Q2 2014 Form 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-11083
BOSTON SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE | 04-2695240 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
300 BOSTON SCIENTIFIC WAY, MARLBOROUGH, MASSACHUSETTS 01752-1234
(Address of principal executive offices) (zip code)
(508) 683-4000
(Registrant’s telephone number, including area code)
ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | Shares outstanding |
Class | | as of July 31, 2014 |
Common Stock, $.01 par value | | 1,325,707,830 |
TABLE OF CONTENTS
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
in millions, except per share data | 2014 | | 2013 | | 2014 | | 2013 |
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Net sales | $ | 1,873 |
| | $ | 1,809 |
| | $ | 3,647 |
| | $ | 3,570 |
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Cost of products sold | 563 |
| | 530 |
| | 1,100 |
| | 1,108 |
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Gross profit | 1,310 |
| | 1,279 |
| | 2,547 |
| | 2,462 |
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Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 743 |
| | 661 |
| | 1,409 |
| | 1,292 |
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Research and development expenses | 206 |
| | 223 |
| | 397 |
| | 427 |
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Royalty expense | 25 |
| | 47 |
| | 65 |
| | 87 |
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Amortization expense | 109 |
| | 101 |
| | 218 |
| | 204 |
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Goodwill impairment charges | — |
| | — |
| | — |
| | 423 |
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Intangible asset impairment charges | 110 |
| | 53 |
| | 165 |
| | 53 |
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Contingent consideration expense (benefit) | (96 | ) | | (18 | ) | | (118 | ) | | (41 | ) |
Restructuring charges | 15 |
| | 26 |
| | 35 |
| | 36 |
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Litigation-related charges (credits) | 267 |
| | — |
| | 260 |
| | 130 |
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Gain on divestiture | — |
| | (34 | ) | | (12 | ) | | (40 | ) |
| 1,379 |
| | 1,059 |
| | 2,419 |
| | 2,571 |
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Operating income (loss) | (69 | ) | | 220 |
| | 128 |
| | (109 | ) |
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Other (expense) income: | | | | | | | |
Interest expense | (53 | ) | | (65 | ) | | (108 | ) | | (130 | ) |
Other, net | 18 |
| | (3 | ) | | 22 |
| | (3 | ) |
Income (loss) before income taxes | (104 | ) | | 152 |
| | 42 |
| | (242 | ) |
Income tax expense (benefit) | (108 | ) | | 22 |
| | (95 | ) | | (18 | ) |
Net income (loss) | $ | 4 |
| | $ | 130 |
| | $ | 137 |
| | $ | (224 | ) |
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Net income (loss) per common share — basic | $ | 0.00 |
| | $ | 0.10 |
| | $ | 0.10 |
| | $ | (0.17 | ) |
Net income (loss) per common share — assuming dilution | $ | 0.00 |
| | $ | 0.10 |
| | $ | 0.10 |
| | $ | (0.17 | ) |
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Weighted-average shares outstanding | | | | | | | |
Basic | 1,323.2 |
| | 1,343.5 |
| | 1,322.4 |
| | 1,347.7 |
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Assuming dilution | 1,345.0 |
| | 1,358.6 |
| | 1,347.1 |
| | 1,347.7 |
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See notes to the unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2014 | | 2013 | | 2014 | | 2013 |
Net income (loss) | | $ | 4 |
| | $ | 130 |
| | $ | 137 |
| | $ | (224 | ) |
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustment | | (2 | ) | | (6 | ) | | (8 | ) | | (3 | ) |
Net change in unrealized gains and losses on derivative financial instruments, net of tax | | (28 | ) | | 43 |
| | (55 | ) | | 118 |
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Net change in certain retirement plans | | — |
| | — |
| | (1 | ) | | — |
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Total other comprehensive income (loss) | | (30 | ) | | 37 |
| | (64 | ) | | 115 |
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Total comprehensive income (loss) | | $ | (26 | ) | | $ | 167 |
| | $ | 73 |
| | $ | (109 | ) |
See notes to the unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| As of |
| June 30, | | December 31, |
in millions, except share and per share data | 2014 | | 2013 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 357 |
| | $ | 217 |
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Trade accounts receivable, net | 1,287 |
| | 1,307 |
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Inventories | 949 |
| | 897 |
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Deferred income taxes | 320 |
| | 288 |
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Prepaid expenses and other current assets | 301 |
| | 302 |
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Total current assets | 3,214 |
| | 3,011 |
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Property, plant and equipment, net | 1,534 |
| | 1,546 |
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Goodwill | 5,735 |
| | 5,693 |
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Other intangible assets, net | 5,659 |
| | 5,950 |
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Other long-term assets | 335 |
| | 371 |
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TOTAL ASSETS | $ | 16,477 |
| | $ | 16,571 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current debt obligations | $ | 3 |
| | $ | 3 |
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Accounts payable | 241 |
| | 246 |
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Accrued expenses | 1,277 |
| | 1,348 |
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Other current liabilities | 252 |
| | 227 |
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Total current liabilities | 1,773 |
| | 1,824 |
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Long-term debt | 4,252 |
| | 4,237 |
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Deferred income taxes | 1,302 |
| | 1,402 |
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Other long-term liabilities | 2,606 |
| | 2,569 |
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Commitments and contingencies |
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Stockholders’ equity | | | |
Preferred stock, $.01 par value - authorized 50,000,000 shares, none issued and outstanding |
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Common stock, $.01 par value - authorized 2,000,000,000 shares and issued 1,571,332,742 shares as of June 30, 2014 and 1,560,302,634 shares as of December 31, 2013 | 16 |
| | 16 |
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Treasury stock, at cost - 247,566,270 shares as of June 30, 2014 and 238,006,570 shares as of December 31, 2013 | (1,717 | ) | | (1,592 | ) |
Additional paid-in capital | 16,635 |
| | 16,579 |
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Accumulated deficit | (8,432 | ) | | (8,570 | ) |
Accumulated other comprehensive income (loss), net of tax | 42 |
| | 106 |
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Total stockholders’ equity | 6,544 |
| | 6,539 |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 16,477 |
| | $ | 16,571 |
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See notes to the unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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| Six Months Ended June 30, |
in millions | 2014 | | 2013 |
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Cash provided by operating activities | $ | 483 |
| | $ | 584 |
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Investing activities: | | | |
Purchases of property, plant and equipment | (124 | ) | | (104 | ) |
Proceeds from sale of property, plant and equipment | — |
| | 53 |
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Purchases of privately held securities | (6 | ) | | (8 | ) |
Purchase of notes receivable | (10 | ) | | (3 | ) |
