Q3 2011 Form 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-11083
BOSTON SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE | 04-2695240 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address of principal executive offices) (zip code)
(508) 650-8000
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | Shares outstanding |
Class | | as of October 31, 2011 |
Common Stock, $.01 par value | | 1,481,505,741 |
TABLE OF CONTENTS
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
in millions, except per share data | 2011 | | 2010 | | 2011 | | 2010 |
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Net sales | $ | 1,874 |
| | $ | 1,916 |
| | $ | 5,774 |
| | $ | 5,804 |
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Cost of products sold | 680 |
| | 623 |
| | 1,999 |
| | 1,939 |
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Gross profit | 1,194 |
| | 1,293 |
| | 3,775 |
| | 3,865 |
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Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 629 |
| | 634 |
| | 1,866 |
| | 1,897 |
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Research and development expenses | 229 |
| | 230 |
| | 665 |
| | 714 |
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Royalty expense | 36 |
| | 39 |
| | 140 |
| | 147 |
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Amortization expense | 97 |
| | 129 |
| | 325 |
| | 381 |
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Goodwill impairment charges |
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| | 697 |
| | 1,817 |
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Intangible asset impairment charges | 9 |
| | 5 |
| | 21 |
| | 65 |
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Contingent consideration expense | 6 |
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| | 18 |
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Acquisition-related milestone |
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| | (250 | ) |
Restructuring charges | 22 |
| | 5 |
| | 77 |
| | 98 |
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Gain on divestiture | (8 | ) | |
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| | (768 | ) | |
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| 1,020 |
| | 1,042 |
| | 3,041 |
| | 4,869 |
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Operating income (loss) | 174 |
| | 251 |
| | 734 |
| | (1,004 | ) |
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Other income (expense): | | | | | | | |
Interest expense | (62 | ) | | (91 | ) | | (210 | ) | | (286 | ) |
Other, net | (1 | ) | | 3 |
| | 18 |
| | (2 | ) |
Income (loss) before income taxes | 111 |
| | 163 |
| | 542 |
| | (1,292 | ) |
Income tax (benefit) expense | (31 | ) | | (27 | ) | | 208 |
| | 9 |
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Net income (loss) | $ | 142 |
| | $ | 190 |
| | $ | 334 |
| | $ | (1,301 | ) |
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Net income (loss) per common share — basic | $ | 0.09 |
| | $ | 0.13 |
| | $ | 0.22 |
| | $ | (0.86 | ) |
Net income (loss) per common share — assuming dilution | $ | 0.09 |
| | $ | 0.12 |
| | $ | 0.22 |
| | $ | (0.86 | ) |
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Weighted-average shares outstanding | | | | | | | |
Basic | 1,514.4 |
| | 1,519.8 |
| | 1,523.1 |
| | 1,517.0 |
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Assuming dilution | 1,524.0 |
| | 1,529.3 |
| | 1,532.0 |
| | 1,517.0 |
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See notes to the unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| As of |
| September 30, | | December 31, |
in millions, except share and per share data | 2011 | | 2010 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 276 |
| | $ | 213 |
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Trade accounts receivable, net | 1,237 |
| | 1,320 |
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Inventories | 972 |
| | 894 |
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Deferred income taxes | 409 |
| | 429 |
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Assets held for sale | 5 |
| | 576 |
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Prepaid expenses and other current assets | 314 |
| | 183 |
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Total current assets | 3,213 |
| | 3,615 |
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Property, plant and equipment, net | 1,684 |
| | 1,697 |
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Goodwill | 9,769 |
| | 10,186 |
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Other intangible assets, net | 6,564 |
| | 6,343 |
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Other long-term assets | 272 |
| | 287 |
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| $ | 21,502 |
| | $ | 22,128 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current debt obligations | $ | 4 |
| | $ | 504 |
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Accounts payable | 256 |
| | 184 |
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Accrued expenses | 1,296 |
| | 1,626 |
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Other current liabilities | 331 |
| | 295 |
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Total current liabilities | 1,887 |
| | 2,609 |
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Long-term debt | 4,259 |
| | 4,934 |
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Deferred income taxes | 1,854 |
| | 1,644 |
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Other long-term liabilities | 1,981 |
| | 1,645 |
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Commitments and contingencies |
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Stockholders’ equity | | | |
Preferred stock, $.01 par value - authorized 50,000,000 shares, none issued and outstanding | | | |
Common stock, $.01 par value - authorized 2,000,000,000 shares; issued 1,531,013,482 shares as of September 30, 2011 and 1,520,780,112 shares as of December 31, 2010 | 15 |
| | 15 |
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Treasury stock, at cost - 30,000,000 shares as of September 30, 2011 | (192 | ) | | |
Additional paid-in capital | 16,318 |
| | 16,232 |
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Accumulated deficit | (4,488 | ) | | (4,822 | ) |
Accumulated other comprehensive loss, net of tax | (132 | ) | | (129 | ) |
Total stockholders’ equity | 11,521 |
| | 11,296 |
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| $ | 21,502 |
| | $ | 22,128 |
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See notes to the unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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| Nine Months Ended September 30, |
in millions | 2011 | | 2010 |
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Cash provided by (used for) operating activities | $ | 659 |
| | $ | (124 | ) |
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Investing activities: | | | |
Purchases of property, plant and equipment, net of proceeds | (221 | ) | | (209 | ) |
Proceeds from sales of publicly traded and privately held equity securities and collections of notes receivable | 2 |
| | 1 |
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Payments for acquisitions of businesses, net of cash acquired | (370 | ) | |
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Payments relating to prior-period acquisitions |
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| | (4 | ) |
Payments for investments in companies and acquisitions of certain technologies | (10 | ) | | (5 | ) |
Proceeds from business divestitures, net of costs | 1,426 |
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Cash provided by (used for) investing activities | 827 |
| | (217 | ) |
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Financing activities: | | | |
Proceeds from long-term borrowings, net of debt issuance costs |
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| | 973 |
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Payments on long-term borrowings | (1,250 | ) | | (900 | ) |
Proceeds from borrowings on credit facilities | 425 |
| | 200 |
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Payments on borrowings from credit facilities | (425 | ) | | (200 | ) |
Payments for acquisitions of treasury stock | (192 | ) | | |
Proceeds from issuances of shares of common stock | 22 |
| | 28 |
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Cash (used for) provided by financing activities | (1,420 | ) | | 101 |
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Effect of foreign exchange rates on cash | (3 | ) | |
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Net increase (decrease) in cash and cash equivalents | 63 |
| | (240 | ) |
Cash and cash equivalents at beginning of period | 213 |
| | 864 |
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Cash and cash equivalents at end of period | $ | 276 |
| | $ | 624 |
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Supplemental Information | | | |
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Non-cash operating activities: | | | |
Stock-based compensation expense | $ | 96 |
| | $ | 122 |
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See notes to the unaudited condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our 2010 Annual Report filed on Form 10-K.
We have reclassified certain prior year amounts to conform to the current year’s presentation. See Note M – Segment Reporting for further details.
Subsequent Events
We evaluate events occurring after the date of our most recent accompanying unaudited condensed consolidated balance sheets for potential recognition or disclosure in our financial statements. We did not identify any material subsequent events requiring adjustment to our accompanying unaudited condensed consolidated financial statements (recognized subsequent events) for the three and nine month periods ended September 30, 2011. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note K - Commitments and Contingencies for more information.
NOTE B – ACQUISITIONS
During the first quarter of 2011, we completed several acquisitions as part of our priority growth initiatives, targeting the areas of structural heart therapy, deep-brain stimulation, peripheral vascular disease, and atrial fibrillation. Our consolidated financial statements include the operating results for each acquired entity from its respective date of acquisition. We do not present pro forma financial information for these acquisitions given their results are not material to our consolidated financial statements.
Sadra Medical, Inc.
On January 4, 2011, we completed the acquisition of the remaining fully diluted equity of Sadra Medical, Inc. Prior to the acquisition, we held a 14 percent equity ownership in Sadra. Sadra is developing a fully repositionable and retrievable device for percutaneous aortic valve replacement to treat patients with severe aortic stenosis. The acquisition was intended to broaden and diversify our product portfolio by expanding into the structural heart market. We are integrating the operations of the Sadra business into our Interventional Cardiology division. We paid $193 million, net of cash acquired, at the closing of the transaction using cash on hand to acquire the remaining 86 percent of Sadra, and may be required to pay future consideration up to $193 million through 2016 that is contingent upon the achievement of certain regulatory- and revenue-based milestones.
Intelect Medical, Inc.
On January 5, 2011, we completed the acquisition of the remaining fully diluted equity of Intelect Medical, Inc. Prior to the acquisition, we held a 15 percent equity ownership in Intelect. Intelect is developing advanced visualization and programming technology for deep-brain stimulation. We have integrated the operations of the Intelect business into our Neuromodulation division. The acquisition was intended to leverage the core architecture of our VerciseTM platform and advance our technology in the field of deep-brain stimulation. We paid $60 million at the closing of the transaction using cash on hand to acquire the remaining 85 percent of Intelect. There is no contingent consideration related to the Intelect acquisition.
