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

9 Months Ended

Oct. 01, 2017

Restructuring and Related Activities [Abstract]

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

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 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 for full-year 2015 associated with the return of acquired IPR&D 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 2016 Financial Report) associated with the integration of Hospira.

In 2016, we substantially completed previously disclosed cost-reduction initiatives begun in 2014 associated with our global commercial structure reorganization, manufacturing plant network rationalization and optimization initiatives, and additional cost-reduction/productivity initiatives across the enterprise.

As a result of the evaluation performed in connection with our decision in September 2016 to not pursue, at that time, splitting IH and EH into two separate publicly-traded companies, we identified new opportunities to potentially achieve greater optimization and efficiency to become more competitive in our business. Therefore, in early 2017, we initiated new enterprise-wide cost reduction/productivity initiatives, which we expect to substantially complete by the end of 2019. These initiatives will encompass all areas of our cost base and will include:

• Optimization of our manufacturing plant network to support IH and EH products and pipelines. During 2017-2019, we expect to incur costs of approximately $800 million related to this initiative. Through October 1, 2017, we incurred approximately $122 million associated with this initiative.

• Activities in non-manufacturing related areas, which include further centralization of our corporate and platform functions, as well as other activities where opportunities are identified. During 2017-2019, we expect to incur costs of approximately $200 million related to this initiative. Through October 1, 2017, we incurred approximately $131 million associated with this initiative.

The costs expected to be incurred during 2017-2019, of approximately $1.0 billion 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 20% of the total charges will be non-cash.

Current-Period Key Activities

For the first nine months of 2017, we incurred costs of $253 million associated with the 2017-2019 program, $238 million associated with the integration of Hospira and $110 million associated with all other acquisition-related initiatives.

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)	October 1, 2017			October 2, 2016		October 1, 2017		October 2, 2016
Restructuring charges(a):
Employee terminations	$	(20	)	$	347	$	9	$	464
Asset impairments(b)	101			27		126		45
Exit costs	10			29		16		64
Total restructuring charges	91			404		150		574
Transaction costs(c)	(14		)	54		4		114
Integration costs(d)	73			74		224		300
Restructuring charges and certain acquisition-related costs	149			531		377		988
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(e):
Cost of sales	39			46		74		145
Research and development expenses	—			1		—		5
Total additional depreciation––asset restructuring	39			47		74		151
Implementation costs recorded in our condensed consolidated statements of income as follows(f):
Cost of sales	26			46		77		127
Selling, informational and administrative expenses	22			23		46		56
Research and development expenses	9			8		26		17
Other (income)/deductions––net	—			1		—		2
Total implementation costs	57			78		150		202
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	245		$	655	$	601	$	1,341

^(a)  In the third quarter and first nine months of 2017, restructuring charges are primarily associated with our acquisitions of Hospira and Medivation, as well as cost-reduction and productivity initiatives not associated with acquisitions. In the third quarter and first nine months of 2016, restructuring charges are largely associated with cost-reduction and productivity initiatives not associated with acquisitions, as well as our acquisitions of Hospira and Medivation. In the third quarter and first nine months ended October 1, 2017, Employee terminations primarily include revisions of our estimates of severance benefits. 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 activities for 2017 are associated with the following:

• For the third quarter of 2017, IH ($4 million); EH ($1 million); WRD/GPD ($15 million); manufacturing operations ($47 million); and Corporate ($25 million).

• For the first nine months of 2017, IH ($10 million); EH ($9 million income); WRD/GPD ($29 million); manufacturing operations ($70 million); and Corporate ($51 million).

The restructuring activities for 2016 are associated with the following:

• For the third quarter of 2016, IH ($148 million); EH ($28 million); WRD/GPD ($52 million); manufacturing operations ($108 million); and Corporate ($67 million).

• For the first nine months of 2016, IH ($162 million); EH ($19 million); WRD/GPD ($104 million); manufacturing operations ($181 million); and Corporate ($107 million).

^(b)  The asset impairment charges for the third quarter and the first nine months of 2017 are largely associated with our acquisitions of Hospira and Medivation.

^(c)  Transaction costs represent external costs for banking, legal, accounting and other similar services, which in the third quarter of 2017 reflect the reversal of an accrual related to the acquisition of Medivation. Transaction costs for the first nine months of 2017 are directly related to our acquisitions of Hospira, Anacor and Medivation. Transaction costs in the third quarter of 2016 were mostly related to the Medivation acquisition, and in the first nine months of 2016, were mostly related to the Medivation and Anacor acquisitions, and our terminated transaction with Allergan.

^(d)  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. In the third quarter and first nine months of 2017, integration costs primarily relate to our acquisitions of Hospira and Medivation. The first nine months of 2017 also include a net gain of $12 million related to the settlement of the Hospira U.S. qualified defined benefit pension plan (see Note 10). In the third quarter of 2016, integration

costs were mostly related to our acquisition of Hospira, and in the first nine months of 2016, integration costs were mostly related to our acquisition of Hospira and our terminated transaction with Allergan.

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

^(f)  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, 2016(a)	$	1,547		$	—		$	36		$	1,583
Provision	9			126			16			150
Utilization and other(b)	(401		)	(126		)	(24		)	(551		)
Balance, October 1, 2017(c)	$	1,154		$	—		$	28		$	1,182

^(a)  Included in Other current liabilities ($863 million) and Other noncurrent liabilities ($720 million).

^(b)  Includes adjustments for foreign currency translation.

^(c) 

Included in Other current liabilities ($533 million) and Other noncurrent liabilities ($650 million).