NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
Principles of Consolidation:
The accompanying unaudited
Condensed Consolidated Financial Statements
of St. Jude Medical, Inc. (St. Jude Medical or the Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (U.S. generally accepted accounting principles) for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s consolidated results of operations, financial position and cash flows. The
Condensed Consolidated Balance Sheet
at
January 2, 2016
was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and footnotes included in its Current Report on Form 8-K filed with the SEC on June 7, 2016 for the fiscal year ended
January 2, 2016
.
The unaudited
Condensed Consolidated Financial Statements
include the accounts of the Company and its wholly-owned subsidiaries, and other entities for which St. Jude Medical has a controlling financial interest.
Effective January 1, 2016, the Company's Board of Directors appointed a new President and Chief Executive Officer whom the Company has determined to be its Chief Operating Decision Maker. During the first quarter of 2016, the Company changed its sales reporting to closely align with how it manages the business in
five
key areas: Traditional Cardiac Rhythm Management, Heart Failure, Atrial Fibrillation, Cardiovascular and Neuromodulation. The Company continues to operate as a single operating segment.
Reclassifications:
Certain prior period amounts have been reclassified to conform to current year presentation.
Fiscal Year:
We utilize a 52/53-week fiscal year ending on the Saturday nearest December 31st. Each of the three-and nine month periods ended
October 1, 2016
and
October 3, 2015
included 13 weeks and 39 weeks, respectively.
New Accounting Pronouncements:
The following table provides a description of recent accounting pronouncements adopted and those standards not yet adopted with potential for a material impact on the Company's financial statements or disclosures.
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Standard
|
|
Description
|
|
Required adoption timing and approach
|
|
Impact of adoption or other significant matters
|
|
Standards recently adopted
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|
|
Accounting Standards Update (ASU) No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
|
|
The standard affects both the variable interest entity and voting interest entity consolidation models.
|
|
Annual and interim periods beginning after December 15, 2015, with either retrospective or modified retrospective application permitted. Early adoption is permitted.
|
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The Company adopted this ASU in the quarter ended April 2, 2016, using the modified retrospective method. The adoption did not have a material impact on the Company's results of operations or financial position.
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ASU No. 2015-05,
Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
|
|
The standard provides guidance to customers about how to account for cloud computing arrangements when such arrangements include software licenses.
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Annual and interim periods beginning after December 15, 2015, with either prospective or retrospective application permitted. Early adoption was permitted.
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The Company adopted this ASU in the quarter ended April 2, 2016, using the prospective method. The adoption did not have a material impact on the Company's results of operations or financial position.
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ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
|
|
The standard requires that inventory within the scope of the guidance be measured at the lower of cost or net realizable value.
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Annual and interim periods beginning after December 15, 2016, with prospective application required. Early adoption is permitted.
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The Company adopted this ASU in the quarter ended April 2, 2016. The adoption did not have a material impact on the Company's results of operations or financial position.
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ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
|
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The update includes amendments to eight specific cash flow presentation matters, including contingent consideration payments after a business combination.
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Annual and interim periods beginning after December 15, 2017, with retrospective application required. Early adoption is permitted.
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The Company adopted this ASU in the interim period ended October 1, 2016. The adoption did not have a material impact on the Company's cash flows.
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Standards not yet adopted
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ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
|
|
The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will supersede the current revenue recognition requirements.
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Refer to ASU No. 2015-14 regarding the adoption timing. Either retrospective or modified retrospective application is permitted.
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The Company plans to adopt this ASU for interim and annual periods beginning after December 15, 2017. The Company is evaluating its approach to the adoption and the potential impact to its results of operations and financial position.
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ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
|
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The standard defers the effective date of ASU No. 2014-09 to annual and interim periods beginning after December 15, 2017. Early adoption is permitted only as of annual and interim reporting periods beginning after December 15, 2016.
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Not applicable.
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Not applicable.
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ASU No. 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
|
|
Among other things, the standard requires certain equity investments to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable fair values, and eliminates certain disclosure requirements.
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Annual and interim periods beginning after December 15, 2017. Early adoption of certain guidance is permitted.
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The Company is evaluating the timing of adoption and the potential impact to its results of operations and financial position.
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ASU No. 2016-02,
Leases (Topic 842)
|
|
Among other things, the standard requires recognition of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position for virtually all leases where we are the lessee.
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Annual and interim periods beginning after December 15, 2018, with modified retrospective application required. Early adoption is permitted.
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The Company is evaluating the timing of adoption and the potential impact to its results of operations and financial position.
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ASU No. 2016-09,
Compensation--Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
|
|
The areas for simplification in this standard involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.
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Annual and interim periods beginning after December 15, 2016, with certain aspects requiring modified retrospective transition, retrospective application, and/or prospective application. Early adoption is permitted if all aspects are adopted simultaneously.
|
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The Company is evaluating the timing of adoption and the potential impact to its results of operations, financial position and cash flows.
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ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
|
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Among other things, the standard clarifies the principle for determining whether a good or service is “separately identifiable” from other promises in the contract and, therefore, should be accounted for separately. It also clarifies that entities are not required to identify promised goods or services that are immaterial in the context of the contract.
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Refer to ASU No. 2015-14 regarding the adoption timing. Either retrospective or modified retrospective application is permitted.
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The Company plans to adopt this ASU for interim and annual periods beginning after December 15, 2017. The Company is evaluating its approach to the adoption and the potential impact to its results of operations and financial position.
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ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
|
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The standard requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs.
|
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Annual and interim periods beginning after December 15, 2017, with modified retrospective application required. Early adoption is permitted.
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The Company is evaluating the timing of adoption and the potential impact to its results of operations and financial position, which is expected to be material.
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NOTE 2 – DEBT
The carrying value of the Company’s debt, including debt issuance costs, discounts or premiums consisted of the following (in millions):
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October 1, 2016
|
|
January 2, 2016
|
|
Term Loan Due 2020
|
$
|
2,336
|
|
|
$
|
2,093
|
|
|
2016 Senior Notes
|
—
|
|
|
500
|
|
|
2018 Senior Notes
|
497
|
|
|
496
|
|
|
2020 Senior Notes
|
497
|
|
|
496
|
|
|
2023 Senior Notes
|
893
|
|
|
892
|
|
|
2025 Senior Notes
|
495
|
|
|
494
|
|
|
2043 Senior Notes
|
689
|
|
|
689
|
|
|
Yen-denominated Senior Notes Due 2017
|
81
|
|
|
68
|
|
|
Yen-denominated Senior Notes Due 2020
|
126
|
|
|
106
|
|
|
Yen-denominated credit facilities
|
64
|
|
|
54
|
|
|
Commercial paper borrowings
|
96
|
|
|
504
|
|
|
Total debt
|
5,774
|
|
|
6,392
|
|
|
Less: current debt obligations
|
371
|
|
|
1,163
|
|
|
Long-term debt
|
$
|
5,403
|
|
|
$
|
5,229
|
|
Contractual maturities of the Company's debt for the next five fiscal years and thereafter, excluding any debt issuance costs, discounts or premiums, as of
October 1, 2016
were as follows (in millions):
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|
|
Remainder of 2016
|
2017
|
2018
|
2019
|
2020
|
After 2020
|
|
Future minimum principal payments
|
$
|
128
|
|
$
|
275
|
|
$
|
598
|
|
$
|
227
|
|
$
|
2,481
|
|
$
|
2,100
|
|
During the first
nine
months of 2016, the Company repaid its
$500 million
principal amount of
5
-year,
2.500%
unsecured senior notes due 2016, made net commercial paper payments of
$408 million
and drew the remaining
$500 million
of its
5
-year,
$2.6 billion
unsecured term loan due 2020 (Term Loan Due 2020) to refinance existing indebtedness and for general corporate purposes. The Company also made quarterly principal payments totaling
$92 million
for the
nine
months ended October 1, 2016 and prepaid an additional
$167 million
on its Term Loan Due 2020. Additionally, during the nine months ended October 1, 2016, the Company's yen-denominated credit facility that expired in March 2016 for
3.25 billion
Japanese Yen (the equivalent of
$32 million
as of
October 1, 2016
) was automatically extended for a
one
-year period bearing interest at
Yen LIBOR
plus
0.250%
, and the Company's yen-denominated credit facility that expired in June 2016 for
3.25 billion
Japanese Yen (the equivalent of
$32 million
as of
October 1, 2016
) was automatically extended for a
one
-year period bearing interest at Yen LIBOR plus
0.270%
.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Securities and Other Shareholder Litigation
December 2012 Securities Litigation:
On December 7, 2012, a putative securities class action lawsuit was filed in federal district court in Minnesota against the Company and an officer (collectively, the defendants) for alleged violations of the federal securities laws, on behalf of all purchasers of the publicly traded securities of the defendants between October 17, 2012 and November 20, 2012. The complaint, which sought unspecified damages and other relief as well as attorneys' fees, challenges the Company’s disclosures concerning its high voltage cardiac rhythm lead products during the purported class period. On December 10, 2012, a second putative securities class action lawsuit was filed in federal district court in Minnesota against the Company and certain officers for alleged violations of the federal securities laws, on behalf of all purchasers of the publicly traded securities of the Company between October 19, 2011 and November 20, 2012. The second complaint alleged similar claims and sought similar relief. In March 2013, the Court consolidated the
two
cases and appointed a lead counsel and lead plaintiff. A consolidated amended complaint was served and filed in June 2013, alleging false or misleading representations made during the class period extending from February 5, 2010 through November 7, 2012. In September 2013, the defendants filed a motion to dismiss the consolidated amended complaint. On March 10, 2014, the Court ruled on the motion to dismiss, denying the motion in part and granting the motion in part. On October 7, 2014, the lead plaintiff filed a second amended complaint. Like the original consolidated amended complaint, the plaintiffs did not assert any specific amount of compensation in the second amended complaint. The Court granted class certification on December 22, 2015. On May 24, 2016, the parties agreed to resolve the case, pending notification to class members and subject to court approval. Under the settlement, the Company agreed to make a payment of
$39.25 million
to resolve all of the class claims and recorded a charge of that amount during the second quarter of 2016. On July 13, 2016, the Court issued an order preliminarily approving the settlement. Concurrent with the recording of the loss, the Company also recognized probable insurance recoveries of
$39.25 million
. The hearing on final settlement approval is scheduled for November 9, 2016.
