Q2 2012 Form 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o
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.)
ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address of principal executive offices) (zip code)
(508) 650-8000
(Registrant’s telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-Accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
 
Shares outstanding
Class
 
as of July 31, 2012
Common Stock, $.01 par value
 
1,418,982,422

Table of Contents

TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 


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PART I
FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
in millions, except per share data
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net sales
$
1,828

 
$
1,975

 
$
3,694

 
$
3,900

Cost of products sold
578

 
688

 
1,209

 
1,319

Gross profit
1,250

 
1,287

 
2,485

 
2,581

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
648

 
642

 
1,306

 
1,237

Research and development expenses
213

 
223

 
428

 
435

Royalty expense
48

 
52

 
96

 
103

Amortization expense
99

 
96

 
195

 
228

Goodwill impairment charges
3,602

 


 
3,602

 
697

Intangible asset impairment charges
129

 
12

 
129

 
12

Contingent consideration expense
1

 
7

 
11

 
13

Restructuring charges
28

 
18

 
39

 
56

Litigation-related net charges
69

 


 
69

 


Gain on divestiture


 


 


 
(760
)
 
4,837

 
1,050

 
5,875

 
2,021

Operating (loss) income
(3,587
)
 
237

 
(3,390
)
 
560

 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(64
)
 
(73
)
 
(132
)
 
(148
)
Other, net
33

 
(6
)
 
27

 
19

(Loss) income before income taxes
(3,618
)
 
158

 
(3,495
)
 
431

Income tax (benefit) expense
(40
)
 
12

 
(30
)
 
239

Net (loss) income
$
(3,578
)
 
$
146

 
$
(3,465
)
 
$
192

 
 
 
 
 
 
 
 
Net (loss) income per common share — basic
$
(2.51
)
 
$
0.10

 
$
(2.42
)
 
$
0.12

Net (loss) income per common share — assuming dilution
$
(2.51
)
 
$
0.10

 
$
(2.42
)
 
$
0.12

 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
1,423.2

 
1,528.6

 
1,434.2

 
1,527.5

Assuming dilution
1,423.2

 
1,535.8

 
1,434.2

 
1,536.0


See notes to the unaudited condensed consolidated financial statements.


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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Net (loss) income
 
$
(3,578
)
 
$
146

 
$
(3,465
)
 
$
192

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(19
)
 
18

 
7

 
46

Net change in unrealized gains and losses on derivative financial instruments, net of tax
 
11

 
(22
)
 
44

 
(40
)
Total other comprehensive (loss) income
 
(8
)
 
(4
)
 
51

 
6

Total comprehensive (loss) income
 
$
(3,586
)
 
$
142

 
$
(3,414
)
 
$
198


See notes to the unaudited condensed consolidated financial statements.



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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
 
June 30,
 
December 31,
in millions, except share and per share data
2012
 
2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
371

 
$
267

Trade accounts receivable, net
1,243

 
1,246

Inventories
898

 
931

Deferred income taxes
406

 
458

Prepaid expenses and other current assets
193

 
203

Total current assets
3,111

 
3,105

Property, plant and equipment, net
1,632

 
1,670

Goodwill
6,474

 
9,761

Other intangible assets, net
6,249

 
6,473

Other long-term assets
352

 
281

 
$
17,818

 
$
21,290

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current debt obligations
$
4

 
$
4

Accounts payable
263

 
203

Accrued expenses
1,325

 
1,327

Other current liabilities
202

 
273

Total current liabilities
1,794

 
1,807

Long-term debt
4,253

 
4,257

Deferred income taxes
1,803

 
1,865

Other long-term liabilities
2,240

 
2,008

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, $.01 par value - authorized 50,000,000 shares, none issued and outstanding
 
 
 
Common stock, $.01 par value - authorized 2,000,000,000 shares
and issued 1,538,999,069 shares as of June 30, 2012 and 1,531,006,390 shares as of December 31, 2011
15

 
15

Treasury stock, at cost - 122,463,958 shares as of June 30, 2012
and 81,950,716 shares as of December 31, 2011
(742
)
 
(492
)
Additional paid-in capital
16,388

 
16,349

Accumulated deficit
(7,846
)
 
(4,381
)
Accumulated other comprehensive loss, net of tax
(87
)
 
(138
)
Total stockholders’ equity
7,728

 
11,353

 
$
17,818

 
$
21,290


See notes to the unaudited condensed consolidated financial statements.

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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Six Months Ended
June 30,
in millions
2012
 
2011
 
 
 
 
Cash provided by operating activities
$
619

 
$
293

 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment, net of proceeds
(118
)
 
(152
)
Proceeds from sales of publicly traded and privately held equity securities and collections of notes receivable


 
1

Payments for acquisitions of businesses, net of cash acquired
(134
)
 
(370
)
Payments relating to prior-period acquisitions
(4
)
 


Payments for investments in companies and acquisitions of certain technologies
(1
)
 
(10
)
Proceeds from business divestitures, net of costs


 
1,417

 
 
 
 
Cash (used for) provided by investing activities
(257
)
 
886

 
 
 
 
Financing activities:
 
 
 
Payments on long-term borrowings
(9
)
 
(1,250
)
Proceeds from borrowings on credit facilities, net of debt issuance costs
251

 
250

Payments on borrowings from credit facilities
(260
)
 
(250
)
Payments for acquisitions of treasury stock
(250
)
 
 
Proceeds from issuances of shares of common stock
9

 
9

 
 
 
 
Cash used for financing activities
(259
)
 
(1,241
)
 
 
 
 
Effect of foreign exchange rates on cash
1

 
3

 
 
 
 
Net increase (decrease) in cash and cash equivalents
104

 
(59
)
Cash and cash equivalents at beginning of period
267

 
213

Cash and cash equivalents at end of period
$
371

 
$
154

 
 
 
 
Supplemental Information
 
 
 
 
 
 
 
Non-cash operating activities:
 
 
 
Stock-based compensation expense
$
57

 
$
65


See notes to the unaudited condensed consolidated financial statements.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our 2011 Annual Report filed on Form 10-K.
We have reclassified certain prior year amounts to conform to the current year’s presentation. See Note L – Segment Reporting for further details.
Subsequent Events
We evaluate events occurring after the date of our most recent accompanying unaudited condensed consolidated balance sheets for potential recognition or disclosure in our financial statements. We did not identify any material subsequent events requiring adjustment to our accompanying unaudited condensed consolidated financial statements (recognized subsequent events) for the three and six month periods ended June 30, 2012. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note J - Commitments and Contingencies for more information.

NOTE B – ACQUISITIONS
Over the past two years, we have completed several acquisitions as part of our priority growth initiatives, targeting the areas of cardiac rhythm management, structural heart therapy, deep brain stimulation, peripheral vascular disease, and atrial fibrillation. Our unaudited condensed consolidated financial statements include the operating results for each acquired entity from its respective date of acquisition. We do not present pro forma financial information for these acquisitions given their results are not material to our consolidated financial statements. Transaction costs associated with these acquisitions were expensed as incurred and were not material for the three and six months ended June 30, 2012 and 2011.
2012 Acquisitions
Cameron Health, Inc.
On June 8, 2012, we completed the acquisition of the remaining equity of Cameron Health, Inc. Cameron has developed the world's first and only commercially available subcutaneous implantable cardioverter defibrillator - the S-ICD® system. The S-ICD® system has received CE Mark approval and is currently sold in EMEA. We accounted for this acquisition as a business combination and, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) Topic 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
Purchase Price Allocation
The components of the preliminary purchase price as of the acquisition date for Cameron were as follows (in millions):
Cash, net of cash acquired
$
134

Fair value of contingent consideration
259

Fair value of prior interests
79

Fair value of debt assumed
9

 
$
481

Prior to the acquisition, we had an equity interest in Cameron and held $40 million of notes receivable. We re-measured our previously held investments to their estimated acquisition-date fair value of $79 million and recorded a gain of $39 million in other, net in the accompanying condensed consolidated statements of operations during the second quarter of 2012. We measured the fair values of the previously held investments based on the liquidation preferences and priority of the equity interests and debt, including accrued interest. In addition, we paid off the assumed debt obligation of Cameron for approximately $9 million during the second quarter of 2012.

