Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-11083

BOSTON SCIENTIFIC CORPORATION

(Exact name of registrant as specified in its charter)



Delaware					04-2695240
(State or other jurisdiction of incorporation or organization)					(I.R.S. Employer Identification No.)

300 Boston Scientific Way	.	Marlborough	.	Massachusetts	01752-1234
(Address of Principal Executive Offices)					(Zip Code)

508 683-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	BSX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares outstanding of Common Stock, $0.01 par value per share, as of July 23, 2019 was 1,392,973,426.

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TABLE OF CONTENTS



		Page No.

PART I	FINANCIAL INFORMATION	3

ITEM 1.	Condensed Consolidated Financial Statements	3

	Condensed Consolidated Statements of Operations (Unaudited)	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	4

	Condensed Consolidated Balance Sheets (Unaudited as of June 30, 2019)	5

	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows (Unaudited)	7

	Notes to the Condensed Consolidated Financial Statements (Unaudited)	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	56

ITEM 4.	Controls and Procedures	57

PART II	OTHER INFORMATION	58

ITEM 1.	Legal Proceedings	58

ITEM 1A.	Risk Factors	58

ITEM 6.	Exhibits	60

SIGNATURE		61

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PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per share data)	2019			2018			2019			2018
Net sales	$	2,631		$	2,490		$	5,124		$	4,870
Cost of products sold	758			739			1,488			1,411
Gross profit	1,873			1,751			3,636			3,458

Operating expenses:
Selling, general and administrative expenses	968			886			1,837			1,746
Research and development expenses	280			275			559			536
Royalty expense	17			17			32			35
Amortization expense	161			147			321			288
Intangible asset impairment charges	37			34			105			35
Contingent consideration expense (benefit)	10			(4		)	(18		)	1
Restructuring charges (credits)	1			5			7			18
Litigation-related net charges (credits)	15			—			(133		)	—
	1,489			1,359			2,711			2,659
Operating income (loss)	384			392			925			799

Other income (expense):
Interest expense	(89		)	(57		)	(198		)	(119		)
Other, net	(150		)	12			(125		)	(11		)
Income (loss) before income taxes	145			347			602			670
Income tax expense (benefit)	(9		)	(209		)	24			(183		)
Net income (loss)	$	154		$	555		$	578		$	853

Net income (loss) per common share — basic	$	0.11		$	0.40		$	0.42		$	0.62
Net income (loss) per common share — assuming dilution	$	0.11		$	0.40		$	0.41		$	0.61

Weighted-average shares outstanding
Basic	1,391.0			1,380.5			1,389.4			1,378.5
Assuming dilution	1,408.6			1,398.9			1,408.5			1,397.8

See notes to the unaudited condensed consolidated financial statements.

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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Net income (loss)	$	154		$	555		$	578		$	853
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	—			(45		)	7			(36		)
Net change in derivative financial instruments	(9		)	158			40			78
Net change in defined benefit pensions and other items	—			—			(1		)	—
Total other comprehensive income (loss)	(9		)	112			45			42
Total comprehensive income (loss)	$	144		$	668		$	623		$	895

See notes to the unaudited condensed consolidated financial statements.

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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	As of
(in millions, except share and per share data)	June 30, 2019			December 31, 2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	123		$	146
Trade accounts receivable, net	1,712			1,608
Inventories	1,300			1,166
Prepaid income taxes	175			161
Other current assets	3,024			921
Total current assets	6,334			4,003
Property, plant and equipment, net	1,820			1,782
Goodwill	8,451			7,911
Other intangible assets, net	6,486			6,372
Other long-term assets	1,217			932
TOTAL ASSETS	$	24,309		$	20,999

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current debt obligations	$	1,949		$	2,253
Accounts payable	524			349
Accrued expenses	1,932			2,246
Other current liabilities	445			412
Total current liabilities	4,850			5,260
Long-term debt	7,591			4,803
Deferred income taxes	416			328
Other long-term liabilities	2,027			1,882

