Edwards Lifesciences Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Edwards Lifesciences develops and sells cardiovascular medical technologies across TAVR, transcatheter mitral and tricuspid therapies (TMTT), Surgical Structural Heart, and Critical Care.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,216.6 million | $1,128.7 million | +7.8% |
| Gross profit | $923.2 million | $863.6 million | +6.9% |
| Gross margin | 75.9% | 76.5% | Down about 0.6 percentage points |
| Operating income | $383.5 million | $358.1 million | +7.1% |
| Net income | $338.2 million | $310.6 million | +8.9% |
| Diluted EPS | $0.54 | $0.49 | +10.2% |
| Operating cash flow | $300.5 million | $207.1 million | +$93.4 million |
| Capital expenditures | $106.0 million | $82.2 million | +$23.8 million |
Revenue growth was led by TAVR, with sales of $791.7 million (+6.7%). TMTT sales were $16.3 million (+56.7%), Surgical Structural Heart $213.0 million (+10.1%), and Critical Care $195.6 million (+7.1%). International sales increased 17.5% to $541.9 million; U.S. sales rose 1.1% to $674.7 million.
Management attributed the gross-margin decline mainly to foreign-exchange effects, including hedging settlements, and incremental COVID-19 response costs; manufacturing efficiencies partly offset these pressures. SG&A and R&D expenses increased, reflecting currency and personnel costs and continued investment in transcatheter therapies and valve innovations. R&D was 17.0% of sales.
Cash, debt, and liquidity
- Cash and cash equivalents were $1,174.2 million at March 31, 2021; short-term investments were $156.4 million. Cash, cash equivalents, and restricted cash totaled $1,190.9 million.
- Operating cash flow was $300.5 million. After $106.0 million of capital expenditures, implied operating cash flow less capital expenditures was $194.5 million.
- Long-term debt carrying value was $595.2 million, representing 4.3% senior notes due in 2028. No borrowings were outstanding under the $750 million revolving credit facility.
- The company repurchased approximately 3.6 million shares for $302.6 million during the quarter; $322.4 million of repurchase authorization remained at quarter-end.
Management said available liquidity and operating cash flow were sufficient for working capital, capital expenditures, and other commitments over the next 12 months.
Outlook, risks, and significant items
- COVID-19: U.S. TAVR procedures began growing as hospitalizations declined and vaccinations increased. Pressure-monitoring demand was elevated early in the quarter, and hospital capital spending showed signs of recovery. Management highlighted uncertainty for international sales due to slower vaccination progress outside the U.S. Pandemic duration, variants, hospital capacity, and resumption of normal operations remain material uncertainties. No specific numerical sales or earnings guidance is provided in the filing text.
- Tax dispute: The IRS issued a draft proposed adjustment concerning 2015–2017 U.S.-Swiss Surgical/TAVR intercompany royalties that could result in approximately $200 million of additional tax expense. The company disputes the proposed change, believes existing accruals are sufficient, and recorded no additional amount. No payment is due, if any, until applicable proceedings conclude; management expected a final notice and Revenue Agent’s Report before the end of Q3 2021. Related transfer-pricing matters for 2015–2021 remain uncertain.
- Litigation and royalties: Edwards recorded a $367.9 million pretax charge in June 2020 under its Abbott settlement and paid $100 million in July 2020. It expects approximately $100 million of additional royalty expense through May 2024, with quarterly payments. Management said lawsuits are not expected to materially affect overall financial condition, though a resolution in a particular period could materially affect that period’s results.
- Other exposures: Uncertain tax positions, investment credit and valuation risk, foreign-exchange movements, contingent acquisition consideration, competition, regulation, product launches, reimbursement, clinical and regulatory outcomes, and manufacturing or quality issues could affect results. Management reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Progress and potential financial exposure from the IRS transfer-pricing examination, including any final adjustment and whether existing reserves remain adequate.
- Whether TAVR procedure growth and international demand recover as COVID-19 conditions evolve, and how sales mix and foreign exchange affect margins.
- Gross-margin trends, including the persistence of currency and COVID-related costs and the contribution from manufacturing efficiencies.
- Cash generation relative to capital spending and the pace of share repurchases, including remaining authorization.
- Future Abbott royalty payments and any material developments in litigation or other contingencies.