Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             
Commission file number:              1-1136
 
 BRISTOL-MYERS SQUIBB COMPANY
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
22-0790350
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
345 Park Avenue, New York, N.Y. 10154
(Address of principal executive offices) (Zip Code)
 
(212) 546-4000
(Registrant’s telephone number, including area code)
 
(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 the filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x    No  ¨
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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
At September 30, 2016, there were 1,671,229,946 shares outstanding of the Registrant’s $0.10 par value common stock.

 



BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
SEPTEMBER 30, 2016
 
 
 
PART I—FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II—OTHER INFORMATION
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 




PART I—FINANCIAL INFORMATION
Item  1. FINANCIAL STATEMENTS
BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
Dollars in Millions, Except Per Share Data
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
EARNINGS
2016
 
2015
 
2016
 
2015
Net product sales
$
4,492

 
$
3,552

 
$
12,888

 
$
10,183

Alliance and other revenues
430

 
517

 
1,296

 
2,090

Total Revenues
4,922

 
4,069

 
14,184

 
12,273

 
 
 
 
 
 
 
 
Cost of products sold
1,305

 
1,097

 
3,563

 
2,957

Marketing, selling and administrative
1,144

 
1,176

 
3,450

 
3,340

Research and development
1,138

 
1,132

 
3,540

 
4,004

Other (income)/expense
(224
)
 
(323
)
 
(1,198
)
 
(515
)
Total Expenses
3,363

 
3,082

 
9,355

 
9,786

 
 
 
 
 
 
 
 
Earnings Before Income Taxes
1,559

 
987

 
4,829

 
2,487

Provision for Income Taxes
344

 
257

 
1,220

 
668

Net Earnings
1,215

 
730

 
3,609

 
1,819

Net Earnings Attributable to Noncontrolling Interest
13

 
24

 
46

 
57

Net Earnings Attributable to BMS
$
1,202

 
$
706

 
$
3,563

 
$
1,762

 
 
 
 
 
 
 
 
Earnings per Common Share
 
 
 
 
 
 
 
Basic
$
0.72

 
$
0.42

 
$
2.13

 
$
1.06

Diluted
$
0.72

 
$
0.42

 
$
2.12

 
$
1.05

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.38

 
$
0.37

 
$
1.14

 
$
1.11



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in Millions
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
COMPREHENSIVE INCOME
2016
 
2015
 
2016
 
2015
Net Earnings
$
1,215

 
$
730

 
$
3,609

 
$
1,819

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges
4

 
(46
)
 
(126
)
 
(49
)
Pension and postretirement benefits
72

 
(131
)
 
(213
)
 
131

Available-for-sale securities
(8
)
 
(16
)
 
46

 
(22
)
Foreign currency translation
1

 
(29
)
 
26

 
(30
)
Other Comprehensive Income/(Loss)
69

 
(222
)
 
(267
)
 
30

 
 
 
 
 
 
 
 
Comprehensive Income
1,284

 
508

 
3,342

 
1,849

Comprehensive Income Attributable to Noncontrolling Interest
13

 
24

 
46

 
57

Comprehensive Income Attributable to BMS
$
1,271

 
$
484

 
$
3,296

 
$
1,792

The accompanying notes are an integral part of these consolidated financial statements.


3



BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Share and Per Share Data(UNAUDITED) 
ASSETS
September 30,
2016
 
December 31,
2015
Current Assets:
 
 
 
Cash and cash equivalents
$
3,432

 
$
2,385

Marketable securities
2,128

 
1,885

Receivables
5,597

 
4,299

Inventories
1,482

 
1,221

Prepaid expenses and other
565

 
625

Total Current Assets
13,204

 
10,415

Property, plant and equipment
4,790

 
4,412

Goodwill
6,875

 
6,881

Other intangible assets
1,377

 
1,419

Deferred income taxes
3,528

 
2,844

Marketable securities
3,035


4,660

Other assets
918

 
1,117

Total Assets
$
33,727

 
$
31,748

 
 
 
 
LIABILITIES
 
 
 
Current Liabilities:
 
 
 
Short-term borrowings and current portion of long-term debt
$
990

 
$
139

Accounts payable
1,407

 
1,565

Accrued liabilities
4,964

 
4,738

Deferred income
1,323

 
1,003

Income taxes payable
312

 
572

Total Current Liabilities
8,996

 
8,017

Deferred income
567

 
586

Income taxes payable
905

 
742

Pension and other liabilities
1,642

 
1,429

Long-term debt
5,836

 
6,550

Total Liabilities
17,946

 
17,324

 
 
 
 
Commitments and contingencies (Note 18)

 

 
 
 
 
EQUITY
 
 
 
Bristol-Myers Squibb Company Shareholders’ Equity:
 
 
 
Preferred stock, $2 convertible series, par value $1 per share: Authorized 10 million shares; 4,161 issued
 
 
 
and outstanding in both 2016 and 2015, liquidation value of $50 per share
—

 
—

Common stock, par value of $0.10 per share: Authorized 4.5 billion shares; 2.2 billion issued in both 2016
 
 
 
and 2015
221

 
221

Capital in excess of par value of stock
1,650

 
1,459

Accumulated other comprehensive loss
(2,735
)
 
(2,468
)
Retained earnings
33,272

 
31,613

Less cost of treasury stock – 537 million common shares in 2016 and 539 million in 2015
(16,795
)
 
(16,559
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
15,613

 
14,266

Noncontrolling interest
168

 
158

Total Equity
15,781

 
14,424

Total Liabilities and Equity
$
33,727

 
$
31,748

The accompanying notes are an integral part of these consolidated financial statements.

