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, 2019. 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.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from these estimates. In particular, the novel Coronavirus ("COVID-19") pandemic has adversely impacted and is likely to further adversely impact nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including sales, expenses, manufacturing, clinical trials, research and development costs, reserves and allowances, fair value measurements, asset impairment charges, contingent consideration obligations, and the effectiveness of the Company's hedging instruments, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
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.
Certain reclassifications have been made to the prior year's consolidated condensed financial statements to conform to the current year presentation.
Stock Split
On May 7, 2020, the Company’s Board of Directors declared a three-for-one stock split of its outstanding shares of common stock effected in the form of a stock dividend, distributed on May 29, 2020 to stockholders of record on May 18, 2020. The Company distributed two newly issued shares of common stock to holders of record of each share of common stock to effect the stock split. All applicable share and per-share amounts in the consolidated condensed financial statements and the notes to consolidated condensed financial statements have been retroactively adjusted to reflect this stock split. The consolidated condensed balance sheet as of December 31, 2019 and the consolidated condensed statements of stockholders’ equity for the nine months ended September 30, 2019 have not been retroactively adjusted to reflect the stock split.
Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on cloud computing service arrangements. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The guidance was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued an amendment to the accounting guidance on fair value measurements. The guidance modifies the disclosure requirements on fair value measurements, including the removal of disclosures of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements related to Level 3 fair value measurements. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued an amendment to the guidance on the measurement of credit losses on financial instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured at
amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The guidance was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.
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):
|
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|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Inventories
|
|
|
|
Raw materials
|
$
|
129.3
|
|
|
$
|
118.0
|
|
Work in process
|
148.3
|
|
|
121.7
|
|
Finished products
|
495.7
|
|
|
401.2
|
|
|
$
|
773.3
|
|
|
$
|
640.9
|
|
At September 30, 2020 and December 31, 2019, $119.4 million and $117.8 million, respectively, of the Company's finished products inventories were held on consignment.
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|
|
|
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September 30, 2020
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|
December 31, 2019
|
|
(in millions)
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
162.5
|
|
|
$
|
180.4
|
|
Employee compensation and withholdings
|
244.8
|
|
|
295.8
|
|
Taxes payable (Note 12)
|
42.3
|
|
|
52.9
|
|
Property, payroll, and other taxes
|
45.5
|
|
|
51.4
|
|
Research and development accruals
|
53.7
|
|
|
51.4
|
|
Accrued rebates
|
59.8
|
|
|
67.1
|
|
Fair value of derivatives
|
21.4
|
|
|
6.4
|
|
Accrued marketing expenses
|
15.1
|
|
|
17.5
|
|
Litigation settlement (Note 3)
|
25.0
|
|
|
—
|
|
Litigation and insurance reserves
|
21.3
|
|
|
20.0
|
|
Accrued relocation costs
|
19.7
|
|
|
17.4
|
|
Accrued professional services
|
6.4
|
|
|
10.1
|
|
Accrued realignment reserves
|
14.2
|
|
|
16.7
|
|
Other accrued liabilities
|
90.4
|
|
|
89.8
|
|
|
$
|
822.1
|
|
|
$
|
876.9
|
|
|
|
|
|
Other liabilities
|
|
|
|
Litigation settlement (Note 3)
|
$
|
244.2
|
|
|
$
|
—
|
|
Deferred compensation
|
97.8
|
|
|
88.7
|
|
Pension liabilities
|
47.2
|
|
|
41.6
|
|
Deferred tax liabilities
|
36.6
|
|
|
36.9
|
|
Payroll taxes
|
17.0
|
|
|
—
|
|
Other
|
41.2
|
|
|
36.1
|
|
|
$
|
484.0
|
|
|
$
|
203.3
|
|
Supplemental Cash Flow Information
(in millions)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
Cash paid during the year for:
|
|
|
|
Amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
21.7
|
|
|
$
|
19.5
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
$
|
30.7
|
|
|
$
|
33.2
|
|
Capital expenditures accruals
|
$
|
39.7
|
|
|
$
|
26.4
|
|
3. INTELLECTUAL PROPERTY LITIGATION EXPENSES
On July 12, 2020, the Company reached an agreement with Abbott Laboratories and its direct and indirect subsidiaries ("Abbott") to, among other things, settle all outstanding patent disputes between the companies (the “Settlement Agreement”) in cases related to transcatheter mitral and tricuspid repair products. See Note 9 for additional information. The Settlement Agreement resulted in the Company recording an estimated $367.9 million pre-tax charge and related liability in June 2020 related to past damages. In addition, the Company will incur royalty expenses through May 2024 totaling an estimated $100 million. The Company made a one-time $100.0 million payment to Abbott in July 2020, and will make quarterly payments in future years.
