Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis presents the factors that had a material effect on our results of operations during the two years ended December 31, 2022. Also discussed is our financial position as of December 31, 2022. You should read this discussion in conjunction with the historical consolidated financial statements and related notes included elsewhere in this Form 10-K. For a discussion related to the results of operations for 2021 compared to 2020 and a discussion related to our consolidated cash flows for 2021 compared to 2020, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10–K filed with the Securities and Exchange Commission on February 14, 2022.
Overview
We are the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or in intensive care. 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 areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care.
Financial Highlights and Market Update
COVID-19 and Macroeconomic Uncertainties
The COVID-19 pandemic has adversely impacted, and may further adversely impact, nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners. Our priority has been to maintain access for patients to our life-saving technologies while providing continuous front-line support to our clinician partners, and protecting the well-being of our employees. Our manufacturing operations have continued to respond to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components to address potential supply constraints.
During the first quarter of 2021, COVID-19 stressed the global healthcare system during the winter months. However, we saw strong recovery beginning in the second quarter of 2021 as widespread vaccine adoption contributed to an increased number of patients. However, the Delta variant had a significant impact on hospital resources during the last two months of the third quarter of 2021, and the Omicron variant had a significant impact during December 2021, especially in the United States.
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During the first quarter of 2022, the Omicron variant had a pronounced impact on hospital capacity, resources, and
procedure volumes in January 2022, especially in the United States. Our 2022 sales were also impacted by slower than expected improvement in United States hospital staffing shortages and foreign currency headwinds. In the second half of 2022, we faced COVID-19 headwinds in Japan, which created significant strain on hospital capacity.
In addition to the impacts described above, the global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including increases to inflation rates, rising interest rates, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A, "Risk Factors," for additional information.
2022 Financial Highlights
Despite the challenges to our business in 2022 due to COVID-19 and macroeconomic factors, our net sales for 2022 were $5.4 billion, representing an increase of $149.9 million over 2021, driven by sales growth of our TAVR products.
Our gross profit increase in 2022 was driven by our sales growth and the positive impact of our foreign currency hedging program.
The increase in our diluted earnings per share in 2022 was driven by a) the aforementioned increase in our gross profit and b) a decrease in our diluted weighted-average shares outstanding, driven by our increased share repurchase activity. This increase was partially offset by a) changes in the fair value of our contingent consideration liabilities, which resulted in a $121.6 million after tax gain in 2021 compared to a $35.0 million after tax gain in 2022, b) an after-tax charge of $47.0 million in 2022, primarily related to the impairment of intangible assets resulting from our decision to exit our HARPOON surgical mitral repair system program, and c) increased sales and marketing and research and development expenses in 2022.
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. Despite the challenges of the COVID-19 pandemic, our dedicated field teams have found creative ways to support physicians, our engineers continued to advance innovation, and our colleagues worked diligently to keep our clinical trials on track. In 2022, we invested 17.6% of our net sales in research and development. The following is a summary of important developments during 2022:
•we received United States Food and Drug Administration ("FDA") approval for the MITRIS RESILIA valve, a tissue valve replacement specifically designed for the heart's mitral position;
•we received CE Mark approval for the PASCAL Precision transcatheter valve repair system for patients suffering from mitral and tricuspid regurgitation, and FDA approval for PASCAL Precision for patients with degenerative mitral regurgitation; and
•we launched the SAPIEN 3 Ultra RESILIA valve following FDA approval.
We are dedicated to generating robust clinical, economic, and quality-of-life evidence increasingly expected by patients, clinicians, and payors in the current healthcare environment, with the goal of encouraging the adoption of innovative new medical therapies that demonstrate superior outcomes.
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Results of Operations
Net Sales by Major Regions
(dollars in millions)
Years Ended December 31, Change
Net sales outside of the United States 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 "Quantitative and Qualitative Disclosures About Market Risk."
Net Sales by Product Group
(dollars in millions)
Years Ended December 31, Change
Transcatheter Mitral and Tricuspid Therapies 116.1 86.0 30.1 35.1 %
Transcatheter Aortic Valve Replacement
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The increase in net sales of TAVR products was driven by:
•higher sales of the Edwards SAPIEN platform in 2022, primarily the Edwards SAPIEN 3 Ultra valve in the United States, Europe, and Rest of World, the Edwards SAPIEN 3 UltraRESILIA valve in the United States, and the Edwards SAPIEN 3 in Japan;
partially offset by:
•foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $140.2 million primarily due to the weakening of the Euro and the Japanese yen against the United States dollar.
During 2022, we continued to advance our EARLY TAVR pivotal trial, studying the treatment of severe aortic stenosis patients before their symptoms develop, and our PROGRESS pivotal trial, studying moderate aortic stenosis patients. During the second quarter of 2022, we began treating patients in our ALLIANCE pivotal trial, studying our next-generation TAVR technology, SAPIEN X4, and during the fourth quarter of 2022, we began the introduction of the SAPIEN 3 Ultra Resilia valve in the United States.
Transcatheter Mitral and Tricuspid Therapies
The increase in net sales of TMTT products was due primarily to continued adoption of our PASCAL system in Europe.
During August 2022, we received European regulatory approval for PASCAL Precision for patients suffering from mitral
and tricuspid regurgitation, and in September 2022, we received FDA approval for PASCAL Precision for patients with degenerative mitral regurgitation. In mitral replacement, we continued to treat patients through the ENCIRCLE pivotal trial for SAPIEN M3 and completed enrollment in the MISCEND early feasibility study for EVOQUE Eos. We also continued to make progress in enrolling the TRISCEND II pivotal trial of the EVOQUE replacement system and the CLASP IITR pivotal trial with the PASCAL repair system in patients with symptomatic, severe tricuspid regurgitation.
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Surgical Structural Heart
The increase in net sales of Surgical products was due primarily to strong adoption of the INSPIRIS RESILIA aortic valve, primarily in the United States and Europe, and the MITRIS RESILIA valve, primarily in the United States. These increases were partially offset by the impact of foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $46.5 million primarily due to the weakening of the Euro and the Japanese yen against the United States dollar.
In March 2022, we received FDA approval for the MITRIS RESILIA valve and initiated the product launch in the United States in April 2022. MITRIS RESILIA is a tissue valve replacement specifically designed for the heart's mitral position and incorporates our advanced RESILIA technology. In early 2023, we began enrolling patients in our MOMENTS clinical study to demonstrate the durability of RESILIA tissue in the mitral position.
Critical Care
The increase in net sales of Critical Care products was driven by:
•increased demand for our capital products, primarily the HemoSphere monitoring platform in the United States and Japan;
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•increased demand for our pressure monitoring products, primarily in the United States; and
•increased demand for our enhanced surgical recovery products, primarily in the United States;
partially offset by:
•foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $39.5 million primarily due to the weakening of the Japanese yen and the Euro against the United States dollar.
Gross Profit
The increase in gross profit as a percentage of net sales in 2022 compared to 2021 was driven primarily by a 3.6 percentage point increase from the impact of our foreign currency hedging program, which includes hedge contract gains and natural hedges (primarily the strengthening of the United States dollar against the Euro and the Japanese yen).
Selling, General, and Administrative ("SG&A") Expenses
SG&A expenses increased in 2022 compared to 2021 due primarily to a resumption of in-person commercial activities following COVID-19 and higher field-based personnel-related costs, primarily TAVR and TMTT in the United States. Foreign
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currency exchange rate fluctuations decreased expenses by $63.1 million due primarily to the strengthening of the United States dollar against the Euro and the Japanese yen.
Research and Development ("R&D") Expenses
R&D expenses increased marginally in 2022 compared to 2021 due primarily to continued investments in our transcatheter innovations, including increased clinical trial activity.
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in income of $35.8 million and $124.1 million in in 2022 and 2021, respectively. The income in 2022 was due to changes in projected probabilities of milestone achievement and our decision in the third quarter of 2022 to exit our HARPOON surgical mitral repair system program. The income in 2021 was attributable to changes in the projected probabilities of milestone achievements and the projected timing of cash inflows from product sales.
Special Charge
For information on special charge, see Note 4 to the "Consolidated Financial Statements."
