Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2016

or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to            
Commission file number 1-15525
 

EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
36-4316614
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Edwards Way, Irvine, California
 
92614
(Address of principal executive offices)
 
(Zip Code)
(949) 250-2500
 (Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  o
 
Non-accelerated filer  o
  (Do not check if a smaller
reporting company)
 
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  ý
The number of shares outstanding of the registrant's common stock, $1.00 par value, as of April 22, 2016 was 211,762,740 .
 


Table of Contents

EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended March 31, 2016

TABLE OF CONTENTS
 
 
Page
Number
 
 
 
 
 
 
 


Table of Contents

Part I. Financial Information

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

 
 

Current assets
 

 
 

Cash and cash equivalents
$
501.4

 
$
718.4

Short-term investments (Note 3)
450.4

 
506.3

Accounts and other receivables, net of allowances of $7.2 and $6.8, respectively
388.5

 
344.1

Inventories (Note 2)
356.6

 
339.9

Prepaid expenses
48.8

 
45.1

Other current assets
73.6

 
94.1

Total current assets
1,819.3

 
2,047.9

Long-term accounts receivable, net of allowances of $6.5 and $6.3, respectively
5.8

 
3.6

Long-term investments (Note 3)
369.2

 
379.9

Property, plant, and equipment, net
497.3

 
482.5

Goodwill
630.9

 
628.3

Other intangible assets, net
203.7

 
205.4

Deferred income taxes
196.5

 
180.5

Other assets
131.1

 
131.2

Total assets
$
3,853.8

 
$
4,059.3

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities (Note 2)
$
458.3

 
$
476.2

Long-term debt
602.2

 
599.9

Other long-term liabilities
494.0

 
480.1

Commitments and contingencies (Note 8)


 


Stockholders' equity
 

 
 

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

 

Common stock, $1.00 par value, 350.0 shares authorized, 239.8 and 239.1 shares issued, and 211.9 and 215.4 shares outstanding, respectively
239.8

 
239.1

Additional paid-in capital
933.4

 
946.8

Retained earnings
3,479.8

 
3,336.8

Accumulated other comprehensive loss
(172.6
)
 
(182.6
)
Treasury stock, at cost, 27.9 and 23.7 shares, respectively
(2,181.1
)
 
(1,837.0
)
Total stockholders' equity
2,299.3

 
2,503.1

Total liabilities and stockholders' equity
$
3,853.8

 
$
4,059.3

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

1

Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions, except per share information; unaudited)
 
Three Months Ended   
March 31,
 
2016
 
2015
Net sales
$
697.3

 
$
590.3

Cost of sales
180.3

 
136.0

Gross profit
517.0

 
454.3

Selling, general, and administrative expenses
212.7

 
202.5

Research and development expenses
102.4

 
86.4

Intellectual property litigation expenses
12.2

 
0.3

Interest expense, net
2.4

 
2.4

Other expense, net
4.0

 
0.2

Income before provision for income taxes
183.3

 
162.5

Provision for income taxes
40.3

 
39.1

Net income
$
143.0

 
$
123.4

Share information  (Note 10)
 

 
 

Earnings per share:
 

 
 

Basic
$
0.67

 
$
0.57

Diluted
$
0.66

 
$
0.56

Weighted-average number of common shares outstanding:
 

 
 

Basic
213.1

 
215.5

Diluted
217.8

 
220.6

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

2

Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
 
Three Months Ended   
March 31,
 
2016
 
2015
Net income
$
143.0

 
$
123.4

Other comprehensive income (loss), net of tax (Note 9):
 
 
 
Foreign currency translation adjustments
27.6

 
(64.7
)
Unrealized (loss) gain on cash flow hedges
(19.6
)
 
17.2

Unrealized gain on available-for-sale investments
1.7

 
0.3

Reclassification of net realized investment loss to earnings
0.3

 
0.2

Other comprehensive income (loss)
10.0

 
(47.0
)
Comprehensive income
$
153.0

 
$
76.4

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

3

Table of Contents

EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
 
Three Months Ended   
March 31,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Net income
$
143.0

 
$
123.4

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

 
 

Depreciation and amortization
15.9

 
16.0

Stock-based compensation (Note 6)
14.3

 
13.6

Excess tax benefit from stock plans
(11.1
)
 
(9.8
)
Gain on investments
(0.3
)
 
(1.1
)
Deferred income taxes
0.2

 
4.1

Other
0.7

 
(0.2
)
Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables, net
(32.2
)
 
(36.5
)
Inventories
(4.6
)
 
(18.9
)
Accounts payable and accrued liabilities
(47.6
)
 
(59.1
)
Income taxes
24.8

 
26.6

Prepaid expenses and other current assets
(3.6
)
 
8.5

Other
7.6

 
6.7

Net cash provided by operating activities
107.1

 
73.3

Cash flows from investing activities
 

 
 

Capital expenditures
(27.7
)
 
(20.8
)
Purchases of held-to-maturity investments (Note 3)
(152.5
)
 
(422.0
)
Proceeds from held-to-maturity investments (Note 3)
255.0

 
330.9

Purchases of available-for sale investments (Note 3)
(73.4
)
 
(84.6
)
Proceeds from available-for-sale investments (Note 3)
47.7

 
18.3

Investments in trading securities, net
(4.0
)
 
(2.0
)
Investments in unconsolidated affiliates, net (Note 3)
(2.0
)
 
(0.4
)
Other
4.2

 
0.3

Net cash provided by (used in) investing activities
47.3

 
(180.3
)
Cash flows from financing activities
 

 
 

Proceeds from issuance of debt
9.7

 
7.4

Payments on debt and capital lease obligations
(9.5
)
 
(8.2
)
Purchases of treasury stock (Note 7)
(344.1
)
 
(101.0
)
Excess tax benefit from stock plans
11.1

 
9.8

Proceeds from stock plans
19.5

 
23.5

Equity forward contract related to accelerated share repurchase agreement (Note 7)
(57.5
)
 

Other
1.7

 
(3.4
)
Net cash used in financing activities
(369.1
)
 
(71.9
)
Effect of currency exchange rate changes on cash and cash equivalents
(2.3
)
 
(17.9
)
Net decrease in cash and cash equivalents
(217.0
)
 
(196.8
)
Cash and cash equivalents at beginning of period
718.4

 
653.8

Cash and cash equivalents at end of period
$
501.4

 
$
457.0

Supplemental disclosures:
 

 
 

Non-cash investing and financing transactions:
 

 
 

Capital expenditures accruals
$
16.4

 
$
6.6

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

4

Table of Contents


1.     BASIS OF PRESENTATION

The accompanying interim consolidated condensed financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in Edwards Lifesciences Corporation's Annual Report on Form 10-K for the year ended December 31, 2015 . Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted.

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

Recently Adopted Accounting Standards

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

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

New Accounting Standards Not Yet Adopted

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

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

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


5


2.     COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Components of selected captions in the consolidated condensed balance sheets consisted of the following (in millions):
 
March 31, 2016
 
December 31, 2015
Inventories
 
 
 
Raw materials
$
61.3

 
$
63.8

Work in process
80.7

 
64.1

Finished products
214.6

 
212.0

 
$
356.6

 
$
339.9


At March 31, 2016 and December 31, 2015 , approximately $71.3 million and $58.8 million , respectively, of the Company's finished products inventories were held on consignment.

 
March 31, 2016
 
December 31, 2015
Accounts payable and accrued liabilities
 

 
 

Accounts payable
$
78.6

 
$
63.9

Employee compensation and withholdings
131.8

 
209.4

Research and development accruals
35.5

 
38.6

Property, payroll, and other taxes
34.8

 
34.5

Fair value of derivatives
33.3

 
4.2

Accrued rebates
24.5

 
23.9

Litigation reserves
14.2

 
5.6

Severance and realignment reserves
12.4

 
19.1

Taxes payable
7.5

 
14.5

Other accrued liabilities
85.7

 
62.5

 
$
458.3

 
$
476.2




6


3.     INVESTMENTS
Debt Securities
Investments in debt securities at the end of each period were as follows (in millions):
 
March 31, 2016
 
December 31, 2015
Held-to-maturity
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
Fair Value
Bank time deposits
$
348.3

 
$

 
$

 
$
348.3

 
$
440.1

 
$

 
$

 
$
440.1

U.S. government and agency securities
29.4

 
0.1

 
(0.1
)
 
29.4

 
32.5

 

 
(0.2
)
 
32.3

Asset-backed securities
1.1

 

 

 
1.1

 
1.2

 

 

 
1.2

Corporate debt securities
15.2

 

 

 
15.2

 
16.4

 

 

 
16.4

Municipal securities
4.4

 

 

 
4.4

 
5.2

 

 

 
5.2

Total
$
398.4

 
$
0.1

 
$
(0.1
)
 
$
398.4

 
$
495.4

 
$

 
$
(0.2
)
 
$
495.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
31.0

 
$

 
$

 
$
31.0

 
$
28.1

 
$

 
$

 
$
28.1

U.S. government and agency securities
52.9

 
0.3

 

 
53.2

 
38.7

 

 
(0.2
)
 
38.5

Asset-backed securities
54.2

 
0.1

 

 
54.3

 
62.8

 

 
(0.2
)
 
62.6

Corporate debt securities
247.0

 
0.8

 
(0.7
)
 
247.1

 
230.0

 

 
(1.3
)
 
228.7

Municipal securities
4.7

 

 

 
4.7

 
4.7

 

 

 
4.7

Total
$
389.8

 
$
1.2

 
$
(0.7
)
 
$
390.3

 
$
364.3

 
$

 
$
(1.7
)
 
$
362.6

The cost and fair value of investments in debt securities, by contractual maturity, as of March 31, 2016 were as follows:
 
Held-to-Maturity
 
Available-for-Sale
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(in millions)
Due in 1 year or less
$
384.1

 
$
384.1

 
$
66.3

 
$
66.3

Due after 1 year through 5 years
2.9

 
2.9

 
270.0

 
270.4

Instruments not due at a single maturity date
11.4

 
11.4

 
53.5

 
53.6

 
$
398.4

 
$
398.4

 
$
389.8

 
$
390.3

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

7


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

 
 

Cost
$

 
$

Unrealized gains
0.2

 
0.2

Fair value of available-for-sale investments
0.2

 
0.2

Equity method investments
 

 
 

Cost
10.9

 
10.9

Equity in losses
(4.0
)
 
(4.2
)
Carrying value of equity method investments
6.9

 
6.7

Cost method investments
 

 
 

Carrying value of cost method investments
23.8

 
21.3

Total investments in unconsolidated affiliates
$
30.9

 
$
28.2

During the three months ended March 31, 2016 , the gross realized gains or losses from sales of available-for-sale investments were not material.
4.     FAIR VALUE MEASUREMENTS
The consolidated condensed financial statements include financial instruments for which the fair market value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, accounts and other receivables, investments, accounts payable, certain accrued liabilities, and borrowings under a revolving credit agreement. The carrying value of these financial instruments generally approximates fair value due to their short-term nature. Financial instruments also include long-term notes payable. As of March 31, 2016 , the fair value of the notes payable, based on Level 2 inputs, was $616.1 million , versus a carrying value of $602.2 million .
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company prioritizes the inputs used to determine fair values in one of the following three categories:
Level 1—Quoted market prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3—Unobservable inputs that are not corroborated by market data.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

8


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company's financial instruments which are measured at fair value on a recurring basis (in millions):
March 31, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 

 
 

 
 

 
 

Cash equivalents
$
14.8

 
$
12.9

 
$

 
$
27.7

Available-for-sale investments:
 
 
 
 
 
 


Corporate debt securities

 
247.1

 

 
247.1

Asset-backed securities

 
54.3

 

 
54.3

U.S. government and agency securities
28.0

 
25.2

 

 
53.2

Commercial paper

 
31.0

 

 
31.0

Municipal securities

 
4.7

 

 
4.7

Equity investments in unconsolidated affiliates
0.2

 

 

 
0.2

Investments held for deferred compensation plans
39.1

 

 

 
39.1

Derivatives

 
14.9

 

 
14.9

 
$
82.1

 
$
390.1

 
$

 
$
472.2

Liabilities
 

 
 

 
 

 
 

Derivatives
$

 
$
33.3

 
$

 
$
33.3

Deferred compensation plans
39.3

 

 

 
39.3

Contingent consideration obligation

 

 
31.1

 
31.1

 
$
39.3

 
$
33.3

 
$
31.1

 
$
103.7

December 31, 2015
 

 
 

 
 

 
 

Assets
 
 
 
 
 
 
 

Cash equivalents
$
3.5

 
$
8.5

 
$

 
$
12.0

Available-for-sale investments:
 
 
 
 
 
 
 
Corporate debt securities

 
228.7

 

 
228.7

Asset-backed securities

 
62.6

 

 
62.6

U.S. government and agency securities
9.6

 
28.9

 

 
38.5

Commercial paper

 
28.1

 

 
28.1

Municipal securities

 
4.7

 

 
4.7

Equity investments in unconsolidated affiliates
0.1

 

 

 
0.1

Investments held for deferred compensation plans
35.3

 

 

 
35.3

Derivatives

 
23.3

 

 
23.3

 
$
48.5

 
$
384.8

 
$

 
$
433.3

Liabilities
 

 
 

 
 

 
 

Derivatives
$

 
$
4.2

 
$

 
$
4.2

Deferred compensation plans
35.5

 

 

 
35.5

Contingent consideration obligation

 

 
30.5

 
30.5

 
$
35.5

 
$
4.2

 
$
30.5

 
$
70.2


The following table summarizes the changes in fair value of the contingent consideration obligation for the three months ended March 31, 2016 (in millions):

Balance at December 31, 2015
 
$
30.5

Changes in fair value (recorded in " Research and Development Expenses ")
 
0.6

Balance at March 31, 2016
 
$
31.1

Cash Equivalents and Available-for-sale Investments
The Company estimates the fair values of its money market funds based on quoted prices in active markets for identical assets. The Company estimates the fair values of its commercial paper, U.S. government and agency securities, asset-backed securities, and corporate debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry standard valuation models, including both income and market-based approaches, for which all

9


significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades and broker-dealer quotes on the same or similar securities, benchmark yields, credit spreads, prepayment and default projections based on historical data, and other observable inputs. The Company independently reviews and validates the pricing received from the third-party pricing service by comparing the prices to prices reported by a secondary pricing source. The Company’s validation procedures have not resulted in an adjustment to the pricing received from the pricing service.

Investments in unconsolidated affiliates are long-term equity investments in companies that are in various stages of development. Certain of the Company’s investments in unconsolidated affiliates are designated as available-for-sale. These investments are carried at fair market value based on quoted market prices.
Deferred Compensation Plans
The Company holds investments in trading securities related to its deferred compensation plans. The investments are in a variety of stock and bond mutual funds. The fair values of these investments and the corresponding liabilities are based on quoted market prices.
Derivative Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and foreign currency option contracts to manage foreign currency exposures, and interest rate swap agreements to manage its interest rate exposures. All derivatives contracts are recognized on the balance sheet at their fair value. The fair value of foreign currency derivative financial instruments was estimated based on quoted market foreign exchange rates and market discount rates. The fair value of the interest rate swap agreements was determined based on a discounted cash flow analysis reflecting the contractual terms of the agreements and the 6-month LIBOR forward interest rate curve. Judgment was employed in interpreting market data to develop estimates of fair value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
Contingent Consideration Obligation
The Company recorded a contingent consideration obligation related to its acquisition of CardiAQ. The contingent consideration obligation was recorded at its estimated fair value, which was determined using a probability weighted discounted cash flow analysis that considered significant unobservable inputs. These inputs included a 2.0% discount rate used to present value the projected cash flows, a 65.0% probability of milestone achievement, and a projected payment date in 2018. The use of different assumptions could have a material effect on the estimated fair value amount.
5.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage its currency exchange rate risk and its interest rate risk, as summarized below. Notional amounts are stated in United States dollar equivalents at spot exchange rates at the respective dates.
 
Notional Amount
 
March 31, 2016
 
December 31, 2015
 
(in millions)
Foreign currency forward exchange contracts
$
1,350.6

 
$
1,061.6

Interest rate swap agreements
300.0

 
300.0

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

10


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

 
 

Foreign currency contracts
 
Other current assets
 
$
3.9

 
$
15.0

Interest rate swap agreements
 
Other assets
 
$
6.5

 
$
1.6

Liabilities
 
 
 
 

 
 

Foreign currency contracts
 
Accrued and other liabilities
 
$
33.3

 
$
4.2

Derivatives not designated as hedging instruments
 
 
 
 

 
 

Assets
 
 
 
 

 
 

Foreign currency contracts
 
Other assets
 
$
4.5

 
$
6.7


11


The following table presents the effect of master-netting agreements and rights of offset on the consolidated condensed balance sheets (in millions):
 
 
 
 
 
 
 
Gross Amounts
Not Offset in
the Consolidated
Balance Sheet
 
 
 
 
 
Gross Amounts
Offset in the
Consolidated
Balance Sheet
 
 
 
 
 
 
 
Net Amounts
Presented in the
Consolidated
Balance Sheet
 
 
March 31, 2016
Gross
Amounts
 
Financial
Instruments
 
Cash
Collateral
Received
 
Net
Amount
Derivative assets
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
8.4

 
$

 
$
8.4

 
$
(4.9
)
 
$

 
$
3.5

Interest rate swap agreements
$
6.5

 
$

 
$
6.5

 
$

 
$

 
$
6.5

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
33.3

 
$

 
$
33.3

 
$
(4.9
)
 
$

 
$
28.4

December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

Derivative assets
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
21.7

 
$

 
$
21.7

 
$
(4.0
)
 
$

 
$
17.7

Interest rate swap agreements
$
1.6

 
$

 
$
1.6

 
$

 
$

 
$
1.6

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$
4.2

 
$

 
$
4.2

 
$
(4.0
)
 
$

 
$
0.2

The following tables present the effect of derivative instruments on the consolidated condensed statements of operations and consolidated condensed statements of comprehensive income (in millions):
 
 
Amount of Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
 
 
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
 
Three Months Ended   
March 31,
 
 
 
Three Months Ended   
March 31,
 
 
Location of Gain or
(Loss) Reclassified from
Accumulated OCI
into Income
 
 
 
2016
 
2015
 
2016
 
2015
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(21.0
)
 
$
36.3

 
Cost of sales
 
$
11.4

 
$
10.5

 
 
 
 
 
 
 
 
 
 
 
Net investment hedges
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(12.3
)
 
$

 
Other expense, net
 
$

 
$


 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Three Months Ended   
March 31,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
Fair value hedges
 
2016
 
2015
Interest rate swap agreements
 
Interest expense, net
 
$
4.9

 
$
4.5

The gains on the interest rate swap agreements are fully offset by the changes in the fair value of the fixed-rate debt being hedged.
 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
 
 
 
Three Months Ended   
March 31,
 
 
Location of Gain or (Loss)
Recognized in Income on
Derivative
 
Derivatives not designated as hedging instruments
 
2016
 
2015
Foreign currency contracts
 
Other expense, net
 
$
(6.4
)
 
$
4.9


12


The Company expects that during the next twelve months it will reclassify to earnings a $3.7 million gain currently recorded in " Accumulated Other Comprehensive Loss ."
6.   STOCK-BASED COMPENSATION
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three months ended March 31, 2016 and 2015 was as follows (in millions):
 
Three Months Ended   
March 31,
 
2016
 
2015
Cost of sales
$
2.0

 
$
1.8

Selling, general, and administrative expenses
9.7

 
9.6

Research and development expenses
2.6

 
2.2

Total stock-based compensation expense
$
14.3

 
$
13.6

At March 31, 2016 , the total remaining compensation cost related to nonvested stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and employee stock purchase plan ("ESPP") subscription awards amounted to $82.3 million , which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of 29 months .
Fair Value Disclosures
The following table includes the weighted-average grant-date fair values of stock options granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
  Option Awards
Three Months Ended   
March 31,
 
2016
 
2015
Average risk-free interest rate
1.1
%
 
1.5
%
Expected dividend yield
None

 
None

Expected volatility
29.7
%
 
30.5
%
Expected term (years)
4.7

 
4.7

Fair value, per option
$
24.28

 
$
19.20

The following table includes the weighted-average grant-date fair values for ESPP subscriptions granted during the periods indicated and the related weighted-average assumptions used in the Black-Scholes option pricing model:
  ESPP
Three Months Ended   
March 31,
 
2016
 
2015
Average risk-free interest rate
0.3
%
 
0.2
%
Expected dividend yield
None

 
None

Expected volatility
26.5
%
 
28.1
%
Expected term (years)
0.6

 
0.6

Fair value, per share
$
18.17

 
$
14.97


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

13


extending to December 2016, subject to certain adjustments pursuant to the agreements. In April 2016, one of the ASR agreements concluded at a VWAP less discount per share price of $84.39 , and the Company received an additional 0.3 million shares under that agreement. If all agreements had been settled on March 31, 2016, Edwards would have received 0.7 million additional shares.

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

8.   COMMITMENTS AND CONTINGENCIES

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

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

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

On April 19, 2016, Boston Scientific filed a lawsuit against Edwards Lifesciences in the Federal District Court in the District of Delaware alleging that the SAPIEN 3 heart valve infringes certain claims of Boston Scientific’s U.S. Patent 8,992,608 related to paravalvular sealing technology.  Also on April 19, 2016, Boston Scientific filed a lawsuit against Edwards Lifesciences in the Federal District Court in the Central District of California alleging that five of its transcatheter heart valve delivery systems and a valve crimper infringe certain claims of eight Boston Scientific U.S. patents.  The complaints seek unspecified monetary damages and injunctive relief. The Company intends to defend itself vigorously in these matters.

In addition, Edwards Lifesciences is or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits related primarily to products and services currently or formerly manufactured or performed, as applicable, by Edwards Lifesciences. Such cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Upon resolution of any such legal matter or other claim, Edwards Lifesciences may incur charges in excess of established reserves. The Company is not able to estimate the amount or range of any loss for legal contingencies for which there is no reserve or additional loss for matters already reserved. While any such charge related to matters could have a material adverse impact on Edwards Lifesciences' net income or cash flows in the period in which it is recorded or paid, management does not believe that any such charge relating to any currently pending lawsuit would have a material adverse effect on Edwards Lifesciences' financial position, results of operations, or liquidity.

Edwards Lifesciences is subject to various environmental laws and regulations both within and outside of the United States. The operations of Edwards Lifesciences, like those of other medical device companies, involve the use of substances

14


regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on Edwards Lifesciences' financial position, results of operations, or liquidity.

9.   ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table is a summary of activity for each component of " Accumulated Other Comprehensive Loss " for the three months ended March 31, 2016 (in millions):
 
Foreign
Currency
Translation
Adjustments
 
Unrealized Gain (Loss) on Cash Flow Hedges
 

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

 
$
(1.5
)
 
$
(11.4
)
 
$
(182.6
)
Other comprehensive gain (loss) before reclassifications
21.6

 
(21.0
)
 
1.7

 

 
2.3

Amounts reclassified from accumulated other comprehensive loss

 
(11.4
)
 
0.3

 

 
(11.1
)
Deferred income tax benefit
6.0

 
12.8

 

 

 
18.8

March 31, 2016
$
(153.9
)
 
$
(7.8
)
 
$
0.5

 
$
(11.4
)
 
$
(172.6
)
The following table provides information about amounts reclassified from " Accumulated Other Comprehensive Loss " (in millions):
 
Three Months Ended   
March 31,
 
 
 
Affected Line on Consolidated Condensed
Statements of Operations
Details about Accumulated Other
Comprehensive Loss Components
2016
 
2015
 
Gain (loss) on cash flow hedges
$
11.4

 
$
10.5

 
Cost of sales
 
(4.4
)
 
(3.8
)
 
Provision for income taxes
 
$
7.0

 
$
6.7

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

 

 
Provision for income taxes
 
$
(0.3
)
 
$
(0.2
)
 
Net of tax

10.   EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during a period. Employee equity share options, nonvested shares, and similar equity instruments granted by the Company are treated as potential common shares in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of restricted stock units, market-based restricted stock units, performance-based restricted stock units, and in-the-money options. The dilutive impact of the restricted stock units, market-based restricted stock units, performance-based restricted stock units, and in-the-money options is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of stock-based compensation expense for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in " Additional Paid-in Capital " when the award becomes deductible are assumed to be used to repurchase shares. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.

15


The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
 
Three Months Ended   
March 31,
 
2016
 
2015
Basic:
 

 
 

Net income
$
143.0

 
$
123.4

Weighted-average shares outstanding
213.1

 
215.5

Basic earnings per share
$
0.67

 
$
0.57

Diluted:
 

 
 

Net income
$
143.0

 
$
123.4

Weighted-average shares outstanding
213.1

 
215.5

Dilutive effect of stock plans
4.7

 
5.1

Dilutive weighted-average shares outstanding
217.8

 
220.6

Diluted earnings per share
$
0.66

 
$
0.56

Stock options, restricted stock units, and market-based restricted stock units to purchase 0.3 million for both the three months ended March 31, 2016 and 2015 , respectively, were outstanding, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. Additionally, 0.7 million shares that would have been received if the ASR agreements discussed in Note 7 were settled as of March 31, 2016 were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
11.   INCOME TAXES
The Company's effective income tax rates were 22.0% and 24.1% for the three months ended March 31, 2016 and 2015 , respectively. The change in the effective rates is primarily a result of the reinstatement of the federal research credit and fluctuations in the relative contribution of our foreign operations and United States operations to worldwide pre-tax income. The federal research credit expired on December 31, 2014 and was not reinstated until December 18, 2015 when the research credit was permanently extended, retroactive to January 1, 2015. Therefore, the effective income tax rate for the three months ended March 31, 2015 was calculated without an assumed benefit from the federal research credit.
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.
As of March 31, 2016 and December 31, 2015 , the liability for income taxes associated with uncertain tax positions was $222.0 million and $216.1 million , respectively. The Company estimates that these liabilities would be reduced by $40.8 million and $40.6 million , respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amounts of $181.2 million and $175.5 million , respectively, if not required, would favorably affect the Company's effective tax rate.
At March 31, 2016 , all material state, local, and foreign income tax matters have been concluded for years through 2008. The Internal Revenue Service ("IRS") has substantially completed its fieldwork for the 2009 through 2012 tax years. However, the audit is currently in suspense pending finalization of an Advance Pricing Agreement ("APA") and Joint Committee of Taxation approval.
As noted above, the Company has entered into an APA process between the Switzerland and United States governments for the years 2009 through 2015 covering transfer pricing matters. The transfer pricing matters are significant to the Company's consolidated condensed financial statements, and the final outcome and timing of the negotiations between the two governments is uncertain.
During 2014, the Company filed with the IRS a request for a pre-filing agreement associated with a tax return filing position on a portion of the litigation settlement payment received from Medtronic, Inc. in May 2014. During the first quarter

16


of 2015, the IRS accepted the pre-filing agreement into the pre-filing agreement program. The finalization of the pre-filing agreement is still pending. However, the Company made an advance payment of tax in December 2015 solely to prevent the further accrual of interest on any potential deficiency, not to signify any potential agreement to a contrary position that may be taken by the IRS.
12.   SEGMENT INFORMATION
Edwards Lifesciences conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan, and Rest of World. All regions sell products that are used to treat structure heart disease and critically ill patients.
The Company's geographic segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer). The Company evaluates the performance of its geographic segments based on net sales and income before provision for income taxes ("pre-tax income"). The accounting policies of the segments are substantially the same as those described in Note 2 of the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015 . Segment net sales and segment pre-tax income are based on internally derived standard foreign exchange rates, which may differ from year to year, and do not include inter-segment profits. Because of the interdependence of the reportable segments, the pre-tax income as presented may not be representative of the geographical distribution that would occur if the segments were not interdependent. Net sales by geographic area are based on the location of the customer.
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include net interest expense, global marketing expenses, corporate research and development expenses, manufacturing variances, corporate headquarters costs, special gains and charges, stock-based compensation, foreign currency hedging activities, certain litigation costs, and most of the Company's amortization expense. Although most of the Company's depreciation expense is included in segment pre-tax income, due to the Company's methodology for cost build-up, it is impractical to determine the amount of depreciation expense included in each segment, and, therefore, a portion is maintained at the corporate level. The Company neither discretely allocates assets to its operating segments, nor evaluates the operating segments using discrete asset information.
The table below presents information about Edwards Lifesciences' reportable segments (in millions):
 
Three Months Ended   
March 31,
 
2016
 
2015
Segment Net Sales
 

 
 

United States
$
375.6

 
$
283.5

Europe
187.1

 
216.5

Japan
63.8

 
68.7

Rest of World
71.5

 
71.3

Total segment net sales
$
698.0

 
$
640.0

Segment Pre-tax Income
 

 
 

United States
$
241.6

 
$
167.4

Europe
94.7

 
107.9

Japan
29.5

 
31.4

Rest of World
17.9

 
16.8

Total segment pre-tax income
$
383.7

 
$
323.5


17


The table below presents reconciliations of segment net sales to consolidated net sales and segment pre-tax income to consolidated pre-tax income (in millions):
 
Three Months Ended   
March 31,
 
2016
 
2015
Net Sales Reconciliation
 

 
 

Segment net sales
$
698.0

 
$
640.0

Foreign currency
(0.7
)
 
(49.7
)
Consolidated net sales
$
697.3

 
$
590.3

Pre-tax Income Reconciliation
 

 
 

Segment pre-tax income
$
383.7

 
$
323.5

Unallocated amounts:
 

 
 

Corporate items
(195.2
)
 
(156.8
)
Intellectual property litigation expenses
(12.2
)
 
(0.3
)
Interest expense, net
(2.4
)
 
(2.4
)
Foreign currency
9.4

 
(1.5
)
Consolidated pre-tax income
$
183.3

 
$
162.5

Enterprise-wide Information
Enterprise-wide information is based on actual foreign exchange rates used in the Company's consolidated condensed financial statements.
 
