filings.toolsEdwards Lifesciences 10-Q 2023-06-30
Filed 2023-07-28. 8 sections, 187K 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 June 30, 2023
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 July 25, 2023 was 607,916,300.
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended June 30, 2023
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. Statements other than statements of historical or current 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, the expected impact of macroeconomic conditions on our business, any predictions, opinions, expectations, plans, strategies, objectives and any statements of assumptions underlying any of the foregoing relating to our 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 regarding 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: our success in developing new products and avoiding manufacturing and quality issues; clinical trial or commercial results or new product approvals and therapy adoption; the impact of public health crises, including the COVID-19 pandemic; the impact of domestic and global conditions; competitive dynamics in the markets in which we operate; our reliance on vendors, suppliers, and other third parties; damage, failure or interruption of our information technology systems; consolidation in the healthcare industry; our ability to protect our intellectual property; our compliance with applicable regulations; our exposure to product liability claims; use of our products in unapproved circumstances; changes to reimbursement for our products; the impact of currency exchange rates; unanticipated actions by the United States Food and Drug Administration and other regulatory agencies; changes to tax laws; 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, 2022, 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 United States 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)
| June 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 1,042.6 | $ | 769.0 | |||||||
| Short-term investments (Note 4) | 466.7 | 446.3 | |||||||||
| Accounts receivable, net of allowances of $8.1 and $7.9, respectively | 754.4 | 643.0 | |||||||||
| Other receivables | 62.5 | 56.1 | |||||||||
| Inventories (Note 2) | 980.2 | 875.5 | |||||||||
| Prepaid expenses | 123.2 | 110.0 | |||||||||
| Other current assets | 217.4 | 195.9 | |||||||||
| Total current assets | 3,647.0 | 3,095.8 | |||||||||
| Long-term investments (Note 4) | 856.2 | 1,239.0 | |||||||||
| Property, plant, and equipment, net | 1,662.2 | 1,632.8 | |||||||||
| Operating lease right-of-use assets | 84.9 | 92.3 | |||||||||
| Goodwill | 1,299.5 | 1,164.3 | |||||||||
| Other intangible assets, net (Note 6) | 431.4 | 285.2 | |||||||||
| Deferred income taxes | 610.7 | 484.0 | |||||||||
| Other assets (Note 5) | 412.1 | 299.1 | |||||||||
| Total assets | $ | 9,004.0 | $ | 8,292.5 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 193.0 | $ | 201.9 | |||||||
| Accrued and other liabilities (Note 2) | 939.9 | 795.0 | |||||||||
| Operating lease liabilities | 24.3 | 25.5 | |||||||||
| Total current liabilities | 1,157.2 | 1,022.4 | |||||||||
| Long-term debt | 596.7 | 596.3 | |||||||||
| Contingent consideration liabilities (Note 7) | — | 26.2 | |||||||||
| Taxes payable | 81.2 | 143.4 | |||||||||
| Operating lease liabilities | 63.5 | 69.5 | |||||||||
| Uncertain tax positions | 303.7 | 267.5 | |||||||||
| Litigation settlement accrual (Note 2) | 112.5 | 143.0 | |||||||||
| Other liabilities | 242.7 | 217.5 | |||||||||
| Total liabilities | 2,557.5 | 2,485.8 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| 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, 649.1 and 646.3 shares issued, and 607.9 and 608.3 shares outstanding, respectively | 649.1 | 646.3 | |||||||||
| Additional paid-in capital | 2,145.5 | 1,969.3 | |||||||||
| Retained earnings | 8,237.6 | 7,590.0 | |||||||||
| Accumulated other comprehensive loss (Note 12) | (255.5) | (254.9) | |||||||||
| Treasury stock, at cost, 41.2 and 38.0 shares, respectively | (4,401.0) | (4,144.0) | |||||||||
| Total Edwards Lifesciences Corporation stockholders' equity | 6,375.7 | 5,806.7 | |||||||||
| Noncontrolling interest (Note 6) | 70.8 | — | |||||||||
| Total stockholders' equity | 6,446.5 | 5,806.7 | |||||||||
| Total liabilities and equity | $ | 9,004.0 | $ | 8,292.5 |
