Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
gildq12019ex311.htm
EX-31.2
gildq12019ex312.htm
EX-32.1
gildq12019ex321.htm
Gilead Sciences Earnings 2019-03-31
GILD 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 q119form10-q.htm FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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 No. 0-19731
GILEAD SCIENCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
94-3047598
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
650-574-3000
Registrant’s Telephone Number, Including Area Code
Title of each class
Common Stock, par value, $0.001 per share
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
GILD
Name of each exchange on which registered
The Nasdaq Global Select Market
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 x 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 x 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 x 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 x
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 30, 2019: 1,271,554,672
We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, AMBISOME®, ATRIPLA®, BIKTARVY®, CAYSTON®, COMPLERA®, DESCOVY®, EMTRIVA®, EPCLUSA®, EVIPLERA®, GENVOYA®, HARVONI®, HEPSERA®, LETAIRIS®, ODEFSEY®, RANEXA®, SOVALDI®, STRIBILD®, TRUVADA®, TRUVADAFORPREP®, TYBOST®, VEMLIDY®, VIREAD®, VOSEVI®, YESCARTA® and ZYDELIG®. LEXISCAN® is a registered trademark of Astellas U.S. LLC. MACUGEN® is a registered trademark of Eyetech, Inc. SYMTUZA® is a registered trademark of Janssen Sciences Ireland UC. TAMIFLU® is a registered trademark of Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.
Accounts receivable, net of allowances of $669 and $583, respectively
3,283
3,327
Inventories
898
814
Prepaid and other current assets
1,939
1,606
Total current assets
34,024
35,836
Property, plant and equipment, net
4,116
4,006
Long-term marketable securities
2,221
1,423
Intangible assets, net
15,438
15,738
Goodwill
4,117
4,117
Other long-term assets
2,921
2,555
Total assets
$
62,837
$
63,675
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
577
$
790
Accrued government and other rebates
3,974
3,928
Other accrued liabilities
2,348
3,139
Current portion of long-term debt and other obligations, net
2,498
2,748
Total current liabilities
9,397
10,605
Long-term debt, net
24,080
24,574
Long-term income taxes payable
5,809
5,922
Other long-term obligations
1,460
1,040
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding
—
—
Common stock, par value $0.001 per share; 5,600 shares authorized; 1,274 and 1,282 shares issued and outstanding, respectively
1
1
Additional paid-in capital
2,494
2,282
Accumulated other comprehensive income
130
80
Retained earnings
19,326
19,024
Total Gilead stockholders’ equity
21,951
21,387
Noncontrolling interest
140
147
Total stockholders’ equity
22,091
21,534
Total liabilities and stockholders’ equity
$
62,837
$
63,675
See accompanying notes.
2
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in millions, except per share amounts)
Three Months Ended
March 31,
2019
2018
Revenues:
Product sales
$
5,200
$
5,001
Royalty, contract and other revenues
81
87
Total revenues
5,281
5,088
Costs and expenses:
Cost of goods sold
957
1,001
Research and development expenses
1,057
937
Selling, general and administrative expenses
1,030
997
Total costs and expenses
3,044
2,935
Income from operations
2,237
2,153
Interest expense
(254
)
(290
)
Other income (expense), net
367
170
Income before provision for income taxes
2,350
2,033
Provision for income taxes
382
494
Net income
1,968
1,539
Net income (loss) attributable to noncontrolling interest
(7
)
1
Net income attributable to Gilead
$
1,975
$
1,538
Net income per share attributable to Gilead common stockholders - basic
$
1.55
$
1.18
Shares used in per share calculation - basic
1,276
1,307
Net income per share attributable to Gilead common stockholders - diluted
$
1.54
$
1.17
Shares used in per share calculation - diluted
1,283
1,320
See accompanying notes.