Commitments and contingencies

Stockholders’ equity
Preferred stock, $0.01 par value - authorized 50,000,000 shares, none issued and outstanding
Common stock, $0.01 par value - authorized 2,000,000,000 shares - issued 1,639,098,930 shares as of June 30, 2019 and 1,632,148,030 shares as of December 31, 2018	16			16
Treasury stock, at cost - 247,566,270 shares as of June 30, 2019 and December 31, 2018	(1,717		)	(1,717		)
Additional paid-in capital	17,422			17,346
Accumulated deficit	(6,375		)	(6,953		)
Accumulated other comprehensive income (loss), net of tax	78			33
Total stockholders’ equity	9,425			8,726
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	24,309		$	20,999

See notes to the unaudited condensed consolidated financial statements.

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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)



	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss), Net of Tax
(in millions, except share data)	Shares Issued	Par Value		Treasury Stock			Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss), Net of Tax
Balance as of December 31, 2017	1,621,062,898	$	16	$	(1,717	)	$	17,161	$	(8,390	)	$	(59	)

Net income (loss)									298
Cumulative effect adjustments for ASC Update Adoptions⁽¹⁾									(233		)
Total other comprehensive income (loss)												(69		)
Impact of stock-based compensation plans, net of tax	6,125,111						23
Balance as of March 31, 2018	1,627,188,009	$	16	$	(1,717	)	$	17,184	$	(8,326	)	$	(128	)

Net income (loss)									555
Total other comprehensive income (loss)												112
Impact of stock-based compensation plans, net of tax	1,688,243						47
Balance as of June 30, 2018	1,628,876,252	$	16	$	(1,717	)	$	17,231	$	(7,770	)	$	(16	)

Net income (loss)									432
Total other comprehensive income (loss)												40
Impact of stock-based compensation plans, net of tax	2,395,031						73
Balance as of September 30, 2018	1,631,271,283	$	16	$	(1,717	)	$	17,304	$	(7,339	)	$	25

Net income (loss)									386
Total other comprehensive income (loss)												8
Impact of stock-based compensation plans, net of tax	876,747						42
Balance as of December 31, 2018	1,632,148,030	$	16	$	(1,717	)	$	17,346	$	(6,953	)	$	33

Net income (loss)									424
Total other comprehensive income (loss)												54
Impact of stock-based compensation plans, net of tax	6,001,343						28
Balance as of March 31, 2019	1,638,149,373	$	16	$	(1,717	)	$	17,374	$	(6,528	)	$	87

Net income (loss)									154
Total other comprehensive income (loss)												(9		)
Impact of stock-based compensation plans, net of tax	949,557						48
Balance as of June 30, 2019	1,639,098,930	$	16	$	(1,717	)	$	17,422	$	(6,375	)	$	78

(1) In 2018, we recorded cumulative effect adjustments to retained earnings to reflect the adoption of Accounting Standards Codification (ASC) Update No. 2014-09, Update No. 2016-16 and Update No. 2016-01. Please refer to Note A – Significant Accounting Policies included in Item 8 of our most recent Annual Report on Form 10-K for more information.

See notes to the unaudited condensed consolidated financial statements.

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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Six Months Ended June 30,
(in millions)	2019			2018
Cash provided by (used for) operating activities	$	642		$	(210	)

Investing activities:
Purchases of property, plant and equipment	(154		)	(134		)
Proceeds from sale of property, plant and equipment	2			—
Payments for acquisitions of businesses, net of cash acquired	(763		)	(418		)
Payments for investments and acquisitions of certain technologies	(115		)	(112		)
Cash provided by (used for) investing activities	(1,030		)	(664		)