Abbott Merger Lawsuits:
On May 2, 2016, a shareholder of the Company filed a purported class action lawsuit in Ramsey County, Minnesota, captioned Silverman v. St. Jude Medical, Inc., et al., 62-CV-16-2872 alleging that the Company's directors breached their fiduciary duties in connection with the proposed merger contemplated by the Company and Abbott Laboratories (Abbott) (the Proposed Transaction). On May 26, 2016, a second action entitled Larkin v. Starks, et al., 62-CV-16-3367, was filed in the same court alleging substantially similar claims. On July 5, 2016, plaintiffs in the
two
actions jointly filed an Amended Shareholder class and Derivative Action Complaint (the Amended Complaint). Plaintiffs’ Amended Complaint asserts that the Company’s directors breached their fiduciary duties by conducting a flawed sale process, failing to maximize shareholder value, and publishing false or misleading disclosure materials relating to the Proposed Transaction, and that the Abbott defendants aided and abetted those breaches. The Amended Complaint asserts direct and/or derivative claims for breach of fiduciary duty, corporate waste and abuse of control under Minnesota Statute § 302A.467. Plaintiffs seek, among other things, to enjoin the Proposed Transaction and an order directing defendants to account to plaintiffs for all damages allegedly suffered by the putative class and damages allegedly incurred by the Company in connection with the Proposed Transaction. On August 3, 2016, a third action entitled Gross v. Starks, et al., 62-CV-16-4581, was filed in Ramsey County, Minnesota, containing allegations similar to those in the Silverman Amended Complaint. This action was consolidated with the two previously filed actions. On June 30, 2016, a shareholder of the Company filed a purported class action lawsuit in the United States District Court for the District of Minnesota, captioned Rosenfeld v. St. Jude Medical, Inc., et al., 16-cv-02275-WMW-FLN, alleging that the Company and its directors violated Section 14(a) of the Securities Exchange Act of 1934, SEC Rule 14a-9, and Minnesota Statute §§ 80A.68 and 80A.76, and that the Company’s directors violated Section 20(a) of the Exchange Act, by filing a Form S-4 with the SEC that contained false or misleading statements regarding the Proposed Transaction. Plaintiff seeks, among other things, to enjoin the Proposed Transaction or, if consummated, an order rescinding it or awarding actual and punitive damages to Plaintiff and the putative class.
The Company and its directors intend to vigorously defend against the allegations in these actions involving the Proposed Transaction. The Company believes that a material loss is remote. Refer to Note 11 for a discussion of the Proposed Transaction.
Regulatory Matters
The U.S. Food and Drug Administration (FDA) inspected the Company’s manufacturing facility in Atlanta, Georgia, where the Company manufactures its CardioMEMS™ HF system, at various times between June 8 to June 26, 2015. On July 6, 2015, the FDA issued a Form 483 identifying certain observed non-conformity with current Good Manufacturing Practice at the facility. Following the receipt of the Form 483, the Company provided written responses to the FDA detailing proposed corrective actions and immediately initiated efforts to address the FDA’s observations of non-conformity. The Company subsequently received a warning letter dated September 30, 2015 from the FDA relating to these non-conformities. Since the completion of the FDA inspection, the Company has provided and will continue to provide the FDA with regular updates. The Company has fully-integrated this former CardioMEMS standalone facility into St. Jude Medical's quality systems. During July 2016, the FDA conducted a follow-up inspection at the Atlanta facility. On July 28, 2016, the FDA issued a Form 483 identifying additional observed non-conformities with current Good Manufacturing Practice at the facility. The Company has worked to remediate these observations. There has been no inspection subsequent to the issuance of the Form 482 and no other further action to date by the FDA. The warning letter is specific to the Atlanta facility and does not impact any of the Company’s other manufacturing facilities. The warning letter does not identify any specific concerns regarding the performance of, or indicate the need for any field or other action regarding, the CardioMEMS™HF system product or any other St. Jude Medical product. The Company will continue manufacturing and shipping product from the Atlanta facility, and customer orders are not expected to be impacted while the Company works to resolve the FDA’s concerns. The Company takes these matters seriously, will respond timely and fully to the FDA’s requests, and believes that the FDA’s concerns will be resolved without a material impact on the Company’s financial results.
Intellectual Property Matters
On October 26, 2016, the Regents of the University of California filed a patent infringement action against the Company in the United States District Court for the Northern District of California alleging that two U.S. patents owned by the Regents of the University of California are infringed by certain of our catheters and other devices used to treat atrial fibrillation. The Company has not recorded an expense related to any potential damages in connection with this matter because any potential loss is not probable or reasonably estimable. Because, based on the Company’s historical experience, the amount ultimately paid, if any, often does not bear any relationship to the amount claimed, the Company cannot reasonably estimate a loss or range of loss, if any, that may result from this matter.
Product Warranties
The Company offers a warranty on various products, the most significant of which relate to tachycardia implantable cardioverter defibrillator (ICD) and pacemaker systems. The Company estimates the costs it expects to incur under its warranties and records a liability for such costs at the time the product is sold. Factors that affect the Company's warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company regularly assesses the adequacy of its warranty liabilities and adjusts the amounts as necessary.
Changes in the Company’s product warranty liability during the three and
nine
months ended
October 1, 2016
and
October 3, 2015
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
|
Balance at beginning of period
|
$
|
25
|
|
|
$
|
29
|
|
|
$
|
31
|
|
|
$
|
35
|
|
|
Warranty expense (benefit) recognized
|
4
|
|
|
—
|
|
|
5
|
|
|
(4
|
)
|
|
Warranty credits issued
|
(4
|
)
|
|
(1
|
)
|
|
(11
|
)
|
|
(3
|
)
|
|
Balance at end of period
|
$
|
25
|
|
|
$
|
28
|
|
|
$
|
25
|
|
|
$
|
28
|
|
NOTE 4 – SPECIAL CHARGES
The Company recognizes certain transactions and events as special charges in its
Condensed Consolidated Financial Statements
. These charges (such as restructuring charges, impairment charges, certain legal settlements or product field action costs and litigation costs) result from facts and circumstances that vary in frequency and impact on the Company's results of operations.