ReVascular Therapeutics, Inc.
On February 15, 2011, we completed the acquisition of 100 percent of the fully diluted equity of ReVascular Therapeutics, Inc. (RVT). RVT has developed an intraluminal chronic total occlusion crossing device enabling endovascular treatment in cases that typically cannot be treated with standard endovascular devices. This acquisition complements our portfolio of devices for lower extremity peripheral artery disease and we have integrated the operations of RVT into our Peripheral Interventions business. We paid $19 million at the closing of the transaction and may be required to pay future consideration up to $16 million through 2014 that is contingent upon the achievement of certain regulatory- and commercialization-based milestones and revenue.
Atritech, Inc.
On March 3, 2011, we completed the acquisition of 100 percent of the fully diluted equity of Atritech, Inc. Atritech has developed
a device designed to close the left atrial appendage of the heart. The WATCHMAN® Left Atrial Appendage Closure Technology, developed by Atritech, is the first device proven to offer an alternative to anticoagulant drugs for patients with atrial fibrillation and at high risk for stroke. The acquisition was intended to broaden our portfolio of less-invasive devices for cardiovascular care by expanding into the areas of atrial fibrillation and structural heart therapy. We are integrating the operations of the Atritech business into our existing business, leveraging expertise from both our Electrophysiology and Interventional Cardiology divisions in the commercialization of the WATCHMAN® device. We paid $98 million, net of cash acquired, at the closing of the transaction and may be required to pay future consideration up to $275 million through 2015 that is contingent upon achievement of certain regulatory-based milestones and revenue.
Purchase Price Allocation
The components of the aggregate preliminary purchase price as of the acquisition date for acquisitions consummated in the first quarter and first nine months of 2011 are as follows (in millions):
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Cash, net of cash acquired | $ | 370 |
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Fair value of contingent consideration | 287 |
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Prior investments | 55 |
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| $ | 712 |
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As of the respective acquisition dates, we recorded total contingent consideration liabilities of $287 million, representing the estimated fair value of the contingent consideration we expected to pay to the former shareholders of the acquired companies based upon the achievement of certain regulatory- and commercialization-related milestones and revenue. The fair value of the contingent consideration liabilities was estimated by discounting, to present value, contingent payments expected to be made. In certain circumstances, we utilized a probability-weighted approach to determine the fair value of contingent consideration related to the expected achievement of milestones. We used risk-adjusted discount rates ranging from two to 20 percent to derive the fair value of the expected obligations, which we believe are appropriate and representative of market participant assumptions.
Prior to our acquisition of the remaining equity ownership in Sadra and Intelect, we held equity interests in these companies of 14 and 15 percent, respectively, carried at an aggregate value of $11 million, and a note receivable carried at a value of $6 million. As a result of re-measuring these investments to fair value, estimated at $55 million as of the respective acquisition dates, we recorded a gain of $38 million in other, net in the accompanying unaudited condensed consolidated statements of operations during the first quarter of 2011.
We accounted for these acquisitions as business combinations and, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards CodificationTM (ASC) Topic 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following summarizes the aggregate preliminary purchase price allocation as of September 30, 2011 (in millions):
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Goodwill | $ | 271 |
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Amortizable intangible assets | 97 |
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Indefinite-lived intangible assets | 468 |
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Deferred income taxes | (124 | ) |
| $ | 712 |
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Transaction costs associated with these acquisitions were expensed as incurred through selling, general and administrative costs in the accompanying unaudited condensed consolidated statements of operations and were not material for the three and nine months ended September 30, 2011.
We allocated the aggregate preliminary purchase price to specific intangible asset categories as of September 30, 2011 as follows:
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| Amount Assigned (in millions) | | Weighted Average Amortization Period (in years) | | Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation |
Amortizable intangible assets | | | | | |
Technology - core | $ | 77 |
| | 7.0 |
| | 22.6 | % |
Technology - developed | 20 |
| | 9.0 |
| | 25.0 | % |
| 97 |
| | 7.4 |
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Indefinite-lived intangible assets | | | | | |
Purchased research and development | 468 |
| | | | 23.6% - 30.0% |
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| $ | 565 |
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Core technology consists of technical processes, intellectual property, and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. Developed technology represents the value associated with marketed products that have received regulatory approval. The amortizable intangible assets are being amortized on a straight-line basis over their assigned estimated useful lives.
Purchased research and development represents the estimated fair value of acquired in-process research and development projects which have not yet reached technological feasibility. These indefinite-lived intangible assets will be tested for impairment on an annual basis, or more frequently if impairment indicators are present, in accordance with U.S. GAAP and our accounting policies described in our 2010 Annual Report filed on Form 10-K, and amortization of the purchased research and development will begin upon completion of the related projects. During the second quarter of 2011, as a result of changes in the timing and amount of the expected cash flows related to certain acquired in-process research and development projects, we tested the related intangible assets for impairment and recorded a $12 million intangible asset impairment charge in the accompanying unaudited condensed consolidated statements of operations. We performed our annual impairment testing during the third quarter of 2011 and did not identify any in-process research and development assets whose carrying values exceeded their fair values. We estimate that the total cost to complete the in-process research and development programs acquired in the first quarter of 2011 is between $150 million and $200 million and expect material net cash inflows from the products in development to commence in 2014-2016, following the respective launches of these technologies in the U.S. and our Europe/Middle East/Africa (EMEA) region.
We believe that the estimated intangible asset values represent the fair value at the date of each acquisition and do not exceed the amount a third party would pay for the assets. We used the income approach, specifically the discounted cash flow method and excess earnings method, to derive the fair value of the amortizable intangible assets and purchased research and development. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurements and Disclosures.
We recorded the excess of the aggregate preliminary purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is non-deductible for tax purposes. Goodwill was established due primarily to revenue and cash flow projections associated with future technologies, as well as synergies expected to be gained from the integration of these businesses into our existing operations, and has been allocated to our reportable segments based on the relative expected benefit from the business combinations, as follows (in millions):
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U.S. | $ | 158 |
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EMEA | 105 |
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Inter-Continental | 7 |
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Japan | 1 |
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| $ | 271 |
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Contingent Payments Related to Prior-Period Acquisitions
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets or obtaining regulatory approvals. We did not make any payments related to prior-period
acquisitions during the first nine months of 2011, and made payments of $4 million during the first nine months of 2010. As of September 30, 2011, the estimated maximum potential amount of future contingent consideration (undiscounted) that we could be required to make associated with acquisitions consummated prior to 2009 is approximately $260 million. In accordance with accounting guidance applicable at the time we completed those acquisitions, we do not recognize a liability until the contingency is resolved and consideration is issued or becomes issuable. Topic 805 requires the recognition of a liability equal to the expected fair value of future contingent payments at the acquisition date for all acquisitions consummated after January 1, 2009. For those acquisitions completed after 2008, we recorded contingent liabilities representing the estimated fair value of the contingent consideration we expected to pay to the former shareholders of the acquired companies as of the respective acquisition dates. We re-measure these liabilities each reporting period, and report changes in the fair value through a separate line item within our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from accretion of the liability due to the passage of time; changes in the timing and amount of revenue estimates; changes in the expected probability and timing of achieving regulatory or commercialization milestones; changes in discount rates; or payments.
In connection with our first quarter 2011 business combinations, we recorded liabilities of $287 million during the first quarter of 2011, representing the estimated fair value of contingent payments expected to be made at the respective acquisition dates, and recorded expense of $3 million in the third quarter of 2011 and $12 million during the first nine months of 2011 representing the increase in the fair value of these obligations between the respective acquisition dates and September 30, 2011. In addition, related to our 2010 business combinations, we recorded net contingent consideration expense of $3 million in the third quarter of 2011 and $6 million for the nine months ended September 30, 2011, representing the increase in fair value of contingent obligations. The maximum amount of future contingent consideration (undiscounted) that we could be required to make associated with acquisitions completed after 2008 is approximately $760 million. Included in the accompanying unaudited condensed consolidated balance sheets is accrued contingent consideration of $376 million as of September 30, 2011 and $71 million as of December 31, 2010.
Acquisition-related Milestone
In connection with Abbott Laboratories’ 2006 acquisition of Guidant Corporation’s vascular intervention and endovascular solutions businesses, Abbott agreed to pay us a milestone payment of $250 million upon receipt of an approval from the Japanese Ministry of Health, Labor and Welfare (MHLW) to market the XIENCE V® stent system in Japan. The MHLW approved the XIENCE V® stent system and we received the milestone payment from Abbott in the first quarter of 2010, which was recorded as a gain in the accompanying unaudited condensed consolidated statements of operations.
