Edwards Lifesciences Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial results are unaudited. Edwards develops and sells cardiovascular and critical-care products, organized across Transcatheter Heart Valve Therapy (THV), Surgical Heart Valve Therapy, and Critical Care.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $616.8 million | $575.1 million | $1,207.1 million | $1,097.5 million |
| Gross margin | 74.3% | 73.7% | 75.6% | 72.9% |
| Net income | $112.7 million | $547.0 million | $236.1 million | $607.3 million |
| Diluted EPS | $1.02 | $5.09 | $2.14 | $5.63 |
Sales grew 7.3% in Q2 and 10.0% in the first half. THV sales rose 28.1% in Q2 and 34.5% for the half; surgical valve sales fell 4.6% and 3.8%, respectively, and Critical Care sales fell 7.1% and 5.8%. U.S. sales increased 25.1% in Q2, while international sales declined 5.7%, largely reflecting foreign-exchange headwinds. Management attributed stronger gross margins to favorable currency effects and product mix, partly offset by manufacturing investments and sales-return reserves and related costs associated with product launches.
Reported profit fell sharply against 2014, when results included a $750.0 million Medtronic litigation-settlement payment, net of tax $487.9 million, and a $50.0 million charitable contribution expense, plus a $7.5 million settlement charge. The 2014 comparison also included $741.9 million of net intellectual-property litigation income for the first half. Accordingly, the year-over-year net income and EPS declines do not reflect an equivalent deterioration in underlying sales performance.
Research and development expense was $97.5 million in Q2 and $183.9 million for the first half; first-half spending equaled 15.2% of sales. SG&A was $213.9 million in Q2 and $416.4 million for the half. The effective tax rate was 20.7% in Q2 and 22.5% for the half, versus 32.7% and 31.8% in 2014; prior-year rates reflected tax on the Medtronic payment and other tax items.
Cash, debt, and liquidity
For the six months, operating cash flow was $243.4 million, versus $916.9 million in 2014, primarily because the prior-year period included the Medtronic payment and 2015 had a higher bonus payout. Capital expenditures were $39.2 million. Investing cash outflow was $167.8 million, including net investment purchases of $123.5 million; financing cash outflow was $122.5 million, primarily reflecting $179.9 million of treasury-stock purchases. Cash and cash equivalents ended the period at $597.6 million, down from $653.8 million at year-end 2014.
At June 30, cash and cash equivalents plus short-term investments totaled approximately $1.409 billion. Long-term debt carrying value was $600.3 million; the company had no borrowings under its $750 million revolving credit facility. Management said available liquidity was sufficient for working capital, capital expenditures, and other commitments over the next 12 months. Cash and short-term investments held outside the U.S. were subject to jurisdictional restrictions and potential taxes if repatriated. The company repurchased $175.0 million of shares during the first half and had $777.5 million of remaining repurchase authority.
Outlook, developments, and risks
The filing provides no specific revenue or earnings guidance. Management cited product innovation and its pipeline as growth priorities. In June 2015, the FDA approved SAPIEN 3 with the Commander Delivery System for high-risk patients; enrollment was underway in an intermediate-risk continued-access program and a European pivotal trial of the self-expanding CENTERA platform.
After quarter-end, Edwards agreed to acquire CardiAQ Valve Technologies for $350.0 million in cash, subject to adjustments, plus a potential $50.0 million payment if specified European regulatory approval is obtained within 48 months of closing. The company planned to fund the purchase with U.S. cash; the acquisition’s financial-statement impact was still being evaluated.
Key uncertainties include foreign-exchange movements, competitive and product-launch execution, clinical and regulatory outcomes, and manufacturing investment needs. The company reported pending or threatened product-related legal matters; it could not estimate losses for certain contingencies, and charges could exceed reserves, although management did not expect pending lawsuits to materially affect financial position, results, or liquidity. Uncertain tax positions totaled $201.6 million before estimated offsetting benefits; resolution of transfer-pricing matters and an IRS pre-filing agreement could significantly change those positions within 12 months. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material change to the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Assess underlying sales and profit trends separately from the unusually large 2014 Medtronic settlement and related tax and charitable-contribution items.
- Track THV growth, product transitions and launches, and whether declines in Surgical Heart Valve Therapy and Critical Care persist.
- Evaluate the impact of currency on reported sales and margins, and the extent to which hedges offset currency exposure.
- Confirm CardiAQ closing terms, funding, potential contingent payment, and subsequent accounting impact.
- Monitor operating cash conversion, share repurchases, liquidity, and outcomes of significant tax and legal contingencies.