4. SPECIAL CHARGE
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.
5. INVESTMENTS
Debt Securities
Investments in debt securities at the end of each period were as follows (in millions):
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|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Held-to-maturity
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
Fair Value
|
Bank time deposits
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank time deposits
|
$
|
33.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33.3
|
|
|
$
|
13.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13.1
|
|
Commercial paper
|
60.1
|
|
|
—
|
|
|
—
|
|
|
60.1
|
|
|
34.3
|
|
|
—
|
|
|
—
|
|
|
34.3
|
|
U.S. government and agency securities
|
130.3
|
|
|
2.5
|
|
|
—
|
|
|
132.8
|
|
|
113.2
|
|
|
0.6
|
|
|
—
|
|
|
113.8
|
|
Foreign government bonds
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Asset-backed securities
|
135.3
|
|
|
1.9
|
|
|
—
|
|
|
137.2
|
|
|
141.2
|
|
|
0.6
|
|
|
(0.1
|
)
|
|
141.7
|
|
Corporate debt securities
|
465.0
|
|
|
7.0
|
|
|
(0.1
|
)
|
|
471.9
|
|
|
487.0
|
|
|
2.3
|
|
|
(0.1
|
)
|
|
489.2
|
|
Total
|
$
|
825.7
|
|
|
$
|
11.4
|
|
|
$
|
(0.1
|
)
|
|
$
|
837.0
|
|
|
$
|
790.5
|
|
|
$
|
3.5
|
|
|
$
|
(0.2
|
)
|
|
$
|
793.8
|
|
The cost and fair value of investments in debt securities, by contractual maturity, as of September 30, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Cost
|
|
Fair Value
|
|
(in millions)
|
Due in 1 year or less
|
$
|
270.2
|
|
|
$
|
271.3
|
|
Due after 1 year through 5 years
|
407.6
|
|
|
415.2
|
|
Instruments not due at a single maturity date
|
147.9
|
|
|
150.5
|
|
|
$
|
825.7
|
|
|
$
|
837.0
|
|
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 September 30, 2020 and December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
Corporate debt securities
|
$
|
28.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28.5
|
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
Asset-backed securities
|
$
|
73.4
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73.4
|
|
|
$
|
(0.1
|
)
|
Corporate debt securities
|
81.4
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
81.4
|
|
|
(0.1
|
)
|
|
$
|
154.8
|
|
|
$
|
(0.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154.8
|
|
|
$
|
(0.2
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
(in millions)
|
Equity method investments
|
|
|
|
|
|
Cost
|
$
|
10.1
|
|
|
$
|
10.7
|
|
Equity in losses
|
(4.6
|
)
|
|
(4.5
|
)
|
Carrying value of equity method investments
|
5.5
|
|
|
6.2
|
|
Equity securities
|
|
|
|
|
|
Carrying value of non-marketable equity securities
|
27.8
|
|
|
23.1
|
|
Total investments in unconsolidated affiliates
|
$
|
33.3
|
|
|
$
|
29.3
|
|
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 recorded an upward adjustment of $1.8 million during the nine months ended September 30, 2020 based on observable price changes, and a downward adjustment of $0.7 million during the nine months ended September 30, 2020 due to an impairment. As of September 30, 2020, the
Company had recorded accumulated upward adjustments of $3.8 million based on observable price changes, and accumulated downward adjustments of $2.6 million due to impairments and observable price changes.
During the three and nine months ended September 30, 2020, the gross realized gains or losses from sales of available-for-sale investments were not material.