NOTE C – DIVESTITURES AND ASSETS HELD FOR SALE
In January 2011, we closed the sale of our Neurovascular business to Stryker Corporation for a purchase price of $1.5 billion in cash. We received $1.450 billion at closing, including upfront payments of $1.426 billion, and $24 million which was placed into escrow to be released upon the completion of local closings in certain foreign jurisdictions, of which we had received approximately $10 million as of September 30, 2011. We will also receive an additional $50 million contingent upon the transfer or separation of certain manufacturing facilities, which we expect will be completed over the next 24 months. We are providing transitional services to Stryker through transition services agreements, and will also supply products to Stryker through supply agreements. These transition services and supply agreements are expected to be effective for a period of approximately 24 months from the date of divestiture, subject to extension. Due to our continuing involvement in the operations of the Neurovascular business, the divestiture does not meet the criteria for presentation as a discontinued operation. We acquired the Neurovascular business in 1997 with our acquisition of Target Therapeutics. The 2010 revenues generated by the Neurovascular business were $340 million, or approximately four percent of our 2010 consolidated net sales. We continue to generate net sales pursuant to our supply and distribution agreements with Stryker; however, these net sales are at significantly lower levels and at reduced gross profit margins as compared to periods prior to the divestiture.
In accordance with ASC Topic 360-10-45, Impairment or Disposal of Long Lived Assets, we have presented separately the assets of the Neurovascular business transferred to Stryker at the closing of the transaction as ‘assets held for sale’ in the accompanying unaudited condensed consolidated balance sheets for both periods presented. Pursuant to the divestiture agreement, Stryker did not assume any liabilities recorded as of the closing date associated with the Neurovascular business. The assets held for sale included in the accompanying unaudited condensed consolidated balance sheets attributable to the divestiture consist of the following:
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| As of |
(in millions) | September 30, 2011 | | December 31, 2010 |
Inventories | $ | 2 |
| | $ | 30 |
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Property, plant and equipment, net |
| | 4 |
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Goodwill |
| | 478 |
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Other intangible assets, net |
| | 59 |
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| $ | 2 |
| | $ | 571 |
|
We also classified as ‘assets held for sale’ certain property, plant and equipment unrelated to the Neurovascular business that we intend to sell within the next twelve months having a net book value of $3 million as of September 30, 2011 and $5 million as of December 31, 2010.
As of September 30, 2011, the assets classified as ‘assets held for sale’ related to the Neurovascular divestiture represent inventories that will transfer to Stryker upon the completion of local closings in certain foreign jurisdictions. We recorded a pre-tax gain of $760 million ($530 million after-tax) during the first quarter of 2011 associated with the closing of the transaction. We also deferred a gain of $27 million in the accompanying unaudited condensed consolidated balance sheets to be recognized upon the release of escrowed funds and the performance of certain activities under the transition services agreements. During the third quarter of 2011, we recognized $8 million of this deferred gain and expect to recognize the remaining $19 million throughout 2011 and 2012.
NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill Impairment Charges
2011 Charge
We test our April 1 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. Based on market information that became available to us toward the end of the first quarter of 2011, we concluded that there was a reduction in the estimated size of the U.S. implantable cardioverter defibrillator (ICD) market, which led to lower projected U.S. Cardiac Rhythm Management (CRM) results compared to prior forecasts and created an indication of potential impairment of the goodwill balance attributable to our U.S. CRM business unit. Therefore, we performed an interim impairment test in accordance with U.S. GAAP and our accounting policies and recorded a non-deductible goodwill impairment charge of $697 million, on both a pre-tax and after-tax basis, associated with this business unit during the first quarter of 2011.
We used the income approach, specifically the discounted cash flow (DCF) method, to derive the fair value of the U.S. CRM reporting unit, as described in our accounting policies in our 2010 Annual Report filed on Form 10-K. We updated all aspects of the DCF model associated with the U.S. CRM business, including the amount and timing of future expected cash flows, terminal value growth rate and the appropriate market-participant risk-adjusted weighted average cost of capital (WACC) to apply.
As a result of physician reaction to study results published by the Journal of the American Medical Association regarding evidence-based guidelines for ICD implants and U.S. Department of Justice (DOJ) investigations into hospitals’ ICD implant practices and the expansion of Medicare recovery audits, among other factors, we estimated the U.S. CRM market would experience negative growth rates in the mid-single digits in 2011, as compared to 2010. Due to these estimated near-term market reductions, as well as the economic impact of physician alignment to hospitals, recent demographic information released by the American Heart Association indicating a lower prevalence of heart failure, and increased competitive and other pricing pressures, we lowered our estimated average U.S. CRM net sales growth rates within our 15-year DCF model from the mid-single digits to the low-single digits. Partially offsetting these factors are increased levels of profitability as a result of cost-reduction initiatives and process efficiencies within the U.S. CRM business, including those associated with our 2011 Restructuring plan, described in Note G - Restructuring-related Activities. The impact of the reduction in the size of the U.S. ICD market, and the related reduction in our forecasted 2011 U.S. CRM net sales, as well as the change in our expected sales growth rates thereafter as a result of the trends noted above were the key factors contributing to the first quarter 2011 goodwill impairment charge.
In the second quarter of 2011, we performed our annual goodwill impairment test for all of our reporting units. In conjunction with our annual test, the fair value of each reporting unit exceeded its carrying value, with the exception of our U.S. CRM reporting unit. Based on the remaining book value of our U.S. CRM reporting unit following the goodwill impairment charge recorded during the first quarter of 2011, the carrying value of our U.S. CRM reporting unit exceeded its fair value, due primarily to the value of amortizable intangible assets allocated to this reporting unit. The remaining book value of our U.S. CRM amortizable
intangible assets was approximately $3.3 billion as of September 30, 2011. In accordance with ASC Topic 350, Intangibles – Goodwill and Other and our accounting policies, we tested our U.S. CRM amortizable intangible assets for impairment on an undiscounted cash flow basis as of March 31, 2011, in conjunction with the goodwill impairment charge, and determined that these assets were not impaired. The assumptions used in our annual goodwill impairment test performed during the second quarter of 2011 related to our U.S. CRM reporting unit were substantially consistent with those used in our first quarter interim impairment test; therefore, it was not deemed necessary to proceed to the second step of the impairment test.
We continue to identify four reporting units with a material amount of goodwill that are at higher risk of potential failure of the first step of the impairment test in future reporting periods. These reporting units include our U.S. CRM reporting unit, which holds $782 million of allocated goodwill; our U.S. Cardiovascular reporting unit, which holds $2.3 billion of allocated goodwill; our U.S. Neuromodulation reporting unit, which holds $1.3 billion of allocated goodwill; and our EMEA region, which holds $4.0 billion of allocated goodwill, each as of September 30, 2011. As of the most recent assessment, the level of excess fair value over carrying value for these reporting units identified as being at higher risk (with the exception of the U.S. CRM reporting unit, whose carrying value continues to exceed its fair value) ranged from approximately eight percent to 15 percent. On a quarterly basis, we monitor the key drivers of fair value for these reporting units to detect events or other changes that would warrant an interim impairment test. The key variables that drive the cash flows of our reporting units are estimated revenue growth rates, levels of profitability and terminal value growth rate assumptions, as well as the WACC rate applied. These assumptions are subject to uncertainty, including our ability to grow revenue and improve profitability levels. For each of these reporting units, relatively small declines in the future performance and cash flows of the reporting unit or small changes in other key assumptions may result in the recognition of significant goodwill impairment charges. For example, keeping all other variables constant, a 50 basis point increase in the WACC applied to the reporting units, excluding acquisitions, would require that we perform the second step of the goodwill impairment test for our U.S. CRM reporting unit, and a 100 basis point increase would require that we perform the second step of the goodwill impairment test for our U.S. Neuromodulation, U.S. Cardiovascular and EMEA reporting units. In addition, keeping all other variables constant, a 100 basis point decrease in perpetual growth rates would require that we perform the second step of the goodwill impairment test for our U.S. CRM reporting unit, and a 200 basis point decrease in perpetual growth rates would require that we perform the second step of the goodwill impairment test for our U.S. Neuromodulation and EMEA reporting units. The estimates used for our future cash flows and discount rates represent management's best estimates, which we believe to be reasonable, but future declines in the business performance of our reporting units may impair the recoverability of our goodwill balance. Future events that could have a negative impact on the fair value of the reporting units include, but are not limited to:
| |
• | decreases in estimated market sizes or market growth rates due to greater-than-expected declines in procedural volumes, pricing pressures, product actions, product sales mix, disruptive technology developments, government cost containment initiatives and healthcare reforms, and/or other economic or regulatory conditions; |
| |
• | declines in our market share and penetration assumptions due to increased competition, an inability to develop or launch new products, and market and/or regulatory conditions that may cause significant launch delays or product recalls; |
| |
• | decreases in our profitability due to an inability to successfully implement and achieve timely and sustainable cost improvement measures consistent with our expectations, increases in our market-participant tax rate, and/or changes in tax laws; |
| |
• | declines in revenue as a result of loss of key members of our sales force and other key personnel; |
| |
• | negative developments in intellectual property litigation that may impact our ability to market certain products or increase our costs to sell certain products; |
| |
• | the level of success of on-going and future research and development efforts and increases in the research and development costs necessary to obtain regulatory approvals and launch new products; |
| |
• | increases in our market-participant risk-adjusted WACC; and |
| |
• | changes in the structure of our business as a result of future reorganizations or divestitures of assets or businesses. |
Negative changes in one or more of these factors could result in additional impairment charges.
