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Table of Contents

 
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, 2020
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 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 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 20, 2020 was 623,248,273.
 

Table of Contents

EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended September 30, 2020

TABLE OF CONTENTS
 
 
Page
Number
 
 
 
 
 
 
 
 

Table of Contents

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, the expected impact of COVID-19 on our business, any predictions, opinions, expectations, plans, strategies, objectives and any statements of assumptions underlying any of the foregoing relating to the company's current and future business and operations, including, but not limited to, financial matters, development activities, clinical trials and regulatory matters, manufacturing and supply operations, and product sales and demand. 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. Statements of past performance, efforts, or results about which inferences or assumptions may be made can also be forward-looking statements and are not indicative of future performance or results; these statements can be identified by the use of words such as "preliminary," "initial," diligence," "industry-leading," "compliant," "indications," or "early feedback" or other forms of these words or similar words or expressions or the negative thereof. 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. These risks and uncertainties include, but are not limited to: uncertainties regarding the severity and duration of the COVID-19 pandemic and its impact on our business and the economy generally, clinical trial or commercial results or new product approvals and therapy adoption; unpredictability of product launches; competitive dynamics; changes to reimbursement for the company's products; the company’s success in developing new products and avoiding manufacturing and quality issues; the impact of currency exchange rates; the timing or results of research and development and clinical trials; unanticipated actions by the U.S. Food and Drug Administration and other regulatory agencies; unexpected litigation impacts or expenses; and other risks detailed under “Risk Factors” in the quarterly report on Form 10-Q for the quarter ended March 31, 2020 and in our annual report on Form 10-K for the year ended December 31, 2019, as such risks and uncertainties may be amended, supplemented or superseded from time to time by subsequent reports on Forms 10-Q and 8-K we file with the Securities and Exchange Commission from time to time. 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.


Table of Contents

Part I. Financial Information

Item 1.    Financial Statements
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except par value; unaudited)
 
September 30,
2020
 
December 31,
2019
ASSETS
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
1,024.0

 
$
1,179.1

Short-term investments (Note 5)
271.3

 
337.8

Accounts receivable, net of allowances of $9.9 and $8.7, respectively
549.7

 
543.6

Other receivables
122.0

 
55.5

Inventories (Note 2)
773.3

 
640.9

Prepaid expenses
68.6

 
59.1

Other current assets
171.5

 
168.0

Total current assets
2,980.4

 
2,984.0

Long-term investments (Note 5)
599.0

 
585.5

Property, plant, and equipment, net
1,276.3

 
1,060.3

Operating lease right-of-use assets
89.5

 
80.1

Goodwill
1,170.0

 
1,167.7

Other intangible assets, net
332.4

 
336.5

Deferred income taxes
215.2

 
172.2

Other assets
138.0

 
101.8

Total assets
$
6,800.8

 
$
6,488.1

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities (Note 2)
$
822.1

 
$
876.9

Operating lease liabilities
24.2

 
25.5

Total current liabilities
846.3

 
902.4

Long-term debt
594.9

 
594.4

Contingent consideration liabilities (Note 6)
180.9

 
172.5

Taxes payable
214.2

 
236.6

Operating lease liabilities
71.0

 
58.9

Uncertain tax positions
199.2

 
171.7

Other liabilities (Note 2)
484.0

 
203.3

Commitments and contingencies (Note 9)


 


Stockholders' equity
 

 
 

Preferred stock, $.01 par value, authorized 50.0 shares, no shares outstanding          
—

 
—

Common stock, $1.00 par value, 1,050.0 shares authorized, 635.0 and 218.1 shares issued, and 622.9 and 209.1 shares outstanding, respectively (Note 1)
635.0

 
218.1

Additional paid-in capital
1,381.6

 
1,623.3

Retained earnings
4,255.5

 
3,741.6

Accumulated other comprehensive loss (Note 10)
(157.9
)
 
(156.0
)
Treasury stock, at cost, 12.1 and 9.0 shares, respectively
(1,903.9
)
 
(1,278.7
)
Total stockholders' equity
4,210.3

 
4,148.3

Total liabilities and stockholders' equity
$
6,800.8

 
$
6,488.1

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

1
Table of Contents

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,
 
2020
 
2019
 
2020
 
2019
Net sales
$
1,140.9

 
$
1,094.0

 
$
3,194.6

 
$
3,173.9

Cost of sales
281.0

 
292.4

 
784.3

 
828.2

Gross profit
859.9

 
801.6

 
2,410.3

 
2,345.7

Selling, general, and administrative expenses
307.2

 
306.2

 
889.9

 
895.0

Research and development expenses
195.5

 
195.5

 
565.0

 
558.8

Intellectual property litigation expenses (Note 3)
8.4

 
7.9

 
400.8

 
19.5

Change in fair value of contingent consideration liabilities, net (Note 6)
(9.0
)
 
(2.3
)
 
8.4

 
12.4

Special charge (Note 4)
—

 
—

 
—

 
24.0

Operating income
357.8

 
294.3

 
546.2

 
836.0

Interest income, net
(0.8
)
 
(2.8
)
 
(7.1
)
 
(7.2
)
Other income, net
(5.7
)
 
(4.6
)
 
(7.3
)
 
(7.8
)
Income before provision for income taxes
364.3

 
301.7

 
560.6

 
851.0

Provision for income taxes
39.1

 
27.0

 
46.7

 
84.3

Net income
$
325.2

 
$
274.7

 
$
513.9

 
$
766.7

Share information (Notes 1 and 11)
 

 
 

 
 

 
 

Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.52

 
$
0.44

 
$
0.83

 
$
1.23

Diluted
$
0.52

 
$
0.43

 
$
0.82

 
$
1.20

Weighted-average number of common shares outstanding:
 

 
 

 
 

 
 

Basic
622.1

 
624.6

 
622.3

 
624.3

Diluted
631.0

 
636.3

 
628.8

 
636.3

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

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Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Net income
$
325.2

 
$
274.7

 
$
513.9

 
$
766.7

Other comprehensive loss, net of tax (Note 10):
 
 
 
 
 
 
 
Foreign currency translation adjustments
10.6

 
(23.5
)
 
14.6

 
(27.1
)
Unrealized (loss) gain on hedges
(22.2
)
 
5.6

 
(22.9
)
 
3.8

Defined benefit pension plans
0.1

 
(0.2
)
 
(0.1
)
 
(0.3
)
Unrealized (loss) gain on available-for-sale investments
(0.4
)
 
0.5

 
6.3

 
6.0

Reclassification of net realized investment loss to earnings
0.1

 
—

 
0.2

 
0.3

Other comprehensive loss
(11.8
)
 
(17.6
)
 
(1.9
)
 
(17.3
)
Comprehensive income
$
313.4

 
$
257.1

 
$
512.0

 
$
749.4

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

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Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
 
Nine Months Ended   
September 30,
 
2020
 
2019
Cash flows from operating activities
 

 
 

Net income
$
513.9

 
$
766.7

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
74.6

 
65.4

Non-cash operating lease cost
20.7

 
18.7

Stock-based compensation (Note 8)
71.7

 
62.9

Inventory write off
—

 
73.1

Change in fair value of contingent consideration liabilities, net (Note 6)
8.4

 
12.4

Deferred income taxes
(37.8
)
 
9.5

Purchase of intellectual property (Note 4)
—

 
24.0

Other
0.6

 
(4.8
)
Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables, net
(9.2
)
 
(70.3
)
Inventories
(118.2
)
 
(83.9
)
Accounts payable and accrued liabilities
(53.9
)
 
70.8

Income taxes
(65.6
)
 
17.0

Prepaid expenses and other current assets
(22.1
)
 
(2.5
)
Litigation settlement accrual (Note 3)
269.2

 
(180.0
)
Other
2.0

 
1.0

Net cash provided by operating activities
654.3

 
780.0

Cash flows from investing activities
 

 
 

Capital expenditures
(293.8
)
 
(182.9
)
Purchases of held-to-maturity investments (Note 5)
(112.0
)
 
(30.0
)
Proceeds from held-to-maturity investments (Note 5)
212.2

 
50.0

Purchases of available-for-sale investments (Note 5)
(394.3
)
 
(95.0
)
Proceeds from available-for-sale investments (Note 5)
358.3

 
278.3

Investments in intangible assets (Note 4)
—

 
(24.0
)
Acquisition
—

 
(100.2
)
Payment for acquisition option
(10.0
)
 
(35.0
)
Issuances of notes receivable
(26.5
)
 
(8.4
)
Other
(5.1
)
 
(3.3
)
Net cash used in investing activities
(271.2
)
 
(150.5
)
Cash flows from financing activities
 

 
 

Proceeds from issuance of debt, net
12.3

 
12.0

Payments on debt and finance lease obligations
(14.0
)
 
(23.7
)
Purchases of treasury stock
(625.2
)
 
(263.3
)
Proceeds from stock plans
103.5

 
125.5

Other
(4.9
)
 
(3.1
)
Net cash used in financing activities
(528.3
)
 
(152.6
)
Effect of currency exchange rate changes on cash and cash equivalents
(9.9
)
 
(4.4
)
Net (decrease) increase in cash and cash equivalents
(155.1
)
 