2016 Initiatives
During the fourth quarter of 2015, the Company initiated restructuring activities to drive cross-functional synergies (the 2016 Initiatives). The 2016 Initiatives include enhancing focus on programs that will strengthen its strategic objectives, driving productivity enhancements and incurring costs to fully integrate its recent acquisitions. During 2015, the Company incurred charges primarily related to severance and other termination benefits.
During the first quarter of 2016, the Company incurred additional charges related to severance and other termination benefits, contract termination costs and fixed asset write-offs, primarily associated with the closure of Thoratec Corporation (Thoratec) facilities as the Company continues to integrate the acquisition. During the second quarter of 2016, the Company incurred additional charges related to severance and other termination benefits, distributor contract terminations and other Thoratec-related contract terminations. During the third quarter of 2016, the Company incurred additional charges related to contract terminations and other exit costs, severance and other termination benefits and fixed asset write-offs, primarily associated with the continued closure of its Thoratec facilities and a U.S. based research facility. The Company currently expects to incur approximately
$5 million
to
$10 million
during the remainder of 2016 to complete the plan, but may incur additional charges in future periods.
A summary of the activity related to the 2016 Initiatives accrual is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Costs
|
|
Inventory
Charges
|
|
Fixed
Asset
Charges
|
|
Other Restructuring Costs
|
|
Total
|
|
Balance at January 3, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cost of sales special charges
|
9
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
12
|
|
|
Special charges
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
Non-cash charges used
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
Cash payments
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(3
|
)
|
|
Balance at January 2, 2016
|
29
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
Cost of sales special charges
|
—
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
Special charges
|
11
|
|
|
—
|
|
|
4
|
|
|
5
|
|
|
20
|
|
|
Non-cash charges used
|
—
|
|
|
(2
|
)
|
|
(5
|
)
|
|
—
|
|
|
(7
|
)
|
|
Cash payments
|
(32
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(37
|
)
|
|
Balance at April 2, 2016
|
8
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
9
|
|
|
Cost of sales special charges
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
Special charges
|
6
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
10
|
|
|
Cash payments
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(10
|
)
|
|
Balance at July 2, 2016
|
8
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
11
|
|
|
Cost of sales special charges
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
Special charges
|
2
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
Non-cash charges used
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Cash payments
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(6
|
)
|
|
Balance at October 1, 2016
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
10
|
|
Manufacturing and Supply Chain Optimization Plan
During 2014, the Company initiated the Manufacturing and Supply Chain Optimization Plan to leverage economies of scale, streamline distribution methods, drive process improvements through global synergies, balance plant utilization levels, centralize certain vendor relationships and reduce overall costs. During 2015, the Company incurred charges primarily related to severance and other termination benefits, contract termination costs and fixed asset write-offs. These costs included charges associated with the elimination of certain operational, quality and hardware development activities at a research and development facility, continued exit costs related to a facility closure in the United States and software development assets no longer expected to be utilized.
During the first, second and third quarters of 2016, the Company incurred additional charges primarily related to continued exit costs associated with a facility closure in the United States. Material charges are not expected in future periods as the Manufacturing and Supply Chain Optimization Plan is now complete.
A summary of the activity related to the Manufacturing and Supply Chain Optimization Plan accrual is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Costs
|
|
Inventory
Charges
|
|
Fixed
Asset
Charges
|
|
Other Restructuring Costs
|
|
Total
|
|
Balance at January 3, 2015
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
20
|
|
|
Cost of sales special charges
|
4
|
|
|
3
|
|
|
15
|
|
|
7
|
|
|
29
|
|
|
Special charges
|
20
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
49
|
|
|
Non-cash charges used
|
—
|
|
|
(3
|
)
|
|
(15
|
)
|
|
—
|
|
|
(18
|
)
|
|
Cash payments
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
|
(62
|
)
|
|
Balance at January 2, 2016
|
11
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
17
|
|
|
Cost of sales special charges
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Cash payments
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(9
|
)
|
|
Balance at April 2, 2016
|
8
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
9
|
|
|
Cost of sales special charges
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Special charges
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Cash payments
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(5
|
)
|
|
Balance at July 2, 2016
|
5
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
6
|
|
|
Special charges
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Cash payments
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(3
|
)
|
|
Balance at October 1, 2016
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
4
|
|
2012 Business Realignment Plan
During 2012, the Company realigned its product divisions into
two
new operating divisions: the Implantable Electronic Systems Division (combining its legacy Cardiac Rhythm Management and Neuromodulation product divisions) and the Cardiovascular and Ablation Technologies Division (combining its legacy Cardiovascular and Atrial Fibrillation product divisions). In addition, the Company centralized certain support functions, including information technology, human resources, legal, business development and certain marketing functions. The organizational changes have been part of a comprehensive plan to accelerate the Company's growth, reduce costs, leverage economies of scale and increase investment in product development. During 2014, the Company announced additional organizational changes including the combination of its Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division, resulting in an integrated research and development (R&D) organization and a consolidation of manufacturing and supply chain operations worldwide.
During 2015, the Company incurred additional charges primarily related to severance and other termination benefits and other restructuring costs, including contract termination costs, asset relocation expenses and other exit costs predominately associated with the facility closure in Europe.
During the first quarter of 2016, the Company reassessed the remaining accrual balance and determined that some of the previously recorded accrual balances were no longer necessary. Additionally, during the third quarter of 2016,
the Company revised estimates for employee termination costs, recognizing a special benefit. Additionally, the Company recognized a special benefit for salvaged inventory components during the third quarter of 2016. No additional charges are expected in future periods as the 2012 Business Realignment Plan is complete.
A summary of the activity related to the 2012 Business Realignment Plan accrual is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Costs
|
|
Inventory
Charges
|
|
Fixed
Asset
Charges
|
|
Other
Restructuring
Costs
|
|
Total
|
|
Balance at January 3, 2015
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
38
|
|
|
Cost of sales special charges
|
2
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
Special charges
|
2
|
|
|
—
|
|
|
2
|
|
|
5
|
|
|
9
|
|
|
Non-cash charges used
|
—
|
|
|
(3
|
)
|
|
(2
|
)
|
|
—
|
|
|
(5
|
)
|
|
Cash payments
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(35
|
)
|
|
Foreign exchange rate impact
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
Balance at January 2, 2016
|
3
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
10
|
|
|
Cost of sales special charges
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
|
Non-cash charges used
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Balance at April 2, 2016
|
3
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
9
|
|
|
Cash payments
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Balance at July 2, 2016
|
2
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
8
|
|
|
Cost of sales special charges
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
Special charges
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Non-cash charges used
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Cash payments
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Balance at October 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Other Special Charges
Intangible asset impairment charges:
During the third quarter of 2015, the Company recognized a
$2 million
impairment charge associated with a customer relationship intangible asset (see Note 8).
Legal settlements:
During the third quarter of 2016, the Company recognized charges of
$3 million
primarily to evaluate allegations made by third parties about the safety and security of the Company's implantable cardiac rhythm management devices, initiate litigation against certain third parties related to those allegations and evaluate claims in a putative class action lawsuit asserting claims related to the safety and security of those devices. The putative class action has not yet been served. The Company also recognized net legal settlement gains of
$19 million
associated with
four
separate legal cases during the first nine months of 2016. Additionally, the Company recognized a legal settlement loss related to the December 2012 Securities Litigation and concurrently recognized insurance recoveries in the same amount during the first nine months of 2016 (see Note 3).
During the third quarter of 2015, the Company recognized a
$1 million
charge related to an unfavorable judgment for a product liability claim. During the first nine months of 2015, this charge was fully offset by
$10 million
in insurance recoveries recognized by the Company as a special benefit in connection with the March 2010 Securities Class Action Litigation.
Product field action costs and litigation costs:
During the first nine months of 2016 and 2015, the Company recognized approximately
$6 million
and
$14 million
, respectively, of litigation charges for expected future probable and estimable legal costs associated with outstanding legal matters related to the Company's product field actions. Charges in excess of the amounts accrued are reasonably possible and depend on a number of factors, such as the type of claims received and the cost to defend.
