EDWARDS LIFESCIENCES CORPORATION The following discussion and analysis presents the factors that had a material effect on our results of operations during the two years endedDecember 31, 2021 . Also discussed is our financial position as ofDecember 31, 2021 . You should read this discussion in conjunction with the historical consolidated financial statements and related notes included elsewhere in this Form 10-K. For a discussion related to the results of operations for 2020 compared to 2019 and a discussion related to our consolidated cash flows for 2020 compared to 2019, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 12, 2021 .
Overview
We are the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or in intensive care. We conduct operations worldwide and are managed in the following geographical regions:United States ,Europe ,Japan , and Rest of World. Our products are categorized into the following areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. Financial Highlights and COVID-19 [[Image Removed: ew-20211231_g2.jpg]][[Image Removed: ew-20211231_g3.jpg]] The COVID-19 pandemic has adversely impacted, and may further adversely impact, nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners. Our priority has been to maintain access for patients to our life-saving technologies while providing continuous front-line support to our clinician partners, and protecting the well-being of our employees. Our manufacturing operations have continued to respond to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components. TAVR and Surgical procedure volumes varied greatly since the middle ofMarch 2020 by geography, and even by hospital, as patients and their physicians analyzed the trade-off between aortic stenosis and their concern for COVID-19. In the last few weeks of the first quarter of 2020, procedure volumes related to our TAVR and Surgical products dropped significantly. Beginning in the second quarter of 2020, procedure volumes improved. In the second quarter of 2020, we also started to progressively resume patient enrollment in all clinical trials that were voluntarily paused or slowed at the end of the first quarter of 2020. While we saw improvements to pre-COVID levels when we resumed enrollment, procedure volumes and enrollment in our clinical trials were negatively impacted in late 2020 due to a resurgence of COVID-19. In Critical Care, during 2020 there was greater demand inEurope andthe United States for our pressure monitoring products, but demand for 22
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other Critical Care products began to decrease at the end of the first quarter of 2020 due to decreased hospital spending related to COVID-19, and that trend continued through the fourth quarter of 2020. During the first quarter of 2021, COVID-19 stressed the global healthcare system during the winter months. However, we saw strong recovery beginning in the second quarter of 2021 as widespread vaccine adoption contributed to an increased number of patients. However, the Delta variant had a significant impact on hospital resources during the last two months of the third quarter of 2021, and the Omicron variant had a significant impact duringDecember 2021 , especially inthe United States . Despite the challenges associated with COVID-19, our net sales for 2021 were$5.2 billion , representing an increase of$846.2 million over 2020, driven by sales growth of our TAVR products. During the first half of 2021,United States TAVR procedures began to grow as COVID-19 hospitalizations decreased and vaccinations increased. However, TAVR sales were negatively impacted in the second half of 2021 asUnited States procedures declined due to the significant impact the Delta and Omicron variants had on hospital resources. Surgical sales grew during 2021 due to increased adoption of our premium high-value technologies around the world and rebounding surgical aortic treatment rates inthe United States . We also saw an increased demand for our Critical Care products in 2021 as hospital capital spending continued to show signs of recovery and elevated COVID hospitalizations inthe United States andEurope increased demand for our pressure monitoring devices. Our gross profit increase in 2021 was driven by our sales growth and lower incremental costs associated with COVID-19. The increase in our diluted earnings per share in 2021 was driven by our gross profit increase and an after-tax charge of$305.1 million in 2020 to settle certain patent litigation related to transcatheter mitral and tricuspid repair products. We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, vendors, business partners and distribution channels. The extent to which COVID-19 and measures taken in response thereto impact our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are 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. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property in support of those developments. Despite the challenges of the COVID-19 pandemic, our dedicated field teams found creative ways to support physicians, our engineers continued to advance innovation, and our colleagues worked diligently to keep our clinical trials on track. In 2021, we invested 17.3% of our net sales in research and development. The following is a summary of important developments during 2021: •we receivedUnited States Food and Drug Administration ("FDA") clearance for the Acumen Hypotension Prediction Index software with the Acumen IQ finger cuff. This is the first noninvasive solution that uses machine learning to alert clinicians of the likelihood a patient is trending toward hypotension, or low blood pressure; •we received FDA approval for the use of the Edwards SAPIEN 3 transcatheter valve with the Alterra adaptive prestent for patients with severe pulmonary regurgitation; •we completed enrollment in EARLY TAVR, a pivotal trial studying the treatment of severe aortic stenosis patients before their symptoms develop, and CLASP IID, a pivotal trial studying Edwards PASCAL in patients with degenerative mitral regurgitation; •we received CE Mark approval to begin treating patients with a previously repaired or replaced valve in the pulmonic position; •we received regulatory approval inJapan for our MITRIS valve, a new mitral valve incorporating RESILIA technology; and •we received FDA approval for our ALLIANCE pivotal trial to study our next generation TAVR technology, SAPIEN X4. 23
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We are dedicated to generating robust clinical, economic, and quality-of-life evidence increasingly expected by patients, clinicians, and payors in the current healthcare environment, with the goal of encouraging the adoption of innovative new medical therapies that demonstrate superior outcomes. Results of OperationsNet Sales by Major Regions (dollars in millions) Years Ended December 31, Change 2021 2020 $ % United States$ 2,963.1 $ 2,516.8 $ 446.3 17.7 % Europe 1,190.3 973.6 216.7 22.3 % Japan 528.9 460.1 68.8 15.0 % Rest of World 550.2 435.8 114.4 26.3 % Outside of the United States 2,269.4 1,869.5 399.9 21.4 % Total net sales$ 5,232.5 $ 4,386.3 $ 846.2 19.3 % Net sales outside ofthe United States include the impact of foreign currency exchange rate fluctuations. The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs, and our hedging activities. For more information, see "Quantitative and Qualitative Disclosures About Market Risk."Net Sales byProduct Group (dollars in millions) Years Ended December 31, Change 2021 2020 $ % Transcatheter Aortic Valve Replacement$ 3,422.5 $ 2,857.3 $ 565.2 19.8 % Transcatheter Mitral and Tricuspid Therapies 86.0 41.8 44.2 105.5 % Surgical Heart Valve Therapy 889.1 761.8 127.3 16.7 % Critical Care 834.9 725.4 109.5 15.1 % Total net sales$ 5,232.5 $ 4,386.3 $ 846.2 19.3 % 24
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Transcatheter Aortic Valve Replacement [[Image Removed: ew-20211231_g4.jpg]] The increase in net sales of TAVR products was driven by: •higher sales of the Edwards SAPIEN platform in 2021 inthe United States ,Europe , andJapan driven by improved COVID-19 conditions compared to 2020. Sales, however, were negatively impacted in the second half of 2021 asUnited States procedures declined due to the significant impact COVID had on hospital resources; and •foreign currency exchange rate fluctuations, which increased net sales outside ofthe United States by$33.9 million primarily due to the strengthening of the Euro againstthe United States dollar. In the second quarter of 2021, we (1) received approval for aUnited States pivotal trial for TAVR in moderate aortic stenosis patients, (2) received approval inJapan to begin treating low-risk patients with SAPIEN 3, and (3) received SAPIEN 3 CE Mark approval to begin treating patients with a previously repaired or replaced valve in the pulmonic position. In the fourth quarter of 2021, we (1) completed enrollment of our EARLY TAVR pivotal trial, which is focused on the treatment of asymptomatic aortic stenosis patients, (2) initiated enrollment in our PROGRESS pivotal trial for moderate aortic stenosis patients, (3) received FDA approval for our ALLIANCE pivotal trial to study our next generation TAVR device, SAPIEN X4, and (4) received FDA approval for the use of the Edwards SAPIEN 3 transcatheter valve with the Alterra adaptive prestent for congenital heart patients. The Alterra prestent compensates for variations in size and morphology of the right ventricular outflow tract to provide a stable landing zone for the SAPIEN 3 valve. 25
