Company Quick10K Filing
Quick10K
Shire
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$172.29 915 $157,614
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-01-11 Other Events, Exhibits
8-K 2019-01-08 Other Events, Exhibits
8-K 2019-01-08 Leave Agreement, M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Exhibits
8-K 2019-01-07 Other Events, Exhibits
8-K 2019-01-03 Other Events, Exhibits
8-K 2018-12-27 Other Events, Exhibits
8-K 2018-12-21 Other Events, Exhibits
8-K 2018-12-18 Other Events, Exhibits
8-K 2018-12-11 Other Events, Exhibits
8-K 2018-12-05 Other Events, Exhibits
8-K 2018-12-04 Shareholder Vote, Other Events, Exhibits
8-K 2018-11-29 Other Events, Exhibits
8-K 2018-11-22 Other Events, Exhibits
8-K 2018-11-21 Other Events, Exhibits
8-K 2018-11-09 Other Events, Exhibits
8-K 2018-11-02 Other Events, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-10-30 Other Events, Exhibits
8-K 2018-10-24 Other Events, Exhibits
8-K 2018-10-18 Other Events, Exhibits
8-K 2018-10-11 Other Events, Exhibits
8-K 2018-10-05 Other Events, Exhibits
8-K 2018-10-04 Other Events, Exhibits
8-K 2018-09-26 Other Events, Exhibits
8-K 2018-09-20 Other Events, Exhibits
8-K 2018-09-14 Other Events, Exhibits
8-K 2018-09-10 Other Events, Exhibits
8-K 2018-09-10 Other Events, Exhibits
8-K 2018-09-10 Other Events, Exhibits
8-K 2018-09-03 Other Events, Exhibits
8-K 2018-08-31 Other Events, Exhibits
8-K 2018-08-29 Other Events, Exhibits
8-K 2018-08-24 Other Events, Exhibits
8-K 2018-08-23 Other Events, Exhibits
8-K 2018-08-21 Other Events, Exhibits
8-K 2018-08-14 Other Events, Exhibits
8-K 2018-08-07 Other Events, Exhibits
8-K 2018-08-01 Other Events, Exhibits
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-07-26 Other Events, Exhibits
8-K 2018-07-20 Other Events, Exhibits
8-K 2018-07-16 Other Events, Exhibits
8-K 2018-07-09 Other Events, Exhibits
8-K 2018-07-02 Other Events, Exhibits
8-K 2018-06-26 Other Events, Exhibits
8-K 2018-06-19 Other Events, Exhibits
8-K 2018-06-13 Other Events, Exhibits
8-K 2018-06-07 Other Events, Exhibits
8-K 2018-06-01 Other Events, Exhibits
8-K 2018-05-28 Other Events, Exhibits
8-K 2018-05-21 Other Events, Exhibits
8-K 2018-05-16 Other Events, Exhibits
8-K 2018-05-15 Other Events, Exhibits
8-K 2018-05-11 Other Events, Exhibits
8-K 2018-05-08 Enter Agreement, Officers, Regulation FD, Exhibits
8-K 2018-05-04 Other Events, Exhibits
8-K 2018-05-03 Other Events, Exhibits
8-K 2018-05-02 Other Events, Exhibits
8-K 2018-05-01 Other Events, Exhibits
8-K 2018-04-27 Other Events, Exhibits
8-K 2018-04-25 Other Events, Exhibits
8-K 2018-04-23 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-20 Other Events, Exhibits
8-K 2018-04-19 Other Events, Exhibits
8-K 2018-04-18 Other Events, Exhibits
8-K 2018-04-16 Other Events, Exhibits
8-K 2018-04-13 Other Events, Exhibits
8-K 2018-04-12 Other Events, Exhibits
8-K 2018-04-11 Other Events, Exhibits
8-K 2018-04-10 Other Events, Exhibits
8-K 2018-04-09 Other Events, Exhibits
8-K 2018-04-06 Other Events, Exhibits
8-K 2018-04-05 Other Events, Exhibits
8-K 2018-04-04 Other Events, Exhibits
8-K 2018-04-03 Other Events, Exhibits
8-K 2018-03-29 Other Events, Exhibits
8-K 2018-03-28 Other Events, Exhibits
8-K 2018-03-23 Other Events, Exhibits
8-K 2018-03-19 Other Events, Exhibits
8-K 2018-03-05 Other Events, Exhibits
8-K 2018-03-01 Other Events, Exhibits
8-K 2018-02-15 Other Events, Exhibits
8-K 2018-02-14 Earnings, Exhibits
8-K 2018-02-01 Other Events, Exhibits
8-K 2018-01-19 Other Events, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
8-K 2018-01-02 Other Events, Exhibits
CA CA 15,562
PRKA Parks America 13
PGOL Patriot Gold 5
WAYS Wave Sync 1
EKKH Eason Education Kingdom Holdings 0
ACAN Americann 0
MSCG Managed Futures Premier Graham 0
FTFC First Trinity Financial 0
SKIN Skinovation Pharmaceutical 0
MTUU Mitu Resources 0
SHPG 2018-09-30
Part I: Financial Information
Item 1. Financial Statements
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
Part Ii, Item 1A. Risk Factors in The Company's Quarterly Report on Form 10-Q for The Quarter Ended June 30, 2018.
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
EX-31.1 ex311.htm
EX-31.2 ex312.htm
EX-32.1 ex321.htm

Shire Earnings 2018-09-30

SHPG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a10-qq3x2018.htm 10-Q Document
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 September 30, 2018

Commission file number 0-29630 
shirelogobluergba56.jpg
SHIRE PLC
(Exact name of registrant as specified in its charter)
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization) 
98-0601486
(I.R.S. Employer Identification No.) 
 
 
Block 2, Miesian Plaza, 50-58 Baggot Street Lower, Dublin 2, Republic of Ireland 
(Address of principal executive offices and zip code)

+353 1 609 6000
(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 x    No o 

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 o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 o    
Non-accelerated filer o                                Smaller reporting company o
Emerging growth company o

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 o     No x
As of October 31, 2018, the number of outstanding ordinary shares of the Registrant was 914,818,708.


1


SHIRE PLC
Form 10-Q for the Quarterly Period Ended September 30, 2018
Table of Contents
 
Page
 
 
 


2


THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements included herein that are not historical facts, including without limitation statements concerning future strategy, plans, objectives, expectations and intentions, projected revenues, the anticipated timing of clinical trials and approvals for, and the commercial potential of, inline or pipeline products, are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, the following:

Shire’s products may not be a commercial success;
increased pricing pressures and limits on patient access as a result of governmental regulations and market developments may affect Shire’s future revenues, financial condition and results of operations;
Shire depends on third parties to supply certain inputs and services critical to its operations including certain inputs, services and ingredients critical to its manufacturing processes. Any disruption to the supply chain for any of Shire’s products may result in Shire being unable to continue marketing or developing a product or may result in Shire being unable to do so on a commercially viable basis for some period of time;
the manufacture of Shire’s products is subject to extensive oversight by various regulatory agencies. Regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to, among other things, significant delays, an increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches;
the nature of producing plasma-based therapies may prevent Shire from timely responding to market forces and effectively managing its production capacity;
Shire has a portfolio of products in various stages of research and development. The successful development of these products is highly uncertain and requires significant expenditures and time, and there is no guarantee that these products will receive regulatory approval;
the actions of certain customers could affect Shire’s ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely affect Shire’s revenues, financial conditions or results of operations;
failure to comply with laws and regulations governing the sales and marketing of its products could materially impact Shire’s revenues and profitability;
Shire’s products and product candidates face substantial competition in the product markets in which it operates, including competition from generics;
Shire’s patented products are subject to significant competition from generics;
adverse outcomes in legal matters, tax audits and other disputes, including Shire’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
Shire may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business;
Shire faces intense competition for highly qualified personnel from other companies and organizations;
failure to successfully execute or attain strategic objectives from Shire’s acquisitions and growth strategy may adversely affect Shire’s financial condition and results of operations;
Shire’s growth strategy depends in part upon its ability to expand its product portfolio through external collaborations, which, if unsuccessful, may adversely affect the development and sale of its products;
a slowdown of global economic growth, or economic instability of countries in which Shire does business, could have negative consequences for Shire’s business and increase the risk of non-payment by Shire’s customers;
changes in foreign currency exchange rates and interest rates could have a material adverse effect on Shire’s operating results and liquidity;
Shire is subject to evolving and complex tax laws, which may result in additional liabilities that may adversely affect Shire’s financial condition or results of operations;
if a marketed product fails to work effectively or causes adverse side effects, this could result in damage to Shire’s reputation, the withdrawal of the product and legal action against Shire;
Shire is dependent on information technology and its systems and infrastructure face certain risks, including from service disruptions, the loss of sensitive or confidential information, cyber-attacks and other security breaches or data leakages that could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
Shire faces risks relating to the expected exit of the United Kingdom from the European Union;
Shire incurred substantial additional indebtedness to finance the Baxalta acquisition, which has increased its borrowing costs and may decrease its business flexibility;

