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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the Quarterly Period Ended March 31, 2013 |
||
or |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 1-15525 |
EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-4316614 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
One Edwards Way, Irvine, California |
92614 |
|
(Address of principal executive offices) | (Zip Code) | |
(949) 250-2500 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares outstanding of the registrant's common stock, $1.00 par value, as of April 30, 2013 was 112,961,747.
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended March 31, 2013
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except par value; unaudited)
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ | 401.5 | $ | 310.9 | |||
Short-term investments |
156.4 | 210.5 | |||||
Accounts and other receivables, net of allowances of $5.5 and $5.6, respectively |
329.7 | 347.5 | |||||
Inventories (Note 3) |
288.5 | 281.0 | |||||
Deferred income taxes |
34.9 | 43.4 | |||||
Prepaid expenses |
43.2 | 41.6 | |||||
Other current assets |
106.5 | 57.0 | |||||
Total current assets |
1,360.7 | 1,291.9 | |||||
Long-term accounts receivable, net of allowances of $6.2 and $6.4, respectively |
10.8 | 9.9 | |||||
Property, plant and equipment, net |
385.4 | 373.3 | |||||
Goodwill |
380.2 | 384.7 | |||||
Other intangible assets, net (Note 4) |
65.5 | 67.0 | |||||
Investments in unconsolidated affiliates (Note 5) |
22.5 | 21.1 | |||||
Deferred income taxes |
45.9 | 47.3 | |||||
Other assets |
25.6 | 26.3 | |||||
|
$ | 2,296.6 | $ | 2,221.5 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current liabilities |
|||||||
Accounts payable and accrued liabilities |
$ | 300.4 | $ | 347.4 | |||
Long-term debt |
192.7 | 189.3 | |||||
Other long-term liabilities |
211.5 | 205.5 | |||||
Commitments and contingencies (Note 10) |
|||||||
Stockholders' equity |
|||||||
Preferred stock, $.01 par value, authorized 50.0 shares, no shares outstanding |
| | |||||
Common stock, $1.00 par value, 350.0 shares authorized, 124.7 and 124.2 shares issued, and 113.5 and 114.3 shares outstanding, respectively |
124.7 | 124.2 | |||||
Additional paid-in capital |
587.2 | 489.0 | |||||
Retained earnings |
1,798.8 | 1,653.9 | |||||
Accumulated other comprehensive loss |
(52.0 | ) | (37.9 | ) | |||
Treasury stock, at cost, 11.2 and 9.9 shares, respectively |
(866.7 | ) | (749.9 | ) | |||
Total stockholders' equity |
1,592.0 | 1,479.3 | |||||
|
$ | 2,296.6 | $ | 2,221.5 | |||
The accompanying notes are an integral part of these
consolidated condensed financial statements.
1
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions, except per share information; unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Net sales |
$ | 496.7 | $ | 459.2 | |||
Cost of goods sold |
122.2 | 127.3 | |||||
Gross profit |
374.5 | 331.9 | |||||
Selling, general and administrative expenses |
185.2 | 177.2 | |||||
Research and development expenses |
79.8 | 68.6 | |||||
Special gain (Note 2) |
(83.6 | ) | | ||||
Interest income, net |
(0.2 | ) | | ||||
Other expense, net |
1.2 | 0.5 | |||||
Income before provision for income taxes |
192.1 | 85.6 | |||||
Provision for income taxes |
47.2 | 20.5 | |||||
Net income |
$ | 144.9 | $ | 65.1 | |||
Share information (Note 12) |
|||||||
Earnings per share: |
|||||||
Basic |
$ | 1.27 | $ | 0.57 | |||
Diluted |
$ | 1.24 | $ | 0.55 | |||
Weighted-average number of common shares outstanding: |
|||||||
Basic |
113.9 | 114.0 | |||||
Diluted |
116.5 | 118.0 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Net income |
$ | 144.9 | $ | 65.1 | |||
Other comprehensive (loss) income, net of tax (Note 11): |
|||||||
Foreign currency translation adjustments |
(24.2 | ) | 7.2 | ||||
Unrealized gain on cash flow hedges |
10.1 | 4.7 | |||||
Unrealized gain on available-for-sale investments |
| 0.7 | |||||
Reclassification of net realized loss to earnings |
| 0.3 | |||||
Other comprehensive (loss) income |
(14.1 | ) | 12.9 | ||||
Comprehensive income |
$ | 130.8 | $ | 78.0 | |||
3
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Cash flows from operating activities |
|||||||
Net income |
$ | 144.9 | $ | 65.1 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|||||||
Depreciation and amortization |
15.3 | 13.8 | |||||
Stock-based compensation (Note 9) |
11.2 | 9.2 | |||||
Excess tax benefit from stock plans |
(61.6 | ) | (38.2 | ) | |||
Deferred income taxes |
0.2 | 1.7 | |||||
Other |
0.1 | (0.9 | ) | ||||
Changes in operating assets and liabilities: |
|||||||
Accounts and other receivables, net |
5.4 | (24.9 | ) | ||||
Inventories |
(18.7 | ) | (7.9 | ) | |||
Accounts payable and accrued liabilities |
(35.9 | ) | (52.3 | ) | |||
Prepaid expenses and other current assets |
28.2 | 2.5 | |||||
Other |
(1.8 | ) | 1.2 | ||||
Net cash provided by (used in) operating activities |
87.3 | (30.7 | ) | ||||
Cash flows from investing activities |
|||||||
Capital expenditures |
(23.0 | ) | (18.0 | ) | |||
Purchases of short-term investments |
(92.7 | ) | (106.1 | ) | |||
Proceeds from short-term investments |
145.2 | 190.3 | |||||
(Investments in) proceeds from unconsolidated affiliates, net |
(1.5 | ) | 2.2 | ||||
Other |
(0.5 | ) | | ||||
Net cash provided by investing activities |
27.5 | 68.4 | |||||
Cash flows from financing activities |
|||||||
Proceeds from issuance of debt |
163.8 | 151.6 | |||||
Payments on debt |
(158.3 | ) | (120.5 | ) | |||
Purchases of treasury stock |
(107.7 | ) | (89.5 | ) | |||
Excess tax benefit from stock plans |
61.6 | 38.2 | |||||
Proceeds from stock plans |
13.8 | 24.9 | |||||
Equity forward contract related to accelerated share repurchase agreement |
| (10.8 | ) | ||||
Other |
1.9 | 3.0 | |||||
Net cash used in financing activities |
(24.9 | ) | (3.1 | ) | |||
Effect of currency exchange rate changes on cash and cash equivalents |
0.7 | 7.5 | |||||
Net increase in cash and cash equivalents |
90.6 | 42.1 | |||||
Cash and cash equivalents at beginning of period |
310.9 | 171.2 | |||||
Cash and cash equivalents at end of period |
$ | 401.5 | $ | 213.3 | |||
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
1. BASIS OF PRESENTATION
The accompanying interim consolidated condensed financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in Edwards Lifesciences Corporation's Annual Report on Form 10-K for the year ended December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted.
In the opinion of management of Edwards Lifesciences Corporation ("Edwards Lifesciences" or the "Company"), the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair statement of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Recently Adopted Accounting Standards
In December 2011, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires an entity to disclose both gross and net information about financial instruments and derivative instruments that are eligible for offset in the consolidated balance sheet or subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB clarified that this guidance applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the accounting guidance or subject to a master netting arrangement or similar agreement. The guidance was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company has provided the information required by this guidance in Note 7.
In July 2012, the FASB issued an amendment to the accounting guidance on intangible assets to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived asset is impaired as a basis for determining whether it is necessary to calculate the fair value of the indefinite-lived asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will consider the use of the qualitative factors when it performs its next impairment test or upon a triggering event.
In February 2013, the FASB issued an amendment to the accounting guidance on reporting amounts reclassified out of accumulated other comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassed is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The guidance was effective prospectively for reporting periods beginning after December 15, 2012, and interim periods within those annual periods. The Company has provided the information required by this guidance in Note 11.
5
2. SPECIAL GAIN
Litigation Award
In February 2013, the Company received $83.6 million from Medtronic, Inc. in satisfaction of the April 2010 jury award of damages for infringement of the U.S. Andersen transcatheter heart valve patent, including accrued interest. See Note 10 for additional information.
