Document
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, 2017
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)
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o |
Non-Accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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, 2017 |
Common Stock, $0.01 par value | | 1,372,127,044 |
TABLE OF CONTENTS
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 | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net sales | $ | 2,257 |
| | $ | 2,126 |
| | $ | 4,418 |
| | $ | 4,090 |
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Cost of products sold | 632 |
| | 639 |
| | 1,282 |
| | 1,211 |
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Gross profit | 1,625 |
| | 1,487 |
| | 3,136 |
| | 2,879 |
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Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 815 |
| | 779 |
| | 1,609 |
| | 1,497 |
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Research and development expenses | 244 |
| | 222 |
| | 480 |
| | 431 |
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Royalty expense | 17 |
| | 20 |
| | 34 |
| | 39 |
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Amortization expense | 142 |
| | 135 |
| | 285 |
| | 271 |
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Restructuring charges (credits) | 1 |
| | 14 |
| | 5 |
| | 17 |
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Contingent consideration expense (benefit) | (24 | ) | | 33 |
| | (74 | ) | | 37 |
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Litigation-related charges (credits) | 205 |
| | 618 |
| | 208 |
| | 628 |
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| 1,400 |
| | 1,821 |
| | 2,547 |
| | 2,920 |
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Operating income (loss) | 225 |
| | (334 | ) | | 589 |
| | (41 | ) |
| | | | | | | |
Other income (expense): | | | | | | | |
Interest expense | (58 | ) | | (59 | ) | | (115 | ) | | (118 | ) |
Other, net | (76 | ) | | (4 | ) | | (78 | ) | | (10 | ) |
Income (loss) before income taxes | 91 |
| | (397 | ) | | 396 |
| | (169 | ) |
Income tax expense (benefit) | (55 | ) | | (190 | ) | | (40 | ) | | (164 | ) |
Net income (loss) | $ | 146 |
| | $ | (207 | ) | | $ | 436 |
| | $ | (5 | ) |
| | | | | | | |
Net income (loss) per common share — basic | $ | 0.11 |
| | $ | (0.15 | ) | | $ | 0.32 |
| | $ | (0.00 | ) |
Net income (loss) per common share — assuming dilution | $ | 0.11 |
| | $ | (0.15 | ) | | $ | 0.31 |
| | $ | (0.00 | ) |
| | | | | | | |
Weighted-average shares outstanding | | | | | | | |
Basic | 1,369.8 |
| | 1,357.4 |
| | 1,367.6 |
| | 1,353.9 |
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Assuming dilution | 1,391.1 |
| | 1,357.4 |
| | 1,390.6 |
| | 1,353.9 |
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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) | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | $ | 146 |
| | $ | (207 | ) | | $ | 436 |
| | $ | (5 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment | 13 |
| | (21 | ) | | 21 |
| | (5 | ) |
Net change in unrealized gains and losses on derivative financial instruments | (21 | ) | | (84 | ) | | (76 | ) | | (153 | ) |
Net change in available-for-sale securities | 2 |
| | — |
| | 2 |
| | — |
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Net change in unrealized costs associated with certain retirement plans | (1 | ) | | — |
| | (1 | ) | | — |
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Total other comprehensive income (loss) | (7 | ) | | (105 | ) | | (54 | ) | | (158 | ) |
Total comprehensive income (loss) | $ | 139 |
| | $ | (312 | ) | | $ | 382 |
| | $ | (163 | ) |
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 | 2017 | | 2016 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 195 |
| | $ | 196 |
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Trade accounts receivable, net | 1,444 |
| | 1,472 |
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Inventories | 1,023 |
| | 955 |
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Deferred and prepaid income taxes | 75 |
| | 75 |
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Other current assets | 485 |
| | 541 |
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Total current assets | 3,222 |
| | 3,239 |
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Property, plant and equipment, net | 1,651 |
| | 1,630 |
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Goodwill | 6,871 |
| | 6,678 |
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Other intangible assets, net | 5,921 |
| | 5,883 |
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Other long-term assets | 717 |
| | 666 |
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TOTAL ASSETS | $ | 18,382 |
| | $ | 18,096 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current debt obligations | $ | 1,018 |
| | $ | 64 |
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Accounts payable | 376 |
| | 447 |
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Accrued expenses | 2,238 |
| | 2,312 |
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Other current liabilities | 668 |
| | 764 |
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Total current liabilities | 4,300 |
| | 3,587 |
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Long-term debt | 4,817 |
| | 5,420 |
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Deferred income taxes | 58 |
| | 18 |
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Other long-term liabilities | 1,972 |
| | 2,338 |
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Commitments and contingencies |
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Stockholders’ equity | | | |
Preferred stock, $0.01 par value - authorized 50,000,000 shares, none issued and outstanding |
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Common stock, $0.01 par value - authorized 2,000,000,000 shares - issued 1,618,030,825 shares as of June 30, 2017 and 1,609,670,817 shares as of December 31, 2016 | 16 |
| | 16 |
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Treasury stock, at cost - 247,566,270 shares as of June 30, 2017 and December 31, 2016 | (1,717 | ) | | (1,717 | ) |
Additional paid-in capital | 17,057 |
| | 17,014 |
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Accumulated deficit | (8,068 | ) | | (8,581 | ) |
Accumulated other comprehensive income (loss), net of tax | (53 | ) | | 1 |
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Total stockholders’ equity | 7,235 |
| | 6,733 |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 18,382 |
| | $ | 18,096 |
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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) | 2017 | | 2016 |
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Cash provided by (used for) operating activities | $ | 299 |
| | $ | 537 |
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Investing activities: | | | |
Purchases of property, plant and equipment | (180 | ) | | (138 | ) |
Proceeds on disposals of property, plant and equipment | — |
| | 29 |
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Payments for acquisitions of businesses, net of cash acquired | (392 | ) | | — |
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Net payments for investments, acquisitions of certain technologies and issuances of notes receivable | (47 | ) | | (41 | ) |
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Cash provided by (used for) investing activities | (619 | ) | | (150 | ) |
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Financing activities: | | | |
Payments on long-term borrowings | (600 | ) | | (250 | ) |
Net increase (decrease) in commercial paper | 1,013 |
| | — |
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Payment of contingent consideration amounts previously established in purchase accounting | (18 | ) | | (35 | ) |
Proceeds from borrowings on credit facilities | 2,156 |
| | 40 |
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Payments on borrowings from credit facilities | (2,216 | ) | | (40 | ) |
Cash used to net share settle employee equity awards | (62 | ) | | (56 | ) |
Proceeds from issuances of shares of common stock | 44 |
| | 73 |
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Cash provided by (used for) financing activities | 317 |
| | (268 | ) |
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Effect of foreign exchange rates on cash | 2 |
| | — |
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Net increase (decrease) in cash and cash equivalents | (1 | ) | | 119 |
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Cash and cash equivalents at beginning of period | 196 |
| | 319 |
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Cash and cash equivalents at end of period | $ | 195 |
| | $ | 438 |
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Supplemental Information | | | |
Stock-based compensation expense | $ | 62 |
| | $ | 58 |
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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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our most recent Annual Report on Form 10-K.
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 months ended June 30, 2017. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note E – Borrowings and Credit Arrangements and Note I – Commitments and Contingencies for more information.
NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS
2017 Acquisitions
Symetis SA
On May 16, 2017 we completed the acquisition of Symetis SA (Symetis) for approximately $430 million in cash. Symetis is a privately-held Swiss structural heart company focused on minimally-invasive transcatheter aortic valve implantation (TAVI) devices. Upon completion of the acquisition, we began selling the ACURATE TA™, ACURATE neo™ ACURATE TF™ Valve Systems in Europe and in other geographies outside of the United States. We are in the process of integrating Symetis into our Interventional Cardiology business and expect the integration to be substantially complete by the end of 2018.
Purchase Price Allocation
We accounted for the acquisition of Symetis as a business combination and, in accordance with FASB ASC Topic 805, Business Combinations, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate preliminary purchase price are as follows (in millions):
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Net cash paid for acquisition | $ | 392 |
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The following summarizes the preliminary purchase price allocation for the Symetis acquisition as of June 30, 2017
(in millions):
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Goodwill | $ | 185 |
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Amortizable intangible assets | 278 |
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Other assets acquired
| 25 |
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Liabilities assumed | (96 | ) |
| $ | 392 |
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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) | | Amortization Period (in years) | | Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation |
Amortizable intangible assets: | | | | | |
Technology-related | $ | 268 |
| | 13 | | 23.5% |
Other intangible assets | 10 |
| | 2-13 | | 23.5% |
| $ | 278 |
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2016 Acquisitions
We did not close any significant acquisitions during the first half of 2016.
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 for products in development at the date of the acquisition. 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 re-measure this liability each reporting period and record changes in the fair value through a separate line item within our condensed consolidated statements of operations.
We recorded a net benefit related to the changes in fair value of our contingent consideration liabilities of $24 million during the second quarter of 2017 and $74 million during the first half of 2017. We recorded net expenses related to the changes in fair value of our contingent consideration liabilities of $33 million during the second quarter of 2016 and $37 million during the first half of 2016. We paid contingent consideration of $28 million during the first half of 2017 and $77 million during the first half of 2016.
Changes in the fair value of our contingent consideration liabilities were as follows (in millions):
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Balance as of December 31, 2016 | $ | 204 |
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Fair value adjustments | (74 | ) |
Contingent payments related to prior period acquisitions | (28 | ) |
Balance as of June 30, 2017 | $ | 102 |
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As of June 30, 2017, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.278 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 liabilities include the following significant unobservable inputs:
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Contingent Consideration Liabilities | Fair Value as of June 30, 2017 | Valuation Technique | Unobservable Input | Range |
R&D and Commercialization-based Milestones | $44 million | Discounted Cash Flow | Discount Rate | 2% - 3% |
Projected Year of Payment | 2017 - 2021 |
Revenue-based Payments | $58 million | Discounted Cash Flow | Discount Rate | 11% - 15% |
Projected Year of Payment | 2017 - 2026 |
Increases or decreases in the fair value of our contingent consideration liabilities 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 R&D, commercialization-based, and revenue-based milestones. Projected contingent payment amounts related to some of our R&D, commercialization-based, and revenue-based milestones are discounted back to the current period using a discounted cash flow model. 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 together, or in isolation, may result in a significantly lower or higher fair value measurement.
Strategic Investments
We did not close any material strategic investments during the first half of 2017 or 2016.
We account for certain of our strategic investments as equity method investments, in accordance with FASB ASC Topic 323, Investments - Equity Method and Joint Ventures.
The aggregate carrying amount of our strategic investments as of June 30, 2017 and December 31, 2016 were comprised of the following categories:
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| | As of |
(in millions) | | June 30, 2017 | December 31, 2016 |
Equity method investments | | $ | 208 |
| $ | 265 |
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Cost method investments | | 42 |
| 20 |
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Available-for-sale securities | | 30 |
| 20 |
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Notes receivable | | 44 |
| 42 |
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| | $ | 324 |
| $ | 347 |
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These investments are classified as other long-term assets within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.
During the second quarter of 2017, we recorded a charge of $53 million for an other-than-temporary impairment loss equal to the difference between the carrying value of one of our investments and its fair value. The charge was recorded within the Other, net caption of our unaudited condensed consolidated statement of operations.
NOTE C – GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill as of June 30, 2017 and December 31, 2016 are as follows:
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| As of |
| June 30, 2017 | | December 31, 2016 |
| Gross Carrying | | Accumulated Amortization/ | | Gross Carrying | | Accumulated Amortization/ |
(in millions) | Amount | | Write-offs | | Amount | | Write-offs |
Amortizable intangible assets | | | | | | | |
Technology-related | $ | 9,390 |
| | $ | (4,675 | ) | | $ | 9,123 |
| | $ | (4,468 | ) |
Patents | 511 |
| | (370 | ) | | 529 |
| | (374 | ) |
Other intangible assets | 1,632 |
| | (779 | ) | | 1,583 |
| | (722 | ) |
| $ | 11,533 |
| | $ | (5,824 | ) | | $ | 11,235 |
| | $ | (5,564 | ) |
Unamortizable intangible assets | | | | | | | |
Goodwill | $ | 16,771 |
| | $ | (9,900 | ) | | $ | 16,578 |
| | $ | (9,900 | ) |
In-process research and development (IPR&D) | 92 |
| | — |
| | 92 |
| | — |
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Technology-related | 120 |
| | — |
| | 120 |
| | — |
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| $ | 16,983 |
| | $ | (9,900 | ) | | $ | 16,790 |
| | $ | (9,900 | ) |
Our technology-related intangible assets that are not subject to amortization represent technical processes, intellectual property and/or institutional understanding acquired through business combinations that are fundamental to the on-going operations of our business and have no limit to their useful life. Our technology-related intangible assets that are not subject to amortization are comprised primarily of certain acquired balloon and other technology, which is foundational to our continuing operations within the Cardiovascular market and other markets within interventional medicine. We assess our indefinite-lived intangible assets at least annually for impairment and reassess their classification as indefinite-lived assets. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other.
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, 2016 | $ | 3,513 |
| | $ | 290 |
| | $ | 2,875 |
| | $ | 6,678 |
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Impact of foreign currency fluctuations and other changes in carrying amount
| 4 |
| | 1 |
| | 3 |
| | 8 |
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Goodwill acquired | 185 |
| | — |
| | — |
| | 185 |
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Balance as of June 30, 2017 | $ | 3,702 |
| | $ | 291 |
| | $ | 2,878 |
| | $ | 6,871 |
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Goodwill Impairment Testing
In the second quarter of 2017, we performed our annual goodwill impairment test for all of our reporting units and concluded the fair value of each reporting unit exceeded its carrying value. Based on the criteria prescribed in FASB ASC Topic 350, we assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. For our 2017 and 2016 annual impairment assessment, we identified seven reporting units: Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic Health and Neuromodulation. We aggregated the Cardiac Rhythm Management and Electrophysiology reporting units, components of the Rhythm Management operating segment, based on the criteria prescribed in FASB ASC Topic 350. These reporting units were aggregated due to a reorganization that commenced in 2015 that resulted in integrated leadership, shared resources and consolidation of certain sites in 2016.