3


the potential uncertainty among our employees, customers, suppliers, and other business partners resulting from the announcement by Takeda Pharmaceutical Company Limited on May 8, 2018 of a recommended offer for Shire under the U.K. Takeover Code; and

a further list and description of risks, uncertainties and other matters can be found in Shire's most recent Annual Report on Form 10-K and in Shire’s subsequent Quarterly Reports on Form 10-Q, in each case including those risks outlined in “ITEM 1A: Risk Factors”, and in Shire’s subsequent reports on Form 8-K and other Securities and Exchange Commission filings, all of which are available on Shire’s website.

All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Except to the extent otherwise required by applicable law, we do not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Trademarks

The Company owns or has rights to trademarks, service marks, or trade names that are used in connection with the operation of its business. In addition, its names, logos, and website names and addresses are owned by the Company or licensed by the Company. The Company also owns or has the rights to copyrights that protect the content of its solutions. Solely for convenience, the trademarks, service marks, trade names, and copyrights referred to in this Quarterly Report on Form 10-Q are listed without the ©, ®, and ™ symbols, but the Company will assert, to the fullest extent under applicable law, its rights or the rights of the applicable licensors to these trademarks, service marks, trade names, and copyrights.

This Quarterly Report on Form 10-Q may include trademarks, service marks, or trade names of other companies. The Company's use or display of other parties’ trademarks, service marks, trade names, or products is not intended to, and does not imply a relationship with, or endorsement or sponsorship of the Company by, the trademark, service mark, or trade name.



4


PART I: Financial Information

Item 1. Financial Statements
SHIRE PLC
CONSOLIDATED BALANCE SHEETS 
(Unaudited, in millions, except par value of shares)
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
193.2

 
$
472.4

Restricted cash
39.9

 
39.4

Accounts receivable, net
3,207.4

 
3,009.8

Inventories
3,458.7

 
3,291.5

Other current assets
900.1

 
795.3

Total current assets
7,799.3

 
7,608.4

Investments
470.7

 
241.1

Property, plant and equipment (PP&E), net
6,453.0

 
6,635.4

Goodwill
19,095.0

 
19,831.7

Intangible assets, net
29,625.4

 
33,046.1

Deferred tax asset
151.2

 
188.8

Other non-current assets
171.3

 
205.4

Total assets
$
63,765.9

 
$
67,756.9

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
4,025.1

 
$
4,184.5

Short term borrowings and capital leases
4,248.7

 
2,788.7

Other current liabilities
237.8

 
908.8

Total current liabilities
8,511.6

 
7,882.0

Long term borrowings and capital leases
11,098.0

 
16,752.4

Deferred tax liability
4,571.2

 
4,748.2

Other non-current liabilities
2,294.9

 
2,197.9

Total liabilities
26,475.7

 
31,580.5

Commitments and contingencies


 


Equity:
 
 
 
Common stock of 5p par value; 1,500 shares authorized; and 922.1 shares issued and outstanding (2017: 1,500 shares authorized; and 917.1 shares issued and outstanding)
81.9

 
81.6

Additional paid-in capital
25,390.2

 
25,082.2

Treasury stock: 7.5 shares (2017: 8.4 shares)
(260.7
)
 
(283.0
)
Accumulated other comprehensive income
626.4

 
1,375.0

Retained earnings
11,452.4

 
9,920.6

Total equity
37,290.2

 
36,176.4

Total liabilities and equity
$
63,765.9

 
$
67,756.9

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


5


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited, in millions, except per share amounts)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product sales
$
3,752.8

 
$
3,533.8

 
$
11,198.5

 
$
10,537.9

Royalties and other revenues
118.9

 
163.8

 
358.4

 
477.8

Total revenues
3,871.7

 
3,697.6

 
11,556.9

 
11,015.7

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,157.6

 
1,001.4

 
3,398.3

 
3,437.3

Research and development
407.2

 
402.8

 
1,240.0

 
1,324.5

Selling, general and administrative
836.8

 
859.7

 
2,549.3

 
2,647.7

Amortization of acquired intangible assets
433.7

 
482.4

 
1,375.3

 
1,280.5

Integration and acquisition costs
93.0

 
237.0

 
512.0

 
696.7

Reorganization costs
254.8

 
5.4

 
268.9

 
24.5

(Gain)/loss on sale of Oncology and product rights
(267.2
)
 
0.3

 
(267.2
)
 
(0.4
)
Total operating expenses
2,915.9

 
2,989.0

 
9,076.6

 
9,410.8

 
 
 
 
 
 
 
 
Operating income from continuing operations
955.8

 
708.6

 
2,480.3

 
1,604.9

 
 
 
 
 
 
 
 
Interest income
1.3

 
1.5

 
4.8

 
5.7

Interest expense
(125.2
)
 
(141.8
)
 
(378.1
)
 
(425.4
)
Other (expense)/income, net
(96.1
)
 
(0.2
)
 
(43.9
)
 
6.8

Total other expense, net
(220.0
)
 
(140.5
)
 
(417.2
)
 
(412.9
)
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and equity in earnings of equity method investees
735.8

 
568.1

 
2,063.1

 
1,192.0

Income taxes
(203.3
)
 
(13.5
)
 
(371.0
)
 
(44.6
)
Equity in earnings/(losses) of equity method investees, net of taxes
4.7

 
(3.4
)
 
11.2

 
0.1

Income from continuing operations, net of taxes
537.2

 
551.2

 
1,703.3

 
1,147.5

(Loss)/gain from discontinued operations, net of taxes

 
(0.4
)
 

 
18.6

Net income
$
537.2

 
$
550.8

 
$
1,703.3

 
$
1,166.1

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.



6


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Unaudited, in millions, except per share amounts)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Earnings per Ordinary Share – basic
 
 
 
 
 
 
 
Earnings from continuing operations  
$
0.59

 
$
0.61

 
$
1.87

 
$
1.27

Earnings from discontinued operations

 

 

 
0.02

Earnings per Ordinary Share – basic
$
0.59

 
$
0.61

 
$
1.87

 
$
1.29

 
 
 
 
 
 
 
 
Earnings per Ordinary Share – diluted
 
 
 
 
 
 
 
Earnings from continuing operations  
$
0.58

 
$
0.60

 
$
1.86

 
$
1.26

Earnings from discontinued operations

 

 

 
0.02

Earnings per Ordinary Share – diluted
$
0.58

 
$
0.60

 
$
1.86

 
$
1.28

 
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 
 
 
Basic  
914.0

 
907.2

 
912.0

 
905.9

Diluted
921.1

 
911.6

 
916.9

 
912.1

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


7


SHIRE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(Unaudited, in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
537.2

 
$
550.8

 
$
1,703.3

 
$
1,166.1

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(100.7
)
 
744.6

 
(679.2
)
 
2,441.1

Pension and other employee benefits (net of tax expense of $nil for the three and nine months ended September 30, 2018 and $nil and $0.9 for the three and nine months ended September 30, 2017, respectively)
(0.5
)
 
0.4

 
(1.5
)
 
11.0

Unrealized gain on available-for-sale securities (net of tax expense of $nil for the three and nine months ended September 30, 2018 and $5.5 and $7.2 for the three and nine months ended September 30, 2017, respectively)

 
23.8

 
(67.9
)
 
20.3

Hedging activities (net of tax benefit of $nil for the three and nine months ended September 30, 2018 and $nil and $3.2 for the three and nine months ended September 30, 2017, respectively)

 
0.2

 

 
(5.7
)
Comprehensive income
$
436.0

 
$
1,319.8

 
$
954.7

 
$
3,632.8


The components of Accumulated other comprehensive income as of September 30, 2018 and December 31, 2017 are as follows:
 
September 30, 2018
 
December 31, 2017
Foreign currency translation adjustments
$
600.4

 
$
1,279.6

Pension and other employee benefits, net of taxes
26.0

 
27.5

Unrealized holding gain on available-for-sale securities, net of taxes

 
67.9

Accumulated other comprehensive income
$
626.4

 
$
1,375.0

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.