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Total consideration includes an initial $150 million cash payment at closing of the transaction, with a potential payment of $150 million upon FDA approval of the S-ICD® system and up to an additional $1.05 billion of potential payments upon achievement of specified revenue-based milestones over a six-year period following FDA approval.
The following summarizes the preliminary purchase price allocation (in millions):
Goodwill
$
315

Amortizable intangible assets
41

Indefinite-lived intangible assets
46

Other net assets
3

Deferred income taxes
76

 
$
481


We allocated a portion of the preliminary purchase price to specific intangible asset categories as follows:
 
Amount
Assigned
(in millions)
 
Weighted
Average
Amortization
Period
(in years)
 
Range of Risk-
Adjusted Discount
Rates used in
Purchase Price
Allocation
Amortizable intangible assets:
 
 
 
 
 
Technology-related
$
39

 
11
 
14.0
%
 Customer relationships
2

 
5
 
14.0
%
Indefinite-lived intangible assets:
 
 
 
 
 
Purchased research and development
46

 
 
 
14.0
%
 
$
87

 
 
 
 

Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we expect to leverage in future products or processes and carry forward from one product generation to the next. The technology-related intangible assets are being amortized on a straight-line basis over their assigned estimated useful lives.

Purchased research and development represents the estimated fair value of acquired in-process research and development projects which have not yet reached technological feasibility. These indefinite-lived intangible assets are tested for impairment on an annual basis, or more frequently if impairment indicators are present, in accordance with U.S. GAAP and our accounting policies described in our 2011 Annual Report filed on Form 10-K. Upon completion of the associated research and development efforts, we determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. We expect to receive FDA approval and launch this technology in the U.S. by mid-2013. We estimate that the total cost to complete the in-process research and development programs including next-generation products related to Cameron is between $30 million and $50 million as of June 30, 2012, and we expect material net cash inflows from these products in development to commence in 2016.
We believe that the estimated intangible asset values represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. We used the income approach, specifically the discounted cash flow method and excess earnings method, to derive the fair value of the amortizable intangible assets and purchased research and development. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurements and Disclosures.
We recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is non-deductible for tax purposes. Goodwill was established due primarily to revenue and cash flow projections associated with future technologies, as well as synergies expected to be gained from the integration of this business into our Cardiac Rhythm Management (CRM) business, and has been allocated to our reportable segments based on the relative expected benefit from the business combinations, as follows (in millions):

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U.S.
$
184

EMEA
97

Inter-Continental
27

Japan
7

 
$
315

2011 Acquisitions
Sadra Medical, Inc.
On January 4, 2011, we completed the acquisition of the remaining fully diluted equity of Sadra Medical, Inc. Prior to the acquisition, we held a 14 percent equity ownership in Sadra. Through our acquisition of Sadra, we are developing a fully repositionable and retrievable device for transcatheter aortic valve replacement (TAVR) to treat patients with severe aortic stenosis. The Lotus™ Valve System consists of a stent-mounted tissue valve prosthesis and catheter delivery system for guidance and placement of the valve. The low-profile delivery system and introducer sheath are designed to enable accurate positioning, repositioning and retrieval at any time prior to release of the aortic valve implant. The acquisition was intended to broaden and diversify our product portfolio by expanding into the structural heart market, and TAVR is one of the fastest growing medical device markets. We are integrating the operations of the Sadra business into our Interventional Cardiology business. Total consideration includes a net cash payment of $193 million at closing to acquire the remaining 86 percent of Sadra and potential payments up to $193 million through 2016 that are contingent upon the achievement of certain regulatory- and revenue-based milestones. During the second quarter of 2012, we recorded an impairment charge of $129 million ($110 million after-tax) to write-down the balance of intangible assets to their fair value related to our in-process research and development project associated with Sadra. Refer to Note D - Goodwill and Other Intangible Assets for further details regarding this charge.
Intelect Medical, Inc.
On January 5, 2011, we completed the acquisition of the remaining fully diluted equity of Intelect Medical, Inc. Prior to the acquisition, we held a 15 percent equity ownership in Intelect. Through our acquisition of Intelect, we are developing advanced visualization and programming technology for deep-brain stimulation (DBS). We have integrated the operations of the Intelect business into our Neuromodulation business. The acquisition was intended to leverage the core architecture of our Vercise™ DBS platform and advance our technology in the field of deep-brain stimulation. We paid $60 million at the closing of the transaction to acquire the remaining 85 percent of Intelect. There is no contingent consideration related to the Intelect acquisition.
ReVascular Therapeutics, Inc.
On February 15, 2011, we completed the acquisition of 100 percent of the fully diluted equity of ReVascular Therapeutics, Inc. (RVT). RVT has developed the TRUEPATH™ intraluminal chronic total occlusion crossing device enabling endovascular treatment in cases that typically cannot be treated with standard endovascular devices. This acquisition was intended to complement our portfolio of devices for lower extremity peripheral artery disease and we have integrated the operations of RVT into our Peripheral Interventions business. Total consideration includes a cash payment of $19 million at closing of the transaction and potential payments of up to $16 million through 2014 that are contingent upon the achievement of certain regulatory- and commercialization-based milestones and revenue.
Atritech, Inc.
On March 3, 2011, we completed the acquisition of 100 percent of the fully diluted equity of Atritech, Inc. Atritech has developed a device designed to close the left atrial appendage of the heart. The WATCHMAN® Left Atrial Appendage Closure Technology, developed by Atritech, is the first device proven to offer an alternative to anticoagulant drugs for patients with atrial fibrillation and at high risk for stroke, and is approved for use in CE Mark countries. The acquisition was intended to broaden our portfolio of less-invasive devices for cardiovascular care by expanding into the areas of atrial fibrillation and structural heart therapy. We are integrating the operations of the Atritech business and are leveraging expertise from both our Electrophysiology and Interventional Cardiology divisions in the commercialization of the WATCHMAN® device. Total consideration includes a net cash payment of $98 million at closing of the transaction and potential payments up to $275 million through 2015 that are contingent upon achievement of certain regulatory-based milestones and revenue.
Purchase Price Allocation
The components of the aggregate purchase price as of the acquisition date for acquisitions closed in the first half of 2011 are as follows (in millions):

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Cash, net of cash acquired
$
370

Fair value of contingent consideration
287

Prior investments
55

 
$
712


As of the respective acquisition dates, we recorded total contingent consideration liabilities of $287 million, representing the estimated fair value of the contingent consideration we expected to pay to the former shareholders of the acquired companies based upon the achievement of certain regulatory- and commercialization-related milestones and revenue. The fair value of the contingent consideration liabilities was estimated by discounting, to present value, contingent payments expected to be made. In certain circumstances, we utilized a probability-weighted approach to determine the fair value of contingent consideration related to the expected achievement of milestones. We used risk-adjusted discount rates ranging from two to 20 percent as of the acquisition date to derive the fair value of the expected obligations, which we believe are appropriate and representative of market participant assumptions.
Prior to our acquisition of the remaining equity ownership in Sadra and Intelect, we held equity interests in these companies of 14 percent and 15 percent, respectively, carried at an aggregate value of $11 million, and a note receivable carried at a value of $6 million. As a result of re-measuring these previously held investments to fair value, estimated at $55 million as of the respective acquisition dates, we recorded a gain of $38 million in other, net in the accompanying unaudited condensed consolidated statements of operations during the first quarter of 2011. We measured the fair values of the previously held investments based on a pro-rata allocation of the consideration paid for the controlling interests acquired less an estimated minority interest discount in certain circumstances after considering previous financing rounds and liquidation preferences of the equity interests.
We accounted for these acquisitions as business combinations and, in accordance with ASC Topic 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following summarizes the aggregate purchase price allocation (in millions):

Goodwill
$
266

Amortizable intangible assets
97

Indefinite-lived intangible assets
470

Deferred income taxes
(121
)
 
$
712


We allocated the aggregate purchase price to specific intangible asset categories as follows:

 
Amount
Assigned
(in millions)
 
Weighted
Average
Amortization
Period
(in years)
 
Range of Risk-
Adjusted Discount
Rates used in
Purchase Price
Allocation
Amortizable intangible assets
 
 
 
 
 
Technology-related
$
97

 
7.4

 
22.6% - 25.0%
 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Purchased research and development
470

 
 
 
23.6% - 30.0%
 
$
567

 
 
 
 

Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we expect to leverage in future products or processes and carry forward from one product generation to the next. The technology-related intangible assets are being amortized on a straight-line basis over their assigned estimated useful lives.