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ | 1,530.2 | $ | 1,373.9 | $ | 2,989.8 | $ | 2,715.1 | |||||||||||||||
| Cost of sales | 343.0 | 269.4 | 672.5 | 568.7 | |||||||||||||||||||
| Gross profit | 1,187.2 | 1,104.5 | 2,317.3 | 2,146.4 | |||||||||||||||||||
| Selling, general, and administrative expenses | 468.7 | 409.0 | 905.0 | 779.3 | |||||||||||||||||||
| Research and development expenses | 270.3 | 250.8 | 531.5 | 479.4 | |||||||||||||||||||
| Intellectual property agreement and litigation expense (Note 3) | 147.9 | 6.1 | 191.4 | 13.2 | |||||||||||||||||||
| Change in fair value of contingent consideration liabilities (Note 7) | (26.9) | (20.9) | (26.2) | (23.8) | |||||||||||||||||||
| Operating income, net | 327.2 | 459.5 | 715.6 | 898.3 | |||||||||||||||||||
| Interest income, net | (9.1) | (0.9) | (17.7) | (1.5) | |||||||||||||||||||
| Other income, net | (2.2) | (4.3) | (3.8) | (1.0) | |||||||||||||||||||
| Income before provision for income taxes | 338.5 | 464.7 | 737.1 | 900.8 | |||||||||||||||||||
| Provision for income taxes | 33.0 | 58.3 | 91.1 | 120.8 | |||||||||||||||||||
| Net income | 305.5 | 406.4 | 646.0 | 780.0 | |||||||||||||||||||
| Net loss attributable to noncontrolling interest (Note 6) | (1.6) | — | (1.6) | — | |||||||||||||||||||
| Net income attributable to Edwards Lifesciences Corporation | $ | 307.1 | $ | 406.4 | $ | 647.6 | $ | 780.0 | |||||||||||||||
| Share information (Note 13) | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.51 | $ | 0.65 | $ | 1.07 | $ | 1.26 | |||||||||||||||
| Diluted | $ | 0.50 | $ | 0.65 | $ | 1.06 | $ | 1.24 | |||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 606.9 | 620.9 | 607.2 | 621.5 | |||||||||||||||||||
| Diluted | 610.3 | 626.7 | 610.6 | 628.1 |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ---
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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 and critical care 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 groups: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care.
Financial Highlights and Market Update
COVID-19 and Macroeconomic Uncertainties
While conditions related to the COVID-19 pandemic have improved compared to 2022, we have continued to experience the impacts of the COVID-19 pandemic in 2023, particularly relating to lingering headwinds in Japan and disruptions related to staffing shortages in the United States and Europe. The COVID-19 pandemic adversely impacted, and may further adversely impact, 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 our organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components to address potential supply constraints.
In addition to the impacts described above, the global economy, including the financial and credit markets, continues to experience extreme volatility and disruptions, including inflationary conditions, rising interest rates, declines in consumer confidence, and uncertainty about economic growth and stability. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information.
Financial Highlights
Despite the challenges to our business due to COVID-19 and macroeconomic factors, our net sales for the first six months of 2023 were $3.0 billion, representing an increase of $274.7 million over the first six months of 2022, driven primarily by sales of our TAVR products.
Our gross profit increased in the six months ended June 30, 2023, driven by our sales growth. Gross profit as a percentage of sales decreased primarily due to the impact of foreign currency exchange rate fluctuations. The decrease in our diluted earnings per share in the six months ended June 30, 2023 was driven by an after-tax charge of $142.2 million related to an intellectual property agreement.
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. In the first six months of 2023, we invested 17.8% of our net sales in research and development.
We are dedicated to generating robust clinical, economic, and quality-of-life evidence increasingly expected by patients, clinicians, and payors in the current healthcare environment, with the goal of encouraging the adoption of innovative new medical therapies that demonstrate superior outcomes.
New Accounting Standards
Information on new accounting standards is included in Note 1 to the "Consolidated Condensed Financial Statements."
