filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | 40 | ||||
| Financial Statements: | |||||
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | 43 | ||||
| For the Years Ended December 31, 2021, 2020, and 2019: | |||||
| Consolidated Statements of Operations | 44 | ||||
| Consolidated Statements of Comprehensive Income | 45 | ||||
| Consolidated Statements of Cash Flows | 46 | ||||
| Consolidated Statements of Stockholders' Equity | 47 | ||||
| Notes to Consolidated Financial Statements | 48 | ||||
| All other schedules are omitted as they are not applicable or the required information is furnished in the Consolidated Financial Statements or notes thereto. |
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 Corporation and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, 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, 2021, 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, 2021, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020**,** and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in 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, 2021, 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 consolidated financial 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 consolidated financial 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 consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial 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 consolidated financial 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 consolidated financial 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.
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 Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Uncertain Tax Positions Related to Intercompany Transfer Pricing
As described in Note 17 to the consolidated financial statements, the Company had an uncertain gross tax position liability balance of $358.4 million as of December 31, 2021, 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.
Fair Value of Contingent Consideration Liabilities
As described in Note 11 to the consolidated financial statements, certain of the Company’s acquisitions involve contingent consideration arrangements. As of December 31, 2021, the Company had a contingent consideration liability of $62.0 million. Payment of additional consideration is contingent upon the acquired company reaching certain performance milestones, such as attaining specified sales levels or obtaining regulatory approvals. These contingent consideration liabilities are measured by management at estimated fair value using either a probability weighted discounted cash flow analysis or a Monte Carlo simulation model, both of which consider significant unobservable inputs. These inputs include (1) the discount rate used to present value the projected cash flows, (2) the probability of milestone achievement, (3) the projected payment dates, and (4) the volatility of future sales.
The principal considerations for our determination that performing procedures relating to the fair value of contingent consideration liabilities is a critical audit matter are the significant judgment by management when estimating the fair value of
these contingent consideration liabilities, including a high degree of estimation uncertainty in evaluating the discount rate, the probability of milestone achievement, the projected payment dates, and the volatility of future sales. This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate the fair value of contingent consideration liabilities. 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 management’s process for estimating the fair value of contingent consideration liabilities, including controls over the determination of the significant unobservable inputs selected by management. These procedures also included, among others (i) testing management’s process for estimating the fair value of these contingent consideration liabilities and (ii) testing management’s probability weighted discounted cash flow analysis or Monte Carlo simulation model used to estimate the fair value of the contingent consideration liabilities. Testing management’s process included evaluating the appropriateness of the valuation methods used and the reasonableness of the significant assumptions related to the discount rate, the probability of milestone achievement, the projected payment dates, and the volatility of future sales. Evaluating the reasonableness of the probability of milestone achievement and projected payment dates involved consideration of information obtained from the Company’s product engineers, clinical trial data, and third-party industry data. The reasonableness of the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness of significant assumptions related to the discount rate and volatility of future sales.
/s/ PricewaterhouseCoopers LLP
Irvine, California
February 14, 2022
We have served as the Company’s auditor since 1999.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 862.8 | $ | 1,183.2 | |||||||
| Short-term investments (Note 7) | 604.0 | 219.4 | |||||||||
| Accounts receivable, net of allowances of $9.3 and $9.6, respectively | 582.2 | 514.6 | |||||||||
| Other receivables | 82.7 | 88.2 | |||||||||
| Inventories (Note 5) | 726.7 | 802.3 | |||||||||
| Prepaid expenses | 85.2 | 75.1 | |||||||||
| Other current assets | 237.1 | 208.2 | |||||||||
| Total current assets | 3,180.7 | 3,091.0 | |||||||||
| Long-term investments (Note 7) | 1,834.2 | 801.6 | |||||||||
| Property, plant, and equipment, net (Note 5) | 1,546.6 | 1,395.2 | |||||||||
| Operating lease right-of-use assets (Note 6) | 92.1 | 94.2 | |||||||||
| Goodwill (Note 9) | 1,167.9 | 1,173.2 | |||||||||
| Other intangible assets, net (Note 9) | 323.6 | 331.4 | |||||||||
| Deferred income taxes | 246.7 | 230.9 | |||||||||
| Other assets | 110.8 | 119.6 | |||||||||
| Total assets | $ | 8,502.6 | $ | 7,237.1 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 204.5 | $ | 196.5 | |||||||
| Accrued and other liabilities (Note 5) | 802.3 | 670.2 | |||||||||
| Operating lease liabilities (Note 6) | 25.5 | 27.2 | |||||||||
| Total current liabilities | 1,032.3 | 893.9 | |||||||||
| Long-term debt (Note 10) | 595.7 | 595.0 | |||||||||
| Contingent consideration liabilities (Notes 8 and 11) | 62.0 | 186.1 | |||||||||
| Taxes payable (Note 17) | 190.0 | 215.3 | |||||||||
| Operating lease liabilities (Note 6) | 69.1 | 72.7 | |||||||||
| Uncertain tax positions (Note 17) | 259.0 | 214.4 | |||||||||
| Litigation settlement accrual (Note 3) | 191.3 | 233.0 | |||||||||
| Other liabilities | 267.3 | 252.4 | |||||||||
| Total liabilities | 2,666.7 | 2,662.8 | |||||||||
| Commitments and contingencies (Notes 6, 10, and 18) | |||||||||||
| Stockholders' equity (Notes 14 and 21) | |||||||||||
| Preferred stock, $0.01 par value, authorized 50.0 shares, no shares outstanding | — | — | |||||||||
| Common stock, $1.00 par value, 1,050.0 shares authorized, 642.0 and 636.4 shares issued, and 624.1 and 624.3 shares outstanding, respectively | 642.0 | 636.4 | |||||||||
| Additional paid-in capital | 1,700.4 | 1,438.1 | |||||||||
| Retained earnings | 6,068.1 | 4,565.0 | |||||||||
| Accumulated other comprehensive loss | (157.7) | (161.1) | |||||||||
| Treasury stock, at cost, 17.9 and 12.1 shares, respectively | (2,416.9) | (1,904.1) | |||||||||
| Total stockholders' equity | 5,835.9 | 4,574.3 | |||||||||
| Total liabilities and stockholders' equity | $ | 8,502.6 | $ | 7,237.1 |
The accompanying notes are an integral part of these consolidated financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share information)
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales | $ | 5,232.5 | $ | 4,386.3 | $ | 4,348.0 | |||||||||||
| Cost of sales | 1,248.9 | 1,080.6 | 1,114.4 | ||||||||||||||
| Gross profit | 3,983.6 | 3,305.7 | 3,233.6 | ||||||||||||||
| Selling, general, and administrative expenses | 1,493.7 | 1,228.4 | 1,242.2 | ||||||||||||||
| Research and development expenses | 903.1 | 760.7 | 752.7 | ||||||||||||||
| Intellectual property litigation expenses, net (Note 3) | 20.6 | 405.4 | 33.4 | ||||||||||||||
| Change in fair value of contingent consideration liabilities, net | (124.1) | 13.6 | (6.1) | ||||||||||||||
| Special charges (Note 4) | — | — | 64.6 | ||||||||||||||
| Operating income | 1,690.3 | 897.6 | 1,146.8 | ||||||||||||||
| Interest expense | 18.4 | 15.8 | 20.7 | ||||||||||||||
| Interest income | (17.4) | (23.4) | (32.2) | ||||||||||||||
| Other income, net (Note 16) | (12.7) | (11.5) | (8.2) | ||||||||||||||
| Income before provision for income taxes | 1,702.0 | 916.7 | 1,166.5 | ||||||||||||||
| Provision for income taxes (Note 17) | 198.9 | 93.3 | 119.6 | ||||||||||||||
| Net income | $ | 1,503.1 | $ | 823.4 | $ | 1,046.9 | |||||||||||
| Share information (Note 2): | |||||||||||||||||
| Earnings per share: | |||||||||||||||||
| Basic | $ | 2.41 | $ | 1.32 | $ | 1.68 | |||||||||||
| Diluted | $ | 2.38 | $ | 1.30 | $ | 1.64 | |||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||
| Basic | 623.3 | 622.6 | 624.8 | ||||||||||||||
| Diluted | 631.2 | 631.9 | 636.7 |
The accompanying notes are an integral part of these consolidated financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net income | $ | 1,503.1 | $ | 823.4 | $ | 1,046.9 | |||||||||||
| Other comprehensive income (loss), net of tax (Note 15): | |||||||||||||||||
| Foreign currency translation adjustments | (50.1) | 32.4 | (11.2) | ||||||||||||||
| Unrealized gain (loss) on hedges | 57.4 | (40.2) | (11.1) | ||||||||||||||
| Unrealized pension credits (costs) | 11.6 | (4.2) | (1.9) | ||||||||||||||
| Unrealized (loss) gain on available-for-sale investments | (24.1) | 6.6 | 6.3 | ||||||||||||||
| Reclassification of net realized investment loss to earnings | 8.6 | 0.3 | 0.4 | ||||||||||||||
| Other comprehensive income (loss), net of tax | 3.4 | (5.1) | (17.5) | ||||||||||||||
| Comprehensive income | $ | 1,506.5 | $ | 818.3 | $ | 1,029.4 |
The accompanying notes are an integral part of these consolidated financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | 1,503.1 | $ | 823.4 | $ | 1,046.9 | |||||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 134.8 | 107.2 | 89.3 | ||||||||||||||
| Non-cash operating lease cost | 28.5 | 28.2 | 25.3 | ||||||||||||||
| Stock-based compensation (Notes 2 and 14) | 109.3 | 92.6 | 81.3 | ||||||||||||||
| Inventory write off (Note 2) | — | — | 73.1 | ||||||||||||||
| Impairment charges (Note 4) | — | — | 40.6 | ||||||||||||||
| Change in fair value of contingent consideration liabilities, net (Note 11) | (124.1) | 13.6 | (6.1) | ||||||||||||||
| Deferred income taxes | (41.4) | (49.4) | 12.1 | ||||||||||||||
| Purchased in-process research and development (Note 4) | — | — | 24.0 | ||||||||||||||
| Other | (23.4) | (3.5) | (2.8) | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts and other receivables, net | (91.1) | 41.9 | (88.0) | ||||||||||||||
| Inventories | 19.0 | (120.6) | (105.4) | ||||||||||||||
| Prepaid expenses and other current assets | 7.9 | (28.5) | (6.8) | ||||||||||||||
| Accounts payable and accrued liabilities | 195.2 | (84.5) | 116.5 | ||||||||||||||
| Litigation settlement accrual | (29.2) | 270.5 | (180.0) | ||||||||||||||
| Income taxes | 62.0 | (52.9) | 43.2 | ||||||||||||||
| Other | (18.5) | 16.3 | 19.7 | ||||||||||||||
| Net cash provided by operating activities | 1,732.1 | 1,054.3 | 1,182.9 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Capital expenditures | (325.8) | (407.0) | (254.4) | ||||||||||||||
| Purchases of held-to-maturity investments (Note 7) | (250.0) | (162.0) | (130.2) | ||||||||||||||
| Proceeds from sales and maturities of held-to-maturity investments (Note 7) | 138.0 | 212.2 | 50.0 | ||||||||||||||
| Purchases of available-for-sale investments (Note 7) | (1,629.3) | (689.7) | (437.9) | ||||||||||||||
| Proceeds from sales and maturities of available-for-sale investments (Note 7) | 391.2 | 564.8 | 359.9 | ||||||||||||||
| Acquisition (Note 8) | — | — | (100.2) | ||||||||||||||
| Payment for acquisition option | (13.1) | (10.0) | (35.0) | ||||||||||||||
| Issuances of notes receivable | (5.1) | (27.0) | (12.9) | ||||||||||||||
| Collections of notes receivable | 20.0 | — | — | ||||||||||||||
| Investments in intangible assets and in-process research and development | (4.0) | (0.3) | (24.0) | ||||||||||||||
| Other | (44.4) | (12.1) | (11.1) | ||||||||||||||
| Net cash used in investing activities | (1,722.5) | (531.1) | (595.8) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Proceeds from issuance of debt | 5.2 | 16.2 | 18.9 | ||||||||||||||
| Payments on debt and finance lease obligations | (7.0) | (17.0) | (28.9) | ||||||||||||||
| Purchases of treasury stock | (512.8) | (625.4) | (263.3) | ||||||||||||||
| Proceeds from stock plans | 158.6 | 140.5 | 160.5 | ||||||||||||||
| Other | (0.3) | (1.2) | (2.8) | ||||||||||||||
| Net cash used in financing activities | (356.3) | (486.9) | (115.6) | ||||||||||||||
| Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash | 13.9 | (20.5) | (3.0) | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (332.8) | 15.8 | 468.5 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | 1,200.2 | 1,184.4 | 715.9 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of year | $ | 867.4 | $ | 1,200.2 | $ | 1,184.4 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2018 | 215.2 | $ | 215.2 | 7.5 | $ | (1,015.4) | $ | 1,384.4 | $ | 2,694.7 | $ | (138.5) | $ | 3,140.4 | |||||||||||||||||||||||||||||||||
| Net income | 1,046.9 | 1,046.9 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (17.5) | (17.5) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under equity plans | 2.9 | 2.9 | 157.6 | 160.5 | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 81.3 | 81.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | 1.5 | (263.3) | (263.3) | ||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | 218.1 | 218.1 | 9.0 | (1,278.7) | 1,623.3 | 3,741.6 | (156.0) | 4,148.3 | |||||||||||||||||||||||||||||||||||||||
| Net income | 823.4 | 823.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (5.1) | (5.1) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under equity plans | 4.5 | 4.5 | 136.0 | 140.5 | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 92.6 | 92.6 | |||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | 3.1 | (625.4) | (625.4) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued to effect stock split | 413.8 | 413.8 | (413.8) | — | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | 636.4 | 636.4 | 12.1 | (1,904.1) | 1,438.1 | 4,565.0 | (161.1) | 4,574.3 | |||||||||||||||||||||||||||||||||||||||
| Net income | 1,503.1 | 1,503.1 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | 3.4 | 3.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under equity plans | 5.6 | 5.6 | 153.0 | 158.6 | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 109.3 | 109.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | 5.8 | (512.8) | (512.8) | ||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | 642.0 | $ | 642.0 | 17.9 | $ | (2,416.9) | $ | 1,700.4 | $ | 6,068.1 | $ | (157.7) | $ | 5,835.9 |
The accompanying notes are an integral part of these consolidated financial statements.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Edwards Lifesciences Corporation ("Edwards Lifesciences" or the "Company") conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan, and Rest of World. Edwards Lifesciences is focused on technologies that treat structural heart disease and critically ill patients. The products and technologies provided by Edwards Lifesciences are categorized into the following main areas: Transcatheter Aortic Valve Replacement, Transcatheter Mitral and Tricuspid Therapies, Surgical Structural Heart, and Critical Care.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Edwards Lifesciences and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company reviews its investments in other entities to determine whether the Company is the primary beneficiary of a variable interest entity ("VIE"). The Company would be the primary beneficiary of the VIE, and would be required to consolidate the VIE, if it has the power to direct the significant activities of the entity and the obligation to absorb losses or receive benefits from the entity that may be significant to the VIE. Based on the Company's analysis, it determined it is not the primary beneficiary of any material VIEs; however, future events may require VIEs to be consolidated if the Company becomes the primary beneficiary.