During the third quarter and first nine months of 2016, the Company recognized
$25 million
and
$28 million
, respectively, of product field action costs. The Company initiated an advisory letter to physicians for patients implanted with certain tachycardia cardiac rhythm management devices that were identified as having a potential premature battery depletion issue that could, on rare occasions, result in necessary treatment not being provided. In connection with this advisory, the Company recognized charges of
$26 million
to
cost of sales special charges
related to product field action costs, primarily for estimated scrapped inventory and costs for providing remote monitoring to patients under the advisory during the third quarter of 2016. Charges in excess of the accrual are reasonably possible and depend on a number of factors, such as the number of physicians requesting remote monitoring. During the first nine months of 2016, the Company also initiated an advisory letter to physicians for patients implanted with certain ICD devices that were identified as having a potential therapy anomaly resulting in a lack of necessary treatment. As a result, the Company recognized charges of
$5 million
to
cost of sales special charges
primarily for estimated scrapped inventory and warranty costs during the first nine months of 2016. Partially offsetting these charges, the Company recognized a
$1 million
benefit and a
$3 million
benefit during the third quarter and first nine months of 2016, respectively, to
cost of sales special charges
for salvaged inventory components related to an advisory action initiated in 2014.
During the fourth quarter of 2016, the Company initiated an advisory letter to physicians participating in an investigational device exemption study for patients implanted with certain leadless bradycardia cardiac rhythm management devices that were identified as having a potential premature battery depletion issue that could, on rare occasions, result in necessary treatment not being provided. As a result, the Company expects to recognize charges relating to scrapped inventory and intangible assets, which will be partially offset by reductions in contingent consideration liabilities.
During the first nine months of 2015, the Company recognized a
$7 million
benefit to
cost of sales special charges
, of which
$5 million
related to salvaged inventory components associated with the same advisory action initiated in 2014 and
$2 million
related to lower than expected direct recall costs associated with a 2012 voluntary product field action related to certain neuromodulation implantable pulse generator charging systems.
Other restructuring-related charges:
The Company also recognized other restructuring-related charges of
$3 million
during the first nine months of 2016.
NOTE 5 – NET EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted net earnings per share attributable to St. Jude Medical, Inc. (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to St. Jude Medical, Inc.
|
$
|
212
|
|
|
$
|
215
|
|
|
$
|
545
|
|
|
$
|
767
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
285.2
|
|
|
282.2
|
|
|
284.3
|
|
|
282.1
|
|
|
Dilution associated with stock-based compensation plans
|
4.8
|
|
|
4.1
|
|
|
3.9
|
|
|
4.2
|
|
|
Diluted weighted average shares outstanding
|
290.0
|
|
|
286.3
|
|
|
288.2
|
|
|
286.3
|
|
|
Basic net earnings per share attributable to St. Jude Medical, Inc.
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
1.92
|
|
|
$
|
2.72
|
|
|
Diluted net earnings per share attributable to St. Jude Medical, Inc.
|
$
|
0.73
|
|
|
$
|
0.75
|
|
|
$
|
1.89
|
|
|
$
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares of common stock excluded from diluted net earnings per share attributable to St. Jude Medical, Inc.
|
—
|
|
|
2.6
|
|
|
4.1
|
|
|
3.1
|
|
NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) AND SUPPLEMENTAL EQUITY INFORMATION
The tables below present the changes in each component of accumulated other comprehensive income, net of tax, including other comprehensive income and reclassifications out of accumulated other comprehensive income into net earnings for the three and
nine
months ended
October 1, 2016
and
October 3, 2015
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Gain (Loss) On
|
Unrealized
|
Foreign
|
Accumulated
|
|
|
Available-for-
|
Gain (Loss) On
|
Currency
|
Other
|
|
For the three months ended
October 1, 2016
|
sale
Securities
|
Derivative Instruments
|
translation adjustment
|
Comprehensive Income (Loss)
|
|
Accumulated other comprehensive income (loss) as of July 2, 2016
|
$
|
4
|
|
$
|
(23
|
)
|
$
|
(328
|
)
|
$
|
(347
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(1
|
)
|
(4
|
)
|
3
|
|
(2
|
)
|
|
Amounts reclassified to net earnings from accumulated other comprehensive income
|
—
|
|
4
|
|
—
|
|
4
|
|
|
Other comprehensive income (loss)
|
(1
|
)
|
—
|
|
3
|
|
2
|
|
|
Accumulated other comprehensive income (loss) as of October 1, 2016
|
$
|
3
|
|
$
|
(23
|
)
|
$
|
(325
|
)
|
$
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Gain (Loss) On
|
Unrealized
|
Foreign
|
Accumulated
|
|
|
Available-for-
|
Gain (Loss) On
|
Currency
|
Other
|
|
For the nine months ended
October 1, 2016
|
sale
Securities
|
Derivative Instruments
|
translation adjustment
|
Comprehensive Income (Loss)
|
|
Accumulated other comprehensive income (loss) as of January 2, 2016
|
$
|
3
|
|
$
|
11
|
|
$
|
(359
|
)
|
$
|
(345
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
(34
|
)
|
34
|
|
—
|
|
|
Amounts reclassified to net earnings from accumulated other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Other comprehensive income (loss)
|
—
|
|
(34
|
)
|
34
|
|
—
|
|
|
Accumulated other comprehensive income (loss) as of October 1, 2016
|
$
|
3
|
|
$
|
(23
|
)
|
$
|
(325
|
)
|
$
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Gain (Loss) On
|
Unrealized
|
Foreign
|
Accumulated
|
|
|
Available-for-
|
Gain (Loss) On
|
Currency
|
Other
|
|
For the three months ended
October 3, 2015
|
sale
Securities
|
Derivative Instruments
|
translation adjustment
|
Comprehensive Income (Loss)
|
|
Accumulated other comprehensive income (loss) as of July 4, 2015
|
$
|
12
|
|
$
|
15
|
|
$
|
(288
|
)
|
$
|
(261
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(1
|
)
|
(7
|
)
|
(25
|
)
|
(33
|
)
|
|
Amounts reclassified to net earnings from accumulated other comprehensive income
|
(7
|
)
|
(4
|
)
|
—
|
|
(11
|
)
|
|
Other comprehensive income (loss)
|
(8
|
)
|
(11
|
)
|
(25
|
)
|
(44
|
)
|
|
Accumulated other comprehensive income (loss) as of October 3, 2015
|
$
|
4
|
|
$
|
4
|
|
$
|
(313
|
)
|
$
|
(305
|
)
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Gain (Loss) On
|
Unrealized
|
Foreign
|
Accumulated
|
|
|
Available-for-
|
Gain (Loss) On
|
Currency
|
Other
|
|
For the nine months ended
October 3, 2015
|
sale
Securities
|
Derivative Instruments
|
translation adjustment
|
Comprehensive Income (Loss)
|
|
Accumulated other comprehensive income (loss) as of January 3, 2015
|
$
|
15
|
|
$
|
3
|
|
$
|
(191
|
)
|
$
|
(173
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
9
|
|
(122
|
)
|
(113
|
)
|
|
Amounts reclassified to net earnings from accumulated other comprehensive income
|
(11
|
)
|
(8
|
)
|
—
|
|
(19
|
)
|
|
Other comprehensive income (loss)
|
(11
|
)
|
1
|
|
(122
|
)
|
(132
|
)
|
|
Accumulated other comprehensive income (loss) as of October 3, 2015
|
$
|
4
|
|
$
|
4
|
|
$
|
(313
|
)
|
$
|
(305
|
)
|
Income taxes are not provided for foreign translation related to permanent investments in international subsidiaries. Reclassification adjustments are made to avoid double counting items in comprehensive income that are also recorded as part of net earnings.
The following table provides details about reclassifications out of accumulated other comprehensive income and the line items impacted in the Company's
Condensed Consolidated Statements of Earnings
during the three and
nine
months ended
October 1, 2016
and
October 3, 2015
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about
|
Amount reclassified from accumulated other comprehensive income
|
|
accumulated other
|
Three Months Ended
|
Nine Months Ended
|
|
|
comprehensive income components
|
October 1, 2016
|
October 3, 2015
|
October 1, 2016
|
October 3, 2015
|
Statements of Earnings Classification
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on available-for-sale securities:
|
|
|
|
(Gain) loss on sale of available-for-sale securities
|
$
|
—
|
|
$
|
(11
|
)
|
$
|
—
|
|
$
|
(18
|
)
|
Other (income) expense
|
|
Tax effect
|
—
|
|
4
|
|
—
|
|
7
|
|
Income tax expense
|
|
Net of tax
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
—
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on derivative financial instruments:
|
|
|
|
(Gain) loss recognized on derivative financial instruments
|
$
|
7
|
|
$
|
(4
|
)
|
$
|
1
|
|
$
|
(8
|
)
|
Cost of sales
|
|
Tax effect
|
(3
|
)
|
—
|
|
(1
|
)
|
—
|
|
Income tax expense
|
|
Net of tax
|
$
|
4
|
|
$
|
(4
|
)
|
$
|
—
|
|
$
|
(8
|
)
|
|
The Company's realized (gains) and losses on its available-for-sales securities and derivative financial instruments are computed using the specific identification method.
