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EW > SEC Filings for EW > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for EDWARDS LIFESCIENCES CORP

Form 10-Q for EDWARDS LIFESCIENCES CORP


4-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements contained in this report to be covered by the safe harbor provisions of such Acts. All statements other than statements of historical fact in this report or referred to or incorporated by reference into this report are "forward-looking statements" for purposes of these sections. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items, plans or expectations with respect to development activities, clinical trials or regulatory approvals, any statements of plans, strategies and objectives of management for future operations, any statements concerning our future operations, financial conditions and prospects, and any statements of assumptions underlying any of the foregoing. These statements can sometimes be identified by the use of the forward-looking words such as "may," "believe," "will," "expect," "project," "estimate," "should," "anticipate," "plan," "goal," "continue," "seek," "pro forma," "forecast," "intend," "guidance," "optimistic," "aspire," "confident," other forms of these words or similar words or expressions or the negative thereof. Investors are cautioned not to unduly rely on such forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our results or future business, financial condition, results of operations or performance to differ materially from our historical results or experiences or those expressed or implied in any forward-looking statements contained in this report. Investors should carefully review the information contained in, or incorporated by reference into, our annual report on Form 10-K for the year ended December 31, 2013 and subsequent reports on Forms 10-Q and 8-K for a description of certain of these risks and uncertainties. These forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.

Overview

We are the global leader in the science of heart valves and hemodynamic monitoring. Driven by a passion to help patients, we partner with clinicians to develop innovative technologies in the areas of structural heart disease and critical care monitoring, enabling them to save and enhance lives. We conduct operations worldwide and are managed in the following geographical regions:
United States, Europe, Japan, and Rest of World. Our products are categorized into the following main areas: Surgical Heart Valve Therapy, Transcatheter Heart Valves, and Critical Care.

Effective January 1, 2014, we changed our method of accounting for certain intellectual property litigation expenses related to the defense and enforcement of issued patents. Under the new method of accounting, these legal costs are expensed in the period incurred; previously, these costs were capitalized and then amortized over the life of the related patent. The financial results below reflect the change in accounting principle. For further information, see Note 2 to the "Consolidated Condensed Financial Statements."


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Financial Results

    The following is a summary of our financial performance (dollars in
millions, except per share data):

                             Three Months Ended                    Six Months Ended
                                  June 30,                             June 30,
                          2014      2013     Change           2014        2013      Change
Net sales                $ 575.1   $ 517.2      11.2 %      $ 1,097.5   $ 1,013.9       8.2 %
Gross profit as a
percentage of net
sales                       73.7 %    76.1 %    (2.4 ) pts.      72.9 %      75.9 %    (3.0 ) pts.
Net income               $ 547.0   $  93.3     486.3 %      $   607.3   $   237.2     156.0 %
Earnings per share
Basic                    $  5.18   $  0.83     524.1 %      $    5.72   $    2.09     173.7 %
Diluted                  $  5.09   $  0.81     528.4 %      $    5.63   $    2.05     174.6 %

Our sales growth was driven by our Transcatheter Heart Valves, primarily in Europe, which benefited from the launch of the Edwards SAPIEN 3 transcatheter heart valve. In connection with the launch of the Edwards SAPIEN XT transcatheter heart valve in the United States and the continued launch of SAPIEN 3 in Europe, our gross profit margin was reduced by the impact from estimated product returns expected in 2014 upon introduction of next-generation transcatheter heart valve products, and weaker currencies. Net income in the first six months of 2014 and 2013 benefited from special items. In the second quarter of 2014, we received $750.0 million ($487.9 million, net of tax), from Medtronic, Inc. ("Medtronic") for an upfront payment due under a litigation settlement agreement, and in the first quarter of 2013, we received from Medtronic an $83.6 million ($52.3 million, net of tax) litigation award.

Healthcare Environment, Opportunities and Challenges

The medical device industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property. To strengthen our leadership and enable future growth opportunities, in the first six months of 2014 we invested 15.9% of our net sales in research and development. In the coming year, we expect increased competition with our Transcatheter Heart Valves as our competitors introduce products in the United States and Europe.

New Accounting Standards

For information on new accounting standards, see Note 1 to the "Consolidated Condensed Financial Statements."

