NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the
three months ended
March 31, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
. 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 months ended
March 31, 2016
. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to
Note I - Commitments and Contingencies
for more information.
Pension Termination Charges
Following our 2006 acquisition of Guidant Corporation, we sponsored the Guidant Retirement Plan, a frozen noncontributory defined benefit plan covering a select group of current and former employees. The plan was partially frozen as of September 25, 1995 and completely frozen as of May 31, 2007. The plan was subsequently terminated effective December 1, 2014. During 2015, we finalized the termination process and settled the plan’s obligations, and as a result, we recorded pension termination charges of
$8 million
during the
first quarter
of
2015
and an additional
$36 million
during the third quarter of 2015 for a total of
$44 million
of pension termination charges in the year ended December 31, 2015. We do not expect to record any additional pension termination charges in
2016
related to the termination of the Guidant Retirement Plan.
NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS
We did not close any material acquisitions during the first quarter of 2016 and 2015.
Contingent Consideration
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets and/or obtaining regulatory approvals. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We 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
net expense
s related to the changes in fair value of our contingent consideration liabilities of
$4 million
and
$27 million
during the
first
quarter of
2016
and the
first
quarter of
2015
, respectively. We paid contingent consideration of
$63 million
during the
first
quarter of
2016
and
$99 million
during the
first
quarter of
2015
.
Changes in the fair value of our contingent consideration liabilities were as follows (in millions):
|
|
|
|
|
Balance as of December 31, 2015
|
$
|
246
|
|
Other amounts recorded related to prior acquisitions
|
1
|
|
Fair value adjustments
|
4
|
|
Contingent payments related to prior period acquisitions
|
(63
|
)
|
Balance as of March 31, 2016
|
$
|
188
|
|
As of
March 31, 2016
, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately
$1.586 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:
|
|
|
|
|
|
Contingent Consideration Liabilities
|
Fair Value as of March 31, 2016
|
Valuation Technique
|
Unobservable Input
|
Range
|
R&D, regulatory and commercialization-based Milestones
|
$20 million
|
Discounted Cash Flow
|
Discount Rate
|
2.1% - 3.7%
|
Probability of Payment
|
32% - 95%
|
Projected Year of Payment
|
2017 - 2021
|
Revenue-based Payments
|
$62 million
|
Discounted Cash Flow
|
Discount Rate
|
11% - 15%
|
Projected Year of Payment
|
2016 - 2022
|
$106 million
|
Monte Carlo
|
Revenue Volatility
|
15%
|
Risk Free Rate
|
LIBOR Term Structure
|
Projected Year of Payment
|
2016 - 2018
|
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, regulatory commercialization-based and revenue-based milestones. Projected contingent payment amounts related to certain R&D, regulatory and commercialization-based and certain revenue-based milestones are discounted back to the current period using a discounted cash flow (DCF) model. Other revenue-based payments are valued using a Monte Carlo valuation model, which simulates future revenues during the earn-out period using management's best estimates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs 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 quarter
of
2016
and 2015.
We account for certain of our strategic investments, as equity method investments, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 323,
Investments - Equity Method and Joint Ventures.
The book value of investments that we accounted for under the equity method of accounting was
$184 million
as of
March 31, 2016
and
$173 million
as of
December 31, 2015
. The aggregate value of our cost method investments was
$46 million
as of
March 31, 2016
and
$45 million
as of
December 31, 2015
. In addition we had notes receivable from certain companies that we account for under the cost method of
$32 million
as of
March 31, 2016
and
$30 million
as of
December 31, 2015
.
As of
March 31, 2016
, the book value of our equity method investments exceeded our share of the book value of the investees’ underlying net assets by approximately
$100 million
, which represents amortizable intangible assets and in-process research and development, corresponding deferred tax liabilities, and goodwill. During the
three
months ended
March 31, 2016
and
March 31, 2015
, the
net losses
from our equity method adjustments, presented within the
Other, net
caption of our condensed consolidated statement of operations, were immaterial.
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
March 31, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Gross Carrying
|
|
Accumulated
Amortization/
|
|
Gross
Carrying
|
|
Accumulated
Amortization/
|
(in millions)
|
Amount
|
|
Write-offs
|
|
Amount
|
|
Write-offs
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
Technology-related
|
$
|
8,948
|
|
|
$
|
(4,155
|
)
|
|
$
|
8,948
|
|
|
$
|
(4,054
|
)
|
Patents
|
520
|
|
|
(362
|
)
|
|
520
|
|
|
(358
|
)
|
Other intangible assets
|
1,531
|
|
|
(639
|
)
|
|
1,529
|
|
|
(610
|
)
|
|
$
|
10,999
|
|
|
$
|
(5,156
|
)
|
|
$
|
10,997
|
|
|
$
|
(5,022
|
)
|
Unamortizable intangible assets
|
|
|
|
|
|
|
|
Goodwill
|
$
|
16,377
|
|
|
$
|
(9,900
|
)
|
|
$
|
16,373
|
|
|
$
|
(9,900
|
)
|
In-process research and development (IPR&D)
|
99
|
|
|
|
|
99
|
|
|
|
Technology-related
|
120
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
$
|
16,596
|
|
|
$
|
(9,900
|
)
|
|
$
|
16,592
|
|
|
$
|
(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 ASC Topic 350,
Intangibles - Goodwill and Other.
The following represents our goodwill balance by global reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Cardiovascular
|
|
Rhythm Management
|
|
MedSurg
|
|
Total
|
Balance as of December 31, 2015
|
$
|
3,451
|
|
|
$
|
292
|
|
|
$
|
2,730
|
|
|
$
|
6,473
|
|
Purchase price adjustments
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
Balance as of March 31, 2016
|
$
|
3,451
|
|
|
$
|
292
|
|
|
$
|
2,734
|
|
|
$
|
6,477
|
|
Goodwill Impairment Testing
We test our goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist. Refer to
Note D - Goodwill and Other Intangible Assets
contained in Item 8 of our most recent Annual Report filed on Form 10-K for discussion of our most recent goodwill impairment test.
The following is a rollforward of accumulated goodwill write-offs by global reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Cardiovascular
|
|
Rhythm Management
|
|
MedSurg
|
|
Total
|
Accumulated write-offs as of December 31, 2015
|
$
|
(1,479
|
)
|
|
$
|
(6,960
|
)
|
|
$
|
(1,461
|
)
|
|
$
|
(9,900
|
)
|
Goodwill written off
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accumulated write-offs as of March 31, 2016
|
$
|
(1,479
|
)
|
|
$
|
(6,960
|
)
|
|
$
|
(1,461
|
)
|
|
$
|
(9,900
|
)
|
Intangible Asset Impairment Testing
On a quarterly basis, we monitor for events or other potential indicators of impairment that would warrant an interim impairment test of our intangible assets. We did not record any intangible asset impairment charges during the three months ended March 31, 2016 and March 31, 2015.
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
(Topic 815).