6. 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 September 30, 2020, the fair value of the notes payable, based on Level 2 inputs, was $718.0 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
2.3
|
|
|
$
|
11.1
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
Bank time deposits
|
—
|
|
|
33.3
|
|
|
—
|
|
|
33.3
|
|
Corporate debt securities
|
—
|
|
|
471.9
|
|
|
—
|
|
|
471.9
|
|
Asset-backed securities
|
—
|
|
|
137.2
|
|
|
—
|
|
|
137.2
|
|
U.S. government and agency securities
|
57.7
|
|
|
75.1
|
|
|
—
|
|
|
132.8
|
|
Foreign government bonds
|
—
|
|
|
1.7
|
|
|
—
|
|
|
1.7
|
|
Commercial paper
|
—
|
|
|
60.1
|
|
|
—
|
|
|
60.1
|
|
Investments held for deferred compensation plans
|
97.8
|
|
|
—
|
|
|
—
|
|
|
97.8
|
|
Derivatives
|
—
|
|
|
27.5
|
|
|
—
|
|
|
27.5
|
|
|
$
|
157.8
|
|
|
$
|
817.9
|
|
|
$
|
—
|
|
|
$
|
975.7
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
Deferred compensation plans
|
97.8
|
|
|
—
|
|
|
—
|
|
|
97.8
|
|
Contingent consideration liabilities
|
—
|
|
|
—
|
|
|
180.9
|
|
|
180.9
|
|
|
$
|
97.8
|
|
|
$
|
21.4
|
|
|
$
|
180.9
|
|
|
$
|
300.1
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
0.7
|
|
|
$
|
31.7
|
|
|
$
|
—
|
|
|
$
|
32.4
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
Bank time deposits
|
—
|
|
|
13.1
|
|
|
—
|
|
|
13.1
|
|
Corporate debt securities
|
—
|
|
|
489.2
|
|
|
—
|
|
|
489.2
|
|
Asset-backed securities
|
—
|
|
|
141.7
|
|
|
—
|
|
|
141.7
|
|
U.S. government and agency securities
|
76.1
|
|
|
37.7
|
|
|
—
|
|
|
113.8
|
|
Foreign government bonds
|
—
|
|
|
1.7
|
|
|
—
|
|
|
1.7
|
|
Commercial paper
|
—
|
|
|
34.3
|
|
|
—
|
|
|
34.3
|
|
Investments held for deferred compensation plans
|
88.9
|
|
|
—
|
|
|
—
|
|
|
88.9
|
|
Derivatives
|
—
|
|
|
30.7
|
|
|
—
|
|
|
30.7
|
|
|
$
|
165.7
|
|
|
$
|
780.1
|
|
|
$
|
—
|
|
|
$
|
945.8
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
Deferred compensation plans
|
88.7
|
|
|
—
|
|
|
—
|
|
|
88.7
|
|
Contingent consideration liabilities
|
—
|
|
|
—
|
|
|
172.5
|
|
|
172.5
|
|
|
$
|
88.7
|
|
|
$
|
6.4
|
|
|
$
|
172.5
|
|
|
$
|
267.6
|
|
The following table summarizes the changes in fair value of the contingent consideration liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
Balance at December 31
|
|
$
|
172.5
|
|
|
$
|
178.6
|
|
Changes in fair value
|
|
8.4
|
|
|
12.4
|
|
Balance at September 30
|
|
$
|
180.9
|
|
|
$
|
191.0
|
|
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 0.1% to 8.5%; weighted average of 3.0%), (2) the probability of milestone achievement (ranging from 0.7% to 99.7%; weighted average of 70.6%), (3) the projected payment dates (ranging from 2023 to 2027; weighted average of 2026), and (4) the volatility of future revenue (ranging from 37.0% to 40.0%; weighted average of 38.9%). The weighted average of each of the above inputs was determined based on the relative fair value of each obligation. The use of different assumptions could have a material effect on the estimated fair value amounts.
