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. When used in this report, the terms, "we," "us," "our," and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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.
Amounts reported in millions within this report are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in dollars.
Subsequent Events
We evaluate events occurring after the date of our most recent accompanying unaudited condensed consolidated balance sheet for potential recognition or disclosure in our financial statements. Those items requiring recognition in the financial statements have been recorded and disclosed accordingly. Refer to Note I – Stockholders' Equity for more information. Those items requiring disclosure (non-recognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note H – Commitments and Contingencies and Note I – Stockholders' Equity for more information.
Accounting Standards Implemented Since December 31, 2019
ASC Update No. 2016-13
In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments - Credit Losses (FASB ASC Topic 326, Financial Instruments - Credit Losses). We adopted the standard as of January 1, 2020 using the modified retrospective method. Under this method, we applied the new credit loss measurement guidance to financial assets measured at amortized cost on the date of adoption and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2020 are presented in accordance with FASB ASC Topic 326. Prior period amounts have not been restated and are reported in accordance with legacy GAAP requirements in FASB ASC Topic 310, Receivables.
Upon the adoption of FASB ASC Topic 326, credit loss reserves are recorded when financial assets are established if credit losses are expected over the asset’s contractual life. These losses were previously expensed when it became probable that a loss would be incurred. As a result of the adoption of FASB ASC Topic 326, we recorded a net reduction to opening retained earnings on January 1, 2020 related to the establishment of credit loss reserves on Trade accounts receivable and recorded a corresponding increase in the Allowance for credit losses, a contra Trade accounts receivable account. The adoption impact was not material to our unaudited condensed consolidated financial statements.
ASC Update No. 2018-15
In August 2018, the FASB issued ASC Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The purpose of Update No. 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Update No. 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period. We adopted Update No. 2018-15 in the first quarter of 2020. The adoption had an immaterial impact on our financial position and results of operations.
ASC Update No. 2018-18
In November 2018, the FASB issued ASC Update No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. The purpose of Update No. 2018-18 is to clarify the interaction between FASB ASC Topic 808 and FASB ASC Topic 606, Revenue from Contracts with Customers (FASB ASC Topic 606) as FASB ASC Topic 808 did not provide comprehensive recognition or measurement guidance for collaborative arrangements, and the accounting for those arrangements was often based on an analogy to other accounting literature or an accounting policy election. Update No. 2018-18 is effective for annual periods beginning after December 15, 2019. We adopted Update No. 2018-18 in the first quarter of 2020. The adoption had an immaterial impact on our financial position and results of operations.
NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS
Our unaudited condensed consolidated financial statements include the operating results for acquired entities from the respective date of acquisition. We did not complete any material acquisitions or divestitures during the first six months of 2020. We have not presented supplemental pro forma financial information for prior acquisitions given their results are not material to our unaudited condensed consolidated financial statements. We recorded immaterial purchase price adjustments during the measurement period for the preliminary purchase price allocations of acquisitions made in prior periods in the first six months of 2020. Transaction costs for all acquisitions completed in the second quarter and first six months of 2020 and 2019 were immaterial to our unaudited condensed consolidated financial statements and were expensed as incurred.
Q2 2019 YTD Acquisitions
Vertiflex, Inc.
On June 11, 2019, we announced the closing of our acquisition of Vertiflex, Inc. (Vertiflex), a privately-held company which developed and commercialized the Superion™ Indirect Decompression System, a minimally-invasive device used to improve physical function and reduce pain in patients with lumbar spinal stenosis (LSS). The transaction price consisted of an upfront cash payment of $465 million and contingent payments that are based on a percentage of Vertiflex sales growth in the first three years following the acquisition close. At the time of acquisition, we estimated the sales-based contingent payments to be in a range of zero to $100 million; however, the payments are uncapped over the three year earn-out period. Following the closing of the acquisition, we integrated the Vertiflex business into our Neuromodulation division.
Millipede, Inc.
On January 29, 2019, we announced the closing of our acquisition of Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. We were an investor in Millipede since the first quarter of 2018 as part of an investment and acquisition option agreement, whereby we purchased a portion of the outstanding shares of Millipede, along with newly issued shares of the company, for an upfront cash payment of $90 million. In the fourth quarter of 2018, upon the successful completion of a first-in-human clinical study, we exercised our option to acquire the remaining shares of Millipede. We held an interest of approximately 20 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. The transaction price for the remaining stake consisted of an upfront cash payment of $325 million and up to an additional $125 million payment upon achievement of a commercial milestone. Following the closing of the acquisition, we integrated the Millipede business into our Interventional Cardiology division.
Purchase Price Allocation
We accounted for the acquisitions of Vertiflex and Millipede as business combinations, and in accordance with FASB ASC Topic 805, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The final purchase prices were comprised of the following components:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Payments for acquisitions, net of cash acquired
|
$
|
763
|
|
|
Fair value of contingent consideration
|
127
|
|
|
Fair value of prior interests
|
102
|
|
|
|
$
|
992
|
|
The final combined purchase price allocation was comprised of the following components:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Goodwill
|
$
|
577
|
|
|
Amortizable intangible assets
|
220
|
|
|
Indefinite-lived intangible assets
|
240
|
|
|
Other assets acquired
|
24
|
|
|
Liabilities assumed
|
(12)
|
|
|
Net deferred tax liabilities
|
(58)
|
|
|
|
$
|
992
|
|
We allocated a portion of the combined purchase price to the specific intangible asset categories as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Assigned
(in millions)
|
|
Amortization Period
(in years)
|
|
|
|
Risk-Adjusted Discount
Rates used in Purchase Price Allocation
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Technology-related
|
$
|
210
|
|
|
12
|
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
10
|
|
|
12
|
|
|
|
15%
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
In-process research and development (IPR&D)
|
240
|
|
|
N/A
|
|
|
|
19%
|
|
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
Goodwill was primarily established due to synergies expected to be gained from leveraging our existing operations as well as revenue and cash flow projections associated with future technologies and has been allocated to our reportable segments based on the relative expected benefit. The goodwill recorded relating to our 2019 acquisitions is not deductible for tax purposes.
Contingent Consideration
Changes in the fair value of our contingent consideration liability were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance as of December 31, 2019
|
$
|
354
|
|
|
|
|
|
|
|
|
Contingent consideration net expense (benefit)
|
(108)
|
|
|
Contingent consideration payments
|
(38)
|
|
|
Balance as of June 30, 2020
|
$
|
208
|
|
As of June 30, 2020, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our prior acquisitions was $627 million. Refer to Note B – Acquisitions and Strategic Investments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.
The $108 million benefit recorded in the first six months of 2020 related to a reduction in the contingent consideration liability for certain prior acquisitions for which we reduced the probability of achievement of associated revenue and/or regulatory milestones upon which payment is conditioned, or in the case of nVision Medical Corporation (nVision) for milestones that would not be achieved due to management's discontinuation of the R&D program.
The recurring Level 3 fair value measurements of our contingent consideration liability that we expect to be required to settle include the following significant unobservable inputs:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration Liability
|
Fair Value as of June 30, 2020
|
Valuation Technique
|
Unobservable Input
|
Range
|
|
|
Weighted Average (1)
|
|
R&D, Regulatory and Commercialization-based Milestones
|
$97 million
|
Discounted Cash Flow
|
Discount Rate
|
3
|
%
|
-
|
3%
|
3%
|
|
|
|
|
Probability of Payment
|
90
|
%
|
-
|
90%
|
90%
|
|
|
|
|
Projected Year of Payment
|
2027
|
-
|
2027
|
2027
|
|
Revenue-based Payments
|
$111 million
|
Discounted Cash Flow
|
Discount Rate
|
11
|
%
|
-
|
14%
|
13%
|
|
|
|
|
Probability of Payment
|
100
|
%
|
-
|
100%
|
100%
|
|
|
|
|
Projected Year of Payment
|
2020
|
-
|
2024
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
Projected contingent payment amounts related to some of our research and development (R&D), commercialization-based and revenue-based milestones are discounted back to the current period using a discounted cash flow model. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of June 30, 2020.
Strategic Investments
The aggregate carrying amount of our strategic investments was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Equity method investments
|
$
|
262
|
|
|
$
|
264
|
|
|
Measurement alternative investments (1)
|
200
|
|
|
171
|
|
|
Publicly-held equity securities (2)
|
—
|
|
|
1
|
|
|
Notes receivable
|
4
|
|
|
23
|
|
|
|
$
|
467
|
|
|
$
|
458
|
|
(1) Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost minus impairment, if any, adjusted to fair value for any observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
(2) Publicly-held equity securities are measured at fair value with changes in fair value recognized currently in Other, net on our accompanying unaudited condensed consolidated statements of operations.
These investments are classified as Other long-term assets within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.
As of June 30, 2020, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $328 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.
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 are as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
As of December 31, 2019
|
|
|
|
(in millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization/ Write-offs
|
|
Gross Carrying Amount
|
|
Accumulated Amortization/ Write-offs
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
Technology-related
|
$
|
11,856
|
|
|
$
|
(5,954)
|
|
|
$
|
12,020
|
|
|
$
|
(5,706)
|
|
|
Patents
|
519
|
|
|
(409)
|
|
|
525
|
|
|
(408)
|
|
|
Other intangible assets
|
1,753
|
|
|
(1,147)
|
|
|
1,754
|
|
|
(1,081)
|
|
|
|
$
|
14,128
|
|
|
$
|
(7,511)
|
|
|
$
|
14,299
|
|
|
$
|
(7,195)
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
20,001
|
|
|
$
|
(9,900)
|
|
|
$
|
20,076
|
|
|
$
|
(9,900)
|
|
|
IPR&D
|
423
|
|
|
—
|
|
|
662
|
|
|
—
|
|
|
Technology-related
|
120
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
|
$
|
20,543
|
|
|
$
|
(9,900)
|
|
|
$
|
20,858
|
|
|
$
|
(9,900)
|
|
Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we intend to leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets and are amortizing them on a straight-line basis over their assigned estimated useful lives. Our IPR&D represents intangible assets that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. In the first quarter of 2020, following receipt of CE Mark for certain products, we reclassified certain of our IPR&D intangible assets to amortizable technology-related assets and began amortization to reflect their use over their remaining lives.
The following represents our goodwill balance by global reportable segment and our separately presented Specialty Pharmaceuticals operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
MedSurg
|
|
Rhythm and Neuro
|
|
Cardiovascular
|
|
Specialty Pharmaceuticals
|
|
Total
|
|
As of December 31, 2019
|
$
|
2,061
|
|
|
$
|
2,192
|
|
|
$
|
5,676
|
|
|
$
|
247
|
|
|
$
|
10,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign currency fluctuations and other changes in carrying amount
|
(8)
|
|
|
1
|
|
|
(58)
|
|
|
(10)
|
|
|
(75)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
$
|
2,053
|
|
|
$
|
2,193
|
|
|
$
|
5,617
|
|
|
$
|
237
|
|
|
$
|
10,101
|
|
Goodwill and Indefinite-Lived Intangible Asset Impairment Testing
We did not record any goodwill impairment charges in the second quarter and first six months of 2020 or 2019. We test our goodwill balances in the second quarter of each year as of April 1 for impairment, or more frequently if impairment indicators are present or changes in circumstances suggest an impairment may exist. In the second quarter of 2020, we performed our annual goodwill impairment test for all of our reporting units and concluded that the fair value of each reporting unit exceeded its carrying value.