Proceeds from sales of publicly traded and privately held equity securities and collections of notes receivable | 12 |
| | — |
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Payments for acquisitions of businesses, net of cash acquired | (72 | ) | | — |
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Payments for investments in companies and acquisitions of certain technologies | (1 | ) | | (7 | ) |
Proceeds from business divestitures, net of costs | 12 |
| | 30 |
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Cash used for investing activities | (189 | ) | | (39 | ) |
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Financing activities: | | | |
Payment of contingent consideration | (15 | ) | | (15 | ) |
Proceeds from borrowings on credit facilities | 650 |
| | 240 |
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Payments on borrowings from credit facilities | (650 | ) | | (240 | ) |
Payments for acquisitions of treasury stock | (125 | ) | | (200 | ) |
Cash used to net share settle employee equity awards | (47 | ) | | (25 | ) |
Proceeds from issuances of shares of common stock | 33 |
| | 19 |
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Cash used for financing activities | (154 | ) | | (221 | ) |
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Effect of foreign exchange rates on cash | — |
| | (1 | ) |
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Net increase (decrease) in cash and cash equivalents | 140 |
| | 323 |
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Cash and cash equivalents at beginning of period | 217 |
| | 207 |
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Cash and cash equivalents at end of period | $ | 357 |
| | $ | 530 |
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Supplemental Information | | | |
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Non-cash operating activities: | | | |
Stock-based compensation expense | $ | 53 |
| | $ | 50 |
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Fair value of contingent consideration recorded in purchase accounting | $ | 3 |
| | $ | — |
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See notes to the unaudited condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our 2013 Annual Report on Form 10-K.
Additionally, certain prior year cash outflows from net share settling employee equity awards to satisfy their tax withholding requirement have been reclassified from an operating activity to a financing activity within our condensed consolidated statements of cash flows. Amounts reclassified from operating to financing activities on the cash flows were not material. In addition, we have reclassified certain other prior year amounts to conform to the current year presentation. Refer to Note L - Segment Reporting for more information.
Subsequent Events
We evaluate events occurring after the date of our most recent accompanying unaudited condensed consolidated balance sheets for potential recognition or disclosure in our financial statements. We did not identify any material subsequent events requiring adjustment to our accompanying unaudited condensed consolidated financial statements (recognized subsequent events) for the three and six month periods ended June 30, 2014. 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
On May 7, 2014, we completed the acquisition of the remaining fully diluted equity of IoGyn, Inc. (IoGyn). Prior to the acquisition, we held approximately 28 percent minority interest in IoGyn in addition to notes receivable of approximately $8 million. Total consideration was comprised of a net cash payment of $65 million at closing to acquire the remaining 72 percent of IoGyn equity and repay outstanding debt. IoGyn has developed the SymphionTM System, a next generation system for hysteroscopic intrauterine tissue removal including fibroids (myomas) and polyps. In March 2014, IoGyn received U.S. FDA approval for the system, and we expect to launch the system in the United States in the second half of 2014. We will integrate the operations of the IoGyn business with our gynecological surgery business, which is part of our Urology and Women’s Health division.
On May 15, 2014, we entered into a definitive agreement to acquire the Interventional Division of Bayer AG, for $415 million in cash at closing. We expect to close this transaction in the second half of 2014, subject to customary closing conditions.
We did not close any material acquisitions during the first half of 2013.
Purchase Price Allocation
We accounted for the acquisition of IoGyn as a business combination and, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) Topic 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate purchase price for the acquisition consummated in 2014 are as follows (in millions):
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Cash, net of cash acquired | $ | 65 |
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Fair value of prior interests | 31 |
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| $ | 96 |
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We re-measured our previously held investments to their estimated acquisition-date fair value of $31 million and recorded a gain of $19 million in other, net, in the accompanying condensed consolidated statements of operations during the second quarter of 2014. We measured the fair values of the previously held investments based on the liquidation preferences and priority of the equity interests and debt, including accrued interest.
Total consideration for the 2014 acquisition included cash payments of $65 million, net of cash acquired, at closing of the transaction.
The following summarizes the aggregate purchase price allocation for the 2014 acquisition as of June 30, 2014 (in millions):
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Goodwill | $ | 39 |
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Amortizable intangible assets | 72 |
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Other net assets | (1 | ) |
Deferred income taxes | (14 | ) |
| $ | 96 |
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We allocated a portion of the purchase price to specific intangible asset categories as follows:
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| Amount Assigned (in millions) | | Weighted Average Amortization Period (in years) | | Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation |
Amortizable intangible assets: | | | | | |
Technology-related | $ | 71 |
| | 14 | | 14% |
Other intangible assets | 1 |
| | 2 | | 14% |
| $ | 72 |
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Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the income approach to derive the fair value of the technology-related intangible assets, and are amortizing them on a straight-line basis over their assigned estimated useful lives.
We believe that the estimated intangible asset values represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurements and Disclosures.
We recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. Goodwill was established due primarily to synergies expected to be gained from leveraging our existing operations as well as revenue and cash flow projections associated with future technologies, and has been allocated to our reportable segments based on the relative expected benefit. See Note D - Goodwill and Other Intangible Assets for more information related to goodwill allocated to our reportable segments.
Contingent Consideration
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets and/or obtaining regulatory approvals. 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.
We recorded a net benefit related to the change in fair value of our contingent consideration liabilities of $96 million in the second quarter of 2014, $118 million in the first half of 2014, $18 million in the second quarter of 2013, and $41 million during the first half of 2013. We paid contingent consideration of $3 million in the second quarter of 2014, $15 million in the first half of 2014 and $15 million during the second quarter and first half of 2013.