3
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
Three Months Ended
March 31,
2019
2018
Net income
$
1,968
$
1,539
Other comprehensive income (loss):
Net foreign currency translation gain, net of tax
21
7
Available-for-sale debt securities:
Net unrealized gain (loss), net of tax
30
(36
)
Reclassifications to net income, net of tax
—
—
Net change
30
(36
)
Cash flow hedges:
Net unrealized gain (loss), net of tax
28
(61
)
Reclassifications to net income, net of tax
(29
)
48
Net change
(1
)
(13
)
Other comprehensive income (loss)
50
(42
)
Comprehensive income
2,018
1,497
Comprehensive income (loss) attributable to noncontrolling interest
(7
)
1
Comprehensive income attributable to Gilead
$
2,025
$
1,496
See accompanying notes.
4
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions, except per share amounts)
Three Months Ended March 31, 2019
Gilead Stockholders’ Equity
Noncontrolling Interest
Total Stockholders’ Equity
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Shares
Amount
Balance at December 31, 2018
1,282
$
1
$
2,282
$
80
$
19,024
$
147
$
21,534
Net income (loss)
—
—
—
—
1,975
(7
)
1,968
Other comprehensive income, net of tax
—
—
—
50
—
—
50
Issuances under employee stock purchase plan
1
—
63
—
—
—
63
Issuances under equity incentive plans
4
—
41
—
—
—
41
Stock-based compensation
—
—
144
—
—
—
144
Repurchases of common stock
(13
)
—
(36
)
—
(867
)
—
(903
)
Dividends declared ($0.63 per share)
—
—
—
—
(814
)
—
(814
)
Cumulative effect from the adoption of new leases standard (Note 1)
—
—
—
—
8
—
8
Balance at March 31, 2019
1,274
$
1
$
2,494
$
130
$
19,326
$
140
$
22,091
Three Months Ended March 31, 2018
Gilead Stockholders’ Equity
Noncontrolling Interest
Total Stockholders’ Equity
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Shares
Amount
Balance at December 31, 2017
1,308
$
1
$
1,264
$
165
$
19,012
$
59
$
20,501
Net income
—
—
—
—
1,538
1
1,539
Other comprehensive loss, net of tax
—
—
—
(42
)
—
—
(42
)
Issuances under employee stock purchase plan
1
—
48
—
—
—
48
Issuances under equity incentive plans
5
—
64
—
—
—
64
Stock-based compensation
—
—
224
—
—
—
224
Repurchases of common stock
(14
)
—
(36
)
—
(1,085
)
—
(1,121
)
Dividends declared ($0.57 per share)
—
—
—
—
(752
)
—
(752
)
Cumulative effect from the adoption of new accounting standards
—
—
—
(293
)
483
—
190
Balance at March 31, 2018
1,300
$
1
$
1,564
$
(170
)
$
19,196
$
60
$
20,651
See accompanying notes.
5
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
Three Months Ended
March 31,
2019
2018
Operating Activities:
Net income
$
1,968
$
1,539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
60
56
Amortization expense
299
301
Stock-based compensation expense
143
220
Deferred income taxes
24
35
Other
(157
)
49
Changes in operating assets and liabilities:
Accounts receivable, net
32
101
Inventories
(15
)
(14
)
Prepaid expenses and other
(43
)
529
Accounts payable
(201
)
(92
)
Income taxes payable
(249
)
(618
)
Accrued liabilities and other
(417
)
164
Net cash provided by operating activities
1,444
2,270
Investing Activities:
Purchases of marketable debt securities
(6,722
)
(397
)
Proceeds from sales of marketable debt securities
575
221
Proceeds from maturities of marketable debt securities
6,511
4,762
Capital expenditures
(237
)
(212
)
Other
(238
)
(20
)
Net cash provided by (used in) investing activities
(111
)
4,354
Financing Activities:
Proceeds from issuances of common stock
103
111
Repurchases of common stock
(834
)
(1,039
)
Repayments of debt and other obligations
(750
)
(4,500
)
Payments of dividends
(817
)
(753
)
Other
(68
)
(414
)
Net cash used in financing activities
(2,366
)
(6,595
)
Effect of exchange rate changes on cash and cash equivalents
20
26
Net change in cash and cash equivalents
(1,013
)
55
Cash and cash equivalents at beginning of period
17,940
7,588
Cash and cash equivalents at end of period
$
16,927
$
7,643
See accompanying notes.