Supplemental Equity Information
On August 3, 2016, the Company's Board of Directors authorized a cash dividend of
$0.31
per share which was paid on October 28, 2016 to shareholders of record as of September 30, 2016.
On January 13, 2015, the Company authorized a share repurchase program of up to
$500 million
of its outstanding common stock. The Company began repurchasing shares on January 30, 2015. From January 30, 2015 through March 2, 2015, the Company repurchased approximately
7.5
million shares for
$500 million
at an average repurchase price of
$66.96
per share.
In June 2013, the Company made an equity investment of
$40 million
in Spinal Modulation, a privately-held company that is focused on the development of an intraspinal neuromodulation therapy that delivers spinal cord stimulation targeting the dorsal root ganglion to manage chronic pain. The investment agreement resulted in a
19%
voting equity interest and provided the Company with the exclusive right, but not the obligation, to acquire Spinal Modulation. Additionally, in connection with the investment and contingent acquisition agreement, the Company also entered into an exclusive international distribution agreement, and obtained significant decision-making rights over Spinal Modulation's operations and economic performance. Accordingly, effective June 7, 2013, the Company determined that Spinal Modulation was a variable interest entity for which St. Jude Medical was the primary beneficiary with the financial condition and results of operations of Spinal Modulation included in St. Jude Medical's
Condensed Consolidated Financial Statements
.
During the second quarter of 2015, the Company exercised its exclusive option and paid
$173 million
to Spinal Modulation’s shareholders to acquire the remaining
81%
ownership interest in the company that it did not previously own and accrued
$155 million
of contingent consideration (see Note 8). The
$173 million
paid in the second quarter of 2015 was classified as a financing activity in the
Condensed Consolidated Statement of Cash Flows
. As the Company retained its controlling interest, the payment for the shares and the accrual for contingent consideration resulted in a decrease in
shareholders' equity before noncontrolling interest
of
$297 million
and a decrease in
noncontrolling interest
of
$33 million
in St. Jude Medical's
Condensed Consolidated Balance Sheets
. Spinal Modulation's results of operations continue to be included in the Company's
Condensed Consolidated Financial Statements
.
The supplemental equity schedules below present changes in the Company's noncontrolling interest and total shareholders' equity for the
nine
months ended
October 1, 2016
and
October 3, 2015
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Shareholders'
|
|
|
|
|
Equity
|
|
|
|
|
Before
|
|
Total
|
|
|
Noncontrolling
|
Noncontrolling
|
Shareholders'
|
|
For the nine months ended October 1, 2016
|
Interest
|
Interest
|
Equity
|
|
Balance at January 2, 2016
|
$
|
4,042
|
|
$
|
—
|
|
$
|
4,042
|
|
|
Net earnings
|
545
|
|
—
|
|
545
|
|
|
Cash dividends declared
|
(265
|
)
|
—
|
|
(265
|
)
|
|
Stock-based compensation
|
83
|
|
—
|
|
83
|
|
|
Common stock issued under employee stock plans and other, net
|
73
|
|
—
|
|
73
|
|
|
Tax benefit from stock plans
|
8
|
|
—
|
|
8
|
|
|
Balance at October 1, 2016
|
$
|
4,486
|
|
$
|
—
|
|
$
|
4,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Shareholders'
|
|
|
|
|
Equity
|
|
|
|
|
Before
|
|
Total
|
|
|
Noncontrolling
|
Noncontrolling
|
Shareholders'
|
|
For the nine months ended October 3, 2015
|
Interest
|
Interest
|
Equity
|
|
Balance at January 3, 2015
|
$
|
4,199
|
|
$
|
45
|
|
$
|
4,244
|
|
|
Net earnings
|
767
|
|
(14
|
)
|
753
|
|
|
Other comprehensive income (loss)
|
(132
|
)
|
—
|
|
(132
|
)
|
|
Cash dividends declared
|
(245
|
)
|
—
|
|
(245
|
)
|
|
Repurchases of common stock
|
(500
|
)
|
—
|
|
(500
|
)
|
|
Stock-based compensation
|
53
|
|
2
|
|
55
|
|
|
Common stock issued under employee stock plans and other, net
|
135
|
|
—
|
|
135
|
|
|
Tax benefit from stock plans
|
17
|
|
—
|
|
17
|
|
|
Additions (purchases) of noncontrolling ownership interests
|
(297
|
)
|
(33
|
)
|
(330
|
)
|
|
Balance at October 3, 2015
|
$
|
3,997
|
|
$
|
—
|
|
$
|
3,997
|
|
NOTE 7 – INCOME TAXES
As of
October 1, 2016
, the Company had
$250 million
accrued for uncertain tax positions, all of which would affect the Company’s effective tax rate if recognized. Additionally, the Company had
$38 million
accrued for gross interest and penalties as of
October 1, 2016
. At
January 2, 2016
, the liability for uncertain tax positions was
$338 million
and the accrual for gross interest and penalties was
$58 million
.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all material U.S. federal, state, foreign and local income tax matters for all tax years through 2004. During the third quarter of 2016, the Company entered into a settlement agreement with the Internal Revenue Service (IRS), closing its 2008 to 2011 tax examinations. The settlement resulted in a $
157 million
reduction of the Company’s uncertain tax positions during the third quarter of 2016 and reduced its accrual for gross interest by
$25 million
. The settlement did not result in a material adjustment to tax expense in the third quarter of 2016. The majority of cash owed to the IRS associated with the settlement was paid during the first nine months of 2016 with the remaining amounts expected to be paid to the IRS in the fourth quarter of 2016.
The Company's effective income tax rate was
13.5%
and
17.6%
for the
third
quarter of 2016 and 2015, respectively, and
16.3%
and
12.7%
for the nine months ended 2016 and 2015, respectively. The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete income tax factors and events. During the three months ended October 1, 2016, special charges, acquisition-related costs and discrete income tax items unfavorably impacted the effective income tax rate by
0.1
percentage points. During the nine months ended October 1, 2016, special charges, acquisition-related costs, other-than-temporary impairments and discrete income tax items unfavorably impacted the effective income tax rate by
3.1
percentage points. Special charges, acquisition-related costs and discrete income tax items recognized during the third quarter of 2015 unfavorably impacted the effective rate by
1.6
percentage points and favorably impacted the effective rate by
4.2
percentage points during the first nine months of 2015.
During the first nine months of 2016, the European Commission concluded that decisions by the tax authorities in Belgium regarding corporate income taxes paid under certain excess profit rulings, including the ruling previously granted to one of the Company’s subsidiaries, did not comply with European Union rules on state aid. Based on the applicability of this conclusion to the Company's 2009 through 2014 tax returns in Belgium, the Company recorded a liability of
43 million
Euros (
$48 million
as of October 1, 2016) including interest to reserve for this uncertain tax position during the first nine months of 2016.
NOTE 8 – FAIR VALUE MEASUREMENTS
The fair value measurement standard applies to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period) and certain financial assets and liabilities that are measured at fair value on a nonrecurring basis. The Company also maintains other financial instruments that approximate their fair value due to their short maturities, and include such instruments as its cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and current and long-term debt obligations.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company's financial assets and liabilities that are measured at fair value on a recurring basis include money-market securities, available-for-sale marketable securities, trading marketable securities, derivative instruments and contingent consideration liabilities. The Company does not have any material nonfinancial assets or liabilities that are measured at fair value on a recurring basis. A summary of the valuation methodologies used for the respective financial assets and liabilities measured at fair value on a recurring basis is as follows:
Money-market securities
: The Company’s money-market securities include funds that are traded in active markets and are recorded at fair value based upon the quoted market prices. The Company classifies these securities as level 1.
