14 Edwards Lifesciences Corporation 15 Edwards Lifesciences Corporation The following discussion and analysis present the factors that had a material effect on the results of operations of Edwards Lifesciences during the three years ended December  31 , 2001 . Also discussed is Edwards Lifesciences’ financial position as of December  31 , 2001 . You should read this discussion in conjunction with the historical consolidated financial statements and related notes included elsewhere in this document. bypass procedures, including oxygenators, blood containers, filters and related devices. Effective June  30 , 2001 , the Company sold its perfusion services business in the United States to an affiliate of Fresenius Medical Care AG (see “Disposition of Assets and Other Non-Recurring Charges, net”). The Company continues to maintain its perfusion services business in Europe. The health care marketplace continues to be competitive. There has been consolidation in Edwards Lifesciences’ customer base and among its competitors, which has resulted in pricing and market share pressures. Edwards Lifesciences has experienced increases in its labor and material costs, which are primarily influenced by general inflationary trends. Management expects these trends to continue. Edwards Lifesciences is a global provider of products and technologies that are designed to treat advanced cardiovascular disease. Edwards Lifesciences focuses on providing products and technologies to address four main cardiovascular disease states: heart valve disease, coronary artery disease, peripheral vascular disease, and congestive heart failure. The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into four main areas: cardiac surgery, critical care, vascular, and perfusion. Joint Venture in Japan Subsequent to the distribution of the Company’s common stock to stockholders of Baxter on  March  31 , 2000 (referred to as the “Distribution”), the cardio- vascular business in Japan is being operated pursuant to a joint venture under which a Japanese subsidiary of Baxter retains ownership of the Japanese business assets, but a subsidiary of Edwards Lifesciences holds a  90 % profit interest. Edwards Lifesciences has an option to purchase the Japanese business assets that may be exercised no earlier than August  1 , 2002 and no later than March  31 , 2005 . The Japanese operations are included in the Consolidated Statements of Operations for the three months ended March  31 , 2000 , consistent with the historical treatment of the Company’s operations while a part of Baxter. Subsequent to March  31 , 2000 , Edwards Lifesciences (a) recognizes its shipments into the joint venture as sales at distributor price at the time the joint venture sells to the end customer, and (b) utilizes the equity method of accounting to record its interest in the operations of the joint venture. Edwards Lifesciences’ cardiac surgery portfolio is comprised of products relating to heart-valve therapy and cannulae products used during open-heart surgery. Edwards Lifesciences is the world’s leader in, and has been a pioneer in the development and commercialization of, tissue valves and repair products used to replace or repair a patient’s diseased or defective heart valve. In the critical care area, Edwards Lifesciences is a world leader in hemodynamic monitoring systems used to measure a patient’s heart function, and also provides central venous access products for fluid and drug delivery. Edwards Lifesciences’ vascular portfolio includes a line of balloon catheter-based products, surgical clips and inserts, angioscopy equipment, artificial implantable grafts, and an endovascular system used to treat life-threatening abdominal aortic aneurysms less invasively. In the perfusion category, Edwards Lifesciences develops, manufactures and markets, in regions outside the United States and Western Europe, a diverse line of disposable products used during cardiopulmonary Net Sales Trends The following table is a summary of domestic and international net sales: Assuming the change in accounting for sales in Japan was effective as of January  1 , 1999 , net sales by product line would have been as follows: The decreases in international net sales during  2001 and 2000 resulted primarily from a change in accounting for sales in Japan (see “Joint Venture in Japan”). Assuming the change in accounting in Japan was effective as of January  1 , 1999 , international net sales for the years  2001 and  2000 would have decreased  8 % and  4 %, respectively. Additionally, excluding the Net Sales by Product Line  The following table is a summary of net sales by product line: The impact of foreign currency exchange rate fluctuations on net sales would not necessarily be indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manu- facturing and operating costs, and Edwards Lifesciences’ hedging activities. For more information, see “Quantitative and Qualitative Disclosure About Market Risk.” The net sales decrease in the United States during  2000 was due primarily to the Company’s partial sale of its perfusion product line effective August  31 , 2000 (see “Disposition of Assets and Other Non-Recurring Charges, net”), and a one- time $ 5 million sale of a patent during  1999 , partially offset by an increase during  2000 in cardiac surgery sales. The net sales decrease in the United States during  2001 was due primarily to the sale of the Company’s perfusion services business in the United States effective June  30 , 2001 (see “Disposition of Assets and Other Non-Recurring Charges, net”), partially offset by an increase in sales of cardiac surgery products. impact of changes in foreign currency exchange rates (primarily the movement of the United States dollar against the Euro and the Japanese Yen), international net sales for the years 2001 and  2000 would have decreased  1 % and increased  2 %, respectively. These adjusted fluctuations were due primarily to the Company’s partial sale of its perfusion product line effective August  31 , 2000 , offset by an increase in sales of cardiac surgery products. Years Ended December 31, Percent Change (dollars in millions) 2001 2000 1999 2001 2000 Cardiac Surgery $ 329 $ 311 $ 306 6 % 2 % Critical Care 210 217 242 ( 3 %) ( 10 %) Vascular 49 55 61 ( 11 %) ( 10 %) Perfusion 102 207 244 ( 51 %) ( 15 %) Other 2 14 52 ( 86 %) ( 73 %) Total net sales $ 692 $ 804 $ 905 ( 14 %) ( 11 %) Years Ended December 31, Percent Change (dollars in millions) 2001 2000 1999 2001 2000 Cardiac Surgery $ 329 $ 309 $ 299 6 % 3 % Critical Care 210 207 209 1 % ( 1 %) Vascular 49 54 58 ( 9 %) ( 7 %) Perfusion 102 202 228 ( 50 %) ( 11 %) Other 2 3 15 ( 33 %) ( 80 %) Total net sales $ 692 $ 775 $ 809 ( 11 %) ( 4 %) Years Ended December 31, Percent Change (dollars in millions) 2001 2000 1999 2001 2000 United States $ 421 $ 482 $ 504 ( 13 %) ( 4 %) International 271 322 401 ( 16 %) ( 20 %) Total net sales $ 692 $ 804 $ 905 ( 14 %) ( 11 %) Results of Operations Overview Management’s Discussion and Analysis  of Financial Condition and Results of Operations Management’s Discussion and Analysis  of Financial Condition and Results of Operations