Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31,
(in millions, except per share data)	2020		2019		2018

Net sales	$	9,913	$	10,735	$	9,823
Cost of products sold	3,465		3,116		2,813
Gross profit	6,448		7,620		7,011

Operating expenses:
Selling, general and administrative expenses	3,787		3,941		3,569
Research and development expenses	1,143		1,174		1,113
Royalty expense	45		65		70
Amortization expense	789		699		599
Goodwill impairment charges	73		—		—
Intangible asset impairment charges	460		105		35
Contingent consideration net expense (benefit)	(100)		(35)		(21)
Restructuring net charges (credits)	52		38		36
Litigation-related net charges (credits)	278		115		103

	6,528		6,102		5,504
Operating income (loss)	(80)		1,518		1,506

Other income (expense):
Interest expense	(361)		(473)		(241)
Other, net	362		(358)		156
Income (loss) before income taxes	(79)		687		1,422
Income tax (benefit) expense	2		(4,013)		(249)
Net income (loss)	(82)		4,700		1,671
Preferred stock dividends	(33)		—		—
Net income (loss) available to common stockholders	$	(115)	$	4,700	$	1,671

Net income (loss) per common share — basic	$	(0.08)	$	3.38	$	1.21
Net income (loss) per common share — assuming dilution	$	(0.08)	$	3.33	$	1.19

Weighted-average shares outstanding
Basic	1,416.7		1,391.5		1,381.0
Assuming dilution	1,416.7		1,410.6		1,401.4

See notes to the consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Year Ended December 31,
(in millions)	2020		2019		2018
Net income (loss)	$	(82)	$	4,700	$	1,671
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	76		195		(21)
Net change in derivative financial instruments	(137)		62		110

Net change in defined benefit pensions and other items	(1)		(20)		2
Total other comprehensive income (loss)	(63)		237		91
Total comprehensive income (loss)	$	(145)	$	4,937	$	1,761

See notes to the consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	As of December 31,
(in millions, except share and per share data)	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,734	$	217
Trade accounts receivable, net	1,531		1,828
Inventories	1,351		1,579
Prepaid income taxes	194		195
Assets held for sale	1,133		—
Other current assets	751		880
Total current assets	6,694		4,699
Property, plant and equipment, net	2,084		2,079
Goodwill	9,951		10,176
Other intangible assets, net	5,917		7,886
Deferred tax assets	4,210		4,196
Other long-term assets	1,921		1,529
TOTAL ASSETS	$	30,777	$	30,565

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current debt obligations	$	13	$	1,416
Accounts payable	513		542
Accrued expenses	2,197		2,109
Other current liabilities	958		800
Total current liabilities	3,681		4,866
Long-term debt	9,130		8,592
Deferred tax liabilities	330		595
Other long-term liabilities	2,309		2,635

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value - authorized 50,000,000 shares - issued 10,062,500 shares as of December 31, 2020 and none as of December 31, 2019	—		—
Common stock, $0.01 par value - authorized 2,000,000,000 shares; issued 1,679,911,918 shares as of December 31, 2020 and 1,642,488,911 shares as of December 31, 2019	17		16
Treasury stock, at cost - 263,289,848 shares as of December 31, 2020 and 247,566,270 shares as of December 31, 2019	(2,251)		(1,717)
Additional paid-in capital	19,732		17,561
Accumulated deficit	(2,378)		(2,253)
Accumulated other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	218		142
Unrealized gain (loss) on derivative financial instruments	36		173

Unrealized costs associated with defined benefit pensions and other items	(47)		(45)
Total stockholders’ equity	15,326		13,877
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	30,777	$	30,565

See notes to the consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


							Treasury Stock		Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss), Net of Tax
	Preferred Stock			Common Stock
(in millions, except share data)	Shares Issued	Par Value		Shares Issued	Par Value









As of December 31, 2017	—	$	—	1,621,062,898	$	16	$	(1,717)	$	17,161	$	(8,390)	$	(59)
Net income (loss)											1,671
Cumulative effect adjustments for ASC Update Adoptions(1)											(233)
Changes in other comprehensive income (loss), net of tax:
Foreign currency translation adjustment													(21)
Derivative financial instruments													110
Defined benefit pensions and other items													2
Impact of stock-based compensation plans, net of tax				11,085,132			—		185

As of December 31, 2018	—	$	—	1,632,148,030	$	16	$	(1,717)	$	17,346	$	(6,953)	$	33
Net income (loss)											4,700

Changes in other comprehensive income (loss), net of tax:
Foreign currency translation adjustment													195
Derivative financial instruments													62

Defined benefit pensions and other items													(20)
Impact of stock-based compensation plans, net of tax				10,340,881					215
As of December 31, 2019	—	$	—	1,642,488,911	$	16	$	(1,717)	$	17,561	$	(2,253)	$	270
Net income (loss)											(82)
Cumulative effect adjustments for adoption of ASC 2016-13											(10)
Changes in other comprehensive income (loss), net of tax:
Foreign currency translation adjustment													76
Derivative financial instruments													(137)
Defined benefit pensions and other items													(1)
Preferred stock issuance	10,062,500	—							975
Common stock issuance				29,382,500	—				975
Preferred stock dividends											(33)
Repurchase of common stock							(535)
Impact of stock-based compensation plans, net of tax				8,040,507					221
As of December 31, 2020	10,062,500	$	—	1,679,911,918	$	17	$	(2,251)	$	19,732	$	(2,378)	$	207

(1) In 2018, we recorded cumulative effect adjustments to retained earnings to reflect the adoption of Accounting Standards Codification (ASC) Update No. 2014-09, Update No. 2016-16 and Update No. 2016-01. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.

See notes to the consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
(in millions)	2020		2019		2018

Net income (loss)	$	(82)	$	4,700	$	1,671
Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities
Gain on sale of businesses	—		(8)		—

Depreciation and amortization	1,123		1,011		894
Deferred and prepaid income taxes	(82)		(4,301)		(87)
Stock-based compensation expense	170		157		140

Goodwill and other intangible asset impairment charges	533		105		35
Net loss (gain) on investments and notes receivable	(398)		30		(155)
Contingent consideration net expense (benefit)	(100)		(35)		(21)

Inventory step-up amortization	58		46		6
Foreign exchange (gain) loss	32		358		(11)
Other, net	213		63		8
Increase (decrease) in operating assets and liabilities, excluding purchase accounting:
Trade accounts receivable	335		(130)		(110)
Inventories	(65)		(290)		(83)
Other assets	(200)		45		(172)
Accounts payable and accrued expenses	88		105		(640)
Other liabilities	(116)		(18)		(1,164)
Cash provided by (used for) operating activities	1,508		1,836		310

Purchases of property, plant and equipment	(376)		(461)		(316)
Proceeds on disposals of property, plant and equipment	12		7		14
Payments for acquisitions of businesses, net of cash acquired	(3)		(4,382)		(1,448)
Proceeds from divestiture of certain businesses	15		90		—
Proceeds from royalty rights	87		52		—
Payments for settlements of hedge contracts	—		(199)		—
Payments for investments and acquisitions of certain technologies	(146)		(149)		(172)

Cash provided by (used for) investing activities	(411)		(5,041)		(1,921)

Payment of contingent consideration previously established in purchase accounting	(49)		(66)		(19)
Payments for royalty rights	(97)		(69)		—
Proceeds from royalty rights transfer	—		256		—
Payments on short-term borrowings	(2,950)		(1,000)		—
Proceeds from short-term borrowings, net of debt issuance costs	2,245		700		999
Net increase (decrease) in commercial paper	(714)		(575)		21
Payments on borrowings from credit facilities	(1,919)		—		(569)
Proceeds from borrowings on credit facilities	1,916		—		569
Payments on long-term borrowings and debt extinguishment costs	(1,260)		(3,560)		(602)
Proceeds from long-term borrowings, net of debt issuance costs	1,683		7,229		987
Cash dividends paid on preferred stock	(28)		—		—
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		—		—
Payments for repurchase of common stock	(535)		—		—
Cash used to net share settle employee equity awards	(59)		(65)		(56)
Proceeds from issuances of shares of common stock pursuant to employee stock compensation and purchase plans	111		123		101
Cash provided by (used for) financing activities	293		2,973		1,432
Effect of foreign exchange rates on cash	(2)		10		(8)
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents	1,388		(222)		(188)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	607		829		1,017
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	1,995	$	607	$	829

See notes to the consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (SUPPLEMENTAL INFORMATION)


	Year Ended December 31,
(in millions)	2020		2019		2018
Supplemental Information
Cash (received) paid for income taxes, net	$	207	$	242	$	1,037
Cash paid for interest	359		449		262
Fair value of contingent consideration recorded in purchase accounting	—		127		248
Non-cash impact of transferred royalty rights	(87)		—		—


	As of December 31,
Reconciliation to amounts within the consolidated balance sheets:	2020		2019		2018
Cash and cash equivalents	$	1,734	$	217	$	146
Restricted cash and restricted cash equivalents included in Other current assets	208		346		655
Restricted cash equivalents included in Other long-term assets	52		43		27
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	1,995	$	607	$	829

See notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Our consolidated financial statements include the accounts of Boston Scientific Corporation and our wholly-owned subsidiaries, after the elimination of intercompany transactions. When used in this report, the terms "we," "us," "our" and "the Company" mean Boston Scientific Corporation and its divisions and subsidiaries. We assess the terms of our investment interests to determine if any of our investees meet the definition of a variable interest entity (VIE). For any VIEs, we perform an analysis to determine whether our variable interests give us a controlling financial interest. The analysis identifies the primary beneficiary of a VIE as the enterprise that has both 1) the power to direct activities of a VIE that most significantly impact the entity’s economic performance and 2) the obligation to absorb losses of the entity or the right to receive benefits from the entity. Based on our assessments under the applicable guidance, we did not have controlling financial interests in any VIEs and, therefore, did not consolidate any VIEs during 2020, 2019 or 2018.

Basis of Presentation

The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-K and Regulation S-X.

Amounts reported in millions within this report are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in dollars.

Subsequent Events

We evaluate events occurring after the date of our accompanying consolidated balance sheets for potential recognition or disclosure in our consolidated 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 and Strategic Investments, Note H – Restructuring-related Activities, Note K – Commitments and Contingencies and Note L – Stockholders' Equity for further details.

Accounting Estimates

To prepare our consolidated financial statements in accordance with U.S. GAAP, management makes estimates and assumptions that may affect the reported amounts of our assets and liabilities, the disclosure of contingent liabilities as of the date of our consolidated financial statements and the reported amounts of our revenues and expenses during the reporting period. Our actual results may differ from these estimates. Refer to Critical Accounting Estimates included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report for further discussion.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash and Cash Equivalents

We record Cash and cash equivalents in our consolidated balance sheets at cost, which approximates fair value. Our policy is to invest excess cash in short-term marketable securities earning a market rate of interest without assuming undue risk of loss of principal amounts invested and we limit our direct exposure to securities in any one industry or issuer. We consider to be cash equivalents all short-term marketable securities with remaining days to maturity of 90 days or less from the purchase date that can be readily converted to cash.

Restricted Cash

Amounts included in restricted cash represent cash on hand required to be set aside by a contractual agreement related to receivable factoring arrangements and deferred compensation plans and are included in the Other current assets caption within our consolidated balance sheets. Generally, the restrictions related to the factoring arrangements lapse at the time we remit the

customer payments collected by us for servicing previously sold customer receivables to the purchaser. Restrictions for deferred compensation lapse when amounts are paid to the employee.

Restricted Cash Equivalents

Restricted cash equivalents primarily represent amounts paid into various qualified settlement funds related to our ongoing transvaginal surgical mesh litigation and current amounts related to our non-qualified pension plan and are included in the Other current assets caption within our consolidated balance sheets. The restrictions related to the various qualified settlement funds will lapse as we approve amounts payable to claimants, at which time we no longer have rights to a return of the amounts paid into the various qualified settlement funds. Restricted cash equivalents included in the Other long-term assets caption within our consolidated balance sheets are related to deferred compensation plans.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, derivative financial instruments and accounts and notes receivable. Our investment policy limits exposure to concentrations of credit risk and changes in market conditions. Counterparties to financial instruments expose us to credit-related losses in the event of nonperformance. We transact our financial instruments with a diversified group of major financial institutions with investment grade credit ratings and actively monitor their credit ratings and our outstanding positions to limit our credit exposure. In the normal course, our payment terms with customers, including hospitals, healthcare agencies, clinics, doctors' offices and other private and governmental institutions, are typically 30 days in the U.S. but may be longer in international markets and generally do not require collateral.

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 write-off amounts determined to be uncollectible against this reserve. Write-offs of uncollectible accounts receivable were immaterial in 2020, 2019 and 2018. We are not dependent on any single institution, and no single customer accounted for more than ten percent of our net sales in 2020, 2019 and 2018; however, large group purchasing organizations, hospital networks, international distributors and dealers and other buying groups have become increasingly important to our business and represent a substantial portion of our net sales.

We closely monitor outstanding receivables for potential collection risks, including those that may arise from economic conditions, in both the U.S. and international economies. 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, the COVID-19 pandemic has accelerated an ongoing site-of-service trend of shifting procedure volumes toward non-hospital settings, particularly ambulatory surgery centers, driven by considerations surrounding costs, reimbursement policies, advances in minimally invasive treatments and remote patient monitoring. We have seen an increase in the volume of our U.S. business conducted in ambulatory surgery centers. Many of these customers are smaller than those we have historically done business with and may have limited liquidity. While certain ambulatory surgery centers are performing an increasing number of procedures in response to the COVID-19 pandemic, others have been negatively impacted by COVID-19 restrictions and mitigation measures. We have adjusted our estimates of credit loss reserves for these customers, regions and conditions, as appropriate. We believe our Allowance for credit losses is adequate as of December 31, 2020 and 2019; however, if significant changes were to occur in the payment practices of government customers, or if there is an increase in bankruptcies among our ambulatory surgery center customers, we may not be able to collect on receivables due to us from these customers, and our write-offs of uncollectible accounts may increase.

Revenue Recognition

We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors or dealers. We consider revenue to be earned when all of the following criteria are met in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers:

We have a contract with a customer that creates enforceable rights and obligations,
Promised products or services are identified,
The transaction price, or the amount we expect to receive, is determinable and
We have transferred control of the promised items to the customer.

Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to provide additional services. We treat shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost and record these costs as a selling expense when incurred. We recognize revenue from consignment arrangements based on product usage, or implant, which indicates that the sale is complete. We recognize a receivable at the point in time we have an unconditional right to payment. Payment terms are typically 30 days in the U.S. but may be longer in international markets.

Deferred Revenue

We record a contract liability, or deferred revenue, when we have an obligation to provide a product or service to the customer and payment is received or due in advance of our performance. When we sell a device with a future service obligation, we defer revenue on the unfulfilled performance obligation and recognize this revenue over the related service period. Many of our Cardiac Rhythm Management product offerings combine the sale of a device with our LATITUDE™ Patient Management System, within our Cardiac Rhythm Management (CRM) business, which represents a future service obligation. Generally, we do not have observable evidence of the standalone selling price related to our future service obligations; therefore, we estimate the selling price using an expected cost plus a margin approach. We allocate the transaction price using the relative standalone selling price method. The use of alternative estimates could result in a different amount of revenue deferral.

Contract liabilities are classified within Other current liabilities and Other long-term liabilities on our accompanying consolidated balance sheets. Our contractual liabilities are primarily composed of deferred revenue related to the LATITUDE Patient Management System. Revenue is recognized over the average service period which is 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 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.

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.

Post-Implant Services

We provide non-contractual services to customers to ensure the safe and effective use of certain implanted devices. Because the revenue related to the immaterial services is recognized before they are delivered, we forward accrue the costs to provide these

services at the time the devices are sold. We record these costs to Selling, general and administrative expenses within our consolidated statements of operations. We estimate the amount of time spent by our representatives performing these services and their compensation throughout the device life to determine the service cost. Changes to our business practice or the use of alternative estimates could result in a different amount of accrued cost.

Warranty Obligations

We offer warranties on certain of our product offerings. The majority of our warranty liability relates to implantable devices offered by our CRM business, which include implantable defibrillator and pacemaker systems. These products come with a standard limited warranty covering the replacement of these devices. We offer a full warranty for a portion of the period post-implant and a partial warranty for a period of time thereafter. We estimate the costs that we may incur under our warranty programs based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim and record a liability equal to these estimated costs as cost of products sold at the time the product sale occurs. We assess the adequacy of our recorded warranty liabilities on a quarterly basis and adjust these amounts as necessary.

Inventories

We state inventories at the lower of first-in, first-out cost or net realizable value. We utilize a standard costing system, capitalizing variances between estimated and actual production costs during periods of normal production, and amortize to Cost of products sold over inventory turns. We expense manufacturing variances during periods of abnormal production, or less than 75 percent of manufacturing capacity. During the year ended December 31, 2020, we recorded $149 million of abnormal manufacturing variances attributable to lower production levels resulting from the COVID-19 pandemic and lower than forecasted demand for our products. We did not record any abnormal production variances during the years ended December 31, 2019 or 2018.

