Edwards Lifesciences Corp. — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013. Edwards develops and sells products for structural heart disease and critical care, including surgical and transcatheter heart valves and hemodynamic monitoring products.
Financial performance
- Net sales: $496.7 million, up 8.2% from $459.2 million. U.S. sales rose 22.1% to $227.9 million; international sales fell 1.4% to $268.8 million, including an $8.1 million adverse foreign-exchange impact.
- Product mix: Transcatheter Heart Valves sales increased 39.7% to $169.7 million; Surgical Heart Valve Therapy declined 2.7% to $198.1 million; Critical Care declined 3.9% to $128.9 million.
- Profit and margins: Gross profit was $374.5 million, with gross margin of 75.4% versus 72.3%. Net income was $144.9 million versus $65.1 million; diluted EPS was $1.24 versus $0.55. Results included an $83.6 million pretax litigation award from Medtronic, so the increase in reported earnings is not solely indicative of recurring performance.
- Expenses: SG&A rose $8.0 million to $185.2 million, while declining to 37.3% of sales from 38.6%. R&D increased $11.2 million to $79.8 million, or 16.1% of sales, primarily due to heart-valve clinical studies.
- Cash flow: Operating cash flow was $87.3 million versus a use of $30.7 million, reflecting the litigation receipt and improved receivables collections, partly offset by working-capital movements and excess stock-plan tax benefits. Investing cash flow was $27.5 million; financing cash flow was a use of $24.9 million, including $107.7 million of treasury-stock purchases.
- Liquidity and debt: Cash and cash equivalents were $401.5 million and short-term investments were $156.4 million at quarter-end. Long-term debt was $192.7 million under a $500 million revolving facility maturing in July 2015. The company reported compliance with its credit covenants. Cash and short-term investments held outside the U.S. totaled $489.9 million and were largely considered indefinitely reinvested.
Material changes and management commentary
- U.S. Transcatheter Heart Valve sales, driven mainly by the Edwards SAPIEN valve, were the principal source of overall growth. The filing attributed the U.S. sales increase primarily to expanded FDA-approved delivery options for certain high-risk patients. International sales were affected by currency, particularly the weaker Japanese yen.
- Gross-margin improvement reflected a more favorable U.S. product mix and foreign-exchange effects, including settlement of hedging contracts. The 2.3% U.S. medical-device excise tax and higher U.S. sales and marketing costs contributed to higher SG&A.
- The company continued enrollment in clinical studies for its SAPIEN XT, SAPIEN 3, and next-generation surgical-valve programs. It reported approval to sell the PERIMOUNT Magna Ease valve in China and approval to include the INTUITY Elite system in an ongoing U.S. trial.
- Management said existing liquidity sources were sufficient for current working capital, capital expenditures, and other commitments. No specific financial guidance or numerical outlook was provided in the supplied filing text.
Risks, contingencies, and unusual items
- The $83.6 million Medtronic payment settled the 2010 jury award, including accrued interest. Proceedings continued over a possible injunction and additional damages; other U.S. and international patent disputes also remained ongoing. Management could not estimate losses for certain legal matters, though it did not believe pending litigation would materially affect financial position, results, or liquidity.
- Uncertain tax-position liabilities were $121.6 million before estimated offsets; the filing noted that final tax-authority outcomes could differ from recorded amounts. Repatriating certain foreign cash could incur taxes and face jurisdictional restrictions.
- Foreign-currency movements, competitive and pricing pressures, regulatory and clinical outcomes, and the valuation of equity investments are risks. Management reported no material change in the risk factors from its 2012 Form 10-K.
- Share repurchases totaled approximately $107.6 million during the quarter; $140.0 million remained authorized under the overall program at March 31, 2013.
Important facts for investors to verify
- How much of reported earnings and operating cash flow growth reflects the one-time Medtronic award rather than ongoing operations.
- Whether transcatheter-valve growth and clinical or regulatory progress continue, and how surgical-valve and Critical Care trends develop.
- Potential outcomes and financial exposure from patent litigation, including further damages or an injunction.
- Cash availability and potential tax costs related to foreign-held funds, as well as progress on debt repayment and share repurchases.
- Foreign-exchange effects, device excise-tax costs, and the development of R&D and SG&A spending relative to sales.