7. 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
|
|
September 30, 2020
|
|
December 31, 2019
|
|
(in millions)
|
Foreign currency forward exchange contracts
|
$
|
1,484.8
|
|
|
$
|
1,336.5
|
|
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 and cross currency swap contracts 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
|
|
September 30, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
$
|
5.4
|
|
|
$
|
14.2
|
|
Foreign currency contracts
|
|
Other assets
|
|
$
|
3.1
|
|
|
$
|
3.2
|
|
Cross currency swap contracts
|
|
Other assets
|
|
$
|
19.0
|
|
|
$
|
13.3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Accounts payable and accrued liabilities
|
|
$
|
21.4
|
|
|
$
|
6.4
|
|
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
|
|
|
September 30, 2020
|
Gross
Amounts
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
Net
Amount
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
8.5
|
|
|
$
|
—
|
|
|
$
|
8.5
|
|
|
$
|
(5.4
|
)
|
|
$
|
—
|
|
|
$
|
3.1
|
|
Cross currency swap contracts
|
$
|
19.0
|
|
|
$
|
—
|
|
|
$
|
19.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19.0
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
21.4
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
(5.4
|
)
|
|
$
|
—
|
|
|
$
|
16.0
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
17.4
|
|
|
$
|
—
|
|
|
$
|
17.4
|
|
|
$
|
(5.7
|
)
|
|
$
|
—
|
|
|
$
|
11.7
|
|
Cross currency swap contracts
|
$
|
13.3
|
|
|
$
|
—
|
|
|
$
|
13.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13.3
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
(5.7
|
)
|
|
$
|
—
|
|
|
$
|
0.7
|
|
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 (loss) (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
September 30,
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
(22.3
|
)
|
|
$
|
22.1
|
|
|
Cost of sales
|
|
$
|
5.9
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
0.3
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
|
|
|
|
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
|
|
|
Nine Months Ended
September 30,
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
(9.7
|
)
|
|
$
|
32.9
|
|
|
Cost of sales
|
|
$
|
19.7
|
|
|
$
|
31.7
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
2.0
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30,
|
|
Location of Gain or
(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net investment hedges
|
|
|
|
|
|
|
|
|
|
|
Cross currency swap contracts
|
|
$
|
(16.6
|
)
|
|
$
|
16.3
|
|
|
Interest income, net
|
|
$
|
1.6
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Nine Months Ended
September 30,
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net investment hedges
|
|
|
|
|
|
|
|
|
|
|
Cross currency swap contracts
|
|
$
|
5.7
|
|
|
$
|
18.4
|
|
|
Interest income, net
|
|
$
|
4.9
|
|
|
$
|
5.0
|
|
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
September 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
2020
|
|
2019
|
Fair value hedges
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other income, net
|
|
$
|
(0.7
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
2020
|
|
2019
|
Fair value hedges
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other income, net
|
|
$
|
(0.4
|
)
|
|
$
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
2020
|
|
2019
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other income, net
|
|
$
|
(1.7
|
)
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Location of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
2020
|
|
2019
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other income, net
|
|
$
|
—
|
|
|
$
|
1.7
|
|
The following tables present the effect of cash flow hedge accounting on the consolidated condensed statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
Three Months Ended
September 30, 2020
|
|
Nine Months Ended
September 30, 2020
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
Other Income, net
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
Other Income, net
|
|
|
|
|
|
Total amounts of income and expense line items presented in the consolidated condensed statements of operations in which the effects of fair value or cash flow hedges are recorded
|
$
|
(281.0
|
)
|
|
$
|
(307.2
|
)
|
|
$
|
5.7
|
|
|
$
|
(784.3
|
)
|
|
$
|
(889.9
|
)
|
|
$
|
7.3
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
Derivatives designated as hedging instruments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3.0
|
)
|
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.6
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated OCI into income
|
$
|
5.9
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
19.7
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
Other Expense (Income), net
|
|
Cost of sales
|
|
Selling, general, and administrative expenses
|
|
Other Expense (Income), net
|
|
|
|
|
|
Total amounts of income and expense line items presented in the consolidated condensed statements of operations in which the effects of fair value or cash flow hedges are recorded
|
$
|
(292.4
|
)
|
|
$
|
(306.2
|
)
|
|
$
|
4.6
|
|
|
$
|
(828.2
|
)
|
|
$
|
(895.0
|
)
|
|
$
|
7.8
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.3
|
|
Derivatives designated as hedging instruments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5.3
|
)
|
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated OCI into income
|
$
|
12.8
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
31.7
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
The Company expects that during the next twelve months it will reclassify to earnings a $1.4 million loss currently recorded in "Accumulated Other Comprehensive Loss."
8. STOCK-BASED COMPENSATION
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three and nine months ended September 30, 2020 and 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of sales
|
$
|
4.3
|
|
|
$
|
3.6
|
|
|
$
|
13.6
|
|
|
$
|
11.5
|
|
Selling, general, and administrative expenses
|
13.8
|
|
|
12.4
|
|
|
43.5
|
|
|
39.4
|
|
Research and development expenses
|
4.9
|
|
|
3.8
|
|
|
14.6
|
|
|
12.0
|
|
Total stock-based compensation expense
|
$
|
23.0
|
|
|
$
|
19.8
|
|
|
$
|
71.7
|
|
|
$
|
62.9
|
|
At September 30, 2020, the total remaining compensation cost related to nonvested stock options, restricted stock units, market-based restricted stock units, and employee stock purchase plan ("ESPP") subscription awards amounted to $160.1 million, which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of 32 months.
