UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

Commission File Number 001-16407

 

ZIMMER BIOMET HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-4151777

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

345 East Main Street, Warsaw, IN  46580

(Address of principal executive offices)

Telephone:  (574) 267-6131

 

 

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, a 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  

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, $0.01 par value

ZBH

New York Stock Exchange

1.414% Notes due 2022

ZBH 22A

New York Stock Exchange

2.425% Notes due 2026

ZBH 26

New York Stock Exchange

As of May 1, 2019, 204,798,283 shares of the registrant’s $.01 par value common stock were outstanding.

 


ZIMMER BIOMET HOLDINGS, INC.

INDEX TO FORM 10-Q

March 31, 2019

 

 

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

7

 

 

Notes to Interim Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A.

 

Risk Factors

 

39

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

39

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

Item 5.

 

Other Information

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

Signatures

 

41

 

2


Part I – Financial Information

Item 1.  Financial  Statements

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts, unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net Sales

 

$

1,975.5

 

 

$

2,017.6

 

Cost of products sold, excluding intangible asset amortization

 

 

553.4

 

 

 

575.8

 

Intangible asset amortization

 

 

143.4

 

 

 

150.8

 

Research and development

 

 

101.7

 

 

 

95.7

 

Selling, general and administrative

 

 

796.4

 

 

 

801.7

 

Acquisition, integration and related

 

 

10.7

 

 

 

46.0

 

Quality remediation

 

 

19.7

 

 

 

42.6

 

Operating expenses

 

 

1,625.3

 

 

 

1,712.6

 

Operating Profit

 

 

350.2

 

 

 

305.0

 

Other expense, net

 

 

(0.5

)

 

 

(3.6

)

Interest expense, net

 

 

(58.0

)

 

 

(78.0

)

Earnings before income taxes

 

 

291.7

 

 

 

223.4

 

Provision for income taxes

 

 

45.5

 

 

 

47.2

 

Net Earnings

 

 

246.2

 

 

 

176.2

 

Less: Net earnings attributable to noncontrolling interest

 

 

0.1

 

 

 

1.5

 

Net Earnings of Zimmer Biomet Holdings, Inc.

 

$

246.1

 

 

$

174.7

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

1.20

 

 

$

0.86

 

Diluted

 

$

1.20

 

 

$

0.85

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

204.4

 

 

 

203.0

 

Diluted

 

 

205.8

 

 

 

204.6

 

 

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

 

3


ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions, unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net Earnings

 

$

246.2

 

 

$

176.2

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

Foreign currency cumulative translation adjustments, net of tax

 

 

(4.4

)

 

 

94.8

 

Unrealized cash flow hedge gains (losses), net of tax

 

 

14.5

 

 

 

(26.4

)

Reclassification adjustments on hedges, net of tax

 

 

(8.2

)

 

 

9.7

 

Adjustments to prior service cost and unrecognized actuarial

   assumptions, net of tax

 

 

2.0

 

 

 

(3.3

)

Total Other Comprehensive Income

 

 

3.9

 

 

 

74.8

 

Comprehensive Income

 

 

250.1

 

 

 

251.0

 

Comprehensive income attributable to the noncontrolling interest

 

 

0.1

 

 

 

1.4

 

Comprehensive Income Attributable to

 

 

 

 

 

 

 

 

Zimmer Biomet Holdings, Inc.