6
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments, consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (Gilead, we, our or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our Condensed Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of March 31, 2019, we did not have any material VIEs.
The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2018, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC).
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Actual results may differ significantly from these estimates.
Concentrations of Risk
We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.
We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States and Europe. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate as of March 31, 2019.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 “Leases” (ASU 2016-02) and subsequently issued supplemental adoption guidance and clarification (collectively, Topic 842). Topic 842 amends a number of aspects of lease accounting, including requiring lessees to recognize right-of-use assets and lease liabilities for operating leases with a lease term greater than one year. Topic 842 supersedes Topic 840 “Leases.”
On January 1, 2019, we adopted Topic 842 using the modified retrospective approach. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 840. We elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed us to carry forward the historical lease classification, retain the initial direct costs for any leases that existed prior to the adoption of the standard and not reassess whether any contracts entered into prior to the adoption are leases. We also elected to account for lease and nonlease components in our lease agreements as a single lease component in determining lease assets and liabilities. In addition, we elected not to recognize the right-of-use assets and liabilities for leases with lease terms of one year or less.
7
Upon adoption of Topic 842, we recorded $441 million of right-of-use assets within Other long-term assets and $490 million of operating lease liabilities, classified primarily within Other long-term obligations on our Condensed Consolidated Balance Sheet, as of January 1, 2019. The adoption did not have a material impact on our Condensed Consolidated Statements of Income or Condensed Consolidated Statements of Cash Flows. See Note 10. Leases for additional information.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” The guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. We are evaluating the impact of the adoption of these standards but we currently do not expect a material impact on our Condensed Consolidated Financial Statements.
In November 2018, the FASB issued Accounting Standards Update No. 2018-18 “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. This guidance will become effective for us beginning in the first quarter of 2020 and will be applied retrospectively to January 1, 2018 when we initially adopted Topic 606. Early adoption is permitted. We are evaluating the impact of the adoption of this standard but we currently do not expect a material impact on our revenue.
8
2.
REVENUES
Disaggregation of Revenues
The following table disaggregates our product sales by product and geographic region and disaggregates our royalty, contract and other revenues by geographic region (in millions):
Three Months Ended March 31, 2019
Three Months Ended March 31, 2018
U.S.
Europe
Other International
Total
U.S.
Europe
Other International
Total
Product sales:
Atripla
$
133
$
16
$
22
$
171
$
228
$
51
$
35
$
314
Biktarvy
739
48
6
793
35
—
—
35
Complera/Eviplera
44
62
9
115
67
109
14
190
Descovy
233
68
41
342
274
75
12
361
Genvoya
728
193
94
1,015
853
186
43
1,082
Odefsey
282
106
9
397
279
58
5
342
Stribild
67
18
11
96
133
29
12
174
Truvada
551
33
22
606
507
97
48
652
Other HIV(1)
11
1
5
17
9
1
3
13
Revenue share – Symtuza(2)
42
24
—
66
—
7
—
7
AmBisome
8
57
28
93
17
56
34
107
Ledipasvir/Sofosbuvir(3)
117
27
81
225
234
56
58
348
Letairis
197
—
—
197
204
—
—
204
Ranexa
155
—
—
155
195
—
—
195
Sofosbuvir/Velpatasvir(4)
230
154
107
491
269
198
69
536
Vemlidy
65
4
32
101
47
3
8
58
Viread
12
14
46
72
7
30
60
97
Vosevi
45
16
2
63
86
16
5
107
Yescarta
90
6
—
96
40
—
—
40
Zydelig
11
15
1
27
14
18
1
33
Other(5)
36
20
6
62
29
15
62
106
Total product sales
3,796
882
522
5,200
3,527
1,005
469
5,001
Royalty, contract and other revenues
22
56
3
81
20
52
15
87
Total revenues
$
3,818
$
938
$
525
$
5,281
$
3,547
$
1,057
$
484
$
5,088
____________________
Notes:
(1)
Includes Emtriva and Tybost
(2)
Represents our revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen Sciences Ireland UC (Janssen)
(3)
Amounts consist of sales of Harvoni and the authorized generic version of Harvoni sold by our separate subsidiary, Asegua Therapeutics LLC
(4)
Amounts consist of sales of Epclusa and the authorized generic version of Epclusa sold by our separate subsidiary, Asegua Therapeutics LLC
(5)
Includes Cayston, Hepsera and Sovaldi
Revenues Recognized from Performance Obligations Satisfied in Prior Periods
During the three months ended March 31, 2019 and 2018, revenues recognized from performance obligations satisfied in prior years related to royalties for licenses of our intellectual property were $155 million and $97 million, respectively. Changes in estimates for variable consideration related to sales made in prior years resulted in a $107 million increase and $87 million decrease in revenues during the three months ended March 31, 2019 and 2018, respectively.
