filings.toolsEdwards Lifesciences 10-Q 2021-09-30
Filed 2021-10-29. 7 sections, 177K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-15525
EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 36-4316614 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Edwards Way
Irvine, California 92614
(Address of principal executive offices and zip code)
(949) 250-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $1.00 per share | EW | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's common stock, $1.00 par value, as of October 25, 2021 was 624,334,496.
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended September 30, 2021
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements contained in this report to be covered by the safe harbor provisions of such Acts. Some statements other than statements of historical fact in this report or referred to or incorporated by reference into this report are "forward-looking statements" for purposes of these sections. These statements include, among other things, the expected impact of COVID-19 on our business, any predictions, opinions, expectations, plans, strategies, objectives and any statements of assumptions underlying any of the foregoing relating to the company's current and future business and operations, including, but not limited to, financial matters, development activities, clinical trials and regulatory matters, manufacturing and supply operations, and product sales and demand. These statements can sometimes be identified by the use of the forward-looking words such as "may," "believe," "will," "expect," "project," "estimate," "should," "anticipate," "plan," "goal," "continue," "seek," "pro forma," "forecast," "intend," "guidance," "optimistic," "aspire," "confident," other forms of these words or similar words or expressions or the negative thereof. Statements of past performance, efforts, or results about which inferences or assumptions may be made can also be forward-looking statements and are not indicative of future performance or results; these statements can be identified by the use of words such as "preliminary," "initial," diligence," "industry-leading," "compliant," "indications," or "early feedback" or other forms of these words or similar words or expressions or the negative thereof. These forward-looking statements are subject to substantial risks and uncertainties that could cause our results or future business, financial condition, results of operations or performance to differ materially from our historical results or experiences or those expressed or implied in any forward-looking statements contained in this report. These risks and uncertainties include, but are not limited to: uncertainties regarding the severity and duration of the COVID-19 pandemic and its impact on our business and the economy generally, clinical trial or commercial results or new product approvals and therapy adoption; inability or failure to comply with regulations; unpredictability of product launches; competitive dynamics; changes to reimbursement for the company's products; the company’s success in developing new products and avoiding manufacturing and quality issues; the impact of currency exchange rates; the timing or results of research and development and clinical trials; unanticipated actions by the U.S. Food and Drug Administration and other regulatory agencies; unexpected impacts or expenses of litigation or internal or government investigations; and other risks detailed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020, as such risks and uncertainties may be amended, supplemented or superseded from time to time by our subsequent reports on Forms 10-Q and 8-K we file with the Securities and Exchange Commission. These forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.
Unless otherwise indicated or otherwise required by the context, the terms "we," "our," "it," "its," "Company," "Edwards," and "Edwards Lifesciences" refer to Edwards Lifesciences Corporation and its subsidiaries.
