Edwards Lifesciences Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Edwards develops and sells cardiovascular products in Transcatheter Heart Valve Therapy (THV), Surgical Heart Valve Therapy, and Critical Care.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $615.5 million | $607.4 million | $1,822.6 million | $1,704.9 million |
| Gross margin | 76.2% | 72.3% | 75.8% | 72.7% |
| Net income | $118.1 million | $94.6 million | $354.2 million | $701.9 million |
| Diluted EPS | $1.07 | $0.87 | $3.22 | $6.49 |
| Operating cash flow | Not separately provided | Not separately provided | $445.9 million | $929.1 million |
- Q3 sales rose 1.3%; nine-month sales rose 6.9%. THV sales increased 10.8% in Q3 and 25.1% year to date. Surgical Heart Valve Therapy and Critical Care sales declined in both periods.
- Gross-margin improvement reflected favorable currency effects, including hedging settlements, and a richer THV product mix; operating investments partly offset the benefit over nine months. Q3 SG&A was $212.0 million and R&D was $101.0 million.
- Nine-month 2015 net income and operating cash flow were substantially below 2014, which included a $750.0 million Medtronic litigation-settlement payment ($487.9 million net of tax). The 2014 comparison also included special charges.
- At September 30, cash and cash equivalents were $646.1 million, short-term investments $604.4 million, and current assets $2,145.5 million. Long-term debt carrying value was $604.9 million; the $750 million revolving credit facility had no borrowings outstanding.
- Cash declined $7.7 million during the first nine months. Investing cash outflow was $343.4 million, including $320.1 million net cash paid for the CardiAQ acquisition; financing cash outflow was $98.9 million, including $180.1 million of treasury-stock purchases.
Changes, outlook, and risks
- U.S. sales grew 9.0% in Q3, while international sales fell 6.0%, with currency translation a major headwind. Management attributed growth to THV launches, including SAPIEN 3 in the U.S. in July 2015; the FDA had approved SAPIEN 3 with the Commander Delivery System for high-risk patients in June.
- Management said available liquidity was sufficient for working capital, capital expenditures, and other commitments over the next 12 months. The filing provides no specific revenue or earnings guidance.
- The August acquisition of CardiAQ, a developer of a transcatheter mitral valve replacement system, involved $348.0 million cash consideration after adjustments and a potential additional $50.0 million contingent on European regulatory approval within 48 months. The company recorded a $30.3 million fair-value liability for the milestone. The purchase-price allocation remained preliminary; the acquired in-process R&D requires further development and regulatory approvals.
- Currency movements affect reported sales and costs; management cited weakening of the euro and yen, and noted foreign-exchange risks and investment-market exposure. Management identified no material change in reported risk factors.
- Tax matters remain uncertain: uncertain tax-position liabilities were $212.4 million before estimated offsetting tax benefits, and a U.S.–Switzerland transfer-pricing agreement and IRS pre-filing matter were unresolved. Finalization of the pre-filing agreement could significantly change uncertain tax positions within 12 months.
- The company disclosed pending or threatened product-related legal matters and said losses could exceed reserves, although management did not expect currently pending lawsuits to materially affect financial position, results, or liquidity. It could not estimate losses for matters without reserves or additional losses on reserved matters.
Investor facts to verify
- Underlying THV growth and launch uptake, separating product performance from currency effects and customer transitions between SAPIEN generations.
- Sustainability of gross-margin gains and the effect of manufacturing investments, R&D spending, and foreign-exchange hedges.
- CardiAQ development milestones, regulatory timing, purchase-accounting revisions, and potential milestone payment.
- Resolution and cash or earnings consequences of uncertain tax positions, including the IRS pre-filing matter and transfer-pricing negotiations.
- Cash generation, foreign-held liquidity and repatriation constraints, debt obligations, and continued share repurchases.