BOSTON SCIENTIFIC CORPORATION Introduction
Boston Scientific Corporation is a global developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. As a medical technology leader for more than 40 years, we have advanced the practice of less-invasive medicine by helping physicians and other medical professionals diagnose and treat a wide range of diseases and medical conditions and improve patients' quality of life by providing alternatives to surgery and other medical procedures that are typically traumatic to the body. Our net sales have increased substantially since our formation, fueled in part by strategic acquisitions designed to improve our ability to take advantage of growth opportunities in the medical device industry and to build diversified portfolios within our core businesses. We advance science for life by providing a broad range of high performance solutions to address unmet patient needs and reduce the cost of healthcare. When used in this report, the terms "we," "us," "our" and "the Company" meanBoston Scientific Corporation and its divisions and subsidiaries.
COVID-19 Pandemic
InDecember 2019 , the novel strain of coronavirus (SARS-Cov-2), and its disease commonly known as COVID-19 (COVID-19), was reported inChina and has since widely impacted the global public health and economic environment. InMarch 2020 , theWorld Health Organization declared COVID-19, including all additional variations and strains thereof, a global pandemic (COVID-19 pandemic). While the majority of procedures using our products are deferrable, most of the conditions that we treat are generally fairly acute and cannot be deferred for extended periods. Because the severity, magnitude, and duration of the COVID-19 pandemic and its economic consequences continue to be uncertain, the pandemic's impact on our operations and financial performance, as well as its impact on our ability to execute our business strategies and initiatives successfully, remains uncertain and difficult to predict. Procedural delays from the further resurgence of COVID-19 infections and the emergence of new, more contagious variant strains of COVID-19, as well as staffing shortages within healthcare facilities, have and may continue to negatively impact demand for our products, net sales, gross profit margin and operating expenses as a percentage of net sales. In addition, conditions created by the COVID-19 pandemic, the economic recovery that has followed in many areas and other macroeconomic factors have led to a challenging labor market in which we compete, which affects our ability to retain and attract new talent as well as put inflationary pressure on certain operational costs due to wage increases. Further, we face and expect to continue to face, increases in the cost and limited availability of raw materials, components, and other inputs necessary to manufacture and distribute our products due to constraints within the global supply chain, as well as increases in the cost and time to distribute our products. We continue to focus our efforts on the health and safety of patients, healthcare providers and employees, while executing our mission of transforming lives through innovative medical solutions to improve the health of patients around the world. Since the onset of the COVID-19 pandemic, our management team has focused on protecting our employees and customers, optimizing our operations and securing our supply chain. We have successfully implemented business continuity plans including establishing a medical advisory group for employees and accelerating capabilities to provide remote physician support. In the first quarter of 2022, we implemented return-to-office protocols across many of our facilities as COVID-19 infection rates trend lower and vaccination rates are higher, relative to earlier in the pandemic. We will continue to be guided by our values and mission and monitor our return-to-office strategy based on science and data for the health and safety of our employees. While we expect the COVID-19 pandemic and related impacts will continue to negatively impact our performance to an extent, particularly inChina with the recent resurgence and associated public health measures implemented, as well as supply chain constraints, we continue to believe our long-term fundamentals remain strong and we will manage through these challenges with strategic focus and the winning spirit of our global team. Corporate Sustainability Our sustainable environmental, social and governance practices underpin all aspects of our global business. Our approach is aligned with theUnited Nations Sustainable Development Goals and our material topics and practices are informed by a broad range of internal and external stakeholders - locally, nationally and globally. Our employees around the world work with suppliers and other organizations that share our commitment to these practices that help address issues related to health inequity, economic disparity, climate change and environmental protection. These efforts are supported by our cross-functionalCorporate Social Responsibility Steering Committee , ourCorporate Social Responsibility Council , ourEnvironmental Health and Safety teams and policies, ourGlobal Council for Inclusion , as well as our local, regional and national employee and community engagement programs. In addition, our Executive Committee performance is measured, among other things, against
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global gender andU.S. (inclusive ofPuerto Rico ) multicultural goals and performance against annual renewable energy goals, and our 2021 annual bonus plan included performance against environmental, engagement, and human capital metrics targets. We were recently named to the Forbes 2022 list of America's Best Employers for Diversity, as well as ranked number one among Health Care Equipment companies on renewable energy use byJUST Capital . For additional information on our sustainability efforts, as well as our Diversity, Equity an Inclusion (DE&I) initiatives, refer to our most recent Annual Report on Form 10-K. For additional information on our annual bonus plan, refer to our Proxy Statement for the 2022 Annual Meeting of Shareholders.
Financial Summary
Our net sales for the first quarter of 2022 were$3.026 billion , as compared to$2.752 billion for the first quarter of 2021. This increase of$274 million , or 10.0 percent, included operational1 net sales growth of 12.6 percent and the negative impact of 270 basis points from foreign currency fluctuations, and includes net sales from our acquisition ofBaylis Medical Company (Baylis Medical) following the date of acquisition. The increase in our net sales was primarily driven by the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on procedural volumes and, as a result, on our net sales. Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business. Our reported net income available to common stockholders for the first quarter of 2022 was$97 million , or$0.07 per diluted share. Our reported results for the first quarter of 2022 included certain charges and/or credits totaling$465 million (after-tax), or$0.32 per diluted share. Excluding these items, adjusted net income available to common stockholders1 was$562 million , or$0.39 per diluted share. Our reported net income available to common stockholders for the first quarter of 2021 was$327 million , or$0.23 per diluted share. Our reported results for the first quarter of 2021 included certain charges and/or credits totaling$197 million (after-tax), or$0.14 per diluted share. Excluding these items, adjusted net income available to common stockholders1 was$524 million , or$0.37 per diluted share. 1Operational net sales growth rates, which exclude the impact of foreign currency fluctuations, and other adjusted measures, which exclude certain items required by generally accepted accounting principles inthe United States (U.S. GAAP) are not prepared in accordance withU.S. GAAP and should not be considered in isolation from, or as a replacement for, the most directly comparable GAAP measure. Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.