In performing the goodwill impairment assessment, we utilized both the optional qualitative assessment and the quantitative approach prescribed under FASB ASC Topic 350. The qualitative assessment was used for testing certain reporting units where fair value has historically exceeded carrying value by greater than 100 percent. All other reporting units were tested using the quantitative approach. After assessing the totality of events, if it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, the quantitative approach of the goodwill impairment test is unnecessary. In 2017, for all reporting units tested using the optional qualitative assessment, we concluded that it was not necessary to perform the quantitative impairment test. For all reporting units tested using the quantitative approach, we concluded that the fair value of each reporting unit exceeded its carrying value. Refer to Critical Accounting Policies and Estimates within 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 further discussion of our annual goodwill impairment testing.
The following is a rollforward of accumulated goodwill write-offs by global reportable segment:
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| | | | | | | | | | | | | | | |
(in millions) | Cardiovascular | | Rhythm Management | | MedSurg | | Total |
Accumulated write-offs as of December 31, 2016 | $ | (1,479 | ) | | $ | (6,960 | ) | | $ | (1,461 | ) | | $ | (9,900 | ) |
Goodwill written off | — |
| | — |
| | — |
| | — |
|
Accumulated write-offs as of June 30, 2017 | $ | (1,479 | ) | | $ | (6,960 | ) | | $ | (1,461 | ) | | $ | (9,900 | ) |
NOTE D – FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We address market risk from changes in foreign currency exchange rates and interest rates through a risk management program that includes the use of derivative financial instruments and we operate the program pursuant to documented corporate risk management policies. 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 FASB ASC Topic 815, Derivatives and Hedging.
Currency Hedging
We are exposed to currency risk consisting primarily of foreign currency denominated monetary assets and liabilities, forecasted foreign currency denominated intercompany transactions 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 derivative instruments and non-derivative transactions 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.
Currently or Previously Designated Foreign Currency Hedges
All of our designated currency hedge contracts outstanding as of June 30, 2017 and December 31, 2016 were cash flow hedges under FASB ASC 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 $2.915 billion as of June 30, 2017 and $2.271 billion as of December 31, 2016.
We recognized net gains of $27 million in earnings on our cash flow hedges during the second quarter of 2017 and $55 million during the first half of 2017, as compared to net gains of $32 million during the second quarter of 2016 and $80 million during the first half of 2016. All currency cash flow hedges outstanding as of June 30, 2017 mature within 60 months. As of June 30, 2017, $25 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, net of tax, of $102 million as of December 31, 2016. As of June 30, 2017, an immaterial amount 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 British pound sterling, Euro and Japanese yen). 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 FASB ASC Topic 815. The currency forward contracts 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 FASB ASC Topic 815 outstanding in the contract amount of $2.197 billion as of June 30, 2017 and $1.830 billion as of December 31, 2016.
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 fixed-rate debt into floating-rate debt or floating-rate debt into fixed-rate debt. We had no interest rate derivative instruments outstanding as of June 30, 2017 and December 31, 2016.
We designate these derivative instruments either as fair value or cash flow hedges under FASB ASC 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.
We are amortizing the gains and losses on previously terminated interest rate derivative instruments, including fixed-to-floating interest rate contracts designated as fair value hedges and forward starting interest rate derivative contracts designated as cash flow hedges into earnings as a component of interest expense over the remaining term of the hedged debt, in accordance with FASB ASC Topic 815. The carrying amount of certain of our senior notes included unamortized gains of $45 million as of June 30, 2017 and $51 million as of December 31, 2016. We had no unamortized losses as of June 30, 2017 compared to an immaterial amount as of December 31, 2016. In addition, we had pre-tax net gains within AOCI related to terminated forward starting interest rate derivative contracts of $8 million as of June 30, 2017 and $9 million as of December 31, 2016. The net gains that we recognized as a reduction of interest expense in earnings related to previously terminated interest rate derivatives were $3 million during the second quarter of 2017 and $6 million during the first half of 2017, as compared to $3 million during the second quarter of 2016 and $6 million during the first half of 2016. As of June 30, 2017, $14 million of net gains may be reclassified to earnings within the next twelve months from amortization of our previously terminated interest rate derivative contracts.
Counterparty Credit Risk
We do not have significant concentrations of credit risk arising from our derivative financial instruments, whether from an individual counterparty or a related group of counterparties. We manage our concentration of counterparty credit risk on our derivative instruments by limiting acceptable counterparties to a diversified group of major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to each counterparty and by actively monitoring their credit ratings and outstanding fair values on an on-going basis. Furthermore, none of our derivative transactions are subject to collateral or other security arrangements and none contain provisions that are dependent on our credit ratings from any credit rating agency.
We also employ master netting arrangements that reduce our counterparty payment settlement risk on any given maturity date to the net amount of any receipts or payments due between us and the counterparty financial institution. Thus, the maximum loss due to 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 FASB ASC Topic 815 on our accompanying unaudited condensed consolidated statements of operations during the second quarter and the first half of 2017 and 2016:
|
| | | | | | | | | |
(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, 2017 | | | | | |
Currency hedge contracts | $ | (6 | ) | | $ | 27 |
| | Cost of products sold |
| $ | (6 | ) | | $ | 27 |
| | |
Three Months Ended June 30, 2016 | | | | | |
Currency hedge contracts | $ | (99 | ) | | $ | 32 |
| | Cost of products sold |
| $ | (99 | ) | | $ | 32 |
| | |
Six Months Ended June 30, 2017 | | | | | |
Currency hedge contracts | $ | (64 | ) | | $ | 55 |
| | Cost of products sold |
Interest rate derivative contracts | — |
| | 1 |
| | Interest Expense |
| $ | (64 | ) | | $ | 56 |
| | |
Six Months Ended June 30, 2016 | | | | | |
Currency hedge contracts | $ | (158 | ) | | $ | 80 |
| | Cost of products sold |
| $ | (158 | ) | | $ | 80 |
| | |
The amount of gain (loss) recognized in earnings related to the ineffective portion of hedging relationships was immaterial in 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, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net gain (loss) on currency hedge contracts | | Other, net | | $ | 5 |
| | $ | (28 | ) | | $ | (12 | ) | | $ | (67 | ) |
Net gain (loss) on foreign currency transaction exposures | | Other, net | | (13 | ) | | 29 |
| | 4 |
| | 63 |
|
Net foreign currency gain (loss) | | Other, net | | $ | (8 | ) | | $ | 1 |
| | $ | (8 | ) | | $ | (4 | ) |
FASB ASC Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures, 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 the assets and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. In doing so, we use inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of June 30, 2017, we have classified all of our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by FASB ASC 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, 2017 and December 31, 2016:
|
| | | | | | | | |
| | As of |
| | June 30, | | December 31, |
(in millions) | Location in Balance Sheet (1) | 2017 | | 2016 |
Derivative Assets: | | | | |
Currently or Previously Designated Hedging Instruments | | | |
Currency hedge contracts | Other current assets | $ | 20 |
| | $ | 98 |
|
Currency hedge contracts | Other long-term assets | 52 |
| | 65 |
|
| | 72 |
| | 163 |
|
Non-Designated Hedging Instruments | | | | |
Currency hedge contracts | Other current assets | 24 |
| | 36 |
|
Total Derivative Assets | | $ | 96 |
| | $ | 199 |
|
| | | | |
Derivative Liabilities: | | | | |
Currently or Previously Designated Hedging Instruments | | | |
Currency hedge contracts | Other current liabilities | $ | 25 |
| | $ | 3 |
|
Currency hedge contracts | Other long-term liabilities | 11 |
| | 4 |
|
| | 36 |
| | 7 |
|
Non-Designated Hedging Instruments | | | | |
Currency hedge contracts | Other current liabilities | 34 |
| | 19 |
|
Total Derivative Liabilities | | $ | 70 |
| | $ | 26 |
|
| |
(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. FASB ASC 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, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| June 30, 2017 | | December 31, 2016 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | |
| | | | | | | | |
| | | | |
Money market and government funds | $ | 66 |
| | $ | — |
| | $ | — |
| | $ | 66 |
| | $ | 42 |
| | $ | — |
| | $ | — |
| | $ | 42 |
|
Available-for-sale securities | 30 |
| | — |
| | — |
| | 30 |
| | 20 |
| | — |
| | — |
| | 20 |
|
Currency hedge contracts | — |
| | 96 |
| | — |
| | 96 |
| | — |
| | 199 |
| | — |
| | 199 |
|
| $ | 96 |
| | $ | 96 |
| | $ | — |
| | $ | 192 |
| | $ | 62 |
| | $ | 199 |
| | $ | — |
| | $ | 261 |
|
Liabilities | | | | | | | | | | | | | | | |
Currency hedge contracts | $ | — |
| | $ | 70 |
| | $ | — |
| | $ | 70 |
| | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 26 |
|
Accrued contingent consideration | — |
| | — |
| | 102 |
| | 102 |
| | — |
| | — |
| | 204 |
| | 204 |
|
| $ | — |
| | $ | 70 |
| | $ | 102 |
| | $ | 172 |
| | $ | — |
| | $ | 26 |
| | $ | 204 |
| | $ | 230 |
|
Our investments in money market and government funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as cash and cash equivalents within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In addition to $66 million invested in money market and government funds as of June 30, 2017, we had $129 million in interest bearing and non-interest bearing bank accounts. In addition to $42 million invested in money market and government funds as of December 31, 2016, we had $19 million in short-term deposits and $135 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 liability. Refer to Note B – Acquisitions and Strategic Investments for a discussion of the changes in the fair value of our contingent consideration liability.
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods 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. Refer to Note B – Acquisitions and Strategic Investments for a discussion of our strategic investments.
The fair value of our outstanding debt obligations was $6.174 billion as of June 30, 2017 and $5.739 billion as of December 31, 2016, which was determined by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy. Refer to Note E – Borrowings and Credit Arrangements for a discussion of our debt obligations.
NOTE E – BORROWINGS AND CREDIT ARRANGEMENTS
We had total debt of $5.835 billion as of June 30, 2017 and $5.484 billion as of December 31, 2016. The debt maturity schedule for the significant components of our long-term debt obligations as of June 30, 2017 and December 31, 2016 is as follows:
|
| | | | | | | | | | |
in millions, except interest rates | | Maturity Date | | June 30, 2017 | | December 31, 2016 |
January 2017 5.125% Notes | | January 2017 | | $ | — |
| | $ | 250 |
|
October 2018 2.650% Notes | | October 2018 | | 600 |
| | 600 |
|
January 2020 6.000% Notes | | January 2020 | | 850 |
| | 850 |
|
May 2020 2.850% Notes | | May 2020 | | 600 |
| | 600 |
|
May 2022 3.375% Notes | | May 2022 | | 500 |
| | 500 |
|
May 2025 3.850% Notes | | May 2025 | | 750 |
| | 750 |
|
October 2023 4.125% Notes | | October 2023 | | 450 |
| | 450 |
|
November 2035 6.250% Notes | | November 2035 | | 350 |
| | 350 |
|
January 2040 7.375% Notes | | January 2040 | | 300 |
| | 300 |
|
August 2018 Term Loan | | August 2018 | | — |
| | 150 |
|
August 2020 Term Loan | | 2018-2020 | | 400 |
| | 600 |
|
Debt discount | | 2018-2040 | | (7 | ) | | (8 | ) |
Deferred financing costs | | 2018-2040 | | (22 | ) | | (24 | ) |
Interest rate swaps | | 2020-2023 | | 45 |
| | 51 |
|
Capital lease obligation | | 2018-2020 | | 1 |
| | 1 |
|
Long-term debt | | | | $ | 4,817 |
| | $ | 5,420 |
|
|
| |
Note: | The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges. |
Revolving Credit Facility
On April 10, 2015, we entered into a $2.000 billion revolving credit facility (the 2015 Facility) with a global syndicate of commercial banks and terminated our previous $2.000 billion revolving credit facility. The 2015 Facility matures on April 10, 2020. This facility provides backing for the commercial paper program described below. There were no borrowings outstanding under the 2015 Facility as of June 30, 2017 and December 31, 2016.
The 2015 Facility agreement contains normal and customary covenants, interest rates and fees as described in our most recent Annual Report on Form 10-K. As of and through June 30, 2017, we were in compliance with the required covenants.
Commercial Paper
In June 2017, we launched a commercial paper program that allows the Company to have a maximum of $2.000 billion in commercial paper outstanding. As of June 30, 2017 there was $1.013 billion of commercial paper outstanding. The commercial paper program is backed by the revolving credit facility. Commercial paper issued as of June 30, 2017 had a weighted average maturity of 23 days and a weighted average yield of 1.7 percent.
Term Loans
As of June 30, 2017, we had an aggregate of $400 million outstanding under our unsecured term loan facilities and $750 million outstanding as of December 31, 2016. These facilities include an unsecured term loan facility maturing August 2018 (August 2018 Term Loan) and an unsecured term loan facility maturing August 2020 (August 2020 Term Loan). The August 2018 Term Loan had $150 million outstanding as of December 31, 2016 and was fully repaid as of June 30, 2017. The August 2020 Term Loan had $400 million outstanding as of June 30, 2017 and $600 million outstanding as of December 31, 2016.
In July 2017, we fully repaid the $400 million outstanding under the August 2020 Term Loan.
Senior Notes
We had senior notes outstanding of $4.400 billion as of June 30, 2017 and $4.650 billion as of December 31, 2016. On January 12, 2017, we used our existing credit facilities to repay the $250 million plus interest of our senior notes due in January 2017. Our senior notes were issued in public offerings, 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 to the extent borrowed by our subsidiaries, to liabilities of our subsidiaries (see Other Arrangements below).
Other Arrangements
As of December 31, 2016, we maintained a $300 million credit and security facility secured by our U.S. trade receivables maturing on June 9, 2017. On February 7, 2017, we amended the terms of this credit and security facility, including increasing the facility size to $400 million and extended the facility maturity to February 2019. We had no borrowings outstanding under this facility as of June 30, 2017 and $60 million as of December 31, 2016.
We have accounts receivable factoring programs in certain European countries that we account for as sales under FASB ASC Topic 860, Transfers and Servicing. These agreements provide for the sale of accounts receivable to third parties, without recourse, of up to $434 million as of June 30, 2017. 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 $165 million of receivables as of June 30, 2017 at an average interest rate of 1.8 percent and $152 million as of December 31, 2016 at an average interest rate of 1.8 percent.
