Edwards Lifesciences Corp - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-15525
EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-4316614 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Edwards Way
Irvine, California 92614
(Address of principal executive offices and zip code)
(949) 250-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | EW | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's common stock, $1.00 par value, as of October 23, 2019 was 208,570,014.
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended September 30, 2019
TABLE OF CONTENTS
Page Number | ||
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements contained in this report to be covered by the safe harbor provisions of such Acts. All statements other than statements of historical fact in this report or referred to or incorporated by reference into this report are "forward-looking statements" for purposes of these sections. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items, plans or expectations with respect to development activities, clinical trials or regulatory approvals, any statements of plans, strategies and objectives of management for future operations, any statements concerning our future operations, financial conditions and prospects, and any statements of assumptions underlying any of the foregoing. These statements can sometimes be identified by the use of the forward-looking words such as "may," "believe," "will," "expect," "project," "estimate," "should," "anticipate," "plan," "goal," "continue," "seek," "pro forma," "forecast," "intend," "guidance," "optimistic," "aspire," "confident," other forms of these words or similar words or expressions or the negative thereof. Investors are cautioned not to unduly rely on such forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our results or future business, financial condition, results of operations or performance to differ materially from our historical results or experiences or those expressed or implied in any forward-looking statements contained in this report. Investors should carefully review the information contained in, or incorporated by reference into, our annual report on Form 10-K for the year ended December 31, 2018 and subsequent reports on Forms 10-Q and 8-K for a description of certain of these risks and uncertainties. These forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.
Unless otherwise indicated or otherwise required by the context, the terms "we," "our," "it," "its," "Company," "Edwards," and "Edwards Lifesciences" refer to Edwards Lifesciences Corporation and its subsidiaries.
Part I. Financial Information
Item 1. Financial Statements
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except par value; unaudited)
September 30, 2019 | December 31, 2018 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 1,186.6 | $ | 714.1 | |||
Short-term investments (Note 5) | 170.3 | 242.4 | |||||
Accounts and other receivables, net of allowances of $8.8 and $8.9, respectively | 570.0 | 537.3 | |||||
Inventories (Note 2) | 611.1 | 607.0 | |||||
Prepaid expenses | 57.3 | 54.3 | |||||
Other current assets | 144.4 | 131.8 | |||||
Total current assets | 2,739.7 | 2,286.9 | |||||
Long-term investments (Note 5) | 386.0 | 506.3 | |||||
Property, plant, and equipment, net | 973.6 | 867.5 | |||||
Operating lease right-of-use assets (Note 3) | 73.3 | — | |||||
Goodwill | 1,156.6 | 1,112.2 | |||||
Other intangible assets, net | 381.1 | 343.2 | |||||
Deferred income taxes | 155.8 | 174.0 | |||||
Other assets | 100.2 | 33.6 | |||||
Total assets | $ | 5,966.3 | $ | 5,323.7 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities (Note 2) | $ | 751.7 | $ | 876.6 | |||
Operating lease liabilities (Note 3) | 24.1 | — | |||||
Total current liabilities | 775.8 | 876.6 | |||||
Long-term debt | 594.2 | 593.8 | |||||
Contingent consideration liabilities (Note 7) | 191.0 | 178.6 | |||||
Taxes payable | 236.5 | 259.4 | |||||
Operating lease liabilities (Note 3) | 52.4 | — | |||||
Uncertain tax positions | 141.7 | 124.9 | |||||
Other long-term liabilities | 159.9 | 150.0 | |||||
Commitments and contingencies (Note 11) | |||||||
Stockholders' equity | |||||||
Preferred stock, $.01 par value, authorized 50.0 shares, no shares outstanding | — | — | |||||
Common stock, $1.00 par value, 350.0 shares authorized, 217.5 and 215.2 shares issued, and 208.5 and 207.7 shares outstanding, respectively | 217.5 | 215.2 | |||||
Additional paid-in capital | 1,570.4 | 1,384.4 | |||||
Retained earnings | 3,461.4 | 2,694.7 | |||||
Accumulated other comprehensive loss (Note 12) | (155.8 | ) | (138.5 | ) | |||
Treasury stock, at cost, 9.0 and 7.5 shares, respectively | (1,278.7 | ) | (1,015.4 | ) | |||
Total stockholders' equity | 3,814.8 | 3,140.4 | |||||
Total liabilities and stockholders' equity | $ | 5,966.3 | $ | 5,323.7 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
1
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions, except per share information; unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net sales | $ | 1,094.0 | $ | 906.6 | $ | 3,173.9 | $ | 2,745.1 | |||||||
Cost of sales | 292.4 | 224.9 | 828.2 | 704.7 | |||||||||||
Gross profit | 801.6 | 681.7 | 2,345.7 | 2,040.4 | |||||||||||
Selling, general, and administrative expenses | 306.2 | 269.5 | 895.0 | 800.4 | |||||||||||
Research and development expenses | 195.5 | 161.8 | 558.8 | 459.1 | |||||||||||
Intellectual property litigation expenses | 7.9 | 7.9 | 19.5 | 19.1 | |||||||||||
Change in fair value of contingent consideration liabilities, net (Note 7) | (2.3 | ) | (6.4 | ) | 12.4 | 8.3 | |||||||||
Special charge (Note 4) | — | — | 24.0 | — | |||||||||||
Operating income | 294.3 | 248.9 | 836.0 | 753.5 | |||||||||||
Interest (income) expense, net | (2.8 | ) | 0.5 | (7.2 | ) | (0.3 | ) | ||||||||
Special gain (Note 4) | — | — | — | (7.1 | ) | ||||||||||
Other income, net | (4.6 | ) | (0.3 | ) | (7.8 | ) | (2.3 | ) | |||||||
Income before provision for income taxes | 301.7 | 248.7 | 851.0 | 763.2 | |||||||||||
Provision for income taxes | 27.0 | 22.8 | 84.3 | 48.0 | |||||||||||
Net income | $ | 274.7 | $ | 225.9 | $ | 766.7 | $ | 715.2 | |||||||
Share information (Note 13) | |||||||||||||||
Earnings per share: | |||||||||||||||