Stock Split
On May 7, 2020, the Company’s Board of Directors declared a three-for-one stock split of the Company's outstanding shares of common stock effected in the form of a stock dividend, distributed on May 29, 2020 to stockholders of record on May 18, 2020. The Company distributed two newly issued shares of common stock to holders of record of each share of common stock to effect the stock split. All applicable share and per-share amounts in the consolidated financial statements and the notes to consolidated financial statements have been retroactively adjusted to reflect this stock split. The consolidated statement of stockholders' equity for the year ended December 31, 2019 has not been retroactively adjusted to reflect the stock split.
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. In particular, the COVID-19 pandemic has adversely impacted, and may further adversely impact, nearly all aspects of the Company's business and markets, including its workforce and the operations of its customers, suppliers, and business partners. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations, and financial condition, including sales, expenses, manufacturing, clinical trials, research and development costs, reserves and allowances, fair value measurements, asset impairment charges, contingent consideration obligations, and the effectiveness of the Company's hedging instruments, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak (including new and more contagious variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, public acceptance and efficacy of vaccines and other treatments, United States and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation
When the local currency of the Company's foreign entities is the functional currency, all assets and liabilities are translated into United States dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The effects of foreign currency translation adjustments for these entities are deferred and reported in stockholders' equity as a component of "Accumulated Other Comprehensive Loss." The effects of foreign currency transactions denominated in a currency other than an entity's functional currency are included in "Other Income, net."
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services.
The Company generates nearly all of its revenue from direct product sales and sales of products under consignment arrangements. Revenue from direct product sales is recognized at a point in time when the performance obligation is satisfied upon delivery of the product. Revenue from sales of consigned inventory is recognized at a point in time when the performance obligation is satisfied once the product has been implanted or used by the customer. The Company periodically reviews consignment inventories to confirm the accuracy of customer reporting. The Company also generates a small portion of its revenue from service contracts, and recognizes revenue from service contracts ratably over the term of the contracts. Sales taxes and other similar taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company does not typically have any significant unusual payment terms beyond 90 days in its contracts with customers. In addition, the Company receives royalty payments for the licensing of certain intellectual property and recognizes the royalty when the subsequent sale of product using the intellectual property occurs.
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.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2021 and 2020, $10.2 million and $6.3 million, respectively, of deferred revenue associated with outstanding service contracts was recorded in “Accrued and Other Liabilities” and "Other Long-term Liabilities." During 2021, the Company recognized as revenue $7.3 million that was included in the balance of deferred revenue as of December 31, 2020, and during 2020, the Company recognized as revenue $6.3 million that was included in the balance of deferred revenue as of December 31, 2019.
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, 2021, 2020, and 2019, shipping costs of $85.3 million, $74.0 million, and $71.5 million, respectively, were included in "Selling, General, and Administrative Expenses."
Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less 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 5% 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
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 extent to which fair value is less than amortized 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 exception 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.
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, 2021, 2020, and 2019, the Company allocated $77.9 million, $63.1 million, and $56.6 million, respectively, of general and administrative costs to inventory. General and administrative costs included in inventory at December 31, 2021 and 2020 were $33.7 million and $30.7 million, respectively.
At December 31, 2021 and 2020, $125.8 million and $130.0 million, respectively, of the Company's finished goods inventories were held on consignment.
In 2019, the Company recorded a $73.1 million charge to "Cost of Sales," primarily comprised of the write off of inventory related to strategic decisions regarding its transcatheter aortic valve portfolio, including the decision to discontinue its CENTERA program.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $127.0 million, $101.8 million, and $84.7 million for the years ended December 31, 2021, 2020, and 2019, 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.
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.
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 2021, 2020, and 2019, 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
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2021 and 2020, the Company did not record any impairment loss related to its in-process research and development assets. In 2019, the Company recorded a $40.6 million charge related to the impairment of certain in-process research and development assets. See Note 4 for further information.
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.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Basic: | |||||||||||||||||
| Net income | $ | 1,503.1 | $ | 823.4 | $ | 1,046.9 | |||||||||||
| Weighted-average shares outstanding | 623.3 | 622.6 | 624.8 | ||||||||||||||
| Basic earnings per share | $ | 2.41 | $ | 1.32 | $ | 1.68 | |||||||||||
| Diluted: | |||||||||||||||||
| Net income | $ | 1,503.1 | $ | 823.4 | $ | 1,046.9 | |||||||||||
| Weighted-average shares outstanding | 623.3 | 622.6 | 624.8 | ||||||||||||||
| Dilutive effect of stock plans | 7.9 | 9.3 | 11.9 | ||||||||||||||
| Dilutive weighted-average shares outstanding | 631.2 | 631.9 | 636.7 | ||||||||||||||
| Diluted earnings per share | $ | 2.38 | $ | 1.30 | $ | 1.64 |
Stock options, restricted stock units, and market-based restricted stock units to purchase approximately 1.8 million, 2.0 million, and 1.5 million shares were outstanding for the years ended December 31, 2021, 2020, and 2019, respectively, but 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 the 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, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cost of sales | $ | 20.4 | $ | 17.2 | $ | 14.7 | |||||||||||
| Selling, general, and administrative expenses | 65.6 | 56.6 | 51.2 | ||||||||||||||
| Research and development expenses | 23.3 | 18.8 | 15.4 | ||||||||||||||
| Total stock-based compensation expense | 109.3 | 92.6 | 81.3 | ||||||||||||||
| Income tax benefit | (18.9) | (15.4) | (14.8) | ||||||||||||||
| Total stock-based compensation expense, net of tax | $ | 90.4 | $ | 77.2 | $ | 66.5 |
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.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivatives
The Company uses derivative financial instruments to manage its currency exchange rate risk and its interest rate risk. It is the Company's policy not to enter into derivative financial instruments for speculative purposes.
Derivative financial instruments involve credit risk in the event the counterparty should default. It is the Company's policy to execute such instruments with global financial institutions that the Company believes to be creditworthy. The Company diversifies its derivative financial instruments among counterparties to minimize exposure to any one of these entities. The Company also uses International Swap Dealers Association master-netting agreements. The master-netting agreements provide for the net settlement of all contracts through a single payment in a single currency in the event of default, as defined by the agreements.
The Company uses foreign currency forward exchange contracts and cross currency swap contracts to manage its exposure to changes in currency exchange rates from (1) future cash flows associated with intercompany transactions and certain local currency expenses expected to occur within the next 13 months (designated as cash flow hedges), (2) its net investment in certain foreign subsidiaries (designated as net investment hedges) and (3) foreign currency denominated assets or liabilities (designated as fair value hedges). The Company also uses foreign currency forward exchange contracts that are not designated as hedging instruments to offset the transaction gains and losses associated with the revaluation of certain assets and liabilities denominated in currencies other than their functional currencies resulting principally from intercompany and local currency transactions.
All derivative financial instruments are recognized at fair value in the consolidated balance sheets. For each derivative instrument that is designated as a fair value hedge, the gain or loss on the derivative included in the assessment of hedge effectiveness is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. The Company reports in "Accumulated Other Comprehensive Loss" the gain or loss on derivative financial instruments that are designated, and that qualify, as cash flow hedges. The Company reclassifies these gains and losses into earnings in the same line item and in the same period in which the underlying hedged transactions affect earnings. Changes in the fair value of net investment hedges are reported in "Accumulated Other Comprehensive Loss" as a part of the cumulative translation adjustment and would be reclassified into earnings if the underlying net investment is sold or substantially liquidated. The portion of the change in fair value related to components excluded from the hedge effectiveness assessment are amortized into earnings over the life of the derivative. The gains and losses on derivative financial instruments for which the Company does not elect hedge accounting treatment are recognized in the consolidated statements of operations in each period based upon the change in the fair value of the derivative financial instrument. Cash flows from net investment hedges are reported as investing activities in the consolidated statements of cash flows, and cash flows from all other derivative financial instruments are reported as operating activities.
New Accounting Standards Not Yet Adopted
In November 2021, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on government assistance. The guidance requires certain disclosures about transactions with a government that are accounted for by applying a grant or contribution model. The guidance is effective for annual periods beginning after December 15, 2021, and should be applied either prospectively or retrospectively. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.
3. INTELLECTUAL PROPERTY LITIGATION EXPENSES, NET
The Company incurred intellectual property litigation expenses, including settlements and external legal costs, of $20.6 million, $405.4 million and $33.4 million during 2021, 2020 and 2019, respectively.
On July 12, 2020, the Company reached an agreement with Abbott Laboratories and its direct and indirect subsidiaries ("Abbott") to, among other things, settle all outstanding patent disputes between the companies (the “Settlement Agreement”) in cases related to transcatheter mitral and tricuspid repair products. The Settlement Agreement resulted in the Company recording an estimated $367.9 million pre-tax charge and related liability in June 2020 related to past damages. In addition, the
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company will incur royalty expenses through May 2024 totaling an estimated $100 million. The Company made a one-time $100.0 million payment to Abbott in July 2020, and is making quarterly payments in subsequent years.
4. SPECIAL CHARGES
Impairment of Long-lived Assets
In December 2019, the Company recorded a charge of $40.6 million to fully impair certain in-process research and development assets. These assets were acquired as part of the acquisition of Valtech Cardio Ltd. ("Valtech") in 2017. The Company measured the amount of the impairment by calculating the amount by which the carrying values exceeded the estimated fair values, which was based on projected discounted future net cash flows. Based on market and clinical trial developments at the time of the impairment, the Company re-evaluated the clinical development plans for the technologies acquired from Valtech, which resulted in a reduction to the projected near-term discounted future net cash flows related to the acquired mitral and tricuspid technology. The impairment was recorded to the Company’s Rest of World segment.
Acquisition of Intellectual Property
In March 2019, the Company recorded a $24.0 million charge related to the acquisition of early-stage transcatheter intellectual property and associated clinical and regulatory experience.