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 22.0 billion Japanese yen (approximately $196 million as of June 30, 2017). We de-recognized $157 million of notes receivable and factored receivables as of June 30, 2017 at an average interest rate of 1.3 percent and $149 million of notes receivable as of December 31, 2016 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.
As of and through June 30, 2017, we were in compliance with all the required covenants related to our debt obligations. For additional information regarding the terms of our debt agreements, refer to Note F - Borrowings and Credit Arrangements of the consolidated financial statements in our most recent Annual Report on Form 10-K.
NOTE F – RESTRUCTURING-RELATED ACTIVITIES
2016 Restructuring Plan
On June 6, 2016, our Board of Directors approved and we committed to a restructuring initiative (the 2016 Restructuring Plan). The 2016 Restructuring Plan is intended to develop global commercialization, technology and manufacturing capabilities in key growth markets, build on our Plant Network Optimization (PNO) strategy, which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and expand operational efficiencies in support of our operating income margin goals. Key activities under the 2016 Restructuring Plan include strengthening global infrastructure through evolving global real estate assets and workplaces, developing global commercial and technical competencies, enhancing manufacturing and distribution expertise in certain regions and continuing implementation of our ongoing PNO strategy. These activities were initiated in the second quarter of 2016 and are expected to be substantially completed by the end of 2018.
The 2016 Restructuring Plan is expected to result in total pre-tax charges of approximately $175 million to $225 million and approximately $160 million to $210 million of these charges are estimated to result in cash outlays. We have recorded related costs of $82 million since the inception of the plan through June 30, 2017 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 2016 Restructuring Plan through the end of 2018 by major type of cost:
|
| |
Type of cost | Total estimated amount expected to be incurred |
Restructuring charges: | |
Termination benefits | $60 million to $70 million |
Other (1) | $10 million to $20 million |
Restructuring-related expenses: | |
Other (2) | $105 million to $135 million |
| $175 million to $225 million |
(1) Consists primarily of consulting fees and costs associated with contract cancellations.
(2) Comprised of other costs directly related to the 2016 Restructuring Plan, including program management, accelerated depreciation and costs to transfer product lines among facilities.
We recorded restructuring charges pursuant to our restructuring plans of $1 million in the second quarter of 2017, $14 million in the second quarter of 2016, $5 million in the first half of 2017 and $17 million in the first half of 2016. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $15 million in the second quarter of 2017, $12 million in the second quarter of 2016, $30 million in the first half of 2017 and $22 million in the first half of 2016.
The following presents these costs (credits) by major type and line item within our accompanying unaudited condensed consolidated statements of operations:
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2017 | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Other | | Total |
Restructuring charges | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Restructuring-related expenses: | | | | | | | | | |
Cost of products sold | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
Selling, general and administrative expenses | — |
| | 2 |
| | — |
| | 1 |
| | 3 |
|
| — |
| | 2 |
| | 12 |
| | 1 |
| | 15 |
|
| $ | — |
| | $ | 2 |
| | $ | 12 |
| | $ | 2 |
| | $ | 16 |
|
All charges incurred in the second quarter of 2017 were related to the 2016 Restructuring Plan.
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2016 | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Other | | Total |
Restructuring charges | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14 |
|
Restructuring-related expenses: | | | | | | | | | |
Cost of products sold | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Selling, general and administrative expenses | — |
| | 3 |
| | — |
| | 2 |
| | 5 |
|
| — |
| | 3 |
| | 7 |
| | 2 |
| | 12 |
|
| $ | 14 |
| | $ | 3 |
| | $ | 7 |
| | $ | 2 |
| | $ | 26 |
|
| | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Other | | Total |
2016 Restructuring Plan | $ | 18 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 19 |
|
2014 Restructuring Plan | (4 | ) | | 3 |
| | 6 |
| | 2 |
| | 7 |
|
| $ | 14 |
| | $ | 3 |
| | $ | 7 |
| | $ | 2 |
| | $ | 26 |
|
|
| | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2017 | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Other | | Total |
Restructuring charges | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 5 |
|
Restructuring-related expenses: | | | | | | | | | |
Cost of products sold | — |
| | — |
| | 24 |
| | — |
| | 24 |
|
Selling, general and administrative expenses | — |
| | 3 |
| | — |
| | 3 |
| | 6 |
|
| — |
| | 3 |
| | 24 |
| | 3 |
| | 30 |
|
| $ | 3 |
| | $ | 3 |
| | $ | 24 |
| | $ | 5 |
| | $ | 35 |
|
All charges incurred in the first half of 2017 were related to the 2016 Restructuring Plan.
|
| | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2016 | | | | | | | | | |
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Other | | Total |
Restructuring charges | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 17 |
|
Restructuring-related expenses: | | | | | | | | | |
Cost of products sold | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
Selling, general and administrative expenses | — |
| | 4 |
| | — |
| | 6 |
| | 10 |
|
| — |
| | 4 |
| | 12 |
| | 6 |
| | 22 |
|
| $ | 15 |
| | $ | 4 |
| | $ | 12 |
| | $ | 8 |
| | $ | 39 |
|
| | | | | | | | | |
|
(in millions) | Termination Benefits | | Accelerated Depreciation | | Transfer Costs | | Other | | Total |
2016 Restructuring Plan | $ | 18 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 19 |
|
2014 Restructuring Plan | (3 | ) | | 4 |
| | 11 |
| | 8 |
| | 20 |
|
| $ | 15 |
| | $ | 4 |
| | $ | 12 |
| | $ | 8 |
| | $ | 39 |
|
Termination benefits represent amounts incurred pursuant to our ongoing benefit arrangements and amounts for “one-time” involuntary termination benefits and have been recorded in accordance with FASB ASC Topic 712, Compensation - Nonretirement and Postemployment Benefits and FASB ASC Topic 420, Exit or Disposal Cost Obligations. Other restructuring costs, which represent primarily consulting fees and costs related to contract cancellations, are being recorded as incurred in accordance with FASB ASC Topic 420. Accelerated depreciation is being recorded over the adjusted remaining useful life of the related assets and program management and production line transfer costs are being recorded as incurred.
As of June 30, 2017, we incurred cumulative restructuring charges related to our 2016 Restructuring Plan of $33 million and restructuring-related charges of $49 million since we committed to the plan. The following presents these costs by major type:
|
| | | |
(in millions) | 2016 Restructuring Plan |
Termination benefits | $ | 27 |
|
Other | 6 |
|
Total restructuring charges | 33 |
|
Accelerated depreciation | 5 |
|
Transfer costs | 39 |
|
Other | 5 |
|
Restructuring-related expenses | 49 |
|
| $ | 82 |
|
We made cash payments of $33 million in the first half of 2017 associated with our 2016 Restructuring Plan, and as of June 30, 2017, we had made total cash payments of $60 million related to our 2016 Restructuring Plan since committing to the plan. These payments were made using cash generated from operations and are comprised of the following:
|
| | | |
(in millions) | 2016 Restructuring Plan |
Six Months Ended June 30, 2017 | |
Termination benefits | $ | 6 |
|
Transfer costs | 24 |
|
Other | 3 |
|
| $ | 33 |
|
| |
Program to Date | |
Termination benefits | $ | 14 |
|
Transfer costs | 39 |
|
Other | 7 |
|
| $ | 60 |
|
Our restructuring liability is primarily comprised of accruals for termination benefits. The following is a rollforward of the termination benefit liability associated with our 2016 Restructuring Plan, which is reported as a component of accrued expenses included in our accompanying unaudited condensed balance sheets:
|
| | | |
(in millions) | 2016 Restructuring Plan |
Accrued as of December 31, 2016 | $ | 16 |
|
Charges (credits) | 3 |
|
Cash payments | (6 | ) |
Accrued as of June 30, 2017 | $ | 13 |
|
In addition to our accrual for termination benefits, we had a $7 million liability as of June 30, 2017 and $6 million as of December 31, 2016 for other restructuring-related items.
