Company Quick10K Filing
Quick10K
Bristol Myers Squibb
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$49.37 1,632 $80,590
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-25 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-24 Earnings, Regulation FD, Exhibits
8-K 2019-01-24 Earnings, Regulation FD, Exhibits
8-K 2019-01-18 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-03 Regulation FD, Other Events, Exhibits
8-K 2019-01-02 Enter Agreement, Exhibits
8-K 2018-12-19 Other Events, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-09-14 Officers
8-K 2018-08-27 Officers, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-07-17 Officers, Exhibits
8-K 2018-05-01
8-K 2018-03-01 Officers, Exhibits
8-K 2018-02-14 Other Events, Exhibits
8-K 2018-02-05 Earnings, Exhibits
8-K 2018-01-22 Officers
8-K 2018-01-05 Other Events
TEVA Teva
BMRN Biomarin Pharmaceutical
GWPH GW Pharmaceuticals
MYOV Myovant Sciences
DVAX Dynavax Technologies
MRUS Merus
ADMP Adamis Pharmaceuticals
IMMY Imprimis Pharmaceuticals
NEOS Neos Therapeutics
HTBX Heat Biologics
BMY 2018-09-30
Part I-Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation and Recently Issued Accounting Standards
Note 2. Business Segment Information
Note 3. Revenue
Note 4. Alliances
Note 5. Divestitures and Licensing Arrangements
Note 6. Other Income (Net)
Note 7. Restructuring
Note 8. Income Taxes
Note 9. Earnings per Share
Note 10. Financial Instruments and Fair Value Measurements
Note 11. Receivables
Note 12. Inventories
Note 13. Property, Plant and Equipment
Note 14. Goodwill and Other Intangible Assets
Note 15. Accrued Liabilities
Note 16. Equity
Note 17. Retirement Benefits
Note 18. Legal Proceedings and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-12 exhibit12ratioofearningsto.htm
EX-31.A bmyex31a_20180930.htm
EX-31.B bmyex31b_20180930.htm
EX-32.A bmyex32a_20180930.htm
EX-32.B bmyex32b_20180930.htm

Bristol Myers Squibb Earnings 2018-09-30

BMY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 bmy-20180930x10q.htm FORM 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             
Commission file number:              1-1136
 
 BRISTOL-MYERS SQUIBB COMPANY
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
22-0790350
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
430 E. 29th Street, 14FL, New York, N.Y. 10016
(Address of principal executive offices) (Zip Code)
 
(212) 546-4000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨   Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
At September 30, 2018, there were 1,632,198,774 shares outstanding of the Registrant’s $0.10 par value common stock.
 




BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
SEPTEMBER 30, 2018
 

*    Indicates brand names of products which are trademarks not owned by BMS. Specific trademark ownership information is included in the Exhibit Index.





PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
Dollars in Millions, Except Per Share Data
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
EARNINGS
2018
 
2017
 
2018
 
2017
Net product sales
$
5,433

 
$
4,862

 
$
15,866

 
$
14,212

Alliance and other revenues
258

 
392

 
722

 
1,115

Total Revenues
5,691

 
5,254

 
16,588

 
15,327

 
 
 
 
 
 
 
 
Cost of products sold
1,648

 
1,579

 
4,857

 
4,413

Marketing, selling and administrative
1,104

 
1,163

 
3,215

 
3,435

Research and development
1,280

 
1,561

 
4,965

 
4,543

Other income (net)
(508
)
 
(232
)
 
(912
)
 
(1,497
)
Total Expenses
3,524

 
4,071

 
12,125

 
10,894

 
 
 
 
 
 
 
 
Earnings Before Income Taxes
2,167

 
1,183

 
4,463

 
4,433

Provision for Income Taxes
255

 
327

 
674

 
1,129

Net Earnings
1,912

 
856

 
3,789

 
3,304

Noncontrolling Interest
11

 
11

 
29

 
(31
)
Net Earnings Attributable to BMS
$
1,901

 
$
845

 
$
3,760

 
$
3,335

 
 
 
 
 
 
 
 
Earnings per Common Share
 
 
 
 
 
 
 
Basic
$
1.16

 
$
0.52

 
$
2.30

 
$
2.02

Diluted
1.16

 
0.51

 
2.30

 
2.02

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.40

 
$
0.39

 
$
1.20

 
$
1.17



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in Millions
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
COMPREHENSIVE INCOME
2018
 
2017
 
2018
 
2017
Net Earnings
$
1,912

 
$
856

 
$
3,789

 
$
3,304

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges
5

 
(1
)
 
71

 
(61
)
Pension and postretirement benefits
22

 
18

 
194

 
74

Available-for-sale securities
2

 
22

 
(31
)
 
41

Foreign currency translation
(21
)
 
7

 
(237
)
 
28

Other Comprehensive Income/(Loss)
8

 
46

 
(3
)
 
82

 
 
 
 
 
 
 
 
Comprehensive Income
1,920

 
902

 
3,786

 
3,386

Noncontrolling Interest
11

 
11

 
29

 
(31
)
Comprehensive Income Attributable to BMS
$
1,909

 
$
891

 
$
3,757

 
$
3,417

The accompanying notes are an integral part of these consolidated financial statements.


3




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED BALANCE SHEETS
Dollars in Millions
(UNAUDITED) 
ASSETS
September 30,
2018
 
December 31,
2017
Current Assets:
 
 
 
Cash and cash equivalents
$
5,408

 
$
5,421

Marketable securities
1,422

 
1,391

Receivables
5,871

 
6,300

Inventories
1,282

 
1,166

Prepaid expenses and other
886

 
576

Total Current Assets
14,869

 
14,854

Property, plant and equipment
5,092

 
5,001

Goodwill
6,686

 
6,863

Other intangible assets
1,107

 
1,210

Deferred income taxes
1,627

 
1,610

Marketable securities
2,017


2,480

Other assets
2,336

 
1,533

Total Assets
$
33,734

 
$
33,551

 
 
 
 
LIABILITIES
 
 
 
Current Liabilities:
 
 
 
Short-term debt obligations
$
1,620

 
$
987

Accounts payable
1,773

 
2,248

Accrued liabilities
5,853

 
6,014

Deferred income
93

 
83

Income taxes payable
355

 
231

Total Current Liabilities
9,694

 
9,563

Deferred income
486

 
454

Income taxes payable
3,112

 
3,548

Pension and other liabilities
1,005

 
1,164

Long-term debt
5,687

 
6,975

Total Liabilities
19,984

 
21,704

 
 
 
 
Commitments and contingencies

 

 
 
 
 
EQUITY
 
 
 
Bristol-Myers Squibb Company Shareholders’ Equity:
 
 
 
Preferred stock

 

Common stock
221

 
221

Capital in excess of par value of stock
2,029

 
1,898

Accumulated other comprehensive loss
(2,326
)
 
(2,289
)
Retained earnings
33,292

 
31,160

Less cost of treasury stock
(19,576
)
 
(19,249
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
13,640

 
11,741

Noncontrolling interest
110

 
106

Total Equity
13,750

 
11,847

Total Liabilities and Equity
$
33,734

 
$
33,551

The accompanying notes are an integral part of these consolidated financial statements.