Part I. Financial Information
Item 1. Financial Statements
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except par value; unaudited)
| September 30, 2021 | December 31, 2020 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 1,506.9 | $ | 1,183.2 | ||||||||||
| Short-term investments (Note 4) | 287.8 | 219.4 | ||||||||||||
| Accounts receivable, net of allowances of $9.5 and $9.6, respectively | 600.6 | 514.6 | ||||||||||||
| Other receivables | 63.6 | 88.2 | ||||||||||||
| Inventories (Note 2) | 737.8 | 802.3 | ||||||||||||
| Prepaid expenses | 76.9 | 75.1 | ||||||||||||
| Other current assets | 241.9 | 208.2 | ||||||||||||
| Total current assets | 3,515.5 | 3,091.0 | ||||||||||||
| Long-term investments (Note 4) | 1,282.0 | 801.6 | ||||||||||||
| Property, plant, and equipment, net | 1,464.6 | 1,395.2 | ||||||||||||
| Operating lease right-of-use assets | 84.8 | 94.2 | ||||||||||||
| Goodwill | 1,170.4 | 1,173.2 | ||||||||||||
| Other intangible assets, net | 325.3 | 331.4 | ||||||||||||
| Deferred income taxes | 184.0 | 230.9 | ||||||||||||
| Other assets | 133.7 | 119.6 | ||||||||||||
| Total assets | $ | 8,160.3 | $ | 7,237.1 | ||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | 139.5 | $ | 196.5 | ||||||||||
| Accrued and other liabilities (Note 2) | 802.8 | 670.2 | ||||||||||||
| Operating lease liabilities | 24.2 | 27.2 | ||||||||||||
| Total current liabilities | 966.5 | 893.9 | ||||||||||||
| Long-term debt | 595.5 | 595.0 | ||||||||||||
| Contingent consideration liabilities (Note 5) | 80.1 | 186.1 | ||||||||||||
| Taxes payable | 190.2 | 215.3 | ||||||||||||
| Operating lease liabilities | 64.4 | 72.7 | ||||||||||||
| Uncertain tax positions | 245.4 | 214.4 | ||||||||||||
| Litigation settlement accrual | 201.4 | 233.0 | ||||||||||||
| Other liabilities | 275.5 | 252.4 | ||||||||||||
| Total liabilities | 2,619.0 | 2,662.8 | ||||||||||||
| Commitments and contingencies (Note 9) | ||||||||||||||
| Stockholders' equity | ||||||||||||||
| Preferred stock, $0.01 par value, authorized 50.0 shares, no shares outstanding | — | — | ||||||||||||
| Common stock, $1.00 par value, 1,050.0 shares authorized, 641.2 and 636.4 shares issued, and 624.2 and 624.3 shares outstanding, respectively | 641.2 | 636.4 | ||||||||||||
| Additional paid-in capital | 1,643.1 | 1,438.1 | ||||||||||||
| Retained earnings | 5,732.8 | 4,565.0 | ||||||||||||
| Accumulated other comprehensive loss (Note 10) | (155.4) | (161.1) | ||||||||||||
| Treasury stock, at cost, 17.0 and 12.1 shares, respectively | (2,320.4) | (1,904.1) | ||||||||||||
| Total stockholders' equity | 5,541.3 | 4,574.3 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 8,160.3 | $ | 7,237.1 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions, except per share information; unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | 1,310.2 | $ | 1,140.9 | $ | 3,902.8 | $ | 3,194.6 | |||||||||||||||
| Cost of sales | 311.7 | 281.0 | 939.4 | 784.3 | |||||||||||||||||||
| Gross profit | 998.5 | 859.9 | 2,963.4 | 2,410.3 | |||||||||||||||||||
| Selling, general, and administrative expenses | 364.4 | 307.2 | 1,069.7 | 889.9 | |||||||||||||||||||
| Research and development expenses | 238.0 | 195.5 | 670.3 | 565.0 | |||||||||||||||||||
| Intellectual property litigation expenses, net (Note 3) | 4.7 | 8.4 | 13.5 | 400.8 | |||||||||||||||||||
| Change in fair value of contingent consideration liabilities (Note 5) | 1.1 | (9.0) | (106.0) | 8.4 | |||||||||||||||||||
| Operating income | 390.3 | 357.8 | 1,315.9 | 546.2 | |||||||||||||||||||
| Interest expense (income), net | 0.8 | (0.8) | 1.5 | (7.1) | |||||||||||||||||||
| Other income, net | (1.4) | (5.7) | (11.3) | (7.3) | |||||||||||||||||||
| Income before provision for income taxes | 390.9 | 364.3 | 1,325.7 | 560.6 | |||||||||||||||||||
| Provision for income taxes | 50.8 | 39.1 | 157.9 | 46.7 | |||||||||||||||||||
| Net income | $ | 340.1 | $ | 325.2 | $ | 1,167.8 | $ | 513.9 | |||||||||||||||
| Share information (Note 11) | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.55 | $ | 0.52 | $ | 1.87 | $ | 0.83 | |||||||||||||||
| Diluted | $ | 0.54 | $ | 0.52 | $ | 1.85 | $ | 0.82 | |||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 623.6 | 622.1 | 623.0 | 622.3 | |||||||||||||||||||
| Diluted | 631.7 | 631.0 | 631.0 | 628.8 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
| **Three Months End |
Showing the first 8K of 121K characters. Open the full section
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. See “Note Regarding Forward-Looking Statements” preceding Part I, Item 1 in this Quarterly Report on Form 10-Q.