8


SHIRE PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited, in millions)
 
Common stock number of shares
 
Common stock
 
Additional paid-in capital
 
Treasury stock
 
Accumulated other comprehensive income
 
Retained earnings
 
Total equity
As of January 1, 2018
917.1

 
$
81.6

 
$
25,082.2

 
$
(283.0
)
 
$
1,375.0

 
$
9,920.6

 
$
36,176.4

Net income

 

 

 

 

 
1,703.3

 
1,703.3

Other comprehensive loss, net of tax

 

 

 

 
(748.6
)
 

 
(748.6
)
Shares issued under employee benefit plans and other
5.0

 
0.3

 
172.3

 

 

 

 
172.6

Cumulative-effect adjustment from adoption of ASU 2014-09, Revenue from Contracts with Customers

 

 

 

 

 
52.0

 
52.0

Cumulative-effect adjustment from adoption of ASU 2016-01, Financial Instruments - Overall

 

 

 

 

 
67.9

 
67.9

Cumulative-effect adjustment from adoption of ASU 2016-16, Income Taxes

 

 

 

 

 
7.5

 
7.5

Share-based compensation

 

 
135.7

 

 

 

 
135.7

Shares released by employee benefit trust to satisfy exercise of stock options

 

 

 
22.3

 

 
(22.3
)
 

Dividends

 

 

 

 

 
(276.6
)
 
(276.6
)
As of September 30, 2018
922.1

 
$
81.9

 
$
25,390.2

 
$
(260.7
)
 
$
626.4

 
$
11,452.4

 
$
37,290.2


Dividends per share

During the nine months ended September 30, 2018, Shire plc declared and paid dividends of $0.2979 U.S. per ordinary share (equivalent of $0.8937 U.S. per ADS) totaling $276.6 million. During the nine months ended September 30, 2017, Shire plc declared and paid dividends of $0.257 U.S. per ordinary share (equivalent to $0.771 U.S. per ADS) totaling $234.7 million.

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


9


SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Nine months ended September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
1,703.3

 
$
1,166.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,808.1

 
1,644.0

Share based compensation
135.7

 
159.7

Expense related to the unwind of inventory fair value adjustments
40.9

 
688.7

Change in deferred taxes
14.2

 
(392.4
)
Change in fair value of contingent consideration
100.4

 
144.3

Impairment of PP&E and intangible assets
169.5

 
167.6

Gain on sale of Oncology franchise
(267.2
)
 

Other, net
(7.2
)
 
99.2

Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable
(362.0
)
 
(301.5
)
(Decrease)/increase in sales deduction accrual
(22.6
)
 
94.0

Increase in inventory
(305.4
)
 
(245.2
)
Decrease in prepayments and other assets
44.6

 
70.4

Decrease in accounts payable and other liabilities
(244.8
)
 
(557.8
)
Net cash provided by operating activities
2,807.5

 
2,737.1

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of Oncology franchise
2,412.2

 

Purchases of PP&E
(564.6
)
 
(565.5
)
Acquisition of business, net of cash acquired
(104.7
)
 

Proceeds from sale of investments
31.8

 
48.1

Other, net
(97.9
)
 
34.8

Net cash provided by/(used in) investing activities
1,676.8

 
(482.6
)


10


SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited, in millions)
 
Nine months ended September 30,
 
2018
 
2017
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from revolving line of credit, long term and short term borrowings
3,735.3

 
3,261.6

Repayment of revolving line of credit, long term and short term borrowings
(7,969.0
)
 
(5,664.5
)
Payment of contingent consideration
(396.0
)
 

Payment of dividend
(276.6
)
 
(234.7
)
Proceeds from issuance of stock for share-based compensation arrangements
180.8

 
92.2

Other, net
(25.6
)
 
(26.2
)
Net cash used in financing activities
(4,751.1
)
 
(2,571.6
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(11.9
)
 
6.2

 
 
 
 
Net decrease in cash, cash equivalents, and restricted cash
(278.7
)
 
(310.9
)
Cash, cash equivalents, and restricted cash at beginning of period
511.8

 
554.5

Cash, cash equivalents, and restricted cash at end of period
$
233.1

 
$
243.6

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
427.1

 
$
434.9

Income taxes paid, net
$
528.4

 
$
308.0

 
 
 
 
Cash, cash equivalents, and restricted cash information:
 
 
 
Cash and cash equivalents
$
193.2

 
$
209.3

Restricted cash
39.9

 
34.3

Cash, cash equivalents, and restricted cash at end of period
$
233.1

 
$
243.6

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


11


SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.    Description of Operations

Shire plc and its subsidiaries (collectively referred to as either “Shire” or the “Company”) is the leading global biotechnology company focused on serving people with rare diseases.

Some of the Company's marketed products include GAMMAGARD, HYQVIA, and CINRYZE for Immunology, ADVATE/ADYNOVATE, VONVENDI, and FEIBA for Hematology, ELAPRASE and REPLAGAL for Genetic Diseases, VYVANSE, ADDERALL XR, and MYDAYIS for Neuroscience, GATTEX/REVESTIVE and NATPARA/NATPAR for Internal Medicine, and XIIDRA for Ophthalmics.

The Company has grown both organically and through acquisition, completing a series of major transactions that have brought therapeutic, geographic, and pipeline growth and diversification. The Company will continue to conduct its own research and development (R&D) focused on rare diseases, as well as evaluate companies, products and pipeline opportunities that offer a strategic fit and have the potential to deliver value to all of the Company’s stakeholders: patients, physicians, policy makers, payers, partners, investors, and employees.

On August 31, 2018, Shire completed the sale of its Oncology franchise to Servier S.A.S. (Servier) for $2.4 billion.

On May 8, 2018, the boards of Takeda Pharmaceutical Company Limited (Takeda) and Shire announced that they have reached agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire (the "Acquisition"). Shire shareholders will be entitled to receive $30.33 in cash for each Shire ordinary share and either 0.839 of a new share in Takeda (as proposed to be issued in connection with the Acquisition) (each a "New Takeda Share") or 1.678 ADSs in Takeda (one ADS equals 0.5 New Takeda Share).

2.    Summary of Significant Accounting Policies

Basis of Presentation 

These interim financial statements of Shire plc and its subsidiaries are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).

The Consolidated Balance Sheet as of December 31, 2017 was derived from the Audited Consolidated Financial Statements as of that date.

These interim Unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 20, 2018.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.

Use of Estimates

The preparation of Financial Statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates, judgments, and assumptions that affect the reported and disclosed amounts of assets, liabilities, and equity at the date of the Unaudited Consolidated Financial Statements and reported amounts of revenues and expenses during the period. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. Estimates are based on historical experience, current conditions, and on various other assumptions that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.


12


New Accounting Pronouncements 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.

Adopted during the current period 

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB subsequently issued several additional ASUs amending the guidance and deferred effective date to January 1, 2018. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements, and financial instruments. Under this accounting standard, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company adopted this new standard on January 1, 2018, using the modified retrospective transition method. Under this method, the Company recognized the cumulative-effect of initially applying the standard as an adjustment to the opening balance of retained earnings. As a result, the Company recorded a cumulative-effect adjustment to increase Retained earnings by $52.0 million, net of tax of $15.6 million. The modified retrospective transition method was applied only to the contracts that were not completed as of the adoption date.

For a complete discussion of accounting for revenue with customers, refer to Note 3, Revenue Recognition, to these Unaudited Consolidated Financial Statements.