Financing activities:
Payment of contingent consideration amounts previously established in purchase accounting	(64		)	(5		)
Payments on short-term borrowings	(1,000		)	—
Net increase (decrease) in commercial paper	675			472
Payments on borrowings from credit facilities	—			(569		)
Proceeds from borrowings on credit facilities	—			569
Payments on long-term borrowings and debt extinguishment costs	(1,472		)	(602		)
Proceeds from long-term borrowings, net of debt issuance costs	4,243			989
Cash used to net share settle employee equity awards	(61		)	(52		)
Proceeds from issuances of shares of common stock	63			53
Cash provided by (used for) financing activities	2,383			856

Effect of foreign exchange rates on cash	—			(5		)

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents	1,994			(23		)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	829			1,017
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	2,823		$	994

Supplemental Information
Stock-based compensation expense	$	74		$	68
Fair value of contingent consideration recorded in purchase accounting	131			140



	As of June 30,
Reconciliation to amounts within the unaudited condensed consolidated balance sheets:	2019		2018
Cash and cash equivalents	$	123	$	208
Restricted cash and restricted cash equivalents included in Other current assets	2,657		756
Restricted cash equivalents included in Other long-term assets	42		31
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	2,823	$	994

See notes to the unaudited condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. When used in this report, the terms, "we," "us," "our," and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our most recent Annual Report on Form 10-K.

Amounts reported in millions within this report are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in dollars.

Subsequent Events

We evaluate events occurring after the date of our most recent accompanying unaudited condensed consolidated balance sheet for potential recognition or disclosure in our financial statements. Those items requiring disclosure (nonrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note B – Acquisitions and Strategic Investments and Note I – Commitments and Contingencies for more information.

Accounting Standards Implemented Since December 31, 2018

ASC Update No. 2016-02

In February 2016, the Financial Accounting Standards Board (FASB) issued ASC Update No. 2016-02, Leases (FASB ASC Topic 842, Leases). We adopted the standard as of January 1, 2019, using the modified retrospective approach and the transition method provided by ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, we applied the new leasing rules on the date of adoption and recognized the cumulative effect of initially applying the standard as an adjustment to our opening balance sheet, rather than at the earliest comparative period presented in the financial statements. Prior periods presented are in accordance with the previous lease guidance under FASB ASC Topic 840, Leases.

In addition, we applied the package of practical expedients permitted under FASB ASC Topic 842 transition guidance to our entire lease portfolio at January 1, 2019. As a result, we were not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the classification of any expired or existing leases and (iii) the treatment of initial direct costs for any existing leases. Furthermore, we elected not to separate lease and non-lease components for the majority of our leases. Instead, for all applicable classes of underlying assets, we accounted for each separate lease component and the non-lease components associated with that lease component, as a single lease component.

As a result of adopting FASB ASC Topic 842 on January 1, 2019, we recognized right-of-use assets of $271 million and corresponding liabilities of $278 million for our existing operating lease portfolio on our unaudited condensed consolidated balance sheet. Operating lease right-of-use assets are presented within Other long-term assets and corresponding liabilities are presented within Other current liabilities and Other long-term liabilities on our unaudited condensed consolidated balance sheets. Finance leases are immaterial to our unaudited condensed consolidated financial statements. Refer to Note E – Borrowings and Credit Arrangements for additional information. There was no material impact to our unaudited condensed consolidated statements of operations or unaudited condensed consolidated statements of cash flows. Please refer to Note G – Leases for information regarding our lease portfolio as of June 30, 2019 as accounted for under FASB ASC Topic 842.

To meet the reporting and disclosure requirements of FASB ASC Topic 842, we implemented a new lease administration and lease accounting system in 2018 that tracks all of our material leasing arrangements. In addition, we designed and implemented new processes and internal controls during the first quarter of 2019 to ensure the completeness and accuracy of the transition adjustment and subsequent financial reporting under FASB ASC Topic 842. We also established monitoring controls to ensure we have appropriate mechanisms in place to identify material leases in a timely manner, particularly contracts that may contain embedded lease features.

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NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

Our unaudited condensed consolidated financial statements include the operating results for acquired entities from the respective date of acquisition. We have not presented pro forma financial information for acquisitions given their results are not material to our unaudited condensed consolidated financial statements. Transaction costs associated with these acquisitions were expensed as incurred and are not material for the second quarter and first six months of 2019 and 2018.