Results of Operations

     Net Sales Trends
     (dollars in millions)

                     Three Months                                 Six Months
                    Ended June 30,                Percent       Ended June 30,                  Percent
                    2014      2013     Change     Change       2014        2013      Change     Change
United States     $  242.0   $ 240.5   $   1.5         0.6 % $   464.4   $   468.4   $  (4.0 )      (0.9 )%
International        333.1     276.7      56.4        20.4 %     633.1       545.5      87.6        16.1 %


Total net sales   $  575.1   $ 517.2   $  57.9        11.2 % $ 1,097.5   $ 1,013.9   $  83.6         8.2 %


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In the United States, the $1.5 million increase and the $4.0 million decrease in net sales for the three and six months ended June 30, 2014, respectively, were due primarily to:


Transcatheter Heart Valves, which decreased net sales by $4.1 million and $16.0 million, respectively, due primarily to (1) a reduction in net sales of the Edwards SAPIEN transcatheter heart valve due to net stocking orders as customers convert from direct sales to consignment and (2) an increase to the sales reserve for estimated Transcatheter Heart Valve product returns expected in the second half of 2014 upon introduction of the Edwards SAPIEN XT transcatheter heart valve. This sales reserve is expected to reverse during 2014 as the introduction of the next-generation valves is expected to be substantially completed in 2014. These decreases were partially offset by an increase in clinical sales of the Edwards SAPIEN 3 transcatheter heart valve;

partially offset by:


Critical Care, which increased net sales by $4.4 million and $7.6 million, respectively, due primarily to enhanced surgical recovery products; and


Surgical Heart Valves, which increased net sales by $1.2 million and $4.5 million, respectively, driven primarily by sales of pericardial aortic tissue valves and clinical sales of the EDWARDS INTUITY Elite valves.

International net sales increased $56.4 million and $87.6 million for the three and six months ended June 30, 2014, respectively, due primarily to:


Transcatheter Heart Valves, which increased net sales by $37.0 million and $66.7 million, respectively, driven primarily by the launch of the Edwards SAPIEN 3 transcatheter heart valve in Europe and the ongoing launch of the Edwards SAPIEN XT transcatheter heart valve in Japan;


Surgical Heart Valves, which increased net sales by $7.7 million and $12.7 million, respectively, driven primarily by sales of pericardial aortic tissue valves;


Critical Care, which increased net sales by $6.7 million and $9.3 million, respectively, driven primarily by core hemodynamic products and enhanced surgical recovery products; and


foreign currency exchange rate fluctuations, which increased net sales for the three months ended June 30, 2014 by $4.8 million due primarily to the strengthening of the Euro against the United States dollar, partially offset by the weakening of the Japanese yen against the United States dollar. Foreign currency exchange rate fluctuations did not have a significant impact to total net sales for the six months ended June 30, 2014.

The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs and our hedging activities. For more information, see Item 3, "Quantitative and Qualitative Disclosures About Market Risk."


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     Net Sales by Product Group
     (dollars in millions)

                   Three Months                                 Six Months
                  Ended June 30,                Percent       Ended June 30,                  Percent
                  2014      2013     Change     Change       2014        2013      Change     Change
Transcatheter
Heart Valves    $  219.7   $ 182.1   $  37.6        20.6 % $   408.9   $   351.8   $  57.1        16.2 %
Surgical
Heart Valve
Therapy            214.0     204.3       9.7         4.8 %     416.6       402.4      14.2         3.6 %
Critical Care      141.4     130.8      10.6         8.1 %     272.0       259.7      12.3         4.7 %


Total net
sales           $  575.1   $ 517.2   $  57.9        11.2 % $ 1,097.5   $ 1,013.9   $  83.6         8.2 %

Transcatheter Heart Valves

The $37.6 million and $57.1 million increases in net sales of Transcatheter Heart Valves for the three and six months ended June 30, 2014, respectively, were due primarily to:


the Edwards SAPIEN 3 transcatheter heart valve, driven primarily by the launch in Europe; and


the ongoing launch of the Edwards SAPIEN XT transcatheter heart valve in Japan;

partially offset by:


the Edwards SAPIEN transcatheter heart valve, primarily in the United States, due to a reduction in net stocking orders as customers convert from direct sales to consignment, and an increase to the sales reserve for estimated Transcatheter Heart Valve product returns expected in the second half of 2014 upon introduction of the Edwards SAPIEN XT transcatheter heart valve in the United States.

During the first quarter of 2014, we completed enrollment in the 500 patient cohort of The PARTNER II Trial studying the Edwards SAPIEN 3 transcatheter valve system in high risk and inoperable patients. In January 2014, we received United States Food and Drug Administration ("FDA") approval to expand The PARTNER II Trial to include a 1,000 patient single-arm, non-randomized cohort to study the Edwards SAPIEN 3 transcatheter valve system in the treatment of intermediate risk patients with severe symptomatic aortic stenosis. In January 2014, we also received CE Mark for the Edwards SAPIEN 3 transcatheter valve system in Europe and immediately commenced a launch. In June 2014, we received FDA approval for the Edwards SAPIEN XT transcatheter heart valve in the United States for the treatment of high-risk and inoperable patients with severe symptomatic aortic stenosis.

