Edwards Lifesciences Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Edwards develops and sells products in transcatheter and surgical heart valve therapy and critical care.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $697.3 million | $590.3 million | +18.1% |
| Gross profit | $517.0 million | $454.3 million | +13.8% |
| Gross margin | 74.1% | 77.0% | -2.9 points |
| Operating expenses: SG&A | $212.7 million | $202.5 million | +$10.2 million |
| Research and development | $102.4 million | $86.4 million | +$16.0 million |
| Income before taxes | $183.3 million | $162.5 million | +12.8% |
| Net income | $143.0 million | $123.4 million | +15.9% |
| Diluted EPS | $0.66 | $0.56 | +17.9% |
| Operating cash flow | $107.1 million | $73.3 million | +$33.8 million |
Sales mix: Transcatheter Heart Valve Therapy (THV) revenue rose 37.0% to $367.8 million; Surgical Heart Valve Therapy fell 0.5% to $195.9 million; Critical Care increased 7.0% to $133.6 million. U.S. sales grew 32.5% to $375.6 million, while international sales increased 4.9% to $321.7 million.
Balance sheet and liquidity: At March 31, cash and cash equivalents were $501.4 million, short-term investments $450.4 million, and long-term investments $369.2 million. Long-term debt was $602.2 million; no amounts were drawn under the $750 million revolving credit agreement. Total assets were $3.85 billion and stockholders’ equity was $2.30 billion. Management said available liquidity was sufficient for working capital, capital expenditures, and other commitments over the next 12 months. Cash and short-term investments were $115.2 million in the U.S. and $836.6 million outside the U.S.; foreign funds may face restrictions or taxes if repatriated.
Cash decreased $217.0 million during the quarter, primarily reflecting share repurchases. Investing activities provided $47.3 million, including net investment proceeds, while financing activities used $369.1 million. Capital expenditures were $27.7 million.
Material changes and management commentary
- Management attributed sales growth primarily to SAPIEN 3 launches in the U.S. and Europe. THV growth more than offset lower surgical heart valve sales and currency-related pressure.
- Gross margin declined 2.9 percentage points. Currency movements, including settlement of hedging contracts, reduced margin by 3.8 points; improved U.S. product mix, led by THV, added 0.9 points.
- SG&A increased in dollars but declined to 30.5% of sales from 34.3%, reflecting stronger revenue growth. R&D was 14.7% of sales, versus 14.6%, with increased investment in mitral and aortic THV development.
- The effective tax rate fell to 22.0% from 24.1%, primarily reflecting reinstatement of the federal research credit and changes in the geographic mix of earnings.
- Q1 included $12.2 million of intellectual-property litigation expense, versus $0.3 million a year earlier, and a $5.0 million contribution to the Edwards Lifesciences Foundation. Other expense, net, was $4.0 million.
- In February, the company entered accelerated share-repurchase agreements for $325 million. It reported 4.2 million shares repurchased under its authorized program during Q1 for an aggregate cost of $400 million, including the ASR forward contract; $277.5 million of authorization remained at quarter-end.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management’s stated liquidity assessment covers the next 12 months; interim results are not necessarily indicative of full-year results.
- In March, the FDA approved expanded use of SAPIEN XT for pulmonic valve replacement and Japan approved SAPIEN 3 for severe, symptomatic aortic stenosis.
- Boston Scientific patent disputes involving SAPIEN 3 and related delivery systems were pending in Europe and the U.S.; Edwards said it intended to defend itself vigorously. Claims seek unspecified damages and injunctive relief. Management said it could not estimate loss ranges for certain legal matters and that charges could affect income or cash flow, although it did not expect currently pending lawsuits to materially affect overall financial position, results, or liquidity.
- Uncertain tax-position liabilities were $222.0 million before estimated offsetting tax benefits of $40.8 million. Transfer-pricing discussions between U.S. and Swiss authorities and an IRS pre-filing agreement remained unresolved; outcomes and timing were uncertain.
- Currency movements affected reported sales and margins. The company also identified exposure to credit and valuation changes in investments, including $788.7 million in fixed-rate debt securities and $30.9 million in equity investments at quarter-end.
Important facts for investors to verify
- Whether THV growth, particularly SAPIEN 3 sales, continues to offset weakness in other product groups and regions.
- How currency effects and hedging settlements affect margins and international results in subsequent quarters.
- Developments in the patent litigation, including potential injunctions, damages, legal costs, or changes to established reserves.
- Resolution and potential financial impact of transfer-pricing matters, uncertain tax positions, and the pending IRS agreement.
- Cash deployment after the substantial Q1 repurchases, including the final ASR settlement, remaining repurchase authority, and accessibility of funds held overseas.