4




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
(UNAUDITED)

 
Nine Months Ended September 30,
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
3,789

 
$
3,304

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
465

 
592

Deferred income taxes
(161
)
 
283

Stock-based compensation
168

 
149

Impairment charges
110

 
223

Pension settlements and amortization
145

 
148

Divestiture gains and royalties
(822
)
 
(546
)
Asset acquisition charges
85

 
510

Loss/(gain) on equity investments
244

 
(17
)
Other adjustments
(43
)
 
125

Changes in operating assets and liabilities:
 
 
 
Receivables
(222
)
 
(539
)
Inventories
(152
)
 
7

Accounts payable
(186
)
 
63

Deferred income
84

 
(91
)
Income taxes payable
199

 
400

Other
(192
)
 
(453
)
Net Cash Provided by Operating Activities
3,511

 
4,158

Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
1,453

 
4,296

Purchase of marketable securities
(1,062
)
 
(4,434
)
Capital expenditures
(661
)
 
(801
)
Divestiture and other proceeds
947

 
526

Acquisition and other payments
(1,215
)
 
(672
)
Net Cash Used in Investing Activities
(538
)
 
(1,085
)
Cash Flows From Financing Activities:
 
 
 
Short-term debt obligations, net
(617
)
 
1,198

Issuance of long-term debt

 
1,488

Repayment of long-term debt
(5
)
 
(1,224
)
Repurchase of common stock
(320
)
 
(2,220
)
Dividends
(1,960
)
 
(1,938
)
Other
(55
)
 
(29
)
Net Cash Used in Financing Activities
(2,957
)
 
(2,725
)
Effect of Exchange Rates on Cash and Cash Equivalents
(29
)
 
59

Net (Decrease)/Increase in Cash and Cash Equivalents
(13
)
 
407

Cash and Cash Equivalents at Beginning of Period
5,421

 
4,237

Cash and Cash Equivalents at End of Period
$
5,408

 
$
4,644

The accompanying notes are an integral part of these consolidated financial statements.

5




Note 1. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS

Bristol-Myers Squibb Company prepared these unaudited consolidated financial statements following the requirements of the SEC and U.S. GAAP for interim reporting. Under those rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Quarterly Report on Form 10-Q, which include all adjustments necessary for a fair presentation of the financial position at September 30, 2018 and December 31, 2017, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. All intercompany balances and transactions have been eliminated. These financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017 included in the 2017 Form 10-K. Refer to the Summary of Abbreviated Terms at the end of this Quarterly Report on Form 10-Q for terms used throughout the document.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be indicative of full year operating results. The preparation of financial statements requires the use of management estimates, judgments and assumptions. The most significant assumptions are estimates used in determining sales rebate and return accruals; legal contingencies; income taxes; and pension and postretirement benefits. Actual results may differ from estimates.

Certain prior period amounts were reclassified to conform to the current period presentation. Loss/(gain) on equity investments previously presented in Other adjustments in the consolidated statements of cash flows is now presented separately.

Recently Adopted Accounting Standards

Revenue from Contracts with Customers
Amended guidance for revenue recognition was adopted in the first quarter of 2018 using the modified retrospective method with the cumulative effect of the change recognized in Retained earnings. The new guidance, referred to as ASC 606, requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most of the existing revenue recognition standards in U.S. GAAP. A five-step model is utilized to achieve the core principle: (1) identify the customer contract; (2) identify the contract’s performance obligation; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation; and (5) recognize revenue when or as a performance obligation is satisfied.

The timing of recognizing revenue for typical net product sales to our customers did not significantly change. However, transaction prices are no longer required to be fixed or determinable and certain variable consideration might be recognized prior to the occurrence or resolution of the contingent event. As a result, certain revenue previously deferred under the prior standard because the transaction price was not fixed or determinable is now accounted for as variable consideration and might be recognized earlier provided such terms are sufficient to reliably estimate the ultimate price expected to be realized.

Estimated future royalties and contingent fees related to certain arrangements are now recognized prior to the third party sale or event occurring to the extent it is probable that a significant reversal in the amount of estimated cumulative revenue will not occur. The new guidance pertaining to the separation of licensing rights and related fee recognition did not significantly change the timing of recognizing revenue in our existing alliance arrangements that are currently generating revenue. The timing of royalties, sales-based milestones and other forms of contingent consideration resulting from the divestiture of businesses as well as royalties and sales-based milestones from licensing arrangements did not change.

The cumulative effect of the accounting change resulted in recognizing contract assets of $214 million and a $168 million increase in Retained earnings net of tax. The cumulative effect was primarily attributed to royalties and licensing rights reacquired by alliance partners that are expected to be received in the future and are not eligible for the licensing exclusion. As a result of the new guidance and cumulative effect adjustment, revenue was approximately $53 million and $151 million lower in the three and nine months ended September 30, 2018, respectively, compared to what would have been reported under the previous guidance. Refer to "—Note 3. Revenue" for further information.


6




Gains and Losses from the Derecognition of Nonfinancial Assets
Amended guidance for gains and losses from the derecognition of nonfinancial assets (ASC 610) was adopted in the first quarter of 2018 using the modified retrospective method. The amendments clarify the scope of asset derecognition guidance, add guidance for partial sales of nonfinancial assets and clarify recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. Certain transactions such as the sale or transfer of product rights that do not constitute a business will require accounting similar to ASC 606 including the potential recognition of variable consideration. The amended guidance may result in earlier recognition of variable consideration depending on the facts and circumstances of each transaction.
The cumulative effect of the accounting change resulted in recognizing contract assets of $167 million and a $130 million increase in Retained earnings net of tax. The cumulative effect was primarily attributed to royalties and termination fees for licensing rights reacquired by third parties that are expected to be received in the future and are not eligible for the licensing exclusion. As a result of the new guidance and cumulative effect adjustment, Other income (net) was approximately $4 million and $16 million lower in the three and nine months ended September 30, 2018, respectively, compared to what would have been reported under the previous guidance.
Presentation of Net Periodic Pension and Postretirement Benefits
Amended guidance requiring all net periodic benefit components for defined benefit pension and other postretirement plans other than service costs to be recorded outside of income from operations (other income) was adopted in the first quarter of 2018 on a retrospective basis. Cost of products sold; Marketing, selling and administrative; and Research and development expenses increased in the aggregate with a corresponding offset in Other income (net).
As adjusted amounts upon adoption of the new guidance are as follows:
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Dollars in Millions
As Previously Reported
 
As Adjusted
 
As Previously Reported
 
As Adjusted
Cost of products sold
$
1,572

 
$
1,579

 
$
4,393

 
$
4,413

Marketing, selling and administrative
1,147

 
1,163

 
3,388

 
3,435

Research and development
1,543

 
1,561

 
4,490

 
4,543

Other income (net)
(191
)
 
(232
)
 
(1,377
)
 