Contract Balances
Our contract assets, which consist of unbilled amounts primarily from arrangements where the licensing of intellectual property is the only or predominant performance obligation, totaled $140 million and $125 million as of March 31, 2019 and December 31, 2018, respectively.
Contract liabilities were not material as of March 31, 2019 and December 31, 2018.
9
3.
FAIR VALUE MEASUREMENTS
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
•
Level 1 inputs include quoted prices in active markets for identical assets or liabilities;
•
Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
•
Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
Our financial instruments consist primarily of cash and cash equivalents, marketable debt securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable debt securities, certain equity securities and foreign currency exchange contracts are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Equity securities with no readily determinable fair values are recorded using the measurement alternative of cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. Short-term and long-term debt are reported at their amortized costs on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.
The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):
March 31, 2019
December 31, 2018
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets:
Available-for-sale debt securities:
U.S. treasury securities
$
4,782
$
—
$
—
$
4,782
$
3,969
$
—
$
—
$
3,969
Certificates of deposit
—
4,211
—
4,211
—
4,361
—
4,361
U.S. government agencies securities
—
1,444
—
1,444
—
938
—
938
Municipal debt securities
—
25
—
25
—
—
—
—
Non-U.S. government securities
—
452
—
452
—
305
—
305
Corporate debt securities
—
12,565
—
12,565
—
13,067
—
13,067
Residential mortgage and asset-backed securities
—
1,036
—
1,036
—
1,524
—
1,524
Equity securities:
Money market funds
3,778
—
—
3,778
5,305
—
—
5,305
Publicly traded equity securities
1,099
18
—
1,117
881
—
—
881
Deferred compensation plan
150
—
150
124
—
—
124
Foreign currency derivative contracts
—
77
—
77
—
78
—
78
Total
$
9,809
$
19,828
$
—
$
29,637
$
10,279
$
20,273
$
—
$
30,552
Liabilities:
Deferred compensation plan
$
150
$
—
$
—
$
150
$
124
$
—
$
—
$
124
Foreign currency derivative contracts
—
2
—
2
—
1
—
1
Total
$
150
$
2
$
—
$
152
$
124
$
1
$
—
$
125
For the three months ended March 31, 2019 and 2018, changes in the fair value of equity securities resulted in net unrealized gains of $197 million and $45 million, respectively, which were included in Other income (expense), net on our Condensed
10
Consolidated Statements of Income. Investments in equity securities without readily determinable fair values were not material for the periods presented.
The following table summarizes the classification of our equity securities in our Condensed Consolidated Balance Sheets (in millions):
March 31, 2019
December 31, 2018
Cash and cash equivalents
$
3,778
$
5,305
Prepaid and other current assets
1,105
863
Other long-term assets
162
142
Total
$
5,045
$
6,310
Our available-for-sale debt securities are classified as cash equivalents, short-term marketable securities and long-term marketable securities on our Condensed Consolidated Balance Sheets. See Note 4. Available-for-Sale Debt Securities for additional information.
Level 2 Inputs
We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.
The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $27.3 billion and $27.1 billion as of March 31, 2019 and December 31, 2018, respectively, and the carrying values were $26.6 billion and $27.3 billion as of March 31, 2019 and December 31, 2018, respectively.
4.
