10-Q 1 bmy-20160630x10q.htm FORM 10-Q Document


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

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             
Commission file number:              1-1136
 
 BRISTOL-MYERS SQUIBB COMPANY
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
22-0790350
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
345 Park Avenue, New York, N.Y. 10154
(Address of principal executive offices) (Zip Code)
 
(212) 546-4000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
At June 30, 2016, there were 1,670,858,535 shares outstanding of the Registrant’s $0.10 par value common stock.

 




BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
JUNE 30, 2016
 





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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
EARNINGS
2016
 
2015
 
2016
 
2015
Net product sales
$
4,432

 
$
3,572

 
$
8,396

 
$
6,631

Alliance and other revenues
439

 
591

 
866

 
1,573

Total Revenues
4,871

 
4,163

 
9,262

 
8,204

 
 
 
 
 
 
 
 
Cost of products sold
1,206

 
1,013

 
2,258

 
1,860

Marketing, selling and administrative
1,238

 
1,135

 
2,306

 
2,164

Research and development
1,266

 
1,856

 
2,402

 
2,872

Other (income)/expense
(454
)
 
107

 
(974
)
 
(192
)
Total Expenses
3,256

 
4,111

 
5,992

 
6,704

 
 
 
 
 
 
 
 
Earnings Before Income Taxes
1,615

 
52

 
3,270

 
1,500

Provision for Income Taxes
427

 
162

 
876

 
411

Net Earnings/(Loss)
1,188

 
(110
)
 
2,394

 
1,089

Net Earnings Attributable to Noncontrolling Interest
22

 
20

 
33

 
33

Net Earnings/(Loss) Attributable to BMS
$
1,166

 
$
(130
)
 
$
2,361

 
$
1,056

 
 
 
 
 
 
 
 
Earnings/(Loss) per Common Share
 
 
 
 
 
 
 
Basic
$
0.70

 
$
(0.08
)
 
$
1.41

 
$
0.63

Diluted
$
0.69

 
$
(0.08
)
 
$
1.41

 
$
0.63

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.38

 
$
0.37

 
$
0.76

 
$
0.74



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in Millions
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
COMPREHENSIVE INCOME
2016
 
2015
 
2016
 
2015
Net Earnings/(Loss)
$
1,188

 
$
(110
)
 
$
2,394

 
$
1,089

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges
(44
)
 
(9
)
 
(130
)
 
(3
)
Pension and postretirement benefits
(124
)
 
306

 
(285
)
 
262

Available-for-sale securities
41

 
(22
)
 
54

 
(6
)
Foreign currency translation
16

 
(32
)
 
25

 
(1
)
Other Comprehensive Income/(Loss)
(111
)
 
243

 
(336
)
 
252

 
 
 
 
 
 
 
 
Comprehensive Income
1,077

 
133

 
2,058

 
1,341

Comprehensive Income Attributable to Noncontrolling Interest
22

 
20

 
33

 
33

Comprehensive Income Attributable to BMS
$
1,055

 
$
113

 
$
2,025

 
$
1,308

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


3




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Share and Per Share Data(UNAUDITED) 
ASSETS
June 30,
2016
 
December 31,
2015
Current Assets:
 
 
 
Cash and cash equivalents
$
2,934

 
$
2,385

Marketable securities
1,717

 
1,885

Receivables
5,622

 
4,299

Inventories
1,437

 
1,221

Prepaid expenses and other
588

 
625

Total Current Assets
12,298

 
10,415

Property, plant and equipment
4,597

 
4,412

Goodwill
6,875

 
6,881

Other intangible assets
1,379

 
1,419

Deferred income taxes
3,389

 
2,844

Marketable securities
3,281


4,660

Other assets
1,012

 
1,117

Total Assets
$
32,831

 
$
31,748

 
 
 
 
LIABILITIES
 
 
 
Current Liabilities:
 
 
 
Short-term borrowings
$
155

 
$
139

Accounts payable
1,504

 
1,565

Accrued liabilities
4,880

 
4,738

Deferred income
1,182

 
1,003

Income taxes payable
164

 
572

Total Current Liabilities
7,885

 
8,017

Deferred income
586

 
586

Income taxes payable
896

 
742

Pension and other liabilities
1,805

 
1,429

Long-term debt
6,581

 
6,550

Total Liabilities
17,753

 
17,324

 
 