Proposed BTG Acquisition

On November 20, 2018, our board of directors and the board of directors of our wholly owned indirect subsidiary, Bravo Bidco Limited (Bidco), and BTG plc (BTG), a public company organized under the laws of England and Wales, issued an announcement (the Rule 2.7 Announcement) under Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers, disclosing the terms of a recommended cash offer to be made by Bidco for the entire issued and to be issued ordinary share capital of BTG (the proposed BTG Acquisition). BTG develops and commercializes products used in minimally-invasive procedures targeting cancer and vascular diseases, as well as acute care pharmaceuticals. In connection with the proposed BTG Acquisition, (i) we entered into a co-operation agreement with Bidco and BTG, (ii) certain shareholders and each BTG director owning shares of BTG delivered deeds of irrevocable undertakings to Bidco and (iii) we entered into a bridge credit agreement (Bridge Facility) that we terminated in February 2019 upon the closing of our senior notes offering. Refer to Note E – Borrowings and Credit Arrangements for further details.

On January 24, 2019, Bidco made such offer on the terms and subject to the conditions of the scheme document published on the same date. On February 28, 2019, a majority in number of BTG shareholders approved the scheme document published on January 24, 2019 (Scheme).

On February 14, 2019, both the Company and BTG received a request for additional information and documentary material from the United States Federal Trade Commission in connection with the proposed BTG Acquisition. The request for additional information related to our drug-eluting and bland embolic microsphere portfolio.

On July 2, 2019, BTG and Boston Scientific issued an announcement disclosing that we signed an agreement for the sale of our existing drug-eluting and bland embolic microsphere portfolio to Varian Medical Systems, Inc. The sale is subject to the satisfaction or waiver of customary closing conditions, including consummation of the proposed BTG Acquisition, and is expected to close immediately after completion of the proposed BTG Acquisition.

Under the terms of the proposed BTG Acquisition, BTG shareholders will receive 840 pence in cash for each BTG share, which values the existing issued and to be issued ordinary share capital of BTG at approximately £3.311 billion (or approximately $4.204 billion based on the exchange rate of U.S. $1.27: £1.00 as of June 28, 2019). We intend to implement the proposed BTG Acquisition by way of a court-sanctioned scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended. Subject to the satisfaction or waiver of all relevant conditions, we expect the proposed BTG Acquisition to be effective in August 2019.

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2019 Acquisitions

Vertiflex, Inc.

On June 11, 2019, we announced the closing of our acquisition of Vertiflex, Inc. (Vertiflex), a privately-held company which has developed and commercialized the Superion™ Indirect Decompression System, a minimally-invasive device used to improve physical function and reduce pain in patients with lumbar spinal stenosis (LSS). The transaction price consists of an upfront cash payment of $465 million and contingent payments that are based on a percentage of Vertiflex sales growth in the first three years following the acquisition close. We estimate the sales-based contingent payments to be in a range of zero to $100 million; however, the payments are uncapped over the three year term. Vertiflex is part of our Neuromodulation business.

Millipede, Inc.

On January 29, 2019, we announced the closing of our acquisition of Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. We have been an investor in Millipede since the first quarter of 2018 as part of an investment and acquisition option agreement, whereby we purchased a portion of the outstanding shares of Millipede, along with newly issued shares of the company, for an upfront cash payment of $90 million. In the fourth quarter of 2018, upon the recent successful completion of a first-in-human clinical study, we exercised our option to acquire the remaining shares of Millipede. We held an interest of approximately 20 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. The transaction price for the remaining stake consists of an upfront cash payment of $325 million and up to an additional $125 million payment upon achievement of a commercial milestone. Millipede is part of our Interventional Cardiology business.

Purchase Price Allocation

We accounted for our 2019 acquisitions as business combinations, and in accordance with FASB ASC Topic 805, Business Combinations, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The aggregate preliminary purchase prices were comprised of the following components:



(in millions)
Payment for acquisition, net of cash acquired	$	763
Fair value of contingent consideration	131
Fair value of prior interest	103
	$	997

The following summarizes the aggregate preliminary purchase price allocations for our 2019 acquisitions as of June 30, 2019:



(in millions)
Goodwill	$	540
Amortizable intangible assets	217
Indefinite-lived intangible assets	295
Other assets acquired	24
Liabilities assumed	(12		)
Net deferred tax liabilities	(68		)
	$	997

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We allocated a portion of the aggregate preliminary purchase prices to the specific intangible asset categories as follows:



	Amount Assigned (in millions)		Amortization Period (in years)	Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	207	12	15%
Other intangible assets	10		12	15%
Indefinite-lived intangible assets:
In-process research and development (IPR&D)	295		N/A	20%
	$	512

2018 Acquisitions

We did not record any material purchase price adjustments to the preliminary or final purchase price allocations of the 2018 acquisitions in the first six months of 2019.

NxThera, Inc.

On April 30, 2018, we announced the closing of our acquisition of NxThera, Inc. (NxThera), a privately-held company that developed the Rezūm™ System, a minimally invasive therapy in a growing category of treatment options for patients with benign prostatic hyperplasia (BPH). We held a minority interest immediately prior to the acquisition date. The transaction price to acquire the remaining stake consists of an upfront cash payment of approximately $240 million and up to approximately $85 million in payments contingent upon commercial milestones over the next four years. NxThera is part of our Urology and Pelvic Health business.

nVision Medical Corporation

On April 16, 2018, we announced the closing of our acquisition of nVision Medical Corporation (nVision), a privately-held company focused on women’s health. nVision developed the first and only device cleared by the U.S. Food and Drug Administration (FDA) to collect cells from the fallopian tubes, offering a potential platform for earlier diagnosis of ovarian cancer. The transaction price consists of an upfront cash payment of $150 million and up to an additional $125 million in payments contingent upon clinical and commercial milestones over the next four years. nVision is part of our Urology and Pelvic Health business.

In addition, we completed other individually immaterial acquisitions in the first six months of 2018 for total consideration of $50 million in cash at closing plus aggregate contingent consideration of up to $10 million.

Purchase Price Allocation

We accounted for our 2018 acquisitions as business combinations, and in accordance with FASB ASC Topic 805, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The components of the aggregate purchase prices are as follows:



(in millions)
Payments for acquisitions, net of cash acquired	$	419
Fair value of contingent consideration	140
Fair value of prior interests	82
	$	641

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The following summarizes the aggregate purchase price allocations for our 2018 acquisitions as of June 30, 2019:



(in millions)
Goodwill	$	272
Amortizable intangible assets	418
Other assets acquired	11
Liabilities assumed	(5		)
Net deferred tax liabilities	(55		)
	$	641

We allocated a portion of the aggregate purchase prices to specific intangible asset categories as follows:



	Amount Assigned (in millions)		Amortization Period (in years)			Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	411	10	-	13	17	%	-	23%
Other intangible assets	7		6	-	13	13	%	-	15%
	$	418

Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets and are amortizing them on a straight-line basis over their assigned estimated useful lives.

Goodwill was primarily established due to synergies expected to be gained from leveraging our existing operations as well as revenue and cash flow projections associated with future technologies and has been allocated to our reportable segments based on the relative expected benefit. Based on preliminary estimates updated for applicable regulatory changes, the goodwill recorded relating to our 2019 and 2018 acquisitions is not deductible for tax purposes.

Contingent Consideration

Changes in the fair value of our contingent consideration liability were as follows:



(in millions)
Balance as of December 31, 2018	$	347
Amount recorded related to current year acquisition	131
Contingent consideration expense (benefit)	(18		)
Contingent consideration payments	(67		)
Balance as of June 30, 2019	$	394

As of June 30, 2019, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $959 million, which includes our estimate of maximum contingent payments of $100 million associated with the Vertiflex acquisition described above.

