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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 8-K/A
(Amendment No. 1)

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

January 4, 2017
Date of Report (Date of earliest event reported)

ABBOTT LABORATORIES
(Exact name of registrant as specified in charter)



Illinois
(State or other Jurisdiction
of Incorporation)
  1-2189
(Commission
File Number)
  36-0698440
(IRS Employer
Identification No.)



100 Abbott Park Road
Abbott Park, Illinois 60064-6400

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (224) 667-6100

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))



   


        This Amendment No. 1 on Form 8-K/A is being filed by Abbott Laboratories ("Abbott") to amend the Current Report on Form 8-K filed on January 5, 2017 (the "Original Report") to provide the disclosures required by Item 9.01 of Form 8-K that were previously omitted from the Original Report as permitted by Item 9.01(a)(4). Except as provided herein, the disclosures made in the Original Report remain unchanged.

Item 2.01.    Completion of Acquisition or Disposition of Assets.

        Pursuant to the terms and conditions of that certain Agreement and Plan of Merger, dated as of April 27, 2016, by and among Abbott, St. Jude Medical, Inc., Vault Merger Sub, Inc. and Vault Merger Sub, LLC, Abbott completed the acquisition of St. Jude Medical, Inc. (the "Transaction") on January 4, 2017.

        In connection with the Transaction, Abbott filed the Original Report describing the acquisition. Abbott is now filing this amendment to include the historical financial statements and pro forma financial information required by Item 9.01 of Form 8-K.

Item 9.01    Financial Statements and Exhibits

(a)   Financial Statements of Business Acquired

        The audited St. Jude Medical, Inc. consolidated statements of earnings, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for three-year period ended December 31, 2016, the audited St. Jude Medical, Inc. consolidated balance sheets as of December 31, 2016 and January 2, 2016, and the accompanying Notes to the Consolidated Financial Statements are attached hereto as Exhibit 99.1 and incorporated by reference.

(b)   Pro forma financial information

        The following information is attached hereto as Exhibit 99.2 and incorporated herein by reference:

(d)   Exhibits

Exhibit
No.
  Exhibit
  23.1   Consent of Ernst & Young LLP, independent registered public accounting firm for St. Jude Medical, Inc.

 

99.1

 

Audited Financial Statements of St. Jude Medical, Inc.

 

99.2

 

Pro Forma Financial Information.

1



SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

  ABBOTT LABORATORIES

Date: February 21, 2017

 

By:

 

/s/ BRIAN B. YOOR


Brian B. Yoor
Executive Vice President, Finance and
Chief Financial Officer

2



EXHIBIT INDEX

Exhibit
No.
  Exhibit
  23.1   Consent of Ernst & Young LLP, independent registered public accounting firm for St. Jude Medical, Inc.

 

99.1

 

Audited Financial Statements of St. Jude Medical, Inc.

 

99.2

 

Pro Forma Financial Information.

3




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SIGNATURE
EXHIBIT INDEX

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the following Registration Statements:

of our report dated February 17, 2017, with respect to the consolidated financial statements of St. Jude Medical, Inc., included in this Current Report on Form 8-K/A.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 20, 2017




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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Exhibit 99.1

ST. JUDE MEDICAL, INC.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

1



ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)

Fiscal Year Ended
  December 31,
2016
  January 2, 2016   January 3, 2015  

Net sales

  $ 6,004   $ 5,541   $ 5,622  

Cost of sales:

                   

Cost of sales before special charges

    1,907     1,706     1,597  

Special charges

    103     39     56  

Total cost of sales

    2,010     1,745     1,653  

Gross profit

    3,994     3,796     3,969  

Selling, general and administrative expense

    1,957     1,878     1,856  

Research and development expense

    746     676     692  

Amortization of intangible assets

    186     116     89  

Special charges

    56     96     181  

Operating profit

    1,049     1,030     1,151  

Interest income

    (1 )   (3 )   (5 )

Interest expense

    159     103     85  

Other (income) expense

    61     2     3  

Other expense, net

    219     102     83  

Earnings before income taxes and noncontrolling interest

    830     928     1,068  

Income tax expense

    96     62     113  

Net earnings before noncontrolling interest

    734     866     955  

Less: Net loss attributable to noncontrolling interest

        (14 )   (47 )

Net earnings attributable to St. Jude Medical, Inc. 

  $ 734   $ 880   $ 1,002  

Net earnings per share attributable to St. Jude Medical, Inc.:

                   

Basic

  $ 2.58   $ 3.11   $ 3.52  

Diluted

  $ 2.54   $ 3.07   $ 3.46  

Cash dividends declared per share:

  $ 1.24   $ 1.16   $ 1.08  

Weighted average shares outstanding:

                   

Basic

    284.7     282.2     285.0  

Diluted

    288.7     286.3     289.7  

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

2



ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)

Fiscal Year Ended
  December 31,
2016
  January 2,
2016
  January 3,
2015
 

Net earnings before noncontrolling interest

  $ 734   $ 866   $ 955  

Other comprehensive income (loss), net of tax:

                   

Unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of ($7 million), $7 million and $4 million, respectively

    15     (12 )   (2 )

Unrealized gain (loss) on derivative financial instruments, net of tax (expense) benefit of ($11 million), ($6 million) and $0 million, respectively

    22     8      

Foreign currency translation adjustment

    (52 )   (168 )   (217 )

Other comprehensive income (loss), net of tax

    (15 )   (172 )   (219 )

Total comprehensive income before noncontrolling interest

    719     694     736  

Total comprehensive loss attributable to noncontrolling interest

        (14 )   (47 )

Total comprehensive income attributable to St. Jude Medical, Inc. 

  $ 719   $ 708   $ 783  

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

3



ST. JUDE MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except par value and share amounts)

 
  December 31,
2016
  January 2,
2016
 

ASSETS

             

Current Assets

             

Cash and cash equivalents

  $ 567   $ 667  

Accounts receivable, less allowance for doubtful accounts of $43 million and $46 million, respectively

    1,210     1,237  

Inventories

    895     909  

Other current assets

    300     269  

Total current assets

    2,972     3,082  

Property, Plant and Equipment

             

Land, building and improvements

    763     729  

Machinery and equipment

    1,670     1,597  

Diagnostic equipment

    516     441  

Property, plant and equipment, at cost

    2,949     2,767  

Less: Accumulated depreciation

    (1,631 )   (1,447 )

Net property, plant and equipment

    1,318     1,320  

Goodwill

    5,638     5,651  

Intangible assets, net

    2,075     2,226  

Deferred income taxes

    149     151  

Other assets

    426     470  

TOTAL ASSETS

  $ 12,578   $ 12,900  

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current Liabilities

             

Current debt obligations

  $ 445   $ 1,163  

Accounts payable

    214     201  

Dividends payable

    89     82  

Income taxes payable

    73     201  

Employee compensation and related benefits

    285     309  

Other current liabilities

    423     510  

Total current liabilities

    1,529     2,466  

Long-term debt

    5,354     5,229  

Deferred income taxes

    500     581  

Other liabilities

    617     582  

Total liabilities

    8,000     8,858  

Commitments and Contingencies (Note 5)

         

Shareholders' Equity

             

Preferred stock ($1.00 par value; 25,000,000 shares authorized; none outstanding)

   
   
 

Common stock ($0.10 par value; 500,000,000 shares authorized; 286,635,463 and 283,450,374 shares issued and outstanding, respectively)

    29     28  

Additional paid-in capital

    318     148  

Retained earnings

    4,591     4,211  

Accumulated other comprehensive income (loss)

    (360 )   (345 )

Total shareholders' equity

    4,578     4,042  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 12,578   $ 12,900  

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

4



ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts)

 
  Common Stock    
   
   
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
   
 
 
  Number of
Shares
  Amount   Additional
Paid-In
Capital
  Retained
Earnings
  Non-
controlling
Interest
  Total
Shareholders'
Equity
 

Balance as of December 28, 2013

    289,117,352   $ 29   $ 220   $ 3,936   $ 46   $ 173   $ 4,404  

Net earnings

                      1,002           (47 )   955  

Other comprehensive income (loss)

                            (219 )       (219 )

Cash dividends declared

                      (309 )               (309 )

Repurchases of common stock

    (6,670,817 )   (1 )   (247 )   (186 )               (434 )

Stock-based compensation

                69                 2     71  

Common stock issued under employee stock plans and other, net

    4,213,366     1     134                       135  

Tax benefit from stock plans

                21                       21  

Measurement period fair value adjustment to noncontrolling interest

                                  (36 )   (36 )

Purchase of shares from noncontrolling ownership interest

                (79 )   (218 )         (47 )   (344 )

Balance as of January 3, 2015

    286,659,901     29     118     4,225     (173 )   45     4,244  

Net earnings

                      880           (14 )   866  

Other comprehensive income (loss)

                            (172 )       (172 )

Cash dividends declared

                      (328 )               (328 )

Repurchases of common stock

    (7,467,660 )   (1 )   (168 )   (331 )               (500 )

Stock-based compensation

                84                 2     86  

Common stock issued under employee stock plans and other, net

    4,258,133         139                       139  

Fair value of replacement equity awards exchanged in business combination

                17                       17  

Tax benefit from stock plans

                20                       20  

Purchase of shares from noncontrolling ownership interest

                (62 )   (235 )         (33 )   (330 )

Balance as of January 2, 2016

    283,450,374     28     148     4,211     (345 )       4,042  

Net earnings

                      734                 734  

Other comprehensive income (loss)

                            (15 )         (15 )

Cash dividends declared

                      (354 )               (354 )

Stock-based compensation

                99                       99  

Common stock issued under employee stock plans and other, net

    3,185,089     1     44                       45  

Tax benefit from stock plans

                27                       27  

Balance as of December 31, 2016

    286,635,463   $ 29   $ 318   $ 4,591   $ (360 ) $   $ 4,578  

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

5



ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

Fiscal Year Ended
  December 31,
2016
  January 2,
2016
  January 3,
2015
 

OPERATING ACTIVITIES

                   

Net earnings before noncontrolling interest

  $ 734   $ 866   $ 955  

Adjustments to reconcile net earnings before noncontrolling interest to net cash from operating activities:

                   

Depreciation of property, plant and equipment

    234     218     221  

Amortization of intangible assets

    186     116     89  

Amortization of debt premium, discounts and debt issue costs

    6     (2 )   (5 )

Inventory step-up amortization

    43     30     5  

Contingent consideration fair value adjustments

    25     (87 )   22  

Payment of contingent consideration

            (27 )

Stock-based compensation

    99     160     71  

Cash settlement of accelerated equity awards

        (74 )    

Excess tax benefits from stock issued under employee stock plans

    (31 )   (24 )   (21 )

Gain on sale of investments

        (22 )   (3 )

Strategic investment impairments

    51          

Deferred income taxes

    (56 )   (60 )   (88 )

Other, net

    36     30     84  

Changes in operating assets and liabilities, net of business combinations:

                   

Accounts receivable

    5     (39 )   112  

Inventories

    (31 )   (39 )   (102 )

