Note 5. Costs Associated with Cost-Reduction and Productivity Initiatives and Acquisition Activity

We incur significant costs in connection with acquiring businesses and restructuring and integrating acquired businesses and in connection with our global cost-reduction and productivity initiatives. For example:

·	for our cost-reduction and 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; and

for our acquisition activity, we typically incur costs that can include transaction costs, integration costs (such as expenditures for consulting and the integration of systems and processes) and restructuring charges, related to employees, assets and activities that will not continue in the combined company.

On February 1, 2011, we announced a new research and productivity initiative to accelerate our strategies to improve innovation and overall productivity in R&D by prioritizing areas with the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.

We incurred the following costs in connection with our cost-reduction and productivity initiatives and acquisition activity, such as King (acquired in 2011) and Wyeth (acquired in 2009):

	Three Months Ended				Nine Months Ended
(millions of dollars)	Oct. 2, 2011		Oct. 3, 2010		Oct. 2, 2011		Oct. 3, 2010

Transaction costs(a)	$	5	$	––	$	28	$	13
Integration costs(b)		187		231		567		650
Restructuring charges(c):
Employee termination costs		770		27		1,626		603
Asset impairments		99		174		157		677
Other		40		67		96		147
Restructuring charges and certain acquisition-related costs		1,101		499		2,474		2,090
Additional depreciation––asset restructuring(d):
Cost of sales		68		241		411		367
Selling, informational and administrative expenses		39		27		69		190
Research and development expenses		146		25		378		45
Total additional depreciation––asset restructuring		253		293		858		602
Implementation costs(e):
Selling, informational and administrative expenses		11		––		11		––
Research and development expenses		8		––		28		––
Total implementation costs		19		––		39		––
Total costs associated with cost-reduction and productivity initiatives and acquisition activity	$	1,373	$	792	$	3,371	$	2,692

(a)	Transaction costs represent external costs directly related to acquired businesses and primarily include expenditures for banking, legal, accounting and other similar services.

(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.

(c)

From the beginning of our cost-reduction and transformation initiatives in 2005 through October 2, 2011, Employee termination costs represent the expected reduction of the workforce by approximately 57,800 employees, mainly in manufacturing and sales and research, of which approximately 41,000 employees have been terminated as of October 2, 2011. 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. Asset impairments primarily include charges to write down property, plant and equipment to fair value. Other primarily includes costs to exit certain assets and activities.

The restructuring charges in 2011 are associated with the following:

For the three months ended October 2, 2011, Primary Care operating segment ($473 million), Specialty Care and Oncology operating segment ($186 million), Established Products and Emerging Markets operating segment ($65 million), Animal Health and Consumer Healthcare operating segment ($30 million), Nutrition operating segment ($2 million), research and development operations ($47 million income), manufacturing operations ($47 million) and Corporate ($153 million).

For the nine months ended October 2, 2011, Primary Care operating segment ($606 million), Specialty Care and Oncology operating segment ($228 million), Established Products and Emerging Markets operating segment ($80 million), Animal Health and Consumer Healthcare operating segment ($44 million), Nutrition operating segment ($4 million), research and development operations ($426 million), manufacturing operations ($203 million) and Corporate ($288 million).

The restructuring charges in 2010 are associated with the following:

For the three months ended October 3, 2010, Primary Care operating segment ($14 million), Specialty Care and Oncology operating segment ($53 million), Established Products and Emerging Markets operating segment ($14 million), Nutrition operating segment ($1 million), research and development operations ($17 million), manufacturing operations ($161 million) and Corporate ($8 million).

For the nine months ended October 3, 2010, Primary Care operating segment ($1 million), Specialty Care and Oncology operating segment ($99 million), Established Products and Emerging Markets operating segment ($23 million), Animal Health and Consumer Healthcare operating segment ($33 million), Nutrition operating segment ($12 million income), research and development operations ($239 million), manufacturing operations ($970 million) and Corporate ($74 million).

(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 and productivity initiatives.

The components of restructuring charges associated with all of our cost-reduction and productivity initiatives and acquisition activity follow:

	Costs Incurred		Activity		Accrual
(millions of dollars)		2005-2011	Through Oct. 2, 2011(a)		As of Oct. 2, 2011(b)

Employee termination costs	$	10,437	$	7,720	$	2,717
Asset impairments		2,465		2,465		––
Other		996		889		107
Total restructuring charges	$	13,898	$	11,074	$	2,824

(a)	Includes adjustments for foreign currency translation.

(b)	Included in Other current liabilities ($1.7 billion) and Other noncurrent liabilities ($1.1 billion).