NOTE G – 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, 2017 | | December 31, 2016 |
Accounts receivable | | $ | 1,564 |
| | $ | 1,591 |
|
Less: allowance for doubtful accounts | | (74 | ) | | (73 | ) |
Less: allowance for sales returns | | (46 | ) | | (46 | ) |
| | $ | 1,444 |
| | $ | 1,472 |
|
The following is a rollforward of our allowance for doubtful accounts for the second quarter and first half of 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
Beginning balance | | $ | 75 |
| | $ | 80 |
| | $ | 73 |
| | $ | 75 |
|
Net charges to expenses | | 2 |
| | 3 |
| | 5 |
| | 7 |
|
Utilization of allowances | | (3 | ) | | (3 | ) | | (4 | ) | | (2 | ) |
Ending balance | | $ | 74 |
| | $ | 80 |
| | $ | 74 |
| | $ | 80 |
|
Inventories
|
| | | | | | | | |
| | As of |
(in millions) | | June 30, 2017 | | December 31, 2016 |
Finished goods | | $ | 652 |
| | $ | 625 |
|
Work-in-process | | 97 |
| | 94 |
|
Raw materials | | 274 |
| | 236 |
|
| | $ | 1,023 |
| | $ | 955 |
|
Other current assets
|
| | | | | | | | |
| | As of |
(in millions) | | June 30, 2017 | | December 31, 2016 |
Prepaid expenses | | $ | 91 |
| | $ | 58 |
|
Restricted cash | | 251 |
| | 243 |
|
Other | | 143 |
| | 240 |
|
| | $ | 485 |
| | $ | 541 |
|
Property, plant and equipment, net
|
| | | | | | | | |
| | As of |
(in millions) | | June 30, 2017 | | December 31, 2016 |
Land | | $ | 92 |
| | $ | 91 |
|
Buildings and improvements | | 1,043 |
| | 981 |
|
Equipment, furniture and fixtures | | 3,081 |
| | 2,955 |
|
Capital in progress | | 305 |
| | 338 |
|
| | 4,521 |
| | 4,365 |
|
Less: accumulated depreciation | | 2,870 |
| | 2,735 |
|
| | $ | 1,651 |
| | $ | 1,630 |
|
Depreciation expense was $65 million for the second quarter of 2017, $62 million for the second quarter of 2016, $127 million for the first half of 2017 and $126 million for the first half of 2016.
Accrued expenses
|
| | | | | | | | |
| | As of |
(in millions) | | June 30, 2017 | | December 31, 2016 |
Legal reserves | | $ | 1,152 |
| | $ | 1,062 |
|
Payroll and related liabilities | | 486 |
| | 572 |
|
Accrued contingent consideration | | 39 |
| | 63 |
|
Other | | 561 |
| | 615 |
|
| | $ | 2,238 |
| | $ | 2,312 |
|
Other long-term liabilities
|
| | | | | | | | |
| | As of |
(in millions) | | June 30, 2017 | | December 31, 2016 |
Accrued income taxes | | $ | 797 |
| | $ | 781 |
|
Legal reserves | | 627 |
| | 961 |
|
Accrued contingent consideration | | 63 |
| | 141 |
|
Other long-term liabilities | | 485 |
| | 455 |
|
| | $ | 1,972 |
| | $ | 2,338 |
|
Accrued warranties
We offer warranties on certain of our product offerings. The majority of our warranty liability relates to implantable devices offered by our Cardiac Rhythm Management (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 for a period of time thereafter. We estimate the costs that we may incur under our warranty programs based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim and record a liability equal to these estimated costs as cost of products sold at the time the product sale occurs. We 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 half of 2017 and 2016 consisted of the following:
|
| | | | | | | | |
| | Six Months Ended June 30, |
(in millions) | | 2017 | | 2016 |
Beginning Balance | | $ | 22 |
| | $ | 23 |
|
Provision | | 13 |
| | 10 |
|
Settlements/reversals | | (13 | ) | | (13 | ) |
Ending Balance | | $ | 22 |
| | $ | 20 |
|
NOTE H – INCOME TAXES
Our effective tax rate from continuing operations was (60.3) percent for the second quarter of 2017 as compared to 47.8 percent for the second quarter of 2016. For the first half of 2017, our effective tax rate from continuing operations was (10.1) percent, as compared to 97.0 percent for the first half of 2016. The change in our reported tax rates for the second quarter and first half of 2017, as compared to the same periods in 2016, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate, including acquisition-related items, contingent consideration, restructuring and restructuring-related items, investment impairment-related items, litigation-related items and amortization expense, as well as the impact of certain discrete tax items.
As of June 30, 2017, we had $1.116 billion of gross unrecognized tax benefits, of which a net $1.027 billion, if recognized, would affect our effective tax rate. As of December 31, 2016, we had $1.095 billion of gross unrecognized tax benefits, of which a net $1.006 billion, if recognized, would affect our effective tax rate.
We have received Notices of Deficiency from the Internal Revenue Service (IRS) reflecting proposed audit adjustments for Guidant Corporation for its 2001 through 2006 tax years and for Boston Scientific Corporation for its 2006 and 2007 tax years. The total incremental tax liability 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 associated 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 pertaining to the sale of Guidant's vascular intervention business to Abbott in April 2006. During 2014, we received a Revenue Agent Report from the IRS reflecting significant proposed audit adjustments to our 2008, 2009 and 2010 tax years based upon the same transfer pricing methodologies that the IRS applied to our 2001 through 2007 tax years.
We do not agree with the transfer pricing methodologies applied by the IRS or its resulting assessment. We have filed petitions with the U.S. Tax Court (Tax Court) contesting the Notices of Deficiency for the 2001 through 2007 tax years in challenge and submitted a letter to the IRS Office of Appeals (IRS Appeals) protesting the Revenue Agent Report for the 2008 through 2010 tax years and requesting an administrative appeal hearing. The issues in dispute were scheduled to be heard in Tax Court in late July 2016. On July 19, 2016, we entered into a Stipulation of Settled Issues with the IRS intended to resolve all of the aforementioned transfer pricing issues, as well as the issues related to our transaction with Abbott, for the 2001 through 2007 tax years. The Stipulation of Settled Issues is contingent upon IRS Office of Appeals applying the same basis of settlement to all transfer pricing issues for the Company’s 2008, 2009 and 2010 tax years and if applicable, review by the United States Congress Joint Committee on Taxation. In October 2016, we reached an agreement in principle with the IRS Appeals as to the resolution of transfer pricing issues in 2008, 2009 and 2010 tax years, subject to additional calculations of tax as well as documentation to memorialize our agreement.
