Edwards Lifesciences Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Comparative figures are for the three months ended March 31, 2016, unless otherwise stated. Edwards develops and sells products for structural heart disease and critical care, grouped into transcatheter heart valve therapy (THVT), surgical heart valve therapy (SHVT), and Critical Care.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $883.5 million | $697.3 million | +26.7% |
| Gross profit | $667.9 million | $517.0 million | +29.2% |
| Gross margin | 75.6% | 74.1% | +1.5 percentage points |
| Income before taxes | $293.6 million | $183.3 million | +60.2% |
| Net income | $230.2 million | $143.0 million | +61.0% |
| Diluted EPS | $1.06 | $0.66 | +60.6% |
| Operating cash flow | $128.3 million | $107.1 million | +$21.2 million |
THVT sales increased 46.6% to $539.2 million, SHVT rose 1.8% to $199.5 million, and Critical Care rose 8.4% to $144.8 million. U.S. sales grew 23.7% to $464.6 million; international sales grew 30.2% to $418.9 million. Management attributed growth primarily to SAPIEN 3 adoption and improved product mix. European sales benefited in part from customer inventory purchases in Germany ahead of a potential supply interruption tied to patent litigation.
SG&A expense was $229.6 million versus $212.7 million; R&D expense was $128.7 million versus $101.8 million. R&D equaled 14.6% of sales. Net income also benefited from a $10.2 million tax benefit associated with adopting new stock-compensation accounting guidance.
Cash, liquidity, and debt
At March 31, cash and cash equivalents were $819.3 million and short-term investments were $98.9 million, totaling $918.2 million. Long-term investments were $519.0 million. Long-term debt was $847.9 million; this included $250.0 million outstanding under a $750.0 million credit agreement and $600.0 million face value of 2.875% senior notes due in October 2018. Management said available liquidity and operating cash flows were sufficient for expected requirements over the next 12 months. Cash and short-term investments held outside the U.S. totaled $685.1 million, much of it considered indefinitely reinvested.
Operating cash flow increased, partly offset by higher working-capital needs. Investing activities provided $151.2 million, including net investment proceeds and an $82.0 million net cash payment for the Valtech acquisition. Financing activities used $391.3 million, primarily reflecting $437.4 million of treasury-stock purchases. Cash declined by $110.8 million during the quarter. The company repurchased 4.6 million shares for approximately $436.0 million and had $595.1 million of authorization remaining.
Material developments, outlook, and risks
- Valtech acquisition: Closed January 23, 2017. Consideration included about 2.8 million Edwards shares and $86.3 million cash. The preliminary purchase-price allocation included $315.0 million goodwill, $109.2 million developed technology, and $87.9 million in-process R&D; the allocation remained subject to finalization. Contingent milestone consideration was recorded at a $195.6 million fair value. Edwards also holds an option to acquire a spun-off mitral valve technology program for approximately $200.0 million, plus a possible $50.0 million regulatory milestone payment.
- Litigation: Boston Scientific patent disputes involve SAPIEN 3 and Lotus products in several jurisdictions. German and U.K. rulings found certain infringement, with potential injunctions affecting SAPIEN 3 sales; the U.K. injunction was stayed pending appeal, and the German injunction had not been elected as of the filing. Edwards appealed and challenged patent validity. The company warns that litigation outcomes could materially affect financial position, results, or liquidity, and it could not estimate potential losses for unreserved matters.
- Taxes: The company reached agreement on some transactions under a U.S.-Switzerland Advance Pricing Agreement and expected related payments within 12 months; other material transfer-pricing matters remained under negotiation. Net uncertain tax positions were $125.3 million after estimated offsets.
- Product development: The company cited continued investment in aortic and mitral THVT development. In April 2017, after quarter-end, it received FDA clearance for the HemoSphere advanced monitoring platform.
- Outlook: The filing does not provide specific quantified revenue or earnings guidance. Management stated that liquidity was adequate for anticipated needs over the next 12 months. The filing cautions that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How much of Q1 THVT growth—particularly German sales—reflects durable demand versus inventory purchases ahead of possible litigation-related supply disruption.
- Current status and potential commercial impact of patent rulings, appeals, injunctions, and related proceedings across jurisdictions.
- Final Valtech purchase-price allocation, milestone-payment assumptions, and whether Edwards exercises its option on the additional mitral technology program.
- Cash conversion and working-capital trends, alongside the scale and pace of share repurchases and debt maturities.
- Resolution, timing, and cash impact of transfer-pricing and other uncertain tax matters.