Edwards Lifesciences Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars. Edwards develops and sells therapies for structural heart disease and critical care, including TAVR, mitral and tricuspid therapies, surgical heart products, and critical-care monitoring products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,140.9 million | $1,094.0 million | $3,194.6 million | $3,173.9 million |
| Gross profit | $859.9 million | $801.6 million | $2,410.3 million | $2,345.7 million |
| Operating income | $357.8 million | $294.3 million | $546.2 million | $836.0 million |
| Net income | $325.2 million | $274.7 million | $513.9 million | $766.7 million |
| Diluted EPS | $0.52 | $0.43 | $0.82 | $1.20 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $654.3 million | $780.0 million |
- Q3 sales grew 4.3%; gross margin was approximately 75.4% versus 73.3%, and operating margin was approximately 31.4% versus 26.9%. Net margin was approximately 28.5% versus 25.1%.
- Nine-month sales increased 0.7%; gross margin was approximately 75.5% versus 73.9%. Operating margin was approximately 17.1% versus 26.3%, reflecting the Abbott litigation charge. Nine-month net income fell about 33% year over year.
- For the nine months, investing cash outflow was $271.2 million, principally reflecting $293.8 million of capital expenditures. Financing cash outflow was $528.3 million, mainly from $625.2 million of treasury-stock purchases. Cash and cash equivalents declined $155.1 million to $1,024.0 million.
- At September 30, cash and cash equivalents plus short-term investments totaled $1,295.3 million. Long-term debt was $594.9 million; no borrowings were outstanding on the $750 million revolving credit facility. Management said available liquidity and operating cash were sufficient for expected requirements over the next 12 months.
Material changes and business drivers
- Q3 sales rose $46.9 million year over year, led by TAVR, up 6.4% to $744.6 million. Nine-month TAVR sales rose 5.3% to $2,081.1 million.
- Nine-month Surgical Structural Heart sales fell 12.4% to $557.6 million, and Critical Care sales fell 2.5% to $527.2 million. COVID-related delays in procedures and reduced hospital capital spending were cited among the causes. TMTT sales rose 36.5% to $28.7 million, from a small base.
- Management attributed improved gross profit partly to the prior-year inventory write-off related to TAVR portfolio decisions, including discontinuation of the CENTERA program, and to Q3 manufacturing efficiencies. COVID-related costs and foreign-exchange effects partially offset the improvement.
- Cash flow from operations declined $125.7 million year over year. Management cited lower operating profits and a $100 million Abbott settlement payment in 2020, partly offset by a $180 million litigation settlement payment in 2019.
- The balance sheet included $773.3 million of inventory, up from $640.9 million at year-end 2019. Property, plant, and equipment, net, increased to $1,276.3 million from $1,060.3 million.
Outlook, risks, and unusual items
- The filing provides no specific numerical sales or earnings guidance. Management said procedure volumes improved during Q2 and Q3 after falling sharply in March, and clinical-trial enrollment had returned to pre-COVID rates. It cautioned that the pandemic’s duration and effects remained uncertain and could continue to adversely affect sales, operations, clinical trials, and financial results.
- In July 2020, Edwards settled worldwide patent disputes with Abbott concerning PASCAL and MITRACLIP-related matters. The settlement produced an estimated $367.9 million pretax charge recorded in Q2, including a $306.9 million after-tax impact cited by management. Edwards paid $100 million in July and expects approximately $100 million of royalty expense through May 2024, with quarterly payments in future years.
- The nine-month effective tax rate was 8.3%, versus 9.9% in 2019; the filing says the change primarily reflected the Abbott settlement’s tax impact. Tax benefits from share-based compensation, lower-taxed foreign earnings, and R&D credits also contributed to rates below the 21% federal statutory rate.
- Other risks include competitive and reimbursement changes, product development and regulatory uncertainty, manufacturing and quality issues, foreign-exchange movements, investment credit risk, and unresolved tax positions. Management said other pending lawsuits were not expected to materially affect overall financial condition, results, or cash flows, but could materially affect an individual reporting period.
- Edwards repurchased 3.0 million shares for $614.7 million during the first nine months and had $625 million of remaining repurchase authorization at September 30. The company also effected a three-for-one stock split in May 2020; reported per-share amounts were retrospectively adjusted.
Key facts for investors to verify
- How COVID-19 procedure volumes, hospital spending, and supply conditions develop, and whether sales growth persists beyond Q3.
- The continuing effect of the Abbott settlement, including future royalties and settlement-related cash payments.
- Whether TAVR growth offsets continued weakness in Surgical and Critical Care, and the commercial and clinical progress of TMTT products.
- Whether elevated inventory and capital spending convert into sales and operating cash flow.
- Potential outcomes of uncertain tax positions, including unresolved U.S.-Swiss transfer-pricing matters, and any material developments in other litigation.