(1,497
)
Definition of a Business
Amended guidance which revises the definition of a business was adopted prospectively in the first quarter of 2018. The amendment provides an initial screen that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, an integrated set of assets and activities would not represent a business. If the screen is not met, the set must include an input and a substantive process that together significantly contributes to the ability to create outputs for the set to represent a business. The amendment also narrows the definition of the term "output" and requires the transfer of an organized work force when outputs do not exist. The amended guidance may result in more transactions being accounted for as assets in the future with the impact to our results of operations dependent on the individual facts and circumstances of each transaction.
Recognition and Measurement of Financial Assets and Liabilities
Amended guidance for the recognition, measurement, presentation and disclosure of financial instruments was adopted using the modified retrospective method in the first quarter of 2018. The new guidance requires that fair value adjustments for equity investments with readily determinable fair values be reported through earnings. The new guidance also requires a qualitative impairment assessment for equity investments without a readily determinable fair value based upon observable price changes and a charge through earnings if an impairment exists. The cumulative effect of the accounting change resulted in a $36 million reduction to Other Comprehensive Income/(Loss) and a corresponding $34 million increase to Retained earnings, net of tax. Refer to "— Note 6. Other Income (Net) for further information and the impact on the results of operations.
Accounting for Hedging Activities
Amended guidance for derivatives and hedging was adopted using the modified retrospective method in the first quarter of 2018. The amended guidance revises and expands items eligible for hedge accounting, simplifies hedge effectiveness testing and changes the timing of recognition and presentation for certain hedged items. Certain disclosure requirements were also modified for hedging activities on a prospective basis. The adoption of the amended standard did not have a material impact on the Company's results of operations.


7




Recently Issued Accounting Standards Not Yet Adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued amended guidance on income tax accounting. The amended guidance permits the reclassification of the income tax effect on amounts recorded within Other comprehensive income impacted by the Tax Cuts and Jobs Act into Retained earnings. The amended guidance is effective for periods ending after December 15, 2018 and applies only to those amounts remaining in Other comprehensive income at the date of enactment of the Act. The amended guidance may be adopted on either a retrospective basis or at the beginning of the period of adoption. The Company is assessing the potential impact of the amended standard.

In addition, the following recently issued accounting standards have not been adopted. Refer to the 2017 Form 10-K for additional information and their potential impacts.
Accounting Standard Update
Effective Date
Leases
January 1, 2019
Financial Instruments - Measurement of Credit Losses
January 1, 2020
Goodwill Impairment Testing
January 1, 2020

Note 2. BUSINESS SEGMENT INFORMATION

BMS operates in a single segment engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of innovative medicines that help patients prevail over serious diseases. A global research and development organization and supply chain organization are responsible for the discovery, development, manufacturing and supply of products. Regional commercial organizations market, distribute and sell the products. The business is also supported by global corporate staff functions. The determination of a single segment is consistent with the financial information regularly reviewed by the chief executive officer for purposes of evaluating performance, allocating resources, setting incentive compensation targets and planning and forecasting future periods. For further information on product and regional revenues, see "—Note 3. Revenue."

Note 3. REVENUE

The following table summarizes the disaggregation of revenue by nature:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Net product sales
$
5,433

 
$
4,862

 
$
15,866

 
$
14,212

Alliance revenues
177

 
232

 
483

 
694

Other revenues
81

 
160

 
239

 
421

Total Revenues
$
5,691

 
$
5,254

 
$
16,588

 
$
15,327


Net product sales represent more than 90% of the Company’s total revenues during the three and nine months ended September 30, 2018 and 2017. Products are sold principally to wholesalers or distributors and to a lesser extent, directly to retailers, hospitals, clinics, government agencies and pharmacies. Customer orders are generally fulfilled within a few days of receipt resulting in minimal order backlog. Contractual performance obligations are usually limited to transfer of control of the product to the customer. The transfer occurs either upon shipment or upon receipt of the product in certain non-U.S. countries after considering when the customer obtains legal title to the product and when the Company obtains a right of payment. At these points, customers are able to direct the use of and obtain substantially all of the remaining benefits of the product.


8




Wholesalers are initially invoiced at contractual list prices. Payment terms are typically 30 to 90 days based on customary practices in each country with the exception of certain biologic products in the U.S., including Opdivo, Yervoy and Empliciti (90 days to 120 days). Revenue is reduced from wholesaler list price at the time of recognition for expected charge-backs, discounts, rebates, sales allowances and product returns, which are referred to as gross-to-net (GTN) adjustments. These reductions are attributed to various commercial arrangements, managed healthcare organizations and government programs such as Medicare, Medicaid and the 340B Drug Pricing Program containing various pricing implications such as mandatory discounts, pricing protection below wholesaler list price or other discounts when Medicare Part D beneficiaries are in the coverage gap. In addition, non-U.S. government programs include different pricing schemes such as cost caps, volume discounts, outcome-based pricing and pricing claw-backs determined on sales of individual companies or an aggregation of companies participating in a specific market. Charge-backs and cash discounts are reflected as a reduction to receivables and settled through the issuance of credits to the customer, typically within one month. All other rebates, discounts and adjustments, including Medicaid and Medicare, are reflected as a liability and settled through cash payments to the customer, typically within various time periods ranging from a few months to one year.

Significant judgment is required in estimating GTN adjustments considering legal interpretations of applicable laws and regulations, historical experience, payer channel mix, current contract prices under applicable programs, unbilled claims, processing time lags and inventory levels in the distribution channel.

The following table summarizes GTN adjustments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Gross product sales
$
7,681

 
$
6,555

 
$
21,891

 
$
18,723

GTN adjustments (a)
 
 
 
 
 
 
 
Charge-backs and cash discounts
(711
)
 
(583
)
 
(1,957
)
 
(1,521
)
Medicaid and Medicare rebates
(847
)
 
(573
)
 
(2,169
)
 
(1,474
)
Other rebates, returns, discounts and adjustments
(690
)
 
(537
)
 
(1,899
)
 
(1,516
)
Total GTN adjustments
(2,248
)
 
(1,693
)
 
(6,025
)
 
(4,511
)
Net product sales
$
5,433

 
$
4,862

 
$
15,866

 
$
14,212

(a)
Includes adjustments to provisions for product sales made in prior periods resulting from changes in estimates of $(7) million and $11 million in the three months ended September 30, 2018 and 2017 and $103 million and $65 million in the nine months ended September 30, 2018 and 2017, respectively.

Alliance and other revenues consist primarily of amounts related to collaborations and out-licensing arrangements. Each of these arrangements are evaluated for whether they represent contracts that are within the scope of the revenue recognition guidance in their entirety or contain aspects that are within the scope of the guidance, either directly or by reference based upon the application of the guidance related to the derecognition of nonfinancial assets (ASC 610).

Performance obligations are identified and separated when the other party can benefit directly from the rights, goods or services either on their own or together with other readily available resources and when the rights, goods or services are not highly interdependent or interrelated.