In the event that the conditions in the Stipulation of Settled Items are satisfied, we expect to make net tax payments of approximately $275 million, plus interest, through the date of payment. If finalized, payments related to the resolution are expected in the next three to nine months. We believe that our income tax reserves associated with these matters are adequate as of June 30, 2017 and we do not expect to recognize any additional charges related to the resolution of this controversy. However, the final resolution of these issues is contingent and if the Stipulation of Settled Issues is not finalized, it 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 $612 million accrued for gross interest and penalties as of June 30, 2017 and $572 million as of December 31, 2016. We recognized net tax expense related to interest and penalties of $13 million during the second quarter of 2017 and the second quarter of 2016, $26 million during the first half of 2017 and $23 million during the first half of 2016.
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 $757 million.
NOTE I – COMMITMENTS AND CONTINGENCIES
The medical device market in which we primarily participate is largely technology driven. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. Over the years, there has been litigation initiated against us by others, including our competitors, claiming that our current or former product offerings infringe patents owned or licensed by them. Intellectual property litigation is inherently complex and unpredictable. In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding or in a series of related proceedings or litigate multiple features of a single class of devices. These 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 have received favorable rulings in several other matters, however, there continues to be outstanding intellectual property litigation. Adverse outcomes in one or more of these matters could have a material adverse effect on our ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.
In the normal course of business, product liability, securities and commercial claims are asserted against us. Similar claims may be asserted against us in the future related to events not known to management at the present time. We maintain an insurance policy providing limited coverage against securities claims and we are substantially self-insured with respect to product liability claims and fully self-insured with respect to intellectual property infringement claims. The absence of significant third-party insurance coverage increases our potential exposure to unanticipated claims or adverse decisions. Product liability claims, securities and commercial litigation and other legal proceedings in the future, regardless of their outcome, could have a material adverse effect on our financial position, results of operations and/or liquidity.
In addition, like other companies in the medical device industry, we are subject to extensive regulation by national, state and local government agencies in the U.S. and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.
In accordance with FASB ASC Topic 450, Contingencies, we accrue anticipated costs of settlements, damages and losses for product liability claims and, under certain conditions, costs of defense, based on historical experience or to the extent specific losses are probable and estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.
Our accrual for legal matters that are probable and estimable was $1.779 billion as of June 30, 2017 and $2.023 billion as of December 31, 2016 and includes certain estimated costs of settlement, damages and defense. We recorded $208 million of litigation-related charges during the first half of 2017 and $628 million of litigation-related charges during the first half of 2016. The net charges recorded in the first half of 2017 and 2016 primarily include amounts related to transvaginal surgical mesh product liability cases and claims. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with our debt covenants.
In management's opinion, we are not currently involved in any legal proceedings other than those disclosed in our most recent Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the Quarter ended March 31, 2017, and those specifically identified below, which, individually or in the aggregate, could have a material adverse effect on our financial condition, operations and/or cash flows. Unless included in our legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding cannot be estimated.
Patent Litigation
On November 29, 2016 Nevro Corp. (“Nevro”) filed a patent infringement action against us and one of our subsidiaries, Boston Scientific Neuromodulation Corporation, in the United States District Court for the Northern District of California alleging that six U.S. patents (Alataris) owned by Nevro are infringed by our spinal cord stimulation systems. On June 29, 2017, Nevro amended the complaint to add an additional patent (Fang). We deny the plaintiff's allegations and intend to defend ourselves vigorously.
Product Liability Litigation
As of July 26, 2017, approximately 48,000 product liability cases or claims related to transvaginal surgical mesh products designed to treat stress urinary incontinence and pelvic organ prolapse have been asserted against us. The pending cases are in various federal and state courts in the United States and include eight putative class actions. There were also fewer than 20 cases in Canada, inclusive of one certified and three putative class actions, and fewer than 25 claims in the United Kingdom. Generally, the plaintiffs allege personal injury associated with use of our transvaginal surgical mesh products. The plaintiffs assert design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. Over 3,100 of the cases have been specially assigned to one judge in state court in Massachusetts. On February 7, 2012, the Judicial Panel on Multi-District Litigation (MDL) established MDL-2326 in the United States District Court for the Southern District of West Virginia and transferred the federal court transvaginal surgical mesh cases to MDL-2326 for coordinated pretrial proceedings. During the fourth quarter of 2013, we received written discovery requests from certain state attorneys general offices regarding our transvaginal surgical mesh products. We have responded to those requests. As of July 26, 2017, we have entered into master settlement agreements in principle or are in final stages of entering one with certain plaintiffs' counsel to resolve an aggregate of approximately 38,000 cases and claims. These master settlement agreements provide that the settlement and distribution of settlement funds to participating claimants are conditional upon, among other things, achieving minimum required claimant participation thresholds. Of the approximately 38,000 cases and claims, approximately 14,500 have met the conditions of the settlement and are final. All settlement agreements were entered into solely by way of compromise and without any admission or concession by us of any liability or wrongdoing.
On or about January 12, 2016, Teresa L. Stevens filed a claim against us and three other defendants asserting for herself and on behalf of a putative class of similarly-situated women, that she was harmed by a vaginal mesh implant that she alleges contained a counterfeit or adulterated resin product that we imported from China. The complaint was filed in the United States District Court for the Southern District of West Virginia, before the same Court that is hearing the mesh MDL. The complaint, which alleges Racketeer Influenced and Corrupt Organizations Act (RICO) violations, fraud, misrepresentation, deceptive trade practices and unjust enrichment, seeks both equitable relief and damages under state and federal law. On January 26, 2016, the Court issued an order staying the case and directing the plaintiff to submit information to allow the FDA to issue a determination with respect to her allegations. In addition, we are in contact with the United States Attorney’s Office for the Southern District of West Virginia and are responding voluntarily to their requests in connection with that office’s review of the allegations concerning the use of mesh resin in the complaint. We deny the plaintiff’s allegations and intend to defend ourselves vigorously.
On February 27, 2017, Carolyn Turner filed a complaint against us and five other defendants asserting for herself and on behalf of a putative class of similarly situated women, that she was harmed by a vaginal mesh implant that she alleges contained a counterfeit or adulterated resin product that we imported from China. The complaint was filed in the United States District Court for the Middle District of Florida, Orlando Division and alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), negligence, strict liability, breach of an express or implied warranty, intentional and negligent misrepresentation, fraud and unjust enrichment. Ms. Turner served this complaint against the Company on April 7, 2017. As of April 27, 2017, this case has been stayed, pending resolution of the transfer petition to the mesh multidistrict litigation. We deny the plaintiff’s allegations and intend to defend ourselves vigorously.
We have established a product liability accrual for known and estimated future cases and claims asserted against us as well as with respect to the actions that have resulted in verdicts against us and the costs of defense thereof associated with our transvaginal surgical mesh products. While we believe that our accrual associated with this matter is adequate, changes to this accrual may be required in the future as additional information becomes available. While we continue to engage in discussions with plaintiffs’ counsel regarding potential resolution of pending cases and claims and intend to vigorously contest the cases and claims asserted against us that do not settle, the final resolution of the cases and claims is uncertain and could have a material impact on our results of operations, financial condition and/or liquidity. Initial trials involving our transvaginal surgical mesh products have resulted in both favorable and unfavorable judgments for us. We do not believe that the judgment in any one trial is representative of potential outcomes of all cases or claims related to our transvaginal surgical mesh products.
