Note 3. 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 and productivity initiatives. For example:

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In connection with our cost-reduction and productivity initiatives, significant programs of which began in 2005, 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

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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).

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as groups 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 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 following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:

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

Transaction costs(a)	$	1	$	13	$	1	$	23
Integration costs(b)		108		199		208		378
Restructuring charges(c):
Employee termination costs		44		189		311		853
Asset impairments		29		33		247		58
Exit costs		8		44		20		56
Restructuring charges and certain acquisition-related costs		190		478		787		1,368
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(d):
Cost of sales		57		171		136		343
Selling, informational and administrative expenses		5		22		6		29
Research and development expenses		––		167		259		230
Total additional depreciation––asset restructuring		62		360		401		602
Implementation costs recorded in our condensed consolidated statements of income as follows(e):
Cost of sales		4		––		4		––
Selling, informational and administrative expenses		15		––		31		––
Research and development expenses		37		10		85		20
Total implementation costs		56		10		120		20
Total costs associated with acquisitions and cost-reduction/ productivity initiatives	$	308	$	848	$	1,308	$	1,990

(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 July 1, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 60,000 employees, mainly in manufacturing and sales and research, of which approximately 47,900 employees have been terminated as of July 1, 2012. For the six months ended July 1, 2012, the increase represents additional accruals with respect to reserves for approximately 2,600 employees.

The restructuring charges in 2012 are associated with the following:

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For the three months ended July 1, 2012, Primary Care operating segment ($35 million income), Specialty Care and Oncology operating segment ($16 million), Established Products and Emerging Markets operating segment ($1 million), Animal Health and Consumer Healthcare operating segment ($13 million), research and development operations ($13 million), manufacturing operations ($14 million) and Corporate ($59 million).

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For the six months ended July 1, 2012, Primary Care operating segment ($32 million income), Specialty Care and Oncology operating segment ($19 million), Established Products and Emerging Markets operating segment ($4 million), Animal Health and Consumer Healthcare operating segment ($18 million), research and development operations ($25 million), manufacturing operations ($166 million) and Corporate ($378 million).

The restructuring charges in 2011 are associated with the following:

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For the three months ended July 3, 2011, Primary Care operating segment ($87 million), Specialty Care and Oncology operating segment ($7 million), Established Products and Emerging Markets operating segment ($12 million), Animal Health and Consumer Healthcare operating segment ($4 million), research and development operations ($51 million), manufacturing operations ($81 million) and Corporate ($24 million).

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For the six months ended July 3, 2011, Primary Care operating segment ($133 million), Specialty Care and Oncology operating segment ($42 million), Established Products and Emerging Markets operating segment ($15 million), Animal Health and Consumer Healthcare operating segment ($14 million), research and development operations ($473 million), manufacturing operations ($155 million) and Corporate ($135 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 following table provides the components of and changes in our restructuring accruals:

(millions of dollars)	Employee Termination Costs(a)			Asset Impairment Charges			Exit Costs			Accrual

Balance, December 31, 2011	$	2,425		$	––		$	92		$	2,517
Provision		311			247			20			578
Utilization and other(b)		(784	)		(247	)		(20	)		(1,051	)
Balance, July 1, 2012(c)	$	1,952		$	––		$	92		$	2,044

(a)	For the six months ended July 1, 2012 Provision includes additional accruals with respect to reserves for approximately 2,600 employees.

(b)	Includes adjustments for foreign currency translation.

(c)	Included in Other current liabilities ($1.2 billion) and Other noncurrent liabilities ($853 million).

The asset impairment charges included in restructuring charges for the six months ended July 1, 2012 primarily relate to assets held for sale and are based on an estimate of fair value, which was determined to be lower than the carrying value of the assets prior to the impairment charge.

The following table provides additional information about the long-lived assets held-for-sale that were impaired in 2012:

	Fair Value(a)								Six Months Ended July 1, 2012
(millions of dollars)	Amount		Level 1		Level 2		Level 3		Impairment

Long-lived assets held-for-sale(b)	$	99	$	––	$	99	$	––	$	227

(a)	The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also 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 $99 million, less costs to sell of $2 million (a net of $97 million), in the first six months of 2012. The impairment charges of $227 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.