BOSTON SCIENTIFIC CORP - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File No. 1-11083
BOSTON SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 04-2695240 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
300 Boston Scientific Way, Marlborough, Massachusetts 01752-1234
(Address of Principal Executive Offices) (Zip Code)
508 683-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | BSX | New York Stock Exchange | ||||||||||||
| 0.625% Senior Notes due 2027 | BSX27 | New York Stock Exchange | ||||||||||||
| 5.50% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share | BSX PR A | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of Common Stock, $0.01 par value per share, as of October 29, 2021 was 1,424,992,477.
TABLE OF CONTENTS
| Page No. | ||||||||
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PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions, except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales | $ | 2,932 | $ | 2,659 | $ | 8,761 | $ | 7,204 | |||||||||||||||
| Cost of products sold | 900 | 869 | 2,739 | 2,465 | |||||||||||||||||||
| Gross profit | 2,032 | 1,790 | 6,022 | 4,740 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 1,066 | 984 | 3,206 | 2,760 | |||||||||||||||||||
| Research and development expenses | 310 | 315 | 884 | 857 | |||||||||||||||||||
| Royalty expense | 14 | 12 | 38 | 32 | |||||||||||||||||||
| Amortization expense | 184 | 197 | 549 | 595 | |||||||||||||||||||
| Intangible asset impairment charges | 128 | 219 | 173 | 452 | |||||||||||||||||||
| Contingent consideration net expense (benefit) | (26) | 6 | (117) | (102) | |||||||||||||||||||
| Restructuring net charges (credits) | 9 | 3 | 18 | 16 | |||||||||||||||||||
| Litigation-related net charges (credits) | — | 260 | 302 | 260 | |||||||||||||||||||
| Gain on disposal of businesses and assets | (40) | — | (48) | — | |||||||||||||||||||
| 1,645 | 1,995 | 5,003 | 4,870 | ||||||||||||||||||||
| Operating income (loss) | 387 | (205) | 1,019 | (130) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (86) | (86) | (254) | (265) | |||||||||||||||||||
| Other, net | 181 | 64 | 192 | 9 | |||||||||||||||||||
| Income (loss) before income taxes | 483 | (227) | 957 | (386) | |||||||||||||||||||
| Income tax expense (benefit) | 64 | (72) | 10 | (94) | |||||||||||||||||||
| Net income (loss) | 419 | (155) | 946 | (292) | |||||||||||||||||||
| Preferred stock dividends | (14) | (14) | (42) | (19) | |||||||||||||||||||
| Net income (loss) available to common stockholders | $ | 405 | $ | (169) | $ | 905 | $ | (311) | |||||||||||||||
| Net income (loss) per common share — basic | $ | 0.28 | $ | (0.12) | $ | 0.64 | $ | (0.22) | |||||||||||||||
| Net income (loss) per common share — assuming dilution | $ | 0.28 | $ | (0.12) | $ | 0.63 | $ | (0.22) | |||||||||||||||
| Weighted-average shares outstanding | |||||||||||||||||||||||
| Basic | 1,423.8 | 1,430.9 | 1,421.3 | 1,413.0 | |||||||||||||||||||
| Assuming dilution | 1,435.6 | 1,430.9 | 1,433.0 | 1,413.0 | |||||||||||||||||||
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net income (loss) | $ | 419 | $ | (155) | $ | 946 | $ | (292) | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustment | (49) | 84 | (130) | (104) | |||||||||||||||||||
| Net change in derivative financial instruments | 50 | (64) | 161 | (15) | |||||||||||||||||||
| Net change in defined benefit pensions and other items | — | — | 1 | — | |||||||||||||||||||
| Total other comprehensive income (loss) | 1 | 20 | 31 | (119) | |||||||||||||||||||
| Total comprehensive income (loss) | $ | 420 | $ | (135) | $ | 978 | $ | (411) | |||||||||||||||
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| As of | |||||||||||
| (in millions, except share and per share data) | September 30, 2021 | December 31, 2020 | |||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,947 | $ | 1,734 | |||||||
| Trade accounts receivable, net | 1,669 | 1,531 | |||||||||
| Inventories | 1,603 | 1,351 | |||||||||
| Prepaid income taxes | 217 | 194 | |||||||||
| Assets held for sale | — | 1,133 | |||||||||
| Other current assets | 792 | 751 | |||||||||
| Total current assets | 6,229 | 6,694 | |||||||||
| Property, plant and equipment, net | 2,109 | 2,084 | |||||||||
| Goodwill | 11,820 | 9,951 | |||||||||
| Other intangible assets, net | 6,227 | 5,917 | |||||||||
| Deferred tax assets | 4,049 | 4,210 | |||||||||
| Other long-term assets | 1,444 | 1,921 | |||||||||
| TOTAL ASSETS | $ | 31,877 | $ | 30,777 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current debt obligations | $ | 261 | $ | 13 | |||||||
| Accounts payable | 674 | 513 | |||||||||
| Accrued expenses | 2,418 | 2,197 | |||||||||
| Other current liabilities | 669 | 958 | |||||||||
| Total current liabilities | 4,022 | 3,681 | |||||||||
| Long-term debt | 8,824 | 9,130 | |||||||||
| Deferred income taxes | 274 | 330 | |||||||||
| Other long-term liabilities | 2,296 | 2,309 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity | |||||||||||
Preferred stock, $0.01 par value - authorized 50,000,000 shares - issued 10,062,500 shares as of September 30, 2021 and December 31, 2020 | — | — | |||||||||
Common stock, $0.01 par value - authorized 2,000,000,000 shares - issued 1,688,023,638 shares as of September 30, 2021 and 1,679,911,918 shares as of December 31, 2020 | 17 | 17 | |||||||||
Treasury stock, at cost - 263,289,848 shares as of September 30, 2021 and December 31, 2020 | (2,251) | (2,251) | |||||||||
| Additional paid-in capital | 19,930 | 19,732 | |||||||||
| Accumulated deficit | (1,473) | (2,378) | |||||||||
| Accumulated other comprehensive income (loss), net of tax | 238 | 207 | |||||||||
| Total stockholders’ equity | 16,462 | 15,326 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 31,877 | $ | 30,777 | |||||||
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions, except share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Preferred stock shares outstanding | |||||||||||||||||||||||
| Beginning | 10,062,500 | 10,062,500 | 10,062,500 | — | |||||||||||||||||||
| Preferred stock issuance | — | — | — | 10,062,500 | |||||||||||||||||||
| Ending | 10,062,500 | 10,062,500 | 10,062,500 | 10,062,500 | |||||||||||||||||||
| Common stock shares outstanding | |||||||||||||||||||||||
| Beginning | 1,685,006,608 | 1,676,753,566 | 1,679,911,918 | 1,642,488,911 | |||||||||||||||||||
| Common stock issuance | — | — | — | 29,382,500 | |||||||||||||||||||
| Stock-based compensation | 3,017,030 | 2,674,643 | 8,111,720 | 7,556,798 | |||||||||||||||||||
| Ending | 1,688,023,638 | 1,679,428,209 | 1,688,023,638 | 1,679,428,209 | |||||||||||||||||||
| Preferred stock | |||||||||||||||||||||||
| Beginning | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Preferred stock issuance | — | — | — | — | |||||||||||||||||||
| Ending | — | $ | — | — | $ | — | |||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Beginning | $ | 17 | $ | 17 | $ | 17 | $ | 16 | |||||||||||||||
| Common stock issuance | — | — | — | — | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||
| Ending | $ | 17 | $ | 17 | $ | 17 | $ | 17 | |||||||||||||||
| Treasury Stock | |||||||||||||||||||||||
| Beginning | $ | (2,251) | $ | (1,717) | $ | (2,251) | $ | (1,717) | |||||||||||||||
| Repurchase of common stock | — | — | — | — | |||||||||||||||||||
| Ending | $ | (2,251) | $ | (1,717) | $ | (2,251) | $ | (1,717) | |||||||||||||||
| Additional Paid-In Capital | |||||||||||||||||||||||
| Beginning | $ | 19,817 | $ | 19,590 | $ | 19,732 | $ | 17,561 | |||||||||||||||
| Preferred stock issuance | — | — | — | 975 | |||||||||||||||||||
| Common stock issuance | — | — | — | 975 | |||||||||||||||||||
| Stock-based compensation | 113 | 97 | 199 | 176 | |||||||||||||||||||
| Ending | $ | 19,930 | $ | 19,687 | $ | 19,930 | $ | 19,687 | |||||||||||||||
| Accumulated Deficit | |||||||||||||||||||||||
| Beginning | $ | (1,878) | $ | (2,405) | $ | (2,378) | $ | (2,253) | |||||||||||||||
| Net income (loss) | 419 | (155) | 946 | (292) | |||||||||||||||||||
| Cumulative effect adjustment for adoption of ASU 2016-13 | — | — | — | (10) | |||||||||||||||||||
| Preferred stock dividends | (14) | (14) | (42) | (19) | |||||||||||||||||||
| Ending | $ | (1,473) | $ | (2,574) | $ | (1,473) | $ | (2,574) | |||||||||||||||
| Accumulated Other Comprehensive Income (Loss), Net of Tax | |||||||||||||||||||||||
| Beginning | $ | 237 | $ | 131 | $ | 207 | $ | 270 | |||||||||||||||
| Total other comprehensive income (loss) | 1 | 20 | 31 | (119) | |||||||||||||||||||
| Ending | $ | 238 | $ | 151 | $ | 238 | $ | 151 | |||||||||||||||
| Total stockholders' equity | 16,462 | 15,564 | 16,462 | 15,564 | |||||||||||||||||||
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30, | |||||||||||
| (in millions) | 2021 | 2020 | |||||||||
| Net income (loss) | $ | 946 | $ | (292) | |||||||
| Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities | |||||||||||
| Gain on disposal of businesses and assets | (48) | — | |||||||||
| Depreciation and amortization | 803 | 834 | |||||||||
| Deferred and prepaid income taxes | (49) | (13) | |||||||||
| Stock-based compensation expense | 145 | 128 | |||||||||
| Intangible asset impairment charges | 173 | 452 | |||||||||
| Net loss (gain) on investments and notes receivable | (208) | (29) | |||||||||
| Contingent consideration net expense (benefit) | (117) | (102) | |||||||||
| Inventory step-up amortization | 15 | 42 | |||||||||
| Foreign exchange (gain) loss | 17 | 13 | |||||||||
| Other, net | 32 | 46 | |||||||||
| Increase (decrease) in operating assets and liabilities, excluding purchase accounting: | |||||||||||
| Trade accounts receivable | (131) | 242 | |||||||||
| Inventories | (315) | (1) | |||||||||
| Other assets | (145) | (119) | |||||||||
| Accounts payable, accrued expenses and other liabilities | 275 | (364) | |||||||||
| Cash provided by (used for) operating activities | 1,392 | 835 | |||||||||
| Purchases of property, plant and equipment | (288) | (217) | |||||||||
| Proceeds from sale of property, plant and equipment | 10 | 6 | |||||||||
| Payments for acquisitions of businesses, net of cash acquired | (2,014) | (3) | |||||||||
| Proceeds from royalty rights | 62 | 66 | |||||||||
| Payments for investments and acquisitions of certain technologies | (51) | (130) | |||||||||
| Proceeds from sale of investments and disposition of certain assets | 329 | — | |||||||||
| Proceeds from disposal of businesses | 801 | 15 | |||||||||
| Proceeds from settlements of hedge contracts | 15 | — | |||||||||
| Cash provided by (used for) investing activities | (1,136) | (264) | |||||||||
| Payment of contingent consideration previously established in purchase accounting | (14) | (35) | |||||||||
| Payments for royalty rights | (85) | (97) | |||||||||
| Payments on short-term borrowings | — | (2,950) | |||||||||
| Proceeds from short-term borrowings, net of debt issuance costs | — | 2,245 | |||||||||
| Net increase (decrease) in commercial paper | — | (714) | |||||||||
| Payments on borrowings from credit facilities | — | (1,919) | |||||||||
| Proceeds from borrowings on credit facilities | — | 1,916 | |||||||||
| Payments on long-term borrowings and debt extinguishment costs | — | (1,000) | |||||||||
| Proceeds from long-term borrowings, net of debt issuance costs | — | 1,683 | |||||||||
| Cash dividends paid on preferred stock | (42) | (14) | |||||||||
| Net proceeds from issuance of preferred stock in connection with public offering | — | 975 | |||||||||
| Net proceeds from issuance of common stock in connection with public offering | — | 975 | |||||||||
| Cash used to net share settle employee equity awards | (48) | (59) | |||||||||
| Proceeds from issuances of common stock pursuant to employee stock compensation and purchase plans | 102 | 107 | |||||||||
| Cash provided by (used for) financing activities | (87) | 1,112 | |||||||||
| Effect of foreign exchange rates on cash | (5) | (8) | |||||||||
| Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | 164 | 1,675 | |||||||||
| Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 1,995 | 607 | |||||||||
| Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 2,159 | $ | 2,282 | |||||||
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(SUPPLEMENTAL INFORMATION)
| Nine Months Ended September 30, | |||||||||||
| (in millions) | 2021 | 2020 | |||||||||
| Supplemental Information | |||||||||||
| Stock-based compensation expense | $ | 145 | $ | 128 | |||||||
| Fair value of contingent consideration recorded in purchase accounting | 384 | — | |||||||||
| Non-cash impact of transferred royalty rights | (62) | (66) | |||||||||
| As of September 30, | |||||||||||
| Reconciliation to amounts in the unaudited consolidated balance sheets: | 2021 | 2020 | |||||||||
| Cash and cash equivalents | $ | 1,947 | $ | 2,022 | |||||||
Restricted cash and restricted cash equivalents included in Other current assets | 155 | 214 | |||||||||
Restricted cash equivalents included in Other long-term assets | 57 | 46 | |||||||||
| Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 2,159 | $ | 2,282 | |||||||
See notes to the unaudited consolidated financial statements. Amounts may not foot due to rounding.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. When used in this report, the terms, "we," "us," "our," and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Accordingly, our unaudited consolidated financial statements and footnotes thereto should be read in conjunction with our audited consolidated financial statements and footnotes thereto included in Item 8 of our most recent Annual Report on Form 10-K.
Amounts reported in millions within this Quarterly Report on Form 10-Q are computed based on the amounts in thousands. As a result, the sum of the components may not equal the total amount reported in millions due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying unrounded amounts.
Subsequent Events
We evaluate events occurring after the date of our accompanying unaudited consolidated balance sheet for potential recognition or disclosure in our financial statements. Those items requiring recognition in the financial statements have been recorded and disclosed accordingly. Those items requiring disclosure (non-recognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note B – Acquisitions, Divestitures and Strategic Investments, Note H – Commitments and Contingencies and Note I – Stockholders' Equity for further details.
NOTE B – ACQUISITIONS, DIVESTITURES AND STRATEGIC INVESTMENTS
Our accompanying unaudited consolidated financial statements include the operating results for acquired entities from the respective dates of acquisition. We completed three acquisitions and one divestiture in the first nine months of 2021 and did not complete any significant acquisitions or divestitures during the first nine months of 2020. We have not presented supplemental pro forma financial information for completed acquisitions or divestitures given their results are not material to our accompanying unaudited consolidated financial statements. Further, transaction costs were immaterial to our accompanying unaudited consolidated financial statements and were expensed as incurred.
In addition, on September 21, 2021, we announced our entry into a definitive agreement to acquire Devoro Medical, Inc. (Devoro Medical), a privately-held company which has developed the WOLF Thrombectomy® Platform, designed to capture and extract blood clots in arterial, venous and pulmonary embolism procedures. We have been an investor in Devoro Medical since 2019 and hold an equity stake of approximately 16 percent. The transaction price consists of an upfront cash payment of $320 million, or approximately $269 million after adjustments for our current equity ownership, debt, and other closing adjustments; and up to $80 million upon achievement of certain clinical and regulatory milestones, or approximately $67 million after adjustments for current equity ownership. The acquisition is expected to close in the fourth quarter of 2021, subject to customary closing conditions. Following the closing of the acquisition, we plan to integrate the Devoro Medical business into our Peripheral Interventions division.
Further, on October 6, 2021, we announced our entry into a definitive agreement to acquire Baylis Medical Company Inc. (Baylis Medical), a privately-held company which has developed the radiofrequcncy (RF) NRG™ and VersaCross™ Transseptal Platforms as well as a family of guidewires, sheaths and dilators used to support left heart access, which will expand our electrophysiology and structural heart product portfolios. The transaction consists of an upfront cash payment of $1.75 billion subject to closing adjustments. The acquisition is expected to close during the first quarter of 2022, subject to customary closing conditions. Following the closing of the acquisition, we plan to integrate the Baylis Medical business into our Electrophysiology division.
2021 Acquisitions
On March 1, 2021, we completed the acquisition of Preventice Solutions, Inc. (Preventice), a privately-held company which offers a full portfolio of mobile cardiac health solutions and services, ranging from ambulatory cardiac monitors, to cardiac
9
event monitors and mobile cardiac telemetry. The transaction consisted of an upfront cash payment of $925 million and up to an additional $300 million in a potential commercial milestone payment. We have been an investor in Preventice since 2015 and held an equity stake of approximately 22 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the allocation of the purchase price according to priority of equity interests, which resulted in a $195 million gain recognized within Other, net in the first quarter of 2021. The transaction price for the remaining stake consisted of an upfront cash payment of $706 million, net of cash acquired, and up to approximately $230 million in future milestone payments. The Preventice business is being managed by our Cardiac Rhythm Management division.
On August 6, 2021, we completed our acquisition of the remaining shares of Farapulse, Inc. (Farapulse), a privately-held company that has developed a non-thermal ablation system for the treatment of atrial fibrillation (AF) and other cardiac arrhythmias. The transaction consisted of an upfront cash payment of $450 million, up to $125 million upon achievement of certain clinical and regulatory milestones and additional revenue-based payments over the next three years. We have been an investor in Farapulse since 2014 and held an equity stake of approximately 27 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the allocation of the purchase price according to priority of equity interests which resulted in a $222 million gain recognized within Other, net during the third quarter of 2021. The transaction price for the remaining stake consisted of an upfront cash payment of $268 million, net of cash acquired, and up to approximately $92 million in future milestone payments. The Farapulse business is being integrated into our Electrophysiology division.
On September 1, 2021, we completed our acquisition of the global surgical business of Lumenis LTD. (Lumenis), a privately-held company that develops and commercializes energy-based medical solutions, including innovative laser systems, fibers and accessories used for urology and otolaryngology procedures. The transaction consisted of an upfront cash payment of $1.039 billion, net of cash acquired. The Lumenis business is being integrated into our Urology and Pelvic Health division.
Purchase Price Allocation
The preliminary purchase price for the acquisitions completed during the first nine months of 2021 was comprised of the amounts presented below, which represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed. The final determination of the fair value of certain assets and liabilities, in particular those associated with our acquisition of Lumenis, will be completed within the measurement period in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. Due to the timing of the Lumenis acquisition, efforts to obtain information and complete the valuation studies necessary to determine the fair value of the various purchase price components are still ongoing.
| (in millions) | Preventice | Lumenis | Farapulse | Total | ||||||||||||||||
| Payment for acquisition, net of cash acquired | $ | 706 | $ | 1,039 | $ | 268 | $ | 2,014 | ||||||||||||
| Fair value of contingent consideration | 221 | — | 162 | 384 | ||||||||||||||||
| Fair value of prior interest | 269 | — | 222 | 491 | ||||||||||||||||
| $ | 1,197 | $ | 1,039 | $ | 653 | $ | 2,889 | |||||||||||||
The preliminary purchase price allocation for these acquisitions was comprised of the following components:
| (in millions) | Preventice | Lumenis | Farapulse | Total | ||||||||||||||||
| Goodwill | $ | 926 | $ | 582 | $ | 386 | $ | 1,894 | ||||||||||||
| Amortizable intangible assets | 237 | 459 | 267 | 964 | ||||||||||||||||
| Indefinite-lived intangible assets | — | — | 43 | 43 | ||||||||||||||||
| Other assets acquired | 65 | 115 | 9 | 190 | ||||||||||||||||
| Liabilities assumed | (32) | (86) | (10) | (127) | ||||||||||||||||
| Net deferred tax liabilities | — | (32) | (43) | (74) | ||||||||||||||||
| $ | 1,197 | $ | 1,039 | $ | 653 | $ | 2,889 | |||||||||||||
Goodwill was primarily established due to synergies expected to be gained from leveraging our existing operations, as well as revenue and cash flow projections associated with future technologies and is not deductible for tax purposes.
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We allocated a portion of the preliminary purchase price to the specific intangible asset categories as follows:
Amount Assigned (in millions) | Weighted Average Amortization Period (in years) | Risk-Adjusted Discount Rates used in Purchase Price Allocation | |||||||||||||||
| Preventice: | |||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||
| Technology-related | $ | 215 | 9 | 10% | |||||||||||||
| Other intangible assets | 22 | 8 | 10% | ||||||||||||||
| $ | 237 | ||||||||||||||||
| Lumenis: | |||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||
| Technology-related | $ | 417 | 14 | 11% | |||||||||||||
| Other intangible assets | 42 | 13 | 11% | ||||||||||||||
| $ | 459 | ||||||||||||||||
| Farapulse: | |||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||
| Technology-related | $ | 267 | 12 | 16% | |||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||
| In-process research and development (IPR&D) | 43 | N/A | 17% | ||||||||||||||
| $ | 310 | ||||||||||||||||
2021 Divestiture
On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business to Stark International Lux S.A.R.L., and SERB SAS, affiliates of SERB, a European specialty pharmaceutical group, for a purchase price of approximately $800 million, which was subject to certain adjustments including cash on hand at the closing of the transaction. The agreement included the transfer of five facilities and approximately 280 employees globally.
We classified the assets and liabilities of the Specialty Pharmaceuticals business (disposal group) as held for sale within our consolidated balance sheet as of December 31, 2020 at their respective carrying values, which approximated fair value, less costs to sell. Assets within the disposal group are presented within Assets held for sale and liabilities are presented within Other current liabilities within our consolidated balance sheet as of December 31, 2020. Refer to Note C – Assets and Liabilities Held for Sale to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information. In the first nine months of 2021, we recognized a Gain on disposal of businesses and assets associated with the transaction of $9 million within our accompanying unaudited consolidated statements of operations.
Contingent Consideration
Changes in the fair value of our contingent consideration liability during the first nine months of 2021 were as follows:
| (in millions) | |||||
| Balance as of December 31, 2020 | $ | 196 | |||
| Amount recorded related to current year acquisitions | 384 | ||||
| Contingent consideration net expense (benefit) | (117) | ||||
| Contingent consideration payments | (14) | ||||
| Balance as of September 30, 2021 | $ | 448 | |||
As of September 30, 2021, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our completed acquisitions was $919 million, which includes amounts related to our recent acquisitions of
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Preventice and Farapulse. Refer to Note B – Acquisitions and Strategic Investments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.
The recurring Level 3 fair value measurements of our contingent consideration liability that we expect to be required to settle include the following significant unobservable inputs:
| Contingent Consideration Liability | Fair Value as of September 30, 2021 | Valuation Technique | Unobservable Input | Range | Weighted Average(1) | ||||||||||||||||||
| R&D, Regulatory and Commercialization-based Milestones | $109 million | Discounted Cash Flow | Discount Rate | 1% | - | 2% | 1% | ||||||||||||||||
| Probability of Payment | 20% | - | 95% | 79% | |||||||||||||||||||
| Projected Year of Payment | 2023 | - | 2027 | 2023 | |||||||||||||||||||
| Revenue-based Payments | $340 million | Discounted Cash Flow | Discount Rate | 4% | - | 14% | 6% | ||||||||||||||||
| Probability of Payment | 100% | 100% | |||||||||||||||||||||
| Projected Year of Payment | 2021 | - | 2024 | 2022 | |||||||||||||||||||
(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
Projected contingent payment amounts related to research and development (R&D), regulatory and commercialization-based and revenue-based milestones are discounted back to the current period, primarily using a discounted cash flow model. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of September 30, 2021.
Strategic Investments
The aggregate carrying amount of our strategic investments was comprised of the following:
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Equity method investments | $ | 266 | $ | 319 | |||||||
Measurement alternative investments(1) | 164 | 183 | |||||||||
Publicly-held equity securities(2) | 4 | 414 | |||||||||
| Notes receivable | — | 2 | |||||||||
| $ | 434 | $ | 918 | ||||||||
(1) Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost less impairment, if any, adjusted to fair value for any observable price changes in orderly transactions for the identical or a similar investment of the same issuer, recognized in Other, net within our accompanying unaudited consolidated statements of operations.
(2) Publicly-held equity securities are measured at fair value with changes in fair value recognized in Other, net within our accompanying unaudited consolidated statements of operations.
These investments are classified as Other long-term assets within our accompanying unaudited consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.
In the third quarter and first nine months of 2021, we recorded losses of $24 million and $178 million, respectively, on our investment in Pulmonx Corporation presented in Other, net associated with the remeasurement of our investment during the period to fair value based on observable market prices, as well as the disposition of our remaining ownership. On March 1, 2021, we completed our acquisition of Preventice, in which we previously held an equity interest of approximately 22 percent and on August 6, 2021, we completed the acquisition of the remaining shares of Farapulse, in which we previously held an equity stake of approximately 27 percent. As of September 30, 2021, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $289 million, which represents amortizable intangible assets, in-process research and development (IPR&D), goodwill and deferred tax liabilities.
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NOTE C – GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill are as follows:
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization/ Write-offs(1) | Gross Carrying Amount | Accumulated Amortization/ Write-offs | |||||||||||||||||||
| Technology-related | $ | 11,787 | $ | (6,590) | $ | 11,059 | $ | (6,179) | |||||||||||||||
| Patents | 497 | (399) | 511 | (407) | |||||||||||||||||||
| Other intangible assets | 1,859 | (1,301) | 1,775 | (1,220) | |||||||||||||||||||
| Amortizable intangible assets | $ | 14,143 | $ | (8,290) | $ | 13,345 | $ | (7,806) | |||||||||||||||
| Goodwill | $ | 21,720 | $ | (9,900) | $ | 19,924 | $ | (9,973) | |||||||||||||||
| IPR&D | $ | 254 | $ | 257 | |||||||||||||||||||
| Technology-related | 120 | 120 | |||||||||||||||||||||
| Indefinite-lived intangible assets | $ | 374 | $ | 377 | |||||||||||||||||||
(1) In the fourth quarter of 2020, we recorded goodwill impairment charges of $73 million related to the Specialty Pharmaceuticals business and classified the remaining assets and liabilities as held for sale as of December 31, 2020. On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business. The goodwill impairment charges of $73 million related to the Specialty Pharmaceuticals business are no longer presented within accumulated write-offs above as of September 30, 2021.
The increase in our balance of goodwill and intangible assets is primarily related to our acquisitions completed in the first nine months of 2021.
Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we intend to leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets and are amortizing them on a straight-line basis over their assigned estimated useful lives. Our in-process research and development (IPR&D) represents intangible assets that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region.
The following represents our goodwill balance by global reportable segment:
| (in millions) | MedSurg | Rhythm and Neuro | Cardiovascular | Total | |||||||||||||||||||
| As of December 31, 2020 | $ | 2,059 | $ | 2,194 | $ | 5,697 | $ | 9,951 | |||||||||||||||
| Impact of foreign currency fluctuations and other changes in carrying amount | (4) | (1) | (15) | (20) | |||||||||||||||||||
| Goodwill acquired | 578 | 1,312 | — | 1,890 | |||||||||||||||||||
| As of September 30, 2021 | $ | 2,633 | $ | 3,506 | $ | 5,682 | $ | 11,820 | |||||||||||||||
Prior to the divestiture on March 1, 2021, we presented the Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.
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Goodwill and Intangible Asset Impairments
We did not record any goodwill impairment charges in the third quarter or first nine months of 2021 or 2020. We test our goodwill balances in the second quarter of each year as of April 1 for impairment, or more frequently if impairment indicators are present or changes in circumstances suggest an impairment may exist. In the second quarter of 2021, we performed our annual goodwill impairment test for all of our reporting units and concluded that the fair value of each reporting unit exceeded its carrying value. There were no impairment indicators in the third quarter of 2021 that necessitated an interim impairment test.
We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We identified the following reporting units in our 2021 annual goodwill impairment test: Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic Health and Neuromodulation. We aggregated the Cardiac Rhythm Management and Electrophysiology reporting units, components of the Rhythm Management operating segment, based on the criteria prescribed in FASB ASC Topic 350, Intangibles - Goodwill and Other.
We recorded Intangible asset impairment charges of $128 million in the third quarter of 2021, $219 million in the third quarter of 2020, $173 million in the first nine months of 2021 and $452 million in the first nine months of 2020. We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. We test our indefinite-lived intangible assets at least annually during the third quarter for impairment and reassess their classification as indefinite-lived assets. In addition, we review our indefinite-lived intangible assets for classification and impairment more frequently if impairment indicators exist. In the third quarter of 2021, we performed our annual IPR&D impairment test and evaluated our indefinite-lived core technology assets using the optional qualitative assessment approach and concluded that the assets were not impaired. We also verified that the classification of IPR&D projects and our indefinite-lived core technology assets recognized within our unaudited consolidated balance sheets continues to be appropriate.
The impairment charges recorded in the third quarter of 2021 were primarily associated with amortizable technology-related intangible assets that were initially established following our acquisition of VENITI, Inc., and in the first nine months of 2021 also included the partial impairment of one of our acquired IPR&D assets. In the third quarter of 2020, impairment charges were primarily associated with IPR&D acquired with Apama Medical, Inc. and in the first nine months of 2020 also included charges primarily associated with amortizable technology-related intangible assets that were initially established following our acquisition of nVision Medical Corporation. Each of these charges were recorded as a result of management’s decision to change commercial launch plans or discontinue certain commercial or R&D programs based on cost to complete or remediate, time to market, overall economic viability or, specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology. Refer to Note A – Significant Accounting Policies to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for further discussion of our annual goodwill and intangible asset impairment testing.
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NOTE D – HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We address market risk from changes in foreign currency exchange rates and interest rates through risk management programs which include the use of derivative and nonderivative financial instruments. We operate these programs pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings to material risk, as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item.
We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
Currency Hedging Instruments
Risk Management Strategy
Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities, forecasted intercompany and third-party transactions, and net investments in certain subsidiaries. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative and nonderivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.
The success of our currency risk management program depends, in part, on forecast transactions denominated primarily in Euro, Japanese yen, Chinese renminbi and Australian dollar. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.
Hedge Designations and Relationships
Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging (FASB ASC Topic 815), and are intended to protect the U.S. dollar value of forecasted transactions. The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in the Net change in derivative financial instruments component of Other comprehensive income (loss), net of tax (OCI) within our accompanying unaudited consolidated statements of comprehensive income (loss) until the underlying third-party transaction occurs. When the underlying third-party transaction occurs, we recognize the gain or loss in earnings within Cost of products sold in our accompanying unaudited consolidated statements of operations. In the event the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the gains or losses within Accumulated other comprehensive income (loss), net of tax (AOCI) to earnings at that time.
We also designate certain forward currency contracts as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the Swiss franc, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. For these derivative instruments, we elected to use the spot method to assess hedge effectiveness. We also elected to exclude the spot-forward difference, referred to as the excluded component, from the assessment of hedge effectiveness and are amortizing this amount separately, as calculated at the date of designation, on a straight-line basis over the term of the currency forward contracts. As such, we defer recognition of foreign currency gains and losses within the Foreign currency translation adjustment (CTA) component of OCI, and we reclassify amortization of the excluded component from AOCI to current period earnings within Interest expense in our accompanying unaudited consolidated statements of operations.
We designate certain euro-denominated debt as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the Euro. As of September 30, 2021 and December 31, 2020, we designated as a net investment hedge a portion of our €900 million in aggregate principal amount of 0.625% senior notes issued in November 2019 and due in 2027. For these nonderivative instruments, we defer recognition of the foreign currency
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remeasurement gains and losses within the CTA component of OCI. We reclassify these gains and losses to current period earnings within Other, net in our accompanying unaudited consolidated statements of operations only when the hedged item affects earnings, which would occur upon disposal or substantial liquidation of the underlying foreign subsidiary.
We also use forward currency contracts that are not part of designated hedging relationships under FASB ASC Topic 815 as a part of our strategy to manage our exposure to currency exchange rate risk related to monetary assets and liabilities and related forecast transactions. These non-designated currency forward contracts have an original time to maturity consistent with the hedged currency transaction exposures, generally less than one year, and are marked-to-market with changes in fair value recorded to earnings within Other, net in our accompanying unaudited consolidated statements of operations.
Interest Rate Hedging Instruments
Risk Management Strategy
Our interest rate risk relates primarily to U.S. dollar borrowings partially offset by U.S. dollar cash investments. We use interest rate derivative instruments to mitigate the risk to our earnings and cash flows associated with exposure to changes in interest rates. Under these agreements, we and the counterparty, at specified intervals, exchange the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. We designate these derivative instruments either as fair value or cash flow hedges in accordance with FASB ASC Topic 815.
Hedge Designations and Relationships
We had no interest rate derivative instruments designated as cash flow hedges outstanding as of September 30, 2021 or December 31, 2020. Prior to 2020, we terminated interest rate derivative instruments that were designated as cash flow hedges and are continuing to recognize the amortization of the gains or losses originally recorded within AOCI to earnings as a component of Interest expense over the same period that the hedged item affects earnings, provided the hedge relationship remains effective. If we determine the hedge relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the amount of gains or losses from AOCI to earnings at that time.
In the event that we designate outstanding interest rate derivative instruments as cash flow hedges, we record the changes in the fair value of the derivatives within OCI until the underlying hedged transaction occurs. The balance of the deferred amounts on our terminated cash flow hedges within AOCI was a $25 million loss as of September 30, 2021 and a $29 million loss as of December 31, 2020. We recognized immaterial gains and losses in Interest expense relating to the amortization of our terminated cash flow hedges in the current and prior periods.
We had no interest rate derivative instruments designated as fair value hedges outstanding as of September 30, 2021 or December 31, 2020. Prior to 2018, we terminated interest rate derivative instruments that were designated as fair value hedges and are continuing to recognize the amortization of the gains or losses originally recorded within Long-term debt in our accompanying unaudited consolidated balance sheets into earnings as a component of Interest expense over the same period that the discount or premium associated with the hedged items affects earnings. In the event that we designate outstanding interest rate derivative instruments as fair value hedges, we record the changes in the fair values of interest rate derivatives designated as fair value hedges and of the underlying hedged debt instruments in Interest expense, which generally offset. The balance of the deferred gains on our terminated fair value hedges within Long-term debt was immaterial as of September 30, 2021 and December 31, 2020. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.
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The following table presents the contractual amounts of our hedging instruments outstanding:
| (in millions) | FASB ASC Topic 815 Designation | As of | ||||||||||||||||||
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||
| Forward currency contracts | Cash flow hedge | $ | 4,344 | $ | 4,531 | |||||||||||||||
| Forward currency contracts | Net investment hedge | 493 | 1,004 | |||||||||||||||||
Foreign currency-denominated debt(1) | Net investment hedge | 997 | 868 | |||||||||||||||||
| Forward currency contracts | Non-designated | 4,838 | 4,946 | |||||||||||||||||
| Total Notional Outstanding | $ | 10,672 | $ | 11,349 | ||||||||||||||||
(1) Foreign currency-denominated debt is the portion of the €900 million debt principal designated as a net investment hedge.
The remaining time to maturity as of September 30, 2021 is within 60 months for all forward currency contracts designated as cash flow hedges and generally less than one year for all non-designated forward currency contracts. The forward currency contracts designated as net investment hedges generally mature within the next year. The euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.
The following presents the effect of our derivative and nonderivative instruments designated as cash flow and net investment hedges under FASB ASC Topic 815 in our accompanying unaudited consolidated statements of operations. Refer to Note M – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative instruments presented within our accompanying unaudited consolidated statements of comprehensive income (loss).
| Effect of Hedging Relationships on Accumulated Other Comprehensive Income | ||||||||||||||||||||||||||||||||
| Amount Recognized in OCI on Hedges | Unaudited Consolidated Statements of Operations(1) | Amount Reclassified from AOCI into Earnings | ||||||||||||||||||||||||||||||
| (in millions) | Pre-Tax Gain (Loss) | Tax Benefit (Expense) | Gain (Loss) Net of Tax | Location of Amount Reclassified and Total Amount of Line Item | Pre-Tax (Gain) Loss | Tax (Benefit) Expense | (Gain) Loss Net of Tax | |||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Forward currency contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | $ | 79 | $ | (18) | $ | 61 | Cost of products sold | $ | 900 | $ | (16) | $ | 3 | $ | (12) | |||||||||||||||||
Net investment hedges(2) | 7 | (2) | 6 | Interest expense | 86 | (2) | — | (2) | ||||||||||||||||||||||||
| Foreign currency-denominated debt | ||||||||||||||||||||||||||||||||
Net investment hedges(3) | 25 | (6) | 20 | Other, net | (181) | — | — | — | ||||||||||||||||||||||||
| Interest rate derivative contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | — | — | — | Interest expense | 86 | 1 | — | 1 | ||||||||||||||||||||||||
| Effect of Hedging Relationships on Accumulated Other Comprehensive Income | ||||||||||||||||||||||||||||||||
| Amount Recognized in OCI on Hedges | Unaudited Consolidated Statements of Operations(1) | Amount Reclassified from AOCI into Earnings | ||||||||||||||||||||||||||||||
| (in millions) | Pre-Tax Gain (Loss) | Tax Benefit (Expense) | Gain (Loss) Net of Tax | Location of Amount Reclassified and Total Amount of Line Item | Pre-Tax (Gain) Loss | Tax (Benefit) Expense | (Gain) Loss Net of Tax | |||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Forward currency contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | $ | (64) | $ | 14 | $ | (50) | Cost of products sold | $ | 869 | $ | (20) | $ | 4 | $ | (15) | |||||||||||||||||
Net investment hedges(2) | (21) | 5 | (16) | Interest expense | 86 | (6) | 1 | (5) | ||||||||||||||||||||||||
| Foreign currency-denominated debt | ||||||||||||||||||||||||||||||||
Net investment hedges(3) | (46) | 10 | (36) | Other, net | (64) | — | — | — | ||||||||||||||||||||||||
| Interest rate derivative contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | — | — | — | Interest Expense | 86 | 1 | — | 1 | ||||||||||||||||||||||||
| Effect of Hedging Relationships on Accumulated Other Comprehensive Income | ||||||||||||||||||||||||||||||||
| Amount Recognized in OCI on Hedges | Unaudited Consolidated Statements of Operations(1) | Amount Reclassified from AOCI into Earnings | ||||||||||||||||||||||||||||||
| (in millions) | Pre-Tax Gain (Loss) | Tax Benefit (Expense) | Gain (Loss) Net of Tax | Location of Amount Reclassified and Total Amount of Line Item | Pre-Tax (Gain) Loss | Tax (Benefit) Expense | (Gain) Loss Net of Tax | |||||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Forward currency contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | $ | 234 | $ | (53) | $ | 182 | Cost of products sold | $ | 2,739 | $ | (31) | $ | 7 | $ | (24) | |||||||||||||||||
| Net investment hedges (2) | 50 | (11) | 39 | Interest expense | 254 | (11) | 3 | (9) | ||||||||||||||||||||||||
| Foreign currency-denominated debt | ||||||||||||||||||||||||||||||||
| Net investment hedges (3) | 60 | (14) | 47 | Other, net | (192) | — | — | — | ||||||||||||||||||||||||
| Interest rate derivative contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | — | — | — | Interest expense | 254 | 4 | (1) | 3 | ||||||||||||||||||||||||
| Effect of Hedging Relationships on Accumulated Other Comprehensive Income | ||||||||||||||||||||||||||||||||
| Amount Recognized in OCI on Hedges | Unaudited Consolidated Statements of Operations(1) | Amount Reclassified from AOCI into Earnings | ||||||||||||||||||||||||||||||
| (in millions) | Pre-Tax Gain (Loss) | Tax Benefit (Expense) | Gain (Loss) Net of Tax | Location of Amount Reclassified and Total Amount of Line Item | Pre-Tax (Gain) Loss | Tax (Benefit) Expense | (Gain) Loss Net of Tax | |||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Forward currency contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | $ | 47 | $ | (11) | $ | 36 | Cost of products sold | $ | 2,465 | $ | (70) | $ | 16 | $ | (55) | |||||||||||||||||
| Net investment hedges (2) | (4) | (21) | (25) | Interest expense | 265 | (18) | 4 | (14) | ||||||||||||||||||||||||
| Foreign currency-denominated debt | ||||||||||||||||||||||||||||||||
| Net investment hedges (3) | (44) | 13 | (31) | Other, net | (9) | — | — | — | ||||||||||||||||||||||||
| Interest rate derivative contracts | ||||||||||||||||||||||||||||||||
| Cash flow hedges | — | — | — | Interest expense | 265 | 4 | (1) | 3 | ||||||||||||||||||||||||
(1) In all periods presented in the table above, the pre-tax (gain) loss amounts reclassified from AOCI to earnings represent the effect of the hedging relationships on earnings. All other amounts included in earnings related to hedging relationships were immaterial.
(2) For our outstanding forward currency contracts designated as net investment hedges, the net gain or loss reclassified from AOCI to earnings as a reduction of Interest expense represents the straight-line amortization of the excluded component as calculated at the date of designation. This initial value of the excluded component has been excluded from the assessment of effectiveness in accordance with FASB ASC Topic 815. In the current and prior period, we did not recognize any gains or losses on the components included in the assessment of hedge effectiveness in earnings.
(3) For our outstanding euro-denominated debt principal designated as a net investment hedge, the change in fair value attributable to changes in the spot rate is recorded in the CTA component of OCI. No amounts were reclassified from AOCI to current period earnings.
As of September 30, 2021, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as cash flow and net investment hedges under FASB ASC Topic 815 that may be reclassified from AOCI to earnings within the next twelve months are presented below (in millions):
| Designated Hedging Instrument | FASB ASC Topic 815 Designation | Location on Unaudited Consolidated Statements of Operations | Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings | |||||||||||||||||
| Forward currency contracts | Cash flow hedge | Cost of products sold | $ | 108 | ||||||||||||||||
| Forward currency contracts | Net investment hedge | Interest expense | 5 | |||||||||||||||||
| Interest rate derivative contracts | Cash flow hedge | Interest expense | (5) | |||||||||||||||||
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Net gains and losses on currency hedge contracts not designated as hedging instruments offset by net gains and losses from currency transaction exposures are presented below:
| Location on Unaudited Consolidated Statements of Operations | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
| Net gain (loss) on currency hedge contracts | Other, net | $ | (15) | $ | 29 | $ | (17) | $ | 20 | |||||||||||||||||||||||
| Net gain (loss) on currency transaction exposures | Other, net | 7 | (30) | 1 | (33) | |||||||||||||||||||||||||||
| Net currency exchange gain (loss) | $ | (8) | $ | (1) | $ | (17) | $ | (13) | ||||||||||||||||||||||||
Fair Value Measurements
FASB ASC Topic 815 requires all derivative and nonderivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative and nonderivative instruments using the framework prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures (FASB ASC Topic 820) and considering the estimated amount we would receive or pay to transfer these instruments at the reporting date with respect to current currency exchange rates, interest rates, the creditworthiness of the counterparty for unrealized gain positions and our own creditworthiness for unrealized loss positions. In certain instances, we may utilize financial models to measure fair value of our derivative and nonderivative instruments. In doing so, we use inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and inputs derived principally from, or corroborated by, observable market data by correlation or other means. The following are the balances of our derivative and nonderivative assets and liabilities:
Location on Unaudited Consolidated Balance Sheets(1) | As of | |||||||||||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | ||||||||||||||||||
| Derivative and Nonderivative Assets: | ||||||||||||||||||||
| Designated Hedging Instruments | ||||||||||||||||||||
| Forward currency contracts | Other current assets | $ | 152 | $ | 53 | |||||||||||||||
| Forward currency contracts | Other long-term assets | 176 | 109 | |||||||||||||||||
| 328 | 162 | |||||||||||||||||||
| Non-Designated Hedging Instruments | ||||||||||||||||||||
| Forward currency contracts | Other current assets | 41 | 79 | |||||||||||||||||
| Total Derivative and Nonderivative Assets | $ | 369 | $ | 242 | ||||||||||||||||
| Derivative and Nonderivative Liabilities: | ||||||||||||||||||||
| Designated Hedging Instruments | ||||||||||||||||||||
| Forward currency contracts | Other current liabilities | $ | 24 | $ | 44 | |||||||||||||||
| Forward currency contracts | Other long-term liabilities | 5 | 54 | |||||||||||||||||
Foreign currency-denominated debt(2) | Other long-term liabilities | 1,033 | 1,094 | |||||||||||||||||
| 1,063 | 1,191 | |||||||||||||||||||
| Non-Designated Hedging Instruments | ||||||||||||||||||||
| Forward currency contracts | Other current liabilities | 57 | 71 | |||||||||||||||||
| Total Derivative and Nonderivative Liabilities | $ | 1,120 | $ | 1,262 | ||||||||||||||||
(1) We classify derivative and nonderivative assets and liabilities as current when the settlement date of the contract is one year or less.
(2) Foreign currency-denominated debt is the portion of the €900 million debt principal designated as a net investment hedge. A portion of this notional is subject to de-designation and re-designation based on changes in the underlying hedged item.
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Recurring Fair Value Measurements
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. FASB ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The category of a financial asset or a financial liability within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
•Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
•Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
•Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
Assets and liabilities measured at fair value on a recurring basis consist of the following:
| As of | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds and time deposits | $ | 1,537 | $ | — | $ | — | $ | 1,537 | $ | 1,584 | $ | — | $ | — | $ | 1,584 | |||||||||||||||||||||||||||||||
| Publicly-held equity securities | 4 | — | — | 4 | 414 | — | — | 414 | |||||||||||||||||||||||||||||||||||||||
| Hedging instruments | — | 369 | — | 369 | — | 242 | — | 242 | |||||||||||||||||||||||||||||||||||||||
| Licensing arrangements | — | — | 280 | 280 | — | — | 365 | 365 | |||||||||||||||||||||||||||||||||||||||
| $ | 1,541 | $ | 369 | $ | 280 | $ | 2,190 | $ | 1,998 | $ | 242 | $ | 365 | $ | 2,605 | ||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Hedging instruments | $ | — | $ | 1,120 | $ | — | $ | 1,120 | $ | — | $ | 1,262 | $ | — | $ | 1,262 | |||||||||||||||||||||||||||||||
| Contingent consideration liability | — | — | 448 | 448 | — | — | 196 | 196 | |||||||||||||||||||||||||||||||||||||||
| Licensing arrangements | — | — | 297 | 297 | — | — | 407 | 407 | |||||||||||||||||||||||||||||||||||||||
| $ | — | $ | 1,120 | $ | 745 | $ | 1,865 | $ | — | $ | 1,262 | $ | 603 | $ | 1,865 | ||||||||||||||||||||||||||||||||
Our investments in money market funds and time deposits are 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 consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In addition to $1.537 billion invested in money market funds and time deposits as of September 30, 2021 and $1.584 billion as of December 31, 2020, we held $410 million in interest-bearing and non-interest-bearing bank accounts as of September 30, 2021 and $150 million as of December 31, 2020.
Our recurring fair value measurements using Level 3 inputs include those related to our contingent consideration liability. Refer to Note B – Acquisitions, Divestitures and Strategic Investments for a discussion of the changes in the fair value of our contingent consideration liability. In addition, our recurring fair value measurements using Level 3 inputs related to our licensing arrangements, including the contractual right to receive future royalty payments related to the Zytiga™ Drug. We recognized a financial asset and associated liability for our licensing arrangements at fair value in our accompanying unaudited consolidated balance sheets using the fair value option in accordance with FASB ASC Topic 825, Financial Instruments.
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We own the contractual right to receive 50 percent of the future royalty payments from the licensee and remit such payments to the inventors associated with the intellectual property. Royalty payments we receive reduce the fair value of the financial asset and are presented within Proceeds from royalty rights, and payments we remit to inventors reduce the fair value of the financial liability and are presented within Payments for royalty rights within our unaudited consolidated statements of cash flows. We sold our right to receive and retain the other 50 percent of the future royalty payments in 2019 for an upfront cash payment, which we accounted for as a secured borrowing in accordance with FASB ASC Topic 860, Transfers and Servicing. Although we sold these rights, we continue to recognize at fair value the future royalty payments as a financial asset and associated liability. Royalty payments associated with the rights we sold no longer impact our cash flows, and we present this activity as Non-cash impact of transferred royalty rights in the supplemental information to our unaudited consolidated statements of cash flows. We reduce the fair value of the financial asset and associated liability when such non-cash activity occurs.
We have recorded the fair value of the financial asset and associated liability using a discounted cash flow approach considering the probability-weighted expected future cash flows to be generated by the royalty stream. The fair value of the financial liability also considers the related contractual provisions that govern our payment obligations. Significant increases or decreases in projected cash flows of the royalty stream and the related contractual provisions that govern our payment obligations, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement of the licensing arrangements' financial asset and liability as of September 30, 2021. However, increases or decreases in the financial asset would be offset by increases or decreases in the financial liability, other than for timing of receipt and remittance; as such our earnings are not subject to material gains and losses from the licensing arrangement.
The recurring Level 3 fair value measurements of our licensing arrangements recognized in our accompanying unaudited consolidated balance sheets as of September 30, 2021 include the following significant unobservable inputs:
| Licensing Arrangements | Fair Value as of September 30, 2021 | Valuation Technique | Unobservable Input | Range | Weighted Average (1) | ||||||||||||||||||
| Financial Asset | $280 million | Discounted Cash Flow | Discount Rate | 15% | 15% | ||||||||||||||||||
| Projected Year of Payment | 2021 | - | 2025 | 2023 | |||||||||||||||||||
| Financial Liability | $297 million | Discounted Cash Flow | Discount Rate | 12 | % | - | 15% | 13% | |||||||||||||||
| Projected Year of Payment | 2021 | - | 2026 | 2023 | |||||||||||||||||||
(1) Unobservable inputs relate to a single financial asset and liability. As such, unobservable inputs were not weighted by the relative fair value of the instruments. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
Changes in the fair value of our licensing arrangements' financial asset were as follows:
| (in millions) | |||||
| Balance as of December 31, 2020 | $ | 365 | |||
| Proceeds from royalty rights | (62) | ||||
| Non-cash impact of transferred royalty rights | (62) | ||||
| Fair value adjustment (expense) benefit | 40 | ||||
| Balance as of September 30, 2021 | $ | 280 | |||
Changes in the fair value of our licensing arrangements' financial liability were as follows:
| (in millions) | |||||
| Balance as of December 31, 2020 | $ | 407 | |||
| Payments for royalty rights | (85) | ||||
| Non-cash impact of transferred royalty rights | (62) | ||||
| Fair value adjustment expense (benefit) | 37 | ||||
| Balance as of September 30, 2021 | $ | 297 | |||
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Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods after initial recognition. The fair value of a measurement alternative 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. Refer to Note B – Acquisitions, Divestitures and Strategic Investments for a discussion of our strategic investments and Note C – Goodwill and Other Intangible Assets for a discussion of the fair values of our intangible assets including goodwill.
The fair value of our outstanding debt obligations was $10.372 billion as of September 30, 2021, including $1.056 billion relating to our euro-denominated December 2027 Notes, and $10.774 billion as of December 31, 2020, including $1.118 billion relating to our euro-denominated December 2027 Notes. We determined fair value by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy, and face value for commercial paper, term loans and credit facility borrowings outstanding. Refer to Note E – Contractual Obligations and Commitments for a discussion of our debt obligations.
NOTE E – CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Borrowings and Credit Arrangements
We had total debt outstanding of $9.085 billion as of September 30, 2021 and $9.143 billion as of December 31, 2020, with current maturities of $261 million as of September 30, 2021 and $13 million as of December 31, 2020. The debt maturity schedule for our long-term debt obligations is presented below:
| (in millions, except interest rates) | Issuance Date | Maturity Date | As of | Coupon Rate(1) | ||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
May 2022 Notes(3) | May 2015 | May 2022 | $ | — | $ | 250 | 3.375% | |||||||||||||||||||||||||
| October 2023 Notes | August 2013 | October 2023 | 244 | 244 | 4.125% | |||||||||||||||||||||||||||
| March 2024 Notes | February 2019 | March 2024 | 850 | 850 | 3.450% | |||||||||||||||||||||||||||
| May 2025 Notes | May 2015 | May 2025 | 523 | 523 | 3.850% | |||||||||||||||||||||||||||
| June 2025 Notes | May 2020 | June 2025 | 500 | 500 | 1.900% | |||||||||||||||||||||||||||
| March 2026 Notes | February 2019 | March 2026 | 850 | 850 | 3.750% | |||||||||||||||||||||||||||
| December 2027 Notes | November 2019 | December 2027 | 1,043 | 1,105 | 0.625% | |||||||||||||||||||||||||||
| March 2028 Notes | February 2018 | March 2028 | 434 | 434 | 4.000% | |||||||||||||||||||||||||||
| March 2029 Notes | February 2019 | March 2029 | 850 | 850 | 4.000% | |||||||||||||||||||||||||||
| June 2030 Notes | May 2020 | June 2030 | 1,200 | 1,200 | 2.650% | |||||||||||||||||||||||||||
November 2035 Notes(2) | November 2005 | November 2035 | 350 | 350 | 7.000% | |||||||||||||||||||||||||||
| March 2039 Notes | February 2019 | March 2039 | 750 | 750 | 4.550% | |||||||||||||||||||||||||||
| January 2040 Notes | December 2009 | January 2040 | 300 | 300 | 7.375% | |||||||||||||||||||||||||||
| March 2049 Notes | February 2019 | March 2049 | 1,000 | 1,000 | 4.700% | |||||||||||||||||||||||||||
Unamortized Debt Issuance Discount and Deferred Financing Costs | 2022 - 2049 | (79) | (88) | |||||||||||||||||||||||||||||
| Unamortized Gain on Fair Value Hedges | 2023 | 4 | 5 | |||||||||||||||||||||||||||||
| Finance Lease Obligation | Various | 6 | 7 | |||||||||||||||||||||||||||||
| Long-term debt | $ | 8,824 | $ | 9,130 | ||||||||||||||||||||||||||||
Note: The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges.
(1) Coupon rates are semi-annual, except for the euro-denominated December 2027 Notes, which bear an annual coupon.
(2) Corporate credit rating improvements may result in a decrease in the adjusted interest rate on our November 2035 Notes to the extent that our lowest credit rating is above BBB- or Baa3. The interest rates on our November 2035 Notes will be permanently reinstated to the issuance rate if the lowest credit ratings assigned to these senior notes is either A- or A3 or higher. Effective November 15, 2021, the interest rate payable will decrease by 0.25 percent and begin accruing at a rate of 6.75 percent following recent upgrades to our credit ratings.
(3) As of September 30, 2021 the outstanding balance is presented within Current Debt Obligations within our unaudited consolidated balance sheet.
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Revolving Credit Facility
On May 10, 2021 we entered into a new $2.750 billion revolving credit facility (2021 Revolving Credit Facility) with a global syndicate of commercial banks and terminated our previous facility (2018 Revolving Credit Facility). The 2021 Revolving Credit Facility will mature on May 10, 2026, with one-year extension options, subject to certain conditions. This facility provides backing for our commercial paper program, and outstanding commercial paper directly reduces borrowing capacity under the 2021 Revolving Credit Facility. There were no amounts outstanding under the 2021 Revolving Credit Facility as of September 30, 2021 or under the 2018 Revolving Credit Facility as of December 31, 2020.
Financial Covenant
As of and through September 30, 2021, we were in compliance with the financial covenant required by the credit facilities described above:
| Covenant Requirement | Actual | |||||||||||||
| as of September 30, 2021 | as of September 30, 2021 | |||||||||||||
Maximum permitted leverage ratio(1) | 4.00 times | 2.89 times | ||||||||||||
(1)Ratio of total debt to consolidated EBITDA, as defined by the credit agreements, as amended.
The 2021 Revolving Credit Facility includes the following financial covenant requirement for all of our credit arrangements (i) maintain the maximum permitted leverage ratio of 4.00 times for the third quarter of 2021, with a step-down to 3.75 times for the fourth quarter of 2021 and through the remaining term. The agreement provides for higher leverage ratios for the period following a qualified acquisition, at our election, for which consideration exceeds $1.000 billion. In the event of such an acquisition, for the four succeeding quarters immediately following, including the quarter in which the acquisition occurs, the maximum permitted leverage ratio is 4.75 times. The maximum permitted ratio steps down for the fifth, sixth and seventh succeeding quarters to 4.50 times, 4.25 times and 4.00 times, respectively. Thereafter, a maximum leverage ratio of 3.75 times is required through the remaining term of the 2021 Revolving Credit Facility. We have not elected to increase the maximum permitted leverage ratio for the recently completed acquisition of Lumenis due to the funding of the acquisition using cash on hand.
The financial covenant requirement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreement, through maturity, of any non-cash charges and up to $500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of September 30, 2021, we had $428 million of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the agreements, are excluded from the calculation of consolidated EBITDA, as defined by the agreements, provided that the sum of any excluded net cash litigation payments do not exceed $1.455 billion in the aggregate. As of September 30, 2021, we had $1.243 billion of the litigation exclusion remaining.
Any inability to maintain compliance with this covenant could require us to seek to renegotiate the terms of our credit arrangements or seek waivers from compliance with this covenant, both of which could result in additional borrowing costs. Further, there can be no assurance that our lenders would agree to such new terms or grant such waivers on terms acceptable to us. In this case, all 2021 Revolving Credit Facility commitments would terminate, and any amounts borrowed under the facility would become immediately due and payable. Furthermore, any termination of our 2021 Revolving Credit Facility may negatively impact the credit ratings assigned to our commercial paper program, which may impact our ability to refinance any then outstanding commercial paper as it becomes due and payable.
Commercial Paper
Our commercial paper program is backed by the 2021 Revolving Credit Facility, as discussed above, and outstanding commercial paper directly reduces borrowing capacity under the 2021 Revolving Credit Facility. We did not have any commercial paper outstanding as of September 30, 2021 or December 31, 2020.
Senior Notes
We had senior notes outstanding of $9.143 billion as of September 30, 2021 and $9.205 billion as of December 31, 2020. Our senior notes were issued in public offerings, are redeemable prior to maturity and are not subject to sinking fund requirements. Our senior notes are unsecured, unsubordinated obligations and rank on parity with each other. These notes are effectively junior to liabilities of our subsidiaries (see Other Arrangements below).
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Other Arrangements
We have accounts receivable factoring programs in certain European countries and with commercial banks in China and Japan which include promissory notes discounting programs. We account for our factoring programs as sales under FASB ASC Topic 860, Transfers and Servicing. We have no retained interest in the transferred receivables, other than collection and administration, and once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. Amounts de-recognized for accounts and notes receivable, which are excluded from Trade accounts receivable, net in our accompanying unaudited consolidated balance sheets, are aggregated by contract denominated currency below (in millions):
| Factoring Arrangements | As of September 30, 2021 | As of December 31, 2020 | |||||||||||||||||||||
| Amount De-recognized | Weighted Average Interest Rate | Amount De-recognized | Weighted Average Interest Rate | ||||||||||||||||||||
| Euro denominated | $ | 152 | 2.1 | % | $ | 148 | 1.9 | % | |||||||||||||||
| Yen denominated | 203 | 0.5 | % | 240 | 0.6 | % | |||||||||||||||||
Renminbi denominated | — | 3.1 | % | — | 3.5 | % | |||||||||||||||||
Other Contractual Obligations and Commitments
We had outstanding letters of credit of $135 million as of September 30, 2021 and $124 million as of December 31, 2020, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of September 30, 2021 and December 31, 2020, none of the beneficiaries had drawn upon the letters of credit or guarantees, and accordingly, we have not recognized a related liability for our outstanding letters of credit in our accompanying unaudited consolidated balance sheets as of September 30, 2021 and December 31, 2020.
Refer to Note F – Contractual Obligations and Commitments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information on our borrowings and credit agreements.
NOTE F – SUPPLEMENTAL BALANCE SHEET INFORMATION
Components of selected captions in our accompanying unaudited consolidated balance sheets are as follows:
Trade accounts receivable, net
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Trade accounts receivable | $ | 1,778 | $ | 1,637 | |||||||
| Allowance for credit losses | (108) | (105) | |||||||||
| $ | 1,669 | $ | 1,531 | ||||||||
The following is a rollforward of our Allowance for credit losses:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Beginning balance | $ | 107 | $ | 94 | $ | 105 | $ | 74 | |||||||||||||||
Cumulative effect adjustment(1) | n/a | n/a | n/a | 10 | |||||||||||||||||||
| Credit loss expense | 9 | 16 | 20 | 39 | |||||||||||||||||||
| Write-offs | (7) | (7) | (17) | (19) | |||||||||||||||||||
| Ending balance | $ | 108 | $ | 103 | $ | 108 | $ | 103 | |||||||||||||||
(1) Effective January 1, 2020, we adopted FASB ASC Topic 326, Financial Instruments - Credit Losses using the modified retrospective method, which requires that we recognize credit loss reserves when financial assets are established if credit losses are expected over the asset’s contractual life. Refer to Note R – New Accounting Pronouncements to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.
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In accordance with FASB ASC Topic 326, we record credit loss reserves to Allowance for credit losses when we establish Trade accounts receivable if credit losses are expected over the asset's contractual life. We base our estimates of credit loss reserves on historical experience and adjust, as necessary, to reflect current conditions using reasonable and supportable forecasts not already reflected in the historical loss information. We utilize an accounts receivable aging approach to determine the reserve to record at accounts receivable commencement for certain customers, applying country or region-specific factors. In performing the assessment of outstanding accounts receivable, regardless of country or region, we may consider significant factors relevant to collectability, including those specific to a customer such as bankruptcy, lengthy average payment cycles and type of account.
We closely monitor outstanding receivables for potential collection risks, including those that may arise from economic conditions. Our sales to government-owned or supported customers, particularly in southern Europe, are subject to an increased number of days outstanding prior to payment relative to other countries. More recently, we have seen an increase in the volume of our U.S. business conducted in ambulatory surgery centers and office-based laboratories. Many of these customers are smaller than those we have historically done business with and may have limited liquidity. We have adjusted our estimates of credit loss reserves for these customers, regions and conditions based on collection trends.
Inventories
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Finished goods | $ | 1,039 | $ | 893 | |||||||
| Work-in-process | 127 | 109 | |||||||||
| Raw materials | 436 | 349 | |||||||||
| $ | 1,603 | $ | 1,351 | ||||||||
Other current assets
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Restricted cash and restricted cash equivalents | $ | 155 | $ | 208 | |||||||
| Derivative assets | 192 | 133 | |||||||||
| Licensing arrangements | 142 | 148 | |||||||||
| Other | 302 | 263 | |||||||||
| $ | 792 | $ | 751 | ||||||||
Property, plant and equipment, net
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Land | $ | 103 | $ | 104 | |||||||
| Buildings and improvements | 1,340 | 1,292 | |||||||||
| Equipment, furniture and fixtures | 3,515 | 3,465 | |||||||||
| Capital in progress | 465 | 446 | |||||||||
| 5,423 | 5,308 | ||||||||||
| Less: accumulated depreciation | 3,314 | 3,224 | |||||||||
| $ | 2,109 | $ | 2,084 | ||||||||
Depreciation expense was $88 million for the third quarter of 2021, $84 million for the third quarter of 2020, $254 million for the first nine months of 2021 and $238 million for the first nine months of 2020.
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Other long-term assets
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Restricted cash equivalents | $ | 57 | $ | 52 | |||||||
| Operating lease right-of-use assets | 415 | 458 | |||||||||
| Derivative assets | 176 | 109 | |||||||||
| Investments | 434 | 918 | |||||||||
| Licensing arrangements | 138 | 218 | |||||||||
| Other | 223 | 166 | |||||||||
| $ | 1,444 | $ | 1,921 | ||||||||
Accrued expenses
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Legal reserves | $ | 357 | $ | 505 | |||||||
| Payroll and related liabilities | 884 | 681 | |||||||||
| Rebates | 351 | 331 | |||||||||
| Contingent consideration liability | 253 | 26 | |||||||||
| Other | 574 | 656 | |||||||||
| $ | 2,418 | $ | 2,197 | ||||||||
Other current liabilities
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Deferred revenue | $ | 160 | $ | 138 | |||||||
| Licensing arrangements | 142 | 153 | |||||||||
| Taxes payable | 113 | 158 | |||||||||
| Liabilities held for sale | — | 200 | |||||||||
| Other | 255 | 307 | |||||||||
| $ | 669 | $ | 958 | ||||||||
Other long-term liabilities
| As of | |||||||||||
| (in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Accrued income taxes | $ | 541 | $ | 547 | |||||||
| Legal reserves | 191 | 64 | |||||||||
| Contingent consideration liability | 195 | 171 | |||||||||
| Licensing arrangements | 155 | 253 | |||||||||
| Operating lease liabilities | 377 | 401 | |||||||||
| Deferred revenue | 296 | 257 | |||||||||
| Other | 542 | 615 | |||||||||
| $ | 2,296 | $ | 2,309 | ||||||||
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NOTE G – INCOME TAXES
Our effective tax rate from continuing operations is presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Effective tax rate from continuing operations | 13.2 | % | 31.7 | % | 1.1 | % | 24.3 | % | |||||||||||||||
The change in our reported tax rates for the third quarter and first nine months of 2021, as compared to the same periods in 2020, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate. These receipts and charges include litigation-related net charges (credits), intangible asset impairment charges, acquisition/divestiture-related net charges as well as certain discrete tax items primarily related to an IRS audit settlement in the third quarter of 2020.
As of September 30, 2021, we had $277 million of gross unrecognized tax benefits, of which a net $195 million, if recognized, would affect our effective tax rate. As of December 31, 2020, we had $261 million of gross unrecognized tax benefits, of which a net $183 million, if recognized, would affect our effective tax rate. The change in our gross unrecognized tax benefit is primarily related to positions on new entities we acquired through recent acquisitions and restructuring activities.
It is reasonably possible that within the next 12 months, we will resolve multiple issues with foreign, federal and state taxing authorities, resulting in a reduction in our balance of unrecognized tax benefits of up to $23 million.
Economic stimulus legislation has been enacted in many countries in response to the COVID-19 pandemic. In the U.S., the CARES Act, enacted on March 27, 2020, provided an estimated $2.2 trillion in COVID-19 pandemic-related relief, and included tax relief and government loans, subsidies and other relief for entities in affected industries. While we have not applied for government loans, we have taken advantage of the benefits offered in multiple jurisdictions, including the U.S. provision allowing taxpayers to defer payment of the employer portion of certain payroll taxes incurred in 2020. This allowed us to preserve cash generated from operations to service our debt obligations and other near-term commitments and is expected to be paid in full by the end of 2022 as permitted by the legislation.
NOTE H – COMMITMENTS AND CONTINGENCIES
The medical device market in which we participate is largely technology driven. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. Over the years, there has been litigation initiated against us by others, including our competitors, claiming that our current or former product offerings infringe patents owned or licensed by them. Intellectual property litigation is inherently complex and unpredictable. In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These dynamics frequently drive settlement not only for individual cases, but also for a series of pending and potentially related and unrelated cases. Although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.
During recent years, we successfully negotiated closure of several long-standing legal matters and have received favorable rulings in several other matters; however, there continues to be outstanding intellectual property litigation. Adverse outcomes in one or more of these matters could have a material adverse effect on our ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.
In the normal course of business, product liability, securities and commercial claims are asserted against us. Similar claims may be asserted against us in the future related to events not known to management at the present time. We maintain an insurance policy providing limited coverage against securities claims and we are substantially self-insured with respect to product liability claims and fully self-insured with respect to intellectual property infringement claims. The absence of significant third-party insurance coverage increases our potential exposure to unanticipated claims or adverse decisions. Product liability claims, securities and commercial litigation and other legal proceedings in the future, regardless of their outcome, could have a material adverse effect on our ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.
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In addition, like other companies in the medical device industry, we are subject to extensive regulation by national, state and local government agencies in the U.S. and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.
In accordance with FASB ASC Topic 450, Contingencies, we accrue anticipated costs of settlement, damages, losses for product liability claims and, under certain conditions, costs of defense, based on historical experience or to the extent specific losses are probable and estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.
Our accrual for legal matters that are probable and estimable was $548 million as of September 30, 2021 and $569 million as of December 31, 2020 and includes certain estimated costs of settlement, damages and defense primarily related to product liability cases or claims related to our transvaginal surgical mesh products. A portion of this accrual is already funded through our qualified settlement fund (QSF), which is included in restricted cash and restricted cash equivalents in Other current assets of $155 million as of September 30, 2021 and $208 million as of December 31, 2020. Refer to Note F – Supplemental Balance Sheet Information for additional information.
We did not record any litigation-related net charges during the third quarter of 2021 and recorded $302 million during the first nine months of 2021, and $260 million during the third quarter and first nine months of 2020, primarily related to transvaginal mesh products, inclusive of a reserve related to claims made by a coalition of state attorneys general. These settlements were finalized in March of 2021 as described further below.
We record certain legal and product liability charges, credits and costs of defense, which we consider to be unusual or infrequent and significant as Litigation-related net charges (credits) in our accompanying unaudited consolidated financial statements. All other legal and product liability charges, credits and costs are recorded within Selling, general and administrative expenses in our accompanying unaudited consolidated statements of operations. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with our financial covenant.
In management's opinion, we are not currently involved in any legal proceedings other than those disclosed in our most recent Annual Report on Form 10-K and those specifically identified below, which, individually or in the aggregate, could have a material adverse effect on our financial condition, operations and/or cash flows. Unless included in our legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding cannot be reasonably estimated.
Patent Litigation
On October 28, 2015, the Company filed suit against Cook Group Limited and Cook Medical LLC (collectively, “Cook”) in the United States District Court for the District of Delaware (1:15-cv-00980) alleging infringement of certain Company patents regarding Cook’s Instinct™ Endoscopic Hemoclip. The case was transferred to the District Court for the Southern District of Indiana. Cook filed seven Inter Partes Review (“IPR”) requests with the U.S. Patent and Trademark Office (USPTO) against the four asserted patents. All IPRs have concluded and Cook and the Company both appealed the Patent Office’s IPR decisions to the Federal Circuit Court of Appeals. On April 30, 2020, the U.S. Court of Appeals ruled that claims from two of the Company's patents remain valid, remanding two of the patents for further review by the USPTO’s Patent Trial and Appeal Board. In November 2020, the Patent Office issued remand rulings invalidating several additional claims. The district court stayed the case pending the appeals court decision on the IPRs, which is now complete. The case is proceeding before the United States District Court for the Southern District of Indiana, with the Company asserting three patents against Cook. Trial is anticipated in February 2023.
On November 20, 2017, The Board of Regents, University of Texas System (UT) and TissueGen. Inc., served a lawsuit against us in the Western District of Texas. The complaint against us alleges patent infringement of two U.S. patents owned by UT, relating to “Drug Releasing Biodegradable Fiber Implant” and “Drug Releasing Biodegradable Fiber for Delivery of Therapeutics,” and affects the manufacture, use and sale of our Synergy™ Stent System. On March 12, 2018, the District Court for the Western District of Texas dismissed the action and transferred it to the United States District Court for the District of Delaware. On September 5, 2019, the Court of Appeals for the Federal Circuit affirmed the dismissal of the District Court for
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the Western District of Texas. In April 2020, the United States Supreme Court denied the University’s Petition for Certiorari. UT is proceeding with its case against BSC in Delaware. Trial is scheduled for November 14, 2022.
On December 9, 2016, the Company and Boston Scientific Neuromodulation Corporation filed a patent infringement action against Nevro in United States District Court for the District of Delaware (16-cv-1163) alleging that ten U.S. patents owned by Boston Scientific Neuromodulation Corporation are infringed by Nevro's Senza™ Spinal Cord Stimulation (SCS) System. At a trial held in October and November 2021 regarding six of Boston Scientific's originally asserted patent claims, a jury granted Boston Scientific a monetary award, finding that each asserted claim is valid, that four of the six claims are infringed by Nevro, and that two of the claims are willfully infringed by Nevro.
On April 21, 2018, the Company and Boston Scientific Neuromodulation Corporation filed a patent infringement, theft of trade secrets and tortious interference with a contract action against Nevro in United States District Court for the District of Delaware (18-cv-664), and amended the complaint on July 18, 2018, alleging that nine U.S. patents owned by Boston Scientific Neuromodulation Corporation are infringed by Nevro’s Senza™ I and Senza™ II SCS Systems. On December 9, 2019, Nevro filed an answer and counterclaims, in which it alleged that our SCS systems infringe five Nevro patents. No trial date has been set for the theft of trade secrets and patent counterclaims. The patent infringement claims from case 18-cv-664 were stayed pending IPRs. On January 6, 2021, the court stayed one of the patent infringement claims from case 16-cv-1163, such that it will proceed with the stayed patent infringement claims from case 18-cv-664.
Product Liability Litigation
As of October 20, 2021, approximately 54,500 product liability cases or claims related to transvaginal surgical mesh products designed to treat stress urinary incontinence and pelvic organ prolapse have been asserted against us. As of October 20, 2021, we have entered into master settlement agreements in principle or are in the final stages of entering one with certain plaintiffs' counsel to resolve an aggregate of approximately 52,500 cases and claims, adjusted to reflect the Company’s analysis of expected non-participation and duplicate claims. These master settlement agreements provide that the settlement and distribution of settlement funds to participating claimants are conditional upon, among other things, achieving minimum required claimant participation thresholds. Of the approximately 52,500 cases and claims, approximately 50,500 have met the conditions of the settlement and are final. All settlement agreements were entered into solely by way of compromise and without any admission or concession by us of any liability or wrongdoing. The pending cases are in various federal and state courts in the U.S. Generally, the plaintiffs allege personal injury associated with use of our transvaginal surgical mesh products. The plaintiffs assert design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. Over 3,100 of the cases were specially assigned to one judge in state court in Massachusetts. On February 7, 2012, the Judicial Panel on Multi-District Litigation (MDL) established MDL-2326 in the U.S. District Court for the Southern District of West Virginia and transferred the federal court transvaginal surgical mesh cases to MDL-2326 for coordinated pretrial proceedings. The Court issued an Order closing the MDL on February 11, 2021, as all cases that had been pending were dismissed or remanded to courts of primary jurisdiction. Outside the United States, there are fewer than 80 claims in the United Kingdom and Ireland. In the first quarter of 2021, two class actions were filed against the Company in Australia. In the second quarter of 2021, one class action was permanently stayed, while the other is proceeding. The registration process for the class action closed on October 29, 2021. Complete registration information is not yet available but preliminary information indicates that fewer than 300 women have completed registration forms alleging they had Boston Scientific implants. There are also fewer than 10 cases in Canada, inclusive of one certified class action, which has settled and received Court approval. On April 16, 2019, the U.S. Food and Drug Administration (FDA) ordered that all manufacturers of surgical mesh products indicated for the transvaginal repair of pelvic organ prolapse stop selling and distributing their products in the United States immediately, stemming from the FDA’s 2016 reclassification of these devices to class III (high risk) devices, and as a result, the Company ceased global sales and distribution of surgical mesh products indicated for transvaginal pelvic organ prolapse. In April 2021 the Company's Board of Directors received a shareholder demand under section 220 of the Delaware General Corporation Law, for inspection of books and records. The Company has notified our insurer and retained counsel to respond to the demand.
We have established a product liability accrual for known and estimated future cases and claims asserted against us as well as with respect to the actions that have resulted in verdicts against us and the costs of defense thereof associated with our transvaginal surgical mesh products. In the second quarter of 2021, we increased the accrual associated with this matter by $298 million to account for increased, post-COVID-19 pandemic settlement and litigation activity related to the remaining cases and claims the Company faces, our revision of the per-case settlement amount for these cases based on recent settlement and litigation activity and changes to our expectations regarding the rate of incoming cases and claims. We continue to engage in discussions with plaintiffs’ counsel regarding potential resolution of pending cases and claims. We continue to vigorously contest the cases and claims asserted against us that do not settle, and expect that more cases will go to trial through 2023. The final resolution of the cases and claims is uncertain and could have a material impact on our results of operations, financial
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condition and/or liquidity. Trials involving our transvaginal surgical mesh products have resulted in both favorable and unfavorable judgments for us. We do not believe that the judgment in any one trial is representative of potential outcomes of all cases or claims related to our transvaginal surgical mesh products.
We are currently named a defendant in 67 filed product liability cases involving our Greenfield Vena Cava Filter, which we discontinued marketing and active selling in the fourth quarter of 2018, alleging various injuries, including perforation of the vena cava, post-implant deep vein thrombosis, fracture, and other injuries. Most of the filed cases are part of a consolidated matter in Middlesex County, Massachusetts. We have received notice of an additional 377 claims, none of which have been filed. As of October 20, 2021, we have entered into master settlement agreements in principle or are in the final stages of entering with certain plaintiffs’ counsel to resolve approximately 200 cases.
Governmental Investigations and Qui Tam Matters
On December 1, 2015, the Brazilian governmental entity known as CADE (the Administrative Council of Economic Defense), served a search warrant on the offices of our Brazilian subsidiary, as well as on the Brazilian offices of several other major medical device makers who do business in Brazil, in furtherance of an investigation into alleged anti-competitive activity with respect to certain tender offers for government contracts. On June 20, 2017, CADE, through the publication of a “technical note,” announced that it was launching a formal administrative proceeding against Boston Scientific’s Brazilian subsidiary, Boston Scientific do Brasil Ltda. (BSB), as well as against the Brazilian operations of Medtronic, Biotronik and St. Jude Medical, two Brazilian associations, ABIMED and AMBIMO and 29 individuals for alleged anti-competitive behavior. In August 2021, the investigating commissioner issued a preliminary recommendation of liability against all of the involved companies, and also recommended that CADE impose fines and penalties. However, on October 25, 2021, the CADE Attorney General's office recommended dismissal of the charges and allegations against BSB and the individual BSB employees who were still individual defendants. The full Commission is considering this recommendation but has not yet issued its decision. We continue to deny the allegations, intend to defend ourselves vigorously and will appeal any decision of liability by the full Commission to the Brazilian courts. During such an appeal the decision would have no force and effect, and the Court would consider the case without being bound by CADE’s decision.
On December 21, 2017, Janssen Biotech, Inc., Janssen Oncology, Inc, Janssen Research & Development, LLC, and Johnson & Johnson (collectively, Janssen) were served with a qui tam complaint filed on behalf of the United States, 29 states, and the District of Columbia. The complaint, which was filed in the United States District Court for the Northern District of California, alleges that Janssen violated the federal False Claims Act and state law when providing pricing information for ZYTIGA to the government in connection with direct government sales and government-funded drug reimbursement programs. The case has been transferred to United States District Court for the District of New Jersey. On June 20, 2019, the complaint was amended to include BTG International Limited as a defendant. In May 2020, a class action complaint was filed in New Jersey federal court against Janssen and BTG by a direct purchaser of Zytiga on behalf of similarly situated entities. The complaint was amended in February 2021 and alleges that BTG and Janssen violated antitrust laws by attempting to enforce certain patents against potential generic competitors. On October 12, 2021, the court granted BTG and Janssen’s motion to compel arbitration in the direct purchaser action and stayed all direct purchaser proceedings. On October 27, 2021, the court granted BTG and Janssen's motion to dismiss all claims in the indirect purchaser action. A motion to dismiss the indirect purchaser and qui tam actions are pending.
Refer to Note G – Income Taxes for information regarding our tax litigation.
Matters Concluded Since December 31, 2020
On February 23, 2015, a judge for the Court of Modena (Italy) ordered a trial for Boston Scientific and three of its employees, as well as numerous other defendants charged in criminal proceedings. The charges arise from allegations that the defendants made improper donations to certain healthcare providers and other employees of the Hospital of Modena in order to induce them to conduct unauthorized clinical trials, as well as related government fraud in relation to the financing of such clinical trials. A trial began on February 24, 2016. On November 10, 2017, the Court issued a ruling that convicted one Boston Scientific employee but acquitted two others and levied a fine of €245 thousand against us and imposed joint and several civil damages of €620 thousand on all defendants. We continue to deny these allegations, and timely appealed the decision on May 10, 2018. On November 9, 2020, the Court of Appeal in Bologna reversed the judgements against Boston Scientific and its employee and acquitted them of all charges. This judgment of acquittal became final as to the Company and its employee on April 15, 2021 when the prosecution chose not to appeal.
During the fourth quarter of 2013, we received written discovery requests from certain state attorneys general regarding our transvaginal surgical mesh products and related alleged violations of states’ consumer protection statutes. On December 12,
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2019, the Mississippi Attorney General filed suit against us in a Mississippi state court alleging violations of the Mississippi Consumer Protection Act. In the fourth quarter of 2020 and the first quarter of 2021, we reached settlements with 48 states, including Mississippi, and the District of Columbia. These settlements were finalized in March of 2021.
On September 6, 2019, Boston Scientific Corporation, Boston Scientific Scimed, Inc., and Fortis Advisors, LLC, as a Securityholder Representative for the former Securityholders of nVision Medical Corp. filed a declaratory judgment action against BioCardia, Inc. in the United States District Court for the Northern District of California to address threats and allegations by BioCardia challenging inventorship and ownership of various patents that Boston Scientific Corporation acquired through an April 13, 2018 merger with nVision as well as related threats and allegations by BioCardia of trade secret misappropriation and unjust enrichment. On December 11, 2019, BioCardia filed an amended answer and counterclaims. On April 23, 2020, BioCardia filed a complaint against nVision, which had not been named as a defendant in the original case. On May 22, 2020, BioCardia amended its complaint against nVision to add twenty former nVision shareholders as defendants. On August 20, 2020, BioCardia again amended its complaint against Boston Scientific Corporation/Boston Scientific Scimed, Inc./Fortis Advisors, LLC and its complaint against nVision/nVision shareholders. On April 8, 2021, the parties settled the dispute, and, on April 12, 2021, the parties filed stipulations with the court to dismiss the remaining legal proceedings. We expect the settlement will not result in any material benefit or liability to the Company.
On May 5, 2014, we were served with a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General. The subpoena seeks information relating to the launch of the Cognis™ CRT-D and Teligen™ ICD line of devices in 2008, the performance of those devices from 2007 to 2009 and the operation of our Physician Guided Learning Program. We are cooperating with this request. On May 6, 2016, a qui tam lawsuit in this matter was unsealed in the United States District Court for the District of Minnesota. At the same time, we learned that the U.S. federal government and the State of California had earlier declined to intervene in that lawsuit on April 15, 2016. The complaint was served on us on July 21, 2016. On October 7, 2016, the plaintiff/relator served an amended complaint that dropped the allegations relating to our Physician Guided Learning Program. We filed a motion to dismiss the amended complaint on December 7, 2016 and the court heard our motion to dismiss on April 5, 2017. On August 29, 2017, the Court granted the motion to dismiss, without prejudice and on September 19, 2017, the relator filed a Second Amended Complaint. We filed a motion to dismiss the Second Amended Complaint on October 10, 2017 and the Court denied that motion on December 13, 2017. On July 31, 2018, the relator filed a motion seeking leave to file a Third Amended Complaint. The Court denied the motion on October 30, 2018. In February 2021, we filed a motion for summary judgment, which the relator opposed, and on August 13, 2021, the Court granted the motion in its entirety. Subsequently, the parties resolved the matter, effective October 4, 2021, and the matter is now concluded. The resolution did not result in any material liability to the Company.
On November 2, 2020, Koninklijke Philips N.V. and IP2IPO Innovations, Ltd. (“Philips”) served a complaint against the Company in the United States District Court for the District of Delaware. The complaint alleges that certain BSC cardiovascular diagnostic devices infringe six Philips patents. The parties have settled the dispute through a confidential settlement agreement.
NOTE I – STOCKHOLDERS' EQUITY
Preferred Stock
We are authorized to issue 50 million shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative participating, option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by our stockholders.
On May 27, 2020, we completed an offering of 10,062,500 shares of 5.50% Mandatory Convertible Preferred Stock (MCPS), Series A at a price to the public and liquidation preference of $100 per share. The net proceeds from the MCPS offering were approximately $975 million after deducting underwriting discounts and commissions and offering expenses. As of September 30, 2021, our MCPS had an aggregate liquidation preference of $1.006 billion.
Holders of MCPS will be entitled to receive, when, as and if declared by our Board of Directors, or an authorized committee thereof, out of funds legally available for payment, cumulative dividends at the annual rate of 5.50% of the liquidation preference of $100 per share, payable in cash or, subject to certain limitations, by delivery of shares of common stock or any combination of cash and shares of common stock, at our election; provided, however, that any unpaid dividends on the MCPS will continue to accumulate as described in the Certificate of Designations.
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Subject to certain exceptions, no dividend or distribution will be declared or paid on shares of our common stock, and no common stock will be purchased, redeemed or otherwise acquired for consideration by us or any of our subsidiaries unless, in each case, all accumulated and unpaid dividends for all preceding dividend periods have been declared and paid, or a sufficient amount of cash or number of shares of common stock has been set apart for the payment of such dividends, on all outstanding shares of MCPS. In the event of our voluntary or involuntary liquidation, winding-up or dissolution, no distribution of our assets may be made to holders of our common stock until we have paid holders of our MCPS, each of which will be entitled to receive a liquidation preference in the amount of $100 per share plus accumulated and unpaid dividends.
Unless earlier converted, each share of MCPS will automatically convert on June 1, 2023, subject to postponement for certain market disruption events, into between 2.3834 and 2.9197 shares of common stock, subject to customary anti-dilution adjustments. The number of shares of common stock issuable upon conversion will be determined based on the average volume-weighted average price per share of common stock over the 20 consecutive trading day period beginning on, and including, the 21st scheduled trading day immediately preceding June 1, 2023.
The MCPS is not subject to any redemption, sinking fund or other similar provisions. However, at our option, we may purchase or exchange the MCPS from time to time in the open market, by tender or exchange offer or otherwise, without the consent of, or notice to, holders of MCPS. The holders of the MCPS will not have any voting rights, with limited exceptions.
In the third quarter of 2021, the Audit Committee of our Board of Directors (the Committee), pursuant to authority delegated to such committee by our Board of Directors, declared and we paid a cash dividend of $1.375 per MCPS share to holders of our MCPS as of August 15, 2021, representing a dividend period from June through August 2021. On October 26, 2021, the Committee declared a cash dividend of $1.375 per MCPS share to holders of our MCPS as of November 15, 2021, representing a dividend period from September through November 2021. We have presented cumulative, unpaid dividends within Accrued expenses within our unaudited consolidated balance sheet as of September 30, 2021.
Refer to Note L – Stockholders' Equity to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for information on the pertinent rights and privileges of our outstanding common stock.
NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Weighted average shares outstanding — basic | 1,423.8 | 1,430.9 | 1,421.3 | 1,413.0 | |||||||||||||||||||
| Net effect of common stock equivalents | 11.8 | — | 11.7 | — | |||||||||||||||||||
| Weighted average shares outstanding - assuming dilution | 1,435.6 | 1,430.9 | 1,433.0 | 1,413.0 | |||||||||||||||||||
The following securities were excluded from the calculation of weighted average shares outstanding - assuming dilution because their effect in the periods presented below would have been anti-dilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Common stock equivalents(1) | 0 | 14 | 0 | 14 | |||||||||||||||||||
Stock options outstanding(2) | 0 | 6 | 3 | 6 | |||||||||||||||||||
MCPS(3) | 24 | 24 | 24 | 11 | |||||||||||||||||||
(1) Represents common stock equivalents pursuant to our employee stock-based compensation plans, which are anti-dilutive in the third quarter and first nine months of 2020 due to our Net loss position in those periods.
(2) Represents stock options outstanding pursuant to our employee stock-based compensation plans with exercise prices that were greater than the average fair market value of our common stock for the related periods.
(3) Represents common stock issuable upon the conversion of MCPS. Refer to Note I – Stockholders' Equity for additional information.
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We base Net income (loss) per common share - assuming dilution upon the weighted-average number of common shares and common stock equivalents outstanding during each year. Potential common stock equivalents are determined using the treasury stock method. We exclude stock options, stock awards and MCPS from the calculation if the effect would be anti-dilutive. The dilutive effect of MCPS is calculated using the if-converted method. The if-converted method assumes that these securities were converted to shares of common stock at the beginning of the reporting period to the extent that the effect is dilutive.
For the third quarter and first nine months of 2021, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of earnings per share (EPS). Accordingly, Net income was reduced by cumulative Preferred stock dividends, as presented in our accompanying unaudited consolidated statements of operations, for purposes of calculating Net income available to common stockholders.
We issued approximately three million shares of our common stock in the third quarters of 2021 and 2020 and eight million shares in the first nine months of 2021 and 2020 following the exercise of stock options, vesting of deferred stock units or purchases under our employee stock purchase plan. We did not repurchase any shares of our common stock in the first nine months of 2021 or 2020. On December 14, 2020, our Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $1.000 billion of our common stock. As of September 30, 2021, we had the full amount remaining available under the authorization.
NOTE K – SEGMENT REPORTING
Our seven core businesses are organized into three reportable segments: MedSurg, Rhythm and Neuro, and Cardiovascular, which represent an aggregation of our operating segments that generate revenues from the sale of medical devices. We measure and evaluate our reportable segments based on net sales of reportable segments, operating income of reportable segments, excluding intersegment profits, and operating income of reportable segments as a percentage of net sales of reportable segments. Operating income of reportable segments as a percentage of net sales of reportable segments is defined as operating income of reportable segments divided by net sales of reportable segments. We exclude from operating income of reportable segments certain corporate-related expenses and certain transactions or adjustments that our chief operating decision maker (CODM) considers to be non-operational, such as amounts related to amortization expense, goodwill and other intangible asset impairment charges, acquisition/divestiture-related net charges (credits), restructuring and restructuring-related net charges (credits); and certain litigation-related net charges (credits) and European Union (EU) Medical Device Regulation (MDR) implementation costs. Although we exclude these amounts from operating income of reportable segments, they are included in reported Income (loss) before income taxes in our accompanying unaudited consolidated statements of operations and are included in the reconciliation below.
A reconciliation of the totals reported for the reportable segments to the applicable line items within our accompanying unaudited consolidated statements of operations is as follows (in millions, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| MedSurg | $ | 917 | $ | 825 | $ | 2,725 | $ | 2,175 | |||||||||||||||
| Rhythm and Neuro | 819 | 757 | 2,436 | 1,985 | |||||||||||||||||||
| Cardiovascular | 1,196 | 1,002 | 3,588 | 2,862 | |||||||||||||||||||
| Total net sales of reportable segments | 2,932 | 2,584 | 8,748 | 7,021 | |||||||||||||||||||
All other (Specialty Pharmaceuticals)(1) | — | 74 | 13 | 183 | |||||||||||||||||||
| Net sales | $ | 2,932 | $ | 2,659 | $ | 8,761 | $ | 7,204 | |||||||||||||||
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| MedSurg | $ | 338 | $ | 307 | $ | 1,033 | $ | 738 | |||||||||||||||
| Rhythm and Neuro | 160 | 165 | 476 | 296 | |||||||||||||||||||
| Cardiovascular | 361 | 208 | 1,117 | 593 | |||||||||||||||||||
| Total operating income of reportable segments | 859 | 680 | 2,626 | 1,628 | |||||||||||||||||||
All other (Specialty Pharmaceuticals)(1) | — | 49 | 4 | 124 | |||||||||||||||||||
| Unallocated amounts: | |||||||||||||||||||||||
| Corporate expenses, including hedging activities | (109) | (108) | (438) | (330) | |||||||||||||||||||
| Intangible asset impairment charges, acquisition/divestiture-related net charges (credits), restructuring and restructuring-related net charges (credits), and certain litigation-related net charges (credits) and EU MDR implementation costs | (178) | (629) | (624) | (957) | |||||||||||||||||||
| Amortization expense | (184) | (197) | (549) | (595) | |||||||||||||||||||
| Operating income (loss) | 387 | (205) | 1,019 | (130) | |||||||||||||||||||
| Other expense, net | 95 | (22) | (62) | (256) | |||||||||||||||||||
| Income (loss) before income taxes | $ | 483 | $ | (227) | $ | 957 | $ | (386) | |||||||||||||||
| (1) On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business. Our consolidated net sales and income (loss) before income taxes for the first nine months of 2021 include Specialty Pharmaceuticals up to the date of the closing of the transaction. | |||||||||||||||||||||||
| Operating income margin of reportable segments | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| MedSurg | 36.8 | % | 37.2 | % | 37.9 | % | 33.9 | % | |||||||||||||||
| Rhythm and Neuro | 19.5 | % | 21.9 | % | 19.5 | % | 14.9 | % | |||||||||||||||
| Cardiovascular | 30.2 | % | 20.8 | % | 31.1 | % | 20.7 | % | |||||||||||||||
NOTE L – REVENUE
We generate revenue primarily from the sale of single-use medical devices and present revenue net of sales taxes in our accompanying unaudited consolidated statements of operations. The following tables disaggregate our revenue from contracts with customers by business and geographic region (in millions):
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Businesses | U.S. | Int'l | Total | U.S. | Int'l | Total | |||||||||||||||||||||||||||||
| Endoscopy | $ | 306 | $ | 227 | $ | 533 | $ | 270 | $ | 205 | $ | 475 | |||||||||||||||||||||||
| Urology and Pelvic Health | 275 | 109 | 384 | 251 | 99 | 350 | |||||||||||||||||||||||||||||
| Cardiac Rhythm Management | 312 | 199 | 512 | 275 | 190 | 465 | |||||||||||||||||||||||||||||
| Electrophysiology | 32 | 55 | 86 | 33 | 43 | 76 | |||||||||||||||||||||||||||||
| Neuromodulation | 175 | 46 | 221 | 176 | 41 | 216 | |||||||||||||||||||||||||||||
| Interventional Cardiology | 376 | 368 | 744 | 255 | 331 | 586 | |||||||||||||||||||||||||||||
| Peripheral Interventions | 250 | 202 | 452 | 236 | 179 | 416 | |||||||||||||||||||||||||||||
| Specialty Pharmaceuticals | — | — | — | 65 | 10 | 74 | |||||||||||||||||||||||||||||
| Net Sales | $ | 1,726 | $ | 1,206 | $ | 2,932 | $ | 1,560 | $ | 1,098 | $ | 2,659 | |||||||||||||||||||||||
On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business. Our consolidated net sales for the first nine months of 2021 include Specialty Pharmaceuticals up to the date of the closing of the transaction.
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| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Businesses | U.S. | Int'l | Total | U.S. | Int'l | Total | |||||||||||||||||||||||||||||
| Endoscopy | $ | 902 | $ | 681 | $ | 1,583 | $ | 715 | $ | 550 | $ | 1,265 | |||||||||||||||||||||||
| Urology and Pelvic Health | 817 | 325 | 1,142 | 650 | 260 | 910 | |||||||||||||||||||||||||||||
| Cardiac Rhythm Management | 903 | 603 | 1,505 | 738 | 515 | 1,253 | |||||||||||||||||||||||||||||
| Electrophysiology | 96 | 169 | 265 | 86 | 116 | 202 | |||||||||||||||||||||||||||||
| Neuromodulation | 520 | 145 | 666 | 426 | 103 | 529 | |||||||||||||||||||||||||||||
| Interventional Cardiology | 1,117 | 1,113 | 2,230 | 741 | 973 | 1,714 | |||||||||||||||||||||||||||||
| Peripheral Interventions | 748 | 609 | 1,358 | 649 | 499 | 1,148 | |||||||||||||||||||||||||||||
| Specialty Pharmaceuticals | 10 | 4 | 13 | 162 | 21 | 183 | |||||||||||||||||||||||||||||
| Net Sales | $ | 5,112 | $ | 3,649 | $ | 8,761 | $ | 4,167 | $ | 3,037 | $ | 7,204 | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Geographic Regions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| U.S. | $ | 1,726 | $ | 1,496 | $ | 5,103 | $ | 4,005 | |||||||||||||||
| EMEA (Europe, Middle East and Africa) | 590 | 540 | 1,855 | 1,507 | |||||||||||||||||||
| APAC (Asia-Pacific) | 517 | 472 | 1,511 | 1,292 | |||||||||||||||||||
| LACA (Latin America and Canada) | 99 | 77 | 279 | 217 | |||||||||||||||||||
| Medical Devices | 2,932 | 2,584 | 8,748 | 7,021 | |||||||||||||||||||
| U.S. | — | 65 | 10 | 162 | |||||||||||||||||||
| International | — | 10 | 4 | 21 | |||||||||||||||||||
| Specialty Pharmaceuticals | — | 74 | 13 | 183 | |||||||||||||||||||
| Net Sales | $ | 2,932 | $ | 2,659 | $ | 8,761 | $ | 7,204 | |||||||||||||||
Emerging Markets(1) | $ | 354 | $ | 291 | $ | 1,030 | $ | 832 | |||||||||||||||
(1) We define Emerging Markets as the 20 countries that we believe have strong growth potential based on their economic conditions, healthcare sectors and our global capabilities. Periodically, we assess our list of Emerging Markets countries, and effective January 1, 2021, modified our list to include the following countries: Brazil, Chile, China, Colombia, Czech Republic, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, Saudi Arabia, Slovakia, South Africa, South Korea, Taiwan, Thailand, Turkey and Vietnam. We have revised prior period amounts to conform to the current year's presentation which had an immaterial impact on previously reported Emerging Markets net sales.
Deferred Revenue
Contract liabilities are classified within Other current liabilities and Other long-term liabilities in our accompanying unaudited consolidated balance sheets. Our deferred revenue balance was $455 million as of September 30, 2021 and $395 million as of December 31, 2020. Our contractual liabilities are primarily composed of deferred revenue related to the LATITUDE™ Patient Management System within our Cardiac Rhythm Management (CRM) business, for which revenue is recognized over the average service period based on device and patient longevity. Our contractual liabilities also include deferred revenue related to the LUX-Dx™ Insertable Cardiac Monitor (ICM) system, also within our CRM business, for which revenue is recognized over the average service period based on device longevity and usage. We recognized revenue of $39 million in the third quarter and $113 million in the first nine months of 2021 that was included in the above contract liability balance as of December 31, 2020. We have elected not to disclose the transaction price allocated to unsatisfied performance obligations when the original expected contract duration is one year or less. In addition, we have not identified material unfulfilled performance obligations for which revenue is not currently deferred.
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Variable Consideration
We generally allow our customers to return defective, damaged and, in certain cases, expired products for credit. We base our estimate for sales returns upon historical trends and record the amount as a reduction to revenue when we sell the initial product. In addition, we may allow customers to return previously purchased products for next-generation product offerings. For these transactions, we defer recognition of revenue on the sale of the earlier generation product based upon an estimate of the amount of product to be returned when the next-generation products are shipped to the customer. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect our estimates related to sales returns and could cause actual returns to differ from these estimates.
We also offer sales rebates and discounts to certain customers. We treat sales rebates and discounts as a reduction of revenue and classify the corresponding liability as current. We estimate rebates for products where there is sufficient historical information available to predict the volume of expected future rebates. If we are unable to reasonably estimate the expected rebates, we record a liability for the maximum rebate percentage offered. We have entered certain agreements with group purchasing organizations to sell our products to participating hospitals at negotiated prices. We recognize revenue from these agreements following the same revenue recognition criteria discussed above.
NOTE M – CHANGES IN OTHER COMPREHENSIVE INCOME
The following tables provide the reclassifications out of Other comprehensive income (loss), net of tax:
Three Months Ended September 30
| (in millions) | Foreign Currency Translation Adjustments | Net Change in Derivative Financial Instruments | Net Change in Defined Benefit Pensions and Other Items | Total | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | 136 | $ | 146 | $ | (46) | $ | 237 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (47) | 61 | — | 14 | |||||||||||||||||||
| (Income) loss amounts reclassified from accumulated other comprehensive income | (2) | (11) | — | (13) | |||||||||||||||||||
| Total other comprehensive income (loss) | (49) | 50 | — | 1 | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | 88 | $ | 196 | $ | (46) | $ | 238 | |||||||||||||||
| (in millions) | Foreign Currency Translation Adjustments | Net Change in Derivative Financial Instruments | Net Change in Defined Benefit Pensions and Other Items | Total | |||||||||||||||||||
| Balance as of June 30, 2020 | $ | (46) | $ | 222 | $ | (45) | $ | 131 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 88 | (50) | — | 38 | |||||||||||||||||||
| (Income) loss amounts reclassified from accumulated other comprehensive income | (5) | (14) | — | (19) | |||||||||||||||||||
| Total other comprehensive income (loss) | 84 | (64) | — | 20 | |||||||||||||||||||
| Balance as of September 30, 2020 | $ | 38 | $ | 158 | $ | (45) | $ | 151 | |||||||||||||||
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Nine Months Ended September 30
| (in millions) | Foreign Currency Translation Adjustments | Net Change in Derivative Financial Instruments | Net Change in Defined Benefit Pensions and Other Items | Total | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | 218 | $ | 36 | $ | (47) | $ | 207 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 5 | 182 | 1 | 188 | |||||||||||||||||||
(Income) loss amounts reclassified from accumulated other comprehensive income(1) | (135) | (21) | — | (157) | |||||||||||||||||||
| Total other comprehensive income (loss) | (130) | 161 | 1 | 31 | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | 88 | $ | 196 | $ | (46) | $ | 238 | |||||||||||||||
(1) In connection with the completion of the divestiture of the Specialty Pharmaceuticals business in the first quarter of 2021, we released $127 million of cumulative translation adjustments associated with the disposed business from Accumulated other comprehensive income (loss), net of tax.
| (in millions) | Foreign Currency Translation Adjustments | Net Change in Derivative Financial Instruments | Net Change in Defined Benefit Pensions and Other Items | Total | |||||||||||||||||||
| Balance as of December 31, 2019 | $ | 142 | $ | 173 | $ | (45) | $ | 270 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (90) | 36 | — | (54) | |||||||||||||||||||
| (Income) loss amounts reclassified from accumulated other comprehensive income | (14) | (52) | — | (65) | |||||||||||||||||||
| Total other comprehensive income (loss) | (104) | (15) | — | (119) | |||||||||||||||||||
| Balance as of September 30, 2020 | $ | 38 | $ | 158 | $ | (45) | $ | 151 | |||||||||||||||
Refer to Note D – Hedging Activities and Fair Value Measurements for further detail on our net investment hedges recorded in Foreign currency translation adjustments and our cash flow hedges recorded in Net change in derivative financial instruments.
The gains and losses on defined benefit and pension items before reclassifications and gains and losses on defined benefit and pension items reclassified from Accumulated other comprehensive income (loss), net of tax were reduced by immaterial income tax impacts in the third quarter and first nine months of 2021 and 2020.
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NOTE N – NEW ACCOUNTING PRONOUNCEMENTS
Periodically, new accounting pronouncements are issued by the FASB or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, we evaluate the pronouncements to determine the potential effects of adoption on our accompanying unaudited consolidated financial statements. During the first quarter of 2021, we implemented the following standards, which did not have a material impact on our financial position and results of operations.
ASC Update No. 2020-10
In October 2020, the FASB issued ASC Update No. 2020-10, Codification Improvements. Update No. 2020-10 amends a wide variety of Topics in the Codification in order to improve the consistency of the Codification and the application thereof, while leaving Generally Accepted Accounting Principles unchanged.
ASC Update No. 2020-06
In August 2020, the FASB issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity.
ASC Update No. 2019-12
In December 2019, the FASB issued ASC Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The purpose of Update No. 2019-12 is to continue the FASB’s Simplification Initiative to reduce complexity in accounting standards. The amendments in Update No. 2019-12 simplify the accounting for income taxes by removing certain exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize or derecognize deferred tax liabilities related to equity method investments that are also foreign subsidiaries, and the methodology for calculating income taxes in an interim period. In addition to removing these exceptions, Update No. 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes.
Standards to be Implemented
ASC Update No. 2021-08
In October 2021, the FASB issued ASC Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in Update No. 2021-08 improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. Update No. 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, and we plan to adopt Update No. 2021-08 during the fourth quarter of 2021. We have the option to apply the amendments retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early adoption, or prospectively. We do not expect the adoption to have a material effect on our financial position or results of operations.
ASC Update No. 2021-05
In July 2021, the FASB issued ASC Update No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. The amendments in Update No. 2021-05 revise lessor lease classification guidance and require accounting for certain leases with variable lease payments that do not depend on a reference index or rate as operating leases. Such classification is required if the lease would have been classified as a sales-type or direct financing lease in accordance with guidance in FASB ASC Topic 842 and the lessor would have otherwise recognized a day-one loss. Update No. 2021-05 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We have the option to apply the amendments retrospectively to leases that commenced or were modified on or after the adoption of FASB ASC Topic 842, or prospectively. We do not expect the adoption to have a material impact on our financial position or results of operations.
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No other new accounting pronouncements issued or effective in the period had or are expected to have a material impact on our accompanying unaudited consolidated financial statements.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Boston Scientific Corporation is a global developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. As a medical technology leader for more than 40 years, we have advanced the practice of less-invasive medicine by helping physicians and other medical professionals diagnose and treat a wide range of diseases and medical conditions and improve patients’ quality of life by providing alternatives to surgery and other medical procedures that are typically traumatic to the body. Our net sales have increased substantially since our formation, fueled in part by strategic acquisitions designed to improve our ability to take advantage of growth opportunities in the medical device industry and to build diversified portfolios within our core businesses. We advance science for life by providing a broad range of high performance solutions to address unmet patient needs and reduce the cost of healthcare. When used in this report, the terms, "we," "us," "our," and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries.
COVID-19 Pandemic
In December 2019, the novel strain of coronavirus (SARS-Cov-2), and its disease commonly known as COVID-19 (COVID-19), was reported in China and has since widely impacted the global public health and economic environment. In March 2020, the World Health Organization (WHO) declared COVID-19, including all additional variations and strains thereof, a global pandemic (COVID-19 pandemic). While the majority of procedures using our products are deferrable, most of the conditions that we treat are generally fairly acute and cannot be deferred for extended periods. As the pandemic spread worldwide and with COVID-19 cases confirmed in all major geographies, many elective and semi-emergent procedures were postponed, enabling hospital staff to focus critical resources on caring for COVID-19 patients.
The ongoing COVID-19 pandemic and accompanying restrictions negatively impacted our net sales and our results of operations beginning in March 2020. We experienced improvement in our global sales trends beginning in the third quarter of 2020 which continued through the third quarter of 2021, as procedure volumes resumed and referral rates improved. During the third quarter of 2021, as the more contagious Delta variant strain surged globally, elective procedures were unfavorably impacted in certain regions, particularly in the U.S., while they improved in many parts of the globe as COVID-19 vaccines were increasingly made available. However, COVID-19 cases persist in many locations around the world where vaccination rates remain low and new, more contagious variant strains of COVID-19 have emerged, resulting in continued restrictions. In particular, certain countries within our Asia Pacific region, including India and Japan, as well as Latin America have been significantly impacted. These restrictions continued to negatively impact our net sales in the first nine months of 2021. The timing and success of efforts to distribute and administer COVID-19 vaccines to these locations and to broad portions of the worldwide population, enabling widespread immunity to COVID-19, will continue to have an impact on the duration and extent of the pandemic and its effect on demand for our products.
Because the severity, magnitude, and duration of the COVID-19 pandemic and its economic consequences continue to be uncertain, the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to execute our business strategies and initiatives successfully, remains uncertain and difficult to predict. Procedural delays from the further resurgence of COVID-19 infections and the emergence of new, more contagious variant strains of COVID-19, as well as labor shortages within healthcare facilities, have and may continue to negatively impact demand for our products, net sales, gross profit margin and operating expenses as a percentage of net sales. In addition, conditions created by the COVID-19 pandemic, the economic recovery that has followed in many areas and other macroeconomic factors have led to a challenging labor market in which we compete, which affects our ability to retain and attract new talent as well as put inflationary pressure on certain operational costs due to wage increases. Further, we face and may continue to face, increases in the cost and limited availability of raw materials, components and other inputs necessary to manufacture and distribute our products due to constraints within the global supply chain, as well as increases in the cost and time to distribute our products.
We continue to focus our efforts on the health and safety of patients, healthcare providers and employees, while executing our mission of transforming lives through innovative medical solutions to improve the health of patients around the world. Since the onset of the COVID-19 pandemic, our global crisis management team has focused on protecting our employees and customers, optimizing our operations and securing our supply chain. We have successfully implemented business continuity plans including establishing a medical advisory group for employees, leveraging work from home infrastructure to facilitate social distancing and accelerating capabilities to provide remote physician support. In certain locations where the COVID-19 transmission rates are low or moderate, as defined by public health experts, employees are returning to the office. We will continue to be guided by our values and mission and monitor our return-to-office strategy based on science and data for the
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health and safety of our employees. While we expect the COVID-19 pandemic will continue to negatively impact our 2021 performance to an extent, we continue to believe our long-term fundamentals remain strong and we will manage through these challenges with strategic focus and the winning spirit of our global team.
Corporate Sustainability
Our sustainable economic, environmental and social practices underpin all aspects of our global business. Our approach is aligned with the United Nations Sustainable Development Goals and our material topics and practices are informed by a broad range of internal and external stakeholders – locally, nationally and globally. Our employees around the world work with suppliers and other organizations that share our commitment to these practices that help address issues related to health inequity, economic disparity, climate change and environmental protection. These efforts are supported by our cross-functional Corporate Social Responsibility Council, our Environmental Health and Safety teams and policies, our Global Council for Inclusion, as well as local, regional and national employee and community programs. Key examples of our programs include setting measurable, transparent diversity, equity and inclusion (DE&I) goals. Our “3UP by 2023” initiative furthers our focus on increasing the representation of women and multicultural talent at the supervisor and manager level by three percentage points or more by December 31, 2022. Our DE&I progress has been recognized in 2021 when we were ranked in the Top 10 America's Best Employers for Diversity by Forbes, named on the JUST Capital Top 100 list of Companies Supporting Healthy Families and Communities and recognized as a "Best Place to Work for Disability Inclusion", achieving top marks on Disability:IN’s 2021 Disability Equality Index (DEI). We are also proactively addressing ways to minimize energy consumption, carbon emissions, waste management and water use. We are focused on a “C3” strategy: Cutting energy use, Converting to renewable energy sources and Compensating with carbon offset projects where needed. We are on track to carbon neutrality in our manufacturing and key distribution sites by 2030, and expect to fully source or generate our electricity from renewable sources by 2024.
Financial Summary
Three Months Ended September 30, 2021
Our net sales for the third quarter of 2021 were $2.932 billion, as compared to $2.659 billion for the third quarter of 2020. This increase of $274 million, or 10.3 percent, included operational net sales growth of 9.7 percent and the positive impact of 60 basis points from foreign currency fluctuations, and includes net sales from our recent acquisitions following the respective dates of acquisition.1 The increase in our net sales was primarily driven by the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had significant impact on our net sales. Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business.
Our reported net income available to common stockholders for the third quarter of 2021 was $405 million, or $0.28 per diluted share. Our reported results for the third quarter of 2021 included certain charges and/or credits totaling $176 million (after-tax), or $0.12 per diluted share. Excluding these items, adjusted net income available to common stockholders for the third quarter of 2021 was $581 million, or $0.41 per diluted share.1, 2
Our reported net loss available to common stockholders for the third quarter of 2020 was $169 million, or $(0.12) per diluted share. Our reported results for the third quarter of 2020 included certain charges and/or credits totaling $698 million (after-tax), or $0.48 per diluted share. Excluding these items, adjusted net income available to common stockholders for the third quarter of 2020 was $530 million, or $0.37 per diluted share.1
1Operational net sales growth rates, which exclude the impact of foreign currency fluctuations, and other adjusted measures, which exclude certain items required by generally accepted accounting principles in the United States (U.S. GAAP) are not prepared in accordance with U.S. GAAP and should not be considered in isolation from, or as a replacement for, the most directly comparable GAAP measure. Refer to Additional Information for a discussion of management’s use of these non-GAAP financial measures.
2In May 2020, we completed an offering of 10,062,500 shares of 5.50% Mandatory Convertible Preferred Stock, Series A (MCPS) at a price to the public and liquidation preference of $100 per share. Refer to the reconciliations below for the impact of the MCPS cumulative preferred stock dividends on our calculations of earnings per share (EPS).
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The following is a reconciliation of our results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview and Additional Information for a discussion of these reconciling items:
| Three Months Ended September 30, 2021 | ||||||||||||||||||||
| (in millions, except per share data) | Income (Loss) Before Income Taxes | Income Tax Expense (Benefit) | Net Income (Loss) | Preferred Stock Dividends | Net Income (Loss) Available to Common Stockholders | Impact per Share(3) | ||||||||||||||
| Reported | $ | 483 | $ | 64 | $ | 419 | $ | (14) | $ | 405 | $ | 0.28 | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Amortization expense | 184 | 16 | 168 | — | 168 | 0.12 | ||||||||||||||
| Intangible asset impairment charges | 128 | 19 | 109 | — | 109 | 0.08 | ||||||||||||||
| Acquisition/divestiture-related net charges (credits) | (232) | (2) | (230) | — | (230) | (0.16) | ||||||||||||||
| Restructuring and restructuring-related net charges (credits) | 44 | 5 | 39 | — | 39 | 0.03 | ||||||||||||||
| Litigation-related net charges (credits) | — | — | — | — | — | (0.00) | ||||||||||||||
| Investment portfolio net losses (gains) | 26 | 8 | 19 | — | 19 | 0.01 | ||||||||||||||
| European Union (EU) Medical device regulation (MDR) implementation costs | 13 | 1 | 12 | — | 12 | 0.01 | ||||||||||||||
| Deferred tax expenses (benefits) | — | (43) | 43 | — | 43 | 0.03 | ||||||||||||||
| Discrete tax items | — | (17) | 17 | — | 17 | 0.01 | ||||||||||||||
| Adjusted | $ | 646 | $ | 51 | $ | 595 | $ | (14) | $ | 581 | $ | 0.41 | ||||||||
(3) For the third quarter of 2021, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of EPS. Accordingly, GAAP Net income and Adjusted net income were reduced by cumulative Preferred stock dividends, as presented in our unaudited consolidated statements of operations, for purposes of calculating GAAP Net income available to common stockholders.
| Three Months Ended September 30, 2020 | ||||||||||||||||||||
| (in millions, except per share data) | Income (Loss) Before Income Taxes | Income Tax Expense (Benefit) | Net Income (Loss) | Preferred Stock Dividends | Net Income (Loss) Available to Common Stockholders | Impact per Share(4) | ||||||||||||||
| Reported | $ | (227) | $ | (72) | $ | (155) | $ | (14) | $ | (169) | $ | (0.12) | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Amortization expense | 197 | 21 | 176 | — | 176 | 0.12 | ||||||||||||||
| Intangible asset impairment charges | 219 | 30 | 189 | — | 189 | 0.13 | ||||||||||||||
| Acquisition/divestiture-related net charges (credits) | 111 | 24 | 87 | — | 87 | 0.06 | ||||||||||||||
| Restructuring and restructuring-related net charges (credits) | 23 | 3 | 21 | — | 21 | 0.01 | ||||||||||||||
| Litigation-related net charges (credits) | 260 | 5 | 255 | — | 255 | 0.18 | ||||||||||||||
| Investment portfolio net losses (gains) | (65) | (15) | (50) | — | (50) | (0.03) | ||||||||||||||
| European Union (EU) Medical device regulation (MDR) implementation costs | 8 | 1 | 7 | — | 7 | 0.00 | ||||||||||||||
| Deferred tax expenses (benefits) | — | (18) | 18 | — | 18 | 0.01 | ||||||||||||||
| Discrete tax items | — | 3 | (3) | — | (3) | (0.00) | ||||||||||||||
| Adjusted | $ | 525 | $ | (18) | $ | 543 | $ | (14) | $ | 530 | $ | 0.37 | ||||||||
(4) For the third quarter of 2020, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of EPS. Accordingly, GAAP Net loss and Adjusted net loss were reduced by cumulative Preferred stock dividends, as presented in our unaudited consolidated statements of operations, for purposes of calculating EPS. We have assumed dilution of 13.6 million common stock equivalents related to employee stock options for all or a portion of the non-GAAP adjustments, which were anti-dilutive for GAAP purposes due to our Net loss position.
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Nine Months Ended September 30, 2021
Our net sales for the first nine months of 2021 were $8.761 billion, as compared to $7.204 billion for the first nine months of 2020. This increase of $1.557 billion, or 21.6 percent, included operational net sales growth of 19.3 percent and the positive impact of 230 basis points from foreign currency fluctuations, and includes net sales from our recent acquisitions following the date of acquisition. The increase in our net sales was primarily driven by the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had significant impact on our net sales. Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business.
Our reported net income available to common stockholders for the first nine months of 2021 was $905 million, or $0.63 per diluted share. Our reported results for the first nine months of 2021 included certain charges and/or credits totaling $778 million (after-tax), or $0.54 per diluted share. Excluding these items, adjusted net income available to common stockholders for the first nine months of 2021 was $1.683 billion, or $1.17 per diluted share.
Our reported net loss available to common stockholders for the first nine months of 2020 was $311 million, or $(0.22) per diluted share. Our reported results for the first nine months of 2020 included certain charges and/or credits totaling $1.351 billion (after-tax), or $0.95 per diluted share. Excluding these items, adjusted net income available to common stockholders for the first nine months of 2020 was $1.040 billion, or $0.73 per diluted share.
The following is a reconciliation of our results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview and Additional Information for a discussion of these reconciling items:
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| (in millions, except per share data) | Income (Loss) Before Income Taxes | Income Tax Expense (Benefit) | Net Income (Loss) | Preferred Stock Dividends | Net Income (Loss) Available to Common Stockholders | Impact per Share(5) | ||||||||||||||
| Reported | $ | 957 | $ | 10 | $ | 946 | $ | (42) | $ | 905 | $ | 0.63 | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Amortization expense | 549 | 53 | 496 | — | 496 | 0.35 | ||||||||||||||
| Intangible asset impairment charges | 173 | 25 | 148 | — | 148 | 0.10 | ||||||||||||||
| Acquisition/divestiture-related net charges (credits) | (444) | 5 | (449) | — | (449) | (0.31) | ||||||||||||||
| Restructuring and restructuring-related net charges (credits) | 133 | 15 | 118 | — | 118 | 0.08 | ||||||||||||||
| Litigation-related net charges (credits) | 302 | 69 | 233 | — | 233 | 0.16 | ||||||||||||||
| Investment portfolio net losses (gains) | 178 | 43 | 136 | — | 136 | 0.09 | ||||||||||||||
| European Union (EU) Medical device regulation (MDR) implementation costs | 35 | 3 | 32 | — | 32 | 0.02 | ||||||||||||||
| Deferred tax expenses (benefits) | — | (86) | 86 | — | 86 | 0.06 | ||||||||||||||
| Discrete tax items | — | 21 | (21) | — | (21) | (0.01) | ||||||||||||||
| Adjusted | $ | 1,883 | $ | 158 | $ | 1,725 | $ | (42) | $ | 1,683 | $ | 1.17 | ||||||||
(5) For the first nine months of 2021, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of EPS. Accordingly, GAAP Net loss and Adjusted net income were reduced by cumulative Preferred stock dividends, as presented in our unaudited consolidated statements of operations, for purposes of calculating GAAP Net income available to common stockholders.
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| Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| (in millions, except per share data) | Income (Loss) Before Income Taxes | Income Tax Expense (Benefit) | Net Income (Loss) | Preferred Stock Dividends | Net Income (Loss) Available to Common Stockholders | Impact per Share(6) | ||||||||||||||
| Reported | $ | (386) | $ | (94) | $ | (292) | $ | (19) | $ | (311) | $ | (0.22) | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Amortization expense | 595 | 62 | 533 | — | 533 | 0.38 | ||||||||||||||
| Intangible asset impairment charges | 452 | 68 | 384 | — | 384 | 0.27 | ||||||||||||||
| Acquisition/divestiture-related net charges (credits) | 148 | 48 | 100 | — | 100 | 0.07 | ||||||||||||||
| Restructuring and restructuring-related net charges (credits) | 77 | 10 | 66 | — | 66 | 0.05 | ||||||||||||||
| Litigation-related net charges (credits) | 260 | 5 | 255 | — | 255 | 0.18 | ||||||||||||||
| Investment portfolio net losses (gains) | (65) | (15) | (50) | — | (50) | (0.04) | ||||||||||||||
| European Union (EU) Medical device regulation (MDR) implementation costs | 20 | 2 | 17 | — | 17 | 0.01 | ||||||||||||||
| Deferred tax expenses (benefits) | — | (26) | 26 | — | 26 | 0.02 | ||||||||||||||
| Discrete tax items | — | (20) | 20 | — | 20 | 0.01 | ||||||||||||||
| Adjusted | $ | 1,100 | $ | 41 | $ | 1,059 | $ | (19) | $ | 1,040 | $ | 0.73 | ||||||||
(6) For the first nine months of 2020, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of EPS. Accordingly, GAAP Net loss and Adjusted net income were reduced by cumulative Preferred stock dividends, as presented in our unaudited consolidated statements of operations, for purposes of calculating EPS. We have assumed dilution of 14.1 million common stock equivalents related to employee stock options for all or a portion of the non-GAAP adjustments, which were anti-dilutive for GAAP purposes due to our Net loss position.
Cash provided by operating activities was $1,392 million for the first nine months of 2021. As of September 30, 2021, we had total debt outstanding of $9.085 billion net of unamortized debt issuance discounts and deferred financing costs, Cash and cash equivalents of $1.947 billion and working capital of $2.207 billion. Refer to Liquidity and Capital Resources for further discussion.
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Quarterly Results and Business Overview
The following section describes our net sales and results of operations by reportable segment and business unit. For additional information on our businesses and product offerings, see Item 1. Business of our most recent Annual Report on Form 10-K.
| Three Months Ended September 30, | |||||||||||||||||
| (in millions) | 2021 | 2020 | Change | ||||||||||||||
Endoscopy | $ | 533 | $ | 475 | 12.1% | ||||||||||||
Urology and Pelvic Health | 384 | 350 | 9.9% | ||||||||||||||
| MedSurg | 917 | 825 | 11.2% | ||||||||||||||
Cardiac Rhythm Management | 512 | 465 | 10.1% | ||||||||||||||
Electrophysiology | 86 | 76 | 13.6% | ||||||||||||||
Neuromodulation | 221 | 216 | 2.4% | ||||||||||||||
| Rhythm and Neuro | 819 | 757 | 8.2% | ||||||||||||||
Interventional Cardiology | 744 | 586 | 26.9% | ||||||||||||||
Peripheral Interventions | 452 | 416 | 8.8% | ||||||||||||||
| Cardiovascular | 1,196 | 1,002 | 19.4% | ||||||||||||||
| Medical Devices | 2,932 | 2,584 | 13.5% | ||||||||||||||
Specialty Pharmaceuticals(7) | — | 74 | (100.0)% | ||||||||||||||
| Net Sales | $ | 2,932 | $ | 2,659 | 10.3% | ||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||
| (in millions) | 2021 | 2020 | Change | ||||||||||||||
Endoscopy | $ | 1,583 | $ | 1,265 | 25.1% | ||||||||||||
Urology and Pelvic Health | 1,142 | 910 | 25.5% | ||||||||||||||
| MedSurg | 2,725 | 2,175 | 25.3% | ||||||||||||||
Cardiac Rhythm Management | 1,505 | 1,253 | 20.1% | ||||||||||||||
Electrophysiology | 265 | 202 | 31.4% | ||||||||||||||
Neuromodulation | 666 | 529 | 25.7% | ||||||||||||||
| Rhythm and Neuro | 2,436 | 1,985 | 22.7% | ||||||||||||||
Interventional Cardiology | 2,230 | 1,714 | 30.1% | ||||||||||||||
Peripheral Interventions | 1,358 | 1,148 | 18.3% | ||||||||||||||
| Cardiovascular | 3,588 | 2,862 | 25.4% | ||||||||||||||
| Medical Devices | 8,748 | 7,021 | 24.6% | ||||||||||||||
Specialty Pharmaceuticals(7) | 13 | 183 | (92.7)% | ||||||||||||||
| Net Sales | $ | 8,761 | $ | 7,204 | 21.6% | ||||||||||||
(7) On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business. Our consolidated net sales include Specialty Pharmaceuticals up to the date of the closing of the transaction.
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MedSurg
Endoscopy
Our Endoscopy business develops and manufactures devices to diagnose and treat a broad range of gastrointestinal (GI) and pulmonary conditions with innovative, less-invasive technologies. Our net sales of Endoscopy products were $533 million for the third quarter of 2021 and $1.583 billion for the first nine months of 2021 and represented 18 percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our Endoscopy net sales increased $57 million, or 12.1 percent, in the third quarter of 2021 and increased $318 million, or 25.1 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 11.4 percent and a positive impact of 60 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 22.6 percent and a positive impact of 250 basis points from foreign currency fluctuations, compared to the prior year period.
Operational net sales growth in the third quarter and first nine months of 2021 was primarily driven by our biliary, single-use imaging, hemostasis and infection prevention franchises due to the recovery of elective and semi-emergent procedure volumes compared to the prior year, particularly in the first half, when the COVID-19 pandemic had a significant negative impact on our net sales.
Urology and Pelvic Health
Our Urology and Pelvic Health business develops and manufactures devices to treat various urological and pelvic conditions for both male and female anatomies. Our net sales of Urology and Pelvic Health products were $384 million for the third quarter of 2021 and $1.142 billion for the first nine months of 2021, representing 13 percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our Urology and Pelvic Health net sales increased $35 million, or 9.9 percent, in the third quarter of 2021 and increased $232 million, or 25.5 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 9.4 percent and a positive impact of 50 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 23.7 percent and a positive impact of 180 basis points from foreign currency fluctuations, compared to the prior year period.
Operational net sales growth included organic net sales growth of 6.6 percent in the third quarter of 2021 and 23.6 percent in the first nine months of 2021, and the positive impact of 280 basis points in the third quarter of 2021 and 20 basis points in the first nine months of 2021 due to our Lumenis, LTD. (Lumenis) acquisition and the divestiture of the Intrauterine Health business in the second quarter of 2020. In the third quarter of 2021, we completed the acquisition of the global surgical business of Lumenis, a privately held company that develops and commercializes energy-based medical solutions, including innovative laser systems, fibers and accessories used for urology and otolaryngology procedures. Organic net sales growth was driven by our stone management and prostate health franchises and, during the first nine months of 2021, our prosthetic urology franchise due to the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a significant negative impact on our net sales.
Rhythm and Neuro
Cardiac Rhythm Management
Our Cardiac Rhythm Management (CRM) business develops and manufactures a variety of implantable devices that monitor the heart and deliver electricity to treat cardiac abnormalities. Our net sales of CRM products were $512 million for the third quarter of 2021 and $1.505 billion for the first nine months of 2021, representing 17 percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our CRM net sales increased $47 million, or 10.1 percent, in the third quarter of 2021 and increased $252 million, or 20.1 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 9.6 percent and a positive impact of 50 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 17.7 percent and a positive impact of 240 basis points from foreign currency fluctuations, compared to the prior year period.
Operational net sales growth included organic net sales declines of (0.3) percent in the third quarter of 2021 and growth of 8.8 percent for the first nine months of 2021, and the positive impact of 990 basis points in the third quarter of 2021 and 890 basis points for the first nine months of 2021 from the acquisition of Preventice Solutions, adding to our CRM business a full
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portfolio of mobile cardiac health solutions and services, ranging from ambulatory cardiac monitors, to cardiac event monitors and mobile cardiac telemetry. During the third quarter of 2021, organic sales performance was driven by a decline in net sales from our defibrillator franchise partially offset by growth in our pacemaker franchise and cardiac diagnostics franchise, led by our LUX-Dx™ Insertable Cardiac Monitor (ICM) system. For the first nine months of 2021, organic net sales growth was attributable to our defibrillator and pacemaker franchises, due to the recovery of semi-emergent and emergent procedure volumes compared to the prior year, particularly in the first half, when the COVID-19 pandemic had a significant negative impact on our net sales, as well as our cardiac diagnostics franchise, led by our ICM system.
Electrophysiology
Our Electrophysiology business develops and manufactures less-invasive medical technologies used in the diagnosis and treatment of rate and rhythm disorders of the heart. Our net sales of Electrophysiology products were $86 million for the third quarter of 2021 and $265 million for the first nine months of 2021, representing three percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our Electrophysiology net sales increased $10 million, or 13.6 percent, in the third quarter of 2021 and increased $63 million, or 31.4 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 13.2 percent and a positive impact of 40 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 27.8 percent and a positive impact of 350 basis points from foreign currency fluctuations, compared to the prior year period.
Operational net sales growth was driven primarily by the recovery of elective procedure volumes compared to the prior year, particularly in the first half, when the COVID-19 pandemic had a significant negative impact on our net sales, as well as the success of our ongoing POLARx™ Cryoablation System and Stablepoint Force-Sensing Catheter international launches.
Neuromodulation
Our Neuromodulation business develops and manufactures devices to treat various neurological movement disorders and manage chronic pain. Our net sales of Neuromodulation products were $221 million for the third quarter of 2021 and $666 million for the first nine months of 2021, representing eight percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our Neuromodulation net sales increased $5 million, or 2.4 percent, in the third quarter of 2021 and increased $136 million, or 25.7 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 2.1 percent and a positive impact of 30 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 24.1 percent and a positive impact of 160 basis points from foreign currency fluctuations, compared to the prior year period.
Operational net sales growth was primarily driven by our spinal cord stimulation (SCS) systems, led by our next generation WaveWriter Alpha™ SCS System. During the first nine months of 2021, growth was driven by sales of both our SCS systems and our deep brain stimulation (DBS) systems, including our Vercise Genus™ DBS System, due to the recovery of elective procedure volumes in the first half of 2021 compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales. During the third quarter of 2021, procedure volumes continued to be negatively impacted by the COVID-19 pandemic due to their elective nature.
Cardiovascular
Interventional Cardiology
Our Interventional Cardiology business develops and manufactures technologies for diagnosing and treating coronary artery disease and structural heart conditions. Our net sales of Interventional Cardiology products were $744 million for the third quarter of 2021 and $2.230 billion for the first nine months of 2021, representing 25 percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our Interventional Cardiology net sales increased $158 million, or 26.9 percent, in the third quarter of 2021 and increased $516 million, or 30.1 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 26.0 percent and a positive impact of 90 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 27.4 percent and a positive impact of 270 basis points from foreign currency fluctuations, compared to the prior year period.
In the third quarter and first nine months of 2021, operational net sales growth was driven by our WATCHMAN FLX™ Left Atrial Appendage Closure Device, our percutaneous coronary intervention guidance (PCIG) franchise and our drug-eluting
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stent (DES) systems due to the recovery of procedure volumes compared to the prior year, particularly in the first half, when the COVID-19 pandemic had a significant negative impact on our net sales. In addition, growth was positively impacted by reserves recorded in the third quarter of 2020 primarily related to our conversion to a consignment inventory model for our LAAC franchise with the launch of our WATCHMAN FLX™ Device in the U.S. These increases were partially offset by the discontinuation of our LOTUS Edge™ Aortic Valve System in the fourth quarter of 2020, general price declines associated with our DES systems and the unfavorable impact of China tender pricing on both DES systems and balloon catheter net sales following a reduction in prices in the first quarter of 2021.
Peripheral Interventions
Our Peripheral Interventions business develops and manufactures products to diagnose and treat peripheral arterial and venous diseases, as well as products to diagnose, treat and ease various forms of cancer. Our net sales of Peripheral Interventions products were $452 million for the third quarter of 2021 and $1.358 billion for the first nine months of 2021, representing 15 percent of our consolidated net sales in both the third quarter and first nine months of 2021. Our Peripheral Interventions net sales increased $36 million, or 8.8 percent, in the third quarter of 2021 and increased $210 million, or 18.3 percent, in the first nine months of 2021, compared to the prior year periods. In the third quarter of 2021, this increase included operational net sales growth of 8.1 percent and a positive impact of 70 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, this increase included operational net sales growth of 16.1 percent and a positive impact of 220 basis points from foreign currency fluctuations, compared to the prior year period.
Operational net sales growth was primarily driven by the Interventional Oncology franchise, including our TheraSphere™ Y-90 Radioactive Glass Microspheres, which received U.S. Food and Drug Administration approval in the first quarter of 2021 after 20 years as a humanitarian device exemption (HDE). In addition, growth was driven by our drug-eluting portfolio, including the Eluvia™ Drug-Eluting Stent and Ranger™ Drug-Coated Balloon due to the recovery of procedure volumes compared to the prior year, particularly in the first half, when the COVID-19 pandemic had a significant negative impact on our net sales, as well as continued worldwide commercial execution and adoption in recently approved countries. In the first quarter of 2021, we received approval from Japan’s Ministry of Health, Labor and Welfare (MHLW) for our Ranger Drug-Coated Balloon and initiated a full launch.
Specialty Pharmaceuticals
On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business for a purchase price of approximately $800 million. Our consolidated net sales include Specialty Pharmaceuticals up to the date of the closing of the transaction.
Emerging Markets
As part of our strategic imperative to drive global expansion, we are seeking to grow net sales and market share by expanding our global presence, including in Emerging Markets. We define Emerging Markets as the 20 countries that we believe have strong growth potential based on their economic conditions, healthcare sectors and our global capabilities. Periodically, we assess our list of Emerging Markets countries, and effective January 1, 2021, modified our list to include the following countries: Brazil, Chile, China, Colombia, Czech Republic, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, Saudi Arabia, Slovakia, South Africa, South Korea, Taiwan, Thailand, Turkey and Vietnam. We have revised prior period amounts to conform to the current year's presentation which had an immaterial impact on previously reported Emerging Markets net sales. Our Emerging Markets net sales represented 12 percent of our consolidated net sales in both the third quarter and first nine months of 2021, 11 percent in the third quarter of 2020, and 12 percent in the first nine months of 2020. In the third quarter of 2021, our Emerging Markets net sales grew 21.9 percent on a reported basis, which included operational net sales growth of 17.8 percent and a positive impact of 410 basis points from foreign currency fluctuations, compared to the prior year period. In the first nine months of 2021, our Emerging Markets net sales grew 23.8 percent on a reported basis, which included operational net sales growth of 18.9 percent and a positive impact of 490 basis points from foreign currency fluctuations, compared to the prior year period. The growth in the third quarter and first nine months of 2021 compared to the prior year periods was driven primarily by our net sales in China, which have largely recovered from the impact of the COVID-19 pandemic on procedural volumes.
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Gross Profit
Our Gross profit was $2.032 billion for the third quarter of 2021, $1.790 billion for the third quarter of 2020, $6.022 billion for the first nine months of 2021 and $4.740 billion for the first nine months of 2020. As a percentage of net sales, our Gross profit increased to 69.3 percent in the third quarter of 2021, as compared to 67.3 percent in the third quarter of 2020 and 68.7 percent in the first nine months of 2021, as compared to 65.8 percent in the first nine months of 2020. The following is a reconciliation of our gross profit margin and a description of the drivers of the changes from period to period:
| Percentage of Net Sales | |||||||||||
| Three Months | Nine Months | ||||||||||
| Gross profit margin - period ended September 30, 2020 | 67.3% | 65.8% | |||||||||
Abnormal production variances | 0.5 | 1.4 | |||||||||
| Sales pricing, volume and mix | 0.4 | 1.3 | |||||||||
| Inventory charges | 0.9 | 0.4 | |||||||||
| All other, including other expenses | 0.2 | (0.1) | |||||||||
| Gross profit margin - period ended September 30, 2021 | 69.3% | 68.7% | |||||||||
The primary factors contributing to the increase in our gross profit margin in the third quarter and first nine months of 2021, as compared to the same periods in 2020, were higher sales volumes and favorable product mix associated with the resumption of procedures using higher-margin products, as well as the prior year impact of abnormal production variances attributable to manufacturing plant shut-downs and excess and obsolete inventory charges due to lower forecasted demand for certain of our products driven by the COVID-19 pandemic in the prior year. These improvements were partially offset by price declines related primarily to sales of our coronary drug-eluting stent systems and foreign currency fluctuations. In addition, inflation has put pressure on our gross profit margin, particularly with increases in costs of certain raw materials, direct labor and freight.
Operating Expenses
The following table provides a summary of certain of our operating expenses:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| (in millions) | $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | |||||||||||||||||||||||||||
| Selling, general and administrative (SG&A) expenses | $ | 1,066 | 36.4 | % | $ | 984 | 37.0 | % | $ | 3,206 | 36.6 | % | $ | 2,760 | 38.3 | % | |||||||||||||||||||
| Research and development (R&D) expenses | 310 | 10.6 | % | 315 | 11.9 | % | 884 | 10.1 | % | 857 | 11.9 | % | |||||||||||||||||||||||
| Royalty expense | 14 | 0.5 | % | 12 | 0.4 | % | 38 | 0.4 | % | 32 | 0.4 | % | |||||||||||||||||||||||
SG&A Expenses
In the third quarter of 2021, our SG&A expenses increased $83 million, or 8 percent, as compared to the third quarter of 2020 and were 60 basis points lower as a percentage of net sales. In the first nine months of 2021, our SG&A expenses increased $445 million, or 16 percent, as compared to the first nine months of 2020 and were 170 basis points lower as a percentage of net sales. The increase in SG&A expenses for the third quarter and first nine months of 2021, as compared to the same period in the prior year, was primarily due to higher selling costs driven by higher global net sales and the targeted lifting of spending controls implemented during the first nine months of 2020 in response to the escalating COVID-19 pandemic. In addition, SG&A expenses in the first nine months of 2021 were further impacted by higher restructuring-related spend and acquisition-related charges.
R&D Expenses
We remain committed to advancing medical technologies and investing in meaningful R&D projects across our businesses. In the third quarter of 2021, our R&D expenses decreased $5 million, or 2 percent, as compared to the third quarter of 2020 and were 130 basis points lower as a percentage of net sales due to higher one-time charges in the prior year. In the first nine months of 2021, our R&D expenses increased $27 million, or 3 percent, as compared to the first nine months of 2020, and were
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180 basis points lower as a percentage of net sales. R&D expenses increased in the first nine months of 2021, as compared to the same period in the prior year, as a result of investments across our businesses in order to maintain a pipeline of new products that we believe will contribute to profitable sales growth.
Royalty Expense
In the third quarter of 2021, our Royalty expense increased $2 million, or 17 percent as compared to the third quarter of 2020 and remained relatively flat as a percentage of net sales. In the first nine months of 2021, our Royalty expense increased $6 million, or 19 percent, as compared to the first nine months of 2020, and remained flat as a percentage of net sales, primarily due to global net sales growth in the third quarter and first nine months of 2021 as compared to the third quarter and first nine months of 2020.
Other Operating Expenses
The following table provides a summary of certain of our other operating expenses, which are excluded by management for purposes of evaluating operating performance, refer to Additional Information for a further description of certain operating expenses:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Amortization expense | $ | 184 | $ | 197 | $ | 549 | $ | 595 | |||||||||||||||
| Intangible asset impairment charges | 128 | 219 | 173 | 452 | |||||||||||||||||||
| Contingent consideration net expense (benefit) | (26) | 6 | (117) | (102) | |||||||||||||||||||
| Restructuring charges (credits) | 9 | 3 | 18 | 16 | |||||||||||||||||||
| Litigation-related net charges (credits) | — | 260 | 302 | 260 | |||||||||||||||||||
| Gain on disposal of businesses and assets | (40) | — | (48) | — | |||||||||||||||||||
Amortization Expense
In the third quarter of 2021, our Amortization expense decreased $13 million, or 7 percent, as compared to third quarter of 2020. In the first nine months of 2021, our Amortization expense decreased $47 million, or 8 percent, as compared to first nine months of 2020. The decrease in Amortization expense in the third quarter and first nine months of 2021, as compared to the same period in the prior year, was driven by the divestiture of the Specialty Pharmaceuticals business partially offset by the addition of amortizable intangible assets associated with our recent acquisitions.
Intangible Asset Impairment Charges
We recorded Intangible asset impairment charges of $128 million in the third quarter of 2021, $219 million in the third quarter of 2020, $173 million in the first nine months of 2021 and $452 million in the first nine months of 2020. The impairment charges recorded in the third quarter of 2021 were primarily associated with amortizable technology-related intangible assets that were initially established following our acquisition of VENITI, Inc., and in the first nine months of 2021 also included the partial impairment of one of our acquired IPR&D assets. In the third quarter of 2020, impairment charges were primarily associated with IPR&D acquired with Apama Medical, Inc. and in the first nine months of 2020 also included charges primarily associated with amortizable technology-related intangible assets that were initially established following our acquisition of nVision Medical Corporation. Each of these charges were recorded as a result of management’s decision to change commercial launch plans or discontinue certain commercial or R&D programs based on cost to complete or remediate, time to market, overall economic viability or, specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology. Refer to Note C – Goodwill and Other Intangible Assets to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and Critical Accounting Estimates in Item 7 of our most recent Annual Report on Form 10-K for additional details and a discussion of key assumptions used in our goodwill and intangible asset impairment testing and future events that could have a negative impact on the recoverability of our goodwill and intangible assets.
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Contingent Consideration Net Expense (Benefit)
To recognize changes in the fair value of our contingent consideration liability, we recorded net benefits of $26 million and $117 million in the third quarter and first nine months of 2021, respectively, a net expense of $6 million in the third quarter of 2020 and a net benefit of $102 million in the first nine months of 2020. The net benefits recorded in the first nine months of 2021 and 2020 related to a reduction in the contingent consideration liability for certain prior acquisitions for which we reduced the probability of achievement of associated revenue and/or regulatory milestones upon which payment is conditioned, or, in the case of nVision, for milestones that would not be achieved due to management's discontinuation of the R&D program. In addition, we made payments of $14 million associated with prior acquisitions during the first nine months of 2021, following the achievement of a revenue-based milestone. Refer to Note B – Acquisitions, Divestitures and Strategic Investments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for additional details related to our contingent consideration arrangements.
Restructuring Charges (Credits)
In November 2018, our Board of Directors approved, and we committed to, a new global restructuring program (the 2019 Restructuring Plan). The 2019 Restructuring Plan, for which our Board of Directors approved an extension and expansion in February 2021, is expected to result in total pre-tax charges of approximately $375 million to $475 million and approximately $340 million to $440 million of these charges are expected to result in cash outlays. We expect the majority of activity associated with our 2019 Restructuring Plan, including the extension, to be substantially complete by the end of 2022. A substantial portion of the savings are being reinvested in strategic growth initiatives. Pursuant to this program, restructuring charges were $9 million in the third quarter of 2021, $3 million in the third quarter of 2020, $15 million in the first nine months of 2021 and $16 million in the first nine months of 2020. Restructuring-related charges were $34 million in the third quarter of 2021, $20 million in the third quarter of 2020, $98 million in the first nine months of 2021 and $61 million in the first nine months of 2020 and were recorded primarily in Cost of products sold and SG&A expenses.
In addition, on November 17, 2020, we announced a global, voluntary recall of all unused inventory of our LOTUS Edge™ Aortic Valve System, and our decision to retire the entire LOTUS™ Valve platform. We recorded immaterial restructuring and restructuring-related charges associated with the product discontinuation in the third quarter of 2021 and recorded $2 million of restructuring charges and $17 million of restructuring-related charges associated with the product discontinuation in the first nine months of 2021. The product discontinuation resulted in total pre-tax restructuring and restructuring-related net charges of approximately $80 million. We substantially completed the restructuring activities in the first quarter of 2021. Refer to Note H – Restructuring-related Activities to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.
Litigation-related net charges (credits)
We did not record any litigation-related net charges during the third quarter of 2021 and recorded $302 million during the first nine months of 2021, related primarily to transvaginal surgical mesh products. During the first nine months of 2021 we increased the accrual associated with this matter to account for increased, post-COVID-19 pandemic settlement and litigation activity related to the remaining cases and claims the Company faces, our revision of the per-case settlement amount for these cases based on recent settlement and litigation activity and changes to our expectations regarding the rate of incoming cases and claims. We recorded litigation-related net charges of $260 million during the third quarter and first nine months of 2020, primarily related to transvaginal mesh products, inclusive of a reserve related to claims made by a coalition of state attorneys general. We record certain legal and product liability charges, credits and costs of defense, which we consider to be unusual or infrequent and significant as Litigation-related net charges (credits) in our accompanying unaudited consolidated financial statements. All other legal and product liability charges, credits and costs are recorded within SG&A expenses.
We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation, and therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with the financial covenant required by our credit arrangements. Refer to Note H – Commitments and Contingencies to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for discussion of our material legal proceedings.
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Interest Expense
The following table provides a summary of our Interest expense and average borrowing rate:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Interest expense (in millions) | $ | (86) | $ | (86) | $ | (254) | $ | (265) | |||||||||||||||
| Average borrowing rate | 3.6 | % | 3.4 | % | 3.6 | % | 3.4 | % | |||||||||||||||
Interest expense and our average borrowing rate remained relatively flat in the third quarter and first nine months of 2021, as compared to the same periods in the prior year. During the first nine months of 2020, we took proactive steps to manage the potential impact of the COVID-19 pandemic on our short-term liquidity and refinanced existing term loans and outstanding commercial paper with proceeds from new term loans and our 2018 Revolving Credit Facility. We refinanced this short-term, variable-rate debt in May 2020 with our issuances of $500 million 1.900% senior notes due June 2025 and $1.200 billion 2.650% senior notes due June 2030. During the third quarter of 2020, we prepaid the remaining $250 million outstanding under our February 2021 Term Loan and terminated the facility. Refer to Liquidity and Capital Resources and Note E – Contractual Obligations and Commitments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for information regarding our debt obligations.
Other, net
The following are the components of Other, net:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Interest income | $ | 1 | $ | 1 | $ | 3 | $ | 3 | |||||||||||||||
| Net foreign currency gain (loss) | (8) | (1) | (17) | (13) | |||||||||||||||||||
| Net gains (losses) on investments | 186 | 48 | 208 | 14 | |||||||||||||||||||
| Other income (expense), net | 3 | 16 | (3) | 6 | |||||||||||||||||||
| $ | 181 | $ | 64 | $ | 192 | $ | 9 | ||||||||||||||||
In the third quarter and first nine months of 2021, in connection with the acquisitions of Farapulse and Preventice, we remeasured the fair value of our previously-held interests in the acquired companies, which resulted in a $222 million and $195 million gain, respectively, recognized within Other, net. In addition, in the third quarter and first nine months of 2021, we recorded losses of $24 million and $178 million, respectively, on our investment in Pulmonx Corporation presented in Other, net associated with the remeasurement of our investment during the period to fair value based on observable market prices, as well as the disposition of our remaining ownership. The Preventice and Farapulse gains are included within Acquisition/divestiture-related net charges (credits) and the Pulmonx loss is included in Investment portfolio net losses (gains) presented in the reconciliation of our results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Financial Summary for the reconciliation and Additional Information for a discussion of management's use of non-GAAP financial measures.
Tax Rates
Our effective tax rate from continuing operations is presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Effective tax rate from continuing operations | 13.2 | % | 31.7 | % | 1.1 | % | 24.3 | % | |||||||||||||||
The change in our reported tax rates for the third quarter and first nine months of 2021, as compared to the same periods in 2020, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate. These receipts and charges include litigation-related net charges (credits), intangible asset impairment charges, acquisition/
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divestiture-related net charges as well as certain discrete tax items primarily related to an IRS audit settlement in the third quarter of 2020.
Economic stimulus legislation has been enacted in many countries in response to the COVID-19 pandemic. In the U.S., the CARES Act, enacted on March 27, 2020, provided an estimated $2.2 trillion in COVID-19 pandemic-related relief, and included tax relief and government loans, subsidies and other relief for entities in affected industries. While we have not applied for government loans, we have taken advantage of the benefits offered in multiple jurisdictions, including the U.S. provision allowing taxpayers to defer payment of the employer portion of certain payroll taxes incurred in 2020. This allowed us to preserve cash generated from operations to service our debt obligations and other near-term commitments and is expected to be paid in full by the end of 2022 as permitted by the legislation.
Critical Accounting Policies and Estimates
Our financial results are affected by the selection and application of accounting policies and methods. In the first nine months of 2021, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.
Liquidity and Capital Resources
Due to the uncertainty of the impact of the COVID-19 pandemic on our business, we took proactive steps in 2020 to reduce costs and ensure we are in a strong position to support customers and patients as healthcare systems recover and elective and semi-emergent procedures resume. These actions included taking steps to manage outstanding borrowings and increase available liquidity, and preemptively amending our financial covenant requirement for our outstanding credit arrangements.
Based on our current business plan, we believe our existing balance of Cash and cash equivalents, future cash generated from operations, access to capital markets and existing credit facilities will be sufficient to fund our operations, invest in our infrastructure, pay our legal-related liabilities, pay taxes due, service and repay our existing debt and fund possible acquisitions for at least the next 12 months. We expect to fund the previously announced definitive agreements to acquire Devoro Medical, Inc. and Baylis Medical Company, Inc. using cash on hand on the closing date of the transactions, expected in the fourth quarter of 2021 and the first quarter of 2022, respectively. Please refer to Contractual Obligations and Commitments below for additional details on our future payment obligations and commitments.
As of September 30, 2021, we had $1.947 billion of unrestricted Cash and cash equivalents on hand, comprised of $1.537 billion invested in money market funds and time deposits and $410 million in interest bearing and non-interest-bearing bank accounts. We invest excess cash on hand in short-term financial instruments that earn at market interest rates while mitigating principal risk through instrument and counterparty diversification, as well as what we believe to be prudent instrument selection. We limit our direct exposure to securities in any one industry or issuer. As of September 30, 2021, we had no commercial paper debt outstanding, resulting in an additional $2.750 billion of available liquidity.
For additional details related to our debt obligations, including our financial covenant requirement, refer to Note E – Contractual Obligations and Commitments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.
The following provides a summary and description of our net cash inflows (outflows):
| Nine Months Ended September 30, | |||||||||||
| (in millions) | 2021 | 2020 | |||||||||
| Cash provided by (used for) operating activities | $ | 1,392 | $ | 835 | |||||||
| Cash provided by (used for) investing activities | (1,136) | (264) | |||||||||
| Cash provided by (used for) financing activities | (87) | 1,112 | |||||||||
Operating Activities
In the first nine months of 2021, cash provided by operating activities increased $557 million as compared to the first nine months of 2020, primarily due to comparatively higher net sales and operating income compared to the same period in the prior year.
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Investing Activities
In the first nine months of 2021, cash provided by investing activities included proceeds of $801 million from the divestiture of the Specialty Pharmaceuticals business and $329 million from the sale of investments and disposition of certain assets, partially offset by a net cash payment of $2.014 billion for the acquisitions of Preventice, Lumenis and Farapulse. For more information, refer to Note B – Acquisitions, Divestitures and Strategic Investments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. In addition, we made purchases of property, plant and equipment of $288 million in the first nine months of 2021 and $217 million in the first nine months of 2020.
Financing Activities
In the first nine months of 2021, cash used for financing activities primarily included cash payments associated with the settlement of employee equity awards, dividends paid to shareholders of our mandatory convertible preferred stock and payments for royalty rights associated with the Zytiga™ Drug. On May 10, 2021 we entered into a new $2.750 billion revolving credit facility (2021 Revolving Credit Facility) with a global syndicate of commercial banks and terminated our previous facility (2018 Revolving Credit Facility). The 2021 Revolving Credit Facility will mature on May 10, 2026, with one-year extension options, subject to certain conditions. We have not made any borrowings against the 2021 Revolving Credit Facility.
In the first nine months of 2020, we took proactive steps to manage the potential impact of the emerging COVID-19 pandemic on our short-term liquidity and refinanced our existing term loans and outstanding commercial paper with proceeds from new term loans, borrowings against our 2018 Revolving Credit Facility, a senior notes offering and public equity offerings of preferred and common stock.
Please refer to Note F – Contractual Obligations and Commitments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information regarding financing activities for the year ended December 31, 2020, including the full repayment of amounts borrowed against our credit facility and partial repayment of amounts borrowed under term loans in the first nine months of 2020.
Financial Covenant
As of and through September 30, 2021, we were in compliance with the financial covenant required by the credit facilities.
The 2021 Revolving Credit Facility includes the following financial covenant requirement for all of our credit arrangements (i) maintain the maximum permitted leverage ratio of 4.00 times for the third quarter of 2021, with a step-down to 3.75 times for the fourth quarter of 2021 and through the remaining term. The agreement provides for higher leverage ratios for the period following a qualified acquisition, at our election, for which consideration exceeds $1.000 billion. In the event of such an acquisition, for the four succeeding quarters immediately following, including the quarter in which the acquisition occurs, the maximum permitted leverage ratio is 4.75 times. The maximum permitted ratio steps down for the fifth, sixth and seventh succeeding quarters to 4.50 times, 4.25 times and 4.00 times, respectively. Thereafter, a maximum leverage ratio of 3.75 times is required through the remaining term of the 2021 Revolving Credit Facility. We have not elected to increase the maximum permitted leverage ratio for the recently completed acquisition of Lumenis due to the funding of the acquisition using cash on hand. We believe that we have the ability to comply with the financial covenant for the next 12 months.
The financial covenant requirement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreement, through maturity, of any non-cash charges and up to $500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of September 30, 2021, we had $428 million of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the agreements, are excluded from the calculation of consolidated EBITDA, as defined by the agreements, provided that the sum of any excluded net cash litigation payments do not exceed $1.455 billion in the aggregate. As of September 30, 2021, we had $1.243 billion of the litigation exclusion remaining.
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Contractual Obligations and Commitments
Certain of our acquisitions involve the payment of contingent consideration. See Note B – Acquisitions, Divestitures and Strategic Investments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for further details regarding the estimated potential amount of future contingent consideration we could be required to pay associated with our acquisitions. There have been no other material changes to our contractual obligations and commitments as reported in our most recent Annual Report filed on Form 10-K.
Equity
On May 27, 2020, we completed an offering of 10,062,500 shares of 5.50% Mandatory Convertible Preferred Stock, Series A (MCPS) at a price to the public and liquidation preference of $100 per share. The net proceeds from the MCPS offering were approximately $975 million after deducting underwriting discounts and commissions and offering expenses. On May 27, 2020, we also completed an offering of 29,382,500 shares of common stock at a public offering price of $34.25 per share. The net proceeds from the common stock offering were approximately $975 million after deducting underwriting discounts and commissions and offering expenses.
We received $102 million in the first nine months of 2021 and $107 million in the first nine months of 2020 in proceeds from stock issuances related to our stock option and employee stock purchase plans. Proceeds from the exercise of employee stock options and employee stock purchases vary from period to period based upon, among other factors, fluctuations in the trading price of our common stock and in the exercise and stock purchase patterns of our employees.
We did not repurchase any shares of our common stock in the first nine months of 2021 or 2020. On December 14, 2020, our Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $1.000 billion of our common stock. As of September 30, 2021, we had the full amount remaining available under the authorization.
Legal Matters
For a discussion of our material legal proceedings see Note H – Commitments and Contingencies to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and Note K – Commitments and Contingencies to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K.
Recent Accounting Pronouncements
Information regarding new accounting pronouncements implemented since December 31, 2020 is included in Note A – Basis of Presentation and information regarding new accounting pronouncements to be implemented is included in Note N – New Accounting Pronouncements to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.
Additional Information
Cybersecurity
We have established controls and procedures to escalate enterprise level issues, including cybersecurity matters, to the appropriate management levels within our organization and our Board of Directors, or members or committees thereof, as appropriate. Under our framework, cybersecurity issues are analyzed by subject matter experts and a crisis committee for potential financial, operational, and reputational risks, based on, among other factors, the nature of the matter and breadth of impact. Matters determined to present potential material impacts to the Company’s financial results, operations, and/or reputation are immediately reported by management to the Board of Directors, or individual members or committees thereof, as appropriate, in accordance with our escalation framework. In addition, we have established procedures to ensure that management responsible for overseeing the effectiveness of disclosure controls is informed in a timely manner of known cybersecurity risks and incidents that may materially impact our operations and that timely public disclosure is made as appropriate.
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Stock Trading Policy
Our directors and executive officers are subject to our Stock Trading Policy, which is designed to facilitate compliance with insider trading laws and governs transactions in our common stock and related derivative securities. Our policy designates certain regular periods, dictated by release of financial results, in which trading is restricted for individuals in information-sensitive positions, including directors and executive officers. In addition, additional periods of trading restriction may be imposed as determined by the President, General Counsel, or Chief Financial Officer in light of material pending developments. Further, during permitted windows, individuals in information-sensitive positions are required to seek pre-clearance for trades from the General Counsel, who assesses whether there are any important pending developments, including cybersecurity matters, which need to be made public before the individual may participate in the market.
Periodically, certain of our executive officers adopt written stock trading plans in accordance with Rule 10b5-1 under the Exchange Act and our own Stock Trading Policy. A Rule 10b5-1 Trading Plan is a written document that pre-establishes the amount, prices and dates (or formulas for determining the amounts, prices and dates) of future purchases or sales of our stock, including shares issued upon exercise of stock options or vesting of deferred stock units. These plans are entered into at a time when the person is not in possession of material non-public information about the Company. We disclose details regarding individual Rule 10b5-1 Trading Plans on the Investor Relations section of our website.
Use of Non-GAAP Financial Measures
To supplement our unaudited consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP financial measures, including adjusted net income (loss), adjusted net income (loss) available to common stockholders and adjusted net income (loss) per share (EPS) that exclude certain amounts; operational net sales, which exclude the impact of foreign currency fluctuations; and organic net sales, which exclude the impact of foreign currency fluctuations as well as the impact of certain acquisitions and divestitures with less than a full period of comparable net sales. These non-GAAP financial measures are not in accordance with generally accepted accounting principles in the United States and should not be considered in isolation from or as a replacement for the most directly comparable GAAP financial measures. Further, other companies may calculate these non-GAAP financial measures differently than we do, which may limit the usefulness of those measures for comparative purposes.
To calculate adjusted net income (loss), adjusted net income (loss) available to common stockholders and adjusted net income (loss) per share we exclude certain charges (credits) from GAAP net income (loss) and GAAP net income (loss) available to common stockholders. Amounts are presented after-tax using our effective tax rate, unless the amount is a significant unusual or infrequently occurring item in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) section 740-270-30, "General Methodology and Use of Estimated Annual Effective Tax Rate." Please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our most recent Annual Report filed on Form 10-K filed with the Securities and Exchange Commission (SEC) for an explanation of each of these adjustments and the reasons for excluding each item.
The GAAP financial measures most directly comparable to adjusted net income (loss), adjusted net income (loss) available to common stockholders and adjusted net income (loss) per share are GAAP net income (loss), GAAP net income (loss) available to common stockholders and GAAP net income (loss) per common share - assuming dilution, respectively.
To calculate operational net sales growth rates, which exclude the impact of foreign currency fluctuations, we convert actual net sales from local currency to U.S. dollars using constant foreign currency exchange rates in the current and prior periods. To calculate organic net sales growth rates, we also remove the impact of acquisitions and divestitures with less than a full period of comparable net sales. The GAAP financial measure most directly comparable to operational net sales and organic net sales is net sales on a GAAP basis.
Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP financial measure are included in the relevant sections of this Quarterly Report.
Management uses these supplemental non-GAAP financial measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors and to establish operational goals and forecasts that are used in allocating resources. In addition, management uses these non-GAAP financial measures to further its understanding of the performance of our operating segments. The adjustments excluded from our non-GAAP financial measures are consistent with those excluded from our operating segments’ measures of net sales and profit or loss. These adjustments are excluded from the segment measures reported to our chief operating decision maker that are used to make operating decisions and assess performance.
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We believe that presenting adjusted net income (loss), adjusted net income (loss) available to common stockholders, adjusted net income (loss) per share, operational net sales and organic net sales growth rates, in addition to the corresponding GAAP financial measures, provides investors greater transparency to the information used by management for its operational decision-making and allows investors to see our results “through the eyes” of management. We further believe that providing this information assists our investors in understanding our operating performance and the methodology used by management to evaluate and measure such performance.
Safe Harbor for Forward-Looking Statements
Certain statements that we may make from time to time, including statements contained in this Quarterly Report on Form 10-Q and information incorporated by reference herein, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by words like “anticipate,” “expect,” “project,” “believe,” “plan,” “estimate,” “intend,” “aim” and similar words. These forward-looking statements are based on our beliefs, assumptions and estimates using information available to us at the time and are not intended to be guarantees of future events or performance. If our underlying assumptions turn out to be incorrect, or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our forward-looking statements.
The forward-looking statements in this Quarterly Report on Form 10-Q are based on certain risks and uncertainties, including the risk factors described in Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and the specific risk factors discussed herein and in connection with forward-looking statements throughout this Quarterly Report on Form 10-Q, which could cause actual results to vary materially from the expectations and projections expressed or implied by our forward-looking statements. These risks and uncertainties, in some cases, have affected and in the future could affect our ability to implement our business strategy and may cause actual results to differ materially from those contemplated by the statements expressed in this Quarterly Report. As a result, readers are cautioned not to place undue reliance on any of our forward-looking statements. Risks and uncertainties that may cause such differences include, among other things: the impact of the ongoing COVID-19 pandemic on our operations and financial results; future U.S. and global economic, political, competitive, reimbursement and regulatory conditions; manufacturing, distribution and supply chain disruptions and cost increases; labor shortages and increases in labor costs; new product introductions and the market acceptance of those products; markets for our products; expected pricing environment; expected procedural volumes; the closing and integration of acquisitions; clinical trial results; demographic trends; intellectual property rights; litigation; financial market conditions; the execution and effect of our restructuring program; the execution and effect of our business strategy, including our cost-savings and growth initiatives; and future business decisions made by us and our competitors. New risks and uncertainties may arise from time to time and are difficult to predict, including those that have emerged or have increased in significance or likelihood as a result of the COVID-19 pandemic. All of these factors are difficult or impossible to predict accurately and many of them are beyond our control. For a further list and description of these and other important risks and uncertainties that may affect our future operations, see Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K filed with the SEC, which we may update in Part II, Item 1A. Risk Factors in subsequent Quarterly Reports on Form 10-Q that we will file hereafter, and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. We disclaim any intention or obligation to publicly update or revise any forward-looking statement to reflect any change in our expectations or in events, conditions, or circumstances on which those expectations may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this Quarterly Report.
The following are some of the important risk factors that could cause our actual results to differ materially from our expectations in any forward-looking statements. For further discussion of these and other risk factors, see Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.
Our Businesses
•The impact of the COVID-19 pandemic on the worldwide economy and financial markets, and developments related to the disease, including the time it will take for vaccines to be broadly produced, distributed and administered worldwide, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and variants thereof and mitigating the economic effects of the pandemic,
•The impact of the COVID-19 pandemic upon the scheduling of elective and semi-emergent procedures,
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•The impact of the COVID-19 pandemic on our global manufacturing and distribution system, including the quality of our products, availability and cost of raw materials and direct labor,
•Our ability to recover from the impact of the COVID-19 pandemic on our business and increase net sales, expand the markets in which we participate, capture market share and adapt to market volatility,
•The impact of natural disasters, climate change, additional future public health crises and other catastrophic events on our ability to manufacture, distribute and sell our products,
•Competitive offerings and related declines in average selling prices for our products,
•The ongoing impact on our business of physician alignment to hospitals, governmental investigations and audits of hospitals and other market and economic conditions on the overall number of procedures performed,
•The performance of, and physician and patient confidence in, our products and technologies or those of our competitors,
•The impact and outcome of ongoing and future clinical trials and market studies undertaken by us, our competitors or other third parties or perceived product performance of our or our competitors' products,
•Variations in clinical results, reliability or product performance of our and our competitors' products,
•Our ability to acquire or develop, launch and supply new or next-generation products and technologies worldwide and in line with our commercialization strategies in a timely and successful manner and with respect to our recent acquisitions,
•The effect of consolidation and competition in the markets in which we do business or plan to do business,
•Disruption in the manufacture or supply of certain components, materials or products, or the failure to secure in a timely manner alternative manufacturing or additional or replacement components, materials or products,
•Our ability to achieve our projected level or mix of product sales, as some of our products are more profitable than others,
•Our ability to attract and retain key personnel, including those associated with recent acquisitions, and maintain our robust corporate culture, especially in light of the remote working conditions imposed by the COVID-19 pandemic, and execute plans to return employees to offices in jurisdictions where safe and feasible,
•The inability of certain of our employees to return to work full time due to impacts of the COVID-19 pandemic, or our inability to recruit personnel into direct labor roles for the duration of the pandemic,
•The impact of enhanced requirements to obtain regulatory approval in the U.S. and around the world, including EU MDR and the associated timing and cost of product approval,
•The impact of increased pressure on the availability and rate of third-party reimbursement for our products and procedures in the U.S. and around the world, including with respect to the timing and costs of creating and expanding markets for new products and technologies,
•The issuance of new or revised accounting standards by the Financial Accounting Standards Board or the Securities and Exchange Commission, and
•The impact of potential goodwill and intangible asset impairment charges on our results of operations.
Regulatory Compliance, Litigation and Data Protection
•The impact of healthcare policy changes and legislative or regulatory efforts in the U.S., the EU and around the world to modify product approval or reimbursement processes, including a trend toward demonstrating clinical outcomes, comparative effectiveness and cost efficiency, as well as the impact of other healthcare reform legislation,
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•Risks associated with our regulatory compliance and quality systems and activities in the U.S., the EU and around the world, including meeting regulatory standards applicable to manufacturing and quality processes,
•The effect of legal, regulatory or market responses to global climate change,
•Our ability to minimize or avoid future field actions or FDA warning letters relating to our products and processes and the ongoing inherent risk of potential physician advisories related to our or our competitors' products,
•The impact of increased scrutiny of and heightened global regulatory enforcement facing the medical device industry arising from political and regulatory changes, economic pressures or otherwise, including under U.S. Anti-Kickback Statute, U.S. False Claims Act and similar laws in other jurisdictions, U.S. Foreign Corrupt Practices Act (FCPA) and similar laws in other jurisdictions, and U.S. and foreign export control, trade embargo and customs laws,
•Costs and risks associated with current and future asserted litigation,
•The effect of our litigation and risk management practices, including self-insurance and compliance activities on our loss contingencies, legal provision and cash flows,
•The impact of, diversion of management attention as a result of, and costs to cooperate with, litigate and/or resolve governmental investigations and our class action, product liability, contract and other legal proceedings,
•The possibility of failure to protect our intellectual property rights and the outcome of patent litigation,
•Our ability to operate properly our information systems that support our business operations and protect our data integrity and products from a cyber-attack or other breach that has a material adverse effect on our business, reputation or results of operations, and
•The potential impact to internal control over financial reporting relating to potential restrictions to access to consigned inventory at customer locations for our inventory count procedures.
Innovation and Certain Growth Initiatives
•The timing, size and nature of our strategic growth initiatives and market opportunities, including with respect to our internal research and development platforms and externally available research and development platforms and technologies and the ultimate cost and success of those initiatives and opportunities,
•Our ability to complete planned clinical trials successfully, obtain regulatory approvals and launch new and next generation products in a timely manner consistent with cost estimates, including the successful completion of projects from in-process research and development,
•Our ability to identify and prioritize our internal research and development project portfolio and our external investment portfolio on profitable net sales growth opportunities as well as to maintain the estimated timing and costs of such projects and expected revenue levels for the resulting products and technologies,
•Our ability to develop, manufacture and market new products and technologies successfully and in a timely manner and the ability of our competitors and other third parties to develop products or technologies that render our products or technologies noncompetitive or obsolete,
•Our ability to execute appropriate decisions to discontinue, write-down or reduce the funding of any of our research and development projects, including projects from in-process research and development from our acquisitions, in our growth adjacencies or otherwise,
•Our dependence on acquisitions, alliances or investments to introduce new products or technologies and to enter new or adjacent growth markets and our ability to fund them or to fund contingent payments with respect to those acquisitions, alliances and investments, and
•The potential failure to successfully integrate and realize the expected benefits, including cost synergies, from the strategic acquisitions, alliances and investments we have consummated or may consummate in the future.
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International Markets
•Our dependency on international net sales to achieve growth, including in emerging markets,
•The timing and collectability of customer payments, as well as our ability to continue factoring customer receivables where we have factoring arrangements,
•The impact on pricing due to national tenders,
•Geopolitical and economic conditions, including civil unrest, terrorist activity, governmental changes, restrictions on the ability to transfer capital across borders, tariffs and other protectionist measures,
•The impact of the United Kingdom’s departure from the European Union,
•Protection of our intellectual property,
•Our ability to comply with established and developing U.S. and foreign legal and regulatory requirements, including FCPA, EU MDR and similar laws in other jurisdictions,
•Our ability to comply with U.S. and foreign export control, trade embargo and customs laws,
•The impact of changes in reimbursement practices and policies,
•The impact of significant developments or uncertainties stemming from changes in the U.S. administration following the 2020 presidential and congressional elections, including changes in U.S. trade policies, tariffs and the reaction of other countries thereto, particularly China,
•Our ability to maintain or expand our worldwide market positions in the various markets in which we compete or seek to compete, including through investments in product diversification and emerging markets such as Brazil, Russia, India and China,
•Our ability to execute and realize anticipated benefits from our investments in emerging markets, and
•The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses and resulting margins.
Liquidity
•Our ability to generate sufficient cash flow to fund operations, capital expenditures, global expansion initiatives, any litigation settlements and judgments, share repurchases and strategic investments and acquisitions as well as maintaining our investment grade ratings and managing our debt levels and financial covenant compliance, particularly in light of the COVID-19 pandemic and lower demand for our products,
•Our ability to access the public and private capital markets when desired and to issue debt or equity securities on terms reasonably acceptable to us,
•The unfavorable resolution of open tax matters, exposure to additional tax liabilities and the impact of changes in U.S. and international tax laws,
•The unfavorable resolution of open litigation matters, exposure to additional loss contingencies and legal provisions,
•The impact of examinations and assessments by domestic and international taxing authorities on our tax provision, financial condition or results of operations,
•The possibility of counterparty default on our derivative financial instruments, and
•Our ability to collect outstanding and future receivables and/or sell receivables under our factoring programs.
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Cost Reduction and Optimization Initiatives
•Risks associated with changes made or expected to be made to our organizational and operational structure, pursuant to our restructuring plans as well as any further restructuring or optimization plans we may undertake in the future and our ability to recognize benefits and cost reductions from such programs and
•Business disruption and employee distraction as we execute our global compliance program, restructuring and optimization plans and divestitures of assets or businesses and implement our other strategic and cost reduction initiatives.
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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop, manufacture and sell medical devices globally and our earnings and cash flows are exposed to market risk from changes in currency exchange rates and interest rates. We address these risks through a risk management program that includes the use of derivative financial instruments. We operate the program pursuant to documented corporate risk management policies. We do not enter derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset losses and gains on underlying hedged exposures. Furthermore, we manage our exposure to counterparty risk on derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
Our currency risk consists primarily of foreign currency denominated firm commitments, forecasted foreign currency denominated intercompany and third-party transactions and net investments in certain subsidiaries. We use both nonderivative (primarily European manufacturing operations) and derivative instruments to manage our earnings and cash flow exposure to changes in currency exchange rates. We had currency derivative instruments outstanding in the contract amount of $9.675 billion as of September 30, 2021 and $10.481 billion as of December 31, 2020. A ten percent appreciation in the U.S. dollar’s value relative to the hedged currencies would increase the derivative instruments’ fair value by $333 million as of September 30, 2021 as compared to $333 million as of December 31, 2020. A ten percent depreciation in the U.S. dollar’s value relative to the hedged currencies would decrease the derivative instruments’ fair value by $408 million as of September 30, 2021 as compared to $407 million as of December 31, 2020. Any increase or decrease in the fair value of our currency exchange rate sensitive derivative instruments would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying asset, liability or forecasted transaction, resulting in minimal impacts on our unaudited consolidated statements of operations.
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. We had no interest rate derivative instruments outstanding as of September 30, 2021 and December 31, 2020. As of September 30, 2021, $9.143 billion in aggregate principal amount of our outstanding debt obligations were at fixed interest rates, representing approximately 100 percent of our total debt, on an amortized cost basis. As of September 30, 2021, our outstanding debt obligations at fixed interest rates were comprised of senior notes.
Refer to Note D – Hedging Activities and Fair Value Measurements to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for further information regarding our derivative financial instruments.
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ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Disclosure controls and procedures are designed to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such material information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation, our CEO and CFO concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting in the third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Further, while many of our employees continued to work remotely to adhere to COVID-19 social distancing requirements, this did not affect our ability to maintain financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. Prior to the COVID-19 pandemic, we were leveraging electronic tools to facilitate our global close process and to connect our physically dispersed team of finance professionals in offices around the world. While the quarterly close cycle was performed remotely, fundamentally, the work performed, and the processes and controls executed did not change.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note G – Income Taxes and Note H – Commitments and Contingencies to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to other information contained elsewhere in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our most recent Annual Report filed on Form 10-K, which could materially affect our business, financial condition or future results.
ITEM 6. EXHIBITS (* documents filed or furnished with this report,)
| 4.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101). | |||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 4, 2021.
BOSTON SCIENTIFIC CORPORATION | |||||||||||
| By: | /s/ Daniel J. Brennan | ||||||||||
| Name: | Daniel J. Brennan | ||||||||||
| Title: | Executive Vice President and Chief Financial Officer | ||||||||||
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