1. BASIS OF PRESENTATION
The accompanying interim consolidated condensed financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in Edwards Lifesciences Corporation's Annual Report on Form 10-K for the year ended
December 31, 2018
. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.
In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair statement of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued an amendment to the guidance on leases. The amendment improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. The guidance was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach was required upon adoption. Reporting entities could elect to adjust comparative periods and record the cumulative effect adjustment at the beginning of the earliest comparative period, or to not adjust comparative periods and record the cumulative effect adjustment at the effective date.
The Company adopted the new guidance as of the effective date of January 1, 2019 with no adjustments to the comparative period presented in the financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance to not reassess (1) whether any expired or existing contracts are, or contain, leases, (2) the lease classification for expired or existing leases, and (3) initial direct costs for existing leases. The Company implemented internal controls and system solutions to enable the preparation and disclosure of financial information about its leasing arrangements upon adoption.
The adoption of the guidance resulted in the recognition of right-of-use ("ROU") assets and additional lease liabilities for operating leases of
$58.7 million
as of January 1, 2019. The guidance did not have an impact on the Company's consolidated condensed statements of operations. See Note 3 for disclosures related to the Company's leases.
2. OTHER CONSOLIDATED FINANCIAL STATEMENT DETAILS
Composition of Certain Financial Statement Captions
Components of selected captions in the consolidated condensed balance sheets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Inventories
|
|
|
|
Raw materials
|
$
|
120.7
|
|
|
$
|
111.5
|
|
Work in process
|
164.4
|
|
|
144.8
|
|
Finished products
|
339.8
|
|
|
350.7
|
|
|
$
|
624.9
|
|
|
$
|
607.0
|
|
At
June 30, 2019
and
December 31, 2018
,
$128.6 million
and
$106.5 million
, respectively, of the Company's finished products inventories were held on consignment. During the
three months ended June 30,
2019
, the Company recorded a
$46.2 million
charge to "
Cost of Sales
," primarily comprised of the write off of inventory related to strategic decisions regarding its transcatheter aortic valve portfolio, including the decision to discontinue its
CENTERA
program.
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
151.0
|
|
|
$
|
134.0
|
|
Employee compensation and withholdings
|
197.8
|
|
|
226.1
|
|
Taxes payable (Note 14)
|
14.6
|
|
|
31.3
|
|
Property, payroll, and other taxes
|
39.2
|
|
|
39.5
|
|
Research and development accruals
|
55.8
|
|
|
48.9
|
|
Accrued rebates
|
82.5
|
|
|
80.0
|
|
Fair value of derivatives
|
4.6
|
|
|
4.4
|
|
Accrued marketing expenses
|
15.5
|
|
|
22.3
|
|
Litigation and insurance reserves
|
19.0
|
|
|
196.7
|
|
Accrued relocation costs
|
13.0
|
|
|
11.3
|
|
Accrued professional services
|
9.4
|
|
|
11.0
|
|
Accrued realignment reserves
|
17.0
|
|
|
6.8
|
|
Other accrued liabilities
|
53.8
|
|
|
64.3
|
|
|
$
|
673.2
|
|
|
$
|
876.6
|
|
Supplemental Cash Flow Information
(in millions)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
Cash paid during the year for:
|
|
|
|
Income taxes
|
$
|
45.2
|
|
|
$
|
195.1
|
|
Amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
12.7
|
|
|
$
|
—
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
Fair value of shares issued in payment for contingent consideration liabilities
|
$
|
—
|
|
|
$
|
34.3
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
$
|
23.5
|
|
|
$
|
—
|
|
Capital expenditures accruals
|
$
|
21.8
|
|
|
$
|
14.5
|
|
3. LEASES
The Company determines whether a contract is, or contains, a lease at inception. ROU assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. ROU assets also include any lease payments made at or before lease commencement and any initial direct costs incurred, and exclude any lease incentives received.
The Company determines the lease term as the noncancellable period of the lease, and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the balance sheet. Certain of the Company’s leases include variable lease payments that are based on costs incurred or actual usage, or adjusted periodically based on an index or a rate. The Company’s leases do not contain any residual value guarantees.
The Company accounts for the lease and non-lease components as a single lease component for all of its leases except vehicle leases, for which the lease and non-lease components are accounted for separately.
Operating leases are included in “
Operating Lease Right-of-Use Assets
” and “
Operating Lease Liabilities
” on the Company’s consolidated condensed balance sheets.
The Company leases certain office space, manufacturing facilities, land, apartments, warehouses, vehicles, and equipment with remaining lease terms ranging from less than
1 year
to
22 years
, some of which include options to extend or terminate the leases.
Operating lease costs for the
three and six months ended June 30, 2019
were
$7.2 million
and
$13.5 million
, respectively. Short-term and variable lease costs were not material for the
three and six months ended June 30, 2019
.
Supplemental balance sheet information related to operating leases was as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
June 30,
2019
|
Operating lease ROU assets
|
$
|
71.2
|
|
|
|
Operating lease liabilities, current portion
|
$
|
23.8
|
|
Operating lease liabilities, long-term portion
|
50.4
|
|
Total operating lease liabilities
|
$
|
74.2
|
|
Maturities of operating lease liabilities at
June 30, 2019
were as follows (in millions):
|
|
|
|
|
2019
|
$
|
13.2
|
|
2020
|
23.4
|
|
2021
|
15.6
|
|
2022
|
10.5
|
|
2023
|
7.6
|
|
Thereafter
|
10.0
|
|
Total lease payments
|
80.3
|
|
Less: imputed interest
|
(6.1
|
)
|
Total lease liabilities
|
$
|
74.2
|
|
|
|
Weighted-average remaining lease term (in years)
|
4.5
|
|
Weighted-average discount rate
|
3.0
|
%
|
As of
June 30, 2019
, the Company had additional operating lease commitments of
$8.0 million
for office space that have not yet commenced. These leases will commence during
2019
with lease terms of
3
years to
7
years.
Disclosures related to periods prior to adopting the new lease guidance
Certain facilities and equipment are leased under operating leases expiring at various dates. Most of the operating leases contain renewal options. Total expense for all operating leases was
$27.0 million
,
$27.3 million
, and
$22.9 million
for the years
2018
,
2017
, and
2016
, respectively.