Interest Expense
Interest expense was $19.2 million and $18.4 million in 2022 and 2021, respectively. The increase in interest expense resulted primarily from lower capitalized interest due to decreased facilities construction.
Interest Income
Interest income was $35.5 million and $17.4 million in 2022 and 2021, respectively. The increase in interest income resulted primarily from a higher average yield on our investments.
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Other Income, net
(in millions)
Years Ended December 31,
Foreign exchange losses (gains), net $ 1.2 $ (5.0)
Gain on insurance settlement (3.8) —
Loss (gain) on investments 1.1 (5.8)
Non-service cost components of net periodic pension benefit cost (1.1) 0.3
Other — (2.2)
Total other income, net $ (2.6) $ (12.7)
The net foreign exchange losses (gains) relate to the foreign currency fluctuations primarily in our global trade and intercompany receivable and payable balances, partially offset by the gains and losses on foreign currency derivative instruments.
The gain on insurance settlement relates to an insurance recovery for damaged cargo shipments of heart valves.
The loss (gain) 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 investments in equity securities.
The non-service cost components of net periodic pension benefit cost includes the costs or gains of our defined benefit plans that are not attributed to services rendered by eligible employees during the year, such as interest costs, expected return on plan assets, and amortization of actuarial gains or losses.
Provision for Income Taxes
($ in millions)
Years Ended December 31, Change
Effective tax rate 13.9 % 11.7 %
Our effective income tax rate in 2022 and 2021 was 13.9% and 11.7%, respectively. Our effective tax rate for 2022 increased in comparison to 2021 primarily due to the decrease in the tax benefit from the change in fair value of contingent consideration liabilities and the decrease in the excess tax benefit from employee share-based compensation.
In 2022, the difference between our 13.9% effective tax rate and the Federal statutory rate of 21% was primarily due to (1) foreign earnings taxed at lower rates, (2) Federal and California research and development credits, (3) the excess tax benefit from employee share-based compensation and (4) the tax benefit from the change in fair value of contingent consideration liabilities.
As of December 31, 2022, we had $189.8 million of gross California research expenditure tax credits that we expect to use in future periods. The credits may be carried forward indefinitely. Based upon anticipated future taxable income, we expect that it is more likely than not that all California research expenditure tax credits will be utilized, although the utilization of the full benefit is expected to occur over a number of years into the distant future.
As of December 31, 2022, our gross uncertain tax positions were $475.3 million. We estimate that these liabilities would be reduced by $182.1 million from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amount of $293.2 million, if not required, would favorably affect our effective tax rate.
In the normal course of business, the Internal Revenue Service ("IRS") and other taxing authorities are in different stages of examining various years of our tax filings. During these audits, we may receive proposed audit adjustments that could be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. 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
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require settlement, the eventual outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated 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. We believe that adequate amounts of tax and related penalty and interest have been provided for any adjustments that may result from our uncertain tax positions.
We executed an Advance Pricing Agreement (“APA”) in 2018 between the United States and Switzerland governments for tax years 2009 through 2020 covering various, but not all, transfer pricing matters. The unagreed transfer pricing matters, namely Surgical Structural Heart and Transcatheter Aortic Valve Replacement (collectively "Surgical/TAVR") intercompany royalty transactions, then reverted to IRS examination for further consideration as part of the respective years' regular tax audits. In addition, we executed other bilateral APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. We have filed to renew all the APAs which cover transactions with Japan for the years 2020 and forward. An APA between Switzerland and Japan covering tax years 2020 through 2024 was executed in 2021. The execution of the other APA renewals depends on many variables outside of our control.
At December 31, 2022, all material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, we continue to address matters in India for years from 2010 and on.
The audits of our United States federal income tax returns through 2014 have been closed. The IRS fieldwork for the 2015 through 2017 tax years was completed during the second quarter of 2021, except for transfer pricing and related matters. The IRS began its examination of the 2018 through 2020 tax years during the first quarter of 2022.
During 2021, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between our United States and Switzerland subsidiaries. The NOPA proposes an increase to our United States taxable income, which could result in additional tax expense for this period of approximately $210 million and represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions. We have formally disagreed with the NOPA and submitted a formal protest on the matter during the fourth quarter of 2021. During the second quarter of 2022, we received the IRS's rebuttal to our protest and were notified that the case had been transferred to the IRS Independent Office of Appeals. The opening conference is scheduled for the first quarter of 2023. We continue to evaluate all possible remedies available to us, which could take several years to resolve. We believe the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, have not accrued any additional amount based on the NOPA received. While no payment of any amount related to the NOPA is required to be made, if at all, until all applicable proceedings have been completed, we made an advance payment of tax in November 2022 to prevent the further accrual of interest on any potential deficiency.
Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 through 2022 that were not resolved under the APA program remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of December 31, 2022. We have considered this information, as well as information regarding the NOPA and rebuttal described above, in our evaluation of our uncertain tax positions. The impact of these unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to our consolidated financial statements. Based on the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in our existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the uncertain tax positions as a long-term liability.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes, among other provisions, changes to the U.S. corporate income tax system, including (1) a 15% minimum tax based on “adjusted financial statement income,” which is effective for tax years beginning after December 31, 2022, and (2) a one percent excise tax on net repurchases of stock after December 31, 2022. While we continue to evaluate the IRA and its application to our business, we do not expect the IRA will have a material impact on our consolidated financial statements.
We have received tax incentives in certain non-United States tax jurisdictions, the primary benefit for which will expire in 2029. The tax reductions as compared to the local statutory rates were $247.4 million ($0.40 per diluted share) and $208.0 million ($0.33 per diluted share) for the years ended December 31, 2022 and 2021, respectively.
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Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, cash from operations, and amounts available under credit facilities. We believe that these sources are sufficient to fund the current and long-term requirements of working capital, capital expenditures, and other financial commitments. 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.
The Tax Cuts and Jobs Act of 2017 (the "2017 Act") included extensive changes to the international tax regime. The 2017 Act required a deemed repatriation of post-1986 undistributed foreign earnings and profits. The one-time transition tax liability, as adjusted, is payable in three remaining annual installments, as outlined in the contractual obligations table presented under "Material Cash Requirements" below. As of December 31, 2022, we had a remaining tax obligation of $188.5 million related to the deemed repatriation. See Note 17 to the "Consolidated Financial Statements" for additional information about the one-time transition tax.
As of December 31, 2022, cash and cash equivalents and short-term investments held in the United States and outside of the United States were $731.8 million and $483.5 million, respectively. During 2022, we repatriated cash of $934.0 million. We assert that $1.0 billion of our foreign earnings continue to be permanently reinvested and our intent is to repatriate $580.8 million of our foreign earnings as of December 31, 2022. The estimated net tax liability on the indefinitely reinvested earnings if repatriated is $14.9 million.
We had a Five-Year Credit Agreement (the "Prior Credit Agreement") which was scheduled to mature on April 28, 2023 and provided up to an aggregate of $750.0 million in borrowings in multiple currencies. In July 2022, we entered into a new Five-Year Credit Agreement (the "New Credit Agreement") which provides for a $750.0 million multi-currency unsecured revolving credit facility and replaced the Prior Credit Agreement. The New Credit Agreement matures on July 15, 2027. We may increase the amount available under the New Credit Agreement by up to an additional $250.0 million in the aggregate and extend the maturity date for an additional year, subject to agreement of the lenders. The New Credit Agreement contains various financial and other covenants, including a maximum leverage ratio, as defined in the agreement. As of December 31, 2022, no amounts were outstanding, and we were in compliance with all covenants under the New Credit Agreement.
In June 2018, we issued $600.0 million of 4.3% fixed-rate unsecured senior notes (the "2018 Notes") due June 15, 2028. We may redeem the 2018 Notes, in whole or in part, at any time and from time to time at specified redemption prices. As of December 31, 2022, we have not elected to redeem any of the 2018 Notes. As of December 31, 2022, the carrying value of the 2018 Notes was $596.3 million. For further information on our debt, see Note 10 to the "Consolidated Financial Statements."
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. During 2022, under the Board authorized repurchase program, we repurchased a total of 20.0 million shares at an aggregate cost of $1.7 billion. As of December 31, 2022, we had remaining authority to purchase $915.6 million of our common stock under the share repurchase program.