During the nine months ended September 30, 2020, the Company granted 1.8 million stock options at a weighted-average exercise price of $72.84, and 0.7 million restricted stock units at a weighted-average grant-date fair value of $73.16. During the nine months ended September 30, 2020, the Company also granted 0.1 million market-based restricted stock units at a weighted-average grant-date fair value of $82.67 and issued an additional 0.1 million shares of common stock related to a previous year's grant of market-based restricted stock units since the payout percentage achieved at the end of the performance period was in excess of the targeted shares. 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 nine months ended September 30, 2020 and 2019 included a risk-free interest rate of 0.2% and 2.2%, respectively, and an expected volatility rate of 32.7% and 29.4%, 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Average risk-free interest rate
|
0.3
|
%
|
|
1.8
|
%
|
|
0.3
|
%
|
|
2.3
|
%
|
Expected dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
33.4
|
%
|
|
29.7
|
%
|
|
34.2
|
%
|
|
29.6
|
%
|
Expected term (years)
|
5.2
|
|
|
5.2
|
|
|
5.1
|
|
|
5.1
|
|
Fair value, per option
|
$
|
22.24
|
|
|
$
|
19.36
|
|
|
$
|
22.19
|
|
|
$
|
18.10
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Average risk-free interest rate
|
0.1
|
%
|
|
2.0
|
%
|
|
1.3
|
%
|
|
2.4
|
%
|
Expected dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
37.5
|
%
|
|
32.0
|
%
|
|
33.1
|
%
|
|
27.1
|
%
|
Expected term (years)
|
0.7
|
|
|
0.7
|
|
|
0.6
|
|
|
0.6
|
|
Fair value, per share
|
$
|
21.79
|
|
|
$
|
19.10
|
|
|
$
|
16.61
|
|
|
$
|
16.43
|
|
9. COMMITMENTS AND CONTINGENCIES
In January 2019, Abbott filed lawsuits against Edwards Lifesciences and its direct and indirect subsidiaries (“Edwards”) in the Federal District Court in the District of Delaware, in the United Kingdom, Germany, Switzerland and Italy, and, in February 2020, in Ireland, alleging patent infringement involving Edwards’ PASCAL heart valve repair system (collectively, the “PASCAL litigation”). In February 2019, Edwards filed a lawsuit against Abbott in the Federal District Court in the Central District of California alleging patent infringement involving Abbott's MITRACLIP device (with the PASCAL litigation, the “Abbott Matters”). On July 12, 2020, Edwards entered into the Settlement Agreement with Abbott to, among other things, settle all patent litigation between the parties related to alleged patent infringement involving Edwards’ PASCAL heart valve repair system and Abbott’s MITRACLIP device. Pursuant to the Settlement Agreement, all of the Abbott Matters and related appeals in courts worldwide were dismissed.
The Settlement Agreement resulted in the Company recording an estimated $367.9 million pre-tax net charge in June 2020 related to past damages. See Note 3 for additional information.
In addition, the Company is or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits including those related to products and services currently or formerly manufactured or performed, as applicable, by the Company, workplace and employment matters, matters involving real estate, Company operations or health care regulations, or governmental investigations (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 loss relating to the Other Lawsuits would have a material adverse effect on the Company's overall financial condition, results of operations or cash flows. However, the resolution of one or more of the Other Lawsuits in any reporting period, could have a material adverse impact on the Company's financial results for that period. The Company is not able to estimate the amount or range of any loss for legal contingencies related to the Other Lawsuits for which there is no reserve or additional loss for matters already reserved.
The Company is subject to various environmental laws and regulations both within and outside of the United States. The Company's operations, 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 the Company's financial results.