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Transcatheter Mitral and Tricuspid Therapies [[Image Removed: ew-20211231_g5.jpg]] The increase in net sales of TMTT products was due primarily to improved COVID-19 conditions compared to 2020 and continued adoption of our PASCAL system inEurope . In the fourth quarter of 2021, we completed enrollment of our CLASP IID pivotal trial studying Edwards PASCAL in patients with degenerative mitral regurgitation. We continued to treat patients with both of our transcatheter mitral replacement therapies through the ENCIRCLE trial for SAPIEN M3 and the MISCEND study for EVOQUE Eos. The MISCEND study will evaluate the safety and performance of EVOQUE Eos, which is designed to advance the treatment of patients with mitral regurgitation with a low-profile valve delivered through a sub 30 French transfemoral delivery system. We also began treating patients with EVOQUE in the TRISCEND II pivotal trial. This study will evaluate the safety and effectiveness of the EVOQUE tricuspid valve replacement system for patients with severe tricuspid regurgitation. Surgical Structural Heart [[Image Removed: ew-20211231_g6.jpg]] The increase in net sales of Surgical products was due primarily to improved COVID-19 conditions compared to 2020 and increased sales of the INSPIRIS RESILIA aortic valve and the KONECT aortic valved conduit, primarily inthe United States . In 26
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addition, foreign currency exchange rate fluctuations increased net sales outside ofthe United States by$13.1 million primarily due to the strengthening of the Euro againstthe United States dollar. InJanuary 2021 , we received regulatory approval inJapan for our MITRIS valve, a new mitral valve incorporating RESILIA technology, which was launched inJapan during the second quarter of 2021. Critical Care [[Image Removed: ew-20211231_g7.jpg]] The increase in net sales of Critical Care products was driven by:
•increased demand for our capital products, primarily Hemosphere platforms in
•increased demand for our pressure monitoring products due to elevated COVID
hospitalizations, primarily in
•increased demand for our enhanced surgical recovery products, primarily in
•foreign currency exchange rate fluctuations, which increased net sales outside ofthe United States by$9.0 million primarily due to the strengthening of the Euro againstthe United States dollar. InJune 2021 , we received FDA clearance for the Acumen Hypotension Prediction Index software with the Acumen IQ finger cuff. This is the first noninvasive solution that uses machine learning to alert clinicians of the likelihood a patient is trending toward hypotension, or low blood pressure. 27
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Gross Profit
[[Image Removed: ew-20211231_g8.jpg]] The increase in gross profit as a percentage of net sales in 2021 compared to 2020 was driven primarily by:
•a 0.5 percentage point increase in
•lower incremental costs associated with COVID-19;
partially offset by:
•a 0.5 percentage point decrease due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts.
Selling, General, and Administrative ("SG&A") Expenses
[[Image Removed: ew-20211231_g9.jpg]]
SG&A expenses increased in 2021 compared to 2020 due primarily to (1) increased
commercial activities, primarily in the United States and Europe , compared to
the COVID-19 impacted prior year, (2) higher personnel-related costs, and (3)
the impact of foreign currency exchange rate fluctuations, which increased
expenses by $22.2 million due primarily to the strengthening of the Euro against
the United States dollar.
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Research and Development ("R&D") Expenses
[[Image Removed: ew-20211231_g10.jpg]]
R&D expenses increased in 2021 compared to 2020 due primarily to continued
investments in our transcatheter innovations. Clinical trial activity also
increased compared to 2020 since spending in 2020 was reduced as we temporarily
paused certain mitral and tricuspid active pivotal clinical trials at the end of
the first quarter of 2020 due to COVID-19.