 
 
Commitments and contingencies (Note 18)

 

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

 

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

 
221

Capital in excess of par value of stock
1,594

 
1,459

Accumulated other comprehensive loss
(2,804
)
 
(2,468
)
Retained earnings
32,706

 
31,613

Less cost of treasury stock – 537 million common shares in 2016 and 539 million in 2015
(16,799
)
 
(16,559
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
14,918

 
14,266

Noncontrolling interest
160

 
158

Total Equity
15,078

 
14,424

Total Liabilities and Equity
$
32,831

 
$
31,748

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

4




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

 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
2,394

 
$
1,089

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
155

 
195

Deferred income taxes
(317
)
 
(59
)
Stock-based compensation
101

 
113

Impairment charges
68

 
20

Pension settlements and amortization
83

 
110

Divestiture gains and royalties
(927
)
 
(325
)
Asset acquisition charges
239

 
806

Other adjustments
(24
)
 
133

Changes in operating assets and liabilities:
 
 
 
Receivables
(852
)
 
(267
)
Inventories
(111
)
 
162

Accounts payable
(36
)
 
(618
)
Deferred income
263

 
(162
)
Income taxes payable
(515
)
 
24

Other
(496
)
 
(524
)
Net Cash Provided by Operating Activities
25

 
697

Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
2,794

 
1,808

Purchase of marketable securities
(1,195
)
 
(1,472
)
Capital expenditures
(503
)
 
(301
)
Divestiture and other proceeds
1,003

 
294

Acquisition and other payments
(267
)
 
(855
)
Net Cash Provided by/(Used in) Investing Activities
1,832

 
(526
)
Cash Flows From Financing Activities:
 
 
 
Short-term borrowings, net
17

 
167

Issuance of long-term debt

 
1,268

Repayment of long-term debt

 
(1,957
)
Interest rate swap contract terminations
42

 
(2
)
Issuance of common stock
132

 
201

Repurchase of common stock
(231
)
 

Dividends
(1,276
)
 
(1,242
)
Net Cash Used in Financing Activities
(1,316
)
 
(1,565
)
Effect of Exchange Rates on Cash and Cash Equivalents
8

 
22

Increase/(Decrease) in Cash and Cash Equivalents
549

 
(1,372
)
Cash and Cash Equivalents at Beginning of Period
2,385

 
5,571

Cash and Cash Equivalents at End of Period
$
2,934

 
$
4,199

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

5





Note 1. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

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

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

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

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

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

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


6




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

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

Note 2. BUSINESS SEGMENT INFORMATION

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

Product revenues were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Oncology
 
 
 
 
 
 
 
Empliciti (elotuzumab)
$
34

 
$

 
$
62

 
$

Erbitux* (cetuximab)

 
169

 

 
334

Opdivo (nivolumab)
840

 
122

 
1,544

 
162

Sprycel (dasatinib)
451

 
405

 
858

 
780

Yervoy (ipilimumab)
241

 
296

 
504

 
621

Cardiovascular
 
 
 
 
 
 
 
Eliquis (apixaban)
777

 
437

 
1,511

 
792

Immunoscience
 
 
 
 
 
 
 
Orencia (abatacept)
593

 
461

 
1,068

 
861

Virology
 
 
 
 
 
 
 
Baraclude (entecavir)
299

 
343

 
590

 
683

Hepatitis C Franchise
546

 
479

 
973

 
743

Reyataz (atazanavir sulfate) Franchise
247

 
303

 
468

 
597

Sustiva (efavirenz) Franchise
271

 
317

 
544

 
607

Neuroscience
 
 
 
 
 
 
 
Abilify* (aripiprazole)
35

 
107

 
68

 
661

Mature Products and All Other
537

 
724

 
1,072

 
1,363

Total Revenues
$
4,871

 
$
4,163

 
$
9,262

 
$
8,204

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

The composition of total revenues was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Net product sales
$
4,432

