Edwards Lifesciences Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise stated. Edwards develops and sells products for transcatheter and surgical heart valve therapy and critical care.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $590.3 million | $522.4 million | +13.0% |
| Gross profit | $454.3 million | $376.5 million | +20.7% |
| Gross margin | 77.0% | 72.1% | +4.9 percentage points |
| Net income | $123.4 million | $60.3 million | +104.6% |
| Diluted EPS | $1.12 | $0.56 | +100.0% |
| Operating cash flow | $73.3 million | $138.9 million | Down $65.6 million |
Sales by product: Transcatheter Heart Valve Therapy (THV) was $268.5 million, up 41.9%; Surgical Heart Valve Therapy was $196.9 million, down 2.8%; and Critical Care was $124.9 million, down 4.4%. The effective tax rate was 24.1%, versus 22.0%.
At March 31, cash and cash equivalents were $457.0 million and short-term investments were $913.8 million. Long-term debt carrying value was $602.7 million. The company reported total assets of $3.49 billion and stockholders’ equity of $2.21 billion. It had no borrowings outstanding under its $750 million credit agreement.
Material changes and drivers
- THV growth was driven by U.S. and Japan launches of SAPIEN XT, the European launch of SAPIEN 3, and U.S. royalties under a Medtronic license agreement.
- Foreign currency reduced reported net sales by $41.3 million overall, particularly due to weakening of the euro and yen. International sales increased only 2.3% as reported; U.S. sales increased 27.5%.
- Gross margin improvement reflected currency and hedging effects (+2.4 percentage points), the prior-year THV sales-return reserve and inventory write-off (+2.1 points), and product mix (+1.1 points), partly offset by higher operating spending.
- Operating cash flow declined mainly because of a larger bonus payout tied to 2014 performance and lower receivable collections, partly offset by improved operating performance. Cash and cash equivalents fell $196.8 million during the quarter.
- The company repurchased 0.7 million shares for approximately $100 million; $852.5 million of repurchase authorization remained at quarter-end.
Outlook, risks and unusual items
The filing provides no specific forward earnings or revenue guidance. Management said available liquidity sources were sufficient for working capital, capital expenditures, and other commitments over the next 12 months. It noted that most foreign-held cash and investments were considered indefinitely reinvested and that repatriation could involve restrictions and taxes.
- U.S. premarket approval application for SAPIEN 3 had been submitted; the company reported ongoing clinical enrollment for SAPIEN 3 and its pivotal European CENTERA trial. Regulatory and clinical outcomes remain uncertain.
- Uncertain tax positions totaled $195.8 million before estimated offsetting tax benefits. The IRS accepted a pre-filing agreement request concerning part of the Medtronic litigation settlement; its resolution could significantly change uncertain tax positions within 12 months. Transfer-pricing negotiations involving the U.S. and Switzerland also remained unresolved.
- Pending product-related lawsuits could result in charges above reserves, although management did not expect currently pending matters to materially affect financial position, results, or liquidity. Environmental compliance was not expected to have a material impact.
- Q1 2014 included a $7.5 million intellectual-property agreement settlement charge, a $3.5 million investment impairment, a $3.7 million insurance settlement gain, and THV launch-related return reserves and inventory write-offs. These items affect year-over-year comparability.
- Foreign currency, investment valuation, tax matters, and competition were identified as relevant risks. Management reported no material change in the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Whether THV growth and margins persist as newer products launch and customers transition from earlier-generation valves.
- The continuing impact of currency movements and hedging on reported sales, margins, and cash flows.
- Progress and outcomes for SAPIEN 3 U.S. regulatory review and the CENTERA clinical program.
- Resolution and potential financial effects of the IRS pre-filing agreement and transfer-pricing matters.
- Cash generation relative to share repurchases, investment purchases, and the company’s stated liquidity needs.