Other current and noncurrent assets

    23     19     (69 )

Accounts payable and accrued expenses

    24     (25 )   (60 )

Income taxes payable

    (111 )   (28 )   120  

Net cash provided by operating activities

    1,237     1,039     1,304  

INVESTING ACTIVITIES

                   

Purchases of property, plant and equipment

    (255 )   (186 )   (190 )

Business combination payments, net of cash acquired

    (28 )   (3,252 )   (147 )

Proceeds from sale of investments

        30     7  

Other investing activities, net

    (23 )   (37 )   (9 )

Net cash used in investing activities

    (306 )   (3,445 )   (339 )

FINANCING ACTIVITIES

                   

Proceeds from exercise of stock options and stock issued, net

    45     139     135  

Excess tax benefits from stock issued under employee stock plans

    31     24     21  

Common stock repurchased, including related costs

        (500 )   (476 )

Dividends paid

    (347 )   (322 )   (303 )

Issuances (payments) of commercial paper borrowings, net

    (314 )   (285 )   75  

Proceeds from debt

    500     3,772     250  

Payments of debt

    (791 )   (925 )   (50 )

Payments of debt issue costs and commitment fees

        (33 )    

Purchase of shares from noncontrolling ownership interest

        (173 )   (344 )

Payment of contingent consideration

    (125 )       (128 )

Other financing activities, net

    (21 )   (5 )   (7 )

Net cash provided by (used in) financing activities

    (1,022 )   1,692     (827 )

Effect of currency exchange rate changes on cash and cash equivalents

    (9 )   (61 )   (69 )

Net increase (decrease) in cash and cash equivalents

    (100 )   (775 )   69  

Cash and cash equivalents at beginning of period

    667     1,442     1,373  

Cash and cash equivalents at end of period

  $ 567   $ 667   $ 1,442  

Supplemental Cash Flow Information

                   

Cash paid during the year for:

                   

Income taxes

  $ 322   $ 133   $ 140  

Interest

  $ 164   $ 91   $ 85  

Noncash investing and financing activities:

                   

Additions in noncontrolling ownership interests

  $   $   $ (36 )

Fair value of acquisition contingent consideration

  $ 4   $ 155   $  

Fair value of equity awards exchanged in business combination

  $   $ 35   $  

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

6



ST. JUDE MEDICAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Company Overview:    St. Jude Medical, Inc., together with its subsidiaries (St. Jude Medical or the Company) develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiovascular and atrial fibrillation therapy areas, and interventional pain therapy and neurostimulation devices for the management of chronic pain and movement disorders. Effective January 1, 2016, the Company's Board of Directors appointed a new President and Chief Executive Officer whom the Company has determined to be its Chief Operating Decision Maker. During 2016, the Company changed its sales reporting to closely align with how it manages the business in five key areas: Traditional Cardiac Rhythm Management (single and dual chamber pacemakers and single and dual chamber implantable cardioverter-defibrillators (ICDs)); Heart Failure (bi-ventricular cardiac resynchronization therapy (CRT) pacemakers and ICDs, ventricular assist devices and the CardioMEMS™ HF system); Atrial Fibrillation (electrophysiology (EP) introducers and catheters, left atrial appendage closure products, advanced cardiac mapping, navigation and recording systems and ablation systems); Cardiovascular (heart valve replacement and repair devices (mechanical heart and tissue heart valves); patent foramen ovale (PFO) closure devices, structural heart defect devices, active vascular closure devices, compression assist devices, pressure measurement guidewires, diagnostic coronary imaging technology (fractional flow reserve and optical coherence tomography) percutaneous catheter introducers, diagnostic guidewires, percutaneous heart pumps (PHPs), renal denervation technology and vascular plugs); and Neuromodulation (spinal cord stimulation, dorsal root ganglion stimulation and radiofrequency ablation for the treatment of chronic pain and deep brain stimulation for the treatment of movement disorders). The Company operates as a single operating segment.

        Principles of Consolidation:    The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries and entities for which St. Jude Medical has a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. For variable interest entities (VIEs), the Company assesses the terms of its interests in the entity to determine if St. Jude Medical is the primary beneficiary. Variable interests are ownership, contractual or other interests in an entity that change with increases or decreases in the fair value of the VIE's net assets exclusive of variable interests. The entity that consolidates the VIE is considered the primary beneficiary, and is defined as the party with (1) the power to direct activities of the VIE that most significantly affect the VIE's economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE (see Note 6).

        Fiscal Year:    The Company utilizes a 52/53-week fiscal year ending on the Saturday nearest December 31st. Fiscal years 2016 and 2015 consisted of 52 weeks and ended on December 31, 2016 and January 2, 2016, respectively. Fiscal year 2014 consisted of 53 weeks and ended on January 3, 2015.

        Reclassifications:    Certain prior period amounts have been reclassified to conform to current year presentation.

        Use of Estimates:    Preparation of the Company's Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.

        Cash Equivalents:    The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. The Company's cash equivalents include bank certificates of deposit, money market funds and instruments and commercial paper investments. The Company performs periodic evaluations of the

7


relative credit standing of the financial institutions and issuers of its cash equivalents and limits the amount of credit exposure with any one issuer.

        Marketable Securities:    Marketable securities consist of publicly-traded equity securities that are classified as available-for-sale securities and investments in mutual funds that are classified as trading securities. On the balance sheet, available-for-sale securities and trading securities are classified as other current assets and other assets, respectively.

        The following table summarizes the components of the balance of the Company's available-for-sale securities as of December 31, 2016 and January 2, 2016 and (in millions):

 
  December 31, 2016   January 2, 2016  

Adjusted cost

  $ 12   $ 5  

Gross unrealized gains

    28     6  

Gross unrealized losses

        (1 )

Fair value

  $ 40   $ 10  

        Available-for-sale securities are reported at fair value based upon quoted market prices (see Note 11). Unrealized gains and losses, net of related incomes taxes, are recognized in accumulated other comprehensive income in the Consolidated Statements of Shareholders' Equity. Upon the sale of an available-for-sale security, the unrealized gain (loss) is reclassified out of accumulated other comprehensive income and reflected as a realized (gain) loss in net earnings (see Note 6). Realized (gains) losses are computed using the specific identification method and recognized as other (income) expense. Additionally, when the fair value of an available-for-sale security falls below its original cost and the Company determines that the corresponding unrealized loss is other-than-temporary, it recognizes an impairment loss to net earnings in that period.

        The Company's investments in mutual funds are reported at fair market value (see Note 11) and are held in a rabbi trust, which is not available for general corporate purposes and is subject to creditor claims in the event of insolvency. These investments are specifically designated as available to the Company solely for the purpose of paying benefits under the Company's deferred compensation plan (see Note 10).

        Accounts Receivable:    The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. Uncollectible accounts are written off against the allowance when it is deemed that a customer account is uncollectible.

        Inventories:    Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories consisted of the following (in millions):

 
  December 31, 2016   January 2, 2016  

Finished goods

  $ 563   $ 609  

Work in process

    100     102  

Raw materials

    232     198  

Inventories

  $ 895   $ 909  

        Property, Plant and Equipment:    Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from 15 years to 39 years for buildings and improvements, three to 15 years for machinery and equipment, including capitalized development costs for internal-use software, and three to seven years for diagnostic equipment. Diagnostic equipment primarily consists of programmers that are used by physicians and

8


healthcare professionals to program and analyze data from ICDs and pacemakers. Diagnostic equipment also includes other capital equipment provided by the Company to its customers for use in diagnostic and surgical procedures. The estimated useful lives of this equipment are based on anticipated usage by physicians and healthcare professionals and the timing and impact of expected new technology platforms and rollouts by the Company. The Company also reviews its property, plant and equipment for impairment when impairment indicators exist. When impairment indicators exist, the Company determines if the carrying value of its long-lived assets or asset groups exceeds the related undiscounted future cash flows. In cases where the carrying value of the Company's long-lived assets or asset groups (excluding goodwill and indefinite-lived intangible assets) exceeds the related undiscounted cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. See Note 11 for further information on fixed asset impairments recognized during 2016, 2015 and 2014.

        Fair Value Measurement:    The fair value measurement accounting standard provides a framework for measuring fair value and defines fair value as the price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The standard establishes a valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on independent market data sources. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available. The valuation hierarchy is composed of three categories. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

        The categories within the valuation hierarchy are described as follows:

        Goodwill:    Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company tests the reporting unit's goodwill for impairment at least annually in the fourth quarter and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The Company is permitted to first assess qualitative factors to determine whether the two-step goodwill impairment test is necessary. If the qualitative assessment results in a determination that the fair value of a reporting unit is more-likely-than-not less than its carrying amount, the Company performs the two-step goodwill impairment test. The Company may bypass the qualitative assessment for the reporting unit in any period and proceed directly to step one of the two-step goodwill impairment test. In the first step, the Company compares the fair value of the reporting unit to its carrying amount. If the reporting unit's fair value exceeds its carrying amount, goodwill is not impaired. If the carrying amount of the reporting unit is positive and exceeds the reporting unit's fair value, the Company performs the second step to measure the amount of the reporting unit's goodwill impairment loss, if any. In the second step, the Company assigns the reporting unit's fair value to the reporting unit's assets and liabilities using acquisition method accounting to determine the implied fair value of the reporting unit's goodwill. The implied fair value of the

9


reporting unit's goodwill is then compared with the carrying amount of the reporting unit's goodwill to determine the goodwill impairment loss to be recognized, if any. See Note 11 for further information about the results of the goodwill impairment tests in 2016, 2015 and 2014.

        Other Intangible Assets:    Other intangible assets consist of purchased technology and patents, in-process research and development (IPR&D) acquired in a business combination, customer lists and relationships, trademarks and tradenames, licenses and distribution agreements. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from three to 20 years. Certain trademark assets are considered indefinite-lived intangible assets and are not amortized. The Company expenses the costs incurred to renew or extend the term of intangible assets.

        The Company's policy defines IPR&D as the value of technology acquired for which the related projects have substance and are incomplete. IPR&D acquired in a business acquisition is recognized at fair value and requires the IPR&D to be capitalized as an indefinite-lived intangible asset until completion of the IPR&D project or upon abandonment. Upon completion of the development project (generally when regulatory approval to market the product is obtained), an impairment assessment is performed prior to amortizing the asset over its estimated useful life. If the IPR&D projects are abandoned, the related IPR&D assets would be written off. The purchase of certain intellectual property assets related to technology or products without regulatory approval is considered a purchase of assets rather than the acquisition of a business. For such purchases, rather than being capitalized, any IPR&D acquired in such asset purchases is expensed immediately.

        The Company also reviews its indefinite-lived intangible assets for impairment regularly to determine if any adverse conditions exist that would indicate impairment or when impairment indicators exist. The Company assesses its indefinite-lived intangible assets for impairment at least annually by considering qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity specific events, changes in net assets and project-based performance toward regulatory approvals. If the qualitative assessment results in a determination that the fair value of an indefinite-lived intangible asset is more-likely-than-not greater than its carrying amount, no additional testing is considered necessary. However, if the Company determines the fair value of its indefinite-lived intangible assets is more-likely-than-not below the carrying value, impairment indicators exist requiring a quantitative assessment to recognize an impairment loss, if necessary. See Note 11 for further information about the indefinite-lived intangible asset impairment tests.

