Q1 2013 Form 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
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)
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, including area code)
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.
Large accelerated filer þ
Accelerated filer o
Non-Accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
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.

 
 
Shares outstanding
Class
 
as of April 30, 2013
Common Stock, $.01 par value
 
1,550,351,484


Table of Contents

TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)

 
Three Months Ended
March 31,
in millions, except per share data
2013
 
2012
 
 
 
 
Net sales
$
1,761

 
$
1,866

Cost of products sold
578

 
631

Gross profit
1,183

 
1,235

 
 
 
 
Operating expenses:
 
 
 
Selling, general and administrative expenses
631

 
659

Research and development expenses
204

 
215

Royalty expense
41

 
48

Amortization expense
103

 
97

Goodwill impairment charges
423

 

Contingent consideration (benefit) expense
(23
)
 
10

Restructuring charges
10

 
10

Litigation-related charges
130

 

Gain on divestiture
(6
)
 

 
1,513

 
1,039

Operating (loss) income
(330
)
 
196

 
 
 
 
Other (expense) income:
 
 
 
Interest expense
(65
)
 
(69
)
Other, net
1

 
(4
)
(Loss) income before income taxes
(394
)
 
123

Income tax (benefit) expense
(40
)
 
10

Net (loss) income
$
(354
)
 
$
113

 
 
 
 
Net (loss) income per common share — basic
$
(0.26
)
 
$
0.08

Net (loss) income per common share — assuming dilution
$
(0.26
)
 
$
0.08

 
 
 
 
Weighted-average shares outstanding
 
 
 
Basic
1,351.9

 
1,445.2

Assuming dilution
1,351.9

 
1,454.1


See notes to the unaudited condensed consolidated financial statements.


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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 
 
Three Months Ended
March 31,
(in millions)
 
2013
 
2012
Net income (loss)
 
$
(354
)
 
$
113

Other comprehensive income:
 
 
 
 
Foreign currency translation adjustment
 
3

 
25

Net change in unrealized gains and losses on derivative financial instruments, net of tax
 
75

 
34

Total other comprehensive income
 
78

 
59

Total comprehensive income (loss)
 
$
(276
)
 
$
172


See notes to the unaudited condensed consolidated financial statements.



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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
 
March 31,
 
December 31,
in millions, except share and per share data
2013
 
2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
268

 
$
207

Trade accounts receivable, net
1,232

 
1,217

Inventories
851

 
884

Deferred income taxes
431

 
433

Prepaid expenses and other current assets
320

 
281

Total current assets
3,102

 
3,022

Property, plant and equipment, net
1,537

 
1,564

Goodwill
5,552

 
5,973

Other intangible assets, net
6,177

 
6,289

Other long-term assets
395

 
306

 
$
16,763

 
$
17,154

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current debt obligations
$
4

 
$
4

Accounts payable
206

 
232

Accrued expenses
1,186

 
1,284

Other current liabilities
240

 
252

Total current liabilities
1,636

 
1,772

Long-term debt
4,250

 
4,252

Deferred income taxes
1,710

 
1,713

Other long-term liabilities
2,664

 
2,547

 
 
 
 
Commitments and contingencies

 

 
 
 
 
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 and issued 1,550,162,126 shares as of March 31, 2013 and 1,542,347,188 shares as of December 31, 2012
16

 
15

Treasury stock, at cost - 199,748,332 shares as of March 31, 2013 and 186,635,532 shares as of December 31, 2012
(1,192
)
 
(1,092
)
Additional paid-in capital
16,437

 
16,429

Accumulated deficit
(8,803
)
 
(8,449
)
Accumulated other comprehensive income (loss), net of tax
45

 
(33
)
Total stockholders’ equity
6,503

 
6,870

 
$
16,763

 
$
17,154


See notes to the unaudited condensed consolidated financial statements.

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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Three Months Ended
March 31,
in millions
2013
 
2012
 
 
 
 
Cash provided by operating activities
$
163

 
$
212

 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
(53
)
 
(66
)
Proceeds from sale of property, plant and equipment
53

 

Purchases of privately held securities
(4
)
 

Payments for investments in companies and acquisitions of certain technologies
(7
)
 

 
 
 
 
Cash used for investing activities
(11
)
 
(66
)
 
 
 
 
Financing activities:
 
 
 
Payment of contingent consideration

 
(3
)
Proceeds from borrowings on credit facilities
240

 
120

Payments on borrowings from credit facilities
(240
)
 
(120
)
Payments for acquisitions of treasury stock
(100
)
 
(138
)
Proceeds from issuances of shares of common stock
10

 
9

 
 
 
 
Cash used for financing activities
(90
)
 
(132
)
 
 
 
 
Effect of foreign exchange rates on cash
(1
)
 
3

 
 
 
 
Net increase in cash and cash equivalents
61

 
17

Cash and cash equivalents at beginning of period
207

 
267

Cash and cash equivalents at end of period
$
268

 
$
284

 
 
 
 
Supplemental Information
 
 
 
 
 
 
 
Non-cash operating activities:
 
 
 
Stock-based compensation expense
$
24

 
$
27


See notes to the unaudited condensed consolidated financial statements.


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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 months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our 2012 Annual Report filed on Form 10-K.
Effective as of January 1, 2013, we reorganized our business from geographic regions to fully operationalized global business units. Our reorganization changed our reporting structure and changed the composition of our reporting units. As a result, we have reclassified certain prior year amounts to conform to the current year’s presentation. See Note D - Goodwill and Other Intangible Assets and Note L – 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 month period ended March 31, 2013. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note J - Commitments and Contingencies for more information.

NOTE B – ACQUISITIONS
We did not close any material acquisitions during the first quarters of 2013 and 2012.

Contingent Consideration
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets or obtaining regulatory approvals. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We remeasure this liability each reporting period and record changes in the fair value through a separate line item within our consolidated statements of operations.
Changes in the fair value of our contingent consideration liability were as follows (in millions):
Balance as of December 31, 2012
$
(663
)
Amounts recorded to acquisition purchase accounting
(2
)
Net fair value adjustments
23

Payments made

Balance as of March 31, 2013
$
(642
)

As of March 31, 2013, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $2.3 billion.

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Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:

Contingent Consideration Liability
Fair Value as of March 31, 2013
Valuation Technique
Unobservable Input
Range
R&D, Regulatory and Commercialization-based Milestones
$199 million
Probability Weighted Discounted Cash Flow
Discount Rate
1.0%-2.4%
Probability of Payment
45% - 98%
Projected Year of Payment
2013 - 2017
Revenue-based Payments
$203 million
Discounted Cash Flow
Discount Rate
12% - 18%
Probability of Payment
15% - 100%
Projected Year of Payment
2013 - 2018
$240 million
Monte Carlo
Revenue Volatility
15% - 29%
Risk Free Rate
LIBOR Term Structure
Projected Year of Payment
2013-2018

Increases or decreases in the fair value of our contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or in the timing or likelihood of achieving regulatory-, revenue- or commercialization-based milestones. Projected contingent payment amounts related to R&D, regulatory- and commercialization-based milestones and certain revenue-based milestones are discounted back to the current period using a discounted cash flow (DCF) model. Other revenue-based payments are valued using a Monte Carlo valuation model, which simulates future revenues during the earn out-period using management's best estimates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement.

NOTE C – DIVESTITURES
In January 2011, we closed the sale of our Neurovascular business to Stryker Corporation for a purchase price of $1.500 billion, $1.450 billion of which we received at closing. We will receive an additional $40 million of consideration contingent upon the transfer or separation of certain manufacturing facilities, which we expect will occur during 2013.
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. Revenue generated by the Neurovascular business was $36 million in the first quarter of 2013 and $29 million in the first quarter of 2012. 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. Further, we expect these sales to decline to a de minimus level following the transfer of certain manufacturing facilities expected in the second quarter of 2013.


