Edwards Lifesciences Corporation — Q3 2021 Form 10-Q
Business context and period. Edwards Lifesciences develops cardiovascular medical technologies, reported across TAVR, transcatheter mitral and tricuspid therapies (TMTT), Surgical Structural Heart, and Critical Care. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,310.2m | $1,140.9m | $3,902.8m | $3,194.6m |
| Gross profit | $998.5m | $859.9m | $2,963.4m | $2,410.3m |
| Gross margin | 76.2% | 75.4% | 75.9% | 75.5% |
| Operating income | $390.3m | $357.8m | $1,315.9m | $546.2m |
| Operating margin | 29.8% | 31.4% | 33.7% | 17.1% |
| Net income | $340.1m | $325.2m | $1,167.8m | $513.9m |
| Diluted EPS | $0.54 | $0.52 | $1.85 | $0.82 |
Q3 sales increased 14.8%; nine-month sales increased 22.2%. TAVR was the largest product area: nine-month sales were $2,551.0m, up 22.6%. Nine-month sales also rose in TMTT (111.5%, to $60.7m), Surgical Structural Heart (19.8%, to $667.8m), and Critical Care (18.2%, to $623.3m).
For the nine months, operating cash flow was $1,358.5m, compared with $654.5m in 2020. Capital expenditures were $236.0m; investing cash outflow was $756.6m, mainly reflecting investment purchases and capital spending. Financing cash outflow was $294.3m, including $416.3m of treasury-stock purchases. Cash, cash equivalents, and restricted cash ended the period at $1,519.9m.
At September 30, cash and cash equivalents were $1,506.9m and short-term investments were $287.8m. Long-term debt was $595.5m, principally the carrying value of $600m of 4.3% senior notes due 2028. The $750m revolving credit facility had no borrowings outstanding. Management stated available liquidity was sufficient for working capital, capital expenditures, and other commitments for the next 12 months.
Changes, drivers, and outlook
- Nine-month operating income and EPS comparisons were substantially affected by the 2020 Abbott patent-settlement charge: $400.8m of intellectual-property litigation expense in the nine-month 2020 period, including a $367.9m pretax charge. The settlement also entails estimated royalty expenses through May 2024 totaling $100m.
- 2021 nine-month results included a $106.0m gain from reduced fair value of contingent consideration liabilities, largely reflecting changed milestone probabilities and timing. This benefit, alongside the prior-year litigation charge, materially affects year-over-year operating-profit comparisons.
- Management cited improved procedure volumes and lower incremental COVID-related costs versus 2020, as well as product mix and manufacturing efficiencies, as contributors to growth and gross-margin improvement. Higher personnel costs, commercial activity, and R&D investment increased expenses.
- COVID-19 conditions improved in the first half of 2021, but the Delta variant constrained U.S. hospital resources and reduced TAVR procedures in the final two months of Q3. Management noted continued uncertainty from variants and slower vaccination progress outside the U.S. No specific full-year financial guidance is provided in the supplied filing text.
- Research and development was 17.2% of nine-month sales. The company reported progress in pivotal TMTT trials and regulatory milestones across its product portfolio.
Risks, contingencies, and unusual items
- The company is reviewing potential Foreign Corrupt Practices Act issues relating to activities in Japan and other markets, with outside counsel; it has notified the SEC and Department of Justice. The outcome and financial impact are not predictable.
- An IRS revised proposed adjustment concerning 2015–2017 U.S.-Swiss Surgical/TAVR transfer pricing could result in approximately $180m of additional tax expense. Edwards formally disputed the adjustment and appealed; no payment is due before proceedings conclude, and no incremental amount was accrued. Related unresolved tax matters may be significant.
- A September 2021 patent-infringement suit concerning SAPIEN 3 Ultra has no recorded accrual because the company cannot estimate exposure; Edwards says it will defend the claims. The balance sheet includes a $201.4m litigation settlement accrual.
- COVID-19 effects, clinical and regulatory outcomes, competition, product demand, manufacturing and supply, foreign exchange, tax examinations, and litigation remain risks. The filing says risk factors were not materially changed from the 2020 Form 10-K.
Key facts for investors to verify
- Whether hospital capacity and COVID-19 trends continue to affect TAVR procedures and the company’s sales outlook.
- Progress and potential financial exposure from the IRS transfer-pricing dispute, including the proposed approximately $180m tax impact.
- Developments in the FCPA review and the SAPIEN 3 Ultra patent lawsuit, for which outcomes or exposure are not currently estimable.
- The sustainability of reported earnings growth after accounting for the 2020 Abbott settlement charge and the 2021 contingent-consideration fair-value gain.
- Cash deployment, including share repurchases (4.7m shares repurchased for $402.3m under authorized programs in the nine-month period), and investment and acquisition-option commitments.