Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

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.

All of our businesses and functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as functions such as information technology, shared services and corporate operations.

Since the acquisition of Wyeth on October 15, 2009, our cost-reduction initiatives announced on January 26, 2009, but not completed as of December 31, 2009, were incorporated into a comprehensive plan to integrate Wyeth’s operations to generate cost savings and to capture synergies across the combined company. In addition, on February 1, 2011, we announced a new 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.

The components of costs associated with cost-reduction/productivity initiatives and acquisition activity follow:

	Three Months Ended
(millions of dollars)	April 1, 2012		April 3, 2011

Transaction costs(a)	$	––	$	10
Integration costs(b)		100		179
Restructuring charges(c):
Employee termination costs		267		667
Asset impairments		218		25
Other		11		13
Restructuring charges and certain acquisition-related costs		596		894
Additional depreciation––asset restructuring, recorded in our condensed consolidated statements of income as follows(d):
Cost of sales		79		172
Selling, informational and administrative expenses		2		7
Research and development expenses		259		64
Total additional depreciation––asset restructuring		340		243
Implementation costs, recorded in our condensed consolidated statements of income as follows(e):
Selling, informational and administrative expenses		15		––
Research and development expenses		48		10
Total implementation costs		63		10
Total costs associated with cost-reduction initiatives and acquisition activity	$	999	$	1,147

(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 April 1, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 59,400 employees, mainly in manufacturing and sales and research, of which approximately 46,300 employees have been terminated as of April 1, 2012. 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 for the three months ended April 1, 2012 are associated with the following:

●

Primary Care operating segment ($3 million), Specialty Care and Oncology operating segment ($3 million), Established Products and Emerging Markets operating segment ($3 million), Animal Health and Consumer Healthcare operating segment ($5 million), research and development operations ($12 million), manufacturing operations ($152 million) and Corporate ($318 million).

The restructuring charges for the three months ended April 3, 2011 are associated with the following:

●

Primary Care operating segment ($46 million), Specialty Care and Oncology operating segment ($35 million), Established Products and Emerging Markets operating segment ($4 million), Animal Health and Consumer Healthcare operating segment ($10 million), Nutrition operating segment ($2 million), research and development operations ($422 million), manufacturing operations ($75 million) and Corporate ($111 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 asset impairment charges included in restructuring charges in the first quarter of 2012 are based on an estimate of fair value for the related assets. A description follows:

				Fair Value(a)
(millions of dollars)	April 1, 2012			Level 1	Level 2			Level 3	Impairment

Long-lived assets held-for-sale (b)	$	112	$	—	$	112	$	—	$	218

(a)	See Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.

(b)

Reflects property, plant and equipment and other long-lived assets written down to their fair value of $112 million, less costs to sell of $2 million (a net of $110 million), in the first quarter of 2012. The impairment charges of $218 million are included in Restructuring charges and certain acquisition-related costs. Fair value is determined primarily using a market approach, with various inputs, such as recent sales transactions.

The components of restructuring charges follow:

	Costs Incurred		Activity		Accrual
(millions of dollars)		2005-2012	Through April 1, 2012(a)		As of April 1, 2012(b)

Employee termination costs	$	10,869	$	8,638	$	2,231
Asset impairments		2,782		2,782		––
Other		1,033		949		84
Total restructuring charges	$	14,684	$	12,369	$	2,315

(a)	Includes adjustments for foreign currency translation.

(b)	Included in Other current liabilities ($1.4 billion) and Other noncurrent liabilities ($891 million).