Changes in the fair value of our contingent consideration liability were as follows (in millions):
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Balance as of December 31, 2013 | $ | (501 | ) |
Amounts recorded related to new acquisitions | (3 | ) |
Other amounts recorded related to prior acquisitions | (1 | ) |
Net fair value adjustments | 118 |
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Payments made | 15 |
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Balance as of June 30, 2014 | $ | (372 | ) |
As of June 30, 2014, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $2.2 billion.
Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:
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Contingent Consideration Liability | Fair Value as of June 30, 2014 | Valuation Technique | Unobservable Input | Range |
R&D, Regulatory and Commercialization-based Milestones | $61 million | Probability Weighted Discounted Cash Flow | Discount Rate | 0.9%-1.4% |
Probability of Payment | 60% - 95% |
Projected Year of Payment | 2014 - 2015 |
Revenue-based Payments | $69 million | Discounted Cash Flow | Discount Rate | 11.5% - 15% |
Probability of Payment | 0% - 100% |
Projected Year of Payment | 2014 - 2018 |
$242 million | Monte Carlo | Revenue Volatility | 11% - 13% |
Risk Free Rate | LIBOR Term Structure |
Projected Year of Payment | 2014-2018 |
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 research and development, 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 in cash. We received $1.450 billion during 2011, including an upfront payment of $1.426 billion, and $24 million which was placed into escrow and released throughout 2011 upon the completion of local closings in certain foreign jurisdictions. We received $10 million during 2012, $28 million during the second quarter of 2013 and we received the final $12 million of consideration in January 2014. At the time of divestiture, due to our continuing involvement in the operations of the Neurovascular business following the transaction, the divestiture did not meet the criteria for presentation as a discontinued operation. Our sales related to our divested Neurovascular business have declined as the various transition services and supply agreements have terminated.
Revenue generated by the Neurovascular business was $1 million in the second quarter of 2014, $3 million in the first half of 2014, $19 million in the second quarter of 2013, and $55 million in the first half of 2013.
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 June 30, 2014 and December 31, 2013 are as follows:
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| | As of |
| | June 30, 2014 | | December 31, 2013 |
| | Gross Carrying | | Accumulated Amortization/ | | Gross Carrying | | Accumulated Amortization/ |
(in millions) | | Amount | | Write-offs | | Amount | | Write-offs |
Amortizable intangible assets | | | | | | | | |
Technology-related | | $ | 8,252 |
| | $ | (3,520 | ) | | $ | 8,272 |
| | $ | (3,342 | ) |
Patents | | 522 |
| | (336 | ) | | 513 |
| | (326 | ) |
Other intangible assets | | 847 |
| | (506 | ) | | 845 |
| | (479 | ) |
| | $ | 9,621 |
| | $ | (4,362 | ) | | $ | 9,630 |
| | $ | (4,147 | ) |
Unamortizable intangible assets | | | | | | | | |
Goodwill | | $ | 15,635 |
| | $ | (9,900 | ) | | $ | 15,593 |
| | $ | (9,900 | ) |
Technology-related | | 197 |
| | — |
| | 197 |
| | — |
|
| | $ | 15,832 |
| | $ | (9,900 | ) | | $ | 15,790 |
| | $ | (9,900 | ) |
In addition, we had $203 million and $270 million of in-process research and development intangible assets as of June 30, 2014 and December 31, 2013, respectively.
The following represents our goodwill balance by global reportable segment:
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(in millions) | | Cardiovascular | | Rhythm Management | | MedSurg | | Total |
Balance as of December 31, 2013 | | $ | 3,252 |
| | $ | 294 |
| | $ | 2,147 |
| | $ | 5,693 |
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Purchase price adjustments | | — |
| | (2 | ) | | — |
| | (2 | ) |
Goodwill acquired | | — |
| | — |
| | 44 |
| | 44 |
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Goodwill written off | | — |
| | — |
| | — |
| | — |
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Other changes in carrying amount * | | 7 |
| | — |
| | (7 | ) | | — |
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Balance as of June 30, 2014 | | $ | 3,259 |
| | $ | 292 |
| | $ | 2,184 |
| | $ | 5,735 |
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* In the first half of 2014, we reallocated $7 million of goodwill between Cardiovascular and MedSurg as a result of the realignment of certain product lines from Endoscopy to Peripheral Interventions as of January 1, 2014.
2014 Goodwill Impairment Testing
We test our goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist.
In the second quarter of 2014, we performed our annual goodwill impairment test for all of our reporting units. In conjunction with our annual test, the fair value of each reporting unit exceeded its carrying value. As a result of the 2014 annual goodwill impairment test, we have identified our global Neuromodulation and global Electrophysiology reporting units as being at higher risk of potential failure of the first step of the goodwill impairment test in future reporting periods. Our global Neuromodulation reporting unit had excess fair value over carrying value of approximately 55 percent as of our annual test date and held $1.356 billion of allocated goodwill as of June 30, 2014. Our global Electrophysiology reporting unit had excess fair value over carrying value of approximately 38 percent as of our annual test date and held $292 million of allocated goodwill as of June 30, 2014. Our global Cardiac Rhythm Management (CRM) reporting unit had a fair value approximately equal to its carrying value; however, due to goodwill impairment charges in prior years, no goodwill remains within our CRM reporting unit. 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 our reporting units including global CRM. Further, the recoverability of our CRM-related amortizable intangibles ($4.236 billion globally as of June 30, 2014) is sensitive to future cash flow assumptions and our global CRM business performance. The $4.236 billion of 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. Refer to Critical Accounting Policies and Estimates within our Management's
Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 of this Quarterly Report on Form 10-Q for a discussion of key assumptions used in our testing.
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 Weighted Average Cost of Capital (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 goodwill or intangible asset impairment charges. For example, keeping all other variables constant, an increase in the WACC applied of 100 basis points combined with a 150 basis point decrease in the terminal value growth rate would require that we perform the second step of the goodwill impairment test for both our global Electrophysiology and global Neuromodulation reporting units. The estimates used for our future cash flows and discount rates represent management's best estimates, which we believe to be reasonable, but future declines in business performance may impair the recoverability of our goodwill and intangible asset balances.