Three Months Ended   
March 31,
 
2016
 
2015
 
 
 
 
Net Sales by Geographic Area
 

 
 

United States
$
375.6

 
$
283.5

Europe
188.5

 
185.3

Japan
66.6

 
58.1

Rest of World
66.6

 
63.4

 
$
697.3

 
$
590.3

Net Sales by Major Product and Service Area
 

 
 

Transcatheter Heart Valve Therapy
$
367.8

 
$
268.5

Surgical Heart Valve Therapy
195.9

 
196.9

Critical Care
133.6

 
124.9

 
$
697.3

 
$
590.3


 
March 31, 2016
 
December 31, 2015
 
(in millions)
Long-lived Tangible Assets by Geographic Area
 

 
 

United States
$
489.9

 
$
473.6

Europe
34.3

 
36.0

Japan
8.7

 
8.1

Rest of World
95.5

 
96.0

 
$
628.4

 
$
613.7


18


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
         This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements contained in this report to be covered by the safe harbor provisions of such Acts. All statements other than statements of historical fact in this report or referred to or incorporated by reference into this report are "forward-looking statements" for purposes of these sections. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items, plans or expectations with respect to development activities, clinical trials or regulatory approvals, any statements of plans, strategies and objectives of management for future operations, any statements concerning our future operations, financial conditions and prospects, and any statements of assumptions underlying any of the foregoing. These statements can sometimes be identified by the use of the forward-looking words such as "may," "believe," "will," "expect," "project," "estimate," "should," "anticipate," "plan," "goal," "continue," "seek," "pro forma," "forecast," "intend," "guidance," "optimistic," "aspire," "confident," other forms of these words or similar words or expressions or the negative thereof. Investors are cautioned not to unduly rely on such forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our results or future business, financial condition, results of operations or performance to differ materially from our historical results or experiences or those expressed or implied in any forward-looking statements contained in this report. Investors should carefully review the information contained in, or incorporated by reference into, our annual report on Form 10-K for the year ended December 31, 2015 and subsequent reports on Forms 10-Q and 8-K for a description of certain of these risks and uncertainties. These forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.
Overview
We are the global leader in patient-focused medical innovations for structural heart disease, as well as critical care and surgical monitoring. Driven by a passion to help patients, we collaborate with the world’s leading clinicians and researchers to address unmet healthcare needs, working to improve patient outcomes and enhance lives. We conduct operations worldwide and are managed in the following geographical regions: United States, Europe, Japan, and Rest of World. Our products are categorized into the following main areas: Transcatheter Heart Valve Therapy ("THV"), Surgical Heart Valve Therapy, and Critical Care.
Financial Results
The following is a summary of our financial performance (dollars in millions, except per share data):
 
Three Months Ended   
March 31,
 
 
2016
 
2015
 
Change
 
Net sales
$
697.3

 
$
590.3

 
18.1
 %
 
Gross profit as a percentage of net sales
74.1
%
 
77.0
%
 
(2.9
)
pts.
Net income
$
143.0

 
$
123.4

 
15.9
 %
 
Earnings per share
 

 
 

 
 

 
Basic
$
0.67

 
$
0.57

 
17.5
 %
 
Diluted
$
0.66

 
$
0.56

 
17.9
 %
 
Our sales growth was led by our THV products, which benefited from the launches of the Edwards SAPIEN 3 transcatheter heart valve in the United States (July 2015) and Europe (January 2014). Our gross profit margin was negatively impacted by foreign currency exchange rate fluctuations, partially offset by an improved product mix, led by THV products. The increase in our net income was primarily driven by our increased sales.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property in support of those developments. In the first three months of 2016 we invested 14.7% of our net sales in research and development.

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New Accounting Standards
For information on new accounting standards, see Note 1 to the " Consolidated Condensed Financial Statements. "
Results of Operations
Net Sales Trends
(dollars in millions)
 
Three Months Ended   
March 31,
 
 
 
 
 
 
 
Percent Change
 
2016
 
2015
 
Change
 
United States
$
375.6

 
$
283.5

 
$
92.1

 
32.5
%
International
321.7

 
306.8

 
14.9

 
4.9
%
Total net sales
$
697.3

 
$
590.3

 
$
107.0

 
18.1
%
International net sales include the impact of foreign currency exchange rate fluctuations. The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs and our hedging activities. For more information, see Item 3, " Quantitative and Qualitative Disclosures About Market Risk ."
Net Sales by Product Group
(dollars in millions)
 
Three Months Ended   
March 31,
 
 
 
 
 
 
 
Percent Change
 
2016
 
2015
 
Change
 
Transcatheter Heart Valve Therapy
$
367.8

 
$
268.5

 
$
99.3

 
37.0
 %
Surgical Heart Valve Therapy
195.9

 
196.9

 
(1.0
)
 
(0.5
)%
Critical Care
133.6

 
124.9

 
8.7

 
7.0
 %
Total net sales
$
697.3

 
$
590.3

 
$
107.0

 
18.1
 %

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Transcatheter Heart Valve Therapy
The increase in net sales of THV products in the United States was due primarily to:
the Edwards SAPIEN 3 valve, driven by its launch in July 2015;
partially offset by:
lower sales of the Edwards SAPIEN XT valve as customers converted to Edwards SAPIEN 3 .
The increase in international net sales of THV products was due to:
the Edwards SAPIEN 3 valve, driven primarily by its launch in Europe in January 2014; and

the Edwards SAPIEN XT valve, driven primarily by its launch in Japan in October 2013;
partially offset by:
lower sales of the Edwards SAPIEN XT transcatheter heart valve in Europe as customers converted to Edwards SAPIEN 3 ; and

foreign currency exchange rate fluctuations, which decreased net sales for the three months ended March 31, 2016 by $3.8 million due primarily to the weakening of the Euro against the United States dollar.

In March 2016, we received approval from the United States Food and Drug Administration ("FDA") to expand use of the Edwards SAPIEN XT transcatheter heart valve for pulmonic valve replacement procedures. The approval enables the treatment of adult and pediatric patients who suffer from either a narrowed pulmonary valve, or moderate or greater pulmonary regurgitation caused by congenital heart disease. Also in March 2016, we received approval for SAPIEN 3 in Japan for the treatment of patients suffering from severe, symptomatic aortic stenosis.
.
 

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Surgical Heart Valve Therapy
The decrease in net sales of Surgical Heart Valve Therapy was driven by:
foreign currency exchange rate fluctuations, which decreased net sales by $2.8 million due primarily to the weakening of various currencies against the United States dollar, primarily the Euro, partially offset by the strengthening of the Japanese yen against the United States dollar; and
cardiac surgery systems, primarily lower sales of specialty cannula products in Europe and Japan;
partially offset by:
higher sales of surgical heart valve products, driven by pericardial aortic tissue valves, primarily in the United States, Rest of World, and Europe.

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Critical Care
The increase in net sales of Critical Care products was driven by:
higher sales of enhanced surgical recovery products in the United States and Europe, and core hemodynamic products in the United States and Rest of World;
partially offset by:
foreign currency exchange rate fluctuations, which decreased net sales by $2.4 million due primarily to the weakening of various currencies against the United States dollar, primarily the Euro, partially offset by the strengthening of the Japanese yen against the United States dollar.
Gross Profit
 
Three Months Ended   
March 31,
 
 
2016
 
2015
 
Change
 
Gross profit as a percentage of net sales
74.1
%
 
77.0
%
 
(2.9
)
pts.
The decrease in gross profit as a percentage of net sales for the three months ended March 31, 2016 was driven primarily by:
a 3.8 percentage point decrease due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts;
partially offset by:
a 0.9 percentage point increase in the United States due to an improved product mix, driven by THV products.
Selling, General, and Administrative ("SG&A") Expenses
(dollars in millions)
 
Three Months Ended   
March 31,
 
 
2016
 
2015
 
Change
 
SG&A expenses
$
212.7

 
$
202.5

 
$
10.2

 
SG&A expenses as a percentage of net sales
30.5
%
 
34.3
%
 
(3.8
)
pts.

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Table of Contents

The increase in SG&A expenses for the three months ended March 31, 2016 was due primarily to (1) higher sales and marketing expenses in the United States, mainly to support the THV program and (2) higher personnel-related costs. These increases were partially offset by the suspension of the medical device excise tax, and the impact of foreign currency, due to the weakening of various currencies against the United States dollar, mainly the Euro. The decrease in SG&A expenses as a percentage of net sales for the three months ended March 31, 2016 was due primarily to higher THV sales in the United States, Europe, and Japan.
Research and Development ("R&D") Expenses
(dollars in millions)
 
Three Months Ended   
March 31,
 
 
 
2016
 
2015
 
Change
 
 
R&D expenses
$
102.4

 
$
86.4

 
$
16.0

 
 
R&D expenses as a percentage of net sales
14.7
%
 
14.6
%
 
0.1

 
pts.
The increase in R&D expenses for the three months ended March 31, 2016 was due primarily to new mitral and aortic THV product development efforts. The suspension of the medical device excise tax provided additional flexibility to accelerate investments in structural heart initiatives.
Intellectual Property Litigation Expenses
We incurred external legal costs related to intellectual property litigation of $ 12.2 million and $0.3 million for the three months ended March 31, 2016 and 2015 , respectively. The increase in intellectual property litigation expenses for the three months ended March 31, 2016 was primarily due to the resolution of an intellectual property litigation matter, and ongoing litigation in the United States and Europe.
Other Expense, net
(in millions)
 
Three Months Ended   
March 31,
 
2016
 
2015
Charitable foundation contribution
$
5.0

 
$

(Gain) loss on investments
(0.7
)
 
1.4

Foreign exchange gains, net
(0.4
)
 
(0.9
)
Other
0.1

 
(0.3
)
Other expense, net
$
4.0

 
$
0.2

In March 2016, the Company contributed $5.0 million to the Edwards Lifesciences Foundation, a related-party not-for-profit organization intended to provide philanthropic support to health- and community-focused charitable organizations. The
contribution was irrevocable and was recorded as an expense at the time of payment.
The (gain) loss on investments primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on our available-for-sale and cost method investments. During the three months ended March 31, 2015 , we recorded an other-than-temporary impairment charge of $3.5 million related to one of our cost method investments.
The net foreign exchange gains relate primarily to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outside the United States, which have statutory tax rates lower than the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.

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Table of Contents

Our effective income tax rate was 22.0% and 24.1% for the three months ended March 31, 2016 and 2015 , respectively. The change in the effective rates is primarily a result of the reinstatement of the federal research credit and fluctuations in the relative contribution of our foreign operations and United States operations to worldwide pre-tax income. The federal research credit expired on December 31, 2014 and was not reinstated until December 18, 2015 when the research credit was permanently extended, retroactive to January 1, 2015. Therefore, the effective income tax rate for the three months ended March 31, 2015 was calculated without an assumed benefit from the federal research credit.
We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. Management believes that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from our uncertain tax positions. For further information, see Note 11 to the " Consolidated Condensed Financial Statements ."
During 2014, we filed with the Internal Revenue Service ("IRS") a request for a pre-filing agreement associated with a tax return filing position on a portion of the litigation settlement payment received from Medtronic in May 2014. During the first quarter of 2015, the IRS accepted the pre-filing agreement into the pre-filing agreement program. The finalization of the pre-filing agreement is still pending. However, we made an advance payment of tax in December 2015 solely to prevent the further accrual of interest on any potential deficiency, not to signify any potential agreement to a contrary position that may be taken by the IRS.
Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, amounts available under credit facilities, and cash from operations. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions.
As of March 31, 2016 , cash and cash equivalents and short-term investments held in the United States and outside the United States were $115.2 million and $836.6 million, respectively. We believe that cash held in the United States, in addition to amounts available under credit facilities and cash from operations, are sufficient to fund our United States operating requirements for the next twelve months. Cash and cash equivalents and short-term investments held outside the United States have historically been used to fund international operations and acquire businesses and assets outside of the United States, the majority of which relates to undistributed earnings of certain of our foreign subsidiaries, which are considered by us to be indefinitely reinvested. We consider making short-term loans of cash held outside the United States to the United States from time to time based on facts and circumstances. The permanent repatriations of cash and cash equivalents and short-term investments held outside the United States are subject to restrictions in certain jurisdictions, and may be subject to withholding and other taxes. The potential tax liability related to any repatriation would be dependent on the facts and circumstances that exist at the time such repatriation is made and the complexities of the tax laws of the United States and the respective foreign jurisdictions.
We have a Five-Year Credit Agreement ("Credit Agreement") which provides up to an aggregate of $750.0 million in borrowings in multiple currencies. We may increase the amount available under the Credit Agreement, subject to agreement of the lenders, by up to an additional $250.0 million in the aggregate. As of March 31, 2016 , there were no borrowings outstanding under the Credit Agreement. In October 2013, we issued $600.0 million of 2.875% fixed-rate unsecured senior notes due October 15, 2018. As of March 31, 2016 , the total carrying value of our long-term debt was $ 602.2 million .
From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. We consider several factors in determining when to execute share repurchases, including, among other things, expected dilution from stock plans, cash capacity, and the market price of our common stock. In February 2016, we entered into accelerated share repurchase ("ASR") agreements to repurchase $325.0 million of the Company's common stock under the Board approved program. During 2016 , we repurchased under the Board authorized repurchase program a total of 4.2 million shares at an aggregate cost of $ 400.0 million , which includes the price of the forward contract associated with our ASR agreements, and as of March 31, 2016 , had remaining authority to purchase $ 277.5 million of our common stock. For further information, see Note 7 to the " Consolidated Condensed Financial Statements ."

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At March 31, 2016 , there had been no material changes in our significant contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 .
Net cash flows provided by operating activities of $ 107.1 million for the three months ended March 31, 2016 increased $ 33.8 million  over the same period last year due primarily to (1) improved operating performance and (2) a decrease in inventory builds in comparison to the prior year.
Net cash used in investing activities of $ 47.3 million for the three months ended March 31, 2016 consisted primarily of capital expenditures of $ 27.7 million , partially offset by net proceeds from investments of $ 70.8 million .
Net cash used in investing activities of $ 180.3 million for the three months ended March 31, 2015 consisted primarily of net purchases of investments of $ 159.8 million and capital expenditures of $ 20.8 million .
Net cash used in financing activities of $ 369.1 million for the three months ended March 31, 2016 consisted primarily of purchases of treasury stock of $401.6 million , including amounts paid under the ASR agreements and recorded as a forward contract, partially offset by proceeds from stock plans of $ 19.5 million and the excess tax benefits from stock plans of $ 11.1 million .
Net cash used in financing activities of $ 71.9 million for the three months ended March 31, 2015 consisted primarily of purchases of treasury stock of $ 101.0 million , partially offset by proceeds from stock plans of $ 23.5 million .
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 36-38 in Item 7, " Management's Discussion and Analysis of Financial Condition and Results of Operations, " of our Annual Report on Form 10-K for the year ended December 31, 2015 . There have been no significant changes from the information discussed therein.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk, Foreign Currency Risk, Credit Risk, and Concentrations of Risk
For a complete discussion of our exposure to interest rate risk, foreign currency risk, credit risk, and concentrations of risk, refer to Item 7A " Quantitative and Qualitative Disclosures About Market Risk " on pages 38-40 of our Annual Report on Form 10-K for the year ended December 31, 2015 . There have been no significant changes from the information discussed therein.
Investment Risk
We are exposed to investment risks related to changes in the underlying financial condition and credit capacity of certain of our investments. As of March 31, 2016 , we had $788.7 million  of investments in fixed-rate debt securities of various companies, of which $338.3 million were long-term. In addition, we had $ 30.9 million of investments in equity instruments of public and private companies. Should these companies experience a decline in financial condition or credit capacity, or fail to meet certain development milestones, a decline in the investments' value may occur, resulting in unrealized or realized losses.

26

Table of Contents

Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures.     Our management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2016 . Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of March 31, 2016 that our disclosure controls and procedures are effective in providing reasonable assurance that the information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

27

Table of Contents

Part II. Other Information
Item 1.    Legal Proceedings
Please see Note 10 to the " Consolidated Condensed Financial Statements " of this Quarterly Report on Form 10-Q, which is incorporated by reference.
Item 1A.    Risk Factors
There have been no material changes to the risk factors under Part I, Item 1A " Risk Factors " in our Annual Report on Form 10-K for the year ended December 31, 2015 .
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
 
 
 
Total Number
 of Shares 
(or Units) 
Purchased (a)
 
Average
Price Paid
per Share
(or Unit)
 
Total Number of 
Shares (or Units) 
Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number
(or Approximate 
Dollar Value) of 
Shares that
May Yet Be 
Purchased
Under the Plans
or Programs
(in millions) (b)
 
January 1, 2016 through January 31, 2016
 
887,900

 
$
77.45

 
887,900

 
$
608.8

 
February 1, 2016 through February 29, 2016
 
3,296,648

 
83.48

 
3,279,111

 
277.5

 
March 1, 2016 through March 31, 2016
 

 

 

 
277.5

 
Total
 
4,184,548

 
82.20

 
4,167,011

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
The difference between the total number of shares (or units) purchased and the total number of shares (or units) purchased as part of publicly announced plans or programs is due to shares withheld by us to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued to employees.

(b)
On July 10, 2014, the Board of Directors approved a stock repurchase program authorizing us to purchase on the open market, including pursuant to a Rule 10b5-1 plan and in privately negotiated transactions, up to $750.0 million of our common stock.

Item 6.    Exhibits
The exhibits listed in the Exhibit Index (following the signature page of this report) are filed, furnished, or incorporated by reference as part of this report on Form 10-Q.


28

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
EDWARDS LIFESCIENCES CORPORATION
 
 
(Registrant)
Date:
April 28, 2016
By:
/s/ SCOTT B. ULLEM
 
 
 
Scott B. Ullem
Chief Financial Officer
(Principal Financial Officer)
Date:
April 28, 2016
By:
/s/ ROBERT W.A. SELLERS
 
 
 
Robert W.A. Sellers
Corporate Controller
(Principal Accounting Officer)

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Table of Contents

EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Exhibit No.
 
Description
 
*10.1

 
Edwards Lifesciences Corporation Nonemployee Directors Stock Incentive Program, as amended and restated as of February 25, 2016
*10.2

 
Edwards Lifesciences Corporation 401(k) Savings and Investment Plan, restated effective January 1, 2016
31.1

 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2

 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32

 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101

 
The following financial statements from Edwards Lifesciences' Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Operations, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Cash Flows, and (v) Notes to Consolidated Condensed Financial Statements
 
 
 
 
* Represents management contract or compensatory plan

30


Exhibit 10.1

Nonemployee Directors Stock Incentive Program

(Amended and Restated as of February 25, 2016)
Edwards Lifesciences Corporation
























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Contents


Article 1.
Establishment, Objectives, and Duration
1
Article 2.
Definitions
2
Article 3.
Administration
4
Article 4.
Eligibility and Participation
5
Article 5.
Shares Subject to the Program
5
Article 6.
Stock Options
7
Article 7.
Stock Issuances
9
Article 8.
Restricted Stock
9
Article 9.
Restricted Stock Units
10
Article 10.
Stock Appreciation Rights
12
Article 11.
Automatic Awards to Nonemployee Directors
12
Article 12.
Beneficiary Designation
15
Article 13.
Deferrals
15
Article 14.
Rights of Participants
15
Article 15.
Change in Control
16
Article 16.
Amendment, Modification, and Termination
16
Article 17.
Compliance with Applicable Law and Withholding
17
Article 18.
Indemnification
18
Article 19.
Successors
18
Article 20.
Legal Construction
18

    

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Edwards Lifesciences Corporation

Nonemployee Directors Stock Incentive Program
(Amended and Restated as of February 25, 2016)
Article 1.
Establishment, Objectives, and Duration
1.1.
Establishment of the Program. Edwards Lifesciences Corporation, a Delaware corporation (hereinafter referred to as the “Company”), hereby amends and restates the Nonemployee Directors Stock Incentive Program formerly known as the Edwards Lifesciences Corporation Nonemployee Directors and Consultants Stock Incentive Program (hereinafter, as amended and restated, referred to as the “Program”), as set forth in this document, effective as of February 25, 2016. The Program was previously amended and restated in March 2002, November 2002, May 2003, February 19, 2004, March 4, 2005, May 2007, November 13, 2008, February 11, 2010, November 9, 2011, and May 14, 2013. Prior to the amendment and restatement on March 4, 2005, consultants were eligible to participate in the Program. The Program permits the grant of Nonqualified Stock Options, Stock Issuances, Restricted Stock, Restricted Stock Units and Stock Appreciation Rights.
The Program became effective as of April 1, 2000 (the “Effective Date”) and shall remain in effect as provided in Section 1.3 hereof. The share limitations under the Program reflect the 2-for-1 stock splits effected on May 27, 2010 and December 14, 2015.
1.2.
Objectives of the Program. The objectives of the Program are to optimize the profitability and growth of the Company through long-term incentives which are consistent with the Company’s goals and which link the personal interests of Participants to those of the Company’s stockholders. The Program is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants who make significant contributions to the Company’s success and to allow Participants to share in the success of the Company.
1.3.
Duration of the Program. The Program commenced on the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board to amend or terminate the Program at any time pursuant to Article 16 hereof, until all Shares subject to it shall have been purchased or acquired according to the Program’s provisions. However, in no event may an Award be granted under the Program on or after April 1, 2020.

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Article 2.
Definitions
Whenever used in the Program, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized:
2.1.
“Annual Retainer” means the fixed annual fee of a Nonemployee Director in effect on the first day of the year in which such Annual Retainer is payable for services to be rendered as a Nonemployee Director of the Company. The Annual Retainer does not include meeting or chairmanship fees.
2.2.
“Award” means, individually or collectively, a grant under this Program of Nonqualified Stock Options, Stock Issuances, Restricted Stock, Restricted Stock Units, or Stock Appreciation Rights.
2.3.
“Award Agreement” means an agreement entered into by the Company and each Participant setting forth the terms and provisions applicable to Awards granted under this Program.
2.4.
“Board” or “Board of Directors” means the Board of Directors of the Company.
2.5.
“Change in Control” of the Company shall mean the occurrence of any one of the following events:
(a)
Any “Person”, as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, and any trustee or other fiduciary holding securities under an employee benefit plan of the Company or such proportionately owned corporation), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company’s then outstanding securities; or
(b)
During any period of not more than twenty-four (24) months, individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in Sections 2.5(a), 2.5(c), or 2.5(d) of this Section 2.5) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or

2



(c)
The consummation of a merger or consolidation of the Company with any other entity, other than: (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than sixty percent (60%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than thirty percent (30%) of the combined voting power of the Company’s then outstanding securities; or
(d)
The Company’s stockholders approve a plan of complete liquidation or dissolution of the Company, or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets (or any transaction having a similar effect.
2.6.
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
2.7.
“Committee” means the Compensation and Governance Committee and any successor thereto or any other committee appointed by the Board to administer Awards to Participants, as specified in Article 3 herein.
2.8.
“Company” means Edwards Lifesciences Corporation, a Delaware corporation, and any successor thereto as provided in Article 19 herein.
2.9.
“Disability” means the inability of the Participant to attend any meetings of the Board or a Committee thereof for a period of twenty-six (26) weeks by reason of a medically determinable physical or mental impairment or the resignation or replacement of the Participant as a member of the Board by reason of such impairment.
2.10.
“Effective Date” shall have the meaning ascribed to such term in Section 1.1 hereof.
2.11.
“Employee” means an employee of the Company or of a Subsidiary of the Company.
2.12.
“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.
2.13.
“Fair Market Value” means, at any date, the closing sale price on the principal securities exchange on which the Shares are traded on the last previous day on which a sale was reported.

3



2.14.
“Nonemployee Director” means a member of the Company’s Board who is not an Employee of the Company.
2.15.
“Nonqualified Stock Option” or “Option” means an option to purchase Shares granted under Article 6 or Article 11 herein and which is not intended to meet the requirements of Code Section 422.
2.16.
“Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.
2.17.
“Participant” means a Nonemployee Director who has been selected to receive an Award or who has outstanding an Award granted under the Program.
2.18.
“Period of Restriction” means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8 herein.
2.19.
“Restricted Stock” means an Award granted to a Participant pursuant to Article 8 herein.
2.20.
“Restricted Stock Unit ” means an Award granted to a Participant pursuant to Article 9 herein.
2.21.
“Shares” means the shares of common stock of the Company.
2.22.
“Stock Appreciation Right” means an Award granted to a Participant pursuant to Article 10 herein.
2.23.
“Stock Issuance” means an Award granted to a Participant pursuant to Article 7 herein.
2.24.
“Subsidiary” means any business, whether or not incorporated, in which the Company beneficially owns, directly or indirectly through another entity or entities, securities or interests representing more than fifty percent (50%) of the combined voting power of the voting securities or voting interests of such business.
Article 3.
Administration
3.1.
General. The Program shall be administered by the Compensation and Governance Committee of the Board, or by any other Committee appointed by the Board for such purpose. Any Committee administering the Program shall be comprised entirely of directors. The members of the Committee shall be appointed in accordance with the bylaws of the Company and the charter of such Committee. Members of the Committee may participate in the

4



Program. The Committee shall have the authority to delegate administrative duties to officers, Employees, or directors of the Company; provided that the Committee shall not be able to delegate its authority with respect to granting Awards.
3.2.
Authority of the Committee. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions of the Program, the Committee shall have the authority to: (a) interpret the provisions of the Program, and prescribe, amend, and rescind rules and procedures relating to the Program; (b) grant Awards under the Program, in such forms and amounts and subject to such terms and conditions as it deems appropriate, including, without limitation, Awards which are made in combination with or in tandem with other Awards (whether or not contemporaneously granted) or compensation or in lieu of current or deferred compensation; (c) subject to Article 16, modify the terms of, cancel and reissue, or repurchase outstanding Awards; (d) prescribe the form of agreement, certificate or other instrument evidencing any Award under the Program; (e) correct any defect or omission and reconcile any inconsistency in the Program or in any Award hereunder; (f) design Awards to satisfy requirements to make such Awards tax-advantaged to Participants in any jurisdiction or for any other reason that the Company desires; and (g) make all other determinations and take all other actions as it deems necessary or desirable for the administration of the Program; provided, however, that except for adjustments made pursuant to Section 5.4, no outstanding Option will be amended or cancelled in connection with any program that is considered a repricing of the Option under the rules of the principal securities exchange on which the Shares are traded without stockholder approval. The determination of the Committee on matters within its authority shall be conclusive and binding on the Company and all other persons. The Committee shall comply with all applicable laws in administering the Plan . If and to the extent permitted by law (and subject to Section 3.1 herein), the Committee may delegate its authority as identified herein.
3.3.
Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Program and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, directors, Participants, and their estates and beneficiaries.
Article 4.
Eligibility and Participation
4.1.
Eligibility. Persons eligible to participate in this Program shall be all Nonemployee Directors.
4.2.
Actual Participation. Subject to the provisions of the Program, the Committee may, from time to time, select from all eligible Nonemployee

5



Directors those to whom Awards shall be granted and shall determine the nature and amount of each Award.
Article 5.
Shares Subject to the Program
5.1.
Number of Shares Available for Grants. Subject to adjustment as provided in Section 5.4 herein, the number of Shares hereby reserved for delivery to Participants under the Program shall be two million eight hundred thousand (2,800,000) Shares. Subject to the restrictions for Nonemployee Directors set forth in Article 11, the Committee shall determine the appropriate methodology for calculating the number of Shares issued pursuant to the Program.
5.2.
Type of Shares. Shares issued under the Program in connection with Awards may be authorized and unissued Shares or issued Shares held as treasury Shares.
5.3.
Reuse of Shares.
(a)
General. In the event of the expiration or termination (by reason of forfeiture, expiration, cancellation, surrender or otherwise) of any Award under the Program, that number of Shares that was subject to the Award but not delivered shall again be available as Awards under the Program.
(b)
Restricted Stock. In the event that Shares are delivered under the Program as Restricted Stock and are thereafter forfeited or reacquired by the Company pursuant to rights reserved upon the grant thereof, such forfeited or reacquired Shares shall again be available as Awards under the Program.
(c)
Stock Appreciation Rights. Upon exercise of any Stock Appreciation Right, the Share reserve under Section 5.1 shall be reduced by the gross number of Shares as to which such Stock Appreciation Right is exercised.
5.4.
Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares which may be delivered under Section 5.1, in the number and class of and/or price of Shares subject to outstanding Awards granted under the Program and in the number and/or class of Shares subject to Awards to be granted to Nonemployee Directors under Article 11, as shall be determined to be appropriate and equitable by the Board, in its sole discretion, to prevent dilution or enlargement of rights;

6



provided, however, that the number of Shares subject to any Award shall always be a whole number. In a stock-for-stock acquisition of the Company, the Committee may, in its sole discretion, substitute securities of another issuer for any Shares subject to outstanding Awards.
Article 6.
Stock Options
6.1.
Grant of Options.
(a)
Subject to the terms and provisions of the Program, Options may be granted in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee.
(b)
If all or any portion of the exercise price or taxes incurred in connection with the exercise are paid by delivery (or, in the case of payment of taxes, by withholding of Shares) of other Shares of the Company, a Participant’s Options may provide for the grant of replacement Options. All Options under the Program shall be granted in the form of nonqualified stock options as no Option under the Program may be granted in the form of an incentive stock option as defined under the provisions of Code Section 422.
6.2.
Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine.
6.3.
Option Price. The Option Price for each grant of an Option under this Program shall be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted.
6.4.
Duration of Options. Unless the Committee determines otherwise, the term of each Option shall expire on the seventh (7 th ) anniversary date of its grant, subject to such provisions for earlier expiration as the Committee may specify in accordance with Section 6.8 (relating to termination of directorship) or otherwise.
6.5.
Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant.
6.6.
Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise (or such other form of notice as the Company may specify) to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, or compliance with such procedures as the Company may establish for notifying the Company, either directly or through an on-line internet transaction with a brokerage firm

7



authorized by the Company to effect such option exercise, of the exercise of the Option for one or more Shares. Exercise of an Option must be accompanied by full payment for the Shares for which the Option is exercised (or a satisfactory “cashless exercise” notice).
The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent; (b) by tendering previously acquired Shares (by either actual delivery or attestation) having an aggregate Fair Market Value at the time of exercise equal to the total Option Price; (c) by a cashless exercise as permitted under Federal Reserve Board’s Regulation T, subject to applicable securities law restrictions and such procedures and limitations as the Company may specify from time to time; (d) by any other means which the Board determines to be consistent with the Program’s purpose and applicable law; or (e) by a combination of two or more of (a) through (d).
Subject to any governing rules or regulations, including cashless exercise procedures, as soon as practicable after receipt of a notification of exercise and full payment (or a satisfactory “cashless exercise” notice), the Company shall cause to be issued and delivered to the Participant, in certificate form or otherwise, evidence of the Shares purchased under the Option(s).
6.7.
Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares.
6.8.
Termination of Directorship. Each Participant’s Option Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s service to the Company as a Nonemployee Director. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination.
6.9.
Nontransferability of Options. Except as otherwise provided in a Participant’s Award Agreement, no Option granted under this Article 6 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement, all Options granted to a Participant under this Article 6 shall be exercisable during his or her lifetime only by such Participant.

8



6.10.
Substitution of Cash. Unless otherwise provided in a Participant’s Award Agreement, and notwithstanding any provision in the Program to the contrary (including but not limited to Section 16.3), in the event of a Change in Control in which the Company’s stockholders holding Shares receive consideration other than shares of common stock that are registered under Section 12 of the Exchange Act, the Committee shall have the authority to require that any outstanding Option be surrendered to the Company by a Participant for cancellation by the Company, with the Participant receiving in exchange a cash payment from the Company within ten (10) days of the Change in Control. Such cash payment shall be equal to the number of Shares under Option, multiplied by the excess, if any, of the greater of (i) the highest per Share price offered to stockholders in any transaction whereby the Change in Control takes place, or (ii) the Fair Market Value of a Share on the date the Change in Control occurs, over the Option Price.
Article 7.
Stock Issuances
7.1.
Stock Issuance Awards. Subject to the terms and provisions of the Program, the Committee may issue Shares as fully vested shares (“Stock Issuances”) in such number and upon such terms as shall be determined by the Committee.
7.2.
Consideration. A Stock Issuance may be awarded in consideration for cash, past services rendered to the Company or an affiliate or for such other consideration as determined by the Committee.
Article 8.
Restricted Stock
8.1.
Restricted Stock Awards. Subject to the terms and provisions of the Program, the Committee may issue Shares subject to retention and transfer restrictions (“Restricted Stock”) as shall be determined by the Committee.
8.2.
Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine.
8.3.
Restriction on Transferability. Except as provided in this Article 8, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Program shall be available during his or her lifetime only to such Participant.

