Edwards Lifesciences Corporation — Q3 2013 Form 10-Q
Business context and period: Edwards develops and sells technologies for structural heart disease and critically ill patients, across Surgical Heart Valve Therapy, Transcatheter Heart Valves (THV), and Critical Care. This unaudited filing covers the quarter and nine months ended September 30, 2013; amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $495.6 million | $447.9 million | $1,509.5 million | $1,389.1 million |
| Gross profit | $365.9 million | $336.2 million | $1,132.6 million | $1,020.3 million |
| Gross margin | 73.8% | 75.1% | 75.0% | 73.5% |
| Net income | $76.9 million | $69.2 million | $315.9 million | $202.1 million |
| Diluted EPS | $0.68 | $0.58 | $2.75 | $1.71 |
| Operating cash flow | Not separately stated for quarter | $361.4 million | $247.4 million |
- Quarter sales grew 10.6%; nine-month sales grew 8.7%. Q3 U.S. sales rose 19.9%, while international sales increased 3.6%.
- THV sales increased 38.9% in Q3 and 33.9% for nine months, to $172.0 million and $523.8 million, respectively. Surgical Heart Valve Therapy grew 3.3% in Q3; Critical Care declined 4.8%.
- Q3 gross margin fell 1.3 percentage points year over year, primarily reflecting higher manufacturing costs ahead of THV product introductions. Nine-month margin increased 1.5 points, supported by product mix and the absence of prior-year recall costs.
- SG&A rose to $180.5 million in Q3 and $555.1 million for nine months, but declined as a share of sales to 36.4% and 36.8%. R&D increased to $84.1 million and $244.4 million, respectively, reflecting clinical studies and product development.
Cash, liquidity, and capital structure
- At September 30, cash and cash equivalents were $471.0 million and short-term investments were $286.6 million. Current assets were $1,570.4 million; accounts payable and accrued liabilities were $335.1 million. The filing reports no separate current-debt balance.
- Cash from operations for nine months was $361.4 million; investing cash outflow was $165.8 million, including $88.9 million of capital expenditures; financing cash outflow was $45.6 million. Cash increased $160.1 million to $471.0 million.
- Debt outstanding was $532.1 million under the amended $750 million credit facility at quarter-end. In October, the company issued $600 million of 2.875% senior notes due 2018 and used proceeds to repay the credit-facility borrowings; remaining proceeds were for general corporate purposes. The notes increase fixed-rate interest expense.
- Nine-month treasury-stock purchases were $474.2 million in the cash-flow statement; MD&A reports total repurchases of $495.0 million, including shares acquired for employee tax withholding. The $250 million accelerated share repurchase was completed in October, with 0.4 million additional shares delivered.
- Management said available liquidity was sufficient for current operating needs. Cash and short-term investments held outside the U.S. totaled $712.9 million and were largely considered indefinitely reinvested; repatriation may involve restrictions and taxes.
Material changes, outlook, and risks
- Nine-month 2013 results included an $83.6 million Medtronic litigation award, recorded as a special gain; associated tax expense was $31.3 million. This materially affects the comparison of nine-month net income with 2012. Q3 had no special gain or charge.
- Management attributed U.S. THV growth largely to higher SAPIEN procedure volume following the October 2012 FDA expansion of the indicated population and access routes. The filing describes SAPIEN XT trial and regulatory developments, including approvals in Japan and Canada, and FDA approval to expand the PARTNER II study for SAPIEN 3. It provides no clear quantified earnings or revenue guidance.
- Currency reduced international sales, particularly through yen weakness. Other risks include competitive and pricing pressures, product development and regulatory approval uncertainty, and exposure to investment-value declines.
- Material litigation includes ongoing U.S. patent disputes with Medtronic and securities class-action lawsuits alleging misleading statements about SAPIEN prospects. A German court found infringement of one Edwards patent and granted an injunction against specified Medtronic valves; appeals and patent-validity proceedings remain pending. Edwards said it could not estimate the impact of that decision. Management stated pending legal matters were not expected to materially affect financial position, results, or liquidity, while noting that losses beyond reserves could affect income or cash flow.
- Uncertain tax-position liabilities were $128.2 million, or an estimated net $100.9 million after specified offsetting tax benefits. The company reported compliance with credit-facility covenants at September 30 and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- How much of reported nine-month earnings growth reflects the one-time $83.6 million litigation award rather than recurring operations.
- Whether THV growth and pipeline approvals can continue, and the effect of manufacturing costs, clinical outcomes, and regulatory decisions on margins and sales.
- The status and potential financial effect of Medtronic patent disputes, the German injunction and appeals, and the securities class actions.
- Post-quarter debt terms and interest costs, the impact of share repurchases on leverage and share count, and the availability and tax implications of offshore cash.
- Changes in currency exposure, uncertain tax positions, and investment valuations.