We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We identified the following reporting units in our 2020 annual goodwill impairment test: Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic Health, Neuromodulation and Specialty Pharmaceuticals. We aggregated the Cardiac Rhythm Management and Electrophysiology reporting units, components of the Rhythm Management operating segment, based on the criteria prescribed in FASB ASC Topic 350, Intangibles - Goodwill and Other.
In 2020, we utilized the qualitative assessment approach to test all of our reporting units. We assessed recent events, including the COVID-19 pandemic, as well as changes in macroeconomic factors, industry and market conditions, overall financial performance and other entity-specific factors since the most recently performed quantitative test. After assessing the totality of events, we determined that it is more likely than not that the fair value of each of our reporting units has sufficient excess over its carrying value, and concluded that goodwill was not impaired or at risk of impairment in the second quarter of 2020.
We recorded Intangible asset impairment charges of $34 million in the second quarter of 2020, $37 million in the second quarter of 2019, $233 million in the first six months of 2020 and $105 million in the first six months of 2019. The impairment charges recorded in the second quarter and first six months of 2020 were primarily associated with amortizable developed technology that were initially established following our acquisition of nVision. In general, these charges were recorded as a result of management’s decision to change commercial launch plans or discontinue certain R&D programs based on cost to complete, time to market, overall economic viability, and specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology.
We test our indefinite-lived intangible assets at least annually during the third quarter for impairment and reassess their classification as indefinite-lived assets. In addition, we review our indefinite-lived intangible assets for classification and impairment more frequently if impairment indicators exist. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with FASB ASC Topic 350. If the carrying value exceeds the fair value of the indefinite-lived intangible asset, we write the carrying value down to the fair value. There were no indicators of impairment in the second quarter of 2020 that necessitated an interim impairment test.
We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If we determine it is more likely than not that the asset is impaired based on our qualitative assessment of impairment indicators, we test the intangible asset for recoverability. If the carrying value of the intangible asset or asset group exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset or asset group, we will write the carrying value down to fair value in the period impairment is identified.
Refer to Critical Accounting Policies and Estimates within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our most recent Annual Report on Form 10-K for further discussion of our annual goodwill and intangible asset impairment testing.
NOTE D – HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We address market risk from changes in foreign currency exchange rates and interest rates through risk management programs which include the use of derivative and nonderivative financial instruments. We operate these programs pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings to material risk, as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item.
We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
Currency Hedging Instruments
Risk Management Strategy
Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities; forecasted intercompany and third-party transactions; net investments in certain subsidiaries; and, during 2019 prior to our acquisition of BTG plc
(BTG), the purchase price of BTG, which was denominated in a currency other than the U.S. dollar. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative and nonderivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.
The success of our currency risk management program depends, in part, on forecast transactions denominated primarily in euro, Japanese yen, Chinese renminbi and British pound sterling. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast, particularly resulting from the impact of COVID-19 on transaction volumes. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Hedge Designations and Relationships
Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging (FASB ASC Topic 815), and are intended to protect the U.S. dollar value of forecasted transactions. The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in the Net change in derivative financial instruments component of Other comprehensive income (loss), net of tax (OCI) on our unaudited condensed consolidated statements of comprehensive income (loss) until the underlying third-party transaction occurs. When the underlying third-party transaction occurs, we recognize the gain or loss in earnings within the Cost of products sold caption of our unaudited condensed consolidated statements of operations. In the event the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the gains or losses within Accumulated other comprehensive income (loss), net of tax (AOCI) to earnings at that time.
We also designate certain forward currency contracts as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the euro, Swiss franc, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. We elected to use the spot method to assess effectiveness for our derivatives that are designated as net investment hedges. Under the spot method, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. We have elected to exclude the spot-forward difference from the assessment of hedge effectiveness and are amortizing this amount separately, as calculated at the date of designation, on a straight-line basis over the term of the currency forward contracts. Amortization of the spot-forward difference is then reclassified from AOCI to current period earnings as a component of Interest expense on our unaudited condensed consolidated statements of operations.
In November 2019, we completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027 (December 2027 Notes). The euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our euro functional entities. We de-designated a portion of the net investment hedge in the second quarter of 2020. The notional value of our outstanding net investment hedges was $1.946 billion as of June 30, 2020 and $1.950 billion as of December 31, 2019, which includes our derivative and nonderivative instruments designated as net investment hedges.
We also use forward currency contracts that are not part of designated hedging relationships under FASB ASC Topic 815 as a part of our strategy to manage our exposure to currency exchange rate risk related to monetary assets and liabilities and related forecast transactions. These non-designated currency forward contracts have an original time to maturity consistent with the hedged currency transaction exposures, generally less than one year, and are marked-to-market with changes in fair value recorded to earnings within the Other, net caption of our unaudited condensed consolidated statements of operations.
Interest Rate Hedging Instruments
Risk Management Strategy
Our interest rate risk relates primarily to U.S. dollar borrowings partially offset by U.S. dollar cash investments. We use interest rate derivative instruments to mitigate the risk to our earnings and cash flows associated with exposure to changes in interest rates. Under these agreements, we and the counterparty, at specified intervals, exchange the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. We designate these derivative instruments either as fair value or cash flow hedges in accordance with FASB ASC Topic 815.
Hedge Designations and Relationships
We had no interest rate derivative instruments designated as cash flow hedges outstanding as of June 30, 2020 and December 31, 2019. Prior to 2020, we terminated interest rate derivative instruments that were designated as cash flow hedges and are continuing to recognize the amortization of the gains or losses originally recorded within AOCI to earnings as a component of Interest expense over the same period that the hedged item affects earnings, so long as the hedge relationship remains effective. If we determine the hedge relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the amount of gains or losses from AOCI to earnings at that time. In the event that we designate outstanding interest rate derivative instruments as cash flow hedges, we record the changes in the fair value of the derivatives within OCI until the underlying hedged transaction occurs. The balance of the deferred amounts on our terminated cash flow hedges within AOCI was a $32 million loss as of June 30, 2020 and a $34 million loss as of December 31, 2019. We recognized immaterial gains and losses in Interest expense relating to the amortization of our terminated cash flow hedges in the current and prior periods.
We had no interest rate derivative instruments designated as fair value hedges outstanding as of June 30, 2020 and December 31, 2019. Prior to 2018, we terminated interest rate derivative instruments that were designated as fair value hedges and are continuing to recognize the amortization of the gains or losses originally recorded within the Long-term debt caption on our unaudited condensed consolidated balance sheets into earnings as a component of Interest expense over the same period that the discount or premium associated with the hedged items affects earnings. In the event that we designate outstanding interest rate derivative instruments as fair value hedges, we record the changes in the fair values of interest rate derivatives designated as fair value hedges and of the underlying hedged debt instruments in Interest expense, which generally offset. The balance of the deferred gains on our terminated fair value hedges within Long-term debt was immaterial as of June 30, 2020 and December 31, 2019. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.
The following table presents the contractual amounts of our hedging instruments outstanding:
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(in millions)
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FASB ASC Topic 815 Designation
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As of
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June 30, 2020
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December 31, 2019
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Forward currency contracts
|
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Cash flow hedge
|
|
$
|
3,589
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|
|
$
|
3,891
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|
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Forward currency contracts
|
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Net investment hedge
|
|
967
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|
953
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Foreign currency-denominated debt (1)
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Net investment hedge
|
|
979
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|
997
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Forward currency contracts
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|
Non-designated
|
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3,885
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4,377
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|
|
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|
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Total Notional Outstanding
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|
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$
|
9,420
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|
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$
|
10,218
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(1) The €900 million (approximately $1.000 billion) debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our euro functional subsidiaries. We de-designated a portion of the net investment hedge in the second quarter of 2020.
The remaining time to maturity as of June 30, 2020 is within 60 months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts. The euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.
The following presents the effect of our derivative and nonderivative instruments designated as cash flow and net investment hedges under FASB ASC Topic 815 on our accompanying unaudited condensed consolidated statements of operations. Refer to Note M – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative instruments presented within the unaudited condensed consolidated statements of comprehensive income (loss).
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Effect of Hedging Relationships on Accumulated Other Comprehensive Income
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Amount Recognized in OCI on Hedges
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Unaudited Condensed Consolidated Statements of Operations (1)
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Amount Reclassified from AOCI into Earnings
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(in millions)
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Pre-Tax Gain (Loss)
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Tax Benefit (Expense)
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Gain (Loss) Net of Tax
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Location of Amount Reclassified and Total Amount of Line Item
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Pre-Tax (Gain) Loss
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Tax (Benefit) Expense
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(Gain) Loss Net of Tax
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Three Months Ended June 30, 2020
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|
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Forward currency contracts
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|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
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(8)
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$
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2
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$
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(6)
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Cost of products sold
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$
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791
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|
|
$
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(28)
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$
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6
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$
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(21)
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Net investment hedges (2)
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(5)
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1
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(4)
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Interest expense
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91
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(6)
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1
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(5)
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Foreign currency-denominated debt
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|
|
|
|
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Net investment hedges (3)
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(22)
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5
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(17)
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Other, net
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18
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|
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—
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—
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—
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Interest rate derivative contracts
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|
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|
|
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|
|
|
|
|
|
Cash flow hedges
|
—
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|
—
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|
—
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|
|
Interest expense
|
91
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|
|
1
|
|
—
|
|
1
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|
|
Three Months Ended June 30, 2019
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|
|
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|
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|
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|
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Forward currency contracts
|
|
|
|
|
|
|
|
|
|
|
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Cash flow hedges
|
$
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2
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$
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(1)
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$
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2
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Cost of products sold
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$
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758
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$
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(16)
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$
|
4
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$
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(12)
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|
|
Net investment hedges (2)
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(5)
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|
1
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|
(4)
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|
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Interest expense
|
89
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|
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(10)
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2
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(8)
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Interest rate derivative contracts
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|
|
|
|
|
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|
|
|
|
|
Cash flow hedges
|
—
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—
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—
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Interest Expense
|
89
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|
1
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|
—
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1
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Six Months Ended June 30, 2020
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Forward currency contracts
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|
|
|
|
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Cash flow hedges
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$
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111
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$
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(25)
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$
|
86
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|
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Cost of products sold
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$
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1,596
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$
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(51)
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$
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11
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$
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(39)
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Net investment hedges (2)
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17
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(25)
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(8)
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|
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Interest expense
|
179
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|
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(12)
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3
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(9)
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Foreign currency-denominated debt
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|
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|
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Net investment hedges (3)
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2
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|
3
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5
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Other, net
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54
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—
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—
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—
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Interest rate derivative contracts
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|
|
Cash flow hedges
|
—
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—
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—
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|
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Interest expense
|
179
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|
|
3
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(1)
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2
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Six Months Ended June 30, 2019
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Forward currency contracts
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|
|
|
|
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|
|
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Cash flow hedges
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$
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75
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$
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(17)
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$
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58
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Cost of products sold
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$
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1,488
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$
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(25)
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$
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6
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$
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(19)
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Net investment hedges (2)
|
28
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(6)
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22
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|
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Interest expense
|
198
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|
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(21)
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5
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(16)
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Interest rate derivative contracts
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Cash flow hedges
|
—
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|
—
|
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—
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|
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Interest expense
|
198
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|
|
2
|
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—
|
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1
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(1) In all periods presented in the table above, the pre-tax (gain) loss amounts reclassified from AOCI to earnings represent the effect of the hedging relationships on earnings. All other amounts included in earnings related to hedging relationships were immaterial.