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Purchased research and development represents the estimated fair value of acquired in-process research and development projects which have not yet reached technological feasibility. These indefinite-lived intangible assets are tested for impairment on an annual basis, or more frequently if impairment indicators are present, in accordance with U.S. GAAP and our accounting policies described in our 2011 Annual Report filed on Form 10-K, and amortization of the purchased research and development begin upon completion of the related projects. We estimate that the total cost to complete the in-process research and development programs acquired in the first half of 2011 is approximately $250 million to $300 million, as of June 30, 2012, and we expect material net cash inflows from the products in development to commence in 2014-2018. Upon completion of the associated research and development efforts, we determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. See Note D - Goodwill and Other Intangible Assets, which contains additional details related to our asset impairment charges related to in-process research and development projects.
 
We believe that the estimated intangible asset values represent the fair value at the date of each acquisition and did not exceed the amount a third party would pay for the assets. We used the income approach, specifically the discounted cash flow method and excess earnings method, to derive the fair value of the amortizable intangible assets and purchased research and development. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurements and Disclosures.
We recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is non-deductible for tax purposes. Goodwill was established due primarily to revenue and cash flow projections associated with future technologies, as well as synergies expected to be gained from the integration of these businesses into our existing operations, and has been allocated to our reportable segments based on the relative expected benefit from the business combinations, as follows (in millions):

U.S.
$
161

EMEA
99

Inter-Continental
5

Japan
1

 
$
266


Contingent Consideration
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets or obtaining regulatory approvals. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through a separate line item within our consolidated statements of operations.
During the second quarter of 2012, we recorded additional contingent liabilities of $259 million, representing the estimated fair value of the contingent consideration we expected to pay to the former shareholders of Cameron upon the achievement of certain regulatory and net sales based milestones. The fair value of the contingent consideration liabilities were estimated by discounting, to present value, contingent payments expected. We utilized a probability-weighted approach to determine the fair value of expected milestone payments and we utilized a Monte Carlo valuation model to determine the fair value of expected sales-based payments.
We recorded net expense related to the change in fair value of our contingent consideration liabilities of $1 million and $11 million in the second quarter and first half of 2012, respectively, and $7 million and $13 million during the second quarter and first half of 2011, respectively. The net expense recorded during the second quarter of 2012 included a $10 million benefit related to the reduction in the fair value of a payment liability due to revised estimates of the required effort, time and cost involved in completing the related in-process projects and the probability of achieving certain future product development targets and regulatory-based milestones before specified time periods. We paid $1 million and $4 million in the second quarter and first half of 2012, respectively, and did not make any payments related to prior-period acquisitions during the second quarter and first half of 2011. As of June 30, 2012, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay is approximately $1.9 billion.
Changes in the fair value of our contingent consideration liability were as follows (in millions):

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Balance as of December 31, 2011
$
(358
)
Contingent consideration liability recorded
(259
)
Net fair value adjustments
(11
)
Payments made
4

Balance as of June 30, 2012
$
(624
)

Increases or decreases in the fair value of our contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or in the timing or likelihood of achieving regulatory-, revenue- or commercialization-based milestones. The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:

Contingent Consideration Liability
Fair Value as of June 30, 2012
Valuation Technique
Unobservable Input
Range
R&D, Regulatory and Commercialization-based Milestones
$311 million
Probability Weighted Discounted Cash Flow
Discount Rate
1.1% - 2.9%
Probability of Payment
38% - 95%
Projected Year of Payment
2012 - 2017
Revenue-based Payments
$196 million
Discounted Cash Flow
Discount Rate
12.0% - 19.5%
Probability of Payment
65% - 100%
Projected Year of Payment
2012 - 2018
$117 million
Monte Carlo
Probability of Payment
95%
Risk Free Rate
LIBOR Term Structure
Projected Year of Payment
2013-2018

Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts related to R&D, regulatory- and commercialization-based milestones and certain revenue-based milestones are discounted back to the current period using a discounted cash flow model. Other revenue-based payments are valued using a monte carlo valuation model, which simulates future revenues during the earn out-period using management's best estimates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement.

NOTE C – DIVESTITURES
In January 2011, we closed the sale of our Neurovascular business to Stryker Corporation for a purchase price of $1.5 billion in cash. We received $1.450 billion at closing, including an upfront payment of $1.426 billion, and $24 million which was placed into escrow and released throughout 2011 upon the completion of local closings in certain foreign jurisdictions. We will receive an additional $50 million contingent upon the transfer or separation of certain manufacturing facilities, which we expect will occur during 2012 and 2013. Due to our continuing involvement in the operations of the Neurovascular business, the divestiture does not meet the criteria for presentation as a discontinued operation. We recorded a pre-tax gain of $760 million ($530 million after-tax) during the first quarter of 2011 associated with the closing of the transaction.
Revenue generated by the Neurovascular business was $30 million in the second quarter of 2012, $59 million in the first half of 2012, $43 million in the second quarter of 2011, and $77 million in the first half of 2011. We continue to generate net sales pursuant to our supply and distribution agreements with Stryker; however, these net sales are at significantly lower levels and at reduced gross profit margins as compared to periods prior to the divestiture.

NOTE D – 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 as of June 30, 2012 and December 31, 2011 is as follows:

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As of
 
 
June 30, 2012
 
December 31, 2011
 
 
Gross Carrying
 
Accumulated
Amortization/
 
Gross Carrying
 
Accumulated
Amortization/
(in millions)
 
Amount
 
Write-offs
 
Amount
 
Write-offs
Amortizable intangible assets
 
 
 
 
 
 
 
 
Technology - core
 
$
6,786

 
$
(1,872
)
 
$
6,786

 
$
(1,722
)
Technology - developed
 
1,076

 
(1,016
)
 
1,037

 
(1,012
)
Patents
 
546

 
(342
)
 
539

 
(331
)
Other intangible assets
 
812

 
(402
)
 
808

 
(376
)
 
 
$
9,220

 
$
(3,632
)
 
$
9,170

 
$
(3,441
)
Unamortizable intangible assets
 
 
 
 
 
 
 
 
Goodwill
 
$
15,203

 
$
(8,729
)
 
$
14,888

 
$
(5,127
)
Technology - core
 
242

 
 
 
242

 
 
Purchased research and development
 
419

 
 
 
502

 
 
 
 
$
15,864

 
$
(8,729
)
 
$
15,632

 
$
(5,127
)

The following is a rollforward of our goodwill balance by reportable segment:
(in millions)
 
United States
 
EMEA
 
Japan
 
Inter-Continental
 
Total
Balance as of December 31, 2011
 
$
4,667

 
$
4,004

 
$
554

 
$
536

 
$
9,761

Purchase price adjustments
 


 
(1
)
 
(2
)
 
3

 
—

Goodwill acquired
 
184

 
97

 
7

 
27

 
315

Goodwill written off
 


 
(3,602
)
 

 

