Edwards Lifesciences Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts are in millions of dollars except per-share data. The filing is unaudited.
Business context and performance
Edwards develops products for structural heart disease and critical care. Q2 growth was led by Transcatheter Heart Valve Therapy (THVT), including SAPIEN 3; management also cited improved THVT product mix and ongoing investment in new structural-heart technologies.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $759.3 | $616.8 | $1,456.6 | $1,207.1 |
| Gross profit | $556.8 | $458.2 | $1,073.8 | $912.5 |
| Net income | $126.6 | $112.7 | $269.6 | $236.1 |
| Diluted EPS | $0.58 | $0.51 | $1.24 | $1.07 |
| Operating cash flow | Not stated separately | Not stated separately | $297.4 | $243.4 |
- Q2 sales increased 23.1% year over year; six-month sales increased 20.7%. THVT sales rose 48.7% in Q2 and 43.0% for the six months. Surgical Heart Valve Therapy sales declined 2.6% and 1.6%, respectively; Critical Care sales increased 8.0% and 7.5%.
- Approximate gross margin was 73.3% in Q2 versus 74.2% a year earlier, and 73.7% for the six months versus 75.6%. Management attributed the pressure primarily to foreign-exchange effects, partly offset by product mix and prior-year SAPIEN 3 launch-related returns and inventory costs.
- Q2 net income increased 12.3%; six-month net income increased 14.2%. Results included a $34.5 million Q2 charge for acquired in-process research and development (IPR&D); without adjustments, the filing does not provide an alternative earnings measure.
- At June 30, cash and cash equivalents were $369.9, short-term investments $690.3, and long-term investments $391.7. Long-term debt carrying value was $602.5; no borrowings were outstanding under the $750 million revolving credit agreement. Cash and short-term investments totaled $1,060.2.
- Six-month investing cash outflow was $295.8, including $64.8 in capital expenditures. Financing cash outflow was $337.4, including $380.7 of treasury-stock purchases and $35.0 paid on the ASR forward contract. Cash declined $348.5 to $369.9.
Changes, outlook, and risks
- U.S. sales rose 32.6% in both Q2 and the six-month period; international sales rose 13.9% and 9.4%, respectively. Reported sales benefited from currency translation compared with the prior year.
- Management said available liquidity and operating cash flow were sufficient for working capital, capital expenditures, and other commitments over the next 12 months. The company reported $118.5 of cash and short-term investments in the U.S. and $941.7 outside the U.S.; foreign funds may face restrictions and taxes if repatriated. The filing provides no specific revenue or earnings guidance.
- R&D spending was 14.8% of six-month sales. In May, the company acquired two early-stage technologies for THVT programs; development, testing, and clinical studies remain necessary before any product could be sold.
- Patent disputes with Boston Scientific involve SAPIEN 3 and Lotus products in the U.S. and Europe. Complaints seek unspecified damages and injunctive relief; the company said outcomes could materially affect financial position, results, or liquidity. Trials were scheduled for January and February 2017.
- Uncertain tax-position liabilities were $225.3, before estimated offsetting tax benefits; transfer-pricing discussions between U.S. and Swiss authorities and an IRS pre-filing agreement remained unresolved. Management said the final outcomes and timing were uncertain.
- Other notable items included a $5.0 charitable contribution in Q1 and $21.3 of six-month intellectual-property litigation expense, versus $1.3 a year earlier. The FDA had lifted the warning letter regarding the Utah facility.
Important facts for investors to verify
- Whether THVT growth, particularly SAPIEN 3 adoption, can continue and offset weakness in surgical heart valve sales.
- How currency movements, hedging, and product mix affect gross margins and earnings.
- Potential financial and operating consequences of the Boston Scientific patent litigation and the timing of proceedings.
- Milestones, further costs, and commercialization prospects for the acquired early-stage technologies.
- Resolution of tax matters and the practical availability and tax cost of foreign-held funds for U.S. needs.