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, 2020 . Also discussed is our financial position as ofDecember 31, 2020 . 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 2019 compared to 2018 and a discussion related to our consolidated cash flows for 2019 compared to 2018, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 14, 2020 .
Overview
We are the global leader in patient-focused medical innovations for structural
heart disease, as well as critical care and surgical monitoring. Driven by a
passion to help patients, we 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
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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 main areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. OnMay 7, 2020 , our Board of Directors declared a three-for-one stock split of our outstanding shares of common stock effected in the form of a stock dividend, distributed onMay 29, 2020 to stockholders of record onMay 18, 2020 . We 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 this "Management's Discussion and Analysis of Financial Condition and Results of Operations" have been retroactively adjusted to give effect to this stock split. Financial Highlights and COVID-19 [[Image Removed: ew-20201231_g2.jpg]][[Image Removed: ew-20201231_g3.jpg]] InMarch 2020 , theWorld Health Organization categorized the Coronavirus disease 2019 ("COVID-19") as a pandemic. COVID-19 continues to spread throughoutthe United States and other countries across the world, and the duration and severity of its effects are currently unknown. The global pandemic has adversely impacted and is likely to 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 support our clinician partners, protect the well-being of our employees, and maintain continuous access to our life-saving technologies while offering front-line in-hospital support. 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 have since been negatively impacted due to a resurgence of COVID-19 in late 2020. Even though health systems adapted to the challenge, the resurgence of COVID-19 late in 2020 continued to impact these patients who need care. In Critical Care, there was greater demand inEurope andthe United States for our pressure monitoring products, but demand for other Critical Care products began to decrease at the end of the first quarter of 2020 due to COVID-19, and that trend continued through the fourth quarter of 2020. Despite the challenges associated with COVID-19, our net sales for 2020 were$4.4 billion , representing an increase of$38.3 million over 2019, driven by sales growth of our TAVR products. 22
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Our gross profit increase in 2020 was driven by a charge of
The decrease in our diluted earnings per share in 2020 was driven by an
after-tax charge of
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. While some evidence collection was slowed due to the COVID-19 pandemic, we and the clinical community are committed to continuing our trials and generating robust evidence. In 2020, we invested 17.3% of our net sales in research and development. The following is a summary of important developments during 2020: •in response to the urgent COVID-19 response around the globe, we temporarily paused new enrollments in our active pivotal clinical trials of transcatheter mitral and tricuspid therapies, which began resuming in the second quarter of 2020; •we received CE Mark for the Edwards PASCAL transcatheter valve repair system for the treatment of European patients with tricuspid regurgitation; •we received Chinese regulatory approval for the Edwards SAPIEN 3 transcatheter heart valve for the treatment of severe, symptomatic aortic stenosis patients at high risk for or unable to undergo open-heart surgery; •we reached an agreement withAbbott to settle all outstanding patent disputes between the companies in cases related to transcatheter mitral and tricuspid repair products; •we received FDA approval for the KONECT RESILIA aortic valved conduit, the first ready-to-implant solution for bio-Bentall procedures, a complex surgery that involves replacement of a patient's aortic valve, aortic root, and the ascending aorta. •we treated our first patient in the RESTORE clinical trial, which will evaluate the safety and effectiveness of the investigational HARPOON Beating Heart Mitral Valve Repair System inthe United States andCanada . 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 Operations
Net Sales by Major Regions (dollars in millions) Years Ended December 31, Change 2020 2019 $ % United States$ 2,516.8 $ 2,532.7 $ (15.9) (0.6) % Europe 973.6 941.2 32.4 3.4 % Japan 460.1 444.7 15.4 3.5 % Rest of World 435.8 429.4 6.4 1.5 % International 1,869.5 1,815.3 54.2 3.0 % Total net sales$ 4,386.3 $ 4,348.0 $ 38.3 0.9 % International net sales include the impact of foreign currency exchange rate fluctuations. The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs, and our hedging activities. For more information, see "Quantitative and Qualitative Disclosures About Market Risk." 23