 
$
3,572

 
$
8,396

 
$
6,631

Alliance revenues
418

 
552

 
827

 
1,507

Other revenues
21

 
39

 
39

 
66

Total Revenues
$
4,871

 
$
4,163

 
$
9,262

 
$
8,204



7




Note 3. ALLIANCES

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

Selected financial information pertaining to our alliances was as follows, including net product sales when BMS is the principal in the third-party customer sale for products subject to the alliance. Expenses summarized below do not include all amounts attributed to the activities for the products in the alliance, but only the payments between the alliance partners or the related amortization if the payments were deferred or capitalized.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Revenues from alliances:
 
 
 
 
 
 
 
Net product sales
$
1,335

 
$
1,228

 
$
2,566

 
$
2,222

Alliance revenues
418

 
552

 
827

 
1,507

Total Revenues
$
1,753

 
$
1,780

 
$
3,393

 
$
3,729

 
 
 
 
 
 
 
 
Payments to/(from) alliance partners:
 
 
 
 
 
 
 
Cost of products sold
$
495

 
$
423

 
$
971

 
$
812

Marketing, selling and administrative
(8
)
 
(3
)
 
(7
)
 
22

Research and development
(3
)
 
66

 
30

 
188

Other (income)/expense
(451
)
 
(148
)
 
(704
)
 
(449
)
 
 
 
 
 
 
 
 
Noncontrolling interest, pre-tax
8

 
23

 
10

 
28

 
Selected Alliance Balance Sheet information:
 
 
 
Dollars in Millions
June 30,
2016
 
December 31,
2015
Receivables - from alliance partners
$
1,187

 
$
958

Accounts payable - to alliance partners
549

 
542

Deferred income from alliances
1,426

 
1,459


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

Note 4. ACQUISITIONS AND DIVESTITURES

In July 2016, BMS acquired all of the outstanding shares of Cormorant Pharmaceuticals (Cormorant), a private pharmaceutical company focused on the development of therapies for cancer and rare diseases. The acquisition provides BMS with full rights to Cormorant's lead candidate HuMax-IL8, a Phase I/II monoclonal antibody that represents a potentially complementary immuno-oncology mechanism of action to T-cell directed antibodies and co-stimulatory molecules. The consideration includes an upfront payment of $35 million and contingent development and regulatory milestone payments of up to $485 million. The transaction is expected to be accounted for as an asset acquisition with essentially all value allocated to HuMax-IL8 which will be included in research and development expense.


8




In April 2016, BMS acquired all of the outstanding shares of Padlock Therapeutics, Inc. (Padlock), a private biotechnology company dedicated to creating new medicines to treat destructive autoimmune diseases. The acquisition provides BMS with full rights to Padlock’s Protein/Peptidyl Arginine Deiminase (PAD) inhibitor discovery program focused on the development of potentially transformational treatment approaches for patients with rheumatoid arthritis. Padlock’s PAD discovery program may have additional utility in treating systemic lupus erythematosus and other autoimmune diseases. The consideration includes an upfront payment of $150 million and contingent development and regulatory milestone payments of up to $450 million. No significant Padlock processes were acquired, therefore the transaction was accounted for as an asset acquisition because Padlock was determined not to be a business as that term is defined in ASC 805 - Business Combinations. The consideration was allocated to the PAD discovery program resulting in $139 million of research and development expenses and to net operating losses and tax credit carryforwards resulting in $11 million of deferred tax assets.

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

In February 2016, BMS sold its investigational HIV medicines business to ViiV Healthcare which includes a number of programs at different stages of discovery, preclinical and clinical development. The transaction excluded BMS's HIV marketed medicines. BMS will provide certain R&D and other services over a transitional period. In February 2016, BMS received an upfront payment of $350 million, resulting in a gain of $269 million. BMS will also receive from ViiV Healthcare contingent development and regulatory milestone payments of up to $1.1 billion, sales-based milestone payments of up to $4.3 billion and future tiered royalties if the products are approved and commercialized.