9



8.4.
Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Program as it may deem advisable including, without limitation, any or all of the following:
(a)
A required period of service with the Company, as determined by the Committee, prior to the vesting of Shares of Restricted Stock.
(b)
A requirement that Participants forfeit (or in the case of Shares sold to a Participant, resell to the Company at his or her cost) all or a part of Shares of Restricted Stock in the event of termination of his or her service as a Nonemployee Director during the Period of Restriction.
(c)
A prohibition against such Participants’ dissemination of any secret or confidential information belonging to the Company, or the solicitation by Participants of the Company’s Employees for employment by another entity.
Shares of Restricted Stock awarded pursuant to the Program shall be registered in the name of the Participant and if such Shares are certificated, in the sole discretion of the Committee, such certificate may be deposited in a bank designated by the Committee or with the Company. The Committee may require a stock power endorsed in blank with respect to Shares of Restricted Stock whether or not certificated.
Unless the Committee determines otherwise, Shares of Restricted Stock covered by each Restricted Stock grant made under the Program shall become freely transferable (subject to any restrictions under applicable securities law) by the Participant after the last day of the applicable Period of Restriction.
8.5.
Voting Rights. Unless the Committee determines otherwise, Participants holding Shares of Restricted Stock issued hereunder shall be entitled to exercise full voting rights with respect to those Shares during the Period of Restriction.
8.6.
Dividends and Other Distributions. Unless the Committee determines otherwise, during the Period of Restriction, Participants holding Shares of Restricted Stock issued hereunder shall be entitled to regular cash dividends paid with respect to such Shares. The Committee may apply any restrictions to the dividends that the Committee deems appropriate.
8.7.
Termination of Directorship. Each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to vest in previously unvested Shares of Restricted Stock following termination of the Participant’s service to the Company as a Nonemployee Director. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need

10



not be uniform among all Shares of Restricted Stock issued pursuant to the Program, and may reflect distinctions based on the reasons for termination.
Article 9.
Restricted Stock Units
9.1.
Restricted Stock Units Awards. Subject to the terms and conditions of the Program, the Committee may issue restricted stock units (“Restricted Stock Units”) which entitle the Participant to receive the Shares underlying those units following the lapse of specified restrictions (whether based on the achievement of designated performance goals or the satisfaction of specified services or upon the expiration of a designated time period following the vesting of the units).
9.2.
Restricted Stock Units Award Agreement. Each Restricted Stock Units award shall be evidenced by a Restricted Stock Units Award Agreement that shall specify the vesting restrictions, the number of Shares subject to the Restricted Stock Units award, and such other provisions as the Committee shall determine.
9.3.
Restrictions. The Committee shall impose such other conditions and/or restrictions on the issuance of any Shares under the Restricted Stock Units granted pursuant to the Program as it may deem advisable including, without limitation, any or all of the following:
(a)
A required period of service with the Company, as determined by the Committee, prior to the issuance of Shares under the Restricted Stock Units award.
(b)
A requirement that the Restricted Stock Units award be forfeited in whole or in part in the event of termination of the Participant’s services as a Nonemployee Director during the vesting period.
(c)
A prohibition against such Participants’ dissemination of any secret or confidential information belonging to the Company, or the solicitation by Participants of the Company’s Employees for employment by another entity.
Unless the Committee determines otherwise, Shares subject to Restricted Stock Units under the Program shall be freely transferable (subject to any restrictions under applicable securities law) by the Participant after receipt of such shares.
9.4.
Stockholder Rights. Participants holding Restricted Stock Units issued hereunder shall not have any rights with respect to Shares subject to the award until the award vests and the Shares are issued hereunder. However, dividend-equivalent units may be paid or credited, either in cash, in actual Shares, or in additional Restricted Stock Units, on outstanding Restricted Stock Units awards, subject to such terms and conditions as the Committee may deem appropriate.

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9.5.
Termination of Directorship. Each Restricted Stock Units Award Agreement shall set forth the extent to which the Participant shall have the right to vest in previously unvested Shares subject to the Restricted Stock Units award following termination of the Participant’s service to the Company as a Nonemployee Director. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Restricted Stock Unit awards issued pursuant to the Program, and may reflect distinctions based on the reasons for termination.
Article 10.
Stock Appreciation Rights
10.1.
Stock Appreciation Rights Awards. Subject to the terms and conditions of the Program, the Committee may issue a Stock Appreciation Rights award which shall entitle the Participant to receive upon exercise a payment in cash or Shares underlying the exercised award equal to the excess (if any) of (a) the Fair Market Value of the Shares on the date of exercise over (b) the aggregate base price in effect for such Shares. A Stock Appreciation Right shall become exercisable during such times and subject to such conditions as shall be determined by the Committee, in its sole discretion.
10.2.
Stock Appreciation Rights Agreement . Each Stock Appreciation Rights award shall be evidenced by a Stock Appreciation Rights Award Agreement that shall specify the vesting restriction, the number of Shares subject to the award and such additional terms and conditions as the Committee shall determine.
10.3.
Base Price. The base price for each grant of a Stock Appreciation Right under this Program shall be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the award is granted.
10.4.
Nontransferability of Stock Appreciation Rights. Except as otherwise provided in a Participant’s Award Agreement, no Stock Appreciation Right granted under this Article 10 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement, all Stock Appreciation Rights granted to a Participant under this Article 10 shall be exercisable during his or her lifetime only by such Participant.
Article 11.
Automatic Awards to Nonemployee Directors
11.1.
Initial Awards.
(a)
Unless otherwise determined by the Committee, each Nonemployee Director who is first elected to the Board shall be granted, on the date of such election, (i) Restricted Stock Units for the number of Shares

12



determined by dividing two hundred thousand dollars ($200,000) by the Fair Market Value per Share on such date, or (ii) Options for the number of Shares determined by dividing two hundred thousand dollars ($200,000) by the fair value of an Option as estimated on the date of grant under a valuation model approved by the Financial Accounting Standards Board (“FASB”) for purposes of the Company’s financial statements under Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor provision), and for both (i) and (ii) rounding up to the nearest whole Share; provided, however, that in no event shall such number exceed twenty thousand (20,000) shares.
(b)
Each Initial Award shall vest in a series of three (3) successive equal annual installments upon the Participant’s completion of each year of Board service over the three (3)-year period measured from the grant date (or such longer period as determined by the Committee).
(c)
Notwithstanding any other provision of the Program to the contrary, the Shares acquired under an Initial Award granted after May 14, 2013 (net of any Shares sold to cover the exercise price and applicable taxes due in connection with the exercise or settlement of the award) may not be sold, transferred or otherwise disposed of prior to the Participant’s cessation of Board service.
(d)
All additional terms of an Initial Award will be as set forth in Section 9, herein, or as set forth in the specific Award Agreement governing such award. Each Initial Award shall become fully-vested in the event of the Participant’s death or Disability.
11.2.
Annual Awards.
(a)
Unless otherwise determined by the Committee, each Nonemployee Director shall receive annually, effective as of the day following each annual meeting of the Company’s stockholders an award as follows:
(i)
An Option for up to forty thousand (40,000) Shares, or
(ii)
A Restricted Stock Units award for up to sixteen thousand (16,000) Shares, or
(iii)
A combination of an Option and Restricted Stock Units award, provided that in no event may the total value of the Option and Restricted Stock Units award subject to such combined award exceed two hundred thousand dollars ($200,000). The Committee shall have the sole discretion to determine the amount and type of award for each year within the foregoing limitations. For such purposes, the value of the Annual Award shall be calculated as follows: (A) the value of

13



an Option shall be equal to the fair value of an option share as estimated on the date of grant under a valuation model approved by FASB for purposes of the Company’s financial statements under Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor provision); and (B) the value of a Restricted Stock Unit shall be equal to the Fair Market Value of the Share on the award date.
(b)
Each Annual Award granted prior to 2012 shall vest in a series of three (3) successive equal annual installments upon the Participant’s completion of each year of Board service over the three (3)-year period measured from the award date (or such longer period as determined by the Committee). Each Annual Award granted after 2011 and before 2015 shall vest upon the Participant’s completion of one (1) year of Board service measured from the award date (or such longer period as determined by the Committee). Each Annual Award granted after 2014 shall vest upon the first to occur of (i) the Participant’s completion of one (1) year of Board service measured from the award date or (ii) the next annual meeting of the Company’s stockholders that occurs after the calendar year in which the Annual Award is granted (or such longer period as determined by the Committee). Each Annual Award shall become fully vested in the event of the Participant’s death or Disability.
(c)
Notwithstanding any other provision of the Program to the contrary, the Shares acquired under an Annual Award granted after 2011 (net of any Shares sold to cover the exercise price and applicable taxes due in connection with the exercise or settlement of the award) may not be sold, transferred or otherwise disposed of prior to the Participant’s cessation of Board service.
(d)
All additional terms of an Annual Award will be as set forth in Articles 6 and 9 herein, or as set forth in the specific Award Agreement governing such award.
11.3.
Annual Retainer Election.
(a)
Subject to the terms and provisions of the Program and any other restrictions set out by the Committee in its sole discretion, the Committee may permit each Nonemployee Director to elect to receive all or a portion of his or her Annual Retainer in the form of Options or Stock Issuances to be issued as of the first day on which such Annual Retainer is otherwise due and payable (the “Conversion Date”) and using the Fair Market Value of a Share as of the Conversion Date as the Option Price of the Options.

14



(b)
If conversion elections are permitted by the Committee, each irrevocable election shall be made in accordance with such rules as the Committee may determine in its sole discretion which shall be consistent with the requirements of Code Section 409A and the Treasury Regulations and rulings promulgated thereunder. Except as may otherwise be determined by the Committee, in the event of a Participant’s election to receive an Option in lieu of his Annual Retainer, the number of shares subject to the Option shall be determined by dividing that portion of the Annual Retainer to be paid in the form of the Option by the Fair Market Value of a Share on the Conversion Date and multiplying the quotient by four (4). In the event of a Participant’s election to receive Shares in lieu of an Annual Retainer, the number of such Shares shall be determined by dividing that portion of the Annual Retainer to be paid in the form of Shares by the Fair Market Value of a Share on the Conversion Date. In the event the preceding formula would result in a fractional Share being issued or subject to an Option, the number of Shares subject to the issuance or Option shall be rounded up to the nearest whole Share.
(c)
Any portion of a Nonemployee Director’s Annual Retainer for which an election has not been made pursuant to this Section 11.3, shall be paid in cash to such Nonemployee Director at such time or times as payments thereof are customarily made by the Company.
(d)
All additional terms of an Award received as a result of the election described herein will be as set-forth in Sections 6 and 7, herein, or as set forth in the specific Award Agreement governing such Award.
Article 12.
Beneficiary Designation
Each Participant under the Program may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Program is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.
Article 13.
Deferrals
The Committee may permit or require a Participant to defer such Participant’s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option, or Stock Appreciation Right or under a Restricted Stock Unit Award. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures

15



for such payment deferrals which shall be consistent with the requirements of Code Section 409A and the Treasury Regulations and rulings promulgated thereunder.
Article 14.
Rights of Participants
14.1.
Directorship. Nothing in the Program or any Award Agreement shall interfere with or limit in any way the right of the Company to terminate at any time any Participant’s service to the Company as a Nonemployee Director, nor confer upon any Participant any right to continue in the service of the Company.
14.2.
Participation. No Nonemployee Director shall have the right to be selected to receive an Award under this Program, or, having been so selected, to be selected to receive a future Award.
Article 15.
Change in Control
Upon the occurrence of a Change in Control and notwithstanding the terms of any Award Agreement, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges:
(a)
Any and all Options granted hereunder shall become immediately exercisable, and shall terminate upon the earlier of (i) the third anniversary of the Participant’s date of termination of service or (ii) expiration of the Option term.
(b)
Any restriction periods and restrictions imposed on Awards shall lapse.
Article 16.
Amendment, Modification, and Termination
16.1.
Amendment, Modification, and Termination. Subject to the terms of the Program including Sections 16.2 and 16.3, the Board may at any time and from time to time, alter, amend, suspend or terminate the Program in whole or in part. However, stockholder approval shall be required for any amendment of the Program that (a) materially increases the number of Shares available for issuance under the Program (other than pursuant to Article 5.4), (b) expands the type of awards available under the Program, (c) materially expands the class of participants eligible to receive Awards under the Program, (d) materially extends the term of the Program, (e) materially changes the method of determining the Option Price under the Program or (f) deletes or limits any provision of the Program prohibiting the repricing of Options. The Committee may amend Awards previously granted under the Program.
16.2.
Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of

16



unusual or nonrecurring events (including, without limitation, the events described in Section 5.4 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Program.
16.3.
Awards Previously Granted. Notwithstanding any provision of the Program or of any Award Agreement to the contrary (but subject to Section 6.10), no termination, amendment, or modification of the Program or amendment of an Award previously granted under the Program shall adversely affect in any material way any Award previously granted under the Program, without the express consent of the Participant holding such Award.
Article 17.
Compliance with Applicable Law and Withholding
17.1.
General. The granting of Awards and the issuance of Shares under the Program shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding anything to the contrary in the Program or any Award Agreement, the following shall apply:
(a)
The Company shall have no obligation to issue any Shares under the Program if such issuance would violate any applicable law or any applicable regulation or requirement of any securities exchange or similar entity.
(b)
Prior to the issuance of any Shares under the Program, the Company may require a written statement that the recipient is acquiring the Shares for investment and not for the purpose or with the intention of distributing the Shares and that the recipient will not dispose of them in violation of the registration requirements of the Securities Act of 1933.
(c)
With respect to any Participant who is subject to Section 16(a) of the Exchange Act, the Committee may, at any time, add such conditions and limitations to Award or payment under the Program or implement procedures for the administration of the Program which it deems necessary or desirable to comply with the requirements of Rule 16b-3 of the Exchange Act.
(d)
If, at any time, the Company, determines that the listing, registration, or qualification (or any updating of any such document) of any Award, or the Shares issuable pursuant thereto, is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory

17



body is necessary or desirable as a condition of, or in connection with, any Award, the issuance of Shares pursuant to any Award, or the removal of any restrictions imposed on Shares subject to an Award, such Award shall not be granted and the Shares shall not be issued or such restrictions shall not be removed, as the case may be, in whole or in part, unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Company.
17.2.
Securities Law Compliance. Transactions under this Program are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Program or action by the Committee or the Board fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board.
17.3.
Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, domestic and foreign taxes, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Program.
17.4.
Share Withholding. Awards payable in Shares may provide that with respect to withholding required upon any taxable event arising thereunder, Participants may elect to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares to satisfy their withholding tax obligations; provided that Participants may only elect to have Shares withheld having a Fair Market Value on the date the tax is to be determined equal to or less than the minimum withholding tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations, including prior Committee approval, that the Committee, in its sole discretion, deems appropriate.
Article 18.
Indemnification
Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Program and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which

18



such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
Article 19.
Successors
All obligations of the Company under the Program with respect to Awards granted hereunder shall, to the extent legally permissible, be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
Article 20.
Legal Construction
20.1.
Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.
20.2.
Severability. In the event any provision of the Program shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Program, and the Program shall be construed and enforced as if the illegal or invalid provision had not been included.
20.3.
Governing Law. To the extent not preempted by federal law, the Program, and all Award or other agreements hereunder, shall be construed in accordance with and governed by the laws of the state of Delaware without giving effect to principles of conflicts of laws.


19


















EDWARDS LIFESCIENCES CORPORATION

401(K) SAVINGS AND INVESTMENT PLAN
(Restated Effective January 1, 2016)




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TABLE OF CONTENTS

Page


ARTICLE I
INTRODUCTION
1
1.1
The Plan
1
1.2
Effective Date
1
1.3
Plan Objectives
1
1.4
Supplements and Appendices
1
ARTICLE II
DEFINITIONS
1
2.1
“Accounting Date”
1
2.2
“Accounts” or “Account Balances”
1
2.3
“Actual Deferral Percentage”
2
2.4
“Administrative & Investment Committee”
2
2.5
“Base Pay”
2
2.6
“Baxter Common Stock”
3
2.7
“Beneficiary” or “Beneficiaries”
3
2.8
“Board of Directors”
3
2.9
“Code”
3
2.10
“Commonly Controlled Entity”
3
2.11
“Company”
3
2.12
“Company Common Stock”
3
2.13
“Compensation”
3
2.14
“Disability”
7
2.15
“Effective Date”
7
2.16
“Eligible Employee”
7
2.17
“Employee”
8
2.18
“Employer”
8
2.19
“Employment Date”
9
2.20
“Entry Date”
9
2.21
“ERISA”
9
2.22
“Forfeiture”
9
2.23
“Highly Compensated Employee”
9
2.24
“Hour of Service”
9

 
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TABLE OF CONTENTS
(continued)
Page

2.25
“Investment Manager”
11
2.26
“Matching Contribution Percentage”
11
2.27
“Maternity/Paternity Absence”
11
2.28
“Normal Retirement Date”
12
2.29
“One-Year Break In Service”
12
2.30
“Participant”
12
2.31
“Part-Time Employee”
12
2.32
“Plan”
12
2.33
“Plan Year”
12
2.34
“Prior Plan”
12
2.35
“Prior Plan Participant”
13
2.36
“Roth Contributions/Roth Elective Deferrals”.
13
2.37
“Spouse”
13
2.38
“Termination of Employment” or “Severance of Employment”
13
2.39
“Trust”
13
2.40
“Trust Agreement”
13
2.41
“Trust Fund”
13
2.42
“Trustee”
13
2.43
“Year of Vesting Service” or “Vesting Service”
14
ARTICLE III
PARTICIPATION
14
3.1
Participation
14
3.2
Cessation of Participation
14
3.3
Reemployment
14
3.4
Transfer of Employment
15
3.5
Reemployment of Veterans
15
ARTICLE IV
CONTRIBUTIONS
17
4.1
Contributions
17
4.2
Certification of Employer Contributions
18
4.3
Contribution Limitations
18
4.4
Annual Addition
19

 
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TABLE OF CONTENTS
(continued)
Page

ARTICLE V
PARTICIPANT CONTRIBUTIONS/CONTRIBUTION LIMITATIONS
20
5.1
Pay Deferral Contributions
20
5.2
Change in Rate of Pay Deferral Contributions/Reemployment
20
5.3
Annual Limitations on Pay Deferral Contributions
21
5.4
General Limitations on Pay Deferral Contributions
21
5.5
Nondiscrimination Rules Applicable to Pay Deferral and Matching Contributions
22
5.6
Rollover Contributions
26
ARTICLE VI
INVESTMENTS AND PLAN ACCOUNTING
27
6.1
Participant Account Balance
27
6.2
Investment of Accounts
29
6.3
Investment Funds
29
6.4
Investment Elections
30
6.5
Information Provided Under ERISA Section 404(c)
33
6.6
Investment Fund Accounting
34
6.7
Expenses
36
6.8
Accounting Dates
36
6.9
Crediting Employer Contributions
36
6.10
Crediting Pay Deferral Contributions
36
6.11
Adjustment of Account Balances
37
ARTICLE VII
DISTRIBUTION OF ACCOUNT BALANCES
37
7.1
Retirement, Disability or Death
37
7.2
Resignation or Dismissal
38
7.3
Special Vesting Rules Upon Sale of Business
38
7.4
Forfeitures
39
7.5
Benefit Commencement Date
39
7.6
Methods of Benefit Payment
43
7.7
Direct Rollovers
44
7.8
Qualified Reservist Distributions
46
7.9
Maximum Installment Period
46

 
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Page

7.10
Minimum Rate of Installment Payments
47
7.11
Surviving Spouse or Designated Beneficiaries
48
7.12
Missing Beneficiaries of Deceased or Missing Participants
48
7.13
Incapacitated Participants or Beneficiaries
49
7.14
Reemployment after Distributions Commence
49
7.15
Erroneous Payments
49
7.16
Finality of Distributions
49
ARTICLE VIII
WITHDRAWALS AND LOANS
49
8.1
Withdrawals
49
8.2
Loans to Participants
54
8.3
No Representation Regarding Tax Effect of Withdrawals or Loans
58
ARTICLE IX
PLAN COMMITTEES
58
9.1
Membership of Administrative & Investment Committees
58
9.2
Administrative & Investment Committee Powers and Duties
58
9.3
Administrative & Investment Committee Powers and Duties
60
9.4
Conflicts of Interest
61
9.5
Compensation; Reimbursement
61
9.6
Standard of Care
61
9.7
Action by Committees
61
9.8
Resignation or Removal of Committee Member
62
9.9
Uniform Application of Rules by Administrative & Investment Committee
62
9.10
Claims Procedure
62
9.11
Investments in Company Common Stock
63
ARTICLE X
AMENDMENT, TERMINATION OR PLAN MERGER
64
10.1
Amendment
64
10.2
Plan Termination
64
10.3
Continuation by a Successor or Purchaser
65
10.4
Plan Merger or Consolidation
65
10.5
Notice to Participants of Amendments Terminations or Plan Mergers
65
10.6
Vesting and Distribution on Termination
65

 
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TABLE OF CONTENTS
(continued)
Page

ARTICLE XI
GENERAL PROVISIONS
66
11.1
No Employment Guarantee
66
11.2
Nonalienation of Plan Benefits
66
11.3
Action by an Employer
66
11.4
Applicable Law
67
11.5
Participant Litigation
67
11.6
Participant and Beneficiary Duties
67
11.7
Individual Account Statements
67
11.8
Gender and Number
67
11.9
Adequacy of Evidence
67
11.10
Notice to Participants and Beneficiaries
67
11.11
Waiver of Notice
68
11.12
Successors
68
11.13
Severability
68
11.14
Nonreversion
68
11.15
Qualification of Plan and Trust
68
11.16
Certain Indemnification
68
11.17
Voice Response Unit Deemed Written Consent
69
11.18
Effective January 1, 2002
69
ARTICLE XII
SPECIAL TOP-HEAVY RULES
69
12.1
Application
69
12.2
Special Terms
69
12.3
Vested Percentage
72
12.4
Minimum Contribution
72
12.5
Termination of Top-Heavy Status
72
ARTICLE XIII
ADOPTION AND WITHDRAWAL FROM PLAN
73
13.1
Procedure for Adoption
73
13.2
Procedure for Withdrawal
73
13.3
Adoption of Plan by Unrelated Employers
74



 
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EDWARDS LIFESCIENCES CORPORATION
401(K) SAVINGS AND INVESTMENT PLAN
ARTICLE I

INTRODUCTION
1.1     The Plan . Effective as of the close of business on March 31, 2000, Baxter International Inc. (“Baxter”) spun-off its cardiovascular group business to Baxter shareholders through a distribution of all of the shares of Edwards Lifesciences Corporation (“Edwards”) (the “Spin-Off’). In connection with the Spin-Off, Edwards has adopted the Edwards Lifesciences Corporation 401(k) Investment and Savings Plan (the “Plan”) for the benefit of certain employees. This Plan is intended to qualify as a profit sharing plan within the meaning of section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”), with a qualified cash or deferred arrangement described in section 401(k) of the Code, as its related trust is intended to be tax-exempt under section 501 (a) of the Code. The Plan was most recently restated effective January 1, 2014.
1.2     Effective Date . This Plan is effective as of April l, 2000.
1.3     Plan Objectives . The Plan is a profit sharing plan maintained by the Company to stimulate interest, initiative and increased efficiency among Participants, to encourage Participants to set aside funds for retirement, to share with Participants the economic benefits produced by their efforts and to assist in providing Participants with retirement benefits.
1.4     Supplements and Appendices . Supplements and appendices to the Plan may be adopted, attached to and incorporated in the Plan at any time. The provisions of any such supplements and appendices shall have the same effect that such provisions would have if they were included within the basic text of the Plan. Supplements and appendices will specify the persons affected and shall supersede the other provisions of the Plan to the extent necessary to eliminate inconsistencies between the Plan provisions and the provisions of such supplements and appendices.
ARTICLE II

DEFINITIONS
The following terms, whenever used in the following capitalized form, shall have the meaning set forth below unless the context clearly indicates otherwise, or unless modified by a supplement or appendix attached hereto:
2.1     “Accounting Date” means each day of the Plan Year that the New York Stock Exchange is open for trading.
2.2     “Accounts” or “Account Balances” refer to all of the accounts described in Section 6.1 which are maintained on behalf of a Participant.

 
 
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2.3     “Actual Deferral Percentage” means a percentage calculated for purposes of Section 5.5(a) for (i) the group of Participants who are Highly Compensated Employees or (ii) the group of all other Participants, as follows:
(a)    For the group of Participants (including any Eligible Employee who is eligible with respect to a Plan Year to make Pay Deferral Contributions but chooses not to do so) who are Highly Compensated Employees for a Plan Year, the Actual Deferral Percentage (referred to herein as the “HCE Actual Deferral Percentage”) for the Plan Year shall be the average of the following percentages (calculated separately for each member of the group): Pay Deferral Contributions on behalf of the group member for the Plan Year, divided by his Compensation for the Plan Year.
(b)    For the group of all other Participants (including any Eligible Employee who is not a Highly Compensated Employee for a Plan Year and who is eligible with respect to the Plan Year to make Pay Deferral Contributions but chooses not to do so), the Actual Deferral Percentage (referred to herein as the “NHCE Actual Deferral Percentage”) for the Plan Year shall be the average of the following percentages (calculated separately for each member of the group): Pay Deferral Contributions on behalf of the group member for the Plan Year, divided by his Compensation for the Plan Year. The NHCE Actual Deferral Percentage shall be determined without regard to whether an Employee is a non-Highly Compensated Employee for the current Plan Year.
The deferral percentages for individuals and the Actual Deferral Percentage for each specified group shall be calculated to the nearest one-hundredth of one percent. To the extent necessary to satisfy the nondiscrimination tests in Section 5.5(a) in a particular Plan Year, and to the extent permitted by law, the Administrative & Investment Committee may elect to add to the numerator of the Actual Deferral Percentage fraction (i) any portion of additional nonelective contributions made by any Employer that may be treated as a “qualified nonelective contribution” under Code Section 401(k) or (ii) any portion of that Plan Year’s Matching Contributions that may be treated as a “qualified matching contribution” under Code Section 401(k). Salary reduction contributions made by a Participant under any other tax-qualified defined contribution plan maintained by the Participant’s Employer or any Commonly Controlled Entity of such Employer shall be included in computing his deferral percentage to the extent the Company elects to aggregate such other defined contribution plan with the Plan for purposes of the nondiscrimination test of Section 5.5(a) or the coverage test of Code Section 410(b).
2.4     “Administrative & Investment Committee ” means the committee which is responsible for administering the Plan and directing the investment of the Trust Fund in accordance with Article IX.
2.5     “Base Pay” means regular straight-time earnings plus commissions and payments in lieu of regular earnings (such as vacation, sick pay and holiday pay). In the case of a part-time hourly employee, such employee’s base pay shall be determined by multiplying such employee’s hourly rate of pay by the number of regularly scheduled hours of work for such employee.

 
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2.6     “Baxter Common Stock” means common stock of Baxter International Inc.
2.7     “Beneficiary” or “Beneficiaries” means the persons, trusts or estates validly designated by a Participant or the Plan pursuant to Section 7.11 to receive any benefits payable on behalf of such Participant after his death.
2.8     “Board of Directors” means the Board of Directors of the Company.
2.9     “Code” means the Internal Revenue Code of 1986, as amended from time to time.
2.10     “Commonly Controlled Entity” means any corporation, trade or business that, together with the Company, is a member of a controlled group of corporations as defined in Section 414(b) of the Code, is under common control as defined in Section 414(c) of the Code, is a member of an affiliated service group as defined in Section 414(m) of the Code or is required to be aggregated pursuant to Section 414(o) of the Code; provided, however, that solely for purposes of Section 4.3, the standard of control under Sections 414(b) and 414(c) of the Code shall be deemed to be “more than 50%” rather than “at least 80%.”
2.11     “Company” means Edwards Lifesciences Corporation.
2.12     “Company Common Stock” means common stock of Edwards Lifesciences Corporation.
2.13     “Compensation” means the amount determined with respect to a Participant in accordance with the following alternative definitions:
(a)     Compensation Generally . Except as required by subsection (b), (c) or (d) below, for each Participant, “Compensation” means the amounts paid by the Employers during the Plan Year to such Participant for services as an Employee which is included in such Compensation under the rules set forth in subparagraph (a)(i) below other than such Compensation which is excluded under the rules set forth in subparagraph (a)(ii) below.
(i)     Included Pay . For purposes of this Section 2.13(a), a Participant’s Compensation shall include:
(A)    All earnings as an employee which are required to be reported as taxable income on Form W-2, including:
1.    bonuses, including incentive bonuses under the Edwards Incentive Plan, the Edwards Performance Bonus Plan and any other bonus plans approved by the Company or its delegate as constituting Compensation hereunder, payments in lieu of salary increases, and bonuses paid to sales representatives if included in the compensation plan;

 
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2.    call in pay;
3.    commission pay;
4.    differential wage payments, defined in Code Section 3401(h)(2) to Participants in qualified military service, effective January 1, 2009, to the extent required by Code Section 414(u);
5.    double time pay;
6.    draws toward commissions;
7.    funeral pay;
8.    holiday pay;
9.    jury duty pay;
10.    lead pay;
11.    mileage pay for long haul truckers;
12.    military pay;
13.    overtime pay;
14.    paid absences;
15.    retroactive pay;
16.    salary or other regular pay;
17.    shift differentials;
18.    sick pay or other short-term disability pay;
19.    straight time pay; and
20.    vacation pay.
(B)    Amounts treated as salary or cash deferred contributions under a cafeteria plan described in Section 125 include any amounts not available in cash in lieu of group health coverage because the Participant is unable to certify that he has other health coverage, Effective January 1, 2001, for purposes of measuring contribution limitations under Section 4.3, Compensation is further expanded to include elective salary reductions not included in gross income under Code Section 132(f)(4) consistent with the Community Renewal Tax Relief Code of 2000.

