Edwards Lifesciences Corporation
Edwards Lifesciences Corp (Form: 10-Q, Received: 07/29/2016 06:05:37)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2016

or
o
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)
 
(Zip Code)
(949) 250-2500
 (Registrant's telephone number, including area code)
 
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  ý     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  o
 
Non-accelerated filer  o
  (Do not check if a smaller
reporting company)
 
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  ý
The number of shares outstanding of the registrant's common stock, $1.00 par value, as of July 22, 2016 was 212,878,828 .
 


Table of Contents

EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended June 30, 2016

TABLE OF CONTENTS
 
 
Page
Number
 
 
 
 
 
 
 


Table of Contents

Part I. Financial Information

Item 1.    Financial Statements
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except par value; unaudited)
 
June 30,
2016
 
December 31,
2015
ASSETS
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
369.9

 
$
718.4

Short-term investments (Note 4)
690.3

 
506.3

Accounts and other receivables, net of allowances of $6.7 and $6.8, respectively
425.8

 
344.1

Inventories (Note 2)
367.6

 
339.9

Prepaid expenses
50.0

 
45.1

Other current assets
81.5

 
94.1

Total current assets
1,985.1

 
2,047.9

Long-term accounts receivable, net of allowances of $6.6 and $6.3, respectively
5.3

 
3.6

Long-term investments (Note 4)
391.7

 
379.9

Property, plant, and equipment, net
516.2

 
482.5

Goodwill
629.4

 
628.3

Other intangible assets, net
208.7

 
205.4

Deferred income taxes
188.6

 
180.5

Other assets
126.4

 
131.2

Total assets
$
4,051.4

 
$
4,059.3

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities (Note 2)
$
478.2

 
$
476.2

Long-term debt
602.5

 
599.9

Other long-term liabilities
499.5

 
480.1

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, 350.0 shares authorized, 241.0 and 239.1 shares issued, and 212.7 and 215.4 shares outstanding, respectively
241.0

 
239.1

Additional paid-in capital
1,020.2

 
946.8

Retained earnings
3,606.4

 
3,336.8

Accumulated other comprehensive loss
(178.7
)
 
(182.6
)
Treasury stock, at cost, 28.3 and 23.7 shares, respectively
(2,217.7
)
 
(1,837.0
)
Total stockholders' equity
2,471.2

 
2,503.1

Total liabilities and stockholders' equity
$
4,051.4

 
$
4,059.3

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   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
759.3

 
$
616.8

 
$
1,456.6

 
$
1,207.1

Cost of sales
202.5

 
158.6

 
382.8

 
294.6

Gross profit
556.8

 
458.2

 
1,073.8

 
912.5

Selling, general, and administrative expenses
228.8

 
213.9

 
441.5

 
416.4

Research and development expenses
112.9

 
97.5

 
215.3

 
183.9

Intellectual property litigation expenses
9.1

 
1.0

 
21.3

 
1.3

Special charges (Note 3)
34.5

 

 
34.5

 

Interest expense, net
2.4

 
1.8

 
4.8

 
4.2

Other expenses, net
0.1

 
1.8

 
4.1

 
2.0

Income before provision for income taxes
169.0

 
142.2

 
352.3

 
304.7

Provision for income taxes
42.4

 
29.5

 
82.7

 
68.6

Net income
$
126.6

 
$
112.7

 
$
269.6

 
$
236.1

Share information  (Note 11)
 

 
 

 
 

 
 

Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.60

 
$
0.52

 
$
1.27

 
$
1.10

Diluted
$
0.58

 
$
0.51

 
$
1.24

 
$
1.07

Weighted-average number of common shares outstanding:
 

 
 

 
 

 
 

Basic
212.2

 
215.3

 
212.6

 
215.4

Diluted
217.3

 
219.9

 
217.6

 
220.3

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

2

Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
 
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
126.6

 
$
112.7

 
$
269.6

 
$
236.1

Other comprehensive (loss) income, net of tax (Note 10):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6.7
)
 
18.4

 
20.9

 
(46.3
)
Unrealized (loss) gain on cash flow hedges
(1.2
)
 
(16.5
)
 
(20.8
)
 
0.7

Unrealized gain (loss) on available-for-sale investments
1.5

 
(0.8
)
 
3.2

 
(0.5
)
Reclassification of net realized investment loss to earnings
0.3

 
0.2

 
0.6

 
0.4

Other comprehensive (loss) income
(6.1
)
 
1.3

 
3.9

 
(45.7
)
Comprehensive income
$
120.5

 
$
114.0

 
$
273.5

 
$
190.4

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

3

Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
 
Six Months Ended   
June 30,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Net income
$
269.6

 
$
236.1

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

 
 

Depreciation and amortization
33.9

 
32.8

Stock-based compensation (Note 7)
28.6

 
24.4

Excess tax benefit from stock plans
(37.2
)
 
(19.7
)
Gain on investments
(1.0
)
 
(1.4
)
Deferred income taxes
0.2

 
2.2

Purchased in-process research and development (Note 3)
34.5

 

Other
2.8

 
0.7

Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables, net
(64.7
)
 
(39.5
)
Inventories
(14.7
)
 
(32.3
)
Accounts payable and accrued liabilities
(12.9
)
 
(19.3
)
Income taxes
60.9

 
44.9

Prepaid expenses and other current assets
(14.0
)
 