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NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill as of March 31, 2013 and December 31, 2012 is as follows:
 
 
As of
 
 
March 31, 2013
 
December 31, 2012
 
 
Gross Carrying
 
Accumulated
Amortization/
 
Gross Carrying
 
Accumulated
Amortization/
(in millions)
 
Amount
 
Write-offs
 
Amount
 
Write-offs
Amortizable intangible assets
 
 
 
 
 
 
 
 
Technology-related
 
$
8,026

 
$
(3,088
)
 
$
8,020

 
$
(3,005
)
Patents
 
499

 
(315
)
 
559

 
(352
)
Other intangible assets
 
810

 
(440
)
 
810

 
(428
)
 
 
$
9,335

 
$
(3,843
)
 
$
9,389

 
$
(3,785
)
Unamortizable intangible assets
 
 
 
 
 
 
 
 
Goodwill
 
$
15,452

 
$
(9,900
)
 
$
15,450

 
$
(9,477
)
Technology-related
 
242

 

 
242

 

 
 
$
15,694

 
$
(9,900
)
 
$
15,692

 
$
(9,477
)

In addition, we had $443 million of purchased research and development intangible assets as of March 31, 2013 and December 31, 2012.
2013 Reorganization
We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. Effective as of January 1, 2013, we reorganized our business from geographic regions to fully operationalized global business units. Our reorganization changed our reporting structure and changed the composition of our reporting units for goodwill impairment testing purposes. Following the reorganization, based on information regularly reviewed by our chief operating decision maker, we have three new global reportable segments consisting of: Cardiovascular, Rhythm Management, and MedSurg. We determined our new global reporting units by identifying our operating segments and assessing whether any components of these segments constituted a business for which discrete financial information is available and whether segment management regularly reviews the operating results of any components. Through this process, we identified the following new global reporting units effective as of January 1, 2013: Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management (CRM), Electrophysiology, Endoscopy, Urology/Women's Health, and Neuromodulation.
To determine the amount of goodwill within our new global reporting units, on a relative fair value basis we reallocated $1.764 billion of goodwill previously allocated to our former Europe, Middle East and Africa (EMEA), Asia Pacific, Japan, and Americas international reporting units to our new global reporting units. In addition, we reallocated the goodwill previously allocated to the former U.S. divisional reporting units to each respective new global reporting unit, with the exception of the goodwill allocated to the former U.S. Cardiovascular reporting unit. The $2.380 billion of goodwill allocated to the former U.S. Cardiovascular reporting unit was reallocated between the new global Interventional Cardiology and global Peripheral Interventions reporting units on a relative fair value basis.
The following represents our goodwill balance by new global reportable segment. We restated the prior period information to conform to the current presentation:
(in millions)
 
Cardiovascular
 
Rhythm Management
 
MedSurg
 
Total
Balance as of December 31, 2012 (restated)
 
$
3,249

 
$
577

 
$
2,147

 
$
5,973

Purchase price adjustments
 
2

 

 

 
2

Goodwill acquired
 

 

 

 

Goodwill written off
 

 
(423
)
 

 
(423
)
Balance as of March 31, 2013
 
$
3,251

 
$
154

 
$
2,147

 
$
5,552


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2013 Goodwill Impairment Testing and Charge
We test our goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. Following our reorganization from regions to global business units and our reallocation of goodwill on a relative fair value basis, we conducted the first step of the goodwill impairment test for all new global reporting units as of January 1, 2013. The first step requires a comparison of the carrying value of the reporting units to the fair value of these units. The fair value of each new global reporting unit exceeded its carrying value, with the exception of the global CRM reporting unit. The global CRM reporting unit carrying value exceeded its fair value primarily due to the carrying value of its amortizable intangible assets. The carrying value of amortizable intangible assets allocated to the global CRM reporting unit was $4.569 billion as of March 31, 2013. In accordance with ASC Topic 350, Intangibles—Goodwill and Other (Topic 350), we tested the global CRM amortizable intangible assets for impairment in conjunction with the interim goodwill impairment test of our global CRM reporting unit. We performed the impairment analysis of the amortizable intangible assets on an undiscounted cash flow basis, and concluded that these assets were not impaired.
The second step of the goodwill impairment test compares the estimated fair value of a reporting unit’s goodwill to its carrying value. We performed the second step of the goodwill impairment test on the global CRM reporting unit and recorded an estimated non-cash goodwill impairment charge of $423 million to write-down the goodwill to its implied fair value as of January 1, 2013. The amount of this charge is subject to finalization. We would recognize any necessary adjustment to this estimate in the second quarter of 2013, as we finalize the second step of the goodwill impairment test, in accordance with Topic 350. The primary driver of this impairment charge was our reorganization from geographic regions to global business units as of January 1, 2013, which changed the composition of our reporting units. As a result of the reorganization, any goodwill allocated to the global CRM reporting unit was no longer supported by the cash flows of other businesses. Under our former reporting unit structure, the goodwill allocated to our regional reporting units was supported by the cash flows from all businesses in each international region. The hypothetical tax structure of the global CRM business and the global CRM business discount rate applied were also contributing factors to the goodwill impairment charge. After recording the estimated impairment charge in the first quarter of 2013, there was no remaining goodwill allocated to the global CRM reporting unit as of March 31, 2013.

The goodwill impairment charge taken during the first quarter of 2013 was determined on a global CRM basis pursuant to our new organizational structure. We used the income approach, specifically the DCF method, to derive the fair value of the global CRM reporting unit. We completed a DCF model associated with our new global CRM business, including the amount and timing of future expected cash flows, tax attributes, the terminal value growth rate of approximately two percent and the appropriate market-participant risk-adjusted weighted average cost of capital (WACC) of approximately 12 percent.
As of March 31, 2013, we identified two global reporting units with goodwill that is at higher risk of potential failure of the first step of the goodwill impairment test in future reporting periods. These reporting units are comprised of our global Neuromodulation reporting unit, which had excess fair value over carrying value of approximately 17 percent and held $1.356 billion of allocated goodwill, and our global Electrophysiology reporting unit, which had excess fair value over carrying value of approximately 56 percent and held $154 million of allocated goodwill, each as of March 31, 2013. Future changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses could result in future impairments of goodwill within the global CRM reporting unit or other reporting units. Additionally, the recoverability of our CRM-related amortizable intangibles is sensitive to future cash flow assumptions and our global CRM business performance. Therefore, our CRM-related amortizable intangibles are at higher risk of potential failure of the first step of the amortizable intangible recoverability test in future reporting periods. An impairment of a material portion of our CRM-related amortizable intangibles carrying value would occur if the second step of the amortizable intangible test is required in a future reporting period.
On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. The key variables that drive the cash flows of our reporting units and amortizable intangibles are estimated revenue growth rates and levels of profitability. Terminal value growth rate assumptions, as well as the WACC rate applied are additional key variables for reporting unit cash flows. These assumptions are subject to uncertainty, including our ability to grow revenue and improve profitability levels. Relatively small declines in the future performance and cash flows of a reporting unit or asset group or small changes in other key assumptions may result in the recognition of significant asset impairment charges. For example, keeping all other variables constant, an increase in the WACC applied of 80 basis points or a 90 basis point decrease in the revenue growth rates over the projection period would require that we perform the second step of the goodwill impairment test for the global Neuromodulation reporting unit. A 440 basis point increase in the WACC applied or a 420 basis point decrease in the revenue growth rates over the projection period would require that we perform the second step of the goodwill impairment test for the global Electrophysiology reporting unit. 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 business performance may impair the recoverability of our goodwill and intangible asset balances.

