Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction and productivity initiatives. For example:


•	In connection with our cost-reduction and productivity initiatives, significant programs of which began in 2005, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and


•	In connection with acquisition activity, we typically incur costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company).

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as groups such as information technology, shared services and corporate operations.

Since the acquisition of Wyeth on October 15, 2009, our cost-reduction initiatives announced on January 26, 2009, but not completed as of December 31, 2009, were incorporated into a comprehensive plan to integrate Wyeth’s operations to generate cost savings and to capture synergies across the combined company. In addition, on February 1, 2011, we announced a new productivity initiative to accelerate our strategies to improve innovation and productivity in R&D by prioritizing areas with the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:



	Three Months Ended				Nine Months Ended
(MILLIONS OF DOLLARS)	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Transaction costs^(a)	$	—	$	5	$	1	$	28
Integration costs^(b)	87		184		295		562
Restructuring charges^(c):
Employee termination costs	113		762		424		1,615
Asset impairments	35		99		282		157
Exit costs	67		40		87		96
Restructuring charges and certain acquisition-related costs	302		1,090		1,089		2,458
Additional depreciation––asset restructuringrecorded in our condensed consolidated statements of income as follows^(d):
Cost of sales	78		68		214		410
Selling, informational and administrative expenses	3		39		8		68
Research and development expenses	—		146		259		379
Total additional depreciation––asset restructuring	81		253		481		857
Implementation costs recorded in our condensed consolidated statements of income as follows^(e):
Cost of sales	19		—		23		—
Selling, informational and administrative expenses	45		12		77		12
Research and development expenses	47		10		132		28
Total implementation costs	111		22		232		40
Total costs associated with acquisitions and cost-reduction/ productivity initiatives	$	494	$	1,365	$	1,802	$	3,355


^(a)	Transaction costs represent external costs directly related to acquired businesses and primarily include expenditures for banking, legal, accounting and other similar services.


^(b)	Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes.

^(c)

From the beginning of our cost-reduction and transformation initiatives in 2005 through September 30, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 59,700 employees, mainly in manufacturing and sales and research, of which approximately 49,300 employees have been terminated as of September 30, 2012. For the nine months ended September 30, 2012, the amount of employee termination costs represents additional accruals with respect to reserves for approximately 2,300 employees.

The restructuring charges in 2012 are associated with the following:


•	For the three months ended September 30, 2012, Primary Care operating segment ($83 million), Specialty Care and Oncology operating segment ($60 million), Established Products and Emerging Markets operating segment ($16 million), other operating segments ($8 million), research and development operations ($39 million income), manufacturing operations ($27 million) and Corporate ($60 million).


•	For the nine months ended September 30, 2012, Primary Care operating segment ($51 million), Specialty Care and Oncology operating segment ($79 million), Established Products and Emerging Markets operating segment ($20 million), other operating segments ($26 million), research and development operations ($14 million income), manufacturing operations ($193 million) and Corporate ($438 million).

The restructuring charges in 2011 are associated with the following:


•	For the three months ended October 2, 2011, Primary Care operating segment ($473 million), Specialty Care and Oncology operating segment ($186 million), Established Products and Emerging Markets operating segment ($64 million), other operating segments ($30 million), research and development operations ($46 million income), manufacturing operations ($41 million) and Corporate ($153 million).


•	For the nine months ended October 2, 2011, Primary Care operating segment ($606 million), Specialty Care and Oncology operating segment ($228 million), Established Products and Emerging Markets operating segment ($80 million), other operating segments ($44 million), research and development operations ($426 million), manufacturing operations ($196 million) and Corporate ($288 million).


^(d)	Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.


^(e)	Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction and productivity initiatives.

The following table provides the components of and changes in our restructuring accruals:



(MILLIONS OF DOLLARS)	Employee Termination Costs			Asset Impairment Charges			Exit Costs			Accrual
Balance, December 31, 2011	$	2,425		$	—		$	92		$	2,517
Provision^(a)	424			282			87			793
Utilization and other^(b)	(1,270		)	(282		)	(69		)	(1,621		)
Balance, September, 2012^(c)	$	1,579		$	—		$	110		$	1,689


^(a)	For the nine months ended September 30, 2012, Provision includes additional accruals with respect to reserves for approximately 2,300 employees.


^(b)	Includes adjustments for foreign currency translation.


^(c)	Included in Other current liabilities ($949 million) and Other noncurrent liabilities ($740 million).

The asset impairment charges included in restructuring charges for the nine months ended September 30, 2012 primarily relate to assets held for sale and are based on an estimate of fair value, which was determined to be lower than the carrying value of the assets prior to the impairment charge.

The following table provides additional information about the long-lived assets held-for-sale that were impaired in 2012:



	Fair Value^(a)								Nine Months Ended September 30, 2012
(MILLIONS OF DOLLARS)	Amount		Level 1		Level 2		Level 3		Impairment
Long-lived assets held-for-sale^(b)	$	96	$	—	$	96	$	—	$	220


^(a)	The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.

^(b)

Reflects property, plant and equipment and other long-lived assets written down to their fair value of $96 million, less costs to sell of $2 million (a net of $94 million), in the first nine months of 2012. The impairment charges of $220 million are included in Restructuring charges and certain acquisition-related costs. Fair value is determined primarily using a market approach, with various inputs, such as recent sales transactions.