Edwards Lifesciences Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context and reporting period
Edwards Lifesciences develops and sells medical technologies for structural heart disease and critical care. Its principal product groups are Transcatheter Heart Valve Therapy (THVT), Surgical Heart Valve Therapy (SHVT), and Critical Care. THVT, led by the SAPIEN 3 valve, was the largest and fastest-growing group in 2016.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $2,963.7 | $2,493.7 | +18.8% |
| Gross profit | $2,166.3 | $1,876.5 | +15.4% |
| Gross margin | 73.1% | 75.2% | -2.1 percentage points |
| Net income | $569.5 | $494.9 | +15.1% |
| Diluted EPS | $2.61 | $2.25 | +16.0% |
| Operating cash flow | $704.4 | $549.7 | +$154.7 |
| Capital expenditures | $176.1 | $102.7 | +$73.4 |
Fourth-quarter 2016 net sales were $767.7, gross profit $554.5, net income $158.5, and diluted EPS $0.73. Full-year sales by product group were THVT $1,628.5 (+38.0%), SHVT $774.9 (-1.3%), and Critical Care $560.3 (+6.0%).
At year-end, cash and cash equivalents were $930.1, short-term investments $341.0, and long-term investments $532.1. Current assets were $2,240.0 and current liabilities $532.5. Long-term debt was $822.3; total stockholders’ equity was $2,619.0. The company reported $704.4 of operating cash flow, $211.7 of cash used in investing, and $268.5 of cash used in financing. It repurchased 7.2 million shares for an aggregate $646.5 during the year. No cash dividends were paid.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by THVT, with U.S. sales rising 27.9% and international sales rising 9.5%. U.S. sales were 55% of total revenue.
- Gross margin declined as foreign exchange effects, including hedge settlements, reduced margin by 4.3 percentage points and manufacturing-capacity investments added costs. Improved THVT mix partly offset these pressures.
- Net income increased with higher sales, partly offset by a $34.5 acquired in-process research and development charge and higher intellectual-property litigation expense ($32.6 versus $7.0 in 2015).
- Operating cash flow rose to $704.4, primarily due to improved operating performance and lower supplier payments, partly offset by higher receivables and stock-plan tax effects.
- 2015 and 2016 comparisons are not directly equivalent to 2014: 2014 net income included a $750.0 million upfront Medtronic settlement payment ($487.9 million net of tax).
Outlook, management commentary, risks, and unusual items
- Management stated that available liquidity, credit facilities, and operating cash flow should fund working capital, capital expenditures, and other commitments for the next 12 months. The filing provides no clear numeric revenue or earnings guidance.
- In January 2017, Edwards completed its acquisition of Valtech for approximately $340.0 million, subject to adjustments, funded with approximately $84.3 million cash and 2.8 million shares. Up to $350.0 million in additional milestone payments may be payable over ten years. The company also holds an option to acquire a spun-off technology program for approximately $200.0 million, subject to adjustments.
- Key risks include regulatory approval delays or failures, clinical-trial uncertainty, product quality or supply interruptions, reimbursement and pricing pressure, competition, foreign-exchange exposure, and intellectual-property disputes. Sales are concentrated in the growing THVT business, increasing the importance of continued adoption and successful product development.
- Boston Scientific patent litigation concerning SAPIEN 3 and related delivery systems remained unresolved; claims seek unspecified damages and injunctive relief. The company stated outcomes are uncertain and could materially affect results or liquidity.
- Gross uncertain tax positions were $245.5 million, with $14.7 million of accrued related interest. Transfer-pricing discussions with U.S. and Swiss authorities and an IRS appeal related to the Medtronic settlement remained unresolved; management said these could cause a significant change in uncertain tax positions.
- The 2.3% U.S. medical-device excise tax was suspended for 2016 and 2017 and was scheduled to resume in 2018. The Dominican Republic’s 10% withholding tax on branch remittances became applicable to remittances paid on or after October 5, 2016; management expected a non-material effect on 2017 results.
- The 2016 effective tax rate was higher than in 2015, principally due to the relative contribution of U.S. and foreign earnings, partly offset by increased research-credit benefits. The company cited foreign tax incentives that reduced taxes by $77.4 million in 2016 and whose primary benefits expire in 2024.
Most important facts for investors to verify
- Whether THVT growth and SAPIEN 3 adoption continue, and how product mix affects margins.
- Whether foreign-exchange movements and manufacturing-capacity spending continue to pressure gross margin.
- The status, accounting impact, and contingent-payment exposure from the Valtech acquisition and other development-stage programs.
- Developments in Boston Scientific patent litigation and the potential effect on SAPIEN 3 sales, costs, or market access.
- Resolution of transfer-pricing and other uncertain tax matters, and the resulting cash-tax and effective-tax-rate impact.
- Cash availability and capital allocation, including the use of overseas cash, debt repayment, acquisition spending, and continued share repurchases.