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The following is a reconciliation of our results of operations prepared in accordance withU.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview and Additional Information for a discussion of these reconciling items: Three Months EndedMarch 31, 2022 Net Income Income (Loss) (Loss) Available
Before Income Income Tax Net Income Preferred Stock to Common Impact per (in millions, except per share data)
Taxes Expense (Benefit) (Loss) Dividends Stockholders Share(2)
Reported $ 156 $ 45 $ 110 $ (14) $ 97 $ 0.07
Non-GAAP adjustments:
Amortization expense 198 28 170 - 170 0.12
Acquisition/divestiture-related net charges (credits) 72 - 72 - 72 0.05
Restructuring and restructuring-related net charges (credits) 29 4 25 - 25
0.02
Investment portfolio net losses (gains) 7 2 5 - 5
0.00
European Union (EU) Medical device regulation (MDR) implementation costs 16 2 14 - 14 0.01 Debt extinguishment charges 194 45 149 - 149 0.10 Deferred tax expenses (benefits) - (30) 30 - 30 0.02 Discrete tax items - - - - - 0.00 Adjusted $ 671 $ 96$ 575 $ (14) $ 562$ 0.39 (2) For the first quarter of 2022, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of EPS. Accordingly, GAAP Net income and Adjusted net income were reduced by cumulative Preferred stock dividends, as presented within our unaudited consolidated statements of operations, for purposes of calculating GAAP Net income available to common stockholders. Three Months Ended March 31, 2021 Income Net Income (Loss) (Loss) Available Before Income Tax Net Income Preferred Stock to Common Impact per (in millions, except per share data) Income Taxes Expense (Benefit) (Loss) Dividends Stockholders Share(3) Reported$ 325 $ (16)$ 341 $ (14) $ 327$ 0.23 Non-GAAP adjustments: Amortization expense 185 18 167 - 167 0.12 Acquisition/divestiture-related net charges (credits) (148) 6 (153) - (153)
(0.11)
Restructuring and restructuring-related net charges (credits) 49 6 44 - 44
0.03
Litigation-related net charges (credits) 4 - 4 - 4
0.00
Investment portfolio net losses (gains) 146 34 112 - 112
0.08
11 1 10 - 10 0.01
Deferred tax expenses (benefits) - (17) 17 - 17 0.01 Discrete tax items - 3 (3) - (3) (0.00) Adjusted$ 572 $ 34$ 538 $ (14) $ 524$ 0.37 (3) For the first quarter of 2021, the effect of assuming the conversion of MCPS into shares of common stock was anti-dilutive, and therefore excluded from the calculation of EPS. Accordingly, GAAP Net income and Adjusted net income were reduced by cumulative Preferred stock dividends, as presented within our unaudited consolidated statements of operations, for purposes of calculating GAAP Net income available to common stockholders.
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Quarterly Results and Business Overview
In the first quarter of 2022, we reorganized our operational structure and have
aggregated our core businesses, each of which generate revenues from the sale of
medical devices (Medical Devices), into two reportable segments: MedSurg and
Cardiovascular. Within the Cardiovascular segment, the newly formed Cardiology
division represents the combined former Rhythm Management and Interventional
Cardiology divisions. We have revised prior periods to conform to the current
year presentation. The following section describes our net sales and results of
operations by reportable segment and business unit. For additional information
on our businesses and product offerings, refer to Item 1. Business of our most
recent Annual Report on Form 10-K.
Three Months Ended March 31,
(in millions) 2022 2021 Change
Endoscopy $ 531 $ 499 6.4%
Urology and Pelvic Health 413 361 14.4%
Neuromodulation 209 198 5.8%
MedSurg 1,153 1,058 9.1%
Cardiology 1,407 1,248 12.7%
Peripheral Interventions 465 433 7.5%
Cardiovascular 1,873 1,681 11.4%
Medical Devices 3,026 2,739 10.5%
Specialty Pharmaceuticals(4) - 13 (100.0)%
Net Sales $ 3,026 $ 2,752 10.0%
(4) On
MedSurg
Endoscopy
Our Endoscopy business develops and manufactures devices to diagnose and treat a broad range of gastrointestinal (GI) and pulmonary conditions with innovative, less-invasive technologies. Our net sales of Endoscopy products were$531 million for the first quarter of 2022 and represented 18 percent of our consolidated net sales. Our Endoscopy net sales increased$32 million , or 6.4 percent, in the first quarter of 2022, compared to the prior year period. In the first quarter of 2022, this increase included operational net sales growth of 8.8 percent and a negative impact of 240 basis points from foreign currency fluctuations, compared to the prior year period. Operational net sales growth in the first quarter of 2022 was primarily driven by our single-use imaging, biliary and hemostasis franchises due to the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales.
