EDWARDS LIFESCIENCES CORPORATION 
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. See "Note Regarding Forward-Looking Statements" preceding Part I, Item 1 in this Quarterly Report on Form 10-Q. We are the global leader in patient-focused medical innovations for structural heart disease, as well as critical care and surgical monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or in intensive care. We conduct operations worldwide and are managed in the following geographical regions:United States ,Europe ,Japan , and Rest of World. Our products are categorized into the following areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. Financial Highlights and COVID-19 [[Image Removed: ew-20210331_g1.jpg]][[Image Removed: ew-20210331_g2.jpg]] The COVID-19 pandemic has adversely impacted and may further adversely impact nearly all aspects of our business and markets, including our workforce and the operations of our customers, suppliers, and business partners. Our priority has been to support our clinician partners, protect the well-being of our employees, and maintain continuous access to our life-saving technologies while offering front-line in-hospital support. Our manufacturing operations have continued to respond to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components. TAVR and Surgical procedure volumes varied greatly since the middle ofMarch 2020 by geography, and even by hospital, as patients and their physicians analyzed the trade-off between aortic stenosis and their concern for COVID-19. In the last few weeks of the first quarter of 2020, procedure volumes related to our TAVR and Surgical products dropped significantly. In Critical Care, there was greater demand inEurope andthe United States for our pressure monitoring products, but demand for other Critical Care products began to decrease at the end of the first quarter of 2020 due to COVID-19. During the first quarter of 2021, COVID-19 stressed the global healthcare system during the winter months. Despite the challenges associated with COVID-19, our net sales for the first three months of 2021 were$1.2 billion , representing an increase of$87.9 million over the first three months of 2020, driven by sales growth of our TAVR products. During the first quarter of 2021,United States TAVR procedures began to grow as COVID-19 hospitalizations decreased and vaccinations increased. We also saw an increased demand for our pressure monitoring products due to elevated hospitalizations at the beginning of the quarter and as hospital capital spending began to show signs of recovery. However, slow vaccination progress outsidethe United States provides uncertainty for the remainder of the year for our net sales outsidethe United States . 23
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Our gross profit increase was driven by our sales growth. As a percentage of sales, our gross margin decreased, driven by the impact of foreign currency exchange rate fluctuations. The increase in our diluted earnings per share was driven by our sales growth. We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, vendors, business partners and distribution channels. The extent to which the COVID-19 global pandemic and measures taken in response thereto impact our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak (including new variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, public acceptance and efficacy of vaccines and other treatments,U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve.
Our success is measured both by the development of innovative products and the
value we bring to our stakeholders. We are committed to developing new
technologies and providing innovative patient care, and we are committed to
defending our intellectual property in support of those developments. While some
evidence collection was slowed during the COVID-19 pandemic, we and the clinical
community are committed to continuing our trials and generating robust evidence.
In the first three months of 2021, we invested 17.0% of our net sales in
research and development.
Results of Operations
Net Sales Trends
(dollars in millions)
Three Months Ended
March 31,
2021 2020 Percent Change Change
United States $ 674.7 $ 667.4 $ 7.3 1.1 %
Europe 280.0 249.3 30.7 12.4 %
Japan 132.3 110.0 22.3 20.2 %
Rest of World 129.6 102.0 27.6 27.0 %
International 541.9 461.3 80.6 17.5 %
Total net sales $ 1,216.6 $ 1,128.7 $ 87.9 7.8 %
International net sales include the impact of foreign currency exchange rate
fluctuations. The impact of foreign currency exchange rate fluctuations on net
sales is not necessarily indicative of the impact on net income due to the
corresponding effect of foreign currency exchange rate fluctuations on
international manufacturing and operating costs, and our hedging activities.
