Business context and reporting period
Edwards Lifesciences Corporation (Edwards) filed this unaudited Form 10-Q for the three months ended March 31, 2019, with comparisons to the first quarter of 2018. The company develops and sells products for structural heart disease and critical care monitoring, across TAVR, transcatheter mitral and tricuspid therapies, surgical structural heart, and critical care.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $993.0 million | $894.8 million | +11.0% |
| Gross profit | $761.2 million | $661.2 million | +15.1% |
| Operating income | $274.2 million | $252.5 million | +8.6% |
| Net income | $249.7 million | $206.6 million | +20.9% |
| Diluted EPS | $1.18 | $0.96 | +22.9% |
| Operating cash flow | $1.5 million | $151.3 million | Down $149.8 million |
Gross margin was approximately 76.6%, up from 73.9%; operating margin was approximately 27.6%, versus 28.2%; net margin was approximately 25.1%, versus 23.1%. The filing attributes gross-margin improvement principally to currency and hedging effects, product mix, and the prior-year surgical consignment transition impact; manufacturing-capacity investment partly offset the improvement.
By product group, TAVR sales were $597.7 million (+8.4%), surgical structural heart $214.7 million (+19.6%), critical care $176.3 million (+7.8%), and transcatheter mitral and tricuspid therapies $4.3 million (up from $0.5 million). U.S. sales rose 17.4% to $562.8 million; international sales rose 3.6% to $430.2 million, including adverse foreign-exchange effects.
Cash and cash equivalents were $709.2 million at March 31, 2019; short- and long-term investments totaled $707.5 million. Long-term debt was $593.9 million, and the $750 million revolving credit facility had no outstanding borrowings. Total assets were $5.47 billion and stockholders’ equity was $3.45 billion. Management said available liquidity was sufficient for working capital, capital expenditures, and other commitments for the next 12 months.
Material changes versus the prior comparable period
- Sales growth was led by U.S. SAPIEN 3 TAVR and surgical valve sales, including INSPIRIS RESILIA. The Q1 2018 surgical comparison included a $34.7 million sales-return reserve associated with the shift to consignment inventory.
- Net income benefited from higher sales and a lower effective tax rate (10.2% versus 21.6%). The prior-year rate included a $24.0 million tax adjustment; Q1 2019 also benefited from employee share-based compensation and lower-taxed foreign earnings.
- R&D expense increased to $171.4 million from $143.2 million, reflecting investment in transcatheter structural-heart programs and clinical trials. R&D was 17.3% of sales.
- Operating cash flow fell sharply, primarily because of a $180.0 million litigation-settlement payment and higher working-capital needs, partly offset by improved operating performance.
- Adoption of the new lease standard in January 2019 added operating lease right-of-use assets and liabilities; adoption did not affect the income statement. March 31 operating lease liabilities totaled $72.3 million.
Outlook, commentary, risks, contingencies, and unusual items
The filing provides no specific earnings or revenue guidance. Management cited continued adoption of SAPIEN 3 and SAPIEN 3 Ultra, ongoing low-risk TAVR and CENTERA clinical trials, and European launch activity for PASCAL. Edwards completed its approximately $100 million cash acquisition of CAS Medical Systems on April 18, 2019, after quarter-end, to add non-invasive brain tissue-oxygenation monitoring technology.
- Q1 included a $24.0 million charge related to early-stage transcatheter intellectual property and associated clinical and regulatory experience. The cash-flow discussion separately reports a $16.8 million payment for this IP; the filing does not clearly reconcile the two amounts.
- Abbott filed patent-infringement suits in the U.S. and several European jurisdictions alleging that Edwards’ PASCAL system infringes Abbott patents, seeking monetary damages and injunctive relief. Edwards said it would defend itself vigorously; Abbott’s U.S. request for a temporary restraining order was denied. Edwards also sued Abbott alleging MITRACLIP infringes Edwards patents.
- Uncertain tax positions and unresolved transfer-pricing matters remain, including matters for tax years 2015–2018; management noted these could be significant. The IRS was examining tax years 2015–2017.
- Foreign-exchange movements affected reported sales and costs. The company also disclosed investment risk related to fixed-income and equity holdings and contingent consideration liabilities measured using significant unobservable assumptions.
- Management reported no material changes to the risk factors in the 2018 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether TAVR and surgical sales momentum continues, and how much growth reflects underlying demand versus the prior-year $34.7 million surgical reserve comparison.
- Whether operating cash flow recovers after the litigation settlement and working-capital outflow, and the timing of related payments.
- The outcome and potential commercial impact of Abbott’s PASCAL litigation, including requests for preliminary injunctions in international proceedings.
- The financial and operating effects of the CASMED acquisition, completed after quarter-end.
- The sustainability of the 10.2% effective tax rate and developments in uncertain tax and transfer-pricing positions.
- The basis for the $24.0 million special charge versus the separately disclosed $16.8 million IP cash payment.