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, 2023. Also discussed is our financial position as of December 31, 2023 and our consolidated cash flows for 2023 compared to 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 2022 compared to 2021 and a discussion related to our consolidated cash flows for 2022 compared to 2021, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report on Form 10–K filed with the Securities and Exchange Commission on February 13, 2023.
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 groups: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. On December 7, 2023, we announced our intention to complete a tax-free spin-off of our Critical Care product group around the end of 2024. The planned separation will enable us to pursue expanded opportunities for TAVR, TMTT, and Surgical patients, as well as new investments in interventional heart failure technologies.
Financial Highlights and Market Update
COVID-19 and Macroeconomic Uncertainties
While conditions related to the COVID-19 pandemic have improved compared to 2022, we have continued to experience the impacts of the COVID-19 pandemic in 2023, particularly in Japan and disruptions related to staffing shortages in the United States and Europe. We continued to remain fully committed to our patient-focused innovation strategy, and our teams were relentless in doing the right things for patients. 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. We expect to continue to experience adverse effects related to COVID-19 for some time, particularly as hospital systems continue experiencing budget constraints and staffing shortages, the supply chains continue to adjust to the market, and medical procedure rates and demand for our products continue to fluctuate as the medical system rebalances its infrastructure and resources in a post-COVID-19 market.
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In addition to the impacts described above, the global economy, including the financial and credit markets, continues to experience volatility and disruptions, including conditions impacting inflation, credit and capital markets, interest rates, and factors affecting global economic stability and the political environment relating to health care. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A, "Risk Factors," for additional information.
Financial Highlights
Despite the challenges to our business due to COVID-19 and macroeconomic headwinds, our net sales for 2023 were $6.0 billion, representing an increase of $622.4 million over 2022, driven by sales growth of our TAVR products.
Our gross profit increased in 2023, driven by our sales growth. Gross profit as a percentage of sales decreased primarily due to the impact of foreign currency exchange rate fluctuations. The decrease in our net income and diluted earnings per share in 2023 was driven primarily by an after-tax charge of $134.9 million related to an intellectual property agreement. See Note 3 to the "Consolidated Financial Statements" for further information.
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. Our vision for growth is to treat patients with both valvular and non-valvular structural heart disease, such as heart failure, which is a natural progression of the disease for many patients suffering from aortic stenosis and mitral and tricuspid regurgitation. In 2023, we invested 17.8% of our net sales in research and development. The following is a summary of important developments since January 1, 2023:
•we launched the Edwards SAPIEN 3 Ultra RESILIA valve in Japan;
•we received CE Mark approval for the Edwards SAPIEN 3 Ultra RESILIA valve in Europe;
•we received CE Mark approval for the EVOQUE tricuspid valve replacement system for the transcatheter treatment of eligible patients with tricuspid regurgitation and United States Food and Drug Administration ("FDA") approval for the treatment of tricuspid regurgitation, making it the world's first transcatheter valve replacement therapy to receive regulatory approval to treat tricuspid regurgitation;
•we received approval in Japan for PASCAL Precision to treat patients with degenerative mitral regurgitation;
•we received CE Mark approval for our MITRIS RESILIA surgical mitral valve;
•we completed enrollment in the ENCIRCLE Trial, the first pivotal trial for our transfemoral mitral replacement therapy, SAPIEN M3;
•we received FDA approval for a SAPIEN M3 continued access program;
•we restarted enrollment in our pivotal trial, ALLIANCE, designed to study our next generation TAVR technology, SAPIEN X4;
•we completed enrollment in PROGRESS, a pivotal trial studying the treatment of moderate aortic stenosis patients;
•we completed the enrollment of the full cohort of the TRISCEND II pivotal trial of the EVOQUE replacement system; and
•we announced our intention to complete a tax-free spin-off of our Critical Care product group around the end of 2024. The planned separation will enable sharpened focus as we pursue expanded opportunities for TAVR, TMTT, and Surgical patients, as well as new investments in interventional heart failure technologies.
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 Geographic Region
(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 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 2023, primarily the Edwards SAPIEN 3 UltraRESILIA valve in the United States and Japan, and the Edwards SAPIEN 3 Ultra valve in Europe and Rest of World;
partially offset by:
•foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $11.3 million primarily due to the weakening of the Japanese yen against the United States dollar, partially offset by the strengthening of the Euro against the United States dollar.
