Edwards Lifesciences Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Figures are in U.S. dollars unless noted.
Business context
Edwards develops and sells medical technologies for structural heart disease and critical care monitoring. Its principal product areas are transcatheter aortic valve replacement (TAVR), transcatheter mitral and tricuspid therapies (TMTT), surgical structural heart, and critical care. TAVR represented 65% of 2020 net sales. The company reported approximately 14,900 employees and sales in about 100 countries.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $4,386.3 million | $4,348.0 million |
| Gross profit / gross margin | $3,305.7 million / 75.4% | $3,233.6 million / 74.4% |
| Operating income / operating margin | $897.6 million / 20.5% | $1,146.8 million / 26.4% |
| Net income / net margin | $823.4 million / 18.8% | $1,046.9 million / 24.1% |
| Diluted EPS | $1.30 | $1.64 |
| Cash from operating activities | $1,054.3 million | $1,182.9 million |
| Capital expenditures | $407.0 million | $254.4 million |
| Cash and cash equivalents | $1,183.2 million | $1,179.1 million |
| Short-term investments | $219.4 million | $337.8 million |
| Long-term debt | $595.0 million | $594.4 million |
Sales grew 0.9% year over year. Operating cash flow less capital expenditures was approximately $647 million in 2020, compared with $929 million in 2019. At year-end, cash and short-term investments totaled about $1.40 billion. The company had no borrowings under its $750 million revolving credit agreement and reported compliance with its covenants. Its outstanding notes are fixed-rate, 4.3% senior notes due 2028. The company has never paid a cash dividend and reported no current plan to do so.
Research and development spending was $760.7 million, or 17.3% of sales. The effective tax rate was 10.2%, compared with 10.3% in 2019. The filing reports a current ratio or a separately stated net-debt measure only indirectly; those values are not provided as reported metrics.
Material changes versus 2019
- Product sales were mixed: TAVR increased 4.4% to $2,857.3 million; TMTT increased 48.5% to $41.8 million; surgical heart valve therapy fell 9.5% to $761.8 million; and critical care fell 2.0% to $725.4 million.
- U.S. sales decreased 0.6% to $2,516.8 million, while international sales increased 3.0% to $1,869.5 million.
- Net income and diluted EPS declined, principally reflecting a $367.9 million pretax Abbott patent-litigation settlement charge recorded in 2020. Intellectual property litigation expense totaled $405.4 million, versus $33.4 million in 2019.
- Gross margin improved by about one percentage point, partly because 2019 included a $73.1 million inventory write-off associated primarily with discontinuing the CENTERA program. The improvement was partly offset by currency effects and COVID-related costs.
- Inventory increased to $802.3 million from $640.9 million, and property, plant, and equipment increased to $1,395.2 million from $1,060.3 million.
- The company repurchased 3.1 million shares for $625.4 million in 2020. In February 2021, it entered an additional $250 million accelerated share repurchase agreement.
Quarterly results, outlook, and management commentary
Fourth-quarter 2020 net sales were $1,191.7 million, compared with $1,174.1 million in fourth-quarter 2019. Fourth-quarter net income was $309.5 million, compared with $280.2 million. Second-quarter 2020 included the Abbott settlement charge and reported a net loss of $121.9 million and diluted loss per share of $0.20.
Management said COVID-19 disrupted procedure volumes, clinical-trial enrollment, and hospital spending. Volumes improved after the sharp decline beginning in March 2020, but a late-year resurgence again affected procedures and trials. Management noted that TAVR sales were also negatively affected in early 2021. Manufacturing continued, and the company said it was managing inventory, logistics, and component supply. No quantified 2021 revenue or earnings guidance is provided in the filing text. Management anticipated approximately $350 million of 2021 capital expenditures.
During 2020, Edwards received CE Mark for PASCAL treatment of tricuspid regurgitation, Chinese approval for SAPIEN 3 in specified high-risk patients, and FDA approval to begin a U.S. pivotal study of the HARPOON system. It also received FDA approval for the KONECT RESILIA aortic valved conduit. Clinical enrollment and regulatory progress remain important to the company’s growth plans.
Risks, contingencies, and unusual items
- Abbott settlement: The settlement resolved patent disputes involving transcatheter mitral and tricuspid repair products. Edwards paid $100 million in July 2020 and expects approximately $100 million in royalties through May 2024; future payments are also reflected in contractual obligations.
- COVID-19: The duration and severity of the pandemic, procedure volumes, hospital capacity, clinical trials, supply chains, and demand remain uncertain.
- Tax uncertainty: Gross uncertain tax positions were $281.8 million, primarily related to transfer pricing. The IRS may propose adjustments relating to 2015–2017 tax years; the company said the possible financial impact could be significant but could not reasonably estimate changes over the next 12 months.
- Regulatory and clinical risk: Product approvals, clinical outcomes, trial timing, post-market requirements, and implementation of the EU Medical Device Regulation could affect commercialization and costs.
- Other exposures: The filing highlights competition, reimbursement and pricing pressure, reliance on certain suppliers (including single-source supplies), product quality and liability, intellectual property disputes, cybersecurity, foreign-exchange exposure, and acquisition-related milestone obligations. Contingent payments could reach up to $810 million if specified milestones or other obligations are met.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Critical audit matters included transfer-pricing tax positions and the valuation of contingent consideration liabilities.
Important facts for investors to verify
- How much of future sales growth depends on TAVR, and whether procedure volumes recover from COVID-related disruption.
- Whether the expected Abbott royalties and remaining settlement payments align with the disclosed timing and amounts.
- Progress, trial results, regulatory approvals, and commercialization prospects for PASCAL, HARPOON, and other mitral and tricuspid programs.
- The outcome of IRS transfer-pricing examinations and any resulting change to tax liabilities or the effective tax rate.
- Whether inventory growth, higher capital spending, and share repurchases remain supportable by operating cash flow and liquidity.