        The Company also reviews its definite-lived intangible assets for impairment when impairment indicators exist. When impairment indicators exist, the Company determines if the carrying value of its definite-lived intangible assets exceeds the related undiscounted future cash flows. In cases where the carrying value exceeds the undiscounted future cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. See Note 11 for further information about the definite-lived intangible asset impairment tests.

        Contingent Consideration:    In connection with certain business combinations or purchases of intellectual property the Company may agree to provide future contingent consideration payments. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets or receiving regulatory approvals to market products. Contingent consideration is recognized on the acquisition date at the estimated fair value of the contingent milestone payment(s). The fair value of the contingent consideration is remeasured to its estimated fair value at each reporting period with the change in fair value recognized in selling, general and administrative expense in the Company's Consolidated Statements of Earnings (see Note 11). Amounts paid in excess of the amount recorded on the acquisition date are classified as cash flows used in operating activities. Payments not exceeding the acquisition-date fair value of the contingent consideration arrangement are

10


classified as cash flows used in financing activities. Payments made soon after the acquisition date are classified as cash flows used in investing activities.

        Derivative and Hedging Activities:    All derivative financial instruments are recognized on the balance sheet at fair value. Derivative assets and derivative liabilities are classified as other current assets, other assets, other current liabilities or other liabilities generally based on the gain or loss position of the hedged item and the instrument's maturity date. As a matter of policy, the Company uses derivatives for risk management purposes and it does not use derivatives for trading or speculative purposes, nor is a party to leveraged derivatives. The Company's policy is to enter into derivative contracts with major financial institutions that have at least an "A" (or equivalent) credit rating.

        A key risk management objective is to mitigate foreign exchange rate volatility and interest rate fluctuations impact on earnings. The Company uses foreign exchange forward contracts, interest rate swaps and interest rate contracts to help mitigate these risks. All hedging instruments that qualify for hedge accounting are designated and effective as hedges, in accordance with U.S. GAAP, which presumes the derivative is highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented at hedge inception. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated hedge period.

        The Company enters into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. From time to time, the Company also enters into interest rate contracts, in anticipation of issuing debt, to hedge against interest rate fluctuations. These transactions are designated as cash flow hedges. Changes in the fair value of these derivatives are recognized in other comprehensive income. The settlement or extension of these derivatives will result in reclassifications from accumulated other comprehensive income to earnings in the period during which the hedged transactions affect earnings and in the same financial statement line item with the earnings effects of the hedged transaction. The Company may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs.

        From time to time, the Company also has entered into interest rate swaps to hedge the fair value of certain debt obligations. For interest rate swap contracts that are designated and qualify as fair value hedges, changes in the value of the fair value hedge are recognized as an asset or liability, as applicable, offsetting the changes in the fair value of the hedged debt instrument. When outstanding, the Company's swap contracts are classified as other current assets, other assets, other current liabilities or other liabilities based on the gain or loss position of the contract and the contract maturity date. Additionally, any payments made or received under the swap contracts are accrued and recognized as interest expense in the Consolidated Statements of Earnings.

        Derivatives not designated as hedging instruments include dedesignated foreign currency forward contracts (formerly designated in cash flow hedging relationships) and foreign currency forward contracts that the Company utilizes to economically hedge the foreign currency impact of assets and liabilities (including intercompany assets and liabilities) denominated in nonfunctional currencies. Although hedge accounting does not apply to the economic hedges, a natural hedging relationship exists in which changes in the fair value of the derivative, which are recognized currently in earnings, act as an economic offset to changes in the fair value of the underlying hedged item(s). The fair value (gains) and losses for instruments that do not qualify for hedge accounting and the related transaction gains and losses are recognized in other (income) expense within the Consolidated Statements of Earnings.

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        Cash flows from derivative instruments are classified in the Consolidated Statements of Cash Flows in the same category as the cash flows from the items subject to the designated hedge or undesignated (economic) hedge relationship.

        Fair values of the Company's derivatives can change significantly from period to period based on, among other factors, market movements and changes in the Company's positions. However, the Company's risk is limited to the fair value of the instruments. The Company monitors its exposure to counterparty credit risk (the risk that counterparties will default and not make payments to the Company according to the terms of the agreements) by selecting major international banks and financial institutions as counterparties and by entering into master netting arrangements with counterparties when possible. A master netting arrangement may allow each counterparty to net settle amounts owed between a St. Jude Medical entity and the counterparty as a result of multiple, separate derivative transactions. The Company, however, has elected to present the fair values of its derivative assets and liabilities within the Company's Consolidated Balance Sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. Derivatives not subject to master netting agreements are not eligible for net presentation (see Note 12).

        Product Warranties:    The Company offers a warranty on various products, the most significant of which relate to ICD and pacemaker systems. The Company estimates the costs it expects to incur under its warranties and records a liability for such costs at the time the product is sold. Factors that affect the Company's warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company regularly assesses the adequacy of its warranty liabilities and adjusts the amounts as necessary.

        Changes in the Company's product warranty liability during fiscal years 2016 and 2015 were as follows (in millions):

 
  2016   2015  

Balance at beginning of period

  $ 31   $ 35  

Assumed from Thoratec Corporation (Thoratec)

        7  

Warranty (benefit) expense recognized

    8     (4 )

Warranty credits issued

    (13 )   (7 )

Balance at end of period

  $ 26   $ 31  

        Product Liability:    Based on historical loss trends and anticipated loss on products sold, the Company accrues for product liability claims through its self-insurance program to adequately cover future losses. Additionally, the Company accrues for product liability claims when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The Company is currently the subject of product liability litigation proceedings and other proceedings described in more detail in Notes 5 and 8.

        Litigation:    The Company accrues a liability for costs related to litigation, including future legal costs, settlements and judgments where it has assessed that such costs are probable and an amount can be reasonably estimated. Receivables for insurance recoveries are recognized when it is probable that a recovery will be realized and may sometimes be recorded in a period subsequent from when the liability is incurred for certain litigation matters, such as shareholder or securities litigation.

        Revenue Recognition:    The Company sells its products to clinics and hospitals world-wide primarily through a direct sales force. In certain international markets, the Company sells its products through independent distributors. The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery of goods occurs through the transfer of title and risks and rewards of

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ownership, the selling price is fixed or determinable and collectability is reasonably assured. A portion of the Company's inventory is held by field sales representatives or consigned at customer locations. For such product inventory, revenue is recognized upon implant or when used by the customer. For products that are not consigned, revenue recognition generally occurs upon shipment to the customer or, in the case of distributors, when title transfers under the contract assuming all other revenue recognition criteria are met. The Company offers sales rebates and discounts to certain customers. The Company records such rebates and discounts as a reduction of net sales in the same period revenue is recognized. The Company estimates rebates based on customers' contracted terms and historical sales experience.

        Excise Taxes:    The Company incurs certain excise taxes in the distribution of its products, including a medical device excise tax assessed on U.S. sales and an excise tax assessed on purchases from the Company's Puerto Rico manufacturing subsidiary. The U.S. medical device excise tax is imposed on the first sale in the U.S. by the manufacturer, producer or importer of a medical device to either a third party or an affiliated distribution entity. The Company capitalizes the assessment of these excise taxes as part of inventory, which is then recognized as cost of sales when the related inventory is sold to a third party customer.

        Research and Development (R&D):    R&D costs are expensed as incurred. R&D costs include costs of all basic research activities, including engineering and technical effort required to develop a new product or make significant improvements to an existing product or manufacturing process. R&D costs also include pre-approval regulatory costs and clinical research expenses.

        Employee Termination Benefits:    Accounting for termination benefits provided by the Company to employees is determined based on the nature of the benefits (e.g., voluntary or involuntary termination) and whether: (a) St. Jude Medical has a substantive plan to providing such benefits, (b) St. Jude Medical has a written employment contract with the impacted employees that includes a provision for such benefits, (c) the termination benefits are due to the occurrence of an event specified in an existing plan or agreement, or (d) the termination benefits are a one-time benefit. In certain circumstances, employee termination benefits may meet more than one of the characteristics listed above and therefore, may have individual elements that are subject to different accounting models.

        Other Restructuring Costs:    From time to time when executing a restructuring or exit plan, the Company incurs costs that are not associated with or will not be incurred to generate revenues. When these costs are incremental to other costs incurred by St. Jude Medical prior to the restructuring plan communication date and will be incurred as a direct result of a restructuring plan, or represent amounts under a contractual obligation that existed prior to the restructuring plan communication date and will either continue after the restructuring plan is completed with no economic benefit or result in a penalty to cancel a contractual obligation, then the Company classifies such costs as other restructuring costs. Such costs are recognized when incurred.

        Stock-Based Compensation:    The Company recognizes stock-based compensation expense for its related compensation programs, which include stock options, restricted stock units, restricted stock awards and the Employee Stock Purchase Plan (ESPP). The fair value of the stock-based compensation is determined at the grant date and the recognition of the related expense is recorded over the vesting period, using a straight-line attribution method, net of estimated forfeitures. All stock option awards granted under these plans have an exercise price equal to the closing stock price on the date of grant, an eight-year contractual life and generally, vest annually over a four-year vesting term. The Company uses the Black-Scholes standard option pricing model (Black-Scholes model) to determine the fair value of stock options and ESPP purchase rights. In addition to the closing stock price on the date of grant, the determination of the fair value of the awards using the Black-Scholes model is also affected by other assumptions, including projected employee stock option exercise behaviors, risk-free interest rate,

13


expected volatility of the Company's stock price in future periods and expected dividend yield, discussed in further detail:

        The fair value of both restricted stock and restricted stock units is based on the Company's closing stock price on the date of grant. Restricted stock units and restricted stock awards under these plans also generally vest annually over a four-year period. Restricted stock awards are considered issued and outstanding at the grant date and have the right to vote and receive cash dividends as other common stock. Directors can elect to receive half or all of their annual retainer in the form of a restricted stock award with a six-month vesting term. Restricted stock units are not issued and outstanding at the grant date; instead, upon vesting the recipient receives one share of the Company's common stock for each vested restricted stock unit.

        The Company's ESPP allows participating employees to purchase newly issued shares of the Company's common stock at a discount through payroll deductions. The ESPP consists of a 12-month offering period whereby employees can purchase shares at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower. The Company expenses the embedded purchase option and 15% discount over the offering period as stock-based compensation expense.

        The Company records deferred tax assets for awards that result in deductions on the Company's income tax returns, based on the amount of stock-based compensation expense recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statements of Earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards). See Note 7 for further detail on the Company's stock-based compensation plans.