3. INVENTORIES
Inventories consisted of the following (in millions):
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Raw materials |
$ | 52.6 | $ | 49.5 | |||
Work in process |
59.3 | 58.8 | |||||
Finished products |
176.6 | 172.7 | |||||
|
$ | 288.5 | $ | 281.0 | |||
4. OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following (in millions):
|
March 31, 2013 | December 31, 2012 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Cost | Accumulated Amortization |
Net Carrying Value |
Cost | Accumulated Amortization |
Net Carrying Value |
|||||||||||||
Amortizable intangible assets |
|||||||||||||||||||
Patents |
$ | 213.7 | $ | (170.1 | ) | $ | 43.6 | $ | 211.2 | $ | (167.3 | ) | $ | 43.9 | |||||
Developed technology |
41.0 | (33.3 | ) | 7.7 | 41.3 | (33.0 | ) | 8.3 | |||||||||||
Other |
10.5 | (7.0 | ) | 3.5 | 10.6 | (6.8 | ) | 3.8 | |||||||||||
|
265.2 | (210.4 | ) | 54.8 | 263.1 | (207.1 | ) | 56.0 | |||||||||||
Unamortizable intangible assets |
|||||||||||||||||||
In-process research and development |
10.7 | | 10.7 | 11.0 | | 11.0 | |||||||||||||
|
$ | 275.9 | $ | (210.4 | ) | $ | 65.5 | $ | 274.1 | $ | (207.1 | ) | $ | 67.0 | |||||
The net carrying value of patents includes $20.7 million of capitalized legal costs related to the defense and enforcement of issued patents and trademarks for which success is deemed probable as of March 31, 2013.
Amortization expense related to other intangible assets was $3.7 million and $3.3 million for the three months ended March 31, 2013 and 2012, respectively. Estimated amortization expense for each of the years ending December 31 is as follows (in millions):
2013 |
$ | 15.2 | ||
2014 |
13.8 | |||
2015 |
12.6 | |||
2016 |
12.2 | |||
2017 |
2.9 |
The Company expenses costs incurred to renew or extend the term of acquired intangible assets.
6
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has a number of equity investments in privately and publicly held companies. Investments in these unconsolidated affiliates are as follows:
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
|
(in millions) |
||||||
Available-for-sale investments |
|||||||
Cost |
$ | 0.4 | $ | 0.4 | |||
Unrealized gains |
1.7 | 1.6 | |||||
Fair value of available-for-sale investments |
2.1 | 2.0 | |||||
Equity method investments |
|||||||
Cost |
13.5 | 13.3 | |||||
Equity in losses |
(2.0 | ) | (1.8 | ) | |||
Carrying value of equity method investments |
11.5 | 11.5 | |||||
Cost method investments |
|||||||
Carrying value of cost method investments |
8.9 | 7.6 | |||||
Total investments in unconsolidated affiliates |
$ | 22.5 | $ | 21.1 | |||
There were no sales of available-for-sale investments during the three months ended March 31, 2013. For the three months ended March 31, 2012, proceeds from sales of available-for-sale investments were $2.1 million, and the Company realized pre-tax gains from these sales of $0.4 million.
6. FAIR VALUE MEASUREMENTS
The consolidated condensed financial statements include financial instruments for which the fair market value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, bank time deposits, accounts and other receivables, investments in unconsolidated affiliates, accounts payable, certain accrued liabilities and borrowings under a revolving credit agreement. The carrying value of these financial instruments generally approximates fair value due to their short-term nature.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company prioritizes the inputs used to determine fair values in one of the following three categories:
Level 1Quoted
market prices in active markets for identical assets or liabilities.
Level 2Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3Unobservable inputs that are not corroborated by market data.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
7
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company's financial instruments which are measured at fair value on a recurring basis (in millions):
March 31, 2013
|
Level 1 | Level 2 | Level 3 | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||||||
Investments held for executive deferred compensation plan |
$ | 13.3 | $ | | $ | | $ | 13.3 | |||||
Investments in unconsolidated affiliates |
2.1 | | | 2.1 | |||||||||
Derivatives |
| 25.6 | | 25.6 | |||||||||
|
$ | 15.4 | $ | 25.6 | $ | | $ | 41.0 | |||||
Liabilities |
|||||||||||||
Derivatives |
$ | | $ | 4.2 | $ | | $ | 4.2 | |||||
Executive deferred compensation plan |
13.6 | | | 13.6 | |||||||||
|
$ | 13.6 | $ | 4.2 | $ | | $ | 17.8 | |||||
December 31, 2012
|
|||||||||||||
Assets |
|||||||||||||
Investments held for executive deferred compensation plan |
$ | 12.7 | $ | | $ | | $ | 12.7 | |||||
Investments in unconsolidated affiliates |
2.0 | | | 2.0 | |||||||||
Derivatives |
| 5.7 | | 5.7 | |||||||||
|
$ | 14.7 | $ | 5.7 | $ | | $ | 20.4 | |||||
Liabilities |
|||||||||||||
Executive deferred compensation plan |
$ | 12.4 | $ | | $ | | $ | 12.4 | |||||
Executive Deferred Compensation Plan
The Company holds investments in trading securities related to its executive deferred compensation plan. The investments are in a variety of stock and bond mutual funds. The fair values of these investments and the corresponding liabilities are based on quoted market prices and are categorized as Level 1.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates are long-term equity investments in companies that are in various stages of development. Certain of the Company's investments in unconsolidated affiliates are designated as available-for-sale. These investments are carried at fair market value based on quoted market prices and are categorized as Level 1.
Derivative Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts to manage foreign currency exposures. All derivatives contracts are recognized on the balance sheet at their fair value. The fair value for derivatives is determined based on quoted foreign currency exchange rates discounted to present as appropriate. The valuation procedures are based upon well recognized financial principles. Although readily observable data is used in the valuations, different valuation methods could have an effect on the estimated fair value. The derivative instruments are categorized as Level 2.
8
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage its currency exchange rate risk as summarized below. Notional amounts are stated in United States dollar equivalents at spot exchange rates at the respective dates. As of March 31, 2013 and December 31, 2012, the Company held foreign currency forward exchange contracts with notional amounts of $755.6 million and $779.0 million, respectively.
The Company uses foreign currency forward exchange contracts to offset the changes due to currency rate movements in the amount of future cash flows associated with intercompany transactions and certain third-party expenses expected to occur within the next 13 months. These foreign currency forward exchange contracts are designated as cash flow hedges. Certain of the Company's locations have assets and liabilities denominated in currencies other than their functional currencies resulting from intercompany and third-party transactions. The Company uses foreign currency forward exchange contracts that are not designated as hedging instruments to offset the transaction gains and losses associated with certain of these assets and liabilities. All foreign currency forward exchange contracts are denominated in currencies of major industrial countries, principally the Euro and the Japanese yen. It is the Company's policy not to enter into derivative financial instruments for speculative purposes.
All derivative financial instruments are recognized at fair value in the consolidated condensed balance sheets. The Company reports in "Accumulated Other Comprehensive Loss" the effective portion of the gain or loss on derivative financial instruments that are designated, and that qualify, as cash flow hedges. The Company reclassifies these gains and losses into earnings in the same period in which the underlying hedged transactions affect earnings. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings. For the three months ended March 31, 2013 and 2012, the Company did not record any gains or losses due to hedge ineffectiveness. The gains and losses on derivative financial instruments for which the Company does not elect hedge accounting treatment are recognized in the consolidated condensed statements of operations in each period based upon the change in the fair value of the derivative financial instrument. Cash flows from derivative financial instruments are reported as operating activities in the consolidated condensed statements of cash flows.
Derivative financial instruments involve credit risk in the event the counterparty should default. It is the Company's policy to execute such instruments with global financial institutions that the Company believes to be creditworthy. The Company diversifies its derivative financial instruments among counterparties to minimize exposure to any one of these entities. The Company also uses International Swap Dealers Association master-netting agreements with certain counterparties. The master-netting agreements provide for the net settlement of all contracts through a single payment in a single currency in the event of default, as defined by the agreements.