4



BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
(UNAUDITED)

 
Nine Months Ended September 30,
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
3,609

 
$
1,819

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
260

 
300

Deferred income taxes
(500
)
 
51

Stock-based compensation
149

 
176

Impairment charges
75

 
24

Pension settlements and amortization
122

 
178

Divestiture gains and royalties
(1,082
)
 
(565
)
Asset acquisition charges
274

 
813

Other adjustments
(56
)
 
(17
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(896
)
 
(586
)
Inventories
(107
)
 
231

Accounts payable
(142
)
 
(1,218
)
Deferred income
445

 
153

Income taxes payable
(262
)
 
77

Other
(467
)
 
(215
)
Net Cash Provided by Operating Activities
1,422

 
1,221

Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
3,674

 
2,449

Purchase of marketable securities
(2,248
)
 
(2,283
)
Capital expenditures
(844
)
 
(535
)
Divestiture and other proceeds
1,193

 
673

Acquisition and other payments
(311
)
 
(892
)
Net Cash Provided by/(Used in) Investing Activities
1,464

 
(588
)
Cash Flows From Financing Activities:
 
 
 
Short-term borrowings, net
102

 
54

Issuance of long-term debt
—

 
1,268

Repayment of long-term debt
—

 
(1,957
)
Interest rate swap contract terminations
42

 
(2
)
Issuance of common stock
144

 
231

Repurchase of common stock
(231
)
 
—

Dividends
(1,912
)
 
(1,859
)
Net Cash Used in Financing Activities
(1,855
)
 
(2,265
)
Effect of Exchange Rates on Cash and Cash Equivalents
16

 
36

Increase/(Decrease) in Cash and Cash Equivalents
1,047

 
(1,596
)
Cash and Cash Equivalents at Beginning of Period
2,385

 
5,571

Cash and Cash Equivalents at End of Period
$
3,432

 
$
3,975

The accompanying notes are an integral part of these consolidated financial statements.

5




Note 1. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS

Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS or the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) and United States (U.S.) generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q, which include all adjustments necessary for a fair presentation of the financial position at September 30, 2016 and December 31, 2015, the results of operations for the three and nine months ended September 30, 2016 and 2015, and cash flows for the nine months ended September 30, 2016 and 2015. All intercompany balances and transactions have been eliminated. These financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015 included in the Annual Report on Form 10-K.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be indicative of full year operating results. The preparation of financial statements requires the use of management estimates and assumptions. The most significant assumptions are employed in estimates used in determining the fair value and potential impairment of intangible assets; sales rebate and return accruals; legal contingencies; income taxes; estimated selling prices used in multiple element arrangements; and pension and postretirement benefits. Actual results may differ from estimates.

Certain prior period amounts were reclassified to conform to the current period presentation. The reclassifications provide a more concise financial statement presentation and additional information is disclosed in the notes if material.
 
Prior Presentation
Current Presentation
Consolidated Statements of Earnings
Advertising and product promotion
Included in Marketing, selling and administrative expenses
Consolidated Balance Sheets
Assets held-for-sale
Included in Prepaid expenses and other
Accrued expenses
Combined as Accrued liabilities

Accrued rebates and returns
Dividends payable
Pension, postretirement and postemployment liabilities
Combined as Pension and other liabilities

Other liabilities
Consolidated Statements of Cash Flows
Net earnings attributable to noncontrolling interest
Included in Other adjustments
Divestiture gains and royalties included in Other adjustments
Divestiture gains and royalties
Asset acquisition charges included in Other adjustments
Asset acquisition charges

In October 2016, the Financial Accounting Standards Board (FASB) issued amended guidance on income tax accounting for intra-entity transfers of assets other than inventory. The amended guidance requires that the tax consequences of transfers of assets between members of a consolidated group be recognized in the period the transfer takes place (excluding inventory). The guidance is effective beginning with interim periods in 2018 with early adoption permitted in the first quarter of 2017 on a modified retrospective approach. The Company is assessing the potential impact of the new standard.

In June 2016, the FASB issued amended guidance for the measurement of credit losses on financial instruments. Entities will be required to use a forward-looking estimated loss model. Available-for-sale debt security credit losses will be recognized as allowances rather than a reduction in amortized cost. The guidance is effective beginning with interim periods in 2020 with early adoption permitted in 2019 on a modified retrospective approach. The Company is assessing the potential impact of the new standard.