OurUrology and Pelvic Health business develops and manufactures devices to treat various urological and pelvic conditions for both male and female anatomies. Our net sales ofUrology and Pelvic Health products were$413 million for the first quarter of 2022, representing 14 percent of our consolidated net sales. OurUrology and Pelvic Health net sales increased$52 million , or 14.4 percent, in the first quarter of 2022, compared to the prior year period. This increase included operational net sales growth of 16.1 percent and a negative impact of 160 basis points from foreign currency fluctuations, compared to the prior year period. Operational net sales growth included organic net sales growth of 6.9 percent in the first quarter of 2022, and the positive impact of 910 basis points due to our acquisition of the surgical business ofLumenis, LTD. (Lumenis) in the third quarter of 2021. Organic net sales growth was primarily driven by our stone management, prostate health and prosthetic urology franchises due in part to the ongoing recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales. 38
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Neuromodulation
Our Neuromodulation business develops and manufactures devices to treat various neurological movement disorders and manage chronic pain. Our net sales of Neuromodulation products were$209 million for the first quarter of 2022, representing 7 percent of our consolidated net sales. Our Neuromodulation net sales increased$12 million , or 5.8 percent in the first quarter of 2022, compared to the prior year period. This increase included operational net sales growth of 7.6 percent and a negative impact of 180 basis points from foreign currency fluctuations, compared to the prior year period. Operational net sales growth was primarily driven by our spinal cord stimulation (SCS) systems, led by our next generation WaveWriter Alpha SCS System, due to the recovery of elective procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales.
Cardiovascular
Cardiology
Our Cardiology business develops and manufactures devices and medical technologies for diagnosing and treating a variety of diseases and abnormalities of the heart. Our net sales of Cardiology products were$1.407 billion for the first quarter of 2022, representing 47 percent of our consolidated net sales. Our Cardiology net sales increased$159 million , or 12.7 percent, in the first quarter of 2022, compared to the prior year period. This increase included operational net sales growth of 16.0 percent and a negative impact of 330 basis points from foreign currency fluctuations, compared to the prior year period. Operational net sales growth included organic net sales growth of 11.1 percent in the first quarter of 2022, and the positive impact of 500 basis points due to our acquisitions ofPreventice Solutions, Inc. (Preventice),Farapulse, Inc. and Baylis Medical in the first and third quarter of 2021 and the first quarter of 2022, respectively. Organic net sales growth was primarily driven by continued market expansion of Left Atrial Appendage Closure (LAAC) procedures with our WATCHMAN™ FLX LAAC Device, our percutaneous coronary intervention guidance (PCIG) franchise and our structural heart valves franchise, led by our ACURATE Neo2™ Aortic Valve System. Organic net sales growth was also driven by our LUX-Dx™ insertable cardiac monitor systems, pacemakers and our subcutaneous implantable cardiac defibrillator (S-ICD) franchises, as well our POLARx™ Cryoablation business. The growth in each of these franchises was primarily due to the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales along with geographical expansion, including the launch of POLARx Cryoablation System inJapan in the third quarter of 2021.
Peripheral Interventions
Our Peripheral Interventions business develops and manufactures products to diagnose and treat peripheral arterial and venous diseases, as well as products to diagnose, treat and ease various forms of cancer. Our net sales of Peripheral Interventions products were$465 million for the first quarter of 2022, representing 15 percent of our consolidated net sales. Our Peripheral Interventions net sales increased$33 million , or 7.5 percent, in the first quarter of 2022, compared to the prior year period. This increase included operational net sales growth of 10.1 percent and a negative impact of 260 basis points from foreign currency fluctuations, compared to the prior year period. Operational net sales growth was primarily driven by our interventional oncology franchise, led by our TheraSphere™Y-90 Radioactive Glass Microspheres, which receivedU.S. Food and Drug Administration (FDA) approval in the first quarter of 2021 after 20 years as a humanitarian exemption (HDE) device, as well as our drug eluting franchise within our arterial portfolio due to the recovery of procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales.
OnMarch 1, 2021 , we completed the divestiture of theSpecialty Pharmaceuticals business for a purchase price of approximately$800 million . Our consolidated net sales includeSpecialty Pharmaceuticals up to the date of the closing of the transaction. Emerging Markets As part of our strategic imperative to drive global expansion, we are seeking to grow net sales and market share by expanding our global presence, including in Emerging Markets. 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 countries, which currently includes the following countries:Brazil ,Chile ,China ,Colombia ,Czech Republic ,India ,Indonesia ,Malaysia ,Mexico ,Philippines ,Poland ,Russia ,Saudi Arabia ,Slovakia , South
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Africa ,South Korea ,Taiwan ,Thailand ,Turkey andVietnam . Our Emerging Markets net sales represented 13 percent of our consolidated net sales in the first quarter of 2022 and 12 percent in the first quarter of 2021. In the first quarter of 2022, our Emerging Markets net sales grew 22.8 percent on a reported basis, which included operational net sales growth of 28.7 percent and a negative impact of 580 basis points from foreign currency fluctuations, compared to the prior year period. The growth in the first quarter of 2022 compared to the prior year period was driven primarily by our net sales inChina ,Brazil andIndia due to the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales. However, due to the recent increase of COVID-19 cases inChina and associated public health measures implemented, we expect a negative sequential impact on procedural volumes and net sales growth in the second quarter of 2022.
Gross Profit
Our Gross profit was$2.071 billion for the first quarter of 2022 and$1.858 billion for the first quarter of 2021. As a percentage of net sales, our Gross profit increased to 68.4 percent in the first quarter of 2022, as compared to 67.5 percent in the first quarter of 2021. The following is a reconciliation of our gross profit margin and a description of the drivers of the changes from period to period: Percentage ofNet Sales Three Months Gross profit margin - period endedMarch 31, 2021 67.5% Sales pricing, volume and mix 0.5 Net impact of foreign currency fluctuations 0.8 All other, including other period expenses (0.4) Gross profit margin - period endedMarch 31, 2022 68.4% The primary factors contributing to the increase in our gross profit margin in the first quarter of 2022, as compared to the prior year period, were higher sales volumes driven by the recovery of elective and semi-emergent procedure volumes compared to the prior year when the COVID-19 pandemic had a more significant negative impact on our net sales. We also experienced favorable product mix associated with the resumption of procedures using higher-margin products, as well as a positive impact from foreign currency fluctuations. These improvements were partially offset by macro-economic factors that have negatively impacted our gross profit margin, including increases in costs of certain raw materials, direct labor and freight. We expect our gross margin to continue to be negatively impacted throughout 2022 while these factors persist.