(2) For our outstanding forward currency contracts designated as net investment hedges, the net gain or loss reclassified from AOCI to earnings as a reduction of Interest expense represents the straight-line amortization of the excluded component as calculated at the date of designation. This initial value of the excluded component has been excluded from the assessment of effectiveness in accordance with FASB ASC Topic 815. In the current period, we did not recognize any gains or losses on the components included in the assessment of hedge effectiveness in earnings.
(3) For our outstanding euro-denominated debt principal designated as a net investment hedge, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. No amounts were reclassified from AOCI to current period earnings.
As of June 30, 2020, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as cash flow and net investment hedges under FASB ASC Topic 815 that may be reclassified from AOCI to earnings within the next twelve months are presented below (in millions):
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Designated Hedging Instrument
|
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FASB ASC Topic 815 Designation
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Location on Unaudited Condensed Consolidated Statements of Operations
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Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
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Forward currency contracts
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Cash flow hedge
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Cost of products sold
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$
|
107
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Forward currency contracts
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Net investment hedge
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Interest expense
|
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21
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Interest rate derivative contracts
|
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Cash flow hedge
|
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Interest expense
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(5)
|
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Net gains and losses on currency hedge contracts not designated as hedging instruments offset by net gains and losses from currency transaction exposures are presented below:
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Location on Unaudited Condensed Consolidated Statements of Operations
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Three Months Ended June 30,
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Six Months Ended June 30,
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(in millions)
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2020
|
|
2019
|
|
2020
|
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2019
|
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Net gain (loss) on currency hedge contracts
|
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Other, net
|
|
$
|
6
|
|
|
$
|
(152)
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|
|
$
|
(9)
|
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|
$
|
(130)
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|
|
Net gain (loss) on currency transaction exposures
|
|
Other, net
|
|
(11)
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|
(4)
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|
|
(3)
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2
|
|
|
Net currency exchange gain (loss)
|
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|
|
$
|
(5)
|
|
|
$
|
(156)
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|
|
$
|
(12)
|
|
|
$
|
(127)
|
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As of June 30, 2019, we had outstanding certain non-designated forward currency contracts that we entered into for the purpose of managing our exposure to currency exchange rate risk related to the British pound sterling-denominated purchase price of BTG. In the third quarter of 2019, we settled all outstanding contracts. We recognized a $151 million loss in the second quarter of 2019 and a $116 million loss in the first six months of 2019 in Other, net due to changes in fair value of the contracts.
Fair Value Measurements
FASB ASC Topic 815 requires all derivative and nonderivative 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 and nonderivative instruments using the framework prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures (FASB ASC Topic 820) and considering the estimated amount we would receive or pay to transfer these instruments at the reporting date with respect to current currency exchange rates, interest rates, the creditworthiness of the counterparty for unrealized gain positions and our own creditworthiness for unrealized loss positions. In certain instances, we may utilize financial models to measure fair value of our derivative and nonderivative instruments. 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. The following are the balances of our derivative and nonderivative assets and liabilities:
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|
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Location on Unaudited Condensed Consolidated Balance Sheets (1)
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As of
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(in millions)
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|
|
June 30, 2020
|
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December 31, 2019
|
|
Derivative and Nonderivative Assets:
|
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|
|
|
|
|
|
Designated Hedging Instruments
|
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|
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|
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Forward currency contracts
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Other current assets
|
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$
|
124
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$
|
72
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|
|
Forward currency contracts
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|
Other long-term assets
|
|
241
|
|
|
216
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|
|
|
|
|
|
364
|
|
|
288
|
|
|
Non-Designated Hedging Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current assets
|
|
37
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total Derivative and Nonderivative Assets
|
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|
|
$
|
402
|
|
|
$
|
321
|
|
|
|
|
|
|
|
|
|
|
Derivative and Nonderivative Liabilities:
|
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|
|
|
|
|
|
Designated Hedging Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
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Other current liabilities
|
|
$
|
2
|
|
|
$
|
3
|
|
|
Forward currency contracts
|
|
Other long-term liabilities
|
|
6
|
|
|
8
|
|
|
Foreign currency-denominated debt
|
|
Other long-term liabilities
|
|
997
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005
|
|
|
1,009
|
|
|
Non-Designated Hedging Instruments
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
Other current liabilities
|
|
31
|
|
|
29
|
|
|
Total Derivative and Nonderivative Liabilities
|
|
|
|
$
|
1,036
|
|
|
$
|
1,037
|
|
(1) We classify derivative and nonderivative assets and liabilities as current when the settlement date of the contract is one year or less.
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 quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. FASB ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The category of a financial asset or a financial liability 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:
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|
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|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
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(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Money market and government funds
|
$
|
1,473
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,473
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Publicly-held securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Hedging instruments
|
—
|
|
|
402
|
|
|
—
|
|
|
402
|
|
|
—
|
|
|
321
|
|
|
—
|
|
|
321
|
|
|
Licensing arrangements
|
—
|
|
|
—
|
|
|
440
|
|
|
440
|
|
|
—
|
|
|
—
|
|
|
518
|
|
|
518
|
|
|
|
$
|
1,473
|
|
|
$
|
402
|
|
|
$
|
440
|
|
|
$
|
2,316
|
|
|
$
|
51
|
|
|
$
|
321
|
|
|
$
|
518
|
|
|
$
|
890
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments
|
$
|
—
|
|
|
$
|
1,036
|
|
|
$
|
—
|
|
|
$
|
1,036
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
|
Contingent consideration liability
|
—
|
|
|
—
|
|
|
208
|
|
|
208
|
|
|
—
|
|
|
—
|
|
|
354
|
|
|
354
|
|
|
Licensing arrangements
|
—
|
|
|
—
|
|
|
488
|
|
|
488
|
|
|
—
|
|
|
—
|
|
|
571
|
|
|
571
|
|
|
|
$
|
—
|
|
|
$
|
1,036
|
|
|
$
|
696
|
|
|
$
|
1,732
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
|
$
|
925
|
|
|
$
|
1,963
|
|
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 $1.473 billion invested in money market and government funds as of June 30, 2020, we had $251 million in interest-bearing and non-interest-bearing bank accounts. Furthermore, in addition to $50 million invested in money market and government funds as of December 31, 2019, we had $165 million in interest-bearing and non-interest-bearing bank accounts.
Our recurring fair value measurements using Level 3 inputs relate to our contingent consideration liability. Refer to Note B – Acquisitions and Strategic Investments for a discussion of the changes in the fair value of our contingent consideration liability.
In addition, our recurring fair value measurements using Level 3 inputs relate to our licensing arrangements, principally the contractual right to receive future royalty payments related to Zytiga™. This contractual right was acquired with BTG on August 19, 2019. Prior to our acquisition of BTG, BTG agreed to pay 50 percent of the Zytiga™ royalty stream, net of certain offsets, to the inventors associated with the intellectual property. In the fourth quarter of 2019, we sold the remaining 50 percent we acquired through our acquisition of BTG of the future Zytiga™ royalty stream for an upfront cash payment of $256 million to the Ontario Municipal Employees Retirement System (OMERS). In accordance with FASB ASC Topic 860, Transfers and Servicing, we are accounting for the transfer of the royalty stream to OMERS as a secured borrowing, continue to recognize the financial asset and associated liability in our unaudited condensed consolidated balance sheets and do not expect to receive any future cash benefit from Zytiga™ royalties.
We have elected the fair value option to account for our licensing arrangements' financial asset and financial liability in accordance with FASB ASC Topic 825, Financial Instruments. As of June 30, 2020, we have recorded the fair values using a discounted cash flow approach considering the probability-weighted expected future cash flows to be generated by the royalty stream. The fair value of the financial liability also considers the related contractual provisions that govern our payment obligations.
The recurring Level 3 fair value measurements of our licensing arrangements recognized in our unaudited condensed consolidated balance sheets as of June 30, 2020 include the following significant unobservable inputs:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing Arrangements
|
Fair Value as of June 30, 2020
|
Valuation Technique
|
Unobservable Input
|
Range
|
|
|
Weighted Average (1)
|
|
Financial Asset
|
$440 million
|
Discounted Cash Flow
|
Discount Rate
|
11
|
%
|
-
|
15%
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Year of Payment
|
2020
|
-
|
2028
|
2024
|
|
Financial Liability
|
$488 million
|
Discounted Cash Flow
|
Discount Rate
|
12
|
%
|
-
|
15%
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Year of Payment
|
2020
|
-
|
2027
|
2024
|
(1) Unobservable inputs relate to a single financial asset and liability. As such, unobservable inputs were not weighted by the relative fair value of the instruments. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
Significant increases or decreases in projected cash flows of the royalty stream and the related contractual provisions that govern our payment obligations, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement of the licensing arrangements' financial asset and liability as of June 30, 2020. However, increases or decreases in the financial asset would be offset by increases or decreases in the financial liability, other than for timing of receipt and remittance; as such our earnings are not subject to material gains or losses from the licensing arrangement.
Changes in the fair value of our licensing arrangements' financial asset were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance as of December 31, 2019
|
$
|
518
|
|
|
|
|
|
Proceeds from royalty rights
|
(91)
|
|
|
|
|
|
Fair value adjustment (expense) benefit
|
13
|
|
|
Balance as of June 30, 2020
|
$
|
440
|
|
Changes in the fair value of our licensing arrangements' financial liability were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance as of December 31, 2019
|
$
|
571
|
|
|
|
|
|
Payments for royalty rights
|
(99)
|
|
|
|
|
|
|
|
|
Fair value adjustment expense (benefit)
|
17
|
|
|
Balance as of June 30, 2020
|
$
|
488
|
|
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods after initial recognition. The fair value of a measurement alternative investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Refer to Note B – Acquisitions and Strategic Investments for a discussion of our strategic investments, and Note C – Goodwill and Other Intangible Assets for a discussion of the fair values of our intangible assets including goodwill.