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Inventories | |||||||||||
| Raw materials | $ | 132.8 | $ | 136.7 | |||||||
| Work in process | 164.3 | 140.0 | |||||||||
| Finished products | 429.6 | 525.6 | |||||||||
| $ | 726.7 | $ | 802.3 | ||||||||
| Property, plant, and equipment, net | |||||||||||
| Land | $ | 116.5 | $ | 97.6 | |||||||
| Buildings and leasehold improvements | 1,010.1 | 881.5 | |||||||||
| Machinery and equipment | 613.4 | 564.9 | |||||||||
| Equipment with customers | 39.2 | 42.2 | |||||||||
| Software | 88.2 | 94.2 | |||||||||
| Construction in progress | 333.8 | 313.3 | |||||||||
| 2,201.2 | 1,993.7 | ||||||||||
| Accumulated depreciation | (654.6) | (598.5) | |||||||||
| $ | 1,546.6 | $ | 1,395.2 | ||||||||
| Accrued and other liabilities | |||||||||||
| Employee compensation and withholdings | $ | 319.7 | $ | 236.7 | |||||||
| Accrued rebates | 77.0 | 67.2 | |||||||||
| Property, payroll, and other taxes | 68.9 | 49.7 | |||||||||
| Research and development accruals | 58.2 | 52.3 |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. OTHER CONSOLIDATED FINANCIAL STATEMENT DETAILS (Continued)
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Legal and insurance (Notes 3 and 18) | 79.1 | 60.8 | |||||||||
| Taxes payable | 30.6 | 18.6 | |||||||||
| Fair value of derivatives | 3.9 | 39.3 | |||||||||
| Accrued marketing expenses | 20.1 | 14.3 | |||||||||
| Accrued professional services | 11.9 | 7.6 | |||||||||
| Accrued realignment reserves | 19.1 | 14.5 | |||||||||
| Accrued relocation costs | 26.2 | 21.0 | |||||||||
| Other accrued liabilities | 87.6 | 88.2 | |||||||||
| $ | 802.3 | $ | 670.2 |
Supplemental Cash Flow Information
(in millions)
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Interest | $ | 20.2 | $ | 19.9 | $ | 19.9 | |||||||||||
| Income taxes | $ | 182.5 | $ | 197.9 | $ | 61.5 | |||||||||||
| Amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows from operating leases | $ | 31.9 | $ | 29.7 | $ | 28.6 | |||||||||||
| Non-cash investing and financing transactions: | |||||||||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities | $ | 28.7 | $ | 39.7 | $ | 49.6 | |||||||||||
| Capital expenditures accruals | $ | 54.3 | $ | 80.4 | $ | 50.8 | |||||||||||
| Conversion of notes receivable to equity investment | $ | 21.5 | $ | 4.5 | $ | — |
Cash, Cash Equivalents, and Restricted Cash
(in millions)
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash and cash equivalents | $ | 862.8 | $ | 1,183.2 | $ | 1,179.1 | |||||||||||
| Restricted cash included in other current assets | 1.5 | 16.6 | 1.6 | ||||||||||||||
| Restricted cash included in other assets | 3.1 | 0.4 | 3.7 | ||||||||||||||
| Total cash, cash equivalents, and restricted cash | $ | 867.4 | $ | 1,200.2 | $ | 1,184.4 |
Amounts included in restricted cash primarily represent funds placed in escrow related to litigation and real estate purchases. Restricted cash as of December 31, 2020 also included funds restricted for construction.
6. LEASES
The Company leases certain office space, manufacturing facilities, land, apartments, warehouses, vehicles, and equipment with remaining lease terms ranging from less than 1 year to 19 years, some of which include options to extend or terminate the leases.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LEASES (Continued)
Operating lease costs for the years ended December 31, 2021, 2020, and 2019 were $29.7 million, $30.5 million, and $27.9 million, respectively. Short-term and variable lease costs were not material for the years ended December 31, 2021, 2020, and 2019.
Supplemental balance sheet information related to operating leases was as follows (in millions, except lease term and discount rate):
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease right-of-use assets | $ | 92.1 | $ | 94.2 | |||||||
| Operating lease liabilities, current portion | $ | 25.5 | $ | 27.2 | |||||||
| Operating lease liabilities, long-term portion | 69.1 | 72.7 | |||||||||
| Total operating lease liabilities | $ | 94.6 | $ | 99.9 |
Maturities of operating lease liabilities at December 31, 2021 were as follows (in millions):
| 2022 | $ | 27.5 | |||
| 2023 | 23.0 | ||||
| 2024 | 13.6 | ||||
| 2025 | 8.3 | ||||
| 2026 | 7.5 | ||||
| Thereafter | 24.6 | ||||
| Total lease payments | 104.5 | ||||
| Less: imputed interest | (9.9) | ||||
| Total lease liabilities | $ | 94.6 |
The following table provides information on the lease terms and discount rates:
| Years Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Weighted-average remaining lease term (in years) | 6.2 | 6.6 | |||||||||
| Weighted-average discount rate | 2.5 | % | 2.7 | % |
As of December 31, 2021, the Company had additional operating lease commitments of $2.5 million for office space that have not yet commenced.
EDWARDS LIFESCIENCES CORPORATION
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):
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Held-to-maturity | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||||||||||||
| Bank time deposits | $ | 162.0 | $ | — | $ | — | $ | 162.0 | $ | 50.0 | $ | — | $ | — | $ | 50.0 | |||||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank time deposits | $ | 2.5 | $ | — | $ | — | $ | 2.5 | $ | 24.1 | $ | — | $ | — | $ | 24.1 | |||||||||||||||||||||||||||||||
| Commercial paper | 127.7 | — | — | 127.7 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| United States government and agency securities | 147.4 | 0.6 | (0.7) | 147.3 | 147.0 | 2.2 | — | 149.2 | |||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 515.2 | 0.3 | (2.9) | 512.6 | 149.6 | 1.9 | — | 151.5 | |||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 1,397.1 | 2.0 | (8.3) | 1,390.8 | 600.8 | 7.5 | — | 608.3 | |||||||||||||||||||||||||||||||||||||||
| Municipal securities | 2.8 | — | — | 2.8 | 2.8 | — | — | 2.8 | |||||||||||||||||||||||||||||||||||||||
| $ | 2,192.7 | $ | 2.9 | $ | (11.9) | $ | 2,183.7 | $ | 924.3 | $ | 11.6 | $ | — | $ | 935.9 |
The cost and fair value of investments in debt securities, by contractual maturity, as of December 31, 2021 were as follows:
| Held-to-Maturity | Available-for-Sale | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Due in 1 year or less | $ | 162.0 | $ | 162.0 | $ | 441.3 | $ | 442.0 | |||||||||||||||
| Due after 1 year through 5 years | — | — | 1,196.7 | 1,189.6 | |||||||||||||||||||
| Due after 5 years through 10 years | — | — | 8.7 | 8.6 | |||||||||||||||||||
| Instruments not due at a single maturity date (a) | — | — | 546.0 | 543.5 | |||||||||||||||||||
| $ | 162.0 | $ | 162.0 | $ | 2,192.7 | $ | 2,183.7 |
(a) Consists of mortgage- and asset-backed securities.
Actual maturities may differ from the contractual maturities due to call or prepayment rights.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS (Continued)
The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| United States government and agency securities | $ | 85.1 | $ | (0.7) | $ | — | $ | — | $ | 85.1 | $ | (0.7) | |||||||||||||||||||||||
| Asset-backed securities | 433.3 | (2.9) | — | — | 433.3 | (2.9) | |||||||||||||||||||||||||||||
| Corporate debt securities | 1,114.1 | (8.3) | — | — | 1,114.1 | (8.3) | |||||||||||||||||||||||||||||
| $ | 1,632.5 | $ | (11.9) | $ | — | $ | — | $ | 1,632.5 | $ | (11.9) |
The unrealized losses were largely due to changes in interest rates and were considered temporary. There were no investments that were in an unrealized loss position as of December 31, 2020.
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Equity method investments | |||||||||||
| Carrying value of equity method investments | $ | 8.4 | $ | 5.7 | |||||||
| Equity securities | |||||||||||
| Carrying value of non-marketable equity securities | 84.1 | 29.4 | |||||||||
| Total investments in unconsolidated entities | $ | 92.5 | $ | 35.1 |
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. The Company recorded an upward adjustment of $4.2 million based on observable price changes during 2021, and an upward adjustment of $1.8 million based on observable price changes and a downward adjustment of $0.7 million due to an impairment during 2020. As of December 31, 2021, the Company had recorded cumulative upward adjustments of $8.0 million based on observable price changes, and cumulative downward adjustments of $2.6 million due to impairment and observable price changes.
In April 2021, the Company recorded $35.9 million related to its investment in a privately-held medical device company (the "Investee"), including an initial cash investment in the Investee's preferred equity securities and other consideration. Also, in April 2021, the Company paid $5.7 million, included in "Other Assets," for an exclusive contingent option to acquire the Investee. Per the agreement, the Company may be required to invest up to an additional $9.9 million in the Investee's preferred equity securities and up to an additional $21.8 million for the option to acquire the Investee, depending on the achievement of certain milestones, of which the Company invested $10.8 million in the fourth quarter of 2021 upon achievement of the first milestone. The Company also agreed to loan the Investee up to $45 million under a secured promissory note. As of December 31, 2021, there had been no borrowings under this secured promissory note.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS (Continued)
The Investee is a VIE; however, Edwards has determined that it is not the primary beneficiary of the VIE since Edwards does not have the power to direct the activities of the Investee that most significantly impact the Investee's economic performance. Edwards accounts for this investment as a non-marketable equity security under the measurement alternative.
During 2021, 2020, and 2019, the gross realized gains or losses from sales of available-for-sale investments were not material.
8. ACQUISITIONS
CAS Medical Systems, Inc.
On February 11, 2019, the Company entered into an agreement and plan of merger to acquire all the outstanding shares of CAS Medical Systems, Inc. ("CASMED") for an aggregate cash purchase price of $2.45 per share of common stock, or an equity value of approximately $100 million. The transaction closed on April 18, 2019, and the cash purchase price, net of cash acquired, was $100.2 million.
The results of operations for CASMED have been included in the accompanying consolidated financial statements from the date of acquisition. Pro forma results have not been presented as the results of CASMED are not material in relation to the consolidated financial statements of Edwards Lifesciences.
In-process Research and Development Assets
The Company acquired Harpoon Medical, Inc ("Harpoon") on December 1, 2017 and CardiAQ Valve Technologies, Inc. ("CardiAQ") on July 3, 2015. In-process research and development assets acquired as part of these transactions were capitalized at fair value, which was determined using the income approach. This approach determines fair value based on cash flow projections which are discounted to present value using a risk-adjusted rate of return. Completion of successful design developments, bench testing, pre-clinical studies and human clinical studies are required prior to selling any product. The risks and uncertainties associated with completing development within a reasonable period of time include those related to the design, development, and manufacturability of the product, the success of pre-clinical and clinical studies, and the timing of regulatory approvals.
The valuation for Harpoon assumed $41.4 million of additional research and development expenditures would be incurred prior to the date of product introduction. In the valuation, net cash inflows were modeled to commence in Europe in 2018, and in the United States and Japan in 2022. The Company does not currently anticipate significant changes to forecasted research and development expenditures, and net cash inflows commenced in Europe in 2020 and are now expected to commence in the United States and Japan in 2023.
The valuation for CardiAQ assumed $97.7 million of additional research and development expenditures would be incurred prior to the date of product introduction and that net cash inflows would commence in late 2018. As a result of certain design enhancements to increase the product's commercial life and applicability to a broader group of patients, the Company has incurred incremental research and development expenditures; however, the Company expects an increase in the net cash inflows, commencing in 2023.
Upon completion of development, the underlying research and development intangible assets will be amortized over their estimated useful lives.