Currency Hedging
We are exposed to currency risk consisting primarily of foreign currency denominated monetary assets and liabilities, forecasted foreign currency denominated intercompany and third-party transactions and net investments in certain subsidiaries. We manage our exposure to changes in foreign currency exchange rates on a consolidated basis to take advantage of offsetting transactions. We use 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
March 31, 2016
and
December 31, 2015
were cash flow hedges under Topic 815 intended to protect the U.S. dollar value of our forecasted foreign currency denominated transactions. We record the effective portion of any change in the fair value of foreign currency cash flow hedges in other comprehensive income (OCI) until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the foreign currency cash flow hedge to earnings. In the event the hedged forecasted transaction does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had currency derivative instruments designated as cash flow hedges outstanding in the contract amount of
$2.197 billion
as of
March 31, 2016
and
$1.458 billion
as of
December 31, 2015
.
We recognized
net gains
of
$48 million
in earnings on our cash flow hedges during the
first
quarter of
2016
, as compared to
net gains
of
$49 million
during the
first
quarter of
2015
. All currency cash flow hedges outstanding as of
March 31, 2016
mature within
36
months. As of
March 31, 2016
,
$77 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
$145 million
as of
December 31, 2015
. As of
March 31, 2016
,
$70 million
of net gains, net of tax, may be reclassified to earnings within the next twelve months.
The success of our hedging program depends, in part, on forecasts of transaction activity in various currencies (primarily Japanese yen, British pound sterling, Australian dollar and Canadian dollar). We may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activity during periods of currency volatility. In addition, changes in foreign currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Non-designated Foreign Currency Contracts
We use currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under Topic 815; are marked-to-market with changes in fair value recorded to earnings; and are entered into for periods consistent with currency transaction exposures, generally less than one year. We had currency derivative instruments not designated as hedges under Topic 815 outstanding in the contract amount of
$2.257 billion
as of
March 31, 2016
and
$2.090 billion
as of
December 31, 2015
.
Interest Rate Hedging
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We have historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates by converting floating-rate debt into fixed-rate debt or fixed-rate debt into floating-rate debt.
We designate these derivative instruments either as fair value or cash flow hedges under Topic 815. We record changes in the value of fair value hedges in interest expense, which is generally offset by changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest rate derivative instruments are included in interest expense. We record the effective portion of any change in the fair value of derivative instruments designated as cash flow hedges as unrealized gains or losses in OCI, net of tax, until the hedged cash flow occurs, at which point the effective portion of any gain or loss is reclassified to earnings. We record the ineffective portion of our cash flow hedges in interest expense. In the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.
In the fourth quarter of 2013, we entered into interest rate derivative contracts having a notional amount of
$450 million
to convert fixed-rate debt into floating-rate debt, which we designated as fair value hedges. During the first quarter of 2015, we terminated these hedges, and we received total proceeds of approximately
$35 million
, which included approximately
$7 million
of net accrued interest receivable. We assessed at inception, and re-assessed on an ongoing basis, whether the interest rate derivative contracts were highly effective in offsetting changes in the fair value of the hedged fixed-rate debt. During the
first
quarter of
2015
, we recognized, in interest expense, an
$8 million
loss
on our hedged debt and an
$8 million
gain
on the related interest rate derivative contract.
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 and treasury locks designated as cash flow hedges upon termination into earnings as a component of interest expense over the remaining term of the hedged debt, in accordance with Topic 815. The carrying amount of certain of our senior notes included unamortized gains of
$60 million
as of
March 31, 2016
and
$63 million
as of
December 31, 2015
, and unamortized losses of
$1 million
as of
March 31, 2016
and
$1 million
as of
December 31, 2015
related to the fixed-to-floating interest rate contracts. In addition, we had pre-tax net gains within AOCI related to terminated forward starting interest rate derivative contracts and treasury locks of
$10 million
as of
March 31, 2016
and
$10 million
as of
December 31, 2015
. The net gains that we recognized as a reduction of interest expense in earnings related to previously terminated interest rate derivatives were approximately
$3 million
during the
first
quarter of
2016
and
$2 million
during the
first
quarter of
2015
. As of
March 31, 2016
,
$13 million
of pre-tax net gains may be reclassified to earnings within the next twelve months as a reduction to interest expense from amortization of our 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 the 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 actively monitoring their credit ratings and outstanding fair values on an ongoing basis. Furthermore, none of our derivative transactions are subject to collateral or other security arrangements, and none contain provisions that are dependent on our credit ratings from any credit rating agency.
We also employ master netting arrangements that reduce our counterparty payment settlement risk on any given maturity date to the net amount of any receipts or payments due between us and the counterparty financial institution. Thus, the maximum loss due to counterparty credit risk is limited to the unrealized gains in such contracts net of any unrealized losses should any of these counterparties fail to perform as contracted. Although these protections do not eliminate concentrations of credit risk, as a result of the above considerations, we do not consider the risk of counterparty default to be significant.
Fair Value of Derivative Instruments
The following presents the effect of our derivative instruments designated as cash flow hedges under Topic 815 on our accompanying unaudited condensed consolidated statements of operations during the
first
quarter of
2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Pre-tax
Gain (Loss)
Recognized in OCI
(Effective Portion)
|
|
Amount of Pre-tax Gain (Loss) Reclassified from AOCI into Earnings
(Effective Portion)
|
|
Location in Statement of
Operations
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
Currency hedge contracts
|
$
|
59
|
|
|
$
|
48
|
|
|
Cost of products sold
|
|
$
|
59
|
|
|
$
|
48
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
Currency hedge contracts
|
$
|
93
|
|
|
$
|
49
|
|
|
Cost of products sold
|
|
$
|
93
|
|
|
$
|
49
|
|
|
|
The amount of gain (loss) recognized in earnings related to the ineffective portion of hedging relationships was immaterial for all periods presented.
Net gains and losses on currency hedge contracts not designated as hedging instruments were offset by net losses and gains from foreign currency transaction exposures, as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Location in Statement of Operations
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Gain (loss) on currency hedge contracts
|
|
Other, net
|
|
$
|
(39
|
)
|
|
$
|
23
|
|
Gain (loss) on foreign currency transaction exposures
|
|
Other, net
|
|
34
|
|
|
(33
|
)
|
Net foreign currency gain (loss)
|
|
Other, net
|
|
$
|
(5
|
)
|
|
$
|
(10
|
)
|
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
(Topic 820), by considering the estimated amount we would receive or pay to transfer these instruments at the reporting date and by taking into account current interest rates, foreign currency exchange rates, the creditworthiness of the counterparty for 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
March 31, 2016
, we have classified all of our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by Topic 820, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.
