filings.toolsEdwards Lifesciences 10-Q 2024-06-30
Filed 2024-07-31. 8 sections, 204K 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, 2024
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 26, 2024 was 602.4 million.
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended June 30, 2024
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 safe harbor provisions. 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 negatives 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," "potential," "possible," "diligence," "industry-leading," "compliant," "indications," or "early feedback" or other forms of these words or similar words or expressions or the negatives 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 ability to complete or realize the anticipated benefits of the sale of our critical care product group; our ability to develop new products and avoid manufacturing and quality issues; risks related to our recent pending acquisitions, including our ability to close the transactions in a timely manner or at all; clinical trial or commercial results or new product approvals and therapy adoption; the impact of domestic and global conditions; competition 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; the impact of public health crises; 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, 2023, as amended in this report, and as such risks and uncertainties may be further 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, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 1,644.5 | $ | 1,136.1 | |||||||
| Short-term investments (Note 5) | 345.3 | 500.5 | |||||||||
| Accounts receivable, net of allowances of $13.9 and $8.3, respectively | 778.3 | 771.5 | |||||||||
| Other receivables | 56.1 | 56.6 | |||||||||
| Inventories (Note 2) | 1,024.7 | 918.3 | |||||||||
| Prepaid expenses | 110.2 | 128.8 | |||||||||
| Other current assets | 252.1 | 224.9 | |||||||||
| Current assets of discontinued operations (Note 4) | 304.8 | 299.0 | |||||||||
| Total current assets | 4,516.0 | 4,035.7 | |||||||||
| Long-term investments (Note 5) | 353.3 | 583.9 | |||||||||
| Property, plant, and equipment, net | 1,640.1 | 1,592.8 | |||||||||
| Operating lease right-of-use assets | 92.8 | 84.4 | |||||||||
| Goodwill | 1,151.0 | 1,152.5 | |||||||||
| Other intangible assets, net | 417.1 | 399.4 | |||||||||
| Deferred income taxes | 832.6 | 749.4 | |||||||||
| Other assets (Note 2) | 789.8 | 463.1 | |||||||||
| Non-current assets of discontinued operations (Note 4) | 306.6 | 302.0 | |||||||||
| Total assets | $ | 10,099.3 | $ | 9,363.2 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 185.9 | $ | 186.6 | |||||||
| Accrued and other liabilities (Note 2) | 902.4 | 858.2 | |||||||||
| Operating lease liabilities | 21.5 | 22.9 | |||||||||
| Current liabilities of discontinued operations (Note 4) | 107.2 | 127.7 | |||||||||
| Total current liabilities | 1,217.0 | 1,195.4 | |||||||||
| Long-term debt | 597.3 | 597.0 | |||||||||
| Taxes payable | 1.1 | 80.6 | |||||||||
| Operating lease liabilities | 74.2 | 65.2 | |||||||||
| Uncertain tax positions | 343.2 | 335.0 | |||||||||
| Litigation settlement accrual | 74.8 | 94.2 | |||||||||
| Other liabilities | 257.1 | 251.3 | |||||||||
| Non-current liabilities of discontinued operations (Note 4) | 30.0 | 25.1 | |||||||||
| Total liabilities | 2,594.7 | 2,643.8 | |||||||||
| 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, 653.5 and 650.5 shares issued, and 602.3 and 601.1 shares outstanding, respectively | 653.5 | 650.5 | |||||||||
| Additional paid-in capital | 2,476.3 | 2,274.4 | |||||||||
| Retained earnings | 9,710.6 | 8,992.4 | |||||||||
| Accumulated other comprehensive loss (Note 12) | (220.2) | (242.8) | |||||||||
| Treasury stock, at cost, 51.2 and 49.4 shares, respectively | (5,182.8) | (5,024.5) | |||||||||
| Total Edwards Lifesciences Corporation stockholders' equity | 7,437.4 | 6,650.0 | |||||||||