2010 Charge
The ship hold and product removal actions associated with our U.S. ICD and cardiac resynchronization therapy defibrillator (CRT-D) products, which we announced on March 15, 2010, and the forecasted corresponding financial impact on our operations created an indication of potential impairment of the goodwill balance attributable to our U.S. CRM reporting unit during the first quarter
of 2010. Therefore, we performed an interim impairment test in accordance with U.S. GAAP and our accounting policies and recorded an estimated non-deductible goodwill impairment charge of $1.817 billion, on both a pre-tax and after-tax basis, associated with our U.S. CRM reporting unit.
Intangible Asset Impairment Charges
2011 Charges
During the third quarter of 2011, we recorded a $9 million intangible asset impairment charge attributable to lower projected cash flows associated with certain technologies. During the second quarter of 2011, we recorded a $12 million intangible asset impairment charge associated with changes in the timing and amount of the expected cash flows related to certain acquired in-process research and development projects. We have recorded these amounts in the intangible asset impairment charges caption in our accompanying unaudited condensed consolidated statements of operations. We do not believe that these impairments, or the factors causing these impairments, will have a material impact on our future operations or cash flows.
2010 Charges
During the first quarter of 2010, due to lower than anticipated net sales of one of our Peripheral Interventions technology offerings, as well as changes in our expectations of future market acceptance of this technology, we lowered our sales forecasts associated with the product. In addition, during the third quarter of 2010, as part of our initiatives to reprioritize and diversify our product portfolio, we discontinued one of our internal research and development programs to focus on those with a higher likelihood of success. As a result of these factors, and in accordance with U.S. GAAP and our accounting policies, we tested the related intangible assets for impairment and recorded a $60 million charge in the first quarter of 2010 and a $5 million charge in the third quarter of 2010 to write down the balance of these intangible assets to their fair value. We recorded these amounts in the intangible asset impairment charges caption in our accompanying unaudited condensed consolidated statements of operations. We do not believe that these impairments, or the factors causing these impairments, will have a material impact on our future operations or cash flows.
NOTE E – FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We develop, manufacture and sell medical devices globally and our earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates and interest rates. We address these risks through a risk management program that includes the use of derivative financial instruments, and operate the program pursuant to documented corporate risk management policies. We recognize all derivative financial instruments in our consolidated financial statements at fair value in accordance with ASC Topic 815, Derivatives and Hedging. In accordance with 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 (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Our derivative instruments do not subject our earnings or cash flows to material risk, as gains and losses on these derivatives generally offset losses and gains on the item being hedged. We do not enter into derivative transactions for speculative purposes and we do not have any non-derivative instruments that are designated as hedging instruments pursuant to Topic 815.
Currency Hedging
We are exposed to currency risk consisting primarily of foreign currency denominated monetary assets and liabilities, forecasted foreign currency denominated intercompany and third-party transactions and net investments in certain subsidiaries. We manage our exposure to changes in foreign currency exchange rates on a consolidated basis to take advantage of offsetting transactions. We use both derivative instruments (currency forward and option contracts), and non-derivative transactions (primarily European manufacturing and distribution operations) to reduce the risk that our earnings and cash flows associated with these foreign currency denominated balances and transactions will be adversely affected by foreign currency exchange rate changes.
Designated Foreign Currency Hedges
All of our designated currency hedge contracts outstanding as of September 30, 2011 and December 31, 2010 were cash flow hedges under Topic 815 intended to protect the U.S. dollar value of our forecasted foreign currency denominated transactions. We record the effective portion of any change in the fair value of foreign currency cash flow hedges in other comprehensive income (OCI) until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the foreign currency cash flow hedge to earnings. In the event the hedged forecasted transaction
does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had currency derivative instruments designated as cash flow hedges outstanding in the contract amount of $2.302 billion as of September 30, 2011 and $2.679 billion as of December 31, 2010.
We recognized net losses of $28 million in earnings on our cash flow hedges during the third quarter of 2011 and $74 million for the first nine months of 2011, as compared to net gains of $5 million during the third quarter of 2010 and net losses of $22 million for the first nine months of 2010. All currency cash flow hedges outstanding as of September 30, 2011 mature within 36 months. As of September 30, 2011, $74 million of net losses, net of tax, were recorded in accumulated other comprehensive income (AOCI) to recognize the effective portion of the fair value of any currency derivative instruments that are, or previously were, designated as foreign currency cash flow hedges, as compared to net losses of $71 million as of December 31, 2010. As of September 30, 2011, $48 million of net losses, net of tax, may be reclassified to earnings within the next twelve months.
The success of our hedging program depends, in part, on forecasts of transaction activity in various currencies (primarily Japanese yen, Euro, British pound sterling, Australian dollar and Canadian dollar). We may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activity during periods of currency volatility. In addition, changes in foreign currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Non-designated Foreign Currency Contracts
We use currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under Topic 815; are marked-to-market with changes in fair value recorded to earnings; and are entered into for periods consistent with currency transaction exposures, generally one to six months. We had currency derivative instruments not designated as hedges under Topic 815 outstanding in the contract amount of $1.872 billion as of September 30, 2011 and $2.398 billion as of December 31, 2010.
Interest Rate Hedging
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We have historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates by converting floating-rate debt into fixed-rate debt or fixed-rate debt into floating-rate debt.
We designate these derivative instruments either as fair value or cash flow hedges under Topic 815. We record changes in the value of fair value hedges in interest expense, which is generally offset by changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest rate derivative instruments are included in interest expense. We record the effective portion of any change in the fair value of derivative instruments designated as cash flow hedges as unrealized gains or losses in OCI, net of tax, until the hedged cash flow occurs, at which point the effective portion of any gain or loss is reclassified to earnings. We record the ineffective portion of our cash flow hedges in interest expense. In the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time. In the first quarter of 2011, we entered interest rate derivative contracts having a notional amount of $850 million to convert fixed-rate debt into floating-rate debt, which we designated as fair value hedges.We terminated these hedges during the third quarter of 2011 and received total proceeds of approximately $80 million, which included approximately $5 million of accrued interest receivable. The carrying amount of our $850 million senior notes maturing in January 2020 include unamortized gains of $74 million as of September 30, 2011, related to the terminated interest rate derivative contracts, which represents the effective portion of these contracts as of the termination date, less amounts amortized. We will amortize this gain into earnings as a reduction of interest expense over the remaining term of the hedged debt, in accordance with Topic 815. We had no interest rate derivative contracts outstanding as of September 30, 2011 or December 31, 2010.
In prior years, we terminated certain interest rate derivative contracts, including fixed-to-floating interest rate contracts, designated as fair value hedges, and floating-to-fixed treasury locks, designated as cash flow hedges. We are amortizing the gains and losses of these derivative instruments upon termination into earnings over the term of the hedged debt. The carrying amount of certain of our senior notes included unamortized gains of $2 million as of September 30, 2011 and December 31, 2010, and unamortized losses of $4 million as of September 30, 2011 and $5 million as of December 31, 2010, related to the fixed-to-floating interest rate contracts. In addition, we had pre-tax net gains within AOCI related to terminated floating-to-fixed treasury locks of $7 million as of September 30, 2011 and $8 million as of December 31, 2010.
During the third quarter and first nine months of 2011, we recognized in earnings less than $1 million of net gains related to our previously terminated interest rate derivative contracts. As of September 30, 2011, we had $4 million of net gains, net of tax, recorded in AOCI to recognize the effective portion of these instruments, as compared to $5 million of net gains as of December
31, 2010. As of September 30, 2011, less than $1 million of net gains, net of tax, may be reclassified to earnings within the next twelve months from amortization of our previously terminated interest rate derivative contracts.
Counterparty Credit Risk
We do not have significant concentrations of credit risk arising from our derivative financial instruments, whether from an individual counterparty or a related group of counterparties. We manage our concentration of counterparty credit risk on our derivative instruments by limiting acceptable counterparties to a diversified group of major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to each counterparty, and by actively monitoring their credit ratings and outstanding fair values on an on-going basis. Furthermore, none of our derivative transactions are subject to collateral or other security arrangements and none contain provisions that are dependent on our credit ratings from any credit rating agency.