Impact of adoption

As a result of adopting the new accounting for revenue with customers on January 1, 2018, the following financial statement line items as of and for the three and nine months ended September 30, 2018 were affected. The following tables provide the amounts as reported in these Unaudited Consolidated Financial Statements and as if the previous accounting guidance was in effect.

Unaudited Consolidated Balance Sheets
 
As of September 30, 2018
(In millions)
As reported
 
Before Adoption of Topic 606
Other current assets
$
900.1

 
$
844.5

Other current liabilities
237.8

 
238.8

Other non-current liabilities
2,294.9

 
2,296.9

Retained earnings
11,452.4

 
11,414.5



13


Unaudited Consolidated Statements of Operations
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
(In millions, except per share)
As reported
 
Before Adoption of Topic 606
 
As reported
 
Before Adoption of Topic 606
Product sales
$
3,752.8

 
$
3,741.5

 
$
11,198.5

 
$
11,162.5

Royalties and other revenues
118.9

 
128.0

 
358.4

 
412.7

Net income
537.2

 
535.5

 
1,703.3

 
1,717.4

Net income per share applicable to common shareholders - basic
0.59

 
0.59

 
1.87

 
1.88

Net income per share applicable to common shareholders - diluted
0.58

 
0.58

 
1.86

 
1.87


Unaudited Consolidated Statements of Cash Flows
 
Nine months ended September 30, 2018
(In millions)
As reported
 
Before Adoption of Topic 606
Net income
$
1,703.3

 
$
1,717.4

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
    Decrease in prepayments and other assets
44.6

 
100.2

    Decrease in accounts payable and other liabilities
(244.8
)
 
(241.8
)

Financial Instrument Accounting

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in the results of operations. The new standard was effective January 1, 2018. The Company adopted ASU No. 2016-01 in the first quarter of 2018. As a result of the adoption, the Company recorded a cumulative-effect adjustment to Retained earnings of $67.9 million to reclassify unrealized gains from available-for-sale equity securities previously recognized in the Other comprehensive income.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This standard was effective January 1, 2018. The Company adopted ASU No. 2016-15 in the first quarter of 2018. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. This standard was effective January 1, 2018. The Company adopted ASU No. 2016-18 in the first quarter of 2018 and amended the presentation of its statements of cash flows for the nine months ended September 30, 2018 and 2017 accordingly. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.


14


Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory. This standard removes the current exception in U.S. GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The standard was effective January 1, 2018. The Company adopted the new standard in the first quarter of 2018 using a modified retrospective approach with a cumulative-effect adjustment to opening retained earnings. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

Retirement Benefits Income Statement Presentation

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. The standard requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. It also requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The standard was effective January 1, 2018. The Company adopted ASU No. 2017-07 in the first quarter of 2018. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

Share-Based Payment Accounting
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope Modification Accounting. The new standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This standard was effective January 1, 2018. The Company adopted ASU No. 2017-09 in the first quarter of 2018. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This new standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The Company adopted ASU No. 2017-04 in the first quarter of 2018. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

To be adopted in future periods 

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new accounting guidance will require the recognition of all long-term lease assets and lease liabilities by lessees and sets forth new disclosure requirements for those lease assets and liabilities. The standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the potential impact on its financial position and results of operations of adopting this guidance. The Company expects the adoption of this new standard may have a material impact on total assets and total liabilities within the Company's Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.


15


Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard amends its hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. The new guidance also expands an entity's ability to hedge non-financial and financial risk components and reduces complexity in fair value hedges of interest rate risk. Additionally, it eliminates the requirement to separately measure and report hedge ineffectiveness, eases certain assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.

Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new standard eliminates, adds and modifies certain disclosure requirements for fair value measurement as part of its disclosure framework project. The amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy will no longer be required to be disclosed, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This standard will be effective for the Company on January 1, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.

Retirement Benefits - Defined Benefit Plans

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard changes the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefits plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. This standard will be effective for the Company on January 1, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.

Intangibles - Goodwill and Other Internal - Use Software

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard will be effective for the Company on January 1, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.

3.    Revenue Recognition

Product Revenue, Net

The Company sells its products to major pharmaceutical wholesalers, distributors, and retail pharmacy chains (collectively, its "Customers"). These Customers subsequently resell the Company’s products to healthcare providers and patients. In addition to distribution agreements with Customers, the Company enters into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. 


16


Revenues from Product sales are recognized when the Customer obtains control, typically upon delivery. When the terms of the contract include customer acceptance provisions, the Company defers revenue recognition until the customer has accepted the goods, unless the acceptance provision relates only to objective specifications which the Company can determine will be met upon shipment. Customer acceptance provisions include temperature checks, government inspections, and other quality control tests. Shipping and handling and fulfillment costs are accrued for when the related revenue is recognized. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues.

Estimates of Variable Consideration

Revenues from Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for reserves related to statutory rebates to State Medicaid and other government agencies; Medicare Part D rebates; commercial rebates and fees to Managed Care Organizations (MCOs), Group Purchasing Organizations (GPOs), distributors, and specialty pharmacies; product returns; sales discounts (including trade discounts); distribution service fees; wholesaler chargebacks; and allowances for coupon and patient assistance programs relating to the Company’s sales of its products.

These reserves are based on estimates of the amounts earned or to be claimed on the related sales. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. If actual results vary, the Company may adjust these estimates, which could have an effect on earnings in the period of adjustment.
Trade discounts are generally credits granted to wholesalers, specialty pharmacies, and other customers for remitting payment on their purchases within established incentive periods and are classified as a reduction of accounts receivable, offset by revenue in the same period that the related revenue is recognized.
Chargebacks are credits or payments issued to wholesalers and other distributors who provide products to qualified healthcare providers at prices lower than the list prices charged to the wholesalers or other distributors. Reserves are estimated based on expected purchases by those qualified healthcare providers. Chargeback reserves are classified as a reduction of accounts receivable in the same period that the related revenue is recognized.
Distribution service fees are credits or payments issued to wholesalers, distributors, and specialty pharmacies for compliance with various contractually-defined inventory management practices or services provided to support patient access to a product. These fees are generally based on a percentage of gross purchases but can also be based on additional services these entities provide. Most of these costs are reflected as a reduction of gross sales; however, to the extent benefit from services can be separately identified and the fair value determined, costs are classified as Selling, general and administrative expenses. Distribution service fees reserves are estimated based on the terms of each individual contract and are classified within accrued expenses.
Medicaid rebates are payments to States under statutory and voluntary reimbursement arrangements. Reserves for these rebates are generally based on an estimate of expected product usage by Medicaid patients and expected rebate rates. Statutory rates are generally based on a percentage of selling price adjusted upwards for price increases in excess of published inflation indices. As a result, rebates generally increase as a percentage of the selling price over the life of the product (as prices increase). Medicaid rebate reserves are estimated based on individual product purchase volumes and are classified within accrued expenses.
Managed care rebates are payments to third parties, primarily pharmacy benefit managers, and other health insurance providers. The reserve for these rebates is based on an estimate of customer buying patterns and applicable contractual rebate rates to be earned over each period. Managed care rebates reserves are estimated based on the terms of each individual contract and purchase volumes and are classified within accrued expenses.

17


Incentive rebates are generally credits or payments issued to specialty pharmacies, distributors, or Group Purchasing Organizations for qualified purchases of certain products. Incentive rebate reserves are estimated based on the terms of each individual contract and purchase volumes and are classified within accrued expenses.
Other discounts and allowances include Medicare rebates, coupon, and patient co-pay assistance. Medicare rebates are payments to health insurance providers of Medicare Part D coverage to qualified patients. Reserve estimates are based on customer buying patterns and applicable contractual rebate rates to be earned over each period. Coupon and co-pay assistance programs provide discounts to qualified patients. Reserve estimates are based on expected claim volumes under these programs and estimated cost per claim that the Company expects to pay. Reserves for Medicare and coupon and patient co-pay programs are classified within accrued expenses.
Product Returns: The Company typically accepts customer product returns in the following circumstances: (a) expiration of shelf life on certain products; (b) product damaged while in the Company’s possession; (c) under sales terms that allow for unconditional return (guaranteed sales); or (d) following product recalls or product withdrawals. Generally, returns for expired product are accepted three months before and up to one year after the expiration date of the related product and the related product is destroyed after it is returned. Depending on the product and the Company’s return policy with respect to that product, the Company may either refund the sales price paid by the customer by issuance of a credit, or exchange the returned product with replacement inventory. The Company typically does not provide cash refunds. The Company estimates the proportion of recorded revenue that will result in a return by considering relevant factors, including but not limited to:
historical returns experience;
the duration of time taken for products to be returned;
the estimated level of inventory in the distribution channel;
product recalls and discontinuances;
the shelf life of products;
the launch of new drugs or new formulations; and
the loss of patent protection, exclusivity or new competition.