Operating Expenses
The following table provides a summary of certain of our operating expenses:
Three Months Ended March 31,
2022 2021
% of Net % of Net
(in millions) $ Sales $ Sales
Selling, general and administrative expenses $
1,060 35.0 %
319 10.5 276 10.0 Royalty expense 12 0.4 12 0.4
Selling, general and administrative expenses (SG&A Expenses)
In the first quarter of 2022, our SG&A expenses increased$41 million , or 4 percent, as compared to the prior year period and were 200 basis points lower as a percentage of net sales. The increase in SG&A expenses for the first quarter of 2022, as compared to the prior year period, was primarily due to higher selling costs driven by higher global net sales.
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Research and development expenses (R&D Expenses)
We remain committed to advancing medical technologies and investing in meaningful R&D projects across our businesses. In the first quarter of 2022, our R&D expenses increased$43 million , or 16 percent, as compared to the prior year period and were 50 basis points higher as a percentage of net sales as a result of investments across our businesses in order to maintain a pipeline of new products that we believe will contribute to profitable sales growth.
Other Operating Expenses
The following table provides a summary of certain of our other operating
expenses, which are excluded by management for purposes of evaluating operating
performance. Refer to Additional Information for a further description of
certain operating expenses:
Three Months Ended
March 31,
(in millions) 2022 2021
Amortization expense $ 198 $ 185
Contingent consideration net expense (benefit) 12 (6)
Restructuring charges (credits) 4 5
Litigation-related net charges (credits) - 4
Gain on disposal of businesses and assets - (6)
Amortization Expense
In the first quarter of 2022, our Amortization expense increased $13 million , or
7 percent, compared to the prior year period. The increase in Amortization
expense was driven by the addition of amortizable intangible assets associated
with our recent acquisitions.
Contingent Consideration Net Expense (Benefit)
To recognize changes in the fair value of our contingent consideration liability, we recorded net charges of$12 million in the first quarter of 2022 and a net benefit of$6 million in the first quarter of 2021. Refer to Note B - Acquisitions, Divestitures and Strategic Investments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for additional details related to our contingent consideration arrangements.
Restructuring Charges (Credits)
InNovember 2018 , our Board of Directors approved, and we committed to, a new global restructuring program (the 2019 Restructuring Plan). In addition, onFebruary 22, 2022 , our Board of Directors approved increased cost estimates to complete additional activities identified under the program, which are expected to result in total pre-tax charges of approximately$425 million to$525 million , and approximately$375 million to$475 million of these charges are expected to result in cash outlays. We expect the majority of activity associated with our 2019 Restructuring Plan to be substantially complete by the end of 2022. A substantial portion of the savings are being reinvested in strategic growth initiatives. Pursuant to this program, restructuring charges were$4 million in the first quarter of 2022 and$3 million in the first quarter of 2021. Restructuring-related charges were$25 million in the first quarter of 2022 and$29 million in the first quarter of 2021, and were recorded primarily in Cost of products sold and SG&A expenses. In addition, onNovember 17, 2020 , we announced a global, voluntary recall of all unused inventory of our LOTUS EdgeTM Aortic Valve System and our decision to retire the entire LOTUSTM Valve platform. We recorded$2 million of restructuring charges and$15 million of restructuring-related charges associated with the product discontinuation in the first quarter of 2021. The restructuring activities were completed in 2021 and resulted in total pre-tax restructuring and restructuring-related net charges of approximately$80 million .
Refer to Note H - Restructuring-related Activities to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.
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Litigation-related net charges (credits)
We did not record any litigation-related net charges during the first quarter of 2022 and recorded litigation-related net charges of$4 million during the first quarter of 2021, primarily related to the finalization of a settlement with a coalition of state attorneys general associated with claims regarding our transvaginal mesh products. 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) within our accompanying unaudited consolidated financial statements. All other legal and product liability charges, credits and costs are recorded within SG&A expenses. 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 the financial covenant required by our credit arrangements. Refer to Note H - Commitments and Contingencies to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for discussion of our material legal proceedings.
Interest Expense
The following table provides a summary of our Interest expense and average
borrowing rate:
Three Months Ended March 31,
2022 2021
Interest expense (in millions) $ (279) $ (82) Average borrowing rate 11.5 % 3.5 % Interest expense increased and our average borrowing rate increased in the first quarter of 2022, as compared to the prior year period, due to$194 million of charges associated with the early extinguishment of$3.275 billion of certain of our senior notes, including payment of tender premiums and the acceleration of unamortized debt issuance costs. As ofMarch 31, 2022 , the weighted average borrowing rate associated with our outstanding senior notes was 2.6 percent. Refer to Liquidity and Capital Resources and Note E - Contractual Obligations and Commitments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for information regarding our debt obligations. Other, net
The following are the components of Other, net:
Three Months Ended March 31,
(in millions) 2022 2021
Interest income $ 4 $ 1
Net foreign currency gain (loss) (9) (2)
Net gains (losses) on investments (20) 37
Other income (expense), net (7) 2
$ (31) $ 37
In connection with the acquisition of Preventice in the first quarter of 2021,
we remeasured the fair value of our previously-held equity interest, which
resulted in a $195 million gain recognized within Other, net in the first
quarter of 2021. In the first quarter of 2021, we also recorded a $146 million
loss on our investment in Pulmonx Corporation presented in Other, net associated
with the partial disposition of our ownership and remeasurement of our remaining
investment to fair value based on observable market prices. The Preventice gain
is included within Acquisition/divestiture-related net charges (credits) and the
Pulmonx loss is included in Investment portfolio net losses (gains) presented in
the reconciliation of our results of operations prepared in accordance with U.S.