 

$

250.0

 

 

$

249.6

 

 

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

4


ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts, unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

586.8

 

 

$

542.8

 

Accounts receivable, less allowance for doubtful accounts

 

 

1,225.3

 

 

 

1,275.8

 

Inventories

 

 

2,310.2

 

 

 

2,256.5

 

Prepaid expenses and other current assets

 

 

376.9

 

 

 

352.3

 

Total Current Assets

 

 

4,499.2

 

 

 

4,427.4

 

Property, plant and equipment, net

 

 

2,014.0

 

 

 

2,015.4

 

Goodwill

 

 

9,570.0

 

 

 

9,594.4

 

Intangible assets, net

 

 

7,522.5

 

 

 

7,684.6

 

Other assets

 

 

683.3

 

 

 

405.0

 

Total Assets

 

$

24,289.0

 

 

$

24,126.8

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

361.1

 

 

$

362.6

 

Income taxes payable

 

 

178.2

 

 

 

142.4

 

Salaries, wages and benefits

 

 

193.1

 

 

 

260.3

 

Other current liabilities

 

 

1,022.6

 

 

 

1,131.0

 

Current portion of long-term debt

 

 

500.0

 

 

 

525.0

 

Total Current Liabilities

 

 

2,255.0

 

 

 

2,421.3

 

Deferred income taxes, net

 

 

990.2

 

 

 

999.5

 

Long-term income tax payable

 

 

662.6

 

 

 

666.2

 

Other long-term liabilities

 

 

531.3

 

 

 

350.0

 

Long-term debt

 

 

8,310.6

 

 

 

8,413.7

 

Total Liabilities

 

 

12,749.7

 

 

 

12,850.7

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Zimmer Biomet Holdings, Inc. Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, one billion shares authorized, 308.7 million

   shares in 2019 (307.9 million in 2018) issued

 

 

3.1

 

 

 

3.1

 

Paid-in capital

 

 

8,748.1

 

 

 

8,686.1

 

Retained earnings

 

 

9,688.1

 

 

 

9,491.2

 

Accumulated other comprehensive loss

 

 

(183.5

)

 

 

(187.4

)

Treasury stock, 103.9 million shares in 2019 (103.9 million shares in 2018)

 

 

(6,721.4

)

 

 

(6,721.7

)

Total Zimmer Biomet Holdings, Inc. stockholders' equity

 

 

11,534.4

 

 

 

11,271.3

 

Noncontrolling interest

 

 

4.9

 

 

 

4.8

 

Total Stockholders' Equity

 

 

11,539.3

 

 

 

11,276.1

 

Total Liabilities and Stockholders' Equity

 

$

24,289.0

 

 

$

24,126.8

 

 

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

 


5


ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share amounts, unaudited)

 

 

 

 

Zimmer Biomet Holdings, Inc. Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Shares

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Shares

 

 

Noncontrolling

 

 

Stockholders'

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

(Loss) Income

 

 

Number

 

 

Amount

 

 

Interest

 

 

Equity

 

Balance January 1, 2018

 

 

306.5

 

 

$

3.1

 

 

$

8,514.9

 

 

$

10,022.8

 

 

$

(83.2

)

 

 

(103.9

)

 

$

(6,721.8

)

 

$

(0.3

)

 

$

11,735.5

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

174.7

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1.5

 

 

 

176.2

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

74.8

 

 

 

-

 

 

 

-

 

 

 

(0.1

)

 

 

74.7

 

Cash dividends declared

($0.24 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(48.7

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(48.7

)

Adoption of

new accounting standard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

42.9

 

 

 

(42.9

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock compensation plans

 

 

0.6

 

 

 

-

 

 

 

61.7

 

 

 

-

 

 

 

-

 

 

 

0.1

 

 

 

0.1

 

 

 

-

 

 

 

61.8

 

Balance March

   31, 2018

 

 

307.1

 

 

$

3.1

 

 

$

8,576.6

 

 

$

10,191.7

 

 

$

(51.3

)

 

 

(103.8

)

 

$

(6,721.7

)

 

$

1.1

 

 

$

11,999.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2019

 

 

307.9

 

 

$

3.1

 

 

$

8,686.1

 

 

$

9,491.2

 

 

$

(187.4

)

 

 

(103.9

)

 

$

(6,721.7

)

 

$

4.8

 

 

$

11,276.1

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

246.1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.1

 

 

 

246.2

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3.9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3.9

 