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Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units and/or amortizable intangible assets 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, and/or competitive technology developments;
declines in our market share and penetration assumptions due to increased competition, an inability to develop or launch new and next-generation products and technology features in line with our commercialization strategies, and market and/or regulatory conditions that may cause significant launch delays or product recalls;
decreases in our forecasted 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;
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, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;
the level of success in managing the growth of acquired companies, achieving sustained profitability consistent with our expectations, establishing government and third-party payer reimbursement, supplying the market and increases in the costs and time necessary to integrate acquired businesses into our operations successfully;
changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses;
increases in our market-participant risk-adjusted WACC; and
declines in revenue as a result of loss of key members of our sales force and other key personnel.
Negative changes in one or more of these factors, among others, could result in additional impairment charges.
The following is a rollforward of accumulated goodwill write-offs by global reportable segment. We restated the prior period information to conform to the current period presentation:
(in millions)
Cardiovascular
 
Rhythm Management
 
MedSurg
 
Total
Accumulated write-offs as of December 31, 2012 (restated)
$
(1,479
)
 
$
(6,537
)
 
$
(1,461
)
 
$
(9,477
)
Goodwill written off

 
(423
)
 

 
(423
)
Accumulated write-offs as of March 31, 2013
$
(1,479
)
 
$
(6,960
)
 
$
(1,461
)
 
$
(9,900
)

Intangible Asset Impairment Testing

On a quarterly basis, we monitor for events or other potential indicators of impairment that would warrant an interim impairment test of our intangible assets. See 2013 Goodwill Impairment Testing and Charge above for discussion of future events that would have a negative impact on the recoverability of our amortizable intangible assets.

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 (Topic 815). 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

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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 March 31, 2013 and December 31, 2012 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 $2.661 billion as of March 31, 2013 and $2.469 billion as of December 31, 2012.
We recognized net losses of $6 million in earnings on our cash flow hedges during the first quarter of 2013, as compared to net losses of $16 million during the first quarter of 2012. All currency cash flow hedges outstanding as of March 31, 2013 mature within 36 months. As of March 31, 2013, $106 million of net gains, 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 gains of $31 million as of December 31, 2012. As of March 31, 2013, $37 million of net gains, 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 less than one year. We had currency derivative instruments not designated as hedges under Topic 815 outstanding in the contract amount of $2.086 billion as of March 31, 2013 and $1.942 billion as of December 31, 2012.
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

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hedge to interest expense at that time. We had no interest rate derivative contracts outstanding as of March 31, 2013 or December 31, 2012.
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 on these derivative instruments upon termination into earnings as a reduction of interest expense over the remaining term of the hedged debt, in accordance with Topic 815. The carrying amount of certain of our senior notes included unamortized gains of $61 million as of March 31, 2013 and $64 million as of December 31, 2012, and unamortized losses of $3 million as of March 31, 2013 and December 31, 2012, 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 $4 million as of March 31, 2013 and December 31, 2012. We recorded $2 million during the first quarter of 2013 as a reduction to interest expense, resulting from the amortization of previously terminated interest rate derivative contracts. As of March 31, 2013, $10 million of pre-tax net gains may be reclassified to earnings within the next twelve months as a reduction to interest expense 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 counterparty credit risk 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 first quarter of 2013 and 2012 (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 March 31, 2013
 
 
 
 
 
Currency hedge contracts
$
113

 
$
(6
)
 
Cost of products sold
 
$
113

 
$
(6
)
 
 
Three Months Ended March 31, 2012
 
 
 
 
 
Currency hedge contracts
$
37

 
$
(16
)
 
Cost of products sold
 
$
37

 
$
(16
)
 
 

The amount of gain (loss) recognized in earnings related to the ineffective portion of hedging relationships was de minimis for all periods presented.

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Net gains and losses on currency hedge contracts not designated as hedging instruments were offset by net losses and gains from foreign currency transaction exposures, as shown in the following table:

in millions
 
 
 
Three Months Ended
 
Location in Statement of Operations
 
March 31,
 
 
2013
 
2012
Gain (loss) on currency hedge contracts
 
Other, net
 
$
26

 
$
3

Gain (loss) on foreign currency transaction exposures
 
Other, net
 
(28
)
 
(6
)
Net foreign currency gain (loss)
 
Other, net
 
$
(2
)
 
$
(3
)
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 (Topic 820), 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 March 31, 2013, 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 March 31, 2013 and December 31, 2012:

 
 
As of
 
 
March 31,
 
December 31,
(in millions)
Location in Balance Sheet (1)
2013
 
2012
Derivative Assets:
 
 
 
 
Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Prepaid and other current assets
$
71

 
$
25

Currency hedge contracts
Other long-term assets
114

 
63

 
 
185

 
88

Non-Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Prepaid and other current assets
32

 
33

Total Derivative Assets
 
$
217

 
$
121

 
 
 
 
 
Derivative Liabilities:
 
 
 
 
Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Other current liabilities
$
14

 
$
20

Currency hedge contracts
Other long-term liabilities
4

 
10

 
 
18

 
30

Non-Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Other current liabilities
22

 
27

Total Derivative Liabilities
 
$
40

 
$
57

(1)
We classify derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less.


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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:
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 March 31, 2013 and December 31, 2012:

 
As of March 31, 2013
 
As of December 31, 2012
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market and government funds
$
36

 

 

 
$
36

 
$
39

 

 

 
$
39

Currency hedge contracts

 
$
217

 

 
217

 

 
$
121

 

 
121

 
$
36

 
$
217

 

 
$
253

 
$
39

 
$
121

 

 
$
160

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency hedge contracts

 
$
40

 

 
$
40

 

 
$
57

 

 
$
57

Accrued contingent consideration

 

 
$
642

 
642

 

 

 
$
663

 
663

 

 
$
40

 
$
642

 
$
682

 

 
$
57

 
$
663

 
$
720


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 $36 million invested in money market and government funds as of March 31, 2013, we had $105 million in short-term time deposits and $127 million in interest bearing and non-interest bearing bank accounts. In addition to $39 million invested in money market and government funds as of December 31, 2012, we had $168 million in interest bearing and non-interest bearing bank accounts.
Changes in the fair value of assets and liabilities measured on a recurring basis using significant unobservable inputs (Level 3) during the first three months of 2013 related solely to our contingent consideration liabilities. Refer to Note B - Acquisitions for a discussion of the fair value measurements related to our contingent consideration liabilities.

Non-Recurring Fair Value Measurements
We have 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 $17 million as of March 31, 2013 and $13 million as of December 31, 2012.
During the three months ended March 31, 2013, we recorded $423 million of losses, to adjust our goodwill balances to their fair value. Refer to Note D - Goodwill and Other Intangible Assets, for further detailed information related to this charge and significant unobservable inputs (Level 3).