The fair value of our outstanding debt obligations was $10.947 billion as of June 30, 2020, including $998 million relating to the euro-denominated December 2027 Notes, and $11.020 billion as of December 31, 2019, including $1.004 billion relating to the euro-denominated December 2027 Notes. We determined fair value by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy, and face value for commercial paper, term loans and credit facility borrowings outstanding. Refer to Note E – Contractual Obligations and Commitments for a discussion of our debt obligations.
NOTE E – CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Borrowings and Credit Arrangements
We had total debt of $9.532 billion as of June 30, 2020 and $10.008 billion as of December 31, 2019. The debt maturity schedule for our long-term debt obligations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rates)
|
|
Issuance Date
|
|
Maturity Date
|
|
As of
|
|
|
|
Coupon Rate (1)
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2022 Notes
|
|
May 2015
|
|
May 2022
|
|
500
|
|
|
500
|
|
|
3.375%
|
|
August 2022 Term Loan
|
|
August 2019
|
|
August 2022
|
|
—
|
|
|
1,000
|
|
|
|
|
October 2023 Notes
|
|
August 2013
|
|
October 2023
|
|
244
|
|
|
244
|
|
|
4.125%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2024 Notes
|
|
February 2019
|
|
March 2024
|
|
850
|
|
|
850
|
|
|
3.450%
|
|
May 2025 Notes
|
|
May 2015
|
|
May 2025
|
|
523
|
|
|
523
|
|
|
3.850%
|
|
June 2025 Notes
|
|
May 2020
|
|
June 2025
|
|
500
|
|
|
—
|
|
|
1.900%
|
|
March 2026 Notes
|
|
February 2019
|
|
March 2026
|
|
850
|
|
|
850
|
|
|
3.750%
|
|
December 2027 Notes
|
|
November 2019
|
|
December 2027
|
|
1,009
|
|
|
1,011
|
|
|
0.625%
|
|
March 2028 Notes
|
|
February 2018
|
|
March 2028
|
|
434
|
|
|
434
|
|
|
4.000%
|
|
March 2029 Notes
|
|
February 2019
|
|
March 2029
|
|
850
|
|
|
850
|
|
|
4.000%
|
|
June 2030 Notes
|
|
May 2020
|
|
June 2030
|
|
1,200
|
|
|
—
|
|
|
2.650%
|
|
November 2035 Notes (2)
|
|
November 2005
|
|
November 2035
|
|
350
|
|
|
350
|
|
|
7.000%
|
|
March 2039 Notes
|
|
February 2019
|
|
March 2039
|
|
750
|
|
|
750
|
|
|
4.550%
|
|
January 2040 Notes
|
|
December 2009
|
|
January 2040
|
|
300
|
|
|
300
|
|
|
7.375%
|
|
March 2049 Notes
|
|
February 2019
|
|
March 2049
|
|
1,000
|
|
|
1,000
|
|
|
4.700%
|
|
Unamortized Debt Issuance Discount
and Deferred Financing Costs
|
|
|
|
2020 - 2049
|
|
(94)
|
|
|
(83)
|
|
|
|
|
Unamortized Gain on Fair Value Hedges
|
|
|
|
2020 - 2023
|
|
6
|
|
|
7
|
|
|
|
|
Finance Lease Obligation
|
|
|
|
Various
|
|
6
|
|
|
6
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
$
|
9,278
|
|
|
$
|
8,592
|
|
|
|
Note: The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges.
(1) Coupon rates are semi-annual, except for the December 2027 Notes, which bears an annual coupon, and the August 2022 Term Loan, which is a variable-rate instrument based on LIBOR.
(2) Corporate credit rating improvements may result in a decrease in the adjusted interest rate on our November 2035 Notes to the extent that our lowest credit rating is above BBB- or Baa3. The interest rates on our November 2035 Notes will be permanently reinstated to the issuance rate if the lowest credit ratings assigned to these senior notes is either A- or A3 or higher.
Revolving Credit Facility
We maintain a $2.750 billion revolving credit facility (Revolving Credit Facility) with a global syndicate of commercial banks that matures on December 19, 2023 with one-year extension options, subject to certain conditions. On May 28, 2020, we entered into an amendment of the credit agreement to permit payment of regularly scheduled quarterly cash dividends and other limited cash payments on our issued 5.50% Mandatory Convertible Preferred Stock, Series A (MCPS) and other capital stock issued by us, which is or becomes mandatorily convertible into or exchangeable for our common stock. This facility provides backing for our commercial paper program, and outstanding commercial paper directly reduces borrowing capacity under the Revolving Credit Facility. The credit agreement requires that we comply with certain covenants, including a financial covenant described within Financial Covenant below. In the first quarter of 2020, we refinanced $1.360 billion of commercial paper using proceeds from the Revolving Credit Facility. In April 2020, we entered into the April 2021 Term Loan, described below, and used the proceeds to repay a portion of the amounts outstanding under the Revolving Credit Facility. In May 2020, we completed our senior notes offering described below and used a portion of the proceeds to repay $450 million outstanding under the Revolving Credit Facility. There were no amounts outstanding under the Revolving Credit Facility as of June 30, 2020 or December 31, 2019.
Term Loans
On April 21, 2020, in a proactive step to offset the potential impact of the COVID-19 pandemic on our short-term liquidity, we entered into a $1.250 billion term loan credit agreement scheduled to mature on April 20, 2021 (April 2021 Term Loan). We used proceeds from the April 2021 Term Loan to repay a portion of the amounts outstanding under the Revolving Credit Facility and the remaining amount under the December 2020 Term Loan described below. In May 2020, as described in further detail below, we used a portion of the proceeds from the May 2020 senior notes offering to prepay $500 million of amounts outstanding under April 2021 Term Loan, and a portion of the combined net proceeds from our MCPS and common stock offerings to repay in full the remaining $750 million outstanding under the April 2021 Term Loan and to pay related fees, expenses and premiums, after which it was terminated.
On February 27, 2020, we entered into a $1.000 billion term loan credit agreement scheduled to mature on February 25, 2021 (February 2021 Term Loan). We used the proceeds from the February 2021 Term Loan to repay the remaining amounts outstanding of the Three-Year Delayed Draw Term Loan, described below. On May 28, 2020, we entered into an amendment of the credit agreement pursuant to which the limitation on restricted payments now permits payment of regularly scheduled quarterly cash dividends and other limited cash payments on our issued MCPS and other capital stock issued by us, which is or becomes mandatorily convertible into or exchangeable for our common stock. The February 2021 Term Loan bears interest at an annual rate of LIBOR plus a margin of 0.85%. The credit agreement is subject to a financial covenant described below under Financial Covenant, and also contains customary events of default, which may result in the acceleration of any outstanding commitments. We used a portion of the proceeds from our May 2020 senior notes offering, described below, to prepay $750 million of amounts outstanding under the February 2021 Term Loan. As of June 30, 2020, we had $250 million outstanding under the February 2021 Term Loan, which is presented within Current debt obligations on our unaudited condensed consolidated balance sheets.
On December 5, 2019, we entered into a $700 million term loan credit agreement, which was scheduled to mature on December 3, 2020 (December 2020 Term Loan). As of December 31, 2019, we had $700 million outstanding under the December 2020 Term Loan, and we used the proceeds to repay a portion of the Two-Year Delayed Draw Term Loan, described below. In January 2020, we repaid $300 million of the outstanding balance of the December 2020 Term Loan with proceeds from our commercial paper program. In April 2020, we used the proceeds from the April 2021 Term Loan to repay the remaining amounts outstanding under the December 2020 Term Loan and terminated the facility.
On December 19, 2018, we entered into a $2.000 billion senior unsecured delayed-draw term loan facility consisting of a $1.000 billion two-year delayed draw term loan credit facility maturing in two years from the date of the closing of the acquisition of BTG (Two-Year Delayed Draw Term Loan) and a $1.000 billion three-year delayed draw term loan credit facility maturing in three years from the date of the closing of the acquisition of BTG (Three-Year Delayed Draw Term Loan). On August 19, 2019, for the purpose of funding the acquisition of BTG, we borrowed $1.000 billion under the Two-Year Delayed Draw Term Loan and $1.000 billion under the Three-Year Delayed Draw Term Loan. In 2019, we repaid all amounts outstanding on the Two-Year Delayed Draw Term Loan with proceeds from the sale of the Zytiga-related royalty interests, December 2020 Term Loan and commercial paper and terminated the facility. As of December 31, 2019, we had $1.000 billion outstanding under the Three-Year Delayed Draw Term Loan (also referred to as the "August 2022 Term Loan" in the debt maturity schedule above). In the first quarter of 2020, we repaid all amounts outstanding on the Three-Year Delayed Draw Term Loan with proceeds from the February 2021 Term Loan and terminated the facility. As of June 30, 2020, we had no amounts outstanding under the Two and Three-Year Delayed Draw Term Loans and the facilities were terminated.
Financial Covenant
As of and through June 30, 2020, we were in compliance with the financial covenant required by all existing credit arrangements described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenant Requirement
|
|
Actual
|
|
|
|
as of June 30, 2020
|
|
as of June 30, 2020
|
|
Maximum permitted leverage ratio (1)
|
|
4.75 times
|
|
3.64 times
|
|
|
|
|
|
|
(1)Ratio of total debt to deemed consolidated EBITDA, as defined by the credit agreements, as amended.
On April 21, 2020, we entered into an agreement with our banking syndicates to amend the financial covenant requirement for all of our outstanding credit arrangements as follows: (i) establish a deemed Consolidated EBITDA of $671 million for the second, third and fourth quarters of 2020, reflecting average quarterly Consolidated EBITDA, as defined in the credit agreements, for 2018 and 2019; and (ii) maintain the maximum permitted leverage ratio of 4.75 times through the remainder of
2020, with a step-down for each succeeding fiscal quarter end to 4.50 times, 4.25 times, 4.00 times and ultimately 3.75 times for the fourth quarter of 2021 and through the remaining term of the facility. In addition, pursuant to the April 21, 2020 Revolving Credit Facility and February 2021 Term Loan amendments, the definition of “Material Adverse Effect” has been amended to remove the direct and indirect effects of the COVID-19 pandemic from what constitutes a material adverse effect.
The financial covenant requirement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreements, through maturity, of any non-cash charges and up to $500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of June 30, 2020, we had $217 million of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the agreements, are excluded from the calculation of consolidated EBITDA, as defined by the agreements, provided that the sum of any excluded net cash litigation payments do not exceed $2.624 billion in the aggregate. As of June 30, 2020, we had $955 million of the litigation exclusion remaining.