We base our provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. Further, the industry in which we participate is characterized by rapid product development and frequent new product introductions. 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 excess, expired and obsolete inventory.

Property, Plant and Equipment

We state property, plant, equipment and leasehold improvements at historical cost. We charge expenditures for maintenance and repairs to expense and capitalize additions and improvements that extend the life of the underlying asset. We provide for depreciation using the straight-line method at rates that approximate the estimated useful lives of the assets. We depreciate buildings over a maximum life of 40 years; building improvements over the remaining useful life of the building structure; equipment, furniture and fixtures over a three to seven year life; and leasehold improvements over the shorter of the useful life of the improvement or the term of the related lease.

Valuation of Business Combinations

We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition, including identifiable intangible assets and in-process research and development (IPR&D), which either arise from a contractual or legal right or are separable from goodwill. We base the fair value of identifiable intangible assets acquired in a business combination, including IPR&D, on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. We allocate to goodwill any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs associated with these acquisitions are expensed as incurred through Selling, general and administrative expenses.

In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through Contingent consideration net expense (benefit) on our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount rates, periods, timing and amount of projected revenue or timing or likelihood of achieving regulatory, revenue or commercialization-based milestones. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones after the acquisition date, including attaining specified revenue

levels, achieving product development targets and/or obtaining regulatory approvals for products in development at the date of the acquisition.

Indefinite-lived Intangibles and IPR&D

Our indefinite-lived intangible assets, which are not subject to amortization, include acquired balloon and other technology, which is foundational to our ongoing operations within our Cardiovascular and MedSurg businesses, and IPR&D intangible assets acquired in a business combination. Our IPR&D represents intangible assets that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. We classify IPR&D as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon completion of the associated research and development efforts, we will determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, we write-off the remaining carrying amount of the associated IPR&D intangible asset.

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

We use the income approach to determine the fair values of our IPR&D. We base our revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected levels of market share. In arriving at the value of the in-process projects, we consider, among other factors, the in-process projects’ stage of completion, the complexity of the work completed as of the acquisition date, the costs already incurred, the projected costs to complete, the contribution of other acquired assets, the expected regulatory path and introduction dates by region and the estimated useful life of the technology. See Note D – Goodwill and Other Intangible Assets for more information related to indefinite-lived intangibles, including IPR&D.

For asset purchases outside of business combinations, we expense any purchased research and development assets as of the acquisition date.

Amortization and Impairment of Intangible Assets

We record definite-lived intangible assets at historical cost and amortize them over their estimated useful lives. We use a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. The approximate useful lives for amortization of our intangible assets are as follows: patents and licenses, two to 20 years; amortizable technology-related and customer relationships, five to 25 years; other intangible assets, various.

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. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. If we determine it is more likely than not that the asset is impaired based on our qualitative assessment of impairment indicators, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset or asset group exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset or asset group, we will write the carrying value down to fair value in the period impairment is identified.

We calculate fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the asset. In determining our estimated future cash flows associated with our intangible assets, we use estimates and assumptions about future revenue contributions, cost structures and remaining useful lives of the asset or asset group. See Note D – Goodwill and Other Intangible Assets for more information related to impairments of intangible assets.

For patents developed internally, we capitalize costs incurred to obtain patents, including attorney fees, registration fees, consulting fees and other expenditures directly related to securing the patent.

Goodwill Valuation

We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination to goodwill. 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.

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. For our 2020 annual impairment assessment, we identified the following reporting units: Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic Health, Neuromodulation and Specialty Pharmaceuticals. 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.

In the second quarter of 2020, we performed our annual goodwill impairment test utilizing the qualitative assessment approach to test all of our reporting units. We assessed recent events, including the COVID-19 pandemic, as well as changes in macroeconomic factors, industry and market conditions, overall financial performance and other entity-specific factors since the most recently performed quantitative test. After assessing the totality of events, we determined that it is more likely than not that the fair value of each of our reporting units has sufficient excess over its carrying value, and concluded that goodwill was not impaired or at risk of impairment.

On December 1, 2020, we announced the execution of a definitive agreement pursuant to which we agreed to sell our Specialty Pharmaceuticals business (disposal group) for a purchase price of $800 million, subject to certain adjustments including cash on hand as of the closing date of the transaction. The sale is expected to close in the first half of 2021, subject to customary closing conditions. We acquired our Specialty Pharmaceuticals business in conjunction with the BTG acquisition on August 19, 2019. In connection with the execution of a definitive agreement to sell the disposal group for a specified amount, we performed an impairment assessment of our goodwill and intangible assets, which resulted in a goodwill impairment of $73 million. As of December 31, 2020, we classified the remaining assets and liabilities of the disposal group as held for sale within our consolidated balance sheets at their respective carrying values, which approximates fair value, less cost to sell. Refer to Note D – Goodwill and Other Intangible Assets to our consolidated financial statements for additional details related to our goodwill balances.

Investments in Publicly Traded and Privately Held Entities

For publicly-held equity securities for which we do not have the ability to exercise significant influence, we measure at fair value with changes in fair value recognized currently in Other, net within our accompanying consolidated statements of operations. For privately-held equity securities for which we do not have the ability to exercise significant influence, we apply the measurement alternative approach and measure these investments at cost minus impairment, if any, adjusted to fair value for any, observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We account for investments in entities over which we have the ability to exercise significant influence under the equity method if we hold 50 percent or less of the voting stock and the entity is not a VIE in which we are the primary beneficiary in accordance with FASB ASC Topic 323, Investments - Equity Method and Joint Ventures. We record these investments initially at cost and adjust the carrying amount to reflect our share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. Lastly, we have notes receivable from certain companies that we account for in accordance with FASB ASC Topic 320*, Investments - Debt and Equity Securities*. Refer to Note B – Acquisitions and Strategic Investments for additional details on our investment balances.

Each reporting period, we evaluate our investments to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. For our investments for which we apply the measurement alternative, if the fair value of the investment is less than its carrying value, the investment

is impaired and we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value. For our equity method investments, if we determine an impairment is other-than-temporary, we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value. We deem an impairment to be other-than-temporary unless available evidence indicates that the valuation is more likely than not to recover up to the carrying value of the investment in a reasonable period of time, and we have both the ability and intent to hold the investment for at least the period of time needed to recover the value.

Net gains and losses and impairments associated with our investment portfolio are included in Other, net in our consolidated statements of operations.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, we determine deferred tax assets and liabilities based on differences between the financial reporting and tax bases of our assets and liabilities. We measure deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider relevant evidence, both positive and negative, to determine the need for a valuation allowance. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities and tax carrybacks, as well as estimates of the impact of future taxable income and available prudent and feasible tax-planning strategies. We recognize interest and penalties related to income taxes as a component of income tax expense. As part of the Tax Cuts and Jobs Act (TCJA), we are subject to a territorial tax system in which we are required to establish an accounting policy in providing for tax on Global Intangible Low Taxed Income (GILTI) earned by certain foreign subsidiaries. We have elected to treat the impact of GILTI as a period cost and report it as part of continuing operations. See Note J – Income Taxes for further information and discussion of our income tax provision and balances including a discussion of the impacts of the TCJA.

Legal and Product Liability Costs

In the normal course of business, we are involved in various legal and regulatory proceedings, including intellectual property, breach of contract, securities litigation and product liability suits. In some cases, the claimants seek damages, as well as other relief, which, if granted, could require significant expenditures or impact our ability to sell our products. We are also the subject of certain governmental investigations, which could result in substantial fines, penalties and administrative remedies. 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. 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 our best estimate of the minimum amount of the range. We analyze litigation settlements to identify each element of the arrangement. We allocate arrangement consideration to patent licenses received based on estimates of fair value and capitalize these amounts as assets if the license will provide an ongoing future benefit. 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 charges (credits) in our consolidated statements of operations; all other legal and product liability charges, credits and costs are recorded within Selling, general and administrative expenses within our consolidated statements of operations. See Note K – Commitments and Contingencies for discussion of our individual material legal proceedings.

Costs Associated with Exit Activities

We record employee termination costs in accordance with FASB ASC Topic 712*,* Compensation - Nonretirement and Postemployment Benefits, if we pay the benefits as part of an ongoing benefit arrangement, which includes benefits provided as part of our established severance policies or that we provide in accordance with international statutory requirements. We accrue employee termination costs associated with an ongoing benefit arrangement if the obligation is attributable to prior services rendered, the rights to the benefits have vested, the payment is probable and we can reasonably estimate the liability. We account for involuntary employee termination benefits that represent a one-time benefit in accordance with FASB ASC Topic 420*,* Exit or Disposal Cost Obligations. We record such costs into expense over the employee’s future service period, if any.

Other costs associated with exit activities may include contract termination costs and consulting fees, which are expensed in accordance with FASB ASC Topic 420 and are included in Restructuring net charges (credits) in our consolidated statements of operations. Additionally, costs directly related to our active restructuring initiatives, including program management costs, accelerated depreciation, fixed asset write-offs and costs to transfer product lines among facilities are included within Costs of

products sold and Selling, general and administrative expenses within our consolidated statements of operations. Impairment of right of use lease assets and lease termination costs directly related to our active restructuring initiatives are expensed in accordance with FASB ASC Topic 842 and included within Costs of products sold or Selling, general and administrative expenses in our consolidated statements of operations. See Note H – Restructuring-related Activities for further information and discussion of our restructuring plans.

Translation of Foreign Currency

We translate all assets and liabilities of foreign subsidiaries from the functional currency, which is generally the local currency, into U.S. dollars using the year-end exchange rate. We show the net effect of these translation adjustments in our consolidated financial statements as a component of Accumulated other comprehensive income (loss), net of tax. We translate revenues and expenses at the average exchange rates in effect during the year. For any significant foreign subsidiaries located in highly inflationary economies, we would re-measure their financial statements as if the functional currency were the U.S. dollar.

Foreign currency transaction gains and losses are included in Other, net in our consolidated statements of operations, net of losses and gains from any related derivative financial instruments.

Financial Instruments

We recognize all derivative financial instruments in our consolidated financial statements at fair value in accordance with FASB ASC Topic 815*, Derivatives and Hedging*, and we present assets and liabilities associated with our derivative financial instruments on a gross basis in our financial statements. In accordance with FASB ASC Topic 815, for those derivative instruments that are designated and qualify as hedging instruments, the hedging instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies for, and has been designated as part of a hedging relationship, as well as on the type of hedging relationship. Our derivative instruments do not subject our earnings to material risk, as gains and losses on these derivatives generally offset gains and losses on the item being hedged, and we do not enter into derivative transactions for speculative purposes. Refer to Note E – Hedging Activities and Fair Value Measurements for more information on our hedging instruments.

Shipping and Handling Costs

We generally do not bill customers for shipping and handling of our products. We treat shipping and handling costs incurred after a customer obtains control of the good as a fulfillment cost and record in Selling, general and administrative expenses within our consolidated statements of operations. Shipping and handling costs were $146 million in 2020, $144 million in 2019 and $124 million in 2018.

Research and Development

We expense research and development (R&D) costs, including new product development programs, regulatory compliance and clinical research as incurred. Refer to Indefinite-lived Intangibles and IPR&D above for our policy regarding R&D projects acquired in connection with our business combinations and asset purchases.

NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

Our consolidated financial statements include the operating results for acquired entities from the respective dates of acquisition. We did not complete any material acquisitions during 2020. We have not presented supplemental pro forma financial information for prior acquisitions given their results are not material to our consolidated financial statements. Transaction costs for all acquisitions completed during 2020, 2019 and 2018 were immaterial to our consolidated financial statements and were expensed as incurred. In 2020, we recorded immaterial purchase price adjustments during the measurement period for the preliminary purchase price allocations associated with prior acquisitions.

On January 21, 2021, we announced our entrance into a definitive agreement to acquire Preventice Solutions, Inc. (Preventice), a privately-held company which offers a full portfolio of mobile cardiac health solutions and services, ranging from ambulatory cardiac monitors, to cardiac event monitors and mobile cardiac telemetry. We have been an investor in Preventice since 2015 and currently hold an equity stake of approximately 22 percent. The transaction price to acquire the remaining stake is expected to result in a net cash payment of approximately $720 million upon closing and up to an additional $230 million payment upon achievement of a commercial milestone. The acquisition is expected to close during the first half of 2021, subject to customary

closing conditions. Following the closing of the acquisition, the Preventice business will be managed by our Cardiac Rhythm Management division.

2019 Acquisitions

BTG plc

On August 19, 2019, we announced the closing of our acquisition of BTG plc (BTG), a public company organized under the laws of England and Wales. BTG had three key portfolios, the largest of which is its interventional medicine portfolio (Interventional Medicine) that encompasses interventional oncology therapeutic technologies for patients with liver and kidney cancers, as well as a vascular portfolio for treatment of deep vein thrombosis, pulmonary embolism, deep venous obstruction and superficial venous disease. Following the closing of the acquisition, we integrated BTG's Interventional Medicine business into our Peripheral Interventions division.

In addition to the Interventional Medicine product lines, the BTG portfolio also included a specialty pharmaceutical business (Specialty Pharmaceuticals) comprised of acute care antidotes to treat overexposure to certain medications and toxins. On December 1, 2020, we announced the execution of a definitive agreement pursuant to which we agreed to sell our Specialty Pharmaceuticals business (disposal group) for a purchase price of $800 million , subject to certain adjustments including cash on hand as of the closing date of the transaction. The sale is expected to close in the first half of 2021, subject to customary closing conditions. Refer to Note C – Assets and Liabilities Held for Sale for additional information.

The BTG portfolio further included a licensing portfolio (Licensing arrangements) that generated net royalties related to BTG intellectual property and product license agreements. In connection with the acquisition, we acquired rights to future royalties associated with the Zytiga™ Drug used to treat certain forms of prostate cancer. In the fourth quarter of 2019, we sold our rights to these royalties for $256 million in cash, included in Proceeds from royalty rights transfer in our consolidated statements of cash flows. Refer to Note E – Hedging Activities and Fair Value Measurements for additional information.

The transaction price for the acquisition of BTG consisted of upfront cash in the aggregate amount of £3.312 billion (or $4.023 billion based on the exchange rate at closing on August 19, 2019) for the entire issued ordinary share capital of BTG, whereby BTG stockholders received 840 pence (or $10.20 based on the exchange rate at closing) in cash for each BTG share. The transaction price included $404 million of cash and cash equivalents acquired. We implemented our acquisition of BTG by way of a court-sanctioned scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended.

Purchase Price Allocation

We accounted for the acquisition of BTG as a business combination, and in accordance with FASB ASC Topic 805*, Business Combinations*, (FASB ASC Topic 805), we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The final purchase price was comprised of the following components:


(in millions)
Payment for acquisition, net of cash acquired			$	3,619

The final purchase price allocation was comprised of the following components:


(in millions)
Goodwill	$	1,635

Trade accounts receivable, net	108
Inventories	232
Other current assets	252
Other intangible assets, net	1,785
Other long-term assets	538
Accrued expenses and other current liabilities	(308)
Other long-term liabilities	(274)
Deferred tax liability	(349)
	$	3,619

We allocated a portion of the purchase price to the specific intangible asset categories as follows:


	Amount Assigned (in millions)		Amortization Period (in years)			Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	1,709	10	-	18	11	%	-	12%


Other intangible assets	75		2	-	11	11%


	$	1,785

We recognized goodwill of $1.635 billion, which is attributable to the synergies expected to arise from the acquisition and revenue and cash flow projections associated with future technologies. We allocated $1.399 billion to our Peripheral Interventions reporting unit and $236 million to the Specialty Pharmaceuticals reporting unit. In 2020, we recorded Goodwill impairment charges of $73 million related to our Specialty Pharmaceuticals business. Refer to Note A – Significant Accounting Policies for additional information.

Transaction with Varian Medical Systems, Inc.

On August 21, 2019, we completed the sale of our drug-eluting and bland embolic microsphere portfolio to Varian Medical Systems, Inc. (Varian) in connection with our acquisition of BTG. The transaction price consisted of an upfront cash payment of $90 million, a portion of which is allocated to the fair value of the services to be rendered under the Transition Services Agreement and Transition Manufacturing Agreement entered into with Varian as part of this transaction. Additionally, we transferred certain contingent consideration arrangements arising from our initial acquisition of the portfolio to Varian and agreed to indemnify Varian for any payments ultimately arising under the terms of the contingent consideration arrangement. Accordingly, as part of the disposal, we recorded a liability of $16 million to recognize the fair value of this guarantee based on our potential obligation resulting from the indemnifications. The maximum amount payable under this guarantee is $200 million in accordance with FASB ASC Topic 460, Guarantees, which is consistent with the contingent consideration arrangement executed with our initial acquisition of the portfolio in accordance with FASB ASC Topic 805.

Vertiflex, Inc.

