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

9 Months Ended

Sep. 27, 2020

Restructuring and Related Activities [Abstract]

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 our corporate enabling functions (such as digital, global real estate operations, legal, finance, human resources, worldwide public affairs, compliance and worldwide procurement).

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 into a more focused, global leader in science-based innovative medicines. Accordingly, in the fourth quarter of 2019, we began 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 corporate enabling function 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 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, we expect to incur costs related to manufacturing network optimization, including certain legacy cost-reduction initiatives, of approximately $500 million, with approximately 20% of the costs to be non-cash. The costs associated with this effort are expected to be incurred primarily from 2020 through 2022, and will include, among other things, implementation costs, product transfer costs, site exit costs, as well as accelerated depreciation.

From the start of this program in the fourth quarter of 2019 through September 27, 2020, we incurred approximately $600 million associated with this program.

Current-Period Key Activities

For the first nine months of 2020, we incurred costs of $621 million composed primarily of the Transforming to a More Focused Company program. For the first nine months of 2019, we incurred costs of $452 million composed of $300 million associated with the 2017-2019 and Organizing for Growth initiatives, $272 million associated with the integration of Array, and $74 million associated with the integration of Hospira, partially offset by income of $194 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 summarizes acquisitions and cost-reduction/productivity initiatives costs and credits:
	Three Months Ended				Nine Months Ended
(MILLIONS OF DOLLARS)	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Restructuring charges/(credits):
Employee terminations	$	(15)	$	82	$	357	$	(86)
Asset impairments	22		3		45		3
Exit costs/(credits)	(11)		(1)		(9)		33
Restructuring charges/(credits)(a)	(4)		83		392		(50)
Transaction costs(b)	—		65		14		65
Integration costs and other(c)	7		217		29		281
Restructuring charges and certain acquisition-related costs	4		365		435		295
Net periodic benefit costs recorded in Other (income)/deductions––net	—		9		29		19
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(d):
Cost of sales	4		6		14		21
Selling, informational and administrative expenses	—		—		—		2
Research and development expenses	—		—		(3)		6
Total additional depreciation––asset restructuring	4		6		10		29
Implementation costs recorded in our condensed consolidated statements of income as follows(e):
Cost of sales	11		14		32		45
Selling, informational and administrative expenses	36		23		114		48
Research and development expenses	1		3		2		16

Total implementation costs	48		40		148		109
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	56	$	420	$	621	$	452

(a)In the first nine months of 2020, restructuring charges mainly represent employee termination costs associated with our Transforming to a More Focused Company cost-reduction program. In the third quarter of 2019, restructuring charges mainly represented employee termination costs associated with cost-reduction and productivity initiatives as well as our acquisition of Array. In the first nine months of 2019, restructuring credits mostly represented the reversal of certain accruals related to our acquisition of Wyeth upon the effective favorable settlement of an IRS audit for multiple tax years, partially offset by employee termination costs associated with cost-reduction and productivity initiatives, as well as our acquisition of Array. 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 third quarter of 2020, Biopharma ($6 million charge); Upjohn ($3 million credit); and Other ($7 million credit).

•For the first nine months of 2020, Biopharma ($3 million credit); Upjohn ($10 million charge); and Other ($386 million charge).

The restructuring activities for 2019 are associated with the following:

•For the third quarter of 2019, Biopharma ($10 million charge); Upjohn ($6 million credit); and Other ($79 million charge).

•For the first nine months of 2019, Biopharma ($38 million credit); Upjohn ($27 million credit); and Other ($15 million charge). 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 first nine 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 third quarter and first nine months of 2020, integration costs and other were mostly related to our acquisition of Array. In the third quarter and first nine months of 2019, integration costs and other primarily included $157 million in payments to Array employees for the fair value of previously unvested stock options that was recognized as post-closing compensation expense. See Notes to Consolidated Financial Statements––Note 2A. Acquisitions, Divestitures, Equity-Method Investments and Assets and Liabilities Held for Sale, Licensing Arrangements and Research and Development and Collaborative Arrangements: Acquisitions in our 2019 Financial Report.

(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 summarizes the components and changes in restructuring accruals:
(MILLIONS OF DOLLARS)	Employee Termination Costs		Asset Impairment Charges		Exit Costs		Accrual
Balance, December 31, 2019(a)	$	887	$	—	$	46	$	933
Provision	357		45		(9)		392
Utilization and other(b)	(411)		(45)		(23)		(479)
Balance, September 27, 2020(c)	$	832	$	—	$	14	$	847

(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 ($607 million) and Other noncurrent liabilities ($240 million).