
)
|
|
17
|
|
Balance as of December 31, 2017
|
15,250
|
|
|
$
|
18
|
|
Granted
|
4,375
|
|
|
28
|
|
Vested (1)
|
(6,194
|
)
|
|
16
|
|
Forfeited
|
(748
|
)
|
|
22
|
|
Balance as of December 31, 2018
|
12,683
|
|
|
$
|
22
|
|
Granted
|
3,656
|
|
|
39
|
|
Vested (1)
|
(4,811
|
)
|
|
20
|
|
Forfeited
|
(449
|
)
|
|
27
|
|
Balance as of December 31, 2019
|
11,079
|
|
|
$
|
29
|
|
|
|
(1)
|
The number of restricted stock units vested includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.
|
The total vesting date fair value of stock award units that vested was approximately $193 million in 2019, $170 million in 2018 and $190 million in 2017.
Market-based DSU Awards
During 2019, 2018 and 2017, we granted market-based DSU awards to certain members of our senior management team. The number of shares ultimately issued to the recipient is based on the total stockholder return (TSR) of our common stock as compared to the TSR of the common stock of the other companies in the S&P 500 Healthcare Index over a three-year performance period. The number of DSUs ultimately granted under this program range from 0 percent to 200 percent of the target number of performance-based DSUs awarded to the participant as determined by achievement of the performance criteria of the program. In addition, award recipients must remain employed by us throughout the three-year performance period to attain the full amount of the market-based DSUs that satisfied the market performance criteria.
We determined the fair value of the market-based DSU awards to be approximately $10 million for 2019, $7 million for 2018 and $8 million for 2017. We determined these fair values based on Monte Carlo simulations as of the date of grant, utilizing the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Awards
|
|
Awards
|
|
Awards
|
Stock price on date of grant
|
$
|
40.12
|
|
|
$
|
27.09
|
|
|
$
|
24.55
|
|
Measurement period (in years)
|
2.9
|
|
|
2.9
|
|
|
2.8
|
|
Risk-free rate
|
2.48
|
%
|
|
2.36
|
%
|
|
1.45
|
%
|
We recognize the expense on these awards in our consolidated statements of operations on a straight-line basis over the three-year measurement period.
Free Cash Flow Performance-based DSU Awards
During 2019, 2018 and 2017, we granted free cash flow performance-based DSU awards to certain members of our senior management team. The attainment of these performance-based DSUs is based on our adjusted free cash flow (AFCF) measured against our internal annual financial plan performance for AFCF. AFCF is measured over a one-year performance period beginning January 1st of each year and ending December 31st. The number of DSUs ultimately granted under this program range from 0 percent to 150 percent of the target number of performance-based DSUs awarded to the participant as determined by achievement of the performance criteria of the program. In addition, award recipients must remain employed by us throughout a three-year service period (inclusive of the one-year performance period) to attain the full amount of the performance-based DSUs that satisfied the performance criteria.
The following table presents our assumptions used in determining the fair value of our AFCF awards currently expected to vest as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 AFCF
|
|
2018 AFCF
|
|
2017 AFCF
|
Fair value, net of forfeitures to date (in millions)
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
6
|
|
Achievement of target payout
|
90
|
%
|
|
118
|
%
|
|
98
|
%
|
Year-end stock price used in determining fair value
|
$
|
45.22
|
|
|
$
|
35.34
|
|
|
$
|
24.79
|
|
We recognize the expense on these awards in our consolidated statements of operations over the vesting period which is three years after the date of grant.
Expense Attribution
We recognize compensation expense for our stock incentive plan using a straight-line method over the substantive vesting period. Most of our stock awards provide for immediate vesting upon death or disability of the participant. In addition, our stock grants to employees provide for accelerated vesting of our stock-based awards, other than performance-based and market-based awards, upon retirement, if the stock award has been held for at least one year by the recipient. In accordance with the terms of our stock grants, for employees who will become retirement eligible prior to the vest date we expense stock-based awards, other than performance-based and market-based awards, over the greater of one year or the period between grant date and retirement-eligibility. The performance-based and market-based awards discussed above do not contain provisions that would accelerate the full vesting of the awards upon retirement-eligibility.