On June 11, 2019, we announced the closing of our acquisition of Vertiflex, Inc. (Vertiflex), a privately-held company which developed and commercialized the Superion™ Indirect Decompression System, a minimally-invasive device used to improve physical function and reduce pain in patients with lumbar spinal stenosis (LSS). The transaction price consisted of an upfront cash payment of $465 million and contingent payments that are based on a percentage of Vertiflex sales growth in the first three years following the acquisition close. At the time of acquisition, we estimated the sales-based contingent payments to be in a range of zero to $100 million; however, the payments are uncapped over the three year earn-out period. Through December 31, 2020, we have made incremental payments of $20 million to the prior shareholders of Vertiflex in accordance with the terms of the agreement. Following the closing of the acquisition, we integrated the Vertiflex business into our Neuromodulation division.

Millipede, Inc.

On January 29, 2019, we announced the closing of our acquisition of Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. We were an investor in Millipede since the first quarter of 2018 as part of an investment and acquisition option agreement, whereby we purchased a portion of the outstanding shares of Millipede, along with newly issued shares of the company, for an upfront cash payment of $90 million. In the fourth quarter of 2018, upon the successful completion of a first-in-human clinical study, we exercised our option to acquire the remaining shares of Millipede. We held an interest of approximately 20 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. The transaction price for the remaining stake consisted of an upfront cash payment of $325 million and up to an additional $125 million payment upon achievement of a commercial milestone. Through December 31, 2020, we have not made any incremental payments to the prior shareholders of Millipede, as the commercial milestone has not yet been achieved. Following the closing of the acquisition, we integrated the Millipede business into our Interventional Cardiology division.

Purchase Price Allocation

We accounted for the acquisitions of Vertiflex and Millipede as business combinations, and in accordance with FASB ASC Topic 805, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The final purchase prices were comprised of the following components:


(in millions)
Payments for acquisitions, net of cash acquired	$	763
Fair value of contingent consideration	127
Fair value of prior interests	102
	$	992

The final combined purchase price allocation was comprised of the following components:


(in millions)
Goodwill	$	577
Amortizable intangible assets	220
Indefinite-lived intangible assets	240
Other assets acquired	24
Liabilities assumed	(12)
Net deferred tax liabilities	(58)
	$	992

We allocated a portion of the combined purchase price to the specific intangible asset categories as follows:


	Amount Assigned (in millions)		Amortization Period (in years)	Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	210	12	15%

Other intangible assets	10		12		15%
Indefinite-lived intangible assets:
In-process research and development	240		N/A	19%
	$	461

2018 Acquisitions

Augmenix, Inc.

On October 16, 2018, we announced the closing of our acquisition of Augmenix, Inc. (Augmenix), a privately-held company that developed and commercialized the SpaceOAR™ Hydrogel System to help reduce common and debilitating side effects that men may experience after receiving radiotherapy to treat prostate cancer. The transaction price consisted of an upfront cash payment of $500 million and up to $100 million in payments contingent upon achieving certain revenue-based milestones. Through December 31, 2020, we made incremental payments of $24 million to the prior shareholders of Augmenix in accordance with the terms of the agreement. Following the closing of the acquisition, we integrated the Augmenix business into our Urology and Pelvic Health division.

Claret Medical, Inc.

On August 2, 2018, we announced the closing of our acquisition of Claret Medical, Inc. (Claret), a privately-held company that has developed and commercialized the Sentinel™ Cerebral Embolic Protection System. The device is used to protect the brain during certain interventional procedures, predominately in patients undergoing transcatheter aortic valve replacement (TAVR). The transaction price consisted of an upfront cash payment of $220 million and an additional $50 million payment for achieving a reimbursement-based milestone that was achieved in the third quarter of 2018. Following the closing of the acquisition, we integrated the Claret business into our Interventional Cardiology division.

Cryterion Medical, Inc.

On July 5, 2018, we announced the closing of our acquisition of Cryterion Medical, Inc. (Cryterion), a privately-held company developing a single-shot cryoablation platform for the treatment of atrial fibrillation. We had been an investor in Cryterion since 2016 and held an interest of approximately 35 percent immediately prior to the acquisition date. The transaction price to acquire the remaining stake consisted of an upfront cash payment of $202 million. Following the closing of the acquisition, we integrated the Cryterion business into our Electrophysiology division.

NxThera, Inc.

On April 30, 2018, we announced the closing of our acquisition of NxThera, Inc. (NxThera), a privately-held company that developed the Rezūm™ System, a minimally invasive therapy in a growing category of treatment options for patients with benign prostatic hyperplasia (BPH). We held a minority interest immediately prior to the acquisition date. The transaction price to acquire the remaining stake consisted of an upfront cash payment of approximately $240 million and up to approximately $85 million in future potential payments contingent upon achieving commercial milestones over the four years following the date of acquisition. Through December 31, 2020, we have made incremental payments of $12 million to the prior shareholders of NxThera in accordance with the terms of the agreement. Following the closing of the acquisition, we integrated the NxThera business into our Urology and Pelvic Health division.

nVision Medical Corporation

On April 16, 2018, we announced the closing of our acquisition of nVision Medical Corporation (nVision), a privately-held company focused on women’s health. nVision developed the first and only device cleared by the U.S. Food and Drug Administration (FDA) to collect cells from the fallopian tubes, offering a potential platform for earlier diagnosis of ovarian cancer. The transaction price consisted of an upfront cash payment of $150 million and up to an additional $125 million in future potential payments contingent upon achieving certain clinical and commercial milestones over the four years following the date of acquisition. Following the closing of the acquisition, we integrated the nVision business into our Urology and Pelvic Health division. We discontinued the nVision R&D program during 2020 and do not expect to make any incremental payments to the prior shareholders.

Other Acquisitions

In addition, we completed other individually immaterial acquisitions in 2018 for total consideration of $158 million in cash at closing plus aggregate future potential contingent consideration of up to $62 million.

We recorded gains of $184 million in 2018 within Other, net on our consolidated statements of operations based on the difference between the book values and the fair values of our previously-held investments immediately prior to the acquisition dates. The aggregate fair value of our previously-held investments immediately prior to the acquisition dates was $251 million. We remeasured the fair value of each previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests.

Purchase Price Allocation

We accounted for our 2018 acquisitions as business combinations, and in accordance with FASB ASC Topic 805, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The final purchase prices were comprised of the following components:


(in millions)
Payments for acquisitions, net of cash acquired	$	1,449
Fair value of contingent consideration	248
Fair value of prior interests	251
	$	1,948

The final combined purchase price allocation was comprised of the following components:


(in millions)
Goodwill	$	939
Amortizable intangible assets	939
In-process research and development	213
Other assets acquired	38
Liabilities assumed	(19)
Net deferred tax liabilities	(162)
	$	1,948

We allocated a portion of the combined purchase price to the specific intangible asset categories as follows:


	Amount Assigned (in millions)		Amortization Period (in years)			Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets
Technology-related	$	908	6	-	14	14	%	-	23%

Other intangible assets	31		6	-	13	13	%	-	15%
Indefinite-lived intangible assets
In-process research and development	213		n/a			15%
	$	1,153

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.

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. The goodwill recorded relating to our acquisitions is not deductible for tax purposes.

Contingent Consideration

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


(in millions)
Balance as of December 31, 2018	$	347
Amounts recorded related to current year acquisitions	127

Contingent consideration arrangements transferred	(16)
Contingent consideration net expense (benefit)	(35)
Contingent consideration payments	(68)
Balance as of December 31, 2019	$	354


Contingent consideration net expense (benefit)	(100)
Contingent consideration payments	(58)
Balance as of December 31, 2020	$	196

As of December 31, 2020, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our prior acquisitions was $532 million.

The $100 million benefit recorded in 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 discontinuation of the R&D program.

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 December 31, 2020		Valuation Technique	Unobservable Input	Range				Weighted Average(1)
R&D, Regulatory and Commercialization-based Milestones	$104 million		Discounted Cash Flow	Discount Rate	2%				2%
Probability of Payment	90%				90%
Projected Year of Payment	2027				2027
Revenue-based Payments	$93 million		Discounted Cash Flow	Discount Rate	12	%	-	14%	13%
Probability of Payment	80	%	-	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 our R&D, commercialization-based and revenue-based milestones are discounted back to the current period, primarily using a discounted cash flow model. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of December 31, 2020.

Strategic Investments

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


	As of December 31,
(in millions)	2020		2019
Equity method investments	$	319	$	264
Measurement alternative investments(1)	183		171
Publicly-held securities(2)	414		1
Notes receivable	2		23
	$	918	$	458

(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 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 consolidated statements of operations.

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

In 2020, we recorded a $363 million gain on our investment in Pulmonx Corporation presented in Other, net to remeasure to fair value based on observable market prices. As of December 31, 2020, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $272 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.

NOTE C – ASSETS AND LIABILITIES HELD FOR SALE

On December 1, 2020, we announced the execution of a definitive agreement pursuant to which we agreed to sell our 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 $800 million, subject to certain adjustments including cash on hand at the closing of the transaction. The agreement includes the transfer of five facilities and approximately 280 employees globally. The transaction is expected to close during the first half of 2021, subject to customary closing conditions.

As of December 31, 2020, we have classified the assets and liabilities of our Specialty Pharmaceuticals business (disposal group) as held for sale within our consolidated balance sheets at their respective carrying values, which approximates 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 sheets. Refer to Note A – Significant Accounting Policies for additional information.

The carrying amounts of the major classes of assets and liabilities of the disposal group as of December 31, 2020 are presented below:


(in millions)	As of December 31, 2020
Cash	$	37
Trade accounts receivable, net	24
Inventories	79
Other current assets	17
Goodwill	175
Other intangible assets, net	758
Other long-term assets	45
Assets held for sale	$	1,133

Accrued expenses and other current liabilities	$	25
Other long-term liabilities	27
Deferred tax liability	148
Liabilities held for sale included in Other current liabilities	$	200

In addition, as of December 31, 2020, we had foreign currency translation adjustments of $107 million contained within Accumulated other comprehensive income (loss), net of tax attributable to the Specialty Pharmaceuticals business to be released upon the closing of the transaction.

NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated goodwill impairment charges are as follows:


	As of December 31, 2020				As of December 31, 2019
(in millions)	Gross Carrying Amount		Accumulated Amortization/Goodwill Impairment Charges		Gross Carrying Amount		Accumulated Amortization/Goodwill Impairment Charges
Technology-related	$	11,059	$	(6,179)	$	12,020	$	(5,706)
Patents	511		(407)		525		(408)
Other intangible assets	1,775		(1,220)		1,754		(1,081)
Amortizable intangible assets	$	13,345	$	(7,806)	$	14,299	$	(7,195)

Goodwill	$	19,924	$	(9,973)	$	20,076	$	(9,900)

IPR&D	257				662
Technology-related	120				120
Indefinite-lived intangible assets	$	377			$	782

During 2020, following receipt of regulatory approvals, we reclassified certain of our IPR&D intangible assets to amortizable technology-related assets and began amortization to reflect their use over their remaining lives.

Intangible asset impairment charges were $460 million in 2020, $105 million in 2019 and $35 million in 2018. The impairment charges recorded in 2020 were primarily associated with our acquisitions of Apama Medical Inc. and nVision Medical Corporation (nVision) following management’s decision to cancel the programs due to cost to complete, time to market, overall economic viability or, specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology. Intangible asset impairment charges in 2020 also included charges related to our acquisition of Sadra Medical, Inc. (Sadra Medical) as a result of lower sales forecasts, as well as the cost of quality remediation efforts following the voluntary recall of our LOTUS Edge™ Aortic Valve System and subsequent discontinuation of the LOTUS platform.

The following represents our goodwill balance by global reportable segment and our separately presented Specialty Pharmaceuticals operating segment:


(in millions)	MedSurg		Rhythm and Neuro		Cardiovascular		Specialty Pharmaceuticals		Total
Balance as of December 31, 2018	$	2,063	$	1,924	$	3,925	$	—	$	7,911

Foreign currency fluctuations and other changes	(1)		—		58		9		66
Goodwill acquired	—		268		1,712		238		2,218
Goodwill divested	—		—		(19)		—		(19)
Balance as of December 31, 2019	$	2,061	$	2,192	$	5,676	$	247	$	10,176

Foreign currency fluctuations and other changes	(2)		3		22		—		22

Goodwill impairment charges	—		—		—		(73)		(73)
Goodwill reclassified to Current assets held for sale	—		—		—		(175)		(175)

Balance as of December 31, 2020	$	2,059	$	2,194	$	5,697	$	—	$	9,951

In 2020, we recorded Goodwill impairment charges of $73 million related to our Specialty Pharmaceuticals business. We did not record any Goodwill impairment charges in 2019 or 2018. Refer to Note A – Significant Accounting Policies for further discussion of our goodwill and intangible asset impairment testing.

Estimated Amortization expense for each of the five succeeding fiscal years based upon our amortizable intangible asset portfolio as of December 31, 2020 is as follows (in millions):



Fiscal Year
2021	$	689
2022	664
2023	651
2024	613
2025	560

NOTE E – HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Derivative Instruments and Hedging Activities

We address market risk from changes in foreign currency exchange rates and interest rates through risk management programs which include the use of derivative and nonderivative financial instruments. We operate these programs pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings to material risk, as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item.

We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.

Currency Hedging Instruments

Risk Management Strategy

Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities; forecasted intercompany and third-party transactions; net investments in certain subsidiaries; and, during 2019 prior to our acquisition of BTG, the purchase price of BTG, which was denominated in a currency other than the U.S. dollar. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative and nonderivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.

The success of our currency risk management program depends, in part, on forecast transactions denominated primarily in Euro, Japanese yen, Chinese renminbi, Australian dollar and British pound sterling. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast, particularly resulting from the impact of COVID-19 on transaction volumes. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.

Hedge Designations and Relationships

Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815*, Derivatives and Hedging* (FASB ASC Topic 815), and are intended to protect the U.S. dollar value of forecasted transactions. The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in the Net change in derivative financial instruments component of Other comprehensive income (loss), net of tax (OCI) within our 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 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 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 Euro, Swiss franc, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. We elected to use the spot method to assess effectiveness for our derivatives that are designated as net investment hedges. Under the spot method, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. We have elected to exclude the spot-forward difference from the assessment of hedge effectiveness and are amortizing this amount separately, as calculated at the date of designation, on a straight-line basis over the term of the currency forward contracts. Amortization of the spot-forward difference is then reclassified from AOCI to current period earnings as a component of Interest expense in our consolidated statements of operations.

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 consolidated statements of operations.

Certain of our non-designated forward currency contracts were entered into for the purpose of managing our exposure to currency exchange rate risk related to the British pound sterling-denominated purchase price of BTG. In 2019, we settled all outstanding contracts, for $294 million, which is presented within Payments for settlements of hedge contracts in our consolidated statements of cash flows. Upon settlement in 2019, we received £3.312 billion of cash to fund our acquisition of BTG, which translated into $4.303 billion based on hedged currency exchange rates. We recognized a $323 million loss in 2019 and a $29 million gain in 2018 in Other, net due to changes in fair value of the contracts.

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 December 31, 2020 and December 31, 2019. 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 $29 million loss as of December 31, 2020 and a $34 million loss as of December 31, 2019. We recognized immaterial gains and losses in Interest expense relating to the amortization of our terminated cash flow hedges in the current and prior periods.

We had no interest rate derivative instruments designated as fair value hedges outstanding as of December 31, 2020 and December 31, 2019. Prior to 2018, we terminated interest rate derivative instruments that were designated as fair value hedges and are continuing to recognize the amortization of the gains or losses originally recorded within Long-term debt in our 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 December 31, 2020 and December 31, 2019. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.

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


(in millions)		FASB ASC Topic 815 Designation		As of December 31,
	2020		2019
Forward currency contracts		Cash flow hedge		$	4,531	$	3,891
Forward currency contracts		Net investment hedge		1,004		953
Foreign currency-denominated debt(1)		Net investment hedge		868		997
Forward currency contracts		Non-designated		4,946		4,377

Total Notional Outstanding				$	11,349	$	10,218

(1) The €900 million (approximately $1.000 billion) debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our euro functional subsidiaries. We dedesignated a portion of the net investment hedges in 2020.

The remaining time to maturity as of December 31, 2020 is within 60 months for all forward currency contracts designated as cash flow hedges and generally less than one year for all non-designated forward currency contracts. The forward currency contracts designated as net investment hedges generally mature within the next two years. The euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.

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 consolidated statements of operations. Refer to Note Q – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative instruments presented within our consolidated statements of comprehensive income (loss).


	Effect of Hedging Relationships on Accumulated Other Comprehensive Income
	Amount Recognized in OCI on Hedges						Consolidated Statements of Operations(1)			Amount Reclassified from AOCI into Earnings
	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
Year Ended December 31, 2020
Forward currency contracts
Cash flow hedges	$	(99)	$	22	$	(77)	Cost of products sold	$	3,465	$	(83)	$	19	$	(64)
Net investment hedges(2)	(37)		8		(29)		Interest expense	361		(24)		5		(19)
Foreign currency-denominated debt
Net investment hedges(3)	(89)		21		(68)		Other, net	(362)		—		—		—
Interest rate derivative contracts
Cash flow hedges	—		—		—		Interest expense	361		5		(1)		4
Year Ended December 31, 2019
Forward currency contracts
Cash flow hedges	$	150	$	(34)	$	117	Cost of products sold	$	3,116	$	(73)	$	16	$	(56)
Net investment hedges(2)	68		(15)		53		Interest expense	473		(43)		10		(33)
Foreign currency-denominated debt
Net investment hedges(3)	(14)		3		(11)		Other, net	358		—		—		—
Interest rate derivative contracts
Cash flow hedges	—		—		—		Interest expense	473		3		(1)		2
Year Ended December 31, 2018
Forward currency contracts
Cash flow hedges	$	167	$	(38)	$	130	Cost of products sold	$	2,813	$	19	$	(4)	$	15
Net investment hedges(2)	56		(13)		43		Interest expense	241		(27)		6		(21)
Interest rate derivative contracts
Cash flow hedges	(44)		10		(34)		Interest expense	241		(1)		—		(1)

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

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

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

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


Designated Hedging Instrument	FASB ASC Topic 815 Designation	Location on 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	$	21
Forward currency contracts	Net investment hedge	Interest expense	13
Interest rate derivative contracts	Cash flow hedge	Interest expense	(5)

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


(in millions)	Location on Consolidated Statements of Operations	Year Ended December 31,
	2020	2019		2018
Net gain (loss) on currency hedge contracts	Other, net	$	73	$	(343)	$	41
Net gain (loss) on currency transaction exposures	Other, net	(105)		(15)		(30)
Net currency exchange gain (loss)		$	(32)	$	(358)	$	11

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, 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:


(in millions)		Location on Consolidated Balance Sheets(1)		As of December 31,
	2020		2019
Derivative and Nonderivative Assets:
Designated Hedging Instruments
Forward currency contracts		Other current assets		$	53	$	72
Forward currency contracts		Other long-term assets		109		216
				162		288
Non-Designated Hedging Instruments
Forward currency contracts		Other current assets		79		33
Total Derivative and Nonderivative Assets				$	242	$	321

Derivative and Nonderivative Liabilities:
Designated Hedging Instruments
Forward currency contracts		Other current liabilities		$	44	$	3
Forward currency contracts		Other long-term liabilities		54		8
Foreign currency-denominated debt(2)		Other long-term liabilities		1,094		998

				1,191		1,009
Non-Designated Hedging Instruments
Forward currency contracts		Other current liabilities		71		29
Total Derivative and Nonderivative Liabilities				$	1,262	$	1,037

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

(2)The €900 million (approximately $1.000 billion) debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our euro functional subsidiaries. We dedesignated a portion of the net investment hedges in 2020.

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
	December 31, 2020								December 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market funds and time deposits	$	1,584	$	—	$	—	$	1,584	$	50	$	—	$	—	$	50
Publicly-held securities	414		—		—		414		1		—		—		1
Hedging instruments	—		242		—		242		—		321		—		321
Licensing arrangements	—		—		365		365		—		—		518		518
	$	1,998	$	242	$	365	$	2,605	$	51	$	321	$	518	$	890
Liabilities
Hedging instruments	$	—	$	1,262	$	—	$	1,262	$	—	$	1,037	$	—	$	1,037
Contingent consideration liability	—		—		196		196		—		—		354		354
Licensing arrangements	—		—		407		407		—		—		571		571
	$	—	$	1,262	$	603	$	1,865	$	—	$	1,037	$	925	$	1,963

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 consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In addition to $1.584 billion invested in money market funds and time deposits as of December 31, 2020 and $50 million as of December 31, 2019, we held $150 million in interest-bearing and non-interest-bearing bank accounts as of December 31, 2020 and $165 million as of December 31, 2019.

Our recurring fair value measurements using Level 3 inputs related to our contingent consideration liability. Refer to Note B – Acquisitions 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, principally the contractual right to receive future royalty payments related to Zytiga™ Drug acquired with BTG. Prior to our acquisition of BTG, BTG agreed to pay 50 percent of the Zytiga royalty stream, net of certain offsets, to the inventors associated with the intellectual property. In the fourth quarter of 2019, we sold the remaining 50 percent we acquired through our acquisition with BTG of the future Zytiga royalty stream for an upfront cash payment of $256 million to the Ontario Municipal Employees Retirement System (OMERS). In accordance with FASB ASC Topic 860, Transfers and Servicing, we are accounting for the transfer of the royalty stream to OMERS as a secured borrowing, continue to recognize the financial asset and associated liability in our consolidated balance sheets and do not expect to receive any future cash benefit from Zytiga royalties.

We have elected the fair value option to account for our licensing arrangements' financial asset and financial liability in accordance with FASB ASC Topic 825, Financial Instruments. As of December 31, 2020, we have recorded the fair values 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.

The recurring Level 3 fair value measurements of our licensing arrangements recognized in our consolidated balance sheets as of December 31, 2020 include the following significant unobservable inputs:


Licensing Arrangements	Fair Value as of December 31, 2020	Valuation Technique	Unobservable Input	Range			Weighted Average(1)
Financial Asset	$365 million	Discounted Cash Flow	Discount Rate	15%			15%

Projected Year of Payment	2021	-	2025	2023
Financial Liability	$407 million	Discounted Cash Flow	Discount Rate	12%	-	15%	13%

Projected Year of Payment	2021	-	2027	2024

(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.

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 December 31, 2020. 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 or losses from the licensing arrangement.

Changes in the fair value of our licensing arrangements' financial asset were as follows:


(in millions)
Balance as of December 31, 2018	$	—
Amounts recorded related to current year acquisition	567
Proceeds from royalty rights	(52)
Fair value adjustment (expense) benefit	3
Balance as of December 31, 2019	$	518
Proceeds from royalty rights	(175)
Fair value adjustment (expense) benefit	22
Balance as of December 31, 2020	$	365

Changes in the fair value of our licensing arrangements' financial liability were as follows:


(in millions)
Balance as of December 31, 2018	$	—
Amounts recorded related to current year acquisition	315
Proceeds from royalty rights transfer	256
Balance as of December 31, 2019	$	571
Payments for royalty rights	(186)
Fair value adjustment expense (benefit)	22
Balance as of December 31, 2020	$	407

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 and Strategic Investments for a discussion of our strategic investments and Note D – 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 $10.774 billion as of December 31, 2020, including $1.118 billion relating to the euro-denominated December 2027 Notes, and $11.020 billion as of December 31, 2019, including $1.004 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 F – Contractual Obligations and Commitments for a discussion of our debt obligations.

NOTE F – CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Borrowings and Credit Arrangements

We had total debt outstanding of $9.143 billion as of December 31, 2020 and $10.008 billion as of December 31, 2019, with current maturities of $13 million as of December 31, 2020 and $1.416 billion as of December 31, 2019. The debt maturity schedule for our long-term debt obligations is presented below:


	Issuance Date	Maturity Date	As of December 31,				Coupon Rate(1)
(in millions, except interest rates)		2020	2019
May 2022 Notes	May 2015	May 2022	$	250	$	500	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		—		1.900%
March 2026 Notes	February 2019	March 2026	850		850		3.750%
December 2027 Notes	November 2019	December 2027	1,105		1,011		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		—		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%
August 2022 Term Loan	August 2019	August 2022	—		1,000
Unamortized Debt Issuance Discount and Deferred Financing Costs		2022 - 2049	(88)		(83)
Unamortized Gain on Fair Value Hedges		2023	5		7
Finance Lease Obligation		Various	7		6
Long-term debt			$	9,130	$	8,592

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, and the August 2022 Term Loan, which was a variable-rate instrument based on LIBOR.

(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.

Revolving Credit Facility

We maintain a $2.750 billion revolving credit facility (Revolving Credit Facility) with a global syndicate of commercial banks that matures on December 19, 2023 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 Revolving Credit Facility. The credit agreement requires that we comply with certain covenants, including a financial covenant described within Financial Covenant below. In the first quarter of 2020, we refinanced $1.360 billion of commercial paper using proceeds from the Revolving Credit Facility. In April 2020, we entered into the April 2021 Term Loan, described below, and used the proceeds to repay a portion of the amounts outstanding under the Revolving Credit Facility. On May 28, 2020, we entered into an amendment of the credit agreement to permit payment of regularly scheduled quarterly cash dividends and other limited cash payments on our issued 5.50% Mandatory Convertible Preferred Stock, Series A (MCPS) and other capital stock issued by us, which is or becomes mandatorily convertible into or exchangeable for shares of our common stock. In May 2020, we completed our senior notes offering described below and used a portion of the proceeds to repay $450 million outstanding under the Revolving Credit Facility. There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2020 or December 31, 2019.

Term Loans

On April 21, 2020, in a proactive step to offset the potential impact of the COVID-19 pandemic on our short-term liquidity, we entered into a $1.250 billion term loan credit agreement scheduled to mature on April 20, 2021 (April 2021 Term Loan). We used proceeds from the April 2021 Term Loan to repay a portion of the amounts outstanding under the Revolving Credit Facility and the remaining amount under the December 2020 Term Loan described below. In May 2020, as described in further detail below, we used a portion of the proceeds from the May 2020 senior notes offering to prepay $500 million of amounts outstanding under the April 2021 Term Loan, and a portion of the combined net proceeds from our MCPS and common stock offerings to repay in full the remaining $750 million outstanding under the April 2021 Term Loan and to pay related fees, expenses and premiums, after which it was terminated.

On February 27, 2020, we entered into a $1.000 billion term loan credit agreement scheduled to mature on February 25, 2021 (February 2021 Term Loan). We used the proceeds from the February 2021 Term Loan to repay the remaining amounts outstanding on the Three-Year Delayed Draw Term Loan, described below. On May 28, 2020, we entered into an amendment of the credit agreement to permit payment of regularly scheduled quarterly cash dividends and other limited cash payments on our issued MCPS and other capital stock issued by us, which is or becomes mandatorily convertible into or exchangeable for shares of our common stock. The February 2021 Term Loan bears interest at an annual rate of LIBOR plus a margin of 0.85%. The credit agreement is subject to a financial covenant described below under Financial Covenant, and also contains customary events of default, which may result in the acceleration of any outstanding commitments. We used a portion of the proceeds from our May 2020 senior notes offering, described below, to prepay $750 million of amounts outstanding under the February 2021 Term Loan in the second quarter of 2020. In the third quarter of 2020, we prepaid the remaining $250 million and terminated the February 2021 Term Loan.

On December 5, 2019, we entered into a $700 million term loan credit agreement, which was scheduled to mature on December 3, 2020 (December 2020 Term Loan). As of December 31, 2019, we had $700 million outstanding under the December 2020 Term Loan, and we used the proceeds to repay a portion of the Two-Year Delayed Draw Term Loan, described below. In January 2020, we repaid $300 million of the outstanding balance of the December 2020 Term Loan with proceeds from our commercial paper program. In April 2020, we used the proceeds from the April 2021 Term Loan to repay the remaining amounts outstanding under the December 2020 Term Loan and terminated the December 2020 Term Loan.

On December 19, 2018, we entered into a $2.000 billion senior unsecured delayed-draw term loan facility consisting of a $1.000 billion two-year delayed draw term loan credit facility maturing in two years from the date of the closing of the acquisition of BTG (Two-Year Delayed Draw Term Loan) and a $1.000 billion three-year delayed draw term loan credit facility maturing in three years from the date of the closing of the acquisition of BTG (Three-Year Delayed Draw Term Loan). On August 19, 2019, for the purpose of funding the acquisition of BTG, we borrowed $1.000 billion under the Two-Year Delayed Draw Term Loan and $1.000 billion under the Three-Year Delayed Draw Term Loan. In 2019, we repaid all amounts outstanding on the Two-Year Delayed Draw Term Loan with proceeds from the sale of the Zytiga-related royalty interests, the December 2020 Term Loan and commercial paper and terminated the facility. As of December 31, 2019, we had $1.000 billion outstanding under the Three-Year Delayed Draw Term Loan (also referred to as the "August 2022 Term Loan" in the debt maturity schedule above). In the first quarter of 2020, we repaid all amounts outstanding on the Three-Year Delayed Draw Term Loan with proceeds from the February 2021 Term Loan and terminated the facility. As of December 31, 2020, we had no amounts outstanding under the Two and Three-Year Delayed Draw Term Loans and the facilities were terminated.

Financial Covenant

As of and through December 31, 2020, we were in compliance with the financial covenant required by our credit facilities described above.


			Covenant Requirement as of December 31, 2020						Actual as of December 31, 2020
Maximum permitted leverage ratio(1)			4.75 times						3.48 times

(1) Ratio of total debt to deemed consolidated EBITDA, as defined by the credit agreements, as amended.

On April 21, 2020, we entered into an agreement with our banking syndicates to amend the financial covenant requirement for all of our outstanding credit arrangements as follows: (i) established a deemed Consolidated EBITDA of $671 million for the second, third and fourth quarters of 2020, reflecting average quarterly Consolidated EBITDA, as defined in the credit agreements, for 2018 and 2019; and (ii) maintain the maximum permitted leverage ratio of 4.75 times through the remainder of 2020, with a step-down for each succeeding fiscal quarter end to 4.50 times, 4.25 times, 4.00 times and ultimately 3.75 times for the fourth quarter of 2021 and through the remaining term of the facility. In addition, pursuant to the April 21, 2020

Revolving Credit Facility and February 2021 Term Loan amendments, the definition of "Material Adverse Effect" has been amended to exclude the direct and indirect effects of the COVID-19 pandemic from what constitutes a material adverse effect through the remainder of 2020.

The financial covenant requirement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreements, through maturity, of any non-cash charges and up to $500 million in restructuring and restructuring-related net charges related to our current or future restructuring plans. As of December 31, 2020, we had $101 million of the restructuring net charges 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 $2.624 billion in the aggregate. As of December 31, 2020, we had $926 million of the litigation exclusion remaining.

Any inability to maintain compliance with this amended covenant could require us to seek to further renegotiate the terms of our Revolving Credit Facility 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 Revolving Credit Facility commitments would terminate, and any amounts borrowed under the facility would become immediately due and payable. Furthermore, any termination of our 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 Revolving Credit Facility, as discussed above. Outstanding commercial paper directly reduces borrowing capacity under the Revolving Credit Facility. In the first quarter of 2020, we refinanced $1.360 billion of commercial paper using proceeds from the Revolving Credit Facility and did not have any commercial paper outstanding as of December 31, 2020.


	As of December 31,
(in millions, except maturity and yield)	2020			2019
Commercial paper outstanding (at par)	$	—		$	711
Maximum borrowing capacity	2,750			2,750
Borrowing capacity available	2,750			2,039
Weighted average maturity	0 days			55 days
Weighted average yield	—		%	2.21		%

Senior Notes

We had senior notes outstanding of $9.205 billion as of December 31, 2020 and $7.661 billion as of December 31, 2019.

On December 29, 2020, we redeemed $250 million of our $500 million 3.375% senior notes due 2022 (May 2022 Notes) at a redemption price calculated in accordance with the terms of the May 2022 Notes and its indenture, plus accrued and unpaid interest through, but excluding, the date of redemption.

In May 2020, we completed an offering of $1.700 billion in aggregate principal amount of senior notes comprised of $500 million of 1.900% senior notes due June 2025 and $1.200 billion of 2.650% senior notes due June 2030. We used the net proceeds from the offering to refinance $450 million of amounts outstanding under the Revolving Credit Facility, prepay $750 million of amounts outstanding under the $1.000 billion February 2021 Term Loan, prepay $500 million of amounts outstanding under the $1.250 billion April 2021 Term Loan and pay related fees, expenses and premiums.

In November 2019, we completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027 (December 2027 Notes). The euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our euro functional entities. Refer to Note E – Hedging Activities and Fair Value Measurements for additional information. We used a portion of the net proceeds from our November 2019 senior notes offering to repay certain outstanding principal amounts of our senior notes including $206 million of our $450 million 4.125% senior notes due 2023, $566 million of our $1.000 billion 4.000% senior notes due 2028 and $227 million of our $750 million 3.850% senior notes due 2025 and pay accrued and unpaid interest, premiums, fees and expenses in

connection with the transaction. In 2019, we incurred associated debt extinguishment charges of $86 million presented in Interest expense in our consolidated statements of operations.

In February 2019, we completed an offering of $4.300 billion in aggregate principal amount of senior notes comprised of $850 million of 3.450% senior notes due March 2024, $850 million of 3.750% senior notes due March 2026, $850 million of 4.000% senior notes due March 2029, $750 million of 4.550% senior notes due March 2039 and $1.000 billion of 4.700% senior notes due March 2049. We used a portion of the net proceeds from the offering to repay the $850 million plus accrued interest and premium of our 6.000% senior notes due in January 2020, the $600 million plus accrued interest and premium of our 2.850% senior notes due in May 2020 and the $1.000 billion plus accrued interest of our August 2019 Term Loan. In 2019, the remaining proceeds were used to finance a portion of our acquisition of BTG.

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).