The estimation process for product returns involves, in each case, a number of interrelating assumptions, which vary for each combination of product and customer. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue from Product sales in the period the related revenue is recognized.

Royalties and other revenues

The Company enters into agreements, where it licenses certain rights to its products to customers. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides; and royalties on net sales of licensed products. Each of these payments is recognized as Royalties and other revenues.

As part of the accounting for these arrangements, the Company must develop estimates that require judgment to determine the stand-alone selling price for each performance obligation, identified in the contract. Performance obligations are promises in a contract to transfer a distinct good or service to the customer. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical, regulatory and commercial success.


18


Licenses of intellectual property: If the license to the Company’s intellectual property is distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. If the performance obligation is satisfied over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Measures of progress for revenue recognition vary depending on the nature of the performance obligation.

Milestone Payments: At the inception of each arrangement that includes milestone payments, the Company evaluates the recognition of milestone payments. Typically, milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are included in the transaction price upon achievement of the milestone. Milestone payments included in transaction price are recognized when or as the performance obligations are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the license is transferred.

The Company receives payments from its customers based on billing schedules established in each contract, which vary across Shire's locations, but generally range between 30 to 90 days. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation is that customer will pay for the product or services in one year or less of receiving those products or services.

The following table presents changes in the Company’s contract assets and liabilities during the nine months ended September 30, 2018:
(In millions)
As of January 1, 2018
 
Increase, net
 
As of September 30, 2018
Contract assets:
 
 
 
 
 
Unbilled receivables
$
42.7

 
$
12.9

 
$
55.6

Contract liabilities:
 
 
 
 
 
Deferred revenue

 
7.4

 
7.4


Contract assets consist of unbilled receivables typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer. The contract assets are included in Other current assets in these Unaudited Consolidated Balance Sheets. Contract liabilities consist of advance payments from customers for future performance obligations. Contract liabilities are included in Other current liabilities in these Unaudited Consolidated Balance Sheets.

4.    Acquisition

In September 2018, Shire acquired 100 percent of the voting equity interests in a source plasma collection company. The acquisition is expected to increase Shire’s access to plasma in the longer term and add to its European plasma collection network, complementing existing core capabilities in plasma supply, and manufacturing.

The total cash consideration for the acquisition was $107.8 million (CHF 105.0 million). Shire recorded the purchase price as goodwill, intangible assets, and other assets. The $96.3 million goodwill is not deductible for tax purposes.


19


5.    Dispositions and Assets Held for Sale

On August 31, 2018, the Company completed the sale of its Oncology franchise to Servier. Under the terms of the agreement, Servier acquired Shire’s Oncology franchise for a net consideration of $2.4 billion, in cash. The Company recognized $267.2 million as a gain, which is recorded within Total operating expenses in the Company's Unaudited Consolidated Statements of Operations.

The assets and liabilities of the Oncology franchise were as follows:
(In millions)
As of August 31, 2018

Intangible Assets
$
1,628.3

Goodwill
565.1

Other
25.6

Current Assets
$
2,219.0

 
 
Current Liabilities
$
116.4


During the nine months ended September 30, 2018, the Company determined it would divest certain facilities as part of its integration efforts. As of September 30, 2018, the Company classified $115.4 million of assets as held for sale and included within Other current assets in these Unaudited Consolidated Financial Statements. The $115.4 million of held for sale assets consisted primarily of property, plant and equipment and was net of $145.4 million of impairment charges recorded during the nine months ended September 30, 2018. The impairment charges were reported within Integration and acquisition costs in these Unaudited Consolidated Financial Statements.

6.    Collaborative and Other Licensing Arrangements

The Company is party to certain collaborative and licensing arrangements. In some of these arrangements, Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success.

On January 25, 2018, Shire entered into a licensing agreement with AB Biosciences Inc. (AB Biosciences). The license grants Shire exclusive worldwide rights to develop and commercialize a recombinant immunoglobulin product candidate. Under the terms of the agreement, AB Biosciences will grant Shire an exclusive, worldwide license to its intellectual property relating to its pan receptor interacting molecule program. The Company paid $10.0 million upfront license fee and AB Biosciences is eligible to receive contingent research, development, and commercialization milestone payments up to $282.5 million as well as tiered royalty payments.

7.    Integration and Acquisition Costs

For the three and nine months ended September 30, 2018, Shire recorded Integration and acquisition costs of $93.0 million and $512.0 million, respectively. These costs relate to the continued integration of Baxalta Inc. (Baxalta), which was acquired in June 2016, Takeda’s proposed acquisition of Shire, and the change in fair value of contingent consideration, primarily related to TAKHZYRO (lanadelumab-flyo), which was acquired from Dyax in 2016.

The Company continues its activities to integrate Baxalta. The costs associated with the integration are primarily related to facility consolidation and professional consulting fees. The Company also drove savings through the continued re-prioritization of its research and development programs and consolidation of its commercial operations. For the three and nine months ended September 30, 2018, these costs include $8.0 million and $151.4 million, respectively, of asset impairments, $12.4 million and $55.5 million, respectively, of third-party professional fees, $4.4 million and $19.2 million, respectively, of expenses associated with facility consolidations, and $5.7 million and $20.7 million, respectively, of employee severance and acceleration of stock compensation. The Company expects the majority of these expenses, except for certain costs related to facility consolidations, to be paid within 12 months from the date the related expenses were incurred. The integration of Baxalta is estimated to be completed by mid to late 2019.

The following table summarizes the reserve for the Baxalta integration costs for certain types of activities during the nine months ended September 30, 2018:

20


(In millions)
Severance and employee benefits
 
Lease terminations
 
Total
As of January 1,
$
72.9

 
$
56.6

 
$
129.5

Amount charged to integration costs
9.2

 
2.3

 
11.5

Paid/utilized
(41.0
)
 
(19.9
)
 
(60.9
)
As of September 30,
$
41.1

 
$
39.0

 
$
80.1


On May 8, 2018, the Boards of Takeda and Shire announced that they had reached an agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire. The closing of the acquisition is expected in the first half of 2019, subject to shareholder approval of both companies as well as the receipt of regulatory approvals. For the three and nine months ended September 30, 2018, costs associated with this proposed offer include $8.0 million and $72.0 million, respectively, of third-party professional fees and $36.4 million and $40.4 million, respectively, of employee incentives. The Company expects the majority of these expenses to be paid within 12 months from the date the related expenses were incurred.

In the three and nine months ended September 30, 2018$54.5 million and $100.4 million, respectively, are included in Integration and acquisition costs relating to the change in fair value of contingent consideration payable mainly related to TAKHZYRO.

For the three and nine months ended September 30, 2017, Shire recorded Integration and acquisition costs of $237.0 million and $696.7 million, respectively, primarily related to the acquisition and integration of Baxalta and Dyax. In the three and nine months ended September 30, 2017, a credit of $3.4 million and a charge of $144.3 million, respectively, is included in Integration and acquisition costs due to the change in fair value of contingent consideration payable mainly related to TAKHZYRO. For the three and nine months ended September 30, 2017, the Baxalta Integration and acquisition costs include $60.2 million and $177.4 million, respectively, of employee severance and acceleration of stock compensation, $28.4 million and $114.0 million, respectively, of third-party professional fees, and $29.7 million and $71.4 million, respectively, of expenses associated with facility consolidations and $114.1 million and $147.8 million, respectively, of asset impairments.

8.     Reorganization Costs

For the three and nine months ended September 30, 2018, Shire recorded Reorganization costs of $254.8 million and $268.9 million, respectively. These costs include $249.2 million and $256.7 million, respectively, of expenses mainly related to the closure of certain of its Cambridge office facilities and $5.6 million and $12.2 million, respectively, of asset impairment, employee severance, professional fees, and consulting fees. For the three and nine months ended September 30, 2018, cash payments associated with these costs were not significant.