GAAP to those adjusted results considered by management. Refer to Financial
Summary for the reconciliation and Additional Information for a discussion of
management's use of non-GAAP financial measures.
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Tax Rate
Our effective tax rate from continuing operations is presented below:
Three Months Ended
2022 2021
Effective tax rate from continuing operations 29.1
% (4.9) %
The change in our reported tax rate for the first quarter of 2022, as compared to the same period in 2021, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate. These receipts and charges include acquisition/divestiture-related net charges, receipts on sales of investments, as well as certain discrete tax items primarily related to unrecognized tax benefits and foreign return-to-provision adjustments.
Critical Accounting Policies and Estimates
Our financial results are affected by the selection and application of accounting policies and methods. In the first quarter of 2022, there were no material changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.
Liquidity and Capital Resources
Based on our current business plan, we believe our existing balance of Cash and cash equivalents, future cash generated from operations, access to capital markets and existing credit facilities will be sufficient to fund our operations, invest in our infrastructure, pay our legal-related liabilities, pay taxes due, service and repay our existing debt and fund possible acquisitions for the next 12 months and for the foreseeable future. As ofMarch 31, 2022 , we had$325 million of unrestricted Cash and cash equivalents on hand, comprised of$25 million invested in money market funds and time deposits and$299 million in interest bearing and non-interest-bearing bank accounts. We invest excess cash on hand in short-term financial instruments that earn at market interest rates while mitigating principal risk through instrument and counterparty diversification, as well as what we believe to be prudent instrument selection. We limit our direct exposure to securities in any one industry or issuer. In 2021, we entered into a new$2.750 billion revolving credit facility (2021 Revolving Credit Facility) with a global syndicate of commercial banks and terminated our previous facility (2018 Revolving Credit Facility). The 2021 Revolving Credit Facility will mature onMay 10, 2026 , 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 2021 Revolving Credit Facility. As ofMarch 31, 2022 , we had$223 million of commercial paper debt outstanding, resulting in an additional$2.527 billion of available liquidity under the 2021 Revolving Credit Facility. For additional details related to our debt obligations, including our financial covenant requirement, refer to Note E - Contractual Obligations and Commitments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. The following provides a summary and description of our net cash inflows (outflows): Three Months Ended March 31, (in millions) 2022 2021 Cash provided by (used for) operating activities $ (58) $ 284 Cash provided by (used for) investing activities (1,574) 71 Cash provided by (used for) financing activities (6) (95) Operating Activities In the first quarter of 2022, cash used for operating activities decreased$342 million as compared to the prior year period, primarily due to changes in working capital partially offset by comparatively higher net sales and operating income. 43
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Investing Activities
In the first quarter of 2022, cash used for investing activities included a net cash payment of$1.471 billion for the acquisition of Baylis Medical. In the first quarter of 2021, cash provided by investing activities included proceeds of$801 million from the divestiture of theSpecialty Pharmaceuticals business, partially offset by a net cash payment of$706 million for the acquisition of Preventice. For more information, refer to Note B - Acquisitions, Divestitures and Strategic Investments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. In addition, we made purchases of property, plant and equipment and internal use software of$121 million in the first quarter of 2022 and$75 million in the first quarter of 2021. Financing Activities In the first quarter of 2022, we completed a public offering (the Offering) of €3.000 billion in aggregate principal amount of euro-dominated senior notes. The Offering resulted in cash proceeds of$3.271 billion , net of investor discounts and issuance costs. We used the net proceeds from the Offering to fund the tender offer and early redemption of combined aggregate principal amount of$3.275 billion of certain of our outstanding senior notes, as well as to pay accrued interest, tender premiums, fees and expenses. Cash used for financing activities in the first quarter of 2022 also included the issuance of commercial paper of$223 million for general corporate purposes. For more information, refer to Note E - Contractual Obligations and Commitments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. In the first quarter of 2022 and 2021, cash used for financing activities also included cash payments associated with the settlement of employee equity awards and payments for royalty rights associated with the Zytiga™ Drug.
Financial Covenant
As of
The 2021 Revolving Credit Facility includes the financial covenant requirement for all of our credit arrangements that we maintain the maximum permitted leverage ratio of 3.75 times through the remaining term. The agreement provides for higher leverage ratios for the period following a qualified acquisition, at our election, for which consideration exceeds$1.000 billion . In the event of such an acquisition, for the four succeeding quarters immediately following, including the quarter in which the acquisition occurs, the maximum permitted leverage ratio is 4.75 times. The maximum permitted ratio steps down for the fifth, sixth and seventh succeeding quarters to 4.50 times, 4.25 times and 4.00 times, respectively. Thereafter, a maximum leverage ratio of 3.75 times is required through the remaining term of the 2021 Revolving Credit Facility. We have not elected to increase the maximum permitted leverage ratio for the recently completed qualified acquisitions due to the funding using cash on hand. We believe that we have the ability to comply with the financial covenant for the next 12 months. The financial covenant requirement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreement, through maturity, of any non-cash charges and up to$500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As ofMarch 31, 2022 , we had$347 million of the restructuring charge 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$1.455 billion in the aggregate. As ofMarch 31, 2022 , we had$1.108 billion of the litigation exclusion remaining.