 
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(ii)     Excluded Pay . For purposes of this subsection (a), a Participant’s Compensation shall exclude:
(A)    Amounts constituting imputed income arising from an Employer’s moving expense reimbursement policies, an Employer’s life insurance plans or an Employer’s other fringe benefit plans;
(B)    Amounts paid to replace benefits not provided under this Plan or any other tax-qualified plan due to the contribution or benefit limitations or the nondiscrimination restrictions of the Code; and
(C)    The following amounts paid, accrued or imputed:
1.    attendance awards;
2.    automobile allowances;
3.    business expense reimbursements;
4.    cash prizes or awards;
5.    Christmas gifts;
6.    contest pay;
7.    deferred compensation, including deferred bonuses;
8.    discretionary awards;
9.    employee referral awards;
10.    executive perquisite allowances;
11.    hiring bonuses;
12.    income from sale of stock;
13.    income from the exercise of stock options;
14.    interest earnings on deferred compensation, including deferred bonuses;
15.    invention fees and awards;
16.    long term disability pay;
17.    mortgage differential payments;

 
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18.    noncash prizes or awards;
19.    pay for unused sick time;
20.    performance shares;
21.    promotional awards;
22.    relocation expense reimbursements;
23.    restricted stock rights;
24.    retention bonuses;
25.    severance pay;
26.    stock appreciation rights;
27.    tax equalization payments to expatriates;
28.    technical achievement awards;
29.    travel allowances;
30.    tuition reimbursements;
31.    workers’ compensation benefits; and
32.    Income paid after severance from employment, as defined in Section 1.415(c)-2(e)(3) of the Treasury Regulations except for payments to an individual who does not currently perform services for the Company by reason of qualified military service (within the meaning of Code section 414(u)(1) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Company rather than entering qualified military service.
(b)     Compensation of Commissioned Sales Representatives . Except as provided in subsections (c) and (d) below, the definition of Compensation set forth in subsection (a) shall apply with respect to a Participant who is a commissioned sales representative not reimbursed for expenses, except that only 85% of the amounts included in Compensation shall be recognized.
(c)     Compensation For Discrimination Tests . For purposes of the definition of “Highly Compensated Employee” contained in Section 2.23 and for purposes of the nondiscrimination limitations of Section 5.5, the “Compensation” of a Participant means the amounts paid by the Employers during the Plan Year to such Participant for personal services as an Employee which are required to be reported as taxable income on Form W-2 and the amount described in subparagraph (a)(i)(B) above.

 
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(d)     Compensation For Contribution and Benefit Limitations . For purposes of Sections 4.3, 4.4, and 12.2(g), “Compensation” of a Plan Participant shall have the same meaning as under subsection (c) above, except that the Compensation of a Participant shall include all amounts paid to such Participant by a Commonly Controlled Entity of his Employer which is not itself an Employer hereunder which would constitute Compensation for purposes of this subsection (d) if such Commonly Controlled Entity were an Employer.
(e)     Maximum Amount of Compensation . The amount of a Participant’s Compensation that may be taken into account for any purpose of the Plan, including the alternative definitions of “Compensation” described in (a), (b), (c) and (d) above and the Top-Heavy provisions of Article XII, shall not exceed (i) for the initial Plan Year $170,000 and (ii) for each subsequent Plan Year, the amount prescribed by Section 401(a)(17) of the Code (as adjusted for increases in the cost-of-living pursuant to Section 401(a)(17)(B) of the Code).
In computing the Compensation of a Participant for all Plan purposes, Compensation paid in currency other than United States dollars shall be converted to United States dollars at the rate of exchange used at that time by his Employer for such purpose. Compensation paid to a Participant before he commences participation in the Plan, and Compensation paid to a Participant after he ceases to receive credit for Hours of Service under the Plan, will not be recognized under the Plan, except where required by applicable law or where the Plan specifically indicates to the contrary.
2.14     “Disability” means a mental or physical condition which renders a Participant eligible for and in actual receipt of a disability benefit under the federal Social Security Act.
2.15     “Effective Date” means April 1, 2000.
2.16     “Eligible Employee” means an Employee on the payroll of an Employer incorporated in the United States whose Compensation constitutes wages from employment within the meaning of Sections 3121(a) and (b) of the Federal Insurance Contribution Act on and after the effective date of the adoption of the Plan by the Employer, but excluding:
(a)    An Employee who is a member of a group of Employees represented by a collective bargaining representative, with respect to which the Plan has not been extended by a currently effective collective bargaining agreement between his Employer and the collective bargaining representative of the group of Employees of which he is a member after good faith bargaining on the subject of employee benefits;
(b)    An Employee who is otherwise excluded from all of the groups of Employees to whom the Plan is extended by the Employers;
(c)    A leased employee who is considered an Employee under Section 2.17; and

 
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(d)    Any other individual who performs services for an Employer pursuant to an agreement (written or oral) that classifies such individual as an independent contractor or as an employee of another entity, or that otherwise contains a waiver of participation in this Plan, regardless of such individual’s employment status under common law
(e)    any employee who is classified as a “proctor” who is hired in conjunction with the launch of the THV product.
(f)    individuals employed by an Employer whose entire amount of non-imputed U.S. source income is paid to a U.S. taxing authority.
2.17     “Employee” means any person who is a common law employee of an Employer or a Commonly Controlled Entity of an Employer and who is in active employment or on an approved leave of absence. Notwithstanding the foregoing, the following rules shall apply in determining a person’s status as an Employee:
(a)     Leased Employees . An individual who is considered a “leased employee” of an Employer under the provisions of Code Section 414(n)(2) shall be considered an Employee, but not an Eligible Employee, for all purposes of the Plan; provided, however, that such individual shall not be considered an Employee if the leasing organization that employs him covers such individual with a plan providing benefits at least as generous as those described in Code Section 414(n)(5).
(b)     United States Citizenship . Individuals employed by an Employer who generally satisfy the requirements of this Section need not be United States citizens to be Employees; provided, however, that individuals who are not United States citizens and who are employed at an Employer’s facility in the United States or one of its possessions solely on the understanding that such United States employment is temporary for purposes of training or familiarization with such facility or with such Employer’s operations or practices shall not be considered to be Employees; and
(c)     Certain Citizens Employed Abroad . Ordinarily an individual must be employed by an Employer and must be employed at one or more of its facilities in the United States or possessions of the United States to be considered an Employee. A United States citizen employed by an Employer at one of its facilities outside of the United States and its possessions may become an Employee if he satisfies the other requirements of this Section and if the applicable requirements of Sections 401 (a) and 404A of the Code and Section 406 or 407 of the Code are satisfied with respect to such Employee.
2.18     “Employer” means the Company or any Commonly Controlled Entity of the Company on and after the Effective Date of its adoption of the Plan in accordance with Section l3.1. “Employer” shall also mean any organization that is not a Commonly Controlled Entity of the Company if such organization adopts the Plan in accordance with Section 13.3.

 
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2.19     “Employment Date” means the day a person first earns an Hour of Service, or, in the case of an Employee who incurs a Termination of Employment prior to becoming a Participant and who is not reemployed within one year of such Termination of Employment, the first day on which the Employee earns an Hour of Service upon his rehire as an Employee.
2.20     “Entry Date ” means as soon as administratively practicable the thirty-first day after an Employee is credited with an Hour of Service.
2.21     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
2.22     “Forfeiture” means the portion of a Participant’s Accounts which is forfeited pursuant to Section 7.4.
2.23     “Highly Compensated Employee” for a Plan Year means an Employee who:
(a)    is a 5%-owner (as defined in Section 416(1)(1) of the Code) of an Employer at any time during the Plan Year or the preceding Plan Year; or
(b)    is paid Compensation in excess of $80,000 (as adjusted for increases in the cost of living in accordance with Section 414(q)(1)(B)(ii) of the Code) from an Employer for the preceding Plan Year.    If the Administrative & Investment Committee so elects for a Plan Year, the Employees taken into account under this paragraph (b) shall be limited to those Employees who were members of the “top-paid group” for the preceding Plan Year. For purposes of the foregoing, an Employee is in the top-paid group for any year if such Employee is in the group consisting of the top 20% of the Employees when ranked on the basis of compensation paid during such year. Such an election shall be included in the written minutes of the Administrative & Investment Committee.
The Plan is intended to satisfy the qualification requirements of the Code, including the coverage and nondiscrimination provisions of Code Sections 410(b) and 401(a)(4). If the Administrative & Investment Committee determines this Plan would violate such restrictions, then the Administrative & Investment Committee is authorized to construe the Plan in a manner necessary to avoid discrimination in favor of Highly Compensated Employees, if the express provisions of the Plan permit such interpretation.
2.24     “Hour of Service” means:
(a)     Duty Hours . Each hour for which an Employee is directly or indirectly paid or entitled to payment by an Employer for the performance of duties.
(b)     Non-Duty Hours (Paid) . Each hour for which an Employee is directly or indirectly paid or entitled to payment by an Employer for reasons (such as vacation, holidays, sickness, short-term disability, long-term disability, medical leave, family medical leave or jury duty) other than the performance of duties.

 
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(c)     Non-Duty Hours (Unpaid) . Each hour for which an Employee is not paid due to medical leave, family medical leave or layoff. Up to a total of 501 Hours of Service shall be credited under this subsection (b) (with such 501 limit reduced by one Hour of Service for each Hour of Service credited under subsection (b)) to an Employee in a computation period on account of any single continuous period during which the Employee performs no duties, provided, however, that if such continuous period extends into the next computation period, up to 501 additional Hours of Service shall be credited in such computation period, and further provided that no Hours of Service shall be credited under this subsection (b) for any period of time after the Employee’s Termination of Employment.
(d)     Back-Pay Hours . Each hour for which no credit has been given under subsections (a), (b) or (c) above, but for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by an Employer.
(e)     Military Service Hours . To the extent not taken into account under another subsection of this Section, each hour of the normally scheduled work week during a period when the Employee is absent from employment with an Employer for voluntary or involuntary military service with the armed forces of the United States, provided that such Employee returns to work within 90 days after his discharge date or within such longer period of time as may be prescribed by the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”).
(f)     Worker’s Compensation . No Hours of Service will be credited if payment is made solely to comply with applicable worker’s compensation or disability insurance laws.
(g)     Intermittent Family Leave . An Employee shall be credited with 45 Hours of Service for each week in which he is on Intermittent Family Leave. Subsections (b) and (c) shall not apply to such Employees. “Intermittent Family Leave” has the meaning given in the Employer’s policies and procedures manual for an Employee who periodically needs time off for the treatment and care of himself or family members due to conditions which require ongoing medical treatment but which do not require the Employee to take an extended leave of absence to provide or obtain such care.
The number of Hours of Service to be credited to any Part-Time Employee shall be calculated based on records maintained by the Employee’s Employer indicating the actual hours for which the Employee is compensated. The number of Hours of Service credited to any other Employee shall be calculated based on 45 hours for each week for which the Employee would be entitled to at least One Hour of Service. In the case of a payment which is made or due on account of a period during which an Employee performs no duties and which results in the crediting of Hours of Service under subsection (b), (c) or (e) above, or in the case of an award or agreement for back pay made with respect to a period described in subsection (d) above, the number of Hours of Service to be credited shall be in accordance with the provisions of the Rules and Regulations for Minimum Standards for Employee Pension Benefit Plans, U.S. Department of Labor, 29 C.F.R. Section 2530.200b-2(b) which are hereby incorporated by reference. Such rules and regulations shall apply to subsection

 
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(b) above as if absences described in such Section were paid absences. Hours of Service shall be credited to a Plan year in accordance with the provisions of subsection (b) of the above-cited Department of Labor Regulations. Hours required to be credited for more than one reason under this Section which pertain to the same period of time shall be credited only once.
2.25     “Investment Manager” means any bank, trust company, firm or institution appointed by the Administrative & Investment Committee to invest part or all of the Trust Fund in accordance with ARTICLE VI.
2.26     “Matching Contribution Percentage” means a percentage calculated for purposes of Section 5.5(b) for (1) the group of Participants who are Highly Compensated Employees or (ii) the group of all other Participants, as follows:
(a)    For the group of Participants (including an Eligible Employee who is eligible with respect to a Plan Year to receive an allocation of Matching Contributions, but who fails to do so solely on account of the Employee’s failure to elect to make Pay Deferral Contributions during the Plan Year) who are Highly Compensated Employees for a Plan Year, the Matching Contribution Percentage (referred to herein as the “HCE Matching Contribution Percentage”) for the Plan Year shall be the average of the following percentages (calculated separately for each member of the group): Matching Contributions on behalf of the group member for the Plan Year, divided by his Compensation for the Plan Year.
(b)    For the group of all other Participants (including any Eligible Employee who is not a Highly Compensated Employee for a Plan Year and who fails to receive an allocation of Matching Contributions solely on account of the Employee’s failure to elect to make Pay Deferral Contributions during the Plan Year), the Matching Contribution Percentage (referred to herein as the “NHCE Matching Contribution Percentage”) for the Plan Year shall be the average of the following percentages (calculated separately for each member of the group): Matching Contributions on behalf of the group member for the prior Plan Year, divided by his Compensation for the prior Plan Year. The NHCE Matching Contribution Percentage shall be determined without regard to whether an Employee is a non-Highly Compensated Employee for the current Plan Year.
The Matching Contribution Percentages for individuals and the Matching Contribution Percentage for each specified group shall be calculated to the nearest one-hundredth of one percent. Matching Contributions made on behalf of a Participant under any other tax-qualified defined contribution plan maintained by the Participant’s Employer or any Commonly Controlled Entity of such Employer shall be included in computing his Matching Contribution Percentage to the extent the Company elects to aggregate such other defined contribution plan with the Plan for purposes of the nondiscrimination test of Section 5.5(b) or the coverage test of Code Section 410(b).
2.27     “Maternity/Paternity Absence” means a paid or unpaid absence from employment (including an unapproved leave of absence) with an Employer or a Commonly

 
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Controlled Entity of an Employer (a) by reason of the pregnancy of the Employee; (b) by reason of the birth of a child of the Employee; (c) by reason of the placement of a child under age 18 in connection with the adoption of the child by the Employee (including a trial period prior to adoption); and (d) for purposes of caring for a child immediately following birth or adoption. The Employee must prove to the satisfaction of the Administrative & Investment Committee that the absence meets the above requirements and must supply information concerning the length of the absence unless the Administrative & Investment Committee has access to relevant information without the Employee submitting it.
2.28     “Normal Retirement Date” means the date on which a Participant attains age 65.
2.29     “One-Year Break In Service” means a Plan Year in which an Employee has fewer than 501 Hours of Service; provided, however, that an Employee shall not have a One-Year Break In Service for any Plan Year if he is an Employee on the last day of the Plan Year. In addition, an Employee who is absent from work due to a Maternity/Paternity Absence or due to an unpaid leave of absence for which credit is required pursuant to the Family Medical Leave Net of 1993, as amended, to be given for purposes of avoiding a break in service shall be treated as having completed certain Hours of Service for a limited period. The Employee will be treated as completing either (1) the number of Hours of Service that normally would have been credited but for the absence (i.e., 45 Hours of Service per week) or (ii) if the normal work hours are unknown, eight Hours of Service for each normal workday during the leave, to a maximum per Plan Year of 501 Hours of Service. The Hours of Service required to be credited under this subsection must be credited only to prevent a One-Year Break in Service in the Plan Year in which the absence begins for one of the permitted reasons or, if crediting in such year is not necessary to prevent a One-Year Break in Service in the Plan Year, in the following Plan Year.
2.30     “Participant” means an Eligible Employee who elects to make Pay Deferral Contributions under the Plan pursuant to Section 5.1, or if earlier, receives a Profit Sharing Contribution pursuant to Section 4.1 (c) or elects to make a Rollover Contribution to the Plan pursuant to Section 5.6.
2.31    “ Part-Time Employee ” means an Employee who is normally scheduled to work less than 20 hours per week for Employee’s Employer.
2.32     “Plan” means the Edwards Lifesciences Corporation 401(k) Investment and Savings Plan.
2.33     “Plan Year” means the twelve consecutive month period beginning January 1 and ending December 31; provided, however, that the first Plan Year shall be the period beginning on the Effective Date and ending on December 31.
2.34     “Prior Plan” means the Baxter International Inc. and Subsidiaries Incentive Investment Plan, as in effect immediately prior to the Effective Date.

 
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2.35     “Prior Plan Participant” means an individual who was a participant in the Prior Plan immediately prior to the Effective Date and who became an Eligible Employee on the Effective Date.
2.36     “Roth Contributions/Roth Elective Deferrals” shall mean any Employer contributions with respect to Plan Years beginning on or after January 1, 2012, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Roth Elective Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any Roth elective deferral arrangement as described in IRC section 402A. Roth Elective Deferrals shall not include any deferrals properly distributed as excess annual additions. Roth Elective Deferrals are a Participant's Plan Deferral Contributions that are includible in the Participant's gross income at the time deferred and have been irrevocably designated as Roth Elective Deferrals by the Participant in his or her deferral election.
2.37     “Spouse” means the person who is or was married to the Participant within the meaning of the laws of the State in which the Participant was married, and, for purposes of determining who is entitled to the survivor annuity under a Joint and Survivor Annuity, the person who as of the date a Participant’s annuity payments begin is alive and married to the Participant within the meaning of the laws of the State in which the Participant was married.
2.38     “Termination of Employment” or “Severance of Employment” when a person ceases to be an Employee and ceases to be on the payroll of an Employer or a Commonly Controlled Entity of an Employer. Transfer of employment from an Employer to another Employer or Commonly Controlled Entity or from one Commonly Controlled Entity to another Commonly Controlled Entity or to an Employer, shall not constitute a Termination of Employment for purposes of the Plan. Notwithstanding the foregoing, an individual who has ceased to be an Employee but who remains for a limited period of time on the payroll of an Employer or a Commonly Controlled Entity of an Employer solely for administrative purposes shall incur a Termination of Employment on the date he ceases to be an Employee.
2.39     “Trust” means the legal entity resulting from the Trust Agreement between the Company and the Trustee, pursuant to which assets of the Plan are received, held, invested and distributed to or for the benefit of Participants, Spouses and Beneficiaries.
2.40     “Trust Agreement” means the agreement between the Company and the Trustee establishing the Trust, as amended.
2.41     “Trust Fund” means all assets held by the Trustee, Investment Managers and insurance institutions in accordance with the Trust Agreement and the Plan.
2.42     “Trustee” means any individual(s) or corporation(s) designated in the Trust Agreement to execute the duties of the Trustee as set forth in the Trust Agreement.

 
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2.43     “Year of Vesting Service” or “Vesting Service” means the period credited to an Employee for purposes of determining the extent to which the Employee is vested in his Employer Matching Account under the vesting schedule set forth in Section 7.2. Under the Plan, an Employee is credited with a Year of Vesting Service if the Employee completes at least 1,000 Hours of Service during any Plan Year. An Employee’s period of service with a corporation that becomes a Commonly Controlled Entity of an Employer shall be taken into account for purposes of this Section if the Employee is employed on the date the corporation becomes a Commonly Controlled Entity. An individual who became an Employee on September 1, 2015 who immediately prior to such date was a leased employee of TriNet HR Corporation working at the location(s) of CardiAQ Valve Technologies, Inc. shall have their service with CardiAQ, Inc. taken into account for purposes of this Section. An individual who became an Employee on December 20, 2007 who immediately prior to such date was an employee of CardioVations Division of Ethicon shall have their service with CardioVations Division of Ethicon taken into account for purposes of this Section. Credit shall be given at the rate of 45 Hours of Service for each week during such period (but not to exceed 1,000 Hours of Service for any twelve month period). If an Employee is credited with at least one Year of Vesting Service, he shall never lose such service regardless of when he returns to employment as an Employee. Notwithstanding the foregoing, an individual (i) who immediately prior to the Effective Date was employed by Baxter or a Commonly Controlled Entity of Baxter and (ii) who becomes an Eligible Employee on the Effective Date shall be credited with the number of Years of Vesting Services such individual earned while employed with Baxter or a Commonly Controlled Entity of Baxter.
ARTICLE III

PARTICIPATION
3.1     Participation . Each Prior Plan Participant shall become a Participant on the Effective Date. Each other Eligible Employee shall become a Participant as of the Entry Date coincident with or immediately following the Participant’s satisfaction of the applicable eligibility service requirement as described in the next two sentences. An Employee who is not a Part-Time Employee shall satisfy the eligibility service requirement on the thirty-first (31 st ) day of employment. An Employee who is a Part-Time Employee shall satisfy the eligibility service requirement at the end of the first twelve-month period beginning on the date of the Employee’s employment, or beginning on any subsequent January 1, during which the Employee completes 1,000 or more Hours of Service during such twelve month period.
3.2     Cessation of Participation . A Participant shall cease to be a Participant on the later of the date on which such Participant ceases to be an Eligible Employee or the date on which the Participant’s Accounts are distributed for his benefit in accordance with the Plan.
3.3     Reemployment . An Eligible Employee who was a Participant or was eligible to participate prior to his Termination of Employment and is reemployed as an Eligible

 
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Employee shall be eligible to recommence participation in the Plan on the first Entry Date following the (late of his reemployment.
3.4     Transfer of Employment . In the event an Employee transfers from employment with an Employer to employment with a division or unit of the Company or a Commonly Controlled Entity of the Company that has not adopted the Plan in accordance with Section 13.1, the Employee’s period of employment with such non-participating division, unit or Commonly Controlled Entity shall be treated as employment with a participating Employer solely for purposes of (1) determining the Participant’s Years of Vesting Service and (ii) determining when the Participant has incurred a Termination of Employment entitling the Participant to a distribution pursuant to ARTICLE VII.
3.5     Reemployment of Veterans . The provisions of this Section shall apply in the case of the reemployment by an Employer of an Eligible Employee, within the period prescribed by USERRA, after the Employee’s completion of a period of qualified military service (as defined in Code Section 414(u)(5)). The provisions of this Section are intended to provide such Employees with the rights required by USERRA and Section 414(u) of the Code, and shall be interpreted in accordance with such intent.
(a)     Make Up of Pay Deferral Contributions . Such Employee shall have the right to make contributions under the Plan (“Make Up Deferrals”), in addition to any Pay Deferral Contributions which the Employee elects to have made under the Plan pursuant to Section 5.1. From time to time while employed by an Employer, such Employee may elect to make such Make Up Deferrals during the period beginning on the date of such Employee’s reemployment and ending on the earlier of:
(i)    the end of the period equal to the product of three and such Employee’s period of qualified military service, and
(ii)    the fifth anniversary of the date of such reemployment.
Such Employee shall not be permitted to contribute Make Up Deferrals to the Plan in excess of the amount which the Employee could have elected to have made under the Plan in the form of Pay Deferral Contributions if the Employee had continued in employment with his Employer during such period of qualified military service. Such Employee shall be deemed to have earned “Compensation” from his Employer during such period of qualified military service for this purpose in the amount prescribed by Code Sections 414(u)(2)(B) and 414(u)(7) (“Qualified Military Service”). The manner in which an Eligible Employee may elect to make up deferrals pursuant to this subsection (a) shall be prescribed by the Administrative & Investment Committee.
(b)     Make Up of Employer Matching Contributions . An Eligible Employee who makes Make Up Deferrals as described in subsection (a) shall be entitled to an allocation of matching contributions (“Make Up Matching Contributions”) in an amount

 
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equal to the amount of Employer Matching Contributions which would have been allocated to the Account of such Eligible Employee under the Plan if such Make Up Deferrals had been made in the form of Pay Deferral Contributions during the period of such Employee’s qualified military service (as determined pursuant to Code Section 414(u)). The amounts necessary to make such allocation of Make Up Matching Contributions shall be derived from Forfeitures not yet applied towards Employer Matching Contributions for the Plan Year in which the Make Up Deferrals are made, and if such Forfeitures are not sufficient for this purpose, then the Eligible Employee’s Employer shall make a special contribution which shall be utilized solely for purposes of such allocation.
(c)     Profit Sharing Contributions . Such Employee shall be entitled to share in allocations of Profit Sharing Contributions with respect to such period of Qualified Military Service as an Eligible Employee. Such Employee shall be deemed to have earned “Compensation” from his or her Employer during such period of Qualified Military Service for this purpose in the amount prescribed by sections 414(u)(2)(B) and 414(u)(7) of the Code.
(d)     Inapplicability of Limitations . Any contributions made by an Eligible Employee or an Employer pursuant to this Section on account of a period of qualified military service in a prior Plan Year shall not be subject to the limitations prescribed by Sections 4.3, 5.3 and 5.4 of the Plan (relating to Sections 402(g), 404 and 415 of the Code) for the Plan Year in which such contributions are made. The Plan shall not be treated as failing to satisfy the nondiscrimination rules of Section 5.5 of the Plan (relating to Sections 401(k)(3) and 401(m) of the Code) for any Plan Year solely on account of any make up contributions made by an Eligible Employee or an Employer pursuant to this Section.
(e)    Individuals Receiving Differential Wage Payments While on Qualified Military Service. Effective January 1, 2009, an individual performing qualified military service who is receiving a differential wage payment, as defined in Code Section 3401(h)(2), from the Employer is deemed to be an Employee. However for purposes of the limitations on in-service withdrawals as described in Article VIII, such individual is treated as having incurred a Termination of Employment during any period such individual is performing services in the uniformed services described in Code Section 3401(h)(2)(A). If such individual elects to receive a distribution because of such deemed Termination of Employment, the individual shall be precluded from making any further Pay Deferral Contributions and from having further Employer Matching Contributions made on his behalf under the Plan or any other plan of deferred compensation, as described in Section 8.1(e)(v) of the Plan.

 
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ARTICLE IV

CONTRIBUTIONS
4.1     Contributions . Each Plan Year each Employer shall contribute to the Trust the following amounts:
(a)    Pay Deferral Contributions made in accordance with Section 5.1 for such Plan Year by its Employees who are Participants.
(b)    Matching Contributions in an amount equal to (i) 100% of the aggregate amount of each such Participant’s Pay Deferral Contributions (not including Catch Up Contributions) made in accordance with Section 5.1 for such Plan Year, up to the first 3% of such Participant’s annual Compensation and (ii) 50% of the aggregate amount of each such Participant’s Pay Deferral Contributions (not including Catch Up Contributions) made in accordance with Section 5.1 for such Plan Year on the next 2% of such Participant’s annual Compensation.
(c)    In the case of each Participant who is an hourly manufacturing employee, Discretionary Profit Sharing Contributions, paid quarterly, in an amount targeted at 3% (which may be more or less than 3%) of each such Participant’s annual Base Pay based on the achievement of certain performance measures to be established by the Administrative & Investment Committee in its discretion.
(d)    In the case of each Participant who is an hourly manufacturing employee and whose. employment was transferred as of March 31, 2000 (the “Distribution Date”) to an Employer from a Commonly Controlled Entity of Baxter, as of the Effective Date, fifty shares of Company Common Stock to be held in the Participant’s Stock Grant Account.
(e)    In the case of each Participant whose employment was transferred as of the Effective Date to an Employer from a Commonly Controlled Entity of Baxter and who is a salaried non-exempt or hourly manufacturing employee on the last day of the applicable Plan Year (as listed in Schedule A hereto), the following Transition Contributions:
(i)    Each Participant with 75 or more “points” (as determined under the terms of the Baxter International Inc. and Subsidiaries Pension Plan (the “Baxter Pension Plan”)) as of the Effective Date will receive an annual Transition Contribution equal to five percent of the Participant’s Base Pay.
(ii)    Each Participant with 70-74 “points” (as determined under the terms of the Baxter Pension Plan) as of the Effective Date will receive an annual Transition Contribution equal to three percent of the Participant’s Base Pay.
(iii)    Each Participant with 65-69 “points” (as determined under the terms of the Baxter Pension Plan) as of the Effective Date will receive an annual Transition Contribution equal to two and one half percent of the Participant’s Base Pay.

 
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(iv)    Each Participant with 60-64 “points” and at least 10 years of “benefit service” (as determined under the terms of the Baxter Pension Plan) as of the Effective Date will receive an annual Transition Contributions equal to one percent of the Participant’s Base Pay.
(v)    Each Participant with 55-59 “points” and at least 10 years of “benefit service” (as determined under the terms of the Baxter Pension Plan) as of the Effective Date will receive an annual Transition Contribution equal to one half of one percent of the Participant’s Base Pay.
Such annual Transition Contributions shall continue until the earlier of (1) the date on which the Participant terminates employment or (2) the first day of the Plan Year following the Plan Year during which such Participant attains age 65.    
Each Employer may also make contributions in accordance with Sections 3.5, and 7.12(b). The Employers may make such contributions annually or more frequently. Such contributions may be credited ratably as of each Accounting Date as provided in Section 6.9 whether or not such contributions are actually made ratably during the Plan Year..
Pay Deferral Contributions shall be paid by an Employer to the Trust no later than the 15th business day of the month following the month in which such contributions would have been payable to each Participant in cash but for the Participant’s election to participate herein (or such other time prescribed by law). Matching Contributions shall be determined and paid by an Employer to the Trust no later than the filing date for the Employer’s federal income tax return 1-or such Plan Year, including extensions. Notwithstanding the foregoing, Profit Sharing Contributions made pursuant to paragraph (c) above shall be made as quarterly cash contributions which shall be invested according to the Participant’s investment elections. If the Participant has made no investment elections, then the contributions shall be used to purchase units of the Company Common Stock Fund in each such Participant’s Account. Transition Contributions made pursuant to paragraph (e) above shall be made annually as cash contributions which shall be invested according to the Participant’s investment elections. If the Participant has made no investment elections, then the contributions shall be used to purchase units of the Company Common Stock Fund in each such Participant’s Account. Shares of Company Common Stock contributed pursuant to paragraph (d) above are not subject to reinvestment. In no event shall the Employer contributions for any Plan Year exceed the amount deductible by the Employer under Section 404 of the Code for the taxable year during which such Plan Year ends.
4.2     Certification of Employer Contributions . An Employer may in its discretion obtain a certification of the correctness of any calculations relating to its contributions under the Plan. A certificate of an independent accountant prepared for this purpose shall conclusively determine such issue.
4.3     Contribution Limitations. The following contribution limitations under the Code shall be applied with respect to a limitation year which coincides with the Plan Year. 