Future minimum lease payments (including interest) under non-cancelable operating leases at
December 31, 2018
were as follows (in millions):
|
|
|
|
|
|
Operating
Leases
|
2019
|
$
|
25.6
|
|
2020
|
21.5
|
|
2021
|
13.5
|
|
2022
|
9.9
|
|
2023
|
6.4
|
|
Thereafter
|
14.3
|
|
Total obligations and commitments
|
$
|
91.2
|
|
4. SPECIAL CHARGE (GAIN)
In March 2019, the Company recorded a
$24.0 million
charge related to the acquisition of early-stage transcatheter intellectual property and associated clinical and regulatory experience.
In March 2018, the Company recorded a
$7.1 million
gain related to the curtailment of its defined benefit plan in Switzerland resulting from the closure of its manufacturing plant.
5. INVESTMENTS
Debt Securities
Investments in debt securities at the end of each period were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Held-to-maturity
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
Fair Value
|
Bank time deposits
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
10.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10.9
|
|
|
$
|
56.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56.7
|
|
U.S. government and agency securities
|
80.8
|
|
|
0.6
|
|
|
(0.1
|
)
|
|
81.3
|
|
|
79.7
|
|
|
0.2
|
|
|
(0.7
|
)
|
|
79.2
|
|
Foreign government bonds
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Asset-backed securities
|
80.7
|
|
|
0.5
|
|
|
—
|
|
|
81.2
|
|
|
110.6
|
|
|
0.1
|
|
|
(0.5
|
)
|
|
110.2
|
|
Corporate debt securities
|
417.8
|
|
|
1.8
|
|
|
(0.4
|
)
|
|
419.2
|
|
|
459.8
|
|
|
0.1
|
|
|
(4.3
|
)
|
|
455.6
|
|
Municipal securities
|
2.7
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
Total
|
$
|
594.6
|
|
|
$
|
2.9
|
|
|
$
|
(0.5
|
)
|
|
$
|
597.0
|
|
|
$
|
711.3
|
|
|
$
|
0.4
|
|
|
$
|
(5.5
|
)
|
|
$
|
706.2
|
|
The cost and fair value of investments in debt securities, by contractual maturity, as of
June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Cost
|
|
Fair Value
|
|
(in millions)
|
Due in 1 year or less
|
$
|
207.4
|
|
|
$
|
207.5
|
|
Due after 1 year through 5 years
|
324.0
|
|
|
325.9
|
|
Instruments not due at a single maturity date
|
63.2
|
|
|
63.6
|
|
|
$
|
594.6
|
|
|
$
|
597.0
|
|
Actual maturities may differ from the contractual maturities due to call or prepayment rights.
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of
June 30, 2019
and
December 31, 2018
, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
U.S. government and agency securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
29.7
|
|
|
$
|
(0.1
|
)
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
31.0
|
|
|
—
|
|
|
31.0
|
|
|
—
|
|
Corporate debt securities
|
47.2
|
|
|
(0.1
|
)
|
|
129.1
|
|
|
(0.3
|
)
|
|
176.3
|
|
|
(0.4
|
)
|
|
$
|
47.2
|
|
|
$
|
(0.1
|
)
|
|
$
|
189.8
|
|
|
$
|
(0.4
|
)
|
|
$
|
237.0
|
|
|
$
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
U.S. government and agency securities
|
$
|
0.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
56.5
|
|
|
$
|
(0.6
|
)
|
|
$
|
57.2
|
|
|
$
|
(0.7
|
)
|
Asset-backed securities
|
4.0
|
|
|
0.1
|
|
|
61.3
|
|
|
(0.6
|
)
|
|
65.3
|
|
|
(0.5
|
)
|
Corporate debt securities
|
177.4
|
|
|
(1.1
|
)
|
|
203.7
|
|
|
(3.2
|
)
|
|
381.1
|
|
|
(4.3
|
)
|
|
$
|
182.1
|
|
|
$
|
(1.1
|
)
|
|
$
|
321.5
|
|
|
$
|
(4.4
|
)
|
|
$
|
503.6
|
|
|
$
|
(5.5
|
)
|
Investments in Unconsolidated Affiliates
The Company has a number of equity investments in privately and publicly held companies. Investments in these unconsolidated affiliates are recorded in "
Long-term Investments
" on the consolidated condensed balance sheets, and are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(in millions)
|
Equity method investments
|
|
|
|
|
|
Cost
|
$
|
10.3
|
|
|
$
|
9.1
|
|
Equity in losses
|
(5.0
|
)
|
|
(4.7
|
)
|
Carrying value of equity method investments
|
5.3
|
|
|
4.4
|
|
Equity securities
|
|
|
|
|
|
Carrying value of non-marketable equity securities
|
18.1
|
|
|
18.1
|
|
Total investments in unconsolidated affiliates
|
$
|
23.4
|
|
|
$
|
22.5
|
|
Non-marketable equity securities consist of investments in privately held companies without readily determinable fair values, and are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The Company did not record any upward or downward adjustments during the
six months ended June 30, 2019
. As of
June 30, 2019
, the Company had recorded accumulated upward adjustments of
$1.7 million
based on observable price changes, and accumulated downward adjustments of
$1.9 million
due to impairment and observable price changes.
During the
three and six months ended June 30, 2019
, the gross realized gains or losses from sales of available-for-sale investments were not material.
6. ACQUISITION
On February 11, 2019, the Company entered into an agreement and plan of merger to acquire all the outstanding shares of CAS Medical Systems, Inc. ("CASMED") for an aggregate cash purchase price of
$2.45
per share of common stock, or an equity value of approximately
$100 million
. The transaction closed on April 18, 2019, and the cash purchase price was
$100.8 million
.
Acquisition-related costs of
$2.0 million
were recorded in “
Selling, General, and Administrative Expenses
” during the
six months ended June 30, 2019
.