The following are the balances of our derivative assets and liabilities as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
Location in Balance Sheet
(1)
|
2016
|
|
2015
|
Derivative Assets:
|
|
|
|
|
Currently or Previously Designated Hedging Instruments
|
|
|
|
Currency hedge contracts
|
Other current assets
|
$
|
101
|
|
|
$
|
138
|
|
Currency hedge contracts
|
Other long-term assets
|
34
|
|
|
66
|
|
|
|
135
|
|
|
204
|
|
Non-Designated Hedging Instruments
|
|
|
|
|
Currency hedge contracts
|
Other current assets
|
29
|
|
|
33
|
|
Total Derivative Assets
|
|
$
|
164
|
|
|
$
|
237
|
|
|
|
|
|
|
Derivative Liabilities:
|
|
|
|
|
Currently or Previously Designated Hedging Instruments
|
|
|
|
Currency hedge contracts
|
Other current liabilities
|
$
|
6
|
|
|
$
|
1
|
|
Currency hedge contracts
|
Other long-term liabilities
|
22
|
|
|
—
|
|
|
|
28
|
|
|
1
|
|
Non-Designated Hedging Instruments
|
|
|
|
|
Currency hedge contracts
|
Other current liabilities
|
62
|
|
|
22
|
|
Total Derivative Liabilities
|
|
$
|
90
|
|
|
$
|
23
|
|
|
|
(1)
|
We classify derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less.
|
Other Fair Value Measurements
Recurring Fair Value Measurements
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
|
|
•
|
Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
|
|
|
•
|
Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
|
|
|
•
|
Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
|
Assets and liabilities measured at fair value on a recurring basis consist of the following as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
As of December 31, 2015
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and government funds
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
118
|
|
Currency hedge contracts
|
—
|
|
|
164
|
|
|
—
|
|
|
164
|
|
|
—
|
|
|
237
|
|
|
—
|
|
|
237
|
|
|
$
|
91
|
|
|
$
|
164
|
|
|
$
|
—
|
|
|
$
|
255
|
|
|
$
|
118
|
|
|
$
|
237
|
|
|
$
|
—
|
|
|
$
|
355
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
Accrued contingent consideration
|
—
|
|
|
—
|
|
|
188
|
|
|
188
|
|
|
—
|
|
|
—
|
|
|
246
|
|
|
246
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
188
|
|
|
$
|
278
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
246
|
|
|
$
|
269
|
|
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
$91 million
invested in money market and government funds as of
March 31, 2016
, we had
$15 million
in short-term time deposits and
$232 million
in interest bearing and non-interest bearing bank accounts. In addition to
$118 million
invested in money market and government funds as of
December 31, 2015
, we had
$31 million
in short-term deposits and
$170 million
in interest bearing and non-interest bearing bank accounts.
Our recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to our contingent consideration liabilities. Refer to
Note B - Acquisitions and Strategic Investments
for a discussion of the changes in the fair value of our contingent consideration liabilities.
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Refer to
Note B – Acquisitions and Strategic Investments
for a discussion of our cost method investments.
The fair value of our outstanding debt obligations was
$6.037 billion
as of
March 31, 2016
and
$5.887 billion
as of
December 31, 2015
, which was determined by using primarily quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy. Refer to
Note E – Borrowings and Credit Arrangements
for a discussion of our debt obligations.
NOTE E – BORROWINGS AND CREDIT ARRANGEMENTS
We had total debt of
$5.677 billion
as of
March 31, 2016
and
December 31, 2015
. The debt maturity schedule for the significant components of our debt obligations as of
March 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
|
Total
|
Senior Notes
|
$
|
—
|
|
|
$
|
250
|
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
1,450
|
|
|
$
|
2,350
|
|
|
$
|
4,650
|
|
Term Loans
|
—
|
|
|
85
|
|
|
390
|
|
|
150
|
|
|
375
|
|
|
—
|
|
|
1,000
|
|
|
$
|
—
|
|
|
$
|
335
|
|
|
$
|
990
|
|
|
$
|
150
|
|
|
$
|
1,825
|
|
|
$
|
2,350
|
|
|
$
|
5,650
|
|
|
|
|
Note:
|
The table above does not include unamortized discounts associated with our senior notes, or amounts related to interest rate contracts used to hedge the fair value of certain of our senior notes.
|
Revolving Credit Facility
On April 10, 2015, we entered into a new
$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. Eurodollar and multicurrency loans under the 2015 Facility bear interest at LIBOR plus an interest margin of between
0.900 percent
and
1.500 percent
, based on our corporate credit ratings and consolidated leverage ratio (
1.300 percent
as of
March 31, 2016
).
In addition, we are required to pay a facility fee based on our credit ratings, consolidated leverage ratio and the total amount of revolving credit commitment, regardless of usage, under the credit agreement (
0.200 percent
per year as of
March 31, 2016
).
The 2015 Facility contains covenants which, among other things, require that we maintain a minimum interest coverage ratio of
3.0 times
consolidated EBITDA and a maximum leverage ratio of
4.5 times
consolidated EBITDA for the first four fiscal quarter-ends following the closing of the AMS Portfolio Acquisition on August 3, 2015, and decreasing to
4.25 times
,
4.0 times
, and
3.75 times
consolidated EBITDA for the next three fiscal quarter-ends after such four fiscal quarter-ends, respectively, and then to
3.50 times
for each fiscal quarter-end thereafter. There were no amounts borrowed under our current and prior revolving credit facilities as of
March 31, 2016
or
December 31, 2015
.
|
|
|
|
|
|
Covenant Requirement
as of March 31, 2016
|
|
Actual as of
March 31, 2016
|
Maximum leverage ratio (1)
|
4.5 times
|
|
2.9 times
|
Minimum interest coverage ratio (2)
|
3.0 times
|
|
7.0 times
|
|
|
(1)
|
Ratio of total debt to consolidated EBITDA, as defined by the credit agreement, for the preceding four consecutive fiscal quarters.
|
|
|
(2)
|
Ratio of consolidated EBITDA, as defined by the credit agreement, to interest expense for the preceding four consecutive fiscal quarters.
|
The credit agreement for the 2015 Facility provides for an exclusion from the calculation of consolidated EBITDA, as defined by the credit agreement, through the credit agreement maturity, of any non-cash charges and up to
$620 million
in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of
March 31, 2016
, we had
$547 million
of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the agreement, are excluded from the calculation of consolidated EBITDA and any new debt issued to fund any tax deficiency payments is excluded from consolidated total debt, as defined in the agreement, provided that the sum of any excluded net cash litigation payments and any new debt issued to fund any tax deficiency payments not exceed
$2.000 billion
in the aggregate. As of
March 31, 2016
, we had
$1.680 billion
of the combined legal and debt exclusion remaining.
As of and through
March 31, 2016
, we were in compliance with the required covenants.
Term Loans
As of
March 31, 2016
, we had an aggregate of
$1.000 billion
outstanding under our unsecured term loan facilities and
$1.000 billion
outstanding as of
December 31, 2015
. These facilities include an unsecured term loan facility entered into in August 2013 (2013 Term Loan) which had
$250 million
outstanding as of
March 31, 2016
and
December 31, 2015
, along with an unsecured term loan credit facility entered into in April 2015 (2015 Term Loan) which had
$750 million
outstanding as of
March 31, 2016
and
December 31, 2015
.