Governmental Investigations and Qui Tam Matters
On August 3, 2012, we were served with a qui tam complaint that had previously been filed under seal against Boston Scientific Neuromodulation Corp. in the U.S. District Court for the District of New Jersey on March 2, 2011. On August 8, 2012, we learned that the federal government had previously declined to intervene in this matter. The relators’ complaint, now unsealed, alleges that Boston Scientific Neuromodulation Corp. violated the federal and various states' false claims acts through submission of fraudulent bills for implanted devices, under-reporting of certain adverse events, and promotion of off-label uses. On September 10, 2012, the relators filed an amended complaint revising and restating certain of the claims in the original complaint. Our motion to dismiss, filed subsequently, was denied on May 31, 2013, and on June 28, 2013, we answered the amended complaint and brought certain counterclaims arising from relators’ unauthorized removal of documents from the business during their employments, which the relators moved to dismiss on July 22, 2013. The Court denied relators’ motion to dismiss the counterclaims on September 4, 2014. Following the completion of fact and expert discovery, we filed a motion for summary judgment against all claims on January 27, 2017; relators filed their own motion for summary judgment against our counterclaims that same date; and the parties await the Court’s rulings on the motions.
On December 1, 2015, the Brazilian governmental entity known as CADE (the Administrative Council of Economic Defense), served a search warrant on the offices of our Brazilian subsidiary, as well as on the Brazilian offices of several other major medical device makers who do business in Brazil, in furtherance of an investigation into alleged anti-competitive activity with respect to certain tender offers for government contracts. On June 20, 2017, CADE, through the publication of a “technical note,” announced that it was launching a formal administrative proceeding against Boston Scientific’s Brazilian subsidiary, Boston Scientific do Brasil Ltda., as well as against the Brazilian operations of Medtronic, Biotronik, and St. Jude Medical, two Brazilian associations, ABIMED and AMBIMO, and 29 individuals for alleged anti-competitive behavior. We deny the allegations and intend to defend ourselves vigorously.
On December 14, 2016, we learned that the Associacao Brasileira de Medicina de Grupo d/b/a ABRAMGE filed a complaint against the Company, Arthrex and Zimmer Biomet Holdings, in the United States District Court for the District of Delaware. This complaint, which ABRAMGE never served against the Company, alleges that the defendants or their agents paid kickbacks to health care providers in order to increase sales and prices and are liable under a variety of common law theories. On February 6, 2017, ABRAMGE filed and served an amended complaint on the Company and the other defendants. The amended complaint does not contain any material changes in the allegations against the Company. Subsequently, on March 2, 2017, ABRAMGE filed a motion to consolidate this lawsuit with two other similar suits that it had brought against Stryker and Abbott Laboratories, in a multidistrict litigation proceeding. On April 13, 2017, we filed a motion to dismiss the amended complaint, as well as a separate opposition to the multidistrict litigation motion, and on May 31, 2017, the Joint Panel on Multi-District Litigation denied ABRAMGE’s motion for the multidistrict litigation.
Other Proceedings
On November 2, 2015, Acacia Research Corporation (ARC) filed an arbitration demand with the American Arbitration Association alleging that the Company breached an agreement relating to the sale of patents from the Company to ARC. The hearing began on February 20, 2017. On May 12, 2017 the arbitrators reached a confidential decision.
NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING
|
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | | 2017 |
| 2016 | | 2017 | | 2016 | |
Weighted average shares outstanding - basic | | 1,369.8 |
| | 1,357.4 |
| | 1,367.6 |
| | 1,353.9 |
| |
Net effect of common stock equivalents | | 21.3 |
| | — |
| * | 23.0 |
| | — |
| * |
Weighted average shares outstanding - assuming dilution | | 1,391.1 |
| | 1,357.4 |
| | 1,390.6 |
| | 1,353.9 |
| |
*We generated net losses in the second quarter and first half of 2016. Our weighted-average shares outstanding for earnings per share calculations exclude common stock equivalents of 17.7 million for the second quarter of 2016 and 18.6 million for the first half of 2016 due to our net loss positions.
The impact of stock options outstanding with exercise prices greater than the average fair market value of our common stock was immaterial for all periods presented.
We issued approximately one million shares of our common stock in the second quarter of 2017, four million shares of our common stock in the second quarter of 2016, eight million shares of our common stock in the first half of 2017 and 12 million shares of our common stock in the first half of 2016, following the exercise of underlying stock options, vesting of deferred stock units or purchases under our employee stock purchase plan. We did not repurchase any shares of our common stock during the first half of 2017 or 2016.
NOTE K – SEGMENT REPORTING
We have three reportable segments comprised of Cardiovascular, Rhythm Management and MedSurg, which represent an aggregation of our operating segments.
Each of our reportable segments generates revenue 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. Sales generated from reportable segments, as well as operating results of reportable segments and corporate expenses, are calculated 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 our internally-derived standard currency exchange rates as of January 1, 2017, used for the current period in order to remove the impact of foreign currency exchange fluctuation. 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-operational, such as acquisition-related, restructuring- and restructuring-related, and litigation-related net credits and charges, 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 June 30, | | Six Months Ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | (restated) | | | | (restated) |
Net sales | | | | | | | | |
Interventional Cardiology | | $ | 612 |
| | $ | 580 |
| | $ | 1,217 |
| | $ | 1,140 |
|
Peripheral Interventions | | 277 |
| | 260 |
| | 545 |
| | 508 |
|
Cardiovascular | | 889 |
| | 840 |
| | 1,762 |
| | 1,648 |
|
| | | | | | | | |
Cardiac Rhythm Management | | 484 |
| | 476 |
| | 956 |
| | 915 |
|
Electrophysiology | | 67 |
| | 60 |
| | 133 |
| | 120 |
|
Rhythm Management | | 551 |
| | 536 |
| | 1,089 |
| | 1,035 |
|
| | | | | | | | |
Endoscopy | | 405 |
| | 361 |
| | 792 |
| | 700 |
|
Urology and Pelvic Health | | 282 |
| | 255 |
| | 546 |
| | 485 |
|
Neuromodulation | | 154 |
| | 135 |
| | 296 |
| | 257 |
|
MedSurg | | 841 |
| | 751 |
| | 1,634 |
| | 1,442 |
|
Net sales allocated to reportable segments | | 2,281 |
| | 2,127 |
| | 4,485 |
| | 4,125 |
|
Impact of foreign currency fluctuations | | (24 | ) | | (1 | ) | | (67 | ) | | (35 | ) |
| | $ | 2,257 |
| | $ | 2,126 |
| | $ | 4,418 |
| | $ | 4,090 |
|
| | | | | | | | |
Income (loss) before income taxes | | | | | | | | |
Cardiovascular | | $ | 268 |
| | $ | 249 |
| | $ | 513 |
| | $ | 503 |
|
Rhythm Management | | 115 |
| | 73 |
| | 216 |
| | 140 |
|
MedSurg | | 270 |
| | 234 |
| | 508 |
| | 448 |
|
Operating income allocated to reportable segments | | 653 |
| | 556 |
| | 1,237 |
| | 1,091 |
|
Corporate expenses and currency exchange | | (66 |