9.6

Other
11.4

 
4.9

Net cash provided by operating activities
297.4

 
243.4

Cash flows from investing activities
 

 
 

Capital expenditures
(64.8
)
 
(39.2
)
Purchases of held-to-maturity investments (Note 4)
(454.5
)
 
(553.4
)
Proceeds from held-to-maturity investments (Note 4)
347.3

 
562.6

Purchases of available-for sale investments (Note 4)
(174.8
)
 
(206.6
)
Proceeds from available-for-sale investments (Note 4)
94.8

 
78.0

Investments in intangible assets and in-process research and development
(41.1
)
 

Investments in trading securities, net
(5.2
)
 
(4.8
)
Investments in unconsolidated affiliates, net (Note 4)
(2.0
)
 
0.7

Other
4.5

 
(5.1
)
Net cash used in investing activities
(295.8
)
 
(167.8
)
Cash flows from financing activities
 

 
 

Proceeds from issuance of debt
15.9

 
13.3

Payments on debt and capital lease obligations
(19.3
)
 
(14.7
)
Purchases of treasury stock (Note 8)
(380.7
)
 
(179.9
)
Excess tax benefit from stock plans
37.2

 
19.7

Proceeds from stock plans
44.6

 
42.5

Equity forward contract related to accelerated share repurchase agreement (Note 8)
(35.0
)
 

Other
(0.1
)
 
(3.4
)
Net cash used in financing activities
(337.4
)
 
(122.5
)
Effect of currency exchange rate changes on cash and cash equivalents
(12.7
)
 
(9.3
)
Net decrease in cash and cash equivalents
(348.5
)
 
(56.2
)
Cash and cash equivalents at beginning of period
718.4

 
653.8

Cash and cash equivalents at end of period
$
369.9

 
$
597.6

Supplemental disclosures:
 

 
 

Non-cash investing and financing transactions:
 

 
 

Capital expenditures accruals
$
17.2

 
$
8.8

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

4

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, 2015 . Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted.

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

Recently Adopted Accounting Standards

In September 2015, the Financial Accounting Standards Board ("FASB") issued an update to the guidance on business combinations. The new guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance was effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The adoption of this guidance did not impact the Company's consolidated financial statements.

In April 2015, the FASB issued an amendment to the accounting guidance on the presentation of debt issuance costs. The guidance requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt, consistent with debt discounts. In August 2015, the FASB clarified that for a line-of-credit arrangement, a company can continue to defer and present debt issuance costs as an asset and subsequently amortize the debt issuance costs over the term of the line-of-credit arrangement, whether or not there are any outstanding borrowings on the line-of-credit arrangement. The guidance was effective for annual reporting periods beginning after December 31, 2015 and interim periods within those periods, and must be applied retrospectively to each prior reporting period presented. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

New Accounting Standards Not Yet Adopted

In March 2016, the FASB issued an amendment to the guidance on stock compensation. The amendment simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements, but anticipates that adoption of this guidance will reduce its effective tax rate.

In March 2016, the FASB issued an update to the guidance on revenue recognition. The update clarifies the implementation guidance on principal versus agent considerations, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. In April 2016, the FASB issued another update to the guidance on revenue recognition. This update clarifies the implementation guidance on identifying performance obligations and licensing, while retaining the related principles for those areas. The amendments in these updates are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact the revenue recognition guidance, including these updates, will have on its consolidated financial statements.

In February 2016, the FASB issued an amendment to the guidance on leases. The amendment improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.


5


2.     COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Components of selected captions in the consolidated condensed balance sheets consisted of the following (in millions):
 
June 30, 2016
 
December 31, 2015
Inventories
 
 
 
Raw materials
$
60.5

 
$
63.8

Work in process
86.5

 
64.1

Finished products
220.6

 
212.0

 
$
367.6

 
$
339.9


At June 30, 2016 and December 31, 2015 , approximately $68.2 million and $58.8 million , respectively, of the Company's finished products inventories were held on consignment.

 
June 30, 2016
 
December 31, 2015
Accounts payable and accrued liabilities
 

 
 

Accounts payable
$
83.4

 
$
63.9

Employee compensation and withholdings
170.9

 
209.4

Property, payroll, and other taxes
35.3

 
34.5

Research and development accruals
35.1

 
38.6

Accrued rebates
27.3

 
23.9

Fair value of derivatives
24.1

 
4.2

Accrued marketing expenses
11.8

 
9.6

Severance and realignment reserves
11.3

 
19.1

Taxes payable
8.7

 
14.5

Litigation reserves
7.2

 
5.6

Other accrued liabilities
63.1

 
52.9

 
$
478.2

 
$
476.2



3.     SPECIAL CHARGES
Acquisition of In-process Research and Development ("IPR&D")
In May 2016, the Company entered into two separate agreements to acquire technologies for use in its transcatheter heart valve programs. In connection with these agreements, the Company recorded an IPR&D charge totaling $34.5 million . The acquired technologies are in the early stages of development and have no alternative uses. Additional design developments, bench testing, pre-clinical studies, and human clinical studies must be successfully completed prior to selling any product using these technologies.