Borrowings under the 2013 Term Loan bear interest at LIBOR plus an interest margin between
1.00 percent
and
1.75 percent
(currently
1.50 percent
) based on our corporate credit ratings and consolidated leverage ratio. We repaid
$150 million
of our 2013 Term Loan facility in 2015. As a result and in accordance with the credit agreement, the remaining outstanding balance is payable with
$10 million
due in the fourth quarter of 2017,
$20 million
due in each of the first and second quarters of 2018 and the remaining principal amount due at the final maturity date in August 2018. The 2013 Term Loan borrowings are repayable at any time without premium or penalty. Our term loan facility requires that we comply with certain covenants, including financial covenants with respect to maximum leverage and minimum interest coverage, consistent with the 2015 Term Loan facility. The maximum leverage ratio requirement is
4.5 times
,
and our actual leverage ratio as of
March 31, 2016
is
2.9 times
. The minimum interest coverage ratio requirement is
3.0 times
,
and our actual interest coverage ratio as of
March 31, 2016
is
7.0 times
.
On April 10, 2015, we entered into a new
$750 million
unsecured term loan credit facility (2015 Term Loan) which matures on August 3, 2020. The 2015 Term Loan was funded on August 3, 2015 and was used to partially fund the AMS Portfolio Acquisition, including the payment of fees and expenses. Term loan borrowings under this facility bear interest at LIBOR plus an interest margin of between
1.00 percent
and
1.75 percent
(currently
1.50 percent
), based on our corporate credit ratings and consolidated leverage ratio. The 2015 Term Loan requires quarterly principal payments of
$38 million
commencing in the third quarter of 2017,
and the remaining principal amount is due at the final maturity date of August 3, 2020.
The 2015 Term Loan agreement requires that we comply with certain covenants, including financial covenants with respect to maximum leverage and minimum interest coverage, consistent with our revolving credit facility. The maximum leverage ratio requirement is
4.5 times
, and our actual leverage ratio as of
March 31, 2016
is
2.9 times
. The minimum interest coverage ratio requirement is
3.0 times
, and our actual interest coverage ratio as of
March 31, 2016
is
7.0 times
.
Senior Notes
We had senior notes outstanding of
$4.650 billion
as of
March 31, 2016
and
December 31, 2015
. In May 2015, we completed the offering of
$1.850 billion
in aggregate principal amount of senior notes consisting of
$600 million
in aggregate principal amount of
2.850%
notes due 2020,
$500 million
in aggregate principal amount of
3.375%
notes due 2022 and
$750 million
in aggregate principal amount of
3.850%
notes due 2025. The net proceeds from the offering of the notes, after deducting underwriting discounts and estimated offering expenses, were approximately
$1.831 billion
. We used a portion of the net proceeds from the senior notes offering to redeem
$400 million
aggregate principal amount of our
5.500%
notes due November 2015 and
$600 million
aggregate principal amount of our
6.400%
notes due June 2016. The remaining senior notes offering proceeds, together with the 2015 Term Loan, were used to fund the AMS Portfolio Acquisition. We recorded a charge of
$45 million
in interest expense, during the second quarter of 2015, for premiums, accelerated amortization of debt issuance costs, and investor discount costs net of interest rate hedge gains related to the early debt extinguishment.
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, to the extent if borrowed by our subsidiaries and to liabilities of our subsidiaries (see
Other Arrangements
below).
Other Arrangements
We maintain a
$300 million
credit and security facility secured by our U.S. trade receivables maturing on June 9, 2017. The credit and security facility requires that we maintain a maximum leverage covenant consistent with our revolving credit facility. The maximum leverage ratio requirement is
4.5 times
, and our actual leverage ratio as of
March 31, 2016
is
2.9 times
. We had no borrowings outstanding under this facility as of
March 31, 2016
and
December 31, 2015
.
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 approximately
$411 million
as of
March 31, 2016
. 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
$178 million
of receivables as of
March 31, 2016
at an average interest rate of
1.7 percent
, and
$151 million
as of
December 31, 2015
at an average interest rate of
2.4 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
21.000 billion
Japanese yen (approximately
$187 million
as of
March 31, 2016
). We de-recognized
$146 million
of notes receivable and factored receivables as of
March 31, 2016
at an average interest rate of
1.6 percent
and
$132 million
of notes receivable as of
December 31, 2015
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
March 31, 2016
we had outstanding letters of credit of
$43 million
, as compared to
$44 million
as of
December 31, 2015
, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of
March 31, 2016
and
December 31, 2015
, none of the beneficiaries had drawn upon the letters of credit or guarantees; accordingly, we did not recognize a related liability for our outstanding letters of credit in our consolidated balance sheets as of
March 31, 2016
or
December 31, 2015
. We believe we will generate sufficient cash from operations to fund these arrangements and intend to fund these arrangements without drawing on the letters of credit.
NOTE F – RESTRUCTURING-RELATED ACTIVITIES
On an ongoing basis, we monitor the dynamics of the economy, the healthcare industry, and the markets in which we compete. We continue to assess opportunities for improved operational effectiveness and efficiency, and better alignment of expenses with revenues, while preserving our ability to make the investments in research and development projects, capital and our people that we believe are essential to our long-term success. As a result of these assessments, we have undertaken various restructuring initiatives in order to enhance our growth potential and position us for long-term success. These initiatives are described below.
2014 Restructuring Plan
On October 22, 2013, our Board of Directors approved, and we committed to, a restructuring initiative (the 2014 Restructuring Plan). The 2014 Restructuring Plan is intended to build on the progress we have made to address financial pressures in a changing global marketplace, further strengthen our operational effectiveness and efficiency and support new growth investments. Key activities under the plan include continued implementation of our ongoing Plant Network Optimization (PNO) strategy, continued focus on driving operational efficiencies and ongoing business and commercial model changes. The PNO strategy is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities. Other activities involve rationalizing organizational reporting structures to streamline various functions, eliminate bureaucracy, increase productivity and better align resources to business strategies and marketplace dynamics. These activities were initiated in the fourth quarter of 2013 and were substantially completed by the end of 2015, except for certain ongoing actions associated with our PNO strategy, which we expect to be substantially completed by the end of 2016.
The implementation of the 2014 Restructuring Plan will result in total pre-tax charges of approximately
$255 million
to
$270 million
, and approximately
$240 million
to
$255 million
of these charges are estimated to result in cash outlays, of which we have made payments of
$212 million
through
March 31, 2016
. We have recorded related costs of
$242 million
since the inception of the plan, and recorded a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.
The following table provides a summary of our estimates of costs associated with the 2014 Restructuring Plan by major type of cost:
|
|
|
Type of cost
|
Total estimated amount expected to be incurred
|
Restructuring charges:
|
|
Termination benefits
|
$95 million to $100 million
|
Other (1)
|
$30 million to $35 million
|
Restructuring-related expenses:
|
|
Other (2)
|
$130 million to $135 million
|
|
$255 million to $270 million
|
(1) Consists primarily of consulting fees and costs associated with contract cancellations.