The following table presents the location and fair value amounts of derivative instruments reported in the consolidated condensed balance sheets (in millions):
|
|
Fair Value | |||||||
---|---|---|---|---|---|---|---|---|---|
Derivatives designated as hedging instruments
|
Balance Sheet Location |
March 31, 2013 |
December 31, 2012 |
||||||
Assets |
|||||||||
Foreign currency contracts |
Other current assets | $ | 25.6 | $ | 5.7 | ||||
Liabilities |
|||||||||
Foreign currency contracts |
Accrued liabilities | $ | 4.2 | $ | |
9
The following table presents the effect of master-netting agreements and rights of offset on the consolidated condensed balance sheets (in millions):
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheet |
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Gross Amounts Offset in Consolidated Balance Sheet |
|
|
|||||||||||||||
|
|
Net Amounts Presented in the Consolidated Balance Sheet |
|
||||||||||||||||
March 31, 2013
|
Gross Amounts(a) |
Financial Instruments |
Cash Collateral Received |
Net Amount |
|||||||||||||||
Derivative Assets |
|||||||||||||||||||
Foreign currency contracts |
$ | 17.5 | $ | | $ | 17.5 | $ | (2.5 | ) | $ | | $ | 15.0 | ||||||
Derivative Liabilities |
|||||||||||||||||||
Foreign currency contracts |
$ | 2.5 | $ | | $ | 2.5 | $ | (2.5 | ) | $ | | $ | | ||||||
December 31, 2012
|
|||||||||||||||||||
Derivative Assets |
|||||||||||||||||||
Foreign currency contracts |
$ | 10.9 | $ | (5.2 | ) | $ | 5.7 | $ | | $ | | $ | 5.7 | ||||||
Derivative Liabilities |
|||||||||||||||||||
Foreign currency contracts |
$ | 5.2 | $ | (5.2 | ) | $ | | $ | | $ | | $ | |
The following tables present the effect of derivative instruments on the consolidated condensed statements of operations and consolidated condensed statements of comprehensive income (in millions):
|
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended March 31, |
|
Three Months Ended March 31, |
||||||||||||
|
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income |
||||||||||||||
Derivatives in cash flow hedging relationships |
2013 | 2012 | 2013 | 2012 | |||||||||||
Foreign currency contracts |
$ | 21.7 | $ | 3.6 | Cost of goods sold | $ | 5.2 | $ | (3.7 | ) |
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
|
Three Months Ended March 31, |
|||||||
|
Location of Gain or (Loss) Recognized in Income on Derivative |
||||||||
Derivatives not designated as hedging instruments |
2013 | 2012 | |||||||
Foreign currency contracts |
Other expense, net | $ | 9.3 | $ | 4.7 |
The Company expects that during the next twelve months it will reclassify to earnings a $6.0 million gain currently recorded in "Accumulated Other Comprehensive Loss."
10
8. DEFINED BENEFIT PLANS
The components of net periodic benefit cost for the three months ended March 31, 2013 and 2012 were as follows (in millions):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Service cost |
$ | 2.0 | $ | 1.8 | |||
Interest cost |
0.5 | 0.6 | |||||
Expected return on plan assets |
(0.3 | ) | (0.4 | ) | |||
Amortization of actuarial loss, prior service credit and other |
0.2 | 0.2 | |||||
Net periodic benefit cost |
$ | 2.4 | $ | 2.2 | |||
9. STOCK-BASED COMPENSATION
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three months ended March 31, 2013 and 2012 was as follows (in millions):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Cost of goods sold |
$ | 1.4 | $ | 1.1 | |||
Selling, general and administrative expenses |
8.2 | 6.8 | |||||
Research and development expenses |
1.6 | 1.3 | |||||
Total stock-based compensation expense |
$ | 11.2 | $ | 9.2 | |||
At March 31, 2013, the total remaining compensation cost related to nonvested stock options, restricted stock units ("RSUs"), market-based restricted stock units ("MRSUs") and employee stock purchase plan ("ESPP") subscription awards amounted to $63.7 million, which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of 29 months.
Fair Value Disclosures
The Black-Scholes option pricing model was used with the following weighted-average assumptions for options granted during the following periods:
Option Awards
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Risk-free interest rate |
0.8 | % | 0.7 | % | |||
Expected dividend yield |
None | None | |||||
Expected volatility |
31.2 | % | 27.2 | % | |||
Expected term (years) |
4.9 | 4.7 | |||||
Fair value, per share |
$ | 23.30 | $ | 18.70 |
11
The Black-Scholes option pricing model was used with the following weighted-average assumptions for ESPP subscriptions granted during the following periods:
ESPP
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Risk-free interest rate |
0.1 | % | 0.1 | % | |||
Expected dividend yield |
None | None | |||||
Expected volatility |
36.0 | % | 29.7 | % | |||
Expected term (years) |
0.6 | 0.6 | |||||
Fair value, per share |
$ | 23.40 | $ | 16.99 |
10. COMMITMENTS AND CONTINGENCIES
In February 2008, Edwards Lifesciences filed a lawsuit against CoreValve, Inc. in the U.S. District Court for the District of Delaware alleging that its ReValving System infringes three of Edwards' U.S. Andersen patents, later narrowed to one patent ("the '552 patent"). Medtronic, Inc. ("Medtronic") acquired CoreValve, Inc. ("Medtronic CoreValve") in April 2009. In April 2010, a federal jury found the '552 patent to be valid and found that Medtronic CoreValve willfully infringes it. The jury also awarded Edwards $73.9 million in damages. In February 2011, the District Court reaffirmed the jury decision and ruled that Edwards is entitled to recover additional damages due to Medtronic CoreValve's continued infringing sales from the trial through the life of the patent, plus interest. In the same ruling, the court denied Edwards' motions for a permanent injunction, as well as its motion for increased damages relating to Medtronic CoreValve's willful infringement. In November 2012, the U.S. Court of Appeals for the Federal Circuit affirmed the April 2010 federal jury decision that Medtronic CoreValve is willfully infringing the '552 patent and ordered the trial court to reconsider Edwards' request for a permanent injunction that would prohibit the manufacture or sale of the CoreValve System in the United States. The Court of Appeals also affirmed the validity of the '552 patent and the federal jury's verdict awarding an initial payment of $73.9 million in damages to Edwards, which covers infringement through early 2010. In February 2013, the Court of Appeals issued a mandate affirming the judgment of the District Court and directing it to reconsider its prior denial of Edwards' request for a permanent injunction and to assess additional damages for the period after the date of the jury award. In February 2013, Edwards received a payment of $83.6 million from Medtronic in satisfaction of the April 2010 jury award of damages for infringement, including accrued interest. Proceedings continue before the District Court regarding the permanent injunction and the additional damages.
A second lawsuit is pending in the same District Court against Medtronic CoreValve and Medtronic alleging infringement of three of Edwards' U.S. Andersen patents.
In May 2012, the United States Patent and Trademark Office ("USPTO") granted Medtronic's fourth request to reexamine the validity of the claim of the '552 patent and in February 2013 confirmed the validity of that patent.
In June 2011, Medtronic filed a lawsuit in the U.S. District Court for the District of Minnesota alleging that certain surgical valve holders and a surgical embolic filter device infringe its patents. Edwards counterclaimed against Medtronic, alleging that the Medtronic Contour 3D annuloplasty ring infringes an Edwards ring patent. Edwards subsequently added two more patents to its counterclaim. In February and March 2012, the USPTO granted Edwards' requests to reexamine the validity of three of the four Medtronic patents involved in this lawsuit.
12
In June 2011, Medtronic CoreValve also filed another lawsuit in the U.S. District Court for the Central District of California alleging that the Edwards SAPIEN transcatheter heart valve infringes a Medtronic CoreValve patent. Edwards counterclaimed against Medtronic CoreValve and Medtronic, alleging that the Medtronic CoreValve heart valve infringes Edwards' U.S. Letac-Cribier transcatheter heart valve patent. Edwards' counterclaim was subsequently transferred to the U.S. District Court for the District of Delaware, where proceedings continue. In April 2012, the USPTO granted Edwards' request to reexamine the validity of the Medtronic CoreValve patent. In November 2012, the California court ruled that the Medtronic CoreValve patent is invalid and dismissed the lawsuit in favor of Edwards. Medtronic has filed an appeal.
In March 2012, Medtronic filed another lawsuit in the U.S. District Court for the Central District of California alleging that the methods of implanting the Edwards SAPIEN transcatheter heart valve in the United States infringe two Medtronic patents relating to methods of pacing the heart.