We recognize stock-based compensation expense for the value of the portion of awards that are ultimately expected to vest. FASB ASC Topic 718, Compensation – Stock Compensation allows forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. We have applied, based on an analysis of our historical forfeitures, a weighted-average annual forfeiture rate of approximately six percent to all unvested stock-based awards as of December 31, 2019, which represents the portion that we expect will be forfeited each year over the vesting period. We re-evaluate this analysis annually or more frequently if there are significant changes in circumstances and adjust the forfeiture rate as necessary. Ultimately, we will only recognize expense for those shares that vest.
Unrecognized Compensation Cost
We expect to recognize the following future expense for awards outstanding as of December 31, 2019:
|
|
|
|
|
|
|
|
Unrecognized
Compensation Cost
(in millions) (1)
|
|
Weighted Average Remaining
Vesting Period
(in years)
|
Stock options
|
$
|
35
|
|
|
|
Non-vested stock awards
|
169
|
|
|
|
|
$
|
204
|
|
|
1.2
|
|
|
(1)
|
Amounts presented represent compensation cost, net of estimated forfeitures.
|
Employee Stock Purchase Plans
Our global employee stock purchase plan provides for the granting of options to purchase up to 50 million shares of our common stock to all eligible employees. Under the global employee stock purchase plan, we grant each eligible employee, at the beginning of each six-month offering period, an option to purchase shares of our common stock equal to not more than ten percent of the employee’s eligible compensation or the statutory limit under the U.S. Internal Revenue Code. Such options may be exercised only to the extent of accumulated payroll deductions at the end of the offering period, at a purchase price equal to 85 percent of the fair market value of our common stock at the beginning or end of each offering period, whichever is less. As of December 31, 2019, there were approximately 8 million shares available for future issuance under the employee stock purchase plan.
Information related to shares issued or to be issued in connection with the employee stock purchase plan based on employee contributions and the range of purchase prices is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Shares issued or to be issued (in thousands)
|
2,196
|
|
|
2,452
|
|
|
2,491
|
|
Range of purchase prices
|
$
|
29.29
|
|
-
|
$36.47
|
|
$
|
21.49
|
|
-
|
$27.91
|
|
$
|
18.60
|
|
-
|
$21.07
|
Expense recognized (in millions)
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
13
|
|
We use the Black-Scholes option-pricing model to calculate the grant-date fair value of shares issued under the employee stock purchase plan. We recognize expense related to shares purchased through the employee stock purchase plan ratably over the offering period.
NOTE M – WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Weighted average shares outstanding - basic
|
1,391.5
|
|
|
1,381.0
|
|
|
1,370.1
|
|
Net effect of common stock equivalents
|
19.0
|
|
|
20.4
|
|
|
22.6
|
|
Weighted average shares outstanding - assuming dilution
|
1,410.6
|
|
|
1,401.4
|
|
|
1,392.7
|
|
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.
NOTE N – SEGMENT REPORTING
We have three reportable segments comprised of MedSurg, Rhythm and Neuro, and Cardiovascular, which represent an aggregation of our operating segments that generate revenues from the sale of medical devices. We measure and evaluate our reportable segments based on net sales of reportable segments, operating income of reportable segments, excluding intersegment profits, and operating income of reportable segments as a percentage of net sales of reportable segments. Operating income of reportable segments as a percentage of net sales of reportable segments is defined as operating income of reportable segments divided by net sales of reportable segments. We exclude from operating income of reportable segments certain corporate-related expenses and certain transactions or adjustments that our chief operating decision maker (CODM) considers to be non-operational, such as amounts related to amortization expense, intangible asset impairment charges, acquisition/divestitures-related items, restructuring and restructuring-related items, medical device regulation charges and litigation-related charges/(credits). Although we exclude these amounts from operating income of reportable segments, they are included in reported Income (loss) before income taxes on the consolidated statements of operations and are included in the reconciliation below.