CASMED is a medical technology company dedicated to non-invasive monitoring of tissue oxygenation in the brain. The Company plans to integrate the acquired technology platform into its hemodynamic monitoring platform. The acquisition was accounted for as a business combination. Tangible and intangible assets acquired were recorded based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of net assets acquired was recorded to goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed (in millions):
|
|
|
|
|
|
|
Current assets
|
|
$
|
6.1
|
|
|
Property and equipment, net
|
|
1.3
|
|
|
Goodwill
|
|
64.4
|
|
|
Developed technology
|
|
35.9
|
|
|
Customer relationships
|
|
8.8
|
|
|
Deferred tax assets
|
|
2.2
|
|
|
Liabilities assumed
|
|
(17.9
|
)
|
|
Total purchase price
|
|
100.8
|
|
|
Less: cash acquired
|
|
(0.6
|
)
|
|
Total purchase price, net of cash acquired
|
|
$
|
100.2
|
|
|
Goodwill includes expected synergies and other benefits the Company believes will result from the acquisition. Goodwill was assigned to the Company’s United States segment and is not deductible for tax purposes. Developed technology assets are being amortized over a weighted-average useful life of
14
years. Customer relationship assets are being amortized over a weighted-average useful life of
10
years.
The results of operations for CASMED have been included in the accompanying consolidated financial statements from the date of acquisition. Pro forma results have not been presented as the results of CASMED are not material in relation to the consolidated financial statements of the Company.
7. FAIR VALUE MEASUREMENTS
The consolidated condensed financial statements include financial instruments for which the fair market value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, accounts and other receivables, investments, accounts payable, certain accrued liabilities, and borrowings under a revolving credit agreement. These financial instruments are held at cost, which generally approximates fair value due to their short-term nature.
Financial instruments also include notes payable. As of
June 30, 2019
, the fair value of the notes payable, based on Level 2 inputs, was
$650.1 million
.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company prioritizes the inputs used to determine fair values in one of the following three categories:
Level 1—Quoted market prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3—Unobservable inputs that are not corroborated by market data.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company's financial instruments which are measured at fair value on a recurring basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
0.1
|
|
|
$
|
18.7
|
|
|
$
|
—
|
|
|
$
|
18.8
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
—
|
|
|
419.2
|
|
|
—
|
|
|
419.2
|
|
Asset-backed securities
|
—
|
|
|
81.2
|
|
|
—
|
|
|
81.2
|
|
U.S. government and agency securities
|
45.3
|
|
|
36.0
|
|
|
—
|
|
|
81.3
|
|
Foreign government bonds
|
—
|
|
|
1.7
|
|
|
—
|
|
|
1.7
|
|
Commercial paper
|
—
|
|
|
10.9
|
|
|
—
|
|
|
10.9
|
|
Municipal securities
|
—
|
|
|
2.7
|
|
|
—
|
|
|
2.7
|
|
Investments held for deferred compensation plans
|
79.7
|
|
|
—
|
|
|
—
|
|
|
79.7
|
|
Derivatives
|
—
|
|
|
18.6
|
|
|
—
|
|
|
18.6
|
|
|
$
|
125.1
|
|
|
$
|
589.0
|
|
|
$
|
—
|
|
|
$
|
714.1
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
4.6
|
|
Deferred compensation plans
|
80.0
|
|
|
—
|
|
|
—
|
|
|
80.0
|
|
Contingent consideration liabilities
|
—
|
|
|
—
|
|
|
193.3
|
|
|
193.3
|
|
|
$
|
80.0
|
|
|
$
|
4.6
|
|
|
$
|
193.3
|
|
|
$
|
277.9
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
—
|
|
|
$
|
11.8
|
|
|
$
|
—
|
|
|
$
|
11.8
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
Corporate debt securities
|
—
|
|
|
455.6
|
|
|
—
|
|
|
455.6
|
|
Asset-backed securities
|
—
|
|
|
110.2
|
|
|
—
|
|
|
110.2
|
|
U.S. government and agency securities
|
19.6
|
|
|
59.6
|
|
|
—
|
|
|
79.2
|
|
Foreign government bonds
|
—
|
|
|
1.7
|
|
|
—
|
|
|
1.7
|
|
Commercial paper
|
—
|
|
|
56.7
|
|
|
—
|
|
|
56.7
|
|
Municipal securities
|
—
|
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
Investments held for deferred compensation plans
|
67.6
|
|
|
—
|
|
|
—
|
|
|
67.6
|
|
Derivatives
|
—
|
|
|
29.9
|
|
|
—
|
|
|
29.9
|
|
|
$
|
87.2
|
|
|
$
|
728.3
|
|
|
$
|
—
|
|
|
$
|
815.5
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
5.2
|
|
|
$
|
—
|
|
|
$
|
5.2
|
|
Deferred compensation plans
|
68.5
|
|
|
—
|
|
|
—
|
|
|
68.5
|
|
Contingent consideration liabilities
|
|
|
|
—
|
|
|
178.6
|
|
|
178.6
|
|
|
$
|
68.5
|
|
|
$
|
5.2
|
|
|
$
|
178.6
|
|
|
$
|
252.3
|
|
The following table summarizes the changes in fair value of the contingent consideration liabilities for the
six months ended June 30, 2019
(in millions):
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
178.6
|
|
Changes in fair value
|
|
14.7
|
|
Balance at June 30, 2019
|
|
$
|
193.3
|
|
Cash Equivalents and Available-for-sale Investments
The Company estimates the fair values of its money market funds based on quoted prices in active markets for identical assets. The Company estimates the fair values of its time deposits, commercial paper, U.S. and foreign government and agency securities, municipal securities, asset-backed securities, and corporate debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades and broker-dealer quotes on the same or similar securities, benchmark yields, credit spreads, prepayment and default projections based on historical data, and other observable inputs. The Company independently reviews and validates the pricing received from the third-party pricing service by comparing the prices to prices reported by a secondary pricing source. The Company’s validation procedures have not resulted in an adjustment to the pricing received from the pricing service.
Deferred Compensation Plans
The Company holds investments in trading securities related to its deferred compensation plans. The investments are in a variety of stock and bond mutual funds. The fair values of these investments and the corresponding liabilities are based on quoted market prices.
Derivative Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and cross currency swap contracts to manage foreign currency exposures. All derivatives contracts are recognized on the balance sheet at their fair value. The fair value of the derivative financial instruments was estimated based on quoted market foreign exchange rates and market discount rates. Judgment was employed in interpreting market data to develop estimates of fair value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
Contingent Consideration Liabilities
Certain of the Company's acquisitions involve contingent consideration arrangements. Payment of additional consideration is contingent upon the acquired company reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. These contingent consideration liabilities are measured at estimated fair value using either a probability weighted discounted cash flow analysis or a Monte Carlo simulation model, both of which consider significant unobservable inputs. These inputs include (1) the discount rate used to present value the projected cash flows (ranging from
2.2%
to
2.8%
), (2) the probability of milestone achievement (ranging from
0.0%
to
98.2%
), (3) the projected payment dates (ranging from 2021 to 2025), and (4) the volatility of future revenue (
45.0%
). The use of different assumptions could have a material effect on the estimated fair value amounts.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage interest rate and foreign currency risks, as summarized below. It is the Company's policy not to enter into derivative financial instruments for speculative purposes. Notional amounts are stated in United States dollar equivalents at spot exchange rates at the respective dates.