472.5

Cash and cash equivalents at beginning of period
1,179.1

 
714.1

Cash and cash equivalents at end of period
$
1,024.0

 
$
1,186.6

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

4
Table of Contents

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, 2019
218.1

 
$
218.1

 
9.0

 
$
(1,278.7
)
 
$
1,623.3

 
$
3,741.6

 
$
(156.0
)
 
$
4,148.3

Net income
 

 
 

 
 

 
 

 
 

 
310.6

 
 

 
310.6

Other comprehensive income, net of tax
 

 
 

 
 

 
 

 
 

 
 

 
4.0

 
4.0

Common stock issued under equity plans
0.4

 
0.4

 
 

 
 

 
28.7

 
 

 
 

 
29.1

Stock-based compensation expense
 

 
 

 
 

 
 

 
23.9

 
 

 
 

 
23.9

Purchases of treasury stock
 

 
 

 
3.0

 
(614.8
)
 


 
 

 
 

 
(614.8
)
Balance at March 31, 2020
218.5

 
$
218.5

 
12.0

 
$
(1,893.5
)
 
$
1,675.9

 
$
4,052.2

 
$
(152.0
)
 
$
3,901.1

Net loss


 


 


 


 


 
(121.9
)
 


 
(121.9
)
Other comprehensive income, net of tax


 


 


 


 


 


 
5.9

 
5.9

Common stock issued under equity plans
1.2

 
1.2

 


 


 
37.0

 


 


 
38.2

Stock-based compensation expense


 


 


 


 
24.8

 


 


 
24.8

Purchases of treasury stock


 


 
0.1

 
(9.0
)
 


 


 


 
(9.0
)
Stock issued to effect stock split (Note 1)
413.8

 
413.8

 


 


 
(413.8
)
 


 


 
—

Balance at June 30, 2020
633.5

 
$
633.5

 
12.1

 
$
(1,902.5
)
 
$
1,323.9

 
$
3,930.3

 
$
(146.1
)
 
$
3,839.1

Net income


 


 


 


 


 
325.2

 


 
325.2

Other comprehensive loss, net of tax


 


 


 


 


 


 
(11.8
)
 
(11.8
)
Common stock issued under equity plans
1.5

 
1.5

 


 


 
34.7

 


 


 
36.2

Stock-based compensation expense


 


 


 


 
23.0

 


 


 
23.0

Purchases of treasury stock


 


 
—

 
(1.4
)
 


 


 


 
(1.4
)
Balance at September 30, 2020
635.0

 
$
635.0

 
12.1

 
$
(1,903.9
)
 
$
1,381.6

 
$
4,255.5

 
$
(157.9
)
 
$
4,210.3

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


5
Table of Contents

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 loss, 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 loss, 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 loss, 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.


6
Table of Contents


1.     BASIS OF PRESENTATION

The accompanying interim consolidated condensed financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in Edwards Lifesciences Corporation's Annual Report on Form 10-K for the year ended December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from these estimates. In particular, the novel Coronavirus ("COVID-19") pandemic has adversely impacted and is likely to further adversely impact nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners.  The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including sales, expenses, manufacturing, clinical trials, research and development costs, reserves and allowances, fair value measurements, asset impairment charges, contingent consideration obligations, and the effectiveness of the Company's hedging instruments, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair statement of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

Certain reclassifications have been made to the prior year's consolidated condensed financial statements to conform to the current year presentation.

Stock Split

On May 7, 2020, the Company’s Board of Directors declared a three-for-one stock split of its outstanding shares of common stock effected in the form of a stock dividend, distributed on May 29, 2020 to stockholders of record on May 18, 2020. The Company distributed two newly issued shares of common stock to holders of record of each share of common stock to effect the stock split. All applicable share and per-share amounts in the consolidated condensed financial statements and the notes to consolidated condensed financial statements have been retroactively adjusted to reflect this stock split. The consolidated condensed balance sheet as of December 31, 2019 and the consolidated condensed statements of stockholders’ equity for the nine months ended September 30, 2019 have not been retroactively adjusted to reflect the stock split.

Recently Adopted Accounting Standards

In August 2018, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on cloud computing service arrangements. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The guidance was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued an amendment to the accounting guidance on fair value measurements. The guidance modifies the disclosure requirements on fair value measurements, including the removal of disclosures of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements related to Level 3 fair value measurements. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued an amendment to the guidance on the measurement of credit losses on financial instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured at

7
Table of Contents

amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The guidance was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.

2.     OTHER CONSOLIDATED FINANCIAL STATEMENT DETAILS

Composition of Certain Financial Statement Captions

Components of selected captions in the consolidated condensed balance sheets consisted of the following (in millions):
 
September 30, 2020
 
December 31, 2019
Inventories
 
 
 
Raw materials
$
129.3

 
$
118.0

Work in process
148.3

 
121.7

Finished products
495.7

 
401.2

 
$
773.3

 
$
640.9



At September 30, 2020 and December 31, 2019, $119.4 million and $117.8 million, respectively, of the Company's finished products inventories were held on consignment.

 
September 30, 2020
 
December 31, 2019
 
(in millions)
Accounts payable and accrued liabilities
 

 
 

Accounts payable
$
162.5

 
$
180.4

Employee compensation and withholdings
244.8

 
295.8

Taxes payable (Note 12)
42.3

 
52.9

Property, payroll, and other taxes
45.5

 
51.4

Research and development accruals
53.7

 
51.4

Accrued rebates
59.8

 
67.1

Fair value of derivatives
21.4

 
6.4

Accrued marketing expenses
15.1

 
17.5

Litigation settlement (Note 3)
25.0

 
—

Litigation and insurance reserves
21.3

 
20.0

Accrued relocation costs
19.7

 
17.4

Accrued professional services
6.4

 
10.1

Accrued realignment reserves
14.2

 
16.7

Other accrued liabilities
90.4

 
89.8

 
$
822.1

 
$
876.9

 
 
 
 
Other liabilities
 
 
 
Litigation settlement (Note 3)
$
244.2

 
$
—

Deferred compensation
97.8

 
88.7

Pension liabilities
47.2

 
41.6

Deferred tax liabilities
36.6

 
36.9

Payroll taxes
17.0

 
—

Other
41.2

 
36.1

 
$
484.0

 
$
203.3




8
Table of Contents

Supplemental Cash Flow Information
(in millions)
 
Nine Months Ended   
September 30,
 
2020
 
2019
Cash paid during the year for:
 
 
 
Amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
21.7

 
$
19.5

Non-cash investing and financing transactions:
 

 
 

Right-of-use assets obtained in exchange for new lease liabilities
$
30.7

 
$
33.2

Capital expenditures accruals
$
39.7

 
$
26.4



3.     INTELLECTUAL PROPERTY LITIGATION EXPENSES

On July 12, 2020, the Company reached an agreement with Abbott Laboratories and its direct and indirect subsidiaries ("Abbott") to, among other things, settle all outstanding patent disputes between the companies (the “Settlement Agreement”) in cases related to transcatheter mitral and tricuspid repair products. See Note 9 for additional information. The Settlement Agreement resulted in the Company recording an estimated $367.9 million pre-tax charge and related liability in June 2020 related to past damages. In addition, the Company will incur royalty expenses through May 2024 totaling an estimated $100 million. The Company made a one-time $100.0 million payment to Abbott in July 2020, and will make quarterly payments in future years.

4.     SPECIAL CHARGE

In March 2019, the Company recorded a $24.0 million charge related to the acquisition of early-stage transcatheter intellectual property and associated clinical and regulatory experience.

5.     INVESTMENTS

Debt Securities

Investments in debt securities at the end of each period were as follows (in millions):
 
September 30, 2020
 
December 31, 2019
Held-to-maturity
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
Fair Value
Bank time deposits
$
—

 
$
—

 
$
—

 
$
—

 
$
100.2

 
$
—

 
$
—

 
$
100.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank time deposits
$
33.3

 
$
—

 
$
—

 
$
33.3

 
$
13.1

 
$
—

 
$
—

 
$
13.1

Commercial paper
60.1

 
—

 
—

 
60.1

 
34.3

 
—

 
—

 
34.3

U.S. government and agency securities
130.3

 
2.5

 
—

 
132.8

 
113.2

 
0.6

 
—

 
113.8

Foreign government bonds
1.7

 
—

 
—

 
1.7

 
1.7

 
—

 
—

 
1.7

Asset-backed securities
135.3

 
1.9

 
—

 
137.2

 
141.2

 
0.6

 
(0.1
)
 
141.7

Corporate debt securities
465.0

 
7.0

 
(0.1
)
 
471.9

 
487.0

 
2.3

 
(0.1
)
 
489.2

Total
$
825.7

 
$
11.4

 
$
(0.1
)
 
$
837.0

 
$
790.5

 
$
3.5

 
$
(0.2
)
 
$
793.8



9
Table of Contents

The cost and fair value of investments in debt securities, by contractual maturity, as of September 30, 2020, were as follows:
 