 
(3,602
)
Balance as of June 30, 2012
 
$
4,851

 
$
498

 
$
559

 
$
566

 
$
6,474


The 2012 purchase price adjustments relate primarily to adjustments in taxes payable and deferred income taxes, including changes in the liability for unrecognized tax benefits.
Goodwill Impairment Charges
2012 Charge
We test our April 1 goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In the second quarter of 2012, we performed our annual goodwill impairment test for all of our reporting units and concluded that the goodwill within our EMEA reporting unit was impaired and recorded an estimated charge of $3.602 billion ($3.579 billion after-tax) in the second quarter of 2012. The amount of this charge is subject to finalization. We would recognize any necessary adjustment to this estimate in the third quarter of 2012, as we finalize the second step of the goodwill impairment test, in accordance with ASC Topic 350, Intangibles—Goodwill and Other.
We used the income approach, specifically the discounted cash flow (DCF) method, to derive the fair value of the EMEA reporting unit, as described in our accounting policies in our 2011 Annual Report filed on Form 10-K. We updated all aspects of the DCF model associated with the EMEA business, including the amount and timing of future expected cash flows, terminal value growth rate and the appropriate market-participant risk-adjusted weighted average cost of capital (WACC) to apply.
As previously disclosed in our 2011 Annual Report filed on Form 10-K, our EMEA reporting unit had a material amount of goodwill that was at higher risk of potential failure of the first step of the impairment test. As a result of revised estimates developed during our annual strategic planning process and analysis performed in conjunction with our annual goodwill impairment test in the second quarter, we concluded that the revenue growth rates projected for the EMEA reporting unit will be slightly lower than our previous estimates primarily driven by macro-economic factors and our performance in the European market. We updated short-term operating projections based on our most recent strategic plan for EMEA prepared by management. We reduced the EMEA long-term growth rates and terminal value growth rate projections and increased the discount rate within our 15-year DCF model for EMEA by approximately 100 basis points due to increased risk associated with our projections in this market primarily as a result of on-going economic uncertainty in Europe. While we do expect revenue growth in our EMEA business, our expectations

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for future growth and profitability are lower than our previous estimates and reflect declines in average selling prices and volume pressures due to austerity measures. The declines expected in the EMEA market did not impact our assumptions related to other reporting units.
The aggregate amount of goodwill that remains associated with our EMEA reporting unit is $498 million as of June 30, 2012. In addition, the remaining book value of our other EMEA intangible assets allocated to our EMEA reporting unit, is approximately $1.5 billion as of June 30, 2012. In accordance with ASC Topic 350, we tested our EMEA amortizable intangible assets as of April 1, 2012 for impairment on an undiscounted cash flow basis, and determined that these assets were not impaired. We also tested our indefinite-lived intangible assets associated with EMEA as of April 1, 2012 and recorded an impairment charge related to the in-process research and development associated with our acquisition of Sadra Medical, Inc. See Intangible Asset Impairment Charges below for a further discussion of this impairment.
In conjunction with our annual goodwill impairment test on all reporting units, the fair value of each reporting unit exceeded its carrying value, with the exception of EMEA and our U.S. CRM reporting unit. Based on the remaining book value of our U.S. CRM reporting unit following the goodwill impairment charge recorded during the first quarter of 2011, the carrying value of our U.S. CRM reporting unit exceeded its fair value, due primarily to the value of amortizable intangible assets allocated to this reporting unit. The remaining book value of our U.S. CRM amortizable intangible assets was approximately $3.4 billion as of June 30, 2012. The values estimated in our annual goodwill impairment test performed during the second quarter of 2012 related to our U.S. CRM reporting unit were substantially consistent with those used in our first quarter interim impairment test.
We continue to identify three reporting units with a material amount of goodwill that are at higher risk of potential failure of the first step of the impairment test in future reporting periods. These reporting units include our U.S. CRM reporting unit, which holds $965 million of allocated goodwill; our U.S. Cardiovascular reporting unit, which holds $2.4 billion of allocated goodwill; and our U.S. Neuromodulation reporting unit, which holds $1.3 billion of allocated goodwill, each as of June 30, 2012. As of our annual goodwill impairment test, the level of excess fair value over carrying value for these reporting units identified as being at higher risk (with the exception of the U.S. CRM reporting unit, whose carrying value continues to exceed its fair value) ranged from approximately 16 percent for our U.S. Neuromodulation reporting unit to 35 percent for our U.S. Cardiovascular reporting unit.
On a quarterly basis, we monitor the key drivers of fair value for these reporting units to detect events or other changes that would warrant an interim impairment test. The key variables that drive the cash flows of our reporting units are estimated revenue growth rates, levels of profitability and terminal value growth rate assumptions, as well as the WACC rate applied. These assumptions are subject to uncertainty, including our ability to grow revenue and improve profitability levels. For each of these reporting units, relatively small declines in the future performance and cash flows of the reporting unit or small changes in other key assumptions, including increases to the reporting unit carrying value, may result in the recognition of significant goodwill impairment charges. For example, keeping all other variables constant, a 50 basis point increase in the WACC applied to the reporting units, excluding acquisitions, would require that we perform the second step of the goodwill impairment test for our U.S. CRM reporting unit, and a 100 basis point increase would require that we perform the second step of the goodwill impairment test for our U.S. Neuromodulation reporting unit. In addition, keeping all other variables constant, a 100 basis point decrease in terminal value growth rates would require that we perform the second step of the goodwill impairment test for our U.S. CRM reporting unit, and a 200 basis point decrease in terminal value growth rates would require that we perform the second step of the goodwill impairment test for our U.S. Neuromodulation reporting unit. The estimates used for our future cash flows and discount rates represent management's best estimates, which we believe to be reasonable, but future declines in the business performance of our reporting units may impair the recoverability of our goodwill balance.
Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units include, but are not limited to:
•
decreases in estimated market sizes or market growth rates due to greater-than-expected declines in procedural volumes, pricing pressures, product actions, and/or competitive technology developments;
•
declines in our market share and penetration assumptions due to increased competition, an inability to develop or launch new and next-generation products and technology features in line with our commercialization strategies, and market and/or regulatory conditions that may cause significant launch delays or product recalls;
•
decreases in our profitability due to an inability to successfully implement and achieve timely and sustainable cost improvement measures consistent with our expectations, increases in our market-participant tax rate, and/or changes in tax laws;
•
negative developments in intellectual property litigation that may impact our ability to market certain products or increase

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our costs to sell certain products;
•
the level of success of on-going and future research and development efforts, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;
•
the level of success in managing the growth of acquired companies, achieving sustained profitability consistent with our expectations, and establishing government and third-party payer reimbursement, and increases in the costs and time necessary to integrate acquired businesses into our operations successfully;
•
changes in our reporting units or in the structure of our business as a result of future reorganizations or divestitures of assets or businesses;
•
increases in our market-participant risk-adjusted WACC; and
•
declines in revenue as a result of loss of key members of our sales force and other key personnel.
Negative changes in one or more of these factors, among others, could result in additional impairment charges.
2011 Charge
Based on market information that became available to us toward the end of the first quarter of 2011, we concluded that there was a reduction in the estimated size of the U.S. ICD market, which led to lower projected U.S. CRM results compared to prior forecasts and created an indication of potential impairment of the goodwill balance attributable to our U.S. CRM business unit. Therefore, we performed an interim impairment test in accordance with U.S. GAAP and our accounting policies and recorded a non-deductible goodwill impairment charge of $697 million, on both a pre-tax and after-tax basis, associated with this business unit during the first quarter of 2011. For further information, refer to Note D - Goodwill and Other Intangible Assets to our consolidated financial statements included in Item 8 of our 2011 Annual Report filed on Form 10-K.
The following is a rollforward of accumulated goodwill write-offs by reportable segment:
 
United
 
 
 
 
 
Inter-
 
 
(in millions)
States
 
EMEA
 
Japan
 
Continental
 
Total
Accumulated write-offs as of December 31, 2011
$
(5,127
)
 
 
 
 
 
 
 
$
(5,127
)
Goodwill written off
 
 
$
(3,602
)
 
 
 
 
 
(3,602
)
Accumulated write-offs as of June 30, 2012
$
(5,127
)
 
$
(3,602
)
 

 

 
$
(8,729
)
Intangible Asset Impairment Charges
2012 Charge
During the second quarter of 2012, as a result of revised estimates developed in conjunction with our annual strategic planning process and annual goodwill impairment test, we performed an interim impairment test of our in-process research and development projects associated with our acquisition of Sadra Medical, Inc. Based on the results of our impairment analysis, we revised our expectations of the required effort, time and cost involved in completing the in-process projects and bringing the related products to market. As a result of these changes, we recorded an impairment charge of $129 million ($110 million after-tax) to write-down the balance of these intangible assets to their fair value during the second quarter of 2012. We believe that the technology associated with our acquisition of Sadra represents a significant future opportunity in the structural heart market.