 
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The Annual Addition (as defined in Section 4.4) allocated to any Participant’s Accounts under the Plan and under any other defined contribution plan maintained by his Employer or a Commonly Controlled Entity of his Employer (“Related Defined Contribution Plans”), shall not exceed the lesser of (a) $30,000 in the initial Plan Year (as adjusted for increases in the cost of living under section 415 of the Code or regulations thereunder) or (b) 25% of the Participant’s total Compensation (effective January 1, 2002, 100% of the Participant’s Compensation within the meaning of Section 415(c)(3) of the Code) paid during the Plan Year by his Employer or a Commonly Controlled Entity of his Employer.  Effective January 1, 2002, the Compensation limit referred to in clause (b) above shall not apply to any contributions for medical benefits after separation from service (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition. Annual Addition shall also not include restoration payments that are allocated to Participant’s Account and catch-up contributions, as defined in Code Section 414(v).  In applying the preceding limitation, the Annual Addition to a Participant’s accounts in any Related Defined Contribution Plans constituting money purchase pension plans and the Annual Addition to a Participant’s accounts under any other Related Defined Contribution Plans (other than money purchase pension plans) shall be limited before the Annual Addition to his accounts are limited, to the extent such action is not inconsistent with such other plans.  Except as provided in Section 5.1 in the event any Employer contributions cannot be credited to a Participant’s Accounts because of the limitations of this Section, excess amounts shall be corrected in accordance with the procedures described in IRS guidance under the Employee Plans Compliance Resolution System (i.e. Rev. Proc. 2008-50) or any applicable subsequent or replacement guidance . To the extent required by regulations under Section 415 of the Code, the Employer contributions allocated to any Participant shall be limited by this Section to take into consideration any allocations made for the benefit of such participant in prior Plan Years in excess of the Annual Addition limitations then in effect or any applicable cumulative limitations.  In applying the rules of this Section, the Administrative & Investment Committee shall make appropriate adjustments to reflect the proper application of Section 415 of the Code with respect to Plan Years of less than 12 months.
4.4     Annual Addition . The Annual Addition for each Participant for each Plan Year means the sum of the following:
(a)    Employer contributions credited to the Participant’s Accounts under Section 4.1 and employer contributions credited to the Participant’s accounts under any Related Defined Contribution Plans (as defined in Section 4.3);
(b)    Remainders and forfeitures credited to the Participant’s Accounts and to his accounts under any Related Defined Contribution Plans;
(c)    After-tax contributions made by the Participant to any Related Defined Contribution Plan; and
(d)    Amounts credited for the benefit of a Key Employee (as defined in Section 12.2(g)) to a separate retiree health or life account maintained by an Employer or

 
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a Commonly Controlled Entity of that Employer or maintained under a Funded Welfare Plan to which the Employer or Commonly Controlled Entity contributes. A “Funded Welfare Plan” means a trust fund established under Section 501(c)(9) of the Code or any other trust, corporation, arrangement or employer account which is treated as a welfare benefit fund for purposes of Section 419(e) of the Code. Effective January 1, 2008, the determination of amounts included or excluded as Annual Additions under the Plan shall be made in accordance with the final Treasury Regulations under Section 415 of the Code dated April 5, 2007.
ARTICLE V

PARTICIPANT CONTRIBUTIONS/CONTRIBUTION LIMITATIONS
5.1     Pay Deferral Contributions . An Eligible Employee may elect in the manner described below to have his Employer reduce his Compensation via payroll deduction in an amount not less than 1% nor more than 25% (prior to January 1,  2003, the maximum percentage was 15%) of his Compensation, in whole multiples of 1%. Such salary reductions shall constitute Pay Deferral Contributions and shall be contributed to the Trust by the Employer in accordance with Section 4.1. Pay Deferral Contributions shall include both before-tax and Roth Elective Deferrals unless otherwise stated. A Participant’s salary reduction election shall be made electronically via telephone or in any such manner prescribed by the Administrative & Investment Committee. Salary reduction elections will become effective as of the first pay period beginning after such elections are properly made. No salary reduction election will become effective unless the Participant properly selects the Plan investment fund or funds to which his Pay Deferral Contributions are to be allocated (in the manner described in Section 6.4). Salary reduction elections shall continue in effect (with automatic adjustments for any change in Compensation) until the Participant alters such election in accordance with Section 5.2 or until the Participant ceases to be an Eligible Employee.
Notwithstanding the percentage limit or dollar limits described in Section 5.3, a Participant who is not less than age 50 by the end of a Plan Year beginning on or after January 1, 2003 may contribute an additional amount of Pay Deferral Contributions (referred to as “Catch Up Contributions”), up to the limit described in Code Section 414(v) as in effect for the Plan Year in which the Catch Up Contribution is made, consistent with procedures established by the Committee. For Catch Up Contribution purposes the salary reduction election percentages shall be made in whole multiples of 1% limited by the amount required to make the required employment tax and other benefit withholding. The Pay Deferral Contribution percentage attributable to Catch Up Contributions will not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) and 415. The Plan will not be treated as failing to satisfy the provisions of the Plan that implement the requirements of Code Sections 401(k)(3), 401(k)(11), 401(k)(12), 410(b) or 416, as applicable, because of authorizing such Catch Up Contributions.
5.2     Change in Rate of Pay Deferral Contributions/Reemployment . Within the limitations of Section 5.1, a Participant may elect to change the rate of his Pay Deferral

 
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Contributions effective once per payroll period. Any such election shall be made electronically via telephone or in any such manner prescribed by the Administrative & Investment Committee. Election changes shall become effective as of the pay period beginning after the election is properly made. A Participant may also elect to suspend or resume making Pay Deferral Contributions in the same manner. If a former Participant is reemployed within one month of his Termination of Employment, his Pay Deferral Contributions will recommence in accordance with the most recent elections received from such Participant prior to such Termination of Employment. Otherwise, the Participant must make new elections in accordance with Section 5.1. Notwithstanding the foregoing, any Participant who elects to contribute a portion of his salary to a non-qualified deferred compensation arrangement maintained by his Employer or a Commonly Controlled Entity of such Employer may not change the rate of his Pay Deferral Contributions, except that he may do so at the end of each Plan Year, to be effective as of the beginning of the following Plan Year.
5.3     Annual Limitations on Pay Deferral Contributions . A Participant’s annual Pay Deferral Contributions (along with deferrals under any other salary reduction arrangement under Code Section 401(k)) shall be limited to the amount specified in Code Section 402(g) (which in 2000 is $10,500, and shall be adjusted from time to time by the Internal Revenue Service under Code Section 402(g)(i)). Upon reaching this limit in any Plan Year, a Participant’s Pay Deferral Contributions shall cease for the remainder of such Plan Year. Alternatively, if a Participant’s Pay Deferral Contributions are not ceased and exceed this limit for any Plan Year, such Pay Deferral Contributions and the attributable earnings shall (effective January 1, 2008, gap period income shall not be distributed) be returned to the Participant no later than April 15 following the close of such Plan Year.
If Pay Deferrals exceed the limit for the Plan Year as a result of a Participant’s combined before-tax and/or Roth Contributions to the Plan and any other plan or arrangement described in Code Section 401(k), 408(k), or 403(b) that is sponsored by an entity unrelated to the Employer, any amount relating to the excess Pay Deferrals made under the Plan (as adjusted for earnings or losses thereon) shall be distributed to such Participant within the statutory time period, so long as the Employer receives a written request for the distribution by no later than March 1 of the calendar year following the calendar year in which such excess Pay Deferral was made. If any Roth Contributions are made to the Plan, the Participant must identify the extent to which the excess deferrals are comprised of Roth Contributions.
5.4     General Limitations on Pay Deferral Contributions . For purposes of applying the limitations of Sections 404 and 415 of the Code, Employer contributions (including Pay Deferral Contributions) will be reduced to the extent necessary (with Pay Deferral Contributions reduced First) to satisfy the following requirements:
(a)    With respect to all Participants, the sum of all Pay Deferral Contributions and Matching Contributions for any Plan Year shall not exceed the maximum deductible amount for Employer contributions for such year under the Code; and

 
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(b)    With respect to each Participant, the sum of all Pay Deferral Contributions and Matching Contributions for any Plan Year shall not exceed the maximum amount which can be credited for such year under Section 4.3.
Any reduction of Pay Deferral Contributions required under this Section 5.4 shall be made in accordance with the procedures described in Section 5.5 below. In applying the limitations of this Section 5.4, the Administrative & Investment Committee may consider any other Employer contributions and cash or deferred or salary reduction contributions permitted to be reflected for such purposes under applicable federal regulations.
5.5     Nondiscrimination Rules Applicable to Pay Deferral and Matching Contributions .
(a)     Actual Deferral Percentage Test . For each Plan Year, at least one of the following nondiscrimination tests under Code Section 401(k)(3) shall be satisfied:
(i)    The HCE Actual Deferral Percentage shall not be more than 125% of the NHCE Actual Deferral Percentage; or
(ii)    The HCE Actual Deferral Percentage shall not be more than two percentage points higher than, nor more than 200% of, the NHCE Actual Deferral Percentage.
(b)     Matching Contribution Percentage Test . For each Plan Year, at least one of the following nondiscrimination tests under Code Section 401(m) shall be satisfied:
(i)    The HCE Matching Contribution Percentage shall not be more than 125% of the NHCE Matching Contribution Percentage; or
(ii)    The HCE Matching Contribution Percentage shall not be more than two percentage points higher than, nor more than 200% of, the NHCE Matching Contribution Percentage.
(c)     Remedial Actions to Satisfy Tests . If the nondiscrimination rules of subsection (a) or (b) would otherwise not be satisfied for a Plan Year, the Administrative & Investment Committee shall take such steps during the Plan Year as it deems necessary or appropriate to adjust the Pay Deferral Contributions for the remainder of the Plan Year on behalf of each Participant who is a Highly Compensated Employee in order for one of the tests to be satisfied. If after the end of the Plan Year, it is determined that such nondiscrimination rules would not be satisfied for such Plan Year, the Administrative & Investment Committee shall take all or any of the actions described below.
(i)    Actual Deferral Percentage Tests.
(A)    Return of Excess Contributions.

 
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If one of the nondiscrimination tests set forth in subsection (a) would otherwise not be satisfied for a Plan Year, the Administrative & Investment Committee shall calculate a total amount by which Pay Deferral Contributions must be reduced in order to satisfy such tests, in the manner prescribed by Section 401(k)(8)(B) of the Code (the “excess contributions amount”). The amount to be returned to each Participant who is a Highly Compensated Employee shall be determined by first reducing the Pay Deferral Contributions of each Participant whose actual dollar amount of Pay Deferral Contributions for such Plan Year is highest until the such reduced dollar amount equals the next highest actual dollar amount of Pay Deferral Contributions made for such Plan Year on behalf of any Highly Compensated Employee, or until the total reduction equals the excess contributions amount. If further reductions are necessary, then such Pay Deferral Contributions on behalf of each Participant who is a Highly Compensated Employee and whose actual dollar amount of Pay Deferral Contributions made for such Plan Year is the highest (determined after the reduction described in the preceding sentence) shall be reduced in accordance with the preceding sentence. Such reductions shall continue to be made to the extent necessary so that the total reduction equals the excess contributions amount.
The Company shall distribute to each such Participant (1) the amount of the reductions prescribed by the preceding paragraph plus any income and minus any loss allocable thereto and (ii) any corresponding Matching Contributions related thereto plus any income and minus any loss allocable thereto in which the Participant would be vested if he incurred a Termination of Employment on the last day of such Plan Year (or earlier if such Participant actually incurred a Termination of Employment at any earlier date), and any corresponding Matching Contributions in which the Participant would not be vested plus any income and minus any loss allocable thereto shall be forfeited. The amount of a Participant’s corresponding Matching Contributions considered to be vested for this purpose shall be determined as if all corresponding Matching Contributions to be distributed or forfeited are the only amounts credited to the Participant’s Employer Matching Account upon the hypothetical or actual Termination of Employment described in the preceding sentence.
The amounts to be returned pursuant to this subparagraph shall be distributed no later than the date which is 2 1/2 months after the end of the Plan Year (or if distribution by such date is administratively impracticable, no later than the last day of the subsequent Plan Year) for which such adjustment is made. The

 
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amount of Pay Deferral Contributions distributed to a Participant shall be reduced by any Pay Deferral Contributions previously distributed to such Participant pursuant to Section 5.3 in order to comply with the limitations of Section 402(g) of the Code. The amount of any income or loss allocable to any such excess deferrals to be so paid including income or loss attributable to the gap period, as described in the Treasury Regulations shall be determined pursuant to the applicable Treasury Regulations. The unadjusted amount of any reductions so distributed shall be treated as an Annual Addition for purposes of Section 4.3.
(B)    Qualified Nonelective Contributions.
If it appears that there will be excess contributions as of the end of any Plan Year, the Administrative and Investment Committee shall inform the Employer. The Employer, in its discretion, may make a supplemental contribution which shall be allocated to the Accounts of active Participants who are not Highly Compensated Employees in a uniform and nondiscriminatory manner in order to eliminate excess contributions. Such supplemental contribution by the Employer must be made, if at all, within the twelve months after the close of the Plan Year in which the contribution is to be allocated. Such supplemental contribution shall be treated for all purposes as a before-tax and/or Roth Contribution (in a ratio substantially identical to the Participant’s Pay Deferral election) and shall satisfy the requirements of Treasury Regulation Section 1.401(k)-2(a)(6). The allocation of a portion of any such supplemental contribution to the Account of an affected Participant is subject to the Code Section 415 limits. If the Employer chooses to make a supplemental contribution in an amount less than that required to completely eliminate all excess contributions, such supplemental contributions shall be taken into account before application of the correction method hereinafter described.
Supplemental contributions will be treated as before-tax and/or Roth contributions and will be fully vested when contributed to the Plan and subject to the same distribution limitations applicable to before-tax and/or Roth Contributions as set forth in Article VII. Supplemental contributions which may be treated as before-tax and/or Roth Contributions must satisfy the requirements set forth in this paragraph without regard to whether they are actually taken into account as before-tax and/or Roth Contributions.”
(C)    Qualified Matching Contributions.

 
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In addition to or in lieu of the actions described in subparagraphs (A) or (B) above, to the extent permitted by law, any portion of that Plan Year’s Matching Contributions that may be treated as a “qualified matching contribution” under Code Section 401(k).
(ii)    Matching Contribution Percentage Tests.
(A)    Return of Excess Aggregate Contributions.
If one of the nondiscrimination tests set forth in subsection (b) would otherwise not be satisfied for a Plan Year, the Administrative & Investment Committee shall calculate a total amount by which Matching Contributions must be reduced in order to satisfy such tests, in the manner prescribed by Section 401(m)(6)(B) of the Code (the “excess aggregate contributions amount”). The amount of reduction applicable to each Participant who is a Highly Compensated Employee shall be determined by first reducing the Matching Contributions of each Participant whose actual dollar amount of Matching Contributions for such Plan Year is highest until the such reduced dollar amount equals the next highest actual dollar amount of Matching Contributions made for such Plan Year on behalf of any Highly Compensated Employee, or until the total reduction equals the excess aggregate contributions amount. If further reductions are necessary, then such Matching Contributions on behalf of each Participant who is a Highly Compensated Employee and whose actual dollar amount of Matching Contributions made for such Plan Year is the highest (determined after the reduction described in the preceding sentence) shall be reduced in accordance with the preceding sentence. Such reductions shall continue to be made to the extent necessary so that the total reduction equals the excess aggregate contributions amount.
The Company shall distribute to each such Participant the portion of the reductions applicable to the Matching Contributions related thereto plus any income and minus any loss allocable thereto in which the Participant would be vested if he incurred a Termination of Employment on the last day of such Plan Year (or earlier if such Participant actually incurred a Termination of Employment at any earlier date), and any Matching Contributions in which the Participant would not be vested plus any income and minus any loss allocable thereto shall be forfeited. The amount of a Participant’s Matching Contributions considered to be vested for this purpose shall be determined as if all corresponding Matching Contributions to be distributed or forfeited are the only amounts credited to the Participant’s Employer Matching Account upon the hypothetical or

 
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actual Termination of Employment described in the preceding sentence.
The amounts to be returned pursuant to this subparagraph shall be distributed no later than the date which is 2 1/2 months after the end of the Plan Year (or if distribution by such date is administratively impracticable, no later than the last day of the subsequent Plan Year) for which such adjustment is made. The amount of any income or loss allocable to any reductions to be distributed or forfeited shall be determined in accordance with applicable U.S. Treasury Regulations. The unadjusted amount of any reductions so distributed shall be treated as an Annual Addition for purposes of Section 4.3. The amount of any income or loss allocable to any such excess deferrals to be so paid including income or loss attributable to the gap period, as described in the Treasury Regulations shall be determined pursuant to the applicable Treasury Regulations.
(B)    Additional Matching Contributions.
In addition to or in lieu of the actions described in subparagraph (A) above, any Employer may make additional Matching Contributions to the Plan to the extent necessary to satisfy one of the tests set forth in subsection (b). The Administrative & Investment Committee shall designate the Participants for whom such contributions are made. The additional contributions shall be credited to the Employer Matching Account of each Participant for whom any such contribution is made.
(iii)    Administrative Discretion.
If after making the adjustments required by paragraphs (1) and (2) of this subsection for a Plan Year the Administrative & Investment Committee determines that the sum of the HCE ADP and the HCE MCP exceeds the aggregate limit for such Plan Year, the Administrative & Investment Committee shall, no later than the last day of the subsequent Plan Year, reduce the Pay Deferral Contributions made for such Plan Year on behalf of each Participant who is a Highly Compensated Employee and any corresponding Matching Contributions to the extent necessary to eliminate such excess. Such reduction shall be effected by reducing the Pay Deferral Contributions made on behalf of each Participant who is a Highly Compensated Employee in the manner described in paragraph (1) of this subsection.
5.6     Rollover Contributions . On such forms and in such manner as prescribed by the Administrative & Investment Committee, the Plan will accept a direct rollover of an eligible rollover distribution from (i) a qualified plan described in Section 401(a) or 403(a) of the Code, excluding after-tax employee contributions, (ii) an annuity contract described in Section 403(b) of the Code, excluding after-tax employee contributions, or (iii) an eligible plan under Section 457 of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a stock or political subdivision of a state. The

 
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Plan will accept a Participant contribution of a Participant rollover contribution of the portion of a distribution from an individual retirement account or annuity described in Code Section 408(a) or 408(b) that is eligible to be rolled over and would otherwise be includible in gross income.
The Trustee may accept rollover amounts on behalf of a Participant only to the extent such amounts constitute “eligible rollover distributions” (as defined in Code Section 402(c)(4)). A Participant who has ceased to be an Employee may only elect to roll over to the Plan an amount credited on his behalf to the Baxter International Inc. and Subsidiaries Pension Plan and only to the extent such amount constitutes an “eligible rollover distribution” (as provided above). “Rollover Contributions” will be credited to a Rollover Account maintained for the Participant pursuant to Section 6.1(h) as soon as administratively practicable after such contributions are remitted to the Administrative & Investment Committee. No rollover election will become effective unless the Participant properly selects the Plan investment fund or funds to which the Rollover Contribution is to be allocated (in the manner described in Section 6.4). A Participant who has previously made an investment election applicable to his Pay Deferral Contributions must apply the same election to his Rollover Contributions and any election to the contrary shall be disregarded.
Effective as of October, 1 2011, a Participant may make a Roth rollover contribution to the Plan (a “Roth Rollover Contribution”). A Roth Rollover Contribution is a direct rollover from another Roth elective deferral account under an applicable retirement plan described in Code Section 402A(e)(1), and only to the extent that the rollover is permitted under Code Section 402(c). The Administrative & Investment Committee’s discretion with respect to Rollover Contributions (as described in this Section 5.6) applies to Roth Rollover Contributions, unless otherwise specified under the Code.
ARTICLE VI

INVESTMENTS AND PLAN ACCOUNTING
6.1     Participant Account Balance . The Administrative & Investment Committee shall establish and maintain the following separate accounts with respect to Participants:
(a)     Before-Tax Account . A “Before-Tax Account” shall be maintained for each Participant. This account shall represent the amount of such Participant’s Pay Deferral Contributions and the expenses, distributions, earnings and losses attributable to such account.
(b)     Employer Matching Account . An “Employer Matching Account” shall be maintained for each Participant. This account shall represent the portion of the Employer Matching Contributions allocated to such Participant under the Plan and the expenses, distributions, earnings and losses attributable to such account.

 
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(c)     Prior Employer Matching Account . A “Prior Employer Matching Account” shall be maintained for each Participant who received a direct transfer of matching account assets from the Prior Plan to the Plan. The Participant shall be 100% vested at all times in such account.
(d)     Profit Sharing Account . A “Profit Sharing Account” shall be maintained for each Participant (i) on whose behalf a profit sharing account was maintained under the Prior Plan or (ii) who receives a Profit Sharing Contribution as described in Section 4.1(c). Such Profit Sharing Account shall reflect the expenses, distributions, earnings and losses attributable to such account.
(e)     Stock Grant Account . A “Stock Grant Account” shall be maintained for each Participant who receives a contribution of Company Common Stock as described in Section 4.1(d). Such Stock Grant Account shall reflect the expenses, distributions, earnings and losses attributable to such account.
(f)     Transition Contribution Account . A “Transition Contribution Account” shall be maintained for each Participant who receives Transition Contributions as described in Section 4.1(e). Such account shall reflect the expenses, distributions, earnings and losses attributable to such account.
(g)     After-Tax Account . An “After-Tax Account” shall be maintained for each Participant on whose behalf an after-tax account was maintained under the Prior Plan. Such After-Tax Account shall reflect the expenses, distributions, earnings and losses attributable to such account. To the extent applicable, separate subaccounts shall be established to account for any after-tax contributions made under a predecessor plan prior to 1987, and after-tax contributions made under a predecessor plan after 1986.
(h)     Rollover Account . A “Rollover Account” shall be maintained for each Participant whose benefits under another plan described in Section 401 (a) of the Code, are transferred to the Trust Fund in accordance with Section 5.6 for the subsequent payment of such amounts in accordance with this Plan. This account shall reflect the expenses, distributions, earnings and losses attributable to such account.
The Accounts represent the Participants’ interests in the Plan and Trust Fund and are intended as bookkeeping account records to assist the Administrative & Investment Committee in the administration of the Plan.
(i)     Roth Account . A Roth Account/Roth Contribution Account shall be maintained for each Participant. This account shall represent the amount of such Participant’s Roth Contributions and the expenses, distributions, earnings and losses attributable to such account.
(j)     Roth Rollover Account . A Roth Rollover Account shall be maintained for each Participant whose benefits under another plan described in Section 401 (a) of the Code, are transferred to the Trust Fund in accordance with Section 5.6 for the

 
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subsequent payment of such amounts in accordance with this Plan. This account shall reflect the expenses, distributions, earnings and losses attributable to such account.
6.2     Investment of Accounts . The Trustee, the Investment Managers and any insurance institutions responsible for investment of the Trust Fund are permitted to commingle the assets of the Trust Fund for purposes of investment with the assets of other plans or trusts which are intended to qualify for plan qualification and federal tax exemption under Sections 401 (a) and 501 (a) of the Code, respectively. Any documents which are required to be incorporated in the Plan and the Trust Agreement to permit such commingled investments are hereby incorporated. Except to the extent required by Sections 6.3 and 6.4, segregated investment of Plan and Trust Fund assets shall not be required with respect to any one or more Participants. Each of the Accounts invested in a particular investment fund shall represent an undivided interest in such investment fund which corresponds to the balance of such Account.
6.3     Investment Funds . From time to time the Administrative & Investment Committee may cause the Trustee, an Investment Manager or an insurance institution to establish one or more investment funds for the investment and reinvestment of the Trust Fund. Although the Administrative & Investment Committee may arrange with the Trustee, Investment Managers and insurance institutions for the establishment of investment funds, the continued availability of these funds cannot be assured nor is it possible to assure that the arrangements or the investment funds managed by a particular Investment Manager, by the Trustee or by an insurance institution will continue to be available on the same or similar terms. Participants may invest the total amount of their Accounts (as provided in Section 6.4) among the investment funds made available by the Administrative & Investment Committee from time to time for such purpose. Such funds shall allow Participants to select from a range of alternatives that offer different types of investments and different risk and return characteristics.
If the Administrative & Investment Committee determines that Participants shall exercise direction and control over the investment of their accounts in a manner intended to insulate Plan fiduciaries from liability for investments under Section 404(c) of ERISA, the investment funds established by the Administrative & Investment Committee pursuant to this Section 6.3 shall afford Participants with a broad range of investment alternatives whereby each Participant has a reasonable opportunity to:
(a)    Affect materially the potential return on amounts in his Accounts and the degree of risk to which such amounts are subject;
(b)    Choose from at least three investment alternatives:
(i)    each of which is diversified and each of which has materially different risk and return characteristics;
(ii)    which, to the extent normally appropriate for Participants, allow them to achieve portfolios with respect to the aggregate of their Accounts which have risk and return characteristics at any point within the range of all alternatives; and

 
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(iii)    each of which when combined with investments in the other alternatives tends to minimize the overall risk of each Participant’s portfolio with respect to the aggregate of his Accounts through diversification.
(c)    Diversify the investments of his Accounts so as to minimize the risk of large losses.
6.4     Investment Elections . Each Participant, in accordance with rules promulgated under the Plan shall direct the investment of his Accounts described in Section 6.1 in one or more of the investment funds available under the Plan. Notwithstanding anything herein to the contrary, a Participant may not exercise any investment discretion with respect to the shares of Company Common Stock contributed pursuant to Section 4.1 (d) or the earnings thereon; provided, however, that a Participant may direct the sale (but not the repurchase) of such Company Common Stock subject to the limitations contained in the following subsections. The Administrative and Investment Committee has the authority to implement trading restrictions on all the investment options available under the Plan. With respect to the investment funds referred to in Section 6.3 above and to the shares of Company Common Stock contributed pursuant to Section 4.1(d) (and earnings thereon), such investment elections shall be subject to the following limitations:
(a)     Initial Investment Election . At the same time and in the same manner that a Participant makes his initial salary reduction election (in accordance with the requirements of Section 5.2), or if earlier, the same time that an Eligible Employee makes a rollover contribution to the Plan (in accordance with Section 5.6), the Participant must direct the Trustee (electronically via telephone or in any such manner prescribed by the Administrative & Investment Committee) as to the investment funds to which the amounts credited to his Accounts shall be invested. Participants shall invest the total amount of the Accounts in any combination (in 1 % increments) of the available investment funds. All investment elections shall continue in force until properly changed in accordance with subsection (b) below.
(b)     Applicability of Investment Elections . Both with respect to initial investment elections and changes in investment elections, unless the Administrative & Investment Committee prescribes otherwise, one election shall apply to the balance, as of the effective date of the election, in the Participant’s Employer Matching Account, Profit Sharing Account, Before-Tax Account, Roth Account, After-Tax Account, Prior Employer Matching Account, Transition Contribution Account, Roth Rollover Account, and Rollover Account, and additions thereto; provided that, with respect to an initial election by a Participant who makes a rollover contribution prior to making Pay Deferral Contributions under the Plan, such election shall apply to the balance, as of the effective date of the election, in the Participant’s Rollover Account and/or Roth Rollover Account.
(c)     Special Limitations and Procedures Applicable to the Company Common Stock Fund . The following limitations and procedures shall be applicable to investment elections which specify investment of a portion of the Participant’s Accounts in the Company Common Stock Fund:

 
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(i)    The aggregate amount of the assets of the Plan which may be invested in the Company Common Stock Fund shall be limited by the Administrative & Investment Committee to the extent the Administrative & Investment Committee deems necessary to prevent the Plan from holding 5% or more of then outstanding Common Stock of the Company or such other amount as shall be necessary to assure that the Plan does not become subject to the provisions of Section 13(d) of the Securities Exchange Act of 1934.
(ii)     Voting of Common Stock of the Company . Pursuant to the terms set forth in the Trust Agreement, each Participant having an interest in the Company Common Stock Fund shall have the right to direct the manner in which the Trustee shall vote the Company Common Stock credited to the Participant’s Accounts. Before each annual or special meeting of shareholders of the Company, there will be sent to each applicable Participant a copy of the proxy solicitation material for such meeting, together with a form requesting instructions to the Trustee on how to vote the Company Common Stock allocated to such Participant’s Accounts. Instructions will be mailed directly to the Trustee to preserve confidentiality. Upon receipt of such instructions, the Trustee will vote such shares as instructed. The Trustee will vote Company Common Stock allocated to Participants’ Accounts for which the Trustee receives no valid voting instructions and Company Common Stock not credited to Participant’s Accounts, if any, held in the Trust Fund in a manner consistent with the provisions of the Trust Agreement and applicable law. The Administrative & Investment Committee may, but is not required to, direct the Trustee with respect to the voting of Company Common Stock described in the previous sentence, and the Trustee will follow such directions except where to do so would be a breach of the Trustee’s duties under the Trust Agreement or applicable law. The Trustee may not divulge information with respect to any Participant’s directions regarding voting of Company Common Stock allocated to his Accounts. A Participant is deemed to be a named fiduciary of the Plan with regard to all instructions the Participant provides to the Trustee as to the manner to which it shall vote the Company Common Stock credited to such Participant’s account.
(iii)     Offers for Company Common Stock . Pursuant to the terms set forth in the Trust Agreement, in the event that the stockholders of the Company have received an offer, including a tender offer, for the purchase or exchange of their shares of Company Common Stock, the following provisions shall apply:
(A)    Each Participant having an interest in the Company Common Stock Fund shall have the right to direct the Trustee concerning the sale or tendering of the number of shares of Company Common Stock credited to the Participant’s Accounts. A Participant is deemed to be a named fiduciary of the Plan with regard to all instructions the Participant provides to the Trustee as to the manner to which it shall vote the Company Common Stock credited to such Participant’s account.
(B)    The Trustee will use its best efforts to communicate or cause to be communicated to all Participants the provisions of the Plan and Trust Agreement relating to such offer, all communications directed generally to the owners of the securities to whom the offer is made or available, and any communications that the

 
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Trustee may receive from persons making the offer or any other interested party (including the Company) relating to the offer. The Company and the Administrative & Investment Committee will provide the Trustee with such information and assistance as the Trustee may reasonably request in connection with these communications to Participants. Neither the Company nor the Trustee may interfere in any manner with any Participant’s investment decision with respect to such an offer.
(C)    If the offer is for all Company Common Stock held by the Trustee in the Trust Fund, then the Trustee will:
1.    Accept or reject the offer with respect to Company Common Stock allocated to each Participant’s Accounts according to that Participant’s investment decision, except where to do so would be a breach of the Trustee’s duties under the Trust Agreement or applicable law; and
2.    Accept or reject the offer with respect to Company Common Stock allocated to Participants’ Accounts for which no valid investment decision was received by the Trustee and with respect to unallocated Company Common Stock held in the Trust Fund in the Trustee’s sole discretion.
The Trustee may not divulge information with respect to any Participant’s investment decision regarding the offer.
(D)    If the offer is for less than all the Company Common Stock held by the Trustee in the Trust Fund, all provisions of paragraphs (A) through (C) will be applied to that offer, except that each Participant will have the opportunity to make an investment decision for a pro rata portion of the Company Common Stock allocated to his Accounts and the Trustee, after effecting those investment decisions, will make its acceptance or rejection of the offer with respect to a pro rata portion of the Company Common Stock allocated to Accounts for which it received no valid investment instructions or which is held unallocated in the Trust Fund, so that the offer has been accepted or rejected with respect to the full amount of Company Common Stock held by the Trustee in the Trust Fund which was subject to the offer.
(E)    Notwithstanding the provisions of paragraphs (C) and (D) above, the Administrative & Investment Committee may, but is not required to, direct the Trustee with respect to the acceptance or rejection of any offer described in paragraph (C) or (D) with respect to Company Common Stock allocated to Participants’ Accounts for which no valid investment instructions are received by the Trustee and with respect to unallocated Company Common Stock held in the Trust Fund, and the Trustee shall accept or reject any such offer in accordance with any such directions from the Administrative & Investment Committee to the Trustee with respect to the offer, except where to do so would be a breach of the Trustee’s duties under the Trust Agreement or applicable law.
(F)    Following the Trustee’s sale or tender of shares pursuant to the terms of this subsection, each affected Participant’s interest in the Company