Cash dividends declared

($0.24 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(49.2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(49.2

)

Stock compensation plans

 

 

0.8

 

 

 

-

 

 

 

62.0

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.3

 

 

 

-

 

 

 

62.3

 

Balance March

   31, 2019

 

 

308.7

 

 

$

3.1

 

 

$

8,748.1

 

 

$

9,688.1

 

 

$

(183.5

)

 

 

(103.9

)

 

$

(6,721.4

)

 

$

4.9

 

 

$

11,539.3

 

 

 

 

 

 

 

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

 

6


ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions, unaudited)

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

246.2

 

 

$

176.2

 

Adjustments to reconcile net earnings to cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

247.7

 

 

 

263.5

 

Share-based compensation

 

 

20.3

 

 

 

13.9

 

Changes in operating assets and liabilities, net of acquired assets and liabilities

 

 

 

 

 

 

 

 

Income taxes

 

 

24.5

 

 

 

8.6

 

Receivables

 

 

50.7

 

 

 

146.2

 

Inventories

 

 

(50.7

)

 

 

(39.6

)

Accounts payable and accrued liabilities

 

 

(231.4

)

 

 

(27.7

)

Other assets and liabilities

 

 

(23.7

)

 

 

(50.6

)

Net cash provided by operating activities

 

 

283.6

 

 

 

490.5

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Additions to instruments

 

 

(63.7

)

 

 

(60.4

)

Additions to other property, plant and equipment

 

 

(37.8

)

 

 

(26.7

)

Net investment hedge settlements

 

 

10.5

 

 

 

-

 

Investments in other assets

 

 

(14.5

)

 

 

(14.6

)

Net cash used in investing activities

 

 

(105.5

)

 

 

(101.7

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Proceeds from senior notes

 

 

-

 

 

 

749.5

 

Proceeds from multicurrency revolving facility

 

 

-

 

 

 

400.0

 

Proceeds from term loans

 

 

200.0

 

 

 

-

 

Payments on term loans

 

 

(310.0

)

 

 

(225.0

)

Net payments on other debt

 

 

-

 

 

 

(0.2

)

Dividends paid to stockholders

 

 

(49.0

)

 

 

(48.6

)

Proceeds from employee stock compensation plans

 

 

44.4

 

 

 

47.9

 

Net cash flows from unremitted collections from factoring programs

 

 

(16.4

)

 

 

(60.8

)

Business combination contingent consideration payments

 

 

-

 

 

 

(13.6

)

Other financing activities

 

 

(4.2

)

 

 

(7.4

)

Net cash provided by (used in) financing activities

 

 

(135.2

)

 

 

841.8

 

Effect of exchange rates on cash and cash equivalents

 

 

1.1

 

 

 

10.4

 

Increase in cash and cash equivalents

 

 

44.0

 

 

 

1,241.0

 

Cash and cash equivalents, beginning of year

 

 

542.8

 

 

 

524.4

 

Cash and cash equivalents, end of period

 

$

586.8

 

 

$

1,765.4

 

 

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

 

7


ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented.  The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).  Results for interim periods should not be considered indicative of results for the full year.

We have reclassified expenses that were previously recognized in a financial statement line item labeled “Acquisition, quality remediation and other” in the three month period ended March 31, 2018 to the financial statement line items of “Selling, general and administrative,” “Acquisition, integration and related,” and “Quality remediation”.  The prior period has been reclassified to conform to the current year presentation.   We made this change to provide additional transparency and better reflect the nature of these expenses.  The impacts of this change on our condensed consolidated statements of earnings are included in the table below.