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The fair value of our outstanding debt obligations was $4.779 billion as of March 31, 2013 and $4.793 billion as of December 31, 2012, which was determined by using primarily quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy. 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 $4.254 billion as of March 31, 2013 and $4.256 billion as of December 31, 2012. The debt maturity schedule for the significant components of our debt obligations as of March 31, 2013 is as follows:

 
 
 
 
(in millions)
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
Senior notes

 
$
600

 
$
1,250

 
$
600

 
$
250

 
$
1,500

 
$
4,200

 

 
$
600

 
$
1,250

 
$
600

 
$
250

 
$
1,500

 
$
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.
Revolving Credit Facility
We maintain a $2.000 billion revolving credit facility, maturing in April 2017, with a global syndicate of commercial banks. Eurodollar and multicurrency loans under this revolving credit facility bear interest at LIBOR plus an interest margin of between 0.875 percent and 1.475 percent, based on our corporate credit ratings and consolidated leverage ratio (1.275 percent as of March 31, 2013). In addition, we are required to pay a facility fee based on our credit ratings, consolidated leverage ratio, and the total amount of revolving credit commitments, regardless of usage, under the agreement (0.225 percent as of March 31, 2013). There were no amounts borrowed under our revolving credit facility as of March 31, 2013 or December 31, 2012.
As of March 31, 2013, we had outstanding letters of credit of $93 million, as compared to $94 million as of December 31, 2012, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of March 31, 2013 and December 31, 2012, none of the beneficiaries had drawn upon the letters of credit or guarantees; accordingly, we had not recognized a related liability for our outstanding letters of credit in our consolidated balance sheets as of March 31, 2013 or December 31, 2012. We believe we will generate sufficient cash from operations to fund these payments and intend to fund these payments without drawing on the letters of credit.
Our revolving credit facility agreement in place as of March 31, 2013 requires that we maintain certain financial covenants, as follows:
 
Covenant
Requirement
 
Actual as of
March 31, 2013
Maximum leverage ratio (1)
3.5 times
 
2.4 times
Minimum interest coverage ratio (2)
3.0 times
 
6.9 times

(1)
Ratio of total debt to consolidated EBITDA, as defined by the credit agreement, for the preceding four consecutive fiscal quarters.
(2)
Ratio of consolidated EBITDA, as defined by the credit agreement, 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 any non-cash charges up to $500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of March 31, 2013, we had $343 million of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the agreement, are excluded from the calculation of consolidated EBITDA and any new debt issued to fund any tax deficiency payments is excluded from consolidated total debt, as defined in the agreement, provided that the sum of any excluded net cash litigation payments and any new debt issued to fund any tax deficiency payments shall not exceed $2.300 billion in the aggregate. As of March 31, 2013, we had approximately $2.3 billion of the combined legal and debt exclusion remaining. As of and through March 31, 2013, we were in compliance with the required covenants.
Any inability to maintain compliance with these covenants could require us to seek to renegotiate the terms of our credit facilities or seek waivers from compliance with these covenants, both of which could result in additional borrowing costs. Further, there

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can be no assurance that our lenders would agree to such new terms or grant such waivers.
Senior Notes
We had senior notes outstanding of $4.200 billion as of March 31, 2013 and December 31, 2012. These notes are publicly registered securities, are redeemable prior to maturity and are not subject to any sinking fund requirements. Our senior notes are unsecured, unsubordinated obligations and rank on parity with each other. These notes are effectively junior to borrowings under our credit and security facility and liabilities of our subsidiaries (see Other Arrangements below).
Other Arrangements
We also maintain a $350 million credit and security facility secured by our U.S. trade receivables. In June 2012, we extended the maturity of this facility to June 2013, subject to further extension. There were no borrowings under this facility as of March 31, 2013 and December 31, 2012.
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 $290 million as of March 31, 2013. 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 $188 million of receivables as of March 31, 2013 at an average interest rate of 3.8 percent, and $191 million as of December 31, 2012 at an average interest rate of 1.6 percent. Within Italy, Spain, Portugal and Greece the number of days our receivables are outstanding has increased above historical levels. We believe we have adequate allowances for doubtful accounts related to our Italy, Spain, Portugal and Greece accounts receivable; however, we will continue to monitor the European economic environment for any collectibility issues related to our outstanding receivables. As of March 31, 2013, our net receivables in these countries greater than 180 days past due totaled $55 million, of which $16 million were past due greater than 365 days. In addition, we are currently pursuing alternative factoring providers and financing arrangements to mitigate our credit exposure to receivables in this region.
In addition, we have uncommitted credit facilities with a commercial Japanese bank that provide for borrowings, promissory notes discounting and receivables factoring of up to 21.0 billion Japanese yen (approximately $223 million as of March 31, 2013). We de-recognized $165 million of notes receivable as of March 31, 2013 at an average interest rate of 1.8 percent and $182 million of notes receivable as of December 31, 2012 at an average interest rate of 1.6 percent. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets.

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. 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 we believe 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 stockholder value. Key activities under the plan include standardizing and automating certain processes and activities; relocating select administrative and functional activities; rationalizing organizational reporting structures; leveraging preferred vendors; and other efforts to eliminate inefficiency. 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. On January 25, 2013, our Board of Directors approved, and we committed to, an expansion of the 2011 Restructuring program (the Expansion). The Expansion is intended to further strengthen our operational effectiveness and efficiencies and support new investments. Activities under the 2011 Restructuring plan were initiated in the third quarter of 2011 and all activities, including those related to the Expansion, are expected to be substantially complete by the end of 2013.
We estimate that the 2011 Restructuring plan, including the Expansion, will result in total pre-tax charges of approximately $300 million to $355 million, and that approximately $270 million to $300 million of these charges will result in future cash outlays,

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of which we have made payments of $174 million, which were partially offset by proceeds of $53 million on facility and fixed asset sales, as of March 31, 2013. As of March 31, 2013, we recorded related costs of $201 million since the inception of the plan, and recorded a portion of these expenses as restructuring charges and the remaining portion through other lines within our unaudited condensed consolidated statements of operations.
The following provides a summary of our expected total costs associated with the 2011 Restructuring plan, including the Expansion, by major type of cost:

Type of cost
Total estimated amount expected to
be incurred
Restructuring charges:
 
Termination benefits
$185 million to $210 million
Other (1)
$70 million to $90 million
Restructuring-related expenses:
 
Other (2)
$45 million to $55 million
 
$300 million to $355 million
(1)
Includes primarily consulting fees, gains and losses on disposals of fixed assets and costs associated with contractual cancellations.
(2)
Comprised of other costs directly related to the 2011 Restructuring plan, including the Expansion, such as 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 stockholder value. Key activities under the plan included the restructuring of certain of our businesses and corporate functions; 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 were complete by the end of 2012.
The execution of the 2010 Restructuring plan resulted in total pre-tax charges of $160 million, and required cash outlays of $145 million, of which we made payments of $145 million as of March 31, 2013. As of March 31, 2013, we recorded 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 costs associated with the 2010 Restructuring plan by major type of cost:

Type of cost
Total amount incurred
Restructuring charges:
 
Termination benefits
$90 million
Fixed asset write-offs
$11 million
Other (1)
$51 million
Restructuring-related expenses:
 
Other (2)
$8 million
 
$160 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 initiative (the Plant Network Optimization program), intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and by closing certain other facilities. The program was a complement to the restructuring initiatives approved by our Board of Directors in 2007 (the 2007 Restructuring plan), and was intended to improve overall gross profit margins. Activities

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under the Plant Network Optimization program were initiated in the first quarter of 2009 and were substantially completed during 2012.
We estimate that the execution of the Plant Network Optimization program will result in total pre-tax charges of approximately $130 million, and that approximately $105 million to $110 million of these charges will result in cash outlays, of which we made payments of $103 million as of March 31, 2013. As of March 31, 2013, we recorded related costs of $129 million since the inception of the plan, and recorded a portion of these expenses as restructuring charges and the remaining portion through cost of products sold within our unaudited condensed 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
$33 million
 
 
Restructuring-related expenses:
 
Accelerated depreciation
$22 million
Transfer costs (1)
$75 million
 
$130 million

(1)
Consists primarily of costs to transfer product lines among facilities, including costs of transfer teams, freight, idle facility and product line validations.
In the aggregate, we recorded net restructuring charges pursuant to our restructuring plans of $10 million in the first quarter of 2013 and 2012. During the first quarter of 2013, our other restructuring charges were partially offset by a $19 million gain recognized on the sale of our Natick, Massachusetts headquarters. We are currently in the process of consolidating our Natick, Massachusetts headquarters into our Marlborough, Massachusetts location, where we are establishing a new global headquarters campus. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $5 million in the first quarter of 2013 and $7 million in the first quarter of 2012.

