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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, 2021
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)
Delaware04-2695240
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueBSXNew York Stock Exchange
0.625% Senior Notes due 2027BSX27New York Stock Exchange
5.50% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per shareBSX PR ANew 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 filerAccelerated filer
Non-accelerated filerSmaller 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, 2021 was 1,420,910,855.


TABLE OF CONTENTS
  Page No.
 
   
   
 
   
 
   
 
   
 
   
   
   
   
   
   
 
2

PART I
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended
March 31,
(in millions, except per share data)20212020
Net sales$2,752 $2,543 
Cost of products sold894 806 
Gross profit1,858 1,737 
Operating expenses:
Selling, general and administrative expenses1,019 978 
Research and development expenses276 300 
Royalty expense12 12 
Amortization expense185 201 
Intangible asset impairment charges 198 
Contingent consideration net expense (benefit)(6)(108)
Restructuring net charges (credits)5 10 
Litigation-related net charges (credits)4  
Gain on disposal of business(6) 
 1,488 1,591 
Operating income (loss)370 146 
Other income (expense):
Interest expense(82)(88)
Other, net37 (36)
Income (loss) before income taxes325 22 
Income tax (benefit) expense(16)12 
Net income (loss)341 11 
Preferred stock dividends(14) 
Net income (loss) available to common stockholders$327 $11 
Net income (loss) per common share — basic$0.23 $0.01 
Net income (loss) per common share — assuming dilution$0.23 $0.01 
Weighted-average shares outstanding
Basic1,418.7 1,397.4 
Assuming dilution1,430.8 1,413.5 





See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
3

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended
March 31,
(in millions)20212020
Net income (loss)$341 $11 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(83)(177)
Net change in derivative financial instruments129 75 
Net change in defined benefit pensions and other items1  
Total other comprehensive income (loss)47 (101)
Total comprehensive income (loss)$388 $(91)









































See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
4

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 As of
(in millions, except share and per share data)March 31, 2021December 31, 2020
 (unaudited) 
ASSETS  
Current assets:  
Cash and cash equivalents$2,016 $1,734 
Trade accounts receivable, net1,631 1,531 
Inventories1,407 1,351 
Prepaid income taxes192 194 
Assets held for sale 1,133 
Other current assets855 751 
Total current assets6,101 6,694 
Property, plant and equipment, net2,053 2,084 
Goodwill10,868 9,951 
Other intangible assets, net5,991 5,917 
Deferred tax assets4,173 4,210 
Other long-term assets1,714 1,921 
TOTAL ASSETS$30,900 $30,777 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Current debt obligations$13 $13 
Accounts payable615 513 
Accrued expenses2,060 2,197 
Other current liabilities705 958 
Total current liabilities3,393 3,681 
Long-term debt9,082 9,130 
Deferred income taxes336 330 
Other long-term liabilities2,370 2,309 
Commitments and contingencies
Stockholders’ equity  
Preferred stock, $0.01 par value - authorized 50,000,000 shares - issued 10,062,500 shares as of March 31, 2021 and December 31, 2020
  
Common stock, $0.01 par value - authorized 2,000,000,000 shares - issued 1,683,861,226 shares as of March 31, 2021 and 1,679,911,918 shares as of December 31, 2020
17 17 
Treasury stock, at cost - 263,289,848 shares as of March 31, 2021 and December 31, 2020
(2,251)(2,251)
Additional paid-in capital19,750 19,732 
Accumulated deficit(2,050)(2,378)
Accumulated other comprehensive income (loss), net of tax254 207 
Total stockholders’ equity15,719 15,326 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$30,900 $30,777 