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(in millions)
|
Foreign currency forward exchange contracts
|
$
|
1,282.4
|
|
|
$
|
1,378.2
|
|
Cross currency swap contracts
|
300.0
|
|
|
300.0
|
|
Derivative financial instruments involve credit risk in the event the counterparty should default. It is the Company's policy to execute such instruments with global financial institutions that the Company believes to be creditworthy. The Company diversifies its derivative financial instruments among counterparties to minimize exposure to any one of these entities. The Company also uses International Swap Dealers Association master-netting agreements. The master-netting agreements provide for the net settlement of all contracts through a single payment in a single currency in the event of default, as defined by the agreements.
The Company uses foreign currency forward exchange contracts, cross currency swap contracts, and foreign currency denominated debt to manage its exposure to changes in currency exchange rates from (a) future cash flows associated with intercompany transactions and certain local currency expenses expected to occur within the next
13 months
(designated as cash flow hedges), (b) its net investment in certain foreign subsidiaries (designated as net investment hedges) and (c) foreign currency denominated assets or liabilities (designated as fair value hedges). The Company also uses foreign currency forward exchange contracts that are not designated as hedging instruments to offset the transaction gains and losses associated with certain assets and liabilities denominated in currencies other than their functional currencies (resulting principally from intercompany and local currency transactions).
All derivative financial instruments are recognized at fair value in the consolidated condensed balance sheets. For each derivative instrument that is designated as a fair value hedge, the gain or loss on the derivative included in the assessment of hedge effectiveness is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. The Company reports in "
Accumulated Other Comprehensive Loss
" the gain or loss on derivative financial instruments that are designated, and that qualify, as cash flow hedges. The Company reclassifies these gains and losses into earnings in the same line item and in the same period in which the underlying hedged transactions affect earnings. Changes in the fair value of net investment hedges are reported in "
Accumulated Other Comprehensive Loss
" as a part of the cumulative translation adjustment and would be reclassified into earnings if the underlying net investment is sold or substantially liquidated. The portion of the change in fair value related to components excluded from the hedge effectiveness assessment are amortized into earnings over the life of the derivative. The gains and losses on derivative financial instruments for which the Company does not elect hedge accounting treatment are recognized in the consolidated statements of operations in each period based upon the change in the fair value of the derivative financial instrument. Cash flows from net investment hedges are reported as investing activities in the consolidated statements of cash flows, and cash flows from all other derivative financial instruments are reported as operating activities.
The following table presents the location and fair value amounts of derivative instruments reported in the consolidated condensed balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
Derivatives designated as hedging instruments
|
|
Balance Sheet
Location
|
|
June 30, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
$
|
15.1
|
|
|
$
|
29.1
|
|
Foreign currency contracts
|
|
Other assets
|
|
$
|
0.6
|
|
|
$
|
—
|
|
Cross currency swap contracts
|
|
Other assets
|
|
$
|
2.9
|
|
|
$
|
0.8
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Accounts payable and accrued liabilities
|
|
$
|
4.6
|
|
|
$
|
4.4
|
|
Foreign currency contracts
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
0.8
|
|
The following table presents the effect of master-netting agreements and rights of offset on the consolidated condensed balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts
Not Offset in
the Consolidated
Balance Sheet
|
|
|
|
|
|
Gross Amounts
Offset in the
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
Net Amounts
Presented in the
Consolidated
Balance Sheet
|
|
|
June 30, 2019
|
Gross
Amounts
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
Net
Amount
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
15.7
|
|
|
$
|
—
|
|
|
$
|
15.7
|
|
|
$
|
(3.3
|
)
|
|
$
|
—
|
|
|
$
|
12.4
|
|
Cross currency swap contracts
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
4.6
|
|
|
$
|
(3.3
|
)
|
|
$
|
—
|
|
|
$
|
1.3
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
29.1
|
|
|
$
|
—
|
|
|
$
|
29.1
|
|
|
$
|
(3.6
|
)
|
|
$
|
—
|
|
|
$
|
25.5
|
|
Cross currency swap contracts
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
5.2
|
|
|
$
|
—
|
|
|
$
|
5.2
|
|
|
$
|
(3.6
|
)
|
|
$
|
—
|
|
|
$
|
1.6
|
|
The following tables present the effect of derivative and non-derivative hedging instruments on the consolidated condensed statements of operations and consolidated condensed statements of comprehensive income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
|
|
|
|
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
|
|
|
Three Months Ended
June 30,
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
(2.1
|
)
|
|
$
|
31.5
|
|
|
Cost of sales
|
|
$
|
11.3
|
|
|
$
|
(12.7
|
)
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
0.5
|
|
|
$
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
|
|
|
|
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
|
|
|
Six Months Ended
June 30,
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
10.8
|
|
|
$
|
16.1
|
|
|
Cost of sales
|
|
$
|
18.9
|
|
|
$
|
(14.2
|
)
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
0.8
|
|
|
$
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on Derivative (Amount Excluded from
Effectiveness Testing)
|
|
|
Three Months Ended
June 30,
|
|
Location of Gain or
(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net investment hedges
|
|
|
|
|
|
|
|
|
|
|
Cross currency swap contracts
|
|
$
|
(3.2
|
)
|
|
$
|
(10.0
|
)
|
|
Interest income, net
|
|
$
|
1.7
|
|
|
$
|
0.2
|
|
Foreign currency denominated debt
|
|
$
|
—
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on Derivative (Amount Excluded from
Effectiveness Testing)
|
|
|
Six Months Ended
June 30,