Intellectual Property Litigation Expenses, net
We incurred intellectual property litigation expenses, including settlements and external legal costs, of$20.6 million and$405.4 million during 2021 and 2020, respectively. OnJuly 12, 2020 , we 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 us recording an estimated$367.9 million pre-tax charge and related liability inJune 2020 related to past damages. In addition, we will incur royalty expenses throughMay 2024 totaling an estimated$100 million . We made a one-time$100.0 million payment toAbbott inJuly 2020 , and are making quarterly payments in subsequent years. For further information, see Note 3 to the "Consolidated Financial Statements."
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in income of$124.1 million in 2021 and expense of$13.6 million in 2020. The income in 2021 was driven by changes in the projected probability and timing of milestone achievements and the projected timing of cash inflows. The expense in 2020 was primarily driven by the accretion of interest due to the passage of time and adjustments to discount rates, partially offset by changes in the projected probability and timing of milestone achievements and the projected timing of cash inflows. Special Charges
For information on special charges, see Note 4 to the "Consolidated Financial Statements."
Interest Expense
Interest expense was
Interest Income
Interest income was
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Other Income, net
(in millions)
Years Ended December 31,
2021 2020
Foreign exchange gains, net $ (5.0) $ (12.3)
Gain on investments (5.8) (0.6)
Non-service cost components of net periodic pension benefit cost 0.3 0.4
Other (2.2) 1.0
Total other income, net $
(12.7)
The net foreign exchange gains relate to the foreign currency fluctuations on
our global trade and intercompany receivable and payable balances, partially
offset by the gains and losses on non-designated derivative instruments.
The gain on investments primarily represents our net share of gains and losses
in investments accounted for under the equity method, and realized gains and
losses on investments in equity securities.
The non-service cost components of net periodic pension benefit cost includes
the costs of our defined benefit plans that are not attributed to services
rendered by eligible employees during the year, such as interest costs, expected
return on plan assets, and amortization of actuarial gains or losses.
Provision for Income Taxes
($ in millions)
Years Ended December 31, Change
2021 2020 $ %
Provision for income taxes $ 198.9 $ 93.3 $ 105.6 113.2 % Effective tax rate 11.7 % 10.2 % Our effective income tax rate in 2021 and 2020 was 11.7% and 10.2%, respectively. Our effective tax rate for 2021 increased in comparison to 2020 primarily due to the impact of the litigation settlement agreement reached in 2020 withAbbott to settle all outstanding patent disputes 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. In 2021, the difference between our 11.7% effective tax rate and the Federal statutory rate of 21% was primarily due to (1) foreign earnings taxed at lower rates net ofthe United States tax on global intangible low-taxed income, (2) Federal andCalifornia research and development credits, (3) the excess tax benefit from employee share-based compensation and (4) the tax benefit from the change in fair value of contingent consideration liabilities. As ofDecember 31, 2021 , we had$167.0 million ofCalifornia research expenditure tax credits that we expect to use in future periods. The credits may be carried forward indefinitely. Based upon anticipated future taxable income, we expect that it is more likely than not that allCalifornia research expenditure tax credits will be utilized, although the utilization of the full benefit is expected to occur over a number of years into the distant future. As ofDecember 31, 2021 , our gross uncertain tax positions were$358.4 million . We estimate that these liabilities would be reduced by$135.1 million from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amount of$223.3 million , if not required, would favorably affect our effective tax rate. In the normal course of business, the Internal Revenue Service ("IRS") and other taxing authorities are in different stages of examining various years of our tax filings. During these audits, we may receive proposed audit adjustments that could be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the eventual outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential 30
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liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. We believe that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from our uncertain tax positions. AtDecember 31, 2021 , all material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, we continue to address matters inIndia for years from 2010. We executed an Advance Pricing Agreement ("APA") in 2018 betweenthe United States andSwitzerland 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 toIRS Examination for further consideration as part of the respective years' regular tax audits. In addition, we executed other bilateral APAs as follows: during 2017, an APA betweenthe United States andJapan covering tax years 2015 through 2019; and during 2018, APAs betweenJapan andSingapore and