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables summarize the activity for each component of "Accumulated Other Comprehensive Loss" (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized Gain (Loss) on Hedges
|
|
Unrealized Gain (Loss) on Available-for-sale Investments
|
|
Unrealized
Pension
Costs
|
|
Total
Accumulated
Other
Comprehensive
Loss
|
December 31, 2019
|
$
|
(154.8
|
)
|
|
$
|
12.5
|
|
|
$
|
1.7
|
|
|
$
|
(15.4
|
)
|
|
$
|
(156.0
|
)
|
Other comprehensive gain (loss) before reclassifications
|
11.6
|
|
|
19.0
|
|
|
(6.3
|
)
|
|
(0.2
|
)
|
|
24.1
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(1.7
|
)
|
|
(8.6
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(10.4
|
)
|
Deferred income tax (expense) benefit
|
(7.6
|
)
|
|
(3.8
|
)
|
|
1.7
|
|
|
—
|
|
|
(9.7
|
)
|
March 31, 2020
|
(152.5
|
)
|
|
19.1
|
|
|
(3.0
|
)
|
|
(15.6
|
)
|
|
(152.0
|
)
|
Other comprehensive gain (loss) before reclassifications
|
1.2
|
|
|
(3.7
|
)
|
|
14.8
|
|
|
—
|
|
|
12.3
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(1.6
|
)
|
|
(7.2
|
)
|
|
0.2
|
|
|
—
|
|
|
(8.6
|
)
|
Deferred income tax benefit (expense)
|
2.1
|
|
|
3.6
|
|
|
(3.5
|
)
|
|
—
|
|
|
2.2
|
|
June 30, 2020
|
(150.8
|
)
|
|
11.8
|
|
|
8.5
|
|
|
(15.6
|
)
|
|
(146.1
|
)
|
Other comprehensive gain (loss) before reclassifications
|
8.1
|
|
|
(24.3
|
)
|
|
(0.6
|
)
|
|
0.1
|
|
|
(16.7
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(1.6
|
)
|
|
(5.5
|
)
|
|
0.1
|
|
|
—
|
|
|
(7.0
|
)
|
Deferred income tax benefit
|
4.1
|
|
|
7.6
|
|
|
0.2
|
|
|
—
|
|
|
11.9
|
|
September 30, 2020
|
$
|
(140.2
|
)
|
|
$
|
(10.4
|
)
|
|
$
|
8.2
|
|
|
$
|
(15.5
|
)
|
|
$
|
(157.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) gain before reclassifications
|
(10.2
|
)
|
|
15.6
|
|
|
4.4
|
|
|
(0.1
|
)
|
|
9.7
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(1.6
|
)
|
|
(7.0
|
)
|
|
—
|
|
|
—
|
|
|
(8.6
|
)
|
Deferred income tax expense
|
(1.3
|
)
|
|
(1.4
|
)
|
|
(1.1
|
)
|
|
—
|
|
|
(3.8
|
)
|
March 31, 2019
|
(156.7
|
)
|
|
30.8
|
|
|
(1.7
|
)
|
|
(13.6
|
)
|
|
(141.2
|
)
|
Other comprehensive gain (loss) before reclassifications
|
10.4
|
|
|
(4.0
|
)
|
|
2.8
|
|
|
—
|
|
|
9.2
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(1.7
|
)
|
|
(8.5
|
)
|
|
0.3
|
|
|
—
|
|
|
(9.9
|
)
|
Deferred income tax benefit (expense)
|
0.8
|
|
|
3.5
|
|
|
(0.6
|
)
|
|
—
|
|
|
3.7
|
|
June 30, 2019
|
(147.2
|
)
|
|
21.8
|
|
|
0.8
|
|
|
(13.6
|
)
|
|
(138.2
|
)
|
Other comprehensive (loss) gain before reclassifications
|
(17.8
|
)
|
|
23.5
|
|
|
0.6
|
|
|
(0.2
|
)
|
|
6.1
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(1.7
|
)
|
|
(15.5
|
)
|
|
—
|
|
|
—
|
|
|
(17.2
|
)
|
Deferred income tax expense
|
(4.0
|
)
|
|
(2.4
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(6.5
|
)
|
September 30, 2019
|
$
|
(170.7
|
)
|
|
$
|
27.4
|
|
|
$
|
1.3
|
|
|
$
|
(13.8
|
)
|
|
$
|
(155.8
|
)
|
The following table provides information about amounts reclassified from "Accumulated Other Comprehensive Loss" (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
Affected Line on Consolidated Condensed
Statements of Operations
|
Details about Accumulated Other
Comprehensive Loss Components
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign currency translation adjustments
|
$
|
1.6
|
|
|
$
|
1.7
|
|
|
$
|
4.9
|
|
|
$
|
5.0
|
|
|
Other income, net
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
(1.2
|
)
|
|
(1.2
|
)
|
|
Provision for income taxes
|
|
$
|
1.2
|
|
|
$
|
1.3
|
|
|
$
|
3.7
|
|
|
$
|
3.8
|
|
|
Net of tax
|
Gain (loss) on hedges
|
$
|
5.9
|
|
|
$
|
12.8
|
|
|
$
|
19.7
|
|
|
$
|
31.7
|
|
|
Cost of sales
|
|
0.3
|
|
|
0.6
|
|
|
2.0
|
|
|
1.4
|
|
|
Selling, general, and administrative expenses
|
|
(0.7
|
)
|
|
2.1
|
|
|
(0.4
|
)
|
|
(2.1
|
)
|
|
Other income, net
|
|
5.5
|
|
|
15.5
|
|
|
21.3
|
|
|
31.0
|
|
|
Total before tax
|
|
(1.4
|
)
|
|
(3.5
|
)
|
|
(5.4