6


4.     INVESTMENTS
Debt Securities
Investments in debt securities at the end of each period were as follows (in millions):
 
June 30, 2016
 
December 31, 2015
Held-to-maturity
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
Fair Value
Bank time deposits
$
565.8

 
$

 
$

 
$
565.8

 
$
440.1

 
$

 
$

 
$
440.1

U.S. government and agency securities
23.4

 
0.1

 
(0.1
)
 
23.4

 
32.5

 

 
(0.2
)
 
32.3

Asset-backed securities
0.8

 

 

 
0.8

 
1.2

 

 

 
1.2

Corporate debt securities
10.0

 

 

 
10.0

 
16.4

 

 

 
16.4

Municipal securities
4.4

 

 

 
4.4

 
5.2

 

 

 
5.2

Total
$
604.4

 
$
0.1

 
$
(0.1
)
 
$
604.4

 
$
495.4

 
$

 
$
(0.2
)
 
$
495.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
36.4

 
$

 
$

 
$
36.4

 
$
28.1

 
$

 
$

 
$
28.1

U.S. government and agency securities
77.5

 
0.5

 

 
78.0

 
38.7

 

 
(0.2
)
 
38.5

Asset-backed securities
61.3

 
0.2

 

 
61.5

 
62.8

 

 
(0.2
)
 
62.6

Corporate debt securities
264.1

 
1.5

 
(0.2
)
 
265.4

 
230.0

 

 
(1.3
)
 
228.7

Municipal securities
4.6

 
0.1

 

 
4.7

 
4.7

 

 

 
4.7

Total
$
443.9

 
$
2.3

 
$
(0.2
)
 
$
446.0

 
$
364.3

 
$

 
$
(1.7
)
 
$
362.6

The cost and fair value of investments in debt securities, by contractual maturity, as of June 30, 2016 were as follows:
 
Held-to-Maturity
 
Available-for-Sale
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(in millions)
Due in 1 year or less
$
593.4

 
$
593.4

 
$
97.0

 
$
96.9

Due after 1 year through 5 years
0.9

 
0.9

 
285.6

 
287.5

Instruments not due at a single maturity date
10.1

 
10.1

 
61.3

 
61.6

 
$
604.4

 
$
604.4

 
$
443.9

 
$
446.0

Actual maturities may differ from the contractual maturities due to call or prepayment rights.

7


Investments in Unconsolidated Affiliates
The Company has a number of equity investments in privately and publicly held companies. Investments in these unconsolidated affiliates are recorded in " Long-term Investments " on the consolidated condensed balance sheets, and are as follows:
 
June 30,
2016
 
December 31,
2015
 
(in millions)
Available-for-sale investments
 

 
 

Cost
$

 
$

Unrealized gains
0.2

 
0.2

Fair value of available-for-sale investments
0.2

 
0.2

Equity method investments
 

 
 

Cost
10.7

 
10.9

Equity in losses
(3.3
)
 
(4.2
)
Carrying value of equity method investments
7.4

 
6.7

Cost method investments
 

 
 

Carrying value of cost method investments
24.0

 
21.3

Total investments in unconsolidated affiliates
$
31.6

 
$
28.2

During the three and six months ended June 30, 2016 , the gross realized gains or losses from sales of available-for-sale investments were not material.
5.     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. The carrying value of these financial instruments generally approximates fair value due to their short-term nature. Financial instruments also include long-term notes payable. As of June 30, 2016 , the fair value of the notes payable, based on Level 2 inputs, was $617.4 million , versus a carrying value of $602.5 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.

8


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company's financial instruments which are measured at fair value on a recurring basis (in millions):
June 30, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 

 
 

 
 

 
 

Cash equivalents
$
24.9

 
$
10.0

 
$

 
$
34.9

Available-for-sale investments:
 
 
 
 
 
 


Corporate debt securities

 
265.4

 

 
265.4

Asset-backed securities

 
61.5

 

 
61.5

U.S. government and agency securities
47.2

 
30.8

 

 
78.0

Commercial paper

 
36.4

 

 
36.4

Municipal securities

 
4.7

 

 
4.7

Equity investments in unconsolidated affiliates
0.2

 

 

 
0.2

Investments held for deferred compensation plans
40.7

 

 

 
40.7

Derivatives

 
14.6

 

 
14.6

 
$
113.0

 
$
423.4

 
$

 
$
536.4

Liabilities
 

 
 

 
 

 
 

Derivatives
$

 
$
24.1

 
$

 
$
24.1

Deferred compensation plans
40.7

 

 

 
40.7

Contingent consideration obligation

 

 
31.5

 
31.5

 
$
40.7

 
$
24.1

 
$
31.5

 
$
96.3

December 31, 2015
 

 
 

 
 

 
 

Assets
 
 
 
 
 
 
 

Cash equivalents
$
3.5

 
$
8.5

 
$

 
$
12.0

Available-for-sale investments:
 
 
 
 
 
 
 
Corporate debt securities

 
228.7

 

 
228.7

Asset-backed securities

 
62.6

 

 
62.6

U.S. government and agency securities
9.6

 
28.9

 

 
38.5

Commercial paper

 
28.1

 

 
28.1

Municipal securities

 
4.7

 

 
4.7

Equity investments in unconsolidated affiliates
0.1

 

 

 
0.1

Investments held for deferred compensation plans
35.3

 

 

 
35.3

Derivatives

 
23.3

 

 
23.3

 
$
48.5

 
$
384.8

 
$

 
$
433.3

Liabilities
 

 
 

 
 

 
 

Derivatives
$

 
$
4.2

 
$

 
$
4.2

Deferred compensation plans
35.5

 

 

 
35.5

Contingent consideration obligation

 

 
30.5

 
30.5

 
$
35.5

 
$
4.2

 
$
30.5

 
$
70.2


The following table summarizes the changes in fair value of the contingent consideration obligation for the six months ended June 30, 2016 (in millions):

Balance at December 31, 2015
 
$
30.5

Changes in fair value (recorded in " Research and Development Expenses ")
 
1.0

Balance at June 30, 2016
 
$
31.5

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 commercial paper, U.S. government and agency 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

9


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.