(2) Comprised of other costs directly related to the 2014 Restructuring Plan, including program management, accelerated depreciation, and costs to transfer product lines among facilities.
We recorded net restructuring charges pursuant to our restructuring plans of
$3 million
in the
first
quarter of
2016
and
$6 million
in the
first
quarter of
2015
. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of
$10 million
in the
first
quarter of
2016
and
$16 million
in the
first
quarter of
2015
.
The following presents these costs (credits) by major type and line item within our accompanying unaudited condensed consolidated statements of operations, as well as by program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Selling, general and administrative expenses
|
—
|
|
|
1
|
|
|
—
|
|
|
4
|
|
|
5
|
|
|
—
|
|
|
1
|
|
|
5
|
|
|
4
|
|
|
10
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
13
|
|
All charges incurred in the
first
quarter of
2016
are related to the 2014 Restructuring Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
Restructuring charges
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
6
|
|
Restructuring-related expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Selling, general and administrative expenses
|
—
|
|
|
1
|
|
|
—
|
|
|
7
|
|
|
8
|
|
|
—
|
|
|
1
|
|
|
8
|
|
|
7
|
|
|
16
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Termination
Benefits
|
|
Accelerated
Depreciation
|
|
Transfer
Costs
|
|
Other
|
|
Total
|
2014 Restructuring Plan
|
$
|
8
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
25
|
|
Substantially completed restructuring programs
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
22
|
|
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 – Non-retirement Postemployment Benefits
and FASB ASC Topic 420,
Exit or Disposal Cost Obligations
(Topic 420). We expect to record additional termination benefits related to our restructuring initiatives throughout 2016 as we complete our 2014 Restructuring Plan. Other restructuring costs, which represent primarily consulting fees and costs related to contract cancellations, are being recorded as incurred in accordance with Topic 420. Accelerated depreciation is being recorded over the adjusted remaining useful life of the related assets, and production line transfer costs are being recorded as incurred.
As of
March 31, 2016
, we incurred cumulative restructuring charges related to our 2014 Restructuring Plan of
$128 million
and restructuring-related costs of
$114 million
since we committed to the plan. The following presents these costs by major type (in millions):
|
|
|
|
|
Termination benefits
|
$
|
97
|
|
Fixed asset write-offs
|
—
|
|
Other
|
31
|
|
Total restructuring charges
|
128
|
|
Accelerated depreciation
|
9
|
|
Transfer costs
|
60
|
|
Other
|
45
|
|
Restructuring-related expenses
|
114
|
|
|
$
|
242
|
|
We made cash payments of
$23 million
in the
first
quarter of
2016
associated with our restructuring initiatives and as of
March 31, 2016
, we had made total cash payments of
$212 million
related to our 2014 Restructuring Plan since committing to the plan. These payments were made using cash generated from operations, and are comprised of the following:
|
|
|
|
|
(in millions)
|
2014 Restructuring Plan
|
Three Months Ended March 31, 2016
|
|
Termination benefits
|
$
|
14
|
|
Transfer costs
|
5
|
|
Other
|
4
|
|
|
$
|
23
|
|
|
|
Program to Date
|
|
Termination benefits
|
$
|
83
|
|
Transfer costs
|
60
|
|
Other
|
69
|
|
|
$
|
212
|
|
Our restructuring liability is primarily comprised of accruals for termination benefits. The following is a rollforward of the termination benefit liability associated with our 2014 Restructuring Plan, which is reported as a component of accrued expenses included in our accompanying unaudited condensed balance sheets (in millions):
|
|
|
|
|
Accrued as of December 31, 2015
|
$
|
29
|
|
Charges (credits)
|
1
|
|
Cash payments
|
(14
|
)
|
Accrued as of March 31, 2016
|
$
|
16
|
|
In addition to our accrual for termination benefits, we had a
$4 million
liability as of
March 31, 2016
and a
$3 million
liability as of
December 31, 2015
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)
|
|
March 31, 2016
|
|
December 31, 2015
|
Accounts receivable
|
|
$
|
1,413
|
|
|
$
|
1,394
|
|
Less: allowance for doubtful accounts
|
|
(80
|
)
|
|
(75
|
)
|
Less: allowance for sales returns
|
|
(42
|
)
|
|
(44
|
)
|
|
|
$
|
1,291
|
|
|
$
|
1,275
|
|
The following is a rollforward of our allowance for doubtful accounts for the
first
quarter of
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
75
|
|
|
$
|
76
|
|
Charges to expenses
|
|
4
|
|
|
2
|
|
Utilization of allowances
|
|
1
|
|
|
(6
|
)
|
Ending balance
|
|
$
|
80
|
|
|
$
|
72
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Finished goods
|
|
$
|
700
|
|
|
$
|
706
|
|
Work-in-process
|
|
107
|
|
|
102
|
|
Raw materials
|
|
215
|
|
|
208
|
|
|
|
$
|
1,022
|
|
|
$
|
1,016
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Land
|
|
$
|
83
|
|
|
$
|
86
|
|
Buildings and improvements
|
|
964
|
|
|
981
|
|
Equipment, furniture and fixtures
|
|
2,849
|
|
|
2,793
|
|
Capital in progress
|
|
185
|
|
|
202
|
|
|
|
4,081
|
|
|
4,062
|
|
Less: accumulated depreciation
|
|
2,617
|
|
|
2,572
|
|
|
|
$
|
1,464
|
|
|
$
|
1,490
|
|
Depreciation expense was
$64 million
for the
first
quarter of
2016
and
$65 million
for the
first
quarter of
2015
.
Accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Legal reserves
|
|
$
|
788
|
|
|
$
|
773
|
|
Payroll and related liabilities
|
|
403
|
|
|
504
|
|
Accrued contingent consideration
|
|
86
|
|
|
119
|
|
Other
|
|
515
|
|
|
574
|
|
|
|
$
|
1,792
|
|
|
$
|
1,970
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Accrued income taxes
|
|
$
|
1,263
|
|
|
$
|
1,253
|
|
Legal reserves
|
|
1,107
|
|
|
1,163
|
|
Accrued contingent consideration
|
|
102
|
|
|
127
|
|
Other long-term liabilities
|
|
462
|
|
|
431
|
|
|
|
$
|
2,934
|
|
|
$
|
2,974
|
|
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 three months of
2016
and
2015
consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Beginning Balance
|
|
$
|
23
|
|
|
$
|
25
|
|
Provision
|
|
4
|
|
|
5
|
|
Settlements/reversals
|
|
(6
|
)
|
|
(4
|
)
|
Ending Balance
|
|
$
|
21
|
|
|
$
|
26
|
|
NOTE H – INCOME TAXES
Our effective tax rates from continuing operations for the three months ended
March 31, 2016
and
March 31, 2015
, were
11.4%
and
97.5%
, respectively. The change in our reported tax rate for the
first
quarter of
2016
, as compared to the same period in
2015
, 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, litigation-related and restructuring and restructuring-related items, as well as the impact of certain discrete tax items.