|
)
|
|
(8.3
|
)
|
|
Provision for income taxes
|
|
$
|
4.1
|
|
|
$
|
12.0
|
|
|
$
|
15.9
|
|
|
$
|
22.7
|
|
|
Net of tax
|
Gain (loss) on available-for-sale investments
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.3
|
)
|
|
Other income, net
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
Provision for income taxes
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
(0.5
|
)
|
|
$
|
(0.3
|
)
|
|
Net of tax
|
11. 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
325.2
|
|
|
$
|
274.7
|
|
|
$
|
513.9
|
|
|
$
|
766.7
|
|
Weighted-average shares outstanding
|
622.1
|
|
|
624.6
|
|
|
622.3
|
|
|
624.3
|
|
Basic earnings per share
|
$
|
0.52
|
|
|
$
|
0.44
|
|
|
$
|
0.83
|
|
|
$
|
1.23
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
325.2
|
|
|
$
|
274.7
|
|
|
$
|
513.9
|
|
|
$
|
766.7
|
|
Weighted-average shares outstanding
|
622.1
|
|
|
624.6
|
|
|
622.3
|
|
|
624.3
|
|
Dilutive effect of stock plans
|
8.9
|
|
|
11.7
|
|
|
6.5
|
|
|
12.0
|
|
Dilutive weighted-average shares outstanding
|
631.0
|
|
|
636.3
|
|
|
628.8
|
|
|
636.3
|
|
Diluted earnings per share
|
$
|
0.52
|
|
|
$
|
0.43
|
|
|
$
|
0.82
|
|
|
$
|
1.20
|
|
Stock options, restricted stock units, and market-based restricted stock units to purchase an aggregate of 2.0 million and 2.4 million shares for the three months ended September 30, 2020 and 2019, respectively, and 5.8 million and 1.9 million shares for the nine months ended September 30, 2020 and 2019, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
12. INCOME TAXES
The Company's effective income tax rates were 10.7% and 8.9% for the three months ended September 30, 2020 and 2019, respectively, and 8.3% and 9.9% for the nine months ended September 30, 2020 and 2019, respectively. The fluctuation in the effective rates between the nine months ended September 30, 2020 and 2019 is primarily due to the impact of the Settlement Agreement with Abbott (see Notes 3 and 9). The effective rates for the nine months ended September 30, 2020 and 2019 were also lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal and California research and development credits. The effective rates include a tax benefit from employee share-based compensation of $16.4 million and $19.6 million for the three months ended September 30, 2020 and 2019, respectively, and $47.0 million and $56.2 million for the nine months ended September 30, 2020 and 2019, 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 September 30, 2020 and December 31, 2019, the gross liability for income taxes associated with uncertain tax positions was $250.5 million and $203.1 million, respectively. The Company estimates that these liabilities would be reduced by $76.6 million and $50.1 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 $173.9 million and $153.0 million, respectively, if not required, would favorably affect the Company's effective tax rate.
The Internal Revenue Service 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. As of September 30, 2020, all material state, local, and foreign income tax matters have been concluded for years through 2010.
During 2018, the Company executed an Advance Pricing Agreement ("APA") 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 2020 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. Based upon the information currently available and numerous possible outcomes, the Company cannot reasonably estimate what, if any, changes in its existing uncertain tax positions may occur in the next 12 months and, therefore, has recorded the gross uncertain tax positions as a long-term liability.
In addition, the Company executed other APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. The Company has filed or intends to file to renew these APAs for the years 2020 and forward. The execution of some or all of these APAs depends on a number of variables outside of the Company's control.