AVAILABLE-FOR-SALE DEBT SECURITIES
The following table summarizes our available-for-sale debt securities (in millions):
March 31, 2019
December 31, 2018
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
U.S. treasury securities
$
4,786
$
—
$
(4
)
$
4,782
$
3,978
$
—
$
(9
)
$
3,969
Certificates of deposit
4,211
—
—
4,211
4,361
—
—
4,361
U.S. government agencies securities
1,446
—
(2
)
1,444
943
—
(5
)
938
Municipal debt securities
25
—
—
25
—
—
—
—
Non-U.S. government securities
453
—
(1
)
452
307
—
(2
)
305
Corporate debt securities
12,576
1
(12
)
12,565
13,095
1
(29
)
13,067
Residential mortgage and asset-backed securities
1,040
—
(4
)
1,036
1,532
—
(8
)
1,524
Total
$
24,537
$
1
$
(23
)
$
24,515
$
24,216
$
1
$
(53
)
$
24,164
11
The following table summarizes the classification of our available-for-sale debt securities in our Condensed Consolidated Balance Sheets (in millions):
March 31, 2019
December 31, 2018
Cash and cash equivalents
$
11,317
$
10,592
Short-term marketable securities
10,977
12,149
Long-term marketable securities
2,221
1,423
Total
$
24,515
$
24,164
The following table summarizes our available-for-sale debt securities by contractual maturity (in millions):
March 31, 2019
Amortized Cost
Fair Value
Within one year
$
22,313
$
22,294
After one year through five years
2,175
2,172
After five years through ten years
31
31
After ten years
18
18
Total
$
24,537
$
24,515
The following table summarizes our available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in millions):
Less Than 12 Months
12 Months or Greater
Total
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
March 31, 2019
U.S. treasury securities
$
—
$
2,971
$
(4
)
$
917
$
(4
)
$
3,888
U.S. government agencies securities
—
483
(2
)
458
(2
)
941
Non-U.S. government securities
—
100
(1
)
160
(1
)
260
Corporate debt securities
(1
)
1,049
(11
)
2,938
(12
)
3,987
Residential mortgage and asset-backed securities
—
85
(4
)
817
(4
)
902
Total
$
(1
)
$
4,688
$
(22
)
$
5,290
$
(23
)
$
9,978
December 31, 2018
U.S. treasury securities
$
—
$
896
$
(9
)
$
1,383
$
(9
)
$
2,279
U.S. government agencies securities
—
30
(5
)
553
(5
)
583
Non-U.S. government securities
—
86
(2
)
192
(2
)
278
Corporate debt securities
(1
)
1,600
(28
)
4,204
(29
)
5,804
Residential mortgage and asset-backed securities
—
192
(8
)
1,186
(8
)
1,378
Total
$
(1
)
$
2,804
$
(52
)
$
7,518
$
(53
)
$
10,322
We held a total of 915 and 1,348 positions, which were in an unrealized loss position, as of March 31, 2019 and December 31, 2018, respectively.
Based on our review of these securities, we believe we had no other-than-temporary impairments as of March 31, 2019 and December 31, 2018, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were not material for the three months ended March 31, 2019 and 2018.
5.
DERIVATIVE FINANCIAL INSTRUMENTS
Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. To manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current
12
market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net on our Condensed Consolidated Statements of Income.
We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. The unrealized gains or losses in Accumulated other comprehensive income (AOCI) are reclassified into product sales when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at March 31, 2019 are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the three months ended March 31, 2019 and 2018 were included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $2.5 billion and $2.2 billion at March 31, 2019 and December 31, 2018, respectively.