Investments in unconsolidated affiliates are long-term equity investments in companies that are in various stages of development. Certain of the Company’s investments in unconsolidated affiliates are designated as available-for-sale. These investments are carried at fair market value based on quoted market prices.
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 foreign currency option contracts to manage foreign currency exposures, and interest rate swap agreements to manage its interest rate exposures. All derivatives contracts are recognized on the balance sheet at their fair value. The fair value of foreign currency derivative financial instruments was estimated based on quoted market foreign exchange rates and market discount rates. The fair value of the interest rate swap agreements was determined based on a discounted cash flow analysis reflecting the contractual terms of the agreements and the 6-month LIBOR forward interest rate curve. 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 Obligation
The Company recorded a contingent consideration obligation related to its acquisition of CardiAQ. The $50.0 million contingent consideration obligation has been recorded at its estimated fair value, which was determined using a probability weighted discounted cash flow analysis that considered significant unobservable inputs. These inputs included a 1.6% discount rate used to present value the projected cash flows, a 65.0% probability of milestone achievement, and a projected payment date in 2018. The use of different assumptions could have a material effect on the estimated fair value amount.
6.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage its currency exchange rate risk and its interest rate risk, as summarized below. Notional amounts are stated in United States dollar equivalents at spot exchange rates at the respective dates.
 
Notional Amount
 
June 30, 2016
 
December 31, 2015
 
(in millions)
Foreign currency forward exchange contracts
$
1,110.3

 
$
1,061.6

Interest rate swap agreements
300.0

 
300.0

The Company uses derivative financial instruments to manage interest rate and foreign currency risks. It is the Company's policy not to enter into derivative financial instruments for speculative purposes. The Company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These interest rate swaps are designated as fair value hedges and meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The Company uses foreign currency forward exchange contracts to offset the changes due to currency rate movements in the amount of future cash flows associated with intercompany transactions and certain local currency expenses expected to occur within the next 13 months . These foreign currency forward exchange contracts are designated as cash flow hedges. Certain of the Company's locations have assets and liabilities denominated in currencies other than their functional currencies resulting principally from intercompany and local currency transactions. The Company uses foreign currency forward exchange contracts and foreign currency option contracts that are not designated as hedging instruments to offset the

10


transaction gains and losses associated with certain of these assets and liabilities. The Company also uses foreign currency forward exchange contracts to protect its net investment in certain foreign subsidiaries from adverse changes in foreign currency exchange rates. These foreign currency forward exchange contracts are designated as net investment hedges. All foreign currency forward exchange contracts and foreign currency option contracts are denominated in currencies of major industrial countries, principally the Euro and the Japanese yen.
All derivative financial instruments are recognized at fair value in the consolidated condensed balance sheets. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. The gain or loss on the interest rate swaps (designated as fair value hedges) is classified in net interest expense, as they hedge the interest rate risk associated with the Company's fixed-rate debt. The Company reports in " Accumulated Other Comprehensive Loss " the effective portion of 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 period in which the underlying hedged transactions affect earnings. The effective portions 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 ineffective portions of cash flow hedges and net investment hedges are recorded in current period earnings. For the six months ended June 30, 2016 and 2015 , the Company did not record any gains or losses due to hedge ineffectiveness. The gains and losses on derivative financial instruments for which the Company does not elect hedge accounting treatment are recognized in the consolidated condensed 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 condensed statements of cash flows, and cash flows from all other derivative financial instruments are reported as operating activities.
Derivative financial instruments involve credit risk in the event the counterparty should default. It is the Company's policy to execute such instruments with global financial institutions that the Company believes to be creditworthy. The Company diversifies its derivative financial instruments among counterparties to minimize exposure to any one of these entities. The Company also uses International Swap Dealers Association master-netting agreements. The master-netting agreements provide for the net settlement of all contracts through a single payment in a single currency in the event of default, as defined by the agreements.
The following table presents the location and fair value amounts of derivative instruments reported in the consolidated condensed balance sheets (in millions):
 
 
 
 
Fair Value
Derivatives designated as hedging instruments
 
Balance Sheet
Location
 
June 30, 2016
 
December 31, 2015
Assets
 
 
 
 

 
 

Foreign currency contracts
 
Other current assets
 
$
7.6

 
$
15.0

Interest rate swap agreements
 
Other assets
 
$
6.4

 
$
1.6

Liabilities
 
 
 
 

 
 

Foreign currency contracts
 
Accrued and other liabilities
 
$
24.1

 
$
4.2

Derivatives not designated as hedging instruments
 
 
 
 

 
 

Assets
 
 
 
 

 
 