For the three and nine months ended September 30, 2017, Shire recorded Reorganization costs of $5.4 million and $24.5 million, respectively. These costs include $nil and $10.8 million, respectively, of expenses related to the closure of certain office facilities and $5.4 million and $13.7 million, respectively, of employee severance, professional fees, and consulting fees.


21


9.    Results of Discontinued Operations

Following the divestment of the Company’s DERMAGRAFT business in January 2014, the operating results associated with the DERMAGRAFT business have been classified as discontinued operations in the Company’s Unaudited Consolidated Statements of Operations for all periods presented.

In January 2017, Shire entered into a final settlement agreement with the Department of Justice (DOJ) in the amount of $350.0 million, plus interest which was accrued in 2016 and paid during 2017.

After the civil settlement with the DOJ was finalized, Shire and Advanced BioHealing Inc.'s (ABH) equity holders entered into a settlement agreement and ABH’s equity holders released the $37.5 million escrow to Shire. Shire released its claims against ABH equity holders upon receiving the entire amount held in escrow.

For the three and nine months ended September 30, 2017, the Company recorded a loss of $0.4 million (net of immaterial tax benefit) and gain of $18.6 million (net of tax expense of $10.9 million), respectively, primarily related to legal contingencies related to the divested DERMAGRAFT business and the release of escrow to Shire, respectively.

10.    Accounts Receivable, Net

Accounts receivable as of September 30, 2018 of $3,207.4 million (December 31, 2017: $3,009.8 million), are stated at the invoiced amount and net of reserve for discounts and doubtful accounts of $331.4 million (December 31, 2017: $271.5 million).

Reserve for discounts and doubtful accounts consists of the following:
(In millions)
2018
 
2017
As of January 1,
$
271.5

 
$
169.6

Provision charged to operations
1,884.2

 
1,074.1

Payments/credits
(1,824.3
)
 
(1,000.0
)
As of September 30,
$
331.4

 
$
243.7

 

Reserve for discounts and doubtful accounts increased for the nine months ended September 30, 2018 compared to the corresponding period in 2017, primarily due to increased usage of biological distributors, higher invoice price to those distributors, and the resulting increase in chargebacks for the distribution of Shire’s Hematology and Immunology products.

As of September 30, 2018, Accounts receivable included $44.1 million (December 31, 2017: $106.6 million) related to royalties receivable.

11.    Inventories

Inventories are stated at the lower of cost and net realizable value. The components of Inventories are as follows:
(In millions)
September 30, 2018
 
December 31, 2017
Finished goods
$
959.7

 
$
926.1

Work-in-progress
1,671.6

 
1,574.0

Raw materials
827.4

 
791.4

 
$
3,458.7

 
$
3,291.5



22


12.    Property, Plant and Equipment, Net

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of Property, plant and equipment, net are summarized as follows:
(In millions)
September 30, 2018
 
December 31, 2017
Land
$
296.2

 
$
332.3

Buildings and leasehold improvements
2,975.1

 
1,940.7

Machinery, equipment and other
3,942.5

 
3,106.3

Assets under construction
759.4

 
2,568.2

   Total property, plant and equipment at cost
7,973.2

 
7,947.5

Less: Accumulated depreciation
(1,520.2
)
 
(1,312.1
)
   Property, plant and equipment, net
$
6,453.0

 
$
6,635.4


Depreciation expense for the three and nine months ended September 30, 2018 was $156.8 million and $432.8 million, respectively, and for the three and nine months ended September 30, 2017 was $119.9 million and $363.5 million, respectively.

In the second quarter of 2018, the FDA approved a new plasma manufacturing facility near Covington, Georgia. Following the approval, $1,840.5 million of assets were reclassified from Asset under construction to Buildings and leasehold improvements and Machinery, equipment and other assets classes.

13.    Intangible assets

The following table summarizes the Company's Intangible assets:
(In millions)
Currently marketed products
 
IPR&D
 
Other intangible assets
 
Total
September 30, 2018
 
 
 
 
 
 
 
Gross acquired intangible assets
$
33,767.4

 
$
1,012.7

 
$
830.8

 
$
35,610.9

Accumulated amortization
(5,561.2
)
 

 
(424.3
)
 
(5,985.5
)
Intangible assets, net
$
28,206.2

 
$
1,012.7

 
$
406.5

 
$
29,625.4

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Gross acquired intangible assets
$
31,973.5

 
$
5,113.9

 
$
835.9

 
$
37,923.3

Accumulated amortization
(4,549.2
)
 

 
(328.0
)
 
(4,877.2
)
Intangible assets, net
$
27,424.3


$
5,113.9


$
507.9


$
33,046.1


During the third quarter of 2018, the U.S. Food and Drug Administration (FDA) approved TAKHZYRO injection, for prophylaxis to prevent attacks of HAE in patients 12 years of age and older. Following the approval, the Company reclassified the TAKHZRO intangible asset from IPR&D to Currently marketed products and started amortizing the asset.

Other intangible assets are comprised primarily of royalty rights and other contract rights associated with Baxalta, Dyax Corp. (Dyax), and NPS Pharmaceuticals Inc. 


23


Activities in the net book value of intangible assets for the nine months ended September 30, 2018 and 2017 are as follows: 
(In millions)
2018
 
2017
As of January 1,
$
33,046.1

 
$
34,697.5

Sale of Oncology franchise
(1,598.5
)
 

Measurement period adjustments

 
(1,397.0
)
Amortization charged
(1,375.3
)
 
(1,280.5
)
Foreign currency translation
(314.2
)
 
1,350.3

Contribution to JV
(163.7
)
 

Impairment
(10.0
)
 
(20.0
)
Other
35.9

 

Acquisition
5.1

 

As of September 30,
$
29,625.4

 
$
33,350.3

 

Measurement period adjustments included in the nine months ended September 30, 2017 related to the acquisition of Baxalta.

For further details regarding the sale of the Oncology franchise, refer to Note 5, Dispositions and Assets Held for Sale.

During the nine months ended September 30, 2018, the Company contributed distributions rights for certain products to a joint venture formed by the Company. Upon the contribution, the net carrying value ($163.7 million) related to those products was recorded within Investments in these Unaudited Consolidated Balance Sheets.

The Company reviews its amortized intangible assets for impairment whenever events or circumstances suggest that their carrying value may not be recoverable. Unamortized intangible assets are reviewed for impairment annually or whenever events or circumstances suggest that their carrying value may not be recoverable.

Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of acquired IPR&D projects, foreign exchange movements, and the technological advancement and regulatory approval of competitor products. The estimated future amortization of acquired intangible assets for the next five years is expected to be as follows:

(In millions)
Anticipated future amortization
2018 (remaining three months)
$
444.4

2019
1,808.0

2020
1,730.7

2021
1,710.9

2022
1,679.3

2023
1,627.3


14.    Goodwill

The following table provides a roll-forward of the Goodwill balance for the nine months ended September 30, 2018 and 2017:

24


(In millions)
2018
 
2017
As of January 1,
$
19,831.7

 
$
17,888.2

Acquisitions
96.3

 
1,076.2

Sale of Oncology franchise
(565.1
)
 

Foreign currency translation and other
(267.9
)
 
754.0

September 30,
$
19,095.0

 
$
19,718.4


For further details regarding acquisitions during the nine months ended September 30, 2018, refer to Note 4, Acquisition.

The increase in Goodwill during the nine months ended September 30, 2017 related to measurement period adjustments of the acquisition of Baxalta.