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The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:



Contingent Consideration Liability	Fair Value as of June 30, 2019	Valuation Technique	Unobservable Input	Range				Weighted Average (1)
R&D, Regulatory and Commercialization-based Milestones	$232 million	Discounted Cash Flow	Discount Rate	3%				3%
			Probability of Payment	17	%	-	90%	82%
			Projected Year of Payment	2019		-	2027	2021
Revenue-based Payments	$162 million	Discounted Cash Flow	Discount Rate	11	%	-	15%	13%
			Probability of Payment	60	%	-	100%	99%
			Projected Year of Payment	2019		-	2026	2021


(1)	Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.

Projected contingent payment amounts related to some of our research and development (R&D), commercialization-based and revenue-based milestones are discounted back to the current period using a discounted cash flow model. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of June 30, 2019.

Strategic Investments

The aggregate carrying amount of our strategic investments was comprised of the following categories:



	As of
(in millions)	June 30, 2019		December 31, 2018
Equity method investments	$	243	$	303
Measurement alternative investments (1)	169		94
Publicly-held equity securities (2)	1		—
Notes receivable	3		26
	$	415	$	424


(1)	Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.


(2)	Publicly-held equity securities are measured at fair value with changes in fair value recognized currently in Net income (loss).

These investments are classified as Other long-term assets within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.

As of June 30, 2019, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by approximately $278 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.

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NOTE C – GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill are as follows:



	As of June 30, 2019					As of December 31, 2018
(in millions)	Gross Carrying Amount		Accumulated Amortization/ Write-offs			Gross Carrying Amount		Accumulated Amortization/ Write-offs
Amortizable intangible assets
Technology-related	$	10,291	$	(5,425	)	$	10,197	$	(5,266	)
Patents	521		(401		)	520		(393		)
Other intangible assets	1,683		(1,018		)	1,666		(958		)
	$	12,495	$	(6,844	)	$	12,383	$	(6,617	)
Indefinite-lived intangible assets
Goodwill	$	18,351	$	(9,900	)	$	17,811	$	(9,900	)
IPR&D	715		—			486		—
Technology-related	120		—			120		—
	$	19,187	$	(9,900	)	$	18,417	$	(9,900	)

The following represents our goodwill balance by global reportable segment:



(in millions)	MedSurg			Rhythm and Neuro		Cardiovascular		Total
Balance as of December 31, 2018	$	2,063		$	1,924	$	3,925	$	7,911
Impact of foreign currency fluctuations and other changes in carrying amount	(1		)	—		2		1
Goodwill acquired	—			271		270		540
Balance as of June 30, 2019	$	2,061		$	2,194	$	4,196	$	8,451

Goodwill and Indefinite-Lived Intangible Asset Impairment Testing

We did not have any goodwill impairments in the second quarter and first six months of 2019 or 2018.

We test our goodwill balances in the second quarter of each year for impairment, or more frequently if impairment indicators are present or changes in circumstances suggest an impairment may exist. In the second quarter of 2019, we performed our annual goodwill impairment test for all of our reporting units and concluded that the fair value of each reporting unit exceeded its carrying value.

In performing the goodwill impairment assessment, we utilized both the optional qualitative assessment and the quantitative approach prescribed under FASB ASC Topic 350, Intangibles - Goodwill and Other. In 2019, we performed a qualitative assessment for our Urology and Pelvic Health, Neuromodulation and Endoscopy reporting units since their fair values have exceeded carrying value by greater than 100 percent. The remaining reporting units were quantitatively tested for impairment. For the reporting units subject to a qualitative assessment, if it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the quantitative approach of the goodwill impairment test is necessary. In 2019, for all reporting units tested using the qualitative assessment, we concluded that it was unnecessary to perform the quantitative impairment test. For all reporting units tested using the quantitative approach, we concluded that the fair value of each reporting unit exceeded its carrying value.

