Business context and reporting period
Edwards Lifesciences Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2016. The company develops and sells medical technologies for structural heart disease and critical care. Its principal product areas are Transcatheter Heart Valve Therapy (THVT), Surgical Heart Valve Therapy (SHVT), and Critical Care.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $739.4 million | $615.5 million | $2,196.0 million | $1,822.6 million |
| Gross profit | $538.0 million | $468.8 million | $1,611.8 million | $1,381.3 million |
| Net income | $141.4 million | $118.1 million | $411.0 million | $354.2 million |
| Diluted EPS | $0.65 | $0.54 | $1.89 | $1.61 |
- Sales increased 20.1% in Q3 and 20.5% year to date; net income increased about 19.7% and 16.0%, respectively.
- Gross margin was approximately 72.8% in Q3 versus 76.2% in 2015, and 73.4% for the nine months versus 75.8%. Management attributed the decline primarily to foreign-exchange effects, including hedge settlements, partly offset by improved U.S. product mix led by THVT.
- THVT sales rose 38.5% in Q3 and 41.4% year to date, to $410.1 million and $1,196.5 million. SHVT sales rose 1.6% in Q3 but declined 0.6% year to date; Critical Care sales rose 5.2% and 6.8%, respectively.
- U.S. sales rose 29.1% in Q3 and 31.3% year to date. International sales rose 10.2% and 9.7%, respectively.
- R&D expense was $113.1 million in Q3 and $328.4 million year to date; the company invested 15.0% of nine-month sales in R&D.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $503.3 million, up from $445.9 million. Capital expenditures were $112.9 million, versus $65.2 million.
- Investing activities used $291.9 million; financing activities used $273.6 million. Cash and cash equivalents fell $73.4 million from year-end 2015 to $645.0 million.
- At September 30, cash and short-term investments totaled $1,200.3 million. Long-term investments were $467.5 million. Long-term debt carrying value was $600.6 million; the company had no borrowings under its $750 million credit agreement.
- The company reported $216.5 million of cash and short-term investments in the U.S. and $983.8 million outside the U.S. It said available liquidity and operating cash flow were sufficient for requirements over the next 12 months, while noting potential restrictions and taxes on repatriation.
- Share repurchases and related ASR activity totaled $400.1 million during 2016 through September 30; $277.5 million of repurchase authorization remained.
Changes, outlook, and risks
- Growth was led by SAPIEN 3 launches and adoption in the U.S., Europe, and Japan. FDA and European approvals expanded SAPIEN 3 use to intermediate-risk patients; the FDA also approved SAPIEN XT for pulmonic valve replacement. The filing notes additional product approvals and a CE Mark received after quarter-end.
- Q3 SG&A and R&D expenses increased, including spending to support THVT sales and development. Year-to-date intellectual-property litigation expense rose to $27.8 million from $3.7 million.
- A $34.5 million second-quarter charge reflected acquired early-stage THVT in-process research and development. The company also recorded a $5.0 million charitable foundation contribution in other expenses.
- No specific earnings or sales forecast is provided in the filing. Management expects a Dominican Republic withholding tax change to increase the effective tax rate in 2017, but does not expect a material effect on results.
- Material uncertainties include Boston Scientific patent litigation in the U.S. and Europe, for which outcomes and potential losses are uncertain and could materially affect results or liquidity; tax examinations and transfer-pricing matters, including an unresolved U.S.-Switzerland APA; and foreign-exchange, investment-credit, and repatriation risks.
- Uncertain tax-position liabilities were $231.4 million before estimated offsetting tax benefits. Management said there were no material changes to previously disclosed risk factors; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether THVT growth and product launches continue to offset slower SHVT performance and foreign-exchange pressure on margins.
- How litigation developments, trial outcomes, and related legal costs affect earnings, cash flows, and product access.
- Progress and resolution of tax audits, the transfer-pricing agreement, and the potential 2017 Dominican Republic tax effect.
- Cash generation, working-capital needs, capital spending, repurchases, and the availability of foreign-held funds for U.S. operations.
- Development, testing, and regulatory progress for acquired THVT technologies, which had no alternative use and required further studies before commercialization.