betweenSwitzerland andJapan covering tax years 2015 through 2019. We have filed to renew all of the APAs which cover transactions withJapan for the years 2020 and forward. The execution of some or all these APA renewals depends on many variables outside of our control. OurUnited States federal income tax returns through 2014 have been audited. TheIRS 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. TheIRS 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, we received a Notice of Proposed Adjustment ("NOPA") from theIRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between ourUnited States andSwitzerland subsidiaries. During the third quarter of 2021, we completed our review of the NOPA and provided comments to theIRS and theIRS subsequently revised the NOPA. The revised NOPA proposes an increase to ourUnited 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. We have formally disagreed with the NOPA and have submitted a formal protest on the matter to theIRS Independent Office of Appeals during the fourth quarter of 2021. We also have received the final Revenue Agent's Report for these tax years. We continue to evaluate all possible remedies available to us, 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. We believe the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, have not accrued any additional amount based on the NOPA received. Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 - 2021 that were not resolved under the APA program remain subject toIRS examination, and those transactions and related tax positions remain uncertain as ofDecember 31, 2021 . We have considered this information, as well as information regarding the NOPA described above, in our evaluation of our uncertain tax positions. The impact of these unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to our consolidated financial statements. Based on the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in our existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the uncertain tax positions as a long-term liability. We have received tax incentives in certain non-United States tax jurisdictions, the primary benefit for which will expire in 2029. The tax reductions as compared to the local statutory rates were$208.0 million ($0.33 per diluted share) and$189.2 million ($0.30 per diluted share) for the years endedDecember 31, 2021 and 2020, respectively. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the "2017 Act"), which was signed into law onDecember 22, 2017 , eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize domestic expenditures over five years and foreign expenditures over fifteen years. AlthoughCongress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it will materially reduce our cash flows beginning in 2022. 31
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Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, cash from operations, and amounts available under credit facilities. We believe that these sources are sufficient to fund the current and long-term requirements of working capital, capital expenditures, and other financial commitments. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions. The 2017 Act included extensive changes to the international tax regime. The 2017 Act required a deemed repatriation of post-1986 undistributed foreign earnings and profits. The one-time transition tax liability, as adjusted, is payable in four remaining annual installments, as outlined in the contractual obligations table below. As ofDecember 31, 2021 , we had a remaining tax obligation of$213.1 million related to the deemed repatriation. See Note 17 to the "Consolidated Financial Statements" for additional information about the one-time transition tax. As ofDecember 31, 2021 , cash and cash equivalents and short-term investments held inthe United States and outside ofthe United States were$903.4 million and$563.4 million , respectively. During 2021, we repatriated cash of$1.1 billion . We assert that$1.0 billion of our foreign earnings continue to be permanently reinvested and our intent is to repatriate$392.9 million of our foreign earnings as ofDecember 31, 2021 . We have a Five-Year Credit Agreement ("the Credit Agreement") which matures onApril 28, 2023 . The Credit Agreement provides up to an aggregate of$750.0 million in borrowings in multiple currencies. Subject to certain terms and conditions, we may increase the amount available under the Credit Agreement by up to an additional$250.0 million in the aggregate. As ofDecember 31, 2021 , there were no borrowings outstanding under 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 atDecember 31, 2021 . InJune 2018 , we issued$600.0 million of 4.3% fixed-rate unsecured senior notes (the "2018 Notes") dueJune 15, 2028 . We may redeem the 2018 Notes, in whole or in part, at any time and from time to time at specified redemption prices. As ofDecember 31, 2021 , we have not elected to redeem any of the 2018 Notes. As ofDecember 31, 2021 , the total carrying value of our 2018 Notes was$595.7 million . For further information on our debt, see Note 10 to the "Consolidated Financial Statements." From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. We consider several factors in determining when to execute share repurchases, including, among other things, expected dilution from stock plans, cash capacity, and