 
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Common Stock Fund shall be eliminated and the proceeds from the sale or tender of the shares credited to the Participant’s Accounts shall be subject to the Participant’s investment direction.
(iv)     Special Limitations and Procedures Applicable to the Baxter Common Stock Fund . The shareholder rights in the event of a tender offer described in subparagraph (d)(iii) shall also be applicable to Participants in the Baxter Common Stock Fund with respect to a pro rata portion of the unallocated shares of Baxter Common Stock in the Baxter Common Stock Fund determined as described above. For purposes of this paragraph, references to “Company” and “Company Common Stock” in paragraph (d) shall mean “Baxter” and “Baxter Common Stock,” respectively.
(v)     Company Common Stock Fund Trading Restrictions. Purchases and sales of an interest in the Company Common Stock Fund other than pursuant to a Participant’s periodic salary reduction investment election are subject to the limitations imposed by the Company’s insider trading policy. Those Participants who are deemed to be Section 16(b) officers may have additional restrictions on trading within the Company Common Stock Fund.
6.5     Information Provided Under ERISA Section 404(c) .
(a)     Participant’s Opportunities to Exercise Control . The Administrative & Investment Committee shall communicate its rules to Participants in a manner calculated to ensure that each Participant has a reasonable opportunity to direct the investment of his Accounts. In addition, if the Administrative & Investment Committee determines that Participants shall exercise direction and control over the investment of their Accounts in a manner intended to insulate Plan fiduciaries from liability for investments under Section 404(c) of ERISA, it shall provide Participants with:
(i)    A statement that the Plan is intended to constitute a plan described in Section 404(c) of ERISA and that the Plan’s fiduciaries may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by the Participant;
(ii)    A description of the investment funds under the Plan and a general description of the investment objectives and risk and return characteristics of each such fund, including information relating to the type and diversification of assets comprising the investment fund;
(iii)    The identity of each investment fund’s Investment Manager;
(iv)    An explanation of any specified limitations on transfers to or from a designated investment fund and any restrictions on the exercise of voting, tender and similar rights appurtenant to the Participant’s investment in the investment fund;

 
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(v)    A description of any transaction fees and expenses which affect the Participant’s Accounts in connection with purchases or sales of interests in the investment funds;
(vi)    A description of the procedures established to provide for the confidentiality of information relating to the purchase, holding and sale of Company Common Stock, and the exercise of voting, tender and similar rights by Participants through investment in the Company Common Stock Fund;
(vii)    In the case of an investment fund which is subject to the Securities Act of 1933, and in which the Participant has no assets invested immediately following or immediately prior to the Participant’s initial investment in that fund, a copy of the most recent prospectus provided to the Plan; and
(viii)    Any materials provided to the Plan relating to the exercise of voting, tender or similar rights which are incidental to the holding in the Account of a Participant of an ownership interest in the Company Common Stock Fund.
(b)     Additional Information Provided Upon Request . If the Administrative & Investment Committee determines that Participants shall exercise direction and control over the investment of their Accounts in a manner intended to insulate Plan fiduciaries from liability for investments under Section 404(c) of ERISA, it shall provide Participants, upon their request, with the following information:
(i)    A description of the annual operating expenses of each investment fund (e.g., investment management fees, administrative fees, transaction costs) which reduce the rate of return to Participants, and the aggregate amount of such expenses expressed as a percentage of average net assets of the fund;
(ii)    Copies of any prospectuses, financial statements and reports, and of any other materials relating to the investment funds, to the extent such information is provided to the Plan;
(iii)    A list of the assets comprising the portfolio of each investment fund and the value of each such asset; and
(iv)    Information concerning the value of shares or units in the investment funds, as well as the past and current investment performance of such funds, determined, net of expenses, on a reasonable and consistent basis.
6.6     Investment Fund Accounting . The undivided interest of each Participant’s Accounts in an investment fund shall be determined in accordance with the accounting procedures specified in the Trust Agreement, investment management agreement, insurance contract, custodian agreement or other document under which such investment fund is maintained (the “Investment Fund Document”). To the extent not inconsistent with such procedures, the following rules shall apply:

 
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(a)     Deposits . Amounts deposited in an investment fund shall be deposited by means of a transfer of such amounts to such investment fund to conform with the investment elections properly received in accordance with Section 6.4.
(b)     Transfers . Amounts required to be transferred from an investment fund to satisfy benefit payments and required transfers to effectuate investment elections in accordance with Section 6.4 shall be transferred from such investment funds as soon as practicable following receipt by the Trustee or Investment Manager of proper instructions to complete such transfers.
(c)     Allocation of Fund Earnings . Except as provided in the applicable Investment Fund Document, all amounts deposited in an investment fund shall be invested as soon as practicable following receipt of such deposit. Notwithstanding the primary purpose or investment policy of an investment fund, assets of any investment fund which are not invested in the primary investment vehicle authorized by the Investment Fund Document shall be invested in such short term instruments or funds as the Trustee or applicable Investment Manager or insurance institution shall determine pending investment in accordance with such Investment Fund Document.
(d)     Accounting for Purchases and Sales of Company Common Stock . Purchases and sales of Company Common Stock shall be made for the Company Common Stock Fund in accordance with the provisions of the Trust Agreement and in accordance with the following:
(i)    No commissions shall be paid in connection with purchases or sales of Company Common Stock from or to any disqualified person or party in interest (as defined for purposes of Section 4975(e)(2) of the Code or Section 3(14) of ERISA).
(ii)    Purchases of Company Common Stock other than purchases on the New York Stock Exchange (the “Exchange”) shall be at a price not greater than the last recorded sales price quoted for such shares on the Exchange on the last trading day on which there was a recorded sale of such shares immediately preceding the date of such purchases (the “Exchange Trading Price”).
(iii)    Sales of Company Common Stock other than sales on the Exchange shall be at a price not less than the Exchange Trading Price (as defined in subparagraph (ii) above).
(iv)    In-kind contributions of the Employers, including contributions of Company Common Stock, are valued at fair market value. For this purpose Company Common Stock shall be valued as of the date of such contribution at the then Exchange Trading Price (as defined in subparagraph (ii) above but determined as of the end of the date on which such contribution is made if such date is a trading day on the Exchange). If there are no sales of Company Common Stock on the date as of which the Exchange Trading Price is determined, then the fair market value of such common stock shall be the mean of the bid and asked prices for such date.

 
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(v)    If the Administrative & Investment Committee is unable to determine the Exchange Trading Price (as defined in subparagraph (ii) above) because sales prices on the Exchange are not so quoted, such quotes are not available to the Administrative & Investment Committee or for any other reason, then the Administrative & Investment Committee may utilize a composite index price or other price which is generally accepted for the establishment of fair market value in lieu of the Exchange Trading Price for purposes of the restrictions of subparagraphs (ii) and (iii) above.
6.7     Expenses . Unless paid by the Employers, all costs and expenses incurred in connection with the general administration of the Plan and Trust shall be allocated among each investment funds in the proportion in which the amount invested in each such fund bears to the amount invested in all funds as of the Accounting Date preceding the date of allocation. All costs and expenses directly identifiable to one fund shall be allocated to that fund. No commission expenses shall be paid from the Plan with respect to transactions described in Section 6.6(d)(i).
6.8     Accounting Dates . All Accounts shall be adjusted in accordance with Section 6.11 as of each Accounting Date.
6.9     Crediting Employer Contributions .
(a)    Employer Matching Contributions shall be credited to the appropriate Accounts of Participants as of the first Accounting Date coincident with or next following the end of the payroll period for which such contributions are made, regardless of the date such contributions are actually made. Expenses, distributions, earnings or losses attributable to such amounts shall be separately credited pursuant to Sections 6.7 and 6.11.
(b)    Employer Profit Sharing Contributions shall be credited to the appropriate Accounts of Participants as of the first Accounting Date coincident with or next following the end of the calendar quarter for which such contributions are made, regardless of the date such contributions are actually made. Expenses, distributions, earnings or losses attributable to such amounts shall be separately credited pursuant to Sections 6.7 and 6.11.
(c)    Transition Contributions shall be credited to the appropriate Accounts of Participants as of the first Accounting Date coincident with or next following the end of the Plan Year for which such contributions are made, regardless of the date such contributions are actually made. Expenses, distributions, earnings or losses attributable to such amounts shall be separately credited pursuant to Sections 6.7 and 6.11.
6.10     Crediting Pay Deferral Contributions . Pay Deferral Contributions shall be credited to the appropriate Accounts as of the first Accounting Date coincident with or next following the end of the payroll period for which such contributions are made, regardless of the date such contributions are actually made. Expenses, distributions, earnings or losses attributable to such amounts shall be separately credited pursuant to Sections 6.7 and 6.11.

 
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6.11     Adjustment of Account Balances . As of each Accounting Date the Administrative & Investment Committee shall cause the Accounts of Participants to be adjusted to reflect adjustments in the value of the Trust Fund, to reflect contributions (net of Forfeitures) credited in accordance with Sections 6.9 and 6.10 and to reflect distributions of benefits (including transfers and withdrawals) as follows:
(a)    First, adjust the Accounts as of the last Accounting Date of all Participants to reflect the Adjusted Net Worth (as described below) of the Trust Fund by applying the earnings adjustment rules applicable to each investment fund and crediting earnings for segregated investments to the appropriate Accounts of the Participants to whom such investments pertain; and
(b)    Next, credit Employer Matching Contributions, (including Forfeitures applied towards such contributions in accordance with Section 7.4) Profit Sharing Contributions, Transition Contributions, and Participant Pay Deferral Contributions to the proper Accounts; and
(c)    Finally, charge to the proper Accounts all distributions made since the previous Accounting Date.
The “Adjusted Net Worth” of the Trust Fund as of any date means the fair market value of the Trust Fund as determined by the Trustee. If an error in the adjustment of Accounts under this Section is discovered, the Administrative & Investment Committee shall correct such error either (i) by crediting or changing the adjustment necessary to make such correction to or against income or unclaimed amounts or as an expense of the Trust Fund for the Plan Year in which the correction is made or (ii) by requiring the Participant’s Employer to make a special contribution to the Plan.
ARTICLE VII

DISTRIBUTION OF ACCOUNT BALANCES
7.1     Retirement, Disability or Death . If a Participant incurs a Termination of Employment, while employed by an Employer or a Commonly Controlled Entity of an Employer, on or after his attainment of age 55 or because of his Disability or death, the balance in his Accounts, after all adjustments required under the Plan have been made, shall be determined as soon as practicable and shall be fully vested and nonforfeitable. Such amount shall be distributable to the Participant or, in the event of the Participant’s death, to his Spouse or Beneficiary in accordance with Section 7.6. Effective January 1, 2007, if a Participant dies while performing qualified military service, the Participant’s Spouse or Beneficiaries shall be entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had the Participant resumed Employment and then incurred a Termination of Employment on account of death.

 
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7.2     Resignation or Dismissal . If a Participant incurs a Termination of Employment for reasons other than a Termination of Employment on or after his attainment of age 55, Disability or death, the balance in his Prior Employer Matching Account, Before-Tax Account, Roth Account, Profit Sharing Account, Stock Grant Account (if any), Transition Contribution Account (if any), After-Tax Account, Rollover Account, Roth Rollover Account and the vested portion of his Employer Matching Account determined in accordance with the vesting schedule below, after all adjustments required under the Plan have been made, shall be determined as soon as practicable and shall be fully vested and nonforfeitable. The portion of such Account which is vested, based upon the balances of all such Accounts as of the Accounting Date coincident with or next preceding the date of distribution (after adjustments required under the Plan as of that date have been made) shall be distributable to the Participant in accordance with Section 7.6.
Vesting Schedule
Years of Vesting Service      Vested Percentage
Less than 1 year    0%
1 year but less than 2 years    20%
2 years but less than 3 years    40%
3 years but less than 4 years    60%
4 years but less than 5 years    80%
5 or more years    100%
7.3     Special Vesting Rules Upon Sale of Business . In the event of a sale by the Company of the stock or substantially all of the assets of an entity that is an Employer, so that the entity ceases to be a participating Employer in this Plan, the Administrative & Investment Committee, in its sole discretion, may determine that all or a portion of the affected Participants (i.e ., those who are employed by such participating Employer) of said entity shall be fully vested in their Account Balances, determined on the date as of which the entity is no longer a participating Employer in this Plan, provided that such Participant is not rehired before actual payment. In lieu of full vesting upon such a sale, the Administrative & Investment Committee may direct that, in accordance with an agreement between the Company and the purchaser of such stock or assets, periods of a Participant’s service following the effective date of such sale be counted towards determination of such Participant’s Vesting Service hereunder. In the absence of Administrative & Investment Committee action, no accelerated vesting or other special vesting rules shall apply to any Participant in connection with any such sale, except as otherwise required by law. The special vesting rules prescribed by this Section shall be applied in a uniform and nondiscriminatory manner to all similarly situated classes of affected Participants. Effective January 1, 2002 an affected Participant shall be deemed to have a Severance from Employment and thereby be entitled to a distribution of his or her Account Balance. However, such a distribution shall be subject to the other provisions of the Plan regarding distributions, other than

 
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provisions that require a Severance from Employment before such amounts may be distributed.
7.4     Forfeitures . The portion of any Participant’s Employer Matching Account which is not vested under Section 7.2 or 7.3 will become a Forfeiture upon such Participant’s Termination of Employment and, except as provided in subsection (c) below, will be applied to reduce Employer Matching Contributions on a periodic basis. However, if such Participant resumes employment with an Employer or Commonly Controlled Entity of an Employer before incurring five consecutive One-Year Breaks In Service, the Forfeiture (unadjusted for subsequent earnings or losses) shall be restored to the Participant’s Employer Matching Account if the Participant restores to the Plan the amount previously distributed in accordance with subsection (a) below unless such restoration is not required under an applicable supplement or appendix to this Plan. The restorations of a Participant’s Employer Matching Account are subject to the following rules:
(a)     Buy-Back Contribution . The Forfeiture shall be restored if within 60 months following such Participant’s resumption of employment, he deposits with the Administrative & Investment Committee an amount equal to the portion of his Employer Matching Account which was previously distributed.
(b)     Restoration of Forfeitures . As of the first Accounting Date following receipt by the Administrative & Investment Committee of the deposit described in subsection (a) above (or as soon as practicable thereafter), the Participant’s Employer Matching Account shall be credited with the Forfeiture.
(c)     Source of Restoration . The amounts necessary to restore the Forfeiture in accordance with subsection (b) above shall be allocated for such purpose from Forfeitures not yet applied towards Employer Matching Contributions, and if such Forfeitures are not sufficient for this purpose, then, to the extent necessary to satisfy such restoration, the balance of such Forfeitures in accordance with subsection (b) above shall be restored by a special allocation of Employer Matching Contributions which shall reduce the amounts available to credit to all other Participants as of such Accounting Date. In lieu of such method of restoring the Forfeiture, the Participant’s Employer may make a special contribution which shall be utilized solely for purposes of such restoration.
7.5     Benefit Commencement Date . Except as otherwise provided in this Section or Section 10.6, the Accounts of a Participant who incurs a Termination of Employment shall be distributed in accordance with Section 7.6 as soon as practicable following the Participant’s Normal Retirement Date. Notwithstanding the preceding sentence, the following rules shall apply for purposes of determining the benefit commencement date for any Participant or Beneficiary:
(a)     Cash-Out of Small Amounts . (i) If the vested portion of a Participant’s Accounts does not exceed $5,000, the Administrative & Investment Committee shall direct

 
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the Trustee to distribute such amount to the Participant (or to the Beneficiary, if appropriate) in a single sum without the consent of the Participant. The remaining portion shall be treated as a Forfeiture. A distribution pursuant to this subsection shall be made as soon as administratively practicable following the Participant’s Termination of Employment. (ii) In the event of a distribution greater than $1,000, in accordance with the provisions of clause (i) above, if the Participant does not elect to have such distribution paid directly to an eligible retirement plan specified by the Participant in a direct rollover or to receive the distribution directly in accordance with Article VIII, then the Administrative and Investment Committee will pay the distribution in a direct rollover to an individual retirement plan designated by the Administrative and Investment Committee.
(b)     Restrictions on Immediate Distribution . If the vested portion of a Participant’s Accounts exceeds $5,000 (disregarding any rollover contributions of any kind), the Participant must consent to any distribution commencement prior to his Normal Retirement Date; provided, however, that consent under this subsection is not required to make distributions necessary to satisfy Code Section 401(a)(9), 401(k)(3), 401(m), 402(g) or 415. In order for a distribution to commence prior to a Participant’s Normal Retirement Date, the Participant must elect such a distribution electronically via telephone or in any such manner prescribed by the Administrative Committee. Any consent by a Participant to receive a distribution prior to his Normal Retirement Date will not be valid unless such consent satisfies the requirements of (i) and (ii):
(i)    The Participant receives a notice, advising him of (A) his right to defer distribution to his Normal Retirement Date, (B) the eligibility requirements for, the material features of, and the relative values of, the optional forms of benefits available under the Plan, and (C) his right to authorize a rollover of the vested portion of his Accounts. The notice will be given no less than 30 nor more than 90 days prior to the Participant’s benefit commencement date, or as otherwise required under Code Section 411(a)(11). Notice may be provided under any method approved under Treasury Regulation Section 1.411(a)-11.
(ii)    The Participant’s consent is provided no less than 30 nor more than 90 days prior to the Participant’s benefit commencement date, or as otherwise required under Code Section 411(a)(11). A Participant who has received the notice and, if required, a summary thereof, may make an affirmative election to receive payment prior to the expiration of the 30-day period provided, (A) the Administrative Committee or its delegate informs the Participant that he or she has a right to a period of at least 30 days after receiving the notice to consider the decision as to whether to elect a distribution and, if applicable, a particular distribution option, and (B) the Participant, after receiving the notice, affirmatively elects a distribution.
(c)     Commencement Date in Absence of Participant Direction . Subject to Section 10.6, unless a Participant elects otherwise (in the time and manner prescribed by the Administrative & Investment Committee), distribution of a Participant’s Accounts which

 
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are distributable in accordance with Sections 7.1 or 7.2 shall commence no later than the 60th day after the end of the Plan Year in which the latest of (i), (ii) or (iii) below occurs.
(i)    The Participant’s Normal Retirement Date;
(ii)    The date of the Participant’s Termination of Employment; or
(iii)    The 5th anniversary of his initial Plan participation.
If such Participant incurs a Termination of Employment prior to his Normal Retirement Date, the Participant will be deemed to have made an election to defer distribution to the earlier of (i) the date the Participant provides written consent to a distribution consistent with the requirements described in subsection (c) or his Normal Retirement Date.
(d)     Benefit Commencement Date of Beneficiary . If a Participant dies prior to the commencement of his benefits, and the vested portion of the Participant’s Accounts exceeds $5,000, benefits payable to his Spouse or other Beneficiary shall commence in accordance with the election of such Spouse or Beneficiary, pursuant to Section 7.6. Notwithstanding the foregoing, the commencement and duration of benefit payments to Spouses and other Beneficiaries shall be subject to the requirements of Code Section 401(a)(9), as described in Sections 7.9 and 7.10. In addition, no benefits shall be paid to any Spouse or other Beneficiary prior to the completion by the Administrative & Investment Committee of its determination of the status of such Spouse or other Beneficiary as a proper payee with respect to such Participant. If the Participant’s surviving Spouse dies prior to commencement of such benefits, the benefits payable to any contingent Beneficiary shall commence no later than December 31 of the calendar year following the calendar year in which such surviving Spouse’s date of death occurs. For purposes of this subsection, a Participant’s benefits shall be deemed to have commenced on the date the Participant requests payment of his distribution, in accordance with subsection (b).
(e)     Alternate Payee Commencement Date . Benefits payable to a former Spouse or other member or former member of the Participant’s family pursuant to a Qualified Domestic Relations Order (as defined in Code Section 414(p)) will commence no sooner than the date the Administrative & Investment Committee or its delegate completes its determination that the order satisfies the requirements set forth in Code Section 414(p). If the value of the alternate payee’s distribution does not exceed $5,000, it shall be distributed in a single sum without the consent of the alternate payee as soon as practicable following the date referred to in the preceding sentence. If the value of the alternate payee’s distribution exceeds $5,000, then the commencement of benefits payable to the alternate payee shall be made at the time prescribed by the terms of the Qualified Domestic Relations Order, subject, however, to the rules set forth herein as applied to the applicable Participant. For such purpose, the alternate payee shall have the same payment options as are available to Participants other than a joint and survivor annuity with the alternate payee’s subsequent spouse.

 
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(f)     Minimum Required Distribution Rules . The requirements of this subsection are intended to reflect the applicable rules of Code Section 401(a)(9) for pre-death distributions and shall take precedence over any inconsistent provisions of the Plan. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant’s “required beginning date.” Distributions in all cases will be made in accordance with Section 401(a)(9) of the Code and Treasury Regulations promulgated thereunder.
(i)     Participants Who Are Not 5%-Owners . The provisions of this paragraph shall apply only to a Participant who was not a 5%-owner (as defined in Code Section 416(i)) at any time during the Plan Year in which the Participant attains age 70½. With respect to a Participant who attains age 70½. during the 1996 Plan Year, such Participant’s required beginning date shall be April 1, 1997 unless that Participant makes an election, in the time and manner prescribed by the Administrative & Investment Committee, to defer commencement until after his Termination of Employment. With respect to a Participant who attains age 70½. on or after January l, 1997, the required beginning date is April 1 of the calendar year following the later of (i) the calendar year in which the Participant attains age 70½. and (ii) subject to subsection (c) above, the calendar year in which contains the Participant’s Termination of Employment. Notwithstanding the preceding sentence, to the extent required by U.S. Treasury Regulations or other guidance of general applicability of the Internal Revenue Service, a Participant’s required beginning date shall be April 1 of the calendar year following the calendar year in which the Participant attains age 70½., if the Participant so elects.
(ii)     5%-Owners . The required beginning date of a Participant who is a 5%-owner (as described above) is April 1 of the calendar year following the calendar year in which the Participant attains age 70½..
If the Participant’s benefit is to be distributed pursuant to this subsection in the form of installments, the following minimum distribution rules shall apply on or after the required beginning date:
(iii)    If a Participant’s benefit is to be distributed over (A) a period not extending beyond the life expectancy of the Participant or the joint life expectancy of the Participant and Beneficiary or (B) a period not extending beyond the life expectancy of the Beneficiary, the amount required to be distributed for each calendar year must be at least equal to the quotient obtained by dividing the Participant’s benefit by the applicable life expectancy.
(iv)    Life expectancy (or joint life expectancy) may be calculated by reference to the Uniform Lifetime Table and Joint and Last Survivor Table set forth in Treasury Regulation Section 401(a)(9)-9. Except as provided in Section 7.10(e), life expectancy shall not be recalculated.
The hierarchy for distributions required to be made pursuant to this subsection (f) shall be the hierarchy applicable to installment distributions provided in Section 7.6(c).

 
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The date on which distribution of a Participant’s Accounts to a Participant or Beneficiary commences under this Section 7.5 is his “Benefit Commencement Date.”
7.6     Methods of Benefit Payment . Participants and, if applicable, Beneficiaries shall make elections regarding the methods of benefit payments in such manner and at such times as the Administrative & Investment Committee shall require. A Participant’s Accounts shall be distributed to him, or in the event of his death to his Beneficiary, in one of the following methods:
(a)     Single Sum Form of Payment . This is the normal form of benefit payment. Unless an optional method of payment is elected by the Participant in accordance with subsection (b), (c), or (d) below, or by the Participant’s Beneficiaries in accordance with subsection (c) or (d) below, the Participant’s Accounts will be distributed in a single sum, provided that if the Participant’s Accounts exceed $5,000, distribution thereof in a single sum may not be made prior to certain designated times without the Participant’s or Beneficiaries’ consent, if required pursuant to Section 7.5.
(b)     RESERVED .
(c)     Optional Installment Form of Payment . If the Participant’s Accounts exceed $5,000, the Participant or his Beneficiaries, as applicable, may elect to have the Participant’s Accounts distributed in the form of substantially equal annual, semiannual, quarterly or monthly installment payments. Such installment payments shall not be payable over a period of time in excess of the “maximum installment period” (as defined in Section 7.9). Installment distributions shall be deducted from the Participant’s Accounts in the following order (and shall be deducted on a pro rata basis from the investment funds to which amounts in such Accounts are allocated):
(i)    The portion of the Participant’s After-Tax Account attributable to after-tax contributions made prior to 1987.
(ii)    The portion of the Participant’s After-Tax Account attributable to after-tax contributions made after 1986 (if any), and the portion of such account attributable to earnings, in the proportion prescribed by section 72 of the Code.
(iii)    Rollover Account.
(iv)    Prior Employer Matching Account.
(v)    Vested portion of Employer Matching Account.
(vi)    Profit Sharing Account.
(vii)    Transition Contribution Account.
(viii)    Before-Tax Account.
(ix)    Stock Grant Account.

 
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(x)    Roth Account.
(xi)    Roth Rollover Account.
(d)     Partial Single Sum Form of Payment . A Participant or his Beneficiaries, as applicable, may elect to have less than 100% of the Participant’s Accounts paid in a single sum. Such election shall be made in accordance with the procedures described in Section 7.5(c). The hierarchy for distributions made pursuant to this subsection shall be the hierarchy applicable to installment distributions provided in subsection (c) above.
Benefits may be distributed in cash or, if applicable, in whole shares of Company Common Stock from the Company Common Stock Fund or Baxter Common Stock from the Baxter Common Stock Fund, provided that property distributed in Company Common Stock may only be distributed if the requirements of Section 9.11 are satisfied. As part of the distribution election, a Participant or his Beneficiaries, as applicable, must indicate the amount, if any, of the balance in the Participant’s Accounts invested in the Company Common Stock Fund that he wishes to receive in Company Common Stock.
Neither the Employers nor the Administrative & Investment Committee shall be obligated to consider the tax effects upon a Participant, Spouse, or other Beneficiary of receipt by that Participant or such Spouse or other Beneficiary of Plan benefits. It shall be the responsibility of Participants to consider the tax effects of the time and manner of benefit distribution and the disposition of distributions upon receipt by a Participant, Spouse, or other Beneficiary.
7.7     Direct Rollovers . Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election hereunder, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.
(a)     Notice of Rights . Each distributee shall be provided with a notice as described in Code Section 402(f) of his or her rights under this subsection no less than 30 days (or such shorter period permitted by applicable U.S. Treasury regulations) and no more than 180 days before the commencement of an eligible rollover distribution to the distributee from the Plan. Written consent of the distributee to the distribution must not be made before the distributee receives the notice and must not be made more than 90 days before such commencement. A participant who has received the 402(f) Notice and, if required, the summary thereof, may waive the 30-day notice requirement by making an affirmative election to make or not to make a direct rollover of all or a portion of his or her Vested Interest. The 402(f) Notice may be provided under any method approved under Treasury Regulation section 1.411(a)-11.
(b)     Definitions .
(i)    Eligible rollover distribution:  An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the

 
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distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated Beneficiary, or for a specified period of 10 years or more; any distribution to the extent that distribution is required under Code Section 401(a)(9); effective January 1, 1999, any hardship distribution described in Code Section 401(k)(2)(B)(i)(IV); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). Effective with respect to distributions made on and after January 1, 2002, (i) no portion of a hardship distribution is includible in an eligible rollover distribution and (ii) a portion of a distribution will not fail to be an eligible rollover distribution merely because it consists of after-tax employee contributions that are not includible in gross income, provided, however, that such portion may be transferred only to an individual retirement account or annuity described in Code Sections 408(a) or (b), or to a qualified defined contribution plan described in Code Sections 401(a) or 403(a) that agrees to separately account for the transferred amounts, including separately accounting for the portion includible in gross income and the part that is not so includible.
(ii)    Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan or contract described in Code Section 403(a), a qualified trust described in Code Section 401(a) that accepts the distributee’s eligible distribution; or an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. However, in the case of an eligible rollover distribution to the surviving spouse or non-spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity.
(iii)    Additional Rollover Options. In addition, effective for distributions made on or after January 1, 2008, qualified rollover contributions from this Plan to a Roth IRA may be made in accordance with the requirements of Section 408A(e) of the Code. Effective January 1, 2010, a direct trustee-to-trustee transfer from the Plan to an individual retirement account described in Code Section 408(b) established for the benefit of a deceased Participant’s non-spouse Beneficiary, as described in Code Section 402(c)(11), shall be treated as an Eligible Rollover Distribution.
(iv)     Distributee : A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving Spouse and the Employee’s or former Employee’s divorced Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the Spouse or former Spouse.
(v)     Direct rollover : A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.

 
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7.8     Qualified Reservist Distributions . Qualified reservist distributions (within the meaning of Code Section 72(t)(2)(G)) shall be permitted under this Plan.
7.9     Maximum Installment Period . Except as expressly provided to the contrary in this ARTICLE VII, the period over which installment payments may be made with respect to any person shall be determined by the Participant. In no event will the period over which installment payments are made exceed a Participant’s Maximum Installment Period. A Participant’s “Maximum Installment Period” shall be determined pursuant to the following rules:
(a)     Life Expectancy Limitation . In no event shall installment payments be made over a period in excess of the life expectancy of the Participant or the life expectancy of the Participant and the Participant’s designated Beneficiary. The Administrative & Investment Committee shall not adjust installment payments to take into account changes in the life expectancy of a Participant or of his Spouse or Beneficiary.
(b)     Incidental Benefit Limitation . In no event will installment payments which commence during the lifetime of the Participant be scheduled over a period which would result in less than 50% of the value of the Participant’s Accounts being distributed over the Participant’s life expectancy, or which otherwise violates the incidental benefit rules of Code Section 401(a)(9), unless the Participant’s Spouse is his Beneficiary.
(c)     Death after Commencement of Benefits . If distribution of a Participant’s benefits over a period (“Prior Payment Period”) not in excess of the period described in subsection (a) above has begun and the Participant dies before the entire balance in his Accounts has been distributed to him, the remaining portion shall be distributed over a period no longer than the remainder of the Prior Payment Period.
(d)     Death before Commencement of Benefits . If a Participant dies before the distribution of his benefits has begun, distribution of the entire balance in his Accounts shall be made no later than December 31 of the calendar year which contains the fifth anniversary of the Participant’s death. However, such five-year limitation shall not apply in the case of any portion of the Accounts to be distributed to the Participant’s designated Beneficiary if such portion is distributed over the life of such designated Beneficiary or over a period not extending beyond the life expectancy of such Beneficiary and such distribution begins not later than December 31 of the calendar year following the calendar year which contains the date of the Participant’s death. Notwithstanding the foregoing, if the designated Beneficiary is the Participant’s surviving Spouse, the date on which distribution must begin as provided in the preceding sentence shall not be earlier than December 31 of the calendar year in which the Participant would have attained age 70½, had he survived. If the Participant’s surviving Spouse dies before distribution begins, this subsection shall be applied as if the surviving Spouse were the Participant except that the provisions applicable to the surviving Spouse of a Participant shall not be applicable to a spouse of the Participant’s surviving Spouse.