Certain of our business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired business reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. For further information, see Note 11 to the "Consolidated Financial Statements."
We have purchased options to acquire and have agreed to provide promissory notes to various entities. These arrangements could result in additional cash outlays in the future should we decide to exercise the options or should the entities draw on the promissory notes. For further information, see Note 8 to the "Consolidated Financial Statements."
On July 12, 2020, we reached the Settlement Agreement with Abbott to settle all outstanding patent disputes between the companies in cases related to transcatheter mitral and tricuspid repair products. The Settlement Agreement resulted in us recording an estimated $367.9 million pretax charge in June 2020 related to past damages. In addition, we will incur royalty expenses through May 2024 totaling an estimated $70 million. We made a one-time $100.0 million payment to Abbott in July 2020, and are making quarterly payments in subsequent years. For further information, see Note 3 to the "Consolidated Financial Statements."
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Consolidated Cash Flows - For the twelve months ended December 31, 2022 and 2021
Net cash flows provided by operating activities of $1.2 billion for 2022 decreased $513.9 million from 2021 due to an increase in tax payments, an increase in inventory builds compared to the prior year, and a higher bonus payout in 2022 associated with 2021 performance.
Net cash provided by investing activities of $252.3 million in 2022 consisted primarily of net proceeds from investments of $661.0 million, partially offset by capital expenditures of $244.6 million and payments of $109.6 million for options to acquire other companies. For further information, see Note 8 to the "Consolidated Financial Statements."
Net cash used in investing activities of $1.7 billion in 2021 consisted primarily of net purchases of investments of $1.4 billion and capital expenditures of $325.8 million.
We currently anticipate making capital expenditures of approximately $300.0 million in 2023 as we continue to invest in our operations.
Net cash used in financing activities of $1.6 billion in 2022 consisted primarily of purchases of treasury stock of $1.7 billion, partially offset by proceeds from stock plans of $146.4 million.
Net cash used in financing activities of $356.3 million in 2021 consisted primarily of purchases of treasury stock of $512.8 million, partially offset by proceeds from stock plans of $158.6 million.
Material Cash Requirements
A summary of our material cash requirements as of December 31, 2022 is as follows (in millions):
Payments Due by Period
Contractual Obligations Total Year 1 Years 2-3 Years 4-5 After 5Years
Litigation settlement obligation (minimum payments) 162.5 50.0 100.0 12.5 —
Pension obligations (b) 2.4 2.4 — — —
_______________________________________________________________________________
(a) As of December 31, 2022, we had recorded $188.5 million of income tax liabilities related to the one-time transition tax that resulted from the enactment of the 2017 Act. The transition tax is due in eight annual installments, with the first five installments paid in 2018 through 2022. The remaining installment amounts will be equal to 15% of the total liability payable in 2023, 20% in 2024, and 25% in 2025. See Note 17 to the "Consolidated Financial Statements" for additional information about the one-time transition tax.
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(b) The amount included in "Less Than 1 Year" reflects anticipated contributions to our various pension plans. Anticipated contributions beyond one year are not determinable. The total accrued benefit liability for our pension plans recognized as of December 31, 2022 was $23.5 million. This amount is impacted by, among other items, pension expense funding levels, changes in plan demographics and assumptions, and investment returns on plan assets. Therefore, we are unable to make a reasonably reliable estimate of the amount and period in which the liability might be paid, and did not include this amount in the contractual obligations table. See Note 13 to the "Consolidated Financial Statements" for further information.
(c) Purchase and other commitments consists primarily of open purchase orders for the acquisition of goods and services in the normal course of business. We have excluded open purchase orders with a remaining term of less than one year. For certain purchase and other commitments, such as commitments to fund equity method or other investments, the timing of the payment is not certain. In these cases, the maturity dates in the table reflect our best estimates.
(d) As of December 31, 2022, the gross liability for uncertain tax positions, including interest, was $519.8 million and relates primarily to transfer pricing matters which are discussed in detail in Note 17 to the "Consolidated Financial Statements." Based upon the information currently available and numerous possible outcomes, we cannot reasonably estimate the amount and period in which the liability might be paid, and did not include this amount in the contractual obligations table.
(e) We acquire assets still in development, enter into research and development arrangements, acquire businesses, and sponsor certain clinical trials that often require milestone, royalty, or other future payments to third-parties, contingent upon the occurrence of certain future events. In situations where we have no ability to influence the achievement of the milestone or otherwise avoid the payment, we have included those payments in the table above. However, we have excluded from the table contingent milestone payments and other contingent liabilities for which we cannot reasonably predict future payments or for which we can avoid making payment by unilaterally deciding to stop development of a product or cease progress of a clinical trial. We estimate that these contingent payments could be up to $810.0 million if all milestones or other contingent obligations are met. This amount includes certain milestone-based contingent obligations that may be paid through a combination of cash and issuance of common stock, and certain sales-based royalties in excess of minimum payment thresholds related to litigation settlements.
Critical Accounting Policies and Estimates
Our results of operations and financial position are determined based upon the application of our accounting policies, as discussed in the notes to the "Consolidated Financial Statements." Certain of our accounting policies represent a selection among acceptable alternatives under GAAP. In evaluating our transactions, management assesses all relevant GAAP and chooses the accounting policy that most accurately reflects the nature of the transactions.
The application of accounting policies requires the use of judgments and estimates. These matters that are subject to judgments and estimates are inherently uncertain, and different amounts could be reported using different assumptions and estimates. Management uses its best estimates and judgments in determining the appropriate amount to reflect in the consolidated financial statements, using historical experience and all available information. We also use outside experts where appropriate. We apply estimation methodologies consistently from year to year.
We believe the following are the critical accounting policies which could have the most significant effect on our reported results and require subjective or complex judgments by management.
Revenue Recognition
When we recognize revenue from the sale of our products, the amount of consideration we ultimately receive varies depending upon the return terms, sales rebates, discounts, and other incentives that we may offer, which are accounted for as variable consideration when estimating the amount of revenue to recognize. The estimate of variable consideration requires significant judgment. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely upon an assessment of historical payment experience, historical relationship to revenues, estimated customer inventory levels, and current contract sales terms with direct and indirect customers. Product returns are typically not significant because returns are generally not allowed unless the product is damaged at time of receipt. If the historical data and inventory estimates used to calculate the variable consideration do not approximate future activity, our financial position, results of operations, and cash flows could be impacted.
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In addition, in limited circumstances, we may allow customers to return previously purchased products, such as for next-generation product offerings. For these transactions, we defer recognition of revenue on the sale of the earlier generation product based upon an estimate of the amount of product to be returned when the next-generation products are shipped to the customer. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls, and variation in product utilization all affect the estimates related to sales returns and could cause actual returns to differ from these estimates.
Our sales adjustment related to distributor rebates given to our United States distributors represents the difference between our sales price to the distributor and the negotiated price to be paid by the end-customer. We validate the distributor rebate accrual quarterly through either a review of the inventory reports obtained from our distributors or an estimate of the distributor's inventory. This distributor inventory information is used to verify the estimated liability for future distributor rebate claims based on historical rebates and contract rates. We periodically monitor current pricing trends and distributor inventory levels to ensure the credit for future distributor rebates is fairly stated.
Intangible Assets and Long-lived Assets
We acquire intangible assets in connection with business combinations and asset purchases. The acquired intangible assets are recorded at fair value, which is determined based on a discounted cash flow analysis. The determination of fair value requires significant estimates, including, but not limited to, the amount and timing of projected future cash flows, the discount rate used to discount those cash flows, the assessment of the asset's life cycle, including the timing and expected costs to complete in-process projects, and the consideration of legal, technical, regulatory, economic, and competitive risks.
In-process research and development assets acquired in business combinations is reviewed for impairment annually, or whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Additionally, management reviews the carrying amounts of other intangible and long-lived assets whenever events or circumstances indicate that the carrying amounts of an asset may not be recoverable. The impairment reviews require significant estimates about fair value, including estimation of future cash flows, selection of an appropriate discount rate, and estimates of long-term growth rates.