Contractual Obligations and Commitments
Certain of our acquisitions involve the payment of contingent consideration. Refer to Note B - Acquisitions, Divestitures and Strategic Investments to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for further details regarding the estimated potential amount of future contingent consideration we could be required to pay associated with our acquisitions. There have been no other material changes to our contractual obligations and commitments as ofMarch 31, 2022 .
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Table of Contents Equity We received$52 million in the first quarter of 2022 and$18 million in the first quarter of 2021 in proceeds from stock issuances related to our stock option and employee stock purchase plans. Proceeds from the exercise of employee stock options and employee stock purchases vary from period to period based upon, among other factors, fluctuations in the trading price of our common stock and in the exercise and stock purchase patterns of our employees. We did not repurchase any shares of our common stock in the first quarter of 2022 or 2021. OnDecember 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. As ofMarch 31, 2022 , we had the full amount remaining available under the authorization. Legal Matters For a discussion of our material legal proceedings refer to Note H - Commitments and Contingencies to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and Note K - Commitments and Contingencies to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K.
Recent Accounting Pronouncements
Information regarding new accounting pronouncements implemented since
Additional Information Cybersecurity We have established controls and procedures to escalate enterprise level issues, including cybersecurity matters, to the appropriate management levels within our organization and our Board of Directors, or members or committees thereof, as appropriate. Under our framework, cybersecurity issues are analyzed by subject matter experts and a crisis committee for potential financial, operational, and reputational risks, based on, among other factors, the nature of the matter and breadth of impact. Matters determined to present potential material impacts to the Company's financial results, operations, and/or reputation are immediately reported by management to the Board of Directors, or individual members or committees thereof, as appropriate, in accordance with our escalation framework. In addition, we have established procedures to ensure that management responsible for overseeing the effectiveness of disclosure controls is informed in a timely manner of known cybersecurity risks and incidents that may materially impact our operations and that timely public disclosure is made or updated, as appropriate. The conflict betweenRussia andUkraine raises cybersecurity risks on a global basis. While there is significant uncertainty around implications of cybersecurity attacks resulting from the conflict, we have taken steps to better understand our readiness, including the resilience of our critical business functions, with the goal of reducing the impact if such an event were to occur.
Stock Trading Policy
Our directors and executive officers are subject to our Stock Trading Policy, which is designed to facilitate compliance with insider trading laws and governs transactions in our common stock and related derivative securities. Our policy designates certain regular periods, dictated by release of financial results, in which trading is restricted for individuals in information-sensitive positions, including directors and executive officers. In addition, additional periods of trading restriction may be imposed as determined by the President, General Counsel, or Chief Financial Officer in light of material pending developments. Further, during permitted windows, individuals in information-sensitive positions are required to seek pre-clearance for trades from the General Counsel,who assesses whether there are any important pending developments, including cybersecurity matters, which need to be made public before the individual may participate in the market.
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Periodically, certain of our executive officers adopt written stock trading plans in accordance with Rule 10b5-1 under the Exchange Act and our own Stock Trading Policy. A Rule 10b5-1 Trading Plan is a written document that pre-establishes the amount, prices and dates (or formulas for determining the amounts, prices and dates) of future purchases or sales of our stock, including shares issued upon exercise of stock options or vesting of deferred stock units. These plans are entered into at a time when the person is not in possession of material non-public information about the Company. We disclose details regarding individual Rule 10b5-1 Trading Plans on the Investor Relations section of our website.
Use of Non-GAAP Financial Measures
To supplement our unaudited consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP financial measures, including adjusted net income (loss), adjusted net income (loss) available to common stockholders and adjusted net income (loss) per share (EPS) that exclude certain amounts; operational net sales, which exclude the impact of foreign currency fluctuations; and organic net sales, which exclude the impact of foreign currency fluctuations as well as the impact of certain acquisitions and divestitures with less than a full period of comparable net sales. These non-GAAP financial measures are not in accordance with generally accepted accounting principles inthe United States and should not be considered in isolation from or as a replacement for the most directly comparable GAAP financial measures. Further, other companies may calculate these non-GAAP financial measures differently than we do, which may limit the usefulness of those measures for comparative purposes. To calculate adjusted net income (loss), adjusted net income (loss) available to common stockholders and adjusted net income (loss) per share we exclude certain charges (credits) from GAAP net income (loss) and GAAP net income (loss) available to common stockholders. Amounts are presented after-tax at our effective tax rate, unless the amount is a significant unusual or infrequently occurring item in accordance withFinancial Accounting Standards Board Accounting Standards Codification Topic 740-270-30, "General Methodology and Use of Estimated Annual Effective Tax Rate." Please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our most recent Annual Report filed on Form 10-K filed with theSecurities and Exchange Commission for an explanation of each of these adjustments and the reasons for excluding each item. The GAAP financial measures most directly comparable to adjusted net income (loss), adjusted net income (loss) available to common stockholders and adjusted net income (loss) per share are GAAP net income (loss), GAAP net income (loss) available to common stockholders and GAAP net income (loss) per common share - assuming dilution, respectively. To calculate operational net sales growth rates, which exclude the impact of foreign currency fluctuations, we convert actual net sales from local currency toU.S. dollars using constant foreign currency exchange rates in the current and prior periods. To calculate organic net sales growth rates, we also remove the impact of acquisitions and divestitures with less than a full period of comparable net sales. The GAAP financial measure most directly comparable to operational net sales and organic net sales is net sales on a GAAP basis.
Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP financial measure are included in the relevant sections of this Quarterly Report.