Basic | $ | 1.32 | $ | 1.08 | $ | 3.68 | $ | 3.41 | |||||||
Diluted | $ | 1.30 | $ | 1.06 | $ | 3.61 | $ | 3.34 | |||||||
Weighted-average number of common shares outstanding: | |||||||||||||||
Basic | 208.2 | 209.0 | 208.1 | 209.5 | |||||||||||
Diluted | 212.1 | 213.2 | 212.1 | 214.1 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 274.7 | $ | 225.9 | $ | 766.7 | $ | 715.2 | |||||||
Other comprehensive (loss) income, net of tax (Note 12): | |||||||||||||||
Foreign currency translation adjustments | (23.5 | ) | (2.0 | ) | (27.1 | ) | (34.9 | ) | |||||||
Unrealized gain on hedges | 5.6 | 13.1 | 3.8 | 36.9 | |||||||||||
Defined benefit pension plans | (0.2 | ) | (0.2 | ) | (0.3 | ) | 0.3 | ||||||||
Unrealized gain (loss) on available-for-sale investments | 0.5 | 0.3 | 6.0 | (3.7 | ) | ||||||||||
Reclassification of net realized investment loss to earnings | — | 0.6 | 0.3 | 2.9 | |||||||||||
Other comprehensive (loss) income | (17.6 | ) | 11.8 | (17.3 | ) | 1.5 | |||||||||
Comprehensive income | $ | 257.1 | $ | 237.7 | $ | 749.4 | $ | 716.7 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 766.7 | $ | 715.2 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 65.4 | 57.5 | |||||
Non-cash operating lease cost | 18.7 | — | |||||
Stock-based compensation (Note 9) | 62.9 | 55.0 | |||||
Inventory write off | 73.1 | — | |||||
Change in fair value of contingent consideration liabilities, net (Note 7) | 12.4 | 8.3 | |||||
Deferred income taxes | 9.5 | 29.8 | |||||
Purchase of intellectual property (Note 4) | 24.0 | — | |||||
Other | (4.8 | ) | 3.0 | ||||
Changes in operating assets and liabilities: | |||||||
Accounts and other receivables, net | (70.3 | ) | (0.3 | ) | |||
Inventories | (83.9 | ) | (43.5 | ) | |||
Accounts payable and accrued liabilities | (109.2 | ) | 4.0 | ||||
Income taxes | 17.0 | (208.6 | ) | ||||
Prepaid expenses and other current assets | (2.5 | ) | 10.9 | ||||
Other | 1.0 | 2.5 | |||||
Net cash provided by operating activities | 780.0 | 633.8 | |||||
Cash flows from investing activities | |||||||
Capital expenditures | (182.9 | ) | (181.1 | ) | |||
Purchases of held-to-maturity investments (Note 5) | (30.0 | ) | (190.0 | ) | |||
Proceeds from held-to-maturity investments (Note 5) | 50.0 | 388.1 | |||||
Purchases of available-for sale investments (Note 5) | (95.0 | ) | (115.3 | ) | |||
Proceeds from available-for-sale investments (Note 5) | 278.3 | 193.1 | |||||
Investments in intangible assets (Note 4) | (24.0 | ) | (3.0 | ) | |||
Payment of contingent consideration | — | (10.0 | ) | ||||
Acquisition (Note 6) | (100.2 | ) | — | ||||
Payment for acquisition option | (35.0 | ) | — | ||||
Other | (11.7 | ) | (10.8 | ) | |||
Net cash (used in) provided by investing activities | (150.5 | ) | 71.0 | ||||
Cash flows from financing activities | |||||||
Proceeds from issuance of debt, net | 12.0 | 686.4 | |||||
Payments on debt and capital lease obligations | (23.7 | ) | (524.1 | ) | |||
Purchases of treasury stock | (263.3 | ) | (523.5 | ) | |||
Proceeds from stock plans | 125.5 | 119.3 | |||||
Payment of contingent consideration | — | (15.1 | ) | ||||
Other | (3.1 | ) | 0.5 | ||||
Net cash used in financing activities | (152.6 | ) | (256.5 | ) | |||
Effect of currency exchange rate changes on cash and cash equivalents | (4.4 | ) | (5.3 | ) | |||
Net increase in cash and cash equivalents | 472.5 | 443.0 | |||||
Cash and cash equivalents at beginning of period | 714.1 | 818.3 | |||||
Cash and cash equivalents at end of period | $ | 1,186.6 | $ | 1,261.3 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; unaudited)
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Par Value | Shares | Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||
Balance at December 31, 2018 | 215.2 | $ | 215.2 | 7.5 | $ | (1,015.4 | ) | $ | 1,384.4 | $ | 2,694.7 | $ | (138.5 | ) | $ | 3,140.4 | |||||||||||||
Net income | 249.7 | 249.7 | |||||||||||||||||||||||||||
Other comprehensive income, net of tax | (2.7 | ) | (2.7 | ) | |||||||||||||||||||||||||
Common stock issued under equity plans | 0.8 | 0.8 | 44.2 | 45.0 | |||||||||||||||||||||||||
Stock-based compensation expense | 20.8 | 20.8 | |||||||||||||||||||||||||||
Purchases of treasury stock | 0.1 | (5.7 | ) | (5.7 | ) | ||||||||||||||||||||||||
Balance at March 31, 2019 | 216.0 | $ | 216.0 | 7.6 | $ | (1,021.1 | ) | $ | 1,449.4 | $ | 2,944.4 | $ | (141.2 | ) | $ | 3,447.5 | |||||||||||||
Net income | 242.3 | 242.3 | |||||||||||||||||||||||||||
Other comprehensive income, net of tax | 3.0 | 3.0 | |||||||||||||||||||||||||||
Common stock issued under equity plans | 0.9 | 0.9 | 40.6 | 41.5 | |||||||||||||||||||||||||
Stock-based compensation expense | 22.3 | 22.3 | |||||||||||||||||||||||||||
Purchases of treasury stock | 1.4 | (256.3 | ) | (256.3 | ) | ||||||||||||||||||||||||
Balance at June 30, 2019 | 216.9 | $ | 216.9 | 9.0 | $ | (1,277.4 | ) | $ | 1,512.3 | $ | 3,186.7 | $ | (138.2 | ) | $ | 3,500.3 | |||||||||||||
Net income | 274.7 | 274.7 | |||||||||||||||||||||||||||
Other comprehensive income, net of tax | (17.6 | ) | (17.6 | ) | |||||||||||||||||||||||||
Common stock issued under equity plans | 0.6 | 0.6 | 38.3 | 38.9 | |||||||||||||||||||||||||
Stock-based compensation expense | 19.8 | 19.8 | |||||||||||||||||||||||||||
Purchases of treasury stock | — | (1.3 | ) | (1.3 | ) | ||||||||||||||||||||||||
Balance at September 30, 2019 | 217.5 | $ | 217.5 | 9.0 | $ | (1,278.7 | ) | $ | 1,570.4 | $ | 3,461.4 | $ | (155.8 | ) | $ | 3,814.8 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; unaudited)
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Par Value | Shares | Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||
Balance at December 31, 2017 | 212.0 | $ | 212.0 | 2.3 | $ | (252.1 | ) | $ | 1,166.9 | $ | 1,962.1 | $ | (132.7 | ) | $ | 2,956.2 | |||||||||||||
Impact to retained earnings from adoption of ASU 2016-16 and ASU 2018-02 | 10.4 | (7.8 | ) | 2.6 | |||||||||||||||||||||||||
Balance at January 1, 2018 | 212.0 | 212.0 | 2.3 | (252.1 | ) | 1,166.9 | 1,972.5 | (140.5 | ) | 2,958.8 | |||||||||||||||||||
Net income | 206.6 | 206.6 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax | 19.2 | 19.2 | |||||||||||||||||||||||||||