        Foreign Currency Translation:    Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Foreign currency transaction gains and losses are included in other (income) expense in the Consolidated Statements of Earnings. Assets and liabilities of foreign operations are translated at period-end exchange rates with the impacts of foreign currency

14


translation recognized to foreign currency translation adjustment, a component of accumulated other comprehensive income (loss) in the Consolidated Statements of Shareholders' Equity.

        Income Taxes:    Income taxes are recorded under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Consolidated Financial Statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the Consolidated Financial Statements and the tax basis of related assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances for deferred tax assets are recognized when, after consideration of all positive and negative evidence, it is considered more-likely-than-not that a portion of the deferred tax assets will not be realized. When the Company changes its determination as to the amount of deferred tax assets that can be realized the valuation allowance is adjusted with a corresponding impact to income tax expense in the Consolidated Statements of Earnings during the period in which such determination is made.

        The Company recognizes liabilities for uncertain tax positions that require application of accounting estimates that are subject to inherent uncertainties associated with the tax audit process, and therefore include certain contingencies. The current portion of tax liabilities, including accrued interest and penalties, is included in income taxes payable and the noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Balance Sheets. To the extent new information becomes available which causes the Company to change its judgment regarding the adequacy of its existing tax liabilities, such changes to the Company's tax liabilities will impact income tax expense in the Consolidated Statements of Earnings in the period in which such determination is made. Interest and penalties related to the Company's accrued tax liabilities for potential tax assessments are also included in income tax expense.

        Net Earnings Per Share Attributable to St. Jude Medical, Inc.:    Basic net earnings per share attributable to St. Jude Medical, Inc. is computed by dividing net earnings attributable to St. Jude Medical, Inc. by the weighted average number of outstanding common shares during the period, exclusive of dilutive securities. Diluted net earnings per share attributable to St. Jude Medical, Inc. is computed by dividing net earnings attributable to St. Jude Medical, Inc. by the weighted average number of outstanding common shares and dilutive securities during the period.

        The following table sets forth the computation of basic and diluted net earnings per share as well as the anti-dilutive shares of common stock excluded from diluted net earnings per share for fiscal years 2016, 2015 and 2014 (in millions, except per share amounts):

 
  2016   2015   2014  

Numerator:

                   

Net earnings attributable to St. Jude Medical, Inc. 

  $ 734   $ 880   $ 1,002  

Denominator:

                   

Basic weighted average shares outstanding

    284.7     282.2     285.0  

Dilution associated with stock-based compensation plans

    4.0     4.1     4.7  

Diluted weighted average shares outstanding

    288.7     286.3     289.7  

Basic net earnings per share attributable to St. Jude Medical, Inc. 

  $ 2.58   $ 3.11   $ 3.52  

Diluted net earnings per share attributable to St. Jude Medical, Inc. 

  $ 2.54   $ 3.07   $ 3.46  

Anti-dilutive shares of common stock excluded from diluted net earnings per share attributable to St. Jude Medical, Inc. 

    3.0     3.8     3.3  

        Subsequent Events:    The Company has evaluated subsequent events through February 17, 2017, the date the consolidated financial statements were available to be issued.

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        New Accounting Pronouncements:    The following table provides a description of recent accounting pronouncements adopted.

Standard
  Description   Impact of adoption or other significant
matters

Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis

  The standard affects both the variable interest entity and voting interest entity consolidation models.   The Company adopted this ASU in the quarter ended April 2, 2016, using the modified retrospective method. The adoption did not have a material impact on the Company's results of operations or financial position.

ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement

 

The standard provides guidance to customers about how to account for cloud computing arrangements when such arrangements include software licenses.

 

The Company adopted this ASU in the quarter ended April 2, 2016, using the prospective method. The adoption did not have a material impact on the Company's results of operations or financial position.

ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory

 

The standard requires that inventory within the scope of the guidance be measured at the lower of cost or net realizable value.

 

The Company adopted this ASU in the quarter ended April 2, 2016. The adoption did not have a material impact on the Company's results of operations or financial position.

ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

 

The standard changes the manner in which an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period. It also includes certain presentation and disclosure requirements relating to such adjustments.

 

The Company adopted this ASU in the quarter ended October 3, 2015. Since the Company did not have any measurement period adjustments relating to prior acquisitions during the 2015 period prior to the adoption, the adoption did not have a material impact on the Company's results of operations or financial position.

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

 

The update includes amendments to eight specific cash flow presentation matters, including contingent consideration payments after a business combination.

 

The Company adopted this ASU in the interim period ended October 1, 2016. The adoption did not have a material impact on the Company's cash flows.

NOTE 2—BUSINESS COMBINATIONS

Fiscal Year 2016

        Middle East distributor:    In February 2016, the Company acquired certain assets and assumed certain liabilities of a medical device distributor in the Middle East for $19 million of total purchase

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consideration. The transaction was accounted for as a purchase business combination. The purchase price allocation, which includes customer relationship intangible assets of $7 million and goodwill of $5 million, is considered preliminary, largely with respect to certain tax-related assets and liabilities. During 2016, the Company did not recognize any material adjustments to provisional amounts.

        U.S. distributor:    In September 2016, the Company acquired a medical device distributor in the U.S. for $14 million of total purchase consideration ($10 million of cash consideration and $4 million of contingent consideration). The transaction was accounted for as a purchase business combination. The purchase price allocation, which includes customer relationship intangible assets of $9 million and goodwill of $5 million, is considered preliminary, largely with respect to certain tax-related liabilities. During 2016, the Company did not recognize any material adjustments to provisional amounts.

Fiscal Year 2015

        Thoratec:    In October 2015, the Company acquired all the outstanding shares of Thoratec Corporation (Thoratec). Under the terms of the agreement, each outstanding Thoratec share was converted into the right to receive $63.50 per share in cash. Thoratec, headquartered in Pleasanton, California, develops, manufactures and markets proprietary medical devices used for mechanical circulatory support for the treatment of heart failure patients. Certain "in-the-money" unvested options to purchase Thoratec shares that were outstanding and unexercised immediately prior to completion of the acquisition were exchanged for St. Jude Medical restricted stock awards; each unvested Thoratec restricted stock unit and performance share unit that was outstanding immediately prior to completion of the acquisition was converted into St. Jude Medical restricted stock units; and certain "in-the-money" unvested options to purchase Thoratec shares, unvested restricted stock units, and unvested Thoratec performance share units previously awarded to certain employees were accelerated upon the acquisition (collectively "accelerated and replacement equity awards"). The aggregate fair value of the accelerated and replacement equity awards of $166 million was based on St. Jude Medical, Inc.'s stock price at the date of acquisition. The value of the replacement equity awards not earned was $57 million as of the date of acquisition and will be expensed over the remaining requisite service periods ranging up to four years (see Note 7). Additionally, during 2015, the Company recognized direct transaction costs of $22 million in selling, general and administrative expense in the Company's Consolidated Statements of Earnings.

        Significant judgment is required in determining the estimated fair values of identifiable intangible assets, including IPR&D assets, and certain other assets and liabilities. Such valuation requires significant estimates and assumptions inherent in the initial measurements including, but not limited to:

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        Adjustments to the preliminary purchase price allocation within the allocation period were not material. The following table summarizes the final purchase price allocation of the values of net assets as a result of the Company's acquisition of Thoratec in October 2015 (in millions):

 
  Thoratec  

Accounts receivable

  $ 75  

Inventories

    150  

Other current and noncurrent assets

    44  

Property, plant and equipment

    57  

Goodwill

    2,143  

Intangible assets

    1,490  

Accounts payable

    (22 )

Other current and noncurrent liabilities

    (69 )

Contingent consideration liabilities

    (33 )

Deferred income tax assets/(liabilities)

    (548 )

Net assets

  $ 3,287  

Cash consideration paid to Thoratec shareholders

  $ 3,484  

Cash consideration paid for vested Thoratec share awards

    30  

Total cash paid

  $ 3,514  

Less: cash acquired

    (262 )

Net cash consideration

  $ 3,252  

Fair value of equity awards exchanged in business combination

    35  

Total purchase consideration

  $ 3,287  

        The goodwill recorded as a result of the Thoratec acquisition is not deductible for income tax purposes. The goodwill is largely attributable to strategic opportunities for growing the Company's portfolio of products treating heart failure by offering more comprehensive therapy options across the care continuum. Synergies are also expected to arise upon the integration of Thoratec, the benefits of utilizing the existing workforce, technology innovation and cross-selling opportunities. Additionally, IPR&D projects that did not have substance at the acquisition date are not separately identified. IPR&D intangible assets include Thoratec projects for its next generation left ventricular assist device and percutaneous heart pumps, which have not been approved for commercialization in the U.S. We currently expect approvals for U.S. commercialization to occur at various times between 2017 and 2019. In connection with the acquisition of Thoratec, the Company recognized $714 million of indefinite-lived IPR&D intangible assets, $683 million of purchased technology and patent definite-lived intangible assets that have an estimated weighted average useful life of 9.8 years and a $93 million trademark definite-lived intangible asset that has an estimated useful life of 16.0 years.

        The consolidated results of the Company for the fiscal year ended January 2, 2016, include Thoratec's results of operations from the acquisition date through January 2, 2016. Net sales and net losses of Thoratec during this period included in the Company's Consolidated Financial Statements for the fiscal year ended January 2, 2016 totaled $136 million and $94 million, respectively.

        The following unaudited pro forma information provides the effect of the Company's acquisition of Thoratec as if the acquisition had occurred on December 29, 2013 (in millions):

(unaudited)
  2015   2014  

Pro forma net sales

  $ 5,919   $ 6,099  

Pro forma net earnings attributable to St. Jude Medical, Inc. 

  $ 970   $ 767  

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        The historical consolidated financial information of the Company and Thoratec has been adjusted in the pro forma information to give effect to pro forma events that are (a) directly attributable to the acquisition and related financing, (b) expected to have a continuing impact on St. Jude Medical, Inc., and (c) factually supportable. In order to reflect the occurrence of the acquisition on December 29, 2013, as required, the unaudited pro forma results include adjustments to reflect, among other things, the incremental intangible asset amortization to be incurred based on the values of each identifiable intangible asset and the interest expense from debt financing obtained to fund the cash consideration transferred. Pro forma adjustments were tax effected at the Company's historical statutory rates in effect for the respective periods. The unaudited pro forma amounts are not necessarily indicative of the combined results of operations that would have been realized had the acquisition and related financing occurred on December 29, 2013, nor are they meant to be indicative of any anticipated combined results of operations that St. Jude Medical, Inc. will experience after the transaction. In addition, the amounts do not include any adjustments for actions that may be taken following the completion of the transaction, such as expected cost savings, operating synergies or revenue enhancements that may be realized subsequent to the transaction. Pro forma 2015 net earnings attributable to St. Jude Medical, Inc. were adjusted to exclude the following in fiscal year 2015: $16 million of direct transaction costs, $19 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory, $64 million of nonrecurring stock-based compensation expenses for Thoratec equity awards accelerated at closing, $46 million of severance and other termination payments and $15 million of retention bonuses, consulting expenses and other bonus payments. These items were included in the pro forma 2014 net earnings attributable to St. Jude Medical, Inc.