Surgical Heart Valve Therapy

The $9.7 million and $14.2 million increases in net sales of Surgical Heart Valve Therapy products for the three and six months ended June 30, 2014, respectively, were due primarily to surgical heart valve products, which increased net sales by $8.8 million and $17.3 million, respectively, driven by sales in the United States and Europe of pericardial aortic tissue valves and EDWARDS INTUITY Elite valves.

In April 2014, we received CE Mark for our advanced EDWARDS INTUITY Elite valve system. This next-generation, rapid deployment system facilitates smaller incisions in surgical aortic valve replacement procedures. In the United States, we continued enrolling patients in our TRANSFORM Trial for EDWARDS INTUITY Elite, and our COMMENCE clinical trial, which is studying our next-generation GLX tissue treatment platform applied to the Magna Ease aortic surgical valve and the Magna Mitral Ease valve.


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Critical Care

The $10.6 million and $12.3 million increases in net sales of Critical Care products during the three and six months ended June 30, 2014, respectively, were due primarily to enhanced surgical recovery products and core hemodynamic products outside the United States, partially offset by foreign currency exchange rate fluctuations, which decreased net sales by $0.5 million and $4.5 million, respectively, due primarily to the weakening of the Japanese yen against the United States dollar. In June 2014, we received FDA clearance for the ClearSight system, a noninvasive monitor that provides clinicians access to blood volume and blood flow information for patients at moderate or high risk of post-surgical complications, in whom invasive monitoring would not be used. The ClearSight system is part of our enhanced surgical recovery product portfolio.

     Gross Profit

                                    Three Months Ended                Six Months Ended
                                         June 30,                         June 30,
                                 2014      2013    Change          2014     2013    Change
Gross profit as a percentage
of net sales                       73.7 %   76.1 %    (2.4 ) pts.   72.9 %   75.9 %    (3.0 ) pts.

The percentage point decrease in gross profit for the three and six months ended June 30, 2014 was driven primarily by (1) the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts, and (2) the impact from the transcatheter heart valve sales return reserve and related inventory write-off, primarily in the United States, in connection with our SAPIEN 3 and SAPIEN XT launches.

Selling, General and Administrative ("SG&A") Expenses

(dollars in millions)

                                   Three Months Ended                 Six Months Ended
                                        June 30,                          June 30,
                                2014      2013     Change         2014      2013     Change
SG&A expenses                  $ 215.5   $ 186.6   $  28.9       $ 412.7   $ 369.0   $  43.7
SG&A expenses as a
percentage of net sales           37.5 %    36.1 %     1.4  pts.    37.6 %    36.4 %     1.2  pts.

The increase in SG&A expenses for the three and six months ended June 30, 2014 was due primarily to (1) higher sales and marketing expenses in the United States, Europe, and Japan, mainly to support the Transcatheter Heart Valve program, and (2) a larger accrual for incentive compensation.

     Research and Development Expenses
     (dollars in millions)

                                       Three Months                      Six Months
                                      Ended June 30,                   Ended June 30,
                                  2014     2013    Change         2014      2013     Change
Research and development
expenses                         $ 89.1   $ 80.5   $   8.6       $ 174.9   $ 160.3   $  14.6
Research and development
expenses as a percentage of
net sales                          15.5 %   15.6 %   (0.1)  pts.    15.9 %    15.8 %     0.1  pts.

The increase in research and development expenses for the three and six months ended June 30, 2014 was due primarily to additional investments in clinical studies in the Surgical Heart Valve and Transcatheter Heart Valve programs, new mitral Transcatheter Heart Valve product development efforts, and a larger accrual for incentive compensation.


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Intellectual Property Litigation (Income) Expense, Net

In May 2014, we entered into an agreement with Medtronic to settle all outstanding patent litigation between the companies, including all cases related to transcatheter heart valves. Pursuant to the agreement, we received an upfront payment from Medtronic in the amount of $750.0 million. For further information, see Note 3 and Note 13 to the "Consolidated Condensed Financial Statements."

We incurred external legal costs related to intellectual property litigation of $2.6 million and $5.5 million for the three months ended June 30, 2014 and 2013, respectively, and $8.1 million and $11.0 million for the six months ended June 30, 2014 and 2013, respectively.

In February 2013, we received $83.6 million from Medtronic in satisfaction of the initial April 2010 jury award of damages for infringement of the United States Andersen transcatheter heart valve patent, including accrued interest. For further information, see Note 13 to the "Consolidated Condensed Financial Statements."

Special Charges

Charitable Foundation Contribution

In June 2014, we contributed $50.0 million to the Edwards Lifesciences Foundation, a related-party not-for-profit organization intended to provide philanthropic support to health- and community-focused charitable organizations. The contribution was irrevocable and was recorded as an expense at the time of payment.

     Settlement

    In March 2014, we recorded a $7.5 million charge to settle past and future
obligations related to one of our intellectual property agreements.

