Edwards Lifesciences Corp. — Q3 2018 Form 10-Q
Business context and reporting period
Medical-device company focused on structural heart disease and critical care monitoring. This filing covers the quarter and nine months ended September 30, 2018; comparisons are with the same 2017 periods. Results are unaudited.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $906.6 million | $821.5 million | $2,745.1 million | $2,546.8 million |
| Gross profit | $681.7 million | $608.2 million | $2,040.4 million | $1,906.8 million |
| Gross margin | 75.2% | 74.0% | 74.3% | 74.9% |
| Operating income | $248.9 million | $214.0 million | $753.5 million | $753.3 million |
| Net income | $225.9 million | $170.1 million | $715.2 million | $586.4 million |
| Diluted EPS | $1.06 | $0.79 | $3.34 | $2.71 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $633.8 million | $636.8 million |
Q3 operating margin was 27.5%, versus 26.1% a year earlier; nine-month operating margin was 27.4%, versus 29.6%. At September 30, cash and equivalents were $1,261.3 million, short-term investments $334.4 million, and total debt carrying value approximately $1,193.5 million. The company had no borrowings outstanding under its $750 million revolving credit agreement. Current assets were $2,912.6 million and current liabilities $1,261.1 million.
Nine-month investing cash flow was positive $71.0 million, including net investment proceeds of $275.9 million, offset partly by $181.1 million of capital spending. Financing used $256.5 million, including $523.5 million of treasury-stock purchases. Cash increased $443.0 million to $1,261.3 million.
Material changes versus the prior comparable period
- Q3 sales rose 10.4%; nine-month sales rose 7.8%. Transcatheter Heart Valve Therapy (THVT) grew 15.9% in Q3 and 12.4% year to date, while Critical Care grew 13.5% and 13.7%, respectively. Surgical Heart Valve Therapy declined 5.6% in Q3 and 7.9% year to date.
- Q3 sales growth reflected SAPIEN 3 adoption, particularly in the U.S. and Japan, and HemoSphere-led Critical Care growth. Year-to-date U.S. surgical valve sales were reduced by a $77.5 million return reserve associated with conversion to consignment inventory.
- Q3 net income increased 32.8%; nine-month net income increased 22.0%. The nine-month effective tax rate fell to 6.3% from 17.5%, reflecting tax reform effects and a $36.1 million benefit from settling tax audits, among other items. Thus, earnings growth was not solely attributable to operations.
- Nine-month operating cash flow was $3.0 million lower year over year, primarily due to higher tax payments and bonus payouts.
Outlook, management commentary, risks and unusual items
- Management said available liquidity sources are sufficient for working capital, capital expenditures, and other commitments over the next 12 months. The filing provides no quantified earnings or revenue guidance.
- Management attributed Q3 gross-margin improvement to product mix favoring THVT. Year-to-date gross margin was pressured by currency and hedging effects, Swiss plant closure costs, and manufacturing investments. R&D was 16.7% of nine-month sales, with spending directed in part to transcatheter programs and clinical trials.
- The company issued $600 million of 4.3% senior notes due 2028; the existing $600 million 2.875% notes matured and were repaid in October 2018. The new credit facility matures in 2023, and the company reported covenant compliance.
- Tax accounting under the 2017 Tax Cuts and Jobs Act remained subject to finalization; management expected any further adjustment to be recorded in Q4 2018. Lease accounting adoption in 2019 was expected to materially increase balance-sheet assets and liabilities, but the impact was not yet quantifiable.
- Patent litigation with Boston Scientific and Symetis creates potential product injunction and financial exposure. A U.K. injunction concerning SAPIEN 3 was stayed for 12 months; a German court found Symetis entitled to seek a preliminary injunction against SAPIEN 3 Ultra sales upon posting a bond. The company said the ultimate outcomes are uncertain and potential charges could materially affect financial position, results, or liquidity.
- Other notable items include contingent consideration expense of $8.3 million for the first nine months, a $7.1 million gain from the Swiss defined-benefit plan curtailment, and ongoing share repurchases. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- How much of reported earnings growth reflects ongoing operations versus the lower tax rate, tax-audit settlement, and other tax-reform adjustments.
- The underlying effect of the $77.5 million surgical-valve sales return reserve and the timing of the transition to consignment sales.
- Developments in SAPIEN 3 and SAPIEN 3 Ultra patent disputes, including injunctions, appeals, damages, and potential effects on product sales.
- Final 2018 tax-reform accounting and the timing and scale of lease liabilities recognized in 2019.
- Cash deployment, including continued repurchases, capital spending, contingent consideration, and debt repayment following quarter-end.