Fiscal Year 2014

        NeuroTherm:    In August 2014, the Company acquired all the outstanding shares of NT Holding Company (NeuroTherm) for $147 million in net cash consideration and assumed $50 million of debt, which has been repaid. Additionally, the Company recognized direct transaction costs of $1 million in selling, general and administrative expense in the Company's Consolidated Statements of Earnings. NeuroTherm, headquartered in Wilmington, Massachusetts, is involved in the business of marketing, designing, manufacturing and distributing radio frequency ablation medical devices and the related consumable items for pain management and interventional radiology markets.

        The goodwill recorded as a result of the NeuroTherm acquisition is not deductible for income tax purposes. The goodwill is largely attributable to strategic opportunities for growing the Company's neuromodulation product portfolio to provide additional product offerings and therapy options, synergies expected to arise after the acquisition and the benefits of the existing workforce related to the acquired business. In connection with the acquisition of NeuroTherm, the Company recognized $87 million of developed technology intangible assets that have estimated useful lives ranging from 11 to 12 years and a $2 million other intangible asset that has an estimated useful life of 5 years.

        During the fourth quarter of 2014, the Company reflected a fair value adjustment and recorded a $7 million decrease to goodwill and deferred income tax assets/(liabilities). All other adjustments to the preliminary purchase price allocation within the allocation period were not material. The following

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table summarizes the final purchase price allocation of the fair values of net assets as a result of the Company's acquisition of NeuroTherm in August 2014 (in millions):

 
  NeuroTherm  

Current assets

  $ 22  

Property, plant and equipment

    2  

Goodwill

    125  

Intangible assets

    89  

Current liabilities

    (13 )

Deferred income tax assets/(liabilities)

    (28 )

Long-term debt

    (50 )

Net assets

  $ 147  

Cash paid

  $ 148  

Less: Cash acquired

    (1 )

Net cash consideration

  $ 147  

        The results of NeuroTherm since the date of acquisition and pro forma disclosures of the consolidated results of the Company with the full year effects of NeuroTherm have not been separately presented since the impact to the Company's results of operations was not material.

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

        The changes in the carrying amount of goodwill for the fiscal years ended December 31, 2016 and January 2, 2016 were as follows (in millions):

Balance as of January 3, 2015

  $ 3,532  

Thoratec

    2,142  

Foreign currency translation and other

    (23 )

Balance as of January 2, 2016

    5,651  

Middle East distributor

    5  

U.S. distributor

    5  

Thoratec

    1  

Foreign currency translation and other

    (24 )

Balance as of December 31, 2016

  $ 5,638  

20


        The following table provides the gross carrying amount of other intangible assets and related accumulated amortization (in millions):

 
  December 31, 2016   January 2, 2016  
 
  Gross
Carrying
Amount
  Accumulated
Amortization
  Gross
Carrying
Amount
  Accumulated
Amortization
 

Definite-lived intangible assets:

                         

Purchased technology and patents

  $ 1,902   $ 755   $ 1,840   $ 578  

Trademarks and tradenames

    116     24     115     16  

Customer lists and relationships

    30     8     21     16  

Licenses, distribution agreements and other

    26     3     6     2  

  $ 2,074   $ 790   $ 1,982   $ 612  

Indefinite-lived intangible assets:

                         

Acquired IPR&D

  $ 764         $ 829        

Trademarks and tradenames

    27           27        

  $ 791         $ 856        

        See Notes 8 and 11 for further information on the Company's intangible asset impairment charges.

        The following table presents expected future amortization expense for acquired intangible assets recognized as of December 31, 2016 and expected amortization expense of indefinite-lived IPR&D assets based on anticipated regulatory product approvals (in millions):

 
  2017   2018   2019   2020   2021   After
2021
 

Amortization expense

  $ 224   $ 242   $ 238   $ 228   $ 181   $ 935  

        The expected amortization expense is an estimate. Actual amounts of amortization expense may differ due to the impact of the Company's merger with Abbott Laboratories (Abbott) (see Note 14).

NOTE 4—DEBT

        The carrying value of the Company's debt, including debt issuance costs, discounts or premiums consisted of the following (in millions):

 
  December 31,
2016
  January 2,
2016
 

Term Loan Due 2020

  $ 2,304   $ 2,093  

2016 Senior Notes

        500  

2018 Senior Notes

    497     496  

2020 Senior Notes

    497     496  

2023 Senior Notes

    893     892  

2025 Senior Notes

    495     494  

2043 Senior Notes

    689     689  

Yen-denominated Senior Notes Due 2017

    70     68  

Yen-denominated Senior Notes Due 2020

    109     106  

Yen-denominated credit facilities

    55     54  

Commercial paper borrowings

    190     504  

Total debt

    5,799     6,392  

Less: current debt obligations

    445     1,163  

Long-term debt

  $ 5,354   $ 5,229  

21


        Contractual maturities of the Company's debt for the next five fiscal years and thereafter, excluding any debt issuance costs, discounts or premiums, as of December 31, 2016 were as follows (in millions):

 
  2017   2018   2019   2020   2021   After
2021
 

Future minimum principal payments

  $ 445   $ 598   $ 227   $ 2,463   $   $ 2,100  

        Term Loan Due 2020:    In August 2015, the Company entered into a 5-year, $2.6 billion term loan due in 2020 (Term Loan Due 2020). In October 2015, the Company received proceeds of $2.1 billion to finance the Company's acquisition of Thoratec. The remaining $500 million was drawn on January 15, 2016 to refinance existing indebtedness of the Company and for general corporate purposes. The Company may make interest payments under the Term Loan Due 2020 at its election of a 1-month, 2-month, 3-month or 6-month LIBOR plus 1.125%, subject to adjustment in the event of a change in the Company's credit ratings. Required quarterly principal payments on the Term Loan Due 2020 began in March 2016, with an increase to the quarterly principal payments after three years followed by a final maturity payment due in October 2020. The Company may make optional principal payments on the outstanding borrowings at any time. During 2016, the Company made quarterly principal payments totaling $124 million and prepaid an additional $167 million on its Term Loan Due 2020.

        2016 Senior Notes:    In January 2016, the Company repaid its $500 million principal amount of 5-year, 2.500% unsecured senior notes (2016 Senior Notes), issued in December 2010. Interest payments were required on a semi-annual basis. The 2016 Senior Notes were issued at a discount, yielding an effective interest rate of 2.540% at issuance.

        Concurrent with the issuance of the 2016 Senior Notes, the Company entered into a 5-year, $500 million notional amount interest rate swap designated as a fair value hedge of the changes in fair value of the Company's fixed-rate 2016 Senior Notes. In June 2012, the Company terminated the interest rate swap and received a cash payment of $24 million. The gain from terminating the interest rate swap agreement was reflected as an increase to the carrying value of the debt and amortized as a reduction of interest expense in the Consolidated Statements of Earnings resulting in a net average interest rate of 1.300% that was recognized over the remaining term of the 2016 Senior Notes.

        2018 Senior Notes:    In September 2015, the Company issued $500 million principal amount of 3-year, 2.000% unsecured senior notes (2018 Senior Notes) that mature in September 2018. The net proceeds from the issuance of the 2018 Senior Notes were used to finance a portion of the Company's Thoratec acquisition. Interest payments are required on a semi-annual basis. The 2018 Senior Notes were issued at a discount, yielding an effective interest rate of 2.084% at issuance. The Company may redeem the 2018 Senior Notes at any time at the applicable redemption price.

        2020 Senior Notes:    In September 2015, the Company issued $500 million principal amount of 5-year, 2.800% unsecured senior notes (2020 Senior Notes) that mature in September 2020. The net proceeds from the issuance of the 2020 Senior Notes were used to finance a portion of the Company's Thoratec acquisition. Interest payments are required on a semi-annual basis. The 2020 Senior Notes were issued at a discount, yielding an effective interest rate of 2.810% at issuance. The Company may redeem the 2020 Senior Notes at any time at the applicable redemption price.

        2023 Senior Notes:    In April 2013, the Company issued $900 million principal amount of 10-year, 3.250% unsecured senior notes (2023 Senior Notes) that mature in April 2023. Interest payments are required on a semi-annual basis. The 2023 Senior Notes were issued at a discount, yielding an effective interest rate of 3.310% at issuance. The Company may redeem the 2023 Senior Notes at any time at the applicable redemption price.

22


        2025 Senior Notes:    In September 2015, the Company issued $500 million principal amount of 10-year, 3.875% unsecured senior notes (2025 Senior Notes) that mature in September 2025. The net proceeds from the issuance of the 2025 Senior Notes were used to finance a portion of the Company's Thoratec acquisition. Interest payments are required on a semi-annual basis. The 2025 Senior Notes were issued at a discount, yielding an effective interest rate of 3.922% at issuance. The Company may redeem the 2025 Senior Notes at any time at the applicable redemption price.

        2043 Senior Notes:    In April 2013, the Company issued $700 million principal amount of 30-year, 4.750% unsecured senior notes (2043 Senior Notes) that mature in April 2043. Interest payments are required on a semi-annual basis. The 2043 Senior Notes were issued at a discount, yielding an effective interest rate of 4.790% at issuance. The Company may redeem the 2043 Senior Notes at any time at the applicable redemption price.

        The majority of the net proceeds from the issuance of the 2023 Senior Notes and 2043 Senior Notes were used to redeem the Company's $700 million principal amount of 5-year, 3.750% unsecured senior notes due in 2014 and the $500 million principal amount of 10-year, 4.875% unsecured senior notes due in 2019.

        Yen-Denominated Senior Notes Due 2017:    In April 2010, the Company issued 7-year, 1.580% unsecured senior notes in Japan (Yen Notes Due 2017) totaling 8.1 billion Japanese Yen (the equivalent of $70 million at December 31, 2016 and $68 million at January 2, 2016). The principal amount of the Yen Notes Due 2017 recorded on the balance sheet fluctuates based on the effects of foreign currency translation. Interest payments are required on a semi-annual basis and the entire principal balance is due in April 2017.

        Yen-Denominated Senior Notes Due 2020:    In April 2010, the Company issued 10-year, 2.040% unsecured senior notes in Japan (Yen Notes Due 2020) totaling 12.8 billion Japanese Yen (the equivalent of $109 million at December 31, 2016 and $106 million at January 2, 2016). The principal amount of the Yen Notes Due 2020 recorded on the balance sheet fluctuates based on the effects of foreign currency translation. Interest payments are required on a semi-annual basis and the entire principal balance is due in April 2020.

        Yen-Denominated Credit Facilities:    In March 2011, the Company borrowed 6.5 billion Japanese Yen (the equivalent of $55 million at December 31, 2016 and $54 million at January 2, 2016) under uncommitted credit facilities with two commercial Japanese banks. The principal amount reflected on the balance sheet fluctuates based on the effects of foreign currency translation. Half of the borrowings bear interest at Yen LIBOR plus 0.250% and mature in March 2017 and the other half of the borrowings bear interest at Yen LIBOR plus 0.275% and mature in June 2017. The maturity dates of each credit facility automatically extend for a one-year period, unless the Company elects to terminate the credit facility.

