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

6 Months Ended

Jun. 30, 2019

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.

2017-2019 Initiatives and Organizing for Growth

During 2018, as we reviewed our business opportunities and challenges and the way in which we think about our business operations, we determined that at the start of our 2019 fiscal year, we would begin operating under our new commercial structure, which reorganized our operations into three businesses––Biopharma, a science-based innovative medicines business; Upjohn, a global, primarily off-patent branded and generic established medicines business; and through July 31, 2019, a Consumer Healthcare business (see Note 13). To operate effectively in this structure and position ourselves for future growth, we are focused on creating a simpler, more efficient operating structure within each business as well as the functions that support them. Beginning in the fourth quarter of 2018, we reviewed previously planned initiatives and new initiatives to ensure that there was alignment around our new structure and combined the 2017-2019 initiatives with our current Organizing for Growth initiatives to form one cohesive plan. Initiatives for the combined program include activities related to the optimization of our manufacturing plant network, the centralization of our corporate and platform functions, and the simplification and optimization of our operating business structure and functions that support them. From 2017 through June 30, 2019, we incurred approximately $774 million associated with manufacturing optimization, and approximately $871 million associated with other activities.

In 2019, we expect restructuring, implementation and additional depreciation charges of about $600 million and, of that amount, we expect approximately 20% of the total charges will be non-cash.

Current-Period Key Activities

For the first six months of 2019, we incurred costs of $32 million composed of $180 million associated with the 2017-2019 and Organizing for Growth initiatives, $51 million associated with the integration of Hospira and income of $199 million primarily due to the reversal of certain accruals upon the effective favorable settlement of a U.S. IRS audit for multiple tax years and other acquisition-related initiatives.

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
	Three Months Ended						Six Months Ended
(MILLIONS OF DOLLARS)	June 30, 2019			July 1, 2018			June 30, 2019			July 1, 2018
Restructuring charges/(credits):
Employee terminations	$	(166	)	$	(21	)	$	(167	)	$	(29	)
Asset impairments	(9		)	(6		)	—			(4		)
Exit costs	31			3			34			—
Restructuring credits(a)	(144		)	(24		)	(134		)	(33		)
Integration costs(b)	29			68			64			120
Restructuring charges and certain acquisition-related costs	(115		)	44			(69		)	87
Net periodic benefit costs recorded in Other (income)/deductions––net	4			29			10			61
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(c):
Cost of sales	7			13			15			30
Selling, informational and administrative expenses	1			—			2			—
Research and development expenses	2			—			5			—
Total additional depreciation––asset restructuring	10			13			23			31
Implementation costs recorded in our condensed consolidated statements of income as follows(d):
Cost of sales	17			20			31			36
Selling, informational and administrative expenses	16			16			25			34
Research and development expenses	9			7			13			13
Total implementation costs	42			44			69			82
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	(59	)	$	131		$	32		$	262

^(a)  In the second quarter and first six months of 2019, restructuring credits mostly represent the reversal of certain accruals related to our acquisition of Wyeth upon the effective favorable settlement of a U.S. IRS audit for multiple tax years (see Note 5B). In the three and six months ended July 1, 2018, restructuring credits were associated with cost-reduction and productivity initiatives not associated with acquisitions, as well as acquisition-related costs, primarily associated with Hospira.

The restructuring activities for 2019 are associated with the following:

• For the second quarter of 2019, Biopharma ($62 million credit); Upjohn ($9 million credit); and Other ($74 million credit).

• For the first six months of 2019, Biopharma ($48 million credit); Upjohn ($22 million credit); and Other ($63 million credit).

The restructuring activities for 2018 are associated with the following:

• For the second quarter of 2018, total reportable segments ($10 million credit); and Other ($13 million credit).

• For the first six months of 2018, total reportable segments ($24 million credit); and Other ($9 million credit). At the beginning of fiscal 2019, we revised our operating segments and are unable to directly associate these prior-period restructuring charges with the new individual segments.

^(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. In the second quarter and first six months of 2019 and 2018, integration costs were primarily related to our acquisition of Hospira.

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

^(d)  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, 2018(a)	$	1,203		$	—	$	49		$	1,252
Provision/(credit)(b)	(167		)	—		34			(134		)
Utilization and other(c)	(303		)	—		(18		)	(321		)
Balance, June 30, 2019(d)	$	733		$	—	$	64		$	797

^(a)  Included in Other current liabilities ($823 million) and Other noncurrent liabilities ($428 million).

^(b)  Includes the reversal of certain accruals related to our acquisition of Wyeth upon the effective favorable settlement of a U.S. IRS audit for multiple tax years. See Note 5B for additional information.

^(c)  Includes adjustments for foreign currency translation.

^(d) 

Included in Other current liabilities ($593 million) and Other noncurrent liabilities ($204 million).