In August 2012, Edwards filed a lawsuit against Medtronic in the German District Court of Mannheim alleging that Medtronic's CoreValve and Evolut valves infringe two of Edwards' transcatheter valve patents. These patents were issued by the European Patent Office and were validated as national patents in various European countries, including Germany. In April 2013, Edwards added a third transcatheter valve patent to the lawsuit. An infringement hearing was held in April 2013 for one of the original patents, and the hearing for the second patent is scheduled in May 2013. A hearing date for the third patent has not yet been scheduled. Related oppositions on the validity of these patents are ongoing at the European Patent Office.
In addition, Edwards Lifesciences is or may be a party to, or may otherwise be responsible for, pending or threatened lawsuits related primarily to products and services currently or formerly manufactured or performed, as applicable, by Edwards Lifesciences. Such cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Upon resolution of any such legal matter or other claim, Edwards Lifesciences may incur charges in excess of established reserves. The Company is not able to estimate the amount or range of any loss for legal contingencies for which there is no reserve or additional loss for matters already reserved. While any such charge could have a material adverse impact on Edwards Lifesciences' net income or cash flows in the period in which it is recorded or paid, management does not believe that any such charge relating to any currently pending lawsuit would have a material adverse effect on Edwards Lifesciences' financial position, results of operations or liquidity.
Edwards Lifesciences is subject to various environmental laws and regulations both within and outside of the United States. The operations of Edwards Lifesciences, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of continuing compliance with environmental protection laws, management believes that such compliance will not have a material impact on Edwards Lifesciences' financial position, results of operations or liquidity.
13
11. ACCUMULATED OTHER COMPREHENSIVE LOSS
Presented below is a summary of activity for each component of "Accumulated Other Comprehensive Loss" for the three months ended March 31, 2013.
|
Foreign Currency Translation Adjustments |
Unrealized Gain on Cash Flow Hedges |
Unrealized Gain on Available-for- Sale Investments |
Unrealized Pension Costs |
Total Accumulated Other Comprehensive Loss |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions) |
|||||||||||||||
December 31, 2012 |
$ | (25.8 | ) | $ | 7.0 | $ | 1.4 | $ | (20.5 | ) | $ | (37.9 | ) | |||
Other comprehensive (loss) income before reclassifications |
(24.2 | ) | 21.7 | 0.1 | | (2.4 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive loss |
| (5.2 | ) | | | (5.2 | ) | |||||||||
Deferred income tax expense |
| (6.4 | ) | (0.1 | ) | | (6.5 | ) | ||||||||
March 31, 2013 |
$ | (50.0 | ) | $ | 17.1 | $ | 1.4 | $ | (20.5 | ) | $ | (52.0 | ) | |||
The following table provides information about amounts reclassified from "Accumulated Other Comprehensive Loss" (in millions):
|
Amount Reclassified from Accumulated Other Comprehensive Loss |
|
|||
---|---|---|---|---|---|
Details about Accumulated Other Comprehensive Loss Components
|
Three Months Ended March 31, 2013 |
Affected Line on Consolidated Condensed Statements of Operations |
|||
Gain on cash flow hedges |
$ | 5.2 | Cost of goods sold | ||
|
(1.9 | ) | Tax expense | ||
|
$ | 3.3 | Net of tax | ||
12. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during a period. Employee equity share options, nonvested shares and similar equity instruments granted by the Company are treated as potential common shares in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of RSUs, MRSUs, and in-the-money options. The dilutive impact of the RSUs, MRSUs, and in-the-money options is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation expense for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in "Additional Paid-in Capital" when the award becomes deductible are assumed to be used to repurchase shares. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.
14
The table below presents the computation of basic and diluted earnings per share (in millions, except for per share information):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Basic: |
|||||||
Net income |
$ | 144.9 | $ | 65.1 | |||
Weighted-average shares outstanding |
113.9 | 114.0 | |||||
Basic earnings per share |
$ | 1.27 | $ | 0.57 | |||
Diluted: |
|||||||
Net income |
$ | 144.9 | $ | 65.1 | |||
Weighted-average shares outstanding |
113.9 | 114.0 | |||||
Dilutive effect of stock plans |
2.6 | 4.0 | |||||
Dilutive weighted-average shares outstanding |
116.5 | 118.0 | |||||
Diluted earnings per share |
$ | 1.24 | $ | 0.55 | |||
Stock options, RSUs, and MRSUs to purchase 2.2 million and 1.2 million shares for the three months ended March 31, 2013 and 2012, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
13. INCOME TAXES
The Company's effective income tax rates were 24.6% and 23.9% for the three months ended March 31, 2013 and 2012, respectively.
The federal research credit expired on December 31, 2011 and was not reinstated until January 2, 2013. Therefore, the effective income tax rate for the three months ended March 31, 2012 was calculated without an assumed benefit for the federal research credit. The effective income tax rate for the three months ended March 31, 2013 included (1) an $8.4 million benefit for the full year 2012 federal research credit and (2) $31.3 million of tax expense associated with the $83.6 million litigation award received from Medtronic, Inc. in February 2013 (see Note 2). The effective income tax rate for the three months ended March 31, 2012 included a $2.3 million benefit from the remeasurement of uncertain tax positions.
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its 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.
As of March 31, 2013 and December 31, 2012, the liability for income taxes associated with uncertain tax positions was $121.6 million and $113.6 million, respectively. The Company estimates that these liabilities would be reduced by $27.1 million and $26.1 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amounts of $94.5 million and $87.5 million, respectively, if not required, would favorably affect the Company's effective tax rate.
15
At March 31, 2013, the Company had concluded all United States federal income tax matters for years through 2008. The Internal Revenue Service began its examination of the 2009 and 2010 tax years during the second quarter of 2011. All material state, local and foreign income tax matters have been concluded for years through 2006.
14. SEGMENT INFORMATION
Edwards Lifesciences conducts operations worldwide and is managed in the following geographical regions: United States, Europe, Japan and Rest of World. All regions sell products that are used to treat advanced cardiovascular disease.
The Company's geographic segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer). The Company evaluates the performance of its geographic segments based on net sales and income before provision for income taxes ("pre-tax income"). The accounting policies of the segments are substantially the same as those described in Note 2 of the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2012. Net sales and pre-tax income of reportable segments are based on internally derived standard foreign exchange rates, which may differ from year to year, and do not include inter segment profits. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographical distribution that would occur if the segments were not interdependent. Net sales by geographic area are based on the location of the customer.
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include net interest expense, global marketing expenses, corporate research and development expenses, manufacturing variances, corporate headquarters costs, special gains and charges, stock-based compensation, foreign currency hedging activities, certain litigation costs and most of the Company's amortization expense. Although most of the Company's depreciation expense is included in segment pre-tax income, due to the Company's methodology for cost build-up, it is impractical to determine the amount of depreciation expense included in each segment, and, therefore, a portion is maintained at the corporate level. The Company neither discretely allocates assets to its operating segments, nor evaluates the operating segments using discrete asset information.
The table below presents information about Edwards Lifesciences' reportable segments (in millions):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Segment Net Sales |
|||||||
United States |
$ | 227.9 | $ | 186.6 | |||
Europe |
155.5 | 150.8 | |||||
Japan |
67.3 | 69.8 | |||||
Rest of world |
54.5 | 52.7 | |||||
Total segment net sales |
$ | 505.2 | $ | 459.9 | |||
Segment Pre-tax Income |
|||||||
United States |
$ | 132.8 | $ | 101.7 | |||
Europe |
72.5 | 67.7 | |||||
Japan |
33.5 | 35.8 | |||||
Rest of world |
12.5 | 13.2 | |||||
Total segment pre-tax income |
$ | 251.3 | $ | 218.4 | |||
16
The table below presents reconciliations of segment net sales to consolidated net sales and segment pre-tax income to consolidated pre-tax income (in millions):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Net Sales Reconciliation |
|||||||
Segment net sales |
$ | 505.2 | $ | 459.9 | |||
Foreign currency |
(8.5 | ) | (0.7 | ) | |||
Consolidated net sales |
$ | 496.7 | $ | 459.2 | |||
Pre-tax Income Reconciliation |
|||||||
Segment pre-tax income |
$ | 251.3 | $ | 218.4 | |||
Unallocated amounts: |
|||||||
Corporate items |
(143.7 | ) | (130.4 | ) | |||
Special gain |
83.6 | | |||||
Interest income, net |
0.2 | | |||||
Foreign currency |
0.7 | (2.4 | ) | ||||
Consolidated pre-tax income |
$ | 192.1 | $ | 85.6 | |||
Enterprise-Wide Information
Enterprise-wide information is based on actual foreign exchange rates used in the Company's consolidated financial statements.
