Edwards Lifesciences Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are identified where relevant. Edwards develops and sells structural-heart therapies and critical-care monitoring products. Its largest business is transcatheter aortic valve replacement (TAVR).
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $3,722.8 million | $3,435.3 million |
| Gross profit / gross margin | $2,783.4 million / 74.8% | $2,560.0 million / 74.5% |
| Operating income / operating margin | $748.2 million / 20.1% | $1,089.4 million / 31.7% |
| Net income / diluted EPS | $722.2 million / $3.38 | $583.6 million / $2.70 |
| Cash from operations | $926.8 million | $1,000.7 million |
| Capital expenditures | $238.7 million | $168.1 million |
- Revenue grew 8.4%. By product group, TAVR/Transcatheter Heart Valve Therapy sales rose 12.8% to $2,286.7 million; Critical Care rose 12.2% to $674.5 million; Surgical Heart Valve Therapy fell 5.6% to $761.6 million.
- TAVR represented 61% of 2018 net sales. U.S. sales were $2,055.3 million, up 7.7%; international sales were $1,667.5 million, up 9.2%.
- Operating income declined despite higher revenue, mainly reflecting $214.0 million of net intellectual-property litigation expense, including a $180.0 million Boston Scientific settlement charge, and $116.2 million of impairment charges. Gross margin improved on favorable product mix, led by TAVR.
- The effective tax rate was approximately 5.1% (income tax provision of $39.2 million on $761.4 million pretax income), versus approximately 43.6% in 2017. The prior year included a substantial one-time tax expense related to U.S. tax reform; 2018 benefited from the lower U.S. federal tax rate and tax-audit settlements.
Financial position and liquidity
- At year-end, cash and cash equivalents were $714.1 million; short- and long-term investments totaled $748.7 million. Total assets were $5,323.7 million and stockholders’ equity was $3,140.4 million.
- Long-term debt had a $593.8 million carrying value ($600 million principal). The $600 million 2.875% notes due in 2018 were repaid and replaced with $600 million of 4.3% notes due 2028. The company had no outstanding borrowings under its $750 million revolving credit agreement and reported covenant compliance.
- Operating cash flow was $926.8 million, down $73.9 million from 2017, primarily because of higher tax payments and bonus payouts. Investing activities provided $76.7 million, mainly from net investment proceeds, while financing activities used $1.1 billion, principally for share repurchases and net debt repayments.
- Edwards repurchased 5.4 million shares for $784.3 million under board-authorized programs during 2018 and had about $0.5 billion of remaining authorization at year-end. The company has not paid cash dividends and reported no current plan to do so.
- Management said available liquidity and operating cash flow were sufficient for working capital, capital expenditure and other commitments for the following 12 months.
Material changes, outlook and notable items
- Growth was led by SAPIEN 3 adoption across regions and Critical Care products, including the HemoSphere monitoring platform. Surgical valve sales were affected by an $82.5 million U.S. sales-return reserve related to conversion to a consignment inventory model.
- In 2018, Edwards received U.S. or European approvals for products including SAPIEN 3 Ultra and Acumen decision-support technology, and received European approval for CENTERA and the Cardioband tricuspid reconstruction system. The company invested 16.7% of sales in research and development.
- The 2018 fourth quarter reported sales of $977.7 million and net income of $7.0 million. Quarterly net income included the $116.2 million impairment and $180.0 million litigation settlement charge; the filing does not provide an adjusted fourth-quarter earnings figure.
- The impairment related to Valtech-developed technology and in-process R&D after clinical and market developments led Edwards to reassess development plans. The company projected later cash inflows from the related mitral technology program than previously expected.
- The Boston Scientific settlement was agreed in January 2019 and paid that month. It resolved outstanding patent disputes and provides that neither party owes further royalties under the agreement. In January 2019, Abbott subsidiaries filed patent-infringement suits concerning Edwards’ PASCAL repair system in the United States and several European jurisdictions; Edwards said it would defend itself vigorously.
- Management identified competition, product development and clinical-trial execution, regulatory approvals, reimbursement and pricing pressure, supplier continuity, manufacturing quality, foreign exchange, cybersecurity, and product-liability and intellectual-property litigation as significant risks. A final CMS policy update for TAVR coverage was expected in 2019; the filing gives no specific earnings or revenue guidance.
- Other obligations include a $270.5 million U.S. tax liability related to deemed repatriation, paid in installments, and up to $585 million of contingent milestone or other development-related payments if specified conditions are met. The filing also reports $157.2 million of gross uncertain tax positions, including interest and penalties, primarily related to transfer pricing.
- Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2018; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether TAVR growth and adoption can continue to offset slowing or declining surgical valve sales, including the effects of consignment inventory and return estimates.
- The underlying earnings and cash-generation trend excluding the 2018 litigation settlement, impairment, tax effects and other special items; reported fourth-quarter net income was only $7.0 million.
- Progress, clinical results, regulatory approvals and revised timelines for Valtech and other mitral/tricuspid programs, including the assumptions behind the $116.2 million impairment.
- Potential outcomes and financial exposure from Abbott’s PASCAL patent suits and any other legal matters, as well as whether the Boston Scientific settlement fully closes the relevant disputes.
- Future reimbursement and pricing developments, especially the expected CMS TAVR coverage policy, and the impact of regulatory changes such as the European Medical Device Regulation.
- Cash deployment, debt repayment capacity, tax installments, uncertain tax positions and contingent milestone commitments, alongside planned investment and share repurchases.