Certain of the Company's business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired business reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. See Note 11 for further information.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and in-process research and development assets resulting from purchase business combinations are not subject to amortization. Other acquired intangible assets with finite lives are amortized over their expected useful lives on a straight-line basis, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be used. The Company expenses costs incurred to renew or extend the term of acquired intangible assets.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
The changes in the carrying amount of goodwill, by segment, during the years ended December 31, 2021 and 2020 were as follows:
| United States | Europe | Rest of World | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Goodwill at December 31, 2019 | $ | 773.7 | $ | 62.8 | $ | 331.2 | $ | 1,167.7 | |||||||||||||||
| Currency translation adjustment | — | 5.5 | — | 5.5 | |||||||||||||||||||
| Goodwill at December 31, 2020 | 773.7 | 68.3 | 331.2 | 1,173.2 | |||||||||||||||||||
| Currency translation adjustment | — | (5.3) | — | (5.3) | |||||||||||||||||||
| Goodwill at December 31, 2021 | $ | 773.7 | $ | 63.0 | $ | 331.2 | $ | 1,167.9 |
Other intangible assets consist of the following (in millions):
| December 31, | |||||||||||||||||||||||||||||||||||||||||
| Weighted-Average Useful Life (in years) | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Net Carrying Value | Cost | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||||||||||||
| Finite-lived intangible assets | |||||||||||||||||||||||||||||||||||||||||
| Patents | 7.4 | $ | 185.7 | $ | (184.2) | $ | 1.5 | $ | 186.1 | $ | (183.6) | $ | 2.5 | ||||||||||||||||||||||||||||
| Developed technology | 13.1 | 153.9 | (55.5) | 98.4 | 155.2 | (51.0) | 104.2 | ||||||||||||||||||||||||||||||||||
| Other | 10.0 | 12.4 | (6.8) | 5.6 | 12.6 | (6.0) | 6.6 | ||||||||||||||||||||||||||||||||||
| 12.6 | 352.0 | (246.5) | 105.5 | 353.9 | (240.6) | 113.3 | |||||||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets | |||||||||||||||||||||||||||||||||||||||||
| In-process research and development | 218.1 | — | 218.1 | 218.1 | — | 218.1 | |||||||||||||||||||||||||||||||||||
| $ | 570.1 | $ | (246.5) | $ | 323.6 | $ | 572.0 | $ | (240.6) | $ | 331.4 |
Amortization expense related to other intangible assets for the years ended December 31, 2021, 2020, and 2019 was $7.7 million, $5.4 million, and $4.6 million, respectively. Estimated amortization expense for each of the years ending December 31 is as follows (in millions):
| 2022 | $ | 6.8 | |||
| 2023 | 8.4 | ||||
| 2024 | 8.4 | ||||
| 2025 | 10.2 | ||||
| 2026 | 15.9 |
10. DEBT AND CREDIT FACILITIES
In June 2018, the Company issued $600.0 million of fixed-rate unsecured senior notes (the "Notes") due June 15, 2028. Interest is payable semi-annually in arrears, with payments due in June and December of each year. The Company may redeem the Notes, in whole or in part, at any time and from time to time at specified redemption prices. In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase all or a portion of the Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest. The Notes also include covenants that limit the Company's ability to incur secured indebtedness, enter into sale and leaseback transactions, and consolidate, merge, or transfer all or substantially all of its assets.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. DEBT AND CREDIT FACILITIES (Continued)
The following is a summary of the Notes as of December 31, 2021 and 2020:
| December 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Amount | Effective Interest Rate | Amount | Effective Interest Rate | ||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Fixed-rate 4.300% 2018 Notes | $ | 600.0 | 4.329 | % | $ | 600.0 | 4.329 | % | |||||||||||||||
| Unamortized discount | (1.0) | (1.1) | |||||||||||||||||||||
| Unamortized debt issuance costs | (3.3) | (3.9) | |||||||||||||||||||||
| Total carrying amount | $ | 595.7 | $ | 595.0 |
As of December 31, 2021 and 2020, the fair value of the Notes was $675.4 million and $711.2 million, respectively, based on observable market prices in less active markets and categorized as Level 2 (Note 11). The debt issuance costs, as well as the discount, are being amortized to interest expense over the term of the Notes.
The Company has a Five-Year Credit Agreement ("the Credit Agreement") which matures on April 28, 2023. The Credit Agreement provides up to an aggregate of $750.0 million in borrowings in multiple currencies. The Company may increase the amount available under the Credit Agreement, subject to agreement of the lenders, by up to an additional $250.0 million in the aggregate. Borrowings generally bear interest at the London interbank offered rate ("LIBOR"), or a comparable or successor rate, plus a spread ranging from 0.9% to 1.3%, depending on the leverage ratio, as defined in the Credit Agreement. The Company also pays a facility fee ranging from 0.1% to 0.2%, depending on the leverage ratio, on the entire credit commitment available, whether drawn or not. The facility fee is expensed as incurred. During 2021, the spread over LIBOR was 0.9% and the facility fee was 0.1%. Issuance costs of $2.4 million are being amortized to interest expense over the term of the Credit Agreement. As of December 31, 2021 and 2020, there were no borrowings outstanding under the Credit Agreement. Amounts outstanding under the Credit Agreement, if any from time to time, are classified as long-term obligations in accordance with the terms of the Credit Agreement. The Credit Agreement is unsecured and contains various financial and other covenants, including a maximum leverage ratio, as defined in the Credit Agreement. The Company was in compliance with all covenants at December 31, 2021.
The weighted-average interest rate under all debt obligations was 3.4% and 3.5% at December 31, 2021 and 2020, respectively.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company prioritizes the inputs used to determine fair values in one of the following three categories:
Level 1—Quoted market prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3—Unobservable inputs that are not corroborated by market data.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The consolidated financial statements include financial instruments for which the fair market value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, accounts and other receivables, investments, accounts payable, certain accrued liabilities, and borrowings under a revolving credit agreement. The carrying value of these financial instruments generally approximates fair value due to their short-term nature. Financial instruments also include notes payable. See Note 10 for further information on the fair value of the notes payable.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. FAIR VALUE MEASUREMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company's financial instruments which are measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in millions):
| December 31, 2021 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents | $ | 15.2 | $ | 30.7 | $ | — | $ | 45.9 | |||||||||||||||
| Available-for-sale investments: | |||||||||||||||||||||||
| Bank time deposits | — | 2.5 | — | 2.5 | |||||||||||||||||||
| Corporate debt securities | — | 1,390.8 | — | 1,390.8 | |||||||||||||||||||
| Asset-backed securities | — | 512.6 | — | 512.6 | |||||||||||||||||||
| United States government and agency securities | 28.4 | 118.9 | — | 147.3 | |||||||||||||||||||
| Commercial paper | — | 127.7 | — | 127.7 | |||||||||||||||||||
| Municipal securities | — | 2.8 | — | 2.8 | |||||||||||||||||||
| Investments held for deferred compensation plans | 130.7 | — | — | 130.7 | |||||||||||||||||||
| Derivatives | — | 55.3 | — | 55.3 | |||||||||||||||||||
| $ | 174.3 | $ | 2,241.3 | $ | — | $ | 2,415.6 | ||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | $ | — | $ | 3.9 | $ | — | $ | 3.9 | |||||||||||||||
| Deferred compensation plans | 130.9 | — | — | 130.9 | |||||||||||||||||||
| Contingent consideration liabilities | — | — | 62.0 | 62.0 | |||||||||||||||||||
| Other liability | — | — | 14.0 | 14.0 | |||||||||||||||||||
| $ | 130.9 | $ | 3.9 | $ | 76.0 | $ | 210.8 | ||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents | $ | 16.2 | $ | — | $ | — | $ | 16.2 | |||||||||||||||
| Available-for-sale investments: | |||||||||||||||||||||||
| Bank time deposits | — | 24.1 | — | 24.1 | |||||||||||||||||||
| Corporate debt securities | — | 608.3 | — | 608.3 | |||||||||||||||||||
| Asset-backed securities | — | 151.5 | — | 151.5 | |||||||||||||||||||
| United States government and agency securities | 56.9 | 92.2 | — | 149.1 | |||||||||||||||||||
| Municipal securities | — | 2.8 | — | 2.8 | |||||||||||||||||||
| Investments held for deferred compensation plans | 111.2 | — | — | 111.2 | |||||||||||||||||||
| Derivatives | — | 8.1 | — | 8.1 | |||||||||||||||||||
| $ | 184.3 | $ | 887.0 | $ | — | $ | 1,071.3 | ||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | $ | — | $ | 39.3 | $ | — | $ | 39.3 | |||||||||||||||
| Deferred compensation plans | 111.6 | — | — | 111.6 | |||||||||||||||||||
| Contingent consideration liabilities | — | — | 186.1 | 186.1 | |||||||||||||||||||
| $ | 111.6 | $ | 39.3 | $ | 186.1 | $ | 337.0 |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. FAIR VALUE MEASUREMENTS (Continued)
The following table summarizes the changes in fair value of the contingent consideration obligation for the years ended December 31, 2021 and 2020 (in millions):
| Contingent Consideration | Other Liability | Total | |||||||||||||||
| Fair value, December 31, 2019 | $ | 172.5 | $ | — | $ | 172.5 | |||||||||||
| Changes in fair value | 13.6 | — | 13.6 | ||||||||||||||
| Fair value, December 31, 2020 | $ | 186.1 | $ | — | $ | 186.1 | |||||||||||
| Additions | — | 14.0 | 14.0 | ||||||||||||||
| Changes in fair value | (124.1) | — | (124.1) | ||||||||||||||
| Fair value, December 31, 2021 | $ | 62.0 | $ | 14.0 | $ | 76.0 |
The change in fair value of the contingent consideration liabilities in 2021 was primarily driven by a $123.2 million reduction to the liability due to changes in the projected probabilities and timing of milestone achievements and the projected timing of cash inflows. The change in fair value of the contingent consideration liabilities in 2020 was primarily driven by the accretion of interest due to the passage of time and adjustments to discount rates, partially offset by a $12.7 million reduction to the liability due to changes in the projected probabilities and timing of milestone achievements and the projected timing of cash inflows.
Cash Equivalents and Available-for-sale Investments
The Company estimates the fair values of its money market funds based on quoted prices in active markets for identical assets. The Company estimates the fair values of its time deposits, commercial paper, United States and foreign government and agency securities, municipal securities, asset-backed securities, and corporate debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades and broker-dealer quotes on the same or similar securities, benchmark yields, credit spreads, prepayment and default projections based on historical data, and other observable inputs. The Company independently reviews and validates the pricing received from the third-party pricing service by comparing the prices to prices reported by a secondary pricing source. The Company’s validation procedures have not resulted in an adjustment to the pricing received from the pricing service.
Deferred Compensation Plans
The Company holds investments in trading securities related to its deferred compensation plans. The investments are in a variety of stock, bond, and money market mutual funds. The fair values of these investments and the corresponding liabilities are based on quoted market prices.
Derivative Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and cross currency swap contracts to manage foreign currency exposures. All derivatives contracts are recognized on the balance sheet at their fair value. The fair value of the derivative financial instruments was estimated based on quoted market foreign exchange rates, cross currency swap basis rates, and market discount rates. Judgment was employed in interpreting market data to develop estimates of fair value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
Contingent Consideration Liabilities
Certain of the Company's acquisitions involve contingent consideration arrangements. Payment of additional consideration is contingent upon the acquired company reaching certain performance milestones, such as attaining specified
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. FAIR VALUE MEASUREMENTS (Continued)
sales levels or obtaining regulatory approvals. These contingent consideration liabilities are measured at estimated fair value using either a probability weighted discounted cash flow analysis or a Monte Carlo simulation model, both of which consider significant unobservable inputs. These inputs include (1) the discount rate used to present value the projected cash flows (ranging from 0.06% to 9.26%; weighted average of 4.1%), (2) the probability of milestone achievement (ranging from 0% to 93.7%; weighted average of 59.2%), (3) the projected payment dates (ranging from 2026 to 2027; weighted average of 2026), and (4) the volatility of future sales (40.0%). The weighted average of each of the above inputs was determined based on the relative fair value of each obligation. The use of different assumptions could have a material effect on the estimated fair value amounts.
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage its currency exchange rate risk and its interest rate risk as summarized below. Notional amounts are stated in United States dollar equivalents at spot exchange rates at the respective dates. The Company does not enter into these arrangements for trading or speculation purposes.
