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 March 31, 2020

OR

☐ 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
0.625% Senior Notes due 2027	BSX27	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 April 30, 2020 was 1,399,350,122.

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 March 31, 2020)	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	34
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	50
ITEM 4.	Controls and Procedures	51
PART II	OTHER INFORMATION	52
ITEM 1.	Legal Proceedings	52
ITEM 1A.	Risk Factors	52
ITEM 6.	Exhibits	53
SIGNATURE		55

2

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended March 31,
(in millions, except per share data)	2020			2019
Net sales	$	2,543		$	2,493
Cost of products sold	806			730
Gross profit	1,737			1,763
Operating expenses:
Selling, general and administrative expenses	978			869
Research and development expenses	300			280
Royalty expense	12			16
Amortization expense	201			160
Intangible asset impairment charges	198			67
Contingent consideration expense (benefit)	(108		)	(28		)
Restructuring charges (credits)	10			6
Litigation-related net charges (credits)	—			(148		)
	1,591			1,222
Operating income (loss)	146			541
Other income (expense):
Interest expense	(88		)	(109		)
Other, net	(36		)	25
Income (loss) before income taxes	22			457
Income tax expense (benefit)	12			33
Net income (loss)	$	11		$	424
Net income (loss) per common share — basic	$	0.01		$	0.31
Net income (loss) per common share — assuming dilution	$	0.01		$	0.30
Weighted-average shares outstanding
Basic	1,397.4			1,387.7
Assuming dilution	1,413.5			1,408.4

See notes to the unaudited condensed consolidated financial statements.

3

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

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

	Three Months Ended March 31,
(in millions)	2020			2019
Net income (loss)	$	11		$	424
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(177		)	6
Net change in derivative financial instruments	75			49
Net change in defined benefit pensions and other items	—			(1		)
Total other comprehensive income (loss)	(101		)	54
Total comprehensive income (loss)	$	(91	)	$	479

See notes to the unaudited condensed consolidated financial statements.

4

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	As of
(in millions, except share and per share data)	March 31, 2020			December 31, 2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	370		$	217
Trade accounts receivable, net	1,577			1,828
Inventories	1,628			1,579
Prepaid income taxes	205			195
Other current assets	1,043			880
Total current assets	4,823			4,699
Property, plant and equipment, net	2,098			2,079
Goodwill	10,098			10,176
Other intangible assets, net	7,393			7,886
Deferred tax assets	4,162			4,196
Other long-term assets	1,538			1,529
TOTAL ASSETS	$	30,113		$	30,565
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current debt obligations	$	1,004		$	1,416
Accounts payable	605			542
Accrued expenses	1,562			2,109
Other current liabilities	804			800
Total current liabilities	3,976			4,866
Long-term debt	9,331			8,592
Deferred income taxes	589			595
Other long-term liabilities	2,412			2,635
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 1,646,877,242 shares as of March 31, 2020 and 1,642,488,911 shares as of December 31, 2019	16			16
Treasury stock, at cost - 247,566,270 shares as of March 31, 2020 and December 31, 2019	(1,717		)	(1,717		)
Additional paid-in capital	17,589			17,561
Accumulated deficit	(2,252		)	(2,253		)
Accumulated other comprehensive income (loss), net of tax	168			270
Total stockholders’ equity	13,804			13,877
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	30,113		$	30,565

See notes to the unaudited condensed consolidated financial statements.

5

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
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
Net income (loss)									126
Total other comprehensive income (loss)												60
Impact of stock-based compensation plans, net of tax	2,243,579						89
Balance as of September 30, 2019	1,641,342,509	$	16	$	(1,717	)	$	17,510	$	(6,249	)	$	138
Net income (loss)									3,996
Total other comprehensive income (loss)												132
Impact of stock-based compensation plans, net of tax	1,146,402						50
Balance as of December 31, 2019	1,642,488,911	$	16	$	(1,717	)	$	17,561	$	(2,253	)	$	270
Net income (loss)									11
Cumulative effect adjustment for adoption of ASU 2016-13									(10		)
Total other comprehensive income (loss)												(101		)
Impact of stock-based compensation plans, net of tax	4,388,331						28
Balance as of March 31, 2020	1,646,877,242	$	16	$	(1,717	)	$	17,589	$	(2,252	)	$	168

See notes to the unaudited condensed consolidated financial statements.