 

 

As

 

 

 

 

 

 

 

 

 

 

Previously

 

 

 

 

 

 

As

 

(in millions)

Reported

 

 

Reclassifications

 

 

Restated

 

Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

$

785.1

 

 

$

16.6

 

 

$

801.7

 

Acquisition, integration and related

 

-

 

 

 

46.0

 

 

 

46.0

 

Quality remediation

 

-

 

 

 

42.6

 

 

 

42.6

 

Acquisition, quality remediation and other

 

105.2

 

 

 

(105.2

)

 

 

-

 

 

The words “we,” “us,” “our” and similar words and “Zimmer Biomet” refer to Zimmer Biomet Holdings, Inc. and its subsidiaries.  “Zimmer Biomet Holdings” refers to the parent company only.

2.  Significant Accounting Policies  

Accounting Pronouncements Recently Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02 – Leases (Topic 842).  This ASU requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. This ASU was effective for us as of January 1, 2019.  This ASU required a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or the period of adoption.  We elected to use the period of adoption (January 1, 2019) transition method and therefore did not restate prior periods.  This ASU allowed for certain practical expedients to make the adoption of the ASU less burdensome.  We elected the practical expedients upon transition which permitted us to not reassess lease identification, classification, and initial direct costs under the new standard for leases that commenced prior to the effective date.  We also elected not to recognize a right-of-use asset nor a lease liability for leases with an initial term of twelve months or less.  Finally, we elected not to separate non-lease components from the leased components in the valuation of our right-of-use asset and lease liability for all asset classes.

On January 1, 2019, we recognized a right-of-use asset of $274.7 million in other assets and lease liabilities of $62.2 million and $221.2 million in other current liabilities and other long-term liabilities, respectively.  No cumulative adjustment to retained earnings was required upon adoption.  We do not have any significant finance leases.  See Note 6 for additional information.

There are no other recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.

8


3.  Revenue Recognition

Net sales by geography are as follows (in millions):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Americas

 

$

1,194.1

 

 

$

1,208.1

 

EMEA

 

 

463.9

 

 

 

496.5

 

Asia Pacific

 

 

317.5

 

 

 

313.0

 

Total

 

$

1,975.5

 

 

$

2,017.6

 

Net sales by product category are as follows (in millions):

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Knees

 

$

694.1

 

 

$

713.3

 

Hips

 

 

484.2

 

 

 

492.0

 

S.E.T.

 

 

439.9

 

 

 

442.3

 

Spine & CMF

 

 

182.8

 

 

 

183.1

 

Dental

 

 

104.5

 

 

 

107.6

 

Other

 

 

70.0

 

 

 

79.3

 

Total

 

$

1,975.5

 

 

$

2,017.6

 

 

4.  Inventories

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in millions)

 

Finished goods

 

$

1,823.2

 

 

$

1,797.7

 

Work in progress

 

 

249.8

 

 

 

230.4

 

Raw materials

 

 

237.2

 

 

 

228.4

 

Inventories

 

$

2,310.2

 

 

$

2,256.5

 

 

5.  Property, Plant and Equipment

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in millions)

 

Land

 

$

28.0

 

 

$

28.0

 

Buildings and equipment

 

 

1,918.7

 

 

 

1,885.6

 

Capitalized software costs

 

 

438.5

 

 

 

425.8

 

Instruments

 

 

3,035.9

 

 

 

2,950.5

 

Construction in progress

 

 

138.1

 

 

 

147.2

 

 

 

 

5,559.2

 

 

 

5,437.1

 

Accumulated depreciation

 

 

(3,545.2

)

 

 

(3,421.7

)

Property, plant and equipment, net

 

$

2,014.0

 

 

$

2,015.4

 

 

We had $45.2 million and $49.3 million of property, plant and equipment included in accounts payable as of March 31, 2019 and December 31, 2018, respectively.

 

6.  Leases

 

We own most of our manufacturing facilities, but lease various office space, vehicles and other less significant assets throughout the world.  Our contracts contain a lease if they convey a right to control the use of an identified asset, either explicitly or implicitly, in

9


exchange for consideration.  Our lease contracts are a necessary part of our business, but we do not believe they are significant to our overall operations.  We do not have any significant finance leases.  Additionally, we do not have significant leases: where we are considered a lessor; where we sublease our assets; with an initial term of twelve months or less; with related parties; with residual value guarantees; that impose restrictions or covenants on us; or that have not yet commenced, but create significant rights and obligations against us.