        Commercial Paper Borrowings:    The Company's commercial paper program provides for the issuance of unsecured notes with maturities up to 270 days. During 2016 and 2015, the Company's weighted average effective interest rate on its commercial paper borrowings was approximately 0.807% and 0.308%, respectively. Any future commercial paper borrowings would bear interest at the applicable then-current market rates.

        Other Available Borrowings:    In July 2015, the Company entered into a commitment letter (Commitment Letter) with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (together BofAML) pursuant to which BofAML committed to provide a $3.7 billion senior unsecured bridge facility (Bridge Facility) to finance the acquisition of Thoratec (see Note 2). The Company never drew any borrowings under the Bridge Facility, which was later terminated in October 2015 when the Company completed its acquisition of Thoratec. However, the Company

23


recognized $13 million of commitment fees associated with the Bridge Facility in other (income) expense in the Consolidated Statements of Earnings.

        In August 2015, the Company entered into a 5-year, $1.5 billion revolving, unsecured committed credit facility (Credit Facility Expiring 2020) that it may draw upon to refinance existing indebtedness and for general corporate purposes. The Credit Facility Expiring 2020 amended and restated the Company's previous $1.5 billion unsecured committed credit facility that was scheduled to expire in May 2018. The Credit Facility Expiring 2020 will expire on August 21, 2020. Borrowings under the Credit Facility Expiring 2020 bear interest at LIBOR plus 0.900%, subject to adjustment in the event of a change in the Company's credit ratings. As of December 31, 2016 and January 2, 2016, the Company had no outstanding borrowings under either facility.

        Operating and financial covenants:    Certain of the Company's debt outstanding and available borrowings contain operating and financial covenants. Specifically, the Credit Facility Expiring 2020 and the Term Loan Due 2020 require that the Company has a leverage ratio (defined as the ratio of indebtedness to EBITDA (net earnings before interest expense, income taxes, depreciation, amortization and certain income and expenses)) not exceeding 3.5 to 1.0. Additionally, during the third quarter of 2015, the Company amended a debt covenant related to its 1.580% Yen Denominated Senior Notes Due 2017 and its 2.040% Yen Denominated Senior Notes Due 2020 (Yen Notes) to require a ratio of total debt to total capitalization not exceeding 60%. Under the Credit Facility Expiring 2020, Term Loan Due 2020, senior notes and Yen Notes, the Company also has certain limitations on how the Company conducts its business, including limitations on dividends, additional liens or indebtedness and limitations on certain acquisitions, mergers, investments and dispositions of assets.

NOTE 5—COMMITMENTS AND CONTINGENCIES

Leases

        The Company leases various facilities and equipment under non-cancelable operating lease arrangements. The following table presents the Company's future minimum lease payments as of December 31, 2016 (in millions):

 
  2017   2018   2019   2020   2021   After
2021
 

Future minimum operating lease payments

  $ 41   $ 31   $ 24   $ 20   $ 19   $ 22  

        Rent expense under all operating leases was $51 million, $45 million and $51 million in fiscal years 2016, 2015 and 2014, respectively.

Securities and Other Shareholder Litigation

        December 2012 Securities Litigation:    On December 7, 2012, a putative securities class action lawsuit was filed in federal district court in Minnesota against the Company and an officer (collectively, the defendants) for alleged violations of the federal securities laws, on behalf of all purchasers of the publicly traded securities of the defendants between October 17, 2012 and November 20, 2012. The complaint, which sought unspecified damages and other relief as well as attorneys' fees, challenges the Company's disclosures concerning its high voltage cardiac rhythm lead products during the purported class period. On December 10, 2012, a second putative securities class action lawsuit was filed in federal district court in Minnesota against the Company and certain officers for alleged violations of the federal securities laws, on behalf of all purchasers of the publicly traded securities of the Company between October 19, 2011 and November 20, 2012. The second complaint alleged similar claims and sought similar relief. In March 2013, the Court consolidated the two cases and appointed a lead

24


counsel and lead plaintiff. A consolidated amended complaint was served and filed in June 2013, alleging false or misleading representations made during the class period extending from February 5, 2010 through November 7, 2012. In September 2013, the defendants filed a motion to dismiss the consolidated amended complaint. On March 10, 2014, the Court ruled on the motion to dismiss, denying the motion in part and granting the motion in part. On October 7, 2014, the lead plaintiff filed a second amended complaint. Like the original consolidated amended complaint, the plaintiffs did not assert any specific amount of compensation in the second amended complaint. The Court granted class certification on December 22, 2015. On May 24, 2016, the parties agreed to resolve the case, pending notification to class members and subject to court approval. Under the settlement, the Company agreed to make a payment of $39.25 million to resolve all of the class claims and recorded a charge of that amount during the second quarter of 2016. On July 13, 2016, the Court issued an order preliminarily approving the settlement. Concurrent with the recording of the loss, the Company also recognized probable insurance recoveries of $39.25 million. The Court gave final approval to the settlement at a hearing on November 9, 2016, and the matter has been dismissed.

        Abbott Merger Lawsuits:    On May 2, 2016, a shareholder of the Company filed a purported class action lawsuit in Ramsey County, Minnesota, captioned Silverman v. St. Jude Medical, Inc., et al., 62-CV-16-2872 alleging that the Company's directors breached their fiduciary duties in connection with the proposed merger contemplated by the Company and Abbott (the Proposed Transaction). On May 26, 2016, a second action entitled Larkin v. Starks, et al., 62-CV-16-3367, was filed in the same court alleging substantially similar claims. On July 5, 2016, plaintiffs in the two actions jointly filed an Amended Shareholder class and Derivative Action Complaint (the Amended Complaint). Plaintiffs' Amended Complaint asserts that the Company's directors breached their fiduciary duties by conducting a flawed sale process, failing to maximize shareholder value, and publishing false or misleading disclosure materials relating to the Proposed Transaction, and that the Abbott defendants aided and abetted those breaches. The Amended Complaint asserts direct and/or derivative claims for breach of fiduciary duty, corporate waste and abuse of control under Minnesota Statute § 302A.467. Plaintiffs seek, among other things, to enjoin the Proposed Transaction and an order directing defendants to account to plaintiffs for all damages allegedly suffered by the putative class and damages allegedly incurred by the Company in connection with the Proposed Transaction. On August 3, 2016, a third action entitled Gross v. Starks, et al., 62-CV-16-4581, was filed in Ramsey County, Minnesota, containing allegations similar to those in the Silverman Amended Complaint. This action was consolidated with the two previously filed actions. On December 6, 2016, plaintiffs in the consolidated action voluntarily dismissed their actions with prejudice.

        On June 30, 2016, a shareholder of the Company filed a purported class action lawsuit in the United States District Court for the District of Minnesota, captioned Rosenfeld v. St. Jude Medical, Inc., et al., 16-cv-02275-WMW-FLN, alleging that the Company and its directors violated Section 14(a) of the Securities Exchange Act of 1934, SEC Rule 14a-9, and Minnesota Statute §§ 80A.68 and 80A.76, and that the Company's directors violated Section 20(a) of the Exchange Act, by filing a Form S-4 with the SEC that contained false or misleading statements regarding the Proposed Transaction. Plaintiff sought, among other things, to enjoin the Proposed Transaction or, if consummated, an order rescinding it or awarding actual and punitive damages to Plaintiff and the putative class. On November 23, 2016, the Plaintiff voluntarily dismissed his complaint.

Regulatory Matters

        The U.S. Food and Drug Administration (FDA) inspected the Company's manufacturing facility in Atlanta, Georgia, where the Company manufactures its CardioMEMS™ HF system, at various times between June 8 to June 26, 2015. On July 6, 2015, the FDA issued a Form 483 identifying certain observed non-conformity with current Good Manufacturing Practice at the facility. Following the receipt of the Form 483, the Company provided written responses to the FDA detailing proposed

25


corrective actions and immediately initiated efforts to address the FDA's observations of non-conformity. The Company subsequently received a warning letter dated September 30, 2015 from the FDA relating to these non-conformities. Since the completion of the FDA inspection, the Company has provided and will continue to provide the FDA with regular updates. The Company has fully-integrated this former CardioMEMS standalone facility into St. Jude Medical's quality systems. During July 2016, the FDA conducted a follow-up inspection at the Atlanta facility. On July 28, 2016, the FDA issued a Form 483 identifying additional observed non-conformities with current Good Manufacturing Practice at the facility. The Company has worked to remediate these observations. There has been no inspection subsequent to the issuance of the Form 483 and no other further action to date by the FDA. The warning letter is specific to the Atlanta facility and does not impact any of the Company's other manufacturing facilities. The warning letter does not identify any specific concerns regarding the performance of, or indicate the need for any field or other action regarding, the CardioMEMS™HF system product or any other St. Jude Medical product. The Company will continue manufacturing and shipping product from the Atlanta facility, and customer orders are not expected to be impacted while the Company works to resolve the FDA's concerns. The Company takes these matters seriously, will respond timely and fully to the FDA's requests, and believes that the FDA's concerns will be resolved without a material impact on the Company's financial results.

Intellectual Property Matters

        On October 26, 2016, the Regents of the University of California filed a patent infringement action against the Company in the United States District Court for the Northern District of California alleging that two U.S. patents owned by the Regents of the University of California are infringed by certain of our catheters and other devices used to treat atrial fibrillation. The Company has not recorded an expense related to any potential damages in connection with this matter because any potential loss is not probable or reasonably estimable. Because, based on the Company's historical experience, the amount ultimately paid, if any, often does not bear any relationship to the amount claimed, the Company cannot reasonably estimate a loss or range of loss, if any, that may result from this matter.

26


NOTE 6—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) AND SUPPLEMENTAL EQUITY INFORMATION

        The table below presents the changes in each component of accumulated other comprehensive income, net of tax, including other comprehensive income and the reclassifications out of accumulated other comprehensive income into net earnings for fiscal years 2016, 2015 and 2014 (in millions):

 
  Unrealized
Gain (Loss) On
Available-for-sale
Securities
  Unrealized
Gain (Loss) On
Derivative
Instruments
  Foreign
Currency
Translation
Adjustment
  Accumulated
Other
Comprehensive
Income
 

Accumulated other comprehensive income (loss) as of December 28, 2013

  $ 17   $ 3   $ 26   $ 46  

Other comprehensive income (loss) before reclassifications

            (217 )   (217 )

Amounts reclassified to net earnings from accumulated other comprehensive income

   
(2

)
 
   
   
(2

)

Other comprehensive income (loss)

    (2 )       (217 )   (219 )

Accumulated other comprehensive income (loss) as of January 3, 2015

    15     3     (191 )   (173 )

Other comprehensive income (loss) before reclassifications

    2     17     (168 )   (149 )

Amounts reclassified to net earnings from accumulated other comprehensive income

   
(14

)
 
(9

)
 
   
(23

)

Other comprehensive income (loss)

    (12 )   8     (168 )   (172 )

Accumulated other comprehensive income (loss) as of January 2, 2016

    3     11     (359 )   (345 )

Other comprehensive income (loss) before reclassifications

    15     16     (52 )   (21 )

Amounts reclassified to net earnings from accumulated other comprehensive income

   
   
6
   
   
6
 

Other comprehensive income (loss)

    15     22     (52 )   (15 )

Accumulated other comprehensive income (loss) as of December 31, 2016

  $ 18   $ 33   $ (411 ) $ (360 )

        Income taxes are not provided for foreign translation related to permanent investments in international subsidiaries. Reclassification adjustments are made to avoid double counting items in comprehensive income that are also recorded as part of net earnings.