15.    Fair Value Measurement

Assets and liabilities that are measured at fair value on a recurring basis

The following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
 
Fair value
(In millions)
Total
 
Level 1
 
Level 2
 
Level 3
As of September 30, 2018
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Marketable equity securities
$
161.0

 
$
161.0

 
$

 
$

Marketable debt securities
17.0

 
3.6

 
13.4

 

Derivative instruments
13.9

 

 
13.9

 

Total assets
$
191.9

 
$
164.6

 
$
27.3

 
$

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Joint venture net written option
$
48.0

 
$

 
$

 
$
48.0

Derivative instruments
30.8

 

 
30.8

 

Contingent consideration payable
616.2

 

 

 
616.2

Total liabilities
$
695.0

 
$

 
$
30.8

 
$
664.2


 
Fair value
(In millions)
Total
 
Level 1
 
Level 2
 
Level 3
As of December 31, 2017
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Marketable equity securities
$
89.7

 
$
89.7

 
$

 
$

Marketable debt securities
17.9

 
3.8

 
14.1

 

Derivative instruments
17.9

 

 
17.9

 

Total assets
$
125.5

 
$
93.5

 
$
32.0

 
$

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Joint venture net written option
$
40.0

 
$

 
$

 
$
40.0

Derivative instruments
14.2

 

 
14.2

 

Contingent consideration payable
1,168.2

 

 

 
1,168.2

Total liabilities
$
1,222.4

 
$

 
$
14.2

 
$
1,208.2


25



Marketable equity and debt securities are included within Investments in these Unaudited Consolidated Balance Sheets. Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in these Unaudited Consolidated Balance Sheets. For information regarding the Company's derivative arrangements, refer to Note 16, Financial Instruments, to these Unaudited Consolidated Financial Statements.

Certain estimates and judgments were required to develop the fair value amounts. The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument. 

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

Marketable equity securities: the fair values of marketable equity securities are estimated based on quoted market prices for those investments.
Marketable debt securities: the fair values of debt securities are obtained from pricing services or broker/dealers who either use quoted prices in an active market or proprietary pricing applications, which include observable market information for like or same securities.
Derivative instruments: the fair values of the swap and forward foreign exchange contracts have been determined using the month-end interest rate and foreign exchange rates, respectively.
Joint venture net written option and contingent consideration payable: the fair values have been estimated using the income approach (using a probability weighted discounted cash flow method).

There were no changes in valuation techniques or inputs utilized or transfers between fair value measurement levels during the three and nine months ended September 30, 2018 and 2017.

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

Contingent consideration payable
 
 
 
(In millions)
2018
 
2017
Balance as of January 1,
$
1,168.2

 
$
1,058.0

Acquisitions

 
(4.0
)
Payments
(647.1
)
 

Change in fair value included in earnings
100.4

 
144.3

Other
(5.3
)
 
(11.4
)
Balance as of September 30,
$
616.2

 
$
1,186.9


Of the $616.2 million of contingent consideration payable as of September 30, 2018, $82.3 million is recorded within Other current liabilities and $533.9 million is recorded within Other non-current liabilities in these Unaudited Consolidated Balance Sheets.

The decrease in contingent consideration payable during the nine months ended September 30, 2018 is related to payments of contingent consideration following the approval of TAKHZYRO acquired from Dyax in 2016.

Joint venture net written option

In March 2017, Shire executed option agreements related to a joint venture that provides Shire with a call option on the partner’s investment in joint venture equity and the partner with a put option on its investment in joint venture equity. The Company had a liability of $48.0 million for the net written option based on the estimated fair value of these options as of September 30, 2018 and the Company re-measures the instrument to fair value through the Unaudited Consolidated Statements of Operations.


26


Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

Financial liabilities:
Fair value as of the measurement date
As of September 30, 2018
 
 
 
 
 
 
 
(In millions, except %)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Contingent consideration payable
$
616.2

 
Income approach (probability weighted discounted cash flow)
 
• Cumulative probability of milestones being achieved
 
• 10.5 to 90%
 
 
 
 
 
• Assumed market participant discount rate
 
• 3.2 to 9.2%
 
 
 
 
 
• Periods in which milestones are expected to be achieved
 
• 2018 to 2040
 
 
 
 
 
• Forecast quarterly royalties payable on net sales of relevant products
 
• $0.1 to $16.0
million

Contingent consideration payable represents future milestones and royalties the Company may be required to pay in conjunction with various business combinations and license agreements. The fair value of the Company’s contingent consideration payable could significantly increase or decrease due to changes in certain assumptions which underpin the fair value measurements. Each set of assumptions is specific to the individual contingent consideration payable.

Financial liabilities:
Fair value as of the measurement date
As of September 30, 2018
 
 
 
 
 
 
 
(In millions, except %)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Joint venture net written option
$
48.0

 
Income approach (probability weighted discounted cash flow)
 
• Cash flow scenario probability weighting
 
• 100%
 
 
 
 
 
• Assumed market participant discount rate
 
• 14%

27



Financial assets and liabilities that are disclosed at fair value

The carrying amounts and estimated fair values of the Company’s financial assets and liabilities that are not measured at fair value on a recurring basis are as follows: 
 
September 30, 2018
 
December 31, 2017
(In millions)
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Financial liabilities:
 
 
 
 
 
 
 
SAIIDAC notes
$
12,058.9

 
$
11,604.7

 
$
12,050.2

 
$
11,913.7

Baxalta notes
1,939.9

 
1,951.3

 
5,057.7

 
5,229.9

Capital lease obligation
366.8

 
366.8

 
349.2

 
349.2


The estimated fair values of long-term debt were based upon recent observable market prices and are considered Level 2 in the fair value hierarchy. The estimated fair value of capital lease obligations is based on Level 2 inputs. 

The carrying amounts of other financial assets and liabilities approximate their estimated fair value due to their short-term nature, such as liquidity and maturity of these amounts, or because there have been no significant changes since the asset or liability was last re-measured to fair value on a non-recurring basis. For more details on the carrying amount and fair value of Baxalta notes, refer to Note 17, Borrowings and Capital Leases.

16.    Financial Instruments

Foreign Currency Contracts

Due to the global nature of its operations, portions of the Company's revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. The main trading currencies of the Company are the U.S. dollar, Euro, British pound sterling, Swiss franc, Canadian dollar, and Japanese yen.

Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency. Where significant exposures remain, the Company uses foreign exchange contracts (spot, forward, and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary.

The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the Unaudited Consolidated Balance Sheets. The Company does not have credit risk related contingent features or collateral linked to the derivatives.

Undesignated Foreign Currency Derivatives

The Company uses forward and option contracts to mitigate the foreign currency risk related to certain balance sheet positions, including intercompany and third-party receivables and payables. The Company has not elected hedge accounting for these derivative instruments. The changes in fair value of these derivatives are reported in earnings.

The table below presents the notional amount, maximum duration, and fair value for the undesignated foreign currency derivatives:
(In millions, except duration)
September 30, 2018
 
December 31, 2017
Notional amount
$
2,192.4

 
$
1,672.3

Maximum duration
11 months

 
3 months

Fair value - net (liability)/asset
$
(1.3
)
 
$
11.4



28


The Company considers the impact of its and its counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of September 30, 2018, credit risk did not materially change the fair value of the Company’s foreign currency contracts.

Interest Rate - Contracts

The Company is exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in benchmark interest rates relating to its debt obligations on which interest is set at floating rates. The Company’s policy is to manage this risk to an acceptable level. The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities. Interest on these facilities is set at floating rates, to the extent utilized. Shire’s exposure under these facilities is to changes in U.S. dollar interest rates. For further details related to interest rates on the Company’s various debt facilities, refer to Note 17, Borrowings and Capital Leases, to these Unaudited Consolidated Financial Statements.

Designated Interest Rate Derivatives

The Company has elected hedge accounting for interest rate swap contracts designated as fair value hedges. The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the underlying Baxalta Notes with the ineffective portion recorded in Interest expense. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of Interest expense in the Unaudited Consolidated Statements of Operations.

The table below presents the notional amount, maturity, and fair value for the designated interest rate derivatives:
(In millions, except maturity)
September 30, 2018
 
December 31, 2017
Notional amount
$
431.0

 
$
1,000.0

Maturity
June 2020 and June 2025

 
June 2020 and June 2025

Fair value - net liability
$
(15.6
)
 
$
(7.7
)

In conjunction with the debt tender offer and extinguishment of debt as more fully described in Note 17, Shire terminated $569.0 million of its interest swaps for a loss of $9.3 million, which is reported in Other (expense)/income, net in the Unaudited Consolidated Statements of Operations.
Summary of Derivatives

The following tables summarize the effect of the derivative instruments in the Company's Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017.

