SPECIAL CHARGES

The Company recognizes certain transactions and events as special charges in its Condensed Consolidated Financial Statements. These charges (such as restructuring charges, impairment charges, certain legal settlements or product field action costs and litigation costs) result from facts and circumstances that vary in frequency and impact on the Company's results of operations.

2016 Initiatives

During the fourth quarter of 2015, the Company initiated restructuring activities to drive cross-functional synergies (the 2016 Initiatives). The 2016 Initiatives include enhancing focus on programs that will strengthen its strategic objectives, driving productivity enhancements and incurring costs to fully integrate its recent acquisitions. During 2015, the Company incurred charges primarily related to severance and other termination benefits.

During the first quarter of 2016, the Company incurred additional charges related to severance and other termination benefits, contract termination costs and fixed asset write-offs, primarily associated with the closure of Thoratec Corporation (Thoratec) facilities as the Company continues to integrate the acquisition. During the second quarter of 2016, the Company incurred additional charges related to severance and other termination benefits, distributor contract terminations and other Thoratec-related contract terminations. During the third quarter of 2016, the Company incurred additional charges related to contract terminations and other exit costs, severance and other termination benefits and fixed asset write-offs, primarily associated with the continued closure of its Thoratec facilities and a U.S. based research facility. The Company currently expects to incur approximately $5 million to $10 million during the remainder of 2016 to complete the plan, but may incur additional charges in future periods.

A summary of the activity related to the 2016 Initiatives accrual is as follows (in millions):



	Employee Termination Costs			Inventory Charges			Fixed Asset Charges			Other Restructuring Costs			Total
Balance at January 3, 2015	$	—		$	—		$	—		$	—		$	—
Cost of sales special charges	9			1			1			1			12
Special charges	22			—			—			—			22
Non-cash charges used	—			(1		)	(1		)	—			(2		)
Cash payments	(2		)	—			—			(1		)	(3		)
Balance at January 2, 2016	29			—			—			—			29
Cost of sales special charges	—			2			1			1			4
Special charges	11			—			4			5			20
Non-cash charges used	—			(2		)	(5		)	—			(7		)
Cash payments	(32		)	—			—			(5		)	(37		)
Balance at April 2, 2016	8			—			—			1			9
Cost of sales special charges	—			—			—			2			2
Special charges	6			—			—			4			10
Cash payments	(6		)	—			—			(4		)	(10		)
Balance at July 2, 2016	8			—			—			3			11
Cost of sales special charges	—			—			—			2			2
Special charges	2			—			1			1			4
Non-cash charges used	—			—			(1		)	—			(1		)
Cash payments	(3		)	—			—			(3		)	(6		)
Balance at October 1, 2016	$	7		$	—		$	—		$	3		$	10

Manufacturing and Supply Chain Optimization Plan

During 2014, the Company initiated the Manufacturing and Supply Chain Optimization Plan to leverage economies of scale, streamline distribution methods, drive process improvements through global synergies, balance plant utilization levels, centralize certain vendor relationships and reduce overall costs. During 2015, the Company incurred charges primarily related to severance and other termination benefits, contract termination costs and fixed asset write-offs. These costs included charges associated with the elimination of certain operational, quality and hardware development activities at a research and development facility, continued exit costs related to a facility closure in the United States and software development assets no longer expected to be utilized.

During the first, second and third quarters of 2016, the Company incurred additional charges primarily related to continued exit costs associated with a facility closure in the United States. Material charges are not expected in future periods as the Manufacturing and Supply Chain Optimization Plan is now complete.

A summary of the activity related to the Manufacturing and Supply Chain Optimization Plan accrual is as follows (in millions):



	Employee Termination Costs			Inventory Charges			Fixed Asset Charges			Other Restructuring Costs			Total
Balance at January 3, 2015	$	14		$	—		$	—		$	6		$	20
Cost of sales special charges	4			3			15			7			29
Special charges	20			—			—			29			49
Non-cash charges used	—			(3		)	(15		)	—			(18		)
Cash payments	(27		)	—			—			(35		)	(62		)
Balance at January 2, 2016	11			—			—			6			17
Cost of sales special charges	—			—			—			1			1
Cash payments	(3		)	—			—			(6		)	(9		)
Balance at April 2, 2016	8			—			—			1			9
Cost of sales special charges	—			—			—			1			1
Special charges	—			—			—			1			1
Cash payments	(3		)	—			—			(2		)	(5		)
Balance at July 2, 2016	5			—			—			1			6
Special charges	—			—			—			1			1
Cash payments	(2		)	—			—			(1		)	(3		)
Balance at October 1, 2016	$	3		$	—		$	—		$	1		$	4

2012 Business Realignment Plan

During 2012, the Company realigned its product divisions into two new operating divisions: the Implantable Electronic Systems Division (combining its legacy Cardiac Rhythm Management and Neuromodulation product divisions) and the Cardiovascular and Ablation Technologies Division (combining its legacy Cardiovascular and Atrial Fibrillation product divisions). In addition, the Company centralized certain support functions, including information technology, human resources, legal, business development and certain marketing functions. The organizational changes have been part of a comprehensive plan to accelerate the Company's growth, reduce costs, leverage economies of scale and increase investment in product development. During 2014, the Company announced additional organizational changes including the combination of its Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division, resulting in an integrated research and development (R&D) organization and a consolidation of manufacturing and supply chain operations worldwide.

During 2015, the Company incurred additional charges primarily related to severance and other termination benefits and other restructuring costs, including contract termination costs, asset relocation expenses and other exit costs predominately associated with the facility closure in Europe.

During the first quarter of 2016, the Company reassessed the remaining accrual balance and determined that some of the previously recorded accrual balances were no longer necessary. Additionally, during the third quarter of 2016, the Company revised estimates for employee termination costs, recognizing a special benefit. Additionally, the Company recognized a special benefit for salvaged inventory components during the third quarter of 2016. No additional charges are expected in future periods as the 2012 Business Realignment Plan is complete.

A summary of the activity related to the 2012 Business Realignment Plan accrual is as follows (in millions):



	Employee Termination Costs			Inventory Charges			Fixed Asset Charges			Other Restructuring Costs			Total
Balance at January 3, 2015	$	26		$	—		$	—		$	12		$	38
Cost of sales special charges	2			3			—			—			5
Special charges	2			—			2			5			9
Non-cash charges used	—			(3		)	(2		)	—			(5		)
Cash payments	(25		)	—			—			(10		)	(35		)
Foreign exchange rate impact	(2		)	—			—			—			(2		)
Balance at January 2, 2016	3			—			—			7			10
Cost of sales special charges	—			(1		)	—			(1		)	(2		)
Non-cash charges used	—			1			—			—			1
Balance at April 2, 2016	3			—			—			6			9
Cash payments	(1		)	—			—			—			(1		)
Balance at July 2, 2016	2			—			—			6			8
Cost of sales special charges	—			(2		)	—			—			(2		)
Special charges	(1		)	—			—			—			(1		)
Non-cash charges used	—			2			—			—			2
Cash payments	(1		)	—			—			—			(1		)
Balance at October 1, 2016	$	—		$	—		$	—		$	6		$	6

Other Special Charges

Intangible asset impairment charges: During the third quarter of 2015, the Company recognized a $2 million impairment charge associated with a customer relationship intangible asset (see Note 8).

Legal settlements: During the third quarter of 2016, the Company recognized charges of $3 million primarily to evaluate allegations made by third parties about the safety and security of the Company's implantable cardiac rhythm management devices, initiate litigation against certain third parties related to those allegations and evaluate claims in a putative class action lawsuit asserting claims related to the safety and security of those devices. The putative class action has not yet been served. The Company also recognized net legal settlement gains of $19 million associated with four separate legal cases during the first nine months of 2016. Additionally, the Company recognized a legal settlement loss related to the December 2012 Securities Litigation and concurrently recognized insurance recoveries in the same amount during the first nine months of 2016 (see Note 3).

During the third quarter of 2015, the Company recognized a $1 million charge related to an unfavorable judgment for a product liability claim. During the first nine months of 2015, this charge was fully offset by $10 million in insurance recoveries recognized by the Company as a special benefit in connection with the March 2010 Securities Class Action Litigation.

Product field action costs and litigation costs: During the first nine months of 2016 and 2015, the Company recognized approximately $6 million and $14 million, respectively, of litigation charges for expected future probable and estimable legal costs associated with outstanding legal matters related to the Company's product field actions. Charges in excess of the amounts accrued are reasonably possible and depend on a number of factors, such as the type of claims received and the cost to defend.

During the third quarter and first nine months of 2016, the Company recognized $25 million and $28 million, respectively, of product field action costs. The Company initiated an advisory letter to physicians for patients implanted with certain tachycardia cardiac rhythm management devices that were identified as having a potential premature battery depletion issue that could, on rare occasions, result in necessary treatment not being provided. In connection with this advisory, the Company recognized charges of $26 million to cost of sales special charges related to product field action costs, primarily for estimated scrapped inventory and costs for providing remote monitoring to patients under the advisory during the third quarter of 2016. Charges in excess of the accrual are reasonably possible and depend on a number of factors, such as the number of physicians requesting remote monitoring. During the first nine months of 2016, the Company also initiated an advisory letter to physicians for patients implanted with certain ICD devices that were identified as having a potential therapy anomaly resulting in a lack of necessary treatment. As a result, the Company recognized charges of $5 million to cost of sales special charges primarily for estimated scrapped inventory and warranty costs during the first nine months of 2016. Partially offsetting these charges, the Company recognized a $1 million benefit and a $3 million benefit during the third quarter and first nine months of 2016, respectively, to cost of sales special charges for salvaged inventory components related to an advisory action initiated in 2014.

During the fourth quarter of 2016, the Company initiated an advisory letter to physicians participating in an investigational device exemption study for patients implanted with certain leadless bradycardia cardiac rhythm management devices that were identified as having a potential premature battery depletion issue that could, on rare occasions, result in necessary treatment not being provided. As a result, the Company expects to recognize charges relating to scrapped inventory and intangible assets, which will be partially offset by reductions in contingent consideration liabilities.

During the first nine months of 2015, the Company recognized a $7 million benefit to cost of sales special charges, of which $5 million related to salvaged inventory components associated with the same advisory action initiated in 2014 and $2 million related to lower than expected direct recall costs associated with a 2012 voluntary product field action related to certain neuromodulation implantable pulse generator charging systems.

Other restructuring-related charges: The Company also recognized other restructuring-related charges of $3 million during the first nine months of 2016.