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, reductions in reimbursement levels, 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; and |
| |
• | increases in our market-participant risk-adjusted WACC. |
Negative changes in one or more of these factors, among others, could result in additional impairment charges.
2013 Charge
Following our reorganization from regions to global business units and our reallocation of goodwill on a relative fair value basis as of January 1, 2013, we conducted the first step of the goodwill impairment test for all global reporting units. As of January 1, 2013, the fair value of each global reporting unit exceeded its carrying value, with the exception of the global CRM reporting unit. In accordance with ASC Topic 350, Intangibles—Goodwill and Other (Topic 350) and our accounting policies, we tested the global CRM intangible assets and goodwill for impairment and recorded a non-cash goodwill impairment charge of $423 million ($422 million after-tax) to write down the goodwill to its implied fair value as of January 1, 2013 as a result of this analysis. 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. Refer to Note D - Goodwill and Other Intangible Assets contained in Item 8 of our 2013 Annual Report filed on Form 10-K for details on the 2013 goodwill impairment charge.
The following is a rollforward of accumulated goodwill write-offs by global reportable segment:
|
| | | | | | | | | | | | | | | |
(in millions) | Cardiovascular | | Rhythm Management | | MedSurg | | Total |
Accumulated write-offs as of December 31, 2013 | $ | (1,479 | ) | | $ | (6,960 | ) | | $ | (1,461 | ) | | $ | (9,900 | ) |
Goodwill written off | — |
| | — |
| | — |
| | — |
|
Accumulated write-offs as of June 30, 2014 | $ | (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 an impairment that would warrant an interim impairment test of our intangible assets. Refer to Note D - Goodwill and Other Intangible Assets contained in Item 8 of our 2013 Annual Report on Form 10-K for a discussion of future events that would have a negative impact on the recoverability of our $4.236 billion of CRM-related amortizable intangible assets. Our CRM-related amortizable intangible assets are at higher risk of potential failure of the first step of the amortizable intangible asset recoverability test in future reporting periods. An impairment of a material portion of our CRM-related amortizable intangible assets carrying value would likely occur if the second step of the amortizable intangible asset test is required in a future reporting period. Refer to Critical Accounting Policies and Estimates within our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 of our 2013 Annual Report on Form 10-K for a discussion of key assumptions used in our testing.
2014 Charges
During the second quarter of 2014, as a result of revised estimates developed in conjunction with our annual strategic planning process and annual goodwill impairment test, we performed an interim impairment test of our in-process research and development projects and core technology associated with certain of our acquisitions. Based on our impairment assessment, and lower expected future cash flows associated with our intangible assets, we recorded pre-tax impairment charges of $110 million in the second quarter of 2014. As a result of changes in our clinical strategy and lower estimates of the European and global hypertension markets, and the resulting amount of future revenue and cash flows associated with the technology acquired from Vessix Vascular Inc. (Vessix), we recorded impairment charges of $67 million related to technology intangible assets during the second quarter of 2014. In addition, in the second quarter of 2014, due to revised expectations and timing as a result of the announcement of an upcoming third FDA Circulatory System Devices Panel, we recorded impairment charges of $35 million related to the in-process research and development intangible assets acquired from Atritech, Inc. (Atritech). We also recorded an additional $8 million intangible asset impairment charge associated with changes in the amount of the expected cash flows related to certain other acquired in-process research and development projects.
During the first quarter of 2014, as a result of lower estimates of the resistant hypertension market following the announcement of data from a competitor's clinical trial, we performed an interim impairment test of our in-process research and development projects and core technology associated with our acquisition of Vessix. The impairment assessments were based upon probability-weighted cash flows of potential future scenarios. Based on our impairment assessment, and lower expected future cash flows associated with our Vessix-related intangible assets, we recorded pre-tax impairment charges of $55 million in the first quarter of 2014 to write-down the balance of these intangible assets to their fair value.
2013 Charges
During the second quarter of 2013, as a result of revised estimates developed in conjunction with our annual strategic planning process and annual goodwill impairment test, we performed an interim impairment test of our in-process research and development projects associated with certain of our acquisitions. Based on the results of our impairment analysis, we revised our expectations of the market size related to Sadra Medical, Inc. (Sadra), and the resulting timing and amount of future revenue and cash flows associated with the technology acquired from Sadra. As a result of these changes, we recorded pre-tax impairment charges of $51 million in the second quarter of 2013 to write-down the balance of these intangible assets to their fair value in each respective period. During the second quarter of 2013, we also recorded an additional $2 million intangible asset impairment charge associated with changes in the amount of the expected cash flows related to certain other acquired in-process research and development projects.
We recorded these amounts in the intangible assets impairment caption in our accompanying unaudited condensed consolidated statements of operations.
The nonrecurring Level 3 fair value measurements of our intangible asset impairment analysis included the following significant unobservable inputs:
|
| | | | | |
Intangible Asset | Valuation Date | Fair Value | Valuation Technique | Unobservable Input | Rate |
In-Process R&D | June 30, 2014 | $7 million | Income Approach - Excess Earnings Method | Discount Rate | 20% |
In-Process R&D | June 30, 2014 | $76 million | Income Approach - Excess Earnings Method | Discount Rate | 16.5% |
Core Technology | June 30, 2014 | $8 million | Income Approach - Excess Earnings Method | Discount Rate | 15% |
In-Process R&D | March 31, 2014 | $6 million | Income Approach - Excess Earnings Method | Discount Rate | 20% |
Core Technology | March 31, 2014 | $64 million | Income Approach - Excess Earnings Method | Discount Rate | 15% |
In-Process R&D | June 30, 2013 | $178 million | Income Approach - Excess Earnings Method | Discount Rate | 16.5% |
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 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 June 30, 2014 and December 31, 2013 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 $2.642 billion as of June 30, 2014 and $2.564 billion as of December 31, 2013.
We recognized net gains of $22 million in earnings on our cash flow hedges during the second quarter of 2014 and $43 million for the first half of 2014, as compared to net gains of $6 million during the second quarter of 2013 and $1 million for the first half of 2013. All currency cash flow hedges outstanding as of June 30, 2014 mature within 36 months. As of June 30, 2014, $85 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 $139 million as of December 31, 2013. As of June 30, 2014, $60 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 $2.114 billion as of June 30, 2014 and $1.952 billion as of December 31, 2013.
