Edwards Lifesciences Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Edwards develops and sells cardiovascular and critical-care medical technologies, including TAVR, transcatheter mitral and tricuspid therapies, surgical structural-heart products, and critical-care products.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,373.9 million | $1,376.0 million | $2,715.1 million | $2,592.6 million |
| Gross profit | $1,104.5 million | $1,041.7 million | $2,146.4 million | $1,964.9 million |
| Operating income | $459.5 million | $542.1 million | $898.3 million | $925.6 million |
| Net income | $406.4 million | $489.5 million | $780.0 million | $827.7 million |
| Diluted EPS | $0.65 | $0.78 | $1.24 | $1.31 |
- Q2 sales were down 0.1% year over year; six-month sales increased 4.7%. Q2 gross margin was approximately 80.4% versus 75.7%; six-month gross margin was approximately 79.0% versus 75.8%. Management attributed the improvement in gross margin largely to foreign-exchange hedging.
- Operating income and net income declined despite higher gross profit. The prior-year comparison included substantially larger gains from changes in contingent consideration fair value: $102.6 million in H1 2021 versus $23.8 million in H1 2022. Higher SG&A and R&D also weighed on earnings.
- H1 operating cash flow was $625.5 million, down from $826.6 million. Management cited higher bonus payments, inventory builds, and estimated tax payments. Capital expenditures were $115.8 million. Cash and cash equivalents were $1,198.1 million at June 30.
- Current assets were $3,263.1 million and current liabilities $969.1 million. Long-term debt was $596.0 million, principally the 4.3% senior notes due 2028. No borrowings were outstanding under the then-existing revolving facility at quarter-end. In July, Edwards replaced it with a $750 million revolver maturing in 2027; no amount was drawn as of July 29.
Performance drivers and material changes
- Q2 TAVR sales increased 0.6% to $906.9 million; H1 sales rose 5.6% to $1,788.2 million. Foreign exchange reduced non-U.S. TAVR sales by $36.4 million in Q2 and $52.7 million in H1.
- TMTT sales grew 25.6% in Q2 to $27.9 million, primarily from continued adoption of PASCAL in Europe. Surgical Structural Heart sales declined 3.7% and Critical Care sales declined 2.0% in Q2.
- Management reported that slower-than-expected improvement in U.S. hospital staffing shortages and foreign-exchange headwinds affected Q2 sales. The Omicron wave had also affected hospital capacity and procedure volumes in Q1, particularly in the U.S.
- H1 R&D spending was $479.4 million, or 17.7% of sales, reflecting continued investment in transcatheter programs and clinical trials. U.S. FDA approval for the MITRIS RESILIA valve was received in March, with U.S. launch beginning in April 2022.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management said it was monitoring COVID-19 impacts, staffing and hospital capacity, supply availability, and foreign-exchange effects; outcomes remain uncertain.
- The IRS proposed an adjustment for 2015–2017 transfer-pricing matters that could result in approximately $180 million of additional tax expense. Edwards disputes the proposal; the case was transferred to the IRS Independent Office of Appeals, and no payment is due while proceedings continue. Other Surgical/TAVR transfer-pricing matters remain unresolved.
- Edwards is reviewing potential FCPA compliance issues involving Japan and other markets, with SEC and DOJ notified. It said the outcome and financial impact cannot currently be predicted.
- Other contingencies include a patent-infringement suit involving SAPIEN 3 Ultra, for which no amount was accrued because exposure could not be estimated, and an EPA show-cause letter regarding alleged hazardous-waste management violations at the Irvine facility. The company described the currently recognized amount for the EPA matter as not material.
- H1 share repurchases totaled 7.2 million shares for $746.4 million; $380.1 million of authorization remained at June 30. In July, the board approved an additional $1.5 billion repurchase authorization. Available-for-sale debt securities had $67.6 million of gross unrealized losses at June 30, which the company attributed largely to interest-rate changes rather than credit quality.
Important facts for investors to verify
- Whether hospital staffing and procedure volumes recover, and how foreign-exchange movements affect reported growth and margins.
- Progress and commercial adoption of TAVR and TMTT products, and the timing and results of pivotal trials and regulatory reviews.
- Potential exposure and timing of resolution for the IRS transfer-pricing dispute, FCPA review, patent litigation, and EPA matter.
- Whether cash generation, investment values, and continued share repurchases remain consistent with liquidity needs and planned R&D investment.