Results of Operations
Net Sales by Region
(dollars in millions)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Percent Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 895.3 | $ | 800.8 | $ | 94.5 | 11.8 | % | $ | 1,744.4 | $ | 1,550.3 | $ | 194.1 | 12.5 | % | |||||||||||||||||||||||||||||||
| Europe | 336.2 | 302.8 | 33.4 | 11.0 | % | 667.3 | 613.9 | 53.4 | 8.7 | % | |||||||||||||||||||||||||||||||||||||
| Japan | 117.9 | 122.9 | (5.0) | (4.1) | % | 232.0 | 258.4 | (26.4) | (10.2) | % | |||||||||||||||||||||||||||||||||||||
| Rest of World | 180.8 | 147.4 | 33.4 | 22.8 | % | 346.1 | 292.5 | 53.6 | 18.3 | % | |||||||||||||||||||||||||||||||||||||
| Outside of the United States | 634.9 | 573.1 | 61.8 | 10.8 | % | 1,245.4 | 1,164.8 | 80.6 | 6.9 | % | |||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,530.2 | $ | 1,373.9 | $ | 156.3 | 11.4 | % | $ | 2,989.8 | $ | 2,715.1 | $ | 274.7 | 10.1 | % |
Net sales outside of the United States 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Percent Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Transcatheter Aortic Valve Replacement | $ | 991.6 | $ | 906.9 | $ | 84.7 | 9.3 | % | $ | 1,939.5 | $ | 1,788.2 | $ | 151.3 | 8.5 | % | |||||||||||||||||||||||||||||||
| Transcatheter Mitral and Tricuspid Therapies | 47.6 | 27.9 | 19.7 | 71.4 | % | 89.2 | 54.9 | 34.3 | 62.6 | % | |||||||||||||||||||||||||||||||||||||
| Surgical Structural Heart | 256.3 | 228.5 | 27.8 | 12.2 | % | 504.5 | 449.3 | 55.2 | 12.3 | % | |||||||||||||||||||||||||||||||||||||
| Critical Care | 234.7 | 210.6 | 24.1 | 11.4 | % | 456.6 | 422.7 | 33.9 | 8.0 | % | |||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,530.2 | $ | 1,373.9 | $ | 156.3 | 11.4 | % | $ | 2,989.8 | $ | 2,715.1 | $ | 274.7 | 10.1 | % |
Transcatheter Aortic Valve Replacement Sales
Net sales of TAVR products increased for the three and six months ended June 30, 2023 driven by:
- higher sales of the Edwards SAPIEN platform in 2023, primarily the Edwards SAPIEN 3 Ultra valve in the United States;
partially offset by:
- foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $3.3 million for the three months ended June 30, 2023, primarily due to the weakening of the Japanese yen against the United States dollar, and $28.5 million for the six months ended June 30, 2023, primarily due the weakening of the Japanese yen and the Euro against the United States dollar.
During the first half of 2023, we continued to enroll our PROGRESS pivotal trial, studying moderate aortic stenosis patients. In March 2023, we launched the Edwards SAPIEN 3 Ultra RESILIA valve in Japan. In July 2023, we announced the restart of enrollment in our pivotal trial, ALLIANCE, designed to study our next generation TAVR technology, SAPIEN X4.
Transcatheter Mitral and Tricuspid Therapies Sales
Net sales of TMTT products increased for the three and six months ended June 30, 2023 primarily due to the continued adoption of our PASCAL system in Europe and its launch in the United States.
During the first six months of 2023, we continued to enroll the CLASP IIF pivotal trial with PASCAL for patients with functional mitral regurgitation. In mitral replacement, enrollment continued in the ENCIRCLE pivotal trial for SAPIEN M3. In tricuspid, we completed the enrollment of the full cohort of the TRISCEND II pivotal trial of the EVOQUE replacement system. In the United States, in December 2022, the Food and Drug Administration approved continued access allowing hospitals that were involved in the clinical trial to continue to have EVOQUE as a therapy option. In addition, enrollment continued in the CLASP IITR pivotal trial with the PASCAL repair system in patients with symptomatic, severe tricuspid regurgitation.
Surgical Structural Heart Sales
Net sales of Surgical products increased for the three and six months ended June 30, 2023 primarily due to increased sales of the INSPIRIS RESILIA aortic valve, primarily in the United States and Europe, and the MITRIS RESILIA valve, primarily in the United States. These increases were partially offset by the impact of foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $2.1 million for the three months ended June 30, 2023, primarily due to the weakening of the Japanese yen against the United States dollar, and $10.5 million for the six months ended June 30, 2023, primarily due to the weakening of the Japanese yen and the Euro against the United States dollar.
We are continuing to enroll patients in our MOMENTIS clinical study to demonstrate the durability of RESILIA tissue in the mitral position.
Critical Care Sales
Net sales of Critical Care products increased for the three and six months ended June 30, 2023 primarily due to:
- increased demand for our enhanced surgical recovery products and pressure monitoring products, primarily in the United States;
partially offset by:
- foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $2.5 million and $11.3 million for the three and six months ended June 30, 2023, respectively, primarily due to the weakening of the Japanese yen against the United States dollar.
Gross Profit
The decrease in gross profit as a percentage of net sales for the three and six months ended June 30, 2023 was driven by a 2.2 percentage point and 1.5 percentage point decrease, respectively, from the impact of foreign currency exchange rate fluctuations, primarily the strengthening of the United States dollar against the Euro.
Selling, General, and Administrative ("SG&A") Expenses
SG&A expenses increased for the three and six months ended June 30, 2023 primarily due to higher field-based personnel-related costs, primarily TAVR and TMTT in the United States, and higher performance-based compensation. Foreign currency exchange rate fluctuations decreased expenses by $1.4 million and $9.9 million for the three and six months ended June 30, 2023, respectively, due to the strengthening of the United States dollar against multiple foreign currencies.
Research and Development ("R&D") Expenses
R&D expenses increased for the three and six months ended June 30, 2023 primarily due to continued investments in our transcatheter aortic valve innovations, including increased clinical trial activity.
Intellectual Property Agreement and Litigation Expense
We incurred intellectual property agreement and litigation expenses of $147.9 million and $6.1 million during the three months ended June 30, 2023 and 2022, respectively, and $191.4 million and $13.2 million during the six months ended June 30, 2023 and 2022, respectively. On April 12, 2023, we entered into an Intellectual Property Agreement (the "Intellectual Property Agreement") with Medtronic, Inc. ("Medtronic") and recorded a $37.0 million charge in March 2023 and a $139.0 million charge in April 2023. For more information, see Note 3 to the "Consolidated Condensed Financial Statements."
Change in Fair Value of Contingent Consideration Liabilities
The change in fair value of contingent consideration liabilities resulted in a gain of $26.9 million and $26.2 million for the three and six months ended June 30, 2023, respectively, and a gain of $20.9 million and $23.8 million for the three and six months ended June 30, 2022, respectively. The gains in 2023 and 2022 were each due to changes in projected probabilities and timing of milestone achievement and the projected timing of cash inflows. For further information, see Note 7 to the "Consolidated Condensed Financial Statements."
Other Income, net
(in millions)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Foreign exchange (gains) losses, net | $ | (2.5) | $ | 1.8 | $ | (3.8) | $ | 4.3 | |||||||||||||||
| Loss (gain) on investments | 0.3 | (0.8) | 0.2 | 0.1 | |||||||||||||||||||
| Gain on insurance settlement | — | (3.8) | — | (3.8) | |||||||||||||||||||
| Other | — | (1.5) | (0.2) | (1.6) | |||||||||||||||||||
| Other income, net | $ | (2.2) | $ | (4.3) | $ | (3.8) | $ | (1.0) |
The net foreign exchange (gains) losses relate to the foreign currency fluctuations primarily in our global trade and intercompany receivable and payable balances, partially offset by the gains and losses on foreign currency derivative instruments.
The loss (gain) 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.
The gain on insurance settlement in the three and six months ended June 30, 2022 relates to an insurance recovery for
damaged cargo shipments of heart valves.
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 9.7% and 12.5% for the three months ended June 30, 2023 and 2022, respectively, and 12.4% and 13.4% for the six months ended June 30, 2023 and 2022, respectively. The decrease in the effective rate between the six months ended June 30, 2023 and 2022 is primarily due to an increase in the benefit from the Federal research and development credit and the Intellectual Property Agreement with Medtronic (see Note 3 to the "Consolidated Condensed Financial Statements"), partially offset by a reduced tax benefit from employee share-based compensation. In addition, the effective rates for the six months ended June 30, 2023 and 2022 were lower than the federal statutory rate of 21% primarily due to (1) foreign earnings taxed at lower rates, (2) Federal and California research and development credits, and (3) the tax benefit from employee share-based compensation.
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 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 Singapore and Japan and between Switzerland and Japan covering tax years 2015 through 2019. We have filed to renew all the APAs which cover transactions with Japan for the years 2020 and forward. An APA between Switzerland and Japan covering tax years 2020 through 2024 was executed in 2021. The execution of some or all these APA renewals depends on many variables outside of our control.
The audits of our United States federal income tax returns through 2014 have been closed. The IRS audit field work for the 2015 through 2017 tax years was completed during the second quarter of 2021, except for certain transfer pricing and related matters. The IRS began its examination of the 2018 through 2020 tax years during the first quarter of 2022.
The audits of our material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, we continue to address matters in India for years from 2010 and on.
During 2021, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015-2017 tax years relating to transfer pricing involving Surgical/TAVR intercompany royalty transactions between our United States and Switzerland subsidiaries. The NOPA proposed an increase to our United States taxable income, which could result in additional tax expense for this period of approximately $220 million and reflects a significant departure from the transfer pricing methods we had previously agreed upon with the IRS for these types of transactions. We have disagreed with the NOPA and submitted a formal protest on the matter during the fourth quarter of 2021. During the second quarter of 2022, we received the IRS's rebuttal to our protest and were notified that the case had been transferred to the IRS Independent Office of Appeals ("Appeals"). The opening conference was held with Appeals during March 2023 and discussions with Appeals continued throughout the second quarter of 2023. While Appeals still maintains jurisdiction over the matter as of June 30, 2023, we and Appeals have now concluded that a satisfactory resolution of this matter at the administrative level is not possible.
We now plan to vigorously contest the proposed adjustments through the judicial process. Final resolution of this matter is not likely within the next 12 months. We believe the amounts previously accrued related to this uncertain tax position are appropriate based on prior experience and interpretation and application of relevant tax law and accounting standards to our facts and, accordingly, have not accrued any additional amount based on the NOPA received or as a result of the Appeals proceedings to date. Nonetheless, the outcome of the judicial process cannot be predicted with certainty, and it is possible that the outcome of that process could have a material impact on our consolidated financial statements. As noted below, similar material tax disputes may arise for the 2018-2023 tax years. While no payment of any amount related to the NOPA has yet been required, we made a partial deposit in November 2022 to prevent the further accrual of interest on that portion of any potential deficiency that may ultimately be sustained.
Surgical/TAVR intercompany royalty transactions covering tax years 2018-2023 that were not resolved under the APA program remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of June 30, 2023. We have considered this information, as well as information regarding the NOPA, the rebuttal and Appeals discussions described above, in our evaluation of our uncertain tax positions. The impact of these unresolved transfer pricing matters, net of any correlative tax adjustments, 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 uncertain tax positions as a long-term liability.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes, among other provisions, changes to the U.S. corporate income tax system, including a 15% minimum tax based on “adjusted financial statement income,” which is effective for tax years beginning after December 31, 2022, and a one percent excise tax on net repurchases of stock after December 31, 2022. Based upon our analysis to date, we do not expect the IRA will have a material impact on our consolidated financial statements.
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 and long-term requirements of working capital, capital expenditures, and other financial commitments. 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 June 30, 2023, cash and cash equivalents and short-term investments held in the United States and outside of the United States were $1,177.3 million and $332.0 million, respectively.
We have a Five-year Credit Agreement (the "Credit Agreement") which provides for a $750.0 million multi-currency unsecured revolving credit facility and matures on July 15, 2027. We may increase the amount available under the Credit Agreement by up to an additional $250.0 million in the aggregate and extend the maturity date for an additional year, subject to agreement of the lenders. As of June 30, 2023, no amounts were 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 June 30, 2023, the carrying value of the 2018 Notes was $596.7 million.
From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. 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 six months ended June 30, 2023, under the Board authorized repurchase program, we repurchased a total of 3.2 million shares at an aggregate cost of $249.1 million. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” for additional information about our share repurchase program. As of June 30, 2023, we had remaining authority to purchase $666.5 million of our common stock under the share repurchase program.
On April 12, 2023, we entered into the Intellectual Property Agreement with Medtronic pursuant to which the parties agreed to a 15-year global covenant not to sue ("CNS") for infringement of certain patents in the structural heart space owned or controlled by each other. In consideration for the global CNS, we paid Medtronic a one-time, lump sum payment of $300.0 million and will pay annual royalty payments that are tied to net sales of certain Edwards products. For more information, see Note 3 to the "Consolidated Condensed Financial Statements."
On February 28, 2023, we acquired a majority equity interest in a medical technology company. In addition, we amended and restated our previous option agreement with the medical technology company. The option agreement gives us the option to acquire the remaining equity interest in the medical technology company. For more information, see Note 6 to the "Consolidated Condensed Financial Statements."
At June 30, 2023, there had been no material changes in our cash requirements from known contractual and other obligations, including commitments for capital expenditures, as disclosed 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, 2022.
Consolidated Cash Flows - For the six months ended June 30, 2023 and 2022:
Net cash flows provided by operating activities of $347.7 million for the six months ended June 30, 2023 decreased $277.8 million over the same period last year primarily due to a $300.0 million payment in 2023 under the Intellectual Property Agreement, partially offset by a higher bonus payout in 2022 associated with 2021 performance.
Net cash provided by investing activities of $70.7 million for the six months ended June 30, 2023 consisted primarily of net proceeds from investments of $371.8 million, partially offset by a payment of $141.2 million to acquire a majority interest in another company (see Note 6 to the "Consolidated Condensed Financial Statements") and capital expenditures of $109.4 million.
Net cash provided by investing activities of $359.1 million for the six months ended June 30, 2022 consisted primarily of net proceeds from investments of $558.4 million, partially offset by capital expenditures of $115.8 million.
Net cash used in financing activities of $154.5 million for the six months ended June 30, 2023 consisted primarily of purchases of treasury stock of $256.8 million, partially offset by proceeds from stock plans of $102.7 million.
Net cash used in financing activities of $676.2 million for the six months ended June 30, 2022 consisted primarily of purchases of treasury stock of $760.7 million, partially offset by proceeds from stock plans of $86.5 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 sales 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 34-36 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, 2022. 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, 2022. There have been no material 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 June 30, 2023, we had $1.2 billion of investments in debt securities, of which $0.7 billion were long-term. In addition, we had $110.4 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, a decline in the investments' value may occur, resulting in unrealized or realized losses. See Note 4 to the "Consolidated Condensed Financial Statements" for additional information.
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 June 30, 2023. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of June 30, 2023 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 June 30, 2023 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 voluntarily notified the United States Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") during 2021 that we have engaged outside counsel to conduct this review and investigation. We have provided status updates to the SEC and DOJ since that time. 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 amount has been accrued. We intend to 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 sanctions are 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, 2022. 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) | |||||||||||||||||||||||||||||||
| April 1, 2023 through April 30, 2023 | 258 | $ | 82.77 | — | $ | 666.5 | |||||||||||||||||||||||||||||
| May 1, 2023 through May 31, 2023 | 83,511 | 88.49 | — | 666.5 | |||||||||||||||||||||||||||||||
| June 1, 2023 through June 30, 2023 | — | — | — | 666.5 | |||||||||||||||||||||||||||||||
| Total | 83,769 | 88.48 | — | ||||||||||||||||||||||||||||||||
(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) In July 2022, the Board of Directors approved a stock repurchase program providing for up to $1.5 billion of repurchases of our common stock, effective July 28, 2022. Repurchases under the program may be made on the open market, including pursuant to a Rule 10b5-1 plan, and in privately negotiated transactions. The repurchase program does not have an expiration date.
Item 5. Other Information
Rule 10b5-1 Trading Plans
On May 30, 2023, Daveen Chopra, Corporate Vice President of TMTT, entered into a 10b5-1 trading plan (the “Plan”) intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act. The Plan provides for the potential sale of 20,500 shares of the Company’s stock commencing September 6, 2023. The Plan terminates on the earlier of March 6, 2024 or the date all shares are sold.
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: | July 28, 2023 | By: | /s/ SCOTT B. ULLEM | ||||||||
| Scott B. Ullem Chief Financial Officer (Principal Financial Officer; Duly Authorized Officer) | |||||||||||
| Date: | July 28, 2023 | By: | /s/ ROBERT W.A. SELLERS | ||||||||
| Robert W.A. Sellers Corporate Controller (Principal Accounting Officer) |