Edwards Lifesciences Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides fourth-quarter results; it is an annual report, not a standalone quarterly filing. Edwards develops and sells surgical and transcatheter heart valves and critical-care monitoring products. Amounts below are in U.S. dollars.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $2,045.5 million | $1,899.6 million |
| Gross profit | $1,523.1 million; 74.5% margin | $1,405.0 million; 74.0% margin |
| Net income | $391.7 million | $293.2 million |
| Diluted EPS | $3.44 | $2.48 |
| Operating cash flow | $472.7 million | $362.1 million |
| Cash and short-term investments | $936.9 million | $521.4 million |
| Long-term debt | $593.1 million | $189.3 million |
Capital expenditures were $109.0 million; investing activities used $412.7 million, primarily reflecting net purchases of short-term investments. Financing activities provided $34.9 million, including debt proceeds and substantial share repurchases. The company repurchased about $497 million of shares during 2013. It reported $1,725.8 million of current assets and $345.6 million of current liabilities. Cash and short-term investments held outside the United States totaled $811.7 million.
Performance and changes versus 2012
- Sales increased 7.7%, slower than 2012’s 13.2% growth. Transcatheter Heart Valve (THV) sales rose 28.2% to $707.7 million; Surgical Heart Valve Therapy increased 1.7% to $801.2 million; Critical Care declined 4.2% to $536.6 million.
- U.S. sales rose 15.7% to $939.6 million, driven principally by SAPIEN valve sales. International sales rose 1.7% to $1,105.9 million; currency movements reduced reported international sales by $43.9 million, mainly due to the weaker yen.
- Gross margin improved 0.5 percentage points, primarily from a more profitable THV mix, partly offset by higher manufacturing costs related to capacity expansion and product launches.
- Net income increased 33.6%, partly reflecting the $83.6 million Medtronic patent award received in February 2013. The award contributed $52.3 million after tax. Results also reflected lower weighted-average diluted shares, following repurchases.
- R&D expense increased to $323.0 million, or 15.8% of sales, from $291.3 million. SG&A rose to $745.6 million, including $15.8 million of medical-device excise tax.
Fourth-quarter results and unusual items
Fourth-quarter 2013 sales were $536.0 million, gross profit was $390.5 million, and net income was $75.8 million, or $0.68 diluted EPS. Q4 included a $15.2 million charge for estimated THV product returns and related costs associated with next-generation product introductions, a $10.4 million workforce-realignment charge, and a $5.9 million write-off of acquired in-process R&D. The filing recorded a net special gain of $67.3 million for 2013, compared with net special charges of $16.0 million in 2012.
Outlook, risks and contingencies
- Management provided no clear numerical sales or earnings guidance in the supplied filing text. It expected increased THV competition in the United States and Europe and continued substantial investment in product development and clinical evidence. SAPIEN 3 received European approval in January 2014 and launched there; U.S. studies were underway.
- In May 2013, the FDA issued a warning letter concerning quality-system execution at the Draper, Utah facility. The FDA indicated it would not approve premarket applications for devices reasonably related to the issues until they are resolved. The company said it was implementing corrective actions.
- Regulatory approvals, clinical outcomes, reimbursement and pricing pressure, product quality and liability, supplier continuity, international currency exposure, and competition are material business risks. The 2.3% U.S. medical-device excise tax took effect in 2013.
- Uncertain tax-position liabilities were $127.7 million, with significant U.S.-Swiss transfer-pricing matters still under an advance-pricing-agreement process. The company also noted $104.7 million of receivables from certain European countries.
- Patent disputes with Medtronic remained active. Edwards received $83.6 million in 2013 under an earlier award; in January 2014, after year-end, a jury awarded Edwards $393.6 million in a separate patent case. That later verdict was not 2013 income and remained subject to subsequent proceedings.
- The company issued $600 million of 2.875% senior notes due in 2018 and had no borrowings outstanding on its $750 million revolving credit facility at year-end. Management said available liquidity and operating cash were sufficient for requirements over the next 12 months.
Important facts for investors to verify
- Progress in resolving the FDA warning-letter findings and any effect on product approvals, manufacturing, or sales.
- Whether THV growth and SAPIEN 3 adoption can offset slower growth in other product groups as competitors launch products.
- The sustainability of earnings and cash flow excluding the one-time Medtronic award, and the effect of product-return reserves and launch costs.
- Developments in Medtronic patent litigation, including appeals, injunctions, additional damages, and the January 2014 verdict.
- Resolution of transfer-pricing tax matters, collectability of European receivables, and the use and accessibility of offshore cash.