Available-for-Sale
 
Cost
 
Fair Value
 
(in millions)
Due in 1 year or less
$
270.2

 
$
271.3

Due after 1 year through 5 years
407.6

 
415.2

Instruments not due at a single maturity date
147.9

 
150.5

 
$
825.7

 
$
837.0


Actual maturities may differ from the contractual maturities due to call or prepayment rights.
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 30, 2020 and December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):

 
September 30, 2020
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Corporate debt securities
$
28.5

 
$
(0.1
)
 
$
—

 
$
—

 
$
28.5

 
$
(0.1
)

 
December 31, 2019
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Asset-backed securities
$
73.4

 
$
(0.1
)
 
$
—

 
$
—

 
$
73.4

 
$
(0.1
)
Corporate debt securities
81.4

 
(0.1
)
 
—

 
—

 
81.4

 
(0.1
)
 
$
154.8

 
$
(0.2
)
 
$
—

 
$
—

 
$
154.8

 
$
(0.2
)


Investments in Unconsolidated Affiliates

The Company has a number of equity investments in privately and publicly held companies. Investments in these unconsolidated affiliates are recorded in "Long-term Investments" on the consolidated condensed balance sheets, and are as follows:
 
September 30,
2020
 
December 31,
2019
 
(in millions)
Equity method investments
 

 
 

Cost
$
10.1

 
$
10.7

Equity in losses
(4.6
)
 
(4.5
)
Carrying value of equity method investments
5.5

 
6.2

Equity securities
 

 
 

Carrying value of non-marketable equity securities
27.8

 
23.1

Total investments in unconsolidated affiliates
$
33.3

 
$
29.3


Non-marketable equity securities consist of investments in privately held companies without readily determinable fair values, and are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The Company recorded an upward adjustment of $1.8 million during the nine months ended September 30, 2020 based on observable price changes, and a downward adjustment of $0.7 million during the nine months ended September 30, 2020 due to an impairment. As of September 30, 2020, the

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Company had recorded accumulated upward adjustments of $3.8 million based on observable price changes, and accumulated downward adjustments of $2.6 million due to impairments and observable price changes.
During the three and nine months ended September 30, 2020, the gross realized gains or losses from sales of available-for-sale investments were not material.
6.     FAIR VALUE MEASUREMENTS

The consolidated condensed financial statements include financial instruments for which the fair market value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, accounts and other receivables, investments, accounts payable, certain accrued liabilities, and borrowings under a revolving credit agreement. These financial instruments are held at cost, which generally approximates fair value due to their short-term nature.

Financial instruments also include notes payable. As of September 30, 2020, the fair value of the notes payable, based on Level 2 inputs, was $718.0 million.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company prioritizes the inputs used to determine fair values in one of the following three categories:
Level 1—Quoted market prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3—Unobservable inputs that are not corroborated by market data.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the Company's financial instruments which are measured at fair value on a recurring basis (in millions):
September 30, 2020
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 

 
 

 
 

 
 

Cash equivalents
$
2.3

 
$
11.1

 
$
—

 
$
13.4

Available-for-sale investments:
 
 
 
 
 
 


Bank time deposits
—

 
33.3

 
—

 
33.3

Corporate debt securities
—

 
471.9

 
—

 
471.9

Asset-backed securities
—

 
137.2

 
—

 
137.2

U.S. government and agency securities
57.7

 
75.1

 
—

 
132.8

Foreign government bonds
—

 
1.7

 
—

 
1.7

Commercial paper
—

 
60.1

 
—

 
60.1

Investments held for deferred compensation plans
97.8

 
—

 
—

 
97.8

Derivatives
—

 
27.5

 
—

 
27.5

 
$
157.8

 
$
817.9

 
$
—

 
$
975.7

Liabilities
 

 
 

 
 

 
 

Derivatives
$
—

 
$
21.4

 
$
—

 
$
21.4

Deferred compensation plans
97.8

 
—

 
—

 
97.8

Contingent consideration liabilities
—

 
—

 
180.9

 
180.9

 
$
97.8

 
$
21.4

 
$
180.9

 
$
300.1

December 31, 2019
 

 
 

 
 

 
 

Assets
 
 
 
 
 
 
 

Cash equivalents
$
0.7

 
$
31.7

 
$
—

 
$
32.4

Available-for-sale investments:
 
 
 
 
 
 
 
Bank time deposits
—

 
13.1

 
—

 
13.1

Corporate debt securities
—

 
489.2

 
—

 
489.2

Asset-backed securities
—

 
141.7

 
—

 
141.7

U.S. government and agency securities
76.1

 
37.7

 
—

 
113.8

Foreign government bonds
—

 
1.7

 
—

 
1.7

Commercial paper
—

 
34.3

 
—

 
34.3

Investments held for deferred compensation plans
88.9

 
—

 
—

 
88.9

Derivatives
—

 
30.7

 
—

 
30.7

 
$
165.7

 
$
780.1

 
$
—

 
$
945.8

Liabilities
 

 
 

 
 

 
 

Derivatives
$
—

 
$
6.4

 
$
—

 
$
6.4

Deferred compensation plans
88.7

 
—

 
—

 
88.7

Contingent consideration liabilities
—

 
—

 
172.5

 
172.5

 
$
88.7

 
$
6.4

 
$
172.5

 
$
267.6



The following table summarizes the changes in fair value of the contingent consideration liabilities (in millions):
 
 
Nine Months Ended   
September 30,
 
 
2020
 
2019
Balance at December 31
 
$
172.5

 
$
178.6

Changes in fair value
 
8.4

 
12.4

Balance at September 30
 
$
180.9

 
$
191.0





12
Table of Contents

Cash Equivalents and Available-for-sale Investments

The Company estimates the fair values of its money market funds based on quoted prices in active markets for identical assets. The Company estimates the fair values of its time deposits, commercial paper, U.S. and foreign government and agency securities, municipal securities, asset-backed securities, and corporate debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades and broker-dealer quotes on the same or similar securities, benchmark yields, credit spreads, prepayment and default projections based on historical data, and other observable inputs. The Company independently reviews and validates the pricing received from the third-party pricing service by comparing the prices to prices reported by a secondary pricing source. The Company’s validation procedures have not resulted in an adjustment to the pricing received from the pricing service.

Deferred Compensation Plans

The Company holds investments in trading securities related to its deferred compensation plans. The investments are in a variety of stock and bond mutual funds. The fair values of these investments and the corresponding liabilities are based on quoted market prices.

Derivative Instruments

The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and cross currency swap contracts to manage foreign currency exposures. All derivatives contracts are recognized on the balance sheet at their fair value. The fair value of the derivative financial instruments was estimated based on quoted market foreign exchange rates and market discount rates. Judgment was employed in interpreting market data to develop estimates of fair value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.

Contingent Consideration Liabilities

Certain of the Company's acquisitions involve contingent consideration arrangements. Payment of additional consideration is contingent upon the acquired company reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. These contingent consideration liabilities are measured at estimated fair value using either a probability weighted discounted cash flow analysis or a Monte Carlo simulation model, both of which consider significant unobservable inputs. These inputs include (1) the discount rate used to present value the projected cash flows (ranging from 0.1% to 8.5%; weighted average of 3.0%), (2) the probability of milestone achievement (ranging from 0.7% to 99.7%; weighted average of 70.6%), (3) the projected payment dates (ranging from 2023 to 2027; weighted average of 2026), and (4) the volatility of future revenue (ranging from 37.0% to 40.0%; weighted average of 38.9%). The weighted average of each of the above inputs was determined based on the relative fair value of each obligation. The use of different assumptions could have a material effect on the estimated fair value amounts.

7.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivative financial instruments to manage interest rate and foreign currency risks, as summarized below. It is the Company's policy not to enter into derivative financial instruments for speculative purposes. Notional amounts are stated in United States dollar equivalents at spot exchange rates at the respective dates.
 
Notional Amount
 
September 30, 2020
 
December 31, 2019
 
(in millions)
Foreign currency forward exchange contracts
$
1,484.8

 
$
1,336.5

Cross currency swap contracts
300.0

 
300.0



Derivative financial instruments involve credit risk in the event the counterparty should default. It is the Company's policy to execute such instruments with global financial institutions that the Company believes to be creditworthy. The Company diversifies its derivative financial instruments among counterparties to minimize exposure to any one of these entities. The Company also uses International Swap Dealers Association master-netting agreements. The master-netting

13
Table of Contents

agreements provide for the net settlement of all contracts through a single payment in a single currency in the event of default, as defined by the agreements.

The Company uses foreign currency forward exchange contracts and cross currency swap contracts to manage its exposure to changes in currency exchange rates from (a) future cash flows associated with intercompany transactions and certain local currency expenses expected to occur within the next 13 months (designated as cash flow hedges), (b) its net investment in certain foreign subsidiaries (designated as net investment hedges) and (c) foreign currency denominated assets or liabilities (designated as fair value hedges). The Company also uses foreign currency forward exchange contracts that are not designated as hedging instruments to offset the transaction gains and losses associated with certain assets and liabilities denominated in currencies other than their functional currencies (resulting principally from intercompany and local currency transactions).