Available-for-sale securities
: The Company’s available-for-sale securities include publicly-traded equity securities that are traded in active markets and are recorded at fair value based upon the closing stock prices. The Company classifies these securities as level 1.
The following table summarizes the components of the balance of the Company’s available-for-sale securities at
October 1, 2016
and
January 2, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
January 2, 2016
|
|
Adjusted cost
|
$
|
4
|
|
|
$
|
5
|
|
|
Gross unrealized gains
|
5
|
|
|
6
|
|
|
Gross unrealized losses
|
—
|
|
|
(1
|
)
|
|
Fair value
|
$
|
9
|
|
|
$
|
10
|
|
Trading securities
: The Company’s trading securities include publicly-traded mutual funds that are traded in active markets and are recorded at fair value based upon quoted market prices of the net asset values of the funds. The Company classifies these securities as level 1.
Derivative instruments
: Fair values for the Company’s derivative financial instruments are based on quoted market prices of comparable instruments, if available, or more commonly on standard pricing models that use readily
observable market parameters from industry standard data providers as their basis. These models reflect contractual terms of the derivatives, including period to maturity and market-based parameters such as foreign currency exchange rates. They do not contain a high level of subjectivity as the techniques used in the models do not require significant judgment and inputs are readily observable from actively quoted markets. The Company classifies these instruments as level 2 (see Note 9).
Contingent consideration liabilities:
The fair value of the Company's contingent liabilities is initially measured based on the consideration expected to be transferred (probability-weighted), discounted back to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The Company measures the liability on a recurring basis using Level 3 inputs including regulatory approval timing, projected revenues or cash flows, growth rates, discount rates, probabilities of payment and projected payment dates. Projected revenues are based on the Company's most recent internal operating budgets and long-term strategic plans. Changes to any of the inputs may result in significantly higher or lower fair value measurements.
A summary of assets and liabilities measured at fair value on a recurring basis at
October 1, 2016
and
January 2, 2016
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Classification
|
October 1, 2016
|
|
Quoted Prices
In Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money-market securities
|
Cash and cash equivalents
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Available-for-sale
securities
|
Other current assets
|
9
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
Foreign currency forward
contracts
|
Other current assets
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Trading securities
|
Other assets
|
322
|
|
|
322
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
|
$
|
354
|
|
|
$
|
353
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current liabilities
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
Contingent consideration
|
Other liabilities
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
Foreign currency forward contracts
|
Other liabilities
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Classification
|
January 2, 2016
|
|
Quoted Prices
In Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money-market securities
|
Cash and cash equivalents
|
$
|
273
|
|
|
$
|
273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Available-for-sale
securities
|
Other current assets
|
10
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
Foreign currency forward contracts
|
Other current assets
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Trading securities
|
Other assets
|
302
|
|
|
302
|
|
|
—
|
|
|
—
|
|
|
Foreign currency forward contracts
|
Other assets
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Total assets
|
|
$
|
601
|
|
|
$
|
585
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
Other current liabilities
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
118
|
|
|
Foreign currency forward contracts
|
Other current liabilities
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
Contingent consideration
|
Other liabilities
|
33
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
Foreign currency forward contracts
|
Other liabilities
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
151
|
|
The recurring Level 3 fair value measurements of the Company's contingent consideration liabilities include the following significant unobservable inputs (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration Liabilities
|
Fair Value as of October 1, 2016
|
Valuation Technique
|
|
Unobservable Input
|
|
Value or Range
|
|
|
|
|
|
|
|
|
|
|
|
Spinal Modulation revenue-based milestones and earn-outs
|
$
|
7
|
|
Monte Carlo Simulation
|
|
Discount Rates
|
|
0.8%
|
-
|
15.5%
|
|
|
|
|
|
Expected Revenue Volatility
|
|
|
|
25.0%
|
|
|
|
|
|
Projected Years of Payments
|
|
2017, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Nanostim, Inc. revenue-based milestones
|
2
|
|
Probability Weighted Discounted Cash Flow
|
|
Discount Rate
|
|
|
|
5.0%
|
|
|
|
|
|
Probability of Payments
|
|
|
|
10.0%
|
|
|
|
|
|
Projected Years of Payments
|
|
2017, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Assumed from Thoratec regulatory-based and revenue-based milestones
|
27
|
|
Probability Weighted Discounted Cash Flow
|
|
Discount Rate
|
|
|
|
4.3%
|
|
|
|
|
|
Probabilities of Payments
|
|
—%
|
-
|
90.0%
|
|
|
|
|
|
Projected Years of Payments
|
|
2018
|
-
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Distributor revenue-based milestones
|
4
|
|
Probability Weighted Discounted Cash Flow
|
|
Discount Rates
|
|
0.9%
|
-
|
1.1%
|
|
|
|
|
|
Probabilities of Payments
|
|
—%
|
-
|
100.0%
|
|
|
|
|
|
Projected Years of Payments
|
|
2019, 2021
|
|
Total contingent consideration liabilities
|
$
|
40
|
|
|
|
|
|
|
|
|
Additionally, the following table provides a reconciliation of the beginning and ending balances of the Company's recurring Level 3 fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nanostim
|
Spinal Modulation
|
Assumed from Thoratec
|
U.S. Distributor
|
Total
|
|
Balance as of January 3, 2015
|
$
|
50
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
50
|
|
|
Initial fair value measurement of contingent consideration
|
—
|
|
155
|
|
—
|
|
—
|
|
155
|
|
|
Liabilities assumed from Thoratec acquisition
|
—
|
|
—
|
|
33
|
|
—
|
|
33
|
|
|
Change in fair value of contingent consideration
|
(48
|
)
|
(33
|
)
|
(6
|
)
|
—
|
|
(87
|
)
|
|
Balance as of January 2, 2016
|
2
|
|
122
|
|
27
|
|
—
|
|
151
|
|
|
Change in fair value of contingent consideration
|
—
|
|
8
|
|
1
|
|
—
|
|
9
|
|
|
Transfer out of Level 3 fair value measurement due to contractual settlement
|
—
|
|
(124
|
)
|
—
|
|
—
|
|
(124
|
)
|
|
Balance as of April 2, 2016
|
2
|
|
6
|
|
28
|
|
—
|
|
36
|
|
|
Change in fair value of contingent consideration
|
—
|
|
(4
|
)
|
(1
|
)
|
—
|
|
(5
|
)
|
|
Balance as of July 2, 2016
|
2
|
|
2
|
|
27
|
|
—
|
|
31
|
|
|
Initial fair value measurement of contingent consideration
|
—
|
|
—
|
|
—
|
|
4
|
|
4
|
|
|
Change in fair value of contingent consideration
|
—
|
|
5
|
|
—
|
|
—
|
|
5
|
|
|
Balance as of October 1, 2016
|
$
|
2
|
|
$
|
7
|
|
$
|
27
|
|
$
|
4
|
|
$
|
40
|
|
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Disclosures are required for certain assets and liabilities that are measured at fair value but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For St. Jude Medical, such measurements of fair value primarily relate to long-lived assets, goodwill, indefinite-lived intangible assets and cost method investments.
Other than the items discussed below, there were no other material impairments that were measured at fair value on a nonrecurring basis for the three and
nine
months ended
October 1, 2016
or
October 3, 2015
.
Long-lived assets:
During the three and nine months ended October 1, 2016, the Company recognized
$1 million
and
$6 million
, respectively, of fixed asset write-offs primarily associated with projects abandoned as the Company continued to integrate its recent acquisitions. During the three and nine months ended October 3, 2015, the Company recognized
$15 million
and
$17 million
of fixed asset write-offs primarily related to fixed asset impairments associated with software development assets no longer expected to be utilized. Typically the Company measures these assets using independent appraisals, market models and discounted cash flow models. However, as these fixed assets had no alternative future use and therefore no discrete future cash flows, the assets were fully impaired.
During the third quarter of 2015, the Company also recognized a
$2 million
impairment charge related to a customer relationship intangible asset. Due to changes in hospital purchasing practices, the Company determined that the intangible asset no longer had any future discrete cash flows and that the asset was fully impaired.
