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 areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. Financial Highlights and Market Update [[Image Removed: ew-20220630_g1.jpg]][[Image Removed: ew-20220630_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 maintain access for patients to our life-saving technologies while providing continuous front-line support to our clinician partners, and protecting the well-being of our employees. Our manufacturing operations have continued to respond to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components.
During the first quarter of 2021, COVID-19 strained the global healthcare system during the winter months. However, we saw a strong recovery from the second quarter of 2021 as COVID vaccines became more widely available and patients who had postponed care were treated.
During the first quarter of 2022, the Omicron variant had a pronounced impact on hospital capacity, resources, and procedure volumes in
January 2022, especially in the United States. Outside the United States, we experienced a less pronounced year-over-year impact from the pandemic.
During the second quarter of 2022, our sales were impacted by a slower than expected improvement in
Despite the challenging macroeconomic factors, our net sales for the first six months of 2022 were
$2.7 billion, representing an increase of $122.5 millionover the first six months of 2021, driven primarily by sales of our TAVR products. 27
Our gross profit increase in the six months ended
June 30, 2022was driven by our sales growth and the positive impact of our foreign currency hedging program. The decrease in our diluted earnings per share in the six months ended June 30, 2022was driven by changes in the fair value of our contingent consideration liabilities, which resulted in a $98.1 millionafter tax gain in the first six months of 2021 compared to a $21.9 millionafter tax gain in the first six months of 2022, and increased sales and marketing and research and development expenses in 2022, partially offset by the aforementioned gross profit increase. We continue to closely monitor the impact of COVID-19 on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, vendors, business partners, and distribution channels. The extent to which the COVID-19 global pandemic and measures taken in response thereto impact our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak (including new and more contagious variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, public acceptance and efficacy of vaccines and other treatments, and the associated impact on economic and operating conditions. 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. Despite the challenges of the COVID-19 pandemic, our dedicated field teams have found creative ways to support physicians, our engineers continued to advance innovation, and our colleagues worked diligently to keep our clinical trials on track. In the first six months of 2022, we invested 17.7% of our net sales in research and development. Results of Operations
Net Salesby Region (dollars in millions) Three Months Ended Six Months Ended June 30, Percent June 30, Percent 2022 2021 Change Change 2022 2021 Change Change United States $ 800.8 $ 795.7 $ 5.10.6 % $ 1,550.3 $ 1,470.4 $ 79.95.4 % Europe 302.8 309.8 (7.0) (2.2) % 613.9 589.8 24.1 4.1 % Japan 122.9 131.8 (8.9) (6.8) % 258.4 264.1 (5.7) (2.2) % Rest of World 147.4 138.7 8.7 6.1 % 292.5 268.3 24.2 9.0 % Outside of the United States 573.1 580.3 (7.2) (1.2) % 1,164.8 1,122.2 42.6 3.8 % Total net sales $ 1,373.9 $ 1,376.0 $ (2.1)(0.1) % $ 2,715.1 $ 2,592.6 $ 122.54.7 % Net sales outside of the United Statesinclude 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. 28
Table of Contents
Net Salesby Product Group(dollars in millions) Three Months Ended Six Months Ended June 30, Percent June 30, Percent 2022 2021 Change Change 2022 2021 Change Change Transcatheter Aortic Valve Replacement $ 906.9 $ 901.5 $ 5.40.6 % $ 1,788.2 $ 1,693.2 $ 95.05.6 % Transcatheter Mitral and Tricuspid Therapies 27.9 22.1 5.8 25.6 % 54.9 38.4 16.5 42.6 % Surgical Structural Heart 228.5 237.4 (8.9) (3.7) % 449.3 450.4 (1.1) (0.2) % Critical Care 210.6 215.0 (4.4) (2.0) % 422.7 410.6 12.1 3.0 % Total net sales $ 1,373.9 $ 1,376.0 $ (2.1)(0.1) % $ 2,715.1 $ 2,592.6 $ 122.54.7 %
Transcatheter Aortic Valve Replacement Sales
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Net sales of TAVR products increased for the three and six months ended
•higher sales of the Edwards SAPIEN platform in 2022, primarily the Edwards SAPIEN 3 Ultra valve in
the United Statesand Europe, and the Edwards SAPIEN 3 in Japan; partially offset by: •foreign currency exchange rate fluctuations, which decreased net sales outside of the United Statesby $36.4 millionand $52.7 millionfor the three and six months ended June 30, 2022, respectively, primarily due to the weakening of the Euro and the Japanese yen against the United Statesdollar. During the first half of 2022, we continued to advance our EARLY TAVR pivotal trial, studying the treatment of severe aortic stenosis patients before their symptoms develop, and our PROGRESS pivotal trial, studying moderate aortic stenosis patients. During the second quarter of 2022, we began treating patients in our ALLIANCE pivotal trial, studying our next-generation TAVR technology, SAPIEN X4. 29