All derivative financial instruments are recognized at fair value in the consolidated condensed balance sheets. For each derivative instrument that is designated as a fair value hedge, the gain or loss on the derivative included in the assessment of hedge effectiveness is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. The Company reports in "Accumulated Other Comprehensive Loss" the gain or loss on derivative financial instruments that are designated, and that qualify, as cash flow hedges. The Company reclassifies these gains and losses into earnings in the same line item and in the same period in which the underlying hedged transactions affect earnings. Changes in the fair value of net investment hedges are reported in "Accumulated Other Comprehensive Loss" as a part of the cumulative translation adjustment and would be reclassified into earnings if the underlying net investment is sold or substantially liquidated. The portion of the change in fair value related to components excluded from the hedge effectiveness assessment are amortized into earnings over the life of the derivative. The gains and losses on derivative financial instruments for which the Company does not elect hedge accounting treatment are recognized in the consolidated statements of operations in each period based upon the change in the fair value of the derivative financial instrument. Cash flows from net investment hedges are reported as investing activities in the consolidated statements of cash flows, and cash flows from all other derivative financial instruments are reported as operating activities.

The following table presents the location and fair value amounts of derivative instruments reported in the consolidated condensed balance sheets (in millions):
 
 
 
 
Fair Value
Derivatives designated as hedging instruments
 
Balance Sheet
Location
 
September 30, 2020
 
December 31, 2019
Assets
 
 
 
 

 
 

Foreign currency contracts
 
Other current assets
 
$
5.4

 
$
14.2

Foreign currency contracts
 
Other assets
 
$
3.1

 
$
3.2

Cross currency swap contracts
 
Other assets
 
$
19.0

 
$
13.3

Liabilities
 
 
 
 

 
 

Foreign currency contracts
 
Accounts payable and accrued liabilities
 
$
21.4

 
$
6.4




14
Table of Contents

The following table presents the effect of master-netting agreements and rights of offset on the consolidated condensed balance sheets (in millions):
 
 
 
 
 
 
 
Gross Amounts
Not Offset in
the Consolidated
Balance Sheet
 
 
 
 
 
Gross Amounts
Offset in the
Consolidated
Balance Sheet
 
 
 
 
 
 
 
Net Amounts
Presented in the
Consolidated
Balance Sheet
 
 
September 30, 2020
Gross
Amounts
 
Financial
Instruments
 
Cash
Collateral
Received
 
Net
Amount
Derivative assets
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
8.5

 
$
—

 
$
8.5

 
$
(5.4
)
 
$
—

 
$
3.1

Cross currency swap contracts
$
19.0

 
$
—

 
$
19.0

 
$
—

 
$
—

 
$
19.0

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
21.4

 
$
—

 
$
21.4

 
$
(5.4
)
 
$
—

 
$
16.0

December 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Derivative assets
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
17.4

 
$
—

 
$
17.4

 
$
(5.7
)
 
$
—

 
$
11.7

Cross currency swap contracts
$
13.3

 
$
—

 
$
13.3

 
$
—

 
$
—

 
$
13.3

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
6.4

 
$
—

 
$
6.4

 
$
(5.7
)
 
$
—

 
$
0.7


The following tables present the effect of derivative and non-derivative hedging instruments on the consolidated condensed statements of operations and consolidated condensed statements of comprehensive income (loss) (in millions):
 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
 
 
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
 
Three Months Ended   
September 30,
 
 Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
 
Three Months Ended   
September 30,
 
 
 
 
 
2020
 
2019
 
2020
 
2019
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(22.3
)
 
$
22.1

 
Cost of sales
 
$
5.9

 
$
12.8

 
 
 
 
 
 
Selling, general, and administrative expenses
 
$
0.3

 
$
0.6

 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
 
 
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
 
Nine Months Ended   
September 30,
 
 Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
 
Nine Months Ended   
September 30,
 
 
 
 
 
2020
 
2019
 
2020
 
2019
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(9.7
)
 
$
32.9

 
Cost of sales
 
$
19.7

 
$
31.7

 
 
 
 
 
 
Selling, general, and administrative expenses
 
$
2.0

 
$
1.4


 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
 
 
 
Amount of Gain or (Loss)
Recognized in Income on Derivative (Amount Excluded from
Effectiveness Testing)
 
 
Three Months Ended   
September 30,
 
 Location of Gain or
(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
 
Three Months Ended   
September 30,
 
 
 
 
 
2020
 
2019
 
2020
 
2019
Net investment hedges
 
 
 
 
 
 
 
 
 
 
Cross currency swap contracts
 
$
(16.6
)
 
$
16.3

 
Interest income, net
 
$
1.6

 
$
1.7


15
Table of Contents

 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
 
 
 
Amount of Gain or (Loss)
Recognized in Income on Derivative (Amount Excluded from
 Effectiveness Testing)
 
 
Nine Months Ended   
September 30,
 
 Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
 
Nine Months Ended   
September 30,
 
 
 
 
 
2020
 
2019
 
2020
 
2019
Net investment hedges
 
 
 
 
 
 
 
 
 
 
Cross currency swap contracts
 
$
5.7

 
$
18.4

 
Interest income, net
 
$
4.9

 
$
5.0



The cross currency swaps have an expiration date of June 15, 2028. At maturity of the cross currency swap contracts, the Company will deliver the notional amount of €257.2 million and will receive $300.0 million from the counterparties. The Company will receive semi-annual interest payments from the counterparties based on a fixed interest rate until maturity of the agreements.
 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Three Months Ended   
September 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
2020
 
2019
Fair value hedges
 
 
 
 
 
 
Foreign currency contracts
 
Other income, net
 
$
(0.7
)
 
$
2.1

 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Nine Months Ended   
September 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
2020
 
2019
Fair value hedges
 
 
 
 
 
 
Foreign currency contracts
 
Other income, net
 
$
(0.4
)
 
$
(2.1
)
 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Three Months Ended   
September 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
2020
 
2019
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency contracts
 
Other income, net
 
$
(1.7
)
 
$
3.2

 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Nine Months Ended   
September 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
2020
 
2019
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency contracts
 
Other income, net
 
$
—

 
$
1.7



16
Table of Contents

The following tables present the effect of cash flow hedge accounting on the consolidated condensed statements of operations (in millions):
 
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
 
Three Months Ended   
September 30, 2020
 
Nine Months Ended   
September 30, 2020
 
Cost of sales
 
Selling, general, and administrative expenses
 
Other Income, net
 
Cost of sales
 
Selling, general, and administrative expenses
 
Other Income, net
 
 
 
 
 
Total amounts of income and expense line items presented in the consolidated condensed statements of operations in which the effects of fair value or cash flow hedges are recorded
$
(281.0
)
 
$
(307.2
)
 
$
5.7

 
$
(784.3
)
 
$
(889.9
)
 
$
7.3

The effects of fair value and cash flow hedging:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Hedged items
$
—

 
$
—

 
$
1.5

 
$
—

 
$
—

 
$
3.0

Derivatives designated as hedging instruments
$
—

 
$
—

 
$
(1.5
)
 
$
—

 
$
—

 
$
(3.0
)
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach
$
—

 
$
—

 
$
0.8

 
$
—

 
$
—

 
$
2.6

Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from accumulated OCI into income
$
5.9

 
$
0.3

 
$
—

 
$
19.7

 
$
2.0

 
$
—


 
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
 
Three Months Ended   
September 30, 2019
 
Nine Months Ended   
September 30, 2019
 
Cost of sales
 
Selling, general, and administrative expenses
 
Other Expense (Income), net
 
Cost of sales
 
Selling, general, and administrative expenses
 
Other Expense (Income), net
 
 
 
 
 
Total amounts of income and expense line items presented in the consolidated condensed statements of operations in which the effects of fair value or cash flow hedges are recorded
$
(292.4
)
 
$
(306.2
)
 
$
4.6

 
$
(828.2
)
 
$
(895.0
)
 
$
7.8

The effects of fair value and cash flow hedging:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Hedged items
$
—

 
$
—

 
$
(1.0
)
 
$
—

 
$
—

 
$
5.3

Derivatives designated as hedging instruments
$
—

 
$
—

 
$
1.0

 
$
—

 
$
—

 
$
(5.3
)
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach
$
—

 
$
—

 
$
1.1

 
$
—

 
$
—

 
$
3.2

Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from accumulated OCI into income
$
12.8

 
$
0.6

 
$
—

 
$
31.7

 
$
1.4

 
$
—



The Company expects that during the next twelve months it will reclassify to earnings a $1.4 million loss currently recorded in "Accumulated Other Comprehensive Loss."


17
Table of Contents

8.    STOCK-BASED COMPENSATION

Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three and nine months ended September 30, 2020 and 2019 was as follows (in millions):
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Cost of sales
$
4.3

 
$
3.6

 
$
13.6

 
$
11.5

Selling, general, and administrative expenses
13.8

 
12.4

 
43.5

 
39.4

Research and development expenses
4.9

 
3.8

 
14.6

 
12.0

Total stock-based compensation expense
$
23.0

 
$
19.8

 
$
71.7

 
$
62.9



At September 30, 2020, the total remaining compensation cost related to nonvested stock options, restricted stock units, market-based restricted stock units, and employee stock purchase plan ("ESPP") subscription awards amounted to $160.1 million, which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of 32 months.