In March 2016, the FASB issued amended guidance for share-based payment transactions. Excess tax benefits and deficiencies will be recognized in the consolidated statement of earnings rather than capital in excess of par value of stock on a prospective basis. A policy election will be available to account for forfeitures as they occur, with the cumulative effect of the change recognized as an adjustment to retained earnings at the date of adoption. Excess tax benefits within the consolidated statement of cash flows will be presented as an operating activity (prospective or retrospective application) and cash payments to tax authorities in connection with shares withheld for statutory tax withholding requirements will be presented as a financing activity (retrospective application). The guidance is effective beginning with interim periods in 2017 with early adoption permitted. The Company is assessing the potential impact of the new standard.

In February 2016, the FASB issued amended guidance on lease accounting. The amended guidance requires the recognition of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments for leases with a term longer than 12 months. The guidance is effective beginning with interim periods in 2019 with early adoption permitted on a modified retrospective approach. The Company is assessing the potential impact of the new standard.

6



In January 2016, the FASB issued amended guidance for the recognition, measurement, presentation and disclosures of financial instruments effective January 1, 2018 with early adoption not permitted. The new guidance requires that fair value adjustments for equity securities with readily determinable fair values currently classified as available-for-sale be reported through earnings. The new guidance also requires a qualitative impairment assessment for equity investments without a readily determinable fair value and a charge through earnings if an impairment exists. The Company is assessing the potential impact of the new standard.

In May 2014, the FASB issued a new standard related to revenue recognition, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2018. Early adoption is permitted no earlier than 2017. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application in retained earnings. The Company is assessing the potential impact of the new standard and has not yet selected a transition method.

Note 2. BUSINESS SEGMENT INFORMATION

BMS operates in a single segment engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of innovative medicines that help patients prevail over serious diseases. A global research and development organization and supply chain organization are responsible for the discovery, development, manufacturing and supply of products. Regional commercial organizations market, distribute and sell the products. The business is also supported by global corporate staff functions. Segment information is consistent with the financial information regularly reviewed by the chief executive officer for purposes of evaluating performance, allocating resources, setting incentive compensation targets and planning and forecasting future periods.

Product revenues were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Oncology
 
 
 
 
 
 
 
Empliciti (elotuzumab)
$
41

 
$
—

 
$
103

 
$
—

Erbitux* (cetuximab)
—

 
167

 
—

 
501

Opdivo (nivolumab)
920

 
305

 
2,464

 
467

Sprycel (dasatinib)
472

 
411

 
1,330

 
1,191

Yervoy (ipilimumab)
285

 
240

 
789

 
861

Cardiovascular
 
 
 
 
 
 
 
Eliquis (apixaban)
884

 
466

 
2,395

 
1,258

Immunoscience
 
 
 
 
 
 
 
Orencia (abatacept)
572

 
484

 
1,640

 
1,345

Virology
 
 
 
 
 
 
 
Baraclude (entecavir)
306

 
320

 
896

 
1,003

Hepatitis C Franchise
379

 
402

 
1,352

 
1,145

Reyataz (atazanavir sulfate) Franchise
238

 
270

 
706

 
867

Sustiva (efavirenz) Franchise
275

 
333

 
819

 
940

Neuroscience
 
 
 
 
 
 
 
Abilify* (aripiprazole)
29

 
46

 
97

 
707

Mature Products and All Other
521

 
625

 
1,593

 
1,988

Total Revenues
$
4,922

 
$
4,069

 
$
14,184

 
$
12,273

*
Indicates brand names of products which are trademarks not owned or wholly owned by BMS. Specific trademark ownership information is included at the end of this quarterly report on Form 10-Q.

The composition of total revenues was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Net product sales
$
4,492

 
$
3,552

 
$
12,888

 
$
10,183

Alliance revenues
402

 
496

 
1,229

 
2,003

Other revenues
28

 
21

 
67

 
87

Total Revenues
$
4,922

 
$
4,069

 
$
14,184

 
$
12,273


7



Note 3. ALLIANCES

BMS enters into collaboration arrangements with third parties for the development and commercialization of certain products. Although each of these arrangements is unique in nature, both parties are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. BMS may either in-license intellectual property owned by the other party or out-license its intellectual property to the other party. These arrangements also typically include research, development, manufacturing and/or commercial activities and can cover a single investigational compound or commercial product or multiple compounds and/or products in various life cycle stages. The rights and obligations of the parties can be global or limited to geographic regions. We refer to these collaborations as alliances and our partners as alliance partners. Products sold through alliance arrangements in certain markets include Empliciti, Erbitux*, Opdivo, Sprycel, Yervoy, Eliquis, Orencia, Sustiva (Atripla*), Abilify* and certain mature and other brands.