Foreign currency contracts
 
Other current assets
 
$
0.6

 
$

Foreign currency contracts
 
Other assets
 
$

 
$
6.7


11


The following table presents the effect of master-netting agreements and rights of offset on the consolidated condensed balance sheets (in millions):
 
 
 
 
 
 
 
Gross Amounts
Not Offset in
the Consolidated
Balance Sheet
 
 
 
 
 
Gross Amounts
Offset in the
Consolidated
Balance Sheet
 
 
 
 
 
 
 
Net Amounts
Presented in the
Consolidated
Balance Sheet
 
 
June 30, 2016
Gross
Amounts
 
Financial
Instruments
 
Cash
Collateral
Received
 
Net
Amount
Derivative assets
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
8.2

 
$

 
$
8.2

 
$
(3.4
)
 
$

 
$
4.8

Interest rate swap agreements
$
6.4

 
$

 
$
6.4

 
$

 
$

 
$
6.4

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
24.1

 
$

 
$
24.1

 
$
(3.4
)
 
$

 
$
20.7

December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

Derivative assets
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
21.7

 
$

 
$
21.7

 
$
(4.0
)
 
$

 
$
17.7

Interest rate swap agreements
$
1.6

 
$

 
$
1.6

 
$

 
$

 
$
1.6

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
4.2

 
$

 
$
4.2

 
$
(4.0
)
 
$

 
$
0.2

The following tables present the effect of derivative instruments on the consolidated condensed statements of operations and consolidated condensed statements of comprehensive income (in millions):
 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
 
 
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
 
Three Months Ended   
June 30,
 
 
 
Three Months Ended   
June 30,
 
 
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
 
 
 
2016
 
2015
 
2016
 
2015
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
0.5

 
$
(7.4
)
 
Cost of sales
 
$
3.2

 
$
19.0

 
 
 
 
 
 
Selling, general, and administrative expenses
 
$
(0.3
)
 
$

 
 
 
 
 
 
 
 
 
 
 
Net investment hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
8.5

 
$

 
Other expenses, net
 
$

 
$


 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
 
 
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
 
Six Months Ended   
June 30,
 
 
 
Six Months Ended   
June 30,
 
 
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
 
 
 
2016
 
2015
 
2016
 
2015
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(20.5
)
 
$
28.9

 
Cost of sales
 
$
14.6

 
$
29.5

 
 
 
 
 
 
Selling, general, and administrative expenses
 
$
(0.3
)
 
$

 
 
 
 
 
 
 
 
 
 
 
Net investment hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(3.8
)
 
$

 
Other expenses, net
 
$

 
$



12


 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Three Months Ended   
June 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
Fair value hedges
 
2016
 
2015
Interest rate swap agreements
 
Interest expense, net
 
$
(0.1
)
 
$
(2.6
)

 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Six Months Ended   
June 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
Fair value hedges
 
2016
 
2015
Interest rate swap agreements
 
Interest expense, net
 
$
4.8

 
$
1.9

The gains on the interest rate swap agreements are fully offset by the changes in the fair value of the fixed-rate debt being hedged.
 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Three Months Ended   
June 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
Derivatives not designated as hedging instruments
 
2016
 
2015
Foreign currency contracts
 
Other expenses, net
 
$
(9.4
)
 
$
1.9


 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Six Months Ended   
June 30,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
Derivatives not designated as hedging instruments
 
2016
 
2015
Foreign currency contracts
 
Other expenses, net
 
$
(15.8
)
 
$
6.8

The Company expects that during the next twelve months it will reclassify to earnings a $3.2 million loss currently recorded in " Accumulated Other Comprehensive Loss ."
7.   STOCK-BASED COMPENSATION
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three and six months ended June 30, 2016 and 2015 was as follows (in millions):
 
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Cost of sales
$
2.1

 
$
1.6

 
$
4.1

 
$
3.4

Selling, general, and administrative expenses
9.4

 
7.1

 
19.1

 
16.7

Research and development expenses
2.8

 
2.1

 
5.4

 
4.3

Total stock-based compensation expense
$
14.3

 
$
10.8

 
$
28.6

 
$
24.4

At June 30, 2016 , the total remaining compensation cost related to nonvested stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and employee stock purchase plan ("ESPP") subscription awards amounted to $116.4 million , which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of 33 months .

13


During the six months ended June 30, 2016 , the Company granted 0.9 million stock options at a weighted-average exercise price of $105.39 and 0.2 million shares of restricted stock units at a weighted-average grant-date fair value of $104.09 . The Company also granted 0.1 million shares of market-based restricted stock units at a weighted-average grant-date fair value of $116.06 . In addition, the Company issued an additional 0.1 million shares 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.
In 2015, in conjunction with the acquisition of CardiAQ, the Company granted performance-based restricted stock units that vest based on the achievement of a specified milestone.  The Company reassesses the probability of vesting at each quarter end and adjusts the stock-based compensation expense based on its probability assessment.  As of June 30, 2016 , achievement of the milestone was deemed not yet probable and no expense has been recognized related to these awards.
Fair Value Disclosures
The fair value of the market-based restricted stock units was determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The weighted-average assumptions used to determine the fair value of the market-based restricted stock units granted during the six months ended June 30, 2016 and 2015 included a risk-free interest rate of 1.0% and 1.0% , respectively, and an expected volatility rate of 30.0% and 31.0% , respectively.
The following table includes the weighted-average grant-date fair values of stock options granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
  Option Awards
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Average risk-free interest rate
1.2
%
 