We also employ master netting arrangements that reduce our counterparty payment settlement risk on any given maturity date to the net amount of any receipts or payments due between us and the counterparty financial institution. Thus, the maximum loss due to credit risk by counterparty is limited to the unrealized gains in such contracts net of any unrealized losses should any of these counterparties fail to perform as contracted. Although these protections do not eliminate concentrations of credit risk, as a result of the above considerations, we do not consider the risk of counterparty default to be significant.
Fair Value of Derivative Instruments
The following presents the effect of our derivative instruments designated as cash flow hedges under Topic 815 on our accompanying unaudited condensed consolidated statements of operations during the third quarter and first nine months of 2011 and 2010 (in millions):
|
| | | | | | | | | |
| Amount of Pre-tax Gain (Loss) Recognized in OCI (Effective Portion) | | Amount of Pre-tax Gain (Loss) Reclassified from AOCI into Earnings (Effective Portion) | | Location in Statement of Operations |
Three Months Ended September 30, 2011 | | | | | |
Currency hedge contracts | $ | 29 |
| | $ | (28 | ) | | Cost of products sold |
| $ | 29 |
| | $ | (28 | ) | | |
Three Months Ended September 30, 2010 | | | | | |
Interest rate hedge contracts |
| | $ | 1 |
| | Interest expense |
Currency hedge contracts | $ | (173 | ) | | 5 |
| | Cost of products sold |
| $ | (173 | ) | | $ | 6 |
| | |
Nine Months Ended September 30, 2011 | | | | | |
Currency hedge contracts | $ | (77 | ) | | $ | (74 | ) | | Cost of products sold |
| $ | (77 | ) | | $ | (74 | ) | | |
Nine Months Ended September 30, 2010 | | | | | |
Interest rate hedge contracts |
| | $ | 2 |
| | Interest expense |
Currency hedge contracts | $ | (56 | ) | | (22 | ) | | Cost of products sold |
| $ | (56 | ) | | $ | (20 | ) | | |
We recognized in earnings a $5 million gain related to the ineffective portion of hedging relationships for the third quarter and first nine months of 2011, related to our interest rate derivative contracts. The amount of gain (loss) recognized in earnings was de minimis for the third quarter and first nine months of 2010.
|
| | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in Earnings (in millions) | | Amount of Gain (Loss) Recognized in Earnings (in millions) |
| | | |
Derivatives Not Designated as Hedging Instruments | Location in Statement of Operations | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
Currency hedge contracts | Other, net | | $ | 8 |
| | $ | (40 | ) | | $ | 2 |
| | $ | (67 | ) |
| | | $ | 8 |
| | $ | (40 | ) | | $ | 2 |
| | $ | (67 | ) |
Losses and gains on currency hedge contracts not designated as hedged instruments were substantially offset by net losses from foreign currency transaction exposures of $12 million during the third quarter of 2011, net gains of $43 million during the third quarter of 2010, net losses of $11 million for the first nine months of 2011 and net gains of $59 million for the first nine months of 2010. As a result, we recorded a net foreign currency loss of $4 million during the third quarter of 2011, a $3 million gain during the third quarter of 2010, a $9 million loss for the first nine months of 2011, and an $8 million loss for the first nine months of 2010, within other, net in our accompanying unaudited condensed consolidated statements of operations.
Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and Disclosures, by considering the estimated amount we would receive or pay to transfer these instruments at the reporting date and by taking into account current interest rates, foreign currency exchange rates, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. Generally, 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. As of September 30, 2011, we have classified all of our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by Topic 820, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.
The following are the balances of our derivative assets and liabilities as of September 30, 2011 and December 31, 2010:
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| | | | | | | | |
| | As of |
| | September 30, | | December 31, |
(in millions) | Location in Balance Sheet (1) | 2011 | | 2010 |
Derivative Assets: | | | | |
Designated Hedging Instruments | | | | |
Currency hedge contracts | Prepaid and other current assets | $ | 25 |
| | $ | 32 |
|
Currency hedge contracts | Other long-term assets | 17 |
| | 27 |
|
| | 42 |
| | 59 |
|
Non-Designated Hedging Instruments | | | | |
Currency hedge contracts | Prepaid and other current assets | 41 |
| | 23 |
|
Total Derivative Assets | | $ | 83 |
| | $ | 82 |
|
| | | | |
Derivative Liabilities: | | | | |
Designated Hedging Instruments | | | | |
Currency hedge contracts | Other current liabilities | $ | 80 |
| | $ | 87 |
|
Currency hedge contracts | Other long-term liabilities | 63 |
| | 71 |
|
| | 143 |
| | 158 |
|
Non-Designated Hedging Instruments | | | | |
Currency hedge contracts | Other current liabilities | 18 |
| | 31 |
|
Total Derivative Liabilities | | $ | 161 |
| | $ | 189 |
|
| |
(1) | We classify derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less. |
Other Fair Value Measurements
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 available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
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• | Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities. |
| |
• | Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. |
| |
• | Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Assets and liabilities measured at fair value on a recurring basis consist of the following as of September 30, 2011 and December 31, 2010:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2011 | | As of December 31, 2010 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | | | | | | |
Money market and government funds | $ | 145 |
| |
| |
| | $ | 145 |
| | $ | 105 |
| |
| |
| | $ | 105 |
|
Currency hedge contracts |
| | $ | 83 |
| |
| | 83 |
| |
| | $ | 82 |
| |
| | 82 |
|
| $ | 145 |
| | $ | 83 |
| |
| | $ | 228 |
| | $ | 105 |
| | $ | 82 |
| |
| | $ | 187 |
|
Liabilities | | | | | | | | | | | | | | | |
Currency hedge contracts |
| | $ | 161 |
| |
| | $ | 161 |
| |
| | $ | 189 |
| |
| | $ | 189 |
|
Accrued contingent consideration |
| |
| | $ | 376 |
| | 376 |
| |
| |
| | $ | 71 |
| | 71 |
|
|
| | $ | 161 |
| | $ | 376 |
| | $ | 537 |
| |
| | $ | 189 |
| | $ | 71 |
| | $ | 260 |
|
Our investments in money market and government funds are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as cash and cash equivalents within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.
In addition to $145 million invested in money market and government funds as of September 30, 2011, we had $12 million in short-term time deposits and $119 million in interest bearing and non-interest bearing bank accounts. In addition to $105 million invested in money market and government funds as of December 31, 2010, we had $16 million of cash invested in short-term time deposits, and $92 million in interest bearing and non-interest bearing bank accounts.
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) during the first nine months of 2011, which relate solely to our contingent consideration liability, were as follows (in millions):
|
| | | |
Balance as of December 31, 2010 | $ | (71 | ) |
Contingent consideration liability recorded | (287 | ) |
Fair value adjustments | (18 | ) |
Balance as of September 30, 2011 | $ | (376 | ) |
Refer to Note B - Acquisitions for a discussion of the changes in the fair value of our contingent consideration liability.
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The aggregate carrying amount of our cost method investments was $16 million as of September 30, 2011 and $43 million as of December 31, 2010. The decrease was due primarily
to our first quarter 2011 acquisitions of the remaining fully diluted equity of companies in which we held a prior equity interest, described further in Note B - Acquisitions.
During the first nine months of 2011, we recorded $718 million of losses to adjust our goodwill and certain other intangible asset balances to their fair value. We wrote down goodwill attributable to our U.S. CRM reporting unit, discussed in Note D – Goodwill and Other Intangible Assets, with a carrying amount of $1.479 billion to its implied fair value of $782 million, resulting in a non-deductible goodwill impairment charge of $697 million in the first quarter of 2011. In addition, during the second quarter of 2011, as a result of changes in the timing and amount of the expected cash flows related to certain acquired in-process research and development projects, we recorded a $12 million intangible asset impairment charge representing a decrease in the estimated fair value of the related intangible assets. Further, during the third quarter of 2011, we recorded a $9 million intangible asset impairment charge attributable to lower projected cash flows associated with certain technologies. In addition, during the first quarter of 2011, we recorded $15 million of losses to write down certain cost method investments. These fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the DCF method, which are classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows within these analyses was based on our most recent operational budgets, long-range strategic plans and other estimates.
During the first nine months of 2010, we recorded $1.882 billion of losses to adjust our goodwill and certain other intangible asset balances to their fair values, and $5 million of losses to write down certain cost method investments. We wrote down goodwill attributable to our U.S. CRM reporting unit with a carrying amount of $3.296 billion to its implied fair value of $1.479 billion, resulting in a net write-down of $1.817 billion. In addition, we recorded a loss of $60 million in the first quarter of 2010 to write down certain of our Peripheral Interventions intangible assets to their estimated fair values, and a loss of $5 million in the third quarter of 2010 to write off the remaining value associated with certain other intangible assets. These fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the DCF method, which are classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows within these analyses was based on our most recent operational budgets, long range strategic plans and other estimates.