Common stock issued under equity plans | 1.0 | 1.0 | 43.8 | 44.8 | |||||||||||||||||||||||||
Stock-based compensation expense | 18.4 | 18.4 | |||||||||||||||||||||||||||
Purchases of treasury stock | (2.1 | ) | (2.1 | ) | |||||||||||||||||||||||||
Balance at March 31, 2018 | 213.0 | $ | 213.0 | 2.3 | $ | (254.2 | ) | $ | 1,229.1 | $ | 2,179.1 | $ | (121.3 | ) | $ | 3,245.7 | |||||||||||||
Net income | 282.7 | 282.7 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (29.5 | ) | (29.5 | ) | |||||||||||||||||||||||||
Common stock issued under equity plans | 1.0 | 1.0 | 38.5 | 39.5 | |||||||||||||||||||||||||
Stock-based compensation expense | 19.2 | 19.2 | |||||||||||||||||||||||||||
Shares issued in payment for contingent consideration liabilities | (0.3 | ) | 32.2 | 2.7 | 34.9 | ||||||||||||||||||||||||
Purchases of treasury stock | 2.8 | (348.3 | ) | (80.0 | ) | (428.3 | ) | ||||||||||||||||||||||
Balance at June 30, 2018 | 214.0 | $ | 214.0 | 4.8 | $ | (570.3 | ) | $ | 1,209.5 | $ | 2,461.8 | $ | (150.8 | ) | $ | 3,164.2 | |||||||||||||
Net income | 225.9 | 225.9 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax | 11.8 | 11.8 | |||||||||||||||||||||||||||
Common stock issued under equity plans | 0.8 | 0.8 | 34.3 | 35.1 | |||||||||||||||||||||||||
Stock-based compensation expense | 17.4 | 17.4 | |||||||||||||||||||||||||||
Purchases of treasury stock | 0.9 | (173.1 | ) | 80.0 | (93.1 | ) | |||||||||||||||||||||||
Balance at September 30, 2018 | 214.8 | $ | 214.8 | 5.7 | $ | (743.4 | ) | $ | 1,341.2 | $ | 2,687.7 | $ | (139.0 | ) | $ | 3,361.3 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
6
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):
September 30, 2019 | December 31, 2018 | ||||||
Inventories | |||||||
Raw materials | $ | 125.8 | $ | 111.5 | |||
Work in process | 148.6 | 144.8 | |||||
Finished products | 336.7 | 350.7 | |||||
$ | 611.1 | $ | 607.0 |
At September 30, 2019 and December 31, 2018, $122.5 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. During the three months ended September 30, 2019, the Company recorded an additional $26.9 million charge to "Cost of Sales" resulting from refinements to its portfolio strategy, which consists mainly of an additional write off of inventory. This amount includes an out-of-period adjustment of $10.3 million. The Company determined that the out-of-period adjustment is not material to the three or nine months ended September 30, 2019 or to any prior periods.
7
September 30, 2019 | December 31, 2018 | ||||||
Accounts payable and accrued liabilities | |||||||
Accounts payable | $ | 135.9 | $ | 134.0 | |||
Employee compensation and withholdings | 262.2 | 226.1 | |||||
Taxes payable (Note 14) | 18.9 | 31.3 | |||||
Property, payroll, and other taxes | 43.2 | 39.5 | |||||
Research and development accruals | 61.2 | 48.9 | |||||
Accrued rebates | 78.0 | 80.0 | |||||
Fair value of derivatives | 4.5 | 4.4 | |||||
Accrued marketing expenses | 14.7 | 22.3 | |||||
Litigation and insurance reserves | 18.9 | 196.7 | |||||
Accrued relocation costs | 16.7 | 11.3 | |||||
Accrued professional services | 12.2 | 11.0 | |||||
Accrued realignment reserves | 16.4 | 6.8 | |||||
Other accrued liabilities | 68.9 | 64.3 | |||||
$ | 751.7 | $ | 876.6 |
Supplemental Cash Flow Information
(in millions)
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
Cash paid during the year for: | |||||||
Income taxes | $ | 53.9 | $ | 227.3 | |||
Amounts included in the measurement of lease liabilities: | |||||||
Operating cash flows from operating leases | $ | 19.5 | $ | — | |||
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 | $ | 33.2 | $ | — | |||
Capital expenditures accruals | $ | 26.4 | $ | 23.7 |
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.
8
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 nine months ended September 30, 2019 were $7.2 million and $20.7 million, respectively. Short-term and variable lease costs were not material for the three and nine months ended September 30, 2019.
Supplemental balance sheet information related to operating leases was as follows (in millions, except lease term and discount rate):
September 30, 2019 | |||
Operating lease ROU assets | $ | 73.3 | |
Operating lease liabilities, current portion | $ | 24.1 | |
Operating lease liabilities, long-term portion | 52.4 | ||
Total operating lease liabilities | $ | 76.5 |
Maturities of operating lease liabilities at September 30, 2019 were as follows (in millions):
2019 | $ | 6.8 | |
2020 | 25.2 | ||
2021 | 17.6 | ||
2022 | 12.3 | ||
2023 | 8.9 | ||
Thereafter | 11.7 | ||
Total lease payments | 82.5 | ||
Less: imputed interest | (6.0 | ) | |
Total lease liabilities | $ | 76.5 | |
Weighted-average remaining lease term (in years) | 4.5 | ||
Weighted-average discount rate | 2.9 | % |
As of September 30, 2019, the Company had additional operating lease commitments of $16.8 million for office space leases that have not yet commenced. These leases will commence during 2019 with lease terms of 6 months to 12 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.
9
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):
September 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 | 75.4 | 0.6 | — | 76.0 | 79.7 | 0.2 | (0.7 | ) | 79.2 | ||||||||||||||||||||||
Foreign government bonds | 1.6 | — | — | 1.6 | 1.7 | — | — | 1.7 | |||||||||||||||||||||||
Asset-backed securities | 80.7 | 0.6 | — | 81.3 | 110.6 | 0.1 | (0.5 | ) | 110.2 | ||||||||||||||||||||||
Corporate debt securities | 354.9 | 2.0 | (0.1 | ) | 356.8 | 459.8 | 0.1 | (4.3 | ) | 455.6 | |||||||||||||||||||||
Municipal securities | 2.7 | — | — | 2.7 | 2.8 | — | — | 2.8 | |||||||||||||||||||||||
Total | $ | 526.2 | $ | 3.2 | $ | (0.1 | ) | $ | 529.3 | $ | 711.3 | $ | 0.4 | $ | (5.5 | ) | $ | 706.2 |
The cost and fair value of investments in debt securities, by contractual maturity, as of September 30, 2019 were as follows:
Available-for-Sale | |||||||
Cost | Fair Value | ||||||
(in millions) | |||||||
Due in 1 year or less | $ | 169.9 | $ | 170.3 | |||
Due after 1 year through 5 years | 292.4 | 294.5 | |||||
Instruments not due at a single maturity date | 63.9 | 64.5 | |||||
$ | 526.2 | $ | 529.3 |
Actual maturities may differ from the contractual maturities due to call or prepayment rights.