Net Sales by Product Group
(dollars in millions)
Three Months Ended
March 31,
2021 2020 Percent Change Change
Transcatheter Aortic Valve Replacement $ 791.7 $ 742.2 $ 49.5 6.7 %
Transcatheter Mitral and Tricuspid Therapies 16.3 10.5 5.8 56.7 %
Surgical Structural Heart 213.0 193.4 19.6 10.1 %
Critical Care 195.6 182.6 13.0 7.1 %
Total net sales $ 1,216.6 $ 1,128.7 $ 87.9 7.8 %
24-------------------------------------------------------------------------------- Table of Contents Transcatheter Aortic Valve Replacement [[Image Removed: ew-20210331_g3.jpg]] Net sales of TAVR products increased for the three months endedMarch 31, 2021 driven by:
•higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory
approval in
•foreign currency exchange rate fluctuations, which increased international net sales by$18.0 million due primarily to the strengthening of the Euro againstthe United States dollar; and •higher sales of the Edwards SAPIEN 3 valve inJapan , driven by strong therapy adoption; partially offset by: •lower sales of the Edwards SAPIEN 3 valve inthe United States , as patients adopted the SAPIEN 3 Ultra System. InApril 2021 , we (1) received approval for aU.S. pivotal trial for TAVR in moderate aortic stenosis patients, (2) received approval inJapan to begin treating low-risk patients with SAPIEN 3, and (3) received SAPIEN 3 CE Mark approval to begin treating patients with a previously repaired or replaced valve in the pulmonic position. 25 -------------------------------------------------------------------------------- Table of Contents Transcatheter Mitral and Tricuspid Therapies [[Image Removed: ew-20210331_g4.jpg]] Net sales of TMTT products increased for the three months endedMarch 31, 2021 due primarily to continued adoption of our PASCAL platform and activation of more centers acrossEurope . This quarter we progressed in the enrollment of our three CLASP pivotal trials for PASCAL. We have also begun treating patients with EVOQUE in the TRISCEND II randomized pivotal study. This study will evaluate the safety and effectiveness of the EVOQUE tricuspid valve replacement system for patients with severe tricuspid regurgitation. In addition, the first patients were recently treated with our next generation transcatheter mitral replacement system, called EVOQUE Eos, through the MISCEND study. This study will evaluate the safety and performance of EVOQUE Eos, which is designed to advance the treatment of patients with mitral regurgitation with a low-profile valve delivered through a sub 30 french transfemoral delivery system. Surgical Structural Heart [[Image Removed: ew-20210331_g5.jpg]] 26 -------------------------------------------------------------------------------- Table of Contents Net sales of Surgical products increased for the three months endedMarch 31, 2021 due primarily to
•increased sales of the INSPIRIS RESILIA aortic valve and the KONECT aortic
valved conduit, primarily in
•foreign currency exchange rate fluctuations, which increased international net sales by$6.4 million due primarily to the strengthening of the Euro againstthe United States dollar. InJanuary 2021 , we received regulatory approval inJapan for our MITRIS valve, a new mitral valve incorporating RESILIA technology. Critical Care [[Image Removed: ew-20210331_g6.jpg]] Net sales of Critical Care products increased for the three months endedMarch 31, 2021 due primarily to:
•foreign currency exchange rate fluctuations, which increased international net
sales by
•increased demand for our pressure monitoring products, primarily inthe United States , as COVID-19 hospitalizations increased early in the first quarter of 2021; and
•increased demand for our capital products, primarily Hemosphere monitors in
27-------------------------------------------------------------------------------- Table of Contents Gross Profit [[Image Removed: ew-20210331_g7.jpg]] The decrease in gross profit as a percentage of net sales for the three months endedMarch 31, 2021 was driven primarily by: •a 1.5 percentage point decrease in the three months endedMarch 31, 2021 due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts; and •incremental costs associated with responding to COVID-19; partially offset by: •manufacturing efficiencies. Selling, General, and Administrative ("SG&A") Expenses [[Image Removed: ew-20210331_g8.jpg]] SG&A expenses increased for the three months endedMarch 31, 2021 due primarily to a) the impact of foreign currency, which increased expenses by$8.9 million due to the weakening ofthe United States dollar against multiple currencies, primarily the Euro and b) higher personnel-related costs, partially offset by reduced travel spending resulting from COVID-19. 28
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Research and Development ("R&D") Expenses
[[Image Removed: ew-20210331_g9.jpg]]
R&D expenses increased for the three months ended March 31, 2021 primarily due
to continued investments in our transcatheter mitral and tricuspid therapies and
our aortic valve replacement innovations.
Change in Fair Value of Contingent Consideration Liabilities
The change in fair value of contingent consideration liabilities resulted in income of$4.5 million and$2.2 million for the three months endedMarch 31, 2021 and 2020, respectively. The income in the first quarter of 2021 was primarily driven by increased discount rates, partially offset by the accretion of interest due to the passage of time. The income in the first quarter of 2020 was primarily driven by an increase in credit spread assumptions, partially offset by decreased discount rates and the accretion of interest due to the passage of time. The changes to the credit spread and discount rate assumptions were primarily due to uncertainties related to COVID-19. For further information, see Note 4 to the "Consolidated Condensed Financial Statements." Other Income, net (in millions) Three Months Ended March 31, 2021 2020 Foreign exchange gains, net$ (1.7) $ (3.7) (Gain) loss on investments (2.7) 1.8 Other (1.1) - Other income, net$ (5.5) $ (1.9) The net foreign exchange gains relate to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, partially offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures. The (gain) loss on investments primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on investments in equity securities.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outsidethe United States which have statutory tax rates typically lower thanthe 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. 29 -------------------------------------------------------------------------------- Table of Contents Our effective income tax rate was 13.1% and 14.8% for the three months endedMarch 31, 2021 and 2020, respectively. The effective rates for the three months endedMarch 31, 2021 and 2020 were lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal andCalifornia research and development credits. We are under continuous tax audits by the Internal Revenue Service ("IRS") and other taxing authorities. During these audits we may receive proposed audit adjustments that could be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the eventual outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. We previously executed an Advance Pricing Agreement ("APA") in 2018 betweenthe United States andSwitzerland 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 toIRS Examination for further consideration as part of the respective years' regular tax audit. In addition, we executed other bilateral APAs as follows: during 2017, an APA betweenthe United States andJapan covering tax years 2015 through 2019; and during 2018, APAs betweenJapan andSingapore and betweenSwitzerland andJapan covering tax years 2015 through 2019. We have filed to renew these APAs related toJapan for the years 2020 and forward. The execution of some or all these APA renewals depends on many variables outside of our control. AtMarch 31, 2021 , all material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, we continue to address matters inWisconsin andIndia for years from 2010. OurU.S. federal income tax returns have all been audited through 2014. TheIRS began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and later added the 2017 tax year to this audit cycle during the first quarter of 2019. TheIRS audit field work for the 2015 through 2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing matters. During the first quarter of 2021, we received a draft Notice of Proposed Adjustment ("Draft NOPA") from theIRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between ourU.S. andSwitzerland affiliated companies. The Draft NOPA proposes an increase to ourU.S. taxable income which could result in additional tax expense for this period of approximately$200 million . Our analysis of the Draft NOPA is ongoing, and we continue to work with theIRS on how the facts are described and analyzed in the Draft NOPA. The Draft NOPA represents a significant change to previously agreed upon transfer pricing methodologies for these transactions. We plan to continue our dialogue with theIRS on this matter and, as a result, the final NOPA and any adjustments asserted by theIRS may differ materially. We anticipate receiving the final NOPA and Revenue Agent's Report prior to the end of the third quarter of 2021. Should we not come to an agreement with theIRS at the examination level, we will evaluate all possible remedies available to us, which could likely take several years to resolve. No payment of any amount related to the Draft NOPA is required to be made, if at all, until all applicable proceedings have been completed. However, we have the option to deposit all or a portion of any proposed assessment at any time. We believe the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, have not recorded any additional amount based on the Draft NOPA received. Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 through 2021 that were not resolved under the APA program remain subject toIRS examination, and those transactions and related tax positions remain uncertain as ofMarch 31, 2021 . We have considered this information, as well as information regarding the Draft NOPA described above, in its evaluation of our uncertain tax positions. These unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to our consolidated condensed financial statements. Based on the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in its existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the gross uncertain tax positions as a long-term liability. 30 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, amounts available under credit facilities, and cash from operations. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions.
As of
We have a Five-Year Credit Agreement ("the Credit Agreement") which matures on
April 28, 2023 . The Credit Agreement provides up to an aggregate of $750.0
million in borrowings in multiple currencies. Subject to certain terms and
conditions, we may increase the amount available under the Credit Agreement by
up to an additional $250.0 million in the aggregate. As of March 31, 2021 , there
were no borrowings outstanding under the Credit Agreement.
In June 2018 , we issued $600.0 million of 4.3% fixed-rate unsecured senior notes
(the "2018 Notes") due June 15, 2028 . As of March 31, 2021 , the total carrying
value of the 2018 Notes was $595.2 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 three months ended March 31, 2021 , under the
Board authorized program, we repurchased a total of 3.6 million shares at an
aggregate cost of $302.5 million , including pursuant to an accelerated share
repurchase agreement we entered into during 2021 (see Note 7 to the
"Consolidated Condensed Financial Statements") and as of March 31, 2021 , we had
remaining authority to purchase $322.4 million of our common stock.
Certain of our business acquisitions involve contingent consideration
arrangements. Payment of additional consideration in the future may be required,
contingent upon the acquired company reaching certain performance milestones,
such as attaining specified revenue levels, achieving product development
targets, or obtaining regulatory approvals. For further information, see Note 4
to the "Consolidated Condensed Financial Statements."
On July 12, 2020 , we reached a Settlement Agreement with Abbott Laboratories to
settle all outstanding patent disputes between the companies in cases related to
transcatheter mitral and tricuspid repair products. The Settlement Agreement
resulted in us recording an estimated $367.9 million pretax charge in June 2020
related to past damages. In addition, we will incur royalty expenses through May
2024 totaling an estimated $100 million . We made a one-time $100.0 million
payment to Abbott in July 2020 , and will make quarterly payments in future
years.
At
31
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Consolidated Cash Flows - For the three months ended March 31, 2021 and 2020:
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Net cash flows provided by operating activities of $300.5 million for the three
months ended March 31, 2021 increased $93.4 million over the same period last
year primarily due to a higher bonus payout in 2020 associated with 2019
performance and improved operating performance in 2021, partially offset by
higher working capital needs in 2021.
Net cash used in investing activities of
Net cash used in investing activities of
Net cash used in financing activities of
Net cash used in financing activities of
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted inthe United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 33-35 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes from the information discussed therein.
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