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
|
(in millions) |
||||||
Net Sales by Geographic Area |
|||||||
United States |
$ | 227.9 | $ | 186.6 | |||
Europe |
154.5 | 148.8 | |||||
Japan |
60.0 | 70.8 | |||||
Rest of world |
54.3 | 53.0 | |||||
|
$ | 496.7 | $ | 459.2 | |||
Net Sales by Major Product and Service Area |
|||||||
Surgical Heart Valve Therapy |
$ | 198.1 | $ | 203.6 | |||
Transcatheter Heart Valves |
169.7 | 121.5 | |||||
Critical Care |
128.9 | 134.1 | |||||
|
$ | 496.7 | $ | 459.2 | |||
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
|
(in millions) |
||||||
Long-Lived Tangible Assets by Geographic Area |
|||||||
United States |
$ | 272.4 | $ | 263.4 | |||
International |
138.6 | 136.2 | |||||
|
$ | 411.0 | $ | 399.6 | |||
17
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. The Company (as defined below in "Overview") intends 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 the Company's 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 the Company's results or future business, financial condition, results of operations or performance to differ materially from the Company's 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, the Company's annual report on Form 10-K for the year ended December 31, 2012 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 the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If the Company does update or correct one or more of these statements, investors and others should not conclude that the Company will make additional updates or corrections.
Overview
Edwards Lifesciences Corporation ("Edwards Lifesciences" or the "Company") is focused on technologies that treat structural heart disease and critically ill patients. A pioneer in the development and commercialization of heart valve products, Edwards Lifesciences is the world's leading manufacturer of tissue heart valves and repair products used to replace or repair a patient's diseased or defective heart valve. The Company is also a global leader in hemodynamic monitoring systems used to measure a patient's cardiovascular function in the hospital setting.
The Company reports its products and technologies in three product groups: Surgical Heart Valve Therapy; Transcatheter Heart Valves; and Critical Care.
Edwards Lifesciences' Surgical Heart Valve Therapy portfolio is comprised primarily of tissue heart valves and heart valve repair products for the surgical replacement or repair of a patient's heart valve. The portfolio also includes a diverse line of products used during minimally invasive surgical procedures, and cannulae, embolic protection devices and other products used during cardiopulmonary bypass. The Company's Transcatheter Heart Valves portfolio includes technologies designed to treat heart valve disease using catheter-based approaches as opposed to open surgical techniques. In the Critical Care portfolio, Edwards Lifesciences' products include pulmonary artery catheters, disposable pressure transducers and advanced monitoring systems. The portfolio also includes a line of balloon catheter-based vascular products, surgical clips and inserts.
The health care marketplace continues to be competitive with strong global and local competitors. The Company competes with many companies, ranging from small start-up enterprises to companies that are larger with broader product offerings than Edwards Lifesciences. Furthermore, rapid product
18
development and technological change characterize the market in which the Company competes. Global demand for health care is increasing as the population ages. There is mounting pressure to contain health care costs in the face of this increasing demand, which has resulted in pricing and market share pressures. The cardiovascular segment of the medical device industry is dynamic, and technology, cost-of-care considerations, regulatory reform, industry and customer consolidation, and evolving patient needs are expected to continue to drive change.
Results of Operations
Net Sales Trends
(dollars in millions)
|
Three Months Ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Percent Change |
|||||||||||
|
2013 | 2012 | Change | ||||||||||
United States |
$ | 227.9 | $ | 186.6 | $ | 41.3 | 22.1 | % | |||||
International |
268.8 | 272.6 | (3.8 | ) | (1.4 | )% | |||||||
Total net sales |
$ | 496.7 | $ | 459.2 | $ | 37.5 | 8.2 | % | |||||
In the United States, the $41.3 million increase in net sales for the three months ended March 31, 2013 was due primarily to Transcatheter Heart Valves, which increased net sales by $42.0 million, driven primarily by sales of the Edwards SAPIEN transcatheter heart valve. In October 2012, the Company received approval from the United States Food and Drug Administration ("FDA") for the transapical and transfemoral delivery of the Edwards SAPIEN transcatheter heart valve for treatment of certain patients deemed at high risk for traditional open-heart surgery. In 2011, the Company received FDA approval for the treatment of certain inoperable patients using a transfemoral delivery approach only.
International net sales decreased $3.8 million for the three months ended March 31, 2013, due primarily to:
partially offset by:
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 the Company's hedging activities. For more information see Item 3, "Quantitative and Qualitative Disclosures About Market Risk."
19
Net Sales by Product Group
(dollars in millions)
|
Three Months Ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Percent Change |
|||||||||||
|
2013 | 2012 | Change | ||||||||||
Surgical Heart Valve Therapy |
$ | 198.1 | $ | 203.6 | $ | (5.5 | ) | (2.7 | )% | ||||
Transcatheter Heart Valves |
169.7 | 121.5 | 48.2 | 39.7 | % | ||||||||
Critical Care |
128.9 | 134.1 | (5.2 | ) | (3.9 | )% | |||||||
Total net sales |
$ | 496.7 | $ | 459.2 | $ | 37.5 | 8.2 | % | |||||
Surgical Heart Valve Therapy
Net sales of Surgical Heart Valve Therapy products decreased by $5.5 million for the three months ended March 31, 2013, due primarily to foreign currency exchange rate fluctuations, which decreased net sales by $3.8 million, due primarily to the weakening of the Japanese yen against the United States dollar.
At the end of the first quarter of 2013, the Company received approval to sell its Carpentier-Edwards PERIMOUNT Magna Ease valve in China. In the United States, the Company received approval from the FDA to include EDWARDS INTUITY Elite, its next generation minimally invasive aortic valve surgery system, in its ongoing TRANSFORM Trial. The Company is continuing to enroll patients in its COMMENCE clinical trial, which is studying its GLX next-generation tissue treatment platform applied to the Magna Ease aortic surgical valve and the Magna Mitral Ease valve.
Transcatheter Heart Valves
Net sales of Transcatheter Heart Valves for the three months ended March 31, 2013 increased by $48.2 million, due primarily to:
The Company is continuing to enroll patients in Cohort A, the surgical arm of The PARTNER II Trial, which is evaluating the Edwards SAPIEN XT transcatheter heart valve for the United States market. The Company continues to enroll patients in the CE Mark trial for its SAPIEN 3 valve.
Critical Care
Net sales of Critical Care products for the three months ended March 31, 2013 decreased by $5.2 million, due primarily to foreign currency exchange rate fluctuations, which decreased net sales by $4.9 million, due primarily to the weakening of the Japanese yen against the United States dollar.
20
Gross Profit
|
Three Months Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | Change | |||||||
Gross profit as a percentage of net sales |
75.4 | % | 72.3 | % | 3.1 pts. |
The 3.1 percentage point increase in gross profit as a percentage of net sales for the three months ended March 31, 2013 was driven primarily by:
Selling, General and Administrative ("SG&A") Expenses
(dollars in millions)
|
Three Months Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | Change | |||||||
SG&A expenses |
$ | 185.2 | $ | 177.2 | $ | 8.0 | ||||
SG&A expenses as a percentage of net sales |
37.3 | % | 38.6 | % | (1.3) pts. |
The increase in SG&A expenses for the three months ended March 31, 2013 was due primarily to (1) the 2.3% excise tax on United States sales of most medical devices which became effective in 2013 and (2) higher sales and marketing expenses in the United States, mainly to support the Transcatheter Heart Valve program. These increases were partially offset by the impact of foreign currency, which reduced expenses by $2.2 million due primarily to the weakening of the Japanese yen against the United States dollar. The decrease in SG&A expenses as a percentage of net sales for the three months ended March 31, 2013 was due primarily to decreased SG&A expenses in Europe as a percentage of net sales.