Management uses these supplemental non-GAAP financial measures to evaluate
performance period over period, to analyze the underlying trends in our
business, to assess our performance relative to our competitors and to establish
operational goals and forecasts that are used in allocating resources. In
addition, management uses these non-GAAP financial measures to further its
understanding of the performance of our operating segments. The adjustments
excluded from our non-GAAP financial measures are consistent with those excluded
from our operating segments' measures of net sales and profit or loss. These
adjustments are excluded from the segment measures reported to our chief
operating decision maker that are used to make operating decisions and assess
performance.
We believe that presenting adjusted net income (loss), adjusted net income
(loss) available to common stockholders, adjusted net income (loss) per share,
operational net sales and organic net sales growth rates, in addition to the
corresponding GAAP financial measures, provides investors greater transparency
to the information used by management for its operational decision-making and
allows investors to see our results "through the eyes" of management. We further
believe that providing this information assists our investors in understanding
our operating performance and the methodology used by management to evaluate and
measure such performance.
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Safe Harbor for Forward-Looking Statements
Certain statements that we may make from time to time, including statements contained in this Quarterly Report on Form 10-Q and information incorporated by reference herein, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by words like "anticipate," "expect," "project," "believe," "plan," "may,", "estimate," "intend," "aim," "goal," "target," "continue," "hope" and similar words. These forward-looking statements are based on our beliefs, assumptions and estimates using information available to us at the time and are not intended to be guarantees of future events or performance. If our underlying assumptions turn out to be incorrect, or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q are based on certain risks and uncertainties, including the risk factors described in Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and the specific risk factors discussed herein and in connection with forward-looking statements throughout this Quarterly Report on Form 10-Q, which could cause actual results to vary materially from the expectations and projections expressed or implied by our forward-looking statements. These risks and uncertainties, in some cases, have affected and in the future could affect our ability to implement our business strategy and may cause actual results to differ materially from those contemplated by the statements expressed in this Quarterly Report on Form 10-Q. As a result, readers are cautioned not to place undue reliance on any of our forward-looking statements. Risks and uncertainties that may cause such differences include, among other things: the impact of the ongoing COVID-19 pandemic on our operations and financial results; futureU.S. and global economic, political, competitive, reimbursement and regulatory conditions, including as a result of the ongoing conflict betweenRussia andUkraine ; manufacturing, distribution and supply chain disruptions and cost increases; disruptions caused by cybersecurity events; disruptions caused by extreme weather or other climate change-related events; labor shortages and increases in labor costs; new product introductions and the market acceptance of those products; markets for our products; expected pricing environment; expected procedural volumes; the closing and integration of acquisitions; clinical trial results; demographic trends; intellectual property rights; litigation; financial market conditions; the execution and effect of our restructuring program; the execution and effect of our business strategy, including our cost-savings and growth initiatives; our ability to achieve environmental, social and governance goals and commitments; and future business decisions made by us and our competitors. New risks and uncertainties may arise from time to time and are difficult to predict, including those that have emerged or have increased in significance or likelihood as a result of the COVID-19 pandemic. All of these factors are difficult or impossible to predict accurately and many of them are beyond our control. For a further list and description of these and other important risks and uncertainties that may affect our future operations, refer to Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K filed with theSEC , which we may update in Part II, Item 1A. Risk Factors in subsequent Quarterly Reports on Form 10-Q that we will file hereafter, and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. We disclaim any intention or obligation to publicly update or revise any forward-looking statement to reflect any change in our expectations or in events, conditions, or circumstances on which those expectations may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this Quarterly Report. The following are some of the important risk factors that could cause our actual results to differ materially from our expectations in any forward-looking statements. For further discussion of these and other risk factors, refer to Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. Our Businesses •The impact of the COVID-19 pandemic on the worldwide economy and financial markets, and developments related to the disease, including the time it will take for vaccines to be broadly distributed and administered worldwide, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and variants thereof and mitigating the economic effects of the pandemic,
•The economic effects of the COVID-19 pandemic, including inflation, labor shortages and supply chain disruptions,
•The impact of the COVID-19 pandemic upon the scheduling of elective and semi-emergent procedures,
•The impact of the COVID-19 pandemic on our global manufacturing and distribution system, including the quality of our products and the availability and cost of raw materials and direct labor,
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•Our ability to recover from the impact of the COVID-19 pandemic on our business and increase net sales, expand the markets in which we participate, capture market share and adapt to market volatility,
•The impact of natural disasters, climate change, additional future public health crises and other catastrophic events on our ability to manufacture, distribute and sell our products,
•Competitive offerings and related declines in average selling prices for our products,
•The ongoing impact on our business of physician alignment to hospitals, governmental investigations and audits of hospitals and other market and economic conditions on the overall number of procedures performed,
•The performance of, and physician and patient confidence in, our products and technologies or those of our competitors,
•The impact and outcome of ongoing and future clinical trials and market studies undertaken by us, our competitors or other third parties or perceived product performance of our or our competitors' products,
•Variations in clinical results, reliability or product performance of our and our competitors' products,
•Our ability to acquire or develop, launch and supply new or next-generation products and technologies worldwide and in line with our commercialization strategies in a timely and successful manner and with respect to our recent acquisitions,
•The effect of consolidation and competition in the markets in which we do business or plan to do business,
•Disruption in the manufacture or supply of certain components, materials or products, or the failure to secure in a timely manner alternative manufacturing or additional or replacement components, materials or products,
•Our ability to achieve our projected level or mix of product sales, as some of our products are more profitable than others,
•Our ability to attract and retain talent, including key personnel associated with recent acquisitions, and to maintain our robust corporate culture, and continue to execute plans to return employees to offices in jurisdictions where safe and feasible, •The inability of certain of our employees to return to work full-time due to impacts of the COVID-19 pandemic, or our inability to recruit personnel into direct labor roles for the duration of the pandemic, •The impact of enhanced requirements to obtain and maintain regulatory approval in theU.S. and around the world, including EU MDR and the associated timing and cost of product approval, •The impact of increased pressure on the availability and rate of third-party reimbursement for our products and procedures in theU.S. and around the world, including with respect to the timing and costs of creating and expanding markets for new products and technologies,
•The issuance of new or revised accounting standards by the
•The impact of potential goodwill and intangible asset impairment charges on our results of operations.