See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
5

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
 Preferred StockCommon StockTreasury StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss), Net of Tax
(in millions, except share data)Shares IssuedPar ValueShares IssuedPar Value
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)
Stock-based compensation4,388,331 28 
As of March 31, 2020 $ 1,646,877,242 $16 $(1,717)$17,589 $(2,252)$168 
Net income (loss)(147)
Total other comprehensive income (loss)(37)
Preferred stock issuance10,062,500  975 
Common stock issuance29,382,500  975 
Preferred stock dividends(5)
Stock-based compensation493,824 50 
As of June 30, 202010,062,500 $ 1,676,753,566 $17 $(1,717)$19,590 $(2,405)$131 
Net income (loss)(155)
Total other comprehensive income (loss)20 
Preferred stock dividends(14)
Stock-based compensation2,674,643 97 
As of September 30, 202010,062,500 $ 1,679,428,209 $17 $(1,717)$19,687 $(2,574)$151 
Net income (loss)210 
Total other comprehensive income (loss)56 
Preferred stock dividends(14)
Repurchase of common stock(535)
Stock-based compensation483,709 45 
As of December 31, 202010,062,500 $ 1,679,911,918 $17 $(2,251)$19,732 $(2,378)$207 
Net income (loss)341 
Total other comprehensive income (loss)47 
Preferred stock dividends(14)
Stock-based compensation3,949,308 19 
As of March 31, 202110,062,500 $ 1,683,861,226 $17 $(2,251)$19,750 $(2,050)$254 










See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
6

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
(in millions)20212020
Net income (loss)$341 $11 
Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities
Gain on disposal of businesses(6) 
Depreciation and amortization268 277 
Deferred and prepaid income taxes(1)7 
Stock-based compensation expense47 42 
Intangible asset impairment charges 184 
Net loss (gain) on investments and notes receivable(37)22 
Contingent consideration net expense (benefit)(6)(108)
Inventory step-up amortization8 18 
Foreign exchange (gain) loss2 7 
Other, net22 43 
Increase (decrease) in operating assets and liabilities, excluding purchase accounting:
Trade accounts receivable(117)161 
Inventories(115)(199)
Other assets(128)(128)
Accounts payable and accrued expenses(10)(456)
Other liabilities16 42 
Cash provided by (used for) operating activities284 (77)
Purchases of property, plant and equipment(75)(100)
Proceeds from sale of property, plant and equipment4 3 
Payments for acquisitions of businesses, net of cash acquired(706) 
Proceeds from royalty rights22 23 
Payments for investments and acquisitions of certain technologies(13)(2)
Proceeds from sale of investments38  
Proceeds from disposal of businesses801  
Cash provided by (used for) investing activities71 (76)
Payment of contingent consideration previously established in purchase accounting(11)(23)
Payments for royalty rights(42)(52)
Payments on short-term borrowings (300)
Proceeds from short-term borrowings, net of debt issuance costs 1,000 
Net increase (decrease) in commercial paper (714)
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)
Cash dividends paid on preferred stock(14) 
Cash used to net share settle employee equity awards(46)(57)
Proceeds from issuances of common stock pursuant to employee stock compensation and purchase plans18 42 
Cash provided by (used for) financing activities(95)256 
Effect of foreign exchange rates on cash(3)(9)
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents258 93 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period1,995 607 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period$2,253 $700 
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(SUPPLEMENTAL INFORMATION)

Three Months Ended March 31,
(in millions)20212020
Supplemental Information
Stock-based compensation expense$47 $42 
Fair value of contingent consideration recorded in purchase accounting219  
Non-cash impact of transferred royalty rights(22)(23)

As of March 31,
Reconciliation to amounts in the unaudited consolidated balance sheets:20212020
Cash and cash equivalents$2,016 $370 
Restricted cash and restricted cash equivalents included in Other current assets
184 288 
Restricted cash equivalents included in Other long-term assets
53 42 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period$2,253 $700 
























See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited 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, and 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 first quarter of 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Accordingly, our unaudited consolidated financial statements and footnotes thereto should be read in conjunction with our audited 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 quarterly report are computed based on the amounts in thousands. As a result, the sum of the components 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 unrounded amounts.

Subsequent Events
We evaluate events occurring after the date of our accompanying unaudited consolidated balance sheet for potential recognition or disclosure in our financial statements. Those items requiring recognition in the financial statements have been recorded and disclosed accordingly. Those items requiring disclosure (non-recognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note H – Commitments and Contingencies and Note I – Stockholders' Equity for further details.

NOTE B – ACQUISITIONS, DIVESTITURES AND STRATEGIC INVESTMENTS

Our accompanying unaudited consolidated financial statements include the operating results for acquired entities from the respective dates of acquisition. We completed one acquisition and one divestiture in the first quarter of 2021 and did not complete any acquisitions or divestitures during the first quarter of 2020. We have not presented supplemental pro forma financial information for completed acquisitions or divestitures given their results are not material to our accompanying unaudited consolidated financial statements. Transaction costs for all acquisitions and divestitures completed during 2021 and 2020 were immaterial to our accompanying unaudited consolidated financial statements and were expensed as incurred.