27


        The following table provides details about reclassifications out of accumulated other comprehensive income and the line items impacted in the Company's Consolidated Statements of Earnings for fiscal years 2016, 2015 and 2014 (in millions):

 
  Amounts reclassified from accumulated other
comprehensive income
Details about accumulated other
comprehensive income components
  2016   2015   2014   Statements of Earnings
Classification

Unrealized (gain) loss on available-for-sale securities:

(Gain) loss on sale of available-for-sale securities

  $   $ (22 ) $ (3 ) Other (income) expense

Tax effect

        8     1   Income tax expense

Net of tax

  $   $ (14 ) $ (2 )  

Unrealized (gain) loss on derivative financial instruments:

(Gain) loss on derivative financial instruments

  $ 9   $ (10 ) $   Cost of sales

Tax effect

    (3 )   1       Income tax expense

Net of tax

  $ 6   $ (9 ) $    

        The Company's realized (gains) and losses on its available-for-sales securities and derivative financial instruments are computed using the specific identification method. There were no available-for-sale other-than-temporary impairment losses recognized in fiscal years 2016, 2015 or 2014.

Supplemental Equity Information

        On December 9, 2016, the Company's Board of Directors authorized a cash dividend of $0.31 per share payable on January 31, 2017 to shareholders of record as of January 13, 2017. However, no St. Jude Medical dividend was paid since the Company's merger with Abbott was effective before the record date (see Note 14).

        During 2015, the Company exercised its exclusive option and paid $173 million to Spinal Modulation's shareholders to obtain the remaining 81% ownership interest in the company that it did not previously own and accrued $155 million of contingent consideration (see Note 11). The $173 million paid during 2015 was classified as a financing activity in the Consolidated Statements of Cash Flows. As the Company retained its controlling interest, the payment for the shares and the accrual for contingent consideration resulted in a decrease in shareholders' equity before noncontrolling interest of $297 million and a decrease in noncontrolling interest of $33 million in St. Jude Medical, Inc.'s Consolidated Balance Sheets. Spinal Modulation's results of operations continued to be included in the Company's Consolidated Financial Statements.

        On January 13, 2015, the Company authorized a share repurchase program of up to $500 million of its outstanding common stock. The Company began repurchasing shares on January 30, 2015. From January 30, 2015 through March 2, 2015, the Company repurchased approximately 7.5 million shares for $500 million at an average repurchase price of $66.96 per share.

        During 2014, the Company exercised its exclusive option and paid $344 million to CardioMEMS' shareholders and $18 million for pre-existing fee and compensation arrangements to obtain the remaining 81% ownership interest in the company that it did not previously own. The $344 million paid during 2014 was classified as a financing activity in the Consolidated Statements of Cash Flows. As the Company retained its controlling interest, the payment for the shares resulted in a decrease in shareholders' equity before noncontrolling interest of $297 million and a decrease in noncontrolling interest of $47 million in St. Jude Medical, Inc.'s Consolidated Balance Sheets. CardioMEMS' results of operations continued to be included in the Company's Consolidated Financial Statements.

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NOTE 7—STOCK-BASED COMPENSATION

Stock-based Compensation Plans

        The Company's total stock-based compensation expense for fiscal years 2016, 2015 and 2014 by income statement line item was as follows (in millions):

 
  2016   2015   2014  

Cost of sales

  $ 6   $ 6   $ 6  

Selling, general and administrative expense

    77     137     49  

Research and development expense

    16     17     16  

Stock-based compensation expense

  $ 99   $ 160   $ 71  

        In connection with the closing of the merger with Abbott (see Note 14), the Company's stock-based compensation plans were frozen such that no future awards may be granted thereunder and the Company's ESPP was terminated.

Weighted Average Fair Values and Black-Scholes Valuation Assumptions

        The following table provides the weighted average grant date fair values of the Company's restricted stock awards, restricted stock units and ESPP purchase rights during fiscal years 2016, 2015 and 2014, excluding Thoratec-related awards:

 
  2016   2015   2014  

Weighted average grant date fair values:

                   

Restricted stock awards

  $ 76.37   $ 71.77   $ 63.48  

Restricted stock units

  $ 74.33   $ 61.79   $ 69.08  

ESPP purchase rights

    N/A   $ 16.91   $ 15.46  

        The following table includes the weighted average grant date fair value of stock options granted to employees during fiscal years 2016, 2015 and 2014 and the related weighted average assumptions used in the Black-Scholes model:

 
  2016   2015   2014  

Fair value of options granted

  N/A   $ 12.54   $ 14.56  

Assumptions:

                 

Expected term (years)

  N/A     5.4     5.4  

Risk-free interest rate

  N/A     1.7 %   1.7 %

Volatility

  N/A     24.7 %   24.9 %

Dividend yield

  N/A     1.8 %   1.6 %

29


Stock-based Compensation Activity

        The following table summarizes stock option activity under all stock-based compensation plans during the fiscal year ended December 31, 2016:

 
  Options
(shares in millions)
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term (in years)
  Aggregate
Intrinsic
Value
(in millions)
 

Outstanding as of January 2, 2016

    16.8   $ 48.22              

Granted

                     

Exercised

    (2.6 )   37.14              

Forfeited and expired

    (0.5 )   59.70              

Outstanding as of December 31, 2016

    13.7   $ 49.88     4.3   $ 415  

Vested and expected to vest

    13.3   $ 49.53     4.2   $ 409  

Exercisable as of December 31, 2016

    10.2   $ 45.11     3.6   $ 356  

        The aggregate intrinsic value of options outstanding and options exercisable is based on the Company's closing stock price on the last trading day of the fiscal year for in-the-money options. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices. The total intrinsic value of options exercised during fiscal years 2016, 2015 and 2014 was $102 million, $94 million and $88 million, respectively.

        The following table summarizes activity for restricted stock awards and restricted stock units under all stock-based compensation plans during the fiscal year ended December 31, 2016, excluding the Company's Thoratec-related awards:

 
  Restricted Stock
Units and Awards
(shares in millions)
  Weighted Average
Grant Date
Fair Value
 

Unvested balance as of January 2, 2016

    1.5   $ 60.65  

Granted

    0.1     74.96  

Vested

    (0.6 )   57.36  

Forfeited

    (0.1 )   61.91  

Unvested balance as of December 31, 2016

    0.9   $ 64.36  

        The total aggregate grant date fair value of restricted stock awards and restricted stock units vested during fiscal years 2016, 2015 and 2014 was $33 million, $30 million and $26 million, respectively, excluding Thoratec-related awards.

Thoratec-related Awards

        During 2015, certain Thoratec equity awards were accelerated upon the completion of the acquisition and settled in cash ("accelerated equity awards"). All other unvested Thoratec equity awards that were outstanding immediately prior to completion of the acquisition were converted into St. Jude Medical, Inc. restricted stock awards or restricted stock units in a manner designed to preserve the intrinsic value of such awards at the acquisition date ("replacement equity awards").

        The values of the accelerated equity awards and replacement equity awards were allocated between the total purchase consideration for Thoratec (see Note 2) and the future requisite service period ranging up to four years based on the ratio of the pre-acquisition service period to the greater of the total service period of the replacement equity award or the original service period of the

30


Thoratec award. The accelerated equity awards and replacement equity awards resulted in incremental stock-based compensation expense of $88 million during fiscal year 2015 and $31 million during fiscal year 2016, that are included in selling, general and administrative expense.

        On October 8, 2015, 1.2 million shares of replacement equity awards were granted at a weighted average grant date fair value of $63.19. Of these awards, 0.1 million shares vested during 2015 at an aggregate exchange date fair value of $5 million. During 2016, an additional 0.8 million shares vested at an aggregate grant date fair value of $38 million and 0.1 million shares were forfeited. Approximately 0.2 million shares remained outstanding and unvested as of December 31, 2016.

NOTE 8—SPECIAL CHARGES

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

2016 Initiatives

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

        During 2016, the Company incurred additional charges related to severance and other termination benefits, contract termination costs and other exit costs, and fixed asset write-offs, primarily associated with the closure of Thoratec facilities and a research facility in the United States. The Company also incurred charges primarily related to inventories that became obsolete due to technology changes by a third party. Material charges are not expected in future periods as the 2016 Initiatives are complete.

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

 
  Employee
Termination
Costs
  Inventory
Charges
  Fixed
Asset
Charges
  Other
Restructuring
Costs
  Total  

Balance at January 3, 2015

  $   $   $   $   $  

Cost of sales special charges

    9     1     1     1     12  

Special charges

    22                 22  

Non-cash charges used

        (1 )   (1 )       (2 )

Cash payments

    (2 )           (1 )   (3 )

Balance at January 2, 2016

    29                 29  

Cost of sales special charges

    1     10     3     7     21  

Special charges

    24         7     13     44  

Non-cash charges used

        (10 )   (10 )       (20 )

Cash payments

    (45 )           (17 )   (62 )

Balance at December 31, 2016

  $ 9   $   $   $ 3   $ 12  

Manufacturing and Supply Chain Optimization Plan

        During 2014, the Company initiated the Manufacturing and Supply Chain Optimization Plan to leverage economies of scale, streamline distribution methods, drive process improvements through global synergies, balance plant utilization levels, centralize certain vendor relationships and reduce

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overall costs. During 2014, the Company incurred charges primarily related to severance and other termination benefits, fixed assets write-offs associated with information technology assets no longer expected to be utilized and distributor and other contract termination costs.

        During 2015, the Company incurred charges primarily related to severance and other termination benefits, contract termination costs and fixed asset write-offs. These costs included charges associated with the elimination of certain operational, quality and hardware development activities at a research and development facility, continued exit costs related to a facility closure in the United States and software development assets no longer expected to be utilized (see Note 11).

        During 2016, the Company incurred additional exit cost charges upon finalizing the facility closure in the United States. Material charges are not expected in future periods as the Manufacturing and Supply Chain Optimization Plan is complete.