Intangible asset impairment charges were $37 million in the second quarter of 2019 and $105 million in the first six months of 2019 and were primarily associated with amortizable technology-related intangible assets. Intangible asset impairment charges were $34 million in the second quarter and $35 million in the first six months of 2018 and were primarily associated with amortizable technology-related intangible assets.

We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If we determine it is more likely than not that the asset is impaired based on our qualitative assessment of impairment indicators, we test the intangible asset for recoverability. If the carrying value of the intangible asset or asset group exceeds the undiscounted cash flows expected to

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result from the use and eventual disposition of the intangible asset or asset group, we will write the carrying value down to fair value in the period impairment is identified.

Refer to Critical Accounting Policies and Estimates within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our most recent Annual Report on Form 10-K for further discussion of our annual goodwill and intangible asset impairment testing.

NOTE D – HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Derivative Instruments and Hedging Activities

We address market risk from changes in foreign currency exchange rates and interest rates through risk management programs which include the use of derivative financial instruments. We operate these programs pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings to material risk, as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item.

We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.

Currency Derivative Instruments

Risk Management Strategy

Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities, forecast intercompany and third-party transactions and net investments in certain subsidiaries. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.

The success of our currency risk management program depends, in part, on forecast transactions denominated primarily in British pound sterling, Euro, Japanese yen and Chinese renminbi. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.

Derivative Designations and Hedging Relationships

Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging, and are intended to protect the U.S. dollar value of forecasted transactions. The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in the Net change in derivative financial instruments component of Other comprehensive income (loss), net of tax (OCI) on our unaudited condensed consolidated statements of comprehensive income (loss) until the underlying third-party transaction occurs. When the underlying third-party transaction occurs, we recognize the gain or loss in earnings within the Cost of products sold caption of our unaudited condensed consolidated statements of operations. In the event the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the gains or losses within Accumulated other comprehensive income (loss), net of tax (AOCI) to earnings at that time.

We also designate certain forward currency contracts as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the Euro, Swiss franc, and Japanese yen. We have elected to use the spot method to assess effectiveness for our derivatives that are designated as net investment hedges. Under the spot method, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. We have elected to exclude the spot-forward difference from the assessment of hedge effectiveness and are amortizing this amount separately, as calculated at the date of designation, on a straight-line basis over the term of the currency forward contracts. Amortization of the spot-forward difference is then reclassified from AOCI to current period earnings as a reduction to Interest expense on our unaudited condensed consolidated statements of operations.

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We also use forward currency contracts that are not part of designated hedging relationships under FASB ASC Topic 815 as a part of our strategy to manage our exposure to currency exchange rate risk related to monetary assets and liabilities and related forecast transactions. These non-designated currency forward contracts have an original time to maturity consistent with the hedged currency transaction exposures, generally less than one year, and are marked-to-market with changes in fair value recorded to earnings within the Other, net caption of our unaudited condensed consolidated statements of operations.

Certain of our non-designated forward currency contracts were entered into for the purpose of managing our exposure to currency exchange rate risk related to the purchase price of the proposed BTG Acquisition. As of June 30, 2019, we had £3.311 billion in aggregate notional amount outstanding of forward and deal-contingent forward currency contracts to hedge the full purchase price of the proposed BTG Acquisition. As of December 31, 2018, we had entered into £2.000 billion in aggregate notional amount of these contracts. We recognized a $151 million loss in the second quarter of 2019 and a $116 million loss in the first six months of 2019 in Other, net due to changes in fair value of the contracts, which are recognized in earnings until contract settlement.

Interest Rate Derivative Instruments

Risk Management Strategy

Our interest rate risk relates primarily to U.S. dollar borrowings partially offset by U.S. dollar cash investments. We use interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates. Under these agreements we and the counterparty, at specified intervals, exchange the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. We designate these derivative instruments either as fair value or cash flow hedges in accordance with FASB ASC Topic 815.