Any inability to maintain compliance with this amended covenant could require us to seek to further renegotiate the terms of our credit facilities or seek waivers from compliance with this covenant, both of which could result in additional borrowing costs. Further, there can be no assurance that our lenders would agree to such new terms or grant such waivers on terms acceptable to us. In this case, all credit facility commitments would terminate, and any amounts borrowed under the facility would become immediately due and payable. Furthermore, any termination of our credit facility may negatively impact the credit ratings assigned to our commercial paper program which may impact our ability to refinance any then outstanding commercial paper as it becomes due and payable.
Commercial Paper
Our commercial paper program is backed by the Revolving Credit Facility, as discussed above. Outstanding commercial paper directly reduces borrowing capacity under the Revolving Credit Facility. In the first quarter of 2020, we refinanced $1.360 billion of commercial paper using proceeds from the Revolving Credit Facility and did not have any commercial paper outstanding as of June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions, except maturity and yield)
|
June 30, 2020
|
|
December 31, 2019
|
|
Commercial paper outstanding (at par)
|
$
|
—
|
|
|
$
|
711
|
|
|
Maximum borrowing capacity
|
2,750
|
|
|
2,750
|
|
|
Borrowing capacity available
|
2,750
|
|
|
2,039
|
|
|
Weighted average maturity
|
0 days
|
|
55 days
|
|
Weighted average yield
|
—
|
%
|
|
2.21
|
%
|
Senior Notes
We had senior notes outstanding of $9.359 billion as of June 30, 2020 and $7.661 billion as of December 31, 2019. In May 2020, we completed an offering of $1.700 billion in aggregate principal amount of senior notes comprised of $500 million of 1.900% senior notes due June 2025 and $1.200 billion of 2.650% senior notes due June 2030. We used the net proceeds from the offering to refinance $450 million of amounts outstanding under the Revolving Credit Facility, prepay $750 million of amounts outstanding under the $1.000 billion February 2021 Term Loan, prepay $500 million of amounts outstanding under the $1.250 billion April 2021 Term Loan and pay related fees, expenses and premiums.
In November 2019, we completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027 (December 2027 Notes). The euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our euro functional entities. Refer to Note D – Hedging Activities and Fair Value Measurements for additional information. We used a portion of the net proceeds from our November 2019 senior notes offering to repay certain outstanding principal amounts of our senior notes including $206 million of our $450 million 4.125% senior notes due 2023, $566 million of our $1.000 billion 4.000% senior notes due 2028 and $227 million of our $750 million 3.850% senior notes due 2025 and pay accrued and unpaid interest, premiums, fees and expenses in connection with the transaction.
In February 2019, we completed an offering of $4.300 billion in aggregate principal amount of senior notes comprised of $850 million of 3.450% senior notes due March 2024, $850 million of 3.750% senior notes due March 2026, $850 million of 4.000% senior notes due March 2029, $750 million of 4.550% senior notes due March 2039 and $1.000 billion of 4.700% senior notes due March 2049. We used a portion of the net proceeds from the offering to repay the $850 million plus accrued interest and premium of our 6.000% senior notes due in January 2020, the $600 million plus accrued interest and premium of our 2.850% senior notes due in May 2020 and the $1.000 billion plus accrued interest of our August 2019 Term Loan. In the third quarter of 2019, the remaining proceeds were used to finance a portion of the acquisition of BTG.
Our senior notes were issued in public offerings, are redeemable prior to maturity and are not subject to sinking fund requirements. Our senior notes are unsecured, unsubordinated obligations and rank on parity with each other. These notes are effectively junior to liabilities of our subsidiaries (see Other Arrangements below).
Other Arrangements
We have accounts receivable factoring programs in certain European countries and with commercial banks in Japan which include promissory notes discounting programs. We account for our factoring programs as sales under FASB ASC Topic 860, Transfers and Servicing. We have no retained interest in the transferred receivables, other than collection and administration, and once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. Amounts de-recognized for accounts and notes receivable, which are excluded from Trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets, are aggregated by contract denominated currency below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factoring Arrangements
|
As of June 30, 2020
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Amount
De-recognized
|
|
Average
Interest Rate
|
|
Amount
De-recognized
|
|
Average
Interest Rate
|
|
Euro denominated
|
$
|
130
|
|
|
2.1
|
%
|
|
$
|
171
|
|
|
1.4
|
%
|
|
Yen denominated
|
188
|
|
|
0.6
|
%
|
|
226
|
|
|
0.6
|
%
|
Other Contractual Obligations and Commitments
We had outstanding letters of credit of $111 million as of June 30, 2020 and $105 million as of December 31, 2019, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of June 30, 2020 and December 31, 2019, none of the beneficiaries had drawn upon the letters of credit or guarantees, accordingly, we have not recognized a related liability for our outstanding letters of credit in our unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.
Refer to Note E – Contractual Obligations and Commitments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information on our borrowings and credit agreements.
NOTE F – SUPPLEMENTAL BALANCE SHEET INFORMATION
Components of selected captions in our accompanying unaudited condensed consolidated balance sheets are as follows:
Cash, cash equivalents, restricted cash and restricted cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Cash and cash equivalents
|
$
|
1,724
|
|
|
$
|
217
|
|
|
Restricted cash and restricted cash equivalents in Other current assets
|
245
|
|
|
346
|
|
|
Restricted cash equivalents in Other long-term assets
|
46
|
|
|
43
|
|
|
|
$
|
2,016
|
|
|
$
|
607
|
|
Trade accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Trade accounts receivable
|
$
|
1,551
|
|
|
$
|
1,902
|
|
|
Allowance for credit losses
|
(94)
|
|
|
(74)
|
|
|
|
$
|
1,457
|
|
|
$
|
1,828
|
|
The following is a rollforward of our Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Beginning balance
|
$
|
87
|
|
|
$
|
72
|
|
|
$
|
74
|
|
|
$
|
68
|
|
|
Cumulative effect adjustment for adoption of ASU 2016-13
|
n/a
|
|
n/a
|
|
10
|
|
|
n/a
|
|
Credit loss expense
|
14
|
|
|
4
|
|
|
22
|
|
|
11
|
|
|
Write-offs
|
(7)
|
|
|
(4)
|
|
|
(13)
|
|
|
(6)
|
|
|
Ending balance
|
$
|
94
|
|
|
$
|
73
|
|
|
$
|
94
|
|
|
$
|
73
|
|
Note: Effective January 1, 2020, we adopted FASB ASC Topic 326 using the modified retrospective method, which requires that we recognize credit loss reserves when financial assets are established if credit losses are expected over the asset’s contractual life. Prior period amounts have not been restated and are presented in accordance with FASB ASC Topic 310. Please refer to Note A – Basis of Presentation for additional information.
In accordance with FASB ASC Topic 326, we record credit loss reserves to Allowance for credit losses when we establish Trade accounts receivable if credit losses are expected over the asset's contractual life. We base our estimates of credit loss reserves on historical experience and adjust, as necessary, to reflect current conditions using reasonable and supportable forecasts not already reflected in the historical loss information. We utilize an accounts receivable aging approach to determine the reserve to record at accounts receivable commencement for certain customers, applying country or region-specific factors. In performing the assessment of outstanding accounts receivable, regardless of country or region, we may consider significant factors relevant to collectability including those specific to a customer such as bankruptcy, lengthy average payment cycles and type of account.
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Finished goods
|
$
|
867
|
|
|
$
|
971
|
|
|
Work-in-process
|
166
|
|
|
192
|
|
|
Raw materials
|
482
|
|
|
416
|
|
|
|
$
|
1,516
|
|
|
$
|
1,579
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Restricted cash and restricted cash equivalents
|
$
|
245
|
|
|
$
|
346
|
|
|
Derivative assets
|
161
|
|
|
105
|
|
|
Licensing arrangements
|
167
|
|
|
186
|
|
|
Other
|
351
|
|
|
243
|
|
|
|
$
|
925
|
|
|
$
|
880
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Land
|
$
|
118
|
|
|
$
|
117
|
|
|
Buildings and improvements
|
1,229
|
|
|
1,198
|
|
|
Equipment, furniture and fixtures
|
3,449
|
|
|
3,411
|
|
|
Capital in progress
|
405
|
|
|
442
|
|
|
|
5,201
|
|
|
5,169
|
|
|
Less: accumulated depreciation
|
3,122
|
|
|
3,089
|
|
|
|
$
|
2,079
|
|
|
$
|
2,079
|
|
Depreciation expense was $78 million for the second quarter of 2020, $73 million for the second quarter of 2019, $154 million for the first six months of 2020 and $142 million for the first six months of 2019.
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Restricted cash equivalents
|
$
|
46
|
|
|
$
|
43
|
|
|
Operating lease right-of-use assets
|
315
|
|
|
336
|
|
|
Derivative assets
|
241
|
|
|
216
|
|
|
Investments
|
467
|
|
|
458
|
|
|
Licensing arrangements
|
273
|
|
|
332
|
|
|
Other
|
157
|
|
|
144
|
|
|
|
$
|
1,500
|
|
|
$
|
1,529
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Legal reserves
|
$
|
314
|
|
|
$
|
470
|
|
|
Payroll and related liabilities
|
572
|
|
|
708
|
|
|
Rebates
|
269
|
|
|
298
|
|
|
Contingent consideration
|
32
|
|
|
56
|
|
|
Other
|
531
|
|
|
576
|
|
|
|
$
|
1,718
|
|
|
$
|
2,109
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Deferred revenue
|
$
|
143
|
|
|
$
|
144
|
|
|
Licensing arrangements
|
174
|
|
|
197
|
|
|
Taxes payable
|
193
|
|
|
265
|
|
|
Other
|
219
|
|
|
195
|
|
|
|
$
|
729
|
|
|
$
|
800
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Accrued income taxes
|
$
|
640
|
|
|
$
|
667
|
|
|
Legal reserves
|
54
|
|
|
227
|
|
|
Accrued contingent consideration
|
176
|
|
|
299
|
|
|
Licensing arrangements
|
314
|
|
|
374
|
|
|
Operating lease liabilities
|
263
|
|
|
276
|
|
|
Deferred revenue
|
251
|
|
|
257
|
|
|
Other
|
537
|
|
|
535
|
|
|
|
$
|
2,236
|
|
|
$
|
2,635
|
|
NOTE G – INCOME TAXES
Our effective tax rate from continuing operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Effective tax rate from continuing operations
|
18.4
|
%
|
|
(5.9)
|
%
|
|
13.7
|
%
|
|
4.0
|
%
|
The change in our reported tax rates for the second quarter and first six months of 2020, as compared to the same periods in 2019, relates primarily to a shift in geographical mix of earnings to higher-tax jurisdictions, partially offset by the impact of certain receipts and charges that are taxed at different rates than our effective tax rate. These receipts and charges include intangible asset impairment charges, acquisition/divestiture-related net charges, restructuring and restructuring-related net charges, litigation-related net charges as well as certain discrete tax items primarily related to share-based payments and impacts of the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, 2020.