1.4
%
 
1.2
%
 
1.4
%
Expected dividend yield
None

 
None

 
None

 
None

Expected volatility
33.1
%
 
29.7
%
 
33.1
%
 
29.8
%
Expected term (years)
4.5

 
4.5

 
4.5

 
4.5

Fair value, per option
$
31.08

 
$
17.70

 
$
30.99

 
$
17.82

The following table includes the weighted-average grant-date fair values for ESPP subscriptions granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
  ESPP
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Average risk-free interest rate
0.3
%
 
0.2
%
 
0.3
%
 
0.2
%
Expected dividend yield
None

 
None

 
None

 
None

Expected volatility
32.8
%
 
26.5
%
 
29.0
%
 
27.6
%
Expected term (years)
0.6

 
0.6

 
0.6

 
0.6

Fair value, per share
$
24.92

 
$
16.51

 
$
20.85

 
$
15.43


8.   ACCELERATED SHARE REPURCHASE
In February 2016, Edwards entered into ASR agreements to repurchase $325.0 million of the Company's common stock based on the volume-weighted average price ("VWAP") of the Company's common stock during the term of the agreements, less a discount. Upon entering into the agreements, Edwards received an initial delivery of 3.2 million shares. The initial shares were valued at $83.60 per share based on the closing price of the Company's common stock on the date of the agreements, and represented approximately 82% of the total contract value. At the conclusion of each of the ASR agreements, the Company may receive additional shares or may be required to pay additional cash or shares (at the Company's election). The final settlements are based on the VWAP over the term of the agreements, less a discount, and will occur at varying termination dates extending to December 2016, subject to certain adjustments pursuant to the agreements. In April 2016, one of the ASR

14


agreements concluded at a VWAP less discount per share price of $84.39 , and the Company received an additional 0.3 million shares under that agreement. If the remaining agreement had been settled on June 30, 2016 , Edwards would have received 0.2 million additional shares.

The ASR agreements were accounted for as two separate transactions: (a) the value of the initial delivery of shares was recorded as shares of common stock acquired in a treasury stock transaction on the acquisition date, and (b) the remaining amount of the purchase price paid was recorded as a forward contract indexed to the Company's own common stock and was recorded in " Additional Paid-in Capital " on the consolidated balance sheets. The initial delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The Company determined that the forward contract indexed to the Company's common stock met all the applicable criteria for equity classification and, therefore, was not accounted for as a derivative instrument.

9.   COMMITMENTS AND CONTINGENCIES

On October 30, 2015, Boston Scientific Scimed, Inc., a subsidiary of Boston Scientific Corporation (“Boston Scientific”), filed a lawsuit in the district court in Düsseldorf, Germany against Edwards Lifesciences and its German subsidiary, Edwards Lifesciences Services GmbH, alleging that Edwards Lifesciences’ SAPIEN 3 heart valve infringes certain claims of a Boston Scientific German national patent arising from EP 2 749 254 B1 (the “‘254 patent”) related to paravalvular sealing technology. On February 26, 2016, Boston Scientific added the German national patent arising from EP 2 926 766 (the “‘766 Patent”) to the infringement allegations. On April 8, 2016, Boston Scientific filed a similar patent infringement action in district court in Paris, France relating to these patents. The complaints seek unspecified money damages and injunctive relief. The Company intends to defend itself vigorously in these matters. Trial is scheduled for February 2017.

On November 2, 2015, Edwards Lifesciences LLC, a U.S. subsidiary of Edwards Lifesciences, filed a lawsuit against Sadra Medical, Inc. and Boston Scientific Scimed, Inc., two subsidiaries of Boston Scientific, in the United Kingdom in the High Court of Justice, Chancery Division, Patents Court to declare invalid and revoke the U.K. national patent corresponding to the ‘254 patent. Edwards later added Boston Scientific’s UK national patent corresponding to the ‘766 patent to this invalidity lawsuit.  The Boston Scientific subsidiaries filed counterclaims against Edwards Lifesciences and three of its European subsidiaries alleging that the SAPIEN 3 heart valve infringes certain claims of the same patents and seeking unspecified monetary damages and injunctive relief. Trial is scheduled for January 2017.

On November 23, 2015, Edwards Lifesciences PVT, Inc., a U.S. subsidiary of Edwards Lifesciences, filed a lawsuit in the district court in Düsseldorf, Germany for patent infringement against Boston Scientific and a German subsidiary, Boston Scientific Medizintechnik GmbH, alleging that the Lotus heart valve infringes certain claims of Edwards Lifesciences’ German national patents EP 1 441 672 B1 and 2 255 753 B1 related to prosthetic valve and delivery system technology. Edwards Lifesciences later added its German national patent EP 2 399 550 to this suit. The complaint seeks unspecified monetary damages and injunctive relief. Trial is scheduled for February 2017.

On April 19, 2016, Boston Scientific filed a lawsuit against Edwards Lifesciences in the Federal District Court in the District of Delaware alleging that the SAPIEN 3 heart valve infringes certain claims of Boston Scientific’s U.S. Patent 8,992,608 related to paravalvular sealing technology and seeking unspecified monetary damages and injunctive relief. On
June 9, 2016, Edwards Lifesciences LLC and Edwards Lifesciences PVT, Inc. filed counterclaims alleging that Boston Scientific’s Lotus heart valve infringes Edwards Lifesciences’ U.S. Patents 9,168,133; 9,339, 383; and 7,510,575 related to prosthetic valve technology.

