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

6 Months Ended

Jun. 28, 2020

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.

Transforming to a More Focused Company Program

With the formation of the GSK Consumer Healthcare joint venture and the anticipated combination of Upjohn, our global, primarily off-patent branded and generics business, with Mylan, Pfizer is transforming itself into a more focused, global leader in science-based innovative medicines. As a result, we began in the fourth quarter of 2019, to identify and undertake efforts to ensure our cost base aligns appropriately with our Biopharmaceutical revenue base as a result of both the completed GSK Consumer Healthcare and expected Upjohn transactions. While certain direct costs have transferred or will transfer to the GSK Consumer Healthcare joint venture and to the Upjohn entities, there are indirect costs which are not expected to transfer. In addition, we are taking steps to restructure our organizations to appropriately support and drive the purpose of the three core functions of our focused innovative medicines business: R&D, Manufacturing and Commercial.

We expect the costs associated with this multi-year program to be incurred from 2020 through 2022 and to total approximately $1.2 billion on a pre-tax basis, with substantially all of the costs to be cash expenditures. Actions may include, among others, changes in location of certain activities, expanded use and co-location of centers of excellence and shared services, and increased use of digital technologies. The associated actions and the specific costs will primarily include severance and benefit plan impacts, exit costs as well as associated implementation costs.

Also as part of this program, in connection with the legacy cost reduction initiatives, primarily related to manufacturing activities, we expect to incur costs of approximately $400 million, with approximately 20% of the costs to be non-cash. The costs associated with this effort are expected to be incurred from 2020 through 2022, and will primarily include implementation costs, product transfer costs, exit costs, as well as accelerated depreciation.

From the start of this program in the fourth quarter of 2019 through June 28, 2020, we incurred approximately $549 million associated with this program.

Current-Period Key Activities

For the first six months of 2020, we incurred costs of $566 million composed primarily of the Transforming to a More Focused Company program. 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 an 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 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Restructuring charges/(credits):
Employee terminations	$	346		$	(166	)	$	371		$	(167	)
Asset impairments	(8		)	(9		)	23			—
Exit costs	1			31			1			34
Restructuring charges(a)	340			(144		)	396			(134		)
Transaction costs(b)	11			—			14			—
Integration costs and other(c)	11			29			21			64
Restructuring charges and certain acquisition-related costs	362			(115		)	431			(69		)
Net periodic benefit costs recorded in Other (income)/deductions––net	5			4			29			10
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(d):
Cost of sales	4			7			10			15
Selling, informational and administrative expenses	—			1			—			2
Research and development expenses	2			2			(3		)	5
Total additional depreciation––asset restructuring	6			10			6			23
Implementation costs recorded in our condensed consolidated statements of income as follows(e):
Cost of sales	11			17			21			31
Selling, informational and administrative expenses	63			16			78			25
Research and development expenses	1			9			1			13
Total implementation costs	75			42			99			69
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	449		$	(59	)	$	566		$	32

^(a)  In the second quarter and first six months of 2020, restructuring charges mainly represent employee termination costs associated with our Transforming to a More Focused Company cost reduction program. 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 an IRS audit for multiple tax years. See Notes to Consolidated Financial Statements––Note 5D. Tax Matters: Tax Contingencies in our 2019 Financial Report.

The restructuring activities for 2020 are associated with the following:

• For the second quarter of 2020, Biopharma ($12 million credit); Upjohn ($1 million credit); and Other ($352 million charge).

• For the first six months of 2020, Biopharma ($9 million credit); Upjohn ($12 million charge); and Other ($393 million charge).

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).

Restructuring costs identified as Other are for restructuring activities associated with corporate enabling functions, WRDM, GPD and other manufacturing and commercial operations, as applicable. For the second quarter and first six months of 2020, restructuring costs identified as Other primarily relate to corporate enabling functions.

^(b)  Transaction costs represent external costs for banking, legal, accounting and other similar services.

^(c)  Integration costs and other represent external, incremental costs directly related to integrating acquired businesses, such as expenditures for consulting and the integration of systems and processes, and certain other qualifying costs. In the second quarter and first six months of 2020, integration costs and other were mostly related to our acquisition of Array. In the second quarter and first six months of 2019, integration costs and other were primarily related to our 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, 2019(a)	$	887		$	—		$	46		$	933
Provision	371			23			1			396
Utilization and other(b)	(341		)	(23		)	(14		)	(378		)
Balance, June 28, 2020(c)	$	918		$	—		$	34		$	951

^(a)  Included in Other current liabilities ($714 million) and Other noncurrent liabilities ($219 million).

^(b)  Includes adjustments for foreign currency translation.

^(c) 

Included in Other current liabilities ($625 million) and Other noncurrent liabilities ($326 million).