Interest Rate Hedging
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We have historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates by converting floating-rate debt into fixed-rate debt or fixed-rate debt into floating-rate debt.
We designate these derivative instruments either as fair value or cash flow hedges under Topic 815. We record changes in the value of fair value hedges in interest expense, which is generally offset by changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest rate derivative instruments are included in interest expense. We record the effective portion of any change in the fair value of derivative instruments designated as cash flow hedges as unrealized gains or losses in OCI, net of tax, until the hedged cash flow occurs, at which point the effective portion of any gain or loss is reclassified to earnings. We record the ineffective portion of our cash flow hedges in interest expense. In the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.
In the fourth quarter of 2013, we entered into interest rate derivative contracts having a notional amount of $450 million to convert fixed-rate debt into floating-rate debt, which we designated as fair value hedges, and had $450 million outstanding as of June 30, 2014. We assessed at inception, and re-assess on an ongoing basis, whether the interest rate derivative contracts are highly effective in offsetting changes in the fair value of the hedged fixed-rate debt. During the second quarter of 2014 we recognized, in interest expense, a $8 million loss on our hedged debt and a $8 million gain on the related interest rate derivative contract. During the first half of 2014 we recognized, in interest expense, a $18 million loss on our hedged debt and a $18 million gain on the related interest rate derivative contract.
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 $49 million as of June 30, 2014 and $54 million as of December 31, 2013, and unamortized losses of $2 million as of June 30, 2014 and $2 million as of December 31, 2013, 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 $2 million as of June 30, 2014 and $3 million as of December 31, 2013. We recorded $2 million during the second quarter of 2014 and $4 million during the first half of 2014 as a reduction to interest expense, resulting from the amortization of previously terminated interest rate derivative contracts. As of June 30, 2014, $9 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 second quarter and first half of 2014 and 2013 (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 June 30, 2014 | | | | | |
Currency hedge contracts | $ | (20 | ) | | $ | 22 |
| | Cost of products sold |
| $ | (20 | ) | | $ | 22 |
| | |
Three Months Ended June 30, 2013 | | | | | |
Currency hedge contracts | $ | 76 |
| | $ | 6 |
| | Cost of products sold |
| $ | 76 |
| | $ | 6 |
| | |
Six Months Ended June 30, 2014 | | | | | |
Currency hedge contracts | $ | (40 | ) | | $ | 43 |
| | Cost of products sold |
| $ | (40 | ) | | $ | 43 |
| | |
Six Months Ended June 30, 2013 | | | | | |
Currency hedge contracts | $ | 190 |
| | $ | 1 |
| | Cost of products sold |
| $ | 190 |
| | $ | 1 |
| | |
The amount of gain (loss) recognized in earnings related to the ineffective portion of hedging relationships was de minimis for all periods presented.
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 | | Location in Statement of Operations | | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Gain (loss) on currency hedge contracts | | Other, net | | $ | (17 | ) | | $ | 29 |
| | $ | (20 | ) | | $ | 54 |
|
Gain (loss) on foreign currency transaction exposures | | Other, net | | 14 |
| | (29 | ) | | 14 |
| | (56 | ) |
Net foreign currency gain (loss) | | Other, net | | $ | (3 | ) | | $ | — |
| | $ | (6 | ) | | $ | (2 | ) |
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 June 30, 2014, 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 June 30, 2014 and December 31, 2013:
|
| | | | | | | | |
| | As of |
| | June 30, | | December 31, |
(in millions) | Location in Balance Sheet (1) | 2014 | | 2013 |
Derivative Assets: | | | | |
Designated Hedging Instruments | | | | |
Currency hedge contracts | Prepaid and other current assets | $ | 94 |
| | $ | 117 |
|
Currency hedge contracts | Other long-term assets | 58 |
| | 120 |
|
Interest rate contracts | Prepaid and other current assets | 3 |
| | 1 |
|
Interest rate contracts | Other long-term assets | 10 |
| | — |
|
| | 165 |
| | 238 |
|
Non-Designated Hedging Instruments | | | | |
Currency hedge contracts | Prepaid and other current assets | 15 |
| | 27 |
|
Total Derivative Assets | | $ | 180 |
| | $ | 265 |
|
| | | | |
Derivative Liabilities: | | | | |
Designated Hedging Instruments | | | | |
Currency hedge contracts | Other current liabilities | $ | 14 |
| | $ | 13 |
|
Currency hedge contracts | Other long-term liabilities | 18 |
| | 19 |
|
Interest rate contracts | Other long-term liabilities | — |
| | 8 |
|
| | 32 |
| | 40 |
|
Non-Designated Hedging Instruments | | | | |
Currency hedge contracts | Other current liabilities | 24 |
| | 23 |
|
Total Derivative Liabilities | | $ | 56 |
| | $ | 63 |
|
| |
(1) | We classify derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less. |
Other Fair Value Measurements
Recurring Fair Value Measurements
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
| |
• | Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities. |
| |
• | Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. |
| |
• | Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Assets and liabilities measured at fair value on a recurring basis consist of the following as of June 30, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2014 | | As of December 31, 2013 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | |
| | | | | | | | |
| | | | |
Money market and government funds | $ | 28 |
| | $ | — |
| | $ | — |
| | $ | 28 |
| | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | 38 |
|
Currency hedge contracts | — |
| | 167 |
| | — |
| | 167 |
| | — |
| | 264 |
| | — |
| | 264 |
|
Interest rate contracts | — |
| | 13 |
| | — |
| | 13 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| $ | 28 |
| | $ | 180 |
| | $ | — |
| | $ | 208 |
| | $ | 38 |
| | $ | 265 |
| | $ | — |
| | $ | 303 |
|
Liabilities | | | | | | | | | | | | | | | |
Currency hedge contracts | $ | — |
| | $ | 56 |
| | $ | — |
| | $ | 56 |
| | $ | — |
| | $ | 55 |
| | $ | — |
| | $ | 55 |
|
Accrued contingent consideration | — |
| | — |
| | 372 |
| | 372 |
| | — |
| | — |
| | 501 |
| | 501 |
|
Interest rate contracts | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
| $ | — |
| | $ | 56 |
| | $ | 372 |
| | $ | 428 |
| | $ | — |
| | $ | 63 |
| | $ | 501 |
| | $ | 564 |
|
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 $28 million invested in money market and government funds as of June 30, 2014, we had $126 million in short-term time deposits and $203 million in interest bearing and non-interest bearing bank accounts. In addition to $38 million invested in money market and government funds as of December 31, 2013, we had $31 million in short-term deposits and $148 million in interest bearing and non-interest bearing bank accounts.