We are the global leader in patient-focused medical innovations for structural heart disease, as well as critical care and surgical monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or in intensive care. We conduct operations worldwide and are managed in the following geographical regions: United States, Europe, Japan, and Rest of World. Our products are categorized into the following areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care.
Financial Highlights and COVID-19
The COVID-19 pandemic has adversely impacted, and may further adversely impact, nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners. Our priority has been to maintain access for patients to our life-saving technologies while providing continuous front-line support to our clinician partners, and protecting the well-being of our employees. Our manufacturing operations have continued to respond to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components.
TAVR and Surgical procedure volumes varied greatly since the middle of March 2020 by geography, and even by hospital, as patients and their physicians analyzed the trade-off between aortic stenosis and their concern for COVID-19. In the last few weeks of the first quarter of 2020, procedure volumes related to our TAVR and Surgical products dropped significantly. In the second and third quarters of 2020, procedure volumes improved. In the second quarter of 2020, we also started to progressively resume patient enrollment at pre-COVID rates in clinical trials that were voluntarily paused or slowed at the end of the first quarter of 2020. In Critical Care, during 2020 there was greater demand in Europe and the United States for our pressure monitoring products, but demand for other Critical Care products began to decrease at the end of the first quarter of 2020 due to COVID-19, and that trend continued through the third quarter of 2020.
During the first quarter of 2021, COVID-19 stressed the global healthcare system during the winter months. However, we saw strong recovery beginning in the second quarter of 2021 as widespread vaccine adoption contributed to an increased number of patients. However, the Delta variant had a significant impact on hospital resources during the last two months of the third quarter of 2021, especially in the United States.
Our net sales for the first nine months of 2021 were $3.9 billion, representing an increase of $708.2 million over the first nine months of 2020, driven by sales of our TAVR products. During the first half of 2021, United States TAVR procedures began to grow as COVID-19 hospitalizations decreased and vaccinations increased. However, TAVR sales were negatively impacted in the last two months of the third quarter of 2021 as United States procedures declined due to the significant impact the Delta variant had on hospital resources. Surgical sales grew during the nine months ended September 30, 2021 due to increased adoption of our premium high-value technologies around the world and rebounding surgical aortic treatment rates in the United States. We also saw an increased demand for our Critical Care capital products as hospital capital spending continued to show signs of recovery. However, slow vaccination progress outside the United States and new variants of COVID-19 provide uncertainty for the remainder of the year for our sales.
Our gross profit increase in the nine months ended September 30, 2021 was driven by our sales growth and lower incremental costs associated with COVID-19. The increase in our diluted earnings per share in the nine months ended September 30, 2021 was driven by our gross profit increase and an after-tax charge of $306.9 million in the second quarter of 2020 to settle certain patent litigation related to transcatheter mitral and tricuspid repair products.
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, vendors, business partners and distribution channels. The extent to which the COVID-19 global pandemic and measures taken in response thereto impact our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak (including new and more contagious variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, public acceptance and efficacy of vaccines and other treatments, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property in support of those developments. While some evidence collection was slowed during the COVID-19 pandemic, we and the clinical community are committed to continuing our trials and generating robust evidence. In the first nine months of 2021, we invested 17.2% of our net sales in research and development.