As of June 30, 2020, we had $383 million of gross unrecognized tax benefits, of which a net $283 million, if recognized, would affect our effective tax rate. As of December 31, 2019, we had $455 million of gross unrecognized tax benefits, of which a net $355 million, if recognized, would affect our effective tax rate.
It is reasonably possible that within the next 12 months we will resolve multiple issues with foreign, federal and state taxing authorities, resulting in a reduction in our balance of unrecognized tax benefits of up to $98 million.
Economic stimulus legislation has been enacted in many countries in response to COVID-19. In the U.S., the CARES Act was signed into law on March 27, 2020 and provides an estimated $2.2 trillion in COVID-19 pandemic related relief, and included tax relief and government loans, subsidies and other relief for entities in affected industries. While we have not applied for government loans, we are evaluating other aid available. We have also taken advantage of the benefits offered in multiple jurisdictions including the U.S. provision allowing taxpayers to defer payment of the employer portion of certain payroll taxes through the end of 2020. This allows us to preserve cash generated from operations to service our debt obligations and other near-term commitments.
NOTE H – COMMITMENTS AND CONTINGENCIES
The medical device market in which we 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 dynamics 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 ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.
In addition, like other companies in the medical device industry, we are subject to extensive regulation by national, state and local government agencies in the U.S. and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.
In accordance with FASB ASC Topic 450, Contingencies, we accrue anticipated costs of 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 $368 million as of June 30, 2020 and $697 million as of December 31, 2019 and includes certain estimated costs of settlement, damages and defense. The decrease in our legal accrual was mainly due to settlement payments related to litigation with Channel Medsystems, Inc. (Channel) and those associated with product liability cases or claims related to transvaginal surgical mesh products. A portion of our legal accrual is already funded through our qualified settlement fund (QSF), which is included in restricted cash and restricted cash equivalents in Other current assets of $245 million as of June 30, 2020 and $346 million as of December 31, 2019. Refer to Note F – Supplemental Balance Sheet Information for additional information.
We did not record any litigation-related net charges during the second quarter and first six months of 2020. In first six months of 2019, our litigation-related net credits included a gain of $148 million, which represents a portion of the total $180 million one-time settlement payment received from Edwards Lifesciences Corporation (Edwards) in January 2019. We record certain legal and product liability charges, credits and costs of defense, which we consider to be unusual or infrequent and significant as Litigation-related net charges (credits) in our unaudited condensed consolidated financial statements. All other legal and product liability charges, credits and costs are recorded within Selling, general and administrative expenses. As such, a portion of the related gain from this settlement was recorded in Selling, general and administrative expenses on our unaudited condensed consolidated statements of operations. 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 financial covenant.
In management's opinion, we are not currently involved in any legal proceedings other than those disclosed in our most recent Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the period ended March 31, 2020 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 reasonably estimated.
Patent Litigation
On October 28, 2015, BSC filed suit against Cook Group Limited and Cook Medical LLC (collectively, “Cook”) in the District Court for the District of Delaware (1:15-cv-00980) alleging infringement of certain Company patents regarding Cook’s Instinct Endoscopic Hemoclip. The case was transferred to the District Court for the S.D. Indiana. Cook filed seven Inter Partes Review (“IPR”) requests with the U.S. Patent and Trademark Office against the four asserted patents. All IPRs have concluded , and Cook and Boston Scientific both appealed the Patent Office’s IPR decisions to the Federal Circuit Court of Appeals. On April 30, 2020, the U.S. Court of Appeals ruled that claims from two of the Boston Scientific patents remain valid, though two of the patents will be further reviewed by the USPTO's Patent Trial and Appeal Board. The district court had stayed the case pending the appeals court decision on the IPRs.
On December 9, 2016, the Company and Boston Scientific Neuromodulation Corporation filed a patent infringement action against Nevro in U.S. District Court for the District of Delaware (16-cv-1163) alleging that ten U.S. patents owned by Boston Scientific Neuromodulation Corporation are infringed by Nevro’s Senza™ Spinal Cord Stimulation System. On June 22, 2020, this action was consolidated with case 18-cv-664, described below. The court set trial for October 2021.
On November 20, 2017, The Board of Regents, University of Texas System (UT) and TissueGen. Inc., served a lawsuit against us in the Western District of Texas. The complaint against us alleges patent infringement of two U.S. patents owned by UT, relating to “Drug Releasing Biodegradable Fiber Implant” and “Drug Releasing Biodegradable Fiber for Delivery of Therapeutics,” and affects the manufacture, use and sale of our Synergy™ Stent System. On March 12, 2018, the District Court for the Western District of Texas dismissed the action and transferred it to the United States District Court for the District of Delaware. On September 5, 2019, the Court of Appeals for the Federal Circuit affirmed the dismissal of the District Court for the Western District of Texas. In April 2020, the United States Supreme Court denied the University’s Petition for Certiorari. UT is proceeding with its case against BSC in Delaware.
On April 21, 2018, the Company and Boston Scientific Neuromodulation Corporation filed a patent infringement, theft of trade secrets and tortious interference with a contract action against Nevro in U.S. District Court for the District of Delaware (18-cv-664), and amended the complaint on July 18, 2018, alleging that nine U.S. patents owned by Boston Scientific Neuromodulation Corporation are infringed by Nevro’s Senza™ I and Senza™ II Spinal Cord Stimulation Systems. On December 9, 2019, Nevro filed an answer and counterclaims, in which it alleged that our Spinal Cord Stimulation systems infringe 5 Nevro patents. On June 22, 2020, this action was consolidated with case 16-cv-1163. The theft of trade secrets, patent counterclaims, and patent infringement claims from case 16-cv-1163 were set for trial in October 2021. The patent infringement claims from case 18-cv-664 were stayed pending IPRs.
Product Liability Litigation
As of July 22, 2020, approximately 54,000 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. As of July 22, 2020, we have entered into master settlement agreements in principle or are in the final stages of entering one with certain plaintiffs' counsel to resolve an aggregate of approximately 52,000 cases and claims, adjusted to reflect the Company’s analysis of expected non-participation and duplicate claims. These master settlement agreements provide that the settlement and distribution of settlement funds to participating claimants are conditional upon, among other things, achieving minimum required claimant participation thresholds. Of the approximately 52,000 cases and claims, approximately 46,500 have met the conditions of the settlement and are final. All settlement agreements were entered into solely by way of compromise and without any admission or concession by us of any liability or wrongdoing. The pending cases are in various federal and state courts in the U.S. 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 were 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. On December 12, 2019 the Mississippi Attorney General filed suit against BSC in State Court alleging violations of the Mississippi Consumer Protection Act which the Company plans to vigorously defend. There are fewer than 25 claims in the United Kingdom. There are also fewer than 25 cases in Canada, inclusive of one certified class action, which has settled and received Court approval. On April 16, 2019, the U.S. Food and Drug Administration (FDA) ordered that all manufacturers of
surgical mesh products indicated for the transvaginal repair of pelvic organ prolapse stop selling and distributing their products in the United States immediately, stemming from the FDA’s 2016 reclassification of these devices to class III (high risk) devices, and as a result, the Company ceased global sales and distribution of surgical mesh products indicated for transvaginal pelvic organ prolapse.
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 6, 2019, Boston Scientific Corporation, Boston Scientific Scimed, Inc., and Fortis Advisors, LLC, as a Securityholder Representative for the former Securityholders of nVision Medical Corp. filed a declaratory judgment action against BioCardia, Inc. in the United States District Court for the Northern District of California to address threats and allegations by BioCardia challenging inventorship and ownership of various patents that Boston Scientific Corporation acquired through an April 13, 2018 merger with nVision as well as related threats and allegations by BioCardia of trade secret misappropriation and unjust enrichment. On December 11, 2019, BioCardia filed an amended answer and counterclaims. On April 23, 2020, BioCardia filed a complaint against nVision, which had not been named as a defendant in the original case. On May 22, 2020, BioCardia amended its complaint against nVision to add twenty former nVision shareholders as defendants.
On December 21, 2017, Janssen Biotech, Inc., Janssen Oncology, Inc, Janssen Research & Development, LLC, and Johnson & Johnson (collectively, Janssen) were served with a qui tam complaint filed on behalf of the United States, 28 states, and the District of Columbia. The complaint, which was filed in the United States District Court for the Northern District of California, alleges that Janssen violated the federal False Claims Act and state law when providing pricing information for ZYTIGA to the government in connection with direct government sales and government-funded drug reimbursement programs. The case has been transferred to United States District Court for the District of New Jersey. On June 20, 2019, the complaint was amended to include BTG International Limited as a defendant. In May 2020, a class action complaint was filed in New Jersey federal court against Johnson & Johnson and BTG by two direct purchasers of Zytiga on behalf of similarly situated entities. The complaint alleges that BTG and J&J violated antitrust laws by attempting to enforce certain patents against potential generic competitors.
Refer to Note G – Income Taxes for information regarding our tax litigation.
Matters Concluded Since December 31, 2019
On March 10, 2017, Imran Niazi filed a patent infringement action against us in the U.S. District Court for the Western District of Wisconsin alleging that a U.S. patent owned by him is infringed by our Acuity™ Lead Delivery System for use with our cardiac resynchronization therapy devices. On June 30, 2017, we filed a motion to dismiss for improper venue and on November 7, 2017 the Wisconsin Court granted the motion to dismiss. On November 13, 2017 Niazi refiled the same action in the U.S. District of Minnesota. We reached a confidential settlement on this matter on February 3, 2020 pursuant to which the action was dismissed.
On November 1, 2017, we entered into a definitive agreement with Channel Medsystems pursuant to which we could have been obligated to pay $145 million in cash up-front and a maximum of $130 million in contingent payments to acquire Channel. The agreement contained a provision allowing Channel to sell the remaining equity interests of Channel to us upon achievement of a regulatory milestone and an option allowing us to acquire the remaining equity interests. We sent a notice of termination of that agreement to Channel in the second quarter of 2018. On September 12, 2018, Channel filed a complaint in Delaware Chancery Court against us for alleged breach of the agreement. Channel alleged that we breached the agreement by terminating it. We answered the complaint, denied the claims by Channel and counterclaimed to recover part of our investment in Channel, alleging fraud in the inducement. On April 2, 2019, Channel announced its receipt of FDA approval of the Cerene™ Cryotherapy Device. Trial testimony was taken in April 2019 and the post-trial briefing and hearing were completed. During the third quarter of 2019, Channel notified us that they were exercising their option to sell the remaining equity interests in Channel to us. We responded to the notification that we did not intend to purchase Channel since the previous agreement had been terminated. On December 18, 2019, the Chancery Court ruled that Boston Scientific was in breach of the agreement and granted Channel's request for specific performance to require the Company to complete the purchase. On January 10, 2020, we filed a Notice of Appeal of the Chancery Court’s decision to the Delaware Supreme Court. On February 4, 2020, the Company
settled the dispute with Channel resulting in termination of the agreement, payment by the Company of an undisclosed sum and surrender of the Company's equity interest in Channel.
