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 connection with our acquisition of Hospira, we are focusing our efforts on achieving an appropriate cost structure for the combined company. For up to a three-year period post-acquisition, we expect to incur costs of approximately $1 billion (not including costs of $215 million in 2015 associated with the return of acquired in-process research and development rights as described in the Current-Period Key Activities section of Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives in our 2015 Financial Report) associated with the integration of Hospira.

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 associated with these programs:

•

Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of four sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $400 million associated with prior acquisition activity and costs of approximately $1.0 billion associated with new non-acquisition-related cost-reduction initiatives. Through April 3, 2016, we incurred approximately $357 million and $570 million, respectively, associated with these initiatives.

•

The 2014 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 different reporting requirements. In connection with this reorganization, during 2014-2016, we expect to incur costs of approximately $225 million. Through April 3, 2016, we incurred approximately $219 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 April 3, 2016, we incurred approximately $532 million associated with these initiatives.

The costs expected to be incurred during 2014-2016, of approximately $2.5 billion in total for the above-mentioned programs (but not including expected costs associated with the Hospira integration), include restructuring charges, 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 2016, we incurred approximately $228 million in cost-reduction and acquisition-related costs (excluding transaction costs) primarily in connection with the acquisition of Hospira and the aforementioned programs, mainly associated with our manufacturing operations.



The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
	Three Months Ended
(MILLIONS OF DOLLARS)	April 3, 2016		March 29, 2015
Restructuring charges^(a):
Employee terminations	$	24	$	31
Asset impairments	1		6
Exit costs	4		6
Total restructuring charges	30		42
Transaction costs^(b)	24		5
Integration costs^(c)	87		13
Restructuring charges and certain acquisition-related costs	141		60
Additional depreciation––asset restructuringrecorded in our condensed consolidated statements of income as follows^(d):
Cost of sales	45		17
Research and development expenses	4		1
Total additional depreciation––asset restructuring	49		18
Implementation costs recorded in our condensed consolidated statements of income as follows^(e):
Cost of sales	43		13
Selling, informational and administrative expenses	12		26
Research and development expenses	6		8
Total implementation costs	62		48
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	252	$	127

^(a)

In the three months ended April 3, 2016, Employee terminations represent the expected reduction of the workforce by approximately 100 employees, mainly in manufacturing. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits, many of which may be paid out during periods after termination.

The restructuring charges for the three months ended April 3, 2016 are associated with the following:


•	the Global Innovative Pharmaceutical segment (GIP) ($8 million); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC) ($1 million); the Global Established Pharmaceutical segment (GEP) ($3 million); Worldwide Research and Development and Medical (WRD/M) ($3 million); manufacturing operations ($14 million); and Corporate ($1 million).

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


•	GIP ($12 million); VOC ($13 million); GEP ($10 million); WRD/M ($12 million); manufacturing operations ($22 million income); and Corporate ($18 million).


^(b)	Transaction costs represent external costs for banking, legal, accounting and other similar services, most of which are directly related to the terminated transaction with Allergan.


^(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, primarily related to the acquisition of Hospira.


^(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, 2015^(a)	$	1,109		$	—		$	48		$	1,157
Provision	24			1			4			30
Utilization and other^(b)	(165		)	(1		)	(9		)	(175		)
Balance, April 3, 2016^(c)	$	968		$	—		$	43		$	1,011


^(a)	Included in Other current liabilities ($776 million) and Other noncurrent liabilities ($381 million).


^(b)	Includes adjustments for foreign currency translation.


^(c)	Included in Other current liabilities ($638 million) and Other noncurrent liabilities ($373 million).