As of
March 31, 2016
, we had
$1.056 billion
of gross unrecognized tax benefits, of which a net
$901 million
, if recognized, would affect our effective tax rate. As of
December 31, 2015
, we had
$1.056 billion
of gross unrecognized tax benefits, of which a net
$900 million
, 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 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. In addition, we believe that the IRS positions with regard to these matters are inconsistent with the applicable tax laws and the existing Treasury regulations. We believe we have meritorious defenses for our tax filings and we have filed petitions with the U.S. Tax Court contesting the Notices of Deficiency for the 2001 - 2007 tax years in challenge. We currently expect the trial in this matter to occur in the second half of 2016. Furthermore, we have submitted a letter to the IRS protesting the Revenue Agent Report for the 2008 - 2010 tax years and requesting an administrative appeal hearing. We do not believe that the IRS will hear our appeal until the Tax Court case is concluded.
No payments on the net assessments would be required until the dispute is definitively resolved, which, based on experiences of other companies, could take several years. We believe our income tax reserves associated with these matters are adequate as of
March 31, 2016
. However, final resolution is uncertain and could have a material impact on our financial condition, results of operations, or cash flows.
We recognize interest and penalties related to income taxes as a component of income tax expense. We had
$516 million
accrued for gross interest and penalties as of
March 31, 2016
and
$500 million
as of
December 31, 2015
. We recognized net tax expense related to interest and penalties of
$10 million
during the
first
quarter of
2016
and
$11 million
during the
first
quarter of
2015
.
It is reasonably possible that within the next 12 months we will resolve multiple issues including transfer pricing and transactional-related issues with foreign, federal and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately
$15 million
.
In November 2015, the FASB issued ASC Update No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. This update simplifies the presentation of deferred income taxes by requiring all deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent on the balance sheet. The new guidance is effective for all public Companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We have elected to early adopt this standard prospectively at the beginning of 2016.
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 United States and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.
In accordance with ASC Topic 450,
Contingencies
, we accrue anticipated costs of settlement, damages, 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
$1.895 billion
as of
March 31, 2016
and
$1.936 billion
as of
December 31, 2015
, and includes certain estimated costs of settlement, damages and defense. We recorded
$10 million
of litigation-related charges during the
first three months of
2016
and
$193 million
of litigation-related charges during the
first three months of
2015
. 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 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 September 22, 2014, The Board of Trustees for the University of Alabama filed a complaint in the United States District Court for the Northern District of Alabama alleging that the sale of our cardiac resynchronization therapy devices infringe a patent owned by the University of Alabama. On August 21, 2015, the court ordered a stay pending our requests for inter partes review of all claims related to the patent before the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (USPTO). Our requests were rejected on September 24, 2015 and October 19, 2015. On March 7, 2016, the USPTO granted our reconsideration motion and initiated an inter partes review and, on March 29, 2016, the District Court stayed the case pending a decision in the inter partes review.
On October 30, 2015, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation and Edwards Lifesciences Services GmbH in Düsseldorf District Court in Germany for patent infringement. We allege that Edwards’ SAPIEN 3 heart valve infringes our patent related to adaptive sealing technology.
On February 25, 2016, we extended the action to allege infringement of a second patent related to adaptive sealing technology.
On November 9, 2015, Edwards Lifesciences, LLC filed an invalidity claim against one of our subsidiaries, Sadra Medical, Inc., in the High Court of Justice, Chancery Division Patents Court in the United Kingdom, alleging that a European patent owned by Sadra relating to a repositionable heart valve is invalid. On January 15, 2016, we filed our defense and counterclaim for a declaration that our European patent is valid and infringed by Edwards.
On February 25, 2016, we amended our counterclaim to allege infringement of a second patent related to adaptive sealing technology.
On April 7, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation, Edwards Lifesciences LLC and Edwards Lifesciences SAS in the Grand Tribunal, Paris France for patent infringement. We allege that Edwards’ SAPIEN 3 heart valve infringes two of our patents related to adaptive sealing technology.
On April 19, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation in the United States District Court for the District of Delaware for patent infringement. We allege that Edwards’ SAPIEN 3 valve infringes a patent related to adaptive sealing technology.
On April 19, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation in the United States District Court for the Central District of California for patent infringement. We allege that Edwards’ aortic valve delivery systems infringe eight of our catheter related patents.
On April 26, 2016, Edwards Lifesciences PVT, Inc. filed a patent infringement action against us and one of our subsidiaries, Boston Scientific Medizintechnik GmbH, in the District Court of Düsseldorf, Germany alleging a European patent (Spenser) owned by Edwards is infringed by our Lotus™ transcatheter heart valve system.
Product Liability Litigation
As of
May 2, 2016
, over
36,000
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
four
putative class actions, and fewer than
15
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 U.S. District Court for the Southern District of West Virginia and transferred the federal court transvaginal surgical mesh cases to MDL-2326 for coordinated pretrial proceedings. 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
May 2, 2016
, we have entered into master settlement agreements with certain plaintiffs' counsel to resolve an aggregate of approximately
11,000
cases and claims of which approximately
6,000
have been settled. Each master settlement agreement was entered into solely by way of compromise and without any admission or concession by us of any liability or wrongdoing and provides that the settlement and the distribution of settlement funds to
participating claimants are conditioned upon, among other things, achieving minimum required claimant participation thresholds. If the participation thresholds under a master settlement agreement are not satisfied, we may terminate that agreement. In addition, we continue to engage in discussions with various plaintiffs’ counsel regarding potential resolution of pending cases and claims.
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 U.S. 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.
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.
Other Proceedings
On September 28, 2011, we served a complaint against Mirowski Family Ventures LLC in the U.S. District Court for the Southern District of Indiana for a declaratory judgment that we have paid all royalties owed and did not breach any contractual or fiduciary obligations arising out of a license agreement. Mirowski answered and filed counterclaims requesting damages. On May 13, 2013, Mirowski Family Ventures served us with a complaint alleging breach of contract in Montgomery County Circuit Court, Maryland, and they amended this complaint on August 1, 2013. On July 29, 2013, the Indiana case was dismissed. On September 10, 2013, we removed the case to the United States District Court for the District of Maryland. On June 5, 2014, the District Court granted Mirowski’s motion to remand the case to the Montgomery County Circuit Court. On September 24, 2014, following a jury verdict against us, the Montgomery County Circuit Court entered a judgment that we breached our license agreement with Mirowski and awarded damages of $308 million. On October 28, 2014, the Montgomery County Circuit Court denied our post-trial motions seeking to overturn the judgment. On November 19, 2014, we filed an appeal with the Maryland Court of Special Appeals. On January 29, 2016, the Maryland Court of Special Appeals affirmed the decision of the Montgomery County Circuit Court. On February 2, 2016, we filed a motion for reconsideration.