During the nine months ended September 30, 2020, the Company granted 1.8 million stock options at a weighted-average exercise price of $72.84, and 0.7 million restricted stock units at a weighted-average grant-date fair value of $73.16. During the nine months ended September 30, 2020, the Company also granted 0.1 million market-based restricted stock units at a weighted-average grant-date fair value of $82.67 and issued an additional 0.1 million shares of common stock related to a previous year's grant of market-based restricted stock units since the payout percentage achieved at the end of the performance period was in excess of the targeted shares. The market-based restricted stock units vest based on a combination of certain service and market conditions. The actual number of shares issued will be determined based on the Company's total shareholder return relative to a selected industry peer group over a three-year performance period, and may range from 0% to 175% of the targeted number of shares granted.

Fair Value Disclosures

The fair value of the market-based restricted stock units was determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The weighted-average assumptions used to determine the fair value of the market-based restricted stock units granted during the nine months ended September 30, 2020 and 2019 included a risk-free interest rate of 0.2% and 2.2%, respectively, and an expected volatility rate of 32.7% and 29.4%, respectively.

The following table includes the weighted-average grant-date fair values of stock options granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
 Option Awards
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Average risk-free interest rate
0.3
%
 
1.8
%
 
0.3
%
 
2.3
%
Expected dividend yield
None

 
None

 
None

 
None

Expected volatility
33.4
%
 
29.7
%
 
34.2
%
 
29.6
%
Expected term (years)
5.2

 
5.2

 
5.1

 
5.1

Fair value, per option
$
22.24

 
$
19.36

 
$
22.19

 
$
18.10



18
Table of Contents

The following table includes the weighted-average grant-date fair values for ESPP subscriptions granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
 ESPP
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Average risk-free interest rate
0.1
%
 
2.0
%
 
1.3
%
 
2.4
%
Expected dividend yield
None

 
None

 
None

 
None

Expected volatility
37.5
%
 
32.0
%
 
33.1
%
 
27.1
%
Expected term (years)
0.7

 
0.7

 
0.6

 
0.6

Fair value, per share
$
21.79

 
$
19.10

 
$
16.61

 
$
16.43



9.    COMMITMENTS AND CONTINGENCIES

In January 2019, Abbott filed lawsuits against Edwards Lifesciences and its direct and indirect subsidiaries (“Edwards”) in the Federal District Court in the District of Delaware, in the United Kingdom, Germany, Switzerland and Italy, and, in February 2020, in Ireland, alleging patent infringement involving Edwards’ PASCAL heart valve repair system (collectively, the “PASCAL litigation”). In February 2019, Edwards filed a lawsuit against Abbott in the Federal District Court in the Central District of California alleging patent infringement involving Abbott's MITRACLIP device (with the PASCAL litigation, the “Abbott Matters”). On July 12, 2020, Edwards entered into the Settlement Agreement with Abbott to, among other things, settle all patent litigation between the parties related to alleged patent infringement involving Edwards’ PASCAL heart valve repair system and Abbott’s MITRACLIP device. Pursuant to the Settlement Agreement, all of the Abbott Matters and related appeals in courts worldwide were dismissed.

The Settlement Agreement resulted in the Company recording an estimated $367.9 million pre-tax net charge in June 2020 related to past damages. See Note 3 for additional information.

In addition, the Company is or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits including those related to products and services currently or formerly manufactured or performed, as applicable, by the Company, workplace and employment matters, matters involving real estate, Company operations or health care regulations, or governmental investigations (the "Other Lawsuits"). The Other Lawsuits raise difficult and complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Management does not believe that any loss relating to the Other Lawsuits would have a material adverse effect on the Company's overall financial condition, results of operations or cash flows.  However, the resolution of one or more of the Other Lawsuits in any reporting period, could have a material adverse impact on the Company's financial results for that period. The Company is not able to estimate the amount or range of any loss for legal contingencies related to the Other Lawsuits for which there is no reserve or additional loss for matters already reserved.

The Company is subject to various environmental laws and regulations both within and outside of the United States. The Company's operations, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on the Company's financial results.


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Table of Contents

10.    ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables summarize the activity for each component of "Accumulated Other Comprehensive Loss" (in millions):
 
Foreign
Currency
Translation
Adjustments
 
Unrealized Gain (Loss) on Hedges
 

Unrealized Gain (Loss) on Available-for-sale Investments
 
Unrealized
Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
December 31, 2019
$
(154.8
)
 
$
12.5

 
$
1.7

 
$
(15.4
)
 
$
(156.0
)
Other comprehensive gain (loss) before reclassifications
11.6

 
19.0

 
(6.3
)
 
(0.2
)
 
24.1

Amounts reclassified from accumulated other comprehensive loss
(1.7
)
 
(8.6
)
 
(0.1
)
 
—

 
(10.4
)
Deferred income tax (expense) benefit
(7.6
)
 
(3.8
)
 
1.7

 
—

 
(9.7
)
March 31, 2020
(152.5
)
 
19.1

 
(3.0
)
 
(15.6
)
 
(152.0
)
Other comprehensive gain (loss) before reclassifications
1.2

 
(3.7
)
 
14.8

 
—

 
12.3

Amounts reclassified from accumulated other comprehensive loss
(1.6
)
 
(7.2
)
 
0.2

 
—

 
(8.6
)
Deferred income tax benefit (expense)
2.1

 
3.6

 
(3.5
)
 
—

 
2.2

June 30, 2020
(150.8
)
 
11.8

 
8.5

 
(15.6
)
 
(146.1
)
Other comprehensive gain (loss) before reclassifications
8.1

 
(24.3
)
 
(0.6
)
 
0.1

 
(16.7
)
Amounts reclassified from accumulated other comprehensive loss
(1.6
)
 
(5.5
)
 
0.1

 
—

 
(7.0
)
Deferred income tax benefit
4.1

 
7.6

 
0.2

 
—

 
11.9

September 30, 2020
$
(140.2
)
 
$
(10.4
)
 
$
8.2

 
$
(15.5
)
 
$
(157.9
)


 
Foreign
Currency
Translation
Adjustments
 
Unrealized Gain on Hedges
 

Unrealized (Loss) Gain on Available-for-sale Investments
 
Unrealized
Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
December 31, 2018
$
(143.6
)
 
$
23.6

 
$
(5.0
)
 
$
(13.5
)
 
$
(138.5
)
Other comprehensive (loss) gain before reclassifications
(10.2
)
 
15.6

 
4.4

 
(0.1
)
 
9.7

Amounts reclassified from accumulated other comprehensive loss
(1.6
)
 
(7.0
)
 
—

 
—

 
(8.6
)
Deferred income tax expense
(1.3
)
 
(1.4
)
 
(1.1
)
 
—

 
(3.8
)
March 31, 2019
(156.7
)
 
30.8

 
(1.7
)
 
(13.6
)
 
(141.2
)
Other comprehensive gain (loss) before reclassifications
10.4

 
(4.0
)
 
2.8

 
—

 
9.2

Amounts reclassified from accumulated other comprehensive loss
(1.7
)
 
(8.5
)
 
0.3

 
—

 
(9.9
)
Deferred income tax benefit (expense)
0.8

 
3.5

 
(0.6
)
 
—

 
3.7

June 30, 2019
(147.2
)
 
21.8

 
0.8

 
(13.6
)
 
(138.2
)
Other comprehensive (loss) gain before reclassifications
(17.8
)
 
23.5

 
0.6

 
(0.2
)
 
6.1

Amounts reclassified from accumulated other comprehensive loss
(1.7
)
 
(15.5
)
 
—

 
—

 
(17.2
)
Deferred income tax expense
(4.0
)
 
(2.4
)
 
(0.1
)
 
—

 
(6.5
)
September 30, 2019
$
(170.7
)
 
$
27.4

 
$
1.3

 
$
(13.8
)
 
$
(155.8
)



20
Table of Contents


The following table provides information about amounts reclassified from "Accumulated Other Comprehensive Loss" (in millions):
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
 
 
Affected Line on Consolidated Condensed
Statements of Operations
Details about Accumulated Other
Comprehensive Loss Components
2020
 
2019
 
2020
 
2019
 
Foreign currency translation adjustments
$
1.6

 
$
1.7

 
$
4.9

 
$
5.0

 
Other income, net
 
(0.4
)
 
(0.4
)
 
(1.2
)
 
(1.2
)
 
Provision for income taxes
 
$
1.2

 
$
1.3

 
$
3.7

 
$
3.8

 
Net of tax
Gain (loss) on hedges
$
5.9

 
$
12.8

 
$
19.7

 
$
31.7

 
Cost of sales
 
0.3

 
0.6

 
2.0

 
1.4

 
Selling, general, and administrative expenses
 
(0.7
)
 
2.1

 
(0.4
)
 
(2.1
)
 
Other income, net
 
5.5

 
15.5

 
21.3

 
31.0

 
Total before tax
 
(1.4
)
 
(3.5
)
 
(5.4
)
 
(8.3
)
 
Provision for income taxes
 
$
4.1

 
$
12.0

 
$
15.9

 
$
22.7

 
Net of tax
Gain (loss) on available-for-sale investments
$
(0.1
)
 
$
—

 
$
(0.2
)
 
$
(0.3
)
 
Other income, net
 
—

 
—

 
(0.3
)
 
—

 
Provision for income taxes
 
$
(0.1
)
 
$
—

 
$
(0.5
)
 
$
(0.3
)
 
Net of tax


11.    EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during a period. Diluted earnings per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include employee equity share options, nonvested shares, and similar equity instruments granted by the Company. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.