| Notional Amount | |||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||
| (in millions) | |||||||||||
| Foreign currency forward exchange contracts | $ | 1,498.8 | $ | 1,525.5 | |||||||
| Cross currency swap contracts | 300.0 | 300.0 | |||||||||
The following table presents the location and fair value amounts of derivative instruments reported in the consolidated balance sheets (in millions):
| Fair Value | |||||||||||||||||
| Balance Sheet Location | December 31, 2021 | December 31, 2020 | |||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||
| Assets | |||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 36.2 | $ | 7.3 | ||||||||||||
| Cross currency swap contracts | Other assets | $ | 19.1 | $ | 0.8 | ||||||||||||
| Liabilities | |||||||||||||||||
| Foreign currency contracts | Accrued and other liabilities | $ | 3.9 | $ | 39.3 | ||||||||||||
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
The following table presents the effect of master-netting agreements and rights of offset on the consolidated balance sheets (in millions):
| Gross Amounts Not Offset in the Consolidated Balance Sheet | |||||||||||||||||||||||||||||||||||
| Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts Presented in the Consolidated Balance Sheet | ||||||||||||||||||||||||||||||||||
| December 31, 2021 | Gross Amounts | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||||||||||||||
| Derivative Assets | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 36.2 | $ | — | $ | 36.2 | $ | (2.8) | $ | — | $ | 33.4 | |||||||||||||||||||||||
| Cross currency swap contracts | $ | 19.1 | $ | — | $ | 19.1 | $ | — | $ | — | $ | 19.1 | |||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 3.9 | $ | — | $ | 3.9 | $ | (2.8) | $ | — | $ | 1.1 | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Derivative Assets | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 7.3 | $ | — | $ | 7.3 | $ | (6.1) | $ | — | $ | 1.2 | |||||||||||||||||||||||
| Cross currency swap contracts | $ | 0.8 | $ | — | $ | 0.8 | $ | — | $ | — | $ | 0.8 | |||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 39.3 | $ | — | $ | 39.3 | (6.1) | $ | — | $ | 33.2 |
The following tables present the effect of derivative and non-derivative hedging instruments on the consolidated statements of operations and consolidated statements of comprehensive income:
| Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | ||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 56.7 | $ | (33.7) | Cost of sales | $ | (23.0) | $ | 18.4 | |||||||||||||||||||||||
| Selling, general, and administrative expenses | $ | (0.6) | $ | 2.2 |
| Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) | ||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||
| Net investment hedges | ||||||||||||||||||||||||||||||||
| Cross currency swap contracts | $ | 18.4 | $ | (12.6) | Interest expense | $ | 6.4 | $ | 6.4 |
The cross currency swap contracts have an expiration date of June 15, 2028. At maturity of the cross currency swap contracts, the Company will deliver the notional amount of €257.2 million and will receive $300.0 million from the counterparties. The Company will receive semi-annual interest payments from the counterparties based on a fixed interest rate until maturity of the agreements.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
| Amount of Gain or (Loss) Recognized in Income on Derivative | |||||||||||||||||||||||
| Location of Gain or (Loss) Recognized in Income on Derivative | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Fair value hedges | |||||||||||||||||||||||
| Foreign currency contracts | Other income, net | $ | 11.6 | $ | (1.4) | $ | 1.4 | ||||||||||||||||
| Amount of Gain or (Loss) Recognized in Income on Derivative | |||||||||||||||||||||||
| Location of Gain or (Loss) Recognized in Income on Derivative | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Foreign currency contracts | Other income, net | $ | 27.4 | $ | (15.1) | $ | 0.3 |
The following table presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations:
| Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | |||||||||||||||||||||||
| Twelve Months Ended December 31, 2021 | |||||||||||||||||||||||
| Cost of sales | Selling, general, and administrative expenses | Other Income, net | |||||||||||||||||||||
| Total amounts of income and expense line items shown in the consolidated statements of operations in which the effects of fair value or cash flow hedges are recorded | $ | (1,248.9) | $ | (1,493.7) | $ | 12.7 | |||||||||||||||||
| The effects of fair value and cash flow hedging: | |||||||||||||||||||||||
| Gain (loss) on fair value hedging relationships: | |||||||||||||||||||||||
| Foreign currency contracts: | |||||||||||||||||||||||
| Hedged items | — | — | (9.0) | ||||||||||||||||||||
| Derivatives designated as hedging instruments | — | — | 9.0 | ||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on an amortization approach | — | — | 2.6 | ||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | |||||||||||||||||||||||
| Foreign currency contracts: | |||||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated OCI into income | (23.0) | (0.6) | — |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
| Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | |||||||||||||||||||||||
| Twelve Months Ended December 31, 2020 | |||||||||||||||||||||||
| Cost of sales | Selling, general, and administrative expenses | Other Income, net | |||||||||||||||||||||
| Total amounts of income and expense line items shown in the consolidated statements of operations in which the effects of fair value or cash flow hedges are recorded | $ | (1,080.6) | $ | (1,228.4) | $ | 11.5 | |||||||||||||||||
| The effects of fair value and cash flow hedging: | |||||||||||||||||||||||
| Gain (loss) on fair value hedging relationships: | |||||||||||||||||||||||
| Foreign currency contracts: | |||||||||||||||||||||||
| Hedged items | — | — | 4.8 | ||||||||||||||||||||
| Derivatives designated as hedging instruments | — | — | (4.8) | ||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on an amortization approach | — | — | 3.4 | ||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | |||||||||||||||||||||||
| Foreign currency contracts: | |||||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated OCI into income | 18.4 | 2.2 | — |
The Company expects that during 2022 it will reclassify to earnings a $7.8 million gain currently recorded in "Accumulated Other Comprehensive Loss." For the years ended December 31, 2021, 2020, and 2019, the Company did not record any gains or losses due to hedge ineffectiveness.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
The Company maintains defined benefit pension plans in Japan and certain European countries.
| Years Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Change in projected benefit obligation: | |||||||||||
| Beginning of year | $ | 126.2 | $ | 105.2 | |||||||
| Service cost | 6.5 | 6.3 | |||||||||
| Interest cost | 0.4 | 0.5 | |||||||||
| Participant contributions | 1.5 | 1.5 | |||||||||
| Actuarial loss | (6.1) | 2.9 | |||||||||
| Benefits paid | (2.5) | (0.6) | |||||||||
| Plan amendment | (0.5) | — | |||||||||
| Currency exchange rate changes and other | (7.6) | 10.4 | |||||||||
| End of year | $ | 117.9 | $ | 126.2 | |||||||
| Change in fair value of plan assets: | |||||||||||
| Beginning of year | $ | 73.3 | $ | 63.2 | |||||||
| Actual return on plan assets | 5.8 | 0.4 | |||||||||
| Employer contributions | 3.1 | 2.8 | |||||||||
| Participant contributions | 1.5 | 1.5 | |||||||||
| Benefits paid | (2.5) | (0.6) | |||||||||
| Currency exchange rate changes and other | (4.3) | 6.0 | |||||||||
| End of year | $ | 76.9 | $ | 73.3 | |||||||
| Funded Status | |||||||||||
| Projected benefit obligation | $ | (117.9) | $ | (126.2) | |||||||
| Plan assets at fair value | 76.9 | 73.3 | |||||||||
| Underfunded status | $ | (41.0) | $ | (52.9) | |||||||
| Net amounts recognized on the consolidated balance sheet: | |||||||||||
| Other long-term liabilities | $ | 41.0 | $ | 52.9 | |||||||
| Accumulated other comprehensive loss, net of tax: | |||||||||||
| Net actuarial loss | $ | (16.4) | $ | (30.8) | |||||||
| Net prior service cost | 6.0 | 6.6 | |||||||||
| Deferred income tax benefit | 2.4 | 4.6 | |||||||||
| Total | $ | (8.0) | $ | (19.6) |
The accumulated benefit obligation ("ABO") for all defined benefit pension plans was $113.3 million and $120.9 million as of December 31, 2021 and 2020, respectively. The projected benefit obligation and ABO were in excess of plan assets for all pension plans as of December 31, 2021 and 2020.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. EMPLOYEE BENEFIT PLANS (Continued)
The components of net periodic pension benefit cost are as follows (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Service cost, net | $ | 6.5 | $ | 6.3 | $ | 5.2 | |||||||||||
| Interest cost | 0.4 | 0.5 | 0.9 | ||||||||||||||
| Expected return on plan assets | (1.1) | (1.0) | (1.4) | ||||||||||||||
| Amortization of actuarial loss | 1.7 | 1.6 | 0.9 | ||||||||||||||
| Amortization of prior service credit | (0.7) | (0.7) | (0.2) | ||||||||||||||
| Net periodic pension benefit cost | $ | 6.8 | $ | 6.7 | $ | 5.4 |
Expected long-term returns for each of the plans' strategic asset classes were developed through consultation with investment advisors. Several factors were considered, including a survey of investment managers' expectations, current market data, minimum guaranteed returns in certain insurance contracts, and historical market returns over long periods. Using policy target allocation percentages and the asset class expected returns, a weighted-average expected return was calculated.
To select the discount rates for the defined benefit pension plans, the Company uses a modeling process that involves matching the expected duration of its benefit plans to a yield curve constructed from a portfolio of AA-rated fixed-income debt instruments, or their equivalent. For each country, the Company uses the implied yield of this hypothetical portfolio at the appropriate duration as a discount rate benchmark.
The weighted-average assumptions used to determine the benefit obligations are as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Discount rate | 0.5 | % | 0.3 | % | |||||||
| Rate of compensation increase | 2.6 | % | 2.6 | % | |||||||
| Cash balance interest crediting rate | 2.5 | % | 2.5 | % | |||||||
| Social securities increase | 1.6 | % | 1.6 | % | |||||||
| Pension increase | 1.8 | % | 1.8 | % |
The weighted-average assumptions used to determine the net periodic pension benefit cost are as follows:
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Discount rate | 0.3 | % | 0.5 | % | 0.9 | % | |||||||||||
| Expected return on plan assets | 1.5 | % | 1.5 | % | 2.3 | % | |||||||||||
| Rate of compensation increase | 2.6 | % | 2.7 | % | 2.8 | % | |||||||||||
| Cash balance interest crediting rate | 2.5 | % | 1.5 | % | 1.5 | % | |||||||||||
| Social securities increase | 1.6 | % | 1.6 | % | 1.8 | % | |||||||||||
| Pension increase | 1.8 | % | 1.8 | % | 1.8 | % |
Plan Assets
The Company's investment strategy for plan assets is to seek a competitive rate of return relative to an appropriate level of risk and to earn performance rates of return in accordance with the benchmarks adopted for each asset class. Risk management practices include diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. EMPLOYEE BENEFIT PLANS (Continued)
The Administrative and Investment Committee decides on the defined benefit plan provider in each location and that provider decides the target allocation for the Company's defined benefit plan at that location. The target asset allocation selected reflects a risk/return profile the Company feels is appropriate relative to the plans' liability structure and return goals. In certain plans, asset allocations may be governed by local requirements. Target weighted-average asset allocations at December 31, 2021, by asset category, are as follows:
| Equity securities | 28.3 | % | |||
| Debt securities | 41.7 | % | |||
| Real estate | 9.8 | % | |||
| Other | 20.2 | % | |||
| Total | 100.0 | % |
The fair values of the Company's defined benefit plan assets at December 31, 2021 and 2020, by asset category, are as follows (in millions):
| December 31, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
| Asset Category | ||||||||||||||||||||||||||||||||
| Cash | $ | 5.4 | $ | — | $ | — | $ | 5.4 | ||||||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||||||||
| United States equities | 1.6 | — | — | 1.6 | ||||||||||||||||||||||||||||
| International equities | 16.3 | — | — | 16.3 | ||||||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||||||||||
| United States government bonds | 6.2 | — | — | 6.2 | ||||||||||||||||||||||||||||
| International government bonds | 26.3 | — | — | 26.3 | ||||||||||||||||||||||||||||
| Real estate | — | 7.6 | — | 7.6 | ||||||||||||||||||||||||||||
| Mortgages | — | 3.5 | — | 3.5 | ||||||||||||||||||||||||||||
| Insurance contracts | — | — | 0.9 | 0.9 | ||||||||||||||||||||||||||||
| Total plan assets measured at fair value | $ | 55.8 | $ | 11.1 | $ | 0.9 | $ | 67.8 | ||||||||||||||||||||||||
| Alternative investments measured at net asset value (a) | 9.1 | |||||||||||||||||||||||||||||||
| Total plan assets | $ | 76.9 |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. EMPLOYEE BENEFIT PLANS (Continued)
| December 31, 2020 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Asset Category | |||||||||||||||||||||||
| Cash | $ | 3.0 | $ | — | $ | — | $ | 3.0 | |||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| United States equities | 3.3 | — | — | 3.3 | |||||||||||||||||||
| International equities | 16.1 | — | — | 16.1 | |||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| United States government bonds | 7.4 | — | — | 7.4 | |||||||||||||||||||
| International government bonds | 26.0 | — | — | 26.0 | |||||||||||||||||||
| Real estate | — | 5.6 | — | 5.6 | |||||||||||||||||||
| Mortgages | — | 3.1 | — | 3.1 | |||||||||||||||||||
| Insurance contracts | — | — | 1.0 | 1.0 | |||||||||||||||||||
| Total plan assets | $ | 55.8 | $ | 8.7 | $ | 1.0 | $ | 65.5 | |||||||||||||||
| Alternative investments measured at net asset value (a) | 7.8 | ||||||||||||||||||||||
| Total plan assets | $ | 73.3 |
(a) Certain investments that were measured at net asset value per share have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total plan assets.
The following table summarizes the changes in fair value of the Company's defined benefit plan assets that have been classified as Level 3 for the years ended December 31, 2021 and 2020 (in millions):
| Insurance Contracts | |||||
| Balance at December 31, 2019 | $ | 0.9 | |||
| Currency exchange rate impact | 0.1 | ||||
| Balance at December 31, 2020 | 1.0 | ||||
| Currency exchange rate impact | (0.1) | ||||
| Balance at December 31, 2021 | $ | 0.9 |
Equity and debt securities are valued at fair value based on quoted market prices reported on the active markets on which the individual securities are traded. Real estate investments are valued by discounting to present value the cash flows expected to be generated by the specific properties. Investments in mortgages are valued at cost, which is deemed to approximate its fair value. The insurance contracts are valued at the cash surrender value of the contracts, which is deemed to approximate its fair value. Alternative investments include hedge funds, private equity funds and other miscellaneous investments, and are valued using the net asset value provided by the fund administrator as a practical expedient. The net asset value is based on the fair value of the underlying assets owned by the fund divided by the number of shares outstanding.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. EMPLOYEE BENEFIT PLANS (Continued)
The following benefit payments, which reflect expected future service, as appropriate, at December 31, 2021, are expected to be paid (in millions):
| 2022 | $ | 5.4 | |||
| 2023 | 6.7 | ||||
| 2024 | 5.6 | ||||
| 2025 | 5.2 | ||||
| 2026 | 6.1 | ||||
| 2024-2026 | 36.1 |
As of December 31, 2021, expected employer contributions for 2022 are $2.2 million.