Our recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to our contingent consideration liabilities. Refer to Note B - Acquisitions in this Quarterly Report on From 10-Q, for a discussion of the changes in the fair value of our contingent consideration liabilities.
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The aggregate carrying amount of our cost method investments was $26 million as of June 30, 2014 and $20 million as of December 31, 2013.
We recorded $110 million of losses to adjust our intangible asset balances to their fair value during the second quarter of 2014 and $165 million for the first half of 2014, as compared to losses of $53 million during the second quarter of 2013 and $476 million for the first half of 2013, which included $423 million of losses to adjust our goodwill balances to their fair value. Refer to Note D - Goodwill and Other Intangible Assets in this Quarterly Report on From 10-Q, for further information related to these charges and significant unobservable inputs (Level 3).
The fair value of our outstanding debt obligations was $4.704 billion as of June 30, 2014 and $4.602 billion as of December 31, 2013, 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 in this Quarterly Report on From 10-Q, for a discussion of our debt obligations.
NOTE F – BORROWINGS AND CREDIT ARRANGEMENTS
We had total debt of $4.255 billion as of June 30, 2014 and $4.240 billion as of December 31, 2013. The debt maturity schedule for the significant components of our debt obligations as of June 30, 2014 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
(in millions) | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | Thereafter | | Total |
Senior notes | $ | — |
| | $ | 400 |
| | $ | 600 |
| | $ | 250 |
| | $ | 600 |
| | $ | 1,950 |
| | $ | 3,800 |
|
Term loan | — |
| | — |
| | 80 |
| | 80 |
| | 240 |
| | — |
| | 400 |
|
| $ | — |
| | $ | 400 |
| | $ | 680 |
| | $ | 330 |
| | $ | 840 |
| | $ | 1,950 |
| | $ | 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 June 30, 2014). 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 June 30, 2014). There were no amounts borrowed under our revolving credit facility as of June 30, 2014 or December 31, 2013.
Our revolving credit facility agreement in place as of June 30, 2014 requires that we maintain certain financial covenants, as follows:
|
| | | |
| Covenant Requirement | | Actual as of June 30, 2014 |
Maximum leverage ratio (1) | 3.5 times | | 2.5 times |
Minimum interest coverage ratio (2) | 3.0 times | | 5.7 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 and up to $500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of June 30, 2014, we had $181 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 June 30, 2014, we had approximately $2.150 billion of the combined legal and debt exclusion remaining. As of and through June 30, 2014, 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 can be no assurance that our lenders would agree to such new terms or grant such waivers.
Term Loan
We had $400 million outstanding under an unsecured term loan facility as of June 30, 2014 and December 31, 2013. Term loan borrowings under this facility bear interest at LIBOR plus an interest margin of between 1.0 percent and 1.75 percent (currently 1.5 percent), based on our corporate credit ratings and consolidated leverage ratio. The term loan borrowings are payable over a five-year period, with quarterly principal payments of $20 million commencing in the first quarter of 2016 and the remaining principal amount due at the final maturity date in August 2018, and are repayable at any time without premium or penalty. Our term loan facility requires that we comply with certain covenants, including financial covenants with respect to maximum leverage and minimum interest coverage. The maximum leverage ratio requirement is 3.5 times and our actual leverage ratio as of June 30, 2014 is 2.5 times. The minimum interest coverage ratio requirement is 3.0 times and our actual interest coverage ratio as of June 30, 2014 is 5.7 times.
Senior Notes
We had senior notes outstanding of $3.800 billion as of June 30, 2014 and December 31, 2013. Our senior 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 $300 million credit and security facility secured by our U.S. trade receivables maturing in June 2015, subject to further extension. The credit and security facility requires that we maintain a maximum leverage covenant consistent with our revolving credit facility. The maximum leverage ratio requirement is 3.5 times and our actual leverage ratio as of June 30, 2014 is 2.5 times. We had no borrowings outstanding under this facility as of June 30, 2014 and December 31, 2013.
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 $309 million as of June 30, 2014. 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 $162 million of receivables as of June 30, 2014 at an average interest rate of 3.1 percent, and $146 million as of December 31, 2013 at an average interest rate of 3.3 percent. Within Italy, Spain, Portugal and Greece, the number of days our receivables are outstanding has remained above historical levels. We believe we have adequate allowances for doubtful accounts related to our Italy, Spain, Portugal and Greece accounts receivable; however, we continue to monitor the European economic environment for any collectibility issues related to our outstanding receivables. During the first half of 2014, we received cash payments of approximately $80 million related to a government-funded settlement of long outstanding receivables in Spain. As of June 30, 2014, our net receivables in these countries greater than 180 days past due totaled $41 million, of which $17 million were past due greater than 365 days.
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 21.000 billion Japanese yen (approximately $207 million as of June 30, 2014). We de-recognized $150 million of notes receivable as of June 30, 2014 at an average interest rate of 2 percent and $147 million of notes receivable as of December 31, 2013 at an average interest rate of 1.8 percent. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets.
As of June 30, 2014 and December 31, 2013, we had outstanding letters of credit of $78 million, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of June 30, 2014 and December 31, 2013, none of the beneficiaries had drawn upon the letters of credit or guarantees; accordingly, we did not recognize a related liability for our outstanding letters of credit in our consolidated balance sheets as of June 30, 2014 or December 31, 2013. We believe we will generate sufficient cash from operations to fund these arrangements and intend to fund these arrangments without drawing on the letters of credit.
NOTE G – RESTRUCTURING-RELATED ACTIVITIES
On an ongoing 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.