Transaction prices for these arrangements may include fixed up-front amounts as well as variable consideration such as contingent development and regulatory milestones, sales-based milestones and royalties. The most likely amount method is used to estimate contingent development, regulatory and sales-based milestones because the ultimate outcomes are binary in nature. The expected value method is used to estimate royalties because a broad range of potential outcomes exist, except for instances in which such royalties relate to a license. Variable consideration is included in the transaction price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with the variable consideration is subsequently resolved. Significant judgment is required in estimating the amount of variable consideration to recognize when assessing factors outside of BMS’s influence such as likelihood of regulatory success, limited availability of third party information, expected duration of time until resolution, lack of relevant past experience, historical practice of offering fee concessions and a large number and broad range of possible amounts. To the extent arrangements include multiple performance obligations that are separable, the transaction price assigned to each distinct performance obligation is reflective of the relative stand-alone selling price and recognized at a point in time upon the transfer of control.

Three types of out-licensing arrangements are typically utilized: 1) arrangements when we out-license intellectual property to another party and have no further performance obligations; 2) arrangements that include a license and an additional performance obligation to supply product upon the request of the third party; and 3) collaboration arrangements, which include transferring a license to a third party to jointly develop and commercialize a product.


9




Most out-licensing arrangements consist of a single performance obligation that is satisfied upon execution of the agreement when the development and commercialization rights are transferred to a third party. Up-front fees are recognized immediately and included in other income. Although contingent development and regulatory milestone amounts are assessed each period for the likelihood of achievement, they are typically constrained and recognized when the uncertainty is subsequently resolved for the full amount of the milestone and included in other income. Sales-based milestones and royalties are recognized when the milestone is achieved or the subsequent sales occur. Sales-based milestones are included in other income and royalties are included in alliance and other revenue.

Certain out-licensing arrangements may also include contingent performance obligations to supply commercial product to the third party upon its request. The license and supply obligations are accounted for as separate performance obligations as they are considered distinct because the third party can benefit from the license either on its own or together with other supply resources readily available to it and the obligations are separately identifiable from other obligations in the contract in accordance with the revenue recognition guidance. After considering the standalone selling prices in these situations, up-front fees, contingent development and regulatory milestone amounts and sales-based milestone and royalties are allocated to the license and recognized in the manner described above. Consideration for the supply obligation is usually based upon stipulated cost-plus margin contractual terms which represent a standalone selling price. The supply consideration is recognized at a point in time upon transfer of control of the product to the third party and included in alliance and other revenue. The above fee allocation between the license and the supply represents the amount of consideration that the Company expects to be entitled to for the satisfaction of the separate performance obligations.

Although collaboration arrangements are unique in nature, both parties are active participants in the operating activities and are exposed to significant risks and rewards depending on the commercial success of the activities. Performance obligations inherent in these arrangements may include the transfer of certain development or commercialization rights, ongoing development and commercialization services and product supply obligations. Except for certain product supply obligations which are considered distinct and accounted for as separate performance obligations similar to the manner discussed above, all other performance obligations are not considered distinct and are combined into a single performance obligation since the transferred rights are highly integrated and interrelated to our obligation to jointly develop and commercialize the product with the third party. As a result, up-front fees are recognized over time throughout the expected period of the collaboration activities and included in other income as the license is combined with other development and commercialization obligations. Contingent development and regulatory milestones that are no longer constrained are recognized in a similar manner on a prospective basis. Royalties and profit sharing are recognized when the underlying sales and profits occur and are included in alliance and other revenue. Refer to "-Note 4. Alliances" for further information.

The following table summarizes the disaggregation of revenue by product and region:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Prioritized Brands
 
 
 
 
 
 
 
Opdivo
$
1,793

 
$
1,265

 
$
4,931

 
$
3,587

Eliquis
1,577

 
1,232

 
4,733

 
3,509

Orencia
675

 
632

 
1,979

 
1,817

Sprycel
491

 
509

 
1,464

 
1,478

Yervoy
382

 
323

 
946

 
975

Empliciti
59

 
60

 
178

 
168

Established Brands
 
 
 
 
 
 
 
Baraclude
175

 
264

 
579

 
819

Sustiva Franchise
72

 
183

 
229

 
555

Reyataz Franchise
87

 
174

 
328

 
555

Hepatitis C Franchise
(2
)
 
73

 
13

 
347

Other Brands
382

 
539

 
1,208

 
1,517

Total Revenues
$
5,691

 
$
5,254

 
$
16,588

 
$
15,327

 
 
 
 
 
 
 
 
United States
$
3,235

 
$
2,864

 
$
9,243

 
$
8,467

Europe
1,365

 
1,262

 
4,179

 
3,596

Rest of World
932

 
970

 
2,728

 
2,858

Other
159

 
158

 
438

 
406

Total Revenues
$
5,691

 
$
5,254

 
$
16,588

 
$
15,327



10




The following table summarizes contract assets as of September 30, 2018 and January 1, 2018:
Dollars in Millions
September 30, 2018
 
January 1, 2018
Prepaid expenses and other
$
193

 
$
349

Other assets
23

 
32

Total Contract Assets
$
216

 
$
381


Contract assets are primarily estimated future royalties and termination fees not eligible for the licensing exclusion and therefore recognized upon the adoption of ASC 606 and ASC 610. Contract assets are reduced and receivables are increased in the period the underlying sales occur. Contingent development and regulatory milestones from out-licensing arrangements of $1.4 billion were constrained and not recognized after considering the likelihood of a significant reversal of cumulative amount of revenue occurring. Cumulative catch-up adjustments to revenue affecting contract assets or contract liabilities were not material during the three and nine months ended September 30, 2018. Revenue recognized from performance obligations satisfied in prior periods was $97 million and $398 million in the three and nine months ended September 30, 2018, consisting primarily of royalties for out-licensing arrangements and revised estimates for gross-to-net adjustments related to prior period sales.

Sales commissions and other incremental costs of obtaining customer contracts are expensed as incurred as the amortization periods would be less than one year.

Note 4. ALLIANCES

BMS enters into collaboration arrangements with third parties for the development and commercialization of certain products. Although each of these arrangements is unique in nature, both parties are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. BMS may either in-license intellectual property owned by the other party or out-license its intellectual property to the other party. These arrangements also typically include research, development, manufacturing and/or commercial activities and can cover a single investigational compound or commercial product or multiple compounds and/or products in various life cycle stages. The rights and obligations of the parties can be global or limited to geographic regions. We refer to these collaborations as alliances and our partners as alliance partners. Products sold through alliance arrangements in certain markets include prioritized products and certain other brands.