While all our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments in our Condensed Consolidated Balance Sheets (in millions):
March 31, 2019
Asset Derivatives
Liability Derivatives
Classification
Fair Value
Classification
Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts
Other current assets
$
74
Other accrued liabilities
$
(1
)
Foreign currency exchange contracts
Other long-term assets
3
Other long-term obligations
—
Total derivatives designated as hedges
77
(1
)
Derivatives not designated as hedges:
Foreign currency exchange contracts
Other current assets
—
Other accrued liabilities
(1
)
Total derivatives not designated as hedges
—
(1
)
Total derivatives
$
77
$
(2
)
December 31, 2018
Asset Derivatives
Liability Derivatives
Classification
Fair Value
Classification
Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts
Other current assets
$
73
Other accrued liabilities
$
(1
)
Foreign currency exchange contracts
Other long-term assets
5
Other long-term obligations
—
Total derivatives designated as hedges
78
(1
)
Derivatives not designated as hedges:
Foreign currency exchange contracts
Other current assets
—
Other accrued liabilities
—
Total derivatives not designated as hedges
—
—
Total derivatives
$
78
$
(1
)
13
The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
Three Months Ended
March 31,
2019
2018
Derivatives designated as hedges:
Gains (losses) recognized in AOCI
$
28
$
(61
)
Gains (losses) reclassified from AOCI into product sales
29
(48
)
Derivatives not designated as hedges:
Losses recognized in Other income (expense), net
$
(6
)
$
(14
)
From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net on our Condensed Consolidated Statements of Income. There were no material amounts recorded in Other income (expense), net on our Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 as a result of the discontinuance of cash flow hedges.
As of March 31, 2019 and December 31, 2018, we only held foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on our Condensed Consolidated Balance Sheets (in millions):
Gross Amounts Not Offset
on our Condensed
Consolidated Balance Sheets
Description
Gross Amounts
of Recognized
Assets/Liabilities
Gross Amounts
Offset on our
Condensed
Consolidated
Balance Sheets
Amounts of Assets/Liabilities Presented
on our Condensed Consolidated
Balance Sheets
Derivative
Financial
Instruments
Cash Collateral
Received/
Pledged
Net Amount
(Legal Offset)
As of March 31, 2019
Derivative assets
$
77
$
—
$
77
$
(2
)
$
—
$
75
Derivative liabilities
(2
)
—
(2
)
2
—
—
As of December 31, 2018
Derivative assets
$
78
$
—
$
78
$
(1
)
$
—
$
77
Derivative liabilities
(1
)
—
(1
)
1
—
—
6.
COLLABORATIVE ARRANGEMENTS
We enter into collaborative arrangements with third parties for the development and commercialization of certain products and product candidates. These arrangements involve two or more parties who are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements may include non-refundable up-front payments, payments by us for options to acquire certain rights, contingent obligations by us for potential development and regulatory milestone payments and/or sales-based milestone payments, royalty payments, revenue or profit-sharing arrangements, cost-sharing arrangements, equity investments, or a combination of these terms.
During the three months ended March 31, 2019, we entered into collaboration arrangements that resulted in cash payments of $165 million, of which $126 million was recorded as up-front collaboration expense within Research and development expenses on our Condensed Consolidated Statements of Income and the remaining balance was recorded in Prepaid and other current assets on our Condensed Consolidated Balance Sheets. During the three months ended March 31, 2018, the initial cash consideration related to collaborations and other arrangements was not material. We do not consider any of these collaboration arrangements to be individually material.
Under the financial terms of these arrangements, we may be required to make payments upon achievement of various developmental, regulatory and commercial milestones, which could be significant. In addition, we may be required to pay significant royalties on future sales if products related to these arrangements are commercialized. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurrence. Future milestone payments and royalties, if any, will be reflected on our Condensed Consolidated Statements of Income when the corresponding events become probable.
14
7.
OTHER FINANCIAL INFORMATION
Inventories
The following table summarizes our inventories (in millions):
March 31, 2019
December 31, 2018
Raw materials
$
1,860
$
1,888
Work in process
267
235
Finished goods
501
507
Total
$
2,628
$
2,630
Reported as:
Inventories
$
898
$
814
Other long-term assets
1,730
1,816
Total
$
2,628
$
2,630
Amounts reported as other long-term assets primarily consisted of raw materials as of March 31, 2019 and December 31, 2018.
Other Accrued Liabilities
The following table summarizes the components of other accrued liabilities (in millions):
March 31, 2019
December 31, 2018
Compensation and employee benefits
$
325
$
555
Accrued payment for marketing-related rights acquired from Japan Tobacco Inc.
185
365
Other accrued expenses
1,838
2,219
Total
$
2,348
$
3,139
8.
INTANGIBLE ASSETS
The following table summarizes our intangible assets, net (in millions):