Derivative Designations and Hedging Relationships

We had no interest rate derivative instruments designated as cash flow hedges outstanding as of June 30, 2019 and $1.000 billion outstanding as of December 31, 2018, which were intended to manage our earnings and cash flow exposure to changes in the benchmark interest rate in connection with the forecasted issuance of fixed-rate debt. For outstanding designated cash flow hedges, we record the changes in the fair value of the derivatives within OCI until the underlying hedged transaction occurs, at which time we recognize the gain or loss within Interest expense over the same period that the hedged items affect earnings, so long as the hedge relationship remains effective. If we determine the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the amount of gains or losses from AOCI to earnings at that time.

During the fourth quarter of 2018, we entered into interest rate derivative contracts designated as cash flow hedges having a notional amount of $1.000 billion to hedge interest rate risk. In the first quarter of 2019, we terminated these instruments in connection with our senior notes issuance in the same period as discussed in Note E – Borrowings and Credit Arrangements. We recognized an immaterial loss within OCI in the first six months of 2019 and are reclassifying the amortization of the loss from AOCI into earnings as a component of Interest expense over the same period that the hedged item affects earnings, so long as the hedge relationship remains effective. We are also continuing to reclassify in a similar manner the amortization of the gains or losses of our other previously terminated interest rate derivative instruments that were designated as cash flow hedges. The balance of the deferred loss on our terminated cash flow hedges within AOCI was immaterial as of June 30, 2019 and December 31, 2018. We recognized immaterial gains and losses in Interest expense relating to the amortization of our terminated cash flow hedges in the current and prior periods.

We had no interest rate derivative instruments designated as fair value hedges outstanding as of June 30, 2019 and December 31, 2018. Prior to 2018, we terminated interest rate derivative instruments that were designated as fair value hedges and are continuing to recognize the amortization of the gains or losses originally recorded within the Long-term debt caption on our unaudited condensed consolidated balance sheets into earnings as a component of Interest expense over the same period that the discount or premium associated with the hedged items affects earnings. In the event that we designate outstanding interest rate derivative instruments as fair value hedges, we record the changes in the fair values of interest rate derivatives designated as fair value hedges and of the underlying hedged debt instruments in Interest expense, which generally offset. The balance of the deferred gains on our terminated fair value hedges within Long-term debt was immaterial as of June 30, 2019 and December 31, 2018. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.

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The following table presents the contractual amounts of our derivative instruments outstanding:



(in millions)	FASB ASC Topic 815 Designation	As of
(in millions)	FASB ASC Topic 815 Designation	June 30, 2019		December 31, 2018
Forward currency contracts	Cash flow hedge	$	4,269	$	3,962
Forward currency contracts	Net investment hedge	1,928		1,483
Forward currency contracts	Non-designated	7,921		5,880
Interest rate derivative contracts	Cash flow hedge	—		1,000
Total Notional Outstanding		$	14,118	$	12,326

The remaining time to maturity as of June 30, 2019 is within 60 months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts.

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The following presents the effect of our derivative instruments designated as cash flow and net investment hedges under FASB ASC Topic 815 on our accompanying unaudited condensed consolidated statements of operations. Refer to Note M – Changes in Other Comprehensive Income for the total amounts relating to derivative instruments presented within the unaudited condensed consolidated statements of comprehensive income (loss).



	Effect of Hedging Relationships on Accumulated Other Comprehensive Income
	Amount Recognized in OCI on Derivative									Unaudited Condensed Consolidated Statements of Operations (1)			Amount Reclassified from AOCI into Earnings
(in millions)	Pre-Tax Gain (Loss)			Tax Benefit (Expense)			Gain (Loss) Net of Tax			Location of Amount Reclassified	Total Amount of Line Item Presented		Pre-Tax (Gain) Loss			Tax (Benefit) Expense		(Gain) Loss Net of Tax
Three Months Ended June 30, 2019
Forward currency contracts
Cash flow hedges	$	2		$	(1	)	$	2		Cost of products sold	$	758	$	(16	)	$	4	$	(12	)
Net investment hedges (2)	(5		)	1			(4		)	Interest expense	89