Our seven core businesses are organized into three reportable segments: MedSurg, Rhythm and Neuro, and Cardiovascular. Following our acquisition of BTG, which closed during the third quarter of 2019, we have included BTG’s Interventional Medicine business within our Peripheral Interventions operating segment, within the Cardiovascular reportable segment. We present BTG’s Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.
A reconciliation of the totals reported for the reportable segments to the applicable line items in our accompanying consolidated statements of operations is as follows (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Net sales
|
2019
|
|
2018
|
|
2017
|
MedSurg
|
$
|
3,307
|
|
|
$
|
3,007
|
|
|
$
|
2,742
|
|
Rhythm and Neuro
|
3,140
|
|
|
3,041
|
|
|
2,808
|
|
Cardiovascular
|
4,208
|
|
|
3,777
|
|
|
3,500
|
|
Total net sales of reportable segments
|
10,654
|
|
|
9,823
|
|
|
9,048
|
|
All other (Specialty Pharmaceuticals)
|
81
|
|
|
n/a
|
|
|
n/a
|
|
Consolidated net sales
|
$
|
10,735
|
|
|
$
|
9,823
|
|
|
$
|
9,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Depreciation expense
|
2019
|
|
2018
|
|
2017
|
MedSurg
|
$
|
75
|
|
|
$
|
72
|
|
|
$
|
68
|
|
Rhythm and Neuro
|
92
|
|
|
91
|
|
|
91
|
|
Cardiovascular
|
138
|
|
|
133
|
|
|
120
|
|
Total depreciation expense of reportable segments
|
306
|
|
|
296
|
|
|
279
|
|
All other (Specialty Pharmaceuticals)
|
6
|
|
|
n/a
|
|
|
n/a
|
|
Consolidated depreciation expense
|
$
|
311
|
|
|
$
|
296
|
|
|
$
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Income (loss) before income taxes
|
2019
|
|
2018
|
|
2017
|
MedSurg
|
$
|
1,204
|
|
|
$
|
1,102
|
|
|
$
|
984
|
|
Rhythm and Neuro
|
666
|
|
|
655
|
|
|
537
|
|
Cardiovascular
|
1,137
|
|
|
1,117
|
|
|
988
|
|
Total operating income of reportable segments
|
3,007
|
|
|
2,875
|
|
|
2,509
|
|
All other (Specialty Pharmaceuticals)
|
56
|
|
|
n/a
|
|
|
n/a
|
|
Unallocated amounts:
|
|
|
|
|
|
Corporate expenses, including hedging activities
|
(264
|
)
|
|
(372
|
)
|
|
(252
|
)
|
Intangible asset impairment charges, acquisition/divestiture-related, restructuring- and restructuring-related, litigation-related net (charges) credits and EU MDR implementation costs
|
(582
|
)
|
|
(398
|
)
|
|
(407
|
)
|
Amortization expense
|
(699
|
)
|
|
(599
|
)
|
|
(565
|
)
|
Operating income (loss)
|
1,518
|
|
|
1,506
|
|
|
1,285
|
|
Other expense, net
|
(831
|
)
|
|
(85
|
)
|
|
(353
|
)
|
Income (loss) before income taxes
|
$
|
687
|
|
|
$
|
1,422
|
|
|
$
|
933
|
|
|
|
|
|
|
|
|
|
|
|
Operating income of reportable segments as a percentage of net sales of reportable segments
|
Year Ended December 31,
|
2019
|
|
2018
|
|
2017
|
MedSurg
|
36.4
|
%
|
|
36.7
|
%
|
|
35.9
|
%
|
Rhythm and Neuro
|
21.2
|
%
|
|
21.5
|
%
|
|
19.1
|
%
|
Cardiovascular
|
27.0
|
%
|
|
29.6
|
%
|
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Total assets
|
2019
|
|
2018
|
MedSurg
|
$
|
1,803
|
|
|
$
|
1,846
|
|
Rhythm and Neuro
|
1,873
|
|
|
1,696
|
|
Cardiovascular
|
2,535
|
|
|
1,954
|
|
Total assets of reportable segments
|
6,211
|
|
|
5,497
|
|
All other (Specialty Pharmaceuticals)
|
211
|
|
|
—
|
|
Goodwill
|
10,176
|
|
|
7,911
|
|
Other intangible assets, net
|
7,886
|
|
|
6,372
|
|
All other corporate assets
|
6,082
|
|
|
1,219
|
|
|
$
|
30,565
|
|
|
$
|
20,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Long-lived assets
|
2019
|
|
2018
|
|
2017
|
U.S.
