Edwards Lifesciences Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Edwards develops and sells medical technologies for structural heart disease and critical care, across TAVR, transcatheter mitral and tricuspid therapies (TMTT), Surgical Structural Heart, and Critical Care.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,459.6 million | $1,341.2 million | +8.8% |
| Gross profit / gross margin | $1,130.1 million / 77.4% | $1,041.9 million / 77.7% | Margin down about 0.3 percentage points |
| Operating income / operating margin | $388.4 million / 26.6% | $438.8 million / 32.7% | Income down 11.5% |
| Net income | $340.5 million | $373.6 million | Down 8.9% |
| Diluted EPS | $0.56 | $0.59 | Down 5.1% |
| Operating cash flow | $314.1 million | $293.3 million | Up $20.8 million |
| Capital expenditures | $61.5 million | $72.7 million | Down $11.2 million |
Sales growth was led by TAVR and the United States. Management attributed the lower gross margin primarily to foreign exchange, including a 0.7-point headwind. Operating income and EPS were pressured by increased operating expenses and a $37 million pre-tax intellectual-property charge associated with the Medtronic agreement; management cited an after-tax impact of $30.5 million on diluted EPS.
Sales trends and business developments
- By product: TAVR sales were $947.9 million, up 7.6%; TMTT $41.6 million, up 53.6%; Surgical Structural Heart $248.2 million, up 12.4%; and Critical Care $221.9 million, up 4.6%.
- By geography: U.S. sales rose 13.3% to $849.1 million; Europe rose 6.5% to $331.1 million; Rest of World rose 13.8% to $165.3 million; Japan fell 15.8% to $114.1 million. The filing cites lingering COVID-related headwinds in Japan and hospital staffing disruptions in Europe. Currency reduced TAVR sales outside the U.S. by $25.2 million.
- R&D expense was $261.2 million, or 17.9% of sales, compared with $228.6 million. Management cited continued investment in transcatheter valve innovation and clinical trials.
- On February 28, Edwards acquired 61% of a medical technology company focused on cardiovascular disease detection and management. The preliminary purchase allocation included $143.0 million of goodwill and $150.5 million of in-process R&D; results since acquisition were immaterial. The allocation remained subject to finalization.
- On April 12, 2023, Edwards entered a 15-year global covenant-not-to-sue agreement with Medtronic covering certain structural-heart patents. The agreement provides for a $300 million upfront payment and annual royalties tied to certain product sales. Edwards recorded a $37 million Q1 charge, a $124 million prepaid royalty asset in April for future sales, and a separate $139 million pre-tax charge in April related to products in development.
Cash, debt, and liquidity
At March 31, 2023, cash and cash equivalents were $872.5 million and short-term investments were $381.7 million. Cash, cash equivalents, and short-term investments totaled $1.254 billion; management reported $902.2 million held in the U.S. and $352.0 million outside the U.S. Long-term debt was $596.5 million, representing the carrying value of 4.3% senior notes due 2028. No amounts were drawn on the $750 million revolving credit facility, which matures in 2027. Management said available liquidity and operating cash flows were sufficient for current and long-term needs.
Operating cash flow increased year over year, primarily reflecting a higher bonus payout in Q1 2022, partly offset by higher 2023 operating costs. Investing cash flow was $0.5 million, including investment-sale proceeds offset by the acquisition and capital expenditures. Financing cash outflow was $206.6 million, primarily due to $249.3 million of treasury-stock purchases. Edwards repurchased 3.2 million shares for approximately $249.1 million under its share-repurchase program and had $666.5 million of remaining authorization at quarter-end.
Outlook, risks, and contingencies
- The filing provides no specific quarterly or full-year sales or earnings guidance. Management discussed continued investment, clinical programs, and ongoing monitoring of COVID-19, macroeconomic conditions, staffing, and supply constraints.
- The IRS is pursuing a proposed transfer-pricing adjustment for 2015–2017 that could result in approximately $210 million of additional tax expense. Edwards disputes the proposal; discussions with the IRS Appeals office were ongoing. Related 2018–2022 transactions also remain subject to examination, and the company cannot estimate possible changes to its uncertain tax positions over the next 12 months.
- Edwards is reviewing potential Foreign Corrupt Practices Act compliance issues in Japan and other markets following voluntary notice to the SEC and DOJ. The outcome and financial impact cannot be predicted.
- A patent-infringement lawsuit alleges that SAPIEN 3 Ultra infringes certain patents. Edwards cannot estimate the possible exposure and has accrued no amount for this case. The company also notes other legal matters that could materially affect results in an individual reporting period.
- Investment risks include approximately $1.3 billion of debt-security investments and $111.1 million of equity investments. Unrealized losses on debt securities were attributed largely to interest rates, and management considered them temporary at quarter-end.
- Other stated risks include competition, product development and adoption, regulatory approvals, reimbursement, suppliers, foreign exchange, and macroeconomic uncertainty. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales growth and TAVR momentum continue, particularly given Japan weakness and foreign-exchange effects.
- The ongoing effects of the Medtronic agreement, including royalties, the April charges, and future product-related costs.
- Developments in the IRS transfer-pricing dispute and other uncertain tax positions, including the potential exposure cited by the company.
- Progress and outcomes of key clinical trials, regulatory decisions, and adoption of TMTT products.
- Final purchase accounting for the February acquisition and any subsequent changes to its preliminary valuation.