Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

3 Months Ended

Mar. 29, 2020

Restructuring and Related Activities [Abstract]

Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction/productivity initiatives. For example:

• In connection with acquisition activity, we typically incur costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and

• In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems.

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as groups such as information technology, shared services and corporate operations.

Transforming to a More Focused Company

With the formation of the GSK Consumer Healthcare venture and the anticipated combination of Upjohn, our global, primarily off-patent branded and generics business, with Mylan, Pfizer is transforming itself into a more focused, global leader in science-based innovative medicines. As a result, we began in the fourth quarter of 2019, to identify and undertake efforts to ensure our cost base aligns appropriately with our Biopharmaceutical revenue base as a result of both the completed GSK Consumer Healthcare and expected Upjohn transactions. While certain direct costs have transferred or will transfer to the GSK Consumer Healthcare joint venture and to the Upjohn entities, there are indirect costs which are not expected to transfer. In addition, we are taking steps to restructure our organizations to appropriately support and drive the purpose of the three core functions of our focused innovative medicines business: R&D, Manufacturing and Commercial.

We expect the costs associated with this multi-year effort to continue through 2022 and to total approximately $1.2 billion on a pre-tax basis with approximately 10% of the costs to be non-cash. Actions may include, among others, changes in location of certain activities, expanded use and co-location of centers of excellence and shared services, and increased use of digital technologies. The associated actions and the specific costs are currently in development but will include severance and benefit

plan impacts, exit costs as well as associated implementation costs. From the start of this initiative in the fourth quarter of 2019 through March 29, 2020, we incurred approximately $160 million associated with this initiative.

Current-Period Key Activities

For the first three months of 2020, we incurred costs of $117 million composed primarily of the Transforming to a More Focused Company initiative. For the first three months of 2019, we incurred costs of $92 million composed primarily of the 2017-2019 and Organizing for Growth initiatives that were substantially completed as of year-end 2019.

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
	Three Months Ended
(MILLIONS OF DOLLARS)	March 29, 2020			March 31, 2019
Restructuring charges/(credits):
Employee terminations	$	25		$	(2	)
Asset impairments	31			9
Exit costs	—			3
Restructuring charges(a)	56			10
Transaction costs(b)	3			—
Integration costs and other(c)	10			36
Restructuring charges and certain acquisition-related costs	69			46
Net periodic benefit costs recorded in Other (income)/deductions––net	24			6
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(d):
Cost of sales	5			9
Selling, informational and administrative expenses	—			1
Research and development expenses	(5		)	3
Total additional depreciation––asset restructuring	—			13
Implementation costs recorded in our condensed consolidated statements of income as follows(e):
Cost of sales	10			13
Selling, informational and administrative expenses	15			9
Research and development expenses	—			4
Total implementation costs	24			26
Total costs associated with acquisitions and cost-reduction/productivity initiatives	$	117		$	92

^(a)  In the first quarter of 2020, restructuring charges mainly represent asset write-downs and employee termination costs associated with cost reduction initiatives. In the first quarter of 2019, restructuring charges were primarily associated with cost reduction initiatives and mainly represent asset write-downs, partially offset by the reversal of previously recorded accruals for employee termination costs and asset impairments related to our acquisition of Hospira.

The restructuring activities for the first quarter of 2020 are associated with the following:

• Biopharma ($2 million charge); Upjohn ($13 million charge); and Other ($41 million charge).

The restructuring activities for the first quarter of 2019 are associated with the following:

• Biopharma ($13 million charge); Upjohn ($13 million credit); and Other ($10 million charge).

^(b)  Transaction costs represent external costs for banking, legal, accounting and other similar services. In the first quarter of 2020, transaction costs relate to our acquisition of Array.

^(c)  Integration costs and other represent external, incremental costs directly related to integrating acquired businesses, such as expenditures for consulting and the integration of systems and processes, and certain other qualifying costs. In the first quarter of 2020, integration costs and other were mostly related to our acquisition of Array. In the first quarter of 2019, integration costs and other were primarily related to our acquisition of Hospira.

^(d)  Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.

^(e)  Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.

The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS)	Employee Termination Costs			Asset Impairment Charges			Exit Costs			Accrual
Balance, December 31, 2019(a)	$	887		$	—		$	46		$	933
Provision	25			31			—			56
Utilization and other(b)	(243		)	(31		)	(1		)	(275		)
Balance, March 29, 2020(c)	$	669		$	—		$	45		$	714

^(a)  Included in Other current liabilities ($714 million) and Other noncurrent liabilities ($219 million).

^(b)  Includes adjustments for foreign currency translation.

^(c) 

Included in Other current liabilities ($532 million) and Other noncurrent liabilities ($182 million).