The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Basic:
 

 
 

 
 

 
 

Net income
$
325.2

 
$
274.7

 
$
513.9

 
$
766.7

Weighted-average shares outstanding
622.1

 
624.6

 
622.3

 
624.3

Basic earnings per share
$
0.52

 
$
0.44

 
$
0.83

 
$
1.23

Diluted:
 

 
 

 
 

 
 

Net income
$
325.2

 
$
274.7

 
$
513.9

 
$
766.7

Weighted-average shares outstanding
622.1

 
624.6

 
622.3

 
624.3

Dilutive effect of stock plans
8.9

 
11.7

 
6.5

 
12.0

Dilutive weighted-average shares outstanding
631.0

 
636.3

 
628.8

 
636.3

Diluted earnings per share
$
0.52

 
$
0.43

 
$
0.82

 
$
1.20



Stock options, restricted stock units, and market-based restricted stock units to purchase an aggregate of 2.0 million and 2.4 million shares for the three months ended September 30, 2020 and 2019, respectively, and 5.8 million and 1.9 million shares for the nine months ended September 30, 2020 and 2019, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.


21
Table of Contents

12.    INCOME TAXES

The Company's effective income tax rates were 10.7% and 8.9% for the three months ended September 30, 2020 and 2019, respectively, and 8.3% and 9.9% for the nine months ended September 30, 2020 and 2019, respectively. The fluctuation in the effective rates between the nine months ended September 30, 2020 and 2019 is primarily due to the impact of the Settlement Agreement with Abbott (see Notes 3 and 9). The effective rates for the nine months ended September 30, 2020 and 2019 were also lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal and California research and development credits. The effective rates include a tax benefit from employee share-based compensation of $16.4 million and $19.6 million for the three months ended September 30, 2020 and 2019, respectively, and $47.0 million and $56.2 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.

As of September 30, 2020 and December 31, 2019, the gross liability for income taxes associated with uncertain tax positions was $250.5 million and $203.1 million, respectively. The Company estimates that these liabilities would be reduced by $76.6 million and $50.1 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amounts of $173.9 million and $153.0 million, respectively, if not required, would favorably affect the Company's effective tax rate.

The Internal Revenue Service began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and its examination of the 2017 tax year during the first quarter of 2019. As of September 30, 2020, all material state, local, and foreign income tax matters have been concluded for years through 2010.

During 2018, the Company executed an Advance Pricing Agreement ("APA") between the United States and Switzerland governments for tax years 2009 through 2020 covering various transfer pricing matters. Certain intercompany transactions covering tax years 2015 through 2020 were not resolved and those related tax positions remain uncertain. These transfer pricing matters may be significant to the Company's consolidated condensed financial statements. Based upon the information currently available and numerous possible outcomes, the Company cannot reasonably estimate what, if any, changes in its existing uncertain tax positions may occur in the next 12 months and, therefore, has recorded the gross uncertain tax positions as a long-term liability.

In addition, the Company executed other APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. The Company has filed or intends to file to renew these APAs for the years 2020 and forward. The execution of some or all of these APAs depends on a number of variables outside of the Company's control.

13.    SEGMENT INFORMATION

Edwards Lifesciences conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan, and Rest of World. All regions sell products that are used to treat advanced cardiovascular disease.

The Company's geographic segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer). The Company evaluates the performance of its geographic segments based on net sales and income before provision for income taxes ("pre-tax income"). The accounting policies of the segments are substantially the same as those described in Note 2 of the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019. Segment net sales and segment pre-tax income are based on internally derived standard foreign exchange rates, which may differ from year to year, and do not include inter-segment profits. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographical distribution that would occur if the segments were not interdependent. Net sales by geographic area are based on the location of the customer.


22
Table of Contents

Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include net interest expense, global marketing expenses, corporate research and development expenses, manufacturing variances, corporate headquarters costs, special gains and charges, stock-based compensation, foreign currency hedging activities, certain litigation costs, changes in the fair value of contingent consideration liabilities, and most of the Company's amortization expense. Although most of the Company's depreciation expense is included in segment pre-tax income, due to the Company's methodology for cost build-up, it is impractical to determine the amount of depreciation expense included in each segment, and, therefore, a portion is maintained at the corporate level. The Company neither discretely allocates assets to its operating segments, nor evaluates the operating segments using discrete asset information.

The table below presents information about Edwards Lifesciences' reportable segments (in millions):
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Segment Net Sales
 

 
 

 
 

 
 

United States
$
662.0

 
$
647.8

 
$
1,845.6

 
$
1,835.5

Europe
241.5

 
219.8

 
695.9

 
684.3

Japan
109.9

 
110.0

 
325.0

 
322.9

Rest of World
115.2

 
112.0

 
323.4

 
316.5

Total segment net sales
$
1,128.6

 
$
1,089.6

 
$
3,189.9

 
$
3,159.2

Segment Operating Income
 

 
 

 
 

 
 

United States
$
453.8

 
$
447.4

 
$
1,264.0

 
$
1,258.3

Europe
124.2

 
111.5

 
356.2

 
353.2

Japan
69.2

 
70.7

 
209.9

 
202.8

Rest of World
35.6

 
36.7

 
105.2

 
99.8

Total segment operating income
$
682.8

 
$
666.3

 
$
1,935.3

 
$
1,914.1


The table below presents reconciliations of segment net sales to consolidated net sales and segment operating income to consolidated pre-tax income (in millions):
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Net Sales Reconciliation
 

 
 

 
 

 
 

Segment net sales
$
1,128.6

 
$
1,089.6

 
$
3,189.9

 
$
3,159.2

Foreign currency
12.3

 
4.4

 
4.7

 
14.7

Consolidated net sales
$
1,140.9

 
$
1,094.0

 
$
3,194.6

 
$
3,173.9

Pre-tax Income Reconciliation
 

 
 

 
 

 
 

Segment operating income
$
682.8

 
$
666.3

 
$
1,935.3

 
$
1,914.1

Unallocated amounts:
 

 
 

 
 

 
 

Corporate items
(331.9
)
 
(384.2
)
 
(1,005.6
)
 
(1,073.1
)
Special charge (Note 4)
—

 
—

 
—

 
(24.0
)
Intellectual property litigation expenses
(8.4
)
 
(7.9
)
 
(400.8
)
 
(19.5
)
Change in fair value of contingent consideration liabilities, net
9.0

 
2.3

 
(8.4
)
 
(12.4
)
Foreign currency
6.3

 
17.8

 
25.7

 
50.9

Consolidated operating income
357.8

 
294.3

 
546.2

 
836.0

Non-operating income
6.5

 
7.4

 
14.4

 
15.0

Consolidated pre-tax income
$
364.3

 
$
301.7

 
$
560.6

 
$
851.0



23
Table of Contents


Enterprise-wide Information

The following enterprise-wide information is based on actual foreign exchange rates used in the Company's consolidated condensed financial statements.
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Net Sales by Geographic Area
 

 
 

 
 

 
 

United States
$
662.0

 
$
647.8

 
$
1,845.6

 
$
1,835.5

Europe
253.8

 
222.6

 
707.8

 
699.0

Japan
113.9

 
112.9

 
330.7

 
324.4

Rest of World
111.2

 
110.7

 
310.5

 
315.0

 
$
1,140.9

 
$
1,094.0

 
$
3,194.6

 
$
3,173.9

Net Sales by Major Product Group
 

 
 

 
 

 
 

Transcatheter Aortic Valve Replacement
$
744.6

 
$
700.0

 
$
2,081.1

 
$
1,975.4

Transcatheter Mitral and Tricuspid Therapies
12.1

 
9.7

 
28.7

 
21.0

Surgical Structural Heart
203.3

 
204.1

 
557.6

 
636.6

Critical Care
180.9

 
180.2

 
527.2

 
540.9

 
$
1,140.9

 
$
1,094.0

 
$
3,194.6

 
$
3,173.9


 
September 30, 2020
 
December 31, 2019
 
(in millions)
Long-lived Tangible Assets by Geographic Area
 

 
 

United States
$
1,031.9

 
$
849.1

Europe
159.1

 
101.5

Japan
18.6

 
21.7

Rest of World
293.3

 
269.4

 
$
1,502.9

 
$
1,241.7



24
Table of Contents

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations        
Overview

The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. See “Note Regarding Forward-Looking Statements” preceding Part I, Item 1 in this Quarterly Report on Form 10-Q.

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.

On May 7, 2020, our Board of Directors declared a three-for-one stock split of our outstanding shares of common stock effected in the form of a stock dividend, distributed on May 29, 2020 to stockholders of record on May 18, 2020. We distributed two newly issued shares of common stock to holders of record of each share of common stock to effect the stock split. All applicable share and per-share amounts in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” have been retroactively adjusted to give effect to this stock split.