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net investment hedges
|
|
|
|
|
|
|
|
|
|
|
Cross currency swap contracts
|
|
$
|
2.1
|
|
|
$
|
(10.0
|
)
|
|
Interest income, net
|
|
$
|
3.3
|
|
|
$
|
0.2
|
|
Foreign currency denominated debt
|
|
$
|
—
|
|
|
$
|
6.8
|
|
|
|
|
|
|
|
In June 2018, the Company repaid and dedesignated its
€370.0 million
of outstanding long-term debt which had been previously designated as a net investment hedge, and concurrently entered into cross currency swap contracts, which were designated as a net investment hedge. The cross currency swaps have an expiration date of June 15, 2028. At maturity of the cross currency swap contracts, the Company will deliver the notional amount of
€257.2 million
and will receive
$300.0 million
from the counterparties. The Company will receive semi-annual interest payments from the counterparties based on a fixed interest rate until maturity of the agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Fair value hedges
|
|
2019
|
|
2018
|
Foreign currency contracts
|
|
Other (income) expense, net
|
|
$
|
(3.3
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Fair value hedges
|
|
2019
|
|
2018
|
Foreign currency contracts
|
|
Other (income) expense, net
|
|
$
|
(4.2
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Derivatives not designated as hedging instruments
|
|
2019
|
|
2018
|
Foreign currency contracts
|
|
Other (income) expense, net
|
|
$
|
—
|
|
|
$
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Derivatives not designated as hedging instruments
|
|
2019
|
|
2018
|
Foreign currency contracts
|
|
Other (income) expense, net
|
|
$
|
(1.5
|
)
|
|
$
|
1.4
|
|
The following table presents the effect of cash flow hedge accounting on the consolidated condensed statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
Other (Income)Expense, net
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
Other (Income) Expense, net
|
|
|
|
|
|
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of fair value or cash flow hedges are recorded
|
$
|
(304.0
|
)
|
|
$
|
(308.5
|
)
|
|
$
|
1.4
|
|
|
$
|
(535.8
|
)
|
|
$
|
(588.8
|
)
|
|
$
|
3.2
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
—
|
|
|
—
|
|
|
4.5
|
|
|
—
|
|
|
—
|
|
|
6.3
|
|
Derivatives designated as hedging instruments
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
—
|
|
|
(6.3
|
)
|
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach
|
—
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
|
2.1
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated OCI into income
|
$
|
11.3
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
18.9
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
Three Months Ended June 30, 2018
|
Six Months Ended June 30, 2018
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
|
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of fair value or cash flow hedges are recorded
|
$
|
(246.2
|
)
|
|
$
|
(274.9
|
)
|
|
|
$
|
(479.8
|
)
|
|
$
|
(530.9
|
)
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated OCI into income
|
$
|
(12.7
|
)
|
|
$
|
(1.0
|
)
|
|
|
$
|
(14.2
|
)
|
|
$
|
(2.1
|
)
|
|
The Company expects that during the next twelve months it will reclassify to earnings a
$13.2 million
gain currently recorded in "
Accumulated Other Comprehensive Loss
."
9. STOCK-BASED COMPENSATION
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the
three and six months ended June 30, 2019
and
2018
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of sales
|
$
|
3.9
|
|
|
$
|
2.8
|
|
|
$
|
7.9
|
|
|
$
|
5.8
|
|
Selling, general, and administrative expenses
|
14.3
|
|
|
12.7
|
|
|
27.0
|
|
|
24.5
|
|
Research and development expenses
|
4.1
|
|
|
3.7
|
|
|
8.2
|
|
|
7.3
|
|
Total stock-based compensation expense
|
$
|
22.3
|
|
|
$
|
19.2
|
|
|
$
|
43.1
|
|
|
$
|
37.6
|
|
At
June 30, 2019
, the total remaining compensation cost related to nonvested stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and employee stock purchase plan ("ESPP") subscription awards amounted to
$158.3 million
, which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of
32 months
.
During the
six months ended June 30, 2019
, the Company granted
0.7 million
stock options at a weighted-average exercise price of
$177.71
and
0.2 million
shares of restricted stock units at a weighted-average grant-date fair value of
$177.38
. The Company also granted
33 thousand
shares of market-based restricted stock units at a weighted-average grant-date fair value of
$193.95
. The market-based restricted stock units vest based on a combination of certain service and market conditions. The actual number of shares issued will be determined based on the Company's total shareholder return relative to a selected industry peer group over a three-year performance period, and may range from
0%
to
175%
of the targeted number of shares granted.
Fair Value Disclosures
The fair value of the market-based restricted stock units was determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The weighted- average assumptions used to determine the fair value of the market-based restricted stock units granted during the six months ended June 30, 2019 and 2018 included a risk-free interest rate of
2.2%
and
2.7%
, respectively, and an expected volatility rate of
29.4%
and
29.7%
, respectively.
The following table includes the weighted-average grant-date fair values of stock options granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Average risk-free interest rate
|
2.3
|
%
|
|
2.9
|
%
|
|
2.3
|
%
|
|
2.9
|
%
|
Expected dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
29.7
|
%
|
|
29.0
|
%
|
|
29.6
|
%
|
|
29.1
|
%
|
Expected term (years)
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Fair value, per option
|
$
|
54.03
|
|
|
$
|
42.12
|
|
|
$
|
54.03
|
|
|
$
|
42.14
|
|
The following table includes the weighted-average grant-date fair values for ESPP subscriptions granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Average risk-free interest rate
|
2.4
|
%
|
|
1.9
|
%
|
|
2.4
|
%
|
|
1.6
|
%
|
Expected dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
31.9
|
%
|
|
32.8
|
%
|
|
32.5
|
%
|
|
32.6
|
%
|
Expected term (years)
|
0.6
|
|
|
0.6
|
|
|
0.6
|
|
|
0.6
|
|
Fair value, per share
|
$
|
46.73
|
|
|
$
|
36.94
|
|
|
$
|
48.43
|
|
|
$
|
35.49
|
|
10. ACCELERATED SHARE REPURCHASE
During 2019 and 2018, the Company entered into accelerated share repurchase ("ASR") agreements providing for the repurchase of the Company's common stock based on the volume-weighted average price ("VWAP") of the Company's common stock during the term of the agreements, less a discount.