|
$
|
1,148
|
|
|
$
|
1,061
|
|
|
$
|
1,065
|
|
Ireland
|
327
|
|
|
242
|
|
|
210
|
|
Other countries
|
604
|
|
|
478
|
|
|
422
|
|
Property, plant and equipment, net
|
2,079
|
|
|
1,782
|
|
|
1,697
|
|
Goodwill
|
10,176
|
|
|
7,911
|
|
|
6,998
|
|
Other intangible assets, net
|
7,886
|
|
|
6,372
|
|
|
5,837
|
|
Operating lease right-of-use assets in Other long-term assets
|
336
|
|
|
—
|
|
|
—
|
|
|
$
|
20,477
|
|
|
$
|
16,064
|
|
|
$
|
14,531
|
|
NOTE O – REVENUE
We generate revenue primarily from the sale of single-use medical devices and present revenue net of sales taxes in our consolidated statements of operations. The following tables disaggregate our revenue from contracts with customers by business and geographic region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Businesses
|
U.S.
|
|
OUS
|
|
Total
|
|
U.S.
|
|
OUS
|
|
Total
|
|
U.S.
|
|
OUS
|
|
Total
|
Endoscopy
|
$
|
1,080
|
|
|
$
|
814
|
|
|
$
|
1,894
|
|
|
$
|
980
|
|
|
$
|
781
|
|
|
$
|
1,762
|
|
|
$
|
894
|
|
|
$
|
724
|
|
|
$
|
1,619
|
|
Urology and Pelvic Health
|
1,005
|
|
|
408
|
|
|
1,413
|
|
|
864
|
|
|
381
|
|
|
1,245
|
|
|
785
|
|
|
339
|
|
|
1,124
|
|
Cardiac Rhythm Management
|
1,135
|
|
|
804
|
|
|
1,939
|
|
|
1,159
|
|
|
792
|
|
|
1,951
|
|
|
1,135
|
|
|
760
|
|
|
1,895
|
|
Electrophysiology
|
148
|
|
|
180
|
|
|
329
|
|
|
150
|
|
|
161
|
|
|
311
|
|
|
136
|
|
|
142
|
|
|
278
|
|
Neuromodulation
|
695
|
|
|
178
|
|
|
873
|
|
|
624
|
|
|
155
|
|
|
779
|
|
|
517
|
|
|
118
|
|
|
635
|
|
Interventional Cardiology
|
1,293
|
|
|
1,522
|
|
|
2,816
|
|
|
1,154
|
|
|
1,436
|
|
|
2,590
|
|
|
1,122
|
|
|
1,297
|
|
|
2,419
|
|
Peripheral Interventions
|
741
|
|
|
651
|
|
|
1,392
|
|
|
608
|
|
|
579
|
|
|
1,187
|
|
|
575
|
|
|
506
|
|
|
1,081
|
|
Specialty Pharmaceuticals
|
70
|
|
|
11
|
|
|
81
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Net Sales
|
$
|
6,167
|
|
|
$
|
4,569
|
|
|
$
|
10,735
|
|
|
$
|
5,538
|
|
|
$
|
4,286
|
|
|
$
|
9,823
|
|
|
$
|
5,162
|
|
|
$
|
3,885
|
|
|
$
|
9,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Geographic Regions
|
2019
|
|
2018
|
|
2017
|
U.S.
|
$
|
6,097
|
|
|
$
|
5,538
|
|
|
$
|
5,162
|
|
EMEA (Europe, Middle East and Africa)
|
2,264
|
|
|
2,176
|
|
|
1,940
|
|
APAC (Asia-Pacific)
|
1,898
|
|
|
1,727
|
|
|
1,587
|
|
LACA (Latin America and Canada)
|
395
|
|
|
383
|
|
|
358
|
|
Medical Devices
|
10,654
|
|
|
9,823
|
|
|
9,048
|
|
U.S.
|
70
|
|
|
n/a
|
|
|
n/a
|
|
OUS
|
11
|
|
|
n/a
|
|
|
n/a
|
|
Specialty Pharmaceuticals
|
81
|
|
|
n/a
|
|
|
n/a
|
|
Net Sales
|
$
|
10,735
|
|
|
$
|
9,823
|
|
|
$
|
9,048
|
|
|
|
|
|
|
|
Emerging Markets (1)
|
$
|
1,252
|
|
|
$
|
1,097
|
|
|
$
|
931
|
|
|
|
(1)
|
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.
|
Contract liabilities are classified within Other current liabilities and Other long-term liabilities on our accompanying consolidated balance sheets. Our deferred revenue balance was $400 million as of December 31, 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 $143 million in 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. Refer to Note A – Significant Accounting Policies for additional information on our accounting policies relating to revenue recognition.
NOTE P – CHANGES IN OTHER COMPREHENSIVE INCOME
The following table provides the reclassifications out of Other comprehensive income, 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 December 31, 2018
|
$
|
(53
|
)
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
(25
|
)
|
|
$
|
33
|
|
Other comprehensive income (loss) before reclassifications
|
228
|
|
|
116
|
|
|
—
|
|
|
(22
|
)
|
|
322
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(33
|
)
|
|
(54
|
)
|
|
—
|
|
|
2
|
|
|
(86
|
)
|
Total other comprehensive income (loss)
|
195
|
|
|
62
|
|
|
—
|
|
|
(20
|
)
|
|
237
|
|
Balance as of December 31, 2019
|
$
|
142
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
(45
|
)
|
|
$
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
—
|
|
|
96
|
|
|
—
|
|
|
(2
|
)
|
|
94
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(21
|
)
|
|
14
|
|
|
1
|
|
|
4
|
|
|
(3
|
)
|
Total other comprehensive income (loss)
|
(21
|
)
|
|
110
|
|
|
—
|
|
|
2
|
|
|
91
|
|
Balance as of December 31, 2018
|
$
|
(53
|
)
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
(25
|
)
|
|
$
|
33
|
|
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. Refer to Note A – Significant Accounting Policies for additional information.
The gains and losses on defined benefit and pension items before reclassifications and gains and losses on defined benefit and pension items reclassified from Accumulated other comprehensive income (loss), net of tax were reduced by immaterial income tax impacts in 2019 and in 2018.
NOTE Q – 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 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. We expect the adoption will have an immaterial impact 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. We expect the adoption will have an immaterial impact on our financial position and results of operations.
ASC Update No. 2018-18
In November 2018, the FASB issued ASC Update No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying The Interaction Between Topic 808 and Topic 606. The purpose of Update No. 2018-18 is to clarify the interaction between FASB ASC Topic 808 and FASB ASC Topic 606 as FASB ASC Topic 808 did not provide comprehensive recognition or measurement guidance for collaborative arrangements, and the accounting for those arrangements was often based on an analogy to other accounting literature or an accounting policy election. Update No. 2018-18 is effective for annual periods beginning after December 15, 2019. We plan to adopt Update No. 2018-18 in the first quarter of 2020. We expect the adoption will have an immaterial impact on our financial position and results of operations.
No other new accounting pronouncements, issued or effective, during the period had, or is expected to have, a material impact on our consolidated financial statements.