Research and Development Expenses
(dollars in millions)
|
Three Months Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | Change | |||||||
Research and development expenses |
$ | 79.8 | $ | 68.6 | $ | 11.2 | ||||
Research and development expenses as a percentage of net sales |
16.1 | % | 14.9 | % | 1.2 pts. |
The increase in research and development expenses for the three months ended March 31, 2013 was due primarily to additional investments in a number of active heart valve clinical studies.
Special Gain
Litigation Award
In February 2013, the Company received $83.6 million from Medtronic, Inc. in satisfaction of the April 2010 jury award of damages for infringement of the U.S. Andersen transcatheter heart valve patent, including accrued interest. For further information, see Note 10 to the consolidated condensed financial statements.
21
Interest Income, net
(in millions)
|
Three Months Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | Change | |||||||
Interest expense |
$ | 1.4 | $ | 1.1 | $ | 0.3 | ||||
Interest income |
(1.6 | ) | (1.1 | ) | (0.5 | ) | ||||
Interest income, net |
$ | (0.2 | ) | $ | | $ | (0.2 | ) | ||
The increase in interest expense for the three months ended March 31, 2013 resulted primarily from a higher average debt balance as compared to the prior year period. The increase in interest income resulted primarily from the release of a deposit upon the settlement of certain litigation.
Other Expense, net
(in millions)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Foreign exchange losses, net |
$ | 0.9 | $ | 0.6 | |||
Loss (gain) on investments in unconsolidated affiliates |
0.2 | (0.4 | ) | ||||
Other |
0.1 | 0.3 | |||||
Other expense, net |
$ | 1.2 | $ | 0.5 | |||
The foreign exchange losses relate to the foreign currency fluctuations in the Company's 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. Foreign exchange fluctuations, related primarily to United States dollar payables in non-United States dollar functional currency locations and Euro denominated intercompany receivables, resulted in a net loss in 2013.
The loss (gain) on investments in unconsolidated affiliates primarily represents the Company's net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on the Company's available-for-sale and cost method investments.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates 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. The Company's effective income tax rates were 24.6% and 23.9% for the three months ended March 31, 2013 and 2012, respectively.
The federal research credit expired on December 31, 2011 and was not reinstated until January 2, 2013. Therefore, the effective income tax rate for the three months ended March 31, 2012 was calculated without an assumed benefit for the federal research credit. The effective income tax rate for the three months ended March 31, 2013 included (1) an $8.4 million benefit for the full year 2012 federal research credit and (2) $31.3 million of tax expense associated with the $83.6 million litigation award received from Medtronic, Inc. in February 2013 (see Note 2 to the consolidated condensed financial statements). The effective income tax rate for the three months ended March 31, 2012 included a $2.3 million benefit from the remeasurement of uncertain tax positions.
22
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its 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.
As of March 31, 2013 and December 31, 2012, the liability for income taxes associated with uncertain tax positions was $121.6 million and $113.6 million, respectively. The Company estimates that these liabilities would be reduced by $27.1 million and $26.1 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amounts of $94.5 million and $87.5 million, respectively, if not required, would favorably affect the Company's effective tax rate.
Liquidity and Capital Resources
The Company's sources of cash liquidity include cash on hand and cash equivalents, short-term investments (bank time deposits with original maturities over three months but less than one year), amounts available under credit facilities and cash from operations. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures and other financial commitments. The Company further believes that it has 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 the Company on favorable terms, or at all.
The Company believes that cash held in the United States, in addition to amounts available under credit facilities and cash from operations, are sufficient to fund its United States operating requirements. As of March 31, 2013, cash and cash equivalents and short-term investments held outside the United States were $489.9 million, and have historically been used to fund international operations and acquire businesses outside of the United States. The majority of cash and cash equivalents and short-term investments held outside the United States relate to undistributed earnings of certain of the Company's foreign subsidiaries which are considered to be indefinitely reinvested by the Company. 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 would exist at the time such repatriation is made and the complexities of the tax laws of the United States and the respective foreign jurisdictions.
The Company has a Four-Year Credit Agreement ("the Credit Facility") which matures on July 29, 2015. The Credit Facility provides up to an aggregate of $500.0 million in borrowings in multiple currencies. Borrowings generally bear interest at the London interbank offering rate ("LIBOR") plus 0.875%, subject to adjustment for leverage ratio changes as defined in the Credit Facility. The Company also pays a facility fee of 0.125% on the entire $500.0 million facility whether or not drawn. The facility fee is also subject to adjustment for leverage ratio changes. All amounts outstanding under the Credit Facility have been classified as long-term obligations as these borrowings are expected to be refinanced pursuant to the Credit Facility. As of March 31, 2013, borrowings of $192.7 million were outstanding under the Credit Facility. The Credit Facility is unsecured and contains various financial and other covenants, including a maximum leverage ratio and a minimum interest coverage ratio, as defined in the Credit Facility. The Company was in compliance with all covenants at March 31, 2013.
23
In September 2011, the Board of Directors approved a stock repurchase program authorizing the Company to purchase on the open market and in privately negotiated transactions up to $500.0 million of the Company's common stock. Under this stock repurchase authorization, in November 2012, the Company entered into a Rule 10b5-1 plan to repurchase, during 2013, up to $245.0 million of the Company's common stock in accordance with certain pre-defined price parameters. As of March 31, 2013, $137.4 million remained available under the Rule 10b5-1 plan. During the three months ended March 31, 2013, the Company repurchased a total of 1.3 million shares at an aggregate cost of $107.6 million, and as of March 31, 2013, had remaining authority under the program to purchase $140.0 million of the Company's common stock. In addition to shares repurchased under the stock repurchase program, the Company also acquired shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.
At March 31, 2013, there had been no material changes in the Company's significant contractual obligations and commercial commitments as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2012.
Net cash flows provided by operating activities of $87.3 million for the three months ended March 31, 2013 increased $118.0 million over the same period a year ago due primarily to (1) receipt of $83.6 million from Medtronic, Inc. in satisfaction of the April 2010 jury award of damages for infringement of the U.S. Andersen transcatheter heart valve patent and (2) increased collections of accounts receivable. These increases were partially offset by a $23.4 million impact from excess tax benefits from stock plans, primarily as a result of the realization of excess tax benefits that had been previously unrealized due to credit carryforwards and net operating losses in the United States in 2011.
Net cash provided by investing activities of $27.5 million for the three months ended March 31, 2013 consisted primarily of net purchases of short-term investments of $52.5 million, partially offset by capital expenditures of $23.0 million.
Net cash provided by investing activities of $68.4 million for the three months ended March 31, 2012 consisted primarily of net proceeds from short-term investments of $84.2 million, partially offset by capital expenditures of $18.0 million.
Net cash used in financing activities of $24.9 million for the three months ended March 31, 2013 consisted primarily of purchases of treasury stock of $107.7 million, partially offset by the excess tax benefit from stock plans of $61.6 million (including the realization of previously unrealized excess tax benefits), and the proceeds from stock plans of $13.8 million.
Net cash used in financing activities of $3.1 million for the three months ended March 31, 2012 consisted primarily of purchases of treasury stock of $100.3 million, partially offset by net proceeds from debt of $31.1 million, proceeds from stock plans of $24.9 million, and the excess tax benefit from stock plans of $38.2 million.
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to the Company's critical accounting policies and estimates which the Company believes could have the most significant effect on the Company's reported results and require subjective or complex judgments by management is contained on pages 36-39 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Company's Annual Report on Form 10-K for the year ended December 31, 2012. Management believes that at March 31, 2013, there had been no material changes to this information.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk, Foreign Currency Risk, Credit Risk and Concentrations of Risk
For a complete discussion of the Company's exposure to interest rate risk, foreign currency risk, credit risk and concentrations of risk, refer to Item 7A "Quantitative and Qualitative Disclosures About Market Risk" on pages 39-40 of the Company's Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes from the information discussed therein.
Investment Risk
Edwards Lifesciences is exposed to investment risks related to changes in the fair values of its investments. The Company invests in equity instruments of public and private companies. These investments are classified in "Investments in Unconsolidated Affiliates" on the consolidated condensed balance sheets.
As of March 31, 2013, Edwards Lifesciences had $22.5 million of investments in equity instruments of other companies and had recorded unrealized gains of $1.4 million on these investments in "Accumulated Other Comprehensive Loss," net of tax. Should these companies experience a decline in financial condition or fail to meet certain development milestones, the decline in the investments' value may be considered other-than-temporary and impairment charges may be necessary.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2013. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of March 31, 2013 that the Company's disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in the Company's internal controls over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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For a description of our material pending legal proceedings, please see Note 10 to the "Consolidated Condensed Financial Statements" of this Quarterly Report on Form 10-Q, which is incorporated by reference.