In March 2023, we launched the Edwards SAPIEN 3 Ultra RESILIA valve in Japan. In July 2023, we announced the restart of enrollment in our pivotal trial, ALLIANCE, designed to study our next generation TAVR technology, SAPIEN X4. In January 2024, we completed enrollment in our PROGRESS pivotal trial, studying the treatment of moderate aortic stenosis patients, and we received CE Mark approval for the Edwards SAPIEN 3 Ultra RESILIA valve in Europe.
Transcatheter Mitral and Tricuspid Therapies
The increase in net sales of TMTT products was due primarily to the launch of our PASCAL system in the United States and its continued adoption in Europe.
During 2023, we continued to enroll the CLASP IIF pivotal trial with PASCAL for patients with functional mitral regurgitation. In mitral replacement, we completed enrollment in the ENCIRCLE pivotal trial for SAPIEN M3 and, in January 2024, we received FDA approval for a SAPIEN M3 continued access program. In tricuspid, we completed the enrollment of the full cohort of the TRISCEND II pivotal trial of the EVOQUE replacement system. In October 2023, we received CE Mark approval in Europe for EVOQUE and in February 2024 we received FDA approval for EVOQUE for the treatment of tricuspic regurgitation. In October 2023, we also received approval in Japan for PASCAL Precision to treat patients with degenerative mitral regurgitation. In addition, enrollment continued in the CLASP IITR pivotal trial with the PASCAL repair system in patients with symptomatic, severe tricuspid regurgitation.
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Surgical Structural Heart
Net sales of Surgical products increased in 2023 primarily due to sales of the INSPIRIS RESILIA aortic valve in the United States and Europe, and the MITRIS RESILIA valve 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 $6.4 million, primarily due to the weakening of the Japanese yen against the United States dollar, partially offset by the strengthening of the Euro against the United States dollar.
We are continuing to enroll patients in our MOMENTIS clinical study to demonstrate the durability of RESILIA tissue in the mitral position. In October 2023, we received CE Mark approval for our MITRIS RESILIA mitral valve and have begun its launch in several European countries.
Critical Care
The increase in net sales of Critical Care products was driven by:
•increased demand for our enhanced surgical recovery products and pressure monitoring products, primarily in the United States;
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partially offset by:
•foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $10.3 million primarily due to the weakening of the Japanese yen against the United States dollar.
Gross Profit
The decrease in gross profit as a percentage of net sales in 2023 compared to 2022 was driven primarily by a 2.5 percentage point decrease from the impact of foreign currency exchange rate fluctuations, primarily the weakening of the United States dollar against multiple currencies, partially offset by the strengthening of the United States dollar against the Japanese yen.
Selling, General, and Administrative ("SG&A") Expenses
SG&A expenses increased in 2023 compared to 2022 due primarily to higher performance-based compensation and higher field-based personnel-related costs in support of our growth strategy and patient activation initiatives, primarily related to TAVR and TMTT in the United States and Europe.
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Research and Development ("R&D") Expenses
R&D expenses increased in 2023 compared to 2022 due primarily to continued investments in our transcatheter innovations, including increased clinical trial activity.
Intellectual Property Agreement and Litigation Expense
We incurred intellectual property agreement and litigation expenses of $203.5 million and $15.8 million during 2023 and 2022, respectively. On April 12, 2023, we entered into an Intellectual Property Agreement (the "Intellectual Property Agreement") with Medtronic, Inc. ("Medtronic") and recorded a $37.0 million charge in March 2023 and a $139.0 million charge in April 2023. For more information, see Note 3 to the "Consolidated Financial Statements."
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in gains of $26.2 million and $35.8 million during 2023 and 2022, respectively. The gains in 2023 were primarily due to changes in projected probabilities of milestone achievement. The gains in 2022 were 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.
Special Charge and Separation Costs
On December 7, 2023, we announced our intention to complete a tax-free spin-off of our Critical Care product group as a separate publicly traded company to Edwards Lifesciences' shareholders. We recorded a charge of $17.2 million, primarily related to costs incurred for consulting, legal, tax, and other professional advisory services associated with the planned spin-off.
In September 2022, in connection with our decision to exit our HARPOON surgical mitral repair system program, we recorded a charge of $62.3 million, of which $60.7 million was included in "Special Charges and Separation Costs" 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 and other related exit costs.
For more information, see Note 4 to the "Consolidated Financial Statements."
Interest Expense
Interest expense was $17.6 million and $19.2 million in 2023 and 2022, respectively. The decrease in interest expense resulted primarily from higher capitalized interest related to facilities construction.
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Interest Income
Interest income was $67.2 million and $35.5 million in 2023 and 2022, respectively. The increase in interest income resulted primarily from a higher average yield on our investments.
Other Income, net
Other income was $14.4 million and $2.6 million in 2023 and 2022, respectively. The increase in other income was driven primarily by higher forward points from derivative instruments entered into to offset foreign currency revaluation of mainly global intercompany receivable and payable balances.
Provision for Income Taxes
($ in millions)
Years Ended December 31, Change
Effective tax rate 12.4 % 13.9 %
Our effective income tax rate in 2023 and 2022 was 12.4% and 13.9%, respectively. Our effective tax rate for 2023 decreased in comparison to 2022 primarily due to the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. On July 21, 2023, the IRS issued Notice 2023-55 which delayed the application of certain U.S. foreign tax credit regulations that had previously limited our ability to claim credits on certain foreign taxes for tax years 2022 and 2023. In addition, there was a tax benefit from the Intellectual Property Agreement with Medtronic (see Note 3 to the "Consolidated Financial Statements"), partially offset by a reduced tax benefit from employee share-based compensation. The effective rates for 2023 and 2022 were lower than the federal statutory rate of 21% primarily due to (1) foreign earnings taxed at lower rates, (2) Federal and California research and development credits, and (3) the tax benefit from employee share-based compensation.
As of December 31, 2023, we had $211.3 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, 2023, our gross uncertain tax positions were $583.9 million. We estimate that these liabilities would be reduced by $250.7 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 $333.2 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 require settlement, the eventual outcome with a tax authority may result in a tax liability that is materially different from 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
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covering tax years 2015 through 2019; and during 2018, APAs between Singapore and Japan and between Switzerland and Japan covering tax years 2015 through 2019. We have filed to renew all three of the APAs with Japan for the years 2020 and forward. An APA between Switzerland and Japan covering tax years 2020 through 2024 was executed in 2021. An APA between the United States and Japan covering tax years 2020 through 2024 was executed in 2023. The execution of some or all these APA renewals depends on many variables outside of our control.
The audits of our United States federal income tax returns through 2014 have been closed. The IRS audit field work for the 2015 through 2017 tax years was completed during the second quarter of 2021, except for certain transfer pricing and related matters. The IRS is currently examining the 2018 through 2020 tax years.
The audits of our 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.
During 2021, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015 through 2017 tax years relating to transfer pricing involving Surgical/TAVR intercompany royalty transactions between our United States and Switzerland subsidiaries. The NOPA proposed a substantial increase to our United States taxable income, which could result in additional tax expense for this period of approximately $230.0 million and represented a departure from a transfer pricing method we had previously agreed upon with the IRS. We have disagreed with the NOPA and pursued an administrative appeal with the IRS Independent Office of Appeals ("Appeals"). The opening conference was held with Appeals during March 2023 and discussions with Appeals continued into the third quarter of 2023. The Appeals process culminated in the third quarter of 2023 when we and Appeals concluded that a satisfactory resolution of the matter at the administrative level was not possible.
During the fourth quarter of 2023, Appeals issued a notice of deficiency ("NOD") increasing our 2015 through 2017 United States federal income tax in amounts resulting from the income adjustments previously reflected in the NOPA. The additional tax sought in excess of our filing position is $269.3 million before consideration of interest and a repatriation tax offset.
We plan to vigorously contest the additional tax claimed by the IRS through the judicial process. Final resolution of this matter is not likely within the next 12 months. We believe the amounts previously accrued related to this uncertain tax position are appropriate for a number of reasons, including the interpretation and application of relevant tax law and accounting standards to our facts and, accordingly, have not accrued any additional amount based on the NOD and other proceedings to date. Nonetheless, the outcome of the judicial process cannot be predicted with certainty, and it is possible that the outcome of that process could have a material impact on our consolidated financial statements. As noted below, similar material tax disputes may arise for the 2018 through 2023 tax years. While no payment of any amount related to the NOPA or NOD has yet been required, we made a partial deposit in November 2022 to prevent the further accrual of interest on that portion of any additional tax we may ultimately be found to owe. We intend to make an additional deposit in the range of $200 million to $300 million with the IRS by the second quarter of 2024 in order to further mitigate interest on potential tax liabilities while we prepare to contest through the judicial process the IRS's entitlement to any of the additional tax claimed by the IRS.
Surgical/TAVR intercompany royalty transactions covering tax years 2018 through 2023 remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of December 31, 2023. We have considered this information, as well as information regarding the NOD and other proceedings described above, in our evaluation of our uncertain tax positions. The impact of these unresolved transfer pricing matters, net of any correlative tax adjustments, 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.
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 $333.2 million ($0.55 per diluted share) and $247.4 million ($0.40 per diluted share) for the years ended December 31, 2023 and 2022, respectively.
Many countries are implementing some or all the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Two-Pillar response to tax challenges arising from the digitalization of the global economy. While we continue to evaluate those countries’ implementations, we do not expect those implementations to have a material impact on our consolidated financial statements in 2024.
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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, 2023, we had a remaining tax obligation of $141.4 million related to the deemed repatriation. See Note 18 to the "Consolidated Financial Statements" for additional information about the one-time transition tax.
As of December 31, 2023, cash and cash equivalents and short-term investments held in the United States and outside of the United States were $1,097.1 million and $547.4 million, respectively. During 2023, we repatriated cash of $790.0 million. We assert that $1.0 billion of our foreign earnings continue to be permanently reinvested and our intent is to repatriate, in the future, $1.2 billion of our foreign earnings as of December 31, 2023. The estimated net tax liability on the indefinitely reinvested earnings if repatriated is $5.1 million.
We have a Five-year Credit Agreement (the "Credit Agreement") which provides for a $750.0 million multi-currency unsecured revolving credit facility and matures on July 15, 2027. We may increase the amount available under the 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. As of December 31, 2023, no amounts were outstanding under the 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, 2023, we have not elected to redeem any of the 2018 Notes. As of December 31, 2023, the carrying value of the 2018 Notes was $597.0 million. For further information on our debt, see Note 11 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 2023, under the Board authorized repurchase program, we repurchased a total of 11.3 million shares at an aggregate cost of $867.1 million. As of December 31, 2023, we had remaining authority to purchase $1.0 billion of our common stock under the share repurchase program.
On April 12, 2023, we entered into the Intellectual Property Agreement with Medtronic pursuant to which the parties agreed to a 15-year global covenant not to sue ("CNS") for infringement of certain patents in the structural heart space owned or controlled by each other. In consideration for the global CNS, we paid Medtronic a one-time, lump sum payment of $300.0 million and are paying annual royalty payments that are tied to net sales of certain Edwards products. For more information, see Note 3 to the "Consolidated Financial Statements."
On February 28, 2023, we acquired a majority equity interest in a medical technology company. In addition, we amended and restated our previous option agreement with the medical technology company. The option agreement gives us the option to acquire the remaining equity interest in the medical technology company. For more information, see Note 8 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 a 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.
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Consolidated Cash Flows - For the twelve months ended December 31, 2023 and 2022
Net cash flows provided by operating activities of $895.8 million for 2023 decreased $322.4 million from 2022 due primarily to a $300.0 million payment in 2023 under the Intellectual Property Agreement, partially offset by a higher bonus payout in 2022 associated with 2021 performance.
Net cash provided by investing activities of $173.8 million in 2023 consisted primarily of net proceeds from investments of $627.9 million, partially offset by capital expenditures of $253.0 million and payments of $95.2 million to acquire a majority interest in another company. For further information, see Note 9 to the "Consolidated Financial Statements."
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."
We currently anticipate making capital expenditures of approximately $300.0 million in 2024 as we continue to invest in our operations.
Net cash used in financing activities of $711.0 million in 2023 consisted primarily of purchases of treasury stock of $879.6 million, partially offset by proceeds from stock plans of $169.9 million.
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.
Material Cash Requirements
A summary of our material cash requirements as of December 31, 2023 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) 112.5 50.0 62.5 — —
Pension obligations (b) 2.7 2.7 — — —
_______________________________________________________________________________
(a) As of December 31, 2023, we had recorded $141.4 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 six installments paid in 2018 through 2023. The remaining installment amounts will be equal to 20% of the total liability payable in 2024 and 25% in 2025. See Note 18 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, 2023 was $36.2 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 14 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, 2023, the gross liability for uncertain tax positions, including interest, was $655.2 million and relates primarily to transfer pricing matters. 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. In addition, we plan to vigorously contest through the judicial process the additional tax claimed by the IRS related to transfer pricing issues for the 2015 through 2017 tax years which may require additional cash outflows. See Note 18 to the "Consolidated Financial Statements" for further information on these matters.
(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 $1.6 billion 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.
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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.
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.
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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.
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 18 to the "Consolidated Financial Statements."
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 19 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, 2023, we had $963.2
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million of investments in debt securities which had an average remaining term to maturity of 0.53 years. Taking into consideration the average maturity of our debt securities, a hypothetical 0.5% to 1.0% absolute increase in interest rates at December 31, 2023 would have resulted in a $3.2 million to $6.5 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, 2023, 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, 2023, there were no borrowings outstanding under the Credit Agreement. Based on our December 31, 2023 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, 2023, a hypothetical 1.0% absolute increase in market interest rates would decrease the fair value of the fixed-rate debt by approximately $23.1 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 11 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 global intercompany receivable and payable balances. 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, 2023 was $2.1 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 $165.5 million. Any gains or losses on the fair value of derivative contracts would generally be offset by gains and losses on the underlying transactions and the net investment, 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 13 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, 2023, 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 amongst 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 2023, 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, 2023, we had $963.2 million of investments in debt securities of various companies, of which $462.7 million were long-term. In addition, we had $121.2 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. See Note 7 to the "Consolidated Financial Statements" for additional information.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 44
Financial Statements:
Consolidated Balance Sheets as of December 31, 2023 and 2022 46
Consolidated Statements of Operations 47
Consolidated Statements of Comprehensive Income 48
Consolidated Statements of Cash Flows 49
Consolidated Statements of Stockholders' Equity 50
Notes to Consolidated Financial Statements 51
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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, 2023and 2022,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, 2023, 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, 2023, 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, 2023and 2022, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2023in 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, 2023, 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 18 to the consolidated financial statements, the Company had an uncertain gross tax position liability balance of $583.9 million as of December 31, 2023, 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 12, 2024
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
Property, plant, and equipment, net (Note 5) 1,749.4 1,632.8
Operating lease right-of-use assets (Note 6) 94.0 92.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued and other liabilities (Note 5) 969.1 795.0
Operating lease liabilities (Note 6) 24.9 25.5
Contingent consideration liabilities (Note 12) — 26.2
Operating lease liabilities (Note 6) 73.0 69.5
Litigation settlement accrual (Note 3) 94.2 143.0
Commitments and contingencies (Notes 6, 11, and 19)
Stockholders' equity (Note 15)
Accumulated other comprehensive loss (Note 16) (242.8) (254.9)
Total Edwards Lifesciences Corporation stockholders' equity 6,650.0 5,806.7
Noncontrolling interest (Note 9) 69.4 —
Total liabilities and stockholders' equity $ 9,363.2 $ 8,292.5
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 agreement and litigation expense (Note 3) 203.5 15.8 20.6
Special charge and separation costs (Note 4) 17.2 60.7 —
Net loss attributable to noncontrolling interest (Note 9) (3.0) — —
Share information (Note 2):
Earnings per share attributable to Edwards Lifesciences Corporation:
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 income (loss), net of tax (Note 16):
Foreign currency translation adjustments 4.3 (46.3) (50.1)
Unrealized (loss) gain on hedges (23.1) (5.9) 57.4
Unrealized pension (costs) credits (9.9) 13.7 11.6
Unrealized gain (loss) on available-for-sale investments 40.8 (58.7) (15.5)
Other comprehensive income (loss), net of tax 12.1 (97.2) 3.4
Comprehensive loss attributable to noncontrolling interest (3.0) — —
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
Impairment charges (Note 4) — 55.1 4.0
Loss (gain) on investments, net 0.1 51.5 (36.8)
Changes in operating assets and liabilities:
Accounts and other receivables, net (141.2) (84.1) (91.1)
Prepaid expenses and other current assets (81.8) 0.1 7.9
Accounts payable and accrued liabilities 146.0 (21.4) 195.2
Intellectual property agreement accrual (33.0) (45.0) (29.2)
Long-term prepaid royalties (Note 3) (109.9) — —
Cash flows from investing activities
Purchases of held-to-maturity investments (Note 7) (66.4) (353.5) (250.0)
Purchases of available-for-sale investments (Note 7) (9.1) (315.8) (1,629.3)
Business combination, net of cash (Note 9) (95.2) — —
Payments for acquisition options (Note 8) (30.0) (109.6) (13.1)
Issuances of notes receivable (62.5) (52.3) (5.1)
Collections of notes receivable — 18.0 20.0
Investments in intangible assets (13.3) (20.2) (4.0)
Net cash provided by (used in) investing activities 173.8 252.3 (1,722.5)
Cash flows from financing activities
Proceeds from issuance of debt — — 5.2
Payments on debt and finance lease obligations (0.3) (0.2) (7.0)
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 3.4 3.4 3.4
Other comprehensive income, net of tax (97.2) (97.2) (97.2)
Other comprehensive loss, net of tax 12.1 12.1 12.1
Changes to noncontrolling interest (Note 9) — 72.4 72.4
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," "Edwards," 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 groups: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. On December 7, 2023, the Company announced its intention to complete a tax-free spin-off of its Critical Care product group around the end of 2024. The planned separation will enable the Company to pursue expanded opportunities for TAVR, TMTT, and Surgical patients, as well as new investments in interventional heart failure technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Edwards Lifesciences, its wholly-owned subsidiaries, and variable interest entities for which the Company is the primary beneficiary (see Note 8). The Company attributes the net income or losses of its consolidated variable interest entities to controlling and noncontrolling interests using the hypothetical liquidation at book value method. All intercompany accounts and transactions have been eliminated in consolidation.
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, which is recognized 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
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EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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, 2023 and 2022, $13.3 million and $10.6 million, respectively, of deferred revenue associated with outstanding service contracts was recorded in “Accrued and Other Liabilities” and "Other Liabilities." During 2023, the Company recognized as revenue $7.6 million that was included in the balance of deferred revenue as of December 31, 2022, and during 2022, the Company recognized as revenue $7.2 million that was included in the balance of deferred revenue as of December 31, 2021.
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, 2023, 2022, and 2021, shipping costs of $99.4 million, $87.4 million, and $85.3 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, 2023, 2022, and 2021, the Company allocated $96.9 million, $88.1 million, and $77.9 million, respectively, of general and administrative costs to inventory. General and administrative costs included in inventory at December 31, 2023 and 2022 were $45.7 million and $43.7 million, respectively.
At December 31, 2023 and 2022, $164.6 million and $128.6 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 $138.9 million, $133.9 million, and $127.0 million for the years ended December 31, 2023, 2022, and 2021, 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 2023, 2022, and 2021, 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 and Note 9. In 2023 and 2021, 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 2.7 5.2 7.9
Dilutive weighted-average shares outstanding 609.4 624.2 631.2
Diluted earnings per share $ 2.30 $ 2.44 $ 2.38
Outstanding stock options, unvested restricted stock units, and unvested market-based restricted stock units to purchase approximately 6.6 million, 3.6 million, and 1.8 million shares for the years ended December 31, 2023, 2022, and 2021,
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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 82.4 75.3 65.6
Research and development expenses 33.4 28.7 23.3
Total stock-based compensation expense, net of tax $ 115.3 $ 105.2 $ 90.4
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 approximately 1 year (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. Upon settlement, 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.
New Accounting Standards Not Yet Adopted
In December 2023, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on income taxes which requires entities to provide additional information in the rate reconciliation and additional disaggregated disclosures about income taxes paid. This guidance requires public entities to disclose in their rate reconciliation table additional categories of information about federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. The guidance is effective for annual periods beginning after December 15, 2024. The Company does not expect the adoption of this guidance to impact its financial statements, but the guidance will impact its income tax disclosures.
In November 2023, the FASB issued an amendment to the accounting guidance on segment reporting. The amendments require disclosure of significant segment expenses and other segment items and requires entities to provide in interim periods all disclosures about a reportable segment's profit or loss and assets that are currently required annually. The amendment also requires disclosure of the title and position of the chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Retrospective application is required, and early adoption is permitted. The Company is curently evaluating the impact the guidance will have on its consolidated financial statements.
In March 2023, the FASB issued an amendment to the accounting guidance on investments in tax credit structures to allow entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial results or disclosures.
3. INTELLECTUAL PROPERTY AGREEMENT AND EXPENSE
The Company incurred intellectual property litigation expenses, including settlements and external legal costs, of $203.5 million, $15.8 million and $20.6 million during 2023, 2022 and 2021, respectively.
On April 12, 2023, Edwards entered into an Intellectual Property Agreement (the "Intellectual Property Agreement") with Medtronic, Inc. ("Medtronic") pursuant to which the parties agreed to a 15-year global covenant not to sue ("CNS") for infringement of certain patents in the structural heart space owned or controlled by each other. In consideration for the global CNS and related mutual access to certain intellectual property rights, Edwards paid to Medtronic a one-time, lump sum payment of $300.0 million and is paying annual royalty payments that are tied to net sales of certain Edwards products. Based upon the terms of the Intellectual Property Agreement, the Company identified the relevant elements for accounting purposes and allocated the $300.0 million upfront payment based on their respective fair values. The Company recorded a $37.0 million pre-tax charge in "Intellectual Property Agreement and Litigation Expense" in March 2023 related primarily to prior commercial sales incurred through March 31, 2023. The Company recorded a prepaid royalty asset of $124.0 million in April
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3. INTELLECTUAL PROPERTY AGREEMENT AND EXPENSE (Continued)
2023 related to future commercial sales, which will be amortized to expense during the term of the Intellectual Property Agreement. Separately, the Company recorded a $139.0 million pre-tax charge in "Intellectual Property Agreement and Litigation Expense" in April 2023 related to products currently in development.
4. SPECIAL CHARGE AND SEPARATION COSTS
On December 7, 2023, the Company announced its intention to complete a spin-off of its Critical Care product group as a separate publicly traded company to Edwards Lifesciences' shareholders. The proposed spin-off is intended to be a tax-free transaction for U.S. federal income tax purposes and is expected to be completed around the end of 2024, subject to the satisfaction of customary conditions including final approval by the Company's board of directors, receipt of a favorable opinion and Internal Revenue Service ruling with respect to the tax-free nature of the transaction, and the effectiveness of a registration statement on Form 10. The Company recorded a charge to its United States segment of $17.2 million, primarily related to costs incurred for consulting, legal, tax, and other professional advisory services associated with the planned spin-off.
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 Separation Costs" 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 9 and Note 10) 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 12).
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 1,234.2 1,189.2
Equipment with customers 37.9 37.4
Accrued and other liabilities
Employee compensation and withholdings $ 371.2 $ 268.7
Property, payroll, and other taxes 63.0 45.6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. OTHER CONSOLIDATED FINANCIAL STATEMENT DETAILS (Continued)
As of December 31,
(in millions)
Research and development accruals 74.1 66.9
Legal and insurance (Notes 3 and 19) 30.7 28.1
Litigation settlement 69.1 53.3
Fair value of derivatives 15.2 20.7
Accrued marketing expenses 15.0 17.0
Accrued professional services 8.8 6.6
Accrued realignment reserves 12.3 15.6
Accrued relocation costs 19.2 25.2
Accrued warranties 10.0 8.4
Other accrued liabilities 89.8 72.2
Supplemental Cash Flow Information
(in millions)
Years Ended December 31,
Cash paid during the year for:
Non-cash investing and financing transactions:
Capital expenditures accruals $ 45.5 $ 42.6 $ 54.3
Conversion of notes receivable to equity investment $ — $ — $ 21.5
Cash, Cash Equivalents, and Restricted Cash
(in millions)
Years Ended December 31,
Restricted cash included in other current assets 3.3 0.5 1.5
Restricted cash included in other assets 0.7 3.1 3.1
Total cash, cash equivalents, and restricted cash $ 1,148.0 $ 772.6 $ 867.4
Amounts included in restricted cash primarily represent funds placed in escrow related to litigation.
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 17 years, some of which include options to extend or terminate the leases.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LEASES (Continued)
Operating lease costs for the years ended December 31, 2023, 2022, and 2021 were $30.1 million, $28.8 million, and $29.7 million, respectively. Short-term and variable lease costs were not material for the years ended December 31, 2023, 2022, and 2021.
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 $ 94.0 $ 92.3
Operating lease liabilities, current portion $ 24.9 $ 25.5
Operating lease liabilities, long-term portion 73.0 69.5
Total operating lease liabilities $ 97.9 $ 95.0
Maturities of operating lease liabilities at December 31, 2023 were as follows (in millions):
Total lease payments 105.8
Less: imputed interest (7.9)
Total lease liabilities $ 97.9
The following table provides information on the lease terms and discount rates:
Years Ended December 31,
Weighted-average remaining lease term (in years) 5.9 6.4
Weighted-average discount rate 2.3 % 1.8 %
As of December 31, 2023, the Company had additional operating lease commitments of $16.0 million for office spaces that have not yet commenced.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS
Debt Securities
Investments in debt securities at the end of each period were as follows (in millions):
Bank time deposits $ 64.5 $ — $ — $ 64.5 $ 96.0 $ — $ — $ 96.0
Available-for-sale
The cost and fair value of investments in debt securities, by contractual maturity, as of December 31, 2023 were as follows:
Held-to-Maturity Available-for-Sale
Amortized Cost Fair Value Amortized Cost Fair Value
(in millions)
Instruments not due at a single maturity date (a) — — 214.2 204.8
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(a) Consists of mortgage- and asset-backed securities.