Defined Contribution Plans
The Company's employees in the United States and Puerto Rico are eligible to participate in a qualified defined contribution plan. In the United States, participants may contribute up to 25% of their eligible compensation (subject to tax code limitation) to the plan. Edwards Lifesciences matches the first 4% of the participant's annual eligible compensation contributed to the plan on a dollar-for-dollar basis. Edwards Lifesciences matches the next 2% of the participant's annual eligible compensation to the plan on a 50% basis. In Puerto Rico, participants may contribute up to 25% of their annual compensation (subject to tax code limitation) to the plan. Edwards Lifesciences matches the first 4% of participant's annual eligible compensation contributed to the plan on a 50% basis. The Company also provides a 2% profit sharing contribution calculated on eligible earnings for each employee. Matching contributions relating to Edwards Lifesciences employees were $38.6 million, $36.6 million, and $31.4 million in 2021, 2020, and 2019, respectively.
The Company also has nonqualified deferred compensation plans for a select group of employees. The plans provide eligible participants the opportunity to defer eligible compensation to future dates specified by the participant with a return based on investment alternatives selected by the participant. The amount accrued under these nonqualified plans was $130.9 million and $111.6 million at December 31, 2021 and 2020, respectively.
14. COMMON STOCK
Treasury Stock
In May 2019, the Board of Directors approved a stock repurchase program authorizing the Company to purchase up to $1.0 billion of the Company's common stock. In May 2021, the Board of Directors approved a new stock repurchase program for an additional $1.0 billion of the Company's common stock. The repurchase programs do not have an expiration date. Stock repurchased under these programs may be used to offset obligations under the Company's employee stock-based benefit programs and stock-based business acquisitions, and will reduce the total shares outstanding.
During 2021, 2020, and 2019, the Company repurchased 5.8 million, 3.1 million, and 1.5 million shares, respectively, at an aggregate cost of $512.8 million, $625.4 million, and $263.3 million, respectively, including shares purchased under the accelerated share repurchase ("ASR") agreements described below and shares acquired to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued to employees. The timing and size of any future stock repurchases are subject to a variety of factors, including expected dilution from stock plans, cash capacity, and the market price of the Company's common stock.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. COMMON STOCK (Continued)
Accelerated Share Repurchase
During 2021 and 2019, the Company entered into ASR agreements providing for the repurchase of the Company's common stock based on the volume-weighted average price ("VWAP") of the Company's common stock during the term of the agreements, less a discount. The following table summarizes the terms of the ASR agreements (dollars and shares in millions, except per share data):
| Initial Delivery | Final Settlement | |||||||||||||||||||||||||||||||||||||||||||
| Agreement Date | Amount Paid | Shares Received | Price per Share (a) | Value of Shares as % of Contract Value | Settlement Date | Total Shares Received | Average Price per Share (a) | |||||||||||||||||||||||||||||||||||||
| May 2019 | $ | 150.0 | 0.7 | $ | 178.66 | 80 | % | May 2019 | 0.8 | $ | 178.42 | |||||||||||||||||||||||||||||||||
| May 2019 | $ | 100.0 | 0.5 | $ | 170.02 | 80 | % | June 2019 | 0.6 | $ | 178.46 | |||||||||||||||||||||||||||||||||
| February 2021 | $ | 250.0 | 2.4 | $ | 83.86 | 80 | % | March 2021 | 3.0 | $ | 84.51 |
(a) The three-for-one stock split distributed on May 29, 2020 excluded treasury shares. The shares and per share prices in the table are reflected at the pre-split amounts and prices at the time of the transaction.
The ASR agreements were accounted for as two separate transactions: (1) the value of the initial delivery of shares was recorded as shares of common stock acquired in a treasury stock transaction on the acquisition date and (2) the remaining amount of the purchase price paid was recorded as a forward contract indexed to the Company's own common stock and was recorded in "Additional Paid-in Capital" on the consolidated balance sheets. The initial delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The Company determined that the forward contract indexed to the Company's common stock met all the applicable criteria for equity classification and, therefore, was not accounted for as a derivative instrument.
Employee and Director Stock Plans
The Edwards Lifesciences Corporation Long-term Stock Incentive Compensation Program (the "Program") provides for the grant of incentive and non-qualified stock options, restricted stock, and restricted stock units for eligible employees of the Company. Under the Program, these grants are awarded at a price equal to the fair market value at the date of grant based upon the closing price on that date. Options to purchase shares of the Company's common stock granted under the Program generally vest over predetermined periods of between three to four years and expire seven years after the date of grant. Service-based restricted stock units of the Company's common stock granted under the Program generally vest over predetermined periods, typically four years after the date of grant. Market-based restricted stock units of the Company's common stock granted under the Program vest over three years based on a combination of certain service and market conditions. The actual number of shares issued will be determined based on the Company's total stockholder return relative to a selected industry peer group. Under the Program, the number of shares of common stock authorized for issuance under the Program was 327.6 million shares. No more than 33.6 million shares reserved for issuance may be granted in the form of restricted stock or restricted stock units.
The Company also maintains the Nonemployee Directors Stock Incentive Compensation Program (the "Nonemployee Directors Program"). Under the Nonemployee Directors Program, annually each nonemployee director may receive up to 120,000 stock options or 48,000 restricted stock units of the Company's common stock, or a combination thereof, provided that in no event may the total value of the combined annual award exceed $0.2 million. These grants generally vest over one year from the date of grant. Under the Nonemployee Directors Program, an aggregate of 8.4 million shares of the Company's common stock has been authorized for issuance.
The Company has an employee stock purchase plan for United States employees and a plan for employees outside of the United States (collectively "ESPP"). Under the ESPP, eligible employees may purchase shares of the Company's common stock at 85% of the lower of the fair market value of Edwards Lifesciences common stock on the effective date of subscription or the date of purchase. Under the ESPP, employees can authorize the Company to withhold up to 15% of their compensation for common stock purchases, subject to certain limitations. The ESPP is available to all active employees of the Company paid from the United States payroll and to eligible employees of the Company outside of the United States, to the extent permitted
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. COMMON STOCK (Continued)
by local law. The ESPP for United States employees is qualified under Section 423 of the Internal Revenue Code. The number of shares of common stock authorized for issuance under the ESPP was 50.4 million shares.
The fair value of each option award and employee stock purchase subscription is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following tables. The risk-free interest rate is estimated using the United States Treasury yield curve and is based on the expected term of the award. Expected volatility is estimated based on a blend of the weighted-average of the historical volatility of Edwards Lifesciences' stock and the implied volatility from traded options on Edwards Lifesciences' stock. The expected term of awards granted is estimated from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that awards granted are expected to be outstanding. The Company uses historical data to estimate forfeitures and has estimated an annual forfeiture rate of 6.4%.
The Black-Scholes option pricing model was used with the following weighted-average assumptions for options granted during the following periods:
Option Awards
| 2021 | 2020 | 2019 | |||||||||||||||
| Average risk-free interest rate | 0.8 | % | 0.3 | % | 2.3 | % | |||||||||||
| Expected dividend yield | None | None | None | ||||||||||||||
| Expected volatility | 34 | % | 33 | % | 30 | % | |||||||||||
| Expected life (years) | 5.0 | 5.0 | 5.1 | ||||||||||||||
| Fair value, per share | $ | 28.90 | $ | 21.70 | $ | 18.17 |
The Black-Scholes option pricing model was used with the following weighted-average assumptions for ESPP subscriptions granted during the following periods:
ESPP
| 2021 | 2020 | 2019 | |||||||||||||||
| Average risk-free interest rate | 0.1 | % | 1.3 | % | 2.4 | % | |||||||||||
| Expected dividend yield | None | None | None | ||||||||||||||
| Expected volatility | 37 | % | 33 | % | 27 | % | |||||||||||
| Expected life (years) | 0.6 | 0.6 | 0.6 | ||||||||||||||
| Fair value, per share | $ | 23.07 | $ | 16.61 | $ | 16.43 |
The fair value of market-based restricted stock units was determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The weighted-average assumptions used to determine the fair value of the market-based restricted stock units during the years ended December 31, 2021, 2020, and 2019 included a risk-free interest rate of 0.4%, 0.2%, and 2.2%, respectively, and an expected volatility rate of 34.4%, 32.7%, and 29.4%, respectively.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. COMMON STOCK (Continued)
Stock option activity during the year ended December 31, 2021 under the Program and the Nonemployee Directors Program was as follows (in millions, except years and per-share amounts):
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding as of December 31, 2020 | 14.3 | $ | 41.27 | ||||||||||||||||||||
| Options granted | 1.6 | 94.04 | |||||||||||||||||||||
| Options exercised | (3.4) | 23.84 | |||||||||||||||||||||
| Options forfeited | (0.2) | 67.89 | |||||||||||||||||||||
| Outstanding as of December 31, 2021 | 12.3 | 52.84 | 3.5 years | $ | 943.1 | ||||||||||||||||||
| Exercisable as of December 31, 2021 | 8.2 | 41.84 | 2.6 years | $ | 719.7 | ||||||||||||||||||
| Vested and expected to vest as of December 31, 2021 | 11.7 | 51.74 | 3.4 years | $ | 911.4 |
The following table summarizes nonvested restricted stock unit activity during the year ended December 31, 2021 under the Program and the Nonemployee Directors Program (in millions, except per-share amounts):
| Shares | Weighted- Average Grant-Date Fair Value | ||||||||||
| Nonvested as of December 31, 2020 | 2.6 | $ | 57.59 | ||||||||
| Granted (a) | 0.8 | 92.95 | |||||||||
| Vested | (1.0) | 48.82 | |||||||||
| Forfeited | (0.1) | 66.54 | |||||||||
| Nonvested as of December 31, 2021 | 2.3 | 73.94 |
(a) The shares granted include 0.1 million shares of market-based restricted stock units granted during 2021, which represents the target number of shares to be issued, and 0.1 million shares related to a previous year's grant of market-based restricted stock units since the payout percentage achieved at the end of the performance period was in excess of target. As described above, the actual number of shares ultimately issued is determined based on the Company's total stockholder return relative to a selected industry peer group.
The intrinsic value of stock options exercised and restricted stock units vested during the years ended December 31, 2021, 2020, and 2019 were $359.8 million, $323.5 million, and $382.1 million, respectively. The intrinsic value of stock options is calculated as the amount by which the market price of the Company's common stock exceeds the exercise price of the option. During the years ended December 31, 2021, 2020, and 2019, the Company received cash from exercises of stock options of $82.2 million, $79.2 million, and $110.4 million, respectively, and tax benefits from exercises of stock options and vesting of restricted stock units of $76.5 million, $72.1 million, and $85.1 million, respectively. The total grant-date fair value of stock options vested during the years ended December 31, 2021, 2020, and 2019 were $36.2 million, $34.0 million, and $31.2 million, respectively.
As of December 31, 2021, the total remaining unrecognized compensation expense related to nonvested stock options, restricted stock units, and employee stock purchase subscriptions amounted to $162.3 million, which will be amortized over the weighted-average remaining requisite service period of 30 months.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
Presented below is a summary of activity for each component of "Accumulated Other Comprehensive Loss" for the years ended December 31, 2021, 2020, and 2019.