The following table summarizes the terms of the ASR agreements (dollars and shares in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Delivery
|
|
Final Settlement
|
Agreement Date
|
|
Amount
Paid
|
|
Shares
Received
|
|
Price per
Share (a)
|
|
Value of
Shares as %
of Contract
Value
|
|
Settlement
Date
|
|
Total Shares
Received
|
|
Average Price
per Share (a)
|
April 2018
|
|
$
|
400.0
|
|
|
2.5
|
|
|
$
|
127.36
|
|
|
80
|
%
|
|
July 2018
|
|
2.8
|
|
|
$
|
142.37
|
|
May 2019
|
|
$
|
150.0
|
|
|
0.7
|
|
|
$
|
178.66
|
|
|
80
|
%
|
|
May 2019
|
|
0.8
|
|
|
$
|
178.42
|
|
May 2019
|
|
$
|
100.0
|
|
|
0.5
|
|
|
$
|
170.02
|
|
|
80
|
%
|
|
June 2019
|
|
0.6
|
|
|
$
|
178.46
|
|
The ASR agreements were accounted for as two separate transactions: (a) the value of the initial delivery of shares was recorded as shares of common stock acquired in a treasury stock transaction on the acquisition date and (b) the remaining amount of the purchase price paid was recorded as a forward contract indexed to the Company's own common stock and was recorded in "
Additional Paid-in Capital
" on the consolidated balance sheets. The initial delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The Company determined that the forward contract indexed to the Company's common stock met all the applicable criteria for equity classification and, therefore, was not accounted for as a derivative instrument.
11. COMMITMENTS AND CONTINGENCIES
On January 28, 2019, Abbott Cardiovascular Systems, Inc. and Evalve, Inc., both subsidiaries of Abbott Laboratories (collectively "Abbott") filed a lawsuit against Edwards Lifesciences Corporation and Edwards Lifesciences, LLC, (“Edwards”) in the Federal District Court in the District of Delaware alleging that the Edwards
PASCAL
heart valve repair system infringes certain claims of Abbott’s U.S. Patent Nos. 7,288,097, 6,752,813, 7,563,267, 7,736,388, and 8,057,493, seeking unspecified monetary damages and preliminary and permanent injunctive relief. Thereafter, Abbott sought a preliminary injunction and a
temporary restraining order and the court denied these requests. Trial is scheduled for May 4, 2020.
On January 28, 2019, Abbott and its Abbott Medical UK Limited subsidiary (inclusively and collectively also "Abbott”) filed a lawsuit in the United Kingdom in the High Court of Justice, Chancery Division, Patents Court, against Edwards Lifesciences Limited, alleging that the Edwards
PASCAL
heart valve repair system infringes certain claims of Abbott’s UK national patents arising from EP 1 624 810 B1 (the " ‘810 patent") and EP 1 408 850 B1 (the “ ‘850 patent”). Abbott has requested a preliminary injunction and the High Court denied this request. The trial is scheduled to begin between December 9-11, 2019.
On January 28, 2019, Abbott Medical GmbH (inclusively and collectively also "Abbott”) filed a lawsuit in the District Court in Düsseldorf, Germany against Edwards Lifesciences Corporation and its German subsidiary, Edwards Lifesciences Services GmbH, alleging that the Edwards
PASCAL
heart valve repair system infringes certain claims of Abbott’s German national patents arising from the ‘810 and ‘850 European patents. The District Court has scheduled trial for July 14, 2020. On
March 15, 2019, Edwards filed a lawsuit in the German Patent Court in Munich, Germany, alleging that Abbott’s ‘850 patent is invalid. The Abbott ‘810 patent is already subject to opposition proceedings at the European Patent Office.
On January 28, 2019, Abbott and Abbott Medical AG (inclusively and collectively also "Abbott”) filed a lawsuit in the Federal Patent Court in St. Gallen, Switzerland against Edwards Lifesciences AG, Edwards Lifesciences Technology Sàrl, Edwards Lifesciences IPRM AG, and Mitral Valve Technologies Sàrl, alleging that the Edwards
PASCAL
heart valve repair system infringes Abbott’s Swiss national patents arising from the same European patents. Abbott has requested a preliminary injunction, the court has held a hearing on this request, and a decision will be forthcoming.
On January 28, 2019, Abbott Cardiovascular System Inc., Abbott Medical Italia S.p.A and Evalve Inc. (inclusively and collectively also "Abbott”) filed a lawsuit in the Civil Court of Milan, Italy against Edwards Lifesciences Corporation, Edwards Lifesciences LLC, and Edwards Lifesciences Italia SpA, alleging that the Edwards
PASCAL
heart valve repair system infringes Abbott’s Italian national patent arising from its ‘850 European patent. The lawsuit seeks a preliminary injunction. The Company intends to defend itself vigorously in all of the above
matters.
On February 22, 2019, Edwards Lifesciences Corporation and Edwards Lifesciences, LLC filed a lawsuit against Abbott Cardiovascular Systems, Inc. in the Federal District Court in the Central District of California alleging that Abbott’s
MITRACLIP
device infringes Edwards’ U.S. Patent Nos. 6,719,767, 7,011,669, and 8,062,313 related to heart implant technology and seeking unspecified monetary damages. A trial date has not yet been scheduled.
Because the ultimate outcome of the above matters involve judgments, estimates, and inherent uncertainties, and cannot be predicted with certainty, charges related to such matters could have a material adverse impact on Edwards Lifesciences' financial results.
In addition, Edwards Lifesciences is or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits related primarily to products and services currently or formerly manufactured or performed, as applicable, by Edwards Lifesciences (the "Other Lawsuits"). The Other Lawsuits raise difficult and complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Management does not believe that any charge relating to the Other Lawsuits would have a material adverse effect on Edwards Lifesciences’ overall financial results. However, the resolution of
one
or more of the Other Lawsuits in any reporting period, could have a material adverse impact on Edwards Lifesciences' financial results for that period. The Company is not able to estimate the amount or range of any loss for legal contingencies for which there is no reserve or additional loss for matters already reserved.