the market price of our common stock. During 2021, under the Board authorized repurchase programs, we repurchased a total of 5.6 million shares at an aggregate cost of$498.5 million , and as ofDecember 31, 2021 , we had remaining authority to purchase$1.1 billion of our common stock. InJanuary 2022 , we entered into an accelerated share repurchase agreement to repurchase$250.0 million of our common stock. For further information, see Notes 14 and 21 to the "Consolidated Financial Statements." Certain of our business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired business reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. For further information, see Note 11 to the "Consolidated Financial Statements." InApril 2021 , we purchased an exclusive option to acquire a medical device company (the "Investee") for up to approximately$390 million , depending on the paid-in capital at closing. Per the agreement, depending on the Investee's achievement of certain milestones, we may be required to invest up to an additional$9.9 million in the Investee's equity securities and up to an additional$21.8 million for the option to acquire the Investee, of which we invested$10.8 million in 2021 upon achievement of the first milestone. We also agreed to loan the Investee up to$45 million under a secured promissory note. For further information, see Note 7 to the "Consolidated Financial Statements." OnJuly 12, 2020 , we reached the Settlement Agreement withAbbott to settle all outstanding patent disputes between the companies in cases related to transcatheter mitral and tricuspid repair products. The Settlement Agreement resulted in us recording an estimated$367.9 million pretax charge inJune 2020 related to past damages. In addition, we will incur royalty expenses throughMay 2024 totaling an estimated$100 million . We made a one-time$100.0 million payment toAbbott inJuly 2020 , and are making quarterly payments in subsequent years. For further information, see Note 3 to the "Consolidated Financial Statements." 32
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Consolidated Cash Flows - For the twelve months endedDecember 31, 2021 and 2020 [[Image Removed: ew-20211231_g11.jpg]] [[Image Removed: ew-20211231_g12.jpg]] [[Image Removed: ew-20211231_g13.jpg]] Net cash flows provided by operating activities of$1.7 billion for 2021 increased$677.8 million from 2020 due to (1) improved operating performance in 2021, (2) a higher bonus payout in 2020 associated with 2019 performance, and (3) a payment of$100.0 million in 2020 for a litigation settlement.
Net cash used in investing activities of
Net cash used in investing activities of
We currently anticipate making capital expenditures of approximately
Net cash used in financing activities of
Material Cash Requirements
A summary of our material cash requirements as ofDecember 31, 2021 is as follows (in millions): Payments Due by Period After 5 Contractual Obligations Total Year 1 Years 2-3 Years 4-5 Years Debt$ 600.0 $ - $ - $ -$ 600.0 Operating leases 104.5 27.5 36.6 15.8 24.6 Interest on debt 125.0 20.0 38.6 38.4 28.0 Transition tax on unremitted foreign earnings and profits (a) 213.1 25.1 109.5 78.5 - Litigation settlement obligation (minimum payments) 212.5 50.0 100.0 62.5 - Pension obligations (b) 2.2 2.2 - - - Purchase and other commitments (c) 30.1 14.3 10.5 2.9 2.4
Total contractual cash obligations (d), (e)
_______________________________________________________________________________
(a) As ofDecember 31, 2021 , we had recorded$213.1 million of income tax liabilities related to the one-time transition tax that resulted from the enactment of the 2017 Act. The transition tax is due in eight annual installments, with the first four installments paid in 2018 through 2021. The remaining installment amounts will be equal to 8% of the total liability payable in 2022, 15% in 2023, 20% in 2024, and 25% in 2025. See Note 17 to the "Consolidated Financial Statements" for additional information about the one-time transition tax. 33
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(b) The amount included in "Less Than 1 Year" reflects anticipated contributions to our various pension plans. Anticipated contributions beyond one year are not determinable. The total accrued benefit liability for our pension plans recognized as ofDecember 31, 2021 was$41.0 million . This amount is impacted by, among other items, pension expense funding levels, changes in plan demographics and assumptions, and investment returns on plan assets. Therefore, we are unable to make a reasonably reliable estimate of the amount and period in which the liability might be paid, and did not include this amount in the contractual obligations table. See Note 13 to the "Consolidated Financial Statements" for further information. (c) Purchase and other commitments consists primarily of open purchase orders for the acquisition of goods and services in the normal course of business. We have excluded open purchase orders with a remaining term of less than one year. For certain purchase and other commitments, such as commitments to fund equity method or other investments, the timing of the payment is not certain. In these cases, the maturity dates in the table reflect our best estimates. (d) As ofDecember 31, 2021 , the gross liability for uncertain tax positions, including interest, was$386.0 