Cost method investments:
The Company also holds investments in equity securities that are accounted for as cost method investments, which are classified as
other assets
and measured at fair value on a nonrecurring basis. The carrying value of these investments was
$59 million
and
$80 million
as of
October 1, 2016
and
January 2, 2016
, respectively. During the first nine months of 2016, the Company concluded that adverse regulatory rulings and subsequent operational decisions made by an entity in which the Company had strategic debt and equity investments had an adverse impact on the fair values of those investments. As a result, the Company recognized other-than-temporary impairments of approximately
$50 million
in
other (income) expense
in the
Condensed Consolidated Statements of Earnings
to fully write-down its cost method equity investment and convertible debt investment. The fair value of the Company’s remaining cost method investments was not estimated during the three and nine months ended
October 1, 2016
since there were no other identified events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments.
Fair Value Measurements of Other Financial Instruments
The aggregate fair value of the Company’s fixed-rate senior notes at
October 1, 2016
(measured using quoted prices in active markets) was
$3,437 million
compared to the aggregate carrying value of
$3,278 million
(inclusive of unamortized debt discounts). The fair value of the Company’s variable-rate debt obligations at
October 1, 2016
approximated its aggregate
$2,496 million
carrying value due to the variable interest rate and short-term nature of these instruments. The Company also had
$372 million
and
$393 million
of cash equivalents invested in short-term deposits and interest and non-interest bearing bank accounts at
October 1, 2016
and
January 2, 2016
, respectively, the cost basis of which approximated the fair value.
NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses foreign currency forward contracts, interest rate swaps and interest rate contracts to manage risks generally associated with foreign exchange rate and interest rate fluctuations. The information that follows explains the various types of derivatives financial instruments and how they impacted the Company's financial position and performance.
Cash Flow Hedges
Foreign exchange forward contracts:
During 2015, the Company began to enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The Company hedges its exposure to the variability in future cash flows of forecasted transactions for periods of up to
24
months. The dollar equivalent gross notional amount of the Company’s foreign exchange forward contracts designated as cash flow hedges at
October 1, 2016
was approximately
$1.0 billion
. Hedge ineffectiveness recognized in earnings on cash flow hedges during the three and nine months ended
October 1, 2016
and
October 3, 2015
was not material.
As of
October 1, 2016
, the Company had a balance of
$27 million
associated with the after-tax net unrealized loss position related to foreign currency forward contracts recorded in
accumulated other comprehensive income
. Based on exchange rates as of
October 1, 2016
, the Company expects to reclassify net losses of approximately
$22 million
after-tax to earnings over the next 12 months contemporaneously with the earnings effects of the related forecasted transactions (with the impact offset by cash flows from the underlying hedged items).
The following table provides the (gains) losses related to derivative instruments designated as cash flow hedges for the
three
and
nine
months ended
October 1, 2016
and
October 3, 2015
, including the location in the
Condensed Consolidated Statements of Earnings
and the
Condensed Consolidated Statements of Comprehensive Income
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (Gain) Loss Recognized
|
|
Ineffective Portion of
|
|
|
Pre-tax (Gain) Loss
|
|
in Earnings on Effective Portion
|
|
(Gain) Loss on Derivative
|
|
|
Recognized in Other
|
|
of Derivative as a Result of
|
|
and Amount Excluded from
|
|
Three
|
Comprehensive
|
|
Reclassification from
|
|
Effectiveness Testing
|
|
months
|
Income on Effective
|
|
Accumulated Other
|
|
Recognized
|
|
ended
|
Portion of Derivative
|
|
Comprehensive Income
|
|
in Earnings
|
|
October 1, 2016
|
Amount
|
|
Amount
|
Location
|
|
Amount
|
Location
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
7
|
|
|
$
|
7
|
|
Cost of sales
|
|
$
|
—
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (Gain) Loss Recognized
|
|
Ineffective Portion of
|
|
|
Pre-tax (Gain) Loss
|
|
in Earnings on Effective Portion
|
|
(Gain) Loss on Derivative
|
|
|
Recognized in Other
|
|
of Derivative as a Result of
|
|
and Amount Excluded from
|
|
Nine
|
Comprehensive
|
|
Reclassification from
|
|
Effectiveness Testing
|
|
months
|
Income on Effective
|
|
Accumulated Other
|
|
Recognized
|
|
ended
|
Portion of Derivative
|
|
Comprehensive Income
|
|
in Earnings
|
|
October 1, 2016
|
Amount
|
|
Amount
|
Location
|
|
Amount
|
Location
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
51
|
|
|
$
|
1
|
|
Cost of sales
|
|
$
|
—
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (Gain) Loss Recognized
|
|
Ineffective Portion of
|
|
|
Pre-tax (Gain) Loss
|
|
in Earnings on Effective Portion
|
|
(Gain) Loss on Derivative
|
|
|
Recognized in Other
|
|
of Derivative as a Result of
|
|
and Amount Excluded from
|
|
Three
|
Comprehensive
|
|
Reclassification from
|
|
Effectiveness Testing
|
|
months
|
Income on Effective
|
|
Accumulated Other
|
|
Recognized
|
|
ended
|
Portion of Derivative
|
|
Comprehensive Income
|
|
in Earnings
|
|
October 3, 2015
|
Amount
|
|
Amount
|
Location
|
|
Amount
|
Location
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
10
|
|
|
$
|
(4
|
)
|
Cost of sales
|
|
$
|
—
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (Gain) Loss Recognized
|
|
Ineffective Portion of
|
|
|
Pre-tax (Gain) Loss
|
|
in Earnings on Effective Portion
|
|
(Gain) Loss on Derivative
|
|
|
Recognized in Other
|
|
of Derivative as a Result of
|
|
and Amount Excluded from
|
|
Nine
|
Comprehensive
|
|
Reclassification from
|
|
Effectiveness Testing
|
|
months
|
Income on Effective
|
|
Accumulated Other
|
|
Recognized
|
|
ended
|
Portion of Derivative
|
|
Comprehensive Income
|
|
in Earnings
|
|
October 3, 2015
|
Amount
|
|
Amount
|
Location
|
|
Amount
|
Location
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
(9
|
)
|
|
$
|
(8
|
)
|
Cost of sales
|
|
$
|
—
|
|
Cost of sales
|
Reclassifications from accumulated other comprehensive income into earnings include accumulated (gains) losses on dedesignated hedges at the time earnings are impacted.
Derivatives Not Designated as Hedging Instruments
Derivatives not designated as hedging instruments include dedesignated foreign currency forward contracts and foreign currency forward contracts that the Company utilizes to economically hedge the foreign currency impact of assets and liabilities denominated in nonfunctional currencies. The dollar equivalent gross notional amount of these forward contracts not designated as hedging instruments totaled approximately
$0.2 billion
as of
October 1, 2016
. The fair value of the Company's outstanding contracts was not material as of
October 1, 2016
and
January 2, 2016
.
The following table provides the (gains) losses related to derivative instruments not designated as hedging instruments, including the location in the
Condensed Consolidated Statements of Earnings
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not
|
|
(Gain) Loss on Derivatives
|
(Gain) Loss on Derivatives
|
|
|
Designated as
|
|
Recognized in Earnings
|
Recognized in Earnings
|
|
|
Hedging
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
Instruments
|
|
October 1, 2016
|
October 3, 2015
|
October 1, 2016
|
October 3, 2015
|
Location
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
$
|
(3
|
)
|
$
|
1
|
|
$
|
(11
|
)
|
Other (income) expense
|
The net (gains) losses were
almost entirely offset by corresponding net (losses) gains on the foreign currency exposures being managed.
Location and Fair Value Amount of Derivative Instruments
The following table summarizes the fair value of the Company’s derivative instruments and their locations in the
Condensed Consolidated Balance Sheets
as of
October 1, 2016
and
January 2, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
October 1, 2016
|
January 2, 2016
|
Location
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
Foreign currency forward contracts
|
$
|
1
|
|
$
|
14
|
|
Other current assets
|
|
|
—
|
|
2
|
|
Other assets
|
|
|
(32
|
)
|
(6
|
)
|
Other current liabilities
|
|
|
(3
|
)
|
(3
|
)
|
Other liabilities
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
Foreign currency forward contracts
|
—
|
|
—
|
|
Other current assets
|
|
|
—
|
|
—
|
|
Other current liabilities
|
|
Total
|
$
|
(34
|
)
|
$
|
7
|
|
|
Additional information with respect to the fair values of the Company's derivative instruments is included in Note 8.