| Noncontrolling interest | 67.2 | 69.4 | |||||||||
| Total stockholders' equity | 7,504.6 | 6,719.4 | |||||||||
| Total liabilities and equity | $ | 10,099.3 | $ | 9,363.2 |
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, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | 1,385.9 | $ | 1,295.5 | $ | 2,732.8 | $ | 2,533.2 | |||||||||||||||
| Cost of sales | 285.3 | 256.9 | 581.6 | 495.9 | |||||||||||||||||||
| Gross profit | 1,100.6 | 1,038.6 | 2,151.2 | 2,037.3 | |||||||||||||||||||
| Selling, general, and administrative expenses | 450.8 | 410.4 | 883.6 | 792.4 | |||||||||||||||||||
| Research and development expenses | 272.6 | 243.7 | 530.4 | 478.5 | |||||||||||||||||||
| Intellectual property agreement and certain litigation expenses (Note 3) | 8.1 | 147.9 | 17.0 | 191.4 | |||||||||||||||||||
| Change in fair value of contingent consideration liabilities (Note 7) | — | (26.9) | — | (26.2) | |||||||||||||||||||
| Operating income, net | 369.1 | 263.5 | 720.2 | 601.2 | |||||||||||||||||||
| Interest income, net | (15.5) | (9.1) | (32.0) | (17.7) | |||||||||||||||||||
| Other income, net | (2.0) | (2.5) | (7.7) | (3.7) | |||||||||||||||||||
| Income from continuing operations before provision for income taxes | 386.6 | 275.1 | 759.9 | 622.6 | |||||||||||||||||||
| Provision for income taxes | 20.2 | 20.9 | 66.8 | 66.2 | |||||||||||||||||||
| Net income from continuing operations | 366.4 | 254.2 | 693.1 | 556.4 | |||||||||||||||||||
| (Loss) income from discontinued operations, net of tax | (1.4) | 51.3 | 22.9 | 89.6 | |||||||||||||||||||
| Net income | 365.0 | 305.5 | 716.0 | 646.0 | |||||||||||||||||||
| Net loss attributable to noncontrolling interest | (1.3) | (1.6) | (2.2) | (1.6) | |||||||||||||||||||
| Net income attributable to Edwards Lifesciences Corporation | $ | 366.3 | $ | 307.1 | $ | 718.2 | $ | 647.6 | |||||||||||||||
| Share information (Note 13) | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Continuing operations | $ | 0.61 | $ | 0.42 | $ | 1.15 | $ | 0.92 | |||||||||||||||
| Discontinued operations | $ | — | $ | 0.09 | $ | 0.04 | $ | 0.15 | |||||||||||||||
| Basic earnings per |
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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. 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. 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"), and Surgical Structural Heart ("Surgical").
On June 3, 2024, we entered into a definitive agreement to sell our Critical Care product group ("Critical Care") to Becton, Dickinson and Company. We expect to complete the sale of Critical Care by the end of the third quarter of 2024 in an all cash-transaction for $4.2 billion, subject to certain customary adjustments as set forth in the agreement. We believe that the planned sale will enable us to pursue expanded opportunities for TAVR, TMTT, and Surgical patients, as well as new investments in interventional heart failure technologies. We analyzed the quantitative and qualitative factors relevant to the divestiture of Critical Care, including its significance to our overall net income and total assets, and determined that the conditions for discontinued operations presentation with respect to Critical Care had been met. As such, the historical financial condition and results of Critical Care have been reflected as discontinued operations in our consolidated condensed financial statements. Prior period amounts have been adjusted to reflect the discontinued operations presentation. Our discussion and analysis of our results of operations is reflective of our continuing operations. See Note 4 to the Consolidated Condensed Financial Statements for further information.
Financial Highlights
Our net sales for the first six months of 2024 were $2.7 billion, representing an increase of $199.6 million compared to the first six months of 2023, driven primarily by sales of our TAVR products.