Selected financial information pertaining to our alliances was as follows, including net product sales when BMS is the principal in the third-party customer sale for products subject to the alliance. Expenses summarized below do not include all amounts attributed to the activities for the products in the alliance, but only the payments between the alliance partners or the related amortization if the payments were deferred or capitalized.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Revenues from alliances:
 
 
 
 
 
 
 
Net product sales
$
1,465

 
$
981

 
$
4,031

 
$
3,203

Alliance revenues
402

 
496

 
1,229

 
2,003

Total Revenues
$
1,867

 
$
1,477

 
$
5,260

 
$
5,206

 
 
 
 
 
 
 
 
Payments to/(from) alliance partners:
 
 
 
 
 
 
 
Cost of products sold
$
572

 
$
445

 
$
1,543

 
$
1,257

Marketing, selling and administrative
(3
)
 
4

 
(10
)
 
26

Research and development
(7
)
 
89

 
23

 
277

Other (income)/expense
(160
)
 
(173
)
 
(864
)
 
(622
)
 
 
 
 
 
 
 
 
Noncontrolling interest, pre-tax
3

 
17

 
13

 
45

 
Selected Alliance Balance Sheet information:
 
 
 
Dollars in Millions
September 30,
2016
 
December 31,
2015
Receivables - from alliance partners
$
1,085

 
$
958

Accounts payable - to alliance partners
550

 
542

Deferred income from alliances
1,414

 
1,459


Specific information pertaining to each of our significant alliances is discussed in our 2015 Form 10-K, including their nature and purpose, the significant rights and obligations of the parties and specific accounting policy elections.

Note 4. ACQUISITIONS AND DIVESTITURES

Acquisitions
In July 2016, BMS acquired all of the outstanding shares of Cormorant Pharmaceuticals (Cormorant), a private pharmaceutical company focused on the development of therapies for cancer and rare diseases. The acquisition provides BMS with full rights to Cormorant's lead candidate HuMax-IL8, a Phase I/II monoclonal antibody that represents a potentially complementary immuno-oncology mechanism of action to T-cell directed antibodies and co-stimulatory molecules. The consideration includes an upfront payment of $35 million and contingent development and regulatory milestone payments of up to $485 million. No significant Cormorant processes were acquired, therefore the transaction was accounted for as an asset acquisition because Cormorant was determined not to be a business as that term is defined in ASC 805 - Business Combinations. The consideration was allocated to HuMax-IL8 resulting in $35 million of research and development expenses.


8



In April 2016, BMS acquired all of the outstanding shares of Padlock Therapeutics, Inc. (Padlock), a private biotechnology company dedicated to creating new medicines to treat destructive autoimmune diseases. The acquisition provides BMS with full rights to Padlock’s Protein/Peptidyl Arginine Deiminase (PAD) inhibitor discovery program focused on the development of potentially transformational treatment approaches for patients with rheumatoid arthritis. Padlock’s PAD discovery program may have additional utility in treating systemic lupus erythematosus and other autoimmune diseases. The consideration includes an upfront payment of $150 million and contingent development and regulatory milestone payments of up to $450 million. No significant Padlock processes were acquired, therefore the transaction was accounted for as an asset acquisition because Padlock was determined not to be a business. The consideration was allocated to the PAD discovery program resulting in $139 million of research and development expenses and to net operating losses and tax credit carryforwards resulting in $11 million of deferred tax assets.

Divestitures
In May 2016, BMS sold the business comprising an alliance with Reckitt Benckiser Group plc (Reckitt) for proceeds of $317 million, resulting in a gain of $277 million. Reckitt initially exercised its option to acquire the business in July 2015, which included several over-the-counter products sold primarily in Mexico and Brazil, as well as a manufacturing facility and related employees.

In February 2016, BMS sold its investigational HIV medicines business to ViiV Healthcare which includes a number of programs at different stages of discovery, preclinical and clinical development. The transaction excluded BMS's HIV marketed medicines. BMS will provide certain R&D and other services over a transitional period. In February 2016, BMS received an upfront payment of $350 million, resulting in a gain of $272 million. BMS will also receive from ViiV Healthcare contingent development and regulatory milestone payments of up to $1.1 billion, sales-based milestone payments of up to $4.3 billion and future tiered royalties if the products are approved and commercialized.

Assets held-for-sale from the businesses discussed above were $134 million at December 31, 2015 and included in prepaid expenses and other. The amount consisted primarily of allocated goodwill relating to the businesses. The allocation of goodwill was determined using the relative fair value of the applicable businesses to the Company's reporting unit. Revenues and pretax earnings related to these businesses were not material in 2016 and 2015 (excluding the divestiture gains).

Note 5. OTHER (INCOME)/EXPENSE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Interest expense
$
42

 
$
41

 
$
127

 
$
141

Investment income
(32
)
 
(18
)
 
(81
)
 
(74
)
Provision for restructuring
19

 
10

 
41

 
50

Litigation and other settlements
(1
)
 
(2
)
 
48

 
14

Equity in net income of affiliates
(19
)
 
(19
)
 
(65
)
 
(67
)
Divestiture gains
(21
)
 
(208
)
 
(574
)
 
(370
)
Royalties and licensing income
(158
)
 
(63
)
 
(579
)
 
(258
)
Transition and other service fees
(57
)
 
(37
)
 
(184
)
 
(91
)
Pension charges
19

 
48

 
66

 
111

Out-licensed intangible asset impairment
—

 
—

 
15

 
13

Equity investment impairment
—

 
—

 
45

 
—

Written option adjustment
—

 
(87
)
 
