Edwards Lifesciences Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Edwards develops and sells cardiovascular products across Surgical Heart Valve Therapy, Transcatheter Heart Valves (THV), and Critical Care. Comparative 2013 results reflect a retrospective accounting change for certain patent-litigation costs.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $522.4 million | $496.7 million | +5.2% |
| Gross profit / gross margin | $376.5 million / 72.1% | $375.7 million / 75.6% | Margin down 3.5 points |
| Net income | $60.3 million | $143.9 million | -58.1% |
| Diluted EPS | $0.56 | $1.24 | -54.8% |
| Operating cash flow | $138.9 million | $101.1 million | +$37.8 million |
| Cash and cash equivalents | $295.7 million | $420.4 million at Dec. 31, 2013 | Down $124.7 million |
| Long-term debt | $725.4 million | $593.1 million at Dec. 31, 2013 | Up $132.3 million |
At March 31, cash plus short-term investments totaled $831.6 million; current assets were $1.60 billion and current liabilities were $356.2 million. The company reported $612.0 million of held-to-maturity investments, including $76.1 million classified as long term. Q1 capital expenditures were $14.3 million. Financing cash outflow was $143.8 million, including $300.0 million of share repurchases.
Changes and operating performance
- Sales growth was led by THV, up 11.5% to $189.2 million, with European procedure growth, share gains, and the SAPIEN 3 launch cited as drivers. Surgical Heart Valve Therapy rose 2.3% to $202.6 million; Critical Care rose 1.2% to $130.6 million.
- International sales increased 11.6% to $300.0 million, while U.S. sales declined 2.4% to $222.4 million. Currency movements reduced international sales by $6.2 million.
- Gross margin fell due mainly to expected product returns tied to U.S. next-generation THV introductions, higher manufacturing costs, and foreign-exchange effects. A $7.1 million increase in the U.S. THV returns reserve contributed to lower U.S. THV sales; the company expected that reserve to reverse during 2014 as the transition progressed.
- SG&A increased $14.8 million to $197.2 million, and R&D increased $6.0 million to $85.8 million. R&D was 16.4% of sales, reflecting clinical studies and product development investment.
- Q1 2013 earnings benefited from the Medtronic patent award: the company received $83.6 million, including interest, and reported $78.1 million of net litigation income. This makes the year-over-year profit decline substantially different from sales growth.
Liquidity, debt, outlook, and risks
- Debt comprised $600 million of 2.875% senior notes due October 2018 and $130 million outstanding under a $750 million credit facility maturing July 2015. The company said the facility borrowing was expected to be refinanced under that facility.
- Management stated that cash, investments, credit availability, and operating cash flow were sufficient for working capital, capital expenditures, and other commitments over the next 12 months. $770.0 million of cash and cash equivalents plus short-term investments was held outside the U.S.; much related to earnings considered indefinitely reinvested and repatriation could incur taxes or face restrictions.
- No numerical earnings or sales guidance is provided in the supplied filing text. Management anticipated increased THV competition as competitors introduced products in the U.S. and Europe.
- Patent litigation remains significant. In January 2014, a jury awarded Edwards $393.6 million in a separate Medtronic infringement case; the filing describes the award as subject to further proceedings. In April, a preliminary injunction restricting U.S. CoreValve sales was granted, then postponed while Medtronic appealed. Additional damages, enhanced damages, and attorneys’ fees in another case remained pending. Other litigation outcomes and potential losses may be uncertain.
- Other notable items included a $7.5 million charge settling obligations under an intellectual-property agreement, a $3.7 million insurance-settlement gain, and a $3.5 million impairment charge on a cost-method investment. The federal research tax credit had expired and was not reinstated as of quarter-end; transfer-pricing discussions with tax authorities remained uncertain.
Most important facts to verify
- Whether the $7.1 million THV returns reserve reverses as expected and how the SAPIEN XT transition affects sales and gross margin.
- Progress, appeal status, and potential financial impact of the Medtronic patent cases, including the $393.6 million jury award and injunction proceedings.
- Drivers and durability of the decline in net income, separating the prior-year litigation award from underlying operating performance.
- Use of cash for share repurchases, debt refinancing and maturity terms, and the availability and tax implications of overseas liquidity.
- Resolution of uncertain tax positions and transfer-pricing negotiations, including the $101.9 million net uncertain-tax-position amount disclosed at quarter-end.