Selected financial information pertaining to our alliances was as follows, including net product sales when BMS is the principal in the third-party customer sale for products subject to the alliance. Expenses summarized below do not include all amounts attributed to the activities for the products in the alliance, but only the payments between the alliance partners or the related amortization if the payments were deferred or capitalized. Certain prior period amounts included below were revised to exclude amounts for arrangements that no longer meet the criteria for collaboration arrangements.
Dollars in Millions
Three Months Ended September 30,
 
Nine Months Ended September 30,
Revenues from alliances:
2018
 
2017
 
2018
 
2017
Net product sales
$
2,037

 
$
1,754

 
$
6,135

 
$
5,017

Alliance revenues
177

 
232

 
483

 
694

Total Revenues
$
2,214

 
$
1,986

 
$
6,618

 
$
5,711

 
 
 
 
 
 
 
 
Payments to/(from) alliance partners:
 
 
 
 
 
 
 
Cost of products sold
$
838

 
$
678

 
$
2,528

 
$
1,965

Marketing, selling and administrative
(26
)
 
(18
)
 
(76
)
 
(41
)
Research and development
(2
)
 
(13
)
 
1,060

 
(14
)
Other income (net)
(14
)
 
(9
)
 
(44
)
 
(29
)

Selected Alliance Balance Sheet information:
 
 
 
Dollars in Millions
September 30,
2018
 
December 31,
2017
Receivables - from alliance partners
$
354

 
$
322

Accounts payable - to alliance partners
835

 
875

Deferred income from alliances(a)
510

 
467

(a)
Includes unamortized up-front, milestone and other licensing proceeds. Amortization of deferred income (primarily related to alliances) was $16 million and $20 million in the three months ended September 30, 2018 and 2017 and $48 million and $59 million in the nine months ended September 30, 2018 and 2017, respectively.
    

11




The nature and purpose, significant rights and obligations of the parties and specific accounting policy elections for each of our significant alliances are discussed in our 2017 Form 10-K. Significant developments and updates related to alliances during 2018 are set forth below.
Nektar
In the second quarter of 2018, BMS and Nektar commenced a worldwide license and collaboration for the development and commercialization of NKTR-214, Nektar’s investigational immuno-stimulatory therapy designed to selectively expand specific cancer-fighting T cells and natural killer cells directly in the tumor micro-environment. The Opdivo and NKTR-214 combination therapy is currently in Phase II clinical studies for multiple cancer indications and in a Phase III clinical study for melanoma. A joint development plan agreed by the parties contemplates development in various indications and tumor types with each party responsible for the supply of their own product. BMS’s share of the development costs associated with therapies comprising a BMS medicine used in combination with NKTR-214 is 67.5%, subject to certain cost caps for Nektar. The parties will also jointly commercialize the therapies, subject to regulatory approval. BMS's share of global NKTR-214 profits and losses will be 35% subject to certain annual loss caps for Nektar.
BMS paid Nektar $1.85 billion for the rights discussed above and 8.3 million shares of Nektar common stock representing a 4.8% ownership interest. BMS’s equity ownership is subject to certain lock-up, standstill and voting provisions for a five-year period. The amount of the up-front payment allocated to the equity investment was $800 million after considering Nektar’s stock price on the date of closing and current limitations on trading the securities. The remaining $1.05 billion of the up-front payment was allocated to the rights discussed above and included in research and development expense in the second quarter of 2018. BMS will also pay up to $1.8 billion upon the achievement of contingent development, regulatory and sales-based milestones over the life of the alliance period.
Ono
In the third quarter of 2018, BMS provided Ono with a right to accept NKTR-214 into their alliance upon completion of a Phase I clinical study of Opdivo and NKTR-214 in the Ono Territory. If the right is exercised, Ono will partially reimburse BMS for development costs incurred with the study and share in certain future development costs, contingent milestone payments, profits and losses under the collaboration with Nektar.
Promedior
In the third quarter of 2018, BMS notified Promedior that it would not exercise its warrant to purchase all outstanding shares of Promedior.

Note 5. DIVESTITURES AND LICENSING ARRANGEMENTS

Divestitures

The following table summarizes proceeds, gains and royalty income resulting from divestitures. Revenues and pretax earnings related to all divestitures were not material in all periods presented (excluding divestiture gains).

 
Three Months Ended September 30,
 
Proceeds(a)
 
Divestiture Gains
 
Royalty Income
Dollars in Millions
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Manufacturing Operations
$

 
$

 
$

 
$

 
$

 
$

Diabetes Business
165

 
82

 

 

 
(170
)
 
(78
)
Erbitux* Business
59

 
54

 

 

 
(48
)
 
(56
)
Mature Brands and Other
140

 
1

 
(108
)
 
1

 
1

 
(2
)
 
$
364

 
$
137

 
$
(108
)
 
$
1

 
$
(217
)
 
$
(136
)
 
Nine Months Ended September 30,
 
Proceeds(a)
 
Divestiture Gains
 
Royalty Income
Dollars in Millions
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Manufacturing Operations
$
159

 
$

 
$

 
$

 
$

 
$

Diabetes Business
408

 
333

 

 
(100
)
 
(497
)
 
(252
)
Erbitux* Business
168

 
162

 

 

 
(145
)
 
(164
)
Mature Brands and Other
212

 
31

 
(178
)
 
(26
)
 
(2
)
 
(4
)
 
$
947

 
$
526

 
$
(178
)
 
$
(126
)
 
$
(644
)
 
$
(420
)
(a)
Includes royalties received subsequent to the related sale of the asset or business.

12




Manufacturing Operations
In the fourth quarter of 2017, BMS sold its small molecule active pharmaceutical ingredient manufacturing operations in Swords, Ireland to SK Biotek for approximately $165 million, subject to certain adjustments. The transaction was accounted for as the sale of a business. SK Biotek will provide certain manufacturing services for BMS through 2022.
Diabetes Business
In the first quarter of 2017, BMS received $100 million from AstraZeneca as additional contingent consideration for the diabetes business divestiture upon achievement of a regulatory approval milestone, which was included in Other income (net).
Mature Brands and Other
Divestitures include several brands sold to Cheplapharm resulting in proceeds of $153 million and divestiture gains of $127 million in 2018.

Licensing Arrangements

Biogen
In the second quarter of 2017, BMS out-licensed to Biogen exclusive rights to develop and commercialize BMS-986168, an anti-eTau compound in development for Progressive Supranuclear Palsy. Biogen paid $300 million to BMS which was included in Other income (net). BMS is also entitled to contingent development, regulatory and sales-based milestone payments of up to $410 million if achieved and future royalties. BMS originally acquired the rights to this compound in 2014 through its acquisition of iPierian. Biogen assumed all of BMS’s remaining obligations to the former stockholders of iPierian.
Roche
In the second quarter of 2017, BMS out-licensed to Roche exclusive rights to develop and commercialize BMS-986089, an anti-myostatin adnectin in development for Duchenne Muscular Dystrophy. Roche paid $170 million to BMS which was included in Other income (net). BMS is also entitled to contingent development and regulatory milestone payments of up to $205 million if achieved and future royalties.