—

 
(123
)
Loss on debt redemption
—

 
—

 
—

 
180

Other
(16
)
 
12

 
(57
)
 
(41
)
Other (income)/expense
$
(224
)
 
$
(323
)
 
$
(1,198
)
 
$
(515
)

9



Note 6. INCOME TAXES
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Earnings Before Income Taxes
$
1,559

 
$
987

 
$
4,829

 
$
2,487

Provision for Income Taxes
344

 
257

 
1,220

 
668

Effective tax rate
22.1
%
 
26.0
%
 
25.3
%
 
26.9
%

The effective tax rate is lower than the U.S. statutory rate of 35% primarily attributable to undistributed earnings of certain foreign subsidiaries in low tax jurisdictions that have been considered or are expected to be indefinitely reinvested offshore. These undistributed earnings primarily relate to operations in Switzerland, Ireland and Puerto Rico. If these undistributed earnings are repatriated to the U.S. in the future, or if it were determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required. Due to complexities in the tax laws and assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes that would have to be provided. Reforms to U.S. tax laws related to foreign earnings have been proposed and if adopted, may increase taxes, which could reduce the results of operations and cash flows. BMS operates under a favorable tax grant in Puerto Rico not scheduled to expire prior to 2023.

The jurisdictional tax rates and other tax impacts attributed to research and development charges, divestiture transactions and other discrete items increased the effective tax rate by 3.1% and 4.4% in the nine months ended September 30, 2016 and 2015, respectively. The taxes attributed to these items were impacted by non-deductible R&D charges for Padlock, Flexus Biosciences, Inc. (Flexus) and Cormorant in 2016 and Flexus in 2015, higher non-deductible goodwill allocated to business divestitures in 2016 and higher valuation allowances attributed to capital loss carryforwards released in 2015. The tax impact for discrete items are reflected immediately and are not considered in estimating the annual effective tax rate.

To a lesser extent, unfavorable earnings mix between high and low tax jurisdictions and favorable R&D tax credits also impacted the effective tax rates. The R&D tax credit legislation was permanently extended in December 2015 and was included in estimating the annual effective tax rate in 2016. The R&D tax credit was not extended as of September 30, 2015, therefore the tax credit was not considered in estimating the annual effective tax rate in 2015.

BMS is currently under examination by a number of tax authorities which have proposed or are considering proposing material adjustments to tax positions for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. It is reasonably possible that the total amount of unrecognized tax benefits at September 30, 2016 could decrease in the range of approximately $265 million to $325 million in the next twelve months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits may result in the payment of additional taxes, adjustment of certain deferred taxes and/or recognition of tax benefits. It is also reasonably possible that new issues will be raised by tax authorities which may require adjustments to the amount of unrecognized tax benefits; however, an estimate of such adjustments cannot reasonably be made at this time.

Note 7. EARNINGS PER SHARE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Amounts in Millions, Except Per Share Data
2016
 
2015
 
2016
 
2015
Net Earnings Attributable to BMS used for Basic and Diluted EPS Calculation
$
1,202

 
$
706

 
$
3,563

 
$
1,762

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
1,671

 
1,668

 
1,670

 
1,666

Incremental shares attributable to share-based compensation plans
8

 
10

 
9

 
11

Weighted-average common shares outstanding – diluted
1,679

 
1,678

 
1,679

 
1,677

 
 
 
 
 
 
 
 
Earnings per Common Share:
 
 
 
 
 
 
 
Basic
$
0.72

 
$
0.42

 
$
2.13

 
$
1.06

Diluted
$
0.72

 
$
0.42

 
$
2.12

 
$
1.05


10



Note 8. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
September 30, 2016
 
December 31, 2015
Dollars in Millions
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents - Money market and other securities
$
—

 
$
2,835

 
$
2,835

 
$
—

 
$
1,825

 
$
1,825

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
—

 
469

 
469

 
—

 
804

 
804

Commercial paper
—

 
540

 
540

 
—

 
—

 
—

Corporate debt securities
—

 
4,046

 
4,046

 
—

 
5,638

 
5,638

Equity funds
—

 
101

 
101

 
—

 
92

 
92

Fixed income funds
—

 
7

 
7

 
—

 
11

 
11

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
—

 
8

 
8

 
—

 
31

 
31

Forward starting interest rate swap contracts
—

 
—

 
—

 
—

 
15

 
15

Foreign currency forward contracts
—

 
20

 
20

 
—

 
50

 
50

Equity investments
34

 
—

 
34

 
60

 
—

 
60

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Forward starting interest rate swap contracts
—

 
(102
)
 
(102
)
 
—

 
(7
)
 
(7
)
Foreign currency forward contracts
—

 
(42
)
 
(42
)
 
—

 
(10
)
 
(10
)

As further described in "Note 10. Financial Instruments and Fair Value Measurements" in our 2015 Form 10-K, our fair value estimates use inputs that are either (1) quoted prices for identical assets or liabilities in active markets (Level 1 inputs), (2) observable prices for similar assets or liabilities in active markets or for identical or similar assets or liabilities in markets that are not active (Level 2 inputs) or (3) unobservable inputs (Level 3 inputs). There were no Level 3 financial assets or liabilities as of September 30, 2016 and December 31, 2015.