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The following presents these costs (credits) by major type and line item within our accompanying unaudited condensed consolidated statements of operations, as well as by program:

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
Restructuring charges
$
8

 

 

 
$
(17
)
 
$
19

 
$
10

Restructuring-related expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 


 
$

 

 

 

Selling, general and administrative expenses

 
$
1

 

 

 
4

 
5

 

 
1

 

 

 
4

 
5

 
$
8

 
$
1

 
$

 
$
(17
)
 
$
23

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
2011 Restructuring plan
$
10

 
$
1

 

 
$
(17
)
 
$
23

 
$
17

2010 Restructuring plan

 

 

 

 


 

Plant Network Optimization program
(2
)
 


 
$

 

 

 
(2
)
 
$
8

 
$
1

 
$

 
$
(17
)
 
$
23

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
Restructuring charges
$
(1
)
 

 

 


 
$
11

 
$
10

Restructuring-related expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 


 
$
4

 

 

 
4

Selling, general and administrative expenses

 

 

 

 
3

 
3

 

 

 
4

 

 
3

 
7

 
$
(1
)
 
$

 
$
4

 


 
$
14

 
$
17

 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
2011 Restructuring plan
$
2

 

 

 


 
$
13

 
$
15

2010 Restructuring plan
(2
)
 
 
 
 
 
 
 
1

 
(1
)
Plant Network Optimization program
(1
)
 


 
$
4

 

 

 
3

 
$
(1
)
 
$

 
$
4

 


 
$
14

 
$
17

 
 
 
 
 
 
 
 
 
 
 
 
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 (Topic 420). We expect to record additional termination benefits related to our restructuring initiatives in 2013 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.

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As of March 31, 2013, we have incurred cumulative restructuring charges related to our 2011 Restructuring plan (including the Expansion), 2010 Restructuring plan and Plant Network Optimization program of $365 million and restructuring-related costs of $125 million since we committed to each plan. The following presents these costs by major type and by plan:
The following presents these costs by major type and by plan:
(in millions)
2011
Restructuring
plan (including the Expansion)
 
2010
Restructuring
plan
 
Plant
Network
Optimization Program
 
Total
Termination benefits
$
110

 
$
90

 
$
33

 
$
233

Fixed asset write-offs


 
11

 

 
11

Other
70

 
51

 

 
121

Total restructuring charges
180

 
152

 
33

 
365

Accelerated depreciation

 

 
22

 
22

Transfer costs

 

 
74

 
74

Other
21

 
8

 

 
29

Restructuring-related expenses
21

 
8

 
96

 
125

 
$
201

 
$
160

 
$
129

 
$
490


We made cash payments of $47 million and received $53 million of cash proceeds on facility and fixed asset sales associated with our restructuring initiatives during the first quarter of 2013. As of March 31, 2013, we had made total cash payments of $422 million related to our 2011 Restructuring plan (including the Expansion), 2010 Restructuring plan and Plant Network Optimization program since committing to each plan, partially offset by proceeds of $53 million. Payments were made using cash generated from operations, and are comprised of the following:

(in millions)
2011
Restructuring
plan (including the Expansion)
 
2010
Restructuring
plan
 
Plant
Network
Optimization Program
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
 
 
Termination benefits
$
22

 
$

 
$
1

 
$
23

Transfer costs

 

 

 

Other
24

 


 

 
24

 
$
46

 
$

 
$
1

 
$
47

 
 
 
 
 
 
 
 
Program to Date
 
 
 
 
 
 
 
Termination benefits
$
85

 
$
89

 
$
30

 
$
204

Transfer costs

 

 
73

 
73

Other
89

 
56

 

 
145

 
$
174

 
$
145

 
$
103

 
$
422



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Our restructuring liability is primarily comprised of accruals for termination benefits. The following is a rollforward of the termination benefit liability associated with our 2011 Restructuring plan (including the Expansion), 2010 Restructuring plan and Plant Network Optimization program, since the inception of the respective plans, which is reported as a component of accrued expenses included in our accompanying unaudited condensed balance sheets:
 
 
Restructuring Plan Termination Benefits
(in millions)
 
2011
 
2010
 
Plant Network Optimization
 
Total
Accrued as of December 31, 2012
 
$
36

 
$
3

 
$
9

 
$
48

Charges (credits)
 
10

 

 
(2
)
 
8

Cash payments
 
(22
)
 

 
(1
)
 
(23
)
Other adjustments
 

 
(3
)
 

 
(3
)
Accrued as of March 31, 2013
 
$
24

 
$

 
$
6

 
$
30


In addition to our accrual for termination benefits, we had an $8 million liability as of March 31, 2013 and a $5 million liability as of December 31, 2012 for other restructuring-related items.

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)
 
March 31, 2013
 
December 31, 2012
Accounts receivable
 
$
1,346

 
$
1,336

Less: allowance for doubtful accounts
 
(86
)
 
(88
)
Less: allowance for sales returns
 
(28
)
 
(31
)
 
 
$
1,232

 
$
1,217

The following is a rollforward of our allowance for doubtful accounts for the first quarter of 2013 and 2012:
 
 
Three Months Ended
March 31,
(in millions)
 
2013
 
2012
Beginning balance
 
$
88

 
$
81

Charges to expenses
 
3

 
9

Utilization of allowances
 
(5
)
 


Ending balance
 
$
86

 
$
90

Inventories
 
 
As of
(in millions)
 
March 31, 2013
 
December 31, 2012
Finished goods
 
$
583

 
$
598

Work-in-process
 
78

 
70

Raw materials
 
190

 
216

 
 
$
851

 
$
884


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Property, plant and equipment, net
 
 
As of
(in millions)
 
March 31, 2013
 
December 31, 2012
Land
 
$
81

 
$
81

Buildings and improvements
 
895

 
873

Equipment, furniture and fixtures
 
2,346

 
2,348

Capital in progress
 
195

 
218

 
 
3,517

 
3,520

Less: accumulated depreciation
 
1,980

 
1,956

 
 
$
1,537

 
$
1,564

Depreciation expense was $61 million for the first quarter of 2013 and $66 million for the first quarter of 2012.
Accrued expenses
 
 
As of
(in millions)
 
March 31, 2013
 
December 31, 2012
Payroll and related liabilities
 
$
356

 
$
452

Accrued contingent consideration
 
132

 
120

Legal reserves
 
127

 
100

Other
 
571

 
612

 
 
$
1,186

 
$
1,284

Other long-term liabilities
 
 
As of
(in millions)
 
March 31, 2013
 
December 31, 2012
Accrued income taxes
 
$
1,243

 
$
1,215

Accrued contingent consideration
 
510

 
543

Legal reserves
 
521

 
391

Other long-term liabilities
 
390

 
398

 
 
$
2,664

 
$
2,547

Accrued warranties
We offer warranties on certain of our product offerings. The majority of our warranty liability as of March 31, 2013 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 three months of 2013 and 2012 consisted of the following (in millions):
 
 
Three Months Ended
March 31,
 
 
2013
 
2012
Beginning Balance
 
$
26

 
$
30

Provision
 
4

 


Settlements/reversals
 
(3
)
 
(7
)
Ending Balance
 
$
27

 
$
23


23

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NOTE I – INCOME TAXES
Tax Rate
The following tables provide a summary of our reported tax rate:
 
 
Three Months Ended
March 31,
 
 
2013
 
2012
Reported tax rate
 
10.2
%
 
7.7
%
Impact of certain receipts/charges*
 
3.0
%
 
7.3
%
 
 
13.2
%
 
15.0
%
 
 
 
 
 
