Edwards Lifesciences Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. Edwards develops and sells products for structural heart disease and critical care monitoring.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,094.0 million | $906.6 million | $3,173.9 million | $2,745.1 million |
| Gross profit | $801.6 million | $681.7 million | $2,345.7 million | $2,040.4 million |
| Operating income | $294.3 million | $248.9 million | $836.0 million | $753.5 million |
| Net income | $274.7 million | $225.9 million | $766.7 million | $715.2 million |
| Diluted EPS | $1.30 | $1.06 | $3.61 | $3.34 |
- Sales increased 20.7% in Q3 and 15.6% year to date. Net income rose 21.6% in Q3 and 7.2% year to date; diluted EPS rose 22.6% and 8.1%, respectively.
- Approximate gross margin was 73.3% in Q3 versus 75.2% a year earlier, and 73.9% year to date versus 74.3%. Approximate operating margin was 26.9% versus 27.5% in Q3 and 26.3% versus 27.4% year to date.
- Research and development expense was $195.5 million in Q3 and $558.8 million year to date. Year-to-date R&D equaled 17.6% of sales.
- Operating cash flow was $780.0 million for the nine months, compared with $633.8 million. Capital expenditures were $182.9 million; investing cash outflow was $150.5 million and financing cash outflow was $152.6 million.
- Cash and cash equivalents totaled $1,186.6 million at September 30; short-term investments were $170.3 million. Long-term debt was $594.2 million, and no borrowings were outstanding under the $750 million revolving credit agreement. Operating lease liabilities totaled $76.5 million.
- Current assets were $2,739.7 million and current liabilities $775.8 million. Management said available liquidity was sufficient for working capital, capital expenditures, and other commitments over the next 12 months.
Material changes and business drivers
- TAVR sales, the largest product group, increased 25.7% in Q3 to $700.0 million and 16.7% year to date to $1,975.4 million. Management cited adoption of SAPIEN 3 and the SAPIEN 3 Ultra launch.
- Q3 sales also increased in Surgical Structural Heart to $204.1 million, Critical Care to $180.2 million, and Transcatheter Mitral and Tricuspid Therapies to $9.7 million. TMTT growth reflected the European PASCAL launch.
- U.S. sales increased 24.9% in Q3 and 21.5% year to date. The prior-year year-to-date comparison was affected by a $77.5 million U.S. surgical-valve sales return reserve tied to conversion to a consignment model.
- Gross profit was weighed down by $73.1 million of inventory write-offs during the first nine months, including a $26.9 million Q3 charge, following portfolio decisions that included discontinuing the CENTERA program. The Q3 charge included a $10.3 million out-of-period adjustment; management said it was not material to the current or prior periods.
- In August, the FDA expanded SAPIEN 3 and SAPIEN 3 Ultra use to severe, symptomatic aortic stenosis patients at low surgical risk. Edwards said it would discontinue CENTERA and continue the SAPIEN 3 Ultra launch.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expressed confidence in liquidity for the next 12 months; forward-looking statements remain subject to substantial risks and uncertainties.
- Year-to-date results included a $24.0 million charge for acquired early-stage transcatheter intellectual property and related clinical and regulatory experience. Edwards also acquired CASMED for $100.8 million in April; its contribution to sales was $10.3 million year to date.
- Operating cash flow increased year over year despite a $180.0 million litigation-settlement payment and higher working-capital needs, according to management. Lower tax payments and improved operating performance contributed to the increase.
- Abbott brought U.S. and European patent actions alleging PASCAL infringes its patents. Courts denied preliminary relief in the U.S. and U.K.; a Swiss court granted a preliminary injunction concerning one patent, which Edwards appealed. Edwards said it could not estimate potential losses. Trials were scheduled in several jurisdictions.
- Uncertain tax positions and unresolved U.S.–Switzerland transfer-pricing matters could affect results. At September 30, the company reported $186.2 million of uncertain-tax-position liabilities before specified offsetting tax benefits.
- Other exposures include currency and investment risks. The company held $529.3 million of fixed-rate debt securities and $27.0 million in equity investments in public and private companies.
Important facts for investors to verify
- Whether TAVR growth and the SAPIEN 3 Ultra launch continue, and the commercial and financial effects of discontinuing CENTERA.
- The scale and timing of further portfolio-related inventory charges, including the impact of the disclosed out-of-period adjustment.
- Developments in Abbott’s patent cases, particularly the Swiss injunction, and any potential financial or market-access consequences.
- Progress and outcomes in PASCAL clinical trials, low-risk TAVR adoption, and integration of CASMED technology.
- Cash conversion, working-capital requirements, capital spending, share repurchases, and resolution of tax matters.