million and relates primarily to transfer pricing matters which are discussed in detail in Note 17 to the "Consolidated Financial Statements." Based upon the information currently available and numerous possible outcomes, we cannot reasonably estimate the amount and period in which the liability might be paid, and did not include this amount in the contractual obligations table. (e) We acquire assets still in development, enter into research and development arrangements, acquire businesses, and sponsor certain clinical trials that often require milestone, royalty, or other future payments to third-parties, contingent upon the occurrence of certain future events. In situations where we have no ability to influence the achievement of the milestone or otherwise avoid the payment, we have included those payments in the table above. However, we have excluded from the table contingent milestone payments and other contingent liabilities for which we cannot reasonably predict future payments or for which we can avoid making payment by unilaterally deciding to stop development of a product or cease progress of a clinical trial. We estimate that these contingent payments could be up to$835.0 million if all milestones or other contingent obligations are met. This amount includes certain milestone-based contingent obligations that may be paid through a combination of cash and issuance of common stock, and certain sales-based royalties in excess of minimum payment thresholds related to litigation settlements.
Critical Accounting Policies and Estimates
Our results of operations and financial position are determined based upon the application of our accounting policies, as discussed in the notes to the "Consolidated Financial Statements." Certain of our accounting policies represent a selection among acceptable alternatives under GAAP. In evaluating our transactions, management assesses all relevant GAAP and chooses the accounting policy that most accurately reflects the nature of the transactions. The application of accounting policies requires the use of judgments and estimates. These matters that are subject to judgments and estimates are inherently uncertain, and different amounts could be reported using different assumptions and estimates. Management uses its best estimates and judgments in determining the appropriate amount to reflect in the consolidated financial statements, using historical experience and all available information. We also use outside experts where appropriate. We apply estimation methodologies consistently from year to year. We believe the following are the critical accounting policies which could have the most significant effect on our reported results and require subjective or complex judgments by management.
Revenue Recognition
When we recognize revenue from the sale of our products, the amount of
consideration we ultimately receive varies depending upon the return terms,
sales rebates, discounts, and other incentives that we may offer, which are
accounted for as variable consideration when estimating the amount of revenue to
recognize. The estimate of variable consideration requires significant judgment.
We include estimated amounts in the transaction price to the extent it is
probable that a significant reversal of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is
resolved. The estimates of variable consideration and determination of whether
to include estimated amounts in the transaction price are based largely upon an
assessment of historical payment experience, historical relationship to
revenues, estimated customer inventory levels, and current contract sales terms
with direct and indirect customers. Product returns are typically not
significant because returns are generally not allowed unless the product is
damaged at time of receipt. If the historical data and inventory estimates used
to calculate the variable consideration do not approximate future activity, our
financial position, results of operations, and cash flows could be impacted.
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In addition, in limited circumstances, we may allow customers to return previously purchased products, such as for next-generation product offerings. For these transactions, we defer recognition of revenue on the sale of the earlier generation product based upon an estimate of the amount of product to be returned when the next-generation products are shipped to the customer. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls, and variation in product utilization all affect the estimates related to sales returns and could cause actual returns to differ from these estimates. Our sales adjustment related to distributor rebates given to ourUnited States distributors represents the difference between our sales price to the distributor and the negotiated price to be paid by the end-customer. We validate the distributor rebate accrual quarterly through either a review of the inventory reports obtained from our distributors or an estimate of the distributor's inventory. This distributor inventory information is used to verify the estimated liability for future distributor rebate claims based on historical rebates and contract rates. We periodically monitor current pricing trends and distributor inventory levels to ensure the credit for future distributor rebates is fairly stated.