Also on April 19, 2016, Boston Scientific filed a lawsuit against Edwards Lifesciences in the Federal District Court in the Central District of California alleging that five of its transcatheter heart valve delivery systems and a valve crimper infringe certain claims of eight Boston Scientific U.S. patents.  The complaints seek unspecified monetary damages and injunctive relief. The Company intends to defend itself vigorously in these matters.

Because the ultimate outcome of the above matters involve judgments, estimates and inherent uncertainties, and cannot be predicted with certainty, charges related to such matters could have a material adverse impact on Edwards Lifesciences' financial position, results of operations, or liquidity.
In addition, Edwards Lifesciences is or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits related primarily to products and services currently or formerly manufactured or performed, as applicable, by Edwards Lifesciences (the “Other Lawsuits”). The Other Lawsuits raise difficult and complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in

15


which each suit is brought, and differences in applicable law. Upon resolution of any of the Other Lawsuits, Edwards Lifesciences may incur charges in excess of established reserves. While any charge related to the Other Lawsuits could have a material adverse impact on Edwards Lifesciences' net income or cash flows in the period in which it is recorded or paid, management does not believe that any charge relating to the Other Lawsuits would have a material adverse effect on Edwards Lifesciences' financial position, results of operations, or liquidity. The Company is not able to estimate the amount or range of any loss for legal contingencies for which there is no reserve or additional loss for matters already reserved.
Edwards Lifesciences is subject to various environmental laws and regulations both within and outside of the United States. The operations of Edwards Lifesciences, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on Edwards Lifesciences' financial position, results of operations, or liquidity.

10.   ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table is a summary of activity for each component of " Accumulated Other Comprehensive Loss " for the six months ended June 30, 2016 (in millions):
 
Foreign
Currency
Translation
Adjustments
 
Unrealized Gain (Loss) on Cash Flow Hedges
 

Unrealized (Loss) Gain on Available-for-sale Investments
 
Unrealized
Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
December 31, 2015
$
(181.5
)
 
$
11.8

 
$
(1.5
)
 
$
(11.4
)
 
$
(182.6
)
Other comprehensive gain (loss) before reclassifications
19.5

 
(20.5
)
 
3.2

 

 
2.2

Amounts reclassified from accumulated other comprehensive loss

 
(14.3
)
 
0.6

 

 
(13.7
)
Deferred income tax benefit
1.4

 
14.0

 

 

 
15.4

June 30, 2016
$
(160.6
)
 
$
(9.0
)
 
$
2.3

 
$
(11.4
)
 
$
(178.7
)
The following table provides information about amounts reclassified from " Accumulated Other Comprehensive Loss " (in millions):
 
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
 
 
Affected Line on Consolidated Condensed
Statements of Operations
Details about Accumulated Other
Comprehensive Loss Components
2016
 
2015
 
2016
 
2015
 
Gain (loss) on cash flow hedges
$
2.9

 
$
19.0

 
$
14.3

 
$
29.5

 
Cost of sales
 
(1.3
)
 
(6.9
)
 
(5.7
)
 
(10.7
)
 
Provision for income taxes
 
$
1.6

 
$
12.1

 
$
8.6

 
$
18.8

 
Net of tax
(Loss) gain on available-for-sale investments
$
(0.3
)
 
$
(0.2
)
 
$
(0.6
)
 
$
(0.4
)
 
Other expenses, net
 

 

 

 

 
Provision for income taxes
 
$
(0.3
)
 
$
(0.2
)
 
$
(0.6
)
 
$
(0.4
)
 
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. Employee equity share options, nonvested shares, and similar equity instruments granted by the Company are treated as potential common shares in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of restricted stock units, market-based restricted stock units, performance-based restricted stock units, and in-the-money options. The dilutive impact of the restricted stock units, market-based restricted stock units, performance-based restricted stock units, and in-the-money options is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of stock-based compensation expense for future service that the Company has not yet recognized, and the amount of tax benefits that

16


would be recorded in " Additional Paid-in Capital " when the award becomes deductible are assumed to be used to repurchase shares. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.
The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
 
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Basic:
 

 
 

 
 

 
 

Net income
$
126.6

 
$
112.7

 
$
269.6

 
$
236.1

Weighted-average shares outstanding
212.2

 
215.3

 
212.6

 
215.4

Basic earnings per share
$
0.60

 
$
0.52

 
$
1.27

 
$
1.10

Diluted:
 

 
 

 
 

 
 