10
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 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):
September 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 | ||||||||||||||||||
Corporate debt securities | $ | — | $ | — | $ | 41.4 | $ | (0.1 | ) | $ | 41.4 | $ | (0.1 | ) |
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 | — | 61.3 | (0.5 | ) | 65.3 | (0.5 | ) | |||||||||||||||
Corporate debt securities | 177.4 | (1.1 | ) | 203.7 | (3.2 | ) | 381.1 | (4.3 | ) | ||||||||||||||
$ | 182.1 | $ | (1.2 | ) | $ | 321.5 | $ | (4.3 | ) | $ | 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:
September 30, 2019 | December 31, 2018 | ||||||
(in millions) | |||||||
Equity method investments | |||||||
Cost | $ | 10.7 | $ | 9.1 | |||
Equity in losses | (3.8 | ) | (4.7 | ) | |||
Carrying value of equity method investments | 6.9 | 4.4 | |||||
Equity securities | |||||||
Carrying value of non-marketable equity securities | 20.1 | 18.1 | |||||
Total investments in unconsolidated affiliates | $ | 27.0 | $ | 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 recorded an upward adjustment of $0.3 million during the three and nine months ended September 30, 2019 based on observable price changes. As of September 30, 2019, the Company had recorded accumulated upward adjustments of $2.0 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 nine months ended September 30, 2019, the gross realized gains or losses from sales of available-for-sale investments were not material.
11
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 nine months ended September 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 September 30, 2019, the fair value of the notes payable, based on Level 2 inputs, was $676.9 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.
12
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, 2019 | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets | |||||||||||||||
Cash equivalents | $ | 248.1 | $ | 66.5 | $ | — | $ | 314.6 | |||||||
Available-for-sale investments: | |||||||||||||||
Corporate debt securities | — | 356.8 | — | 356.8 | |||||||||||
Asset-backed securities | — | 81.3 | — | 81.3 | |||||||||||
U.S. government and agency securities | 45.5 | 30.5 | — | 76.0 | |||||||||||
Foreign government bonds | — | 1.6 | — | 1.6 | |||||||||||
Commercial paper | — | 10.9 | — | 10.9 | |||||||||||
Municipal securities | — | 2.7 | — | 2.7 | |||||||||||
Investments held for deferred compensation plans | 81.4 | — | — | 81.4 | |||||||||||
Derivatives | — | 48.5 | — | 48.5 | |||||||||||
$ | 375.0 | $ | 598.8 | $ | — | $ | 973.8 | ||||||||
Liabilities | |||||||||||||||
Derivatives | $ | — | $ | 4.4 | $ | — | $ | 4.4 | |||||||
Deferred compensation plans | 82.0 | — | — | 82.0 | |||||||||||
Contingent consideration liabilities | — | — | 191.0 | 191.0 | |||||||||||
$ | 82.0 | $ | 4.4 | $ | 191.0 | $ | 277.4 | ||||||||
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 nine months ended September 30, 2019 (in millions):
Balance at December 31, 2018 | $ | 178.6 | ||
Changes in fair value | 12.4 | |||
Balance at September 30, 2019 | $ | 191.0 |
13
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 1.9% to 3.0%), (2) the probability of milestone achievement (ranging from 43.4% to 98.4%), (3) the projected payment dates (ranging from 2022 to 2026, 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 | |||||||
September 30, 2019 | December 31, 2018 | ||||||
(in millions) | |||||||
Foreign currency forward exchange contracts | $ | 1,247.7 | $ | 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.
14
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 | September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||||
Foreign currency contracts | Other current assets | $ | 27.7 | $ | 29.1 | |||||
Foreign currency contracts | Other assets | $ | 1.6 | $ | — | |||||
Cross currency swap contracts | Other assets | $ | 19.2 | $ | 0.8 | |||||
Liabilities | ||||||||||
Foreign currency contracts | Accounts payable and accrued liabilities | $ | 4.4 | $ | 4.4 | |||||
Foreign currency contracts | Other long-term liabilities | $ | — | $ | 0.8 |
15
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, 2019 | Gross Amounts | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Foreign currency contracts | $ | 29.3 | $ | — | $ | 29.3 | $ | (4.0 | ) | $ | — | $ | 25.3 | ||||||||||
Cross currency swap contracts | $ | 19.2 | $ | — | $ | 19.2 | $ | — | $ | — | $ | 19.2 | |||||||||||
Derivative liabilities | |||||||||||||||||||||||
Foreign currency contracts | $ | 4.4 | $ | — | $ | 4.4 | $ | (4.0 | ) | $ | — | $ | 0.4 | ||||||||||
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 September 30, | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Three Months Ended September 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Cash flow hedges | ||||||||||||||||||
Foreign currency contracts | $ | 22.1 | $ | 12.1 | Cost of sales | $ | 12.8 | $ | (4.6 | ) | ||||||||
Selling, general, and administrative expenses | $ | 0.6 | $ | (0.4 | ) |
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, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Cash flow hedges | ||||||||||||||||||
Foreign currency contracts | $ | 32.9 | $ | 28.2 | Cost of sales | $ | 31.7 | $ | (18.8 | ) | ||||||||
Selling, general, and administrative expenses | $ | 1.4 | $ | (2.5 | ) |
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, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Net investment hedges | ||||||||||||||||||
Cross currency swap contracts | $ | 16.3 | $ | (0.5 | ) | Interest (income) expense, net | $ | 1.7 | $ | 1.6 |
16
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, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Net investment hedges | ||||||||||||||||||
Cross currency swap contracts | $ | 18.4 | $ | (10.5 | ) | Interest (income) expense, net | $ | 5.0 | $ | 1.8 | ||||||||
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 September 30, | ||||||||||
Location of Gain or (Loss) Recognized in Income on Derivative | ||||||||||
Fair value hedges | 2019 | 2018 | ||||||||
Foreign currency contracts | Other income, net | $ | 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 | ||||||||||
Fair value hedges | 2019 | 2018 | ||||||||
Foreign currency contracts | Other income, net | $ | (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 | ||||||||||
Derivatives not designated as hedging instruments | 2019 | 2018 | ||||||||
Foreign currency contracts | Other income, net | $ | 3.2 | $ | 5.9 |
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 | ||||||||||
Derivatives not designated as hedging instruments | 2019 | 2018 | ||||||||
Foreign currency contracts | Other income, net | $ | 1.7 | $ | 7.3 |
17
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 September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||||||||||||||||||
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 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 | $ | — |
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships | |||||||||||||||||
Three Months Ended September 30, 2018 | Nine Months Ended September 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 | $ | (224.9 | ) | $ | (269.5 | ) | $ | (704.7 | ) | $ | (800.4 | ) | |||||
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 | $ | (4.6 | ) | $ | (0.4 | ) | $ | (18.8 | ) | $ | (2.5 | ) |
The Company expects that during the next twelve months it will reclassify to earnings a $9.4 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 nine months ended September 30, 2019 and 2018 was as follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Cost of sales | $ | 3.6 | $ | 2.7 | $ | 11.5 | $ | 8.5 | |||||||
Selling, general, and administrative expenses | 12.4 | 11.9 | 39.4 | 36.4 | |||||||||||
Research and development expenses | 3.8 | 2.8 | 12.0 | 10.1 | |||||||||||
Total stock-based compensation expense | $ | 19.8 | $ | 17.4 | $ | 62.9 | $ | 55.0 |
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At September 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 $143.3 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, 2019, the Company granted 0.8 million stock options at a weighted-average exercise price of $178.81 and 0.2 million shares of restricted stock units at a weighted-average grant-date fair value of $179.85. The Company also granted 33,000 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 nine months ended September 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 September 30, | Nine Months Ended September 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Average risk-free interest rate | 1.8 | % | 2.8 | % | 2.3 | % | 2.9 | % | |||||||
Expected dividend yield | None | None | None | None | |||||||||||
Expected volatility | 29.7 | % | 29.2 | % | 29.6 | % | 29.1 | % | |||||||
Expected term (years) | 5.2 | 5.2 | 5.1 | 5.0 | |||||||||||
Fair value, per option | $ | 58.07 | $ | 46.37 | $ | 54.31 | $ | 42.44 |
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, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Average risk-free interest rate | 2.0 | % | 2.2 | % | 2.4 | % | 1.7 | % | |||||||
Expected dividend yield | None | None | None | None | |||||||||||
Expected volatility | 32.0 | % | 34.3 | % | 32.4 | % | 32.8 | % | |||||||
Expected term (years) | 0.7 | 0.7 | 0.6 | 0.6 | |||||||||||
Fair value, per share | $ | 57.31 | $ | 46.58 | $ | 49.29 | $ | 36.53 |
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.