In-process research and development fair value is measured using projected revenues, projected expenses, discount rates, and probability of expected launch. The nonrecurring Level 3 fair value measurements of our 2012 intangible asset impairment analysis included the following significant unobservable inputs:

Intangible Asset
Fair Value as of June 30, 2012
Valuation Technique
Unobservable Input
Range
In-Process R&D
$184 million
Income Approach - Excess Earnings Method
Discount Rate
20%

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2011 Charge
During the second quarter of 2011, we recorded a $12 million intangible asset impairment charge associated with changes in the timing and amount of the expected cash flows related to certain acquired in-process research and development projects.

We recorded these amounts in the intangible assets impairment charges caption in our accompanying unaudited condensed consolidated statements of operations.

NOTE E – FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We develop, manufacture and sell medical devices globally and our earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates and interest rates. We address these risks through a risk management program that includes the use of derivative financial instruments, and operate the program pursuant to documented corporate risk management policies. We recognize all derivative financial instruments in our consolidated financial statements at fair value in accordance with ASC Topic 815, Derivatives and Hedging. In accordance with Topic 815, for those derivative instruments that are designated and qualify as hedging instruments, the hedging instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. The accounting for changes in the fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Our derivative instruments do not subject our earnings or cash flows to material risk, as gains and losses on these derivatives generally offset losses and gains on the item being hedged. We do not enter into derivative transactions for speculative purposes and we do not have any non-derivative instruments that are designated as hedging instruments pursuant to Topic 815.
Currency Hedging
We are exposed to currency risk consisting primarily of foreign currency denominated monetary assets and liabilities, forecasted foreign currency denominated intercompany and third-party transactions and net investments in certain subsidiaries. We manage our exposure to changes in foreign currency exchange rates on a consolidated basis to take advantage of offsetting transactions. We use both derivative instruments (currency forward and option contracts), and non-derivative transactions (primarily European manufacturing and distribution operations) to reduce the risk that our earnings and cash flows associated with these foreign currency denominated balances and transactions will be adversely affected by foreign currency exchange rate changes.
Designated Foreign Currency Hedges
All of our designated currency hedge contracts outstanding as of June 30, 2012 and December 31, 2011 were cash flow hedges under Topic 815 intended to protect the U.S. dollar value of our forecasted foreign currency denominated transactions. We record the effective portion of any change in the fair value of foreign currency cash flow hedges in other comprehensive income (OCI) until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the foreign currency cash flow hedge to earnings. In the event the hedged forecasted transaction does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had currency derivative instruments designated as cash flow hedges outstanding in the contract amount of $2.318 billion as of June 30, 2012 and $2.088 billion as of December 31, 2011.
We recognized net losses of $10 million in earnings on our cash flow hedges during the second quarter of 2012 and $26 million for the first half of 2012, as compared to net losses of $27 million during the second quarter of 2011 and $46 million for the first half of 2011. All currency cash flow hedges outstanding as of June 30, 2012 mature within 36 months. As of June 30, 2012, $8 million of net losses, net of tax, were recorded in accumulated other comprehensive income (AOCI) to recognize the effective portion of the fair value of any currency derivative instruments that are, or previously were, designated as foreign currency cash flow hedges, as compared to net losses of $52 million as of December 31, 2011. As of June 30, 2012, $17 million of net losses, net of tax, may be reclassified to earnings within the next twelve months.
The success of our hedging program depends, in part, on forecasts of transaction activity in various currencies (primarily Japanese yen, Euro, British pound sterling, Australian dollar and Canadian dollar). We may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activity during periods of currency volatility. In addition, changes in foreign currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Non-designated Foreign Currency Contracts

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We use currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under Topic 815; are marked-to-market with changes in fair value recorded to earnings; and are entered into for periods consistent with currency transaction exposures, generally less than one year. We had currency derivative instruments not designated as hedges under Topic 815 outstanding in the contract amount of $2.015 billion as of June 30, 2012 and $2.209 billion as of December 31, 2011.
Interest Rate Hedging
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We have historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates by converting floating-rate debt into fixed-rate debt or fixed-rate debt into floating-rate debt.
We designate these derivative instruments either as fair value or cash flow hedges under Topic 815. We record changes in the value of fair value hedges in interest expense, which is generally offset by changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest rate derivative instruments are included in interest expense. We record the effective portion of any change in the fair value of derivative instruments designated as cash flow hedges as unrealized gains or losses in OCI, net of tax, until the hedged cash flow occurs, at which point the effective portion of any gain or loss is reclassified to earnings. We record the ineffective portion of our cash flow hedges in interest expense. In the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time. We had no interest rate derivative contracts outstanding as of June 30, 2012 or December 31, 2011.
In prior years, we terminated certain interest rate derivative contracts, including fixed-to-floating interest rate contracts, designated as fair value hedges, and floating-to-fixed treasury locks, designated as cash flow hedges. We are amortizing the gains and losses on these derivative instruments upon termination into earnings as a reduction of interest expense over the remaining term of the hedged debt, in accordance with Topic 815. The carrying amount of certain of our senior notes included unamortized gains of $68 million as of June 30, 2012 and $73 million as of December 31, 2011, and unamortized losses of $4 million as of June 30, 2012 and $4 million as of December 31, 2011, related to the fixed-to-floating interest rate contracts. In addition, we had pre-tax net gains within AOCI related to terminated floating-to-fixed treasury locks of $6 million as of June 30, 2012 and $7 million as of December 31, 2011. We recorded $3 million during the second quarter of 2012 and $5 million during the first half of 2012 as a reduction to interest expense, resulting from the amortization of previously terminated interest rate derivative contracts. As of June 30, 2012, $10 million of pre-tax net gains may be reclassified to earnings within the next twelve months as a reduction to interest expense from amortization of our previously terminated interest rate derivative contracts.
Counterparty Credit Risk
We do not have significant concentrations of credit risk arising from our derivative financial instruments, whether from an individual counterparty or a related group of counterparties. We manage our concentration of counterparty credit risk on our derivative instruments by limiting acceptable counterparties to a diversified group of major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to each counterparty, and by actively monitoring their credit ratings and outstanding fair values on an on-going basis. Furthermore, none of our derivative transactions are subject to collateral or other security arrangements and none contain provisions that are dependent on our credit ratings from any credit rating agency.
We also employ master netting arrangements that reduce our counterparty payment settlement risk on any given maturity date to the net amount of any receipts or payments due between us and the counterparty financial institution. Thus, the maximum loss due to counterparty credit risk is limited to the unrealized gains in such contracts net of any unrealized losses should any of these counterparties fail to perform as contracted. Although these protections do not eliminate concentrations of credit risk, as a result of the above considerations, we do not consider the risk of counterparty default to be significant.
Fair Value of Derivative Instruments
The following presents the effect of our derivative instruments designated as cash flow hedges under Topic 815 on our accompanying unaudited condensed consolidated statements of operations during the second quarter and first half of 2012 and 2011 (in millions):


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Amount of Pre-tax
Gain (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Pre-tax Loss Reclassified from AOCI into Earnings
(Effective Portion)
 
Location in Statement of
Operations
Three Months Ended June 30, 2012
 
 
 
 
 
Currency hedge contracts
$
10

 
$
(10
)
 
Cost of products sold
 
$
10

 
$
(10
)
 
 
Three Months Ended June 30, 2011
 
 
 
 
 
Currency hedge contracts
$
(60
)
 
$
(27
)
 
Cost of products sold
 
$
(60
)
 
$
(27
)
 