There have been no material changes to the risk factors under Part I, Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
|
Total Number of Shares (or Units) Purchased(a)(c) |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(b)(c) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 1, 2013 through January 31, 2013 |
278,134 | $ | 91.96 | 278,134 | $ | 222.0 | |||||||
February 1, 2013 through February 28, 2013 |
500,469 | 87.63 | 499,115 | 184.0 | |||||||||
March 1, 2013 through March 31, 2013 |
517,096 | 84.94 | 517,096 | 140.0 | |||||||||
Total |
1,295,699 | 87.48 | 1,294,345 | ||||||||||
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto and include the following:
*10.1 | Edwards Lifesciences Corporation Severance Pay Plan, restated effective January 1, 2013 | ||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101 | The following financial statements from Edwards Lifesciences' Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Operations, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Cash Flows, and (v) Notes to Consolidated Condensed Financial Statements |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EDWARDS LIFESCIENCES CORPORATION (Registrant) |
||||
Date: May 6, 2013 |
By: |
/s/ THOMAS M. ABATE Thomas M. Abate Corporate Vice President, Chief Financial Officer (Chief Accounting Officer) |
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EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Exhibit No. | Description | ||
---|---|---|---|
*10.1 | Edwards Lifesciences Corporation Severance Pay Plan, restated effective January 1, 2013 | ||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
101 | The following financial statements from Edwards Lifesciences' Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Operations, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Cash Flows, and (v) Notes to Consolidated Condensed Financial Statements |
30
Exhibit 10.1
EDWARDS LIFESCIENCES CORPORATION
SEVERANCE PAY PLAN
(Effective April 1, 2000 and Restated Effective January 1, 2013)
EDWARDS LIFESCTENCES CORPORATION
SEVERANCE PAY PLAN
TABLE OF CONTENTS
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Page | ||
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ARTICLE I |
PURPOSE |
1 | ||
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ARTICLE II |
DEFINITIONS |
1 | ||
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Section 2.1 |
Definitions |
1 | ||
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(a) |
Code |
1 | ||
(b) |
Company |
1 | ||
(c) |
Effective Date |
1 | ||
(d) |
Eligible Employee |
1 | ||
(e) |
Employer |
2 | ||
(f) |
Excluded Division or Facility |
2 | ||
(g) |
401k Earnings |
2 | ||
(h) |
Monthly Compensation |
2 | ||
(i) |
Months of Service |
3 | ||
(j) |
Plan |
4 | ||
(k) |
Plan Administrator |
4 | ||
(l) |
Plan Year |
4 | ||
(m) |
Release |
4 | ||
(n) |
Separation of Service |
4 | ||
(o) |
Severance Benefits |
4 | ||
(p) |
Severance Pay |
4 | ||
(q) |
Termination |
4 | ||
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Section 2.2 |
Gender and Number |
5 | ||
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ARTICLE III |
METHOD OF FUNDING |
5 | ||
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ARTICLE IV |
PAYMENT OF SEVERANCE PAY AND BENEFITS |
5 | ||
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Section 4.1 |
Qualification for Severance Pay |
5 | ||
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Section 4.2 |
Severance Pay for Eligible Employees |
5 | ||
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(a) |
Hourly, Salaried Nonexempt Employees or Exempt Employees With Pay Grouping E or Below (Including Sales Representatives who receive incentive pay) |
5 | ||
(b) |
Exempt Employees Pay Grouping F, G and H |
6 | ||
(c) |
Limitation on Severance Pay |
6 | ||
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Section 4.3 |
Payment of Severance Pay |
6 | ||
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Section 4.4 |
Severance Benefits |
7 | ||
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(a) |
Vacation |
7 | ||
(b) |
Floating Holidays |
7 | ||
(c) |
Other Benefits |
7 | ||
TABLE OF CONTENTS
(continued)
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Page | |
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Section 4.5 |
Limitations |
7 | |
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ARTICLE V |
ADMINISTRATION OF PLAN |
8 | |
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Section 5.1 |
General |
8 | |
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Section 5.2 |
Regulations |
8 | |
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Section 5.3 |
Claims Procedure |
8 | |
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ARTICLE VI |
AMENDMENT OR TERMINATION OF PLAN |
9 | |
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ARTICLE VII |
MISCELLANEOUS |
10 | |
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Section 7.1 |
Limitation on Rights |
10 | |
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Section 7.2 |
Headings |
10 | |
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Section 7.3 |
Severability |
10 | |
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Section 7.4 |
Governing Law |
10 | |
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Section 7.5 |
Successors and Assigns |
10 | |
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Section 7.6 |
Administration |
10 | |
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Section 7.7 |
Section 409A |
10 |
EDWARDS LIFESCIENCES CORPORATION
SEVERANCE PAY PLAN
Edwards Lifesciences Corporation hereby adopts this Plan, to be known as the Edwards Lifesciences Corporation Severance Pay Plan.
ARTICLE I
PURPOSE
The purpose of this Plan is to provide qualifying Eligible Employees with Severance Pay in accordance with the provisions set forth below. This Plan supersedes and replaces all previous severance or separation pay plans, policies, or arrangements maintained by any Employer, other than as set forth herein.
ARTICLE II
DEFINITIONS
Section 2.1 Definitions. When used in this Plan, the words and phrases below have the following meanings unless the context clearly otherwise requires:
(a) Code shall mean the Internal Revenue Code of 1986, as amended.
(b) Company shall mean Edwards Lifesciences Corporation, or any successor or successors.
(c) Effective Date shall mean April 1, 2000.
(d) Eligible Employee shall mean any individual employed in a domestic facility who is either:
(1) a regular full-time employee of an Employer; or
(2) a part-time employee of an Employer who is scheduled to work at least 20 hours per week for such Employer;
and who timely signs the Release;
but excluding:
(i) any employee who is not on the U.S. payroll of an Employer;
(ii) any employee covered by a collective bargaining agreement (unless participation in the Plan is provided for in such collective bargaining agreement);
(iii) any leased or temporary employee;
(iv) any employee who refuses to accept another position either within the Company or with a successor employer;
(v) any employee whose job is outsourced to an employer who is not a member of the controlled group; provided such employee is offered a position with such employer, regardless of the terms and conditions of such offer;
(vi) sunset employees (employee who are hired for a specific period of time);
(vii) employees who fail to timely sign a Release agreement;
(viii) employees who fail to return from a leave of absence in a timely manner (including but not limited to those employees who are on medical or disability leave and fail to return to work in a timely manner after they have been determined to no longer be disabled);
(ix) any employee who is classified as a proctor who is hired in conjunction with the launch of the THV product;
(x) individuals employed by an Employer whose entire amount of non-imputed U.S. source income is paid to a U.S. taxing authority; and
(xi) the Chief Executive Officer.
(e) Employer shall mean the Company (but only with respect to employees who are not employed by an Excluded Division or Facility), and each affiliated domestic corporation.
(f) Excluded Division or Facility shall mean the divisions and/or facilities of the Company to which the Plan does not apply and which are listed on Schedule A hereto. This Schedule A may be updated from time to time to reflect a listing of Excluded Divisions or Facilities or special adoption dates for previously Excluded Divisions or Facilities that become Employers.
(g) 401k Earnings shall mean eligible compensation as defined by the Edwards Lifesciences Corporation 401(k) Savings and Investment Plan.
(h) Monthly Compensation shall mean the Eligible Employees monthly base salary as in effect on the date that the individuals employment as an active employee ceases. For purposes of the preceding sentence, monthly base compensation shall mean:
(1) in the case of a salaried Eligible Employee, such employees monthly base salary;
(2) in the case of an hourly Eligible Employee, such employees hourly rate (plus any shift differential) multiplied by the number of regularly scheduled hours in a normal work week multiplied by 4.3;
(3) in the case of a sales representative who receives incentive pay, the greater of:
(i) such employees prior years 401k Earnings, divided by 12; or
(ii) such employees Year-to-Date 401k Earnings, annualized and divided by twelve; and
(4) in the case of a Perfusionist and Perfusion Service Managers,
(i) such employees year to date eligible earnings (salary and other regular pay, including manager pay and procedure based pay), annualized and divided by twelve.