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Table of ContentsNet Sales byProduct Group (dollars in millions) Years Ended December 31, Change 2020 2019 $ % Transcatheter Aortic Valve Replacement$ 2,857.3 $ 2,737.9 $ 119.4 4.4 % Transcatheter Mitral and Tricuspid Therapies 41.8 28.2 13.6 48.5 % Surgical Heart Valve Therapy 761.8 841.7 (79.9) (9.5) % Critical Care 725.4 740.2 (14.8) (2.0) % Total net sales$ 4,386.3 $ 4,348.0 $ 38.3 0.9 % Transcatheter Aortic Valve Replacement [[Image Removed: ew-20201231_g4.jpg]] The increase in net sales of TAVR products was due primarily to higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory approval inthe United States (December 2018 ) and inEurope (November 2018 ). The adoption of the Edwards SAPIEN 3 Ultra System continued to be very positive in 2020. However, our sales in 2020 were negatively impacted by the COVID-19 pandemic, and these challenges have continued in early 2021. Our procedure volumes dropped significantly beginning inMarch 2020 due to COVID-19, and began to steadily improve beginning inMay 2020 . In the first quarter of 2020, to ensure the safety of our employees and clinician partners from the threat of COVID-19, we decided to pause proctoring at centers that were not already trained on the Edwards SAPIEN 3 Ultra System. In the second quarter of 2020, we resumed proctoring. 24
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Transcatheter Mitral and Tricuspid Therapies [[Image Removed: ew-20201231_g5.jpg]] The increase in net sales of TMTT products was due primarily to sales inEurope of the Edwards PASCAL transcatheter valve repair system, which received CE Mark inFebruary 2019 . Our sales in 2020 were negatively impacted by the COVID-19 pandemic. Our procedure volumes for PASCAL dropped significantly inMarch 2020 due to COVID-19, and began to improve beginning inMay 2020 . At the end ofMarch 2020 , we temporarily paused new enrollments in our active pivotal clinical trials of transcatheter mitral and tricuspid therapies in response to the COVID-19 response around the globe. In the second quarter of 2020, we began resuming enrollments. However, due to a resurgence of COVID-19 in late 2020, we are experiencing a negative impact to clinical trial enrollment. InMay 2020 , we received CE Mark for the PASCAL Ace implant system for mitral and tricuspid repair. Surgical Structural Heart [[Image Removed: ew-20201231_g6.jpg]] The decrease in net sales of Surgical products was due primarily to decreased sales of aortic tissue valves, primarily inthe United States andEurope , due to the impact of COVID-19. The ongoing adoption of TAVR also contributed to the decrease inUnited States surgical aortic valve sales. These decreases were partially offset by increased sales of the INSPIRIS RESILIA 25
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aortic valve and the KONECT aortic valved conduit, primarily inthe United States . Increased and improved management of intensive care unit capacity, as well as prioritization of heart surgery in many hospitals, contributed to rebounding procedure volumes late in the second quarter of 2020. In the fourth quarter of 2020, hospitals experienced an influx of COVID-19 patients, limiting surgical valve procedures. InEurope , our HARPOON Beating Heart Mitral Valve Repair System became available commercially at the end of 2019, and the first commercial case was successfully completed inEurope in the second quarter of 2020. In addition, we received FDA approval inApril 2020 to begin ourU.S. pivotal investigational device exemption study. HARPOON offers the potential for earlier treatment of degenerative mitral valve disease, with faster recovery and more consistent outcomes for surgical patients. Critical Care [[Image Removed: ew-20201231_g7.jpg]] The decrease in net sales of Critical Care products was driven by a decline in sales of our enhanced surgical recovery products, primarily inthe United States , as many surgical procedures were delayed due to COVID-19 beginning inMarch 2020 . We also experienced a decline in orders of our HemoSphere advanced monitoring platform inthe United States as hospitals limited their capital spending due to COVID-19. These decreases in net sales were partially offset by increased demand for our pressure monitoring products, primarily inEurope andthe United States , as COVID-19 hospitalizations increased. In addition, our sales in 2020 and 2019 included$22.6 million and$16.8 million , respectively, related toCAS Medical Systems, Inc. ("CASMED"), which we acquired onApril 18, 2019 . CASMED is a medical technology company dedicated to non-invasive monitoring of tissue oxygenation in the brain. 26
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Gross Profit
[[Image Removed: ew-20201231_g8.jpg]] Our gross profit was higher as a percentage of net sales in 2020 compared to 2019. In 2019, our gross profit was reduced by$73.1 million due to the decision to discontinue our CENTERA program, resulting in a 1.7 percentage point increase in 2020 compared to 2019. This increase was partially offset by a) a 1.0 percentage point decrease in 2020 due to the impact of foreign currency exchange rate fluctuations, net of hedging, and b) incremental costs associated with COVID-19. Selling, General, and Administrative ("SG&A") Expenses [[Image Removed: ew-20201231_g9.jpg]] The decrease in SG&A expenses in 2020 compared to 2019 was due primarily to a) decreased sales, marketing and travel-related expense associated with COVID-19 and b) lower performance-based compensation, partially offset by increased sales and marketing expenses related to transcatheter structural heart field personnel, primarily inthe United States . 27
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Research and Development ("R&D") Expenses
[[Image Removed: ew-20201231_g10.jpg]]
The increase in R&D expenses in 2020 compared to 2019 was due primarily to a)
investments in our transcatheter mitral and tricuspid therapies and our aortic
valve replacement programs and b) costs associated with discontinuing our
SUTRAFIX program. These increases were partially offset by a) decreased spending
on transcatheter aortic valve clinical trials and b) decreased performance-based
compensation.
Intellectual Property Litigation Expenses, net
We incurred intellectual property litigation expenses, including settlements and external legal costs, of$405.4 million and$33.4 million during 2020 and 2019, 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. See Note 18 to the "Consolidated Financial Statements" for additional information. 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 will make quarterly payments in future years.
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in expense of$13.6 million in 2020 and income of$6.1 million in 2019. 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. The income in 2019 was due primarily to longer product development timelines, which reduced the probability of milestone achievements, partially offset by the accretion of interest due to the passage of time and discount rate adjustments. Special Charges (Gain), net
For information on special charges and gains, see Note 4 to the "Consolidated Financial Statements."
Interest Expense
Interest expense was
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Interest Income
Interest income was$23.4 million and$32.2 million in 2020 and 2019, respectively. The decrease in interest income resulted primarily from lower average interest rates, partially offset by a higher average investment balance. Other Income, net (in millions) Years Ended December 31, 2020 2019 Foreign exchange gains, net$ (12.3) $ (5.9) Gain on investments (0.6) (0.5) Non-service cost components of net periodic pension benefit cost 0.4 0.2 Other 1.0 (2.0) Total other income, net $
(11.5)
The net foreign exchange gains relate to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures.
The gain on investments 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
Years Ended December 31, Change
2020 2019 $ %
Provision for income taxes 93.3 119.6 (26.3) (22.0) %
Effective tax rate 10.2 % 10.3 %
Our effective income tax rate in 2020 and 2019 was 10.2% and 10.3%,
respectively. Our effective tax rate for 2020 decreased slightly in comparison
to 2019 primarily due to the tax benefit from the Settlement Agreement with
Abbott (see Notes 3 and 18 to the "Consolidated Financial Statements"),
partially offset by the increase in the U.S. tax on global intangible low-taxed
income and the decrease in the tax benefit from employee share-based
compensation.
In 2020, the difference between our 10.2% effective tax rate and the Federal
statutory rate of 21% was primarily due to a) foreign earnings taxed at lower
rates, b) Federal and California research and development credits, and c) the
tax benefit from employee share-based compensation.
As of December 31, 2020 , we have $145.1 million of California research
expenditure tax credits that we expect to use in future periods. The credits may
be carried forward indefinitely. Based upon anticipated future taxable income,
we expect that it is more likely than not that all California research
expenditure tax credits will be utilized, although the utilization of the full
benefit is expected to occur over a number of years and into the distant future.
As of December 31, 2020 , gross uncertain tax positions were $281.8 million . We
estimate that these liabilities would be reduced by $95.1 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 $186.7 million , if not required, would favorably affect our
effective tax rate.
We strive to resolve open matters with each tax authority at the examination
level and could reach agreement with a tax authority at any time. While we have
accrued for matters we believe are more likely than not to require settlement,
the final outcome with a tax authority may result in a tax liability that is
more or less than that reflected in the consolidated financial statements.
Furthermore, we may later decide to challenge any assessments, if made, and may
exercise our right to appeal. The
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uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. We believe that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from our uncertain tax positions. AtDecember 31, 2020 , all material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, we continue to address matters inWisconsin andIndia for years from 2010. During 2018, we executed an Advance Pricing Agreement ("APA") 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 intercompany royalty transactions, then reverted to Internal Revenue Service ("IRS") Examination for further consideration as part of the respective years' regular tax audit. In addition, we signed agreements during 2018 with theIRS to settle open tax years 2009 through 2014, including all transfer pricing matters for those years and the tax treatment of a portion of a litigation settlement payment received in 2014. 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 through 2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing matters. As a result, certain intercompany transactions covering tax years 2015 through 2020 that were not resolved under the APA program remain subject toIRS examination, and those transactions and related tax positions remain uncertain as ofDecember 31, 2020 . TheIRS has signaled that it may be preparing proposed audit adjustments related to these intercompany transactions for the 2015 through 2017 tax years which, if issued, could be provided to us during 2021. We have considered this information in our evaluation of our reserves for uncertain tax positions. 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 to our existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the gross uncertain tax positions as a long-term liability. We intend to file to renew the APA betweenthe United States andSwitzerland for the years 2021 and forward. In addition, we executed other 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 these APAs related toJapan for the years 2020 and forward. The execution of some or all of these APAs depends on a number of variables outside of our control. We have received tax incentives in certain non-U.S. tax jurisdictions, the primary benefit for which will expire in 2029. The tax reductions as compared to the local statutory rates were$189.2 million ($0.30 per diluted share) and$157.6 million ($0.25 per diluted share) for the years endedDecember 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, amounts available under credit facilities, and cash from operations. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months from the financial statement issuance date. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions. The Tax Cuts and Jobs Act of 2017 (the "2017 Act"), which was signed into law onDecember 22, 2017 , 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 five remaining annual installments, as outlined in the contractual obligations table below. As ofDecember 31, 2020 , we had a remaining tax obligation of$238.7 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, 2020 , cash and cash equivalents and short-term investments held inthe United States and outsidethe United States were$618.8 million and$783.8 million , respectively. During 2020, we repatriated cash of$600.0 million . We 30
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assert that
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 will make quarterly payments in future years. For further information, see Notes 3 and 18 to the "Consolidated Financial Statements." OnApril 18, 2019 , we acquired CASMED for an aggregate cash purchase price of$2.45 per share of common stock, or$100.8 million . For more information, see Note 8 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 company reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. For further information, see Note 8 to the "Consolidated Financial Statements." 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, 2020 , 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, 2020 . 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, 2020 , we have not elected to redeem any of the 2018 Notes. As ofDecember 31, 2020 , the total carrying value of our 2018 Notes was$595.0 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 2020, under the Board authorized repurchase programs, we repurchased a total of 3.0 million shares at an aggregate cost of$614.7 million , and as ofDecember 31, 2020 , we had remaining authority to purchase$625.0 million of our common stock. For further information, see Note 14 to the "Consolidated Financial Statements." InFebruary 2021 , we entered into an accelerated share repurchase agreement to repurchase$250.0 million of our common stock. For further information, see Note 22 to the "Consolidated Financial Statements." Consolidated Cash Flows - For the twelve months endedDecember 31, 2020 and 2019 [[Image Removed: ew-20201231_g11.jpg]] [[Image Removed: ew-20201231_g12.jpg]] [[Image Removed: ew-20201231_g13.jpg]] Net cash flows provided by operating activities of$1.1 billion for 2020 decreased$128.6 million from 2019 due primarily to lower operating profits in 2020 and a payment of$100.0 million for a litigation settlement, partially offset by a payment of$180.0 million in 2019 for a litigation settlement. 31
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Net cash used in investing activities of
Net cash used in investing activities of$595.8 million in 2019 consisted primarily of a) capital expenditures of$254.4 million , b) net purchases of investments of$174.9 million , c) a$100.2 million net cash payment associated with the acquisition of CASMED, d) a$35.0 million payment for an option to acquire a company, and e) a$24.0 million payment to acquire certain early-stage transcatheter intellectual property and associated clinical and regulatory experience.