13. 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, 2019. 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Segment Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
662.0
|
|
|
$
|
647.8
|
|
|
$
|
1,845.6
|
|
|
$
|
1,835.5
|
|
Europe
|
241.5
|
|
|
219.8
|
|
|
695.9
|
|
|
684.3
|
|
Japan
|
109.9
|
|
|
110.0
|
|
|
325.0
|
|
|
322.9
|
|
Rest of World
|
115.2
|
|
|
112.0
|
|
|
323.4
|
|
|
316.5
|
|
Total segment net sales
|
$
|
1,128.6
|
|
|
$
|
1,089.6
|
|
|
$
|
3,189.9
|
|
|
$
|
3,159.2
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
453.8
|
|
|
$
|
447.4
|
|
|
$
|
1,264.0
|
|
|
$
|
1,258.3
|
|
Europe
|
124.2
|
|
|
111.5
|
|
|
356.2
|
|
|
353.2
|
|
Japan
|
69.2
|
|
|
70.7
|
|
|
209.9
|
|
|
202.8
|
|
Rest of World
|
35.6
|
|
|
36.7
|
|
|
105.2
|
|
|
99.8
|
|
Total segment operating income
|
$
|
682.8
|
|
|
$
|
666.3
|
|
|
$
|
1,935.3
|
|
|
$
|
1,914.1
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net Sales Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
$
|
1,128.6
|
|
|
$
|
1,089.6
|
|
|
$
|
3,189.9
|
|
|
$
|
3,159.2
|
|
Foreign currency
|
12.3
|
|
|
4.4
|
|
|
4.7
|
|
|
14.7
|
|
Consolidated net sales
|
$
|
1,140.9
|
|
|
$
|
1,094.0
|
|
|
$
|
3,194.6
|
|
|
$
|
3,173.9
|
|
Pre-tax Income Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
682.8
|
|
|
$
|
666.3
|
|
|
$
|
1,935.3
|
|
|
$
|
1,914.1
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate items
|
(331.9
|
)
|
|
(384.2
|
)
|
|
(1,005.6
|
)
|
|
(1,073.1
|
)
|
Special charge (Note 4)
|
—
|
|
|
—
|
|
|
—
|
|
|
(24.0
|
)
|
Intellectual property litigation expenses
|
(8.4
|
)
|
|
(7.9
|
)
|
|
(400.8
|
)
|
|
(19.5
|
)
|
Change in fair value of contingent consideration liabilities, net
|
9.0
|
|
|
2.3
|
|
|
(8.4
|
)
|
|
(12.4
|
)
|
Foreign currency
|
6.3
|
|
|
17.8
|
|
|
25.7
|
|
|
50.9
|
|
Consolidated operating income
|
357.8
|
|
|
294.3
|
|
|
546.2
|
|
|
836.0
|
|
Non-operating income
|
6.5
|
|
|
7.4
|
|
|
14.4
|
|
|
15.0
|
|
Consolidated pre-tax income
|
$
|
364.3
|
|
|
$
|
301.7
|
|
|
$
|
560.6
|
|
|
$
|
851.0
|
|
Enterprise-wide Information
The following enterprise-wide information is based on actual foreign exchange rates used in the Company's consolidated condensed financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in millions)
|
Net Sales by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
662.0
|
|
|
$
|
647.8
|
|
|
$
|
1,845.6
|
|
|
$
|
1,835.5
|
|
Europe
|
253.8
|
|
|
222.6
|
|
|
707.8
|
|
|
699.0
|
|
Japan
|
113.9
|
|
|
112.9
|
|
|
330.7
|
|
|
324.4
|
|
Rest of World
|
111.2
|
|
|
110.7
|
|
|
310.5
|
|
|
315.0
|
|
|
$
|
1,140.9
|
|
|
$
|
1,094.0
|
|
|
$
|
3,194.6
|
|
|
$
|
3,173.9
|
|
Net Sales by Major Product Group
|
|
|
|
|
|
|
|
|
|
|
|
Transcatheter Aortic Valve Replacement
|
$
|
744.6
|
|
|
$
|
700.0
|
|
|
$
|
2,081.1
|
|
|
$
|
1,975.4
|
|
Transcatheter Mitral and Tricuspid Therapies
|
12.1
|
|
|
9.7
|
|
|
28.7
|
|
|
21.0
|
|
Surgical Structural Heart
|
203.3
|
|
|
204.1
|
|
|
557.6
|
|
|
636.6
|
|
Critical Care
|
180.9
|
|
|
180.2
|
|
|
527.2
|
|
|
540.9
|
|
|
$
|
1,140.9
|
|
|
$
|
1,094.0
|
|
|
$
|
3,194.6
|
|
|
$
|
3,173.9
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
(in millions)
|
Long-lived Tangible Assets by Geographic Area
|
|
|
|
|
|
United States
|
$
|
1,031.9
|
|
|
$
|
849.1
|
|
Europe
|
159.1
|
|
|
101.5
|
|
Japan
|
18.6
|
|
|
21.7
|
|
Rest of World
|
293.3
|
|
|
269.4
|
|
|
$
|
1,502.9
|
|
|
$
|
1,241.7
|
|