Available-for-sale Securities

The following table summarizes available-for-sale securities:
 
Dollars in Millions
Amortized
Cost
 
Gross
Unrealized
Gain in
Accumulated
OCI
 
Gross
Unrealized
Loss in
Accumulated
OCI
 
Fair Value
 
 
September 30, 2016
 
 
 
 
 
 
 
 
Certificates of deposit
$
469

 
$
—

 
$
—

 
$
469

 
Commercial paper
540

 
—

 
—

 
540

 
Corporate debt securities
4,011

 
36

 
(1
)
 
4,046

 
Equity investments
31

 
4

 
(1
)
 
34

 
Total
$
5,051

 
$
40

 
$
(2
)
 
$
5,089

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Certificates of deposit
$
804

 
$
—

 
$
—

 
$
804

 
Corporate debt securities
5,646

 
15

 
(23
)
 
5,638

 
Equity investments
74

 
10

 
(24
)
 
60

 
Total
$
6,524

 
$
25

 
$
(47
)
 
$
6,502

Dollars in Millions
September 30,
2016
 
December 31,
2015
Current marketable securities(a)
$
2,128

 
$
1,885

Non-current marketable securities(b)
3,035

 
4,660

Other assets
34

 
60

Available-for-sale securities
$
5,197

 
$
6,605

(a)
The fair value option for financial assets was elected for investments in equity and fixed income funds. The fair value of these investments were $108 million at September 30, 2016 and $103 million at December 31, 2015 and were included in current marketable securities.
(b)
All non-current marketable securities mature within five years as of September 30, 2016 and December 31, 2015.

11



Qualifying Hedges and Non-Qualifying Derivatives
The following table summarizes the fair value of outstanding derivatives:
 
 
 
September 30, 2016
 
December 31, 2015
Dollars in Millions
Balance Sheet Location
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other assets
 
$
1,250

 
$
8

 
$
1,100

 
$
31

Interest rate swap contracts
Pension and other liabilities
 
—

 
—

 
650

 
(1
)
Forward starting interest rate swap contracts
Other assets
 
—

 
—

 
500

 
15

Forward starting interest rate swap contracts
Accrued liabilities
 
750

 
(102
)
 
—

 
—

Forward starting interest rate swap contracts
Pension and other liabilities
 
—

 
—

 
250

 
(7
)
Foreign currency forward contracts
Prepaid expenses and other
 
415

 
18

 
1,016

 
50

Foreign currency forward contracts
Accrued liabilities
 
748

 
(40
)
 
342

 
(5
)
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
Prepaid expenses and other
 
188

 
2

 
—

 
—

Foreign currency forward contracts
Accrued liabilities
 
360

 
(2
)
 
445

 
(5
)

Cash Flow Hedges — The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro ($517 million) and Japanese yen ($360 million) at September 30, 2016.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1,066 million) are designated to hedge euro currency exposures of the net investment in certain foreign affiliates.

Fair Value Hedges — The notional amount of fixed-to-floating interest rate swap contracts terminated was $500 million in 2016 and $147 million in 2015 generating proceeds of $43 million in 2016 and $28 million in 2015 (including accrued interest).

Debt Obligations
Long-term debt and the current portion of long-term debt includes:
Dollars in Millions
September 30,
2016
 
December 31,
2015
Principal Value
$
6,367

 
$
6,339

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
8

 
30

Unamortized basis adjustment from swap terminations
294

 
272

Unamortized bond discounts and issuance costs
(84
)
 
(91
)
Total
$
6,585

 
$
6,550

 
 
 
 
Current portion of long-term debt
$
749

 
$
—

Long-term debt
$
5,836

 
$
6,550


The fair value of debt was $7,493 million at September 30, 2016 and $6,909 million at December 31, 2015 valued using Level 2 inputs. Interest payments were $140 million and $158 million for the nine months ended September 30, 2016 and 2015, respectively, net of amounts related to interest rate swap contracts.


12



The following summarizes the issuance and redemption of long-term debt obligations in 2015 (none in 2016) and related termination of interest rate swap contracts:
 
2015
Amounts in Millions
Euro
 
U.S. dollars
Principal Value:
 
 
 
1.000% Euro Notes due 2025
€
575

 
$
643

1.750% Euro Notes due 2035
575

 
643

Total
€
1,150

 
$
1,286

 
 
 
 
Proceeds net of discount and deferred loan issuance costs
€
1,133

 
$
1,268

 
 
 
 
Forward starting interest rate swap contracts terminated:
 
 
 
Notional amount
€
500

 
$
559

Unrealized loss
(16
)
 
(18
)
Dollars in Millions
2015
Principal amount
$
1,624

Carrying value
1,795

Debt redemption price
1,957

Notional amount of interest rate swap contracts terminated
735

Interest rate swap contract termination payments
11

Loss on debt redemption(a)
180


(a)
Including acceleration of debt issuance costs, loss on interest rate lock contract and other related fees.