Edwards Lifesciences is subject to various environmental laws and regulations both within and outside of the United States. The operations of Edwards Lifesciences, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on Edwards Lifesciences' financial results.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table is a summary of activity for each component of "
Accumulated Other Comprehensive Loss
" for the
six months ended June 30, 2019
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized Gain on Hedges
|
|
Unrealized (Loss) Gain on Available-for-sale Investments
|
|
Unrealized
Pension
Costs
|
|
Total
Accumulated
Other
Comprehensive
Loss
|
December 31, 2018
|
$
|
(143.6
|
)
|
|
$
|
23.6
|
|
|
$
|
(5.0
|
)
|
|
$
|
(13.5
|
)
|
|
$
|
(138.5
|
)
|
Other comprehensive gain (loss) before reclassifications
|
0.2
|
|
|
11.6
|
|
|
7.2
|
|
|
(0.1
|
)
|
|
18.9
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(3.3
|
)
|
|
(15.5
|
)
|
|
0.3
|
|
|
—
|
|
|
(18.5
|
)
|
Deferred income tax (expense) benefit
|
(0.5
|
)
|
|
2.1
|
|
|
(1.7
|
)
|
|
—
|
|
|
(0.1
|
)
|
June 30, 2019
|
$
|
(147.2
|
)
|
|
$
|
21.8
|
|
|
$
|
0.8
|
|
|
$
|
(13.6
|
)
|
|
$
|
(138.2
|
)
|
The following table provides information about amounts reclassified from "
Accumulated Other Comprehensive Loss
" (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
Affected Line on Consolidated Condensed
Statements of Operations
|
Details about Accumulated Other
Comprehensive Loss Components
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Foreign currency translation adjustments
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
—
|
|
|
Other (income) expense, net
|
|
(0.4
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
$
|
—
|
|
|
Net of tax
|
Gain on hedges
|
$
|
11.3
|
|
|
$
|
(12.7
|
)
|
|
$
|
18.9
|
|
|
$
|
(14.2
|
)
|
|
Cost of sales
|
|
0.5
|
|
|
(1.0
|
)
|
|
0.8
|
|
|
(2.1
|
)
|
|
Selling, general, and administrative expenses
|
|
(3.3
|
)
|
|
—
|
|
|
(4.2
|
)
|
|
—
|
|
|
Other (income) expense, net
|
|
11.8
|
|
|
(13.7
|
)
|
|
15.5
|
|
|
(16.3
|
)
|
|
Total before tax
|
|
(2.8
|
)
|
|
3.3
|
|
|
(4.8
|
)
|
|
4.0
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
9.0
|
|
|
$
|
(10.4
|
)
|
|
$
|
10.7
|
|
|
$
|
(12.3
|
)
|
|
Net of tax
|
(Loss) gain on available-for-sale investments
|
$
|
(0.3
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(2.3
|
)
|
|
Other (income) expense, net
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.2
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
(0.3
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(2.1
|
)
|
|
Net of tax
|
Unrealized pension costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.6
|
)
|
|
Other (income) expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.5
|
)
|
|
|
13. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during a period. Diluted earnings per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include employee equity share options, nonvested shares, and similar equity instruments granted by the Company. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.
The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
242.3
|
|
|
$
|
282.7
|
|
|
$
|
492.0
|
|
|
$
|
489.3
|
|
Weighted-average shares outstanding
|
208.1
|
|
|
209.5
|
|
|
208.0
|
|
|
209.8
|
|
Basic earnings per share
|
$
|
1.16
|
|
|
$
|
1.35
|
|
|
$
|
2.37
|
|
|
$
|
2.33
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
242.3
|
|
|
$
|
282.7
|
|
|
$
|
492.0
|
|
|
$
|
489.3
|
|
Weighted-average shares outstanding
|
208.1
|
|
|
209.5
|
|
|
208.0
|
|
|
209.8
|
|
Dilutive effect of stock plans
|
4.0
|
|
|
4.5
|
|
|
4.1
|
|
|
4.7
|
|
Dilutive weighted-average shares outstanding
|
212.1
|
|
|
214.0
|
|
|
212.1
|
|
|
214.5
|
|
Diluted earnings per share
|
$
|
1.14
|
|
|
$
|
1.32
|
|
|
$
|
2.32
|
|
|
$
|
2.28
|
|
Stock options, restricted stock units, and market-based restricted stock units to purchase
1.0 million
and
1.2 million
shares for the
three months ended June 30,
2019
and
2018
, respectively, and
0.6 million
and
1.2 million
shares for the
six months
ended June 30, 2019
and
2018
, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
14. INCOME TAXES
The Company's effective income tax rates were
10.7%
and
(12.6)%
for the
three months ended June 30,
2019
and
2018
, respectively, and
10.4%
and
4.9%
for the
six months ended June 30, 2019
and
2018
, respectively. The effective rates for the
six months ended June 30, 2019
and
2018
were lower than the federal statutory rate of
21%
primarily due to (1) the tax benefit from employee share-based compensation and (2) foreign earnings taxed at lower rates. The effective rate
for the
six months ended June 30, 2018
included an expense of
$15.8 million
related to adjustment of the estimated provisional amounts recorded at December 31, 2017 in accordance with SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. In addition, the effective rate for the
three and six months ended June 30, 2018
included a
$36.1 million
benefit from the settlement of tax audits, and a tax benefit of
$9.1 million
from a tax reform related restructuring. The effective rates include a tax benefit from employee share-based compensation of
$17.6 million
and
$17.3 million
for the
three months ended June 30,
2019
and
2018
, respectively, and
$36.6 million
and
$31.4 million
for the
six months ended June 30, 2019
and
2018
, respectively.
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.
As of
June 30, 2019
and
December 31, 2018
, the liability for income taxes associated with uncertain tax positions was
$172.9 million
and
$150.7 million
, respectively. The Company estimates that these liabilities would be reduced by
$49.8 million
and
$42.7 million
, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amounts of
$123.1 million
and
$108.0 million
, respectively, if not required, would favorably affect the Company's effective tax rate.
At
June 30, 2019
, all material state, local, and foreign income tax matters have been concluded for years through 2008. The Internal Revenue Service ("IRS") began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and its examination of the 2017 tax year during the first quarter of 2019.
During the second quarter of 2019, the Dominican Republic tax authorities inquired as to withholding tax matters related to branch remittances in 2016 and certain intercompany transactions payments for 2016 through 2018. At this time, the Company does not believe these matters are subject to withholding tax, however, the Company is continuing to interact with the relevant authorities and the Company's analysis is on-going.
During 2018, the Company executed an Advance Pricing Agreement between the United States and Switzerland governments for tax years 2009 through 2020 covering various transfer pricing matters. Certain intercompany transactions covering tax years 2015 through 2018 were not resolved and those related tax positions remain uncertain. These transfer pricing matters may be significant to the Company's consolidated condensed financial statements.
15. SEGMENT INFORMATION
Edwards Lifesciences conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan, and Rest of World. All regions sell products that are used to treat advanced cardiovascular disease.