6

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
(in millions)	2020			2019
Cash provided by (used for) operating activities	$	(77	)	$	350
Investing activities:
Purchases of property, plant and equipment	(100		)	(63		)
Proceeds from sale of property, plant and equipment	3			2
Payments for acquisitions of businesses, net of cash acquired	—			(321		)
Proceeds from royalty rights	23			—
Payments for investments and acquisitions of certain technologies	(2		)	(28		)
Cash provided by (used for) investing activities	(76		)	(410		)
Financing activities:
Payment of contingent consideration and royalty rights previously established in purchase accounting	(76		)	(7		)
Payments on short-term borrowings	(300		)	(1,000		)
Proceeds from short-term borrowings, net of debt issuance costs	1,000			—
Net increase (decrease) in commercial paper	(714		)	370
Payments on borrowings from credit facilities	(479		)	—
Proceeds from borrowings on credit facilities	1,839			—
Payments on long-term borrowings and debt extinguishment costs	(1,000		)	(1,472		)
Proceeds from long-term borrowings, net of debt issuance costs	—			4,243
Cash used to net share settle employee equity awards	(57		)	(60		)
Proceeds from issuances of shares of common stock	42			53
Cash provided by (used for) financing activities	256			2,127
Effect of foreign exchange rates on cash	(9		)	—
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents	93			2,067
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	607			829
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	700		$	2,896
Supplemental Information
Stock-based compensation expense	$	42		$	36
Fair value of contingent consideration recorded in purchase accounting	—			87
Non-cash impact of transferred royalty rights	(23		)	—

	As of March 31,
Reconciliation to amounts in the unaudited condensed consolidated balance sheets:	2020		2019
Cash and cash equivalents	$	370	$	139
Restricted cash and restricted cash equivalents included in Other current assets	288		2,724
Restricted cash equivalents included in Other long-term assets	42		33
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	700	$	2,896

See notes to the unaudited condensed consolidated financial statements.

7

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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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 (non-recognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note E – Contractual Obligations and Commitments and Note H – Commitments and Contingencies for more information.

In December 2019, the novel strain of coronavirus (SARS-Cov-2), and its disease commonly known as COVID-19 (COVID-19), was reported in China and has since widely impacted the global public health and economic environment. In March 2020, the World Health Organization (WHO) declared COVID-19, including all additional variations and strains thereof, a global pandemic (COVID-19 pandemic). We have evaluated the recoverability of the assets on our unaudited condensed consolidated balance sheet as of March 31, 2020 in accordance with relevant authoritative accounting literature including Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 855 - Subsequent Events. We considered the disruptions caused by COVID-19, including lower than forecasted sales and customer demand, a decline in the price of our common stock and macroeconomic factors potentially impacting accounts receivable, inventory, investments, intangible assets, goodwill and other assets and liabilities. Where forward looking estimates are required, we made a good-faith estimate based on information available as of the balance sheet date. We have continued to monitor for indicators of impairment through the date of this Quarterly Report filed on Form 10-Q, and reflected accordingly in the accompanying condensed consolidated financial statements. Those items requiring disclosure (non-recognized subsequent events) in the financial statements have been disclosed accordingly.

Accounting Standards Implemented Since December 31, 2019

ASC Update No. 2016-13

In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments - Credit Losses (FASB ASC Topic 326, Financial Instruments - Credit Losses). We adopted the standard as of January 1, 2020 using the modified retrospective method. Under this method, we applied the new credit loss measurement guidance to financial assets measured at amortized cost on the date of adoption and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2020 are presented in accordance with FASB ASC Topic 326. Prior period amounts have not been restated and are reported in accordance with legacy GAAP requirements in FASB ASC Topic 310, Receivables.

Upon the adoption of FASB ASC Topic 326, credit loss reserves are recorded when financial assets are established if credit losses are expected over the asset’s contractual life. These losses were previously expensed when it became probable that a loss would be incurred.

As a result of the adoption of FASB ASC Topic 326, we recorded a net reduction to opening retained earnings on January 1, 2020 related to the establishment of credit loss reserves on Trade accounts receivable and recorded a corresponding increase in the Allowance for credit losses, a contra Trade accounts receivable account. The adoption impact was not material to our unaudited condensed consolidated financial statements.

8

ASC Update No. 2018-15

In August 2018, the FASB issued ASC Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The purpose of Update No. 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Update No. 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period. We adopted Update No. 2018-15 in the first quarter of 2020. The adoption had an immaterial impact on our financial position and results of operations.

ASC Update No. 2018-18

In November 2018, the FASB issued ASC Update No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. The purpose of Update No. 2018-18 is to clarify the interaction between FASB ASC Topic 808 and FASB ASC Topic 606, Revenue from Contracts with Customers (FASB ASC Topic 606) as FASB ASC Topic 808 did not provide comprehensive recognition or measurement guidance for collaborative arrangements, and the accounting for those arrangements was often based on an analogy to other accounting literature or an accounting policy election. Update No. 2018-18 is effective for annual periods beginning after December 15, 2019. We adopted Update No. 2018-18 in the first quarter of 2020. The adoption had an immaterial impact on our financial position and results of operations.

