Edwards Lifesciences Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and reporting period
Edwards Lifesciences develops and sells cardiovascular medical devices, principally transcatheter aortic valve replacement (TAVR), transcatheter mitral and tricuspid therapies (TMTT), surgical structural heart products, and critical-care monitoring products. TAVR accounted for 63% of 2019 net sales. The company reorganized product reporting in 2019 to show TMTT separately from TAVR; prior periods were recast for this presentation.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $4,348.0 | $3,722.8 | +16.8% |
| Gross profit | $3,233.6 | $2,783.4 | +16.2% |
| Gross margin | 74.4% | 74.8% | Down 0.4 percentage points |
| Operating income | $1,146.8 | $748.2 | +53.3% |
| Net income | $1,046.9 | $722.2 | +45.0% |
| Diluted EPS | $4.93 | $3.38 | +45.9% |
| Operating cash flow | $1,179.4 | $926.8 | +$252.6 |
Operating margin was 26.4% versus 20.1%; net margin was 24.1% versus 19.4%. Margins and earnings comparisons were affected by significant litigation and impairment items in both years. R&D expense was $752.7 million, or 17.3% of sales, up 21% year over year. SG&A expense was $1,242.2 million.
Fourth quarter: Net sales were $1,174.1 million, gross profit $887.9 million, net income $280.2 million, and diluted EPS $1.32. Fourth-quarter 2018 net income was $7.0 million and diluted EPS $0.03, reflecting a $180.0 million litigation-settlement charge and a $116.2 million impairment charge.
Sales mix and growth: TAVR sales rose 19.9% to $2,737.9 million; Surgical sales rose 10.5% to $841.7 million; Critical Care sales rose 9.7% to $740.2 million. TMTT sales were $28.2 million versus $2.9 million, primarily reflecting the European launch of PASCAL. U.S. sales increased 23.2% to $2,532.7 million; international sales increased 8.9% to $1,815.3 million. TAVR growth was led by SAPIEN 3 and SAPIEN 3 Ultra adoption.
Liquidity and debt: Cash and cash equivalents were $1,179.1 million and short-term investments were $337.8 million at year-end. Current assets were $2,984.0 million versus current liabilities of $902.4 million. Long-term debt carrying value was $594.4 million, representing $600.0 million of 4.3% senior notes due 2028; no borrowings were outstanding on the $750 million revolving credit facility. Operating cash flow was $1,179.4 million; capital expenditures were $254.4 million. The company repurchased $263.3 million of stock in 2019 and had $1.2 billion of repurchase authorization remaining. No cash dividends have been paid.
Material changes versus the prior comparable period
- Revenue growth and higher earnings were driven mainly by TAVR sales and improved product mix. U.S. sales were particularly strong.
- Gross margin declined modestly, including a $73.1 million cost-of-sales charge, primarily an inventory write-off related to TAVR portfolio decisions and discontinuation of the CENTERA program. Increased operational investment and European regulatory-compliance spending also weighed on margin; foreign exchange and hedging partly offset the pressure.
- Operating income benefited from lower intellectual-property litigation expense: $33.4 million in 2019 versus $214.0 million in 2018. The 2018 amount included the $180.0 million Boston Scientific settlement, paid in January 2019.
- Net income included $64.6 million of special charges in 2019, including a $40.6 million impairment of acquired in-process R&D and a $24.0 million early-stage IP acquisition charge. In 2018, special charges were $109.1 million in selected financial data, including a $116.2 million impairment, and the litigation settlement was separately expensed.
- The effective tax rate increased to 10.3% from 5.1%, mainly because of U.S. tax on global intangible low-taxed income and a 2018 tax benefit from audit settlements. The company reported $203.1 million in gross uncertain tax positions, primarily related to transfer pricing.
- Operating cash flow rose, while investing cash flow was a use of $595.8 million, including capital spending, the CASMED acquisition, and investment purchases. Financing cash use was $115.6 million, materially below 2018, when large share repurchases and net debt repayments drove $1.1 billion of outflow.
Outlook, management commentary, risks, and contingencies
- Management said available cash, investments, credit facilities, and operating cash flow should fund working capital, capital expenditures, and other financial commitments for the next 12 months. It anticipated approximately $400 million of capital expenditures in 2020. The filing text does not provide a clear numerical 2020 revenue or earnings guidance range.
- Product and regulatory developments included U.S. and European approvals to expand SAPIEN 3 use to low-surgical-risk patients, European CE Mark for PASCAL, FDA authorization of an EVOQUE tricuspid-valve early-feasibility study, and European approval of the HARPOON mitral repair system. PASCAL and EVOQUE development, clinical results, approvals, and commercial adoption remain execution risks.
- Abbott lawsuits allege that PASCAL infringes patents in the United States and several European jurisdictions; Edwards is also pursuing patent litigation against Abbott concerning MITRACLIP. Outcomes and potential losses could not be estimated in the filing. Abbott’s requested preliminary relief was denied in some proceedings; a preliminary injunction was granted in Switzerland on one patent and appealed.
- Other material risks include stringent device regulation and the EU Medical Device Regulation transition, reimbursement and pricing pressure, competition and product adoption, clinical-trial outcomes, product quality and liability, and reliance on certain single-source suppliers. Currency movements affect reported international sales; the company uses hedges but does not eliminate this exposure.
- Contingent consideration liabilities were $172.5 million. The company also disclosed up to $565.0 million of possible milestone and other contingent payments if applicable milestones or obligations are met. The $263.9 million transition-tax liability is payable in installments. Management stated that transfer-pricing matters remain uncertain and may be significant.
- The company acquired CASMED for $100.8 million in April 2019. It discontinued the CENTERA program and recorded related inventory write-offs; it also impaired remaining Valtech mitral and tricuspid in-process R&D assets.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified uncertain transfer-pricing tax positions and fair value of contingent consideration as critical audit matters.
Most important facts for investors to verify
- Whether TAVR growth and low-risk patient adoption continue, and how sales concentration in TAVR evolves.
- Progress, regulatory milestones, clinical evidence, launch costs, and commercial uptake for PASCAL, EVOQUE, HARPOON, and other mitral/tricuspid programs.
- The full earnings impact of the $73.1 million inventory charge, the $40.6 million impairment, and future portfolio or development decisions.
- Developments in Abbott-related patent proceedings and any resulting injunctions, damages, or restrictions on PASCAL sales.
- Resolution of transfer-pricing tax positions, including the $203.1 million gross uncertain-tax-position balance, and the remaining transition-tax installments.
- Whether 2020 capital spending approaches the anticipated $400 million and how it affects cash generation and capital returns.
- Evidence that margin pressure, foreign-exchange exposure, reimbursement changes, and supplier or manufacturing risks remain manageable.