 
Six Months Ended June 30, 2012
 
 
 
 
 
Currency hedge contracts
$
46

 
$
(26
)
 
Cost of products sold
 
$
46

 
$
(26
)
 
 
Six Months Ended June 30, 2011
 
 
 
 
 
Currency hedge contracts
$
(107
)
 
$
(46
)
 
Cost of products sold
 
$
(107
)
 
$
(46
)
 
 

The amount of gain (loss) recognized in earnings related to the ineffective portion of hedging relationships was de minimis for all periods presented.
Derivatives Not Designated as Hedging Instruments
Location in Statement of
Operations
 
Amount of Gain (Loss) Recognized
in Earnings (in millions)
 
Amount of Gain (Loss) Recognized
in Earnings (in millions)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Currency hedge contracts
Other, net
 
$
12

 
$
(7
)
 
$
15

 
$
(6
)
 
 
 
$
12

 
$
(7
)
 
$
15

 
$
(6
)

Net gains and losses on currency hedge contracts not designated as hedging instruments were substantially offset by net losses from foreign currency transaction exposures of $19 million during the second quarter of 2012, net gains of $3 million during the second quarter of 2011, net losses of $25 million for the first half of 2012 and net gains of $1 million for the first half of 2011. As a result, we recorded net foreign currency losses of $7 million during the second quarter of 2012, $4 million during the second quarter of 2011, $10 million for the first half of 2012, and $5 million for the first half of 2011, within other, net in our accompanying unaudited condensed consolidated statements of operations.
Topic 815 requires all derivative 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 instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and Disclosures (Topic 820), by considering the estimated amount we would receive or pay to transfer these instruments at the reporting date and by taking into account current interest rates, foreign currency exchange rates, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. Generally, 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. As of June 30, 2012, we have classified all of our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by Topic 820, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.
The following are the balances of our derivative assets and liabilities as of June 30, 2012 and December 31, 2011:


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As of
 
 
June 30,
 
December 31,
(in millions)
Location in Balance Sheet (1)
2012
 
2011
Derivative Assets:
 
 
 
 
Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Prepaid and other current assets
$
31

 
$
31

Currency hedge contracts
Other long-term assets
33

 
20

 
 
64

 
51

Non-Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Prepaid and other current assets
27

 
36

Total Derivative Assets
 
$
91

 
$
87

 
 
 
 
 
Derivative Liabilities:
 
 
 
 
Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Other current liabilities
$
46

 
$
69

Currency hedge contracts
Other long-term liabilities
19

 
49

 
 
65

 
118

Non-Designated Hedging Instruments
 
 
 
 
Currency hedge contracts
Other current liabilities
16

 
13

Total Derivative Liabilities
 
$
81

 
$
131

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

Other Fair Value Measurements
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 available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities 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.

Assets and liabilities measured at fair value on a recurring basis consist of the following as of June 30, 2012 and December 31, 2011:


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As of June 30, 2012
 
As of December 31, 2011
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market and government funds
$
78

 

 

 
$
78

 
$
78

 

 

 
$
78

Currency hedge contracts

 
$
91

 

 
91

 

 
$
87

 

 
87

 
$
78

 
$
91

 

 
$
169

 
$
78

 
$
87

 

 
$
165

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency hedge contracts

 
$
81

 

 
$
81

 

 
$
131

 

 
$
131

Accrued contingent consideration

 

 
$
624

 
624

 

 

 
$
358

 
358

 

 
$
81

 
$
624

 
$
705

 

 
$
131

 
$
358

 
$
489


Our investments in money market and government funds are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as cash and cash equivalents within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.

In addition to $78 million invested in money market and government funds as of June 30, 2012, we had $151 million in short-term time deposits and $142 million in interest bearing and non-interest bearing bank accounts. In addition to $78 million invested in money market and government funds as of December 31, 2011, we had $88 million of cash invested in short-term time deposits, and $101 million in interest bearing and non-interest bearing bank accounts.
Changes in the fair value of assets and liabilities measured on a recurring basis using significant unobservable inputs (Level 3) during the first half of 2012 related solely to our contingent consideration liabilities. Refer to Note B - Acquisitions for a discussion of the fair value measurements related to our contingent consideration liabilities.

Non-Recurring Fair Value Measurements
We have certain assets and liabilities that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The aggregate carrying amount of our cost method investments was $13 million as of June 30, 2012 and $16 million as of December 31, 2011.
During the first half of 2012, we recorded $3.731 billion of losses to adjust our goodwill and certain other intangible asset balances to their fair value. In the second quarter of 2012, we wrote down goodwill attributable to our EMEA reporting unit, discussed in Note D – Goodwill and Other Intangible Assets, to its implied fair value, resulting in an estimated goodwill impairment charge of $3.602 billion. The amount of this charge is subject to finalization. We would recognize any necessary adjustment to this estimate in the third quarter of 2012, when we finalize the second step of the goodwill impairment test, in accordance with Topic 350. In addition, during the second quarter of 2012, as a result of revised expectations of the required effort, time and cost involved in completing Sadra's in-process research and development projects and bringing the related products to market, we recorded a $129 million intangible asset impairment charge, representing a decrease in the estimated fair value of the related intangible assets. During the first half of 2011, we recorded $709 million of losses to adjust our goodwill and certain other intangible asset balances to their fair value. In the first quarter of 2011, we wrote down goodwill attributable to our U.S. CRM reporting unit, discussed in Note D – Goodwill and Other Intangible Assets, with a carrying amount of $1.479 billion to its implied fair value of $782 million, resulting in a non-deductible goodwill impairment charge of $697 million. In addition, during the second quarter of 2011, as a result of changes in the timing and amount of the expected cash flows related to certain acquired in-process research and development projects, we recorded a $12 million intangible asset impairment charge representing a decrease in the estimated fair value of the related intangible assets. These fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method, which are classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows within these analyses was based on our most recent operational budgets, long-range strategic plans and other estimates. Refer to Note D - Goodwill and Other Intangible Assets, for further detailed information related to significant unobservable inputs.
The fair value of our outstanding debt obligations was $4.824 billion as of June 30, 2012 and $4.649 billion as of December 31, 2011, which was determined by using primarily quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy. Refer to Note F – Borrowings and Credit Arrangements for a discussion of our debt obligations.

NOTE F – BORROWINGS AND CREDIT ARRANGEMENTS

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We had total debt of $4.257 billion as of June 30, 2012 and $4.261 billion as of December 31, 2011. The debt maturity schedule for the significant components of our debt obligations as of June 30, 2012 is as follows:

 
 
 
 
(in millions)
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
 
Total
Senior notes

 

 
$
600

 
$
1,250

 
$
600

 
$
1,750

 
$
4,200

 

 

 
$
600

 
$
1,250

 
$
600

 
$
1,750

 
$
4,200

 
Note:
 
The table above does not include unamortized discounts associated with our senior notes, or amounts related to interest rate contracts used to hedge the fair value of certain of our senior notes.
Revolving Credit Facility
In April 2012, we financed a new $2.0 billion revolving credit facility which will mature in April 2017 and replaced the previous credit facility. Eurodollar and multicurrency loans under the new revolving credit facility bear interest at LIBOR plus an interest margin of between 0.875 percent and 1.475 percent (1.275 percent as of June 30, 2012), based on our corporate credit ratings and consolidated leverage ratio. In addition, we are required to pay a facility fee (0.225 percent as of June 30, 2012) based on our corporate credit ratings, consolidated leverage ratio, and the total amount of revolving credit commitments, generally irrespective of usage, under the credit agreement. There were no amounts borrowed under our revolving credit facility as of June 30, 2012 or under our previous credit facility as of December 31, 2011.
Our revolving credit facility agreement in place as of June 30, 2012 requires that we maintain certain financial covenants, as follows:

 
Covenant
Requirement
 
Actual as of
June 30, 2012
Maximum leverage ratio (1)
3.5 times
 
2.4 times
Minimum interest coverage ratio (2)
3.0 times
 
6.6 times

(1)
Ratio of total debt to consolidated EBITDA, as defined by the credit agreement, for the preceding four consecutive fiscal quarters.
(2)
Ratio of consolidated EBITDA, as defined by the credit agreement, to interest expense for the preceding four consecutive fiscal quarters.
The credit agreement in place as of June 30, 2012 provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreement, through the credit agreement maturity, of up to $500 million in restructuring charges and restructuring-related expenses related to current or future restructuring plans. As of June 30, 2012, we had $467 million of the restructuring charge exclusion remaining. Any non-cash charges, as defined by the agreement, are excluded from the calculation of consolidated EBITDA. In addition, any cash litigation payments, as defined by the agreement, are excluded from the calculation of consolidated EBITDA and any new debt issued to fund any tax deficiency payments is excluded from consolidated total debt, as defined in the agreement, provided that the sum of any excluded cash litigation payments and any new debt issued to fund any tax deficiency payments shall not exceed $2.3 billion in the aggregate. As of June 30, 2012, we had $2.290 billion of the combined legal and debt exclusion remaining. As of and through June 30, 2012, we were in compliance with the required covenants.
Any inability to maintain compliance with these covenants could require us to seek to renegotiate the terms of our credit facilities or seek waivers from compliance with these covenants, both of which could result in additional borrowing costs. Further, there can be no assurance that our lenders would grant such waivers.
Senior Notes
We had senior notes outstanding in the amount of $4.2 billion as of June 30, 2012 and December 31, 2011.
Other Arrangements
We also maintain a $350 million credit and security facility secured by our U.S. trade receivables. Effective June 29, 2012, we extended the maturity of this facility to June 2013, subject to further extension. There were no amounts borrowed under this facility as of June 30, 2012 or December 31, 2011.

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In addition, we have accounts receivable factoring programs in certain European countries that we account for as sales under ASC Topic 860, Transfers and Servicing (Topic 860). These agreements provide for the sale of accounts receivable to third parties, without recourse, of up to approximately 230 million Euro (translated to approximately $291 million as of June 30, 2012). We have no significant retained interests in the transferred receivables, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. We de-recognized $261 million of receivables as of June 30, 2012 at an average interest rate of 2.4 percent, and $390 million as of December 31, 2011 at an average interest rate of 3.3 percent. The European sovereign debt crisis has impacted our ability to sell accounts receivable under our factoring programs within southern Europe. Certain of our factoring agents have suspended their factoring programs to reduce their exposure levels to government owned or supported debt. The European economic environment may further impact our future ability to transfer receivables, and may negatively impact the costs or credit limits of our existing factoring programs, which may negatively impact our cash flow and results of operations. Within Italy, Spain, Greece and Portugal the number of days our receivables are outstanding is greater than our historical levels in those countries. We believe we have adequate allowances for doubtful accounts related to our Italy, Spain, Greece and Portugal accounts receivable; however, we continue to monitor the European economic environment for any collectibility issues related to our outstanding receivables. In addition, we are currently pursuing alternative factoring arrangements to mitigate our risk of further reductions in cash flow in this region. During the second quarter of 2012, we received cash payments of $60 million related to a government-funded settlement of outstanding receivables in Spain. In addition, during 2011, the Greek government converted a significant portion of our outstanding receivables into bonds, which we monetized during the first half of 2011. These developments have reduced our credit exposure in these countries.
In addition, we have uncommitted credit facilities with a commercial Japanese bank that provide for accounts receivable discounting and factoring of up to 21.0 billion Japanese yen (translated to approximately $264 million as of June 30, 2012). Under these facilities, we de-recognized $197 million of Japanese trade receivables as of June 30, 2012 at an average interest rate of 1.6 percent and $188 million of Japanese trade receivables as of December 31, 2011 at an average interest rate of 1.7 percent. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets.

NOTE G – RESTRUCTURING-RELATED ACTIVITIES
On an on-going basis, we monitor the dynamics of the economy, the healthcare industry, and the markets in which we compete; and we continue to assess opportunities for improved operational effectiveness and efficiency, and better alignment of expenses with revenues, while preserving our ability to make the investments in research and development projects, capital and our people that we believe are essential to our long-term success. As a result of these assessments, we have undertaken various restructuring initiatives in order to enhance our growth potential and position us for long-term success. These initiatives are described below.
2011 Restructuring plan
On July 26, 2011, our Board of Directors approved, and we committed to, a restructuring initiative (the 2011 Restructuring plan) designed to strengthen operational effectiveness and efficiencies, increase competitiveness and support new investments, thereby increasing shareholder value. Key activities under the plan include standardizing and automating certain processes and activities; relocating select administrative and functional activities; rationalizing organizational reporting structures; leveraging preferred vendors; and other efforts to eliminate inefficiency. Among these efforts, we are expanding our ability to deliver best-in-class global shared services for certain functions and divisions at several locations in emerging markets. This action is intended to enable us to grow our global commercial presence in key geographies and take advantage of many cost-reducing and productivity-enhancing opportunities. In addition, we are undertaking efforts to streamline various corporate functions, eliminate bureaucracy, increase productivity and better align corporate resources to our key business strategies. Activities under the 2011 Restructuring plan were initiated in the third quarter of 2011 and are expected to be substantially complete by the end of 2013.
We estimate that the 2011 Restructuring plan will result in total pre-tax charges of approximately $155 million to $210 million, and that approximately $150 million to $200 million of these charges will result in future cash outlays, of which we had made payments of $54 million as of June 30, 2012. As of June 30, 2012, we had recorded related costs of $78 million since the inception of the plan, and are recording a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.
The following provides a summary of our expected total costs associated with the 2011 Restructuring plan by major type of cost:


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Table of Contents

Type of cost
Total estimated amount expected to
be incurred
Restructuring charges:
 
Termination benefits
$125 million to $150 million
Other (1)
$20 million to $40 million
Restructuring-related expenses:
 
Other (2)
$10 million to $20 million
 
$155 million to $210 million

(1)
Includes primarily consulting fees and costs associated with contractual cancellations.
(2)
Comprised of other costs directly related to the 2011 Restructuring plan, including program management, accelerated depreciation, retention and infrastructure-related costs.
2010 Restructuring plan
On February 6, 2010, our Board of Directors approved, and we committed to, a series of management changes and restructuring initiatives (the 2010 Restructuring plan) designed to focus our business, drive innovation, accelerate profitable revenue growth and increase both accountability and shareholder value. Key activities under the plan include the integration of our Cardiovascular and CRM businesses, as well as the restructuring of certain other businesses and corporate functions; the re-alignment of our international structure to reduce our administrative costs and invest in expansion opportunities including significant investments in emerging markets; and the re-prioritization and diversification of our product portfolio. Activities under the 2010 Restructuring plan were initiated in the first quarter of 2010 and are expected to be substantially complete by the end of 2012.
We estimate that the 2010 Restructuring plan will result in total pre-tax charges of approximately $165 million to $185 million, and that approximately $150 million to $160 million of these charges will result in cash outlays, of which we had made payments of $143 million as of June 30, 2012. As of June 30, 2012, we had recorded related costs of $159 million since the inception of the plan, and are recording a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.
The following provides a summary of our expected total costs associated with the 2010 Restructuring plan by major type of cost:

Type of cost
Total estimated amount expected to
be incurred
Restructuring charges:
 
Termination benefits
$95 million to $100 million
Fixed asset write-offs
$10 million to $15 million
Other (1)
$50 million to $55 million
Restructuring-related expenses:
 
Other (2)
$10 million to $15 million
 
$165 million to $185 million

(1)
Includes primarily consulting fees and costs associated with contractual cancellations.
(2)
Comprised of other costs directly related to the 2010 Restructuring plan, including accelerated depreciation and infrastructure-related costs.
Plant Network Optimization program
In January 2009, our Board of Directors approved, and we committed to, a plant network optimization initiative (the Plant Network Optimization program), which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and by closing certain other facilities. The program is a complement to the restructuring initiatives approved by our Board of Directors in 2007 (the 2007 Restructuring plan), and is intended to improve overall gross profit margins. Activities under the Plant Network Optimization program were initiated in the first quarter of 2009 and are expected to be substantially complete by the end of 2012.
We estimate that the execution of the Plant Network Optimization program will result in total pre-tax charges of approximately