Contingent Consideration
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. We determine the fair value of the contingent consideration based primarily on the following factors:
•discount rates used to present value the projected cash flows;
•the probability of success of clinical events and regulatory approvals, and/or meeting commercial milestones; and
•projected payment dates.
On a quarterly basis, we revalue these obligations and record changes in their fair value as an adjustment to earnings. Changes to contingent consideration obligations can result from adjustments to discount rates, accretion of the discount rates due to the passage of time, changes in our estimates of the likelihood or timing of achieving development or commercial milestones, changes in the probability of certain clinical events, or changes in the assumed probability associated with regulatory approval.
The assumptions related to determining the value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration expense recorded in any given period.
Income Taxes
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Realization of certain deferred tax assets, primarily tax credits, net operating loss and other carryforwards, is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings.
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We have made an accounting policy election to recognize the United States tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income amongst various tax jurisdictions. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. Significant judgment is required in evaluating our uncertain tax positions, including estimating the ultimate resolution to intercompany pricing controversies between countries when there are numerous possible outcomes. We review these tax uncertainties quarterly and adjust the liability as events occur that affect potential liabilities for additional taxes, such as the progress of tax audits, lapsing of applicable statutes of limitations, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.
For additional details on our income taxes, see Note 2 and Note 17 to the "Consolidated Financial Statements."
Stock-based Compensation
We measure and recognize compensation expense for all stock-based awards based on estimated fair values. Stock-based awards consist of stock options, service-based restricted stock units, market-based restricted stock units, and employee stock purchase subscriptions. The fair value of each option award and employee stock purchase subscription is estimated on the date of grant using the Black-Scholes option valuation model. The fair value of market-based restricted stock units is determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The Black-Scholes and Monte Carlo models require various highly judgmental assumptions, including stock price volatility, risk-free interest rate, and expected option term. Stock-based compensation expense is recorded net of estimated forfeitures. Judgment is required in estimating the stock awards that will ultimately be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations would be impacted.
Legal Contingencies
We are or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits, including those related to products and services currently or formerly manufactured or performed by us, workplace and employment matters, matters involving real estate, our operations or health care regulations, or governmental investigations. We accrue for loss contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If we determine that a loss is possible, but not probable, and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. These matters 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. As such, significant judgment is required in determining our legal accruals. We describe our legal proceedings in Note 18 to the "Consolidated Financial Statements."
New Accounting Standards
Information regarding new accounting standards is included in Note 2 to the "Consolidated Financial Statements."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our business and financial results are affected by fluctuations in world financial markets, including changes in currency exchange rates and interest rates. We manage these risks through a combination of normal operating and financing activities and derivative financial instruments. We do not use derivative financial instruments for trading or speculative purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. Our investment strategy is focused on preserving capital and supporting our liquidity requirements, while earning a reasonable market return. We invest in a variety of debt securities, primarily time deposits, commercial paper, United States and foreign government and agency securities, asset-backed securities, corporate debt securities, and municipal debt securities. The market value of our investments may decline if current market interest rates rise. As of December 31, 2022, we had $1.6 billion of investments in debt securities which had an average remaining term to maturity of 0.98 years. Taking into consideration the
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average maturity of our debt securities, a hypothetical 0.5% to 1.0% absolute increase in interest rates at December 31, 2022 would have resulted in a $7.8 million to $15.5 million decrease in the fair value of these investments. Such a decrease would only result in a realized loss if we choose or are forced to sell the investments before the scheduled maturity, which we currently do not anticipate.
For more information related to investments, see Note 7 to the "Consolidated Financial Statements."
We are also exposed to interest rate risk on our debt obligations. As of December 31, 2022, we had $600.0 million of 2018 Notes outstanding that carry a fixed rate, and also had available a $750.0 million Credit Agreement that carries a variable interest rate based on the Secured Overnight Financing Rate ("SOFR"). As of December 31, 2022, there were no borrowings outstanding under the Credit Agreement. Based on our December 31, 2022 variable debt levels, a hypothetical 1.0% absolute increase in floating market interest rates would not have impacted our interest expense since we had no variable debt outstanding during the year. As of December 31, 2022, a hypothetical 1.0% absolute increase in market interest rates would decrease the fair value of the fixed-rate debt by approximately $26.7 million. This hypothetical change in interest rates would not impact the interest expense on the fixed-rate debt.
For more information related to outstanding debt obligations, see Note 10 to the "Consolidated Financial Statements."
Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances and results of our non-United States subsidiaries into United States dollars, currency gains and losses related to intercompany and third-party transactions denominated in currencies other than a subsidiary's functional currency, and currency gains and losses associated with intercompany loans. Our principal currency exposures relate to the Euro and the Japanese yen. Our objective is to minimize the volatility of our exposure to these risks through a combination of normal operating and financing activities and the use of derivative financial instruments in the form of foreign currency forward exchange contracts and cross currency swap contracts. The total notional amount of our derivative financial instruments entered into for foreign currency management purposes at December 31, 2022 was $2.0 billion. A hypothetical 10% increase (or decrease) in the value of the United States dollar against all hedged currencies would increase (or decrease) the fair value of these derivative contracts by $158.2 million. Any gains or losses on the fair value of derivative contracts would generally be offset by gains and losses on the underlying transactions, so the net impact would not be significant to our financial condition or results of operations.
For more information related to outstanding foreign exchange contracts, see Note 2 and Note 12 to the "Consolidated Financial Statements."
Credit Risk
Derivative financial instruments involve credit risk in the event the financial institution counterparty should default. It is our policy to execute such instruments with major financial institutions that we believe to be creditworthy. At December 31, 2022, all derivative financial instruments were with bank counterparties assigned investment grade ratings by national rating agencies. We further diversify our derivative financial instruments among counterparties to minimize exposure to any one of these entities. We have not experienced a counterparty default and do not anticipate any non-performance by our current derivative counterparties.
Concentrations of Risk
We invest excess cash in a variety of debt securities, and diversify the investments between financial institutions. Our investment policy limits the amount of credit exposure to any one issuer.
In the normal course of business, we provide credit to customers in the health care industry, perform credit evaluations of these customers, and maintain allowances for potential credit losses, which have historically been adequate compared to actual losses. In 2022, we had no customers that represented 10% or more of our total net sales or accounts receivable, net.
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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 December 31, 2022, we had $1.6 billion of investments in debt securities of various companies, of which $1.1 billion were long-term. In addition, we had $108.3 million of investments in equity instruments. Should these companies experience a decline in financial performance, 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.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 40
Financial Statements:
Consolidated Balance Sheets as of December 31, 2022 and 2021 42
Consolidated Statements of Operations 43
Consolidated Statements of Comprehensive Income 44
Consolidated Statements of Cash Flows 45
Consolidated Statements of Stockholders' Equity 46
Notes to Consolidated Financial Statements 47
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Edwards Lifesciences Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Edwards Lifesciences Corporationand its subsidiaries(the “Company”) as of December 31, 2022and 2021,and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022and 2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2022in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Uncertain Tax Positions Related to Intercompany Transfer Pricing
As described in Note 17 to the consolidated financial statements, the Company had an uncertain gross tax position liability balance of $475.3 million as of December 31, 2022, of which a majority is related to intercompany transfer pricing. As disclosed by management, the Company is subject to income taxes in the United States and numerous foreign jurisdictions. The Company’s income tax returns in these jurisdictions are periodically audited by domestic and foreign tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income amongst various tax jurisdictions. Significant judgment is required by management in evaluating uncertain tax positions, including estimating the ultimate resolution to intercompany pricing controversies between countries when there are numerous possible outcomes.
The principal considerations for our determination that performing procedures relating to uncertain tax positions related to intercompany transfer pricing is a critical audit matter are the significant judgment by management when determining uncertain tax positions related to intercompany transfer pricing, including a high degree of estimation uncertainty in estimating the ultimate resolution to intercompany pricing controversies between countries when there are numerous possible outcomes. This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate the accurate measurement of uncertain tax positions related to intercompany transfer pricing. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to intercompany transfer pricing, and controls over measurement of the liability. These procedures also included, among others, (i) testing the information used in the calculation of the liability for uncertain tax positions related to intercompany transfer pricing, including US federal filing positions, and the related final income tax returns; (ii) testing the calculation of the liability for uncertain tax positions related to intercompany transfer pricing, by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing management’s assessment of possible outcomes of uncertain tax positions related to intercompany transfer pricing controversies between countries; and (iv) evaluating the status and results of income tax audits with the relevant tax authorities. Professionals with specialized skill and knowledge were used to assist in the evaluation of the accurate measurement of the Company’s uncertain tax positions related to intercompany transfer pricing, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than not to be sustained and the amount of potential tax benefit to be realized, and the application of relevant tax laws.