Note 6. OTHER INCOME (NET)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Interest expense
$
44

 
$
48

 
$
135

 
$
145

Investment income
(44
)
 
(32
)
 
(118
)
 
(87
)
Loss/(gain) on equity investments
(97
)
 
(5
)
 
244

 
(17
)
Provision for restructuring
45

 
28

 
102

 
207

Litigation and other settlements
11

 

 
10

 
(489
)
Equity in net income of affiliates
(22
)
 
(21
)
 
(73
)
 
(59
)
Divestiture (gains)/losses
(108
)
 
1

 
(178
)
 
(126
)
Royalties and licensing income
(338
)
 
(209
)
 
(1,058
)
 
(1,093
)
Transition and other service fees

 
(12
)
 
(5
)
 
(32
)
Pension and postretirement
(10
)
 
(19
)
 
(40
)
 
(29
)
Intangible asset impairment

 

 
64

 

Loss on debt redemption

 

 

 
109

Other
11

 
(11
)
 
5

 
(26
)
Other income (net)
$
(508
)
 
$
(232
)
 
$
(912
)
 
$
(1,497
)

Loss/(gain) on equity investments includes a $100 million increase and $307 million decrease in fair value adjustments for the equity investment in Nektar in the three and nine months ended September 30, 2018, respectively.
Litigation and other settlements includes BMS's share of a patent-infringement litigation settlement of $481 million related to Merck's PD-1 antibody Keytruda* in the first quarter of 2017.
Royalties and licensing income includes up-front licensing fees of $470 million from Biogen and Roche in the second quarter of 2017.


13




Note 7. RESTRUCTURING

In October 2016, the Company announced a restructuring plan to evolve and streamline its operating model. The majority of the charges are expected to be incurred through 2020, range between $1.5 billion to $2.0 billion and consist of employee termination benefit costs, contract termination costs, plant and equipment accelerated depreciation and impairment charges and other shutdown costs associated with early manufacturing and R&D site exits. Cash outlays in connection with these actions are expected to be approximately 40% to 50% of the total charges. Charges of approximately $1.0 billion have been recognized for these actions since the announcement ($200 million and $534 million for the nine months ended September 30, 2018 and 2017, respectively). Restructuring charges are recognized upon meeting certain criteria, including finalization of committed plans, reliable estimates and discussions with local works councils in certain markets.

Employee workforce reductions were approximately 600 and 1,200 for the nine months ended September 30, 2018 and 2017, respectively.

The following tables summarize the charges and activity related to the restructuring actions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Employee termination costs
$
37

 
$
18

 
$
72

 
$
190

Other termination costs
8

 
10

 
30

 
17

Provision for restructuring
45

 
28

 
102

 
207

Accelerated depreciation
30

 
64

 
82

 
216

Asset impairments

 
1

 
10

 
144

Other shutdown costs
1

 

 
6

 
3

Total charges
$
76

 
$
93

 
$
200

 
$
570

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Cost of products sold
$
12

 
$
1

 
$
39

 
$
131

Marketing, selling and administrative
1

 

 
2

 

Research and development
18

 
64

 
57

 
232

Other income (net)
45

 
28

 
102

 
207

Total charges
$
76

 
$
93

 
$
200

 
$
570

 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
Liability at January 1
$
186

 
$
114

 
 
 
 
Charges
108

 
233

Change in estimates
(6
)
 
(26
)
Provision for restructuring
102

 
207

Foreign currency translation
2

 
17

Payments
(171
)
 
(179
)
Liability at September 30
$
119

 
$
159



14




Note 8. INCOME TAXES
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2018
 
2017
 
2018
 
2017
Earnings Before Income Taxes
$
2,167

 
$
1,183

 
$
4,463

 
$
4,433

Provision for Income Taxes
255

 
327

 
674

 
1,129

Effective Tax Rate
11.8
%
 
27.6
%
 
15.1
%
 
25.5
%

New tax reform legislation in the U.S. was enacted on December 22, 2017 known as the Tax Cuts and Jobs Act of 2017 (the Act). The Act moves from a worldwide tax system to a quasi-territorial tax system and comprises broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. tax rate from 35% to 21%; (2) adding a deemed repatriation transition tax on certain foreign earnings and profits; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) including certain income of controlled foreign companies in U.S. taxable income; (5) creating a new minimum tax referred to as a base erosion anti-abuse income tax; (6) limiting certain research-based credits; and (7) eliminating the domestic manufacturing deduction.

Although many aspects of the Act were not effective until 2018, additional tax expense of $2.9 billion was recognized in the fourth quarter of 2017 upon its enactment, including a $2.6 billion one-time deemed repatriation transition tax on previously untaxed post-1986 foreign earnings and profits (including related tax reserves). The accounting for the $2.6 billion was and continues to be incomplete as we do not have all of the necessary information available, prepared and analyzed to complete the accounting. However, a reasonable estimate of this tax was recorded as a provisional amount. The provisional amount was reduced by $49 million in 2018, and may continue to change until completed in the fourth quarter of 2018 if additional interpretations of the relevant tax code are released.

The provisional adjustment discussed above, jurisdictional tax rates and other tax impacts attributed to non-deductible R&D charges, Nektar equity investment fair value adjustments and other specified items decreased the effective tax rate by 1.5% and 0.8% in the three and nine months ended September 30, 2018, and increased the effective tax rate by 4.7% and 3.7% in the three and nine months ended September 30, 2017, respectively. The tax impact of these discrete items are reflected immediately and are not considered in estimating the annual effective tax rate. In addition to the ongoing impact of U.S. tax reform discussed above, a $49 million tax reserve release, a higher Puerto Rico excise tax credit and unfavorable changes in earnings mix resulted in a reduction to the effective tax rates of 9.6% and 5.9% in the three and nine months ended September 30, 2018 from prior year comparable periods, respectively. Additional changes to the effective tax rate may occur in future periods due to various reasons including pretax earnings mix, tax reserves, cash repatriations and revised interpretations of the relevant tax code.

BMS is currently under examination by a number of tax authorities, which have proposed or are considering proposing material adjustments to tax positions for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. It is reasonably possible that new issues will be raised by tax authorities, which may require adjustments to the amount of unrecognized tax benefits; however, an estimate of such adjustments cannot reasonably be made at this time.

It is also reasonably possible that the total amount of unrecognized tax benefits at September 30, 2018 could decrease in the range of approximately $305 million to $355 million in the next twelve months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits may result in the payment of additional taxes, adjustment of certain deferred taxes and/or recognition of tax benefits.

Note 9. EARNINGS PER SHARE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Amounts in Millions, Except Per Share Data
2018
 
2017
 
2018
 
2017
Net Earnings Attributable to BMS used for Basic and Diluted EPS Calculation
$
1,901

 
$
845

 
$
3,760

 
$
3,335

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
1,632

 
1,639

 
1,633

 
1,648

Incremental shares attributable to share-based compensation plans
4

 
6

 
4

 
7

Weighted-average common shares outstanding - diluted
1,636

 
1,645

 
1,637

 
1,655

 
 
 
 
 
 
 
 
Earnings per share - basic
$
1.16

 
$
0.52

 
$
2.30

 
$
2.02

Earnings per share - diluted
1.16

 
0.51

 
2.30

 
2.02



15




Note 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
September 30, 2018
 
December 31, 2017
Dollars in Millions
Level 1
 
Level 2
 
Level 1
 
Level 2
Cash and cash equivalents - money market and other investments
$

 
$
4,861

 
$

 
$
4,728

Marketable securities
 
 
 
 
 
 
 
Certificates of deposit

 
15

 

 
141

Commercial paper

 
608

 

 
50

Corporate debt securities

 
2,675

 

 
3,548

Equity investments

 
141

 

 
132

Derivative assets

 
47

 

 
13

Equity investments
104

 
494

 
67

 

Derivative liabilities

 
(24
)
 

 
(52
)

As further described in "—Note 9. Financial Instruments and Fair Value Measurements" in our 2017 Form 10-K, our fair value estimates use inputs that are either (1) quoted prices for identical assets or liabilities in active markets (Level 1 inputs); (2) observable prices for similar assets or liabilities in active markets or for identical or similar assets or liabilities in markets that are not active (Level 2 inputs); or (3) unobservable inputs (Level 3 inputs). There were no Level 3 financial assets or liabilities as of September 30, 2018 and December 31, 2017.