 
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For purposes of this Section, a Participant’s “Designated Beneficiary” means the Participant’s Beneficiary determined in accordance with Section 7.11.
7.10     Minimum Rate of Installment Payments . Except as expressly provided to the contrary in this ARTICLE VII, a Participant who has selected an installment method of payment may select the rate at which his benefits are paid, provided the rate or amount of such installment payments satisfies all of the following rules, to be applied in a uniform and nondiscriminatory manner:
(a)     Dollar Limitation . The Administrative & Investment Committee may establish a minimum dollar amount for any installment payment.
(b)     Frequency of Payment . Installments may be paid monthly, quarterly, semi-annually or annually.
(c)     Equal Payments . Installments must be payable in substantially equal amounts, provided that the Administrative & Investment Committee may adjust such amounts annually or more frequently to reflect earnings, losses or other adjustments to the Participant’s Accounts.
(d)     Incidental Benefit Limitation . In no event will installment payments which commence during the lifetime of the Participant be scheduled at a rate which would result in less than 50% of the value of the Participant’s Accounts being distributed over the Participant’s life expectancy, or which otherwise violates the incidental benefit rules of Code Section 401(a)(9), unless the Participant’s Spouse is his Beneficiary.
(e)     Rate of Payment Under Code Section 401(a)(9) . Notwithstanding the provisions of Section 7.9 or any other provisions of this Section, the frequency, timing and rate at which installment payments are made to a Participant shall comply with the minimum rate of payment requirements of Section 401(a)(9) of the Code. Solely for purposes of such redetermination, the life expectancy of the Participant and his Spouse or Beneficiary may be adjusted as of such Plan Year end. The Administrative & Investment Committee shall redetermine the amount of such installment as of each subsequent Plan Year to assure continued compliance with such requirements but no further adjustments shall be made to reflect further changes in such life expectancies.
(f)     Death after Commencement of Benefits . If distribution of a Participant’s benefits has begun and the Participant dies before the entire balance in his Accounts has been distributed to him, the remaining portion shall be distributed at least as rapidly as under the method of distribution being used as of the date of the Participant’s death.
(g)     Death before Commencement of Benefits . If a Participant dies before the distribution of his benefits has begun, distribution of the entire balance in his Accounts shall be made over the period specified in Section 7.9(d) and shall be payable in an amount and at a rate of payment which complies with the requirements of Code Section 401(a)(9).

 
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The Administrative & Investment Committee may redetermine the amount of such payments from time to time to assure continued compliance with such requirements.
7.11     Surviving Spouse or Designated Beneficiaries . Except as provided in this Section, a Participant’s Spouse shall be his designated Beneficiary and any benefits remaining to be paid hereunder following a Participant’s death shall be distributed to the Participant’s surviving Spouse, if any. Except as provided below, any such benefits which remain to be paid following the death of the Participant’s surviving Spouse shall be paid to the estate of the Participant’s surviving Spouse. If there is no surviving Spouse or if the surviving Spouse of such Participant consents in the manner described below, the benefits remaining to be paid shall be distributed to the Participant’s designated Beneficiary or Beneficiaries. A Beneficiary designation must be completed and filed with the Administrative & Investment Committee during the Participant’s lifetime. A Beneficiary designation properly completed and filed with the Administrative & Investment Committee will cancel all such designations dated earlier. A Participant may designate contingent or successive Beneficiaries and may name natural persons, legal persons or entities, trusts, estates, trustees or legal representatives as the Beneficiaries. If a married Participant designates a Beneficiary or contingent Beneficiary other than his Spouse and the estate of such Spouse, the Participant’s Spouse must consent in writing to such designation and such consent must be witnessed by a notary public or Plan representative. If the Spouse does not so consent, then such Beneficiary designation shall not be effective unless the Spouse dies before the Participant unless following the death of the Participant his surviving Spouse disclaims all rights to the Participant’s benefits.
If the Participant dies leaving no surviving Spouse and either (a) the Participant failed to file a valid beneficiary designation form, or (b) all persons designated on the beneficiary designation form have predeceased the Participant, the Participant’s benefit shall be paid in the following order: (i) to the Participant’s surviving children (including legally adopted children) in equal shares, (ii) to the Participant’s surviving parents (including legally adoptive parents) in equal shares, (iii) to the Participant’s surviving brothers and sisters in equal shares, then (iv) to the Participant’s estate.
7.12     Missing Beneficiaries of Deceased or Missing Participants . Subject to all applicable laws relating to unclaimed property, if the Trustee mails by registered or certified mail, postage prepaid, to the last known address of a Participant or Beneficiary, a notification that he is entitled to a Plan distribution, and if the notification is returned by the United States Postal Service as being undeliverable because the addressee cannot be located at the address indicated, and if the Trustee has no knowledge of such Participant’s or Beneficiary’s whereabouts for three years after the date the notification was mailed (or if for three years after the date the notification was mailed to the Participant or Beneficiary he does not respond by informing the Trustee of his or her whereabouts), then, subject to the applicable state laws concerning escheat, the aggregate amount of such Participant’s Accounts shall be treated as a Forfeiture and used to reduce Employer Matching Contributions, subject to the following:
(a)     Restoration of Forfeiture . If following a Forfeiture under this Section 7.12, the Participant or Beneficiary is located, the Forfeiture (unadjusted for subsequent

 
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earnings or losses), shall be restored by crediting such amount to the appropriate Accounts of the Participant as of the next Accounting Date.
(b)     Source of Restoration . The amounts necessary to restore the Forfeiture in accordance with (a) above shall be allocated for such purpose from Forfeitures not yet applied towards Employer Matching Contributions and if Forfeitures are not sufficient then from an initial allocation of Employer Matching Contributions to the extent necessary to satisfy such restoration, which special allocation shall reduce the amounts available for allocation to all other Participants in accordance with Section 6.9 as of the relevant Accounting Date. In lieu of such method of restoring the Forfeiture, the Participant’s Employer may make a special contribution which shall be allocated solely for purposes of such restoration.
Participants and Beneficiaries are required to maintain current post office addresses on file with the Administrative & Investment Committee.
7.13     Incapacitated Participants or Beneficiaries . If a Participant or Beneficiary is incompetent or a minor, and a conservator, guardian, or other person legally charged with his care has been appointed, any benefits to which such Participant or Beneficiary is entitled shall be payable to such conservator, guardian, or other person legally charged with his care. The decision of the Administrative & Investment Committee in such matters shall be final, binding, and conclusive upon all affected or interested parties. Neither the Plan nor any representative of the Plan has any duty to see to the proper application of such payments.
7.14     Reemployment after Distributions Commence . If a Participant has elected an installment form of distribution, all such payments shall cease if the Participant is rehired as an Eligible Employee. The portion of the Accounts not distributed shall remain in such Participant’s Accounts. Payments under an annuity contract shall continue during any period of reemployment.
7.15     Erroneous Payments . All benefits under the Plan shall be paid to the Participant, Spouse or Beneficiary entitled thereto (“Payee”) in cash and/or in Company Common Stock, provided that if any such payment shall be made in error or in excess of the amount due, the Payee shall be required to return any such payment or excessive portion of any payment upon request of the Administrative & Investment Committee.
7.16     Finality of Distributions . Payments made in accordance with this Article VII shall discharge all liabilities for such payments under the Plan.
ARTICLE VIII

WITHDRAWALS AND LOANS
8.1     Withdrawals . Except as provided in an applicable supplement or appendix to this Plan, Accounts of Participants who have not ceased to be Employees may be withdrawn in accordance with the following rules:

 
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(a)     After-Tax/Rollover Contributions . A Participant may elect to withdraw all or a portion of the total value (determined as of the date described below) of his After-Tax Account and/or Rollover Account and/or Roth Rollover Account including earnings thereon. A Section 16b officer of the Company must obtain permission from the Company in order to receive an in-service distribution under this subsection. Only one withdrawal of After-Tax Contributions per calendar month may be made pursuant to this subsection.
(b)     Employer Matching, Prior Employer Matching, Transition Contribution and Profit Sharing Account Withdrawals. A Participant who would be fully vested in his Employer Matching Contributions Under Section 7.1 or 7.2 if his Accounts were then distributable and who is fully vested and has completed five or more years of Plan participation may elect to withdraw all or a portion of the total value (determined as of the date described below) of his Employer Matching Account, Prior Employer Matching Account, Transition Contribution Account and Profit Sharing Account. The amount to be withdrawn is satisfied by reducing the value determined for each such Account by the amount requested to be withdrawn by the Participant, without regard to any distinction between contributions and earnings. A Participant who receives a withdrawal under this subsection (b) is ineligible to make Pay Deferral Contributions under Section 5.1 for a period of six months commencing on the first day of the first pay period following the date on which the Accounts are valued under this subsection for purposes of such withdrawal. Such Participant’s Pay Deferral Contributions shall recommence on the first day of the first pay period following the date on which such Contributions were suspended and shall be at the same rate as in effect at the time of suspension (unless the Participant elects otherwise). A Section 16(b) officer of the Company must obtain permission from the Company in order to receive an in-service distribution under this subsection. Only one withdrawal per calendar month may be made pursuant to this subsection.
(c)     Stock Grant Account . A Participant is not permitted to withdraw the shares contributed to his Stock Grant Account until he has incurred a Termination of Employment.
(d)     Withdrawals after Age 59 1/2 . Except as otherwise provided in an applicable supplement or appendix to this Plan, a Participant who has attained age 59 1/2 and who is fully vested and has completed five years of Plan participation may elect to withdraw 100% of the value (determined as of the date described below) of his Accounts other than his Stock Grant Account. A Section 16(b) Officer of the Company must obtain permission from the Company in order to receive an in-service distribution under this sub-section. Only one withdrawal per calendar month may be made pursuant to this subsection.
(e)     Hardship Withdrawal . A Participant who has withdrawn all amounts permitted to be withdrawn under subsections (a), (b), (c) and (d) above and who has established hardship (as described below) may elect to withdraw a specified dollar amount

 
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up to the total value (determined as of the date described below) of his vested Accounts, other than his Stock Grant Account, according to the hierarchy set forth in 1(h) below. Such withdrawals shall be subject to the following:
(i)     Immediate and Heavy Financial Need . A withdrawal shall be deemed to be made on account of a hardship only if it is made on account of an immediate and heavy financial need of the Participant and is necessary to satisfy such financial need. The determination of whether a Participant has an immediate and heavy financial need is to be made on the basis of all relevant facts and circumstances.
(ii)     Exhaustion of Other Resources . A withdrawal will not be deemed to be necessary to satisfy the immediate and heavy financial need requirement of subparagraph (i) above unless the Participant has first obtained all distributions and withdrawals, other than hardship withdrawals, and all nontaxable loans currently available under all plans maintained by the Employers and Commonly Controlled Entities of the Employers. A withdrawal generally may be treated as necessary to satisfy the immediate and heavy financial need if the need cannot reasonably be relieved:
(A)    Through reimbursement or compensation by insurance or otherwise;
(B)    By reasonable liquidation of the Participant’s assets, to the extent such liquidation would not itself cause an immediate and heavy financial need;
(C)    By cessation of Pay Deferral Contributions under the Plan, and the cessation of any similar contributions under all qualified and nonqualified plans of deferred compensation maintained by the Participant’s Employer or any Commonly Controlled Entity; or
(D)    By other distributions or nontaxable loans (at the time of the loan) from the Plan or any other plan maintained by the Participant’s Employer or any Commonly Controlled Entity, or by borrowing from commercial sources on reasonable commercial terms.
For purposes of this Section, the Participant’s resources shall be deemed to include those assets of his Spouse and minor children that are reasonably available to the Participant. A financial need shall not fail to qualify as immediate and heavy merely because such need was reasonably foreseeable or voluntarily incurred by the Participant.
(iii)     Specific Hardship . A withdrawal shall be deemed to be made on account of an immediate and heavy financial need of a Participant if the withdrawal is made on account of:
(A)    Expenses for medical care that would be deductible under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted income);

 
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(B)    The purchase of a principal residence of the Participant (excluding mortgage payments);
(C)    Payment of tuition, room and board, and related educational fees for up to the next 12 months of post-secondary education for the Participant, or his Spouse, children, or dependents (as defined in Code Section 152);
(D)    The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant’s principal residence;
(E)    Payments for burial or funeral expenses for the Participant’s deceased parent, spouse, children or dependents (as defined in Code Section 152 without regard to section 152(d)(1)(b));
(F)    Expenses for the repair of damage to the Participant’s principal residence that would qualify for the casualty deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income); or
(G)    Such other reasons as the Commissioner of Internal Revenue may prescribe. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the withdrawal.
(iv)     Withdrawal Limited to Need . A withdrawal shall not be treated as necessary to satisfy an immediate and heavy financial need of a Participant to the extent the amount of the withdrawal is in excess of the amount required to relieve the financial need or to the extent such need may be satisfied from other resources that are reasonably available to the Participant. This determination generally is to be made on the basis of all relevant facts and circumstances.
(v)    Impact of Withdrawal on Future Participation. Upon receiving a hardship withdrawal, a Participant shall be precluded from making any further Pay Deferral Contributions and from having further Employer Matching Contributions made on his behalf under the Plan or any other plan of deferred compensation maintained by his Employer or any Commonly Controlled Entity until the beginning of the first pay period coincident with or next following the end of a period of 12 months (6 months effective January 1, 2002) commencing with the date of such withdrawal. The Participant’s Pay Deferral Contributions shall recommence at the same rate. The denial of a Participant’s request for a hardship withdrawal shall be treated as a denial of a claim for a benefit under the Plan, and shall thus be subject to the claim and review procedures set forth under Section 9.10. For purposes of this subparagraph (v) the phrase “other plan of deferred compensation” means all qualified and nonqualified plans of deferred compensation, including a cash or deferred arrangement that is part of a cafeteria plan within the meaning of Code Section 125; however, it does not include any mandatory employee contribution portion of a defined benefit plan, or a health or welfare benefit plan (including one that is part of a cafeteria plan.) For purposes of the six-month suspension of contributions, the phrase “plans

 
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maintained by the Employer” also includes stock option, stock purchase or similar plans maintained by the Employer.
(f)     Requesting Withdrawals . A Participant may request a withdrawal electronically via telephone or in any such manner prescribed by the Administrative & Investment Committee. Upon receipt and approval of a withdrawal request, the Trustee shall mail a federally mandated tax information notice to the Participant. To receive payment of a withdrawal, the Participant must telephone the Trustee (in the manner prescribed by the Administrative & Investment Committee) no earlier than seven days and no later than 30 days after the day he requested the withdrawal. If the Participant fails to telephone the Trustee within this period, the withdrawal request shall be canceled.
(g)     Spousal Consent . No withdrawal shall be made to a married Participant who has elected to have his Accounts distributed in an annuity form unless the Participant’s Spouse consents to the withdrawal in the manner prescribed by the Administrative & Investment Committee. Such consent must be in writing and witnessed by a notary public.
(h)     Hierarchy . Hardship withdrawals shall be deducted from the Participant’s Accounts in the following order (and shall be deducted on a pro rata basis from the investment funds to which amounts in such Accounts are allocated):
(i)    The portion of the Participant’s After-Tax Account attributable to after-tax contributions made prior to 1987.
(ii)    The portion of the Participant’s After-Tax Account attributable to after-tax contributions made after 1986 (if any), and the-portion of such account attributable to earnings, in the proportion prescribed by section 72 of the Code.
(iii)    Rollover Account.
(iv)    Prior Employer Matching Account.
(v)    Vested portion of Employer Matching Account.
(vi)    Profit Sharing Account.
(vii)    Transition Contribution Account.
(viii)    Before-Tax Account.
(ix)    Roth Account.
(x)    Roth Rollover Account.
After a withdrawal in accordance with this Section, amounts remaining in the Participant’s accounts, if any, shall continue to be held, invested and adjusted in accordance with the Plan and Trust Agreement until such amounts are subsequently withdrawn or otherwise

 
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distributable in accordance with ARTICLE VII. Withdrawals under this Section shall ordinarily be based on a valuation of the applicable Accounts as of the Accounting Date immediately preceding the date on which such request is processed and/or approved by the Trustee or Administrative & Investment Committee. Actual distribution of amounts withdrawn shall ordinarily occur as soon as practicable after the request is processed.
8.2     Loans to Participants . Loans shall be extended to Participants who are Employees of participating Employers (those Employees classified as Section 16(b) officers of the Company must obtain permission from the Company in order to receive a loan under this Section), but excluding: (i) Participants, located outside the United States who, at the time the loan is made, is not receiving regular payments of compensation under a United States payroll system, (ii) those Employees classified as parties in interest, (iii) Participants who have a domestic relations order pending with the Plan, (iv) those individuals who are receiving benefits under the Company’s long term disability plan, and (v) Participants who are on an unpaid leave of absence or severance. Loans to Participants are subject to the following rules::
(a)     Authority . The Administrative & Investment Committee, upon request by a Participant in the manner described in subsection (n) below, shall direct the Trustee to make a loan from the Trust Fund to a Participant.
(b)     Loan Documents . Each loan shall be evidenced by a written promissory note providing for repayment and interest. As described in subsection (n) below, the promissory note shall consist of a loan agreement, to which the Participant shall indicate his agreement by endorsing the loan check. The Administrative & Investment Committee shall make appropriate arrangements with the Trustee regarding the custody of such notes.
(c)     Applicability . The Administrative & Investment Committee shall exercise its authority under this Section in a manner which makes loans available to all eligible Plan Participants on a reasonably equivalent basis. Loans shall also be made available to any other person who has an account balance under the Plan if the person is a “party in interest” with respect to the Plan, as defined in section 3(14) of ERISA (each such person referred to in this Section as a “Participant”).
(d)     Frequency and Number . The Administrative & Investment Committee may establish conditions on the frequency and number of loans to Participants. As of the Effective Date, no Participant may have more than two loans outstanding at any given time.
(e)     Term of Loan . The term of the loan will be for a period of time not exceeding five years. Notwithstanding the foregoing, the term of the loan may be for a period of up to ten years if the loan is used to acquire any dwelling unit which within a reasonable time is to be used as a principal residence of the Participant in accordance with Section 72(p)(2) of the Code. The Administrative & Investment Committee shall be entitled to rely on

 
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any representation made by a Participant with regard to the purpose for which a loan is requested.
(f)     Minimum Loan . From time to time the Administrative & Investment Committee may establish a minimum loan amount, provided that such limitation shall not exceed $1,000. As of the Effective Date the minimum loan amount is $500.
(g)     Maximum Loan . The principal amount of the loan may not exceed the lesser of:
(i)    $50,000, provided that such dollar limit shall be reduced by the highest outstanding balance of loans to the Participant from the Plan and any other “qualified employer plan” (as defined in Code Section 72(p)(4)) maintained by the Employer or any Commonly Controlled Entity of the Employer at any time in the prior 12 consecutive month period; or
(ii)    50% of the sum of the Participant’s vested Accounts under this Plan (excluding the Participant’s Stock Grant Account), provided that such percentage limit shall be reduced by the percentage of such Participant’s Accounts which is then invested in any other loans.
The limitations of subparagraphs (1) and (ii) above shall be applied as of the Accounting Date immediately preceding or coincident with the day the loan is requested pursuant to the procedures specified in subsection (n) below; provided, however, that the Participant’s vested Accounts as of such request date shall be reduced by the amount of any withdrawals made to such Participant between the date of the loan request and the date such loan is processed by the Trustee.
(h)     Interest Rate . The interest rate charged to Participants for loans under this Section shall be determined by the Administrative & Investment Committee from time to time. The rate selected by the Administrative & Investment Committee for this purpose shall be a rate which the Administrative & Investment Committee determines is within the range of prevailing rates which would be charged by commercial lenders for loans of a similar type. For this purpose the Administrative & Investment Committee may rely on such evidence as it may deem reliable concerning such prevailing rates and all decisions of the Administrative & Investment Committee regarding such rates shall be conclusive. The interest rate applicable as of the Effective Date is the prime rate (as published in the Wall Street Journal on the last Accounting Date of the month preceding the month in which the loan is made) plus 1°/o.
(i)     Security . Loans shall be secured by all of the balances in the Participant’s Accounts, together with such additional collateral as the Administrative & Investment Committee may require either at the time of the loan or from time to time thereafter. In determining the adequacy of such security, the Administrative & Investment Committee shall not consider any non-vested portion of the Participant’s Accounts and a Participant’s vested Accounts shall not be considered adequate security unless immediately

 
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prior to disbursement of the loan the vested portions of the Participant’s Accounts (as of the most recent Accounting Date) have an aggregate value equal to at least twice the sum of the face amount of such loan and the then outstanding balances of all prior loans to such Participant.
(j)     Loan Fees . An application fee shall be charged against the Participant’s Account for each loan processed. The amount of such fee shall be established by the Administrative & Investment Committee from time to time. As of the Effective Date, such fee is $50.
(k)     Repayment Terms . All Plan loans shall be repaid under a written repayment schedule by payroll deduction and shall be evidenced by a written promissory note payable to the Trustee. If a Participant with an outstanding loan incurs a Termination of Employment thereby making payroll deductions impossible, then, unless the Participant elects to roll over such loan and the transferee plan agrees to accept such roll over, the Participant must repay the entire outstanding balance of the loan upon the earlier of (i) the expiration of the original term of the loan and (ii) the date which is 90 days after such Termination of Employment. In no event shall principal and interest payments be less frequent than quarterly on a level amortization basis in substantially non-increasing installments. Loans may be prepaid in full at any time. Loan repayments under this Plan may be suspended with respect to a Participant in military service to the extent required by USERRA and in accordance with Section 414(u)(4) of the Code.
(l)     Distribution Prior to Loan Repayment . Notwithstanding any other provision of the Plan, any distribution under this Plan to or on behalf of a Participant to whom one or more loans are then outstanding shall first be applied by the Trustee to reduce the outstanding balances of such loans. For this purpose loan reductions shall first be applied to satisfy any loan installments in default. Payments shall be applied to loans which are not in default pro rata.
(m)     Events of Default . In the event of a default in payment of either principal or interest that is due under the terms of any loan, the Plan Administrator may declare the full amount of the loan due and payable and may take whatever action may be lawful to remedy the default. With respect to a Participant who terminates employment, default will be deemed to have occurred if any loan is not rolled over or paid in full within 90 days following his Termination of Employment, as described in subsection (k) above. With respect to a Participant who is an Employee on an unpaid leave of absence, default will be deemed to have occurred if any payment is not made within one year following the due date for any payment of principal and/or interest for which no payment is made by the Participant. The Trustee may offset amounts owed by the Participant against Plan benefits owed to him or her without being in violation of Section 11.2.
(n)     Requesting Loans . A Participant may request a loan electronically via telephone or in any such manner prescribed by the Administrative & Investment Committee.

 
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(i)     Non-Residential Loans . Upon receipt and approval of a request for a non-residential loan, the Trustee shall mail a loan agreement (including a promissory note) along with a loan check to the Participant. By endorsing the check, the Participant shall indicate his agreement to the terms and conditions of the loan, as described in the loan agreement.
(ii)     Residential Loans . Upon receipt of a request for a loan to be used for the purchase of the Participant’s primary residence, the Trustee shall send the Participant a loan agreement along with information as to what supporting documentation the Participant must submit in connection with such loan request. The Participant must then submit this supporting documentation within 30 days. If the loan request is approved, the Trustee shall mail a loan agreement (including a promissory note) along with a loan check to the Participant. By endorsing the check, the Participant shall indicate his agreement to the terms and conditions of the loan, as described in the loan agreement. If the loan request is denied, the Trustee shall notify the Participant and inform the Participant of the reason for such denial within a reasonable period of time after the loan request.
(o)     Hierarchy . Loan amounts shall be deducted from the Participant’s Accounts in the following order (and shall be deducted on a pro rata basis from the investment funds to which amounts in such Accounts are allocated):
(i)    Matched portion of Before-Tax Account.
(ii)    Non-matched portion of Before-Tax Account.
(ii)A    Matched portion of Roth Account.
(ii)B    Non-matched portion of the Roth Account.
(iii)    Transition Contribution Account.
(iv)    Prior Employer Matching Account.
(v)    Vested portion of Employer Matching Account.
(vi)    Profit Sharing Account.
(vii)    Rollover Account.
(viii)    After-Tax Account.
(viii)    A Roth Rollover Account.
Repayments of loan principal will be credited to the Participant’s Accounts in the same order as above. Repayments of interest will be credited on a pro rata basis to the Accounts from which the loan was deducted. All loan

 
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repayments will be allocated to investment funds in accordance with the Participant’s existing investment elections for the applicable Accounts.
Notwithstanding anything in this Section 8.2 to the contrary, neither the shares contributed to a Participant’s Stock Grant Account nor the earnings thereon shall be available for loans.
8.3     No Representation Regarding Tax Effect of Withdrawals or Loans . Neither the Employers, the Administrative & Investment Committee, the Trustee nor any other Plan representative shall be construed as representing the tax effects of any withdrawals or loans made in accordance with this ARTICLE VIII. It shall be the responsibility of Participants requesting withdrawals or loans to consider the tax effects of such withdrawals or loans.
ARTICLE IX

PLAN COMMITTEES
9.1     Membership of Administrative & Investment Committees . The Administrative & Investment Committee, consisting of at least three persons, shall be appointed by the Compensation Committee of the Board of Directors. The Secretary of the Company shall certify to the Trustee from time to time the appointment to (and termination from) office of each member of the Administrative & Investment Committee and the persons, if any, who are selected as secretaries of the Administrative & Investment Committee. The appointment of a member of either Committee and acceptance of such appointment by any person constitutes an agreement by and between the Company and such Committee member that the member, acting in concert with the other Committee members, shall have and will exercise the powers and duties described herein, including, with respect to the Administrative & Investment Committee, the power and duty to interpret this Plan and determine the benefits to which Participants are entitled hereunder.
9.2     Administrative & Investment Committee Powers and Duties . The Administrative & Investment Committee shall have such powers and duties necessary to discharge its duties hereunder, including, but not limited to, the following:
(a)    Within its complete and unfettered discretion to construe and interpret the terms of the Plan and Trust Agreement provisions and to resolve all questions arising under the Plan including questions of Plan participation, eligibility for benefits and the rights of Employees, Participants, Beneficiaries and other persons to benefits under the Plan and to determine the amount, manner and time of payment of any benefits hereunder;
(b)    To prescribe procedures, rules and regulations to be followed by Employees, Participants, Beneficiaries and other persons or to be otherwise utilized in the efficient administration of the Plan consistent with the Trust;

 
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(c)    To make determinations as to the rights of Employees, Participants, Beneficiaries and other persons to benefits under the Plan and to afford any Participant or Beneficiary dissatisfied with such determination with rights pursuant to a claims procedure adopted by the Administrative & Investment Committee;
(d)    To enforce the Plan in accordance with the terms of the Plan and the Trust and to enforce its procedures, rules and regulations;
(e)    To be responsible for the preparation and maintenance of records necessary to determine the rights and benefits of Employees, Participants and Beneficiaries or other persons under the Plan and the Trust and to request and receive from the Employers such information necessary to prepare such records;
(f)    To prepare and distribute in such manner as it deems appropriate and to prepare and file with appropriate government agencies information, disclosures, descriptions and reporting documents regarding the Plan, and in the preparation and review of such reports the Administrative & Investment Committee is entitled to rely upon information supplied to it by the Employees, accountants, counsel, actuaries, the Investment Managers and any insurance institutions described in the Trust Agreement;
(g)    To appoint or employ individuals to assist in the administration of the Plan and other agents (corporate or individual) that the Administrative & Investment Committee deems advisable, including legal counsel and such clerical, medical, accounting, auditing, actuarial and other services as the Administrative & Investment Committee may require in carrying out the provisions of the Plan. However, no agent except an Investment Manager or fiduciary named in the Plan shall be appointed or employed in a position that would require or permit him or her: (i) to exercise discretionary authority or control over the acquisition, disposition or management of Trust assets; (ii) to render investment advice for a fee; or (iii) to exercise discretionary authority or responsibility for Plan administration;
(h)    To cause to be prepared and to cause to be distributed, in such manner as the Trustee determines to be appropriate, information explaining the Plan and Trust;
(i)    To furnish to the Employers upon request such annual or other reports with respect to the administration of the Plan as are reasonable and appropriate;
(j)    To receive, review and keep on file (as it deems convenient or proper) reports of the financial condition, receipts and disbursements, and assets of the Trust; and
(k)    To discharge all other duties set forth in the Plan.
The Administrative & Investment Committee has no power to add to, subtract from or modify any of the terms of the Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any requirements of eligibility for benefits under the Plan.

 
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9.3     Administrative & Investment Committee Powers and Duties . The Administrative & Investment Committee has such powers necessary to discharge its duties hereunder, including, but not limited to, the following:
(a)    To establish and from time to time revise the investment policy of the Plan, to communicate and consult with the Company, the Administrative & Investment Committee and the Trustee and any Investment Manager or insurance institution regarding the investment policy applicable to the Plan as a whole or to any individual investment fund;
(b)    To supervise the performance by the Trustee and any Investment Manager or insurance institution regarding their responsibilities under the Plan and Trust. The Investment Committee shall review and analyze performance information supplied by the Trustee and the Investment Managers or insurance institutions to the Investment Committee and/or any such performance information obtained. independently by the Investment Committee and shall report the results of such analysis to the Finance Committee of the Board of Directors from time to time in such form and with such degree of frequency as the Administrative & Investment Committee shall determine proper. Such responsibilities of the Administrative & Investment Committee with respect to supervision, review and analysis shall be performed no less frequently than once each Plan Year and shall ordinarily not be required more frequently than once each calendar quarter. The Trustee, the Administrative & Investment Managers and insurance institutions have been allocated the responsibility for day-to-day investment management of the Plan and Trust and the responsibilities of the Administrative & Investment Committee hereunder are not intended to relieve the Trustee, Investment Managers or insurance institutions of such on-going investment management responsibilities;
(c)    To instruct the Trustee, the Administrative & Investment Managers and insurance institutions with respect to the proper application of contributions made under the Plan;
(d)    To determine the proper allocation of investment responsibilities with respect to the assets of the Plan between the Trustee and any Investment Manager or insurance institution acting hereunder or under the terms of the Trust and to allocate fiduciary responsibilities among these parties;
(e)    To the extent not provided to the contrary in the Trust Agreement, to appoint the Trustee and any Investment Managers or insurance institutions, to direct the establishment of any investment fund and to remove the Trustee and any Investment Managers or insurance institutions or appoint additional Trustees, Investment Managers or insurance institutions;
(f)    To review any accounts submitted by the Trustee and any Investment Managers or insurance institutions and to report to the Finance Committee of the Board of Directors with respect to any such accounts;

 
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(g)    Following the Administrative & Investment Committee’s determination of the benefit rights of any Participant or Beneficiary, to aggregate information concerning such benefits and authorize and direct the Trustee with respect to the commencement, modification or cessation of such benefit payments;
(h)    To supervise the performance of fiduciary responsibilities by others including the Trustee and any Investment Managers;
(i)    To appoint and utilize the services of administrative staff employees of the Company and the other Employers for the performance of duties delegated to the Administrative & Investment Committee hereunder and to rely upon information received from such staff employees; provided that in both cases the Administrative & Investment Committee reasonably believes the performance of such services and the preparation of such information is within the competence of such staff employees;
(j)    To furnish to the Employers, upon reasonable request, such annual or other reports as the Employers deem necessary regarding the administration of the Plan; and
(k)    To employ reputable agents (who may also be Employees) and to delegate to them any of the administrative powers or duties imposed upon the Administrative & Investment Committee or the Employers.
9.4     Conflicts of Interest . No member of the Administrative & Investment Committee shall participate in any action on matters involving solely such member’s rights or benefits as a Participant under the Plan.
9.5     Compensation; Reimbursement . No member of the Administrative & Investment Committee shall receive compensation for his services, but the Employers shall reimburse him for any necessary expenses incurred in the discharge of his duties.
9.6     Standard of Care . The Administrative & Investment Committee shall perform their duties under this Plan in accordance with the terms of this document and the Trust Agreement solely in the interest of the Participants and for the exclusive purposes of providing retirement benefits to Participants and defraying the reasonable expenses of Plan administration and operation. The Administrative & Investment Committee shall also perform their duties under this Plan with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with like aims.
9.7     Action by Committees . Action by each Plan Committee ( i.e ., the Administrative & Investment Committee) is subject to the following special rules:
(a)    Each Committee may act by meeting or by document signed without meeting and documents may be signed through the use of a single document or concurrent documents.