On March 3, 2021, we announced our entry into a definitive agreement to acquire the global surgical business of Lumenis LTD. (Lumenis), a privately-held company that develops and commercializes energy-based medical solutions, for an upfront cash payment of approximately $1.070 billion subject to closing adjustments. The global surgical business of Lumenis includes innovative laser systems, fibers, and accessories used for urology and otolaryngology procedures. The acquisition is expected to close during the second half of 2021, subject to customary closing conditions. Following the closing of the acquisition, we plan to integrate the Lumenis business into our Urology and Pelvic Health division.

2021 Acquisition

On March 1, 2021, we completed the acquisition of Preventice Solutions, Inc. (Preventice), a privately-held company which offers a full portfolio of mobile cardiac health solutions and services, ranging from ambulatory cardiac monitors, to cardiac event monitors and mobile cardiac telemetry. The transaction consisted of an upfront cash payment of $925 million and up to an additional $300 million in a potential commercial milestone payment. We have been an investor in Preventice since 2015 and held an equity stake of approximately 22 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the allocation of the purchase price according to priority of equity interests, which resulted in a $195 million gain recognized within Other, net in the first quarter of 2021. The transaction price for the remaining stake consisted of an upfront cash payment of $706 million, net of cash acquired, and up to approximately $230 million in an additional future revenue-based payment. The Preventice business is being managed by our Cardiac Rhythm Management division.

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Purchase Price Allocation

The preliminary purchase price was comprised of the amounts presented below, which represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed. The final determination of the fair value of certain assets and liabilities will be completed within the measurement period in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. As of March 31, 2021, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary, including the projection of the underlying cash flows used to determine the fair value of the identified intangible assets and contingent consideration liability.

(in millions)
Payment for acquisition, net of cash acquired$706 
Fair value of contingent consideration219 
Fair value of prior interest269 
$1,194 


The preliminary purchase price allocation was comprised of the following components:
(in millions)
Goodwill$924 
Amortizable intangible assets236 
Other assets acquired66 
Liabilities assumed(32)
$1,194 

We allocated a portion of the preliminary purchase price to the specific intangible asset categories as follows:
Amount Assigned
(in millions)
Weighted Average Amortization Period
(in years)
Risk-Adjusted Discount
Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related$214 910%
Other intangible assets22 810%
$236 
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 is not deductible for tax purposes.

2021 Divestiture

On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business to Stark International Lux S.A.R.L., and SERB SAS, affiliates of SERB, a European specialty pharmaceutical group, for a purchase price of approximately $800 million, subject to certain adjustments including cash on hand at the closing of the transaction. The agreement included the transfer of five facilities and approximately 280 employees globally.

We classified the assets and liabilities of the Specialty Pharmaceuticals business (disposal group) as held for sale within our consolidated balance sheet as of December 31, 2020 at their respective carrying values, which approximated fair value, less costs to sell. Assets within the disposal group are presented within Assets held for sale and liabilities are presented within Other current liabilities within our consolidated balance sheet as of December 31, 2020. Refer to Note C – Assets and Liabilities Held for Sale to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information. In the first quarter of 2021, we recognized a $6 million Gain on disposal of business associated with the transaction within our accompanying unaudited consolidated statements of operations.

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Contingent Consideration

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

(in millions)
Balance as of December 31, 2020$196 
Amount recorded related to current year acquisitions219 
Contingent consideration net expense (benefit)(6)
Contingent consideration payments(11)
Balance as of March 31, 2021$398 

As of March 31, 2021, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our completed acquisitions was $754 million, which includes amounts related to our acquisition of Preventice. 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 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 LiabilityFair Value as of March 31, 2021Valuation TechniqueUnobservable InputRange
Weighted Average(1)
R&D, Regulatory and Commercialization-based Milestones$103 millionDiscounted Cash FlowDiscount Rate2%2%
Probability of Payment90%90%
Projected Year of Payment20272027
Revenue-based Payments$296 millionDiscounted Cash FlowDiscount Rate4 %-14%7%
Probability of Payment80 %-100%100%
Projected Year of Payment2021-20242022
(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 research and development (R&D), commercialization-based and revenue-based milestones are discounted back to the current period, primarily 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, 2021.

Strategic Investments

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

As of
(in millions)March 31, 2021December 31, 2020
Equity method investments$246 $319 
Measurement alternative investments(1)
182 183 
Publicly-held equity securities(2)
213 414 
Notes receivable2 2 
$643 $918 
(1)    Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost less 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, recognized in Other, net within our accompanying unaudited consolidated statements of operations.
(2)    Publicly-held equity securities are measured at fair value with changes in fair value recognized in Other, net within our accompanying unaudited consolidated statements of operations.

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

In the first quarter of 2021, we recorded a $146 million net loss on our investment in Pulmonx Corporation presented in Other, net associated with the partial disposition of our ownership and remeasurement of our remaining investment to fair value based on observable market prices. In addition, on March 1, 2021, we completed our acquisition of Preventice, in which we previously held an equity interest. As of March 31, 2021, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $286 million, which represents amortizable intangible assets, in-process research and development (IPR&D), goodwill and deferred tax liabilities.

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, 2021As of December 31, 2020
(in millions)Gross Carrying Amount
Accumulated Amortization/ Write-offs(1)
Gross Carrying AmountAccumulated Amortization/ Write-offs
Technology-related$11,279 $(6,325)$11,059 $(6,179)
Patents499 (397)511 (407)
Other intangible assets1,810 (1,252)1,775 (1,220)
Amortizable intangible assets$13,588 $(7,975)$13,345 $(7,806)
    
Goodwill$20,768 $(9,900)$19,924 $(9,973)
IPR&D$257 $257 
Technology-related120 120 
Indefinite-lived intangible assets$377 $377 
(1)    In the fourth quarter of 2020, we recorded goodwill impairment charges of $73 million related to the Specialty Pharmaceuticals business and classified the remaining assets and liabilities as held for sale as of December 31, 2020. On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business. The goodwill impairment charges of $73 million related to the Specialty Pharmaceuticals business are no longer presented within accumulated write-offs above as of March 31, 2021.

The increase in our balance of goodwill and intangible assets is primarily related to our acquisition of Preventice in the first quarter of 2021.

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.

The following represents our goodwill balance by global reportable segment:
(in millions)MedSurgRhythm and NeuroCardiovascularTotal
As of December 31, 2020$2,059 $2,194 $5,697 $9,951 
Impact of foreign currency fluctuations and other changes in carrying amount(3)(1)(2)(6)
Goodwill acquired 924  924 
As of March 31, 2021$2,056 $3,117 $5,695 $10,868 

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Prior to the divestiture on March 1, 2021, we presented the Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.

Goodwill and Indefinite-Lived Intangible Asset Impairment Testing

We did not record any goodwill impairment charges in the first quarter 2021 or 2020. We did not record any Intangible asset impairment charges in the first quarter 2021 and recorded $198 million of Intangible asset impairment charges in the first quarter of 2020.

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 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 impairment charges recorded in the first quarter of 2020 were primarily associated with amortizable technology-related intangible assets that were initially established following our acquisition of 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 or, specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology.

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.

Refer to Note A – Significant Accounting Policies to our audited financial statements contained in Item 8 of 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, 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 and
13

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 Australian dollar. 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.

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) within our accompanying unaudited 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 Cost of products sold in our accompanying unaudited 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 Swiss franc, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. For these derivative instruments, we elected to use the spot method to assess hedge effectiveness. We also elected to exclude the spot-forward difference, referred to as the excluded component, 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. As such, we defer recognition of foreign currency gains and losses within the Foreign currency translation adjustment (CTA) component of OCI, and we reclassify amortization of the excluded component from AOCI to current period earnings within Interest expense in our accompanying unaudited consolidated statements of operations.

We designate certain euro-denominated debt as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the Euro. As of March 31, 2021 and December 31, 2020, we designated as a net investment hedge a portion of our €900 million in aggregate principal amount of 0.625% senior notes issued in November 2019 and due in 2027. For these nonderivative instruments, we defer recognition of the foreign currency remeasurement gains and losses within the CTA component of OCI. We reclassify these gains and losses to current period earnings within Other, net in our accompanying unaudited consolidated statements of operations only when the hedged item affects earnings, which would occur upon disposal or substantial liquidation of the underlying foreign subsidiary.

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 Other, net in our accompanying unaudited 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.