Financial Highlights and COVID-19
ew10-qq220_chartx39428a19.jpgew10-qq220_chartx40915a19.jpg
In March 2020, the World Health Organization categorized the Coronavirus disease 2019 ("COVID-19") as a pandemic. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. The global pandemic has adversely impacted and is likely to further adversely impact nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners. Our priority has been to support our clinician partners, protect the well-being of our employees, and maintain continuous access to our life-saving technologies while offering front-line in-hospital support. Our manufacturing operations have continued to respond to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components.

TAVR and Surgical procedure volumes varied greatly since the middle of March 2020 by geography, and even by hospital, as patients and their physicians analyzed the trade-off between aortic stenosis and their concern for COVID-19. In the last few weeks of the first quarter of 2020, procedure volumes related to our TAVR and Surgical products dropped significantly. During the second and third quarters of 2020, procedure volumes improved. In the second quarter of 2020, we also started to

25
Table of Contents

progressively resume patient enrollment in all clinical trials that were voluntarily paused or slowed at the end of the first quarter of 2020, and we are now enrolling patients at pre-COVID rates. In Critical Care, there was greater demand in Europe for our pressure monitoring products, but demand for other Critical Care products began to decrease at the end of the first quarter of 2020 due to COVID-19, and that trend continued through the third quarter of 2020.

Despite the challenges associated with COVID-19, our net sales for the first nine months of 2020 were $3.2 billion, representing an increase of $20.7 million over the first nine months of 2019, driven by sales growth of our TAVR products.

Our gross profit increase was driven by a charge recorded during the three and nine months ended September 30, 2019 of $26.9 million and $73.1 million, respectively, primarily comprised of the write off of inventory related to strategic decisions regarding our TAVR portfolio, including the decision to discontinue our CENTERA program.

The increase from the prior quarter-to-date period in our diluted earnings per share was driven by our increased sales growth as well as reduced spending due to COVID-19. The decrease from the prior year-to-date period in our diluted earnings per share was driven by an after-tax charge of $306.9 million in the second quarter of 2020 to settle certain patent litigation related to transcatheter mitral and tricuspid repair products.  For further information, see Notes 3 and 9 to the "Consolidated Condensed Financial Statements."
 
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, vendors, business partners and distribution channels. The extent to which the COVID-19 global pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations.

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 2020, we invested 17.7% 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."

Results of Operations

Net Sales Trends
(dollars in millions)
 
Three Months Ended   
September 30,
 
 
 
 
 
Nine Months Ended   
September 30,
 
 
 
 
 
 
 
Percent Change
 
 
 
Percent Change
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
 
United States
$
662.0

 
$
647.8

 
$
14.2

 
2.2
%
 
$
1,845.6

 
$
1,835.5

 
$
10.1

 
0.6
 %
Europe
253.8

 
222.6

 
31.2

 
13.9
%
 
707.8

 
699.0

 
8.8

 
1.2
 %
Japan
113.9

 
112.9

 
1.0

 
0.8
%
 
330.7

 
324.4

 
6.3

 
1.9
 %
Rest of World
111.2

 
110.7

 
0.5

 
0.7
%
 
310.5

 
315.0

 
(4.5
)
 
(1.4
)%
International
478.9

 
446.2

 
32.7

 
7.3
%
 
1,349.0

 
1,338.4

 
10.6

 
0.8
 %
Total net sales
$
1,140.9

 
$
1,094.0

 
$
46.9

 
4.3
%
 
$
3,194.6

 
$
3,173.9

 
$
20.7

 
0.7
 %

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.

26
Table of Contents


Net Sales by Product Group
(dollars in millions)
 
Three Months Ended   
September 30,
 
 
 
 
 
Nine Months Ended   
September 30,
 
 
 
 
 
 
 
Percent Change
 
 
 
Percent Change
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
 
Transcatheter Aortic Valve Replacement
$
744.6

 
$
700.0

 
$
44.6

 
6.4
 %
 
$
2,081.1

 
$
1,975.4

 
$
105.7

 
5.3
 %
Transcatheter Mitral and Tricuspid Therapies
12.1

 
9.7

 
2.4

 
23.7
 %
 
28.7

 
21.0

 
7.7

 
36.5
 %
Surgical Structural Heart
203.3

 
204.1

 
(0.8
)
 
(0.3
)%
 
557.6

 
636.6

 
(79.0
)
 
(12.4
)%
Critical Care
180.9

 
180.2

 
0.7

 
0.4
 %
 
527.2

 
540.9

 
(13.7
)
 
(2.5
)%
Total net sales
$
1,140.9

 
$
1,094.0

 
$
46.9

 
4.3
 %
 
$
3,194.6

 
$
3,173.9

 
$
20.7

 
0.7
 %

Transcatheter Aortic Valve Replacement
ew10-qq120_chartx55097a20.jpg
Net sales of TAVR products increased for the three and nine months ended September 30, 2020 driven by higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory approval in the United States (December 2018) and in Europe (November 2018). Our sales for the nine months ended September 30, 2020 were also negatively impacted by the COVID-19 pandemic. Our procedure volumes dropped significantly beginning in March 2020 due to COVID-19, and began to steadily improve beginning in May 2020.

The launch of the Edwards SAPIEN 3 Ultra System continued to be very positive in the first nine months of 2020. In the first quarter of 2020, to ensure the safety of our employees and clinician partners from the threat of COVID-19, we decided to pause proctoring at centers that were not already trained on the Edwards SAPIEN 3 Ultra System. In the second quarter of 2020, we resumed training.

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Transcatheter Mitral and Tricuspid Therapies
chart-24a48e476b4c9df1964a08.jpg
Net sales of TMTT products increased for the three and nine months ended September 30, 2020 due primarily to sales in Europe of PASCAL, which received CE Mark in February 2019. Our sales in nine months ended September 30, 2020 were also negatively impacted by the COVID-19 pandemic. Our procedure volumes for PASCAL dropped significantly in April 2020 due to COVID-19, and began to improve beginning in May 2020.

At the end of March 2020, we temporarily paused new enrollments in our active pivotal clinical trials of transcatheter mitral and tricuspid therapies in response to the COVID-19 response around the globe. In the second quarter of 2020, we began resuming enrollments and are now enrolling patients at pre-COVID rates. In May 2020, we received CE Mark for the PASCAL Ace implant system for mitral and tricuspid repair.

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Surgical Structural Heart
ew10-qq120_chartx56718a20.jpg
Net sales of Surgical products decreased for the three and nine months ended September 30, 2020 due primarily to decreased sales of aortic tissue valves, primarily in the United States and Europe, due to the impact of COVID-19. The ongoing adoption of TAVR also contributed to the decrease in United States surgical aortic valve sales. These decreases were partially offset by increased sales of the INSPIRIS RESILIA aortic valve, primarily in the United States. Increased and improved management of intensive care unit capacity, as well as prioritization of heart surgery in many hospitals, contributed to rebounding procedure volumes late in the second quarter of 2020.

In Europe, our HARPOON Beating Heart Mitral Valve Repair System became available commercially at the end of 2019, and the first commercial case was successfully completed in Europe in the second quarter of 2020. In addition, we received United States Food and Drug Administration approval in April 2020 to begin our U.S. pivotal investigational device exemption study. HARPOON offers the potential for earlier treatment of degenerative mitral valve disease, with faster recovery and more consistent outcomes for surgical patients.


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Critical Care
ew10-qq120_chartx58317a20.jpg
The decrease in net sales of Critical Care products for the nine months ended September 30, 2020 was driven by a decline in sales of our enhanced surgical recovery products, primarily in the United States, as many surgical procedures were delayed due to COVID-19 beginning in March 2020. We also experienced a decline in orders of our HemoSphere advanced monitoring platform in the United States as hospitals limited their capital spending due to COVID-19. Foreign exchange rate fluctuations decreased net sales for the nine months ended September 30, 2020 by $4.4 million due to the weakening of multiple currencies, primarily the Euro, against the United States dollar.

These decreases in net sales during the nine months ended September 30, 2020 were partially offset by increased demand for our pressure monitoring products, primarily in Europe. In addition, our sales for the three and nine months ended September 30, 2020 included $5.6 million and $15.7 million, respectively, related to CAS Medical Systems, Inc. ("CASMED"), which we acquired on April 18, 2019. CASMED is a medical technology company dedicated to non-invasive monitoring of tissue oxygenation in the brain.








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Gross Profit
ew10-qq220_chartx43964a19.jpg
The increase in gross profit as a percentage of net sales for the three and nine months ended September 30, 2020 was driven primarily by:
•
a charge in the three and nine months ended September 30, 2019 of $26.9 million and $73.1 million, respectively, related to strategic decisions regarding our TAVR portfolio, including the decision to discontinue our CENTERA program; and
•
manufacturing efficiencies in the three months ended September 30, 2020;
partially offset by:
•
a 1.4 percentage point and 0.8 percentage point decrease in the three and nine months ended September 30, 2020, respectively, due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts; and
•
incremental costs associated with COVID-19.