*These receipts/charges are taxed at different rates than our effective tax rate.
The change in our reported tax rate for the first quarter of 2013, as compared to the same period in 2012, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate and the impact of certain discrete tax items. In the first quarter of 2013, the receipts and charges included a goodwill impairment charge, acquisition- and divestiture-related net credits, and litigation- and restructuring-related charges. Our reported tax rate in the first quarter of 2013 was favorably affected by discrete tax items that primarily related to the reinstatement of tax legislation that has been retroactively applied, offset in part by the resolution of uncertain tax positions related to audit settlements. In the first quarter of 2012, the receipts and charges included acquisition- divestiture- and restructuring-related charges. Our reported tax rate in the first quarter of 2012 was also affected by discrete tax items related primarily to the resolution of an uncertain tax position resulting from a favorable court ruling.
As of March 31, 2013, we had $1.049 billion of gross unrecognized tax benefits, of which a net $913 million, if recognized, would affect our effective tax rate. As of December 31, 2012, we had $1.052 billion of gross unrecognized tax benefits, of which a net $902 million, if recognized, would affect our effective tax rate.
We are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters through 2000 and substantially all material state, local, and foreign income tax matters through 2001.
We have received Notices of Deficiency from the Internal Revenue Service (IRS) reflecting proposed audit adjustments for Guidant Corporation (Guidant) for its 2001 through 2006 tax years and Boston Scientific Corporation for its 2006 and 2007 tax years. Subsequent to issuing these Notices, the IRS conceded a portion of its original assessment. The total incremental tax liability now asserted by the IRS for the applicable periods is $1.162 billion plus interest. The primary issue in dispute for all years is the transfer pricing in connection with the technology license agreements between domestic and foreign subsidiaries of Guidant. In addition, the IRS has proposed adjustments in connection with the financial terms of our Transaction Agreement with Abbott Laboratories (Abbott) pertaining to the sale of Guidant's vascular intervention business to Abbott in April 2006. We do not agree with the transfer pricing methodologies applied by the IRS or its resulting assessment and we believe that the IRS has exceeded its authority by attempting to adjust the terms of our negotiated third-party agreement with Abbott. In addition, we believe that the IRS positions with regard to these matters are inconsistent with the applicable tax laws and the existing Treasury regulations.
We believe we have meritorious defenses for our tax filings and we have filed petitions with the U.S. Tax Court contesting the Notices of Deficiency for the tax years in challenge. No payments on the net assessment would be required until the dispute is definitively resolved, which, based on experiences of other companies, could take several years. We believe that our income tax reserves associated with these matters are adequate and the final resolution will not have a material impact on our financial condition or results of operations. However, final resolution is uncertain and could have a material impact on our financial condition, results of operations, or cash flows.
We recognize interest and penalties related to income taxes as a component of income tax expense. We had $378 million accrued for gross interest and penalties as of March 31, 2013 and $364 million as of December 31, 2012. The increase in gross interest and penalties was $14 million, recognized in our unaudited condensed consolidated statements of operations. We recognized tax expense related to interest and penalties of $9 million during the first quarter of 2013 and $2 million during the first quarter of 2012.

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It is reasonably possible that within the next 12 months we will resolve multiple issues including transfer pricing and transactional-related issues with foreign, federal and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $15 million.

NOTE J – COMMITMENTS AND CONTINGENCIES

The medical device market in which we primarily participate is largely technology driven. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. Over the years, there has been litigation initiated against us by others, including our competitors, claiming that our current or former product offerings infringe patents owned or licensed by them. Intellectual property litigation is inherently complex and unpredictable. In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently drive settlement not only for individual cases, but also for a series of pending and potentially related and unrelated cases. Although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.

During recent years, we successfully negotiated closure of several long-standing legal matters and recently received favorable legal rulings in several other matters; however, there continues to be outstanding intellectual property litigation particularly in the coronary stent market. Adverse outcomes in one or more of these matters could have a material adverse effect on our ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.

In the normal course of business, product liability, securities and commercial claims are asserted against us. Similar claims may be asserted against us in the future related to events not known to management at the present time. We maintain an insurance policy providing limited coverage against securities claims, and we are substantially self-insured with respect to product liability claims and fully self-insured with respect to intellectual property infringement claims. The absence of significant third-party insurance coverage increases our potential exposure to unanticipated claims or adverse decisions. Product liability claims, securities and commercial litigation, and other legal proceedings in the future, regardless of their outcome, could have a material adverse effect on our financial position, results of operations and/or liquidity.

In addition, like other companies in the medical device industry, we are subject to extensive regulation by national, state and local government agencies in the United States and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.

We record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable. In accordance with ASC Topic 450, Contingencies, we accrue anticipated costs of settlement, damages, losses for general product liability claims and, under certain conditions, costs of defense, based on historical experience or to the extent specific losses are probable and estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.

Our accrual for legal matters that are probable and estimable was $648 million as of March 31, 2013 and $491 million as of December 31, 2012, and includes estimated costs of settlement, damages and defense. The increase in our legal accrual was primarily due to $130 million in litigation-related charges recorded during the quarter. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with our debt covenants.

In management's opinion, we are not currently involved in any legal proceedings other than those disclosed in our 2012 Annual Report filed on Form 10-K and specifically identified below, which, individually or in the aggregate, could have a material adverse effect on our financial condition, operations and/or cash flows. Unless included in our legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding cannot be estimated.


25

Table of Contents

Patent Litigation

In February 2013, Orbus International B.V. filed suits against the Company and two of its Dutch subsidiaries in the Hague District Court in the Netherlands and Orbus Medical GmbH filed suits against the Company and one of its German subsidiaries in the Duesseldorf District Court in Germany. In March 2013, Orbus Medical Inc. and Orbus international B.V. filed suit against the Company and two of its Irish subsidiaries in the Irish Commercial Court in Dublin, Ireland. Each of these matters alleges that the Company's sale of stent systems using the Element design infringe European patents owned by Orbus Medical Inc. and licensed to other Orbus entities. In one Dutch matter, Orbus is seeking cross border, preliminary injunctive relief, and a hearing is scheduled for June 11, 2013. In the other Dutch matter, Orbus is seeking damages and injunctive relief, and a hearing is scheduled for December 20, 2013. In one German matter, Orbus sought preliminary injunctive relief, which the Duesseldorf District Court granted on April 30, 2013. On that same date, we appealed the injunction to the Court of Appeals of Duesseldorf. In the other German matter, Orbus is seeking damages and injunctive relief, and a hearing is scheduled for May 14, 2014. In the Irish matter, Orbus is seeking damages and injunctive relief. In March 2013, two of the Company's subsidiaries filed suit against Orbus Medical Inc. in the English High Court seeking a declaration that the sale of the stent systems with the Element design do not infringe two Orbus patents and to have the two patents found invalid.

Product Liability Litigation

As of May 6, 2013, there were over 5,000 product liability cases or claims asserted against us in various federal and state courts across the country alleging personal injury associated with use of our transvaginal surgical mesh products designed to treat stress urinary incontinence and pelvic organ prolapse.  Generally, the plaintiffs allege design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims.  Many of the cases have been specially assigned to one judge in state court in Massachusetts. On February 7, 2012, the Judicial Panel on Multi-District Litigation (MDL) established MDL-2326 in the U.S. District Court for the Southern District of West Virginia and transferred the federal court transvaginal surgical mesh cases to MDL-2326 for coordinated pretrial proceedings. In addition, in October 2012 we were contacted by the Attorney General for the State of California informing us that their office and certain other state attorneys general offices intend to initiate a civil investigation into our sale of transvaginal surgical mesh products.