The fair value of our outstanding debt obligations was $4.667 billion as of September 30, 2011 and $5.654 billion as of December 31, 2010, which was determined by using primarily quoted market prices for our publicly-registered senior notes, classified as Level 1 within the fair value hierarchy. This decrease was due primarily to debt repayments of $1.250 billion during the first nine months of 2011, as well as an increase in the market price for our publicly-traded senior notes. Refer to Note F – Borrowings and Credit Arrangements for a discussion of our debt obligations.
NOTE F – BORROWINGS AND CREDIT ARRANGEMENTS
We had total debt of $4.263 billion as of September 30, 2011 and $5.438 billion as of December 31, 2010. During the first nine months of 2011, we prepaid the remaining $1.0 billion of our term loan and paid $250 million of our senior notes at maturity. The debt maturity schedule for the significant components of our debt obligations as of September 30, 2011 is as follows:
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| | | | | | | | | | | | | | | | | | | | | |
| Payments due by Period | | |
(in millions) | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | Thereafter | | Total |
Senior notes |
| |
| |
| | $ | 600 |
| | $ | 1,250 |
| | $ | 2,350 |
| | $ | 4,200 |
|
|
| |
| |
| | $ | 600 |
| | $ | 1,250 |
| | $ | 2,350 |
| | $ | 4,200 |
|
|
| | | |
| Note: | | The table above does not include unamortized discounts associated with our senior notes, or amounts related to interest rate contracts used to hedge the fair value of certain of our senior notes. |
Term Loan and Revolving Credit Facility
During the first nine months of 2011, we prepaid the remaining $1.0 billion of our term loan maturities without premium or penalty.
We maintain a $2.0 billion revolving credit facility, maturing in June 2013, with up to two one-year extension options subject to certain conditions. Any revolving credit facility borrowings bear interest at LIBOR plus an interest margin of between 1.55 percent and 2.625 percent, based on our corporate credit ratings (currently 2.05 percent). In addition, we are required to pay a facility fee based on our credit ratings and the total amount of revolving credit commitments, regardless of usage, under the agreement (currently 0.45 percent). In July 2011, Fitch Ratings upgraded our corporate credit rating to BBB-, an investment-grade rating and Moody’s Investors Service raised our Ba1 rating outlook to positive from stable. The Fitch upgrade has resulted in a slightly favorable reduction in the facility fee and the interest rate on the facility. Any borrowings under the revolving credit facility are unrestricted and unsecured. In the third quarter of 2011, we borrowed $175 million under the facility and subsequently repaid the
borrowed amounts during the third quarter of 2011. There were no amounts borrowed under our revolving credit facility as of September 30, 2011 or December 31, 2010.
Our revolving credit facility agreement requires that we maintain certain financial covenants, as follows:
|
| | | |
| Covenant Requirement | | Actual as of September 30, 2011 |
Maximum leverage ratio (1) | 3.5 times | | 1.5 times |
Minimum interest coverage ratio (2) | 3.0 times | | 9.0 times |
| |
(1) | Ratio of total debt to consolidated EBITDA, as defined by the agreement, as amended, for the preceding four consecutive fiscal quarters. |
| |
(2) | Ratio of consolidated EBITDA, as defined by the agreement, as amended, to interest expense for the preceding four consecutive fiscal quarters. |
The credit agreement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreement, through the credit agreement maturity, of up to $258 million in restructuring charges and restructuring-related expenses related to our previously announced restructuring plans, plus an additional $300 million for any future restructuring initiatives, including our recently announced 2011 Restructuring program. As of September 30, 2011, we had $361 million of the combined restructuring charge exclusion remaining. In addition, any litigation-related charges and credits are excluded from the calculation of consolidated EBITDA until such items are paid or received; and up to $1.5 billion of any future cash payments for future litigation settlements or damage awards (net of any litigation payments received); as well as litigation-related cash payments (net of cash receipts) of up to $1.310 billion related to amounts that were recorded in the financial statements as of March 31, 2010 are excluded from the calculation of consolidated EBITDA. As of September 30, 2011, we had $1.832 billion of the combined legal payment exclusion remaining.
As of and through September 30, 2011, we were in compliance with the required covenants. Our inability to maintain compliance with these covenants could require us to seek to renegotiate the terms of our credit facilities 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 grant such waivers.
Senior Notes
We had senior notes outstanding in the amount of $4.2 billion as of September 30, 2011 and $4.450 billion as of December 31, 2010. In January 2011, we paid $250 million of our senior notes at maturity.
Other Arrangements
We also maintain a $350 million credit and security facility secured by our U.S. trade receivables. In August 2011, we extended the maturity of this facility to August 2012. There were no amounts borrowed under this facility as of September 30, 2011 or December 31, 2010. In January 2011, we borrowed $250 million under this facility and used the proceeds to prepay $250 million of our term loan, and subsequently repaid the borrowed amounts during the first quarter of 2011.
In addition, we have accounts receivable factoring programs in certain European countries that we account for as sales under ASC Topic 860, Transfers and Servicing. These agreements provide for the sale of accounts receivable to third parties, without recourse, of up to approximately 330 million Euro (translated to approximately $445 million as of September 30, 2011). We have no retained interests in the transferred receivables, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. We de-recognized $387 million of receivables as of September 30, 2011 at an average interest rate of 2.5 percent, and $363 million as of December 31, 2010 at an average interest rate of 2.0 percent. Further, we have uncommitted credit facilities with two commercial Japanese banks that provide for borrowings and promissory notes discounting of up to 18.5 billion Japanese yen (translated to approximately $240 million as of September 30, 2011). We de-recognized $188 million of notes receivable as of September 30, 2011 at an average interest rate of 1.8 percent and $197 million of notes receivable as of December 31, 2010 at an average interest rate of 1.7 percent. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets.
NOTE G – RESTRUCTURING-RELATED ACTIVITIES
On an on-going basis, we monitor the dynamics of the economy, the healthcare industry, and the markets in which we compete;
and we continue to assess opportunities for improved operational effectiveness and efficiency, and better alignment of expenses with revenues, while preserving our ability to make the investments in research and development projects, capital and our people that are essential to our long-term success. As a result of these assessments, we have undertaken various restructuring initiatives in order to enhance our growth potential and position us for long-term success. These initiatives are described below.
2011 Restructuring plan
On July 26, 2011, our Board of Directors approved, and we committed to, a restructuring initiative (the 2011 Restructuring plan) designed to strengthen operational effectiveness and efficiencies, increase competitiveness and support new investments, thereby increasing shareholder value. Key activities under the plan include standardizing and automating certain processes and activities; relocating select administrative and functional activities; rationalizing organizational reporting structures; and leveraging preferred vendors. Among these efforts, we are expanding our ability to deliver best-in-class global shared services for certain functions and divisions at several locations in emerging markets. This action is intended to enable us to grow our global commercial presence in key geographies and take advantage of many cost-reducing and productivity-enhancing opportunities. In addition, we are undertaking efforts to streamline various corporate functions, eliminate bureaucracy, increase productivity and better align corporate resources to our key business strategies. Activities under the 2011 Restructuring plan were initiated in the third quarter of 2011 and are expected to be substantially complete within the next 24 months.
We estimate that the 2011 Restructuring plan will result in total pre-tax charges of approximately $155 million to $210 million, and that approximately $150 million to $200 million of these charges will result in future cash outlays. We have recorded related costs of $15 million since the inception of the plan, and are recording a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.
The following provides a summary of our expected total costs associated with the plan by major type of cost:
|
| |
Type of cost | Total estimated amount expected to be incurred |
Restructuring charges: | |
Termination benefits | $125 million to $150 million |
Other (1) | $20 million to $40 million |
Restructuring-related expenses: | |
Other (2) | $10 million to $20 million |
| $155 million to $210 million |
| |
(1) | Includes primarily consulting fees and costs associated with contractual cancellations. |
| |
(2) | Comprised of other costs directly related to the 2011 Restructuring plan, including program management, accelerated depreciation, retention and infrastructure-related costs. |
2010 Restructuring plan
On February 6, 2010, our Board of Directors approved, and we committed to, a series of management changes and restructuring initiatives (the 2010 Restructuring plan) designed to focus our business, drive innovation, accelerate profitable revenue growth and increase both accountability and shareholder value. Key activities under the plan include the integration of our Cardiovascular and CRM businesses, as well as the restructuring of certain other businesses and corporate functions; the centralization of our research and development organization; the re-alignment of our international structure to reduce our administrative costs and invest in expansion opportunities including significant investments in emerging markets; and the re-prioritization and diversification of our product portfolio. Activities under the 2010 Restructuring plan were initiated in the first quarter of 2010 and are expected to be substantially complete by the end of 2012.
We estimate that the 2010 Restructuring plan will result in total pre-tax charges of approximately $165 million to $185 million, and that approximately $150 million to $160 million of these charges will result in cash outlays, of which we have made payments of $135 million to date. We have recorded related costs of $166 million since the inception of the plan, and are recording a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.