Results of Operations
Net Sales Trends
(dollars in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Percent Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 753.2 | $ | 662.0 | $ | 91.2 | 13.8 | % | $ | 2,223.6 | $ | 1,845.6 | $ | 378.0 | 20.5 | % | |||||||||||||||||||||||||||||||
| Europe | 291.1 | 253.8 | 37.3 | 14.7 | % | 880.9 | 707.8 | 173.1 | 24.5 | % | |||||||||||||||||||||||||||||||||||||
| Japan | 125.9 | 113.9 | 12.0 | 10.6 | % | 390.0 | 330.7 | 59.3 | 17.9 | % | |||||||||||||||||||||||||||||||||||||
| Rest of World | 140.0 | 111.2 | 28.8 | 25.7 | % | 408.3 | 310.5 | 97.8 | 31.5 | % | |||||||||||||||||||||||||||||||||||||
| International | 557.0 | 478.9 | 78.1 | 16.3 | % | 1,679.2 | 1,349.0 | 330.2 | 24.5 | % | |||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,310.2 | $ | 1,140.9 | $ | 169.3 | 14.8 | % | $ | 3,902.8 | $ | 3,194.6 | $ | 708.2 | 22.2 | % |
International net sales include the impact of foreign currency exchange rate fluctuations. The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs, and our hedging activities.
Net Sales by Product Group
(dollars in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Percent Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Transcatheter Aortic Valve Replacement | $ | 857.8 | $ | 744.6 | $ | 113.2 | 15.2 | % | $ | 2,551.0 | $ | 2,081.1 | $ | 469.9 | 22.6 | % | |||||||||||||||||||||||||||||||
| Transcatheter Mitral and Tricuspid Therapies | 22.3 | 12.1 | 10.2 | 83.6 | % | 60.7 | 28.7 | 32.0 | 111.5 | % | |||||||||||||||||||||||||||||||||||||
| Surgical Structural Heart | 217.4 | 203.3 | 14.1 | 6.9 | % | 667.8 | 557.6 | 110.2 | 19.8 | % | |||||||||||||||||||||||||||||||||||||
| Critical Care | 212.7 | 180.9 | 31.8 | 17.6 | % | 623.3 | 527.2 | 96.1 | 18.2 | % | |||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,310.2 | $ | 1,140.9 | $ | 169.3 | 14.8 | % | $ | 3,902.8 | $ | 3,194.6 | $ | 708.2 | 22.2 | % |
Transcatheter Aortic Valve Replacement
Net sales of TAVR products increased for the three and nine months ended September 30, 2021 driven by:
-
higher sales of the Edwards SAPIEN platform in 2021 driven by improved COVID-19 conditions compared to 2020 and continued strong adoption in the United States, Europe, and Japan. Sales, however, were negatively impacted in the last two months of the third quarter of 2021 as U.S. procedures declined due to the significant impact the Delta variant had on hospital resources; and
-
foreign currency exchange rate fluctuations, which increased international net sales by $4.9 million and $39.6 million for the three and nine months ended September 30, 2021, respectively, primarily due to the strengthening of the Euro against the United States dollar.
In April 2021, we (1) received approval for a U.S. pivotal trial for TAVR in moderate aortic stenosis patients, (2) received approval in Japan to begin treating low-risk patients with SAPIEN 3, and (3) received SAPIEN 3 CE Mark approval to begin treating patients with a previously repaired or replaced valve in the pulmonic position.
Transcatheter Mitral and Tricuspid Therapies
Net sales of TMTT products increased for the three and nine months ended September 30, 2021 primarily due to improved COVID-19 conditions compared to 2020 and continued adoption of our PASCAL system in Europe.
We are progressing in the enrollment of five pivotal trials across our differentiated portfolio to support therapies for patients suffering from mitral and tricuspid regurgitation. We are gaining experience with the PASCAL Precision platform as part of our CLASP trials. We continued to treat patients with both of our transcatheter mitral replacement therapies through the ENCIRCLE trial for SAPIEN M3 and the MISCEND study for EVOQUE Eos. The MISCEND study will evaluate the safety and performance of EVOQUE Eos, which is designed to advance the treatment of patients with mitral regurgitation with a low-profile valve delivered through a sub 30 french transfemoral delivery system. Also, we have begun treating patients with EVOQUE in the TRISCEND II pivotal trial. This study will evaluate the safety and effectiveness of the EVOQUE tricuspid valve replacement system for patients with severe tricuspid regurgitation.
Surgical Structural Heart
Net sales of Surgical products increased for the three and nine months ended September 30, 2021 primarily due to improved COVID-19 conditions compared to 2020 and increased sales of the INSPIRIS RESILIA aortic valve and the KONECT aortic valved conduit, primarily in the United States. In addition, foreign currency exchange rate fluctuations increased international net sales by $2.1 million and $14.8 million for the three and nine months ended September 30, 2021, respectively, primarily due to the strengthening of the Euro against the United States dollar.
In January 2021, we received regulatory approval in Japan for our MITRIS valve, a new mitral valve incorporating RESILIA technology, which was launched in Japan during the second quarter of 2021.
Critical Care
Net sales of Critical Care products increased for the three and nine months ended September 30, 2021 primarily due to:
-
increased demand for our capital products, primarily Hemosphere platforms in the United States, as hospital capital spending continued to show signs of recovery;
-
increased demand for our pressure monitoring products due to elevated hospitalizations in the United States;
-
increased demand for our enhanced surgical recovery products, primarily in the United States; and
-
foreign currency exchange rate fluctuations, which increased international net sales by $1.0 million and $11.1 million for the three and nine months ended September 30, 2021, respectively, primarily due to the strengthening of the Euro and multiple other currencies against the United States dollar.
In June 2021, we received U.S. Food and Drug Administration clearance for the Acumen Hypotension Prediction Index software with the Acumen IQ finger cuff. This is the first noninvasive solution that uses machine learning to alert clinicians of the likelihood a patient is trending toward hypotension, or low blood pressure.
Gross Profit
The increase in gross profit as a percentage of net sales for the three and nine months ended September 30, 2021 was driven primarily by:
-
a 0.3 percentage point and 0.6 percentage point increase for the three and nine months ended September 30, 2021, respectively, in the United States due to an improved product mix, driven by TAVR products;
-
lower incremental costs associated with COVID-19; and
-
manufacturing efficiencies;
partially offset by:
- a 0.3 percentage point and 1.2 percentage point decrease for the three and nine months ended September 30, 2021, respectively, due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts.
Selling, General, and Administrative ("SG&A") Expenses
SG&A expenses increased for the three and nine months ended September 30, 2021 primarily due to (1) higher personnel-related costs, (2) increased commercial activities compared to the COVID-19 impacted prior year, and (3) the impact of foreign currency exchange rate fluctuations, which increased expenses by $4.4 million and $24.6 million for the three and nine months ended September 30, 2021, respectively, due to the weakening of the United States dollar against multiple currencies, primarily
the Euro.
Research and Development ("R&D") Expenses
R&D expenses increased for the three and nine months ended September 30, 2021 primarily due to continued investments in our transcatheter innovations, including increased clinical trial activity. In addition, beginning in the second quarter of 2020, spending on clinical trials was reduced as we temporarily paused certain mitral and tricuspid active pivotal clinical trials at the end of the first quarter of 2020 due to COVID-19.
Change in Fair Value of Contingent Consideration Liabilities
The change in fair value of contingent consideration liabilities resulted in expense of $1.1 million and income of $106.0 million for the three and nine months ended September 30, 2021, respectively, and income of $9.0 million and expense of $8.4 million for the three and nine months ended September 30, 2020, respectively. The income in the first nine months of 2021 and the three months ended September 30, 2020 was driven by changes in the projected probability and timing of milestone achievements and the projected timing of cash inflows. The expense in the three months ended September 30, 2021 and in the nine months ended September 30, 2020 was due to the accretion of interest due to the passage of time and, in 2020, discount rates (which decreased significantly in the first quarter of 2020). For further information, see Note 5 to the "Consolidated Condensed Financial Statements."
Other Income, net
(in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Foreign exchange gains, net | $ | (0.7) | $ | (5.5) | $ | (5.1) | $ | (9.2) | |||||||||||||||
| (Gain) loss on investments | (0.5) | 0.2 | (4.6) | 0.8 | |||||||||||||||||||
| Other | (0.2) | (0.4) | (1.6) | 1.1 | |||||||||||||||||||
| Other income, net | $ | (1.4) | $ | (5.7) | $ | (11.3) | $ | (7.3) |
The net foreign exchange gains relate to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, partially offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures.
The (gain) loss on investments primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on investments in equity securities.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outside the United States which have statutory tax rates typically lower than the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
Our effective income tax rate was 13.0% and 10.7% for the three months ended September 30, 2021 and 2020, respectively, and 11.9% and 8.3% for the nine months ended September 30, 2021 and 2020, respectively. The fluctuation in the effective rates between the nine months ended September 30, 2021 and 2020 is primarily due to the impact of the litigation settlement agreement reached in 2020 with Abbott Laboratories and its direct and indirect subsidiaries to settle all outstanding patent disputes. In addition, the effective rates for the nine months ended September 30, 2021 and 2020 were lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal and California research and development credits.
In the normal course of business, the Internal Revenue Service (“IRS”) and other taxing authorities are in different stages of examining various years of our tax filings. During these audits we may receive proposed audit adjustments that could be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the eventual outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law.
We executed an Advance Pricing Agreement ("APA") in 2018 between the United States and Switzerland governments for tax years 2009 through 2020 covering various, but not all, transfer pricing matters. The unagreed transfer pricing matters, namely Surgical Structural Heart and Transcatheter Aortic Valve Replacement (collectively "Surgical/TAVR") intercompany royalty transactions, then reverted to IRS Examination for further consideration as part of the respective years' regular tax audits. In addition, we executed other bilateral APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. We have filed to renew these APAs related to Japan for the years 2020 and forward. The execution of some or all these APA renewals depends on many variables outside of our control.
At September 30, 2021, all material state, local, and foreign income tax matters have been concluded for years through 2015. During the second quarter of 2021, we completed a Wisconsin state income tax audit for tax years 2010 through 2016 which resulted in a tax benefit of approximately $2.0 million. While not material, we continue to address matters in India for years from 2010.
Our U.S. federal income tax returns through 2014 have been audited. The IRS began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and later added the 2017 tax year to this audit cycle during the first quarter of 2019. The IRS audit field work for the 2015 through 2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing and related matters.
During the second quarter of 2021, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between our U.S. and Switzerland subsidiaries. During the third quarter of 2021, we completed our review of the NOPA and provided comments to the IRS and the IRS subsequently revised the NOPA. The revised NOPA proposes an increase to our U.S. taxable income which could result in additional tax expense for this period of approximately $180 million and represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions.
We also have received the final Revenue Agent's Report for these tax years. We have formally disagreed with the NOPA and have submitted a formal protest on the matter to the IRS Independent Office of Appeals. We continue to evaluate all possible remedies available to us, which could take several years to resolve. No payment of any amount related to the NOPA is required to be made, if at all, until all applicable proceedings have been completed. We believe the amounts previously accrued
related to this uncertain tax position are sufficient and, accordingly, have not accrued any additional amount based on the NOPA received.
Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 through 2021 that were not resolved under the APA program remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of September 30, 2021. We have considered this information, as well as information regarding the NOPA described above, in our evaluation of our uncertain tax positions. These unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to our consolidated financial statements. Based on the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in our existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the gross uncertain tax positions as a long-term liability.
Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, cash from operations, and amounts available under credit facilities. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions.
As of September 30, 2021, cash and cash equivalents and short-term investments held in the United States and outside the United States were $981.5 million and $813.2 million, respectively.
We have a Five-Year Credit Agreement ("the Credit Agreement") which matures on April 28, 2023. The Credit Agreement provides up to an aggregate of $750.0 million in borrowings in multiple currencies. Subject to certain terms and conditions, we may increase the amount available under the Credit Agreement by up to an additional $250.0 million in the aggregate. As of September 30, 2021, there were no borrowings outstanding under the Credit Agreement.
In June 2018, we issued $600.0 million of 4.3% fixed-rate unsecured senior notes (the "2018 Notes") due June 15, 2028. As of September 30, 2021, the total carrying value of the 2018 Notes was $595.5 million.
From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. On May 4, 2021, the Board of Directors approved a new stock repurchase program providing for an additional $1.0 billion of repurchases of our common stock. We consider several factors in determining when to execute share repurchases, including, among other things, expected dilution from stock plans, cash capacity, and the market price of our common stock. During the nine months ended September 30, 2021, under the Board authorized program, we repurchased a total of 4.7 million shares at an aggregate cost of $402.3 million, including pursuant to an accelerated share repurchase agreement we entered into during 2021 (see Note 8 to the "Consolidated Condensed Financial Statements") and as of September 30, 2021, we had remaining authority to purchase $1.2 billion of our common stock, which includes the additional stock repurchase program authorized by the Board in May 2021.
Certain of our business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired company reaching certain performance milestones, such as attaining specified sales levels, achieving product development targets, or obtaining regulatory approvals. For further information, see Note 5 to the "Consolidated Condensed Financial Statements."
In April 2021, we purchased an exclusive option to acquire a medical device company (the "Investee") for up to approximately $390 million, depending on the paid-in capital at closing. Depending on the Investee's achievement of certain milestones, we may be required to invest up to an additional $9.9 million in the Investee's equity securities and up to an additional $21.8 million for the option to acquire the Investee. We also agreed to loan the Investee up to $45 million under a secured promissory note. For further information, see Note 4 to the "Consolidated Condensed Financial Statements."
On July 12, 2020, we reached a settlement agreement with Abbott Laboratories to settle all outstanding patent disputes between the companies in cases related to transcatheter mitral and tricuspid repair products. The settlement agreement resulted in us recording an estimated $367.9 million pretax charge in June 2020 related to past damages. In addition, we will incur royalty expenses through May 2024 totaling an estimated $100 million. We made a one-time $100.0 million payment to Abbott in July 2020, and are making quarterly payments in subsequent years.
At September 30, 2021, there had been no material changes in our significant contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, other than the aforementioned agreement with the Investee.
Consolidated Cash Flows - For the nine months ended September 30, 2021 and 2020:
Net cash flows provided by operating activities of $1.4 billion for the nine months ended September 30, 2021 increased $704.0 million over the same period last year primarily due to (1) improved operating performance in 2021, (2) a higher bonus payout in 2020 associated with 2019 performance, and (3) a payment of $100.0 million in 2020 for a litigation settlement.
Net cash used in investing activities of $756.6 million for the nine months ended September 30, 2021 consisted primarily of capital expenditures of $236.0 million and net purchases of investments of $507.6 million.
Net cash used in investing activities of $271.2 million for the nine months ended September 30, 2020 consisted primarily of capital expenditures of $293.8 million, partially offset by net proceeds from investments of $58.6 million.
Net cash used in financing activities of $294.3 million for the nine months ended September 30, 2021 consisted primarily of purchases of treasury stock of $416.3 million, partially offset by proceeds from stock plans of $124.7 million.
Net cash used in financing activities of $528.3 million for the nine months ended September 30, 2020 consisted primarily of purchases of treasury stock of $625.2 million, partially offset by proceeds from stock plans of $103.5 million.
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 33-35 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes from the information discussed therein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk, Foreign Currency Risk, Credit Risk, and Concentrations of Risk
For a complete discussion of our exposure to interest rate risk, foreign currency risk, credit risk, and concentrations of risk, refer to Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes from the information discussed therein.
Investment Risk
We are exposed to investment risks related to changes in the underlying financial condition and credit capacity of certain of our investments. As of September 30, 2021, we had $1.5 billion of investments in debt securities of various companies, of which $1.2 billion were long-term. In addition, we had $82.0 million of investments in equity instruments of public and private companies. Should these companies experience a decline in financial performance, financial condition, or credit capacity, or fail to meet certain development milestones, including as a result of the impact of COVID-19 on their business or operations or otherwise, a decline in the investments' value may occur, resulting in unrealized or realized losses.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2021. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of September 30, 2021 that our disclosure controls and procedures are designed at a reasonable assurance level and effective in providing reasonable assurance that the information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
We are reviewing and investigating whether business activities in Japan and other markets violate certain provisions of the Foreign Corrupt Practices Act ("FCPA"). We have voluntarily notified the U.S. Securities and Exchange Commission and the U.S. Department of Justice that we have engaged outside counsel to conduct this review and investigation. Any determination that our operations or activities are not in compliance with existing laws, including the FCPA, could result in the imposition of fines, penalties, and equitable remedies. We cannot currently predict the outcome of the review and investigation or the potential impact on our financial statements.
On September 28, 2021, Aortic Innovations LLC, a non-practicing entity, filed a lawsuit against Edwards Lifesciences Corporation and certain of its subsidiaries (“Edwards”) in the United States District Court for the District of Delaware alleging that Edwards’ SAPIEN 3 Ultra product infringes certain of its patents. We are unable to predict the ultimate outcome of this matter or estimate a range of possible exposure; therefore, no amounts have been accrued. We believe the claims to be without merit and will vigorously defend ourselves in this litigation.
We are subject to various environmental laws and regulations both within and outside of the United States. Our operations, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on our financial results. Our threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary exposure is involved is $1 million.
Item 1A. Risk Factors
A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended December 31, 2020. There have been no material changes to our Risk Factors as previously reported.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| Period | Total Number of Shares (or Units) Purchased (a) | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (b) | |||||||||||||||||||||||||||||||
| July 1, 2021 through July 31, 2021 | 1,800 | $ | 106.68 | — | $ | 1,222.7 | |||||||||||||||||||||||||||||
| August 1, 2021 through August 31, 2021 | — | — | — | 1,222.7 | |||||||||||||||||||||||||||||||
| September 1, 2021 through September 30, 2021 | 13,139 | 121.00 | — | 1,222.7 | |||||||||||||||||||||||||||||||
| Total | 14,939 | 119.27 | — | ||||||||||||||||||||||||||||||||
(a) The difference between the total number of shares (or units) purchased and the total number of shares (or units) purchased as part of publicly announced plans or programs is due to shares withheld by us to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued to employees.
(b) On May 8, 2019, the Board of Directors approved a stock repurchase program authorizing us to purchase up to $1.0 billion of our common stock. On May 4, 2021, the Board of Directors approved a new stock repurchase program providing for an additional $1.0 billion of repurchases of our common stock. Repurchases under the programs may be made on the open market, including pursuant to a Rule 10b5-1 plan, and in privately negotiated transactions. These repurchase programs do not have an expiration date.
Item 6. Exhibits
The exhibits listed in the Exhibit Index below are filed, furnished, or incorporated by reference as part of this report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EDWARDS LIFESCIENCES CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Date: | October 29, 2021 | By: | /s/ SCOTT B. ULLEM | ||||||||
| Scott B. Ullem Chief Financial Officer (Principal Financial Officer; Duly Authorized Officer) | |||||||||||
| Date: | October 29, 2021 | By: | /s/ ROBERT W.A. SELLERS | ||||||||
| Robert W.A. Sellers Corporate Controller (Principal Accounting Officer) |