/s/ PricewaterhouseCoopers LLP
Irvine, California
February 13, 2023
We have served as the Company’s auditor since 1999.
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EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
December 31,
ASSETS
Current assets
Cash and cash equivalents $ 769.0 $ 862.8
Property, plant, and equipment, net (Note 5) 1,632.8 1,546.6
Operating lease right-of-use assets (Note 6) 92.3 92.1
Other intangible assets, net (Note 9) 285.2 323.6
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued and other liabilities (Note 5) 795.0 802.3
Operating lease liabilities (Note 6) 25.5 25.5
Contingent consideration liabilities (Notes 8 and 11) 26.2 62.0
Operating lease liabilities (Note 6) 69.5 69.1
Litigation settlement accrual (Note 3) 143.0 191.3
Commitments and contingencies (Notes 6, 10, and 18)
Stockholders' equity (Note 14)
Accumulated other comprehensive loss (Note 15) (254.9) (157.7)
Total liabilities and stockholders' equity $ 8,292.5 $ 8,502.6
The accompanying notes are an integral part of these consolidated financial statements.
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EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share information)
Years Ended December 31,
Intellectual property litigation expenses, net (Note 3) 15.8 20.6 405.4
Special charge (Note 4) 60.7 — —
Share information (Note 2):
Earnings per share:
Weighted-average number of common shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
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EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Years Ended December 31,
Other comprehensive (loss) income, net of tax (Note 15):
Foreign currency translation adjustments (46.3) (50.1) 32.4
Unrealized (loss) gain on hedges (5.9) 57.4 (40.2)
Unrealized pension credits (costs) 13.7 11.6 (4.2)
Unrealized (loss) gain on available-for-sale investments (77.5) (24.1) 6.6
Reclassification of net realized investment loss to earnings 18.8 8.6 0.3
Other comprehensive (loss) income, net of tax (97.2) 3.4 (5.1)
The accompanying notes are an integral part of these consolidated financial statements.
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EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended December 31,
Cash flows from operating activities
Adjustments to reconcile net income to cash provided by operating activities:
Impairment charges (Note 4) 55.1 4.0 —
Loss (gain) on investments, net 51.5 (36.8) (21.2)
Changes in operating assets and liabilities:
Accounts and other receivables, net (84.1) (91.1) 41.9
Prepaid expenses and other current assets 0.1 7.9 (28.5)
Accounts payable and accrued liabilities (21.4) 195.2 (84.5)
Cash flows from investing activities
Purchases of held-to-maturity investments (Note 7) (353.5) (250.0) (162.0)
Purchases of available-for-sale investments (Note 7) (315.8) (1,629.3) (689.7)
Payment for acquisition option (Note 8) (109.6) (13.1) (10.0)
Issuances of notes receivable (52.3) (5.1) (27.0)
Collections of notes receivable 18.0 20.0 —
Investments in intangible assets (20.2) (4.0) (0.3)
Net cash provided by (used in) investing activities 252.3 (1,722.5) (531.1)
Cash flows from financing activities
Proceeds from issuance of debt — 5.2 16.2
Payments on debt and finance lease obligations (0.2) (7.0) (17.0)
The accompanying notes are an integral part of these consolidated financial statements.
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EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
Common Stock Treasury Stock
Other comprehensive loss, net of tax (5.1) (5.1)
Stock-based compensation expense 92.6 92.6
Other comprehensive income, net of tax 3.4 3.4
Stock-based compensation expense 109.3 109.3
Other comprehensive loss, net of tax (97.2) (97.2)
Stock-based compensation expense 126.8 126.8
The accompanying notes are an integral part of these consolidated financial statements.
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EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Edwards Lifesciences Corporation ("Edwards Lifesciences" or the "Company") conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan, and Rest of World. Edwards Lifesciences is focused on technologies that treat structural heart disease and critically ill patients. The products and technologies provided by Edwards Lifesciences are categorized into the following main areas: Transcatheter Aortic Valve Replacement, Transcatheter Mitral and Tricuspid Therapies, Surgical Structural Heart, and Critical Care.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Edwards Lifesciences and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company reviews its investments in other entities to determine whether the Company is the primary beneficiary of a variable interest entity ("VIE"). The Company would be the primary beneficiary of the VIE, and would be required to consolidate the VIE, if it has the power to direct the significant activities of the entity and the obligation to absorb losses or receive benefits from the entity that may be significant to the VIE. Based on the Company's analysis, it determined it is not the primary beneficiary of any material VIEs; however, future events may require VIEs to be consolidated if the Company becomes the primary beneficiary.
Use of Estimates
The consolidated financial statements of Edwards Lifesciences have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") which have been applied consistently in all material respects. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
Foreign Currency Translation
When the local currency of the Company's foreign entities is the functional currency, all assets and liabilities are translated into United States dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The effects of foreign currency translation adjustments for these entities are deferred and reported in stockholders' equity as a component of "Accumulated Other Comprehensive Loss." The effects of foreign currency transactions denominated in a currency other than an entity's functional currency are included in "Other Income, net."
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services.
The Company generates nearly all of its revenue from direct product sales and sales of products under consignment arrangements. Revenue from direct product sales is recognized at a point in time when the performance obligation is satisfied upon delivery of the product. Revenue from sales of consigned inventory is recognized at a point in time when the performance obligation is satisfied once the product has been implanted or used by the customer. The Company periodically reviews consignment inventories to confirm the accuracy of customer reporting. The Company also generates a small portion of its revenue from service contracts, and recognizes revenue from service contracts ratably over the term of the contracts. Sales taxes and other similar taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company does not typically have any significant unusual payment terms beyond 90 days in its contracts with customers. In addition, the Company receives royalty payments for the licensing of certain intellectual property and recognizes the royalty when the subsequent sale of product using the intellectual property occurs.
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EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The amount of consideration the Company ultimately receives varies depending upon the return terms, sales rebates, discounts, and other incentives that the Company may offer, which are accounted for as variable consideration when estimating the amount of revenue to recognize. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely upon an assessment of historical payment experience, historical relationship to revenues, estimated customer inventory levels, and current contract sales terms with direct and indirect customers.
The Company's sales adjustment related to distributor rebates given to the Company's United States distributors represents the difference between the Company's sales price to the distributor and the negotiated price to be paid by the end-customer. This distributor rebate is recorded as a reduction to sales and a reduction to the distributor's accounts receivable at the time of sale to a distributor. The Company periodically monitors current pricing trends and distributor inventory levels to ensure the credit for future distributor rebates is fairly stated.
The Company offers volume rebates to certain group purchasing organizations ("GPOs") and customers based upon targeted sales levels. Volume rebates offered to GPOs are recorded as a reduction to sales and an obligation to the GPOs, as the Company expects to pay in cash. Volume rebates offered to customers are recorded as a reduction to sales and either a reduction to accounts receivable if the Company expects a net payment from the customer, or as an obligation to the customer if the Company expects to pay in cash. The provision for volume rebates is estimated based upon customers' contracted rebate programs, projected sales levels, and historical experience of rebates paid. The Company periodically monitors its customer rebate programs to ensure that the allowance and liability for accrued rebates is fairly stated.
Product returns are typically not significant because returns are generally not allowed unless the product is damaged at time of receipt. In limited circumstances, the Company may allow customers to return previously purchased products, such as for next-generation product offerings. For these transactions, the Company defers recognition of revenue on the sale of the earlier generation product based upon an estimate of the amount of product to be returned when the next-generation products are shipped to the customer.
The Company sells separately priced service contracts, which range from 12 to 36 months, to owners of its hemodynamic monitors. The Company invoices the customer the total amount of consideration at the inception of the contract and recognizes revenue ratably over the term of the contract. As of December 31, 2022 and 2021, $10.6 million and $10.2 million, respectively, of deferred revenue associated with outstanding service contracts was recorded in “Accrued and Other Liabilities” and "Other Liabilities." During 2022, the Company recognized as revenue $7.2 million that was included in the balance of deferred revenue as of December 31, 2021, and during 2021, the Company recognized as revenue $7.3 million that was included in the balance of deferred revenue as of December 31, 2020.
A limited number of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the transaction price is allocated to each performance obligation based on its relative standalone selling price charged to other customers.
The Company applies the optional exemption of not disclosing the amount of the transaction price allocated to unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from the Company's premises or third party distribution centers, including storage, to the customer's premises, are included in "Selling, General, and Administrative Expenses." Handling costs, which are costs incurred to store at the Company's premises, move, and prepare products for shipment, are included in "Cost of Sales." For the years ended December 31, 2022, 2021, and 2020, shipping costs of $87.4 million, $85.3 million, and $74.0 million, respectively, were included in "Selling, General, and Administrative Expenses."
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EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. These investments are valued at cost, which approximates fair value.
Investments
The Company invests its excess cash in debt securities, including time deposits, commercial paper, United States government and agency securities, asset-backed securities, corporate debt securities, and municipal debt securities. Investments with maturities of one year or less are classified as short-term, and investments with maturities greater than one year are classified as long-term. Investments that the Company has the ability and intent to hold until maturity are classified as held-to-maturity and carried at amortized cost. Investments in debt securities that are classified as available-for-sale are carried at fair value with unrealized gains and losses included in "Accumulated Other Comprehensive Loss." The Company determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such designation at each balance sheet date.
The Company also has long-term equity investments in companies that are in various stages of development. These investments are reported at fair value or under the equity method of accounting, as appropriate. Equity investments that do not have readily determinable fair values are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The Company accounts for investments in limited partnerships and limited liability corporations, whereby the Company owns a minimum of 3% of the investee's outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss, and dividends paid.
Realized gains and losses on investments that are sold are determined using the specific identification method, or the first-in, first-out method, depending on the investment type, and recorded to "Other Income, net." Income relating to investments in debt securities is recorded to "Interest Income."
Equity investments without readily determinable fair value are considered impaired when there is an indication that the fair value of the Company's interest is less than the carrying amount. Equity method investments are considered impaired when there is an indication of an other-than-temporary decline in value below the carrying amount. Impairments of equity investments are recorded in "Other Income, net."
Debt securities in an unrealized loss position are written down to fair value through “Other Income, net” if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. For debt securities in an unrealized loss position that do not meet the aforementioned criteria, the Company assesses whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the length of time and the extent to which the security's fair value has been below cost, changes to the rating of the security by a rating agency, and any adverse conditions specifically related to the security, among other factors. When a credit loss exists, the Company compares the present value of cash flows expected to be collected from the debt security to the amortized cost basis of the security to determine the allowance amount that should be recorded, if any.
Accounts Receivable
The majority of the Company’s accounts receivable arise from direct product sales and sales of products under consignment arrangements, and have payment terms that generally require payment within 30 to 90 days. The Company does not adjust its receivables for the effects of a significant financing component at contract inception if collection of the receivable is expected within one year or less from the time of sale. In countries where the Company has experienced a pattern of payments extending beyond the stated terms and collection of the receivable is expected beyond one year from the time of sale, the Company assesses whether the customer has a significant financing component and discounts the receivable and reduces the related revenues over the period of time that the Company estimates those amounts will be paid using the country’s market-based borrowing rate for such period.
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EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company provides reserves against accounts receivable for estimated losses that may result from a customer’s inability to pay based on customer-specific analysis and general matters such as current assessments of past due balances, economic conditions and forecasts, and historical credit loss activity. Amounts determined to be uncollectible are charged or written-off against the reserve.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Market value for raw materials is based on replacement costs, and for other inventory classifications is based on net realizable value.
A write-down for excess or slow moving inventory is recorded for inventory which is obsolete, damaged, nearing its expiration date (generally triggered at six months prior to expiration), or slow moving (generally defined as quantities in excess of a two-year supply).
The Company allocates to inventory general and administrative costs that are related to the production process. These costs include insurance, manufacturing accounting and human resources personnel, and information technology. During the years ended December 31, 2022, 2021, and 2020, the Company allocated $88.1 million, $77.9 million, and $63.1 million, respectively, of general and administrative costs to inventory. General and administrative costs included in inventory at December 31, 2022 and 2021 were $43.7 million and $33.7 million, respectively.
At December 31, 2022 and 2021, $128.6 million and $125.8 million, respectively, of the Company's finished goods inventories were held on consignment.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Depreciation is principally calculated for financial reporting purposes on the straight-line method over the estimated useful lives of the related assets, which range from 10 to 40 years for buildings and improvements, from 3 to 15 years for machinery and equipment, and from 3 to 5 years for software. Leasehold improvements are amortized over the life of the related facility leases or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Construction in progress is not depreciated until the asset is ready for its intended use.
Depreciation expense for property, plant, and equipment was $133.9 million, $127.0 million, and $101.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Leases
The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. The Company's incremental borrowing rate is determined based on the estimated rate of interest for collateralized borrowing over a similar term as the associated lease. Right-of-use assets also include any lease payments made at or before lease commencement and any initial direct costs incurred, and exclude any lease incentives received.
The Company determines the lease term as the noncancellable period of the lease, and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the balance sheet. Certain of the Company’s leases include variable lease payments that are based on costs incurred or actual usage, or adjusted periodically based on an index or a rate. The Company’s leases do not contain any residual value guarantees.
The Company accounts for the lease and non-lease components as a single lease component for all of its leases except vehicle leases, for which the lease and non-lease components are accounted for separately.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Operating leases are included in “Operating Lease Right-of-Use Assets” and “Operating Lease Liabilities” on the Company’s consolidated balance sheets. See Note 6 for further information.
Acquisitions
Businesses that the Company acquires are included in its results of operations as of the acquisition date. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Contingent consideration obligations incurred in connection with a business combination are recorded at their fair values on the acquisition date and remeasured on a quarterly basis, with changes in their fair value recorded as an adjustment to earnings, until the related contingencies have been resolved. When the assets acquired do not meet the definition of a business combination, the transactions is accounted for as an asset acquisition. In an asset acquisition, the cost of the acquisition is allocated to the assets acquired and liabilities assumed based on their relative fair values. Upfront payments related to in-process research and development projects with no alternative future use are expensed upon acquisition.
Impairment of Goodwill and Long-lived Assets
Goodwill is reviewed for impairment annually in the fourth quarter of each fiscal year, or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the Company performs a quantitative impairment test. The Company determined, after performing a qualitative review of each reporting unit, that it is more likely than not that the fair value of each of its reporting units substantially exceeds the respective carrying amounts. Accordingly, in 2022, 2021, and 2020, the Company did not record any goodwill impairment loss.
Indefinite-lived intangible assets relate to in-process research and development acquired in business combinations. The estimated fair values of in-process research and development projects acquired in a business combination which have not reached technological feasibility are capitalized and accounted for as indefinite-lived intangible assets subject to impairment testing until completion or abandonment of the projects. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If the project is abandoned, all remaining capitalized amounts are written off immediately. Indefinite-lived intangible assets are reviewed for impairment annually in the fourth quarter of each fiscal year, or whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment loss is recognized when the asset's carrying value exceeds its fair value. In-process research and development projects acquired in an asset acquisition are expensed unless the project has an alternative future use.
Management reviews the carrying amounts of other finite-lived intangible assets and long-lived tangible assets whenever events or circumstances indicate that the carrying amounts of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit, and adverse legal or regulatory developments. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair market value. Estimated fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. For the purposes of identifying and measuring impairment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
In 2022, the Company recorded a $52.7 million impairment of certain developed technology and in-process research and development assets. For further information, see Note 4. In 2021 and 2020, the Company did not record any impairment loss related to its in-process research and development assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. The Company recognizes the financial statement benefit of a tax position only after determining that a position would more likely than not be sustained based upon its technical merit if challenged by the relevant taxing authority and taken by management to the court of last resort. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authority. The Company recognizes interest and penalties related to income tax matters in income tax expense. The Company has made an accounting policy election to recognize the United States tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and adjusting the amount, if necessary. The factors used to assess the likelihood of realization are both historical experience and the Company's forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company's effective tax rate on future earnings.
Research and Development Costs
Research and development costs are charged to expense when incurred.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include employee equity share options, nonvested shares, and similar equity instruments granted by the Company. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.
The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
Years Ended December 31,
Basic:
Diluted:
Dilutive effect of stock plans 5.2 7.9 9.3
Dilutive weighted-average shares outstanding 624.2 631.2 631.9
Diluted earnings per share $ 2.44 $ 2.38 $ 1.30
Outstanding stock options, unvested restricted stock units, and unvested market-based restricted stock units to purchase approximately 3.6 million, 1.8 million, and 2.0 million shares for the years ended December 31, 2022, 2021, and 2020,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
Stock-based Compensation
The Company measures and recognizes compensation expense for all stock-based awards based on estimated fair values. Stock-based awards consist of stock options, restricted stock units (service-based and market-based), and employee stock purchase subscriptions. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over each award's requisite service period (vesting period) on a straight-line basis. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Upon exercise of stock options or vesting of restricted stock units, the Company issues common stock.
Total stock-based compensation expense was as follows (in millions):
Years Ended December 31,
Selling, general, and administrative expenses 75.3 65.6 56.6
Research and development expenses 28.7 23.3 18.8
Total stock-based compensation expense, net of tax $ 105.2 $ 90.4 $ 77.2
Upon a participant's retirement, all unvested stock options are immediately forfeited. In addition, upon retirement, a participant will immediately vest in 25% of service-based restricted stock units for each full year of employment with the Company measured from the grant date. All remaining unvested service-based restricted stock units are immediately forfeited. For market-based restricted stock units, upon retirement and in certain other specified cases, a participant will receive a pro-rated portion of the shares that would ultimately be issued based on attainment of the performance goals as determined on the vesting date. The pro-rated portion is based on the participant's whole months of service with the Company during the performance period prior to the date of termination.
Derivatives
The Company uses derivative financial instruments to manage its currency exchange rate risk and its interest rate risk. It is the Company's policy not to enter into derivative financial instruments for speculative purposes.
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 Company uses foreign currency forward exchange contracts and cross currency swap contracts to manage its exposure to changes in currency exchange rates from (1) future cash flows associated with intercompany transactions and certain local currency expenses expected to occur within the next 13 months (designated as cash flow hedges), (2) its net investment in certain foreign subsidiaries (designated as net investment hedges) and (3) foreign currency denominated assets or liabilities (designated as fair value hedges). The Company also uses foreign currency forward exchange contracts that are not designated as hedging instruments to offset the transaction gains and losses associated with the revaluation of certain assets and liabilities denominated in currencies other than their functional currencies, resulting principally from intercompany and local currency transactions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
All derivative financial instruments are recognized at fair value in the consolidated balance sheets. For each derivative instrument that is designated as a fair value hedge, the gain or loss on the derivative included in the assessment of hedge effectiveness is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. The Company reports in "Accumulated Other Comprehensive Loss" 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 line item and in the same period in which the underlying hedged transactions affect earnings. Changes in the fair value 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 portion of the change in fair value related to components excluded from the hedge effectiveness assessment are amortized into earnings over the life of the derivative. The gains and losses on derivative financial instruments for which the Company does not elect hedge accounting treatment are recognized in the consolidated 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 statements of cash flows, and cash flows from all other derivative financial instruments are reported as operating activities.
Recently Adopted Accounting Standards
In November 2021, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on government assistance. The guidance requires certain disclosures about transactions with a government that are accounted for by applying a grant or contribution model. The guidance was effective for annual periods beginning after December 15, 2021. The adoption of this guidance was applied prospectively and did not have an impact on the Company's consolidated financial statements.
3. INTELLECTUAL PROPERTY LITIGATION EXPENSES, NET
The Company incurred intellectual property litigation expenses, including settlements and external legal costs, of $15.8 million, $20.6 million and $405.4 million during 2022, 2021 and 2020, respectively.
On July 12, 2020, the Company reached an agreement with Abbott Laboratories and its direct and indirect subsidiaries ("Abbott") to, among other things, settle all outstanding patent disputes between the companies (the “Settlement Agreement”) in cases related to transcatheter mitral and tricuspid repair products. The Settlement Agreement resulted in the Company recording an estimated $367.9 million pre-tax charge and related liability in June 2020 related to past damages. In addition, the Company will incur royalty expenses through May 2024 totaling an estimated $70 million. The Company made a one-time $100.0 million payment to Abbott in July 2020, and is making quarterly payments in subsequent years. As of December 31, 2022, $53.3 million was accrued in "Accrued and other liabilities" and $143.0 million was accrued in "Litigation
settlement accrual" on the consolidated balance sheet.
4. SPECIAL CHARGE
In September 2022, the Company decided to exit its HARPOON surgical mitral repair system program. As a result, the Company recorded a charge to its United States segment of $62.3 million, of which $60.7 million was included in "Special Charge" and $1.6 million was included in "Cost of Sales" on the consolidated statements of operations. The charge primarily related to the full impairment of intangible assets associated with the technology for $52.7 million (see Note 8 and Note 9) and other related exit costs. The Company believes that no additional contingent consideration is due and, in September 2022, recorded an $11.7 million contingent consideration gain associated with the exit (see Note 11).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. OTHER CONSOLIDATED FINANCIAL STATEMENT DETAILS
Composition of Certain Financial Statement Captions
Components of selected captions in the consolidated balance sheets are as follows:
As of December 31,
(in millions)
Inventories
Property, plant, and equipment, net
Buildings and leasehold improvements 1,189.2 1,010.1
Equipment with customers 37.4 39.2
Accrued and other liabilities
Employee compensation and withholdings $ 268.7 $ 319.7
Property, payroll, and other taxes 45.6 68.9
Research and development accruals 66.9 58.2
Legal and insurance (Notes 3 and 18) 81.4 79.1
Fair value of derivatives 20.7 3.9
Accrued marketing expenses 17.0 20.1
Accrued professional services 6.6 11.9
Accrued realignment reserves 15.6 19.1
Accrued relocation costs 25.2 26.2
Other accrued liabilities 80.6 87.6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. OTHER CONSOLIDATED FINANCIAL STATEMENT DETAILS (Continued)
Supplemental Cash Flow Information
(in millions)
Years Ended December 31,
Cash paid during the year for:
Amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 28.1 $ 31.9 $ 29.7
Non-cash investing and financing transactions:
Capital expenditures accruals $ 42.6 $ 54.3 $ 80.4
Conversion of notes receivable to equity investment $ — $ 21.5 $ 4.5
Cash, Cash Equivalents, and Restricted Cash
(in millions)
Years Ended December 31,
Restricted cash included in other current assets 0.5 1.5 16.6
Restricted cash included in other assets 3.1 3.1 0.4
Total cash, cash equivalents, and restricted cash $ 772.6 $ 867.4 $ 1,200.2
Amounts included in restricted cash primarily represent funds placed in escrow related to litigation and real estate purchases. Restricted cash as of December 31, 2020 also included funds restricted for construction.
6. LEASES
The Company leases certain office space, manufacturing facilities, land, apartments, warehouses, vehicles, and equipment with remaining lease terms ranging from less than 1 year to 18 years, some of which include options to extend or terminate the leases.
Operating lease costs for the years ended December 31, 2022, 2021, and 2020 were $28.8 million, $29.7 million, and $30.5 million, respectively. Short-term and variable lease costs were not material for the years ended December 31, 2022, 2021, and 2020.
Supplemental balance sheet information related to operating leases was as follows (in millions, except lease term and discount rate):
As of December 31,
Operating lease right-of-use assets $ 92.3 $ 92.1
Operating lease liabilities, current portion $ 25.5 $ 25.5
Operating lease liabilities, long-term portion 69.5 69.1
Total operating lease liabilities $ 95.0 $ 94.6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LEASES (Continued)
Maturities of operating lease liabilities at December 31, 2022 were as follows (in millions):
Total lease payments 102.7
Less: imputed interest (7.7)
Total lease liabilities $ 95.0
The following table provides information on the lease terms and discount rates:
Years Ended December 31,
Weighted-average remaining lease term (in years) 6.4 6.2
Weighted-average discount rate 1.8 % 2.5 %
As of December 31, 2022, the Company had additional operating lease commitments of $14.1 million for office spaces that have not yet commenced.