Net income
$
126.6

 
$
112.7

 
$
269.6

 
$
236.1

Weighted-average shares outstanding
212.2

 
215.3

 
212.6

 
215.4

Dilutive effect of stock plans
5.1

 
4.6

 
5.0

 
4.9

Dilutive weighted-average shares outstanding
217.3

 
219.9

 
217.6

 
220.3

Diluted earnings per share
$
0.58

 
$
0.51

 
$
1.24

 
$
1.07

Stock options, restricted stock units, and market-based restricted stock units to purchase 1.1 million and 2.0 million shares for the three months ended June 30, 2016 and 2015 , respectively, and 0.7 million and 1.1 million shares for the six months ended June 30, 2016 and 2015 , respectively, were outstanding, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. Additionally, 0.2 million shares that would have been received if the ASR agreement discussed in Note 8 was settled as of June 30, 2016 were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
12.   INCOME TAXES
The Company's effective income tax rates were 25.1% and 20.7% for the three months ended June 30, 2016 and 2015 , respectively, and 23.5% and 22.5% for the six months ended June 30, 2016 and 2015 . The change in the effective rates is primarily a result of fluctuations in the relative contribution of our foreign operations and United States operations to worldwide pre-tax income, offset by the benefit from the reinstatement of the federal research credit. The federal research credit expired on December 31, 2014 and was not reinstated until December 18, 2015 when the research credit was permanently extended, retroactive to January 1, 2015. Therefore, the effective income tax rate for the three and six months ended June 30, 2015 was calculated without an assumed benefit from the federal research credit.
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.
As of June 30, 2016 and December 31, 2015 , the liability for income taxes associated with uncertain tax positions was $225.3 million and $216.1 million , respectively. The Company estimates that these liabilities would be reduced by $40.7 million and $40.6 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 $184.6 million and $175.5 million , respectively, if not required, would favorably affect the Company's effective tax rate.
At June 30, 2016 , all material state, local, and foreign income tax matters have been concluded for years through 2008. The Internal Revenue Service ("IRS") has substantially completed its fieldwork for the 2009 through 2012 tax years. However, the audit is currently in suspense pending finalization of an Advance Pricing Agreement ("APA") and Joint Committee of Taxation approval.
The Company has entered into an APA process between the Switzerland and United States governments for the years 2009 through 2015 covering transfer pricing matters. The transfer pricing matters are significant to the Company's consolidated

17


condensed financial statements, and the final outcome and timing of the negotiations between the two governments is uncertain.
During 2014, the Company filed with the IRS a request for a pre-filing agreement associated with a tax return filing position on a portion of the litigation settlement payment received from Medtronic, Inc. in May 2014. During the first quarter of 2015, the IRS accepted the pre-filing agreement into the pre-filing agreement program. The finalization of the pre-filing agreement is still pending. However, the Company made an advance payment of tax in December 2015 solely to prevent the further accrual of interest on any potential deficiency, not to signify any potential agreement to a contrary position that may be taken by the IRS.
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 structural heart disease and critically ill patients.
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, 2015 . 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 pre-tax income as presented may not be representative of the geographical distribution that would occur if the segments were not interdependent. Net sales by geographic area are based on the location of the customer.
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include net interest expense, global marketing expenses, corporate research and development expenses, manufacturing variances, corporate headquarters costs, special gains and charges, certain stock-based compensation, foreign currency hedging activities, certain litigation costs, and most of the Company's amortization expense. Although most of the Company's depreciation expense is included in segment pre-tax income, due to the Company's methodology for cost build-up, it is impractical to determine the amount of depreciation expense included in each segment, and, therefore, a portion is maintained at the corporate level. The Company neither discretely allocates assets to its operating segments, nor evaluates the operating segments using discrete asset information.
The table below presents information about Edwards Lifesciences' reportable segments (in millions):
 
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Segment Net Sales
 

 
 

 
 

 
 

United States
$
401.5

 
$
302.7

 
$
777.1

 
$
586.2

Europe
198.0

 
213.9

 
385.1

 
430.4

Japan
71.9

 
75.2

 
135.7

 
143.9

Rest of World
77.0

 
80.4

 
148.5

 
151.7

Total segment net sales
$
748.4

 
$
672.2

 
$
1,446.4

 
$
1,312.2

Segment Pre-tax Income
 

 
 

 
 

 
 

United States
$
260.2

 
$
166.4

 
$
501.8

 
$
333.8

Europe
98.2

 
103.2

 
192.9

 
211.1

Japan
38.6

 
36.6

 
68.1

 
68.0

Rest of World
19.1

 
21.5

 
37.0

 
38.3

Total segment pre-tax income
$
416.1

 
$
327.7

 
$
799.8

 
$
651.2


18


The table below presents reconciliations of segment net sales to consolidated net sales and segment pre-tax income to consolidated pre-tax income (in millions):
 
Three Months Ended   
June 30,
 
Six Months Ended   
June 30,
 
2016
 
2015
 
2016
 
2015
Net Sales Reconciliation
 

 
 

 
 

 
 

Segment net sales
$
748.4

 
$
672.2

 
$
1,446.4

 
$
1,312.2

Foreign currency
10.9

 
(55.4
)
 
10.2

 
(105.1
)
Consolidated net sales
$
759.3

 
$
616.8

 
$
1,456.6

 
$
1,207.1

Pre-tax Income Reconciliation
 

 
 

 
 

 
 

Segment pre-tax income
$
416.1

 
$
327.7

 
$
799.8

 
$
651.2

Unallocated amounts:
 

 
 

 
 

 
 

Corporate items
(206.3
)
 
(178.8
)
 
(401.5
)
 
(335.6
)
Special charges (Note 3)
(34.5
)
 

 
(34.5
)
 

Intellectual property litigation expenses
(9.1
)
 
(1.0
)
 
(21.3
)
 
(1.3
)
Interest expense, net
(2.4
)
 
(1.8
)
 
(4.8
)
 
(4.2
)
Foreign currency
5.2