Selling, General, and Administrative ("SG&A") Expenses
ew10-qq220_chartx45302a19.jpg
SG&A expenses increased for the three months ended September 30, 2020 due primarily to increased sales and marketing expenses related to transcatheter structural heart field personnel, primarily in the United States, partially offset by decreased costs associated with COVID-19. SG&A expenses decreased for the nine months ended September 30, 2020 due to decreased

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sales, marketing and travel-related expense associated with COVID-19, and the impact of foreign currency, which decreased expenses by $5.5 million due to the strengthening of the United States dollar against multiple currencies, primarily the Euro. These decreases for the nine months ended September 30, 2020 were partially offset by increased sales and marketing expenses related to transcatheter structural heart field personnel, primarily in the United States.

Research and Development ("R&D") Expenses
ew10-qq220_chartx46645a19.jpg
R&D expenses were flat for the three months ended September 30, 2020 primarily due to increased spending on transcatheter mitral valve replacement clinical trials, offset by decreased spending on transcatheter aortic valve clinical trials and decreased travel and other expenses associated with COVID-19. The increase in R&D expenses for the nine months ended September 30, 2020 was primarily due to investments in our transcatheter mitral and tricuspid therapies, partially offset by decreased spending on transcatheter aortic valve clinical trials.

Change in Fair Value of Contingent Consideration Liabilities, net

The change in fair value of contingent consideration liabilities resulted in income of $9.0 million and $2.3 million for the three months ended September 30, 2020 and 2019, respectively, and expense of $8.4 million and $12.4 million for the nine months ended September 30, 2020 and 2019, respectively. The changes in fair value were primarily driven by changes in the projected probability and timing of milestone achievements, and the projected timing of cash inflows, partially offset by the accretion of interest due to the passage of time, and for the nine months ended September 30, 2020, discount rates (which decreased significantly in the first quarter of 2020). For further information, see Note 6 to the "Consolidated Condensed Financial Statements."

Special Charge

For information on the $24.0 million special charge recorded during the nine months ended September 30, 2019, see Note 4 to the "Consolidated Condensed Financial Statements."

Other Income, net
(in millions)
 
Three Months Ended   
September 30,
 
Nine Months Ended   
September 30,
 
2020
 
2019
 
2020
 
2019
Foreign exchange gains, net
$
(5.5
)
 
$
(1.0
)
 
$
(9.2
)
 
$
(4.6
)
Loss (gain) on investments
0.2

 
(1.6
)
 
0.8

 
(1.2
)
CASMED earn-out on sale of assets
—

 
(2.0
)
 
—

 
(2.0
)
Other
(0.4
)
 
—

 
1.1

 
—

Other income, net
$
(5.7
)
 
$
(4.6
)
 
$
(7.3
)
 
$
(7.8
)

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The net foreign exchange gains relate primarily to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, partially offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures.

The loss (gain) 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 investments in 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.

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 typically 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 10.7% and 8.9% for the three months ended September 30, 2020 and 2019, respectively, and 8.3% and 9.9% for the nine months ended September 30, 2020 and 2019, respectively. The fluctuation in the effective rates between the nine months ended September 30, 2020 and 2019 is primarily due to the impact of the litigation settlement agreement (the "Settlement Agreement") with Abbott Laboratories (see Notes 3 and 9 to the "Consolidated Condensed Financial Statements"). The effective rates for the nine months ended September 30, 2020 and 2019 were also lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal and California research and development credits.

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 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 12 to the "Consolidated Condensed Financial Statements."

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. At September 30, 2020, all material state, local, and foreign income tax matters have been concluded for years through 2010.

During 2018, we executed an Advance Pricing Agreement ("APA") between the United States and Switzerland governments for tax years 2009 through 2020 covering various transfer pricing matters. Certain intercompany transactions covering tax years 2015 through 2020 were not resolved and those related tax positions remain uncertain. These transfer pricing matters may be significant to our consolidated financial statements. Based upon the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in our existing uncertain tax positions may occur in the next 12 months and, therefore, have recorded the gross uncertain tax positions as a long-term liability.

In addition, we executed other APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. We have filed or intend to file to renew these APAs for the years 2020 and forward. The execution of some or all of these APAs depends on a number of variables outside of our control.

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.


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As of September 30, 2020, cash and cash equivalents and short-term investments held in the United States and outside the United States were $770.0 million and $525.3 million, respectively.

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, 2020, 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, 2020, the total carrying value of the 2018 Notes was $594.9 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 the nine months ended September 30, 2020, under the Board authorized program, we repurchased a total of 3.0 million shares at an aggregate cost of $614.7 million, and as of September 30, 2020, we had remaining authority to purchase $625.0 million of our common stock.

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 6 to the "Consolidated Condensed Financial Statements."

On July 12, 2020, we reached the Settlement Agreement with Abbott Laboratories to settle all outstanding patent disputes between the companies in cases related to transcatheter mitral and tricuspid repair products. The Settlement Agreement resulted in us recording an estimated $367.9 million pretax charge in June 2020 related to past damages. In addition, we will incur royalty expenses through May 2024 totaling an estimated $100 million. We made a one-time $100.0 million payment to Abbott in July 2020, and will make quarterly payments in future years. For further information, see Notes 3 and 9 to the "Consolidated Condensed Financial Statements."

At September 30, 2020, 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, 2019.

Consolidated Cash Flows - For the nine months ended September 30, 2020 and 2019:
ew10-qq220_chartx39380a19.jpg ew10-qq220_chartx40257a19.jpg ew10-qq220_chartx40975a19.jpg
Net cash flows provided by operating activities of $654.3 million for the nine months ended September 30, 2020 decreased $125.7 million over the same period last year primarily due to lower operating profits in 2020 and a payment of $100.0 million for a litigation settlement, partially offset by a payment of $180.0 million in 2019 for a litigation settlement. For further information, see Notes 3 and 9 to the "Consolidated Condensed Financial Statements."

Net cash used in investing activities of $271.2 million for the nine months ended September 30, 2020 consisted primarily of capital expenditures of $293.8 million, partially offset by net proceeds from investments of $58.6 million.

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 in April 2019, (3) a $35.0 million payment for an option to acquire a company, and (4) a $24.0 million payment to

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acquire certain early-stage transcatheter intellectual property and associated clinical and regulatory experience, partially offset by net proceeds from investments of $194.7 million.

Net cash used in financing activities of $528.3 million for the nine months ended September 30, 2020 consisted primarily of purchases of treasury stock of $625.2 million, partially offset by proceeds from stock plans of $103.5 million.

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 $263.3 million, partially offset by proceeds from stock plans of $125.5 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 38-41 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, 2019. 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, 2019. 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, 2020, we had $837.0 million of investments in fixed-rate debt securities of various companies, of which $565.7 million were long-term. In addition, we had $33.3 million of investments in equity instruments of public and private companies. Should these companies experience a decline in financial performance, financial condition, or credit capacity, or fail to meet certain development milestones, including as a result of the impact of COVID-19 on their business or operations or otherwise, 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, 2020. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of September 30, 2020 that our disclosure controls and procedures are designed at a reasonable assurance level and 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.

Changes in Internal Control Over Financial Reporting. There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.

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Part II. Other Information
Item 1.    Legal Proceedings

Please see Note 9 to the "Consolidated Condensed Financial Statements" of this Quarterly Report on Form 10-Q regarding the settlement and dismissal of all outstanding patent litigation matters involving Abbott Laboratories and its direct and indirect subsidiaries (collectively, the “Abbott Matters”), which is incorporated by reference. A description of the Abbott Matters is included in Part II, Item 1, "Legal Proceedings," and Note 8 to the "Consolidated Condensed Financial Statements" of our Quarterly Report on Form 10-Q for our quarter ended March 31, 2020 filed with the Securities and Exchange Commission on April 28, 2020 and is incorporated herein by reference.

Item 1A.    Risk Factors

A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended December 31, 2019 and of our Quarterly Report on Form 10-Q for our quarter ended March 31, 2020.  There have been no material changes to our Risk Factors as previously reported.

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, 2020 through July 31, 2020
 
968

 
$
67.34

 
—

 
$
625.0

 
August 1, 2020 through August 31, 2020
 
—

 
—

 
—

 
625.0

 
September 1, 2020 through September 30, 2020
 
16,181

 
81.78

 
—

 
625.0

 
Total
 
17,149

 
80.96

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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. The repurchase program does not have an expiration date.


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Item 6.    Exhibits

The exhibits listed in the Exhibit Index below are filed, furnished, or incorporated by reference as part of this report on Form 10-Q.

Exhibit No.
 
Description
 
*10.1

 
*10.2

 
31.1

 
31.2

 
32

 
101.INS

 
XBRL Inline 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
104

 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
 
 
 
* Represents management contract or compensatory plan


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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 23, 2020
By:
/s/ SCOTT B. ULLEM
 
 
 
Scott B. Ullem
Chief Financial Officer
(Principal Financial Officer; Duly Authorized Officer)
Date:
October 23, 2020
By:
/s/ ROBERT W.A. SELLERS
 
 
 
Robert W.A. Sellers
Corporate Controller
(Principal Accounting Officer)

38