Edwards Lifesciences Corp. — Q2 2021 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2021. Edwards develops and sells cardiovascular and critical-care medical technologies, with products in TAVR, transcatheter mitral and tricuspid therapies, Surgical Structural Heart, and Critical Care.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,376.0M | $925.0M | $2,592.6M | $2,053.7M |
| Gross profit / margin | $1,041.7M / 75.7% | $686.8M / 74.2% | $1,964.9M / 75.8% | $1,550.4M / 75.5% |
| Operating income (loss) | $542.1M | $(169.7)M | $925.6M | $188.4M |
| Net income (loss) | $489.5M | $(121.9)M | $827.7M | $188.7M |
| Diluted EPS | $0.78 | $(0.20) | $1.31 | $0.30 |
| Operating cash flow | Not separately provided | Not separately provided | $826.6M | $438.4M |
- Q2 sales rose 48.7%; six-month sales rose 26.2%. TAVR was the largest product area, with six-month sales of $1,693.2M, up 26.7%.
- Six-month investing cash outflow was $379.2M, including $175.3M of capital expenditures. Financing cash outflow was $333.3M, primarily reflecting $414.5M of treasury-stock purchases. Cash, cash equivalents, and restricted cash ended at $1,325.9M.
- At June 30, cash and cash equivalents were $1,312.8M; short- and long-term investments were $1,262.6M. Current assets were $3,322.9M and current liabilities $886.2M. Long-term debt was $595.4M; no borrowings were outstanding under the $750M revolving credit facility.
- Management reported gross-margin improvement from product mix, lower incremental COVID-related costs, and manufacturing efficiencies, partly offset by foreign exchange and hedging effects.
Changes, outlook, and notable matters
- Management attributed the recovery to improved procedure volumes as COVID-19 conditions eased, with growth across all product groups and geographies. Q2 growth was especially strong in the U.S. and Europe; currency movements also benefited international sales.
- 2020 comparisons are affected by the $367.9M pretax Abbott patent-settlement charge recorded in June 2020 and by the much smaller 2021 contingent-consideration liability. The latter generated $102.6M of Q2 income and $107.1M for the first half of 2021, largely from revised milestone probabilities and timing assumptions. These items materially affect year-over-year earnings comparisons.
- The Abbott settlement also entails estimated royalty expenses totaling about $100M through May 2024; quarterly payments follow the $100M payment made in July 2020.
- No numerical full-year guidance is provided in the supplied filing text. Management said slower vaccination progress outside the U.S. and new COVID-19 variants create uncertainty for the remainder of 2021. It stated liquidity sources should meet working-capital, capital-expenditure, and other commitments for the next 12 months.
- The IRS issued a proposed adjustment concerning 2015–2017 U.S.-Swiss Surgical/TAVR royalty transfer pricing that could result in about $200M of additional tax expense. Edwards disputes the proposal, has not accrued an additional amount, and says payment, if any, would not be due until proceedings conclude. Related tax matters remain uncertain and may be significant.
- The company is investigating certain employee-initiated grants and payments in Japan for possible FCPA issues and has notified the SEC and DOJ. It cannot predict the outcome or financial impact.
- Other risks include ongoing COVID-19 effects on procedures, supply, trials and demand; regulatory, product-development, manufacturing, competitive and reimbursement risks; and potential investment losses. The filing reports no material change to previously disclosed risk factors.
- The board authorized an additional $1.0B share-repurchase program in May 2021. Edwards repurchased 4.7M shares for $402.3M during the first half; $1.2B of repurchase authority remained at June 30.
Investor verification priorities
- Track the IRS transfer-pricing dispute, the possible approximately $200M tax exposure, and the status of related uncertain tax positions.
- Assess the persistence of post-pandemic procedure recovery, particularly outside the U.S., and the effects of COVID-19 variants and vaccination progress.
- Separate underlying operating trends from the Abbott settlement comparison and the substantial contingent-consideration fair-value gain.
- Monitor TAVR growth and progress in mitral and tricuspid pivotal trials, product approvals, and adoption.
- Review repurchase pace, capital spending, and the value and risks of investments and the investee acquisition option.