Edwards Lifesciences Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are in U.S. dollars. The company develops and sells therapies for structural heart disease and critical care, across TAVR, transcatheter mitral and tricuspid therapies (TMTT), Surgical Structural Heart, and Critical Care.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,530.2m | $1,373.9m | $2,989.8m | $2,715.1m |
| Gross profit | $1,187.2m | $1,104.5m | $2,317.3m | $2,146.4m |
| Gross margin | 77.6% | 80.4% | 77.5% | 79.0% |
| Operating income | $327.2m | $459.5m | $715.6m | $898.3m |
| Net income attributable to Edwards | $307.1m | $406.4m | $647.6m | $780.0m |
| Diluted EPS | $0.50 | $0.65 | $1.06 | $1.24 |
- Sales grew 11.4% in Q2 and 10.1% for the first half. First-half growth was led by TAVR, with TMTT posting the fastest percentage growth.
- First-half product-group sales: TAVR $1,939.5m (+8.5%); TMTT $89.2m (+62.6%); Surgical Structural Heart $504.5m (+12.3%); Critical Care $456.6m (+8.0%).
- First-half U.S. sales increased 12.5%; Europe increased 8.7%; Rest of World increased 18.3%; Japan declined 10.2%. Management cited lingering COVID-related headwinds in Japan and foreign-exchange effects.
- Gross margin declined year over year. Management attributed 2.2 percentage points of the Q2 decline and 1.5 points of the first-half decline to foreign-exchange movements, primarily U.S. dollar strength against the euro.
Cash flow, liquidity, and debt
- For the six months ended June 30, operating cash flow was $347.7m, down from $625.5m. Management said the $300m Medtronic agreement payment was the primary driver of the decline.
- Six-month investing cash flow was positive $70.7m, including $141.2m paid for an acquisition and $109.4m in capital expenditures. Financing cash flow was negative $154.5m, including $256.8m of treasury-stock purchases.
- Cash and cash equivalents were $1,042.6m; short-term investments were $466.7m. Current assets were $3,647.0m and current liabilities $1,157.2m.
- Long-term debt was $596.7m, representing 4.3% senior notes due June 2028. No amounts were outstanding under the $750m revolving credit facility. Cash and short-term investments exceeded reported debt by approximately $912.6m.
- Inventory rose to $980.2m from $875.5m at year-end 2022; accounts receivable increased to $754.4m from $643.0m.
Material changes and unusual items
- Edwards entered a 15-year global intellectual-property covenant-not-to-sue agreement with Medtronic in April 2023. It paid $300m upfront and will make annual royalties tied to sales of certain products. The company recorded $176m in pretax charges ($37m in March and $139m in April), and management cited a $142.2m after-tax impact for the first half. A $124m prepaid royalty asset relates to future sales.
- In February, Edwards acquired a 61% interest in a cardiovascular-technology company for cash and consolidated it. The filing reports $141.2m of acquisition cash outflow and $133.2m of goodwill; Edwards also holds an option to acquire the remaining interest.
- Q2 and first-half earnings included gains of $26.9m and $26.2m, respectively, from reducing contingent consideration liabilities to zero following a reassessment of milestone achievement probabilities.
- The company repurchased 3.2m shares for $249.1m under its authorized program during the first half; $666.5m of repurchase authority remained at June 30.
Outlook, risks, and contingencies
- The filing provides no quantified forward guidance. Management describes ongoing product development and clinical-trial activity, including the PROGRESS TAVR trial, continued PASCAL and SAPIEN M3 studies, and completion of enrollment in the full TRISCEND II cohort. Management said enrollment in the pivotal ALLIANCE trial for next-generation TAVR restarted in July 2023.
- Management cited staffing shortages, lingering COVID-related effects, inflation, higher interest rates, economic uncertainty, supply constraints, competition, product development and regulatory risks, and foreign-exchange exposure. It said it was managing inventory and monitoring supply and logistics.
- The IRS transfer-pricing dispute for tax years 2015–2017 may result in approximately $220m of additional tax expense if the proposed adjustment is sustained. Administrative resolution was deemed unattainable; the company plans to contest the matter in court and says resolution is unlikely within 12 months. Related 2018–2023 transfer-pricing matters remain under examination, and potential impacts may be significant but are not estimable.
- The company is investigating potential Foreign Corrupt Practices Act issues involving activities in Japan and other markets; it cannot predict the outcome or financial impact. A patent-infringement lawsuit concerning SAPIEN 3 Ultra has no recorded accrual because exposure cannot be estimated. The balance sheet also includes $181.7m of accruals associated with an Abbott settlement agreement.
- Management stated that available liquidity is sufficient for current and long-term requirements. It reported no material changes to previously disclosed risk factors or internal controls.
Important facts for investors to verify
- How much of ongoing revenue and margin performance is affected by foreign exchange, particularly in Japan and Europe, and whether Japan sales recover.
- The future royalty burden under the Medtronic agreement and the extent to which the upfront payment and related charges affect subsequent periods.
- Developments, timing, and potential financial exposure in the IRS transfer-pricing dispute and the FCPA review.
- Cash conversion and working-capital trends, including receivables and inventory growth, after the one-time Medtronic payment.
- Clinical, regulatory, and commercial progress for TAVR and TMTT programs, including the acquired company and the option to purchase its remaining equity.