Edwards Lifesciences Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Edwards develops and sells medical technologies for structural heart disease and critical-care monitoring. Its product areas are Transcatheter Heart Valve Therapy (THVT), Surgical Heart Valve Therapy (SHVT), and Critical Care.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $894.8 million | $883.5 million | +1.3% |
| Gross profit / margin | $661.2 million / 73.9% | $667.9 million / 75.6% | Margin down 1.7 percentage points |
| Operating income / margin | $252.5 million / 28.2% | $298.3 million / 33.8% | Down 15.4% |
| Net income | $206.6 million | $230.2 million | Down 10.3% |
| Diluted EPS | $0.96 | $1.06 | Down 9.4% |
| Cash from operations | $151.3 million | $128.3 million | Up $23.0 million |
Revenue by product: THVT was $551.6 million, up 2.3%; SHVT was $179.5 million, down 10.0%; and Critical Care was $163.7 million, up 13.0%. U.S. sales rose 3.2%; Europe fell 11.9%, while Japan and Rest of World rose 16.9% and 17.9%, respectively.
SG&A increased to $256.0 million from $229.6 million, and R&D rose to $143.2 million from $128.7 million. The effective tax rate was 21.6% in both periods. Q1 2018 tax expense included a $24.0 million adjustment to provisional Tax Act amounts following new IRS guidance.
Cash, debt, and liquidity
At March 31, cash and cash equivalents were $1.227 billion, short-term investments $272.3 million, and long-term investments $532.1 million. Total debt was approximately $1.055 billion: $598.6 million of short-term senior notes and $456.0 million of long-term credit-agreement borrowings. Cash and short-term investments exceeded reported debt by approximately $444 million.
Cash increased $408.7 million during the quarter. Investing activities provided $220.3 million, mainly from investment proceeds, partly offset by $43.2 million of capital expenditures and a $10.0 million contingent-consideration payment. Financing activities provided $40.9 million. Management said available cash, investments, credit facilities, and operating cash flow should cover requirements for the next 12 months.
The $600 million, 2.875% senior notes mature in October 2018; the company said it planned to issue new notes to partially replace them and expected to cover the remainder through refinancing, cash, or its credit agreement. The $750 million credit agreement matures in July 2019; $456.0 million was outstanding.
Material changes, outlook, and notable items
- Reported revenue growth was modest, while operating income and net income declined. Management cited higher operating expenses, foreign-exchange effects, and comparison-period factors.
- Q1 2017 European THVT sales included $61.8 million of additional SAPIEN 3 inventory purchased by German customers ahead of a potential litigation-related supply interruption. Customers consumed that inventory through Q1 2018.
- Q1 2018 SHVT sales included a $34.7 million U.S. sales-return reserve associated with conversion to a consignment inventory model. Gross margin also faced currency, Swiss plant-closure, manufacturing-investment, and consignment-conversion pressures; improved U.S. product mix partly offset these effects.
- A $7.1 million gain arose from curtailment of the Swiss defined-benefit plan following the planned plant closure. The closure-related severance charge was recorded in 2017; $1.8 million of severance obligations remained at quarter-end.
- Product and regulatory developments included CE Mark approval for the self-expanding CENTERA valve, U.S. authorization to begin its intermediate-risk pivotal trial, and U.S. approval in April for a limited continued-access protocol for the PARTNER 3 low-risk trial. The Acumen Hypotension Prediction Index received U.S. regulatory approval in Q1.
- Patent litigation remains a material uncertainty. In the U.K., an appellate ruling upheld a decision finding a Boston Scientific patent valid and infringed by SAPIEN 3; damages and injunction matters were remanded. The company said it could not estimate losses for certain legal contingencies. It also reported a favorable U.S. patent-office decision invalidating claims asserted against SAPIEN 3.
- The company early adopted several accounting standards in Q1, including revenue recognition; it reported no material financial-statement impact from the revenue standard.
Important facts for investors to verify
- Whether THVT growth and Critical Care momentum can offset SHVT weakness and the nonrecurring comparison effects in Europe and U.S. surgical valves.
- How the 2018 note maturity will be refinanced or repaid, and the resulting interest cost and liquidity position.
- Final accounting for the Tax Act transition and any further changes to tax expense or cash tax obligations.
- Developments in patent disputes, including potential injunctions, damages, appeals, and impacts on product availability or sales.
- Whether gross-margin pressures from foreign exchange, manufacturing investments, and the consignment transition persist.