Available-for-sale Securities

The following table summarizes available-for-sale securities:
 
September 30, 2018
 
December 31, 2017
Dollars in Millions
Amortized Cost
 
Gross Unrealized
 
 
 
Amortized Cost
 
Gross Unrealized
 
 
 
Gains
 
Losses
 
Fair Value
 
 
Gains
 
Losses
 
Fair Value
Certificates of deposit
$
15

 
$

 
$

 
$
15

 
$
141

 
$

 
$

 
$
141

Commercial paper
608

 

 

 
608

 
50

 

 

 
50

Corporate debt securities
2,720

 

 
(45
)
 
2,675

 
3,555

 
3

 
(10
)
 
3,548

Equity investments(a)

 

 

 

 
31

 
37

 
(1
)
 
67

 
$
3,343

 
$

 
$
(45
)
 
$
3,298

 
$
3,777

 
$
40

 
$
(11
)
 
$
3,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity investments(b)
 
 
 
 
 
 
739

 
 
 
 
 
 
 
132

Total
 
 
 
 
 
 
$
4,037

 
 
 
 
 
 
 
$
3,938

Dollars in Millions
September 30,
2018
 
December 31,
2017
Current marketable securities
$
1,422

 
$
1,391

Non-current marketable securities(c)
2,017

 
2,480

Other assets(a)
598

 
67

Total
$
4,037

 
$
3,938

(a)
Includes equity investments with readily determinable fair values not measured using the fair value option as of December 31, 2017.
(b)
Includes equity and fixed income funds measured using the fair value option at December 31, 2017. Refer to "Note.1 Basis of Presentation and Recently Issued Accounting Standards" for more information.
(c)
All non-current marketable securities mature within five years as of September 30, 2018 and December 31, 2017.

Equity investments not measured at fair value and excluded from the above table were limited partnerships and other equity method investments of $109 million at September 30, 2018 and $66 million at December 31, 2017 and other equity investments without readily determinable fair values of $193 million at September 30, 2018 and $152 million at December 31, 2017. These amounts are included in Other assets. Adjustments to equity investments without readily determinable fair values for the nine months ended September 30, 2018 were $18 million resulting from observable price changes for similar securities of the same issuer and were recorded in Other income (net).

16




The following table summarizes net loss recorded for equity investments with readily determinable fair values held as of September 30, 2018:
Dollars in Millions
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Net gain/(loss) recognized
$
97

 
$
(262
)
Less: Net gain/(loss) recognized for equity investments sold

 

Net unrealized gain/(loss) on equity investments held
$
97

 
$
(262
)
Qualifying Hedges and Non-Qualifying Derivatives
The following table summarizes the fair value of outstanding derivatives:
 
September 30, 2018
 
December 31, 2017
 
Asset(a)
 
Liability(b)
 
Asset(a)
 
Liability(b)
Dollars in Millions
Notional
 
Fair Value
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$
755

 
$
(19
)
 
$

 
$

 
$
755

 
$
(6
)
Cross-currency interest rate swap contracts
175

 
2

 
125

 
(1
)
 

 

 

 

Foreign currency forward contracts
1,446

 
43

 
22

 

 
944

 
12

 
489

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
414

 
2

 
157

 
(4
)
 
206

 
1

 
1,369

 
(37
)
(a)
Included in prepaid expenses and other and other assets.
(b)
Included in accrued liabilities and pension and other liabilities.

The following table summarizes the financial statement classification and amount of gain/(loss) recognized on hedging instruments:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Dollars in Millions
Cost of products sold
 
Other income (net)
 
Cost of products sold
 
Other income (net)
Interest rate swap contracts
$

 
$
5

 
$

 
$
18

Cross-currency interest rate swap contracts

 
2

 

 
6

Foreign currency forward contracts
13

 
10

 
(20
)
 
17

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Dollars in Millions
Cost of products sold
 
Other income (net)
 
Cost of products sold
 
Other income (net)
Interest rate swap contracts
$

 
$
7

 
$

 
$
23

Foreign currency forward contracts
3

 
(19
)
 
38

 
(42
)

17





The following table summarizes the effect of derivative and non-derivative instruments designated as hedging instruments in Other Comprehensive Income/(Loss):
Dollars in Millions
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Derivatives qualifying as cash flow hedges
 
 
 
Foreign currency forward contracts gain/(loss):
 
 
 
Recognized in Other Comprehensive Income/(Loss)(a)
$
18

 
$
63

Reclassified to Cost of products sold
(13
)
 
20

 
 
 
 
Derivatives qualifying as net investment hedges
 
 
 
Cross-currency interest rate swap contracts gain/(loss):
 
 
 
Recognized in Other Comprehensive Income/(Loss)
5

 
1

 
 
 
 
Non-derivatives qualifying as net investment hedges
 
 
 
Non U.S. dollar borrowings gain/(loss):
 
 
 
Recognized in Other Comprehensive Income/(Loss)
(6
)
 
10

(a)
The amount is expected to be reclassified into earnings in the next 12 months.

Cash Flow Hedges — Foreign currency forward contracts are used to hedge certain forecasted intercompany inventory purchase transactions and certain foreign currency transactions. The fair value for contracts designated as cash flow hedges is temporarily reported in Accumulated other comprehensive loss and included in earnings when the hedged item affects earnings. Upon adoption of the amended guidance for derivatives and hedging, the entire change in fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in the derivatives qualifying as cash flow hedges component of Other Comprehensive Income/(Loss). The net gain or loss on foreign currency forward contracts is expected to be reclassified to net earnings (primarily included in cost of products sold) within the next twelve months. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro ($861 million) and Japanese yen ($393 million) at September 30, 2018.

The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during all periods presented. Cash flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring within 60 days after the originally forecasted date or when the hedge is no longer effective. Assessments to determine whether derivatives designated as qualifying hedges are highly effective in offsetting changes in the cash flows of hedged items are performed at inception and on a quarterly basis. Foreign currency forward contracts not designated as hedging instruments are used to offset exposures in certain foreign currency denominated assets, liabilities and earnings. Changes in the fair value of these derivatives are recognized in earnings as they occur.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1.1 billion) are designated to hedge euro currency exposures of the net investment in certain foreign affiliates. These borrowings are designated as net investment hedges and recognized in long-term debt. The effective portion of foreign exchange gain or loss on the remeasurement of euro debt was $10 million in 2018 and $132 million in 2017 and was recorded in the foreign currency translation component of Other Comprehensive Income/(Loss) with a related offset in long-term debt.