7. INVESTMENTS
Debt Securities
Investments in debt securities at the end of each period were as follows (in millions):
Available-for-sale
Bank time deposits $ — $ — $ — $ — $ 2.5 $ — $ — $ 2.5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS (Continued)
The cost and fair value of investments in debt securities, by contractual maturity, as of December 31, 2022 were as follows:
Held-to-Maturity Available-for-Sale
Amortized Cost Fair Value Amortized Cost Fair Value
(in millions)
Due after 5 years through 10 years — — 6.0 5.7
Instruments not due at a single maturity date (a) — — 427.3 409.7
_______________________________________
(a) Consists of mortgage- and asset-backed securities.
Actual maturities may differ from the contractual maturities due to call or prepayment rights.
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2022 and 2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
Less than 12 Months 12 Months or Greater Total
Municipal securities — — 2.5 (0.2) 2.5 (0.2)
Less than 12 Months 12 Months or Greater Total
U.S. government and agency securities $ 85.1 $ (0.7) $ — $ — $ 85.1 $ (0.7)
The Company reviews its investments in debt securities to determine if there has been an other-than-temporary decline in fair value. Consideration is given to 1) the length of time and the extent to which the security's fair value has been below cost, 2) the financial condition and near-term prospects of the issuer, including the credit quality of the security's issuer, 3) the Company's intent to sell the security, and 4) whether it is more likely than not the Company will have to sell the security before recovery of its amortized cost. During 2022, the decline in fair value of the debt securities was largely due to changes in interest rates, not credit quality, and as of December 31, 2022, the Company did not intend to sell the securities, and it was not more likely than not that it will be required to sell the securities, before recovery of the unrealized losses, and therefore, the unrealized losses are considered temporary.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS (Continued)
Investments in Unconsolidated Entities
The Company has a number of equity investments in unconsolidated entities. These investments are recorded in "Long-term Investments" on the consolidated balance sheets, and are as follows:
December 31,
(in millions)
Equity method investments
Carrying value of equity method investments $ 21.4 $ 8.4
Equity securities
Carrying value of non-marketable equity securities 86.9 84.1
Total investments in unconsolidated entities $ 108.3 $ 92.5
During 2022, the Company made $13.2 million of equity investments in limited liability companies that invest in qualified community development entities ("CDEs") through the New Markets Tax Credit ("NMTC") program. The NMTC program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvements through the development of successful businesses in these communities. The NMTC is equal to 39% of the qualified investment and is taken over seven years. These limited liability companies are variable interest entities ("VIEs"). The Company determined that it is not the primary beneficiary of the VIEs because it does not have the power to direct the activities that most significantly impact the economic performance of the VIEs, and therefore the Company does not consolidate these entities. Instead, the NMTC investments are accounted for as equity method investments.
Non-marketable equity securities consist of investments in privately held companies without readily determinable fair values, and are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During 2022, the Company recorded an upward adjustment of $0.8 million based on observable price changes and a downward adjustment of $0.5 million due to an impairment. During 2021, the Company recorded an upward adjustment of $4.2 million based on observable price changes. As of December 31, 2022, the Company had recorded cumulative upward adjustments of $8.8 million based on observable price changes, and cumulative downward adjustments of $3.1 million due to impairments and observable price changes.
During 2022, 2021, and 2020, the gross realized gains or losses from sales of available-for-sale investments were not material.
8. ACQUISITIONS AND OTHER ARRANGEMENTS
In-process Research and Development Assets
The Company acquired Harpoon Medical, Inc ("Harpoon") on December 1, 2017 and CardiAQ Valve Technologies, Inc. ("CardiAQ") on July 3, 2015. In-process research and development assets acquired as part of these transactions were capitalized at fair value, which was determined using the income approach. This approach determines fair value based on cash flow projections which are discounted to present value using a risk-adjusted rate of return. Completion of successful design developments, bench testing, pre-clinical studies and human clinical studies are required prior to selling any product. The risks and uncertainties associated with completing development within a reasonable period of time include those related to the design, development, and manufacturability of the product, the success of pre-clinical and clinical studies, and the timing of regulatory approvals.
In September 2022, the Company decided to exit the HARPOON program and recorded a $28.1 million impairment charge to fully write off the in-process research and development assets. See Note 4 for further information.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. ACQUISITIONS AND OTHER ARRANGEMENTS (Continued)
The valuation for CardiAQ assumed $97.7 million of additional research and development expenditures would be incurred prior to the date of product introduction and that net cash inflows would commence in late 2018. As a result of certain design enhancements to increase the product's commercial life and applicability to a broader group of patients, the Company has incurred incremental research and development expenditures; however, the Company expects an increase in the net cash inflows, commencing in 2024.
Upon completion of development, the underlying research and development intangible assets will be amortized over their estimated useful lives.
Certain of the Company's business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired business reaching certain performance milestones, such as attaining specified sales levels or obtaining regulatory approvals. See Note 11 for further information.
Investments in Variable Interest Entities
Edwards has relationships with various variable interest entities that it does not consolidate as Edwards lacks the power to direct the activities that significantly impact the economic success of these entities. The Company's maximum loss exposure to variable interest entities, prior to the exercise of options to acquire the entities, is limited to its investments in the variable interest entities, which include equity investments, options to acquire, and promissory notes.
In August 2022, the Company entered into an option agreement with a medical device company. Under the option agreement, Edwards paid $47.1 million for an option to acquire the medical device company. The $47.1 million option is included in "Other Assets" on the consolidated balance sheet.
In June 2022, the Company entered into a convertible promissory note and amended its existing warrant agreement with a medical device company. Under the convertible promissory note agreement, the Company has agreed to loan the medical device company up to $47.5 million, of which $32.5 million has been advanced as of December 31, 2022. In addition, the Company amended its warrant agreement under which the Company had previously paid $35.0 million for an option to acquire the medical device company. The amendment extends the warrant right period. The $35.0 million warrant and the $32.5 million note receivable are included in "Other Assets" on the consolidated balance sheet.
In May 2022, the Company entered into an option agreement with a medical technology company. Under the option agreement, Edwards paid $60.0 million for an option to acquire the medical technology company, of which $10 million was paid in 2021. The $60.0 million option is included in "Other Assets" on the consolidated balance sheet.
In April 2021, the Company recorded $35.9 million, included in "Long-term Investments," related to its investment in a privately-held medical device company (the "Investee"), including an initial cash investment in the Investee's preferred equity securities and other consideration. Also, in April 2021, the Company paid $5.7 million, included in "Other Assets," for an option to acquire the Investee. Per the agreement, the Company may be required to invest up to an additional $9.9 million in the Investee's preferred equity securities and up to an additional $21.8 million for the option to acquire the Investee, depending on the achievement of certain milestones, of which the Company invested $10.8 million in the fourth quarter of 2021 upon achievement of the first milestone. The Company also agreed to loan the Investee up to $45.0 million under a secured promissory note. As of December 31, 2022, there had been no borrowings under this secured promissory note.
In addition, Edwards has made equity investments through the NMTC program in limited liability companies that are considered VIEs. For more information, see Note 7.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and in-process research and development assets resulting from purchase business combinations are not subject to amortization. Other acquired intangible assets with finite lives are amortized over their expected useful lives on a straight-line basis, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be used. The Company expenses costs incurred to renew or extend the term of acquired intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
In 2022, the Company recorded a $52.7 million impairment charge related to certain of its developed technology and in-process research and development assets. See Note 4 for further information.
The changes in the carrying amount of goodwill, by segment, during the years ended December 31, 2022 and 2021 were as follows:
UnitedStates Europe Rest of World Total
(in millions)
Currency translation adjustment — (5.3) — (5.3)
Currency translation adjustment — (3.6) — (3.6)
Other intangible assets consist of the following (in millions):