On April 24, 2014, Dr. Qingsheng Zhu and Dr. Julio Spinelli, acting jointly on behalf of the stockholder representative committee of Action Medical, Inc. (Action Medical), filed a lawsuit against us and our subsidiary, Cardiac Pacemakers, Inc. (CPI), in the U.S. District Court for the District of Delaware. The stockholder representatives allege that we and CPI breached a contractual duty to pursue development and commercialization of certain patented heart pacing methods and devices and to return certain patents. On March 15, 2016, the Court granted summary judgment in our favor as to all of plaintiffs’ claims for damages. A trial on the single remaining claim, and our counterclaim, for specific performance, is scheduled for July 8, 2016.
Refer to
Note H - Income Taxes
for information regarding our tax litigation.
Matters Concluded Since December 31, 2015
On March 12, 2010, we received a Civil Investigative Demand (CID) from the Civil Division of the U.S. Department of Justice (DOJ) requesting documents and information relating to reimbursement advice offered by us relating to certain CRM devices. On February 9, 2016, the DOJ informed us that we are no longer required to retain documents and information relating to the CID.
On July 11, 2014, we were served with a subpoena from the U.S. Attorney for the District of New Jersey. The subpoena seeks information relating to BridgePoint Medical, Inc., which we acquired in October 2012, including information relating to its sale of CrossBoss® and Stingray® products, educational and training activities that relate to those sales and our acquisition of BridgePoint Medical. On August 20, 2015, the court unsealed a qui tam lawsuit brought by a former employee named Robin Levy
against the company as well as a decision by the U.S. Attorney for New Jersey declining to intervene in the lawsuit. The lawsuit alleges that the company violated the federal and various state false claims acts through seeking to upcode Chronic Total Occlusion (“CTO”) procedures and requiring in-patient treatment and purchases of coronary stents in order for physicians to receive training on the CTO procedure. On January 26, 2016, the Court dismissed the qui tam lawsuit.
On March 18, 2015, Denise Fretter and Maria Korsgaard, claiming to represent a class of current and former female field sales employees at Boston Scientific Neuromodulation Corporation (BSNC), filed a lawsuit against BSNC in the U.S. District Court for the Central District of California. The plaintiffs allege gender discrimination in pay, promotions and differential treatment against them and the putative class. On February 6, 2016, the parties entered into a confidential settlement agreement, and the case has been dismissed.
NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in millions)
|
|
2016
|
|
2015
|
|
Weighted average shares outstanding - basic
|
|
1,350.4
|
|
|
1,333.7
|
|
|
Net effect of common stock equivalents
|
|
19.5
|
|
|
—
|
|
*
|
Weighted average shares outstanding - assuming dilution
|
|
1,369.9
|
|
|
1,333.7
|
|
|
*We generated a net loss in the
first
quarter of
2015
. Our weighted-average shares outstanding for earnings per share calculations exclude common stock equivalents of
24.0 million
for the
first
quarter of
2015
due to our net loss.
Weighted average shares outstanding, assuming dilution, excludes the impact of
one million
stock options for the
first
quarter of
2016
, and
10 million
stock options for the
first
quarter of
2015
, due to the exercise prices of these stock options being greater than the average fair market value of our common stock during the period.
We issued approximately
eight million
shares of our common stock in the
first
quarter of
2016
and
13 million
shares of our common stock in the
first
quarter of
2015
, following the exercise of underlying stock options or 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
quarter of
2016
or
2015
.
NOTE K – SEGMENT REPORTING
We have
three
reportable segments comprised of Cardiovascular, Rhythm Management, and MedSurg.
Each of our reportable segments generates revenues from the sale of medical devices. We measure and evaluate our reportable segments based on segment net sales and operating income, excluding the impact of changes in foreign currency. Sales generated from reportable segments, as well as operating results of reportable segments, are based on internally-derived standard currency exchange rates, which may differ from year to year, and do not include intersegment profits. As needed, we restate segment information for the prior period based on our internally-derived standard currency exchange rates 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 charges or credits that our chief operating decision maker considers to be non-recurring and/or non-operational, such as amounts related to acquisition- and divestiture-, litigation-, restructuring- and restructuring-related net charges and credits; pension termination 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
March 31,
|
(in millions)
|
|
2016
|
|
2015
|
|
|
|
|
|
Net sales
|
|
|
|
|
Interventional Cardiology
|
|
$
|
613
|
|
|
$
|
541
|
|
Peripheral Interventions
|
|
264
|
|
|
232
|
|
Cardiovascular
|
|
877
|
|
|
773
|
|
|
|
|
|
|
Cardiac Rhythm Management
|
|
471
|
|
|
483
|
|
Electrophysiology
|
|
64
|
|
|
61
|
|
Rhythm Management
|
|
535
|
|
|
544
|
|
|
|
|
|
|
Endoscopy
|
|
365
|
|
|
328
|
|
Urology and Pelvic Health
|
|
243
|
|
|
130
|
|
Neuromodulation
|
|
125
|
|
|
116
|
|
MedSurg
|
|
733
|
|
|
574
|
|
Net sales allocated to reportable segments
|
|
2,145
|
|
|
1,891
|
|
Impact of foreign currency fluctuations
|
|
(181
|
)
|
|
(123
|
)
|
|
|
$
|
1,964
|
|
|
$
|
1,768
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
Cardiovascular
|
|
$
|
299
|
|
|
$
|
236
|
|
Rhythm Management
|
|
90
|
|
|
78
|
|
MedSurg
|
|
239
|
|
|
166
|
|
Operating income allocated to reportable segments
|
|
628
|
|
|
480
|
|
Corporate expenses and currency exchange
|
|
(134
|
)
|
|
(82
|
)
|
Acquisition- and divestiture-, litigation-, restructuring- and restructuring-related net charges, and pension termination charges
|
|
(65
|
)
|
|
(261
|
)
|
Amortization expense
|
|
(136
|
)
|
|
(113
|
)
|
Operating income (loss)
|
|
293
|
|
|
24
|
|
Other expense, net
|
|
(65
|
)
|
|
(75
|
)
|
Income (loss) before income taxes
|
|
$
|
228
|
|
|
$
|
(51
|
)
|
NOTE L – CHANGES IN OTHER COMPREHENSIVE INCOME
The following table provides the reclassifications out of other comprehensive income for the
three months ended
March 31, 2016
and
March 31, 2015
. Amounts in the chart below are presented net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Unrealized gains/losses on derivative financial instruments
|
|
Defined benefit pension items / Other
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
(54
|
)
|
|
$
|
152
|
|
|
$
|
(10
|
)
|
|
$
|
88
|
|
Other comprehensive income (loss) before reclassifications
|
|
16
|
|
|
(38
|
)
|
|
(2
|
)
|
|
(24
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(31
|
)
|
|
2
|
|
|
(29
|
)
|
Net current-period other comprehensive income
|
|
16
|
|
|
(69
|
)
|
|
—
|
|
|
(53
|
)
|
Balance as of March 31, 2016
|
|
$
|
(38
|
)
|
|
$
|
83
|
|
|
$
|
(10
|
)
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Unrealized gains/losses on derivative financial instruments
|
|
Defined benefit pension items / Other
|
|
Total
|
Balance as of December 31, 2014
|
|
$
|
(38
|
)
|
|
$
|
219
|
|
|
$
|
(37
|
)
|
|
$
|
144
|
|
Other comprehensive income (loss) before reclassifications
|
|
(35
|
)
|
|
59
|
|
|
(3
|
)
|
|
21
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(31
|
)
|
|
8
|
|
|
(23
|
)
|
Net current-period other comprehensive income
|
|
(35
|
)
|
|
28
|
|
|
5
|
|
|
(2
|
)
|
Balance as of March 31, 2015
|
|
$
|
(73
|
)
|
|
$
|
247
|
|
|
$
|
(32
|
)
|
|
$
|
142
|
|
The income tax impact of the amounts in other comprehensive income for unrealized gains and losses on derivative financial instruments before reclassifications was
a benefit
of
$21 million
in the
first
quarter of
2016
and
an expense
of
$34 million
in the
first
quarter of
2015
. The gains and losses on derivative financial instruments reclassified were reduced by income tax impacts of
$17 million
in the
first
quarter of
2016
and
$18 million
in the
first
quarter of
2015
. Refer to
Note D – Fair Value Measurements
in this Quarterly Report on Form 10-Q for further detail on the reclassifications related to derivatives.