 

  Our real estate leases generally have terms of between 5 to 10 years and contain lease extension options that can vary from month-to-month extensions to up to 5 year extensions.  We include extension options in our lease term if we are reasonably certain to exercise that option.  In determining whether an extension is reasonably certain, we consider the uniqueness of the property for our needs, the availability of similar properties, whether the extension period payments remain the same or may change due to market rates or fixed price increases in the contract, and other economic factors.  Our vehicle leases generally have terms of between 3 to 5 years and contain lease extension options on a month-to-month basis.  Our vehicle leases are generally not reasonably certain to be extended.

 

Under GAAP, we are required to discount our lease liabilities to present value using the rate implicit in the lease, or our incremental borrowing rate for a similar term as the lease term if the implicit rate is not readily available.  We generally do not have adequate information to know the implicit rate in a lease and therefore use our incremental borrowing rate.  Under GAAP, the incremental borrowing rate must be on a collateralized basis, but our debt arrangements are unsecured.  We have determined our incremental borrowing rate by using our credit rating to estimate our unsecured borrowing rate and applying reasonable assumptions to reduce the unsecured rate for a risk adjustment effect from collateral.

 

Information on our leases is as follows ($ in millions):

 

 

Three Months Ended

 

 

 

March 31, 2019

 

Lease cost

 

$

18.6

 

Operating cash flows from leases

 

$

18.8

 

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

 

$

5.8

 

 

 

 

As of

 

 

 

March 31, 2019

 

Right-of-use assets recognized in Other assets

 

$

262.6

 

Lease liabilities recognized in Other current liabilities

 

$

62.2

 

Lease liabilities recognized in Other long-term liabilities

 

$

208.2

 

Weighted-average remaining lease term

 

6.3 years

 

Weighted-average discount rate

 

 

2.6

%

 

Our variable lease costs are not significant.

 

Our future minimum lease payments as of March 31, 2019 were (in millions):

 

For the Years Ending December 31,

 

 

 

 

2019 (April 1, 2019 to December 31, 2019)

 

$

51.9

 

2020

 

 

58.7

 

2021

 

 

45.3

 

2022

 

 

32.5

 

2023

 

 

27.7

 

Thereafter

 

 

80.9

 

Total

 

 

297.0

 

Less imputed interest

 

 

26.6

 

Total

 

$

270.4

 

 

Under GAAP, since we adopted the new standard using the period of adoption transition method (see Note 2 for additional information regarding the new standard), we are not required to present 2018 comparative disclosures.  However, we are required to present the required annual disclosures under the previous GAAP lease accounting standard.  Accordingly, the following were the future minimum rental commitments under non-cancelable operating leases as of December 31, 2018 (in millions):

 

10


For the Years Ending December 31,

 

 

 

 

2019

 

$

67.1

 

2020

 

 

56.9

 

2021

 

 

44.1

 

2022

 

 

32.2

 

2023

 

 

27.7

 

Thereafter

 

 

81.6

 

 

 

7.  Transfers of Financial Assets

We have receivables purchase arrangements with unrelated third parties to liquidate portions of our trade accounts receivable balance.  The receivables relate to products sold to customers and are short-term in nature.  The factorings are treated as sales of our accounts receivable.  Proceeds from the transfers reflect either the face value of the accounts receivable or the face value less factoring fees.  

In the U.S. and Japan, our programs are executed on a revolving basis with a maximum funding limit as of March 31, 2019 of $400.0 million combined.  We act as the collection agent on behalf of the third party, but have no significant retained interests or servicing liabilities related to the accounts receivable sold.  In order to mitigate credit risk, we purchased credit insurance for the factored accounts receivable.  As a result, our risk of loss is limited to the factored accounts receivable not covered by the insurance.  Additionally, we have provided guarantees for the factored accounts receivable.  The maximum exposures to loss associated with these arrangements were $35.5 million and $33.0 million as of March 31, 2019 and December 31, 2018, respectively.