The following provides a summary of our expected total costs associated with the plan by major type of cost:
|
| |
Type of cost | Total estimated amount expected to be incurred |
Restructuring charges: | |
Termination benefits | $95 million to $100 million |
Fixed asset write-offs | $10 million to $15 million |
Other (1) | $50 million to $55 million |
Restructuring-related expenses: | |
Other (2) | $10 million to $15 million |
| $165 million to $185 million |
| |
(1) | Includes primarily consulting fees and costs associated with contractual cancellations. |
| |
(2) | Comprised of other costs directly related to the 2010 Restructuring plan, including accelerated depreciation and infrastructure-related costs. |
Plant Network Optimization program
In January 2009, our Board of Directors approved, and we committed to, a Plant Network Optimization program, which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and by closing certain other facilities. The program is a complement to our 2007 Restructuring plan, discussed below, and is intended to improve overall gross profit margins. Activities under the Plant Network Optimization program were initiated in the first quarter of 2009 and are expected to be substantially complete by the end of 2012.
We expect that the execution of the Plant Network Optimization program will result in total pre-tax charges of approximately $130 million to $145 million, and that approximately $110 million to $120 million of these charges will result in cash outlays, of which we have made payments of $62 million to date. We have recorded related costs of $115 million since the inception of the plan, and are recording a portion of these expenses as restructuring charges and the remaining portion through cost of products sold within our consolidated statements of operations. The following provides a summary of our estimates of costs associated with the Plant Network Optimization program by major type of cost:
|
| |
Type of cost | Total estimated amount expected to be incurred |
Restructuring charges: | |
Termination benefits | $35 million to $40 million |
| |
Restructuring-related expenses: | |
Accelerated depreciation | $20 million to $25 million |
Transfer costs (1) | $75 million to $80 million |
| $130 million to $145 million |
| |
(1) | Consists primarily of costs to transfer product lines among facilities, including costs of transfer teams, freight, idle facility and product line validations. |
2007 Restructuring plan
In October 2007, our Board of Directors approved, and we committed to, an expense and head count reduction plan (the 2007 Restructuring plan). The plan was intended to bring expenses in line with revenues as part of our initiatives to enhance short- and long-term shareholder value. The transfer of production lines contemplated under the 2007 Restructuring plan was completed as of December 31, 2010; all other major activities under the plan were completed as of December 31, 2009. The execution of this plan resulted in total pre-tax expenses of $427 million and required cash outlays of $380 million, of which we have paid $373 million to date.
We recorded restructuring charges pursuant to our restructuring plans of $22 million in the third quarter of 2011, $5 million in the third quarter of 2010, $77 million in the first nine months of 2011, and $98 million in the first nine months of 2010. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $7 million in the third quarter of 2011, $13 million in the third quarter of 2010, $32 million in
the first nine months of 2011, and $41 million in the first nine months of 2010.
The following presents these costs by major type and line item within our accompanying unaudited condensed consolidated statements of operations, as well as by program:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2011 | | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
Restructuring charges | $ | 12 |
| |
| |
| |
| | $ | 10 |
| | $ | 22 |
|
Restructuring-related expenses: | | | | | | | | | | | |
Cost of products sold |
| | $ | 2 |
| | $ | 5 |
| |
| |
| | 7 |
|
Selling, general and administrative expenses |
| |
| |
| |
| |
|
| |
|
|
|
| | 2 |
| | 5 |
| |
| |
|
| | 7 |
|
| $ | 12 |
| | $ | 2 |
| | $ | 5 |
| |
| | $ | 10 |
| | $ | 29 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
2011 Restructuring plan | $ | 9 |
| |
| |
| |
| | $ | 6 |
| | $ | 15 |
|
2010 Restructuring plan | 1 |
| |
| |
| |
| | 4 |
| | 5 |
|
Plant Network Optimization program | 2 |
| | $ | 2 |
| | $ | 5 |
| |
| |
| | 9 |
|
| $ | 12 |
| | $ | 2 |
| | $ | 5 |
| |
| | $ | 10 |
| | $ | 29 |
|
| | | | | | | | | | | |
Three Months Ended September 30, 2010 | | | | | | | | | | | |
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
Restructuring charges | $ | 2 |
| |
| |
| | $ | 1 |
| | $ | 2 |
| | $ | 5 |
|
Restructuring-related expenses: | | | | | | | | | | | |
Cost of products sold |
| | $ | 2 |
| | $ | 10 |
| |
| |
| | 12 |
|
Selling, general and administrative expenses |
| |
| |
| |
| | 1 |
| | 1 |
|
|
| | 2 |
| | 10 |
| |
| | 1 |
| | 13 |
|
| $ | 2 |
| | $ | 2 |
| | $ | 10 |
| | $ | 1 |
| | $ | 3 |
| | $ | 18 |
|
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
2010 Restructuring plan | $ | 2 |
| |
| |
| | $ | 1 |
| | $ | 3 |
| | $ | 6 |
|
Plant Network Optimization program | 2 |
| | $ | 2 |
| | $ | 8 |
| |
| |
| | 12 |
|
2007 Restructuring plan | (2 | ) | |
| | 2 |
| |
| |
|
| |
|
|
| $ | 2 |
| | $ | 2 |
| | $ | 10 |
| | $ | 1 |
| | $ | 3 |
| | $ | 18 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2011 | | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
Restructuring charges | $ | 49 |
| |
| |
| |
| | $ | 28 |
| | $ | 77 |
|
Restructuring-related expenses: |
| |
| |
| |
| |
| |
|
Cost of products sold |
| | $ | 8 |
| | $ | 20 |
| |
| |
| | 28 |
|
Selling, general and administrative expenses |
| |
| |
| |
| | 4 |
| | 4 |
|
|
| | 8 |
| | 20 |
| |
| | 4 |
| | 32 |
|
| $ | 49 |
| | $ | 8 |
| | $ | 20 |
| |
| | $ | 32 |
| | $ | 109 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
2011 Restructuring plan | $ | 9 |
| |
| |
| |
| | $ | 6 |
| | $ | 15 |
|
2010 Restructuring plan | 32 |
| | $ | 1 |
| |
| |
| | 26 |
| | 59 |
|
Plant Network Optimization program | 8 |
| | 7 |
| | $ | 20 |
| |
| |
| | 35 |
|
| $ | 49 |
| | $ | 8 |
| | $ | 20 |
| |
| | $ | 32 |
| | $ | 109 |
|
| | | | | | | | | | | |
Nine Months Ended September 30, 2010 | | | | | | | | | | | |
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
Restructuring charges | $ | 66 |
| |
| |
| | $ | 8 |
| | $ | 24 |
| | $ | 98 |
|
Restructuring-related expenses: |
| |
| |
| |
| |
| |
|
Cost of products sold |
| | $ | 6 |
| | $ | 32 |
| |
| |
| | 38 |
|
Selling, general and administrative expenses |
| |
| |
| |
| | 3 |
| | 3 |
|
|
| | 6 |
| | 32 |
| |
| | 3 |
| | 41 |
|
| $ | 66 |
| | $ | 6 |
| | $ | 32 |
| | $ | 8 |
| | $ | 27 |
| | $ | 139 |
|
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
2010 Restructuring plan | $ | 61 |
| |
| |
| | $ | 8 |
| | $ | 23 |
| | $ | 92 |
|
Plant Network Optimization program | 4 |
| | $ | 6 |
| | $ | 20 |
| |
| |
| | 30 |
|
2007 Restructuring plan | 1 |
| |
| | 12 |
| |
| | 4 |
| | 17 |
|
| $ | 66 |
| | $ | 6 |
| | $ | 32 |
| | $ | 8 |
| | $ | 27 |
| | $ | 139 |
|
Termination benefits represent amounts incurred pursuant to our on-going benefit arrangements and amounts for “one-time” involuntary termination benefits, and have been recorded in accordance with ASC Topic 712, Compensation – Non-retirement Postemployment Benefits and ASC Topic 420, Exit or Disposal Cost Obligations. We expect to record additional termination benefits related to our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program in 2011 and 2012 when we identify with more specificity the job classifications, functions and locations of the remaining head count to be eliminated. Other restructuring costs, which represent primarily consulting fees, are being recorded as incurred in accordance with Topic 420. Accelerated depreciation is being recorded over the adjusted remaining useful life of the related assets, and production line transfer costs are being recorded as incurred.