Governmental Investigations and Qui Tam Matters

In December 2007, we were informed by the U.S. Attorney's Office for the Northern District of Texas that it was conducting an investigation of allegations related to improper promotion of biliary stents for off-label uses. The allegations were set forth in a qui tam complaint, which named us and certain of our competitors. Following the federal government's decision not to intervene in the case, the U.S. District Court for the Northern District of Texas unsealed the complaint. In March 2011, the District Court issued an order granting our motion to dismiss and, in March 2012, issued its opinion ordering that all claims against us be dismissed, some of which were dismissed with prejudice and some of which were dismissed without prejudice to the relator's right to amend those claims. On September 14, 2012, the relator filed and served an amended complaint restating the claims that the District Court dismissed without prejudice. On January 17, 2013, the District Court granted our motion to dismiss with prejudice all of the relator's remaining claims against us, and on April 12, 2013, the District Court amended its order of dismissal to specify that it was final and appealable. On May 3, 2013, the relator voluntarily moved to dismiss his appeal of the January 17, 2013 order of dismissal, which he had filed with the U.S. Court of Appeals for the Fifth Circuit on February 15, 2013.

On June 27, 2008, the Republic of Iraq filed a complaint against our wholly-owned subsidiary, BSSA France, and 92 other defendants in the U.S. District Court of the Southern District of New York. The complaint alleges that the defendants acted improperly in connection with the sale of products under the United Nations Oil for Food Program. The complaint also alleges Racketeer Influenced and Corrupt Organizations Act (RICO) violations, conspiracy to commit fraud and the making of false statements and improper payments, and it seeks monetary and punitive damages. A hearing on the pending motion to dismiss was held on October 26, 2012, and on February 6, 2013, the District Court dismissed the complaint with prejudice on standing and jurisdictional grounds. On February 20, 2013, the plaintiff filed an appeal.

On March 22, 2010, we received a subpoena from the U.S. Attorney's Office for the District of Massachusetts seeking documents relating to the former Market Development Sales Organization that operated within our CRM business. We are cooperating with the request. On October 21, 2011, the U.S. District Court for the District of Massachusetts unsealed a qui tam complaint that relates to the subject matter of the U.S. Attorney's investigation, after the federal government declined to intervene in the matter. Subsequently, on January 30, 2012, the relator filed an amended complaint. On July 5, 2012, the District Court issued an opinion and order dismissing the amended complaint for lack of subject matter jurisdiction. On July 12, 2012, the relator appealed the judgment of dismissal to the U.S. Court of Appeals for the First Circuit, and oral argument was held on February 7, 2013.


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Table of Contents

Other Proceedings

Refer to Note I - Income Taxes for information regarding our tax litigation.

Matters Concluded Since December 31, 2012

On December 4, 2009, we, along with Boston Scientific Scimed, Inc., filed a complaint for patent infringement against Cordis Corporation alleging that its Cypher Mini™ stent product infringes a U.S. patent (the Jang patent) owned by us. In April 2011, the U.S. District Court for the District of Delaware granted summary judgment that Cordis willfully infringed the Jang patent. After a trial on damages in May 2011, the jury found in favor of Boston Scientific for lost profits of approximately $18.5 million and royalties of approximately $1 million. On March 13, 2012, the District Court granted our motion for enhanced damages, resulting in a total damages award of approximately $41 million. On February 12, 2013, the Court of Appeals affirmed the District Court's judgment in favor of Boston Scientific.

On November 17, 2009, Boston Scientific Scimed, Inc. filed suit against OrbusNeich Medical, Inc. and certain of its subsidiaries in the Hague District Court in the Netherlands alleging that OrbusNeich's sale of the Genous stent infringes a patent owned by us (the Keith patent) and seeking monetary damages and injunctive relief. On March 13, 2012, the Hague Court of Appeals denied our request for preliminary relief. On April 2, 2013, the Hague Court of Appeals found the Keith patent invalid.

NOTE K – WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
Three Months Ended
March 31,
(in millions)
 
2013
 
2012
Weighted average shares outstanding - basic
 
1,351.9

 
1,445.2

Net effect of common stock equivalents
 

*
8.9

Weighted average shares outstanding - assuming dilution
 
1,351.9

 
1,454.1


* We generated a net loss in the first quarter of 2013. Our weighted-average shares outstanding for earnings per share calculations
excludes common stock equivalents of 12.8 million for the first quarter of 2013 due to our net loss position in this period.
Weighted average shares outstanding, assuming dilution, excludes the impact of 48 million stock options for the first quarter of 2013 and 59 million stock options for the first quarter of 2012, due to the exercise prices of these stock options being greater than the average fair market value of our common stock during the period.
We issued approximately eight million shares of our common stock in the first quarters of 2013 and 2012, following the exercise or vesting of underlying stock options or deferred stock units, or purchases under our employee stock purchase plans. We repurchased approximately 13 million shares of our common stock during the first quarter of 2013 for approximately $100 million, pursuant to our authorized repurchase programs as discussed in Note L – Stockholders' Equity to our audited financial statements contained in Item 8 of our 2012 Annual Report on Form 10-K.

NOTE L – SEGMENT REPORTING
Effective as of January 1, 2013, we reorganized our business from geographic regions to fully operationalized global business units. Following the reorganization, based on information regularly reviewed by our chief operating decision maker, we have three new reportable segments comprised of: Cardiovascular, Rhythm Management, and MedSurg. Our reportable segments represent an aggregate of operating segments. We have restated the prior period to conform to the current year presentation of our reportable segments.
Each of our reportable segments generates revenues from the sale of medical devices. We measure and evaluate our reportable segments based on segment net sales and operating income, excluding the impact of changes in foreign currency and sales from divested businesses. Sales generated from reportable segments and divested businesses, as well as operating results of reportable segments and corporate expenses, are based on internally-derived standard currency exchange rates, which may differ from year to year, and do not include intersegment profits. We restated segment information for the prior period based on standard currency exchange rates used for the current period in order to remove the impact of foreign currency exchange fluctuations. Based on information regularly reviewed by our chief operating decision maker following our reorganization, we also restated certain expenses associated with our manufacturing and corporate operations. We exclude from segment operating income certain corporate-related expenses and certain transactions or adjustments that our chief operating decision maker considers to be non-recurring and/or non-operational, such as amounts related to goodwill and other intangible asset impairment charges; acquisition-,

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divestiture-, restructuring- and litigation-related charges and credits; and amortization expense. Although we exclude these amounts from segment operating income, they are included in reported consolidated operating income (loss) and are included in the reconciliation below.
A reconciliation of the totals reported for the reportable segments to the applicable line items in our accompanying unaudited condensed consolidated statements of operations is as follows:
 
 
Three Months Ended
March 31,
 
(in millions)
 
2013
 
2012*
 
Net sales
 
 
 
 
 
   Interventional Cardiology
 
$
514

 
$
598

 
   Peripheral Interventions
 
194

 
188

 
Cardiovascular
 
708

 
786

 
 
 
 
 
 
 
   Cardiac Rhythm Management
 
485

 
504

 
   Electrophysiology
 
35

 
37

 
Rhythm Management
 
520

 
541

 
 
 
 
 
 
 
   Endoscopy
 
313

 
298

 
   Urology/Women's Health
 
119

 
118

 
   Neuromodulation
 
89

 
83

 
MedSurg
 
521

 
499

 
Net sales allocated to reportable segments
 
1,749

 
1,826

 
Sales generated from divested businesses
 
36

 
29

 
Impact of foreign currency fluctuations
 
(24
)
 
11

 
 
 
$
1,761

 
$
1,866

 
 
 
 
 
 
 
Income (loss) before income taxes
 
 
 
 
 
Cardiovascular
 
$
170

 
$
191

 
Rhythm Management
 
63

 
83

 
MedSurg
 
150

 
133

 
Operating income allocated to reportable segments
 
383

 
407

 
Corporate expenses and currency exchange
 
(70
)
 
(84
)
 
Goodwill and other intangible asset impairment charges; and acquisition-, divestiture-, restructuring-, and litigation related charges or credits
 
(540
)
 
(30
)
 
Amortization expense
 
(103
)
 
(97
)
 
Operating (loss) income
 
(330
)
 
196

 
Other expense, net
 
(64
)
 
(73
)
 
Loss (income) before income taxes
 
$
(394
)
 
$
123

 
* We have restated prior year detail to conform to current year presentation.