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments
As of
October 1, 2016
, St. Jude Medical, Inc. had International Swaps and Derivatives Association agreements with
four
applicable banks and financial institutions that contain netting provisions.
The following tables provide information as though the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of the netting arrangements with each of the counterparties as of
October 1, 2016
and January 2, 2016, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset in the
Condensed Consolidated Balance Sheet
that are Subject to Master Netting Agreements
|
|
|
|
|
|
Gross Amount of
|
|
|
|
|
|
|
Eligible Offsetting
|
|
|
|
|
|
Gross Amount of
|
Recognized
|
|
|
|
|
|
Derivative Assets
|
Derivative Liabilities
|
|
|
|
|
|
Presented in the
|
Presented in the
|
|
Net
|
|
|
|
Condensed
|
Condensed
|
Cash
|
Amount of
|
|
|
|
Consolidated
|
Consolidated
|
Collateral
|
Derivative
|
|
Derivatives as of October 1, 2016
|
|
Balance Sheet
|
Balance Sheet
|
Received
|
Assets
|
|
Derivatives subject to master netting agreements
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
|
Derivatives not subject to master netting agreements
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset in the
Condensed Consolidated Balance Sheet
that are Subject to Master Netting Agreements
|
|
|
|
|
|
Gross Amount of
|
|
|
|
|
|
Gross Amount of
|
Eligible Offsetting
|
|
|
|
|
|
Derivative
|
Recognized
|
|
|
|
|
|
Liabilities
|
Derivative Assets
|
|
|
|
|
|
Presented in the
|
Presented in the
|
|
Net
|
|
|
|
Condensed
|
Condensed
|
Cash
|
Amount of
|
|
|
|
Consolidated
|
Consolidated
|
Collateral
|
Derivative
|
|
Derivatives as of October 1, 2016
|
|
Balance Sheet
|
Balance Sheet
|
Pledged
|
Liabilities
|
|
Derivatives subject to master netting agreements
|
|
$
|
19
|
|
$
|
1
|
|
$
|
—
|
|
$
|
18
|
|
|
Derivatives not subject to master netting agreements
|
|
16
|
|
|
|
16
|
|
|
Total
|
|
$
|
35
|
|
$
|
1
|
|
$
|
—
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset in the
Condensed Consolidated Balance Sheet
that are Subject to Master Netting Agreements
|
|
|
|
|
|
Gross Amount of
|
|
|
|
|
|
|
Eligible Offsetting
|
|
|
|
|
|
Gross Amount of
|
Recognized
|
|
|
|
|
|
Derivative Assets
|
Derivative Liabilities
|
|
|
|
|
|
Presented in the
|
Presented in the
|
|
Net
|
|
|
|
Condensed
|
Condensed
|
Cash
|
Amount of
|
|
|
|
Consolidated
|
Consolidated
|
Collateral
|
Derivative
|
|
Derivatives as of January 2, 2016
|
|
Balance Sheet
|
Balance Sheet
|
Received
|
Assets
|
|
Derivatives subject to master netting agreements
|
|
$
|
3
|
|
$
|
1
|
|
$
|
—
|
|
$
|
2
|
|
|
Derivatives not subject to master netting agreements
|
|
13
|
|
|
|
13
|
|
|
Total
|
|
$
|
16
|
|
$
|
1
|
|
$
|
—
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset in the
Condensed Consolidated Balance Sheet
that are Subject to Master Netting Agreements
|
|
|
|
|
|
Gross Amount of
|
|
|
|
|
|
Gross Amount of
|
Eligible Offsetting
|
|
|
|
|
|
Derivative
|
Recognized
|
|
|
|
|
|
Liabilities
|
Derivative Assets
|
|
|
|
|
|
Presented in the
|
Presented in the
|
|
Net
|
|
|
|
Condensed
|
Condensed
|
Cash
|
Amount of
|
|
|
|
Consolidated
|
Consolidated
|
Collateral
|
Derivative
|
|
Derivatives as of January 2, 2016
|
|
Balance Sheet
|
Balance Sheet
|
Pledged
|
Liabilities
|
|
Derivatives subject to master netting agreements
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
|
Derivatives not subject to master netting agreements
|
|
8
|
|
|
|
8
|
|
|
Total
|
|
$
|
9
|
|
1
|
|
$
|
—
|
|
$
|
8
|
|
For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period. Derivatives not subject to master netting agreements are not eligible for net presentation. As of both
October 1, 2016
and
January 2, 2016
, no cash collateral had been received or pledged related to these derivative instruments.
NOTE 10 – BUSINESS COMBINATIONS
Fiscal Year 2016
Middle East distributor:
In February 2016, the Company acquired certain assets and assumed certain liabilities of a medical device distributor in the Middle East for
$19 million
of total purchase consideration. The transaction was accounted for as a purchase business combination. The purchase price allocation, which includes customer relationship intangible assets of
$7 million
and goodwill of
$5 million
, is considered preliminary, largely with respect to certain tax-related assets and liabilities. During the first nine months of 2016, the Company did not recognize any material adjustments to provisional amounts.
U.S. distributor:
In September 2016, the Company acquired a medical device distributor in the U.S. for
$14 million
of total purchase consideration (
$10 million
of cash consideration and
$4 million
of contingent consideration). The transaction was accounted for as a purchase business combination. The purchase price allocation, which includes customer relationship intangible assets of
$9 million
and goodwill of
$5 million
, is considered preliminary, largely with respect to certain tax-related liabilities.
Fiscal Year 2015
Thoratec:
The Company finalized the purchase price allocation during the third quarter of 2016. Based on its evaluation of information about facts and circumstances that existed as of the date Thoratec was acquired, the Company recognized adjustments to provisional amounts that were not material.
NOTE 11 - ABBOTT TRANSACTION
On April 27, 2016, the Company and Abbott entered into an agreement and plan of merger (the “Merger Agreement”). Under the Merger Agreement generally each outstanding share of the Company’s common stock will be converted into the right to receive (x)
$46.75
in cash, without interest thereon, and (y)
0.8708
of a validly issued, fully paid and non-assessable common share of Abbott (such ratio as may be adjusted pursuant to the Merger Agreement), less any applicable withholding taxes.
Completion of the merger is subject to customary closing conditions, including (i) adoption of the Merger Agreement by the affirmative vote of the holders of a majority of all outstanding Company common shares, which occurred in connection with the shareholders meeting on October 26, 2016, (ii) effectiveness of the Registration Statement on Form S-4, which was filed with the Securities and Exchange Commission by Abbott in connection with the registration of the Abbott common shares to be issued in the merger and became effective on September 26, 2016, (iii) the expiration of the waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act), and receipt of other specified antitrust approvals, (iv) subject to specified materiality thresholds, the accuracy of the representations and warranties of the other party, (v) the other party having performed in all material respects all of its obligations under the Merger Agreement, (vi) the absence of a material adverse effect, as defined in the Merger Agreement, on the other party, and (vii) the receipt by each party of opinions to the effect that the transaction will be treated as a reorganization for U.S. federal income tax purposes.
On July 11, 2016, the Company and Abbott each received a request for additional information (the Second Request) from the United States Federal Trade Commission (FTC) pursuant to the HSR Act, in connection with Abbott’s pending acquisition of the Company. The effect of the Second Request is to extend the waiting period imposed by the HSR Act until
30
days after Abbott and the Company have substantially complied with the request, unless that period is extended voluntarily by the parties or terminated sooner by the FTC.
On October 18, 2016, the Company announced that it and Abbott (together, the Sellers) reached an agreement in principle to sell certain products to Tokyo-based Terumo Corporation (Terumo). The Sellers’ purpose in making this divestiture is to obtain HSR Act approval in the U.S. and additional regulatory approvals in certain foreign jurisdictions that are conditions precedent to completion of the merger. The products that the Sellers propose to sell to Terumo, for cash consideration of approximately
$1.12 billion
, include the Company’s Angio-Seal
TM
and FemoSeal
TM
vascular closure products and Abbott's Vado® Steerable Sheath product. The divestiture is conditioned upon completion of the merger between the Company and Abbott and is expected to close promptly following the merger’s completion
.