We have incurred cumulative restructuring charges related to our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program of $207 million and restructuring-related costs of $89 million since we committed to each plan. The following presents these costs by major type and by plan:
|
| | | | | | | | | | | | | | | |
(in millions) | 2011 Restructuring plan | | 2010 Restructuring plan | | Plant Network Optimization | | Total |
Termination benefits | $ | 9 |
| | $ | 96 |
| | $ | 35 |
| | $ | 140 |
|
Fixed asset write-offs |
|
| | 11 |
| |
| | 11 |
|
Other | 5 |
| | 51 |
| |
| | 56 |
|
Total restructuring charges | 14 |
| | 158 |
| | 35 |
| | 207 |
|
Accelerated depreciation |
| |
| | 20 |
| | 20 |
|
Transfer costs |
| |
| | 60 |
| | 60 |
|
Other | 1 |
| | 8 |
| |
| | 9 |
|
Restructuring-related expenses | 1 |
| | 8 |
| | 80 |
| | 89 |
|
| $ | 15 |
| | $ | 166 |
| | $ | 115 |
| | $ | 296 |
|
We made cash payments of $24 million in the third quarter of 2011 and $92 million in the first nine months of 2011 associated with restructuring initiatives pursuant to these plans, and have made total cash payments of $201 million related to our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program since committing to each plan. Each of these payments was made using cash generated from operations, and are comprised of the following:
|
| | | | | | | | | | | | | | | |
(in millions) | 2011 Restructuring plan | | 2010 Restructuring plan | | Plant Network Optimization | | Total |
Three Months Ended September 30, 2011 | | | | | | | |
Termination benefits |
|
| | $ | 9 |
| | $ | 1 |
| | $ | 10 |
|
Transfer costs |
| |
| | 5 |
| | 5 |
|
Other | $ | 4 |
| | 5 |
| |
| | 9 |
|
| $ | 4 |
| | $ | 14 |
| | $ | 6 |
| | $ | 24 |
|
| | | | | | | |
Nine Months Ended September 30, 2011 | | | | | | | |
Termination benefits |
|
| | $ | 34 |
| | $ | 2 |
| | $ | 36 |
|
Transfer costs |
| |
| | 20 |
| | 20 |
|
Other | $ | 4 |
| | 32 |
| |
| | 36 |
|
| $ | 4 |
| | $ | 66 |
| | $ | 22 |
| | $ | 92 |
|
| | | | | | | |
Program to Date | | | | | | | |
Termination benefits |
|
| | $ | 80 |
| | $ | 2 |
| | $ | 82 |
|
Transfer costs |
| |
| | 60 |
| | 60 |
|
Other | $ | 4 |
| | 55 |
| |
| | 59 |
|
| $ | 4 |
| | $ | 135 |
| | $ | 62 |
| | $ | 201 |
|
We also made cash payments of $1 million during the third quarter of 2011 and $3 million during the first nine months of 2011 associated with our 2007 Restructuring plan and have made total cash payments of $373 million related to the 2007 Restructuring plan since committing to the plan in the fourth quarter of 2007.
The following is a rollforward of the restructuring liability associated with our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program, since the inception of the respective plan, which is reported as a component of accrued expenses included in our accompanying unaudited condensed consolidated balance sheets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Plant Network | | |
| | 2011 Restructuring plan | | 2010 Restructuring plan | | Optimization | | |
| | | | | | | | | | | | | | | | |
(in millions) | | Termination Benefits | | Other | | Subtotal | | Termination Benefits | | Other | | Subtotal | | Termination Benefits | | Total |
Accrued as of December 31, 2008 | | | | | | | | | | | | | | | | |
Charges | |
| |
| |
| |
| |
| |
| | $ | 22 |
| | $ | 22 |
|
Cash payments | |
| |
| |
| |
| |
| |
| |
| |
|
Accrued as of December 31, 2009 | |
| |
| |
| |
| |
| |
| | 22 |
| | 22 |
|
Charges | |
|
| |
|
| |
|
| | $ | 66 |
| | $ | 28 |
| | $ | 94 |
| | 4 |
| | 98 |
|
Cash payments | |
|
| |
|
| |
|
| | (45 | ) | | (20 | ) | | (65 | ) | |
| | (65 | ) |
Accrued as of December 31, 2010 | |
|
| |
|
| |
|
| | 21 |
| | 8 |
| | 29 |
| | 26 |
| | 55 |
|
Charges | | $ | 9 |
| | $ | 4 |
| | $ | 13 |
| | 32 |
| | 24 |
| | 56 |
| | 8 |
| | 77 |
|
Cash payments | |
|
| | (4 | ) | | (4 | ) | | (34 | ) | | (32 | ) | | (66 | ) | | (2 | ) | | (72 | ) |
Accrued as of September 30, 2011 | | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | 19 |
| | $ | — |
| | $ | 19 |
| | $ | 32 |
| | $ | 60 |
|
The remaining restructuring liability associated with our 2007 Restructuring plan was $7 million as of September 30, 2011 and $10 million as of December 31, 2010.
NOTE H – SUPPLEMENTAL BALANCE SHEET INFORMATION
Components of selected captions in our accompanying unaudited condensed consolidated balance sheets are as follows:
Trade accounts receivable, net
|
| | | | | | | | |
| | As of |
(in millions) | | September 30, 2011 | | December 31, 2010 |
Accounts receivable | | $ | 1,341 |
| | $ | 1,445 |
|
Less: allowance for doubtful accounts | | (75 | ) | | (83 | ) |
Less: allowance for sales returns | | (29 | ) | | (42 | ) |
| | $ | 1,237 |
| | $ | 1,320 |
|
The following is a rollforward of our allowance for doubtful accounts for the third quarter and first nine months of 2011 and 2010:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2011 | | 2010 | | 2011 | | 2010 |
Beginning balance | | $ | 67 |
| | $ | 72 |
| | $ | 83 |
| | $ | 71 |
|
Net charges to expenses | | 12 |
| | 6 |
| | 1 |
| | 17 |
|
Utilization of allowances | | (4 | ) | |
|
| | (9 | ) | | (10 | ) |
Ending balance | | $ | 75 |
| | $ | 78 |
| | $ | 75 |
| | $ | 78 |
|
During the first quarter of 2011, we reversed $20 million of previously established allowances for doubtful accounts against long-outstanding receivables in Greece. These receivables had previously been fully reserved as we had determined that they had a high risk of being uncollectible due to the economic situation in Greece. During the first quarter of 2011, the Greek government converted these receivables into bonds, which we were able to monetize, reducing our allowance for doubtful accounts as a credit to selling, general and administrative expenses. We continue to monitor the European economic environment for any collectibility issues related to our outstanding receivables in this region.
Inventories
|
| | | | | | | | |
| | As of |
(in millions) | | September 30, 2011 | | December 31, 2010 |
Finished goods | | $ | 658 |
| | $ | 622 |
|
Work-in-process | | 97 |
| | 95 |
|
Raw materials | | 217 |
| | 177 |
|
| | $ | 972 |
| | $ | 894 |
|
Property, plant and equipment, net
|
| | | | | | | | |
| | As of |
(in millions) | | September 30, 2011 | | December 31, 2010 |
Land | | $ | 119 |
| | $ | 119 |
|
Buildings and improvements | | 911 |
| | 919 |
|
Equipment, furniture and fixtures | | 2,033 |
| | 1,889 |
|
Capital in progress | | 263 |
| | 241 |
|
| | 3,326 |
| | 3,168 |
|
Less: accumulated depreciation | | 1,642 |
| | 1,471 |
|
| | $ | 1,684 |
| | $ | 1,697 |
|
Depreciation expense was $75 million for the third quarter of 2011, $72 million for the third quarter of 2010, $215 million for the first nine months of 2011, and $221 million for the first nine months of 2010.
Accrued expenses
|
| | | | | | | | |
| | As of |
(in millions) | | September 30, 2011 | | December 31, 2010 |
Legal reserves | | $ | 130 |
| | $ | 441 |
|
Payroll and related liabilities | | 440 |
| | 436 |
|
Accrued contingent consideration | | 8 |
| | 9 |
|
Other | | 718 |
| | 740 |
|
| | $ | 1,296 |
| | $ | 1,626 |
|
Other long-term liabilities
|
| | | | | | | | |
| | As of |
(in millions) | | September 30, 2011 | | December 31, 2010 |
Legal reserves | | $ | 139 |
| | $ | 147 |
|
Accrued income taxes | | 1,076 |
| | 1,062 |
|
Accrued contingent consideration | | 368 |
| | 62 |
|
Other long-term liabilities | | 398 |
| | 374 |
|
| | $ | 1,981 |
| | $ | 1,645 |
|
Accrued warranties
We offer warranties on certain of our product offerings. Approximately 85 percent of our warranty liability as of September 30, 2011 related to implantable devices offered by our CRM business, which include defibrillator and pacemaker systems. Our CRM products come with a standard limited warranty covering the replacement of these devices. We offer a full warranty for a portion of the period post-implant, and a partial warranty over the substantial remainder of the useful life of the product. We estimate the costs that we may incur under our warranty programs based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim, and record a liability equal to these estimated costs as cost of products sold at the time the product sale occurs. We reassess the adequacy of our recorded warranty liabilities on a quarterly basis and adjust these amounts as necessary. The current portion of our warranty accrual is included in other accrued expenses in the table above and the non-current portion of our warranty accrual is included in other long-term liabilities in the table above. Changes in our product warranty accrual during
the first nine months of 2011 and 2010 consisted of the following (in millions):
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | |