Edwards Lifesciences Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Edwards develops and sells medical technologies for structural heart disease and critical care monitoring, across Transcatheter Heart Valve Therapy (THVT), Surgical Heart Valve Therapy (SHVT), and Critical Care.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $943.7m | $841.8m | $1,838.5m | $1,725.3m |
| Gross profit | $697.5m | $630.7m | $1,358.7m | $1,298.6m |
| Operating income | $252.1m | $241.0m | $504.6m | $539.3m |
| Net income | $282.7m | $186.1m | $489.3m | $416.3m |
| Diluted EPS | $1.32 | $0.86 | $2.28 | $1.93 |
- Sales rose 12.1% in Q2 and 6.6% year to date. THVT grew 20.0% in Q2; Critical Care grew 14.5%; SHVT declined 8.1%.
- Gross margin was approximately 73.9% in Q2 and year to date, below the prior-year periods (approximately 74.9% and 75.3%). Management cited foreign exchange, Switzerland plant-closure costs, and operational investment, partly offset by improved U.S. product mix.
- Operating income increased 4.6% in Q2 but fell 6.4% year to date. Net income increased substantially, reflecting tax benefits as well as operating performance.
- Six-month operating cash flow was $291.5m, down $34.5m year over year, primarily due to higher tax payments and bonus payouts. Capital expenditures were $96.0m.
- At June 30, cash and equivalents were $1.226bn and short-term investments $174.4m. Debt carrying value totaled $1.193bn: $599.2m short-term and $593.9m long-term. The company had no borrowings under its $750m revolving credit agreement and reported compliance with covenants.
Changes, outlook, and material matters
- Q2 sales growth was led by SAPIEN 3 and increased U.S. and Japan demand, plus HemoSphere platform sales. Foreign exchange also lifted reported sales. Prior German advance purchases in Q1 2017 and their subsequent consumption affected comparisons; year-to-date SHVT sales included a $63.1m reserve related to conversion to consignment inventory.
- The effective tax rate was negative 12.6% in Q2 and 4.9% for the first half. Six-month results included a $36.1m benefit from settling IRS audits and tax-reform-related effects; tax accounting estimates under the 2017 Act remained subject to change.
- Edwards issued $600m of 4.300% notes due 2028 and expected to repay the remaining 2013 notes due October 2018 using available cash. It repurchased $420.4m of shares during 2018; an April accelerated repurchase agreement covered $400m.
- Management said available liquidity was sufficient for working capital, capital expenditures, and other commitments for the next 12 months. The filing provides no specific earnings or sales guidance.
- Patent disputes with Boston Scientific remain a significant uncertainty. In the U.K., an injunction concerning SAPIEN 3 was confirmed but stayed for 12 months; other proceedings and appeals continue. The company warns that legal outcomes could materially affect results, financial position, or liquidity, and says it cannot estimate losses for certain contingencies.
Investor verification priorities
- Assess how sustainable THVT growth is and whether SHVT sales recover after the consignment-model reserve and German inventory comparison effects.
- Separate underlying earnings from tax benefits and other unusual items, including the IRS settlement, tax-reform adjustments, and contingent-consideration remeasurement expense.
- Review cash generation against share repurchases, capital spending, and the October 2018 note maturity.
- Monitor patent litigation, particularly injunction and appeal developments affecting SAPIEN 3, and any resulting sales or cash exposure.