14

Hedge Designations and Relationships

We had no interest rate derivative instruments designated as cash flow hedges outstanding as of March 31, 2021 and December 31, 2020. 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, provided 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 $28 million loss as of March 31, 2021 and a $29 million loss as of December 31, 2020. 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, 2021 and December 31, 2020. 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 Long-term debt in our accompanying unaudited 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, 2021 and December 31, 2020. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.

The following table presents the contractual amounts of our hedging instruments outstanding:
(in millions)FASB ASC Topic 815 DesignationAs of
March 31, 2021December 31, 2020
Forward currency contractsCash flow hedge$4,741 $4,531 
Forward currency contractsNet investment hedge1,004 1,004 
Foreign currency-denominated debt(1)
Net investment hedge927 868 
Forward currency contractsNon-designated5,296 4,946 
Total Notional Outstanding$11,969 $11,349 
(1)    Foreign currency-denominated debt is the portion of the €900 million debt principal designated as a net investment hedge.

The remaining time to maturity as of March 31, 2021 is within 60 months for all forward currency contracts designated as cash flow hedges and generally less than one year for all non-designated forward currency contracts. The forward currency contracts designated as net investment hedges generally mature within the next two years. The euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.

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The following presents the effect of our derivative and nonderivative instruments designated as cash flow and net investment hedges under FASB ASC Topic 815 in our accompanying unaudited consolidated statements of operations. Refer to Note M – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative instruments presented within our accompanying unaudited consolidated statements of comprehensive income (loss).
Effect of Hedging Relationships on Accumulated Other Comprehensive Income
Amount Recognized in OCI on Hedges
Unaudited Consolidated Statements of Operations(1)
Amount Reclassified from AOCI into Earnings
(in millions)Pre-Tax Gain (Loss)Tax Benefit (Expense)Gain (Loss) Net of TaxLocation of Amount Reclassified and Total Amount of Line ItemPre-Tax (Gain) LossTax (Benefit) Expense(Gain) Loss Net of Tax
Three Months Ended March 31, 2021
Forward currency contracts
Cash flow hedges$171 $(39)$133 Cost of products sold$894 $(6)$1 $(5)
Net investment hedges(2)
52 (12)40 Interest expense82 (6)1 (5)
Foreign currency-denominated debt
Net investment hedges(3)
48 (11)37 Other, net(37)   
Interest rate derivative contracts
Cash flow hedges   Interest expense82 1  1 
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 expense88 (6)1 (5)
Foreign currency-denominated debt
Net investment hedges(3)
24 (2)22 Other, net36    
Interest rate derivative contracts
Cash flow hedges   Interest Expense88 1  1 
(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 and prior 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 CTA component of OCI. No amounts were reclassified from AOCI to current period earnings.

As of March 31, 2021, 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 InstrumentFASB ASC Topic 815 DesignationLocation on Unaudited Consolidated Statements of OperationsAmount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
Forward currency contractsCash flow hedgeCost of products sold$79 
Forward currency contractsNet investment hedgeInterest expense9 
Interest rate derivative contractsCash flow hedgeInterest expense(5)

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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 Consolidated Statements of OperationsThree Months Ended March 31,
(in millions)20212020
Net gain (loss) on currency hedge contractsOther, net$(1)$(15)
Net gain (loss) on currency transaction exposuresOther, net(1)8 
Net currency exchange gain (loss)$(2)$(7)

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 Consolidated Balance Sheets(1)
As of
(in millions)March 31, 2021December 31, 2020
Derivative and Nonderivative Assets:   
Designated Hedging Instruments  
Forward currency contractsOther current assets$122 $53 
Forward currency contractsOther long-term assets209 109 
  332 162 
Non-Designated Hedging Instruments   
Forward currency contractsOther current assets67 79 
Total Derivative and Nonderivative Assets $399 $242 
Derivative and Nonderivative Liabilities:   
Designated Hedging Instruments  
Forward currency contractsOther current liabilities$22 $44 
Forward currency contractsOther long-term liabilities28 54 
Foreign currency-denominated debt(2)
Other long-term liabilities1,044 1,094 
  1,094 1,191 
Non-Designated Hedging Instruments   
Forward currency contractsOther current liabilities57 71 
Total Derivative and Nonderivative Liabilities $1,151 $1,262 
(1)    We classif