Designated Foreign exchange contracts
(In millions)
Loss recognized in OCI
 
 
 
Gain reclassified from AOCI into income
Cash flow hedges
2018
 
2017
 
Location
 
2018
 
2017
Three months ended September 30,
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
(0.2
)
 
Cost of sales
 
$

 
$
0.3

Nine months ended September 30,
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
(0.9
)
 
Cost of sales
 
$

 
$
8.6



29


Undesignated foreign exchange contracts
(In millions)
 
 
Gain/(loss) recognized in income
 
Location
 
2018
 
2017
Three months ended September 30,
 
 
 
 
 
Foreign exchange contracts
Other (expense)/income, net
 
$
4.7

 
$
36.7

Nine months ended September 30,
 
 
 
 
 
Foreign exchange contracts
Other (expense)/income, net
 
$
(28.6
)
 
$
57.4


Designated Interest Rate Derivatives
(In millions)
 
 
Loss recognized in income
Fair value hedges
Location
 
2018
 
2017
Three months ended September 30,
 
 
 
 
 
Interest rate contracts, net
Interest expense
 
$
(1.0
)
 
$
(1.1
)
Nine months ended September 30,
 
 
 
 
 
Interest rate contracts, net
Interest expense
 
$
(4.9
)
 
$
(2.5
)

Summary of Derivatives

The following table presents the classification and estimated fair value of derivative instruments on the Company's Unaudited Consolidated Balance Sheets:
 
Asset position
 
Liability position
 
 
 
Fair value
 
 
 
Fair value
(In millions)
Location
 
September 30, 2018
December 31, 2017
 
Location
 
September 30, 2018
December 31, 2017
Undesignated derivative instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
13.9

$
17.9

 
Other current liabilities
 
$
15.2

$
6.5

 
 
 
$
13.9

$
17.9

 
 
 
$
15.2

$
6.5

 
 
 
 
 
 
 
 
 
 
Designated derivative Instruments
 
 
 
 
 
 
 
 
 
Interest rate contracts
Long term borrowings
 
$

$

 
Long term borrowings
 
$
15.6

$
7.7

 
 
 
$

$

 
 
 
$
15.6

$
7.7

Total derivative fair value
 
 
$
13.9

$
17.9

 
 
 
$
30.8

$
14.2

Potential effect of rights to offset
 
 
(8.3
)
(2.7
)
 
 
 
(8.3
)
(2.7
)
Net derivative
 
 
$
5.6

$
15.2

 
 
 
$
22.5

$
11.5



30


17.    Borrowings and Capital Leases
(In millions)
September 30, 2018
 
December 31, 2017
Short term borrowings and capital leases:
 
 
 
SAIIDAC Notes
$
3,295.3

 
$

Baxalta Notes

 
748.8

Borrowings under the Revolving Credit Facilities Agreement
915.0

 
810.0

Borrowings under the November 2015 Facilities Agreement

 
1,196.3

Capital leases
9.5

 
7.5

Other borrowings
28.9

 
26.1

 
$
4,248.7

 
$
2,788.7

 
 
 
 
Long term borrowings and capital leases:
 
 
 
SAIIDAC Notes
$
8,763.6

 
$
12,050.2

Baxalta Notes
1,939.9

 
4,308.9

Capital leases
357.3

 
341.7

Other borrowings
37.2

 
51.6

 
$
11,098.0

 
$
16,752.4

 
 
 
 
Total borrowings and capital leases
$
15,346.7

 
$
19,541.1


For a more detailed description of the Company's financing agreements, refer below and to Note 17, Borrowings and Capital Leases, of Shire's Annual Report on Form 10-K for the year ended December 31, 2017.

Debt Tender Offer

On September 11, 2018, Shire purchased an aggregate of $2.3 billion in principal amount of Baxalta Notes from existing holders consisting of its 2.875% Notes due June 2020, 3.600% Notes due June 2022, 4.000% Notes due June 2025 and 5.250% Notes due June 2045 pursuant to a debt tender offer. Shire paid approximately $2.4 billion, including accrued and unpaid interest and tender premium, to purchase such notes. As a result of the debt tender offer, the Company recognized a loss on extinguishment of debt in the third quarter of 2018 of $40.6 million, which is included in Other (expense)/income, net within the Unaudited Consolidated Statements of Operations.

SAIIDAC Notes

On September 23, 2016, Shire Acquisitions Investments Ireland Designated Activity Company (SAIIDAC), a wholly owned subsidiary of Shire plc, issued unsecured senior notes with a total aggregate principal value of $12.1 billion (SAIIDAC Notes), guaranteed by Shire plc and, as of December 1, 2016, by Baxalta. Below is a summary of the SAIIDAC Notes as of September 30, 2018:
(In millions, except %)
Aggregate amount
 
Coupon rate
 
Carrying amount as of September 30, 2018
Fixed-rate notes due 2019
$
3,300.0

 
1.900
%
 
$
3,295.3

Fixed-rate notes due 2021
3,300.0

 
2.400
%
 
3,289.0

Fixed-rate notes due 2023
2,500.0

 
2.875
%
 
2,490.8

Fixed-rate notes due 2026
3,000.0

 
3.200
%
 
2,983.8

 
$
12,100.0

 
 
 
$
12,058.9



31


As of September 30, 2018, there were $41.1 million of debt issuance costs and discounts recorded as a reduction of the carrying amount of debt. These costs will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity.

Baxalta Notes

Shire plc guaranteed senior notes issued by Baxalta in connection with the acquisition of Baxalta (Baxalta Notes). Following repayment of the $375.0 million floating-rate notes and the $375.0 million fixed-rate notes due in June 2018 and the subsequent $2.3 billion bond tender offer on September 11, 2018, the remaining Baxalta Notes as of September 30, 2018 are shown below:
(In millions, except %)
Aggregate principal
 
Coupon rate
 
Carrying amount as of September 30, 2018
Fixed-rate notes due 2020
$
404.5

 
2.875
%
 
$
403.0

Fixed-rate notes due 2022
219.4

 
3.600
%
 
221.9

Fixed-rate notes due 2025
800.5

 
4.000
%
 
799.7

Fixed-rate notes due 2045
500.4

 
5.250
%
 
515.3

Total assumed Senior Notes
$
1,924.8

 
 
 
$
1,939.9

 

The book values above include any premiums, discounts, and adjustments related to hedging instruments. For further details related to the interest rate derivative contracts, please see Note 16, Financial Instruments, to these Unaudited Consolidated Financial Statements.

Revolving Credit Facilities Agreement

On December 12, 2014, Shire entered into a $2.1 billion revolving credit facilities agreement (RCF) with a number of financial institutions. As of September 30, 2018, the Company utilized $915.0 million of the RCF. The RCF, which terminates on December 12, 2021, may be used for financing the general corporate purposes of Shire. The RCF incorporates a $250.0 million U.S. dollar and Euro swingline facility operating as a sub-limit thereof.

Term Loan Facilities Agreements

November 2015 Facilities Agreement

On November 2, 2015, Shire entered into a $5.6 billion facilities agreement (November 2015 Facilities Agreement), which comprised of three amortizing credit facilities with ultimate maturity on November 2, 2018. As of September 30, 2018, there were no amounts outstanding under the November 2015 Facilities Agreement as it was fully repaid and canceled on September 28, 2018.

Short-term uncommitted lines of credit (Credit lines) 

Shire has access to various Credit lines from a number of banks which are available to be utilized from time to time to provide short-term cash management flexibility. These Credit lines can be withdrawn by the banks at any time. The Credit lines are not relied upon for core liquidity. As of September 30, 2018, these lines of credit were not utilized.

Capital Lease Obligations

The capital leases are primarily related to office and manufacturing facilities. As of September 30, 2018, the total capital lease obligations, including current portions, were $366.8 million.

18.    Retirement and Other Benefit Programs

The Company sponsors various pension and other post-employment benefit (OPEB) plans in the U.S. and other countries. Net periodic benefit cost for the three and nine months ended September 30, 2018 and 2017 is as follows:


32


 
Three months ended September 30,
 
2018
 
2017
(In millions)
U.S. pensions
 
International pensions
 
OPEB (U.S.)
 
U.S. pensions
 
International pensions
 
OPEB (U.S.)
Net periodic benefit cost