NOTE R - EMPLOYEE RETIREMENT PLANS
Defined Benefit Pension Plans
Domestic Retirement Plans
Following our 2006 acquisition of Guidant, we assumed the Guidant Supplemental Retirement Plan, a frozen, non-qualified defined benefit plan for certain former officers and employees of Guidant. The Guidant Supplemental Retirement Plan was partially funded through a Rabbi Trust that contains segregated company assets within restricted cash used to pay the benefit obligations related to the plan.
We also maintain an Executive Retirement Plan, a defined benefit plan covering executive officers and division presidents. Participants may retire with benefits once retirement conditions have been satisfied.
U.K. Plan
As a result of our acquisition of BTG, we assumed a benefit obligation related to a defined benefit pension plan sponsored by BTG for eligible United Kingdom (U.K.) employees (U.K. Plan). The U.K. Plan was closed to new entrants as of June 1, 2004. Prior to the acquisition close date of August 19, 2019, the Trustees of the U.K. Plan executed buy-in arrangements (Buy-in Contracts), which effectively, as structured under the Buy-in Contracts, are intended to provide payments designed to equal all future designated contractual benefit payments to covered participants. The benefit obligation of the pension plan is not transferred to the insurers, and we remain responsible for paying pension benefits. We do not anticipate any additional material contributions or payments to the U.K. Plan or the insurer.
In connection with our preliminary purchase price allocation of BTG, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following assumptions were used to measure the fair value of the benefit obligation and associated plan assets as of the August 19, 2019 measurement date:
|
|
|
|
|
|
|
|
Discount Rate
|
|
Expected Return on Plan Assets
|
|
Rate of Compensation Increase
|
U.K. Plan
|
0.4%
|
|
0.4%
|
|
3.4%
|
As of the measurement date of August 19, 2019, the funded status was as follows:
|
|
|
|
|
(in millions)
|
|
Fair value of plan assets
|
$
|
213
|
|
Benefit obligation
|
(216
|
)
|
Funded status
|
$
|
(3
|
)
|
Refer to Note B – Acquisitions and Strategic Investments for additional information on our acquisition of BTG.
Information about the U.K. Plan presented below is as of the December 31, 2019 measurement date.
Other International Retirement Plans
In addition, we maintain retirement plans covering certain international employees.
We use a December 31 measurement date for these plans and record the net unfunded and underfunded portion as a liability within non-current liabilities, with the current portion within accrued expenses, on the consolidated balance sheets, recognizing changes primarily through OCI. As of December 31, 2019 and 2018, the funded status of our plans were unfunded or underfunded in aggregate. The outstanding obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
(in millions)
|
Accumulated Benefit Obligation (ABO)
|
|
Projected
Benefit
Obligation (PBO)
|
|
Fair value of Plan Assets
|
|
Unfunded/Underfunded
PBO Recognized
|
Domestic Retirement Plans
|
$
|
50
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
54
|
|
U.K. Plan
|
212
|
|
|
212
|
|
|
209
|
|
|
3
|
|
Other International Retirement Plans
|
204
|
|
|
223
|
|
|
123
|
|
|
100
|
|
|
$
|
466
|
|
|
$
|
488
|
|
|
$
|
332
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
(in millions)
|
Accumulated Benefit Obligation (ABO)
|
|
Projected
Benefit
Obligation (PBO)
|
|
Fair value of Plan Assets
|
|
Unfunded/Underfunded PBO Recognized
|
Domestic Retirement Plans
|
$
|
47
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
International Retirement Plans
|
166
|
|
|
182
|
|
|
107
|
|
|
75
|
|
|
$
|
213
|
|
|
$
|
232
|
|
|
$
|
107
|
|
|
$
|
125
|
|
A rollforward of the changes in the PBO for our retirement plans is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
Beginning obligations
|
$
|
232
|
|
|
$
|
207
|
|
Acquired and established plans(1)
|
216
|
|
|
23
|
|
Service costs
|
15
|
|
|
14
|
|
Interest costs
|
5
|
|
|
4
|
|
Actuarial (gain) loss
|
—
|
|
|
(1
|
)
|
Plan amendments and assumption changes
|
11
|
|
|
(2
|
)
|
Benefits paid
|
(10
|
)
|
|
(10
|
)
|
Impact of foreign currency fluctuations
|
19
|
|
|
(3
|
)
|
Ending obligation
|
$
|
488
|
|
|
$
|
232
|
|
|
|
(1)
|
Plans obtained through acquisition and other increases in connection with our international operations. Refer to Note B – Acquisitions and Strategic Investments for additional information regarding the U.K. Plan we acquired with BTG on August 19, 2019.