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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. The court subsequently granted Abbott's request for a preliminary injunction on the '850 patent and Edwards has appealed.
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.
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Because the ultimate outcome of the above matters involve judgments, estimates, and inherent uncertainties, charges related to such matters could have a material adverse impact on Edwards Lifesciences' financial results. The Company records accruals for loss contingencies to the extent it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company is not able to estimate the amount or range of any loss for these matters.
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 nine months ended September 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 (loss) gain before reclassifications | (17.6 | ) | 35.1 | 7.8 | (0.3 | ) | 25.0 | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss | (5.0 | ) | (31.0 | ) | 0.3 | — | (35.7 | ) | |||||||||||
Deferred income tax expense | (4.5 | ) | (0.3 | ) | (1.8 | ) | — | (6.6 | ) | ||||||||||
September 30, 2019 | $ | (170.7 | ) | $ | 27.4 | $ | 1.3 | $ | (13.8 | ) | $ | (155.8 | ) |
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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 | 2019 | 2018 | 2019 | 2018 | |||||||||||||
Foreign currency translation adjustments | $ | 1.7 | $ | — | $ | 5.0 | $ | — | Other income, net | ||||||||
(0.4 | ) | — | (1.2 | ) | — | Provision for income taxes | |||||||||||
$ | 1.3 | $ | — | $ | 3.8 | $ | — | Net of tax | |||||||||
Gain on hedges | $ | 12.8 | $ | (4.6 | ) | $ | 31.7 | $ | (18.8 | ) | Cost of sales | ||||||
0.6 | (0.4 | ) | 1.4 | (2.5 | ) | Selling, general, and administrative expenses | |||||||||||
2.1 | — | (2.1 | ) | — | Other income, net | ||||||||||||
15.5 | (5.0 | ) | 31.0 | (21.3 | ) | Total before tax | |||||||||||
(3.5 | ) | 1.1 | (8.3 | ) | 5.1 | Provision for income taxes | |||||||||||
$ | 12.0 | $ | (3.9 | ) | $ | 22.7 | $ | (16.2 | ) | Net of tax | |||||||
(Loss) gain on available-for-sale investments | $ | — | $ | (0.6 | ) | $ | (0.3 | ) | $ | (2.9 | ) | Other income, net | |||||
— | — | — | 0.2 | Provision for income taxes | |||||||||||||
$ | — | $ | (0.6 | ) | $ | (0.3 | ) | $ | (2.7 | ) | Net of tax | ||||||
Unrealized pension costs | $ | — | $ | — | $ | — | $ | (0.6 | ) | Other income, net | |||||||
— | — | — | 0.1 | Provision for 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Basic: | |||||||||||||||
Net income | $ | 274.7 | $ | 225.9 | $ | 766.7 | $ | 715.2 | |||||||
Weighted-average shares outstanding | 208.2 | 209.0 | 208.1 | 209.5 | |||||||||||
Basic earnings per share | $ | 1.32 | $ | 1.08 | $ | 3.68 | $ | 3.41 | |||||||
Diluted: | |||||||||||||||
Net income | $ | 274.7 | $ | 225.9 | $ | 766.7 | $ | 715.2 | |||||||
Weighted-average shares outstanding | 208.2 | 209.0 | 208.1 | 209.5 | |||||||||||
Dilutive effect of stock plans | 3.9 | 4.2 | 4.0 | 4.6 | |||||||||||
Dilutive weighted-average shares outstanding | 212.1 | 213.2 | 212.1 | 214.1 | |||||||||||
Diluted earnings per share | $ | 1.30 | $ | 1.06 | $ | 3.61 | $ | 3.34 |
Stock options, restricted stock units, and market-based restricted stock units to purchase 0.8 million and 1.0 million shares for the three months ended September 30, 2019 and 2018, respectively, and 0.6 million and 1.1 million shares for the nine
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months ended September 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 8.9% and 9.2% for the three months ended September 30, 2019 and 2018, respectively, and 9.9% and 6.3% for the nine months ended September 30, 2019 and 2018, respectively. The effective rates for the nine months ended September 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 nine months ended September 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 nine months ended September 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 $19.6 million and $12.9 million for the three months ended September 30, 2019 and 2018, respectively, and $56.2 million and $44.3 million for the nine months ended September 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 September 30, 2019 and December 31, 2018, the liability for income taxes associated with uncertain tax positions was $186.2 million and $150.7 million, respectively. The Company estimates that these liabilities would be reduced by $61.7 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 $124.5 million and $108.0 million, respectively, if not required, would favorably affect the Company's effective tax rate.
At September 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. During the third quarter of 2019, the Company received a letter from the Dominican Republic tax authorities stating that their review through 2018 had concluded, and as a result no withholding tax was due.
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.