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

 
  Employee
Termination
Costs
  Inventory
Charges
  Fixed
Asset
Charges
  Other
Restructuring
Costs
  Total  

Balance at December 28, 2013

  $   $   $   $   $  

Cost of sales special charges

    7                 7  

Special charges

    12         5     8     25  

Non-cash charges used

            (5 )       (5 )

Cash payments

    (5 )           (2 )   (7 )

Balance at January 3, 2015

    14             6     20  

Cost of sales special charges

    4     3     15     7     29  

Special charges

    20             29     49  

Non-cash charges used

        (3 )   (15 )       (18 )

Cash payments

    (27 )           (35 )   (62 )

Foreign exchange rate impact

                (1 )   (1 )

Balance at January 2, 2016

    11             6     17  

Cost of sales special charges

                2     2  

Special charges

                2     2  

Non-cash charges used

                     

Cash payments

    (9 )           (9 )   (18 )

Balance at December 31, 2016

  $ 2   $   $   $ 1   $ 3  

2012 Business Realignment Plan

        During 2012, the Company realigned its product divisions into two new operating divisions: the Implantable Electronic Systems Division (combining its legacy Cardiac Rhythm Management and Neuromodulation product divisions) and the Cardiovascular and Ablation Technologies Division (combining its legacy Cardiovascular and Atrial Fibrillation product divisions). In addition, the Company centralized certain support functions, including information technology, human resources, legal, business development and certain marketing functions. The organizational changes have been part of a comprehensive plan to accelerate the Company's growth, reduce costs, leverage economies of scale and increase investment in product development.

        During 2014, the Company announced additional organizational changes including the combination of its Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division, resulting in an integrated research and development organization and a consolidation of manufacturing

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and supply chain operations worldwide. The integration was conducted in a phased approach during 2014. In connection with these actions, the Company incurred charges primarily related to severance and other termination benefits and other restructuring costs, including distributor and other contract termination costs, costs associated with the discontinuation of a clinical trial and planned exit costs related to a facility in Europe. Additionally, the Company recognized inventory and fixed asset write-offs related to a discontinued clinical trial and fixed asset write-offs associated with projects abandoned under the new realigned structure.

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

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

        A summary of the activity related to the 2012 Business Realignment Plan accrual during fiscal years 2016, 2015 and 2014 is as follows (in millions):

 
  Employee
Termination
Costs
  Inventory
Charges
  Fixed
Asset
Charges
  Other
Restructuring
Costs
  Total  

Balance at December 28, 2013

  $ 54   $   $   $ 33   $ 87  

Cost of sales special charges

    8     8     13     1     30  

Special charges

    36         7     35     78  

Non-cash charges used

        (8 )   (20 )       (28 )

Cash payments

    (69 )           (56 )   (125 )

Foreign exchange rate impact

    (3 )           (1 )   (4 )

Balance at January 3, 2015

    26             12     38  

Cost of sales special charges

    2     3             5  

Special charges

    2         2     5     9  

Non-cash charges used

        (3 )   (2 )       (5 )

Cash payments

    (25 )           (10 )   (35 )

Foreign exchange rate impact

    (2 )               (2 )

Balance at January 2, 2016

    3             7     10  

Cost of sales special charges

        (3 )       (1 )   (4 )

Special charges

    (1 )               (1 )

Non-cash charges used

        3             3  

Cash payments

    (2 )           (1 )   (3 )

Balance at December 31, 2016

  $   $   $   $ 5   $ 5  

2011 Restructuring Plan

        During 2011, the Company incurred special charges related to restructuring actions to realign certain activities in the Company's legacy Cardiac Rhythm Management business and sales and selling support organizations. The restructuring actions included phasing out Cardiac Rhythm Management manufacturing and R&D operations in a country in Europe, reductions in the Company's workforce and rationalizing product lines. The 2011 Restructuring Plan was completed in 2013. Cash payments totaled $1 million and $13 million during 2015 and 2014, respectively. All other activity was not material.

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Other Special Charges

        Intangible asset impairment charges:    During 2016, the Company recognized an intangible asset impairment charge of $5 million related to an indefinite-lived IPR&D asset.

        During 2015, the Company recognized a $2 million impairment charge associated with a customer relationship intangible asset.

        During 2014, the Company recognized intangible asset impairment charges for certain indefinite-lived IPR&D assets and an indefinite-lived tradename asset resulting in impairment charges of $50 million and $8 million, respectively. See Note 11 for further discussion of these intangible asset impairment charges.

        Legal settlements:    During 2016, the Company recognized net legal settlement gains of $18 million associated with five unrelated legal cases. Additionally, although the Company recognized a legal settlement loss related to the December 2012 Securities Litigation, it concurrently recognized insurance recoveries in the same amount during 2016. In connection with the March 2010 Securities Class Action Litigation, the Company recognized $7 million in insurance recoveries as a special benefit during 2016. Partially offsetting the legal settlement gains, the Company recognized charges of $8 million primarily to evaluate allegations made by third parties about the safety and security of the Company's implantable cardiac rhythm management devices, initiate litigation against certain third parties related to those allegations and evaluate claims in a putative class action lawsuit asserting claims related to the safety and security of those devices. In December 2016, the plaintiff in the putative class action filed a notice with the Court voluntarily dismissing the case.

        During 2015, the Company recognized $10 million in insurance recoveries as a special benefit associated with the March 2010 Securities Class Action Litigation. Partially offsetting this benefit, the Company recognized $3 million in charges related to two unrelated legal settlements and a $1 million charge related to an unfavorable judgment for a product liability claim.

        During 2014, the Company recognized a $48 million special benefit related to a favorable judgment and resolution in a patent infringement case. Partially offsetting this gain, the Company recognized $37 million of legal settlement expense for three unrelated legal settlements.

        Product field action costs and litigation costs:    During 2016, 2015 and 2014, the Company recognized $8 million, $19 million and $31 million, respectively, of litigation charges for expected future probable and estimable legal costs associated with outstanding legal matters related to the Company's product field actions. Charges in excess of the amounts accrued are reasonably possible and depend on a number of factors, such as the type of claims received and the cost to defend.

        During 2016, the Company initiated an advisory letter to physicians for patients implanted with certain tachycardia cardiac rhythm management devices that were identified as having a potential premature battery depletion issue that could, on rare occasions, result in necessary treatment not being provided. In connection with this advisory, the Company recognized charges of $94 million, of which $82 million was recorded to cost of sales special charges related to product field action costs, primarily for device replacement costs, estimated scrapped inventory and costs for providing remote monitoring to patients under the advisory. Charges in excess of the accrual are reasonably possible and depend on a number of factors, such as the number of physicians requesting remote monitoring and device replacements.

        During 2016, the Company also initiated an advisory letter to physicians for patients implanted with certain ICD devices that were identified as having a potential therapy anomaly resulting in a lack of necessary treatment. As a result, the Company recognized charges of $5 million to cost of sales special charges primarily for estimated scrapped inventory and warranty costs.

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        During 2016, the Company also initiated an advisory letter to physicians participating in an investigational device exemption study for patients implanted with certain leadless bradycardia cardiac rhythm management devices that were identified as having a potential premature battery depletion issue that could, on rare occasions, result in necessary treatment not being provided. As a result, the Company recognized $2 million to cost of sales special charges for estimated scrapped inventory.

        During 2014, the Company initiated an advisory letter to physicians for patients implanted with certain ICDs that were identified as having a potential battery anomaly. As a result, the Company recognized special charges of $23 million, which was recorded to cost of sales special charges, primarily for scrapped inventory as well as additional warranty and patient monitoring costs. During both 2016 and 2015, the Company recognized a $5 million benefit each year in cost of sales special charges for salvaged inventory components related to this advisory action.

        During both 2015 and 2014, the Company recognized a $2 million and a $4 million benefit, respectively, in cost of sales special charges due to lower than expected direct recall costs associated with a 2012 voluntary product field action related to certain neuromodulation implantable pulse generator charging systems.

        Other restructuring-related charges:    The Company also recognized other restructuring-related charges of $3 million and $2 million during 2016 and 2015, respectively.

NOTE 9—INCOME TAXES

        The Company's earnings before income taxes as generated from its U.S. and international operations are as follows (in millions):

 
  2016   2015   2014  

U.S. 

  $ (222 ) $ (107 ) $ 157  

International

    1,052     1,035     911  

Earnings before income taxes and noncontrolling interest

  $ 830   $ 928   $ 1,068  

        Income tax expense consisted of the following (in millions):

 
  2016   2015   2014  

Current:

                   

U.S. federal

  $ 23   $ 64   $ 151  

U.S. state and other

    6     2     11  

International

    123     56     39  

Total current

    152     122     201  

Deferred

    (56 )   (60 )   (88 )

Income tax expense

  $ 96   $ 62   $ 113  

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        The components of deferred tax assets and liabilities are as follows (in millions):

 
  2016   2015  

Deferred income tax assets:

             

Net operating loss carryforwards

  $ 427   $ 350  

Tax credit carryforwards

    217     144  

Inventories

    32     34  

Stock-based compensation

    49     56  

Compensation and benefits

    144     143  

R&D expenditures, capitalized for tax

    69     80  

Accrued liabilities and other

    107     124  

    1,045     931  

Less: valuation allowance

    (419 )   (337 )

Deferred income tax assets, net

    626     594  

Deferred income tax liabilities:

             

Unrealized gain on available-for-sale securities

    (8 )   (1 )

Unrealized gain on derivative financial instruments

    (15 )   (4 )

Property, plant and equipment

    (151 )   (166 )

Intangible assets

    (803 )   (853 )

Deferred income tax liabilities

    (977 )   (1,024 )

Net deferred income tax assets (liabilities)

  $ (351 ) $ (430 )

        As of December 31, 2016, the Company had U.S. federal net operating loss carryforwards, the tax effect of which was $3 million and U.S. tax credit carryforwards, the tax effect of which was $123 million that will expire from 2024 through 2033 if not utilized. The Company also has state tax carryforwards, the tax effect of which was $98 million, that have an unlimited carryforward period. These amounts are subject to annual usage limitations. In addition, the Company had foreign tax net operating loss carryforwards, the tax effect of which was $424 million as of December 31, 2016. These tax attributes have an unlimited carryforward period. Because of the change in ownership resulting from the Abbott Transaction (see Note 14), there may be an annual limitation on the amount of the carryforwards that can be utilized.

        Certain of the Company's subsidiaries in international tax jurisdictions are in cumulative loss positions and have experienced cumulative losses in recent periods. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset that is difficult to overcome when determining that a valuation allowance is not needed against deferred tax assets. The Company's valuation allowances reduced the carrying value of deferred tax assets associated with certain net operating loss and tax credit carryforwards in these tax jurisdictions.

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        A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:

 
  2016   2015   2014  

U.S. federal statutory tax rate

    35.0 %   35.0 %   35.0 %

Increase (decrease) in tax rate resulting from:

                   

U.S. state income taxes, net of federal tax benefit

    1.0     (0.1 )   0.2  

International taxes at lower rates

    (16.8 )   (22.6 )   (19.6 )

Tax benefits from domestic manufacturer's deduction

        (1.0 )   (1.2 )

Research and development credits

    (3.2 )   (2.7 )   (2.8 )

Puerto Rico excise tax

    (2.8 )   (2.4 )   (1.7 )

Reversal of excess tax accruals

    (3.7 )   (2.8 )    

Noncontrolling interest

        0.5     1.8  

Restructuring and acquisition-related items

    1.5     3.0