NOTE I – STOCKHOLDERS' EQUITY
Preferred Stock
We are authorized to issue 50 million shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative participating, option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by our stockholders.
On May 27, 2020, we completed an offering of 10,062,500 shares of 5.50% Mandatory Convertible Preferred Stock, Series A (MCPS) at a price to the public and liquidation preference of $100 per share. The net proceeds from the MCPS offering were approximately $975 million after deducting underwriting discounts and commissions and offering expenses. As of June 30, 2020, our MCPS had an aggregate liquidation preference of $1.006 billion.
Holders of MCPS will be entitled to receive, when, as and if declared by our Board of Directors, or an authorized committee thereof, out of funds legally available for payment, cumulative dividends at the annual rate of 5.50% of the liquidation preference of $100 per share, payable in cash or, subject to certain limitations, by delivery of shares of common stock or any combination of cash and shares of common stock, at our election; provided, however, that any unpaid dividends on the MCPS will continue to accumulate as described in the Certificate of Designations.
Subject to certain exceptions, no dividend or distribution will be declared or paid on shares of our common stock, and no common stock will be purchased, redeemed or otherwise acquired for consideration by us or any of our subsidiaries unless, in each case, all accumulated and unpaid dividends for all preceding dividend periods have been declared and paid, or a sufficient amount of cash or number of shares of common stock has been set apart for the payment of such dividends, on all outstanding shares of MCPS. In the event of our voluntary or involuntary liquidation, winding-up or dissolution, no distribution of our assets may be made to holders of our common stock until we have paid holders of our MCPS, each of which will be entitled to receive a liquidation preference in the amount of $100 per share plus accumulated and unpaid dividends.
Unless earlier converted, each share of MCPS will automatically convert on June 1, 2023, subject to postponement for certain market disruption events, into between 2.3834 and 2.9197 shares of common stock, subject to customary anti-dilution adjustments. The number of shares of common stock issuable upon conversion will be determined based on the average volume-weighted average price per share of common stock over the 20 consecutive trading day period beginning on, and including, the 21st scheduled trading day immediately preceding June 1, 2023.
The MCPS is not subject to any redemption, sinking fund or other similar provisions. However, at our option, we may purchase or exchange the MCPS from time to time in the open market, by tender or exchange offer or otherwise, without the consent of, or notice to, holders of MCPS. The holders of the MCPS will not have any voting rights, with limited exceptions.
On July 30, 2020, the Audit Committee of our Board of Directors, pursuant to authority delegated to such committee by our Board of Directors, declared a cash dividend of $1.4361 per MCPS share (or $14 million in aggregate cash dividends) to be paid on September 1, 2020 to holders of our MCPS as of August 15, 2020, representing a dividend period beginning on the May 27, 2020 issuance date and ending on August 31, 2020. We have presented cumulative, unpaid dividends covering the period from May 27, 2020 through June 30, 2020 totaling $5 million within Accrued expenses on our unaudited condensed consolidated balance sheet as of June 30, 2020.
Common Stock
We are authorized to issue 2.000 billion shares of common stock, $0.01 par value per share. Holders of common stock are entitled to one vote per share. Holders of common stock are entitled to receive dividends, if and when declared by our Board of Directors, and to share ratably in our assets legally available for distribution to our stockholders in the event of liquidation. Holders of common stock have no preemptive, subscription, redemption, or conversion rights. The holders of common stock do not have cumulative voting rights. The holders of a majority of the shares of common stock can elect all of the directors and can control our management and affairs. Holders of common stock are junior to holders of MCPS in terms of liquidation preference.
On May 27, 2020, we completed an offering of 29,382,500 shares of common stock at a public offering price of $34.25 per share. The net proceeds from the common stock offering were approximately $975 million after deducting underwriting discounts and commissions and offering expenses.
We used a portion of the net proceeds from the May 27, 2020 MCPS and common stock offerings to repay remaining amounts outstanding under the April 2021 Term Loan and to pay related fees, expenses and premiums as discussed in Note E – Contractual Obligations and Commitments. The remaining proceeds will be used for general corporate purposes, which may include refinancing or repayment of other outstanding indebtedness and funding potential future acquisitions and investments.
NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Weighted average shares outstanding - basic
|
1,410.9
|
|
|
1,391.0
|
|
|
1,404.1
|
|
|
1,389.4
|
|
|
Net effect of common stock equivalents
|
—
|
|
|
17.6
|
|
|
—
|
|
|
19.1
|
|
|
Weighted average shares outstanding - assuming dilution
|
1,410.9
|
|
|
1,408.6
|
|
|
1,404.1
|
|
|
1,408.5
|
|
The following securities were excluded from the calculation of weighted average shares outstanding - assuming dilution because their effect in the periods presented below would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Common stock equivalents (1)
|
13
|
|
0
|
|
14
|
|
0
|
|
Stock options outstanding (2)
|
6
|
|
0
|
|
6
|
|
0
|
|
MCPS (3)
|
9
|
|
0
|
|
5
|
|
0
|
(1) Represents common stock equivalents pursuant to our employee stock-based compensation plans, which are antidilutive in the second quarter and first six months of 2020 due to our Net loss positions.
(2) Represents stock options outstanding pursuant to our employee stock-based compensation plans with exercise prices that were greater than the average fair market value of our common stock for the related periods.
(3) Represents common stock issuable upon the conversion of MCPS. Refer to Note I – Stockholders' Equity for additional information.
We base Net income (loss) per common share upon the weighted-average number of common shares and common stock equivalents outstanding during each year. Potential common stock equivalents are determined using the treasury stock method. We exclude stock options, stock awards and MCPS from the calculation if the effect would be anti-dilutive. The dilutive effect of MCPS is calculated using the if-converted method. The if-converted method assumes that these securities were converted to shares of common stock at the later of the May 27, 2020 issuance date or the beginning of the reporting period to the extent that the effect is dilutive. If the effect is anti-dilutive, we calculate Net income (loss) per common share by adjusting Net income (loss) in the numerator for the effect of the cumulative MCPS dividends for the respective period.
We issued less than one million shares of our common stock in the second quarter of 2020, approximately one million shares of our common stock in the second quarter of 2019, approximately five million shares of our common stock in the first six months of 2020, approximately seven million shares of our common stock in the first six months of 2019, following the exercise of stock options, vesting of deferred stock units or purchases under our employee stock purchase plan. We did not repurchase any shares of our common stock in the first six months of 2020 or 2019.
NOTE K – SEGMENT REPORTING
Our seven core businesses are organized into three reportable segments: MedSurg, Rhythm and Neuro, and Cardiovascular, which represent an aggregation of our operating segments that generate revenues from the sale of medical devices. We measure and evaluate our reportable segments based on net sales of reportable segments, operating income of reportable segments, excluding intersegment profits, and operating income of reportable segments as a percentage of net sales of reportable segments. Operating income of reportable segments as a percentage of net sales of reportable segments is defined as operating income of reportable segments divided by net sales of reportable segments. We exclude from operating income of reportable segments certain corporate-related expenses and certain transactions or adjustments that our chief operating decision maker (CODM) considers to be non-operational, such as amounts related to amortization expense, intangible asset impairment charges, acquisition/divestitures-related net charges/(credits), restructuring and restructuring-related net charges/(credits), certain EU Medical Device Regulation (MDR) implementation costs and litigation-related charges/(credits). Although we exclude these amounts from operating income of reportable segments, they are included in reported Income (loss) before income taxes on the unaudited condensed consolidated statements of operations and are included in the reconciliation below.
Following our acquisition of BTG, which closed during the third quarter of 2019, we have included BTG’s Interventional Medicine business within our Peripheral Interventions operating segment, within the Cardiovascular reportable segment. We present BTG’s Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.
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 (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Net sales
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
MedSurg
|
$
|
576
|
|
|
$
|
818
|
|
|
$
|
1,350
|
|
|
$
|
1,584
|
|
|
Rhythm and Neuro
|
525
|
|
|
786
|
|
|
1,228
|
|
|
1,543
|
|
|
Cardiovascular
|
834
|
|
|
1,026
|
|
|
1,860
|
|
|
1,998
|
|
|
Total net sales of reportable segments
|
1,935
|
|
|
2,631
|
|
|
4,437
|
|
|
5,124
|
|
|
All other (Specialty Pharmaceuticals)
|
68
|
|
|
n/a
|
|
109
|
|
|
n/a
|
|
Consolidated net sales
|
$
|
2,003
|
|
|
$
|
2,631
|
|
|
$
|
4,546
|
|
|
$
|
5,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Income (loss) before income taxes
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
MedSurg
|
$
|
173
|
|
|
$
|
295
|
|
|
$
|
432
|
|
|
$
|
551
|
|
|
Rhythm and Neuro
|
32
|
|
|
167
|
|
|
131
|
|
|
322
|
|
|
Cardiovascular
|
186
|
|
|
301
|
|
|
385
|
|
|
577
|
|
|
Total operating income of reportable segments
|
391
|
|
|
763
|
|
|
947
|
|
|
1,449
|
|
|
All other (Specialty Pharmaceuticals)
|
49
|
|
|
n/a
|
|
75
|
|
|
n/a
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Corporate expenses, including hedging activities
|
(189)
|
|
|
(91)
|
|
|
(222)
|
|
|
(140)
|
|
|
Intangible asset impairment charges, acquisition/divestiture-related net (charges) credits, restructuring- and restructuring-related net (charges) credits, EU MDR implementation costs and litigation-related net (charges) credits
|
(125)
|
|
|
(127)
|
|
|
(327)
|
|
|
(64)
|
|
|
Amortization expense
|
(197)
|
|
|
(161)
|
|
|
(398)
|
|
|
(321)
|
|
|
Operating income (loss)
|
(71)
|
|
|
384
|
|
|
75
|
|
|
925
|
|
|
Other expense, net
|
(110)
|
|
|
(239)
|
|
|
(234)
|
|
|
(323)
|
|
|
Income (loss) before income taxes
|
$
|
(181)
|
|
|
$
|
145
|
|
|
$
|
(159)
|
|
|
$
|
602
|
|
|
|
|
|
|
|
|
|
|
|
Operating income of reportable segments as a percentage of net sales of reportable segments
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
MedSurg
|
30.1
|
%
|
|
36.1
|
%
|
|
32.0
|
%
|
|
34.8
|
%
|
|
Rhythm and Neuro
|
6.1
|
%
|
|
21.2
|
%
|
|
10.7
|
%
|
|
20.9
|
%
|
|
Cardiovascular
|
22.3
|
%
|
|
29.3
|
%
|
|
20.7
|
%
|
|
28.9
|
%
|
NOTE L – REVENUE
We generate revenue primarily from the sale of single-use medical devices and present revenue net of sales taxes in our unaudited condensed consolidated statements of operations. The following tables disaggregate our revenue from contracts with customers by business and geographic region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Businesses
|
U.S.