We currently anticipate making capital expenditures of approximately
Net cash used in financing activities of
Contractual Obligations
A summary of all of our contractual obligations and commercial commitments as of
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 108.1 30.0 35.1 14.9 28.1
Interest on debt 148.9 20.5 40.5 39.4 48.5
Transition tax on unremitted foreign earnings
and profits (a) 238.7 25.1 72.2 141.4 -
Litigation settlement obligation (minimum
payments) 250.0 50.0 100.0 100.0 -
Pension obligations (b) 2.5 2.5 - - -
Purchase and other commitments (c) 26.7 13.7 9.7 1.5 1.8
Total contractual cash obligations (d), (e)
_______________________________________________________________________________
(a) As ofDecember 31, 2020 , we had recorded$238.7 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 annual installment paid in 2018, the second annual installment paid in 2019 and the third annual installment paid in 2020. The remaining installment amounts will be equal to 8% of the total liability, payable in fiscal years 2021 through 2022, 15% in fiscal year 2023, 20% in fiscal year 2024, and 25% in fiscal year 2025. See Note 17 to the "Consolidated Financial Statements" for additional information about the one-time transition tax. (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, 2020 was$52.9 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, 2020 , the gross liability for uncertain tax positions, including interest, was$301.2 million and relates primarily to transfer pricing matters. During 2018, we executed an APA betweenthe United States andSwitzerland governments for tax years 2009 through 2020 covering various but not all transfer pricing matters. As a result, certain 32
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intercompany transactions covering tax years 2015 through 2020 that were not resolved under the APA program remain subject toIRS examination, and those transactions and related tax positions remain uncertain as of the balance sheet date. These unresolved transfer pricing matters may be significant to our consolidated financial statements, and the final outcome of the negotiations is uncertain. 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 for our uncertain tax positions. 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. (e) We acquire assets still in development, enter into research and development arrangements, acquire businesses, and sponsor certain clinical trials that often require milestone, royalty, or other future payments to third-parties, contingent upon the occurrence of certain future events. In situations where we have no ability to influence the achievement of the milestone or otherwise avoid the payment, we have included those payments in the table above. However, we have excluded from the table contingent milestone payments and other contingent liabilities for which we cannot reasonably predict future payments or for which we can avoid making payment by unilaterally deciding to stop development of a product or cease progress of a clinical trial. We estimate that these contingent payments could be up to$810.0 million if all milestones or other contingent obligations are met. This amount includes certain milestone-based contingent obligations that may be paid through a combination of cash and issuance of common stock, and certain sales-based royalties in excess of minimum payment thresholds related to litigation settlements.
Critical Accounting Policies and Estimates
Our results of operations and financial position are determined based upon the application of our accounting policies, as discussed in the notes to the "Consolidated Financial Statements." Certain of our accounting policies represent a selection among acceptable alternatives under GAAP. In evaluating our transactions, management assesses all relevant GAAP and chooses the accounting policy that most accurately reflects the nature of the transactions. The application of accounting policies requires the use of judgment and estimates. These matters that are subject to judgments and estimation 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. 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 33
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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 net 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 revenue.
On a quarterly basis, we revalue these obligations and record changes in their
fair value as an adjustment to earnings. Changes to contingent consideration
obligations can result from adjustments to discount rates, accretion of the
discount rates due to the passage of time, changes in our estimates of the
likelihood or timing of achieving development or commercial milestones, changes
in the probability of certain clinical events, or changes in the assumed
probability associated with regulatory approval.
The assumptions related to determining the value of contingent consideration
include a significant amount of judgment, and any changes in the underlying
estimates could have a material impact on the amount of contingent consideration
expense recorded in any given period.
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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 theU.S. tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises. We are subject to income taxes 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, performance-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. For performance-based restricted stock units, expense is recognized if and when we conclude that it is probable that the performance condition will be achieved, which requires judgment. 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, as applicable, 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. 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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