|
The critical assumptions associated with our employee retirement plans for 2019 are as follows:
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
Weighted Average Expected Return on Plan
|
|
Weighted Average Rate of Compensation Increase(1)
|
|
|
|
Domestic Retirement Plans
|
2.94%
|
|
n/a
|
|
1.50%
|
U.K. Plan
|
0.60%
|
|
0.60%
|
|
3.00%
|
Other International Retirement Plans
|
0.75%
|
|
2.05%
|
|
2.65%
|
|
|
(1)
|
Rates of compensation increase were not weighted by the relative fair value of the instruments. As such, the amount represents the median of the inputs and is not a weighted average.
|
The critical assumptions associated with our employee retirement plans for 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
Expected Return on Plan Assets
|
|
Rate of Compensation Increase
|
Domestic Retirement Plans
|
4.00
|
%
|
-
|
4.25%
|
|
n/a
|
|
3.00%
|
International Retirement Plans
|
0.50
|
%
|
-
|
2.34%
|
|
1.90
|
%
|
-
|
4.10%
|
|
1.50
|
%
|
-
|
6.78%
|
A rollforward of the changes in the fair value of plan assets for our funded retirement plans is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
Beginning fair value
|
$
|
107
|
|
|
$
|
87
|
|
Acquired and established plans(1)
|
213
|
|
|
16
|
|
Actual return on plan assets
|
7
|
|
|
(2
|
)
|
Employer contributions
|
13
|
|
|
14
|
|
Participant contributions
|
2
|
|
|
2
|
|
Actuarial gain (loss)
|
(20
|
)
|
|
—
|
|
Benefits paid
|
(10
|
)
|
|
(10
|
)
|
Impact of foreign currency fluctuations
|
19
|
|
|
—
|
|
Ending fair value
|
$
|
332
|
|
|
$
|
107
|
|
|
|
(1)
|
Plans obtained through acquisition and other increases in connection with our international operations. Refer to Note B – Acquisitions and Strategic Investments for additional information regarding the U.K. Plan we acquired with BTG on August 19, 2019.
|
For our defined benefit plans excluding our U.K. Plan, we base our discount rate on the rates of return available on high-quality bonds with maturities approximating the expected period over which benefits will be paid. The rate of compensation increase is based on historical and expected rate increases. We base our rate of expected return on plan assets on historical experience, our investment guidelines and expectations for long-term rates of return. Our assets are invested in a variety of securities, primarily equity securities and government bonds. These securities are considered Level 1 and Level 2 investments.
For our U.K. Plan, we utilize the insurance buy-in methodology and base our discount rate on a yield curve reflective of the market pricing obtained in the most recent buy-in transaction, which occurred prior to the acquisition of BTG, and movements in market-observed buy-in pricing as of December 31, 2019. We believe this is a reasonable proxy for an effective settlement rate of the buy-in assets. The discount rate is calculated as the single equivalent assumption that gives the same value of the liabilities as if the figures were calculated using the full yield curve. We assume that all pension increases will continue to be linked to the Retail Price Inflation (RPI), both before and after retirement, for all members, with the exception of post-88 Guaranteed Minimum Pensions (GMP), which will be based on Consumer Price Inflation (CPI). We base our rate of expected return on plan assets as equal to the discount rate used to value the buy-in assets. The U.K. Plan assets' investment policy is to invest in fully matching assets. This has been achieved through the purchase of two buy-in policies (Buy-in contracts), which provide payments designed to equal all future benefit payments due from the fund. As of December 31, 2019, the Buy-in contracts represented 99% of the total plan assets, as compared to the target percentage of 100%, and are considered Level 3 investments.