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 did not complete any acquisitions during the first quarter of 2020. We have not presented supplemental pro forma financial information for prior acquisitions given their results are not material to our unaudited condensed consolidated financial statements. We recorded immaterial purchase price adjustments to the preliminary purchase price allocations of previous acquisitions during the measurement period in the first quarter of 2020. Transaction costs for all acquisitions completed in the first quarter of 2019 were immaterial to our unaudited condensed consolidated financial statements and were expensed as incurred.

Q1 2019 Acquisitions

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 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 consisted of an upfront cash payment of $325 million and up to an additional $125 million payment upon achievement of a commercial milestone. Following the closing of the acquisition, we have integrated the Millipede business into our Interventional Cardiology division.

9

Purchase Price Allocation

We accounted for our 2019 acquisition of Millipede as a business combination, 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 final purchase price is comprised of the following components:

(in millions)
Payment for acquisition, net of cash acquired	$	321
Fair value of contingent consideration	83
Fair value of prior interests	102
	$	505

The purchase price allocation of our acquisition of Millipede was comprised of the following components as of March 31, 2020:

(in millions)
Goodwill	$	307
Amortizable intangible assets	—
Indefinite-lived intangible assets	240
Other assets acquired	2
Liabilities assumed	(1		)
Net deferred tax liabilities	(43		)
	$	505

We allocated a portion of the purchase price of our acquisition of Millipede to the specific intangible asset category as follows:

	Amount Assigned (in millions)	Amortization Period (in years)	Risk-Adjusted Discount Rates used in Purchase Price Allocation
Indefinite-lived intangible assets:
In-process research and development (IPR&D)	240	N/A	19%

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. The goodwill recorded relating to our 2019 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, 2019	$	354
Contingent consideration expense (benefit)	(108		)
Contingent consideration payments	(28		)
Balance as of March 31, 2020	$	218

As of March 31, 2020, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was $658 million associated with our prior acquisitions. Refer to Note B – Acquisitions and Strategic Investments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.

The $108 million benefit recorded in the first quarter of 2020 related to a reduction in the contingent consideration liability for certain prior acquisitions for which we reduced the probability of achievement of associated revenue and/or regulatory milestones, or in the case of nVision for milestones that would not be achieved due to management's discontinuation of the R&D program.

10

The recurring Level 3 fair value measurements of our contingent consideration liability that we expect to be required to settle include the following significant unobservable inputs:

Contingent Consideration Liability	Fair Value as of March 31, 2020	Valuation Technique	Unobservable Input	Range				Weighted Average (1)
R&D, Regulatory and Commercialization-based Milestones	$96 million	Discounted Cash Flow	Discount Rate	3	%	-	3%	3%
			Probability of Payment	90%				90%
			Projected Year of Payment	2020		-	2027	2024
Revenue-based Payments	$121 million	Discounted Cash Flow	Discount Rate	11	%	-	14%	13%
			Probability of Payment	100%				100%
			Projected Year of Payment	2020		-	2024	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 March 31, 2020.

Strategic Investments

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

	As of
(in millions)	March 31, 2020		December 31, 2019
Equity method investments	$	253	$	264
Measurement alternative investments (1)	181		171
Publicly-held equity securities (2)	—		1
Notes receivable	2		23
	$	437	$	458

(1) Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost minus impairment, if any, adjusted to fair value for any 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 Other, net on our accompanying unaudited condensed consolidated statements of operations.

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 March 31, 2020, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $313 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.

11

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 March 31, 2020					As of December 31, 2019
(in millions)	Gross Carrying Amount		Accumulated Amortization/ Write-offs			Gross Carrying Amount		Accumulated Amortization/ Write-offs
Amortizable intangible assets
Technology-related	$	11,906	$	(5,806	)	$	12,020	$	(5,706	)
Patents	525		(409		)	525		(408		)
Other intangible assets	1,748		(1,113		)	1,754		(1,081		)
	$	14,178	$	(7,328	)	$	14,299	$	(7,195	)
Indefinite-lived intangible assets
Goodwill	$	19,998	$	(9,900	)	$	20,076	$	(9,900	)
IPR&D	423		—			662		—
Technology-related	120		—			120		—
	$	20,541	$	(9,900	)	$	20,858	$	(9,900	)

Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we intend to 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. Our IPR&D represents intangible assets that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. In the first quarter of 2020, following receipt of CE Mark for certain products, we reclassified the underlying assets and begin amortization to reflect their use over their remaining lives.

The following represents our goodwill balance allocated to our global reportable segments and unallocated amounts:

(in millions)	MedSurg			Rhythm and Neuro		Cardiovascular			Specialty Pharmaceuticals			Total
As of December 31, 2019	$	2,061		$	2,192	$	5,676		$	247		$	10,176
Impact of foreign currency fluctuations and other changes in carrying amount	(13		)	—		(55		)	(9		)	(78		)
As of March 31, 2020	$	2,049		$	2,191	$	5,621		$	238		$	10,098

Goodwill and Indefinite-Lived Intangible Asset Impairment Testing

We did not have any goodwill impairment charges in the first quarter of 2020 or 2019. We recorded Intangible asset impairment charges of $198 million in the first quarter of 2020 and $67 million in the first quarter of 2019.

We test our indefinite-lived intangible assets at least annually during the third quarter for impairment and reassess their classification as indefinite-lived assets. In addition, we review our indefinite-lived intangible assets for classification and impairment more frequently if impairment indicators exist. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. If the carrying value exceeds the fair value of the indefinite-lived intangible asset, we write the carrying value down to the fair value.

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

12

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.

The first quarter of 2020 impairment charges were primarily associated with amortizable developed technology that were initially established following our acquisition of nVision Medical Corporation (nVision). These charges were recorded as a result of management’s decision to change commercial launch plans or discontinue certain R&D programs based on cost to complete, time to market, overall economic viability, and specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology.

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 and nonderivative 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 Hedging Instruments

Risk Management Strategy

Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities; forecasted intercompany and third-party transactions; net investments in certain subsidiaries; and, during 2019 prior to our acquisition of BTG, the purchase price of BTG, which was denominated in a currency other than the U.S. dollar. 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 and nonderivative 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 Euro, Japanese yen, Chinese renminbi and British pound sterling. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast, particularly resulting from the impact of COVID-19 on transaction volumes. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.

Hedge Designations and Relationships

Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging (FASB ASC Topic 815), 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.

13

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, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. We 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 component of Interest expense on our unaudited condensed consolidated statements of operations.

In November 2019, we completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027 (December 2027 Notes). The Euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional entities. The notional value of our outstanding net investment hedges was $1.954 billion as of March 31, 2020 and $1.950 billion as of December 31, 2019, which includes our derivative and nonderivative instruments designated as net investment hedges.

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.

Interest Rate Hedging 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 mitigate the risk to our earnings and cash flows associated with 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.

Hedge Designations and Relationships

We had no interest rate derivative instruments designated as cash flow hedges outstanding as of March 31, 2020 and December 31, 2019. These instruments are 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. Prior to 2020, we terminated interest rate derivative instruments that were designated as cash flow hedges and are continuing to recognize the amortization of the gains or losses originally recorded within AOCI to 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. If we determine the hedge 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. In the event that we designate outstanding interest rate derivative instruments as cash flow hedges, we record the changes in the fair value of the derivatives within OCI until the underlying hedged transaction occurs. The balance of the deferred amounts on our terminated cash flow hedges within AOCI was a $33 million loss as of March 31, 2020 and a $34 million loss as of December 31, 2019. 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 March 31, 2020 and December 31, 2019. 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 March 31, 2020 and December 31, 2019. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.

14

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

(in millions)	FASB ASC Topic 815 Designation	As of
		March 31, 2020		December 31, 2019
Forward currency contracts	Cash flow hedge	$	3,916	$	3,891
Forward currency contracts	Net investment hedge	957		953
Foreign currency-denominated debt (1)	Net investment hedge	997		997
Forward currency contracts	Non-designated	4,209		4,377
Total Notional Outstanding		$	10,078	$	10,218

(1) The €900 million (approximately $1.000 billion) debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional subsidiaries.

The remaining time to maturity as of March 31, 2020 is within 60 months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts. The Euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.

The following presents the effect of our derivative and nonderivative 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 L – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative 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 Hedges								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 March 31, 2020
Forward currency contracts
Cash flow hedges	$	119	$	(27	)	$	92		Cost of products sold	$	806	$	(23	)	$	5	$	(18	)
Net investment hedges (2)	22		(26		)	(4		)	Interest expense	88		(6		)	1		(5		)
Foreign currency-denominated debt
Net investment hedges (3)	24		(2		)	22			Other, net	36		—			—		—
Interest rate derivative contracts
Cash flow hedges	—		—			—			Interest expense	88		1			—		1
Three Months Ended March 31, 2019
Forward currency contracts
Cash flow hedges	$	72	$	(16	)	$	56		Cost of products sold	$	730	$	(9	)	$	2	$	(7	)
Net investment hedges (2)	33		(7		)	26			Interest expense	109		(10		)	2		(8		)

(1) In all periods presented in the table above, the pre-tax (gain) loss amounts reclassified from AOCI to earnings represent the effect of the hedging relationships on earnings. All other amounts included in earnings related to hedging relationships were immaterial.

(2) For our outstanding forward currency contracts designated as net investment hedges, the net gain or loss reclassified from AOCI to earnings as a reduction of Interest expense represents the straight-line amortization of the excluded component as calculated at the date of designation. This initial value of the excluded component has been excluded from the assessment of effectiveness in accordance with FASB ASC Topic 815. In the current period, we did not recognize any gains or losses on the components included in the assessment of hedge effectiveness in earnings.

(3) For our outstanding Euro-denominated debt principal designated as a net investment hedge, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. No amounts were reclassified from AOCI to current period earnings.

15

As of March 31, 2020, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as cash flow and net investment hedges under FASB ASC Topic 815 that may be reclassified from AOCI to earnings within the next twelve months are presented below (in millions):

Designated Hedging Instrument	FASB ASC Topic 815 Designation	Location on Unaudited Condensed Consolidated Statements of Operations	Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
Forward currency contracts	Cash flow hedge	Cost of products sold	$	116
Forward currency contracts	Net investment hedge	Interest expense	24
Interest rate derivative contracts	Cash flow hedge	Interest expense	(5		)

Net gains and losses on currency hedge contracts not designated as hedging instruments offset by net gains and losses from currency transaction exposures are presented below:

	Location on Unaudited Condensed Consolidated Statements of Operations	Three Months Ended March 31,
(in millions)		2020			2019
Net gain (loss) on currency hedge contracts	Other, net	$	(15	)	$	22
Net gain (loss) on currency transaction exposures	Other, net	8			6
Net currency exchange gain (loss)		$	(7	)	$	28

16

Fair Value Measurements

FASB ASC Topic 815 requires all derivative and nonderivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative and nonderivative instruments using the framework prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures (FASB ASC Topic 820) and considering the estimated amount we would receive or pay to transfer these instruments at the reporting date with respect to current currency exchange rates, interest rates, the creditworthiness of the counterparty for unrealized gain positions and our own creditworthiness for unrealized loss positions. In certain instances, we may utilize financial models to measure fair value of our derivative and nonderivative instruments. In doing so, we use inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and inputs derived principally from, or corroborated by, observable market data by correlation or other means. The following are the balances of our derivative and nonderivative assets and liabilities:

	Location on Unaudited Condensed Consolidated Balance Sheets (1)	As of
(in millions)		March 31, 2020		December 31, 2019
Derivative and Nonderivative Assets:
Designated Hedging Instruments
Forward currency contracts	Other current assets	$	112	$	72
Forward currency contracts	Other long-term assets	292		216
		404		288
Non-Designated Hedging Instruments
Forward currency contracts	Other current assets	106		33
Total Derivative and Nonderivative Assets		$	509	$	321
Derivative and Nonderivative Liabilities:
Designated Hedging Instruments
Forward currency contracts	Other current liabilities	$	2	$	3
Forward currency contracts	Other long-term liabilities	4		8
Foreign currency-denominated debt	Other long-term liabilities	975		998
		982		1,009
Non-Designated Hedging Instruments
Forward currency contracts	Other current liabilities	43		29
Total Derivative and Nonderivative Liabilities		$	1,025	$	1,037

(1) We classify derivative and nonderivative assets and liabilities as current when the settlement date of the contract is one year or less.

Recurring Fair Value Measurements

On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. FASB ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The category of a financial asset or a financial liability within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:

• Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.

• Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.

• Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

17

Assets and liabilities measured at fair value on a recurring basis consist of the following:

	As of
	March 31, 2020								December 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market and government funds	$	16	$	—	$	—	$	16	$	50	$	—	$	—	$	50
Publicly-held securities	—		—		—		—		1		—		—		1
Hedging instruments	—		509		—		509		—		321		—		321
Licensing arrangements	—		—		480		480		—		—		518		518
	$	17	$	509	$	480	$	1,006	$	51	$	321	$	518	$	890
Liabilities
Hedging instruments	$	—	$	1,025	$	—	$	1,025	$	—	$	1,037	$	—	$	1,037
Contingent consideration liability	—		—		218		218		—		—		354		354
Licensing arrangements	—		—		507		507		—		—