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

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

 
$
49

 
$
85

 
$
100

Investment income
(25
)
 
(26
)
 
(49
)
 
(56
)
Provision for restructuring
18

 
28

 
22

 
40

Litigation and other settlements
6

 
4

 
49

 
16

Equity in net income of affiliates
(20
)
 
(22
)
 
(46
)
 
(48
)
Divestiture gains
(283
)
 
(8
)
 
(553
)
 
(162
)
Royalties and licensing income
(167
)
 
(97
)
 
(421
)
 
(195
)
Transition and other service fees
(74
)
 
(27
)
 
(127
)
 
(54
)
Pension charges
25

 
36

 
47

 
63

Out-licensed intangible asset impairment

 

 
15

 
13

Equity investment impairment
45

 

 
45

 

Written option adjustment

 

 

 
(36
)
Loss on debt redemption

 
180

 

 
180

Other
(21
)
 
(10
)
 
(41
)
 
(53
)
Other (income)/expense
$
(454
)
 
$
107

 
$
(974
)
 
$
(192
)

9




Note 6. INCOME TAXES
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2016
 
2015
 
2016
 
2015
Earnings Before Income Taxes
$
1,615

 
$
52

 
$
3,270

 
$
1,500

Provision for Income Taxes
427

 
162

 
876

 
411

Effective tax rate
26.4
%
 
311.5
%
 
26.8
%
 
27.4
%

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

The jurisdictional tax rates and other tax impacts attributed to research and development charges, divestiture transactions and other discrete items increased the effective tax rate by 4.0% and 5.5% in the six months ended June 30, 2016 and 2015, respectively. The taxes attributed to these items were impacted by non-deductible R&D charges for Padlock and Flexus Biosciences, Inc. (Flexus) in 2016 and Flexus in 2015, higher non-deductible goodwill allocated to business divestitures in 2016 and higher valuation allowances attributed to capital loss carryforwards released in 2015. The tax impact for discrete items are reflected immediately and are not considered in estimating the annual effective tax rates. The effective tax rate for the second quarter of 2015 was primarily impacted by the $800 million non-deductible R&D charge for the acquisition of Flexus.

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

BMS is currently under examination by a number of tax authorities which have proposed or are considering proposing material adjustments to tax positions for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. It is reasonably possible that the total amount of unrecognized tax benefits at June 30, 2016 could decrease in the range of approximately $270 million to $330 million in the next twelve months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits may result in the payment of additional taxes, adjustment of certain deferred taxes and/or recognition of tax benefits. It is also reasonably possible that new issues will be raised by tax authorities which may require adjustments to the amount of unrecognized tax benefits; however, an estimate of such adjustments cannot reasonably be made at this time.

Note 7. EARNINGS/(LOSS) PER SHARE
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Amounts in Millions, Except Per Share Data
2016
 
2015
 
2016
 
2015
Net Earnings/(Loss) Attributable to BMS used for Basic and Diluted EPS Calculation
$
1,166

 
$
(130
)
 
$
2,361

 
$
1,056

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
1,670

 
1,667

 
1,670

 
1,665

Contingently convertible debt common stock equivalents

 

 

 
1

Incremental shares attributable to share-based compensation plans
9

 

 
9

 
11

Weighted-average common shares outstanding – diluted
1,679

 
1,667

 
1,679

 
1,677

 
 
 
 
 
 
 
 
Earnings/(Loss) per Common Share:
 
 
 
 
 
 
 
Basic
$
0.70

 
$
(0.08
)
 
$
1.41

 
$
0.63

Diluted
$
0.69

 
$
(0.08
)
 
$
1.41

 
$
0.63


Contingently convertible debt common stock equivalents and incremental shares attributable to share-based compensation plans of 10 million were excluded from the per share calculation for the three months ended June 30, 2015 because of the net loss in that period.

10




Note 8. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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

 
$
2,425

 
$
2,425

 
$

 
$
1,825

 
$
1,825

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
438

 
438

 

 
804

 
804

Commercial paper

 
100

 
100

 

 

 

Corporate debt securities

 
4,358

 
4,358

 

 
5,638

 
5,638

Equity funds

 
95

 
95

 

 
92

 
92

Fixed income funds

 
7

 
7

 

 
11

 
11

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts

 
14

 
14

 

 
31

 
31

Forward starting interest rate swap contracts

 

 

 

 
15

 
15

Foreign currency forward contracts

 
36

 
36

 

 
50

 
50

Equity investments
34

 

 
34

 
60

 

 
60

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts

 

 

 

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

 
(98
)
 
(98
)
 

 
(7
)
 
(7
)
Foreign currency forward contracts

 
(59
)
 
(59
)
 

 
(10
)
 
(10
)

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

Available-for-sale Securities

The following table summarizes available-for-sale securities:
 
Dollars in Millions
Amortized
Cost
 
Gross
Unrealized
Gain in
Accumulated
OCI
 
Gross
Unrealized
Loss in
Accumulated
OCI
 
Fair Value
 
 
June 30, 2016
 
 
 
 
 
 
 
 
Certificates of deposit
$
438

 
$

 
$

 
$
438

 
Commercial paper
100

 

 

 
100

 
Corporate debt securities
4,310

 
48

 

 
4,358

 
Equity investments
32

 
4

 
(2
)
 
34

 
Total
$
4,880

 
$
52

 
$
(2
)
 
$
4,930

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Certificates of deposit
$
804

 
$

 
$

 
$
804

 
Corporate debt securities
5,646

 
15

 
(23
)
 
5,638

 
Equity investments
74

 
10

 
(24
)
 
60

 
Total
$
6,524

 
$
25

 
$
(47
)
 
$
6,502

Dollars in Millions
June 30,
2016
 
December 31,
2015
Current marketable securities(a)
$
1,717

 
$
1,885

Non-current marketable securities(b)
3,281

 
4,660

Other assets
34

 
60

Available-for-sale securities
$
5,032

 
$
6,605

(a)
The fair value option for financial assets was elected for investments in equity and fixed income funds. The fair value of these investments were $102 million at June 30, 2016 and $103 million at December 31, 2015 and were included in current marketable securities.
(b)
All non-current marketable securities mature within five years as of June 30, 2016 and December 31, 2015.

11




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

 
$
14

 
$
1,100

 
$
31

Interest rate swap contracts
Pension and other liabilities
 

 

 
650

 
(1
)
Forward starting interest rate swap contracts
Other assets
 

 

 
500

 
15

Forward starting interest rate swap contracts
Accrued liabilities
 
750

 
(98
)
 

 

Forward starting interest rate swap contracts
Pension and other liabilities
 

 

 
250

 
(7
)
Foreign currency forward contracts
Prepaid expenses and other
 
638

 
36

 
1,016

 
50

Foreign currency forward contracts
Accrued liabilities
 
782

 
(55
)
 
342

 
(5
)
Foreign currency forward contracts
Pension and other liabilities
 
31

 
(1
)
 

 

 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
Accrued liabilities
 
380

 
(3
)
 
445

 
(5
)

Cash Flow Hedges — The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro ($721 million) and Japanese yen ($441 million) at June 30, 2016.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1,055 million) are designated to hedge euro currency exposures of the net investment in certain foreign affiliates.

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

Debt Obligations
Long-term debt includes:
Dollars in Millions
June 30,
2016
 
December 31,
2015
Principal Value
$
6,353

 
$
6,339

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
14

 
30

Unamortized basis adjustment from swap terminations
301

 
272

Unamortized bond discounts and issuance costs
(87
)
 
(91
)
Total
$
6,581

 
$
6,550


The fair value of debt was $7,455 million at June 30, 2016 and $6,909 million at December 31, 2015 valued using Level 2 inputs. Interest payments were $102 million and $124 million for the six months ended June 30, 2016 and 2015, respectively, net of amounts related to interest rate swap contracts.


12




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

 
$
643

1.750% Euro Notes due 2035
575

 
643

Total
1,150

 
$
1,286

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

 
$
1,268

 
 
 
 
Forward starting interest rate swap contracts terminated:
 
 
 
Notional amount
500

 
$
559

Unrealized loss
(16
)
 
(18
)
 
Six Months Ended
Dollars in Millions
June 30, 2015
Principal amount
$
1,624

Carrying value
1,795

Debt redemption price
1,957

Notional amount of interest rate swap contracts terminated
735

Interest rate swap contract termination payments
11

Loss on debt redemption(a)
180


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

Note 9. RECEIVABLES
Dollars in Millions
June 30,
2016
 
December 31,
2015
Trade receivables
$
3,825

 
$
3,070

Less allowances
(140
)
 
(122
)
Net trade receivables
3,685

 
2,948

Alliance receivables
1,187

 
958

Prepaid and refundable income taxes
483

 
182

Other
267

 
211

Receivables
$
5,622

 
$
4,299


Non-U.S. receivables sold on a nonrecourse basis were $341 million and $188 million for the six months ended June 30, 2016 and 2015, respectively. Receivables from three pharmaceutical wholesalers in the U.S. represented 62% and 53% of total trade receivables at June 30, 2016 and December 31, 2015, respectively.

Note 10. INVENTORIES
Dollars in Millions
June 30,
2016
 
December 31,
2015
Finished goods
$
399

 
$
381

Work in process
977

 
868

Raw and packaging materials
248

 
199

Total inventories
$
1,624

 
$
1,448

 
 
 
 
Inventories
$
1,437

 
$
1,221

Other assets
187

 
227


Other assets include inventory pending regulatory approval of $108 million at June 30, 2016 and $85 million at December 31, 2015 and other amounts expected to remain on-hand beyond one year.


13




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

 
$
107

Buildings
4,700

 
4,515

Machinery, equipment and fixtures
3,440

 
3,347

Construction in progress
699

 
662

Gross property, plant and equipment
8,946

 
8,631

Less accumulated depreciation
(4,349
)
 
(4,219
)
Property, plant and equipment
$
4,597

 
$
4,412


Depreciation expense was $210 million and $258 million for the six months ended June 30, 2016 and 2015, respectively.

Note 12. OTHER INTANGIBLE ASSETS
Dollars in Millions
June 30,
2016
 
December 31,
2015
Licenses
$
559

 
$
574

Developed technology rights
2,358

 
2,357

Capitalized software
1,362

 
1,302

In-process research and development
120

 
120

Gross other intangible assets
4,399

 
4,353

Less accumulated amortization
(3,020
)
 
(2,934
)
Other intangible assets
$
1,379

 
$
1,419


Amortization expense was $88 million and $96 million for the six months ended June 30, 2016 and 2015, respectively.

Note 13. ACCRUED LIABILITIES
Dollars in Millions
 
June 30,
2016
 
December 31,
2015
Accrued rebates and returns
 
$
1,649

 
$
1,324

Employee compensation and benefits
 
604

 
904

Dividends payable
 
642

 
655

Accrued research and development
 
573

 
553

Litigation and other settlements
 
146

 
189

Royalties
 
170

 
161

Restructuring
 
58

 
89

Pension and postretirement benefits
 
47

 
47

Other
 
991

 
816

Accrued liabilities
 
$
4,880

 
$
4,738


14




Note 14. DEFERRED INCOME
Dollars in Millions
June 30,
2016
 
December 31,
2015
Alliances
$
1,426

 
$
1,459

Other
342

 
130

Total deferred income
$
1,768

 
$
1,589

 
 
 
 
Current portion
$
1,182

 
$
1,003

Non-current portion
586

 
586


Alliances include unamortized upfront, milestone and other licensing proceeds, revenue deferrals attributed to Atripla* and undelivered elements of diabetes business divestiture proceeds. As of June 30, 2016, other deferred income includes approximately $185 million of Opdivo product sale deferrals under an early access program in France which began in 2015. The amount of net product sales to be realized is subject to final price negotiations with the French government. Amortization of deferred income was $143 million and $159 million for the six months ended June 30, 2016 and 2015, respectively.

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

 
$
221

 
$
1,507

 
$
32,541

 
547

 
$
(16,992
)
 
$
131

Net earnings

 

 

 
1,056

 

 

 
43

Cash dividends declared

 

 

 
(1,236
)
 

 

 

Employee stock compensation plans

 

 
(144
)
 

 
(6
)
 
341

 

Debt conversion

 

 

 

 

 
2

 

Distributions

 

 

 

 

 

 
(6
)
Balance at June 30, 2015
2,208

 
$
221

 
$
1,363

 
$
32,361

 
541

 
$
(16,649
)
 
$
168

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
2,208

 
$
221

 
$
1,459

 
$
31,613

 
539

 
$
(16,559
)
 
$
158

Net earnings

 

 

 
2,361

 

 

 
33

Cash dividends declared

 

 

 
(1,268
)
 

 

 

Stock repurchase program

 

 

 

 
4

 
(231
)
 

Employee stock compensation plans

 

 
135

 

 
(6
)
 
(9
)
 

Distributions

 

 

 

 

 

 
(31
)
Balance at June 30, 2016
2,208

 
$
221

 
$
1,594

 
$
32,706

 
537

 
$
(16,799
)
 
$
160


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


15




The components of other comprehensive income/(loss) were as follows:
 
2016
 
2015
 
Pretax
 
Tax
 
After tax
 
Pretax
 
Tax
 
After tax
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:(a)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
$
(59
)
 
$
20

 
$
(39
)
 
$
35

 
$
(19
)
 
$
16

Reclassified to net earnings
(5
)
 

 
(5
)
 
(36
)
 
11

 
(25
)
Derivatives qualifying as cash flow hedges
(64
)
 
20

 
(44
)
 
(1
)
 
(8
)
 
(9
)
Pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Actuarial gains/(losses)
(233
)
 
83

 
(150
)
 
412

 
(145
)
 
267

Amortization(b)
19

 
(9
)
 
10

 
24

 
(9
)
 
15

Curtailments and settlements(c)
25

 
(9
)
 
16

 
36

 
(12
)
 
24

Pension and postretirement benefits
(189
)
 
65

 
(124
)
 
472

 
(166
)
 
306

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
10

 
(3
)
 
7

 
(32
)
 
9

 
(23
)
Realized losses
34

 

 
34

 
1

 

 
1

Available-for-sale securities(d)
44

 
(3
)
 
41

 
(31
)
 
9

 
(22
)
Foreign currency translation
20

 
(4
)
 
16

 
(26
)
 
(6
)
 
(32
)
 
$
(189
)
 
$
78

 
$
(111
)
 
$
414

 
$
(171
)
 
$
243

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:(a)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
$
(185
)
 
$
62

 
$
(123
)
 
$
70

 
$
(30
)
 
$
40

Reclassified to net earnings
(9
)
 
2

 
(7
)
 
(63
)
 
20

 
(43
)
Derivatives qualifying as cash flow hedges
(194
)
 
64

 
(130
)
 
7

 
(10
)
 
(3
)
Pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Actuarial gains/(losses)
(525
)
 
186

 
(339
)
 
292

 
(103
)
 
189

Amortization(b)
36

 
(12
)
 
24

 
47

 
(15
)
 
32

Curtailments and settlements(c)
47

 
(17
)
 
30

 
63

 
(22
)
 
41

Pension and postretirement benefits
(442
)
 
157

 
(285
)
 
402

 
(140
)
 
262

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
37

 
(17
)
 
20

 
(7
)
 
1

 
(6
)
Realized losses
34

 

 
34

 

 

 

Available-for-sale securities
71

 
(17
)
 
54

 
(7
)
 
1

 
(6
)
Foreign currency translation
22

 
3

 
25

 
20

 
(21
)
 
(1
)
 
$
(543
)
 
$
207

 
$
(336
)
 
$
422

 
$
(170
)
 
$
252


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

The accumulated balances related to each component of other comprehensive loss, net of taxes, were as follows:
Dollars in Millions
June 30,
2016
 
December 31, 2015
Derivatives qualifying as cash flow hedges
$
(96
)
 
$
34

Pension and other postretirement benefits
(2,365
)
 
(2,080
)
Available-for-sale securities
31

 
(23
)
Foreign currency translation
(374
)
 
(399
)
Accumulated other comprehensive loss
$
(2,804
)
 
$
(2,468
)


16




Note 16. PENSION AND POSTRETIREMENT BENEFIT PLANS

The net periodic benefit cost/(credit) of defined benefit pension and postretirement benefit plans includes:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
Dollars in Millions
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost – benefits earned during the year
$
7

 
$
6

 
$
1

 
$
1

 
$
13

 
$
12

 
$
2

 
$
2

Interest cost on projected benefit obligation
49

 
60

 
2

 
3

 
100

 
121

 
5

 
6

Expected return on plan assets
(106
)
 
(103
)
 
(6
)
 
(6
)
 
(210
)
 
(205
)
 
(12
)
 
(13
)
Amortization of prior service credits
(1
)
 
(1
)
 
(1
)
 
(2
)
 
(2
)
 
(2
)
 
(2
)
 
(3
)
Amortization of net actuarial loss
21

 
26

 

 
1

 
40

 
50

 

 
2

Curtailments and settlements
25