| Foreign Currency Translation Adjustments | Unrealized Gain (Loss) on Hedges | Unrealized (Loss) Gain on Available-for-sale Investments | Unrealized Pension Costs (a) | Total Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| December 31, 2018 | $ | (143.6) | $ | 23.6 | $ | (5.0) | $ | (13.5) | $ | (138.5) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (1.5) | 27.9 | 7.9 | (3.2) | 31.1 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (6.6) | (44.2) | 0.4 | 0.7 | (49.7) | ||||||||||||||||||||||||
| Deferred income tax (expense) benefit | (3.1) | 5.2 | (1.6) | 0.6 | 1.1 | ||||||||||||||||||||||||
| December 31, 2019 | (154.8) | 12.5 | 1.7 | (15.4) | (156.0) | ||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 35.7 | (34.8) | 8.0 | (5.5) | 3.4 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (6.4) | (19.2) | 0.3 | 0.9 | (24.4) | ||||||||||||||||||||||||
| Deferred income tax benefit (expense) | 3.1 | 13.8 | (1.4) | 0.4 | 15.9 | ||||||||||||||||||||||||
| December 31, 2020 | (122.4) | (27.7) | 8.6 | (19.6) | (161.1) | ||||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (39.2) | 66.3 | (29.2) | 12.8 | 10.7 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (6.4) | 12.0 | 8.6 | 1.0 | 15.2 | ||||||||||||||||||||||||
| Deferred income tax (expense) benefit | (4.5) | (20.9) | 5.1 | (2.2) | (22.5) | ||||||||||||||||||||||||
| December 31, 2021 | $ | (172.5) | $ | 29.7 | $ | (6.9) | $ | (8.0) | $ | (157.7) |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)
(a)For the years ended December 31, 2021, 2020, and 2019, the change in unrealized pension costs consisted of the following (in millions):
| Pre-Tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||
| 2021 | |||||||||||||||||
| Prior service credit arising during period | $ | 0.1 | $ | — | $ | 0.1 | |||||||||||
| Amortization of prior service credit | (0.7) | 0.1 | (0.6) | ||||||||||||||
| Net prior service cost arising during period | (0.6) | 0.1 | (0.5) | ||||||||||||||
| Net actuarial loss arising during period | 14.4 | (2.3) | 12.1 | ||||||||||||||
| Unrealized pension costs, net | $ | 13.8 | $ | (2.2) | $ | 11.6 | |||||||||||
| 2020 | |||||||||||||||||
| Prior service credit arising during period | $ | 0.6 | $ | (0.2) | $ | 0.4 | |||||||||||
| Amortization of prior service credit | (0.7) | 0.1 | (0.6) | ||||||||||||||
| Net prior service cost arising during period | (0.1) | (0.1) | (0.2) | ||||||||||||||
| Net actuarial loss arising during period | (4.5) | 0.5 | (4.0) | ||||||||||||||
| Unrealized pension costs, net | $ | (4.6) | $ | 0.4 | $ | (4.2) | |||||||||||
| 2019 | |||||||||||||||||
| Prior service credit arising during period | $ | 4.6 | $ | (0.6) | $ | 4.0 | |||||||||||
| Amortization of prior service credit | (0.2) | 0.1 | (0.1) | ||||||||||||||
| Net prior service credit arising during period | 4.4 | (0.5) | 3.9 | ||||||||||||||
| Net actuarial loss arising during period | (6.9) | 1.1 | (5.8) | ||||||||||||||
| Unrealized pension costs, net | $ | (2.5) | $ | 0.6 | $ | (1.9) |
The following table provides information about amounts reclassified from "Accumulated Other Comprehensive Loss" (in millions):
| Years Ended December 31, | |||||||||||||||||
| Details about Accumulated Other Comprehensive Loss Components | 2021 | 2020 | Affected Line on Consolidated Statements of Operations | ||||||||||||||
| Foreign currency translation adjustments | $ | 6.4 | $ | 6.4 | Other income, net | ||||||||||||
| (1.6) | (1.6) | Provision for income taxes | |||||||||||||||
| $ | 4.8 | $ | 4.8 | Net of tax | |||||||||||||
| Gain (loss) on hedges | $ | (23.0) | $ | 18.4 | Cost of sales | ||||||||||||
| (0.6) | 2.2 | Selling, general, and administrative expenses | |||||||||||||||
| 11.6 | (1.4) | Other income, net | |||||||||||||||
| (12.0) | 19.2 | Total before tax | |||||||||||||||
| 4.6 | (5.0) | Provision for income taxes | |||||||||||||||
| $ | (7.4) | $ | 14.2 | Net of tax | |||||||||||||
| (Loss) gain on available-for-sale investments | $ | (8.6) | $ | (0.3) | Other income, net | ||||||||||||
| 2.1 | (0.6) | Provision for income taxes | |||||||||||||||
| $ | (6.5) | $ | (0.9) | Net of tax | |||||||||||||
| Amortization of pension adjustments | $ | (1.0) | $ | (0.9) | Other income, net | ||||||||||||
| 0.1 | 0.2 | Provision for income taxes | |||||||||||||||
| $ | (0.9) | $ | (0.7) | Net of tax |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. OTHER INCOME, NET
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Foreign exchange gains, net | $ | (5.0) | $ | (12.3) | $ | (5.9) | |||||||||||
| Gain on investments | (5.8) | (0.6) | (0.5) | ||||||||||||||
| Non-service cost components of net periodic pension benefit cost | 0.3 | 0.4 | 0.2 | ||||||||||||||
| Other | (2.2) | 1.0 | (2.0) | ||||||||||||||
| Total other income, net | $ | (12.7) | $ | (11.5) | $ | (8.2) |
17. INCOME TAXES
The Company's income before provision for income taxes was generated from operations in the United States and outside of the United States as follows (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | 610.9 | $ | 151.3 | $ | 383.4 | |||||||||||
| Outside of the United States, including Puerto Rico | 1,091.1 | 765.4 | 783.1 | ||||||||||||||
| $ | 1,702.0 | $ | 916.7 | $ | 1,166.5 |
The provision for income taxes consists of the following (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Current | |||||||||||||||||
| United States: | |||||||||||||||||
| Federal | $ | 125.2 | $ | 23.4 | $ | 31.3 | |||||||||||
| State and local | 25.1 | 48.2 | 48.7 | ||||||||||||||
| Outside of the United States, including Puerto Rico | 92.6 | 73.9 | 29.1 | ||||||||||||||
| Current income tax expense | $ | 242.9 | $ | 145.5 | $ | 109.1 | |||||||||||
| Deferred | |||||||||||||||||
| United States: | |||||||||||||||||
| Federal | $ | (9.4) | $ | 11.0 | $ | 28.3 | |||||||||||
| State and local | (25.4) | (32.9) | (18.3) | ||||||||||||||
| Outside of the United States, including Puerto Rico | (9.2) | (30.3) | 0.5 | ||||||||||||||
| Deferred income tax (benefit) expense | (44.0) | (52.2) | 10.5 | ||||||||||||||
| Total income tax provision | $ | 198.9 | $ | 93.3 | $ | 119.6 |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
The components of deferred tax assets and liabilities are as follows (in millions):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Deferred tax assets | |||||||||||
| Compensation and benefits | $ | 109.8 | $ | 88.6 | |||||||
| Benefits from uncertain tax positions | 33.9 | 27.0 | |||||||||
| Net tax credit carryforwards | 142.0 | 125.5 | |||||||||
| Net operating loss carryforwards | 69.4 | 64.1 | |||||||||
| Accrued liabilities | 108.0 | 105.0 | |||||||||
| Inventories | 13.5 | 16.3 | |||||||||
| Cash flow and net investment hedges | — | 3.3 | |||||||||
| State income taxes | 0.4 | 0.5 | |||||||||
| Investments | 0.7 | 1.8 | |||||||||
| Lease liability obligations | 6.6 | 7.7 | |||||||||
| Other | 1.3 | 3.6 | |||||||||
| Total deferred tax assets | 485.6 | 443.4 | |||||||||
| Deferred tax liabilities | |||||||||||
| Property, plant, and equipment | (64.1) | (53.4) | |||||||||
| Cash flow and net investment hedges | (6.4) | — | |||||||||
| Deferred tax on foreign earnings | (26.3) | (29.2) | |||||||||
| Right-of-use assets | (6.1) | (7.0) | |||||||||
| Other intangible assets | (75.5) | (76.3) | |||||||||
| Other | (2.6) | (3.1) | |||||||||
| Total deferred tax liabilities | (181.0) | (169.0) | |||||||||
| Valuation allowance | (82.5) | (71.6) | |||||||||
| Net deferred tax assets | $ | 222.1 | $ | 202.8 |
During 2021, net deferred tax assets increased $19.3 million, including items that were recorded to stockholders' equity and which did not impact the Company's income tax provision.
The valuation allowance of $82.5 million as of December 31, 2021 reduces certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the net operating loss carryforwards of certain non-United States subsidiaries and certain non-United States credit carryforwards.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
Net operating loss and capital loss carryforwards and the related carryforward periods at December 31, 2021 are summarized as follows (in millions):
| Carryforward Amount | Tax Benefit Amount | Valuation Allowance | Net Tax Benefit | Carryforward Period Ends | |||||||||||||||||||||||||
| United States federal net operating losses | $ | 17.6 | $ | 3.7 | $ | — | $ | 3.7 | 2030-2037 | ||||||||||||||||||||
| United States federal net operating losses | 11.3 | 2.4 | — | 2.4 | Indefinite | ||||||||||||||||||||||||
| United States state net operating losses | 33.5 | 1.6 | (1.6) | — | 2026-2039 | ||||||||||||||||||||||||
| United States state net operating losses | 1.0 | 0.1 | (0.1) | — | Indefinite | ||||||||||||||||||||||||
| Non-United States net operating losses | 5.8 | 1.5 | (1.2) | 0.3 | 2022-2028 | ||||||||||||||||||||||||
| Non-United States net operating losses | 353.3 | 60.1 | (50.8) | 9.3 | Indefinite | ||||||||||||||||||||||||
| United States capital losses | 34.1 | 0.2 | (0.2) | — | 2024 | ||||||||||||||||||||||||
| Total | $ | 456.6 | $ | 69.6 | $ | (53.9) | $ | 15.7 |
Certain tax attributes are subject to an annual limitation as a result of the acquisitions of Harpoon and CASMED, which constitute a change of ownership as defined under Internal Revenue Code Section 382.
The gross tax credit carryforwards and the related carryforward periods at December 31, 2021 are summarized as follows (in millions):
| Carryforward Amount | Valuation Allowance | Net Tax Benefit | Carryforward Period Ends | ||||||||||||||||||||
| California research expenditure tax credits | $ | 167.0 | $ | — | $ | 167.0 | Indefinite | ||||||||||||||||
| Federal research expenditure tax credits | 1.5 | — | 1.5 | 2026-2039 | |||||||||||||||||||
| Foreign tax credits | 2.9 | (2.9) | — | 2030-2031 | |||||||||||||||||||
| Puerto Rico purchases credit | 23.4 | (23.4) | — | Indefinite | |||||||||||||||||||
| Total | $ | 194.8 | $ | (26.3) | $ | 168.5 |
The Company has $167.0 million of California research expenditure tax credits it expects to use in future periods. The credits may be carried forward indefinitely. Based upon anticipated future taxable income, the Company expects 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. Accordingly, no valuation allowance has been provided. The Company has $23.4 million of Puerto Rico purchases credit. Throughout its history and into the future, the Puerto Rico operations generate, or are expected to generate, credits each year in excess of its ability to utilize credits in those years. As a result, even though the credits have an indefinite life, the Company continues to record a valuation allowance on the credit carryforwards.
On December 22, 2017, Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act (the "2017 Act"), was signed into law. The 2017 Act a) reduced the United States federal corporate tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017, b) required companies to pay a one-time mandatory deemed repatriation tax on the cumulative earnings of certain foreign subsidiaries that were previously tax deferred, and c) created new taxes on certain foreign earnings in future years. The Company elected to pay the repatriation tax in installments over eight years.
The Company asserts that $1.0 billion of its foreign earnings continue to be indefinitely reinvested and it intends to repatriate $392.9 million of its foreign earnings as of December 31, 2021. The estimated net tax liability on the indefinitely reinvested earnings if repatriated is $23.1 million.
The Company has 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 $208.0 million ($0.33 per diluted share), $189.2 million ($0.30 per diluted share), and $159.2 million ($0.25 per diluted share) for the years ended December 31, 2021, 2020, and 2019, respectively.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
A reconciliation of the United States federal statutory income tax rate to the Company's effective income tax rate is as follows (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Income tax expense at United States federal statutory rate | $ | 357.4 | $ | 192.5 | $ | 245.0 | |||||||||||
| Foreign income taxed at different rates | (122.2) | (80.5) | (75.0) | ||||||||||||||
| State and local taxes, net of federal tax benefit | 11.9 | 5.0 | 11.9 | ||||||||||||||
| Tax credits, federal and state | (48.4) | (43.1) | (42.9) | ||||||||||||||
| Build of reserve for prior years' uncertain tax positions | 3.6 | 4.2 | 5.0 | ||||||||||||||
| Tax on global intangible low-taxed income | 56.5 | 49.2 | 32.0 | ||||||||||||||
| Foreign-derived intangible income deduction | (1.3) | (2.6) | (7.2) | ||||||||||||||
| Contingent consideration liabilities | (26.1) | 2.9 | (1.3) | ||||||||||||||
| United States federal deductible employee share-based compensation | (47.8) | (48.3) | (57.6) | ||||||||||||||
| Nondeductible employee share-based compensation | 5.3 | 4.2 | 3.2 | ||||||||||||||
| Other | 10.0 | 9.8 | 6.5 | ||||||||||||||
| Income tax provision | $ | 198.9 | $ | 93.3 | $ | 119.6 |
The Company's effective tax rate for 2021 increased in comparison to 2020 primarily due to the tax benefit from the Settlement Agreement with Abbott in 2020 (see Note 3) and the decrease in the excess tax benefit from employee share-based compensation, partially offset by the tax benefit from the change in fair value of contingent consideration liabilities. The Company's effective tax rate for 2020 decreased slightly in comparison to 2019 primarily due to the tax benefit from the Settlement Agreement with Abbott in 2020, partially offset by the increase in the United States tax on global intangible low-taxed income and the decrease in the excess tax benefit from employee share-based compensation.
Uncertain Tax Positions
As of December 31, 2021 and 2020, the gross uncertain tax positions were $358.4 million and $281.8 million, respectively. The Company estimates that these liabilities would be reduced by $135.1 million and $95.1 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amounts of $223.3 million and $186.7 million, respectively, if not required, would favorably affect the Company's effective tax rate.