     Interest Expense, net
     (in millions)

                                       Three Months                  Six Months
                                      Ended June 30,               Ended June 30,
                                  2014     2013    Change     2014     2013     Change
         Interest expense        $  4.4   $  1.4   $   3.0   $  9.0   $  2.8   $    6.2
         Interest income           (1.3 )   (1.0 )    (0.3 )   (2.4 )   (2.6 )      0.2


         Interest expense, net   $  3.1   $  0.4   $   2.7   $  6.6   $  0.2   $    6.4

The increase in interest expense for the three and six months ended June 30, 2014 resulted primarily from a higher average debt balance as compared to the prior year period, and higher average interest rates due to the issuance in October 2013 of $600.0 million of 2.875% fixed-rate unsecured senior notes.


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     Other Expense, net
     (in millions)

                                                            Three Months       Six Months
                                                               Ended             Ended
                                                              June 30,          June 30,
                                                           2014      2013     2014    2013
Foreign exchange losses, net                              $   1.3   $  0.3   $  1.1   $ 1.2
(Gain) loss on investments in unconsolidated affiliates      (0.9 )   (0.2 )    2.6       -
Insurance settlement gain                                       -        -     (3.7 )     -
Other                                                           -        -      0.1     0.1


Other expense, net                                        $   0.4   $  0.1   $  0.1   $ 1.3

The foreign exchange losses relate to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures.

The (gain) loss on investments in unconsolidated affiliates primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on our available-for-sale and cost method investments. During the six months ended June 30, 2014, we recorded an other-than-temporary impairment charge of $3.5 million related to one of our cost method investments, and we recorded a $1.4 million gain related to a distribution we received from one of our equity method investments.

In March 2014, we recorded a $3.7 million insurance settlement gain related to inventory that was damaged in the fourth quarter of 2013.

Provision for Income Taxes

The provision for income taxes consists of provisions for federal, state and foreign income taxes. We operate in an international environment with significant operations in various locations outside the United States, which have statutory tax rates lower than the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. Our effective income tax rates were 32.7% and 22.6% for the three months ended June 30, 2014 and 2013, respectively, and 31.8% and 23.8% for the six months ended June 30, 2014 and 2013, respectively.

The effective tax rate for the three and six months ended June 30, 2014 included (1) $262.1 million of tax expense associated with a $750.0 million litigation settlement payment received from Medtronic in May 2014 (see Note 3 to the "Consolidated Condensed Financial Statements"), and (2) $6.2 million of tax benefits from the remeasurement of uncertain tax positions.

The federal research credit expired on December 31, 2013 and has not been reinstated as of June 30, 2014. Therefore, the effective income tax rates for the three and six months ended June 30, 2014 were calculated without an assumed benefit for the federal research credit. In 2013, the federal research credit related to 2013 favorably impacted the effective tax rate by approximately 1.3%. The effective income tax rate for the six months ended June 30, 2013 included
(1) an $8.4 million benefit for the full year 2012 federal research credit, which was reinstated on January 2, 2013, and (2) $31.3 million of tax expense associated with the $83.6 million litigation award received from Medtronic in February 2013 (see Note 3 to the "Consolidated Condensed Financial Statements").

We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability


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that is more or less than that reflected in the consolidated financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues and issuance of new legislation, regulations or case law. Management believes that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from these uncertain tax positions. For further information, see Note 16 to the "Consolidated Condensed Financial Statements."

Liquidity and Capital Resources

Our sources of cash liquidity include cash and cash equivalents, short-term investments, amounts available under credit facilities, and cash from operations. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures and other financial commitments for the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions. We believe that we have the financial flexibility to attract long-term capital to fund short-term and long-term growth objectives. However, no assurances can be given that such long-term capital will be available to us on favorable terms, or at all.

We believe that cash held in the United States, in addition to amounts available under credit facilities and cash from operations, are sufficient to fund our United States operating requirements. Cash and cash equivalents and short-term investments held outside the United States have historically been used to fund international operations and acquire businesses outside of the United States, although a portion of those amounts may from time to time be subject to temporary intercompany loans into the United States. As of June 30, 2014, cash and cash equivalents and short-term investments held outside the United States were $767.6 million. The majority of cash and cash equivalents and short-term investments held outside the United States relates to undistributed earnings of certain of our foreign subsidiaries which are considered by us to be indefinitely reinvested. Repatriations of cash and cash equivalents and short-term investments held outside the United States are subject to restrictions in certain jurisdictions and may be subject to withholding and other taxes. The potential tax liability related to any repatriation would be dependent on the facts and circumstances that exist at the time such repatriation is made and the complexities of the tax laws of the United States and the respective foreign jurisdictions.

We have a Four-Year Credit Agreement ("Credit Facility") which provides up . . .

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