Actual maturities may differ from the contractual maturities due to call or prepayment rights.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS (Continued)
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2023 and 2022, 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
U.S. government and agency securities $ — $ — $ 67.1 $ (2.8) $ 67.1 $ (2.8)
Municipal securities — — 2.6 (0.2) 2.6 (0.2)
Less than 12 Months 12 Months or Greater Total
Municipal securities — — 2.5 (0.2) 2.5 (0.2)
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 financial condition and near-term prospects of the issuer, including the credit quality of the security's issuer, 2) the Company's intent to sell the security, and 3) whether it is more likely than not the Company will have to sell the security before recovery of its amortized cost. 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, 2023, 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.
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 $ 33.6 $ 21.4
Equity securities
Carrying value of non-marketable equity securities 87.6 86.9
Total investments in unconsolidated entities $ 121.2 $ 108.3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS (Continued)
During 2023, the Company made $12.1 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 2023, the Company did not record any upward or downward adjustments due to observable price changes or impairments. 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. As of December 31, 2023, 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 2023, 2022, and 2021, the gross realized gains or losses from sales of available-for-sale investments were not material.
8. INVESTMENTS IN VARIABLE INTEREST ENTITIES
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. The Company's maximum loss exposure to variable interest entities, prior to the exercise of options to acquire the entities, is limited to its investment in the variable interest entities, which include equity investments, options to acquire, and promissory notes.
Consolidated VIEs
In February 2023, the Company acquired a majority equity interest in a medical technology company pursuant to a preferred stock purchase agreement, and amended and restated a previous option agreement to acquire the remaining equity interest. Edwards concluded that it is the primary beneficiary and consolidated the VIE. See Note 9 for additional information.
Unconsolidated VIEs
Edwards has relationships with various VIEs that it does not consolidate as Edwards lacks the power to direct the activities that significantly impact the economic success of these entities.
In March 2023, the Company agreed to pay a medical device company up to $45.0 million as consideration for an option to acquire the medical device company, of which $30.0 million had been paid as of December 31, 2023. Also, in March 2023, Edwards advanced $5.0 million to the medical device company under a convertible promissory note. The option and the note are included in "Other Assets" on the consolidated balance sheet as of December 31, 2023.
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 sheets.
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 agreed to loan the medical device company up to $47.5 million, of which $32.5 million had been advanced as of December 31, 2023. In addition, in 2019, the Company paid $35.0 million for an option to acquire the medical device company. The $35.0 million option and the $32.5 million note receivable are included in "Other Assets" on the consolidated balance sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INVESTMENTS IN VARIABLE INTEREST ENTITIES (Continued)
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 $10.0 million was paid in 2021. In addition, during 2023, the Company entered into two promissory notes totaling $25.0 million with the medical technology company. The $60.0 million option and the $25.0 million note receivable are included in "Other Assets" on the consolidated balance sheets.
In April 2021, the Company entered into a $45.0 million secured promissory note agreement with a privately-held medical device company (the "Investee"), of which $30.0 million had been advanced as of December 31, 2023. Also in 2021, the Company invested $39.3 million, included in "Long-term Investments," in the Investee's preferred equity securities and paid $13.1 million, included in "Other Assets," for an option to acquire the Investee. Pursuant to the agreement, the Company may be required to invest up to an additional $6.5 million in the Investee's preferred equity securities and up to an additional $14.4 million for the option to acquire the Investee.
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. BUSINESS COMBINATIONS
On February 28, 2023, the Company acquired 61% of the then outstanding shares of a medical technology company in an all cash transaction. The Company determined it was the primary beneficiary of this VIE, and the VIE has been consolidated in the Company's consolidated financial statements. In addition, the Company amended and restated its previous option agreement with the medical technology company. The option agreement gives Edwards the option to acquire the remaining equity interest in the medical technology company.
The medical technology company is dedicated to developing technologies for detecting and managing patients with cardiovascular disease. The transaction was accounted for as a business combination. Tangible and intangible assets and liabilities acquired were recorded based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of net assets acquired was recorded to goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed (in millions):
Assets $ 8.1
In-process research and development 136.6
Liabilities assumed (1.7)
Deferred tax liabilities (28.0)
Fair value of net assets acquired 248.2
Less: Noncontrolling interest (a) (72.4)
Total purchase price 175.8
Less: cash acquired (6.8)
Total purchase price, net of cash acquired (b) $ 169.0
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