Edwards Lifesciences Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Edwards develops and sells cardiovascular and critical-care medical technologies, including TAVR, transcatheter mitral and tricuspid therapies, surgical structural-heart products, and critical-care products.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $925.0 | $1,086.9 | $2,053.7 | $2,079.9 |
| Gross profit | $686.8 | $782.9 | $1,550.4 | $1,544.1 |
| Gross margin | 74.2% | 72.0% | 75.5% | 74.2% |
| Operating income (loss) | ($169.7) | $267.5 | $188.4 | $541.7 |
| Net income (loss) | ($121.9) | $242.3 | $188.7 | $492.0 |
| Diluted EPS | ($0.20) | $0.38 | $0.30 | $0.77 |
| Operating cash flow | Not presented quarterly | $438.2 | $342.7 |
Q2 gross margin improved year over year, partly because the prior-year period included a $46.2 million inventory write-off. Six-month R&D expense was $369.5 million, or 18.0% of sales. The Q2 operating loss and net loss primarily reflect a $367.9 million pretax litigation charge, partly offset by a $46.3 million income-tax benefit.
Revenue trends and changes versus prior periods
- Q2 sales declined 14.9% year over year; first-half sales declined 1.3%.
- Q2 TAVR sales fell 12.3% to $594.3 million as COVID-19 disrupted procedures. First-half TAVR sales rose 4.8% to $1,336.5 million, with SAPIEN 3 Ultra growth more than offsetting lower SAPIEN 3 sales.
- Q2 Surgical Structural Heart sales fell 26.1% to $160.9 million; first-half sales fell 18.1% to $354.3 million, principally due to delayed procedures.
- Q2 Critical Care sales fell 11.3% to $163.7 million; first-half sales fell 4.0% to $346.3 million. Pressure-monitoring demand in Europe partly offset declines in other products.
- Q2 TMTT sales declined 11.2% to $6.1 million, while first-half sales increased 47.6% to $16.6 million.
Liquidity, debt, and cash flow
- At June 30, cash and cash equivalents were $903.5 million and short-term investments were $260.3 million, totaling $1,163.8 million. Total current assets were $2,690.3 million and current liabilities $873.2 million.
- Long-term debt carrying value was $594.7 million, consisting of 4.300% senior notes due 2028. No borrowings were outstanding under the $750 million revolving credit facility, which matures in 2023.
- First-half operating cash flow was $438.2 million, including a $367.9 million litigation-settlement accrual; management said the year-over-year increase also reflected a $180 million settlement payment made in 2019, partly offset by higher 2020 working-capital needs.
- First-half investing cash outflow was $144.9 million, including $190.5 million of capital expenditures. Financing cash outflow was $562.3 million, primarily reflecting $623.8 million of treasury-stock purchases.
- Management stated available liquidity and expected operating cash were sufficient for working capital, capital expenditures, and other financial commitments over the next 12 months.
Outlook, commentary, risks, and unusual items
- COVID-19 materially disrupted procedures, customer activity, clinical trials, and demand. TAVR and surgical procedure volumes began improving during May and June; clinical-trial enrollment also progressively resumed. Management emphasized that the pandemic’s duration and financial effects remained uncertain. The filing provides no quantified financial guidance.
- On July 12, 2020, Edwards and Abbott agreed to settle patent disputes involving PASCAL and MITRACLIP-related products; the matters and related appeals were dismissed. Edwards recorded a $367.9 million pretax charge for past damages and estimated additional royalties of $100 million through May 2024. It paid Abbott $100 million in July 2020, with further quarterly payments expected.
- Other risks include product competition and adoption, regulatory and clinical-trial outcomes, reimbursement, manufacturing and quality, currency movements, investment-value declines, tax examinations, and other litigation. Management said other lawsuits were not expected to materially affect overall financial condition, results, or cash flows, though a resolution in a single period could materially affect that period.
- The company completed a three-for-one stock split in May 2020; per-share data and relevant share counts were adjusted as described in the filing. First-half share repurchases totaled $614.7 million, with $625.0 million of authorization remaining at quarter-end.
Important facts for investors to verify
- How procedure volumes and sales recover by geography and product group as COVID-related disruptions change.
- The timing and cash impact of Abbott settlement payments and royalties, and whether any related expenses or obligations change.
- Whether reported cash generation is sustained, taking into account working capital, capital spending, and settlement-related cash flows.
- Progress in clinical trials, regulatory approvals, and adoption of newer products, especially TAVR and TMTT offerings.
- Potential outcomes of unresolved tax positions and examinations; the filing reports $181.3 million of uncertain-tax-position liabilities on the balance sheet.