|
|
OUS
|
|
Total
|
|
U.S.
|
|
OUS
|
|
Total
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
$
|
190
|
|
|
$
|
158
|
|
|
$
|
348
|
|
|
$
|
270
|
|
|
$
|
200
|
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
Urology and Pelvic Health
|
162
|
|
|
66
|
|
|
228
|
|
|
248
|
|
|
100
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
Cardiac Rhythm Management
|
208
|
|
|
143
|
|
|
351
|
|
|
288
|
|
|
210
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
Electrophysiology
|
22
|
|
|
30
|
|
|
51
|
|
|
39
|
|
|
46
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Neuromodulation
|
100
|
|
|
23
|
|
|
122
|
|
|
160
|
|
|
44
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Interventional Cardiology
|
189
|
|
|
306
|
|
|
495
|
|
|
318
|
|
|
388
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
Peripheral Interventions
|
189
|
|
|
151
|
|
|
340
|
|
|
155
|
|
|
165
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Specialty Pharmaceuticals
|
60
|
|
|
8
|
|
|
68
|
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,118
|
|
|
$
|
885
|
|
|
$
|
2,003
|
|
|
$
|
1,478
|
|
|
$
|
1,153
|
|
|
$
|
2,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
Businesses
|
U.S.
|
|
OUS
|
|
Total
|
|
U.S.
|
|
OUS
|
|
Total
|
|
Endoscopy
|
$
|
445
|
|
|
$
|
345
|
|
|
$
|
790
|
|
|
$
|
523
|
|
|
$
|
387
|
|
|
$
|
910
|
|
|
Urology and Pelvic Health
|
400
|
|
|
161
|
|
|
560
|
|
|
479
|
|
|
195
|
|
|
674
|
|
|
Cardiac Rhythm Management
|
463
|
|
|
325
|
|
|
788
|
|
|
576
|
|
|
413
|
|
|
989
|
|
|
Electrophysiology
|
53
|
|
|
72
|
|
|
126
|
|
|
75
|
|
|
89
|
|
|
164
|
|
|
Neuromodulation
|
250
|
|
|
63
|
|
|
313
|
|
|
304
|
|
|
86
|
|
|
390
|
|
|
Interventional Cardiology
|
486
|
|
|
642
|
|
|
1,128
|
|
|
614
|
|
|
753
|
|
|
1,367
|
|
|
Peripheral Interventions
|
413
|
|
|
319
|
|
|
732
|
|
|
311
|
|
|
320
|
|
|
631
|
|
|
Specialty Pharmaceuticals
|
97
|
|
|
12
|
|
|
109
|
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Net Sales
|
$
|
2,607
|
|
|
$
|
1,939
|
|
|
$
|
4,546
|
|
|
$
|
2,881
|
|
|
$
|
2,243
|
|
|
$
|
5,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Geographic Regions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
U.S.
|
$
|
1,058
|
|
|
$
|
1,478
|
|
|
$
|
2,510
|
|
|
$
|
2,881
|
|
|
EMEA (Europe, Middle East and Africa)
|
416
|
|
|
571
|
|
|
968
|
|
|
1,132
|
|
|
APAC (Asia-Pacific)
|
410
|
|
|
481
|
|
|
819
|
|
|
918
|
|
|
LACA (Latin America and Canada)
|
51
|
|
|
101
|
|
|
140
|
|
|
192
|
|
|
Medical Devices
|
1,935
|
|
|
2,631
|
|
|
4,437
|
|
|
5,124
|
|
|
U.S.
|
60
|
|
|
n/a
|
|
97
|
|
|
n/a
|
|
OUS
|
8
|
|
|
n/a
|
|
12
|
|
|
n/a
|
|
Specialty Pharmaceuticals
|
68
|
|
|
n/a
|
|
109
|
|
|
n/a
|
|
Net Sales
|
$
|
2,003
|
|
|
$
|
2,631
|
|
|
$
|
4,546
|
|
|
$
|
5,124
|
|
|
|
|
|
|
|
|
|
|
|
Emerging Markets (1)
|
$
|
255
|
|
|
$
|
318
|
|
|
$
|
522
|
|
|
$
|
614
|
|
(1) We define Emerging Markets as the 20 countries that we believe have strong growth potential based on their economic conditions, healthcare sectors and our global capabilities. Periodically, we assess our list of Emerging Markets, which is currently comprised of the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, Saudi Arabia, Slovakia, South Africa, South Korea, Thailand, Turkey and Vietnam.
Deferred Revenue
Contract liabilities are classified within Other current liabilities and Other long-term liabilities on our accompanying unaudited condensed consolidated balance sheets. Our deferred revenue balance was $393 million as of June 30, 2020 and $400 million as of December 31, 2019. Our contractual liabilities are primarily composed of deferred revenue related to the LATITUDE™ Patient Management System. Revenue is recognized over the average service period which is based on device and patient longevity. We recognized revenue of $31 million in the second quarter and $66 million in the first six months of 2020 that was included in the above December 31, 2019 contract liability balance. We have elected not to disclose the transaction price allocated to unsatisfied performance obligations when the original expected contract duration is one year or less. In addition, we have not identified material unfulfilled performance obligations for which revenue is not currently deferred.
Variable Consideration
We generally allow our customers to return defective, damaged and, in certain cases, expired products for credit and record the amount for estimated sales returns as a reduction to revenue when we sell the initial product. In addition, we may allow customers to return previously purchased products for next-generation product offerings. For these transactions, we defer recognition of revenue on the sale of the earlier generation product based upon an estimate of the amount of product to be returned when the next-generation products are shipped to the customer.
We also offer sales rebates and discounts to certain customers. We treat sales rebates and discounts as a reduction of revenue and classify the corresponding liability as current. If we are unable to reasonably estimate the expected rebates, we record a liability for the maximum rebate percentage offered. We have entered certain agreements with group purchasing organizations to sell our products to participating hospitals at negotiated prices. We recognize revenue from these agreements following the same revenue recognition criteria discussed above.
NOTE M – CHANGES IN OTHER COMPREHENSIVE INCOME
The following tables provide the reclassifications out of Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of March 31, 2020
|
$
|
(35)
|
|
|
$
|
248
|
|
|
|
|
$
|
(45)
|
|
|
$
|
168
|
|
|
Other comprehensive income (loss) before reclassifications
|
(6)
|
|
|
(6)
|
|
|
|
|
—
|
|
|
(12)
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(5)
|
|
|
(20)
|
|
|
|
|
—
|
|
|
(25)
|
|
|
Total other comprehensive income (loss)
|
(11)
|
|
|
(26)
|
|
|
|
|
—
|
|
|
(37)
|
|
|
Balance as of June 30, 2020
|
$
|
(46)
|
|
|
$
|
222
|
|
|
|
|
$
|
(45)
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of March 31, 2019
|
$
|
(46)
|
|
|
$
|
160
|
|
|
|
|
$
|
(26)
|
|
|
$
|
87
|
|
|
Other comprehensive income (loss) before reclassifications
|
8
|
|
|
2
|
|
|
|
|
—
|
|
|
10
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(8)
|
|
|
(11)
|
|
|
|
|
—
|
|
|
(19)
|
|
|
Total other comprehensive income (loss)
|
—
|
|
|
(9)
|
|
|
|
|
—
|
|
|
(9)
|
|
|
Balance as of June 30, 2019
|
$
|
(46)
|
|
|
$
|
150
|
|
|
|
|
$
|
(26)
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of December 31, 2019
|
$
|
142
|
|
|
$
|
173
|
|
|
|
|
$
|
(45)
|
|
|
$
|
270
|
|
|
Other comprehensive income (loss) before reclassifications
|
(178)
|
|
|
86
|
|
|
|
|
—
|
|
|
(92)
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(9)
|
|
|
(37)
|
|
|
|
|
—
|
|
|
(47)
|
|
|
Total other comprehensive income (loss)
|
(187)
|
|
|
48
|
|
|
|
|
—
|
|
|
(139)
|
|
|
Balance as of June 30, 2020
|
$
|
(46)
|
|
|
$
|
222
|
|
|
|
|
$
|
(45)
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Derivative Financial Instruments
|
|
|
|
Net Change in Defined Benefit Pensions and Other Items
|
|
Total
|
|
Balance as of December 31, 2018
|
$
|
(53)
|
|
|
$
|
111
|
|
|
|
|
$
|
(25)
|
|
|
$
|
33
|
|
|
Other comprehensive income (loss) before reclassifications
|
22
|
|
|
58
|
|
|
|
|
(1)
|
|
|
79
|
|
|
(Income) loss amounts reclassified from accumulated other comprehensive income
|
(16)
|
|
|
(18)
|
|
|
|
|
—
|
|
|
(34)
|
|
|
Total other comprehensive income (loss)
|
7
|
|
|
40
|
|
|
|
|
(1)
|
|
|
45
|
|
|
Balance as of June 30, 2019
|
$
|
(46)
|
|
|
$
|
150
|
|
|
|
|
$
|
(26)
|
|
|
$
|
78
|
|
Refer to Note D – Hedging Activities and Fair Value Measurements for further detail on our net investment hedges recorded in Foreign currency translation adjustments and our cash flow hedges recorded in Net change in derivative financial instruments.
The gains and losses on defined benefit and pension items before reclassifications and gains and losses on defined benefit and pension items reclassified from Accumulated other comprehensive income (loss), net of tax were reduced by immaterial income tax impacts in the second quarter and first six months of 2020 and 2019.
NOTE N – NEW ACCOUNTING PRONOUNCEMENTS
Periodically, 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 unaudited condensed consolidated financial statements.
Standards to be Implemented
ASC Update No. 2020-06
In August 2020, the FASB issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently in the process of determining the effect that the adoption will have on our financial position and results of operations.
ASC Update No. 2019-12
In December 2019, the FASB issued ASC Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The purpose of Update No. 2019-12 is to continue the FASB’s Simplification Initiative to reduce complexity in accounting standards. The amendments in Update No. 2019-12 simplify the accounting for income taxes by removing certain exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize or derecognize
deferred tax liabilities related to equity method investments that are also foreign subsidiaries, and the methodology for calculating income taxes in an interim period. In addition to removing these exceptions, Update No. 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. Update No. 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. We are currently in the process of assessing in which quarter to adopt, as well as determining the effect that the adoption will have on our financial position and results of operations.
No other new accounting pronouncements issued or effective in the period had or are expected to have a material impact on our unaudited condensed consolidated financial statements.