Mitral and Tricuspid Transcatheter Therapy Sales
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TMTT product net sales increased for the three and six months ended
We remain on track for
United States Food and Drug Administrationapproval and CE Mark Medical Device Regulation approval of PASCAL Precision for patients with degenerative mitral regurgitation by year end. In mitral replacement, we continued to broaden our experience with both of our transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial for SAPIEN M3 and the MISCEND study for EVOQUE Eos. We also continued to make progress in enrolling the TRISCEND II pivotal trial of the EVOQUE system and the CLASP IITR pivotal trial with PASCAL in patients with symptomatic, severe tricuspid regurgitation.. 30
Surgical Structural Heart Sales
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Net sales of Surgical products decreased for the three and six months ended
June 30, 2022primarily due to foreign currency exchange rate fluctuations, which decreased net sales outside of the United Statesby $12.0 millionand $17.4 millionfor the three and six months ended June 30, 2022, respectively, primarily due to the weakening of the Euro and the Japanese yen against the United Statesdollar. The impact of foreign currency was partially offset by increased sales of the INSPIRIS RESILIA aortic valve, primarily in the United Statesand Europe, the KONECT aortic valved conduit, primarily in the United States, and the MITRIS RESILIA valve, primarily in the United Statesand Japan. In March 2022, we received United States Food and Drug Administrationapproval for the MITRIS RESILIA valve and initiated the product launch in the United Statesin April 2022. MITRIS RESILIA is a tissue valve replacement specifically designed for the heart's mitral position and incorporates our advanced RESILIA technology. 31
Intensive care sales
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Net sales of Critical Care products decreased in the quarter ended
• increased demand for our HemoSphere monitoring platform, pressure monitoring products and enhanced surgical recovery products, primarily in
partially offset by:
•foreign currency exchange rate fluctuations, which decreased net sales outside of
the United Statesby $9.6 millionand $14.1 millionfor the three and six months ended June 30, 2022, respectively, primarily due to the weakening of the Euro and the Japanese yen against the United Statesdollar. 32
Gross Profit [[Image Removed: ew-20220630_g7.jpg]] The increase in gross profit as a percentage of net sales for the three and six months ended
June 30, 2022was driven by a 3.8 percentage point and 3.1 percentage point increase for the three and six months ended June 30, 2022, respectively, from the impact of our foreign currency hedging program, which includes natural hedges and hedge contract gains (primarily the strengthening of the United Statesdollar against the Japanese yen and the Euro). Selling, General, and Administrative ("SG&A") Expenses [[Image Removed: ew-20220630_g8.jpg]] SG&A expenses increased for the three and six months ended June 30, 2022primarily due to higher field-based personnel-related costs and a resu'mption of in-person commercial activities, primarily TAVR and TMTT in the United Statesand Europe. Foreign currency exchange rate fluctuations decreased expenses by $15.5 millionand $22.4 millionfor the three and six months ended June 30, 2022, respectively, due to the weakening of the Euro and the Japanese yen against the United Statesdollar. 33
Research and Development ("R&D") Expenses [[Image Removed: ew-20220630_g9.jpg]] R&D expenses increased for the three and six months ended
June 30, 2022primarily due to continued investments in our transcatheter innovations, including increased clinical trial activity.
Change in fair value of contingent consideration liabilities, net
The change in fair value of contingent consideration liabilities resulted in gains of
$20.9 millionand $102.6 millionfor the three and six months ended June 30, 2022and 2021, respectively. The gains were driven by changes in the projected probability and timing of milestone achievements and the projected timing of cash inflows. For further information, see Note 5 to the "Consolidated Condensed Financial Statements." Other Income, net (in millions) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Foreign exchange losses (gains), net $ 1.8 $ (2.7) $ 4.3 $ (4.4)Gain on insurance settlement (3.8) - (3.8) - (Gain) loss on investments (0.8) (1.4) 0.1 (4.1) Other (1.5) (0.3) (1.6) (1.4) Other income, net $ (4.3) $ (4.4) $ (1.0) $ (9.9)
Net foreign exchange losses (gains) relate to currency fluctuations primarily in our global and intercompany trade receivable and payable balances, partially offset by gains and losses on foreign currency derivative instruments.
Gain on insurance settlement during the three and six months ended
relates to insurance recovery for damaged freight shipments of heart valves.
The (gain) loss on investments primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on investments in equity securities.
Provision for income taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outside
the United Stateswhich have statutory tax rates typically lower than the United Statestax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. 34
Our effective income tax rate was 12.5% and 10.3% for the three months ended
June 30, 2022and 2021, respectively, and 13.4% and 11.5% for the six months ended June 30, 2022and 2021, respectively. The increase in the effective rate between the six months ended June 30, 2022and 2021 was primarily due to a reduced tax benefit from employee share-based compensation and the estimated impact of U.S.foreign tax credit regulations published by the U.S. Treasuryon January 4, 2022. These regulations limit the amount of foreign taxes that are creditable against U.S.income taxes. In addition, the effective rates for the six months ended June 30, 2022and 2021 were lower than the federal statutory rate of 21% primarily due to (1) foreign earnings taxed at lower rates, (2) Federal and Californiaresearch 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 condensed financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. We executed an Advance Pricing Agreement ("APA") in 2018 between the United Statesand Switzerlandgovernments 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 Examinationfor 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 Statesand Japancovering tax years 2015 through 2019; and during 2018, APAs between Japanand Singaporeand between Switzerlandand Japancovering tax years 2015 through 2019. We have filed to renew all the APAs which cover transactions with Japanfor the years 2020 and forward. The execution of some or all these APA renewals depends on many variables outside of our control.
The audits of our
United Statesfederal income tax returns through 2014 have been closed. The IRSaudit field work for the 2015 through 2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing and related matters. The IRSbegan its examination of the 2018 through 2020 tax years during the first quarter of 2022. During 2021, we received a Notice of Proposed Adjustment ("NOPA") from the IRSfor the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between our United Statesand Switzerlandsubsidiaries. The NOPA proposes an increase to our United Statestaxable income, which could result in additional tax expense for this period of approximately $180 millionand represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions. We have formally 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'srebuttal to our protest and were notified that the case had been transferred to the IRS Independent Office of Appeals. We continue to evaluate all possible remedies available to us, which could take several years to resolve. No payment of any amount related to the NOPA is required to be made, if at all, until all applicable proceedings have been completed. We believe the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, have not accrued any additional amount based on the NOPA received. Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015-2022 that were not resolved under the APA program remain subject to IRSexamination, and those transactions and related tax positions remain uncertain as of June 30, 2022. We have considered this information, as well as information regarding the NOPA and rebuttal described above, in our evaluation of our uncertain tax positions. The impact of 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 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. 35
Cash 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, 2022, cash and cash equivalents and short-term investments held in the United Statesand outside of the United Stateswere $1,065.6 millionand $450.2 million, respectively. We had a Five-Year Credit Agreement ("the Prior Credit Agreement") which was scheduled to mature on April 28, 2023and provided up to an aggregate of $750.0 millionin borrowings in multiple currencies. As of June 30, 2022, there were no borrowings outstanding under the Prior Credit Agreement and we were in compliance with all covenants. In July 2022, we entered into a new Five-Year Credit Agreement (the "New Credit Agreement") which provides for a $750.0 millionmulti-currency unsecured revolving credit facility (the "Revolving Facility") and replaced the Prior Credit Agreement. The New Credit Agreement matures on July 15, 2027. We may increase the amount available under the Revolving Facility by up to an additional $250.0 millionin the aggregate and extend the maturity date for an additional year, subject to agreement of the lenders. As of July 29, 2022, no amounts were outstanding under the Revolving Facility. For further information, see Note 14 to the "Consolidated Condensed Financial Statements." In June 2018, we issued $600.0 millionof 4.3% fixed-rate unsecured senior notes (the "2018 Notes") due June 15, 2028. As of June 30, 2022, the carrying value of the 2018 Notes was $596.0 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, 2022, under the Board authorized repurchase program, we repurchased a total of 7.2 million shares at an aggregate cost of $746.4 million. As of June 30, 2022, we had remaining authority to purchase $380.1 millionof our common stock. In July 2022, the Board of Directors approved an additional $1.5 billionof repurchases of our common stock under our share repurchase program, effective July 28, 2022. This share repurchase program has no expiration date. At June 30, 2022, 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, 2021.
Consolidated cash flows – For the six months ended
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Net cash flows provided by operating activities of
$625.5 millionfor the six months ended June 30, 2022decreased $201.1 millionover the same period last year primarily due to a higher bonus payout in 2022 associated with 2021 performance, an increase in inventory builds compared to the prior year, and an increase in estimated tax payments.
Net cash provided by investing activities of
Net cash used in investing activities of
Net cash used in financing activities of
Net cash used in financing activities of
Significant Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in
the United Stateswhich 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 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, 2021. There have been no significant changes from the information discussed therein.
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