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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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Segment Net Sales | |||||||||||||||
United States | $ | 647.8 | $ | 518.5 | $ | 1,835.5 | $ | 1,510.2 | |||||||
Europe | 219.8 | 191.6 | 684.3 | 608.1 | |||||||||||
Japan | 110.0 | 95.4 | 322.9 | 288.4 | |||||||||||
Rest of World | 112.0 | 96.8 | 316.5 | 290.2 | |||||||||||
Total segment net sales | $ | 1,089.6 | $ | 902.3 | $ | 3,159.2 | $ | 2,696.9 | |||||||
Segment Operating Income | |||||||||||||||
United States | $ | 447.4 | $ | 353.0 | $ | 1,258.3 | $ | 1,010.5 | |||||||
Europe | 111.5 | 90.9 | 353.2 | 295.6 | |||||||||||
Japan | 70.7 | 55.0 | 202.8 | 171.8 | |||||||||||
Rest of World | 36.7 | 28.3 | 99.8 | 89.6 | |||||||||||
Total segment operating income | $ | 666.3 | $ | 527.2 | $ | 1,914.1 | $ | 1,567.5 |
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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, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net Sales Reconciliation | |||||||||||||||
Segment net sales | $ | 1,089.6 | $ | 902.3 | $ | 3,159.2 | $ | 2,696.9 | |||||||
Foreign currency | 4.4 | 4.3 | 14.7 | 48.2 | |||||||||||
Consolidated net sales | $ | 1,094.0 | $ | 906.6 | $ | 3,173.9 | $ | 2,745.1 | |||||||
Pre-tax Income Reconciliation | |||||||||||||||
Segment operating income | $ | 666.3 | $ | 527.2 | $ | 1,914.1 | $ | 1,567.5 | |||||||
Unallocated amounts: | |||||||||||||||
Corporate items | (384.2 | ) | (281.0 | ) | (1,073.1 | ) | (792.0 | ) | |||||||
Special charge (Note 4) | — | — | (24.0 | ) | — | ||||||||||
Intellectual property litigation expenses | (7.9 | ) | (7.9 | ) | (19.5 | ) | (19.1 | ) | |||||||
Change in fair value of contingent consideration liabilities, net | 2.3 | 6.4 | (12.4 | ) | (8.3 | ) | |||||||||
Foreign currency | 17.8 | 4.2 | 50.9 | 5.4 | |||||||||||
Consolidated operating income | 294.3 | 248.9 | 836.0 | 753.5 | |||||||||||
Non-operating income | 7.4 | (0.2 | ) | 15.0 | 9.7 | ||||||||||
Consolidated pre-tax income | $ | 301.7 | $ | 248.7 | $ | 851.0 | $ | 763.2 |
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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(in millions) | |||||||||||||||
Net Sales by Geographic Area | |||||||||||||||
United States | $ | 647.8 | $ | 518.7 | $ | 1,835.5 | $ | 1,510.3 | |||||||
Europe | 222.6 | 201.3 | 699.0 | 659.3 | |||||||||||
Japan | 112.9 | 94.2 | 324.4 | 289.5 | |||||||||||
Rest of World | 110.7 | 92.4 | 315.0 | 286.0 | |||||||||||
$ | 1,094.0 | $ | 906.6 | $ | 3,173.9 | $ | 2,745.1 | ||||||||
Net Sales by Major Product and Service Area | |||||||||||||||
Transcatheter Aortic Valve Replacement | $ | 700.0 | $ | 557.1 | $ | 1,975.4 | $ | 1,692.2 | |||||||
Transcatheter Mitral and Tricuspid Therapies | 9.7 | 0.7 | 21.0 | 2.1 | |||||||||||
Surgical Structural Heart | 204.1 | 184.6 | 636.6 | 554.4 | |||||||||||
Critical Care | 180.2 | 164.2 | 540.9 | 496.4 | |||||||||||
$ | 1,094.0 | $ | 906.6 | $ | 3,173.9 | $ | 2,745.1 |
September 30, 2019 | December 31, 2018 | ||||||
(in millions) | |||||||
Long-lived Tangible Assets by Geographic Area | |||||||
United States | $ | 791.5 | $ | 642.1 | |||
Europe | 73.7 | 36.6 | |||||
Japan | 23.1 | 6.7 | |||||
Rest of World | 258.7 | 214.4 | |||||
$ | 1,147.0 | $ | 899.8 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or intensive care. We conduct operations worldwide and are managed in the following geographical regions: United States, Europe, Japan, and Rest of World. Our products are categorized into the following main areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care.
Financial Highlights
![ew10-qq220_chartx39428a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx39428a13.jpg)
![ew10-qq220_chartx40915a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx40915a13.jpg)
Our sales growth was driven by our TAVR products, primarily increased sales of the Edwards SAPIEN 3 transcatheter heart valve and the Edwards SAPIEN 3 Ultra System. Our 2018 year-to-date Surgical sales in the United States were reduced by a $77.5 million sales return reserve related to our conversion to a consignment inventory model for surgical valves.
Our gross profit increase was driven by our sales performance noted above. Partially offsetting this increase, during the three and nine months ended September 30, 2019 we recorded a charge of $26.9 million and $73.1 million, respectively, primarily comprised of the write off of inventory related to strategic decisions regarding our transcatheter aortic valve portfolio, including the decision to discontinue our CENTERA program. The charge recorded in the three months ended September 30, 2019 included an out-of-period adjustment of $10.3 million. We determined that the out-of-period adjustment is not material to the three or nine months ended September 30, 2019 or to any prior periods.
The increase from the prior year in our diluted earnings per share was primarily driven by the aforementioned sales growth, partially offset by a prior year tax benefit combined with the current year charge, noted above, related to decisions regarding our TAVR portfolio.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property in support of those developments. In the first nine months of 2019, we invested 17.6% of our net sales in research and development.
New Accounting Standards
For information on new accounting standards, see Note 1 to the "Consolidated Condensed Financial Statements."
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Results of Operations
Net Sales Trends
(dollars in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
Percent Change | Percent Change | ||||||||||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||||||||
United States | $ | 647.8 | $ | 518.7 | $ | 129.1 | 24.9 | % | $ | 1,835.5 | $ | 1,510.3 | $ | 325.2 | 21.5 | % | |||||||||||||
Europe | 222.6 | 201.3 | 21.3 | 10.5 | % | 699.0 | 659.3 | 39.7 | 6.0 | % | |||||||||||||||||||
Japan | 112.9 | 94.2 | 18.7 | 19.9 | % | 324.4 | 289.5 | 34.9 | 12.1 | % | |||||||||||||||||||
Rest of World | 110.7 | 92.4 | 18.3 | 19.6 | % | 315.0 | 286.0 | 29.0 | 10.2 | % | |||||||||||||||||||
International | 446.2 | 387.9 | 58.3 | 15.0 | % | 1,338.4 | 1,234.8 | 103.6 | 8.4 | % | |||||||||||||||||||
Total net sales | $ | 1,094.0 | $ | 906.6 | $ | 187.4 | 20.7 | % | $ | 3,173.9 | $ | 2,745.1 | $ | 428.8 | 15.6 | % |
International net sales include the impact of foreign currency exchange rate fluctuations. The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs, and our hedging activities. For more information, see Item 3, "Quantitative and Qualitative Disclosures About Market Risk."