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$130 million to $145 million, and that approximately $110 million to $120 million of these charges will result in cash outlays, of which we had made payments of $94 million as of June 30, 2012. As of June 30, 2012, we had recorded related costs of $129 million since the inception of the plan, and are recording a portion of these expenses as restructuring charges and the remaining portion through cost of products sold within our consolidated statements of operations.
The following provides a summary of our estimates of costs associated with the Plant Network Optimization program by major type of cost:

Type of cost
Total estimated amount expected to
be incurred
Restructuring charges:
 
Termination benefits
$35 million to $40 million
 
 
Restructuring-related expenses:
 
Accelerated depreciation
$20 million to $25 million
Transfer costs (1)
$75 million to $80 million
 
$130 million to $145 million

(1)
Consists primarily of costs to transfer product lines among facilities, including costs of transfer teams, freight, idle facility and product line validations.
In the aggregate, we recorded restructuring charges pursuant to our restructuring plans of $28 million in the second quarter of 2012, $18 million in the second quarter of 2011, $39 million in the first half of 2012, and $56 million in the first half of 2011. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $5 million in the second quarter of 2012, $12 million in the second quarter of 2011, $11 million in the first half of 2012, and $24 million in the first half of 2011.

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Table of Contents

The following presents these costs by major type and line item within our accompanying unaudited condensed consolidated statements of operations, as well as by program:

Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
Restructuring charges
$
22

 

 

 

 
$
6

 
$
28

Restructuring-related expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 


 
$
2

 

 

 
2

Selling, general and administrative expenses

 

 

 

 
3

 
3

 

 


 
2

 

 
3

 
5

 
$
22

 


 
$
2

 

 
$
9

 
$
33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
2011 Restructuring plan
$
20

 

 

 

 
$
8

 
$
28

2010 Restructuring plan


 

 

 

 
1

 
1

Plant Network Optimization program
2

 


 
$
2

 

 

 
4

 
$
22

 


 
$
2

 

 
$
9

 
$
33

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
Restructuring charges
$
8

 

 

 

 
$
10

 
$
18

Restructuring-related expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
$
3

 
$
8

 

 

 
11

Selling, general and administrative expenses

 

 

 

 
1

 
1

 

 
3

 
8

 

 
1

 
12

 
$
8

 
$
3

 
$
8

 

 
$
11

 
$
30

 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
2010 Restructuring plan
$
2

 

 

 

 
$
11

 
$
13

Plant Network Optimization program
6

 
$
3

 
$
8

 

 

 
17

 
$
8

 
$
3

 
$
8

 

 
$
11

 
$
30


  

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Table of Contents

Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
Restructuring charges
$
20

 

 

 

 
$
19

 
$
39

Restructuring-related expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 


 
$
6

 

 

 
6

Selling, general and administrative expenses

 

 

 

 
5

 
5

 

 


 
6

 

 
5

 
11

 
$
20

 


 
$
6

 

 
$
24

 
$
50

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
2011 Restructuring plan
$
22

 

 

 

 
$
21

 
$
43

2010 Restructuring plan
(2
)
 

 

 

 
3

 
1

Plant Network Optimization program


 


 
$
6

 

 

 
6

 
$
20

 


 
$
6

 

 
$
24

 
$
50

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
Restructuring charges
$
36

 

 

 

 
$
20

 
$
56

Restructuring-related expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
$
6

 
$
16

 

 

 
22

Selling, general and administrative expenses

 

 

 

 
2

 
2

 

 
6

 
16

 

 
2

 
24

 
$
36

 
$
6

 
$
16

 

 
$
22

 
$
80

 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Termination
Benefits
 
Accelerated
Depreciation
 
Transfer
Costs
 
Fixed Asset
Write-offs
 
Other
 
Total
2010 Restructuring plan
$
29

 

 

 

 
$
22

 
$
51

Plant Network Optimization program
7

 
$
6

 
$
16

 

 

 
29

 
$
36

 
$
6

 
$
16

 

 
$
22

 
$
80


Termination benefits represent amounts incurred pursuant to our on-going benefit arrangements and amounts for “one-time” involuntary termination benefits, and have been recorded in accordance with ASC Topic 712, Compensation – Non-retirement Postemployment Benefits and ASC Topic 420, Exit or Disposal Cost Obligations (Topic 420). We expect to record additional termination benefits related to our restructuring initiatives in 2012 when we identify with more specificity the job classifications, functions and locations of the remaining head count to be eliminated. Other restructuring costs, which represent primarily consulting fees, are being recorded as incurred in accordance with Topic 420. Accelerated depreciation is being recorded over the adjusted remaining useful life of the related assets, and production line transfer costs are being recorded as incurred.
As of June 30, 2012, we had incurred cumulative restructuring charges related to our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program of $258 million and restructuring-related costs of $107 million since we committed to each plan.
The following presents these costs by major type and by plan:

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Table of Contents

(in millions)
2011
Restructuring
plan
 
2010
Restructuring
plan
 
Plant
Network
Optimization Program
 
Total
Termination benefits
$
43

 
$
88

 
$
36

 
$
167

Fixed asset write-offs


 
11

 

 
11

Other
29

 
51

 

 
80

Total restructuring charges
72

 
150

 
36

 
258

Accelerated depreciation

 

 
22

 
22

Transfer costs

 

 
71

 
71

Other
6

 
9

 

 
15

Restructuring-related expenses
6

 
9

 
93

 
108

 
$
78

 
$
159

 
$
129

 
$
366


We made cash payments of $30 million in the second quarter of 2012 and $65 million in the first half of 2012 associated with restructuring initiatives pursuant to these plans, and as of June 30, 2012, we had made total cash payments of $291 million related to our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program since committing to each plan. Each of these payments was made using cash generated from operations, and is comprised of the following:

(in millions)
2011
Restructuring
plan
 
2010
Restructuring
plan
 
Plant
Network
Optimization Program
 
Total
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
Termination benefits
$
8

 
$
1

 
$
6

 
$
15

Transfer costs

 

 
2

 
2

Other
13

 


 

 
13

 
$
21

 
$
1

 
$
8

 
$
30

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2012
 
 
 
 
 
 
 
Termination benefits
$
16

 
$
3

 
$
17

 
$
36

Transfer costs

 

 
6

 
6

Other
23

 


 

 
23

 
$
39

 
$
3

 
$
23

 
$
65

 
 
 
 
 
 
 
 
Program to Date
 
 
 
 
 
 
 
Termination benefits
$
19

 
$
87

 
$
23

 
$
129

Transfer costs

 

 
71

 
71

Other
35

 
56

 

 
91

 
$
54

 
$
143

 
$
94

 
$
291

We also made cash payments of $1 million during the second quarter of 2012 and $4 million during the first half of 2012 associated with our 2007 Restructuring plan, and as of June 30, 2012, we had made total cash payments of $378 million related to the 2007 Restructuring plan since committing to the plan in the fourth quarter of 2007.
The following is a rollforward of the restructuring liability associated with our 2011 Restructuring plan, 2010 Restructuring plan and Plant Network Optimization program, which is reported as a component of accrued expenses included in our accompanying unaudited condensed consolidated balance sheets:

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Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plant
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Network
 
 
 
 
2011 Restructuring plan
 
2010 Restructuring plan
 
Optimization Program
 
 
(in millions)
 
Termination
Benefits
 
Other
 
Subtotal
 
Termination
Benefits
 
Other
 
Subtotal
 
Termination
Benefits
 
Total
Accrued as of December 31, 2009
 

 

 

 

 

 

 
$
22

 
$
22

Charges
 


 


 


 
$
66

 
$
28

 
$
94

 
4

 
98

Cash payments
 


 


 


 
(45
)
 
(20
)
 
(65
)
 

 
(65
)
Accrued as of December 31, 2010