Our gross profit increased in the six months ended June 30, 2024, driven by our sales growth. Gross profit as a percentage of sales decreased primarily due to foreign currency rate fluctuations. The increase in our diluted earnings per share in the six months ended June 30, 2024 was driven by an after-tax charge of $142.2 million in the six months ended June 30, 2023 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 innovations, and we are committed to defending our intellectual property in support of those developments. Our vision for growth is to treat patients with both valvular and non-valvular structural heart disease, such as heart failure, which is a natural progression of the disease for many patients suffering from aortic stenosis and mitral and tricuspid regurgitation. In the first six months of 2024, we invested 19.4% 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 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 816.8 | $ | 761.9 | $ | 54.9 | 7.2 | % | $ | 1,609.7 | $ | 1,487.0 | $ | 122.7 | 8.3 | % | |||||||||||||||||||||||||||||||
| Europe | 335.6 | 301.9 | 33.7 | 11.2 | % | 665.3 | 598.6 | 66.7 | 11.2 | % | |||||||||||||||||||||||||||||||||||||
| Japan | 87.4 | 94.1 | (6.7) | (7.2) | % | 174.1 | 182.8 | (8.7) | (4.7) | % | |||||||||||||||||||||||||||||||||||||
| Rest of World | 146.1 | 137.6 | 8.5 | 6.2 | % | 283.7 | 264.8 | 18.9 | 7.1 | % | |||||||||||||||||||||||||||||||||||||
| Outside of the United States | 569.1 | 533.6 | 35.5 | 6.7 | % | 1,123.1 | 1,046.2 | 76.9 | 7.3 | % | |||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,385.9 | $ | 1,295.5 | $ | 90.4 | 7.0 | % | $ | 2,732.8 | $ | 2,533.2 | $ | 199.6 | 7.9 | % |
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 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Transcatheter Aortic Valve Replacement | $ | 1,038.6 | $ | 991.6 | $ | 47.0 | 4.7 | % | $ | 2,046.5 | $ | 1,939.5 | $ | 107.0 | 5.5 | % | |||||||||||||||||||||||||||||||
| Transcatheter Mitral and Tricuspid Therapies | 83.0 | 47.6 | 35.4 | 74.7 | % | 155.9 | 89.2 | 66.7 | 74.9 | % | |||||||||||||||||||||||||||||||||||||
| Surgical Structural Heart | 264.3 | 256.3 | 8.0 | 3.1 | % | 530.4 | 504.5 | 25.9 | 5.1 | % | |||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,385.9 | $ | 1,295.5 | $ | 90.4 | 7.0 | % | $ | 2,732.8 | $ | 2,533.2 | $ | 199.6 | 7.9 | % |
Transcatheter Aortic Valve Replacement Sales
Net sales of TAVR products increased for the three and six months ended June 30, 2024 driven by:
- higher sales of the Edwards SAPIEN platform in 2024, primarily the Edwards SAPIEN 3 Ultra RESILIA valve in the United States and Japan, and the Edwards SAPIEN 3 Ultra valve in Europe;
partially offset by:
- foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $10.4 million and $12.5 million for the three and six months ended June 30, 2024, respectively, primarily due to the weakening of the Japanese yen against the United States dollar.
While our global competitive position did not meaningfully change during the first six months of 2024, we experienced lower-than-expected sales growth of TAVR products. This was due to a combination of regional pressure on our competitive position and reduction in procedures with certain hospital centers in the United States related to a variety of factors including, but not limited to, resources and priorities.
In January 2024, we completed patient treatment in our PROGRESS pivotal trial, studying the treatment of moderate aortic stenosis patients, and we received CE Mark approval for the Edwards SAPIEN 3 Ultra RESILIA valve in Europe.
Transcatheter Mitral and Tricuspid Therapies Sales
Net sales of TMTT products increased for the three and six months ended June 30, 2024 primarily due to higher sales of our PASCAL transcatheter edge-to-edge repair ("TEER") system and our initial launch of the EVOQUE tricuspid valve replacement system in the United States and Europe.
In mitral replacement, we completed enrollment in the ENCIRCLE pivotal trial for SAPIEN M3 and, in January 2024, we received FDA approval for a SAPIEN M3 continued access program*.* In February 2024, we received FDA approval for EVOQUE for the treatment of tricuspid regurgitation.
Surgical Structural Heart Sales
Net sales of Surgical products increased for the three and six months ended June 30, 2024 primarily due to higher sales of the INSPIRIS RESILIA aortic valve in the United States and Europe, the MITRIS RESILIA valve in the United States and Europe, and the KONECT RESILIA tissue valved conduit in the United States.
We have completed enrollment in the United States and Canada of patients in our MOMENTIS clinical study to demonstrate the durability of RESILIA tissue in the mitral position.
Gross Profit
The decrease in gross profit as a percentage of net sales for the three and six months ended June 30, 2024 was driven by a 0.7 percentage point and 1.4 percentage point negative impact, respectively, from foreign currency rate fluctuations, primarily due to the strengthening of the United States dollar against the Japanese yen, partially offset by the weakening 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, 2024 primarily due to higher field-based personnel-related costs in support of our growth strategy initiatives, primarily in the United States and Europe. Foreign currency exchange rate fluctuations decreased expenses by $4.2 million and $5.7 million for the three and six months ended June 30, 2024, respectively, primarily due to the strengthening of United States dollar against the Japanese yen.
Research and Development ("R&D") Expenses
R&D expenses increased for the three and six months ended June 30, 2024 primarily due to continued investments in our aortic transcatheter valve innovations, including increased clinical trial activity.
Intellectual Property Agreement and Certain Litigation Expenses
We incurred certain litigation expenses related to intellectual property litigation and tax litigation of $8.1 million and $8.9 million during the three months ended June 30, 2024 and 2023, respectively, and $17.0 million and $15.4 million during the six months ended June 30, 2024 and 2023, respectively. Also, 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. The gain in 2023 was due to changes in projected probabilities and timing of milestone achievement and the projected timing of cash inflows. As of June 30, 2023, the probability of milestone achievement was determined to be 0% and, accordingly, the contingent consideration liability was zero. For further information, see Note 7 to the Consolidated Condensed Financial Statements.
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 attributable to continuing operations was 5.2% and 7.6% for the three months ended June 30, 2024 and 2023, respectively, and 8.8% and 10.6% for the six months ended June 30, 2024 and 2023, respectively. The decrease in the effective rate between the six months ended June 30, 2024 and 2023 was primarily due to an increase in tax benefits from foreign earnings taxed at lower rates and favorable global income tax audit settlements. In addition, the effective rates for the six months ended June 30, 2024 and 2023 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.
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. 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 taxing 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 materially different from 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 believe that adequate amounts of tax and related penalty and interest have been provided for any adjustments that may result from these uncertain tax positions.
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 three of the APAs with Japan for the years 2020 and forward. An APA between Switzerland and Japan covering tax years 2020 through 2024 was executed in 2021. An APA between the United States and Japan covering tax years 2020 through 2024 was executed in 2023. The APA renewal between Singapore and Japan covering tax years 2020 through 2026 is pending.
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 is currently examining the 2018 through 2020 tax years. The audits of our material state, local, and foreign income tax matters have been concluded for years through 2015.
During 2021, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015 through 2017 tax years relating to transfer pricing involving Surgical/TAVR intercompany royalty transactions between our United States and Switzerland subsidiaries. The NOPA proposed a substantial increase to our United States taxable income, which could result in additional tax expense for the 2015 through 2017 period of approximately $240 million and represented a departure from a transfer pricing method we had previously agreed upon with the IRS. We have disagreed with the NOPA and pursued an administrative appeal with the IRS Independent Office of Appeals ("Appeals"). The Appeals process culminated in the third quarter of 2023 when we and Appeals concluded that a satisfactory resolution of the matter at the administrative level was not possible.
During the fourth quarter of 2023, Appeals issued a notice of deficiency ("NOD") increasing our 2015 through 2017 United States federal income tax in amounts resulting from the income adjustments previously reflected in the NOPA. The additional tax sought in excess of our filing position is $269.3 million before consideration of interest and a repatriation tax
offset.
We plan to vigorously contest the additional tax claimed by the IRS 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 for a number of reasons, including the interpretation and application of relevant tax law and accounting standards to our facts and, accordingly, have not accrued any additional amount based on the NOD and other 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 through 2023 tax years. While no payment of any amount related to the NOPA or NOD has yet been required, we made a partial deposit with the IRS of $75 million in November 2022 to prevent the further accrual of interest on that portion of any additional tax we may ultimately be found to owe. In March 2024, we made an additional deposit with the IRS of $305 million to further mitigate interest on potential tax liabilities and interest thereon while we prepare to contest through the judicial process the IRS's entitlement to any of the additional tax claimed by the IRS.
Surgical/TAVR intercompany royalty transactions covering tax years 2018 through 2023 remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of June 30, 2024. We have considered this information, as well as information regarding the NOD and other proceedings 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.
During the first quarter of 2024, we received a notice of assessment from the Israel Tax Authority (“ITA”) wherein the ITA claimed that we owe approximately $110 million of tax excluding interest and penalties in connection with a claimed 2017 transfer of intellectual property. We maintain that we did not transfer intellectual property outside of Israel and intend to vigorously defend that position through administrative proceedings including a formal appeal of the assessment expected to be filed in the third quarter of 2024. If necessary, we will defend that position through judicial proceedings. There can be no assurance that this matter will be resolved in our favor and an adverse outcome could have a material effect on our consolidated financial statements.
Additionally, many countries are implementing some or all the Organization for Economic Co-operation and Development's Base Erosion and Profit Shifting Pillar Two rules ("Pillar Two") that impose a global minimum tax of 15%. Under Pillar Two, a company is required to determine a combined effective tax rate for all entities located in a jurisdiction. If the jurisdictional effective tax rate is less than 15%, a top-up tax will be due to bring the jurisdictional effective tax rate up to 15%. We are continuing to monitor the implementation of Pillar Two by individual countries and the potential effects of Pillar Two on our effective tax rate. We do not expect Pillar Two to have a material impact on our consolidated financial statements in 2024. The provisions effective in 2025 may have a material impact on our consolidated financial statements in 2025 and future years, depending on future legislation, regulatory guidance, and business events.
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, 2024, cash and cash equivalents and short-term investments held in the United States and outside of the United States were $1.5 billion and $527.9 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, 2024, 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. We may redeem the 2018 Notes, in whole or in part, at any time and from time to time at specified redemption prices. As of June 30, 2024, we have not elected to redeem any of the 2018 Notes. As of June 30, 2024, the carrying value of the 2018 Notes was $597.3 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, 2024, under the Board authorized repurchase program, we repurchased a total of 1.7 million shares at an aggregate cost of $150.0 million. As of June 30, 2024, we had remaining authority to purchase $898.5 million of our common stock under the share repurchase program.
In July 2024, we entered into agreements and plans of mergers to acquire multiple medical device companies for a total aggregate cash purchase price of $1.5 billion, subject to certain adjustments, of which $115.0 million was paid in July 2024. These agreements include up to an additional $745.0 million of potential payments upon achievement of certain regulatory, performance, and sales milestones. For more information, see Note 16 to the Consolidated Condensed Financial Statements.
In June 2024, we entered into a definitive agreement to sell our Critical Care product group ("Critical Care") to Becton, Dickinson and Company. We expect to complete the sale of Critical Care by the end of the third quarter of 2024 in an all cash-transaction for $4.2 billion, subject to certain customary adjustments as set forth in the agreement.
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 are paying annual royalties that are tied to net sales of certain Edwards products. For more information, see Note 3 to the Consolidated Condensed Financial Statements.
We have purchased options to acquire and have agreed to provide promissory notes to various entities. These arrangements could result in additional cash outlays in the future should we decide to exercise the options or should the entities
draw on the promissory notes.
At June 30, 2024, 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, 2023.
Consolidated Cash Flows - For the six months ended June 30, 2024 and 2023:
Net cash flows provided by operating activities of $318.0 million for the six months ended June 30, 2024 decreased $29.7 million over the same period last year primarily due to a $305.1 million tax deposit we made in 2024 to mitigate interest on potential tax liabilities we are contesting through the judicial process (see Note 14 to the Consolidated Condensed Financial Statements), partially offset by a $300.0 million payment in the six months ended June 30, 2023 under an intellectual property agreement.
Net cash provided by investing activities of $187.9 million for the six months ended June 30, 2024 consisted primarily of net proceeds from investments of $391.6 million, partially offset by capital expenditures of $150.7 million.
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 and capital expenditures of $109.4 million.
Net cash used in financing activities of $34.9 million for the six months ended June 30, 2024 consisted primarily of purchases of treasury stock of $158.3 million, partially offset by proceeds from stock plans of $116.4 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.
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 38-40 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, 2023. 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, 2023. 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, 2024, we had $575.0 million of investments in debt securities, of which $229.7 million were long-term. In addition, we had $123.6 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 5 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, 2024. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of June 30, 2024 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, 2024 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
Please see Part I, Item 1, Note 11 of the “Consolidated Condensed Financial Statements” of this Quarterly Report on Form 10-Q for a description of our legal proceedings, which is incorporated by reference herein.
Item 1A. Risk Factors
Our business and assets are subject to varying degrees of risk and uncertainty that can be affected by a number of factors. An investor should carefully consider the risks described below, as well as those described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business. When any of these events or circumstances occurs, our business, financial condition, results of operations, or prospects could be materially harmed. In that case, the value of our securities could decline and an investor could lose part or all of his or her investment. In addition, forward-looking statements within the meaning of the federal securities laws that are contained in this Quarterly Report on Form 10-Q or in our other filings or statements may be subject to the risks described below and in our Annual Report on Form 10-K as well as other risks and uncertainties. Please read the cautionary notice regarding forward-looking statements.
In connection with us no longer pursuing a spin-off of our Critical Care product group, the risk factors titled “Assuming the spin-off is successfully completed, the newly spun-off Critical Care company as a standalone public company may not deliver the returns that we or the shareholders anticipate” and “We may not be able to complete the announced spin-off of our Critical Care product group at all, or within the timeframes we anticipate, or pursuant to the tax-free structure that we anticipate, and we may not realize some or all of the expected benefits of this transaction” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 are no longer deemed material. In addition, the risk factor titled “If we identify underperforming operations or products or if there are unforeseen operating difficulties and expenditures in connection with business acquisitions or strategic alliances, we may be required, from time to time, to recognize charges, which could be substantial and which could adversely affect our results of operations” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 is hereby replaced in its entirety with the risk factor titled “Failure to successfully integrate acquired businesses, technologies or strategic alliances, or challenges related to the execution of acquisitions or divestitures, as well as liabilities or claims relating to such acquired businesses or divestitures, could adversely affect our business and results of operations,” as set forth below. Except as set forth herein and below, there have been no other material changes to the Company’s risk factors since the Annual Report on Form 10-K for the year ended December 31, 2023.
We may not be able to complete the announced sale of our Critical Care product group in a timely fashion or at all, and we may not realize some or all of the expected benefits of this transaction.
On June 3, 2024, we announced that we had entered into an agreement with Becton, Dickinson and Company (“Purchaser”) pursuant to which we agreed to sell our Critical Care product group to the Purchaser with the intention to close by the end of the third quarter of 2024 (the “Transaction”) and that we are no longer pursuing the previously announced spin-off of our Critical Care product group. In connection with the Transaction, we and the Purchaser must meet certain closing conditions, which include obtaining required regulatory approvals, among others. A failure to satisfy all closing conditions could result in the Transaction not closing in a timely manner or at all, which may adversely affect our business and the price of our common stock. In addition, the occurrence of an event, change, or other circumstance that could give rise to the termination of the agreement could have a material adverse effect on our business and operations. We have incurred, and we expect to continue to incur, significant costs associated with the Transaction, and the total costs may be significantly higher than projected. The Transaction has required, and we expect that it will continue to require, significant resources from us, including but not limited to management’s attention and employee resources. There is no assurance that the closing of the Transaction will occur at all or that we will be able to execute on our strategy or achieve our goals or other expectations after the closing of the Transaction. The Transaction may also have an adverse impact on our operating results and business generally. If we do not close in a timely manner or fail to realize some or all of the anticipated benefits of the Transaction, our business and financial condition may be adversely affected. Additionally, we plan to enter into transition services agreements in connection with the Transaction to provide certain support services, which could divert substantial attention and resources from the operation of our business and have an adverse effect on our business, results of operations, and financial condition.
Failure to successfully integrate acquired businesses, technologies or strategic alliances, or challenges related to the execution of acquisitions or divestitures, as well as liabilities or claims relating to such acquired businesses or divestitures, could adversely affect our business and results of operations.
As part of our strategy we actively manage a portfolio of businesses, technologies, services, and products as well as enter into potential strategic alliances. If we are unable to acquire businesses or technologies or other transactions on a timely basis or at all, we will not be able to execute our strategy and our business and results of operations may be adversely impacted. The integration of acquired businesses and technologies may be costly and may divert significant amounts of resources, including management and employee time and attention, away from the development and commercialization of our other products. Our failure to successfully manage the integration and growth of acquired businesses and technologies and our existing structural heart therapies could have an adverse impact on our business. We may not receive the anticipated benefits of acquisitions despite such expenses and diversion of resources, and acquisitions may not prove to be profitable. Furthermore, we may face unforeseen challenges in executing our strategic plans to expand our products and therapies, which could cause our business and results of operations to suffer.
From time to time, we identify operations and products that are underperforming or that do not fit with our longer-term business strategy, or there may be unforeseen operating difficulties and significant expenditures during the integration of an acquired business, technology, service or product into our existing operations. To the extent that the value of these assets decline, we may be required to write down the value of the assets. We may dispose of these underperforming operations or products or voluntarily cease operations related to a product. In addition, we may be required to record charges or write-downs in connection with acquisitions and divestitures, including charges related to developed technology and/or in-process research and development assets. Any of these events could adversely affect our results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares 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) (a) (b) | |||||||||||||||||||||||||||||||
| April 1, 2024 through April 30, 2024 | 1,396,161 | $ | 86.72 | 1,396,161 | $ | 927.4 | |||||||||||||||||||||||||||||
| May 1, 2024 through May 31, 2024 | 333,496 | 86.72 | 333,496 | 898.5 | |||||||||||||||||||||||||||||||
| June 1, 2024 through June 30, 2024 | — | — | — | 898.5 | |||||||||||||||||||||||||||||||
| Total | 1,729,657 | 86.72 | 1,729,657 | ||||||||||||||||||||||||||||||||
(a) 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. In December 2023, the Board of Directors approved an additional $1.0 billion of repurchases under this program. 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.
(b) In April 2024, we entered into a $150.0 million accelerated share repurchase ("ASR") agreement and received, on April 30, 2024, an initial delivery of 1.4 million shares of our common stock, representing approximately 80 percent of the total contract value. The ASR concluded and on May 29, 2024 we received an additional 0.3 million shares. Shares purchased pursuant to the ASR agreement are presented in the table above in the periods in which they were received.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the second quarter of 2024, any executive officer or director who entered into a 10b5-1 trading plan intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act (each, a "Plan") is listed as follows:
On May 1, 2024, Larry Wood, Corporate Vice President and Group President, Transcatheter Aortic Valve Replacement and Surgical Structural Heart, entered into a Plan providing for the potential sale of 25,000 shares of the Company’s stock commencing August 1, 2024. Mr. Wood's Plan terminates on the earlier of November 5, 2024 or the date all shares are sold.
In addition, on July 26, 2024, Scott B. Ullem, Corporate Vice President, Chief Financial Officer, terminated a Plan that had provided for the potential sale of 67,500 shares of the Company’s stock commencing May 21, 2024. Following the termination date, no remaining shares can be sold pursuant to the Plan.
Amended and Restated Long-Term Stock Incentive Compensation Program
On May 7, 2024, the Company held its 2024 Annual Meeting of Stockholders (the “Annual Meeting”). At the Annual Meeting, the Company’s stockholders approved the amendment and restatement of the Company’s Long-Term Stock Incentive Compensation Program (the “Long-Term Stock Program”). The amendments approved by stockholders included (1) an increase in the total number of shares of the Company’s common stock available for issuance under the Long-Term Stock Program by 6,900,000 shares to a new total share limit of 334,500,000 shares, (2) an increase in the total number of shares of the Company’s common stock available for issuance as restricted stock and restricted stock unit awards under the Long-Term Stock Program by 2,000,000 shares to a new limit on the total number of shares available for these types of awards of 35,600,000 shares, and (3) an extension of the term within which new awards may be granted under the Long-Term Stock Program through February 21, 2034.
The foregoing description of the Long-Term Stock Program amendment is qualified in its entirety by the full text of the Long-Term Stock Program, as amended and restated, which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
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.
- Represents management contract or compensatory plan
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 31, 2024 | By: | /s/ SCOTT B. ULLEM | ||||||||
| Scott B. Ullem Corporate Vice President, Chief Financial Officer (Principal Financial Officer; Duly Authorized Officer) | |||||||||||
| Date: | July 31, 2024 | By: | /s/ ANDREW M. DAHL | ||||||||
| Andrew M. Dahl Senior Vice President, Principal Accounting Officer (Principal Accounting Officer) |