Excess and Obsolete Inventory
The valuation of our inventory requires us to estimate excess, obsolete, and expired inventory. We base our provisions for excess, obsolete, and expired inventory on our estimates of forecasted sales. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional allowances for excess, obsolete, and expired inventory in the future. In addition, our industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls, increasing levels of consigned inventory, and variation in product utilization all affect our estimates related to excess, obsolete, and expired inventory.
Intangible Assets and Long-lived Assets
We acquire intangible assets in connection with business combinations and asset purchases. The acquired intangible assets are recorded at fair value, which is determined based on a discounted cash flow analysis. The determination of fair value requires significant estimates, including, but not limited to, the amount and timing of projected future cash flows, the discount rate used to discount those cash flows, the assessment of the asset's life cycle, including the timing and expected costs to complete in-process projects, and the consideration of legal, technical, regulatory, economic, and competitive risks. In-process research and development assets acquired in business combinations is reviewed for impairment annually, or whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Additionally, management reviews the carrying amounts of other intangible and long-lived assets whenever events or circumstances indicate that the carrying amounts of an asset may not be recoverable. The impairment reviews require significant estimates about fair value, including estimation of future cash flows, selection of an appropriate discount rate, and estimates of long-term growth rates.
Contingent Consideration
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. We determine the fair value of the contingent consideration based primarily on the following factors:
•discount rates used to present value the projected cash flows;
•the probability of success of clinical events and regulatory approvals, and/or meeting commercial milestones;
•projected payment dates; and
•volatility of future sales.
On a quarterly basis, we revalue these obligations and record changes in their
fair value as an adjustment to earnings. Changes to contingent consideration
obligations can result from adjustments to discount rates, accretion of the
discount rates due to the passage of time, changes in our estimates of the
likelihood or timing of achieving development or commercial milestones, changes
in the probability of certain clinical events, or changes in the assumed
probability associated with regulatory approval.
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The assumptions related to determining the value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration expense recorded in any given period.
Income Taxes
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Realization of certain deferred tax assets, primarily tax credits, net operating loss and other carryforwards, is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings.
We have made an accounting policy election to recognize
We are subject to income taxes inthe United States and numerous foreign jurisdictions. Our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income amongst various tax jurisdictions. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. Significant judgment is required in evaluating our uncertain tax positions, including estimating the ultimate resolution to intercompany pricing controversies between countries when there are numerous possible outcomes. We review these tax uncertainties quarterly and adjust the liability as events occur that affect potential liabilities for additional taxes, such as the progress of tax audits, lapsing of applicable statutes of limitations, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.
For additional details on our income taxes, see Note 2 and Note 17 to the "Consolidated Financial Statements."
Stock-based Compensation
We measure and recognize compensation expense for all stock-based awards based on estimated fair values. Stock-based awards consist of stock options, service-based restricted stock units, market-based restricted stock units, and employee stock purchase subscriptions. The fair value of each option award and employee stock purchase subscription is estimated on the date of grant using the Black-Scholes option valuation model. The fair value of market-based restricted stock units is determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The Black-Scholes andMonte Carlo models require various highly judgmental assumptions, including stock price volatility, risk-free interest rate, and expected option term. Stock-based compensation expense is recorded net of estimated forfeitures. Judgment is required in estimating the stock awards that will ultimately be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations would be impacted.
Legal Contingencies
We are or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits, including those related to products and services currently or formerly manufactured or performed by us, workplace and employment matters, matters involving real estate, our operations or health care regulations, or governmental investigations. We accrue for loss contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If we determine that a loss is possible, but not probable, and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. These matters raise difficult and complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. As such, significant judgment is required in determining our legal accruals. We describe our legal proceedings in Note 18 to the "Consolidated Financial Statements."
New Accounting Standards
Information regarding new accounting standards is included in Note 2 to the "Consolidated Financial Statements."
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