Edwards Lifesciences Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Edwards develops and sells products for structural heart disease and critical care, including surgical and transcatheter heart valves and hemodynamic monitoring systems. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $517.2 | $482.0 | $1,013.9 | $941.2 |
| Gross profit | $392.2 | $352.2 | $766.7 | $684.1 |
| Gross margin | 75.8% | 73.1% | 75.6% | 72.7% |
| Net income | $94.1 | $67.8 | $239.0 | $132.9 |
| Diluted EPS | $0.82 | $0.57 | $2.07 | $1.12 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $214.3 | $116.1 |
- Q2 sales increased 7.3% year over year; first-half sales increased 7.7%. U.S. sales rose 16.2% in Q2 and 19.0% in the first half, while international sales were nearly flat in Q2 and down 0.4% for the first half, partly because of foreign-exchange effects, particularly the weaker yen.
- Transcatheter Heart Valve sales grew 24.9% in Q2 and 31.6% in the first half, to $182.1 and $351.8, respectively. Surgical Heart Valve Therapy sales were up 1.9% in Q2 but down 0.4% for the first half; Critical Care sales declined 3.6% and 3.8%, respectively.
- Q2 net income rose 38.8%; first-half net income rose 79.8%. The first-half comparison includes an $83.6 litigation award from Medtronic, so reported earnings growth is not solely from ongoing operations.
- Gross margin improved 2.7 percentage points in Q2 and 2.9 points for the first half. Management cited fewer recall-related costs than in 2012, a more profitable U.S. product mix, and favorable currency and hedging effects, partly offset by manufacturing inefficiencies.
- SG&A increased to $189.4 in Q2 and $374.6 in the first half, but declined as a share of sales. R&D increased to $80.5 and $160.3, respectively, reflecting investment in heart-valve studies and transcatheter product development.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $372.7 and short-term investments were $202.3, totaling $575.0. Current assets were $1,390.6 and current liabilities were $314.2.
- Long-term debt was $227.3, compared with $189.3 at year-end 2012. The company amended its credit facility in June, increasing its capacity to $750.0; it matures in July 2015. The company reported compliance with its covenants.
- First-half operating cash flow was $214.3, including the $83.6 Medtronic receipt; management also cited improved operating performance. Investing activities used $44.4, including $51.4 of capital expenditures. Financing activities used $114.2, primarily reflecting treasury-stock purchases.
- The company repurchased $245.0 of stock in the first half and reported $752.6 of remaining repurchase authorization. Cash and short-term investments held outside the U.S. were $527.7 after a $100.0 temporary intercompany loan; some foreign funds may face restrictions or taxes if repatriated.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management said available cash, investments, credit facilities, and operating cash flow were sufficient for current requirements, while noting that future capital may not be available on favorable terms.
- The $83.6 Medtronic patent award was recorded as a first-half special gain. The related tax expense was $31.3; the first-half effective tax rate was 23.9%. A federal research-credit benefit of $8.4 also affected the period.
- Patent litigation with Medtronic remains ongoing, including proceedings over additional damages and an injunction. In Germany, a court found infringement of one Edwards patent and granted an injunction covering Medtronic CoreValve and Evolut systems. Enforcement requires a €50.0 million bond, and the company said it could not yet estimate the decision’s impact. The decision and related patent matters remain subject to appeal or further proceedings.
- The company disclosed uncertainty around other pending legal claims and stated that additional charges could exceed existing reserves, although management did not expect currently pending lawsuits to materially affect financial position, results, or liquidity. It reported no material change to the risk factors in its 2012 Form 10-K.
- Other risks include competitive and pricing pressures, product development and regulatory approval uncertainty, foreign-currency exposure, possible investment impairments, and uncertain tax positions. The uncertain-tax-position liability was $125.3 at June 30.
Investor verification priorities
- Separate recurring operating performance from the $83.6 litigation award and its tax effects; assess comparable earnings excluding this unusual item.
- Track transcatheter valve growth, clinical-trial progress, regulatory approvals, and the sustainability of gross-margin improvement.
- Monitor the German injunction, required bond, appeals, and U.S. litigation outcomes, including any additional damages or potential business impact.
- Review cash deployment and liquidity, including the pace of share repurchases, facility borrowings, and constraints or tax costs associated with foreign cash.
- Assess foreign-exchange effects and the exposure to manufacturing inefficiencies, critical-care sales declines, and uncertain tax positions.