In January 2018, BMS entered into $300 million of cross-currency interest rate swap contracts maturing in December 2022 designated to hedge Japanese yen currency exposures of the Company's net investment in its Japan subsidiary. Contract fair value changes are recorded in the foreign currency translation component of Other Comprehensive Income/(Loss) with a related offset in Pension and other liabilities.

Fair Value Hedges — Fixed to floating interest rate swap contracts are designated as fair value hedges and used as an interest rate risk management strategy to create an appropriate balance of fixed and floating rate debt. The contracts and underlying debt for the hedged benchmark risk are recorded at fair value. Gains or losses resulting from changes in fair value of the underlying debt attributable to the hedged benchmark interest rate risk are recorded in interest expense with an associated offset to the carrying value of debt. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, all changes in fair value of the swap are recorded in interest expense with an associated offset to the derivative asset or liability on the consolidated balance sheet. As a result, there was no net impact in earnings. When the underlying swap is terminated prior to maturity, the fair value adjustment to the underlying debt is amortized as a reduction to interest expense over the remaining term of the debt.


18




Debt Obligations
Short-term debt obligations include:
Dollars in Millions
September 30,
2018
 
December 31,
2017
Commercial paper
$

 
$
299

Non-U.S. short-term borrowings
312

 
512

Current portion of long-term debt
1,247

 

Other
61

 
176

Total
$
1,620

 
$
987


The average amount of commercial paper outstanding was $25.1 million at a weighted-average rate of 1.3% during 2018. The maximum amount of commercial paper outstanding was $300 million with no outstanding balance at September 30, 2018.

Long-term debt and the current portion of long-term debt include:
Dollars in Millions
September 30,
2018
 
December 31,
2017
Principal Value
$
6,819

 
$
6,835

Adjustments to Principal Value
 
 
 
Fair value of interest rate swap contracts
(19
)
 
(6
)
Unamortized basis adjustment from swap terminations
207

 
227

Unamortized bond discounts and issuance costs
(73
)
 
(81
)
Total
$
6,934

 
$
6,975

 
 
 
 
Current portion of long-term debt
$
1,247

 
$

Long-term debt
5,687

 
6,975


In February 2017, BMS issued $1.5 billion in senior unsecured notes in a registered public offering. Proceeds, net of discount and deferred loan issuance costs, were $1.49 billion. The fair value of long-term debt was $7.1 billion at September 30, 2018 and $7.5 billion at December 31, 2017 valued using Level 2 inputs. Interest payments were $174 million and $172 million for the nine months ended September 30, 2018 and 2017, respectively, net of amounts related to interest rate swap contracts.

During the third quarter of 2017, the $750 million 0.875% Notes matured and were repaid.

During the second quarter of 2017, the Company repurchased certain long-term debt obligations with interest rates ranging from 5.875% to 6.875%. The following summarizes the debt repurchase activity:
Dollars in Millions
2017
Principal amount
$
337

Carrying value
366

Debt redemption price
474

Loss on debt redemption(a)
109

(a)
Including acceleration of debt issuance costs, gain on previously terminated interest rate swap contracts and other related fees.

Note 11. RECEIVABLES
Dollars in Millions
September 30,
2018
 
December 31,
2017
Trade receivables
$
4,873

 
$
4,599

Less charge-backs and cash discounts
(216
)
 
(209
)
Less bad debt allowances
(35
)
 
(43
)
Net trade receivables
4,622

 
4,347

Prepaid and refundable income taxes
180

 
691

Alliance, royalties, VAT and other
1,069

 
1,262

Receivables
$
5,871

 
$
6,300


19




Non-U.S. receivables sold on a nonrecourse basis were $594 million and $460 million for the nine months ended September 30, 2018 and 2017, respectively. Receivables from our three largest pharmaceutical wholesalers in the U.S. represented 69% and 65% of total trade receivables at September 30, 2018 and December 31, 2017, respectively.

Note 12. INVENTORIES
Dollars in Millions
September 30,
2018
 
December 31,
2017
Finished goods
$
429

 
$
384

Work in process
994

 
931

Raw and packaging materials
244

 
273

Total inventories
$
1,667

 
$
1,588

 
 
 
 
Inventories
$
1,282

 
$
1,166

Other assets
385

 
422

Other assets include inventory expected to remain on hand beyond one year in both periods.

Note 13. PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
September 30,
2018
 
December 31,
2017
Land
$
105

 
$
100

Buildings
5,278

 
4,848

Machinery, equipment and fixtures
3,223

 
3,059

Construction in progress
570

 
980

Gross property, plant and equipment
9,176

 
8,987

Less accumulated depreciation
(4,084
)
 
(3,986
)
Property, plant and equipment
$
5,092

 
$
5,001

Depreciation expense was $366 million and $509 million for the nine months ended September 30, 2018 and 2017, respectively.

Note 14. GOODWILL AND OTHER INTANGIBLE ASSETS
Dollars in Millions
Estimated Useful Lives
September 30,
2018
 
December 31,
2017
Goodwill
 
$
6,686

 
$
6,863

 
 
 
 
 
Other intangible assets:
 
 
 
 
Licenses
5 – 15 years
$
537

 
$
567

Developed technology rights
9 – 15 years
2,357

 
2,357

Capitalized software
3 – 10 years
1,451

 
1,381

IPRD
 
32

 
32

Gross other intangible assets
 
4,377

 
4,337

Less accumulated amortization
 
(3,270
)
 
(3,127
)
Other intangible assets
 
$
1,107

 
$
1,210


An out of period adjustment was included in the nine months ended September 30, 2018 to reduce Goodwill and increase Accumulated other comprehensive loss by $180 million attributed to goodwill from prior acquisitions of foreign entities previously not recorded in the correct local currency. The adjustment did not impact the consolidated results of operations and was not material to previously reported balance sheets.

Amortization expense was $147 million and $142 million for the nine months ended September 30, 2018 and 2017, respectively.

In the first quarter of 2018, a $64 million impairment charge was recorded in Other income (net) for an out-licensed asset obtained in the 2010 acquisition of ZymoGenetics, Inc., which did not meet its primary endpoint in a Phase II clinical study.


20




Note 15. ACCRUED LIABILITIES
Dollars in Millions
 
September 30,
2018
 
December 31,
2017
Rebates and returns
 
$
2,263

 
$
2,024

Employee compensation and benefits
 
758

 
869

Research and development
 
778

 
783

Dividends
 
653

 
654

Royalties
 
355

 
285

Branded Prescription Drug Fee
 
147

 
303

Restructuring
 
102

 
155

Pension and postretirement benefits
 
40

 
40

Litigation and other settlements
 
41

 
38

Other
 
716

 
863

Accrued liabilities
 
$
5,853

 
$
6,014


Note 16. EQUITY

The following table summarizes changes in equity for the three and nine months ended September 30, 2018: