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/productivity initiatives. For example:

•

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); and


•	In connection with our cost-reduction/productivity initiatives, 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.

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

In early 2014, we announced that we would be incurring costs in 2014-2016 related to new programs: our new global commercial structure reorganization and additional cost-reduction/productivity initiatives.

We have the following initiatives underway:

•

Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of six sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $300 million associated with prior acquisition activity and costs of approximately $1.5 billion associated with new non-acquisition-related cost-reduction initiatives. Through March 29, 2015, we incurred approximately $205 million and $293 million, respectively, associated with these initiatives.

•

New global commercial structure reorganization, which primarily includes the streamlining of certain functions, the realignment of regional locations and colleagues to support the businesses, as well as implementing the necessary system changes to support future reporting requirements. In connection with this reorganization, during 2014-2016, we expect to incur costs of approximately $300 million. Through March 29, 2015, we incurred approximately $179 million associated with this reorganization.


•	Other new cost-reduction/productivity initiatives, primarily related to commercial property rationalization and consolidation. In connection with these cost-reduction activities, during 2014-2016, we expect to incur costs of approximately $850 million. Through March 29, 2015, we incurred approximately $231 million associated with these initiatives.

The costs expected to be incurred during 2014-2016, of approximately $2.9 billion in total, include restructuring charges, integration costs, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about a quarter of the charges will be non-cash.

Current-Period Key Activities

In the first quarter of 2015, we incurred approximately $121 million in cost-reduction and acquisition-related costs (excluding transaction costs) in connection with the aforementioned programs, primarily associated with our manufacturing and sales operations.



The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
	Three Months Ended
(MILLIONS OF DOLLARS)	March 29, 2015		March 30, 2014
Restructuring charges^(a):
Employee terminations	$	31	$	30
Asset impairments	6		6
Exit costs	6		4
Total restructuring charges	42		40
Transaction costs^(b)	5		—
Integration costs^(c)	13		18
Restructuring charges and certain acquisition-related costs	60		58
Additional depreciation––asset restructuringrecorded in our condensed consolidated statements of income as follows^(d):
Cost of sales	17		74
Research and development expenses	1		—
Total additional depreciation––asset restructuring	18		74
Implementation costs recorded in our condensed consolidated statements of income as follows^(e):
Cost of sales	13		6
Selling, informational and administrative expenses	26		15
Research and development expenses	8		11
Total implementation costs	48		32
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	127	$	164


^(a)	In the three months ended March 29, 2015, Employee terminations represent the expected reduction of the workforce by approximately 200 employees, mainly in manufacturing and sales.

The restructuring charges for the three months ended March 29, 2015 are associated with the following:


•	the Global Innovative Pharmaceutical segment (GIP) ($12 million); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($13 million); the Global Established Pharmaceutical segment (GEP) ($10 million); Worldwide Research and Development and Medical ($12 million); manufacturing operations ($22 million income); and Corporate ($18 million).

The restructuring charges for the three months ended March 30, 2014 are associated with the following:


•	the Global Innovative Pharmaceutical segment (GIP) ($2 million); the Global Established Pharmaceutical segment (GEP) ($7 million); Worldwide Research and Development and Medical ($1 million); manufacturing operations ($26 million); and Corporate ($4 million).


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


^(c)	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.


^(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/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, 2014^(a)	$	1,114		$	—		$	52		$	1,166
Provision	31			6			6			42
Utilization and other^(b)	(127		)	(6		)	(30		)	(162		)
Balance, March 29, 2015^(c)	$	1,019		$	—		$	28		$	1,046


^(a)	Included in Other current liabilities ($735 million) and Other noncurrent liabilities ($431 million).


^(b)	Includes adjustments for foreign currency translation.


^(c)	Included in Other current liabilities ($648 million) and Other noncurrent liabilities ($398 million).