Net Sales by Product Group
(dollars in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
Percent Change | Percent Change | ||||||||||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||||||||
Transcatheter Aortic Valve Replacement | $ | 700.0 | $ | 557.1 | $ | 142.9 | 25.7 | % | $ | 1,975.4 | $ | 1,692.2 | $ | 283.2 | 16.7 | % | |||||||||||||
Transcatheter Mitral and Tricuspid Therapies | 9.7 | 0.7 | 9.0 | NM | 21.0 | 2.1 | 18.9 | NM | |||||||||||||||||||||
Surgical Structural Heart | 204.1 | 184.6 | 19.5 | 10.5 | % | 636.6 | 554.4 | 82.2 | 14.8 | % | |||||||||||||||||||
Critical Care | 180.2 | 164.2 | 16.0 | 9.7 | % | 540.9 | 496.4 | 44.5 | 9.0 | % | |||||||||||||||||||
Total net sales | $ | 1,094.0 | $ | 906.6 | $ | 187.4 | 20.7 | % | $ | 3,173.9 | $ | 2,745.1 | $ | 428.8 | 15.6 | % |
NM - Not meaningful
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Transcatheter Aortic Valve Replacement
![ew10-qq120_chartx55097a14.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq120_chartx55097a14.jpg)
Net sales of TAVR products increased for the three and nine months ended September 30, 2019 due primarily to:
• | higher sales of the Edwards SAPIEN 3 valve, particularly in the United States, driven by strong therapy adoption; and |
• | higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory approval in Europe (November 2018) and the United States (December 2018); |
partially offset by
• | foreign currency exchange rate fluctuations, which decreased net sales for the three and nine months ended September 30, 2019 by $4.2 million and $29.5 million, respectively, due primarily to the weakening of the Euro against the United States dollar. |
The March 2019 results of the PARTNER 3 Trial demonstrated superiority of SAPIEN 3 TAVR over surgery in the low risk patient population. In August 2019, we received U.S. Food and Drug Administration ("FDA") approval to expand use of the Edwards SAPIEN 3 and SAPIEN 3 Ultra transcatheter heart valve systems to the treatment of severe, symptomatic aortic stenosis patients who are determined to be at low risk of open-heart surgery. Given the approval for patients at low surgical risk and the continued excellence and versatility of our balloon expandable platform, we decided to discontinue the CENTERA program. While the CENTERA valve has demonstrated excellent clinical outcomes and is performing well for patients, the time and resources required to optimize deliverability as well as expanding the indications to match the SAPIEN 3 valve are significant. We are continuing our launch of the Edwards SAPIEN 3 Ultra System.
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Transcatheter Mitral and Tricuspid Therapies
![chart-24a48e476b4c9df1964a02.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/chart-24a48e476b4c9df1964a02.jpg)
Net sales of TMTT products increased for the three and nine months ended September 30, 2019 due primarily to the launch of the Edwards PASCAL transcatheter valve repair system in Europe.
In mitral repair, we continue to enroll our CLASP IID U.S. pivotal trial to study PASCAL in primary, or degenerative, mitral valve disease. We also have initiated enrollment in our CLASP IIF pivotal trial for patients with secondary, or functional, mitral valve disease. In September, we received FDA approval for our CLASP IITR pivotal trial to study PASCAL in patients with symptomatic severe tricuspid regurgitation.
Surgical Structural Heart
![ew10-qq120_chartx56718a14.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq120_chartx56718a14.jpg)
Net sales of Surgical increased for the three and nine months ended September 30, 2019 due primarily to:
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• | sales return reserves in the prior year periods of $14.4 million and $77.5 million, respectively, in the United States related to our conversion to a consignment inventory model; and |
• | increased sales of aortic tissue valves in the United States and Japan, primarily the INSPIRIS RESILIA aortic valve; |
partially offset by:
• | foreign currency exchange rate fluctuations, which decreased net sales for the three and nine months ended September 30, 2019 by $1.3 million and $13.5 million, respectively, due primarily to the weakening of the Euro against the United States dollar. |
Critical Care
![ew10-qq120_chartx58317a14.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq120_chartx58317a14.jpg)
The increase in net sales of Critical Care products was driven by our HemoSphere advanced monitoring platform and our core hemodynamic products, primarily in the United States, partially offset by foreign currency exchange rate fluctuations, which decreased net sales for the three and nine months ended September 30, 2019 by $0.6 million and $9.1 million, respectively, due primarily to the weakening of the Euro against the United States dollar.
On April 18, 2019, we completed the acquisition of CAS Medical Systems, Inc. ("CASMED"). CASMED is a medical technology company dedicated to non-invasive monitoring of tissue oxygenation in the brain. Our sales for the three and nine months ended September 30, 2019 included $5.5 million and $10.3 million, respectively, related to CASMED.
We received FDA clearance in the third quarter of 2019 to use FORE-SIGHT, our cerebral oximetry technology, on our Hemosphere platform.
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Gross Profit
![ew10-qq220_chartx43964a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx43964a13.jpg)
The decrease in gross profit as a percentage of net sales for the three and nine months ended September 30, 2019 was driven primarily by a charge of $26.9 million and $73.1 million, respectively, related to strategic decisions regarding our transcatheter aortic valve portfolio, including the decision to discontinue our CENTERA program. For further information see the "Financial Highlights" section above. This decrease was partially offset by a 1.3 percentage point and 1.9 percentage point increase, respectively, due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts.
Selling, General, and Administrative ("SG&A") Expenses![ew10-qq220_chartx45302a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx45302a13.jpg)
![ew10-qq220_chartx45302a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx45302a13.jpg)
The increase in SG&A expenses for the three and nine months ended September 30, 2019 was due primarily to higher transcatheter structural heart field personnel-related costs, primarily in the United States and Europe. These increases were partially offset by the impact of foreign currency, which decreased expenses by $2.2 million and $14.8 million, respectively, primarily due to the strengthening of the United States dollar. The decrease in SG&A expenses as a percentage of sales was primarily due to leverage from our higher sales performance.
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Research and Development ("R&D") Expenses
![ew10-qq220_chartx46645a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx46645a13.jpg)
The increase in R&D expenses and ratio as a percentage of net sales for the three and nine months ended September 30, 2019 was due primarily to continued investments in our transcatheter structural heart programs, including generating clinical evidence.
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in income of $2.3 million and expense of 12.4 million for the three and nine months ended September 30, 2019, respectively, and income of $6.4 million and expense of $8.3 million for the three and nine months ended September 30, 2018, respectively. The income in the three month periods were primarily due to changes in the projected timing of cash inflows and milestone achievement. For the year to date periods, the expense was primarily driven by adjustments to discount rates and the accretion of interest due to the passage of time. For further information, see Note 7 to the "Consolidated Condensed Financial Statements."
Special Charge (Gain)
For information on special charge (gain), see Note 4 to the "Consolidated Condensed Financial Statements."
Other Income, net
(in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Foreign exchange gains, net | $ | (1.0 | ) | $ | (0.6 | ) | $ | (4.6 | ) | $ | (4.9 | ) | |||
(Gain) loss on investments | (1.6 | ) | — | (1.2 | ) | 2.1 | |||||||||
CASMED earn-out on sale of assets | (2.0 | ) | — | (2.0 | ) | — | |||||||||
Other | — | 0.3 | — | 0.5 | |||||||||||
Other income, net | $ | (4.6 | ) | $ | (0.3 | ) | $ | (7.8 | ) | $ | (2.3 | ) |
The net foreign exchange gains relate primarily to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures.
The (gain) loss on investments primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on our money market accounts and equity securities.
The CASMED earn-out relates to a sales performance obligation by an entity that purchased one of CASMED's discontinued product lines in 2017.
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Provision for Income Taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outside the United States, which have statutory tax rates lower than the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
Our effective income tax rate was 8.9% and 9.2% for the three months ended September 30, 2019 and 2018, respectively, and 9.9% and 6.3% for the nine months ended September 30, 2019 and 2018, respectively. The effective rates for the nine months ended September 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 nine months ended September 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 nine months ended September 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 $19.6 million and $12.9 million for the three months ended September 30, 2019 and 2018, respectively, and $56.2 million and $44.3 million for the nine months ended September 30, 2019 and 2018.