Our $8.855 billion of senior notes issued in 2009, 2013, 2015, 2018, 2019 and 2020 contain a change-in-control provision, which provides that each holder of the senior notes may require us to repurchase all or a portion of the notes at a price equal to 101 percent of the aggregate repurchased principal, plus accrued and unpaid interest, if a rating event, as defined in the indenture, occurs as a result of a change-in-control, as defined in the indenture. Any other credit rating changes may impact our borrowing cost, but do not require us to repay any borrowings.

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 consolidated balance sheets, are aggregated by contract denominated currency below (in millions):


	As of December 31, 2020				As of December 31, 2019
Factoring Arrangements	Amount De-recognized		Weighted Average Interest Rate		Amount De-recognized		Weighted Average Interest Rate
Euro denominated	$	148	1.9	%	$	171	1.4	%
Yen denominated	240		0.6	%	226		0.6	%
Renminbi denominated(1)	—		3.5	%	n/a		n/a

(1) The Renminbi denominated factoring arrangement was entered into in 2020 and had remaining capacity available as of December 31, 2020. There were no amounts de-recognized for accounts receivable as of December 31, 2020 associated with this arrangement.

Other Contractual Obligations and Commitments

We had outstanding letters of credit of $124 million as of December 31, 2020 and $105 million as of December 31, 2019, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of December 31, 2020 and December 31, 2019, none of the beneficiaries had drawn upon the letters of credit or guarantees, accordingly, we have not recognized a related liability for our outstanding letters of credit in our consolidated balance sheets as of December 31, 2020 and December 31, 2019.

Future minimum purchase obligations, relating primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business, were as of December 31, 2020 (in millions):


Fiscal Year	Unrecorded Purchase Obligations
2021	$	403
2022	53
2023	41
2024	26
2025	13
Thereafter	—
	$	535

NOTE G – LEASES

We have operating and finance leases for real estate including corporate offices, land, warehouse space, and vehicles and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). We recognize lease expense on a straight-line basis over the lease term for short-term leases that we do not record on our balance sheet. If there is a change in our assessment of the lease term and, as a result, the remaining lease term extends more than 12 months from the end of the previously determined lease term, or we subsequently become reasonably certain that we will exercise an option to purchase the underlying asset, the lease no longer meets the definition of a short-term lease and is accounted for as either an operating or finance lease and recognized on the balance sheet. In accordance with FASB ASC Topic 842, Leases, we account for the lease components and the non-lease components as a single lease component, with the exception of our warehouse leases. Our leases have remaining lease terms of less than 1 year to approximately 56 years, some of which may include options to extend the leases for up to 10 years. If we are reasonably certain we will exercise an option to extend the lease, the time period covered by the extension option is included in the lease term.

We determine whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of the arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

Our operating lease right-of-use assets are presented within Other long-term assets and corresponding liabilities are presented within Other current liabilities and Other long-term liabilities on our consolidated balance sheets. Finance leases are immaterial to our consolidated financial statements. Refer to Note F – Contractual Obligations and Commitments for additional information. The following table presents supplemental balance sheet information related to our operating leases:


	As of December 31,
(in millions)	2020		2019
Assets
Operating lease right-of-use assets in Other long-term assets	$	458	$	336
Liabilities
Operating lease liabilities in Other current liabilities	70		67
Operating lease liabilities in Other long-term liabilities	401		276

The following table presents the weighted average remaining lease term and discount rate information related to our operating leases:


	As of December 31,
	2020	2019
Weighted average remaining lease term	10.5 years	5.8 years
Weighted average discount rate	2.4%	3.7%

Our operating lease cost under FASB ASC Topic 842 was $92 million in 2020 and $80 million in 2019. Rent expense under FASB ASC Topic 840 amounted to $92 million in 2018.

The following table presents supplemental cash flow information related to our operating leases:


	Year Ended December 31,
(in millions)	2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities
Operating cash flows from operating leases	$	91	$	77

Right-of-use assets obtained in exchange for operating lease obligations were $202 million as of December 31, 2020 and $137 million as of December 31, 2019.

The following table presents the maturities of our operating lease liabilities as of December 31, 2020 (in millions):


Fiscal year	Operating Leases
2021	$	86
2022	75
2023	60
2024	49
2025	43
Thereafter	218
Total future minimum operating lease payments	530
Less: imputed interest	(59)
Present value of operating lease liabilities	$	471

As of December 31, 2020, we have additional leases for office space and warehouse space, that have not yet commenced, of approximately $25 million. These leases will commence in 2021 and thereafter with lease terms of up to 15 years.

NOTE H – RESTRUCTURING-RELATED ACTIVITIES

2019 Restructuring Plan

On November 15, 2018, our Board of Directors approved, and we committed to a global restructuring program (the 2019 Restructuring Plan). The 2019 Restructuring Plan is intended to support our effort to improve operating performance and meet anticipated market demands by ensuring that we are appropriately structured and resourced to deliver sustainable value to patients and customers. Key activities under the 2019 Restructuring Plan include supply chain network optimization intended to maximize our global manufacturing and distribution network capacity and building functional capabilities that support business growth. These activities were initiated in 2019, with the majority of activity expected to be complete by the end of 2022, following a one-year extension approved by our Board of Directors on February 22, 2021.

On February 22, 2021, our Board of Directors approved an extension and expansion of the 2019 Restructuring Plan to include additional cost optimization activities, including the centralization of certain functional capabilities within the international regions in which we operate, and a one-year extension of the program to complete these activities along with certain other initiatives that were delayed in 2020 due to restrictions related to the COVID-19 pandemic. We expect the majority of activity associated with our 2019 Restructuring Plan, including the expansion, to be substantially complete by the end of 2022.

The following table provides a summary of our estimates of total pre-tax charges associated with the 2019 Restructuring Plan, including the expansion, by major type of cost, of which approximately $340 million to $440 million are expected to result in cash outlays:


Type of Cost (in millions)	Total Estimated Amount Expected to be Incurred
Restructuring charges:
Termination benefits	$75	-	$100
Other(1)	25	-	50
Restructuring-related expenses:
Other(2)	275	-	325
	$375	-	$475

(1) Consists primarily of consulting fees and costs associated with contractual cancellations.

(2) Comprised of other costs directly related to the restructuring program, including program management, accelerated depreciation, fixed asset write-offs, and costs to transfer product lines among facilities.

2016 Restructuring Plan

On June 6, 2016, our Board of Directors approved, and we committed to a restructuring initiative (the 2016 Restructuring Plan). The 2016 Restructuring Plan was intended to develop global commercialization, technology and manufacturing capabilities in key growth markets, build on our Plant Network Optimization (PNO) strategy which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and expand operational efficiencies in support of our operating income margin goals. Key activities under the 2016 Restructuring Plan included strengthening global infrastructure through evolving global real estate assets and workplaces, developing global commercial and technical competencies, enhancing manufacturing and distribution expertise in certain regions and continuing implementation of our PNO strategy. These activities were initiated in the second quarter of 2016 and substantially completed in 2019.

The following table provides a summary of total pre-tax charges associated with the 2016 Restructuring Plan by major type of cost, of which approximately $255 million resulted in cash outlays:


Type of cost (in millions)	Total Amount Incurred
Restructuring charges:
Termination benefits	$	86
Other(1)	21
Restructuring-related expenses:
Other(2)	164
	$	271

(1) Consists primarily of consulting fees and costs associated with contract cancellations.

(2) Comprised of other costs directly related to the 2016 Restructuring Plan, including program management, accelerated depreciation, fixed asset write-offs and costs to transfer product lines among facilities.

The following presents the restructuring and restructuring-related net charges (credits) by major type and line item within our accompanying consolidated statements of operations (in millions):


Year Ended December 31, 2020	Termination Benefits		Transfer Costs		Other		Total
Restructuring charges	$	27	$	—	$	24	$	52
Restructuring-related expenses:
Cost of products sold	—		64		—		64
Selling, general and administrative expenses	—		—		51		51
Research and development expenses	—		—		4		4
	—		64		55		119
	$	27	$	64	$	79	$	171


Year Ended December 31, 2019	Termination Benefits		Transfer Costs		Other		Total
Restructuring charges	$	38	$	—	$	—	$	38
Restructuring-related expenses:
Cost of products sold	—		32		—		32
Selling, general and administrative expenses	—		—		13		13
	—		32		13		44
	$	38	$	32	$	13	$	82


Year Ended December 31, 2018	Termination Benefits		Transfer Costs		Other		Total
Restructuring charges	$	32	$	—	$	4	$	36
Restructuring-related expenses:
Cost of products sold	—		47		—		47
Selling, general and administrative expenses	—		—		12		12
	—		47		12		59
	$	32	$	47	$	16	$	96

LOTUS Discontinuation

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 platform. We estimate the decision will result in total pre-tax restructuring and restructuring-related net charges of approximately $80 million to $90 million, which includes $30 million to $40 million of estimated charges expected to result in future cash outlays. We recorded $55 million of restructuring and restructuring-related net charges associated with the product discontinuation in 2020, which is included in the table above for the year ended December 31, 2020, and expect the remaining activity to be substantially complete during early 2021.

In addition, during 2020 we recorded $119 million of inventory charges within Cost of products sold and $8 million of Intangible asset impairment charges associated with the product discontinuation.

The following table presents cumulative restructuring and restructuring-related net charges incurred as of December 31, 2020, related to our ongoing Restructuring Plans by major type:


(in millions)	2016 Restructuring Plan		2019 Restructuring Plan		Total
Termination benefits	$	86	$	38	$	124
Other(1)	21		26		46
Total restructuring charges	106		64		171
Transfer costs	126		87		213
Other(2)	39		28		66
Restructuring-related charges	164		115		279
	$	271	$	179	$	450

(1) Consists primarily of consulting fees and costs associated with contract cancellations.

(2) Comprised of other costs directly related to our Restructuring Plans, including program management, accelerated depreciation, and fixed asset write-offs.

Cumulative cash payments associated with our ongoing Restructuring Plans were made using cash generated from operations and are comprised of the following:


(in millions)	2016 Restructuring Plan		2019 Restructuring Plan		Total
Termination benefits	$	89	$	12	$	100
Transfer costs	125		77		202
Other	41		25		67
	$	255	$	114	$	369

NOTE I – SUPPLEMENTAL BALANCE SHEET INFORMATION

Components of selected captions in our accompanying consolidated balance sheets are as follows:

Trade accounts receivable, net


	As of December 31,
(in millions)	2020		2019
Trade accounts receivable	$	1,637	$	1,902
Allowance for credit losses	(105)		(74)

	$	1,531	$	1,828

The following is a rollforward of our Allowance for credit losses:


	Year Ended December 31,
(in millions)	2020		2019		2018
Beginning balance	$	74	$	68	$	68
Cumulative effect adjustment for adoption of ASU 2016-13	10		n/a		n/a
Credit loss expense	49		23		19
Write-offs	(27)		(17)		(19)
Ending balance	$	105	$	74	$	68

Note: Effective January 1, 2020, we adopted FASB ASC Topic 326 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. Prior period amounts have not been restated and are presented in accordance with FASB ASC Topic 310. Please refer to Note R – New Accounting Pronouncements for additional information.

Inventories


	As of December 31,
(in millions)	2020		2019
Finished goods	$	893	$	971
Work-in-process	109		192
Raw materials	349		416
	$	1,351	$	1,579

Approximately 33 percent of our finished goods inventory as of December 31, 2020 and approximately 32 percent as of December 31, 2019 was at customer locations pursuant to consignment arrangements or held by sales representatives.

Other current assets


	As of December 31,
(in millions)	2020		2019
Restricted cash and restricted cash equivalents	$	208	$	346
Derivative assets	133		105
Licensing arrangements	148		186

Other	263		243
	$	751	$	880

Property, plant and equipment, net


	As of December 31,
(in millions)	2020		2019
Land	$	104	$	117
Buildings and improvements	1,292		1,198
Equipment, furniture and fixtures	3,465		3,411
Capital in progress	446		442
	5,308		5,169
Less: accumulated depreciation	3,224		3,089
	$	2,084	$	2,079

Depreciation expense was $333 million in 2020, $311 million in 2019 and $296 million in 2018.

Other long-term assets


	As of December 31,
(in millions)	2020		2019
Restricted cash equivalents	$	52	$	43
Operating lease right-of-use assets	458		336
Derivative assets	109		216
Investments	918		458
Licensing arrangements	218		332
Other	166		144
	$	1,921	$	1,529

Accrued expenses


	As of December 31,
(in millions)	2020		2019
Legal reserves	$	505	$	470
Payroll and related liabilities	681		708
Rebates	331		298
Contingent consideration	26		56
Other	656		576
	$	2,197	$	2,109

Other current liabilities


	As of December 31,
(in millions)	2020		2019
Deferred revenue	$	138	$	144
Licensing arrangements	153		197
Taxes payable	158		265
Liabilities held for sale	200		—
Other	307		195
	$	958	$	800

Other long-term liabilities


	As of December 31,
(in millions)	2020		2019
Accrued income taxes	$	547	$	667
Legal reserves	64		227
Contingent consideration	171		299
Licensing arrangements	253		374
Operating lease liabilities	401		276
Deferred revenue	257		257
Other	615		535
	$	2,309	$	2,635

NOTE J – INCOME TAXES

Our Income (loss) before income taxes consisted of the following:


	Year Ended December 31,
(in millions)	2020		2019		2018
Domestic	$	(660)	$	(1,145)	$	35
Foreign	581		1,832		1,387
	$	(79)	$	687	$	1,422

The related expense (benefit) for income taxes consisted of the following:


	Year Ended December 31,
(in millions)	2020		2019		2018
Current
Federal	$	(29)	$	120	$	(221)
State	(35)		54		(27)
Foreign	151		101		160
	87		275		(87)

Deferred
Federal	(26)		(146)		(124)
State	(6)		(18)		4
Foreign	(53)		(4,124)		(42)
	(85)		(4,288)		(162)
	$	2	$	(4,013)	$	(249)

The reconciliation of income taxes at the federal statutory rate to the actual expense (benefit) for income taxes is as follows:


	Year Ended December 31,
	2020		2019		2018
			(reclassified)(1)		(reclassified)(1)
U.S. federal statutory income tax rate	(21.0)	%	21.0	%	21.0	%
State income taxes, net of federal benefit	16.6	%	6.7	%	0.1	%
Domestic taxes on foreign earnings	155.4	%	21.9	%	0.5	%
Effect of foreign taxes	(40.7)	%	(47.6)	%	(8.4)	%
Acquisition-related	(16.7)	%	12.2	%	2.1	%
Research credit	(43.0)	%	(4.2)	%	(2.6)	%
Valuation allowance	(42.0)	%	1.1	%	(5.2)	%

Goodwill impairment charges	3.7	%	—	%	—	%
Compensation-related	(7.7)	%	(0.3)	%	(1.0)	%
Non-deductible expenses	64.4	%	3.6	%	0.8	%
Uncertain tax positions	(96.8)	%	1.4	%	(22.0)	%
TCJA net impact	—	%	—	%	(4.7)	%
Intra-entity asset transfers	10.2	%	(597.0)	%	—	%

Return to provision	(37.3)	%	(0.2)	%	(0.2)	%
Change in tax rates	51.8	%	(0.2)	%	0.5	%
Other, net	6.0	%	(2.4)	%	1.6	%
	2.9	%	(584.0)	%	(17.5)	%

(1) Due to the disclosure of additional rate reconciling items in 2020, we have reclassified select items in prior years to align with the new categories disclosed in the current year.

Significant components of our deferred tax assets and liabilities are as follows:


	As of December 31,
(in millions)	2020		2019

Deferred Tax Assets:
Inventory costs and related reserves	$	10	$	—
Tax benefit of net operating loss and credits	557		545
Reserves and accruals	308		258
Restructuring-related charges	23		20
Litigation and product liability reserves	82		168
Investment write-down	—		42
Compensation related	134		121
Federal benefit of uncertain tax positions	9		10
Intangible assets	3,551		3,447
Other	(6)		—
	4,668		4,611
Less: valuation allowance	(887)		(915)
	3,781		3,696
Deferred Tax Liabilities:
Property, plant and equipment	1		16
Unrealized gains and losses on derivative financial instruments	12		52
Investment write-up	34		—
Inventory costs and related reserves	—		2
Other	—		25
	47		95

Net Deferred Tax Assets	3,734		3,601
Prepaid on intercompany profit	194		195
Net Deferred Tax Assets and Prepaid on Intercompany Profit	$	3,928	$	3,796

Our deferred tax assets, deferred tax liabilities and prepaid on intercompany profit, are included in the following locations within our accompanying consolidated balance sheets (in millions):


	Location on Consolidated Balance Sheets	As of December 31,
Component	2020			2019
Prepaid on intercompany profit	Prepaid income taxes	$	194		$	195
Non-current deferred tax asset	Assets held for sale	2			—
Non-current deferred tax asset	Deferred tax assets	4,210			4,196
Deferred Tax Assets and Prepaid on Intercompany Profit		4,406			4,391

Non-current deferred tax liability	Deferred tax liabilities	330			595

Non-current deferred tax liability	Liabilities held for sale in Other current liabilities	148			—
Deferred Tax Liabilities		478			595

Net Deferred Tax Assets and Prepaid on Intercompany Profit		$	3,928		$	3,796

As of December 31, 2020, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $474 million. As of December 31, 2019, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $449 million. In addition, we had foreign tax net operating loss carryforwards and tax credits, the tax effect of which was $83 million as of December 31, 2020, as compared to $105 million as of December 31, 2019. These tax attributes expire periodically beginning in 2021.

During the fourth quarter of 2019, we completed intra-entity asset transfers of certain intellectual property rights among various wholly owned subsidiaries. These transactions occurred to more closely align the global economic ownership of our intellectual property rights with our current and future business operations. These transactions did not result in a taxable gain in any jurisdiction, however, some of the transactions did create a step-up in the tax-deductible basis in the transferred intellectual property rights in certain jurisdictions. As a result, we recorded deferred tax assets in the amount of $4.102 billion, which represents the book and tax basis differences measured at applicable statutory tax rates, net of a valuation allowance of $542 million.

After consideration of all positive and negative evidence, we believe that it is more likely than not that a portion of our deferred tax assets will not be realized. As a result, we established a valuation allowance of $887 million as of December 31, 2020 and $915 million as of December 31, 2019, representing a decrease of $28 million. The decrease in the valuation allowance as of December 31, 2020, as compared to December 31, 2019, is primarily due to current year utilization of loss carryforwards and the concurrent release of the related valuation allowance. The income tax impact of the unrealized gain or loss component of other comprehensive income and stockholders' equity was a benefit of $78 million in 2020, a charge of $13 million in 2019 and a charge of $37 million in 2018.

We obtain tax incentives through Free Trade Zone Regime offered in Costa Rica which allows 100.0 percent exemption from income tax in the first eight years of operations and 50.0 percent exemption in the following four years. This tax incentive resulted in income tax savings of $64 million for 2020, $173 million for 2019 and $146 million for 2018. The tax incentive for 100.0 percent exemption from income tax was renewed during 2019 and is expected to expire in 2027. The impact on Net income (loss) per common share - assuming dilution was $0.04 for 2020, $0.12 for 2019 and $0.10 for 2018. Additionally, we benefit from tax incentives in Puerto Rico resulting in income tax savings of $30 million for 2020, and immaterial amounts for 2019 and 2018.

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. As of December 31, 2019, we had $455 million of gross unrecognized tax benefits, of which a net $355 million, if recognized, would affect our effective tax rate. As of December 31, 2018, we had $427 million of gross unrecognized tax benefits, of which a net $332 million, if recognized, would affect our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	Year Ended December 31,
(in millions)	2020		2019		2018
Beginning Balance	$	455	$	427	$	1,238
Additions based on positions related to the current year	28		30		79
Additions based on positions related to prior years	6		45		4
Reductions for tax positions of prior years	(186)		(34)		(433)
Settlements with taxing authorities	(27)		(4)		(459)
Statute of limitation expirations	(15)		(9)		(3)
Ending Balance	$	261	$	455	$	427

We are subject to U.S. Federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters through 2016 and substantially all material state and local income tax matters through 2010. We have concluded all foreign income tax matters through 2013, with the exception of issues for Italy, which have concluded through 2002.

In the second quarter of 2018, a decision was entered by the U.S. Tax Court resolving all disputes for Guidant Corporation for its 2001 through 2006 tax years and our 2006 and 2007 tax years as well as the tax issues related to our 2006 transaction with Abbott Laboratories. Additionally, we resolved all issues with the IRS Office of Appeals for our 2008 through 2010 tax years. The final settlement calculation resulted in a final net tax payment of $303 million plus $307 million of estimated interest, which was remitted in the second quarter of 2018. Due to the final settlement of these disputes, we recorded a net tax benefit of $250 million in 2018 to remove a reserve related to these years.

In the fourth quarter of 2018, we received a Revenue Agent Report (RAR) from the IRS for our 2011 through 2013 tax years. We remitted $93 million to the IRS in the fourth quarter of 2018 reflecting the net balance of tax and interest due for these years after consideration of amounts owed to us by the IRS. Due to the resolution of these tax years, we recorded a net tax benefit of $90 million in 2018 to remove a reserve related to these years.

In the third quarter of 2020, we received notification from the IRS regarding the examination of our 2014 through 2016 tax years stating that the Joint Committee on Taxation completed its review on July 21, 2020, and the IRS examination was resolved. Due to the resolution of these tax years, we recorded a net tax benefit of $91 million in the third quarter of 2020 to release the reserves related to these years. We received a refund of $62 million from the IRS in the fourth quarter of 2020 reflecting the net balance of amounts owed to us by the IRS after consideration of tax and interest due for these years.

We recognize interest and penalties related to income taxes as a component of income tax expense. We had $41 million accrued for gross interest and penalties as of December 31, 2020 and $19 million as of December 31, 2019. We recognized net tax expense related to interest and penalties of $7 million in 2020, as compared to a net tax benefit of $1 million in 2019 and a net tax benefit of $498 million in 2018. The increase in our net tax expense related to interest and penalties as of December 31, 2020, as compared to December 31, 2019, is related to reaching favorable settlements with the taxing authorities during 2019.

It is reasonably possible that within the next 12 months we will resolve transactional- related issues with foreign and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $27 million.

During 2018, we completed our analysis and recording of all tax effects related to the TCJA, as required under SAB 118, and recorded a net benefit of $67 million, exclusive of the one-time transition tax adjustment described below.

For the year ended December 31, 2017, we were required under the TCJA to calculate a one-time transition tax based on our total post-1986 foreign subsidiaries' earnings and profits (E&P) that we previously deferred from U.S. income taxes. As a result of various audit activities, the revised amount of transition tax was approximately $939 million as of December 31, 2020 as compared to $856 million as of December 31, 2018. We anticipate offsetting this liability against existing tax attributes reducing the required payment to approximately $597 million, which will be remitted over an eight-year period. We have begun remitting the required installment payments, with a balance remaining of $477 million as of December 31, 2020. In addition, we have provided for U.S. state income taxes of $20 million on all U.S. dollar-denominated E&P accumulated through December 31, 2017, which constitutes the preponderance of our foreign subsidiaries' accumulated E&P through December 31, 2017. We intend to indefinitely reinvest the unremitted foreign earnings of all other subsidiaries as of December 31, 2017, as well as all subsequent earnings generated by all of our foreign subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings and additional outside basis difference in these entities is not practicable.

We are subject to a territorial tax system under the TCJA, in which we are required to provide for tax on Global Intangible Low Taxed Income (GILTI) earned by certain foreign subsidiaries. We have established an accounting policy election to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.

Economic stimulus legislation has been enacted in many countries in response to the COVID-19 pandemic. In the U.S., the CARES Act was signed into law on March 27, 2020 and 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 through the end of 2020. This allowed us to preserve cash generated from operations to service our debt obligations and other near-term commitments.

NOTE K – 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.

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 $569 million as of December 31, 2020 and $697 million as of December 31, 2019 and includes certain estimated costs of settlement, damages and defense. The decrease in our legal accrual was mainly due to settlement payments related to litigation with Channel Medsystems, Inc. (Channel), partially offset by charges associated with product liability cases or claims related to transvaginal surgical mesh products. A portion of our legal 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 $208 million as of December 31, 2020 and $346 million as of December 31, 2019. Refer to Note A – Significant Accounting Policies for additional information.

We recorded litigation-related net charges of $278 million in 2020, primarily related to transvaginal mesh products, inclusive of a reserve related to claims made by a coalition of state attorneys general. Those claims settled in principle in the fourth quarter of 2020.

We recorded litigation-related net charges of $115 million in 2019, which included a net charge of $223 million in the fourth quarter of 2019, primarily related to litigation with Channel, net charges of $25 million in the third quarter of 2019 and $15 million in the second quarter of 2019, primarily related to transvaginal surgical mesh product liability litigation, and a gain of $148 million recorded in the first quarter of 2019, which represents a portion of the total $180 million one-time settlement payment received from Edwards Lifesciences Corporation (Edwards) in January 2019. 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 consolidated financial statements. All other legal and product liability charges, credits and costs are recorded within Selling, general and administrative expenses. As such, a portion of the related gain from this settlement was recorded in Selling, general and administrative expenses in our consolidated statements of operations.

We recorded litigation-related net charges of $103 million in 2018, primarily related to transvaginal surgical mesh product liability litigation. 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 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, BSC 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 against the four asserted patents. All IPRs have concluded, and Cook and Boston Scientific 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 Boston Scientific patents remain valid, remanding two of the patents for further review by the USPTO's Patent Trial and Appeal Board. In November, the Patent Office issued remand rulings invalidating several additional claims. The district court had stayed the case pending the appeals court decision on the IPRs, which is now complete. In the first or second quarter of 2021, the case will proceed before the United States District Court for the Southern District of Indiana, with BSC asserting two patents against Cook. Trial is anticipated in 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 System. On June 22, 2020, this action was consolidated with case 18-cv-664, described below. The court set trial for October 2021.

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 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.

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 Spinal Cord Stimulation Systems. On December 9, 2019, Nevro filed an answer and counterclaims, in which it alleged that our Spinal Cord Stimulation systems infringe five Nevro patents. On June 22, 2020, this action was consolidated with case 16-cv-1163. The theft of trade secrets, patent counterclaims, and patent infringement claims from case 16-cv-1163 were set for trial in October 2021. 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.

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.

Product Liability Litigation

As of January 27, 2021, approximately 54,000 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 January 27, 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 52,000 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 52,000 cases and claims, approximately 48,000 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. During the fourth quarter of 2013, we received written discovery requests from certain state attorneys general offices regarding our transvaginal surgical mesh products. We have responded to those requests. On December 12, 2019 the Mississippi Attorney General filed suit against BSC in State Court alleging violations of the Mississippi Consumer Protection Act which the Company plans to vigorously defend. There are fewer than 60 claims in the United Kingdom and fewer than 125 cases in Australia. 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.

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. While we believe that our accrual associated with this matter is adequate, changes to this accrual may be required in the future as additional information becomes available. We have also established an accrual related to the claims made by the coalition of state attorneys general. While we continue to engage in discussions with plaintiffs’ counsel regarding potential resolution of pending cases and claims and intend to vigorously contest the cases and claims asserted against us that do not settle, the final resolution of the cases and claims is uncertain and could have a material impact on our results of operations, financial condition and/or liquidity. Initial 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 118 filed product liability cases involving our Greenfield Vena Cava Filter, 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 597 claims, none of which have been filed.

Governmental Investigations and Qui Tam Matters

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™ and Teligen™ line of devices in 2008, the performance of those devices from 2007 to 2009 and the operation of the 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. 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 the 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.

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.

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., 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. We deny the allegations and intend to defend ourselves vigorously.

Other Proceedings

On May 16, 2018, Arthur Rosenthal et al., filed a plenary summons against Boston Scientific Corporation and Boston Scientific Limited with the High Court of Ireland alleging that payments are due pursuant a transaction agreement regarding Labcoat Limited, a company Boston Scientific purchased in 2008 that provided coating technology for drug-eluting stents.

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 18, 2019, Blue Cross & Blue Shield of Louisiana and HMO Louisiana, Inc. filed a class action complaint against Janssen Biotech, Inc, Janssen Oncology, Inc, Janssen Research & Development, LLC and BTG International Limited in the United States District Court for the Eastern District of Virginia. The complaint alleges that the defendants violated the Sherman Act and the antitrust and consumer protections laws of several states by pursuing patent litigation relating to ZYTIGA™ in order to delay generic entry. On June 21, 2019, the case was transferred to the United States District Court for the District of New Jersey and has been consolidated with similar complaints.

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, 28 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 Johnson & Johnson and BTG by two direct purchasers of Zytiga on behalf of similarly situated entities. The complaint alleges that BTG and J&J violated antitrust laws by attempting to enforce certain patents against potential generic competitors.

On December 4, 2020 Enrique Jevons, individually and on behalf of all others similarly situated, filed a class action complaint against Boston Scientific Corporation, Michael F. Mahoney and Daniel J. Brennan, stemming from the recall and retirement of the LOTUS Edge™ Aortic Valve System (LOTUS System) in United States District Court for the Eastern District of New York. On December 14, 2020, the parties agreed to transfer the case to the United States District Court for the District of Massachusetts. On December 16, 2020, Mariano Errichiello, individually and on behalf of all other similarly situated, filed a second, materially similar class action complaint against Boston Scientific Corporation, Michael F. Mahoney, Joseph M. Fitzgerald, and Daniel J. Brennan in the United States District Court for the District of Massachusetts. The Company expects these cases to be superseded by a single amended and consolidated class action complaint in the first or second quarter of 2021. On December 15, 2020, the Securities and Exchange Commission’s Boston Regional Office (Boston SEC) notified the Company that it is conducting an investigation related to Boston Scientific’s decision to retire the LOTUS System, and issued a voluntary request for documents and information related to that decision. On February 10, 2021, the Boston SEC issued a second voluntary request for additional documents and information. The Company is cooperating fully with the investigation. On February 8, 2021, the Company received a letter from The Vladimir Gusinsky Revocable Trust, a shareholder, demanding that the Company’s Board of Directors conduct an investigation into actions by the Company’s directors and executive officers regarding statements made about the effectiveness and commercial viability of the LOTUS System.

On December 16, 2020 Mariano Errichiello, individually and on behalf of all others similarly situated, filed a class action complaint against Boston Scientific Corporation, Michael F. Mahoney, Joseph M. Fitzgerald and Daniel J. Brennan stemming from the recall and retirement of the LOTUS Edge™ Aortic Valve System in United States District Court for the District of Massachusetts.

Refer to Note J – Income Taxes for information regarding our tax litigation.

Matters Concluded Since December 31, 2019

On April 30, 2019, Tissue Anchor Innovations filed a complaint for patent infringement in the United States District Court Central District of California against Fountain Valley Regional Hospital and Medical Center, Los Alamitos Medical Center and us. The complaint alleged that the Solyx™ Sling System infringes US Patent 6,506,190. We reached a confidential settlement in this matter in July 2020, pursuant to which the action was dismissed.

On March 10, 2017, Imran Niazi filed a patent infringement action against us in the United States District Court for the Western District of Wisconsin alleging that a U.S. patent owned by him is infringed by our Acuity™ Lead Delivery System. On June 30, 2017, we filed a motion to dismiss for improper venue and on November 7, 2017 the Wisconsin Court granted the motion to dismiss. On November 13, 2017 Niazi refiled the same action in the U.S. District of Minnesota. We reached a confidential settlement on this matter on February 3, 2020 pursuant to which the action was dismissed.

On November 1, 2017, we entered into a definitive agreement with Channel pursuant to which we could have been obligated to pay $145 million in cash up-front and a maximum of $130 million in contingent payments to acquire Channel. The agreement contained a provision allowing Channel to sell the remaining equity interests of Channel to us upon achievement of a regulatory milestone and an option allowing us to acquire the remaining equity interests. We sent a notice of termination of that agreement to Channel in the second quarter of 2018. On September 12, 2018, Channel filed a complaint in Delaware Chancery Court against us for alleged breach of the agreement. Channel alleged that we breached the agreement by terminating it. We answered the complaint, denied the claims by Channel and counterclaimed to recover part of our investment in Channel, alleging fraud in the inducement. On April 2, 2019, Channel announced its receipt of FDA approval of the Cerene™ Cryotherapy Device. Trial testimony was taken in April 2019, and the post-trial briefing and hearing were completed. During the third quarter of 2019, Channel notified us that they were exercising their option to sell the remaining equity interests in Channel to us. We responded to the notification that we did not intend to purchase Channel since the previous agreement had been terminated. On December 18, 2019, the Chancery Court ruled that Boston Scientific was in breach of the agreement and granted Channel's request for specific performance to require the Company to complete the purchase. On January 10, 2020, we filed a Notice of Appeal of the Chancery Court’s decision to the Delaware Supreme Court. On February 4, 2020, the Company settled the dispute with Channel resulting in termination of the agreement, payment by the Company of an undisclosed sum and surrender of the Company's equity interest in Channel.

On November 29, 2016 Nevro Corp. (Nevro) filed a patent infringement action against us and one of our subsidiaries, Boston Scientific Neuromodulation Corporation, in the U.S. District Court for the Northern District of California alleging that six U.S. patents (Alataris) owned by Nevro are infringed by our spinal cord stimulation systems. On June 29, 2017, Nevro amended the complaint to add an additional patent (Fang). On July 24, 2018, summary judgment was entered in favor of the Company and on July 31, 2018, we received final judgment and dismissal of the action. On July 31, 2018, Nevro filed an appeal. On April 9, 2020, the Court of Appeals for the Federal Circuit vacated the finding of indefiniteness as to certain patents, provided claim constructions for those patents, and remanded the case. On December 16, 2020, the district court dismissed all remaining claims with prejudice, ending the case with Nevro receiving none of its requested relief.

NOTE L – 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. As of December 31, 2019, we had no shares of preferred stock issued or outstanding.

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 December 31, 2020, 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.

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.

On September 1, 2020, we paid to holders of our MCPS as of August 15, 2020 a cash dividend of $1.4361 per MCPS share (or $14 million in aggregate cash dividends), representing a dividend period beginning on the May 27, 2020 issuance date through August 31, 2020. On December 1, 2020, we paid to holders of our MCPS as of November 15, 2020 a cash dividend of $1.3750 per MCPS share (or $14 million in aggregate cash dividends), representing a dividend period beginning on September 1, 2020 through November 30, 2020. On February 1, 2021, the Audit Committee of our Board of Directors, pursuant to authority delegated to such committee by our Board of Directors, declared a cash dividend of $1.375 per MCPS share (or $14 million in aggregate cash dividends) to be paid on March 1, 2021 to holders of our MCPS as of February 15, 2021, representing a dividend period beginning December 1, 2020 through February 28, 2021. We have presented cumulative, unpaid dividends covering this period from December 1, 2020 through December 31, 2020 totaling $5 million within Accrued expenses within our consolidated balance sheets as of December 31, 2020.

Common Stock

We are authorized to issue 2.000 billion shares of common stock, $0.01 par value per share. Holders of common stock are entitled to one vote per share. Holders of common stock are entitled to receive dividends, if and when declared by our Board of Directors, and to share ratably in our assets legally available for distribution to our stockholders in the event of liquidation. Holders of common stock have no preemptive, subscription, redemption, or conversion rights. The holders of common stock do not have cumulative voting rights. The holders of a majority of the shares of common stock can elect all of the directors and can control our management and affairs. Holders of common stock are junior to holders of MCPS in terms of liquidation preference.

On May 27, 2020, we 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 used a portion of the net proceeds from the May 27, 2020 MCPS and common stock offerings to repay remaining amounts outstanding under the April 2021 Term Loan and to pay related fees, expenses and premiums as discussed in Note F – Contractual Obligations and Commitments. The remaining proceeds are being used for general corporate purposes.

On January 25, 2013, our Board of Directors approved and on January 29, 2013, we announced a program authorizing the repurchase of up to $1.000 billion of our common stock (2013 share repurchase program). In the fourth quarter of 2020, we repurchased approximately 15.7 million shares of our common stock pursuant to the 2013 share repurchase program for a total of approximately $535 million in cash, which represented the full amount remaining under that authorization.

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 (2020 share repurchase program). As of December 31, 2020, we had the full amount remaining available under the 2020 share repurchase program.

We did not repurchase any shares of our common stock during 2019 or 2018. There were approximately 263 million shares in treasury as of December 31, 2020 and 248 million shares in treasury as of December 31, 2019.

NOTE M – STOCK INCENTIVE AND PURCHASE PLANS

Employee and Director Stock Incentive Plans

In 2020, our Board of Directors and stockholders approved amendments to our 2011 Long-Term Incentive Plan effective October 1, 2020 (Amended and Restated 2011 LTIP), authorizing for issuance up to 171 million shares of our common stock. The Amended and Restated 2011 LTIP covers officers, directors, employees and consultants and provides for the grant of restricted or unrestricted common stock, restricted stock units (RSUs), options to acquire our common stock, stock appreciation rights, performance awards (market-based and performance-based RSUs) and other stock and non-stock awards. Shares reserved under our current and former stock incentive plans totaled approximately 187 million as of December 31, 2020. The Executive Compensation and Human Resources Committee (the Committee) of the Board of Directors, consisting of independent, non-employee directors may authorize the issuance of common stock and cash awards under the Amended and Restated 2011 LTIP in recognition of the achievement of long-term performance objectives established by the Committee.

Non-qualified options issued to employees are generally granted with an exercise price equal to the market price of our stock on the grant date, vest over a four-year service period and have a ten-year contractual life. In the case of qualified options, if the recipient owns more than ten percent of the voting power of all classes of stock, the option granted will be at an exercise price of 110 percent of the fair market value of our common stock on the date of grant and will expire over a period not to exceed five years. Non-vested stock awards, including restricted stock awards (RSAs), RSUs and deferred stock units (DSUs) issued to employees are generally granted with an exercise price of zero and typically vest in four or five equal annual installments. These awards represent our commitment to issue shares to recipients after the vesting period. Upon each vesting date, such awards are no longer subject to risk of forfeiture and we issue shares of our common stock to the recipient.

The following presents the impact of stock-based compensation on our consolidated statements of operations:


	Year Ended December 31,
(in millions, except per share data)	2020		2019		2018
Cost of products sold	$	9	$	8	$	7
Selling, general and administrative expenses	130		120		109
Research and development expenses	30		28		24
	170		157		140
Income tax (benefit) expense	(28)		(24)		(21)
	$	142	$	133	$	119
Net impact per common share - basic	$	0.10	$	0.10	$	0.09
Net impact per common share - assuming dilution	$	0.10	$	0.09	$	0.08

Stock Options

We use the Black-Scholes option-pricing model to calculate the grant-date fair value of stock options granted to employees under our stock incentive plans. We calculated the fair value for options granted using the following estimated weighted-average assumptions:


	Year Ended December 31,
	2020					2019					2018
Options granted (in thousands)	3,819					2,992					3,491
Weighted-average exercise price	$	41.79				$	40.20				$	27.26
Weighted-average grant-date fair value	$	10.44				$	11.76				$	8.55
Black-Scholes Assumptions
Expected volatility	23				%	24				%	26				%
Expected term (in years, weighted)	5.8					6.1					6.0
Risk-free interest rate	0.27%		-	1.72%		1.38%		-	2.61%		2.61%		-	3.01%

Expected Volatility

We use our historical volatility and implied volatility as a basis to estimate expected volatility in our valuation of stock options.

Expected Term

We estimate the expected term of options using historical exercise and forfeiture data. We believe that this historical data provides the best estimate of the expected term of new option grants.

Risk-Free Interest Rate

We use yield rates on U.S. Treasury securities for a period approximating the expected term of the award to estimate the risk-free interest rate in our grant-date fair value assessment.

Expected Dividend Yield

We have not historically paid cash dividends on our common stock and currently we do not intend to pay cash dividends on our common stock. Therefore, we have assumed an expected dividend yield of zero in our grant-date fair value assessment.

Information related to stock options under stock incentive plans are as follows:


	Stock Options (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2017	26,716	$	13
Granted	3,491	27
Exercised	(4,385)	11
Cancelled/forfeited	(519)	22
Outstanding as of December 31, 2018	25,304	$	16
Granted	2,992	40
Exercised	(4,872)	12
Cancelled/forfeited	(359)	24
Outstanding as of December 31, 2019	23,065	$	19
Granted	3,819	42
Exercised	(3,096)	13
Cancelled/forfeited	(666)	27
Outstanding as of December 31, 2020	23,122	$	24	5.5	$	312
Exercisable as of December 31, 2020	15,105	17		4.1	290
Expected to vest as of December 31, 2020	7,683	37		8.2	22
Total vested and expected to vest as of December 31, 2020	22,787	$	24	5.4	$	312

The total intrinsic value of stock options exercised was $84 million in 2020, $140 million in 2019 and $90 million in 2018.

Non-Vested Stock

We value RSAs, RSUs and DSUs based on the closing trading value of our shares on the date of grant. Information related to non-vested stock awards is as follows:


	Non-Vested Stock Award Units (in thousands)	Weighted Average Grant-Date Fair Value
Balance as of December 31, 2017	15,250	$	18
Granted	4,375	28
Vested(1)	(6,194)	16
Forfeited	(748)	22
Balance as of December 31, 2018	12,683	$	22
Granted	3,656	39
Vested(1)	(4,811)	20
Forfeited	(449)	27
Balance as of December 31, 2019	11,079	$	29
Granted	3,609	41
Vested(1)	(4,147)	25
Forfeited	(554)	34
Balance as of December 31, 2020	9,987	$	34

(1)The number of shares vested includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.

The total vesting date fair value of shares that vested was approximately $172 million in 2020, $193 million in 2019 and $170 million in 2018.

Market-based DSU Awards

During 2020, 2019 and 2018, we granted market-based DSU awards to certain members of our senior management team. The number of shares ultimately issued to the recipient is based on the total stockholder return (TSR) of our common stock as compared to the TSR of the common stock of the other companies in the S&P 500 Healthcare Index over a three-year performance period. The number of DSUs ultimately granted under this program range from 0 percent to 200 percent of the target number of performance-based DSUs awarded to the participant as determined by achievement of the performance criteria of the program. In addition, in general, award recipients must remain employed by us throughout the three-year performance period to attain the full amount of the market-based DSUs that satisfied the market performance criteria.

We determined the fair value of the market-based DSU awards to be approximately $8 million for 2020, $10 million for 2019 and $7 million for 2018. We determined these fair values based on Monte Carlo simulations as of the date of grant, utilizing the following assumptions:


	2020			2019			2018
	Awards			Awards			Awards
Stock price on date of grant	$	42.16		$	40.12		$	27.09
Measurement period (in years)	2.9			2.9			2.9
Risk-free rate	1.37		%	2.48		%	2.36		%

We recognize the expense on these awards in our consolidated statements of operations on a straight-line basis over the three-year measurement period.

Free Cash Flow Performance-based DSU Awards

During 2020, 2019 and 2018, we granted free cash flow performance-based DSU awards to certain members of our senior management team. The attainment of these performance-based DSUs is based on our adjusted free cash flow (AFCF) measured against our internal annual financial plan performance for AFCF. AFCF is measured over a one-year performance period beginning January 1st of each year and ending December 31st. The number of DSUs ultimately granted under this program range from 0 percent to 150 percent of the target number of performance-based DSUs awarded to the participant as determined by achievement of the performance criteria of the program. In addition, in general, award recipients must remain employed by us throughout a three-year service period (inclusive of the one-year performance period) to attain the full amount of the performance-based DSUs that satisfied the performance criteria.

The following table presents our assumptions used in determining the fair value of our AFCF awards currently expected to vest as of December 31, 2020:


	2020 AFCF			2019 AFCF			2018 AFCF
Fair value, net of forfeitures to date (in millions)	$	6		$	8		$	11
Achievement of target payout	89		%	90		%	118		%
Year-end stock price used in determining fair value	$	35.95		$	45.22		$	35.34

We recognize the expense on these awards in our consolidated statements of operations over the vesting period which is three years after the date of grant.

Expense Attribution

We recognize compensation expense for our stock incentive plan using a straight-line method over the substantive vesting period. Most of our stock awards provide for immediate vesting upon death or disability of the participant. In addition, our stock grants to employees provide for accelerated vesting of our stock-based awards, other than performance-based and market-based awards, upon retirement, if the stock award has been held for at least one year by the recipient. In accordance with the terms of our stock grants, for employees who will become retirement eligible prior to the vest date we expense stock-based awards, other than performance-based and market-based awards, over the greater of one year or the period between grant date and retirement-eligibility. The performance-based and market-based awards discussed above do not contain provisions that would accelerate the full vesting of the awards upon retirement-eligibility.

We recognize stock-based compensation expense for the value of the portion of awards that are ultimately expected to vest. FASB ASC Topic 718, Compensation – Stock Compensation allows forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. We have applied, based on an analysis of our historical forfeitures, a weighted-average annual forfeiture rate of approximately five percent to all unvested stock-based awards as of December 31, 2020, which represents the portion that we expect will be forfeited each year over the vesting period. We re-evaluate this analysis annually or more frequently if there are significant changes in circumstances and adjust the forfeiture rate as necessary. Ultimately, we will only recognize expense for those shares that vest.

Unrecognized Compensation Cost

We expect to recognize the following future expense for awards outstanding as of December 31, 2020:


	Unrecognized Compensation Cost (in millions) (1)		Weighted Average Remaining Vesting Period (in years)
Stock options	$	35
Non-vested stock awards	169
	$	204	1.7

(1)Amounts presented represent compensation cost, net of estimated forfeitures.

Employee Stock Purchase Plans

Our global employee stock purchase plan provides for the granting of options to purchase up to 50 million shares of our common stock to all eligible employees. Under the global employee stock purchase plan, we grant each eligible employee, at the beginning of each six-month offering period, an option to purchase shares of our common stock equal to not more than ten percent of the employee’s eligible compensation or the statutory limit under the U.S. Internal Revenue Code. Such options may be exercised only to the extent of accumulated payroll deductions at the end of the offering period, at a purchase price equal to 85 percent of the fair market value of our common stock at the beginning or end of each offering period, whichever is less. As of December 31, 2020, there were approximately 6 million shares available for future issuance under the employee stock purchase plan. We temporarily suspended our global employee stock purchase plan for the offering period for the second half of 2020 due to cost-savings initiatives in response to the COVID-19 pandemic and have resumed for the offering period for the first half of 2021.

Information related to shares issued or to be issued in connection with the employee stock purchase plan based on employee contributions and the range of purchase prices is as follows:


	Year Ended December 31,
	2020		2019				2018
Shares issued or to be issued (in thousands)	1,387		2,196				2,452
Range of purchase prices	$	29.84	$29.29		-	$36.47	$21.49		-	$27.91
Expense recognized (in millions)	$	10	$	19			$	17

We use the Black-Scholes option-pricing model to calculate the grant-date fair value of shares issued under the employee stock purchase plan. We recognize expense related to shares purchased through the employee stock purchase plan ratably over the offering period.

NOTE N – WEIGHTED AVERAGE SHARES OUTSTANDING


	Year Ended December 31,
(in millions)	2020	2019	2018
Weighted average shares outstanding - basic	1,416.7	1,391.5	1,381.0
Net effect of common stock equivalents	—	19.0	20.4
Weighted average shares outstanding - assuming dilution	1,416.7	1,410.6	1,401.4

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 antidilutive:


	Year Ended December 31,
(in millions)	2020	2019	2018
Common stock equivalents(1)	14	n/a	n/a
Stock options outstanding(2)	6	0	0
MCPS(3)	14	n/a	n/a

(1) Represents common stock equivalents pursuant to our employee stock-based compensation plans, which are anti-dilutive in 2020 due to our Net loss position in this period.

(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 L – Stockholders' Equity for additional information.

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 later of the May 27, 2020 issuance date or the beginning of the reporting period to the extent that the effect is dilutive.

In 2020, 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 loss was reduced by cumulative Preferred stock dividends, as presented in our consolidated statements of operations, for purposes of calculating Net loss available to common stockholders.

NOTE O – 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), certain litigation-related net charges (credits), certain investment portfolio net losses (gains) and 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 consolidated statements of operations and are included in the reconciliation below.

Following our acquisition of BTG, we have included BTG’s Interventional Medicine business within our Peripheral Interventions operating segment, within the Cardiovascular reportable segment. We present BTG’s Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.

A reconciliation of the totals reported for the reportable segments to the applicable line items in our accompanying consolidated statements of operations is as follows (in millions, except percentages):


	Year Ended December 31,
Net sales	2020		2019		2018
MedSurg	$	3,066	$	3,307	$	3,007
Rhythm and Neuro	2,752		3,140		3,041
Cardiovascular	3,876		4,208		3,777
Total net sales of reportable segments	9,694		10,654		9,823
All other (Specialty Pharmaceuticals)	219		81		n/a
Consolidated net sales	$	9,913	$	10,735	$	9,823


	Year Ended December 31,
Depreciation expense	2020		2019		2018
MedSurg	$	80	$	75	$	72
Rhythm and Neuro	96		92		91
Cardiovascular	154		138		133
Total depreciation expense of reportable segments	330		306		296
All other (Specialty Pharmaceuticals)	3		$	6	n/a
Consolidated depreciation expense	$	333	$	311	$	296


	Year Ended December 31,
Income (loss) before income taxes	2020		2019		2018
MedSurg	$	1,079	$	1,204	$	1,102
Rhythm and Neuro	439		666		655
Cardiovascular	661		1,137		1,117
Total operating income of reportable segments	2,179		3,007		2,875
All other (Specialty Pharmaceuticals)	143		56		n/a
Unallocated amounts:
Corporate expenses, including hedging activities	(405)		(264)		(372)
Goodwill and other intangible asset impairment charges, acquisition/divestiture-related net charges (credits), restructuring and restructuring-related net charges (credits), certain litigation-related net charges (credits) and EU Medical Device Regulation (MDR) implementation costs	(1,208)		(582)		(398)
Amortization expense	(789)		(699)		(599)
Operating income (loss)	(80)		1,518		1,506
Other expense, net	1		(831)		(85)
Income (loss) before income taxes	$	(79)	$	687	$	1,422


Operating income of reportable segments as a percentage of net sales of reportable segments	Year Ended December 31,
2020			2019			2018
MedSurg	35.2	%		36.4	%		36.7	%
Rhythm and Neuro	15.9	%		21.2	%		21.5	%
Cardiovascular	17.1	%		27.0	%		29.6	%


	As of December 31,
Total assets	2020		2019
MedSurg	$	1,638	$	1,803
Rhythm and Neuro	1,827		1,873
Cardiovascular	2,461		2,535
Total assets of reportable segments	5,926		6,211
All other (Specialty Pharmaceuticals)	1,133		211
Goodwill	9,951		10,176
Other intangible assets, net	5,917		7,886
All other corporate assets	7,850		6,082
	$	30,777	$	30,565

Following the announcement of our plan to sell our Specialty Pharmaceuticals business, as of December 31, 2020, we have classified the assets and liabilities of our Specialty Pharmaceuticals business (disposal group) as held for sale within our consolidated balance sheets at their respective carrying values, which approximates fair value, less costs to sell. Accordingly, the total assets of the Specialty Pharmaceuticals business as of December 31, 2020 reflected above include goodwill and intangible assets attributable to the disposal group that were not previously allocated to our reportable segments.


	As of December 31,
Long-lived assets	2020		2019		2018
U.S.	$	1,151	$	1,148	$	1,061
Ireland	382		327		242
Other countries	551		604		478
Property, plant and equipment, net	2,084		2,079		1,782
Goodwill	9,951		10,176		7,911
Other intangible assets, net	5,917		7,886		6,372
Operating lease right-of-use assets in Other long-term assets	458		336		—
	$	18,409	$	20,477	$	16,064

NOTE P – REVENUE

We generate revenue primarily from the sale of single-use medical devices and present revenue net of sales taxes in our consolidated statements of operations. The following tables disaggregate our revenue from contracts with customers by business and geographic region (in millions):


	Year Ended December 31,
	2020						2019						2018
Businesses	U.S.		OUS		Total		U.S.		OUS		Total		U.S.		OUS		Total
Endoscopy	$	1,000	$	780	$	1,780	$	1,080	$	814	$	1,894	$	980	$	781	$	1,762
Urology and Pelvic Health	918		368		1,286		1,005		408		1,413		864		381		1,245
Cardiac Rhythm Management	992		712		1,704		1,135		804		1,939		1,159		792		1,951
Electrophysiology	118		169		287		148		180		329		150		161		311
Neuromodulation	610		151		761		695		178		873		624		155		779
Interventional Cardiology	981		1,317		2,299		1,293		1,522		2,816		1,154		1,436		2,590
Peripheral Interventions	888		689		1,577		741		651		1,392		608		579		1,187
Specialty Pharmaceuticals	193		27		219		70		11		81		n/a		n/a		n/a
Net Sales	$	5,701	$	4,212	$	9,913	$	6,167	$	4,569	$	10,735	$	5,538	$	4,286	$	9,823


	Year Ended December 31,
Geographic Regions	2020		2019		2018
U.S.	$	5,508	$	6,097	$	5,538
EMEA (Europe, Middle East and Africa)	2,097		2,264		2,176
APAC (Asia-Pacific)	1,781		1,898		1,727
LACA (Latin America and Canada)	307		395		383
Medical Devices	9,694		10,654		9,823
U.S.	193		70		n/a
International	27		11		n/a
Specialty Pharmaceuticals	219		81		n/a
Net Sales	$	9,913	$	10,735	$	9,823

Emerging Markets(1)	$	1,093	$	1,252	$	1,097

(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 which is currently comprised of the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, Saudi Arabia, Slovakia, South Africa, South Korea, Thailand, Turkey and Vietnam.

Contract liabilities are classified within Other current liabilities and Other long-term liabilities in our accompanying consolidated balance sheets. Our deferred revenue balance was $395 million as of December 31, 2020 and $400 million as of

December 31, 2019. Our contractual liabilities are primarily composed of deferred revenue related to the LATITUDE™ Patient Management System. Revenue is recognized over the average service period which is based on device and patient longevity. We recognized revenue of $135 million in 2020 that was included in the above December 31, 2019 contract liability balance. 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.

We capitalize sales force commissions related to contracts with customers when the associated revenue is expected to be earned over a period that exceeds one year. Deferred commissions are primarily related to the sale of devices enabled with our LATITUDE™ Patient Management System. We have elected to expense commission costs when incurred for contracts with an expected duration of one year or less. Capitalized commission fees are amortized over the period the associated products or services are transferred. Similarly, we capitalize certain recoverable costs related to the delivery of the LATITUDE™ Remote Monitoring Service. These fulfillment costs are amortized over the average service period. Our total capitalized contract costs are immaterial to our consolidated financial statements.

We received FDA approval in mid-2020 and began the U.S. launch of our next generation WATCHMAN FLX™ Left Atrial Appendage Closure (LAAC) Device within our Interventional Cardiology business. The next generation WATCHMAN FLX™ Device is indicated to reduce the risk of stroke in patients with non-valvular atrial fibrillation (NVAF) who need an alternative to oral anticoagulation therapy by permanently closing off the left atrial appendage. In 2020, we recorded $179 million in revenue reserves primarily related to our conversion to a consignment commercial model for our LAAC franchise with the launch of our next-generation WATCHMAN FLX™ Device in the U.S. In connection with the conversion, we repurchased customer-owned inventory and will recognize revenue for consigned units as they are consumed by customers.

Refer to Note A – Significant Accounting Policies for additional information on our accounting policies relating to revenue recognition.

NOTE Q – CHANGES IN OTHER COMPREHENSIVE INCOME

The following table provides the reclassifications out of Other comprehensive income, 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	95		(77)		(5)		13
(Income) loss amounts reclassified from accumulated other comprehensive income	(19)		(60)		3		(76)
Total other comprehensive income (loss)	76		(137)		(1)		(63)
Balance as of December 31, 2020	$	218	$	36	$	(47)	$	207


(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, 2018	$	(53)	$	111	$	(25)	$	33
Other comprehensive income (loss) before reclassifications	228		116		(22)		322
(Income) loss amounts reclassified from accumulated other comprehensive income	(33)		(54)		2		(86)
Total other comprehensive income (loss)	195		62		(20)		237
Balance as of December 31, 2019	$	142	$	173	$	(45)	$	270

Refer to Note E – 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 2020 and in 2019.

NOTE R – 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 consolidated financial statements.

Accounting Standards Implemented Since December 31, 2019

ASC Update No. 2016-13

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

Upon the adoption of FASB ASC Topic 326, credit loss reserves are recorded when financial assets are established if credit losses are expected over the asset’s contractual life. These losses were previously expensed when it became probable that a loss would be incurred. As a result of the adoption of FASB ASC Topic 326, we recorded a net reduction to opening retained earnings on January 1, 2020 related to the establishment of credit loss reserves on Trade accounts receivable and recorded a corresponding increase in the Allowance for credit losses, a contra Trade accounts receivable account. The adoption had an immaterial impact on our financial position and results of operations.

ASC Update No. 2018-15

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

ASC Update No. 2018-18

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

Standards to be Implemented

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. Update No. 2020-10 is effective for annual periods beginning

after December 15, 2020, for public business entities. We plan to adopt Update No. 2020-10 in the first quarter of 2021 and expect it will have an immaterial impact on our financial position and results of operations.

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. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We plan to early adopt Update No. 2020-06 in the first quarter of 2021 and expect it will have an immaterial impact on our financial position and results of operations.

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. Update No. 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. We plan to adopt Update No. 2019-12 in the first quarter of 2021 and expect it will have an immaterial impact on our financial position and results of operations.

No other new accounting pronouncements, issued or effective, during the period had, or is expected to have, a material impact on our consolidated financial statements.

NOTE S – EMPLOYEE RETIREMENT PLANS

Defined Benefit Pension Plans

Domestic Retirement Plans

Following our 2006 acquisition of Guidant, we assumed the Guidant Supplemental Retirement Plan, a frozen, non-qualified defined benefit plan for certain former officers and employees of Guidant. The Guidant Supplemental Retirement Plan was partially funded through a Rabbi Trust that contains segregated company assets within restricted cash used to pay the benefit obligations related to the plan.

We also maintain an Executive Retirement Plan, a defined benefit plan covering executive officers and division presidents. Participants may retire with benefits once retirement conditions have been satisfied.

U.K. Plan

As a result of our acquisition of BTG, we assumed a benefit obligation related to a defined benefit pension plan sponsored by BTG for eligible United Kingdom (U.K.) employees (U.K. Plan). The U.K. Plan was closed to new entrants as of June 1, 2004. Prior to the acquisition close date of August 19, 2019, the Trustees of the U.K. Plan executed buy-in arrangements (Buy-in Contracts), which effectively, as structured under the Buy-in Contracts, are intended to provide payments designed to equal all future designated contractual benefit payments to covered participants. The benefit obligation of the pension plan is not transferred to the insurers, and we remain responsible for paying pension benefits. We do not anticipate any additional material contributions or payments to the U.K. Plan or the insurer.

In connection with the final purchase price allocation of BTG, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following assumptions were used to measure the fair value of the benefit obligation and associated plan assets as of the August 19, 2019 measurement date:


			Discount Rate						Expected Return on Plan Assets						Rate of Compensation Increase
U.K. Plan			0.4%						0.4%						3.4%

As of the measurement date of August 19, 2019, the funded status was as follows:


(in millions)
Fair value of plan assets	$	213
Benefit obligation	(216)
Funded status	$	(3)

Refer to Note B – Acquisitions and Strategic Investments for additional information on our acquisition of BTG.

Information about the U.K. Plan presented below are as of the December 31, 2020 and 2019 measurement dates.

Other International Retirement Plans

In addition, we maintain retirement plans covering certain international employees.

We use a December 31 measurement date for these plans and record the net unfunded and underfunded portion as a liability within non-current liabilities, with the current portion within accrued expenses, on the consolidated balance sheets, recognizing changes primarily through OCI. As of December 31, 2020 and 2019, the funded status of our plans were unfunded or underfunded in aggregate. The outstanding obligation is as follows:


	As of December 31, 2020
(in millions)	Accumulated Benefit Obligation (ABO)		Projected Benefit Obligation (PBO)		Fair value of Plan Assets		Unfunded/Underfunded PBO Recognized
Domestic Retirement Plans	$	54	$	58	$	—	$	58

U.K. Plan	226		226		223		3
Other International Retirement Plans	225		247		132		115
	$	506	$	532	$	355	$	177


	As of December 31, 2019
(in millions)	Accumulated Benefit Obligation (ABO)		Projected Benefit Obligation (PBO)		Fair value of Plan Assets		Unfunded/Underfunded PBO Recognized
Domestic Retirement Plans	$	50	$	54	$	—	$	54
U.K. Plan	212		212		209		3
Other International Retirement Plans	204		223		123		100
	$	466	$	488	$	332	$	156

A rollforward of the changes in the PBO for our retirement plans is as follows:


	Year Ended December 31,
(in millions)	2020		2019
Beginning obligations	$	488	$	232
Acquired plans	—		216
Service costs	19		15
Interest costs	5		5
Actuarial (gain) loss	22		—
Plan amendments and assumption changes	(5)		11
Benefits paid	(23)		(10)
Impact of foreign currency fluctuations	26		19
Ending obligation	$	532	$	488

The critical assumptions associated with our employee retirement plans for 2020 are as follows:


	Weighted Average Discount Rate	Weighted Average Expected Return on Plan		Weighted Average Rate of Compensation Increase(1)

Domestic Retirement Plans	1.90%	n/a	1.50%
U.K. Plan	0.10%	0.10%	n/a
Other International Retirement Plans	0.67%		1.98%	2.40%

(1) Rates of compensation increase were not weighted by the relative fair value of the instruments. As such, the amount represents the median of the inputs and is not a weighted average.

The critical assumptions associated with our employee retirement plans for 2019 are as follows:


	Weighted Average Discount Rate	Weighted Average Expected Return on Plan	Weighted Average Rate of Compensation Increase(1)
Domestic Retirement Plans	2.94%	n/a	1.50%
U.K. Plan	0.60%	0.60%	3.00%
Other International Retirement Plans	0.75%	2.05%	2.65%

(1) Rates of compensation increase were not weighted by the relative fair value of the instruments. As such, the amount represents the median of the inputs and is not a weighted average.

A rollforward of the changes in the fair value of plan assets for our funded retirement plans is as follows:


	Year Ended December 31,
(in millions)	2020		2019
Beginning fair value	$	332	$	107
Acquired plans	—		213
Actual return on plan assets	2		7
Employer contributions	12		13
Participant contributions	2		2
Actuarial gain (loss)	14		(20)
Benefits paid	(23)		(10)
Impact of foreign currency fluctuations	16		19
Ending fair value	$	355	$	332

For our defined benefit plans excluding our U.K. Plan, we base our discount rate on the rates of return available on high-quality bonds with maturities approximating the expected period over which benefits will be paid. The rate of compensation increase is based on historical and expected rate increases. We base our rate of expected return on plan assets on historical experience, our

investment guidelines and expectations for long-term rates of return. Our assets are invested in a variety of securities, primarily equity securities and government bonds. These securities are considered Level 1 and Level 2 investments.

For our U.K. Plan, we utilize the insurance buy-in methodology and base our discount rate on a yield curve reflective of the market pricing obtained in the most recent buy-in transaction, which occurred prior to the acquisition of BTG, and movements in market-observed buy-in pricing as of December 31, 2020. We believe this is a reasonable proxy for an effective settlement rate of the buy-in assets. The discount rate is calculated as the single equivalent assumption that gives the same value of the liabilities as if the figures were calculated using the full yield curve. We assume that all pension increases will continue to be linked to the Retail Price Inflation (RPI), both before and after retirement, for all members, with the exception of post-88 Guaranteed Minimum Pensions (GMP), which will be based on Consumer Price Inflation (CPI). We base our rate of expected return on plan assets as equal to the discount rate used to value the buy-in assets. The U.K. Plan assets' investment policy is to invest in fully matching assets. This has been achieved through the purchase of two buy-in policies (Buy-in contracts), which provide payments designed to equal all future benefit payments due from the fund. As of December 31, 2020, the Buy-in contracts represented 100% of the total plan assets, as compared to the target percentage of 100 percent, and are considered Level 3 investments. As of December 31, 2019, the Buy-in contracts represented 99 percent of the total plan assets, as compared to the target percentage of 100 percent, and are considered Level 3 investments.

The following table presents the fair value hierarchy of the U.K. Plan assets measured at fair value as of December 31, 2020:


	As of
	December 31, 2020
(in millions)	Level 1		Level 2		Level 3		Total
Buy-in contracts	$	—	$	—	$	223	$	223

Total assets	$	—	$	—	$	223	$	223

The following table presents the fair value hierarchy of the U.K. Plan assets measured at fair value as of December 31, 2019:


	As of
	As of December 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total
Buy-in contracts	$	—	$	—	$	207	$	207
Cash	1		—		—		1
Total assets	$	1	$	—	$	207	$	209

Changes in the fair value of the U.K. Plan Level 3 assets were as follows:


(in millions)	Buy-in Contracts
Balance as of December 31, 2019	$	209
Actual return on plan assets	1
Actuarial gain (loss)	15


Transfers out for benefits paid	(9)
Impact of foreign currency fluctuations	7
Balance as of December 31, 2020	$	223

Defined Contribution Plan

We also sponsor a voluntary 401(k) Retirement Savings Plan for eligible employees. We match 200 percent of employee elective deferrals for the first two percent of employee eligible compensation and 50 percent of employee elective deferrals greater than two percent, but not exceeding six percent, of employee eligible compensation. Total expense for our matching contributions to the plan was $102 million in 2020, $98 million in 2019 and $87 million in 2018.

QUARTERLY RESULTS OF OPERATIONS

(in millions, except per share data)

(unaudited)


	Three Months Ended
	Mar 31,		June 30,		Sept 30,		Dec 31,
2020
Net sales	$	2,543	$	2,003	$	2,659	$	2,708
Gross profit	1,737		1,212		1,790		1,708
Operating income (loss)	146		(71)		(205)		50
Net income (loss)	11		(147)		(155)		210
Net income (loss) available to common stockholders	11		(153)		(169)		196
Net income (loss) per common share - basic	$	0.01	$	(0.11)	$	(0.12)	$	0.14
Net income (loss) per common share - assuming dilution	$	0.01	$	(0.11)	$	(0.12)	$	0.14

2019
Net sales	$	2,493	$	2,631	$	2,707	$	2,905
Gross profit	1,763		1,873		1,930		2,054
Operating income (loss)	541		384		383		210
Net income (loss)	424		154		126		3,996
Net income (loss) per common share - basic	$	0.31	$	0.11	$	0.09	$	2.87
Net income (loss) per common share - assuming dilution	$	0.30	$	0.11	$	0.09	$	2.83

Our reported results for 2020 included 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), investment portfolio net losses (gains), EU MDR implementation costs, deferred tax expenses (benefits) and discrete tax items (after tax) of: $380 million in charges in the first quarter, $273 million in charges in the second quarter, $698 million in charges in the third quarter and $141 million of charges in the fourth quarter.

Our reported results for 2019 included amortization expense, intangible asset impairment charges, acquisition/divestiture-related net charges (credits), restructuring and restructuring-related net charges (credits), certain litigation-related net charges (credits), investment portfolio net losses (gains), EU MDR implementation costs, certain debt extinguishment net charges (credits), deferred tax expenses (benefits) and discrete tax items (after tax) of: $66 million in charges in the first quarter, $396 million in charges in the second quarter, $424 million in charges in the third quarter and $3.353 billion of credits in the fourth quarter. These after-tax net credits consisted primarily of: deferred tax benefits of $4.102 billion arising from an intra-entity asset transfer of intellectual property.

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