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Table of Contents

 
 
Three Months Ended, March 31,
(in millions)
 
2013
 
2012*
Depreciation expense
 
 
 
 
Cardiovascular
 
$
24

 
$
27

Rhythm Management
 
23

 
23

MedSurg
 
16

 
17

Depreciation expense allocated to reportable segments
 
63

 
67

Corporate expenses and currency exchange
 
(2
)
 
(1
)
 
 
$
61

 
$
66

* We have restated prior year detail to conform to current year presentation.

 
 
As of
(in millions)
 
March 31, 2013
 
December 31, 2012*
Total assets
 
 
 
 
Cardiovascular
 
$
1,539

 
$
1,535

Rhythm Management
 
1,336

 
1,350

MedSurg
 
958

 
967

Total tangible assets allocated to reportable segments
 
3,833

 
3,852

Goodwill
 
5,552

 
5,973

Other intangible assets
 
6,177

 
6,289

All other corporate and manufacturing operations assets
 
1,201

 
1,040

 
 
$
16,763

 
$
17,154

* We have restated prior year detail to conform to current year presentation.


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Table of Contents

NOTE M – CHANGES IN OTHER COMPREHENSIVE INCOME

The following table provides the reclassifications out of other comprehensive income for the three months ended March 31, 2013 and March 31, 2012. Amounts in the chart below are presented net of tax.
(in millions)
 
Foreign currency translation adjustments
 
Unrealized gains/losses on derivative financial instruments
 
Defined benefit pension items / Other
 
Total
Balance as of December 31, 2012
 
$(26)
 
$34
 
$(41)
 
$(33)
Other comprehensive income (loss) before reclassifications
 
3
 
71
 
 
74
Amounts reclassified from accumulated other comprehensive income
 
 
4
 
 
4
Net current-period other comprehensive income
 
3
 
75
 
 
78
Balance as of March 31, 2013
 
$(23)
 
$109
 
$(41)
 
$45
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
Foreign currency translation adjustments
 
Unrealized gains/losses on derivative financial instruments
 
Defined benefit pension items / Other
 
Total
Balance as of December 31, 2011
 
$(58)
 
$(48)
 
$(32)
 
$(138)
Other comprehensive income (loss) before reclassifications
 
25
 
23
 
 
48
Amounts reclassified from accumulated other comprehensive income
 
 
11
 
 
11
Net current-period other comprehensive income
 
25
 
34
 
 
59
Balance as of March 31, 2012
 
$(33)
 
$(14)
 
$(32)
 
$(79)
The income tax impact of the amounts in other comprehensive income for unrealized gains/losses on derivative financial instruments was an expense of $45 million in the first quarter of 2013 and an expense of $19 million in the first quarter of 2012. The income tax impact of the amounts reclassified from unrealized gains/losses on derivative financial instruments was a benefit of $2 million in the first quarter of 2013 and a benefit of $6 million in the first quarter of 2012. Refer to Note E – Fair Value Measurements for further detail on the reclassifications related to derivatives.

NOTE N – NEW ACCOUNTING PRONOUNCEMENTS
Standards Implemented
ASC Update No. 2013-02
In February 2013, the FASB issued ASC Update No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. Update No. 2013-02 requires that entities provide information about amounts reclassified out of accumulated other comprehensive income by component. The amendment also requires entities to present significant amounts by the respective line items of net income, either on the face of the income statement or in the notes to the financial statements for amounts required to be reclassified out of accumulated other comprehensive income in their entirety in the same reporting period. For other amounts that are not required to be reclassified to net income in their entirety, a cross-reference is required to other disclosures that provide additional details about those amounts. We adopted Update No. 2013-02 beginning in our first quarter ended March 31, 2013. Update No. 2013-02 is related to presentation only and its adoption did not impact our results of operations or financial position. See Note M - Changes in Other Comprehensive Income to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.

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ASC Update No. 2013-01
In January 2013, the FASB issued ASC Update No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. Update No. 2013-01 clarifies the FASB's intent about requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements, previously issued ASC Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). We adopted Update No. 2013-01 beginning in our first quarter ended March 31, 2013. The adoption of Update No. 2013-01 did not impact our results of operations or financial position.


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Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. Our products and technologies are used to diagnose or treat a wide range of medical conditions, including heart, digestive, pulmonary, vascular, urological, women's health, and chronic pain conditions. We continue to innovate in these areas and are intent on extending our innovations into new geographies and high-growth adjacency markets.
Effective as of January 1, 2013, we reorganized our business into fully operationalized global business units. We have three new global reportable segments comprised of Cardiovascular, Rhythm Management, and MedSurg. We have restated prior period information for 2012 to conform to current year presentation of our segments.
Financial Summary
Three Months Ended March 31, 2013
Our net sales for the first quarter of 2013 were $1.761 billion, as compared to net sales of $1.866 billion for the first quarter of 2012, a decrease of $105 million, or six percent. Excluding the impact of changes in foreign currency exchange rates, which had a $35 million negative impact on our first quarter 2013 net sales as compared to the same period in the prior year, and the change in net sales from divested businesses of $7 million, our net sales decreased $77 million, or four percent.1 Refer to Business and Market Overview for a discussion of our net sales by global business.
Our reported net loss for the first quarter of 2013 was $354 million, or $0.26 per share, driven primarily by a goodwill impairment charge related to our global Cardiac Rhythm Management (CRM) business unit recorded in conjunction with interim goodwill impairment testing required following the change in composition of our segments and reporting units. Refer to Quarterly Results and Critical Accounting Policies and Estimates for a discussion of our goodwill valuation and this impairment charge. Our reported results for the first quarter of 2013 included a goodwill impairment charge, acquisition- and divestiture-related net credits, restructuring- and litigation-related charges, and amortization expense totaling $578 million (after-tax), or $0.42 per share. Excluding these items, net income for the first quarter of 2013 was $224 million, or $0.16 per share.1 Our reported net income for the first quarter of 2012 was $113 million, or $0.08 per share. Our reported results for the first quarter of 2012 included acquisition-, divestiture-, and restructuring-related charges and amortization expense totaling $107 million, or $0.07 per share. Excluding these items, net income for the first quarter of 2012 was $220 million, or $0.15 per share.1











1 Sales growth rates that exclude the impact of changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Refer to Additional Information for a discussion of management’s use of these non-GAAP financial measures.

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Table of Contents

The following is a reconciliation of results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results for a discussion of each reconciling item:

 
 
Three Months Ended March 31, 2013
 
 
 
 
 
Tax
 
 
 
Impact per
 
in millions, except per share data
 
Pre-Tax
 
Impact
 
After-Tax
 
share
 
GAAP net loss
 
$
(394
)
 
$
40

 
$
(354
)
 
$
(0.26
)
 
Non-GAAP adjustments:
 
 
 
 
 
 
 
 
 
Goodwill impairment charge
 
423

 
(1
)
 
422

 
0.31

*
Acquisition-related charges (credits)
 
(23
)
 

 
(23
)
 
(0.02
)
*
Divestiture-related charges (credits)
 
(5
)
 
2

 
(3
)
 
0.00

*
Restructuring-related charges
 
15

 
(4
)
 
11

 
0.01

*
Litigation-related charges
 
130

 
(48
)
 
82

 
0.06

*
Amortization expense
 
103

 
(14
)
 
89

 
0.06

*