2014 Restructuring Plan
On October 22, 2013, the Board of Directors approved, and we committed to, a restructuring initiative (the 2014 Restructuring plan). The 2014 Restructuring plan is intended to build on the progress we have made to address financial pressures in a changing global marketplace, further strengthen our operational effectiveness and efficiency and support new growth investments. Key activities under the plan include continued implementation of our ongoing Plant Network Optimization (PNO) strategy, continued focus on driving operational efficiencies and ongoing business and commercial model changes. The PNO strategy is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities. Other activities involve rationalizing organizational reporting structures to streamline various functions, eliminate bureaucracy, increase productivity and better align resources to business strategies and marketplace dynamics. These activities were initiated in the fourth quarter of 2013 and are expected to be substantially completed by the end of 2015.
We estimate that the implementation of the 2014 Restructuring plan will result in total pre-tax charges of approximately $175 million to $225 million, and approximately $160 million to $210 million of these charges is estimated to result in cash outlays, of which we have made payments of $39 million to date. We have recorded related costs of $79 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 consolidated statements of operations.
The following table provides a summary of our estimates of costs associated with the 2014 Restructuring plan by major type of cost:
|
| |
Type of cost | Total estimated amount expected to be incurred |
Restructuring charges: | |
Termination benefits | $100 million to $120 million |
Other (1) | $10 million to $20 million |
Restructuring-related expenses: | |
Other (2) | $65 million to $85 million |
| $175 million to $225 million |
(1) Consists primarily of consultant fees and costs associated with contractual cancellations.
(2) Comprised of other costs directly related to the 2014 Restructuring plan, including program management, accelerated depreciation, and costs to transfer product lines among facilities.
2011 Restructuring Plan
On July 26, 2011, our Board of Directors approved, and we committed to, a restructuring initiative (the 2011 Restructuring plan) designed to strengthen operational effectiveness and efficiencies, increase competitiveness and support new investments, thereby increasing shareholder value. Key activities under the 2011 Restructuring plan included 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 expanded our ability to deliver best-in-class global shared services for certain functions and divisions at several locations in emerging markets. This action was 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 undertook 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 plan (the Expansion). The Expansion was 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, were substantially completed by the end of 2013.
The 2011 Restructuring plan, including the Expansion, is estimated to result in total pre-tax charges of approximately $289 million to $292 million, and approximately $282 million to $285 million of these charges is estimated to result in cash outlays, of which we have made payments of $282 million to date. We have recorded related costs of $287 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 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 | $138 million to $141 million |
Other (1) | $112 million |
Restructuring-related expenses: | |
Other (2) | $39 million |
| $289 million to $292 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. |
Plant Network Optimization Program
In January 2009, our Board of Directors approved, and we committed to, a 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 intended to improve our overall gross profit margins. Activities under the Plant Network Optimization program were initiated in the first quarter of 2009 and were substantially completed during 2012.
The Plant Network Optimization program resulted in total pre-tax charges of $126 million, and resulted in cash outlays of $103 million. We 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 costs associated with the Plant Network Optimization program by major type of cost:
|
| |
Type of cost | Total amount incurred |
Restructuring charges: | |
Termination benefits | $30 million |
| |
Restructuring-related expenses: | |
Accelerated depreciation | $22 million |
Transfer costs (1) | $74 million |
| $126 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 $15 million in the second quarter of 2014, $26 million in the second quarter of 2013, $35 million in the first half of 2014, and $36 million in the first half of 2013. During the first half of 2013, our restructuring charges were partially offset by a $19 million gain recognized on the sale of our Natick, Massachusetts headquarters. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $10 million in the second quarter of 2014, $5 million in the second quarter of 2013, $18 million in the first half of 2014, and $10 million in the first half of 2013.
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 June 30, 2014 | | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
Restructuring charges | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | 15 |
|
Restructuring-related expenses: | | | | | | | | | | | |
Cost of products sold | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Selling, general and administrative expenses | — |
| | 1 |
| | — |
| | — |
| | 5 |
| | 6 |
|
| — |
| | 1 |
| | 4 |
| | — |
| | 5 |
| | 10 |
|
| $ | 8 |
| | $ | 1 |
| | $ | 4 |
| | $ | — |
| | $ | 12 |
| | $ | 25 |
|
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
2014 Restructuring plan | $ | 10 |
| | $ | 1 |
| | $ | 4 |
| | $ | — |
| | $ | 12 |
| | $ | 27 |
|
2011 Restructuring plan (including the Expansion) | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
| $ | 8 |
| | $ | 1 |
| | $ | 4 |
| | $ | — |
| | $ | 12 |
| | $ | 25 |
|
| | | | | | | | | | | |
Three Months Ended June 30, 2013 | | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Net Gain on Fixed Asset Disposals | | Other | | Total |
Restructuring charges | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | 26 |
|
Restructuring-related expenses: | | | | | | | | | | | |
Cost of products sold | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Selling, general and administrative expenses | — |
| | 1 |
| | — |
| | — |
| | 4 |
| | 5 |
|
| — |
| | 1 |
| | — |
| | — |
| | 4 |
| | 5 |
|
| $ | 13 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 31 |
|
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Net Gain on Fixed Asset Disposals | | Other | | Total |
2011 Restructuring plan (including the Expansion) | $ | 15 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 33 |
|
Plant Network Optimization program | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
| $ | 13 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 31 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2014 | | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
Restructuring charges | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | 35 |
|
Restructuring-related expenses: | | | | | | | | | | | |
Cost of products sold | — |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Selling, general and administrative expenses | — |
| | 2 |
| | — |
| | — |
| | 10 |
| | 12 |
|
| — |
| | 2 |
| | 6 |
| | — |
| | 10 |
| | 18 |
|
| $ | 19 |
| | $ | 2 |
| | $ | 6 |
| | $ | — |
| | $ | 26 |
| | $ | 53 |
|
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Fixed Asset Write-offs | | Other | | Total |
2014 Restructuring plan | $ | 19 |
| | $ | 2 |
| | $ | 6 |
| | $ | — |
| | $ | 23 |
| | $ | 50 |
|
2011 Restructuring plan (including the Expansion) | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
| $ | 19 |
| | $ | 2 |
| | $ | 6 |
| | $ | — |
| | $ | 26 |
| | $ | 53 |
|
| | | | | | | | | | | |
Six Months Ended June 30, 2013 | | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Net Gain on Fixed Asset Disposals | | Other | | Total |
Restructuring charges | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | (16 | ) | | $ | 31 |
| | $ | 36 |
|
Restructuring-related expenses: | | | | | | | | | | | |
Cost of products sold | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Selling, general and administrative expenses | — |
| | 1 |
| | — |
| | — |
| | 9 |
| | 10 |
|
| — |
| | 1 |
| | — |
| | — |
| | 9 |
| | 10 |
|
| $ | 21 |
| | $ | 1 |
| | $ | — |
| | $ | (16 | ) | | $ | 40 |
| | $ | 46 |
|
| | | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Net Gain on Fixed Asset Disposals | | Other | | Total |
2011 Restructuring plan (including the Expansion) | $ | 25 |
| | $ | 1 |
| | $ | — |
| | $ | (16 | ) | | $ | 40 |
| | $ | 50 |
|
Plant Network Optimization program | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (4 | ) |
| $ | 21 |
| | $ | 1 |
| | $ | — |
| | $ | (16 | ) | | $ | 40 |
| | $ | 46 |
|
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 2014 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.