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.
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. During the third quarter of 2019, we received a letter from the Dominican Republic tax authorities stating that their review through 2018 had concluded, and as a result no withholding tax was due.
We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe 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, we may later decide to challenge any assessments, if made, and may exercise our 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. We believe that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from our uncertain tax positions. For further information, see Note 14 to the "Consolidated Condensed Financial Statements."
During 2018, we 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 our consolidated condensed financial statements.
Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, amounts available under credit facilities, and cash from operations. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions.
As of September 30, 2019, cash and cash equivalents and short-term investments held in the United States and outside the United States were $1,039.2 million and $317.7 million, respectively.
On April 18, 2019, we acquired CASMED for an aggregate cash purchase price of $2.45 per share of common stock, or $100.8 million. For more information, see Note 6 to the "Consolidated Condensed Financial Statements."
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Certain of our business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired company reaching certain performance milestones, such as attaining specified revenue levels, achieving product development targets, or obtaining regulatory approvals. For further information, see Note 7 to the "Consolidated Condensed Financial Statements."
In April 2018, we entered into a Five-Year Credit Agreement ("the Credit Agreement") which matures on April 28, 2023. The Credit Agreement provides up to an aggregate of $750.0 million in borrowings in multiple currencies. Subject to certain terms and conditions, we may increase the amount available under the Credit Agreement by up to an additional $250.0 million in the aggregate. As of September 30, 2019, there were no borrowings outstanding under the Credit Agreement.
In June 2018, we issued $600.0 million of 4.300% fixed-rate unsecured senior notes (the "2018 Notes") due June 15, 2028. As of September 30, 2019, the total carrying value of the 2018 Notes was $594.2 million.
From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. We consider several factors in determining when to execute share repurchases, including, among other things, expected dilution from stock plans, cash capacity, and the market price of our common stock. During 2019, we repurchased a total of 1.4 million shares at an aggregate cost of $255.0 million, and as of September 30, 2019, we had remaining authority to purchase $1.2 billion of our common stock.
At September 30, 2019, there had been no material changes in our significant contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Consolidated Cash Flows - For the nine months ended September 30, 2019 and 2018:
![ew10-qq220_chartx39380a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx39380a13.jpg)
![ew10-qq220_chartx40257a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx40257a13.jpg)
![ew10-qq220_chartx40975a13.jpg](https://www.sec.gov/Archives/edgar/data/0001099800/000109980019000024/ew10-qq220_chartx40975a13.jpg)
Net cash flows provided by operating activities of $780.0 million for the nine months ended September 30, 2019 increased $146.2 million over the same period last year due primarily to (1) higher tax payments in 2018 related to an audit settlement, (2) improved operating performance in 2019, and (3) a higher bonus payout in 2018 associated with 2017 performance, partially offset by (1) a payment of $180.0 million for a litigation settlement and (2) higher working capital needs in 2019.
Net cash used in investing activities of $150.5 million for the nine months ended September 30, 2019 consisted primarily of (1) capital expenditures of $182.9 million, (2) an $100.2 million net cash payment associated with the acquisition of CASMED, (3) a $35.0 million payment for an option to acquire a company, and (4) a $24.0 million payment to acquire certain early-stage transcatheter intellectual property and associated clinical and regulatory experience, partially offset by net proceeds from investments of $203.3 million.
Net cash provided by investing activities of $71.0 million for the nine months ended September 30, 2018 consisted primarily of net proceeds from investments of $275.9 million, partially offset by capital expenditures of $181.1 million and a $10.0 million contingent consideration milestone payment associated with the acquisition of Harpoon Medical, Inc.
Net cash used in financing activities of $152.6 million for the nine months ended September 30, 2019 consisted primarily of purchases of treasury stock of $255.0 million, partially offset by proceeds from stock plans of $125.5 million.
Net cash used in financing activities of $256.5 million for the nine months ended September 30, 2018 consisted primarily of purchases of treasury stock of $512.4 million and a $15.1 million contingent consideration milestone cash payment
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associated with the acquisition of Valtech Cardio Ltd., partially offset by net proceeds from debt of $162.3 million and proceeds from stock plans of $119.3 million.
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 39-41 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes from the information discussed therein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk, Foreign Currency Risk, Credit Risk, and Concentrations of Risk
For a complete discussion of our exposure to interest rate risk, foreign currency risk, credit risk, and concentrations of risk, refer to Item 7A "Quantitative and Qualitative Disclosures About Market Risk" on pages 42-44 of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes from the information discussed therein.
Investment Risk
We are exposed to investment risks related to changes in the underlying financial condition and credit capacity of certain of our investments. As of September 30, 2019, we had $529.3 million of investments in fixed-rate debt securities of various companies, of which $359.0 million were long-term. In addition, we had $27.0 million of investments in equity instruments of public and private companies. Should these companies experience a decline in financial condition or credit capacity, or fail to meet certain development milestones, a decline in the investments' value may occur, resulting in unrealized or realized losses.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2019. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of September 30, 2019 that our disclosure controls and procedures are effective in providing reasonable assurance that the information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to leases on our financial statements to facilitate its adoption on January 1, 2019. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.
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Part II. Other Information
Item 1. Legal Proceedings
Please see Note 11 to the "Consolidated Condensed Financial Statements" of this Quarterly Report on Form 10-Q, which is incorporated by reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period | Total Number of Shares (or Units) Purchased (a) | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (b) | |||||||||||||
July 1, 2019 through July 31, 2019 | 1,014 | $ | 190.33 | — | $ | 1,239.6 | |||||||||||
August 1, 2019 through August 31, 2019 | — | — | — | 1,239.6 | |||||||||||||
September 1, 2019 through September 30, 2019 | 4,889 | 218.37 | — | 1,239.6 | |||||||||||||
Total | 5,903 | 213.55 | — | ||||||||||||||
(a) | The difference between the total number of shares (or units) purchased and the total number of shares (or units) purchased as part of publicly announced plans or programs is due to shares withheld by us to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued to employees. |
(b) | On May 8, 2019, the Board of Directors approved a stock repurchase program authorizing us to purchase on the open market, including pursuant to a Rule 10b5-1 plan and in privately negotiated transactions, up to $1.0 billion of our common stock. |
Item 6. Exhibits
The exhibits listed in the Exhibit Index (following the signature page of this report) are filed, furnished, or incorporated by reference as part of this report on Form 10-Q.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EDWARDS LIFESCIENCES CORPORATION | |||
(Registrant) | |||
Date: | October 25, 2019 | By: | /s/ SCOTT B. ULLEM |
Scott B. Ullem Chief Financial Officer (Principal Financial Officer) | |||
Date: | October 25, 2019 | By: | /s/ ROBERT W.A. SELLERS |
Robert W.A. Sellers Corporate Controller (Principal Accounting Officer) |
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EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Exhibit No. | Description | |||
31.1 | ||||
31.2 | ||||
32 | ||||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||
101.SCH | XBRL Taxonomy Extension Schema Document. | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Represents management contract or compensatory plan
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