The following table presents the fair value hierarchy of the U.K. Plan assets measured at fair value as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2019
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Buy-in contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
207
|
|
|
$
|
207
|
|
Cash
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total assets
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
207
|
|
|
$
|
209
|
|
Changes in the fair value of the U.K. Plan Level 3 assets were as follows:
|
|
|
|
|
(in millions)
|
Buy-in Contracts
|
Balance as of December 31, 2018
|
$
|
—
|
|
Acquired plans(1)
|
213
|
|
Actuarial gain (loss)
|
(20
|
)
|
Benefits paid
|
(4
|
)
|
Impact of foreign currency fluctuations
|
19
|
|
Balance as of December 31, 2019
|
$
|
209
|
|
|
|
(1)
|
Refer to Note B – Acquisitions and Strategic Investments for additional information regarding the U.K. Plan we acquired with BTG on August 19, 2019.
|
Defined Contribution Plan
We also sponsor a voluntary 401(k) Retirement Savings Plan for eligible employees. We match 200 percent of employee elective deferrals for the first two percent of employee eligible compensation and 50 percent of employee elective deferrals greater than two percent, but not exceeding six percent, of employee eligible compensation. Total expense for our matching contributions to the plan was $98 million in 2019, $87 million in 2018 and $79 million in 2017.
QUARTERLY RESULTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Mar 31,
|
|
June 30,
|
|
Sept 30,
|
|
Dec 31,
|
2019
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,493
|
|
|
$
|
2,631
|
|
|
$
|
2,707
|
|
|
$
|
2,905
|
|
Gross profit
|
1,763
|
|
|
1,873
|
|
|
1,930
|
|
|
2,054
|
|
Operating income (loss)
|
541
|
|
|
384
|
|
|
383
|
|
|
210
|
|
Net income (loss)
|
424
|
|
|
154
|
|
|
126
|
|
|
3,996
|
|
Net income (loss) per common share - basic
|
$
|
0.31
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
$
|
2.87
|
|
Net income (loss) per common share - assuming dilution
|
$
|
0.30
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
$
|
2.83
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,379
|
|
|
$
|
2,490
|
|
|
$
|
2,393
|
|
|
$
|
2,561
|
|
Gross profit
|
1,707
|
|
|
1,751
|
|
|
1,720
|
|
|
1,832
|
|
Operating income (loss)
|
407
|
|
|
392
|
|
|
388
|
|
|
319
|
|
Net income (loss)
|
298
|
|
|
555
|
|
|
432
|
|
|
386
|
|
Net income (loss) per common share - basic
|
$
|
0.22
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
|
$
|
0.28
|
|
Net income (loss) per common share - assuming dilution
|
$
|
0.21
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
|
$
|
0.27
|
|
Our reported results for 2019 included EU MDR implementation charges, amortization expense, intangible asset impairment charges, acquisition/divestiture-related net charges, restructuring and restructuring-related net charges, litigation-related net charges, debt extinguishment charges, certain investment impairment charges, certain deferred tax benefits and certain discrete tax items (after tax) of: $66 million in charges in the first quarter, $396 million in charges in the second quarter, $424 million in charges in the third quarter and $3,353 million of credits in the fourth quarter. These after-tax net credits consisted primarily of: deferred tax benefits of $4,102 million arising from an intra-entity asset transfer of intellectual property, partially offset by $672 million of acquisition / divestiture-related net charges primarily related to the BTG acquisition and $628 million of amortization expense.
Our reported results for 2018 included amortization expense, intangible asset impairment charges, acquisition-related net charges, restructuring and restructuring-related net charges, litigation-related net charges, certain investment impairment charges and certain discrete tax items (after tax) of: $157 million in the first quarter, $13 million in the second quarter, $53 million in the third quarter and $166 million in the fourth quarter. These after-tax net charges consisted primarily of: $328 million credit related to certain discrete tax items and $520 million of amortization expense.