The income tax impact of the amounts in other comprehensive income for defined benefit and pension items before reclassification was an immaterial benefit for the
first
quarter of
2016
and the
first
quarter of
2015
. The losses on defined benefit and pension related items reclassified from accumulated other comprehensive income were reduced by immaterial income tax impacts in the
first
quarter of
2016
and by
$4 million
of income tax impacts in the
first
quarter of
2015
.
NOTE M – NEW ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, we evaluate the pronouncements to determine the potential effects of adoption on our consolidated financial statements.
Standards Implemented
ASC Update No. 2015-05
In April 2015, the FASB issued ASC Update No. 2015-05,
Intangibles- Goodwill and Other - Internal -Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.
Update No. 2015-05 provides accounting guidance on how customers should treat cloud computing arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Update No. 2015-05 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods. We elected to adopt the amendments prospectively to all arrangements entered into or materially modified after the effective date. The adoption of Update No. 2015-05 did not have a material impact on our financial position or results of operations.
ASC Update No. 2015-12
In July 2015, the FASB issued ASC Update No. 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965).
Update No. 2015-12 has three parts. Part I designates contract value as the only required measure for fully benefit-responsive investment contracts. Part II simplifies the investment disclosure requirements under Topics 820, 960, 962, and 965 for employee benefits plans and Part III provides an alternative measurement date for fiscal periods that do not coincide with a month-end date. Update No. 2015-12 is effective for fiscal years beginning after December 15, 2015. The adoption of Update No. 2015-12 did not have a material impact on our financial position or results of operations.
ASC Update No. 2015-16
In September 2015, the FASB issued ASC Update No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement - Period Adjustments
. Update No. 2015-16 eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. Update No. 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should be either presented separately on the face of the income statement or disclosed in the notes. Update No. 2015-16 is effective for fiscal years beginning after December 15, 2015. The adoption of Update No. 2015-16 did not impact on our financial position or results of operations.
ASC Update No. 2015-17
In November 2015, the FASB issued ASC Update No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.
Update No. 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. It is effective for fiscal years beginning after December 15, 2016; however, earlier application is permitted. We elected to early adopt Update No. 2015-17 on a prospective basis; as such, prior periods were not retrospectively adjusted. The adoption of Update No. 2015-17 did not have a material impact on our financial position or results of operations.
ASC Update No. 2016-07
In March 2016, the FASB issued ASC Update No. 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323)
. When a previously held investment qualifies for equity method accounting due to an increase in ownership interest or influence, Update 2016-07 eliminates the requirement for investors to adjust results retroactively as if the equity method had been in effect during prior periods the investment was held. Instead, it requires investors to adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. We elected to early adopt Update No. 2016-07 on a prospective basis.
The adoption of Update No. 2016-07 did not impact on our financial position or results of operations.
Standards to be Implemented
ASC Update No. 2014-09
In May 2014, the FASB issued ASC Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
Update No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies using International Financial Reporting Standards and U.S. GAAP. The core principle requires entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect
the consideration an entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to approve a one year deferral, making the standard effective for public entities for annual and interim periods beginning after December 15, 2017. As such, the standard will be effective for us on January 1, 2018. Under the deferral, early application is still permitted but not before the original public organization effective date, which is for annual reporting periods beginning after December 15, 2016. We expect to adopt Update No. 2014-09 effective January 1, 2018. We are in the process of determining the effect that the adoption of this standard will have on our financial position and results of operations.
ASC Update No. 2016-01
In January 2016, the FASB issued ASC Update No. 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
It is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application of certain provisions is permitted. Update 2016-01 requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. Update 2016-01 also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and liability. The adoption of Update No. 2016-01 is not expected to have a material impact on our financial position or results of operations.
ASC Update No. 2016-02
In February 2016, the FASB issued ASC Update No. 2016-02,
Leases (Topic 842).
It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. Update 2016-02 is intended to increase the transparency and comparability among organizations by recognizing lease asset and lease liabilities on the balance sheet, including those previously classified as operating leases under current GAAP, and disclosing key information about leasing arrangements. We are in the process of determining the effect that the adoption of this standard will have on our financial position and results of operations.
ASC Update No. 2016-08
In March 2016, the FASB issued ASC Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. The effective date and transition requirements are consistent with Update 2014-09. The purpose of Update No. 2016-08 is to clarify the guidance on principal versus agent considerations. It includes indicators that help to determine whether an entity controls the specified good or service before it is transferred to the customer and to assist in determining when the entity satisfied the performance obligation and as such, whether to recognize a gross or a net amount of consideration in their consolidated statement of operations. We are in the process of determining the effect that the adoption will have on our financial position and results of operations.
ASC Update No. 2016-09
In March 2016, the FASB issued ASC Update No. 2016-09,
Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update is effective for annual reporting periods after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The purpose of the update is to simplify several areas of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We are in the process of determining the effect that the adoption will have on our financial position and results of operations.
ASC Update No. 2016-10
In April 2016, the FASB issued ASC Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The effective date and the transition requirements are consistent with Update 2014-09. The guidance clarifies that entities are not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. Update 2016-10 also addresses how to determine whether promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing. We are in the process of determining the effect that the adoption will have on our financial position and results of operations.
No other new accounting pronouncements, issued or effective, during the period had, or is expected to have, a material impact on our condensed consolidated financial statements.