A reconciliation of the beginning and ending amount of uncertain tax positions, excluding interest, penalties, and foreign exchange, is as follows (in millions):
| December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Uncertain gross tax positions, January 1 | $ | 281.8 | $ | 203.1 | $ | 150.7 | |||||||||||
| Current year tax positions | 82.1 | 86.4 | 55.4 | ||||||||||||||
| Increase in prior year tax positions | 2.3 | 6.0 | 0.8 | ||||||||||||||
| Decrease in prior year tax positions | (4.8) | (10.0) | (3.8) | ||||||||||||||
| Settlements | (0.3) | (3.7) | — | ||||||||||||||
| Lapse of statutes of limitations | (2.7) | — | — | ||||||||||||||
| Uncertain gross tax positions, December 31 | $ | 358.4 | $ | 281.8 | $ | 203.1 |
The table above summarizes the gross amounts of uncertain tax positions without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such uncertain tax positions were settled.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
The Company recognizes interest and penalties, if any, related to uncertain tax positions in the provision for income taxes. As of December 31, 2021, the Company had accrued $19.5 million (net of $8.1 million tax benefit) of interest related to uncertain tax positions, and as of December 31, 2020, the Company had accrued $14.3 million (net of $5.1 million tax benefit) of interest related to uncertain tax positions. During 2021, 2020, and 2019, the Company recognized interest expense, net of tax benefit, of $5.2 million, $5.0 million, and $4.7 million, respectively, in "Provision for Income Taxes" on the consolidated statements of operations.
In the normal course of business, the Internal Revenue Service ("IRS") and other taxing authorities are in different stages of examining various years of the Company's tax filings. During these audits, the Company 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 the Company's results of operations and financial condition. The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. Management believes that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from these uncertain tax positions.
At December 31, 2021, all material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, the Company continues to address matters in India for years from 2010.
The Company 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, the Company executed other bilateral APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. The Company has filed to renew all of the APAs which cover transactions with Japan for the years 2020 and forward. The execution of some or all of these APA renewals depends on many variables outside of the Company's control.
The Company’s United States federal income tax returns through 2014 have been audited. The IRS began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and later added the 2017 tax year to this audit cycle during the first quarter of 2019. The IRS audit field work for the 2015-2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing and related matters.
During the second quarter of 2021, the Company received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between the Company's United States and Switzerland subsidiaries. During the third quarter of 2021, the Company completed its review of the NOPA and provided comments to the IRS and the IRS subsequently revised the NOPA. The revised NOPA proposes an increase to the Company's United States taxable income which could result in additional tax expense for this period of approximately $180 million and represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions.
The Company has formally disagreed with the NOPA and has submitted a formal protest on the matter to the IRS Independent Office of Appeals during the fourth quarter of 2021. The Company also has received the final Revenue Agent's Report for these tax years. The Company continues to evaluate all possible remedies available to it, which could take several years to resolve. No payment of any amount related to the NOPA is required to be made, if at all, until all applicable proceedings have been completed. The Company believes the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, has not accrued any additional amount based on the NOPA received.
Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 - 2021 that were not resolved under the APA program remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
December 31, 2021. The Company has considered this information, as well as information regarding the NOPA described above, in its evaluation of its uncertain tax positions. The impact of these unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to the Company’s consolidated financial statements. Based on the information currently available and numerous possible outcomes, the Company cannot reasonably estimate what, if any, changes in its existing uncertain tax positions may occur in the next 12 months and, therefore, has continued to record the uncertain tax positions as a long-term liability.
18. LEGAL PROCEEDINGS
The Company is reviewing and investigating whether business activities in Japan and other markets violate certain provisions of the Foreign Corrupt Practices Act ("FCPA"). The Company has voluntarily notified the SEC and the United States Department of Justice that it has engaged outside counsel to conduct this review and investigation. Any determination that the Company’s operations or activities are not in compliance with existing laws, including the FCPA, could result in the imposition of fines, penalties, and equitable remedies. The Company cannot currently predict the outcome of the review and investigation or the potential impact on its financial statements.
On September 28, 2021, Aortic Innovations LLC, a non-practicing entity, filed a lawsuit against Edwards Lifesciences Corporation and certain of its subsidiaries ("Edwards") in the United States District Court for the District of Delaware alleging that Edwards’ SAPIEN 3 Ultra product infringes certain of its patents. The Company is unable to predict the ultimate outcome of this matter or estimate a range of possible exposure; therefore, no amounts have been accrued. The Company intends to vigorously defend itself in this litigation.
The Company is 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, as applicable, by the Company, workplace and employment matters, matters involving real estate, Company operations or health care regulations, or governmental investigations (the "Lawsuits"). The Lawsuits 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. Management does not believe that any loss relating to the Lawsuits would have a material adverse effect on the Company's overall financial condition, results of operations or cash flows. However, the resolution of one or more of the Lawsuits in any reporting period, could have a material adverse impact on the Company's financial results for that period. The Company is not able to estimate the amount or range of any loss for legal contingencies related to the Lawsuits for which there is no reserve or additional loss for matters already reserved.
The Company is subject to various environmental laws and regulations both within and outside of the United States. The Company's operations, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on the Company's financial results. The Company's threshold of disclosing material environmental legal proceedings involving a governmental authority where potential monetary exposure is involved is $1 million.
19. SEGMENT INFORMATION
Edwards Lifesciences conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan, and Rest of World. All regions sell products that are used to treat advanced cardiovascular disease.
The Company's geographic segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer). The Company evaluates the performance of its geographic segments based on net sales and operating income. The accounting policies of the segments are the same as those described in Note 2. Segment net sales and segment operating income are based on internally derived standard foreign exchange rates, which may differ from year to year, and do not include inter-segment profits. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographical distribution that would occur if the segments were not interdependent. Net sales by geographic area are based on the location of the customer. There were no customers that represented 10% or more of the Company's total net sales.
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. SEGMENT INFORMATION (Continued)
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include net interest income, global marketing expenses, corporate research and development expenses, manufacturing variances, corporate headquarters costs, special gains and charges, stock-based compensation, foreign currency hedging activities, certain litigation costs, changes in the fair value of contingent consideration liabilities, and most of the Company's amortization expense. Although most of the Company's depreciation expense is included in segment operating income, due to the Company's methodology for cost build-up, it is impractical to determine the amount of depreciation expense included in each segment, and, therefore, a portion is maintained at the corporate level. The Company neither discretely allocates assets to its operating segments, nor evaluates the operating segments using discrete asset information.
The table below presents information about Edwards Lifesciences' reportable segments (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Segment Net Sales | |||||||||||||||||
| United States | $ | 2,963.1 | $ | 2,516.8 | $ | 2,532.7 | |||||||||||
| Europe | 1,099.6 | 945.2 | 926.1 | ||||||||||||||
| Japan | 528.0 | 448.6 | 441.4 | ||||||||||||||
| Rest of World | 533.2 | 451.5 | 433.3 | ||||||||||||||
| Total segment net sales | $ | 5,123.9 | $ | 4,362.1 | $ | 4,333.5 | |||||||||||
| Segment Operating Income | |||||||||||||||||
| United States | $ | 2,051.0 | $ | 1,727.3 | $ | 1,742.3 | |||||||||||
| Europe | 569.1 | 479.3 | 472.0 | ||||||||||||||
| Japan | 348.0 | 286.4 | 272.3 | ||||||||||||||
| Rest of World | 185.2 | 150.1 | 127.9 | ||||||||||||||
| Total segment operating income | $ | 3,153.3 | $ | 2,643.1 | $ | 2,614.5 |
The table below presents reconciliations of segment net sales to consolidated net sales and segment operating income to consolidated pre-tax income (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net Sales Reconciliation | |||||||||||||||||
| Segment net sales | $ | 5,123.9 | $ | 4,362.1 | $ | 4,333.5 | |||||||||||
| Foreign currency | 108.6 | 24.2 | 14.5 | ||||||||||||||
| Consolidated net sales | $ | 5,232.5 | $ | 4,386.3 | $ | 4,348.0 | |||||||||||
| Pre-tax Income Reconciliation | |||||||||||||||||
| Segment operating income | $ | 3,153.3 | $ | 2,643.1 | $ | 2,614.5 | |||||||||||
| Unallocated amounts: | |||||||||||||||||
| Corporate items | (1,613.8) | (1,358.0) | (1,439.7) | ||||||||||||||
| Special charges | — | — | (64.6) | ||||||||||||||
| Intellectual property litigation expenses, net | (20.6) | (405.4) | (33.4) | ||||||||||||||
| Change in fair value of contingent consideration liabilities, net | 124.1 | (13.6) | 6.1 | ||||||||||||||
| Foreign currency | 47.3 | 31.5 | 63.9 | ||||||||||||||
| Consolidated operating income | 1,690.3 | 897.6 | 1,146.8 | ||||||||||||||
| Non-operating income | 11.7 | 19.1 | 19.7 | ||||||||||||||
| Consolidated pre-tax income | $ | 1,702.0 | $ | 916.7 | $ | 1,166.5 |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. SEGMENT INFORMATION (Continued)
Enterprise-Wide Information
(in millions)
Enterprise-wide information is based on actual foreign exchange rates used in the Company's consolidated financial statements.
| As of or for the Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net Sales by Geographic Area | |||||||||||||||||
| United States | $ | 2,963.1 | $ | 2,516.8 | $ | 2,532.7 | |||||||||||
| Europe | 1,190.3 | 973.6 | 941.2 | ||||||||||||||
| Japan | 528.9 | 460.1 | 444.7 | ||||||||||||||
| Rest of World | 550.2 | 435.8 | 429.4 | ||||||||||||||
| $ | 5,232.5 | $ | 4,386.3 | $ | 4,348.0 | ||||||||||||
| Net Sales by Major Product Area | |||||||||||||||||
| Transcatheter Aortic Valve Replacement | $ | 3,422.5 | $ | 2,857.3 | $ | 2,737.9 | |||||||||||
| Transcatheter Mitral and Tricuspid Therapies | 86.0 | 41.8 | 28.2 | ||||||||||||||
| Surgical Structural Heart | 889.1 | 761.8 | 841.7 | ||||||||||||||
| Critical Care | 834.9 | 725.4 | 740.2 | ||||||||||||||
| $ | 5,232.5 | $ | 4,386.3 | $ | 4,348.0 | ||||||||||||
| Long-lived Tangible Assets by Geographic Area | |||||||||||||||||
| United States | $ | 1,195.8 | $ | 1,084.3 | $ | 849.1 | |||||||||||
| Europe | 197.9 | 192.7 | 101.5 | ||||||||||||||
| Japan | 19.7 | 20.4 | 21.7 | ||||||||||||||
| Rest of World | 335.5 | 311.0 | 269.4 | ||||||||||||||
| $ | 1,748.9 | $ | 1,608.4 | $ | 1,241.7 |
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. VALUATION AND QUALIFYING ACCOUNTS
| Additions | |||||||||||||||||||||||||||||
| Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Year ended December 31, 2021 | |||||||||||||||||||||||||||||
| Allowance for doubtful accounts (a) | $ | 16.4 | $ | 1.2 | $ | 0.6 | $ | (2.5) | $ | 15.7 | |||||||||||||||||||
| Tax valuation allowance (b) | 71.6 | 12.4 | — | (1.5) | 82.5 | ||||||||||||||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||||||||
| Allowance for doubtful accounts (a) | $ | 14.7 | $ | 3.1 | $ | — | $ | (1.4) | $ | 16.4 | |||||||||||||||||||
| Tax valuation allowance (b) | 65.8 | 6.3 | 0.6 | (1.1) | 71.6 | ||||||||||||||||||||||||
| Year ended December 31, 2019 | |||||||||||||||||||||||||||||
| Allowance for doubtful accounts (a) | $ | 13.6 | $ | 4.7 | $ | 0.2 | $ | (3.8) | $ | 14.7 | |||||||||||||||||||
| Tax valuation allowance (b) | 46.7 | 18.9 | 0.2 | — | 65.8 |
(a) The deductions related to allowances for doubtful accounts represent accounts receivable which are written off.
(b) The tax valuation allowances are provided for other-than-temporary impairments and unrealized losses related to certain investments that may not be recognized due to the uncertainty of the ready marketability of certain impaired investments, and net operating loss and credit carryforwards that may not be recognized due to insufficient taxable income.
21. SUBSEQUENT EVENT
In January 2022, the Company entered into an ASR agreement to repurchase $250.0 million of Edwards Lifesciences' common stock based on the volume-weighted average price ("VWAP") of Edwards Lifesciences' common stock during the term of the agreements, less a discount. Upon entering into the agreement, the Company received an initial delivery of approximately 1.9 million shares, representing approximately 80% of the shares to be repurchased. At the termination of the ASR, the Company may receive additional shares or may be required to pay additional cash or shares (at the Company's election). The final settlement is based on the VWAP over the term of the agreement, less a discount. The ASR agreement has a scheduled termination date of February 16, 2022.
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