As of June 30, 2014, we have incurred cumulative restructuring charges related to our 2014 Restructuring plan, 2011 Restructuring plan (including the Expansion), and Plant Network Optimization program of $339 million and restructuring-related costs of $153 million since we committed to each plan. The following presents these costs by major type and by plan:
|
| | | | | | | | | | | | | | | |
(in millions) | 2014 Restructuring plan | | 2011 Restructuring plan (including the Expansion) | | Plant Network Optimization program | | Total |
Termination benefits | $ | 48 |
| | $ | 136 |
| | $ | 30 |
| | $ | 214 |
|
Fixed asset write-offs | — |
| | (1 | ) | | — |
| | (1 | ) |
Other | 13 |
| | 113 |
| | — |
| | 126 |
|
Total restructuring charges | 61 |
| | 248 |
| | 30 |
| | 339 |
|
Accelerated depreciation | 2 |
| | 5 |
| | 22 |
| | 29 |
|
Transfer costs | 6 |
| | — |
| | 74 |
| | 80 |
|
Other | 10 |
| | 34 |
| | — |
| | 44 |
|
Restructuring-related expenses | 18 |
| | 39 |
| | 96 |
| | 153 |
|
| $ | 79 |
| | $ | 287 |
| | $ | 126 |
| | $ | 492 |
|
We made cash payments of $24 million in the second quarter of 2014 and $53 million in the first half of 2014 associated with restructuring initiatives pursuant to these plans, and as of June 30, 2014, we had made total cash payments of $424 million related to our 2014 Restructuring plan, 2011 Restructuring plan (including the Expansion), and Plant Network Optimization program since committing to each plan. These payments were made using cash generated from operations, and are comprised of the following:
|
| | | | | | | | | | | | | | | |
(in millions) | 2014 Restructuring plan | | 2011 Restructuring plan (including the Expansion) | | Plant Network Optimization program | | Total |
Three Months Ended June 30, 2014 | | | | | | | |
Termination benefits | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
Transfer costs | 4 |
| | — |
| | — |
| | 4 |
|
Other | 12 |
| | 2 |
| | — |
| | 14 |
|
| $ | 22 |
| | $ | 2 |
| | $ | — |
| | $ | 24 |
|
| | | | | | | |
Six Months Ended June 30, 2014 | | | | | | | |
Termination benefits | $ | 12 |
| | $ | 7 |
| | $ | — |
| | $ | 19 |
|
Transfer costs | 6 |
| | — |
| | — |
| | 6 |
|
Other | 21 |
| | 7 |
| | — |
| | 28 |
|
| $ | 39 |
| | $ | 14 |
| | $ | — |
| | $ | 53 |
|
| | | | | | | |
Program to Date | | | | | | | |
Termination benefits | $ | 12 |
| | $ | 131 |
| | $ | 30 |
| | $ | 173 |
|
Transfer costs | 6 |
| | — |
| | 73 |
| | 79 |
|
Other | 21 |
| | 151 |
| | — |
| | 172 |
|
| $ | 39 |
| | $ | 282 |
| | $ | 103 |
| | $ | 424 |
|
Our restructuring liability is primarily comprised of accruals for termination benefits. The following is a rollforward of the termination benefit liability associated with our 2014 Restructuring plan and 2011 Restructuring plan (including the Expansion), which is reported as a component of accrued expenses included in our accompanying unaudited condensed balance sheets:
|
| | | | | | | | | | | | |
(in millions) | | 2014 Restructuring plan | | 2011 Restructuring plan (including the Expansion) | | Total |
Accrued as of December 31, 2013 | | $ | 29 |
| | $ | 12 |
| | $ | 41 |
|
Charges (credits) | | 19 |
| | — |
| | 19 |
|
Cash payments | | (12 | ) | | (7 | ) | | (19 | ) |
Other adjustments | | — |
| | — |
| | — |
|
Accrued as of June 30, 2014 | | $ | 36 |
| | $ | 5 |
| | $ | 41 |
|
In addition to our accrual for termination benefits, we had a $5 million liability as of June 30, 2014 and an $8 million liability as of December 31, 2013 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) | | June 30, 2014 | | December 31, 2013 |
Accounts receivable | | $ | 1,403 |
| | $ | 1,419 |
|
Less: allowance for doubtful accounts | | (80 | ) | | (81 | ) |
Less: allowance for sales returns | | (36 | ) | | (31 | ) |
| | $ | 1,287 |
| | $ | 1,307 |
|
The following is a rollforward of our allowance for doubtful accounts for the second quarter and first half of 2014 and 2013:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2014 | | 2013 | | 2014 | | 2013 |
Beginning balance | | $ | 75 |
| | $ | 86 |
| | $ | 81 |
| | $ | 88 |
|
Charges to expenses | | 6 |
| | 3 |
| | 4 |
| | 6 |
|
Utilization of allowances | | (1 | ) | | (5 | ) | | (5 | ) | |