NOTE 7

INFUSION PUMP AND BUSINESS OPTIMIZATION CHARGES

Infusion Pump Charges

The company had undertaken a field corrective action with respect to the SIGMA Spectrum Infusion Pump, which is predominantly sold in the United States. The United States Food and Drug Administration (FDA) categorized the action as a Class 1 recall during the second quarter of 2014. Remediation primarily included software-related corrections and a replacement pump in a limited number of cases. In 2014, the company recorded a charge of $93 million related primarily to cash costs associated with remediation efforts and utilized $4 million in 2014. During 2015, the company refined its expectations relating to the costs associated with the remediation effort and recorded partial reversals of the cash and non-cash reserves totaling $26 million and $10 million, respectively. Additionally the company utilized $13 million of the cash reserves during 2015. In 2016, the company recorded utilization of cash and non-cash reserves of $22 million and $3 million, respectively, as well as partial reversals of cash and non-cash reserves of $11 million and $1 million, respectively. As of December 31, 2016, the remediation efforts are substantially complete and the remaining costs and reserves are considered immaterial to the company.

From 2005 through 2014, the company recorded total charges and adjustments of $863 million related to the COLLEAGUE and SYNDEO infusion pumps, including $700 million of cash costs and $163 million principally related to asset impairments.

The following table summarizes cash activity and reserve adjustments related to the company’s COLLEAGUE and SYNDEO infusion pump reserves through December 31, 2016.

(in millions)
Charges and adjustments in 2005 through 2014	$	700
Utilization in 2005 through 2014		(678	)
Reserves at December 31, 2014		22
Reserve adjustments		(7	)
Utilization		(8	)
Reserves at December 31, 2015		7
Reserve adjustments		(4	)
Utilization		(3	)
Reserves at December 31, 2016	$	—

As of December 31, 2016, the company has completed its field corrective actions related to the COLLEAGUE and SYNDEO infusion pumps.

Business Optimization Charges

Beginning in the second half of 2015, the company has initiated actions to transform the company’s cost structure and enhance operational efficiency. These efforts include restructuring the organization, optimizing the manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions. Through December 31, 2016 the company incurred cumulative pretax costs of $407 million related to these actions. The costs consisted primarily of employee termination, implementation costs, and accelerated depreciation. The company expects to incur additional pretax costs of approximately $390 million and capital expenditures of $90 million through the completion of these initiatives. These costs will primarily include employee termination costs, implementation costs, and accelerated depreciation. Of this amount, the company expects that approximately 10 percent of the charges will be non-cash.

In addition to the programs above, the company recorded additional net business optimization charges of $125 million in 2016. These charges primarily include employee termination costs, contract termination costs, asset impairments, and Gambro integration costs. Approximately 40% of these costs were non-cash. The company does not anticipate incurring any additional costs related to these programs in the future and expects them to be substantially completed by the end of 2017.

The company recorded the following charges related to business optimization programs in 2016, 2015, and 2014:

years ended December 31 (in millions)	2016		2015		2014
Restructuring charges, net	$	285	$	130	$	(6	)
Costs to implement business optimization programs		65		—		—
Gambro integration costs		26		73		144
Accelerated depreciation		33		—		—
Total business optimization charges	$	409	$	203	$	138

Included in the restructuring charges for 2016 were net employee termination costs of $180 million which primarily consisted of a global workforce reduction program and $27 million related to the impairment of acquired IPR&D as described in Note 6. Restructuring charges for 2016 also included $54 million for costs associated with the discontinuation of the VIVIA home hemodialysis development program. These costs consist of contract termination costs of $21 million, asset impairments of $31 million and other exit costs of $2 million.

Included in the restructuring charges for 2015 were net employee termination costs of $83 million which primarily related to the global workforce reduction program mentioned above. Additionally, asset impairments of $13 million and $29 million were recorded related to a developed technology intangible assets and a manufacturing facility rationalization program, respectively.

Restructuring charges recorded in 2014 primarily related to employee and contract termination costs associated with legacy, non-transformational restructuring initiatives.

The company recorded the following components of restructuring costs in 2016, 2015 and 2014:

	2016
(in millions)	COGS			SGA			R&D			Total
Employee termination costs	$	72		$	109		$	13		$	194
Contract termination costs		9			5			13			27
Asset impairments		38			—			40			78
Reserve adjustments
Employee termination costs		(1	)		(11	)		(2	)		(14	)
Total restructuring charges	$	118		$	103		$	64		$	285

	2015
(in millions)	COGS			SGA			R&D			Total
Employee termination costs	$	14		$	86		$	15		$	115
Contract termination costs	$	3		$	2		$	—		$	5
Asset impairment		40			—			2			42
Reserve adjustments
Employee termination costs		(19	)		(10	)		(3	)		(32	)
Total restructuring charges	$	38		$	78		$	14		$	130

	2014
(in millions)	COGS			SGA			R&D			Total
Employee termination costs	$	10		$	24		$	—		$	34
Contract termination costs		2			6			2			10
Asset impairment		2			2			—			4
Reserve adjustments
Employee termination costs		(19	)		(31	)		1			(49	)
Contract termination costs		(3	)		—			—			(3	)
Asset impairment		(2	)		—			—			(2	)
Total restructuring charges	$	(10	)	$	1		$	3		$	(6	)

Costs to implement business optimization programs in 2016 were $65 million. These costs consisted primarily of external consulting and employee salary and related costs. The costs were included within marketing and administrative and R&D expense.

Costs related to the integration of Gambro were included within marketing and administrative expense for all referenced periods.

In 2016, the company recognized accelerated depreciation, primarily associated with facilities to be closed of $33 million. The costs were recorded in cost of sales.

The following table summarizes cash activity in the reserves related to the company’s business optimization initiatives.

(in millions)
Reserve at December 31, 2013	$	244
2014 charges		44
Reserve adjustments		(54	)
Utilization in 2014		(88	)
CTA		(19	)
Reserve at December 31, 2014		127
2015 charges		120
Reserve adjustments		(32	)
Utilization in 2015		(89	)
CTA		(10	)
Reserve at December 31, 2015		116
2016 charges		221
Reserve adjustments		(14	)
Utilization in 2016		(164	)
CTA		5
Reserve at December 31, 2016	$	164

Reserve adjustments primarily relate to employee termination cost reserves established in prior periods.

The company’s restructuring reserves of $164 million as of December 31, 2016 consisted of $146 million of employee termination costs and the remaining reserves related to contract termination costs. The reserves are expected to be substantially utilized by the end of 2018.