Regulatory Compliance, Litigation and Data Protection
•The impact of healthcare policy changes and legislative or regulatory efforts in theU.S. , the EU and around the world to modify product approval or reimbursement processes, including a trend toward demonstrating clinical outcomes, comparative effectiveness and cost efficiency, as well as the impact of other healthcare reform legislation,
•Risks associated with our regulatory compliance and quality systems and
activities in the
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•The effect of legal, regulatory or market responses to global climate change,
•Our ability to minimize or avoid future field actions or FDA warning letters relating to our products and processes and the ongoing inherent risk of potential physician advisories related to our or our competitors' products,
•The impact of increased scrutiny of and heightened global regulatory
enforcement facing the medical device industry arising from political and
regulatory changes, economic pressures or otherwise, including under
•Costs and risks associated with current and future asserted litigation,
•The effect of our litigation and risk management practices, including self-insurance and compliance activities on our loss contingencies, legal provisions and cash flows,
•The impact of, diversion of management attention as a result of, and costs to cooperate with, litigate and/or resolve governmental investigations and our class action, product liability, contract and other legal proceedings,
•The possibility of failure to protect our intellectual property rights and the outcome of patent litigation,
•Our ability to operate properly our information systems that support our business operations and protect our data integrity and products from a cyber-attack or other breach that has a material adverse effect on our business, reputation or results of operations including increased risks as an indirect result of the ongoing conflict betweenRussia andUkraine , and •The potential impact to internal control over financial reporting relating to potential restrictions to access to consigned inventory at customer locations for our inventory count procedures.
Innovation and Certain Growth Initiatives
•The timing, size and nature of our strategic growth initiatives and market opportunities, including with respect to our internal research and development platforms and externally available research and development platforms and technologies and the ultimate cost and success of those initiatives and opportunities, •Our ability to complete planned clinical trials successfully, obtain regulatory approvals and launch new and next generation products in a timely manner consistent with cost estimates, including the successful completion of projects from in-process research and development, •Our ability to identify and prioritize our internal research and development project portfolio and our external investment portfolio on profitable net sales growth opportunities as well as to maintain the estimated timing and costs of such projects and expected revenue levels for the resulting products and technologies, •Our ability to develop, manufacture and market new products and technologies successfully and in a timely manner and the ability of our competitors and other third parties to develop products or technologies that render our products or technologies noncompetitive or obsolete, •Our ability to execute appropriate decisions to discontinue, write-down or reduce the funding of any of our research and development projects, including projects from in-process research and development from our acquisitions, in our growth adjacencies or otherwise, •Our dependence on acquisitions, alliances or investments to introduce new products or technologies and to enter new or adjacent growth markets and our ability to fund them or to fund contingent payments with respect to those acquisitions, alliances and investments, and
•The potential failure to successfully integrate and realize the expected benefits, including cost synergies, from the strategic acquisitions, alliances and investments we have consummated or may consummate in the future.
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International Markets
•Our dependency on international net sales to achieve growth, including in emerging markets,
•The timing and collectability of customer payments, as well as our ability to continue factoring customer receivables where we have factoring arrangements,
•The impact on pricing due to national and regional tenders,
•Geopolitical and economic conditions, including civil unrest, terrorist activity, governmental changes, restrictions on the ability to transfer capital across borders, tariffs and other protectionist measures,
•The impact of the
•The impact of the
•Protection of our intellectual property,
•Our ability to comply with established and developingU.S. and foreign legal and regulatory requirements, including FCPA, EU MDR and similar laws in other jurisdictions,
•Our ability to comply with
•The impact of changes in reimbursement practices and policies,
•The impact of significant developments or uncertainties stemming from changes
in the
•Our ability to maintain or expand our worldwide market positions in the various markets in which we compete or seek to compete, including through investments in product diversification and emerging markets such asBrazil ,Russia ,India andChina ,
•Our ability to execute and realize anticipated benefits from our investments in emerging markets, and
•The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses and resulting margins.
Liquidity
•Our ability to generate sufficient cash flow to fund operations, capital expenditures, global expansion initiatives, any litigation settlements and judgments, share repurchases and strategic investments and acquisitions as well as maintaining our investment grade ratings and managing our debt levels and financial covenant compliance, particularly in light of the COVID-19 pandemic and lower demand for our products,
•Our ability to access the public and private capital markets when desired and to issue debt or equity securities on terms reasonably acceptable to us,
•The unfavorable resolution of open tax matters, exposure to additional tax
liabilities and the impact of changes in
•The unfavorable resolution of open litigation matters, exposure to additional loss contingencies and legal provisions,
•The impact of examinations and assessments by domestic and international taxing authorities on our tax provisions, financial condition or results of operations,
•The possibility of counterparty default on our derivative financial instruments, and
•Our ability to collect outstanding and future receivables and/or sell receivables under our factoring programs.
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Cost Reduction and Optimization Initiatives
•Risks associated with changes made or expected to be made to our organizational and operational structure, pursuant to our restructuring plans as well as any further restructuring or optimization plans we may undertake in the future and our ability to recognize benefits and cost reductions from such programs and
•Business disruption and employee distraction as we execute our global compliance program, restructuring and optimization plans and divestitures of assets or businesses and implement our other strategic and cost reduction initiatives.
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