Note 9. RECEIVABLES
Dollars in Millions
September 30,
2016
 
December 31,
2015
Trade receivables
$
3,963

 
$
3,070

Less allowances
(150
)
 
(122
)
Net trade receivables
3,813

 
2,948

Alliance receivables
1,085

 
958

Prepaid and refundable income taxes
444

 
182

Other
255

 
211

Receivables
$
5,597

 
$
4,299


Non-U.S. receivables sold on a nonrecourse basis were $470 million and $327 million for the nine months ended September 30, 2016 and 2015, respectively. Receivables from our three largest pharmaceutical wholesalers in the U.S. represented 63% and 53% of total trade receivables at September 30, 2016 and December 31, 2015, respectively.

Note 10. INVENTORIES
Dollars in Millions
September 30,
2016
 
December 31,
2015
Finished goods
$
416

 
$
381

Work in process
952

 
868

Raw and packaging materials
265

 
199

Total inventories
$
1,633

 
$
1,448

 
 
 
 
Inventories
$
1,482

 
$
1,221

Other assets
151

 
227


Other assets include inventory pending regulatory approval of $80 million at September 30, 2016 and $85 million at December 31, 2015 and other amounts expected to remain on-hand beyond one year.


13



Note 11. PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
September 30,
2016
 
December 31,
2015
Land
$
107

 
$
107

Buildings
4,724

 
4,515

Machinery, equipment and fixtures
3,194

 
3,347

Construction in progress
906

 
662

Gross property, plant and equipment
8,931

 
8,631

Less accumulated depreciation
(4,141
)
 
(4,219
)
Property, plant and equipment
$
4,790

 
$
4,412


Depreciation expense was $319 million and $393 million for the nine months ended September 30, 2016 and 2015, respectively.

Note 12. OTHER INTANGIBLE ASSETS
Dollars in Millions
September 30,
2016
 
December 31,
2015
Licenses
$
554

 
$
574

Developed technology rights
2,357

 
2,357

Capitalized software
1,393

 
1,302

In-process research and development
120

 
120

Gross other intangible assets
4,424

 
4,353

Less accumulated amortization
(3,047
)
 
(2,934
)
Other intangible assets
$
1,377

 
$
1,419


Amortization expense was $134 million and $140 million for the nine months ended September 30, 2016 and 2015, respectively.

Note 13. ACCRUED LIABILITIES
Dollars in Millions
 
September 30,
2016
 
December 31,
2015
Accrued rebates and returns
 
$
1,636

 
$
1,324

Employee compensation and benefits
 
715

 
904

Dividends payable
 
642

 
655

Accrued research and development
 
586

 
553

Royalties
 
189

 
161

Litigation and other settlements
 
123

 
189

Restructuring
 
60

 
89

Pension and postretirement benefits
 
47

 
47

Other
 
966

 
816

Accrued liabilities
 
$
4,964

 
$
4,738


14



Note 14. DEFERRED INCOME
Dollars in Millions
September 30,
2016
 
December 31,
2015
Alliances
$
1,414

 
$
1,459

Other
476

 
130

Total deferred income
$
1,890

 
$
1,589

 
 
 
 
Current portion
$
1,323

 
$
1,003

Non-current portion
567

 
586


Alliances include unamortized upfront, milestone and other licensing proceeds, revenue deferrals attributed to Atripla* and undelivered elements of diabetes business divestiture proceeds. As of September 30, 2016, other deferred income includes approximately $265 million of Opdivo product sale deferrals under an early access program in France which began in 2015. The amount of net product sales to be realized is subject to final price negotiations with the French government. Amortization of deferred income was $193 million and $233 million for the nine months ended September 30, 2016 and 2015, respectively.

Note 15. EQUITY
 
Common Stock
 
Capital in  Excess
of Par Value
of Stock
 
Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interest
Dollars and Shares in Millions
Shares
 
Par Value
 
Shares
 
Cost
 
Balance at January 1, 2015
2,208

 
$
221

 
$
1,507

 
$
32,541

 
547

 
$
(16,992
)
 
$
131

Net earnings
—

 
—

 
—

 
1,762

 
—

 
—

 
73

Cash dividends declared
—

 
—

 
—

 
(1,857
)
 
—

 
—

 
—

Employee stock compensation plans
—

 
—

 
(94
)
 
—

 
(7
)
 
384

 
—

Debt conversion
—

 
—

 
—

 
—

 
—

 
2

 
—

Distributions
—

 
—

 
—

 
—

 
—

 
—

 
(10
)
Balance at September 30, 2015
2,208

 
$
221

 
$
1,413

 
$
32,446

 
540

 
$
(16,606
)
 
$
194

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
2,208

 
$
221

 
$
1,459

 
$
31,613

 
539

 
$
(16,559
)
 
$
158

Net earnings
—

 
—

 
—

 
3,563

 
—

 
—

 
46

Cash dividends declared
—

 
—

 
—

 
(1,904
)
 
—

 
—

 
—

Stock repurchase program
—

 
—

 
—

 
—

 
4

 
(231
)
 
—

Employee stock compensation plans
—

 
—

 
191

 
—

 
(6
)
 
(5
)
 
—

Distributions
—

 
—

 
—

 
—

 
—

 
—

 
(36
)
Balance at September 30, 2016
2,208

 
$
221

 
$
1,650

 
$
33,272

 
537

 
$
(16,795
)
 
$
168


Treasury stock is recognized at the cost to reacquire the shares. Shares issued from treasury are recognized utilizing the first-in first-out method.