The Company's geographic segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer). The Company evaluates the performance of its geographic segments based on net sales and income before provision for income taxes ("pre-tax income"). The accounting policies of the segments are substantially the same as those described in Note 2 of the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended
December 31, 2018
. Segment net sales and segment pre-tax income are based on internally derived standard foreign exchange rates, which may differ from year to year, and do not include inter-segment profits. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographical distribution that would occur if the segments were not interdependent. Net sales by geographic area are based on the location of the customer.
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include net interest expense, global marketing expenses, corporate research and development expenses, manufacturing variances, corporate headquarters costs, special gains and charges, stock-based compensation, foreign currency hedging activities, certain litigation costs, changes in the fair value of contingent consideration liabilities, and most of the Company's amortization expense. Although most of the Company's depreciation expense is included in segment pre-tax income, due to the Company's methodology for cost build-up, it is impractical to determine the amount of depreciation expense included in each segment, and, therefore, a portion is maintained at the corporate level. The Company neither discretely allocates assets to its operating segments, nor evaluates the operating segments using discrete asset information.
The table below presents information about Edwards Lifesciences' reportable segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Segment Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
624.9
|
|
|
$
|
512.2
|
|
|
$
|
1,187.7
|
|
|
$
|
991.7
|
|
Europe
|
237.2
|
|
|
211.2
|
|
|
464.5
|
|
|
416.5
|
|
Japan
|
113.7
|
|
|
101.9
|
|
|
212.9
|
|
|
193.0
|
|
Rest of World
|
107.7
|
|
|
101.7
|
|
|
204.5
|
|
|
193.4
|
|
Total segment net sales
|
$
|
1,083.5
|
|
|
$
|
927.0
|
|
|
$
|
2,069.6
|
|
|
$
|
1,794.6
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
427.6
|
|
|
$
|
343.7
|
|
|
$
|
810.9
|
|
|
$
|
657.5
|
|
Europe
|
122.3
|
|
|
101.7
|
|
|
241.7
|
|
|
204.7
|
|
Japan
|
71.1
|
|
|
62.0
|
|
|
132.1
|
|
|
116.8
|
|
Rest of World
|
32.3
|
|
|
32.3
|
|
|
63.1
|
|
|
61.3
|
|
Total segment operating income
|
$
|
653.3
|
|
|
$
|
539.7
|
|
|
$
|
1,247.8
|
|
|
$
|
1,040.3
|
|
The table below presents reconciliations of segment net sales to consolidated net sales and segment operating income to consolidated pre-tax income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net Sales Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
$
|
1,083.5
|
|
|
$
|
927.0
|
|
|
$
|
2,069.6
|
|
|
$
|
1,794.6
|
|
Foreign currency
|
3.4
|
|
|
16.7
|
|
|
10.3
|
|
|
43.9
|
|
Consolidated net sales
|
$
|
1,086.9
|
|
|
$
|
943.7
|
|
|
$
|
2,079.9
|
|
|
$
|
1,838.5
|
|
Pre-tax Income Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
653.3
|
|
|
$
|
539.7
|
|
|
$
|
1,247.8
|
|
|
$
|
1,040.3
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate items
|
(389.1
|
)
|
|
(266.7
|
)
|
|
(688.9
|
)
|
|
(511.0
|
)
|
Special charge (Note 4)
|
—
|
|
|
—
|
|
|
(24.0
|
)
|
|
—
|
|
Intellectual property litigation expenses
|
(7.0
|
)
|
|
(5.5
|
)
|
|
(11.6
|
)
|
|
(11.2
|
)
|
Change in fair value of contingent consideration liabilities, net
|
(8.0
|
)
|
|
(10.9
|
)
|
|
(14.7
|
)
|
|
(14.7
|
)
|
Foreign currency
|
18.3
|
|
|
(4.5
|
)
|
|
33.1
|
|
|
1.2
|
|
Consolidated operating income
|
267.5
|
|
|
252.1
|
|
|
541.7
|
|
|
504.6
|
|
Non-operating income
|
3.8
|
|
|
(1.1
|
)
|
|
7.6
|
|
|
9.9
|
|
Consolidated pre-tax income
|
$
|
271.3
|
|
|
$
|
251.0
|
|
|
$
|
549.3
|
|
|
$
|
514.5
|
|
Enterprise-wide Information
Enterprise-wide information is based on actual foreign exchange rates used in the Company's consolidated condensed financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in millions)
|
|
|
|
|
Net Sales by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
624.9
|
|
|
$
|
512.1
|
|
|
$
|
1,187.7
|
|
|
$
|
991.6
|
|
Europe
|
241.7
|
|
|
228.0
|
|
|
476.4
|
|
|
458.0
|
|
Japan
|
113.1
|
|
|
102.6
|
|
|
211.5
|
|
|
195.3
|
|
Rest of World
|
107.2
|
|
|
101.0
|
|
|
204.3
|
|
|
193.6
|
|
|
$
|
1,086.9
|
|
|
$
|
943.7
|
|
|
$
|
2,079.9
|
|
|
$
|
1,838.5
|
|
Net Sales by Major Product and Service Area
|
|
|
|
|
|
|
|
|
|
|
|
Transcatheter Aortic Valve Replacement
|
$
|
677.7
|
|
|
$
|
584.0
|
|
|
$
|
1,275.4
|
|
|
$
|
1,135.1
|
|
Transcatheter Mitral and Tricuspid Therapies
|
7.0
|
|
|
0.9
|
|
|
11.3
|
|
|
1.4
|
|
Surgical Structural Heart
|
217.8
|
|
|
190.3
|
|
|
432.5
|
|
|
369.8
|
|
Critical Care
|
184.4
|
|
|
168.5
|
|
|
360.7
|
|
|
332.2
|
|
|
$
|
1,086.9
|
|
|
$
|
943.7
|
|
|
$
|
2,079.9
|
|
|
$
|
1,838.5
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(in millions)
|
Long-lived Tangible Assets by Geographic Area
|
|
|
|
|
|
United States
|
$
|
755.5
|
|
|
$
|
642.1
|
|
Europe
|
60.1
|
|
|
36.6
|
|
Japan
|
17.0
|
|
|
6.7
|
|
Rest of World
|
249.3
|
|
|
214.4
|
|
|
$
|
1,081.9
|
|
|
$
|
899.8
|
|