SPECIAL CHARGES

Special Charges

The Company recognizes certain transactions and events as special charges in its consolidated financial statements. These charges (such as impairment charges, restructuring charges and certain litigation charges) result from facts and circumstances that vary in frequency and impact on the Company’s results of operations. In order to enhance segment comparability and reflect management’s focus on the ongoing operations of the Company, special charges are not reflected in the individual reportable segments operating results.

During the first and second quarters of 2012, the Company incurred special charges totaling $70 million and $38 million, respectively. Of the $70 million and $38 million of special charges recognized, $42 million and $30 million, respectively, related primarily to restructuring actions to realign certain activities in the Company’s CRM business and sales and selling support organizations. The formalized plan for these actions was announced in the second quarter of 2011 and included phasing out CRM manufacturing and research and development (R&D) operations in Sweden, reducing the Company’s workforce and rationalizing product lines. The charges incurred to date include employee termination costs and asset write-off and impairment charges associated with inventory, fixed assets and intangible assets.

During the first quarter of 2012, the Company also agreed to settle a dispute on licensed technology for the Company’s Angio-Seal™ vascular closure devices. In connection with this settlement, which resolved all disputed claims and included a fully-paid perpetual license, the Company recognized a $28 million settlement expense which it classified as a special charge. The Company also recognized a $12 million licensed technology intangible asset to be amortized over the technology’s remaining patent life.

A summary of the activity related to the 2011 and 2012 special charges and restructuring accrual is as follows (in millions):



	Employee Termination Costs			Inventory Charges			Fixed Asset Charges			Intangible Asset Charges			Other			Total
Balance at January 1, 2011	$	—		$	—		$	—		$	—		$	—		$	—
Special charges	82			20			26			52			39			219
Non-cash charges used	—			(20		)	(26		)	(52		)	(1		)	(99		)
Cash payments	(27		)	—			—			—			(15		)	(42		)
Foreign exchange rate impact	(1		)	—			—			—			—			(1		)
Balance at December 31, 2011	$	54		$	—		$	—		$	—		$	23		$	77
Special charges	16			9			—			—			45			70
Non-cash charges used	—			(9		)	—			—			—			(9		)
Cash payments	(20		)	—			—			—			(15		)	(35		)
Balance at March 31, 2012	$	50		$	—		$	—		$	—		$	53		$	103
Special charges	13			3			—			5			17			38
Non-cash charges used	—			(3		)	—			(5		)	(4		)	(12		)
Cash payments	(14		)	—			—			—			(21		)	(35		)
Foreign exchange rate impact	(2		)	—			—			—			(1		)	(3		)
Balance at June 30, 2012	$	47		$	—		$	—		$	—		$	44		$	91

Employee Termination Costs: In connection with the staged phase-out of CRM manufacturing and R&D operations in Sweden, the Company began recognizing severance costs and other termination benefits during 2011 for over 650 employees in accordance with ASC Topic 420, Exit or Disposal Cost Obligations whereby certain employee termination costs are recognized over the employees’ remaining future service period. Additionally, during 2011, the Company recognized certain severance costs for 550 employees after management determined that such severance and benefits were probable and estimable, in accordance with ASC Topic 712, Nonretirement Postemployment Benefits. Of the total $82 million of employee termination costs recorded in 2011, $9 million was classified as a special charge in cost of sales.

During the first quarter of 2012, the Company recognized additional severance costs and other termination benefits for nearly 50 employees after management determined that such severance and benefits were probable and estimable, in accordance with ASC Topic 712, Nonretirement Postemployment Benefits. Of the total $16 million of employee termination costs recorded during the first quarter of 2012, $5 million was classified as a special charge in cost of sales.

During the second quarter of 2012, the Company recognized additional severance costs and other termination benefits for approximately 70 employees after management determined that such severance and benefits were probable and estimable, in accordance with ASC Topic 712, Nonretirement Postemployment Benefits. Of the total $13 million of employee termination costs recognized during the second quarter of 2012, $5 million was classified as a special charge in cost of sales.

Inventory Charges: The Company recorded $9 million and $3 million of inventory obsolescence charges during the first and second quarters of 2012, respectively, primarily associated with the rationalization of product lines in our CRM and Neuromodulation (NMD) businesses. The Company also recognized $20 million of inventory obsolescence charges during 2011. All inventory charges were classified as a special charge in cost of sales.

Fixed Asset Charges: The Company recorded $26 million of impairment and accelerated depreciation charges during 2011, of which $12 million related to an impairment charge to write-down the Company’s CRM manufacturing facility in Sweden to its fair value. The impairment charge was recognized in accordance with ASC Topic 360, Property, Plant and Equipment after it was determined that its remaining undiscounted future cash flows did not exceed its carrying value. Of the $26 million charge, $9 million was classified as a special charge in cost of sales.

Intangible Asset Charges: The Company recorded $52 million of intangible asset impairment charges during 2011, of which $49 million related to intangible assets acquired in connection with legacy acquisitions of businesses involved in the distribution of the Company’s products. Due to the changing dynamics of the U.S. healthcare market, specifically as it relates to hospital purchasing practices, the Company determined that the fair value of these intangible assets did not exceed their carrying values and recognized a $49 million impairment charge.

During the second quarter of 2012, the Company determined that certain intangible assets in the Company's Atrial Fibrillation (AF) and Cardiovascular (CV) businesses were considered impaired as their future expected undiscounted cash flows did not exceed the carrying value of the related assets. As a result, the Company recognized a $5 million impairment charge to write-down the intangible assets to their fair value.

Other Charges: During 2011, the Company recognized $21 million of charges associated with other CRM restructuring actions which included $13 million of pension settlement charges associated with the termination of Sweden’s defined benefit pension plan and $4 million of idle facility costs incurred during 2011 from transitioning CRM manufacturing operations in Sweden to cost-advantaged locations. The Company also recognized $7 million of contract termination costs, $4 million of legal settlement costs and $7 million of other costs. Of the total $39 million recorded as other charges, $10 million was classified as a special charge in cost of sales.

During the first quarter of 2012, the Company recognized $45 million of other special charges which included the $28 million license dispute settlement charge, $9 million of restructuring related and realignment charges associated with the Company’s CRM business and sales and selling support organizations (of which $3 million related to idle facility costs in Sweden), $4 million of contract termination costs and $4 million of other costs. Of the total $45 million of other charges, $9 million was classified as a special charge in cost of sales.

During the second quarter of 2012, the Company recognized $17 million of other special charges which included $13 million of restructuring related and realignment charges associated with the Company’s CRM business and sales and selling support organizations (of which $4 million related to idle facility costs in Sweden) and $4 million of contract termination costs. Of the total $17 million of other charges, $7 million was classified as a special charge in cost of sales.