 
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(b)    Each Committee shall act by a majority, and such action shall be as effective as if such action had been taken by all Committee members, provided that by majority action one or more Committee members or other persons may be authorized to act with respect to particular matters on behalf of all Committee members.
(c)    Each Committee may, but is not required to, select a secretary, who may but need not be a Committee member, and the certificate of such secretary that the Committee has taken or authorized any action shall be conclusive in favor of any person relying upon such certificate.
(d)    Each Committee may act through agents or other delegates and may retain legal counsel, auditors or other specialists (who may also be Employees) to aid in the Committee’s performance of its responsibilities.
9.8     Resignation or Removal of Committee Member . Any person serving as an Administrative & Investment Committee member may resign from such Committee at any time by written notice to the Compensation Committee of the Board of Directors or may be removed by the Compensation Committee at any time by written notice to such member. Any person serving as an Administrative & Investment Committee member may resign from such Committee at any time by written notice to the Finance Committee of the Board of Directors or may be removed by the Finance Committee at any time by written notice to such member. The Compensation Committee shall fill any vacancy in the membership of the Administrative & Investment Committee as soon as practicable. The Finance Committee Company shall fill any vacancy in the membership of Administrative & Investment Committee as soon as practicable. Until any such vacancy is filled, the remaining members of the applicable Committee may exercise all of the powers, rights and duties conferred on the Committee.
9.9     Uniform Application of Rules by Administrative & Investment Committee . The Administrative & Investment Committee shall apply all rules, regulations, procedures and decisions uniformly and consistently to all Employees and Participants similarly situated. Any ruling, regulation, procedure or decision of the Administrative & Investment Committee which is not inconsistent with the provisions of the Plan or the Trust shall be conclusive and binding upon all persons affected by it. There shall be no appeal of any ruling by the Administrative & Investment Committee which is within its authority, except as provided in Section 9.10 below. When making a determination or a calculation, the Administrative & Investment Committee is entitled to rely on information supplied by the Employer, Trustee, Investment Managers, insurance institutions, accountants and other professionals including legal counsel for the Company.
9.10     Claims Procedure . Each person entitled to benefits under the Plan (the “Applicant”) must submit a written claim for benefits to the Administrative & Investment Committee. If a claim for benefits by the Applicant is denied, in whole or in part, the Administrative & Investment Committee shall furnish the Applicant within 90 days after receipt of such claim (or within 180 days after receipt if special circumstances require an extension of time), a written notice which (i) specifies the reason for the denial, (ii) refers to the pertinent provisions of the Plan on which the denial is based, (iii) describes any

 
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additional material or information necessary for properly completing the claim and explains why such material or information is necessary, (iv) explains the claim review procedures of this Section 9.10, and (v) advises the Applicant of his or her right to bring a civil action under ERISA Section 502(a) following the denial or adverse benefit determination on appeal, provided Participant brings the action within 1 year following the denial or adverse benefit determination on appeal. If special circumstances require an extension of the initial 90 day review period, the Administrative & Investment Committee shall furnish the Applicant, prior to the termination of the initial 90-day review period, with a written notice of the extension indicating the special circumstances requiring an extension and the date by which the Administrative & Investment Committee expects to render a decision. Any Applicant whose claim is denied under the provisions described above, or who has not received from the Administrative & Investment Committee a response to his claim within the time periods specified in the provisions described above may request a review of the denied claim by written request to the Administrative & Investment Committee within 60 days after receiving notice of the denial. In connection with such request, the Applicant or his authorized representative may review pertinent documents and may submit issues and comments in writing. If such a request is made, the Administrative & Investment Committee shall make a full and fair review of the denial of the claim and shall make a decision not later than 60 days after receipt of the request, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case a decision shall be made as soon as possible but not later than 120 days after receipt of the request for review, and written notice of the extension shall be given to the Applicant before the commencement of the extension. The decision on review shall be in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of the Plan on which the decision is based. No person entitled to benefits under the Plan shall have any right to seek review of a denial of benefits, or to bring any action to enforce a claim for benefits, in any court prior to his filing a claim for benefits and exhausting all of his rights under this Section 9.10. Although not required to do so, an Applicant may choose to state the reason or reasons he believes he is entitled to benefits, and may choose to submit written evidence, during the initial claim process or review of claim denial process. An Applicant shall be entitled to bring a civil action under ERISA Section 502(a) following a denial or an adverse benefit determination on appeal, provided Applicant brings the action within one year following the denial or adverse benefit determination on appeal. If an Applicant’s claim is approved, but Applicant believes he or she is entitled to a different amount of benefits, Applicant can file a written claim for adjustment within one year of the date of the initial payment.
9.11     Investments in Company Common Stock . The Administrative & Investment Committee is responsible for directing the Trustee with respect to investments of Plan assets in Company Common Stock. In connection with such investments, the Administrative & Investment Committee has the authority to cause the Trustee to exercise or sell in the open market any options, rights or warrants which entitle the Plan to subscribe to or purchase shares of Company Common Stock. As provided in Section 6.6, the Administrative & Investment Committee is responsible for determining the appropriate value for Company Common Stock contributed to the Plan or purchased by the Plan. Notwithstanding the foregoing, all certificates for shares of Company Common Stock held on behalf of the Plan shall be in the custody of the Trustee and shall be held in the name of the Trustee or a nominee

 
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of the Trustee. Prior to any distribution of Plan assets in the form of Company Common Stock pursuant to Section 10.6 or any other provision of the Plan, the Administrative & Investment Committee shall cause such Common Stock held by the Trust, to the extent not registered under the Securities Act of 1933, to be registered to the extent required under said Act.
ARTICLE X

AMENDMENT, TERMINATION OR PLAN MERGER
10.1     Amendment . The Administrative & Investment Committee shall have the right at any time to amend in whole or in part any or all of the provisions of this Plan except as expressly set forth below
(a)    Except as expressly provided in Section 11.14 below, no amendment may result in, authorize or permit any part of the Trust Fund, the income from the Trust Fund or any Plan assets to be distributed to or for the benefit of anyone other than the Participants and any other persons entitled to benefits under the Plan.
(b)    No amendment may be adopted which will reduce any Participant’s benefits to an amount less than the benefit that the Participant would be entitled to receive if he had resigned from the employ of the Employers and all Commonly Controlled Entities of the Employers immediately prior to the effective date of such amendment.
(c)    No amendment may increase the duties of either the Administrative & Investment Committee without its consent.
10.2     Plan Termination . The Plan will terminate as to all Employers on the earlier of the date the Plan is terminated by the Company with respect to all Employers or the earliest date on which one of the events described in subsections (a) through (d) below has occurred with respect to all Employers. The Plan will terminate with respect to an individual Employer on the first to occur of the following dates:
(a)    Any date that the Plan is terminated with respect to an individual Employer by action of that Employer, provided that the Company and the Trustee have been given prior written notice of such termination and provided that the Company does not elect to continue the Plan as it applies to such Employer.
(b)    Any date that the Employer is judicially declared bankrupt or insolvent unless the Company elects to continue the Plan as it applies to such Employer.
(c)    Any date an Employer completely discontinues its contributions under the Plan unless the Company elects to continue such contributions.
(d)    Any date the Employer is dissolved, merged, consolidated or reorganized or the date on which the assets of the Employer are completely or substantially

 
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sold, unless arrangements have been made whereby the Plan will be continued by the Company or the other Employers or by a successor to the Employer or purchaser of its assets under Section 10.3.
10.3     Continuation by a Successor or Purchaser . The Plan and the Trust shall not terminate with respect to an Employer in the event of dissolution, merger, consolidation or reorganization of such Employer or sale by such Employer of its entire assets or substantially all of its assets if arrangements are made in writing among the Employer, the Company and any successor to the Employer or purchaser of all or substantially all of its assets whereby such successor or purchaser will continue the Plan and the Trust. If such arrangements are made, such successor or purchaser shall be substituted for the Employer under the Plan and the Trust.
10.4     Plan Merger or Consolidation . The Company may cause the Plan or the Trust or both to be merged or consolidated with, or may transfer the assets or liabilities under the Plan to, any other qualified plan or from any other qualified plan, provided that the documents and other arrangements regarding such merger, consolidation or transfer provide safeguards which would cause each Participant in the Plan, if the Plan terminated, to receive a benefit in the event of a termination immediately after such merger, consolidation or transfer which is equal to. or greater than the benefit the Participant would have been entitled to receive if the Plan had terminated immediately prior to such merger, consolidation or transfer.
10.5     Notice to Participants of Amendments Terminations or Plan Mergers . Participants shall be notified by the Company within a reasonable time following any significant amendment, termination, Plan merger or consolidation. The Administrative & Investment Committee, in its sole discretion, shall determine whether an amendment is “significant” for purposes of the preceding sentence.
10.6     Vesting and Distribution on Termination . There shall be no Employer contributions (including Pay Deferral Contributions) after the date the Plan terminates. However, the Trust shall remain in existence, and all of the provisions of the Plan (other than the provisions relating to contributions) which in the sole opinion of the Trustee are necessary, shall remain in full force and effect until all the assets of the Plan are distributed in accordance with the terms of the Plan and the Trust. The benefits of each Participant affected by a termination or partial termination will be fully vested and will be payable to such Participant in a lump sum as soon as practicable, unless other arrangements are previously made in accordance with ARTICLE VII. Notwithstanding the foregoing, if the Plan assets to be distributed to Participants in accordance with this Section 10.6 include Company Common Stock, prior to such distribution the Company shall cooperate with the Administrative & Investment Committee to cause all such Company Common Stock, to the extent not registered under the Securities Act of 1933, to be registered to the extent required under said Act.

 
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ARTICLE XI

GENERAL PROVISIONS
11.1     No Employment Guarantee . The establishment of the Plan, any modification thereof, the creation of any fund or Account, or the payment of any benefits shall not be construed as giving to any Participant or other person any legal or equitable right against the Employers, the Administrative & Investment Committee, the Trustee or any Plan representative except as herein provided. Under no circumstances shall the terms of employment with the Employer of any Participant be modified or in any way affected hereby. The maintenance of this Plan shall not constitute a contract of employment with the Employer. Participation in the Plan will not give any Participant a right to be retained as an Employee of any Employer.
11.2     Nonalienation of Plan Benefits . The rights or interests of any Participant or any Beneficiary to any benefits or future payments hereunder shall not be subject to attachment or garnishment or other legal proceeding or process by any creditor of any such Participant or Beneficiary nor shall any such Participant or Beneficiary have any right to alienate, anticipate, commute, pledge, attach, encumber or assign any of the benefits or rights which he may expect to receive, contingently or otherwise under the Plan except as may be required by the tax withholding provisions of the Code or of a state’s income tax act, or as may be required by Section 8.2.
(a)    The rule against alienation in this Section 11.2 shall not apply to a “Qualified Domestic Relations Order” (as defined in Code Section 414(p)). The Administrative & Investment Committee shall establish written procedures consistent with Code Section 414(p) and ERISA Section 206(d)(3) to determine the qualified status of any domestic relations order.
(b)    The rule against alienation in this Section 11.2 shall not apply, to the extent permitted by law, to any offset of a Participant’s benefits under the Plan against an amount that the Participant is ordered or required to pay to the Plan pursuant to (1) a judgment of conviction for a crime involving the Plan, (ii) a civil judgment in connection with a violation (or alleged violation) of Part 4 of Subtitle B of Title I of ERISA or (iii) a settlement agreement between the Secretary of Labor and the Participant or the Pension Benefit Guaranty Corporation and the Participant in connection with a violation (or alleged violation) of Part 4 of Subtitle B of Title I of ERISA.
11.3     Action by an Employer . Action required or permitted to be taken by an Employer may be taken by action of the board of directors of that Employer or by a person or committee of persons authorized to act by said board. The Company’s powers may be exercised by the Board of Directors or a person or committee of persons authorized to act by the Board of Directors or by the Company’s chief executive officer or his delegate.

 
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11.4     Applicable Law . The Plan and Trust shall be construed in accordance with the provisions of ERISA and other applicable federal laws. To the extent not inconsistent with such laws, this Plan shall be construed in accordance with the laws of California.
11.5     Participant Litigation . In any action or proceeding regarding the Plan assets or any property constituting a portion or all thereof or regarding the administration of the Plan, Employees or former employees of the Employers or their Beneficiaries or any other persons having or claiming to have an interest in this Plan shall not be necessary parties and shall not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding shall be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this Plan. To the extent permitted by law, if a legal action is begun against the Employers, the Administrative & Investment Committee, or the Trustee by or on behalf of any person and such action results adversely to such person or if a legal action arises because of conflicting claims to a Participant’s or other person’s benefits, the costs to the Employers, the Administrative & Investment Committee, or the Trustee of defending the action will be charged to the sums, if any, which were involved in the action or were payable to the Participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in this Plan shall constitute a release of the Employers, the Administrative & Investment Committee, the Trustee and their agents from any and all liability and obligation not involving willful misconduct or gross neglect.
11.6     Participant and Beneficiary Duties . Each person entitled to benefits under the Plan shall furnish the Administrative & Investment Committee with all appropriate documents, evidence, data or information which the Administrative & Investment Committee considers necessary or desirable in administering the Plan.
11.7     Individual Account Statements . At least once each year the Administrative & Investment Committee will issue to each Participant an Account Balance statement. As of the Effective Date, such statements are provided quarterly.
11.8     Gender and Number . Words denoting the masculine gender shall include the feminine and neuter genders and the singular shall include the plural and the plural shall include the singular wherever required by the context.
11.9     Adequacy of Evidence . Evidence which is required of anyone under this Plan shall be executed or presented by proper individuals or parties and may be in the form of certificates, affidavits, documents or other information which the Administrative & Investment Committee, the Trustee, the Employer or other persons acting on such evidence consider pertinent and reliable.
11.10     Notice to Participants and Beneficiaries . A notice mailed to a Participant or Beneficiary at his last address filed with the Administrative & Investment Committee will be binding on the Participant or Beneficiary for all purposes of the Plan.

 
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11.11     Waiver of Notice . To the extent permitted by applicable law, any notice under this Plan may be wholly or partially waived by the person entitled to notice.
11.12     Successors . This Plan and the Trust will be binding on all persons entitled to benefits hereunder and their respective heirs and legal representatives, and on the Administrative & Investment Committee, the Trustee and their successors.
11.13     Severability . If any provision of the Plan is held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provisions had never been contained in the Plan.
11.14     Nonreversion . Except as provided below, the Employers have no right, title or interest in the assets of the Plan or in the Trust Fund and no portion of the Trust Fund or the assets of the Plan or interest therein shall at any time revert or be repaid to the Employers. Notwithstanding the preceding sentence, the following Employer contributions or Participant contributions may be returned to the Employer or the Participant, as the case may be:
(a)    The Employer contributions which cannot be credited to a Participant’s Account because of the limitations of Sections 4.3 or 4.4 may be returned to the Employer.
(b)    Employer contributions which are conditioned upon their deductibility under Code Section 404 shall be returned to the applicable Employer or Employers to the extent any such contributions are determined to be nondeductible. Employer contributions and Participant contributions which are made as a result of a mistake of fact may be returned to the Employer or the Participant making those contributions. Employer contributions may only be repaid under this subsection within 12 months after the date the error or nondeductibility is discovered by the Employer.
(c)    Employer contributions which are conditioned upon qualification of the Plan and the Trust may be returned to the- Employer if the Plan is not initially determined to be qualified.
11.15     Qualification of Plan and Trust . The Trust and the Plan taken together are intended to qualify under Section 401(a) so as to be tax-exempt under Section 501(a) of the Code, as amended. Each of the Trust and the Plan shall also be deemed to be mutually incorporated by reference and to implement and form a part of each other such document. Unless and until advised to the contrary, the Administrative & Investment Committee, the Trustee, any Investment Managers, any insurance institutions and persons dealing with them shall be entitled to assume that the Trust and this Plan are so qualified and tax-exempt.
11.16     Certain Indemnification . To the extent permitted by applicable law and to the extent that he is not indemnified or saved harmless under any liability insurance contracts, any present or former Administrative & Investment Committee or Investment Committee member and any officer, Employee or director of any Employer or its subsidiaries or affiliates

 
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shall be indemnified and saved harmless by the Employers from and against any and all liabilities or allegations of liability, joint or several to which he may be subjected by reason of any act done or omitted to be done in good faith in the administration and operation of the Plan and Trust (and for the acts and omissions of his agents or co-fiduciaries), including all expenses reasonably incurred in the defense of any action, suit or proceeding (including reasonable attorneys’ fees and reasonable costs of settlement) in the event that the Employers fail to provide such defense after having been requested to do so.
11.17     Voice Response Unit Deemed Written Consent . Where the written consent of a Participant, Spouse, Beneficiary, or alternate payee is required pursuant to the terms of the Plan and/or applicable law, electronic telephone entries made by any such individual via the Company’s automated “voice response unit” system shall constitute such written consent for purposes of the Code and U.S. Treasury regulations.
11.18    Effective January 1, 2002. With respect to any distribution or severance from employment on or after that date, a Participant’s benefits will become payable upon the Participant’s termination of employment due to death, disability or severance from employment or, subject to Code Section 401(k)(10), a termination of the Plan without establishment of a successor plan. Prior to 2002, Plan benefits will become distributable when (a) the Participant separates from service, including but not limited to a separation due to death, disability or retirement, (b) subject to Code Section 401(k)(10), if substantially all the assets of a trade or business are sold to an unrelated corporation, the Participant continues employment with the unrelated corporation and the Employer continues to maintain this Plan, or (c) subject to Code Section 401(k)(10), if an Employer’s interest in a subsidiary is sold to an unrelated entity and the Participant continues employment with the subsidiary and the Employer continues to maintain this Plan.
ARTICLE XII

SPECIAL TOP-HEAVY RULES
12.1     Application . Notwithstanding any provisions of the Plan to the contrary, the provisions of this ARTICLE XII shall apply and be effective for any Plan Year for which the Plan shall be determined to be a “Top-Heavy Plan” as provided and defined herein.
12.2     Special Terms . For purposes of this ARTICLE XII, the following terms shall have the following meanings:
(a)    “Aggregate Benefit” means the sum of:
(i)    The present value of the accrued benefit under each and all defined benefit plans in the Aggregation Group determined on each plan’s individual Determination Date as if there were a Termination of Employment on the most recent date the plan is valued by an actuary for purposes of computing plan costs under Section 412 of

 
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the Code within the 12-month period ending on the Determination Date of each such plan, but with respect to the first plan year of any such plan determined by taking into account the estimated accrued benefit as of the Determination Date; provided that the actuarial assumptions to be applied for purposes of this subparagraph (i) shall be the same assumptions as those applied for purposes of determining the actuarial equivalents of optional benefits under the particular plan, except that the interest rate assumption shall be 5%;
(ii)    The present value of the accrued benefit (i.e., account balances) under each and all defined contribution plans in the Aggregation Group, valued as of the valuation date coinciding with or immediately preceding the Determination Date of each such plan, including (A) contributions made after the valuation date but on or prior to the Determination Date, (B) with respect to the first plan year of any plan, any contribution made subsequent to the Determination Date but allocable as of any date in the first plan year or (C) with respect to any defined contribution plan subject to Section 412 of the Code, any contribution made after the Determination Date that is allocable as of a date on or prior to the Determination Date; and
(iii)    The sum of each and all amounts distributed (other than a rollover or plan-to-plan transfer) from any Aggregation Group Plan, plus a rollover or plan-to-plan transfer initiated by the Employee and made to a plan which is not an Aggregation Group Plan within the Current Plan Year, however, (1) that in the case of a distribution made for a reason other than a Participant’s Termination of Employment, death or Disability, such sums shall include all amounts distributed within the Current Plan Year or within the preceding four plan years of any such plan and (ii) that provided such amounts are not already included in the present value of the accrued benefits as of the valuation date coincident with or immediately preceding the Determination Date.
The Aggregate Benefit shall not include the value of any rollover or plan-to-plan transfer to an Aggregation Group Plan, the contribution or transfer of which was initiated by a Participant, was from a plan which was not an Aggregation Group Plan and was made after December 31, 1983, nor shall the Aggregate Benefit include the value of employee contributions which are deductible pursuant to Section 219 of the Code.
(b)     Aggregation Group” means the Plan and any plan (including a plan that has terminated) which is described in Section 401 (a) of the Code, is an annuity contract described in Section 403(a) of the Code, is a simplified employee pension described in Section 408(k) of the Code or is a simple retirement account described in Section 408(p) of the Code maintained or adopted by an Employer or a Commonly Controlled Entity of the Employer in the Current Plan Year which is either a “Required Aggregation Group” or a “Permissive Aggregation Group.
(i)    A “Required Aggregation Group” means all Aggregation Group Plans (A) in which a Key Employee participates or (B) which enable any Aggregation Group Plan in which a Key Employee participates to satisfy the requirements of Section 401(a)(4) or Section 410 of the Code;

 
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(ii)    A “Permissive Aggregation Group” means all Aggregation Group Plans included in the Required Aggregation Group, plus one or more other Aggregation Group Plans as designated by the Administrative & Investment Committee in its sole discretion, which satisfy the requirements of Section 401(a)(4) and Section 410 of the Code when considered with the other component plans of the Required Aggregation Group.
(c)    “Aggregation Group Plan” means the Plan and each other plan in the Aggregation Group.
(d)    “Current Plan Year” means (i) with respect to the Plan, the Plan Year in which the Determination Date occurs, and (ii) with respect to each other Aggregation Group Plan, the plan year of such other plan in which occurs the Determination Date of such other plan.
(e)    “Determination Date” means (i) with respect to the Plan and its Plan Year, the last day of the preceding Plan Year, or (ii) with respect to any other Aggregation Group Plan in any calendar year during which the Plan is not the only component plan of an Aggregation Group, the determination date of each plan in such Aggregation Group to occur during the calendar year as determined under the provisions of each such plan.
(f)    “Former Key Employee” means an Employee (including a terminated Employee) who is not a Key Employee in the Current Plan Year but who was a Key Employee at any time prior to the Current Plan Year.
(g)    “Key Employee” means an Employee (including a terminated Employee) who at any time during the Current Plan Year is:
(i)    An officer of an Employer or a Commonly Controlled Entity of an Employer whose total Compensation from the Employer and the Commonly Controlled Entities during the Plan Year is greater than the amount in effect under Section 416(i)(1)(A)(i) of the Code (as adjusted for cost-of-living increases by the Secretary of the Treasury) for the calendar year in which the Plan Year ends; provided, however, that no more than the lesser of (A) 50 Employees, or (B) the greater of (1) three Employees or (2) 10% (rounded to the next whole integer) of the greatest number of Employees during the Current Plan Year shall be considered as officers for this purpose. Such officers considered will be those with the greatest annual Compensation as an officer during the one-year period ending on the Determination Date
(ii)    A person who owns more than 5% of the value of the outstanding stock of an Employer or of any Commonly Controlled Entity of the Employer or more than 5% of the total combined voting power of all stock of the Employer or any Commonly Controlled Entity of the Employer (considered separately); or
(iii)    A person who owns more than 1% of the value of the outstanding stock of an Employer or a Commonly Controlled Entity of the Employer or

 
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more than 1 % of the total combined voting power of all stock of the Employer or of the Commonly Controlled Entity (considered separately) and whose total annual Compensation from the Employer and the Commonly Controlled Entity is in excess of $150,000.
The rules of Section 416(i)(1)(B) and (C) of the Code shall be applied for purposes of determining an Employee’s ownership interest in an Employer or a Commonly Controlled Entity of an Employer for purposes of subparagraphs (iii) and (iv) above. For purposes of this subsection (g), “value” means fair market value. A Beneficiary (who would not otherwise be considered a Key Employee) of a deceased Key Employee shall be deemed to be a Key Employee in substitution for such deceased Key Employee.
(h)    “Top-Heavy Plan” means the Plan with respect to any Plan Year if the Aggregate Benefit of all Key Employees or the Beneficiaries of Key Employees determined on the Determination Date is an amount in excess of 60% of the Aggregate Benefit of all persons who are Employees within the Current Plan Year, excluding Former Key Employees. With respect to any calendar year during which the Plan is not the only Aggregation Group Plan, the ratio determined under the preceding sentence shall be computed based on the sum of the Aggregate Benefits of each Aggregation Group Plan totaled as of the last Determination Date of any Aggregation Group Plan to occur during the calendar year.
12.3     Vested Percentage . For any Plan Year that the Plan is a Top-Heavy Plan, the non-forfeitable percentage of the Employer Matching Account of any person who is an Employee for such Plan Year shall be determined under the vesting schedule in Section 7.2.
12.4     Minimum Contribution . For any Plan Year that the Plan shall be a Top-Heavy Plan, each Participant who is (a) an Eligible Employee but who is neither a Key Employee nor a Former Key Employee and (b) who is an Employee on the last day of the Plan Year regardless of how many Hours of Service he earned during the Plan Year shall have allocated to his Employer Matching Account the sum of Employer Matching Contributions in an amount equal to not less than the lesser of 3% of such Participant’s Compensation, or an amount which is the same ratio or percentage of Employer Matching Contributions to such Compensation for the Plan Year as for the Key Employee who has the highest such ratio or percentage for the Plan Year. The amount of Employer Matching Contributions required to be allocated under this Section for any Plan Year shall be reduced by the amount of Employer contributions and Forfeitures allocated on behalf of the Participant under any other defined contribution plan in the Aggregation Group for the Plan Year. For Plan Years beginning after 2001, Matching Contributions will be taken into account as Employer Contributions for purposes of the minimum contribution in a top-heavy Plan Year.
12.5     Termination of Top-Heavy Status . If the Plan has been determined to be a Top-Heavy Plan for one or more Plan Years and thereafter ceases to be a Top-Heavy Plan,

 
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the provisions of this ARTICLE XII shall cease to apply to such Plan effective as of the Determination Date on which the Plan is not a Top-Heavy Plan.
ARTICLE XIII

ADOPTION AND WITHDRAWAL FROM PLAN
13.1     Procedure for Adoption . Any Employer and certain unrelated companies (as provided in Section 13.3) may adopt the Plan for the benefit of their Employees as of a date specified. No such adoption shall be effective until such adoption has been approved by the Administrative & Investment Committee. Notwithstanding any term or provision of the Plan to the contrary (including, but not limited to, terms and conditions concerning Vesting Service, Eligibility Service, Compensation and amount of retirement benefits), the terms and provisions as may be imposed with respect to such Employer Employers and their Employees in an applicable supplement or appendix to the Plan shall govern. Any Employer who adopts the Plan in accordance with this Section or Section 13.3 agrees to be bound by all the terms, provisions, conditions and limitations of the Plan and the accompanying Trust Agreement which are pertinent to any entity defined as an “Employer” in the Plan with respect to its Eligible Employees under the Plan. Such Employer further agrees that the Administrative & Investment Committee shall act for the Employer and its Eligible Employees under the provisions of the Plan. Such Employer further agrees to furnish from time to time such information with reference to its Eligible Employees as may be required by the Administrative & Investment Committee .
13.2     Procedure for Withdrawal . Any Employer (other than the Company) may, with the consent of the Company, and subject to such conditions as may be imposed by the Company, terminate its adoption of the Plan. Upon discontinuance of an Employer’s participation in the Plan, the Trustee shall cause a determination to be made of the equitable part of the Plan assets held on account of Participants of the withdrawing Employer and their Beneficiaries. The Administrative & Investment Committee shall direct the Trustee to transfer assets representing such equitable part to a separate fund for the plan of the withdrawing Employer. Such withdrawing Employer may thereafter exercise, in respect of such separate fund, all the rights and powers reserved to the Company with respect to Plan assets. The plan of the withdrawing Employer shall, until amended by the withdrawing Employer, continue with the same terms as the Plan herein, except that with respect to the separate plan of the withdrawing Employer the words “Employer,” “Employers,” and “Company” shall thereafter be considered to refer only to the withdrawing Employer. Any discontinuance of participation by an Employer shall be effected in such manner that each Participant or Beneficiary would (if the Plan and the plan of the withdrawing Employer then terminated) receive a benefit immediately after such discontinuance of participation which is equal to or greater than the benefit he or she would have been entitled to receive immediately before such discontinuance of participation if the Plan had then terminated. No transfer of assets pursuant to this Section shall be effected until such statements with respect thereto, if any, required by ERISA to be filed in advance thereof have been filed.

 
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13.3     Adoption of Plan by Unrelated Employers . The Company may authorize companies that are not Commonly Controlled Entities with respect to the Company to adopt the Plan. Such authorization may extend to an individual company or to a group of related companies. Any such company that is authorized to adopt the Plan for the benefit of its employees shall do so in accordance with Section 13.1. For purposes of such adoption and for purposes of its participation in the Plan, any such company shall be deemed to be an “Employer” hereunder and shall be subject to all terms of the Plan applicable to an Employer.

 
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IN WITNESS WHEREOF, a duly authorized officer of the Company and a member of the Administrative and Investment Committee has caused this Plan to be executed on the 15th day of January, 2016.
EDWARDS LIFESCIENCES CORPORATION
ADMINISTRATIVE AND INVESTMENT
COMMITTEE

By: /s/ Christine Z. McCauley     

Its: Corporate Vice President, Human Resources


 
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Exhibit 31.1
EDWARDS LIFESCIENCES CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
I, Michael A. Mussallem, certify that:
1.  I have reviewed this quarterly report on Form 10-Q of Edwards Lifesciences Corporation;
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:
April 28, 2016
By:
/s/ MICHAEL A. MUSSALLEM
 
 
 
Michael A. Mussallem
Chairman of the Board and
Chief Executive Officer





Exhibit 31.2

EDWARDS LIFESCIENCES CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
I, Scott B. Ullem, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Edwards Lifesciences Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.  The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:
April 28, 2016
By:
/s/ SCOTT B. ULLEM
 
 
 
Scott B. Ullem
Chief Financial Officer





Exhibit 32
EDWARDS LIFESCIENCES CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Edwards Lifesciences Corporation (the "Company") on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Michael A. Mussallem, Chairman of the Board and Chief Executive Officer of the Company, and Scott B. Ullem, Corporate Vice President, Chief Financial Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

April 28, 2016
/s/ MICHAEL A. MUSSALLEM
 
Michael A. Mussallem
Chairman of the Board and
Chief Executive Officer
April 28, 2016
/s/ SCOTT B. ULLEM
 
Scott B. Ullem
Chief Financial Officer