In Europe, we sell to a third party and have no continuing involvement or significant risk with the factored accounts receivable.

Funds received from the transfers are recorded as an increase to cash and a reduction to accounts receivable outstanding in the condensed consolidated balance sheets.  We report the cash flows attributable to the sale of receivables to third parties in cash flows from operating activities in our condensed consolidated statements of cash flows.  Net expenses resulting from the sales of receivables are recognized in selling, general and administrative expense.  Net expenses include any resulting gains or losses from the sales of receivables, credit insurance and factoring fees.

In the three month periods ended March 31, 2019 and 2018, we sold receivables having an aggregate face value of $799.4 million and $617.0 million to third parties in exchange for cash proceeds of $798.7 million and $616.7 million, respectively.  Expenses recognized on these sales during the three month periods ended March 31, 2019 and 2018 were not significant.  In the three month periods ended March 31, 2019 and 2018, under the U.S. and Japan programs, we collected $698.4 million and $481.4 million, respectively, from our customers and remitted that amount to the third party, and we effectively repurchased $34.7 million and $51.2 million, respectively, of previously sold accounts receivable from the third party, due to the programs’ revolving nature.  As of March 31, 2019 and December 31, 2018, we had collected $50.4 million and $66.8 million, respectively, of funds that were unremitted to the third party, which are reflected in our condensed consolidated balance sheets under other current liabilities.  The initial collection of cash from customers and its remittance to the third party is reflected in net cash provided by/(used in) financing activities in our condensed consolidated statements of cash flows.  

At March 31, 2019 and December 31, 2018, the outstanding principal amount of receivables that has been derecognized under the U.S. and Japan revolving arrangements amounted to $390.4 million and $365.9 million, respectively.

11


8.  Debt

Our debt consisted of the following (in millions):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

4.625% Senior Notes due 2019

 

$

500.0

 

 

$

500.0

 

U.S. Term Loan B

 

 

-

 

 

 

25.0

 

Total current portion of long-term debt

 

$

500.0

 

 

$

525.0

 

Long-term debt

 

 

 

 

 

 

 

 

2.700% Senior Notes due 2020

 

$

1,500.0

 

 

$

1,500.0

 

Floating Rate Notes due 2021

 

 

450.0

 

 

 

450.0

 

3.375% Senior Notes due 2021

 

 

300.0

 

 

 

300.0

 

3.150% Senior Notes due 2022

 

 

750.0

 

 

 

750.0

 

3.700% Senior Notes due 2023

 

 

300.0

 

 

 

300.0

 

3.550% Senior Notes due 2025

 

 

2,000.0

 

 

 

2,000.0

 

4.250% Senior Notes due 2035

 

 

253.4

 

 

 

253.4

 

5.750% Senior Notes due 2039

 

 

317.8

 

 

 

317.8

 

4.450% Senior Notes due 2045

 

 

395.4

 

 

 

395.4

 

1.414% Euro Notes due 2022

 

 

561.4

 

 

 

571.6

 

2.425% Euro Notes due 2026

 

 

561.4

 

 

 

571.6

 

U.S. Term Loan B

 

 

-

 

 

 

200.0

 

U.S. Term Loan C

 

 

650.0

 

 

 

535.0

 

Japan Term Loan A

 

 

106.0

 

 

 

105.3

 

Japan Term Loan B

 

 

193.0

 

 

 

191.7

 

Debt discount and issuance costs

 

 

(40.3

)

 

 

(42.7

)

Adjustment related to interest rate swaps

 

 

12.5

 

 

 

14.6

 

Total long-term debt

 

$

8,310.6

 

 

$