Edwards Lifesciences Corporation — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below identify the fourth quarter. Edwards develops and sells structural-heart-disease therapies and critical-care monitoring products. Its principal product areas are Transcatheter Heart Valve Therapy (THV), Surgical Heart Valve Therapy, and Critical Care.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $2,322.9 million | $2,045.5 million |
| Gross profit / gross margin | $1,697.3 million / 73.1% | $1,528.9 million / 74.7% |
| Net income | $811.1 million | $389.1 million |
| Diluted EPS | $7.48 | $3.42 |
| Operating cash flow | $1,022.3 million | $472.7 million |
| Cash and cash equivalents | $653.8 million | $420.4 million |
| Short-term and long-term investments | $1,025.9 million | $538.4 million |
| Long-term debt carrying value | $598.1 million | $593.1 million |
| Total assets | $3,524.3 million | $2,709.9 million |
- Fourth-quarter 2014 net sales were $618.0 million, gross profit $457.6 million, net income $109.2 million, and diluted EPS $1.00. Fourth-quarter 2013 sales were $536.0 million and net income $75.1 million.
- Sales by product area: THV $943.6 million, up 33.3%; Surgical Heart Valve Therapy $826.1 million, up 3.1%; Critical Care $553.2 million, up 3.1%.
- International sales were $1,275.6 million, or 55% of total sales. The company reported a $23.0 million adverse currency impact on international sales.
- Cash flow from investing was negative $633.0 million, including $527.4 million of net investment purchases and $82.9 million of capital expenditures. Cash flow from financing was negative $153.0 million, primarily reflecting $300.9 million of treasury-stock purchases.
- Working capital was approximately $1,860.2 million, based on current assets of $2,294.6 million less current liabilities of $434.4 million. The company had no borrowings on its $750 million credit facility at year-end.
Material changes and unusual items
- Sales increased 13.6% year over year, led by THV launches and uptake, including SAPIEN 3 in Europe and SAPIEN XT in the United States and Japan. THV represented about 41% of 2014 sales, versus 35% in 2013.
- Reported 2014 net income included a $750 million upfront Medtronic patent-settlement payment, or $487.9 million after tax. The settlement ended outstanding patent litigation, included cross-licensing and an eight-year covenant not to sue, and provides for quarterly royalties through April 2022. Reported 2013 results included an $83.6 million Medtronic litigation award.
- Gross margin declined 1.6 percentage points, reflecting currency effects, higher incentive compensation, and higher manufacturing costs, particularly in Utah; improved U.S. product mix partly offset the decline.
- Special charges totaled $70.7 million, including a $50 million charitable contribution, $10.2 million of acquired in-process R&D, a $7.5 million intellectual-property settlement, and asset write-down and other costs.
- R&D spending was $346.5 million, or 14.9% of sales, compared with $323.0 million in 2013. SG&A rose to $858.0 million, or 36.9% of sales.
- Effective January 1, 2014, the company changed its accounting for certain patent-litigation legal costs to expense them as incurred rather than capitalize and amortize them. Prior periods were retrospectively adjusted; the change reduced retained earnings by $10.5 million as of January 1, 2012.
Outlook, risks, and contingencies
- Management said cash, investments, operating cash flow, and available credit were sufficient for working capital, capital expenditures, and other commitments over the next 12 months. The filing text does not provide a clear numerical revenue or earnings forecast.
- Pipeline and clinical priorities include next-generation TAVR systems, mitral transcatheter therapies, surgical-valve platforms, and less-invasive hemodynamic monitoring. The company submitted its U.S. premarket approval application for SAPIEN 3 at year-end 2014.
- The FDA’s May 2013 warning letter concerning quality-system execution at the Draper, Utah facility remained a material regulatory issue. A variance for SAPIEN XT delivery systems and components manufactured there ran through June 15, 2015, subject to an agreed action plan.
- Uncertain tax positions were $192.3 million, excluding certain related amounts; the company cited ongoing U.S.–Switzerland transfer-pricing discussions and a tax agreement request concerning part of the Medtronic settlement. Management said the timing and amount of any resolution could not be reliably estimated.
- Other key risks include product liability and quality issues, regulatory approval delays, reimbursement and pricing pressure, dependence on new products and clinical evidence, single-source supply exposure, foreign exchange, international collections, and intellectual-property disputes. Management did not believe currently pending lawsuits would materially affect financial position, results, or liquidity, but noted outcomes remain uncertain.
- The company held $1,438.8 million of cash and investments at year-end, but $787.1 million was held outside the United States; much of the foreign balance was treated as indefinitely reinvested and could face tax or other restrictions if repatriated. Debt consists primarily of $600 million of 2.875% senior notes due October 2018.
Most important facts for investors to verify
- Separate recurring operating performance from the $750 million Medtronic settlement and other unusual charges when assessing earnings and cash flow.
- Track THV growth, SAPIEN 3 U.S. approval progress, product adoption, and the clinical and regulatory milestones in the company’s pipeline.
- Check progress resolving the Draper facility warning-letter issues and the status and terms of the SAPIEN XT variance.
- Assess the sustainability of gross margin given currency movements, manufacturing costs, and incentive compensation.
- Monitor resolution of the transfer-pricing and settlement-related tax matters, and the potential availability of offshore cash.
- Review the full financial statements and notes for litigation, contingencies, cash-flow composition, and debt and repurchase commitments; this summary is not a substitute for the filing.