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Edwards Lifesciences (EW) Tops Q2 Earnings, '16 View Up

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Edwards Lifesciences Corp. (EW - Free Report) reported second-quarter 2016 adjusted earnings per share (EPS) of 76 cents, beating the Zacks Consensus Estimate by 8.6%. Adjusted earnings also improved 33.3% year over year, primarily driven by strong sales growth.

However, unfavorable impact of foreign exchange and increased selling, general and administrative (SG&A) along with research and development (R&D) expenses partially stemmed this growth. Further, the bottom line results also surpassed Edwards Lifesciences’ guidance of 67–73 cents.

Excluding one-time items, net income in the second quarter improved 12.3% or 13.7% year over year to $126.6 million or 58 cents per share, respectively.

Sales Details

Edwards Lifesciences’ second-quarter sales improved 23.1% to $759.3 million. The top line also comfortably beat the Zacks Consensus Estimate of $722 million and the company guidance of $700–$740 million. Revenues were primarily driven by considerable growth in transcatheter heart valve (THV) sales as well as strong performance delivered by the Critical Care segment.

In the second quarter, underlying sales increased 21.1% (excluding the impact of foreign exchange fluctuations and the THV sales return reserve). In the U.S., sales improved 32.6% year over year to $401.5 million. In the international market, sales grew 13.9% to $357.8 million.

 

EDWARDS LIFESCI Price, Consensus and EPS Surprise

EDWARDS LIFESCI Price, Consensus and EPS Surprise | EDWARDS LIFESCI Quote

 

Sales by Product Groups

In the second quarter, sales from the surgical heart valve therapy product group declined 2.6% year over year to $198.7 million (down 3.3% on an underlying basis). Globally, sales growth was affected as a temporary suspension was imposed on this segment’s surgical mitral valves. However, this negative factor was partially offset by solid growth in surgical aortic valves.

The transcatheter heart valves (THV) product group sales grew 48.7% to $418.6 million (up 45.1%), primarily on the back of continued strong therapy adoption across all geographies, with notable strength in the U.S. THV sales rose 66.7% on an underlying basis in the U.S., driven by better-than-expected procedure growth as well as strong sales growth in both large and small hospitals

Critical Care product group sales improved 8% to $142 million (up 6.7%). Global growth in this product group was driven primarily by strong growth witnessed in Edwards Lifesciences’ core products and the company’s Enhanced Surgical Recovery Program.

Propelled by THV’s strong momentum, Edwards Lifesciences now expects sales from THV products in the range of $1.5–$1.7 billion for full-year 2016, above the company’s earlier guidance of $1.4–$1.6 billion; reflecting a 30% growth on an underlying basis. However, management continues to anticipate sales in the range of $780–$820 million for Surgical Heart Valves and $510–$550 million for Critical Care.

Margins

In the second quarter, gross margin contracted by 100 basis points (bps) to 73.3%, in line with management’s expectation. This decline can be attributed to unfavorable foreign exchange fluctuations, partially offset by a more profitable product mix reflecting strong growth in THV and the prior year sales return reserve.

SG&A expenses rose 7% year over year to $228.8 million, on account of sales and personnel related expenses. On the other hand, R&D expenditures grew 15.8% year over year to $112.9 million, owing to continued investments in the company’s transcatheter mitral valve and aortic valve programs. Adjusted operating margin in the quarter expanded 450 bps to 28.3% as rise in revenues outweighed the rise in operating expense.  

Cash Position

Edwards Lifesciences exited the second quarter with cash and cash equivalents and short-term investments of $1.1 billion, compared with $951.8 million at the end of the first-quarter 2016. Long-term debt was $602.5 million compared with $602.2 million at the end of prior quarter.

Cash flow from operating activities was $190.3 million in the second quarter. Excluding capital spending of $37.1 million, free cash flow was $153.2 million. During the first-half 2016, Edwards Lifesciences repurchased 4.6 million shares of its common stock for $415.7 million.

Guidance

Edwards Lifesciences raised its full-year 2016 financial guidance. Management now expects total sales to be at the high end of its previous range of $2.70–$3 billion. The current Zacks Consensus Estimate for revenues of $2.90 billion lies within the guided range.

Likewise, the company projects adjusted earnings per share in the range of $2.78–$2.88 (up from the earlier guidance of $2.67–$2.77), as a result of an upward revision in estimates for sales. The current Zacks Consensus Estimate of $2.75 lies below the company-guided range.

Earlier, management announced its expectation to deliver 2016 free cash flow in the range of $500–$600 million.

For the third-quarter 2016, at current foreign exchange rates, adjusted EPS is forecasted within 62–68 cents on revenues of $720–$760 million. The Zacks Consensus Estimate for EPS of 64 cents lies within the EPS guidance range, while the same for revenues of $700.8 million lie below the company’s guidance range. 

Our Take

Edwards Lifesciences ended the second quarter on an encouraging note, with its financial numbers squarely beating the Zacks Consensus Estimate; in line with the last quarter.   Moreover, the upward revision in both EPS and sales expectations for full-year 2016 raises investor optimism in the stock. Incidentally, the upgraded view takes into account strong first half results delivered by the company, an expected third quarter approval of intermediate risk in the U.S., and the current momentum of therapy adoption globally.

However, the company continued to perform poorly on its gross margin front. On the other hand, although Edwards’ higher operating expenses might have made investors anxious, it is a relief to know that the higher expenses was on account of advanced initiatives adopted by the company to improve its overall sales growth.

Nevertheless, management expects to gain traction in the ever expanding TAVR market, based on increasing preference in favor of transcatheter aortic valve replacement as well as compelling clinical evidences, leading to strong adoption of its THV therapy.

Zacks Rank & Other Key Picks

Edwards currently holds a Zacks Rank #4 (Sell). Some better-ranked medical stocks are Abiomed, Inc. , Cynosure, Inc. and Masimo Corp. (MASI - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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