As of September 30, 2016, $1.1 billion of common stock repurchase capacity remains under prior approved programs. In October 2016, the Board of Directors approved a new share repurchase program authorizing the repurchase of an additional $3.0 billion of common stock. Repurchases may be made either in the open market or through private transactions, including under repurchase plans established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The stock repurchase program does not have an expiration date and may be suspended or discontinued at any time.


15



The components of other comprehensive income/(loss) were as follows:
 
2016
 
2015
 
Pretax
 
Tax
 
After tax
 
Pretax
 
Tax
 
After tax
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:(a)
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses
$
(14
)
 
$
4

 
$
(10
)
 
$
(34
)
 
$
14

 
$
(20
)
Reclassified to net earnings
21

 
(7
)
 
14

 
(39
)
 
13

 
(26
)
Derivatives qualifying as cash flow hedges
7

 
(3
)
 
4

 
(73
)
 
27

 
(46
)
Pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Actuarial gains/(losses)
72

 
(26
)
 
46

 
(272
)
 
96

 
(176
)
Amortization(b)
20

 
(7
)
 
13

 
20

 
(6
)
 
14

Curtailments and settlements(c)
19

 
(6
)
 
13

 
48

 
(17
)
 
31

Pension and postretirement benefits
111

 
(39
)
 
72

 
(204
)
 
73

 
(131
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses
(8
)
 
4

 
(4
)
 
(24
)
 
8

 
(16
)
Realized gains
(4
)
 
—

 
(4
)
 
—

 
—

 
—

Available-for-sale securities
(12
)
 
4

 
(8
)
 
(24
)
 
8

 
(16
)
Foreign currency translation
(2
)
 
3

 
1

 
(34
)
 
5

 
(29
)
 
$
104

 
$
(35
)
 
$
69

 
$
(335
)
 
$
113

 
$
(222
)
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:(a)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
$
(199
)
 
$
66

 
$
(133
)
 
$
36

 
$
(16
)
 
$
20

Reclassified to net earnings
12

 
(5
)
 
7

 
(102
)
 
33

 
(69
)
Derivatives qualifying as cash flow hedges
(187
)
 
61

 
(126
)
 
(66
)
 
17

 
(49
)
Pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Actuarial gains/(losses)
(453
)
 
160

 
(293
)
 
20

 
(7
)
 
13

Amortization(b)
56

 
(19
)
 
37

 
67

 
(21
)
 
46

Curtailments and settlements(c)
66

 
(23
)
 
43

 
111

 
(39
)
 
72

Pension and postretirement benefits
(331
)
 
118

 
(213
)
 
198

 
(67
)
 
131

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
29

 
(13
)
 
16

 
(31
)
 
9

 
(22
)
Realized losses
30

 
—

 
30

 
—

 
—

 
—

Available-for-sale securities
59

 
(13
)
 
46

 
(31
)
 
9

 
(22
)
Foreign currency translation
20

 
6

 
26

 
(14
)
 
(16
)
 
(30
)
 
$
(439
)
 
$
172

 
$
(267
)
 
$
87

 
$
(57
)
 
$
30


(a)
Included in cost of products sold
(b)
Included in cost of products sold, research and development and marketing, selling and administrative expenses
(c)
Included in other (income)/expense

The accumulated balances related to each component of other comprehensive loss, net of taxes, were as follows:
Dollars in Millions
September 30,
2016
 
December 31, 2015
Derivatives qualifying as cash flow hedges
$
(92
)
 
$
34

Pension and other postretirement benefits
(2,293
)
 
(2,080
)
Available-for-sale securities
23

 
(23
)
Foreign currency translation
(373
)
 
(399
)
Accumulated other comprehensive loss
$
(2,735
)
 
$
(2,468
)


16



Note 16. PENSION AND POSTRETIREMENT BENEFIT PLANS

The net periodic benefit cost/(credit) of defined benefit pension and postretirement benefit plans includes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
Dollars in Millions
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost – benefits earned during the year
$
6

 
$
6

 
$
1

 
$
1

 
$
19

 
$
18

 
$
3

 
$
3

Interest cost on projected benefit obligation
45

 
60

 
2

 
3

 
145

 
181

 
7

 
9

Expected return on plan assets
(104
)
 
(102
)
 
(6
)
 
(7
)
 
(314
)
 
(307
)
 
(18
)
 
(20
)
Amortization of prior service credits
(1
)
 
—

 
—

 
(1
)
 
(3
)
 
(2
)
 
(2
)
 
(4
)
Amortization of net actuarial (gain)/loss
22