(ii) Year-to-Date 401k Earnings shall be calculated no greater than 30 days prior to the employees date of Termination.
(i) Months of Service shall mean the most recent period of consecutive, continuous employment ending on the Eligible Employees Termination date during which the Eligible Employee is:
(i) entitled to payment by the Employer for the performance of duties;
(ii) entitled to payment by the Employer for a period of time during which the Eligible Employee does not perform duties due to vacation, holiday, jury duty, a leave of absence of not more than six months for medical purposes or disability, or any other approved leave of absence; or
(iii) on an unpaid leave of absence approved by the Employer, including a leave of absence for military duty.
Only full months of employment are counted in determining Months of Service. Months will not be prorated.
For purposes of above, Eligible Employees shall not suffer breaks in service as the result of being on an approved international assignment or transfer. Months on an approved international assignment or transfer are counted in determining Months of Service.
For purposes of the above, months of service with the Companys predecessor corporation, Baxter International Inc. and its eligible affiliates, shall be included in the determination if the Eligible Employee was an employee of the predecessor corporation on
March 31, 2000 and transferred to the Employer pursuant to the spin-off of the Employer from the predecessor corporation.
(j) Plan shall mean the Edwards Lifesciences Corporation Severance Pay Plan.
(k) Plan Administrator shall mean the Company or the Plan Administrative Committee of the Company, if the Companys board of directors has delegated to such Committee the authority to serve as Plan Administrator, who shall be responsible for the general administration of the Plan.
(l) Plan Year shall mean calendar year.
(m) Release shall mean a general release agreement provided by an Employer whereby the employee waives any and all claims against an Employer that relate to employment with and separation from an Employer.
(n) Separation of Service shall mean a separation from service with the meaning of Code Section 409A and the Treasury Regulations issued thereunder.
(o) Severance Benefits shall mean continued coverage under certain of the Employers employee benefit plans and employment policies as set forth in Section 4.4 herein.
(p) Severance Pay shall mean the sums payable as set forth in Article IV herein.
(q) Termination for purposes of this Plan shall mean the dismissal of an Eligible Employee from active employment by an Employer following the Effective Date by reason of
(1) a decision by an Employer to eliminate such Eligible Employees employment position; or
(2) a decision by an Employer to reduce the size of the Employers work force.
Termination, for purposes of this Plan, shall not mean termination of employment with an Employer for any reason other than as set forth in (1) and (2) above, including, but not limited to:
(i) the Eligible Employees voluntary termination of employment with the Employer, including termination due to retirement;
(ii) the Eligible Employees termination of employment with the Employer upon the sale, assignment, transfer, conveyance or other disposition of the Employers business and/or all or a part of its assets if the employee is offered employment by a purchaser or successor after the transaction is consummated;
(iii) the dismissal of the Eligible Employee by an Employer for any action which, in the sole judgment of the Employer, is for cause including, but not limited to, violation of the Employers policies and procedures, an act of fraud or dishonesty affecting or involving the Employer, or breach of a material provision of such Employees employment agreement or other similar agreement with the Employer;
(iv) the transfer of the Eligible Employee from employment by an Employer to comparable employment, as determined in the sole judgment of the Employer, by another Employer or a subsidiary or other affiliate thereof;
(v) the death of the Eligible Employee while an employee of an Employer;
(vi) layoff, meaning involuntary dismissal by an Employer for a period of time that the Employer, in its sole judgment, expects to be less than six months in duration, or such other time period as set forth in an applicable recall policy not to exceed six months.
(vii) a decision by an Employer that an Eligible Employee does not meet the performance requirements of his or her job assignment.
Section 2.2 Gender and Number. The masculine gender whenever used herein shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
ARTICLE III
METHOD OF FUNDING
An Employer shall pay Severance Pay from current operating funds. No property of an Employer is or shall be, by reason of this Plan, held in trust for any employee of an Employer, nor shall any person have any interest in or any lien or prior claim upon any property of an Employer, by reason of the Plan, or an Employers obligation to make payments hereunder.
ARTICLE IV
PAYMENT OF SEVERANCE PAY AND BENEFITS
Section 4.1 Qualification for Severance Pay. Subject to Section 4.5, an Eligible Employee for whom a Termination occurs shall qualify for Severance Pay as provided in Section 4.2.
Section 4.2 Severance Pay for Eligible Employees.
(a) Hourly, Salaried Nonexempt Employees or Exempt Employees With Pay Grouping E or Below (Including Sales Representatives who receive incentive pay). Severance Pay for a qualifying Eligible Employee who is an hourly, salaried nonexempt employee or exempt employee With Pay Grouping E or Below (including salespersons who
receive incentive pay) as of the date the Eligible Employees severance benefit is calculated shall be an amount equal to:
(1) Monthly Compensation multiplied by 1.0; plus
(2) 2% of his or her Monthly Compensation multiplied by;
(3) the number of full Months of Service which such Eligible Employee has completed as of the date of Termination.
(b) Exempt Employees Pay Grouping F, G and H. Severance Pay for a qualifying Eligible Employee who is an exempt employee in Pay Grouping F, G and H as of the date the Eligible Employees severance benefit is calculated shall be an amount equal to:
(1) Monthly Compensation multiplied by 1.5; plus
(2) 4% of his or her Monthly Compensation multiplied by the number of full Months of Service which such Eligible Employee has completed as of the date of Termination.
(c) Limitation on Severance Pay. Notwithstanding anything in this Plan to the contrary, an Eligible Employees Severance Pay shall not exceed two times such employees annual compensation dining the twelve-month period immediately preceding the employees Termination date. For purposes of the preceding sentence, annual compensation shall mean W-2 compensation the total of all compensation, including, but not limited to, wages, salary and any other benefit of monetary value, whether paid in the form of cash or otherwise, which was paid as consideration for such Eligible Employees service for an Employer during such twelve-month period which constitute wages for federal income tax purposes properly reported on the Eligible Employees Federal Income Tax Withholding Statement (Form W-2), or which would have been so paid at such Eligible Employees rate of compensation if he or she had worked a full year.
Section 4.3 Payment of Severance Pay. Subject to Section 4.5, an Eligible Employees Severance Pay shall be paid in equal installments in accordance with the Employers normal payroll practices for active employees beginning with the first pay day within the 60-day period following the Eligible Employees Separation from Service on which the Release is effective following the expiration of any applicable revocation period, but in no event later than the last day of such 60-day period on which the Release is effective. In no event will any payments be made later than the last day of the second calendar year following the year in which the Eligible Employees Separation from Service occurs. The number of installments is calculated by taking the amount of the Eligible Employees Severance Pay and dividing it by the amount of the Eligible Employees Monthly Compensation. Severance Pay shall be reduced by withholdings and deductions required under all applicable federal, state and local or other laws or regulations and by other applicable reductions.
In the case of any person who while receiving Severance Pay becomes hired by an Employer or a nonparticipating affiliate of an Employer, Severance Pay shall be suspended as of the first pay period for which such person is scheduled to work.
In the case of any person who:
(a) previously terminated employment with an Employer under circumstances entitling him or her to Severance Pay,
(b) is hired by an Employer as a regular employee during the one-year period beginning on such persons Termination date; and
(c) becomes entitled to Severance Pay again as a result of such persons subsequent termination of employment with an Employer.
Such Eligible Employees Severance Pay shall be determined based on his or her original date of hire by the Employer (adjusted for any period of time during which such person was not employed by an Employer) and shall be reduced by the amount of any Severance Pay already received by such Eligible Employee. For purposes of this paragraph Employer includes an Excluded Division or Facility.
In the case of any person who:
(a) previously terminated employment with an Employer under circumstances entitling him or her to Severance Pay;
(b) is hired by an Employer as a regular employee after the one-year period beginning on such persons Termination date; and
(c) becomes entitled to Severance Pay again as a result of such persons subsequent termination of employment with an Employer.
Such Eligible Employees Severance Pay shall be determined taking into account only Months of Service since the date as of which he or she became rehired by an Employer. For purposes of this paragraph, Employer include as Excluded Division or Facility.
Section 4.4 Severance Benefits. Severance Benefits following the date of his or her Termination as follows:
(a) Vacation. An Eligible Employee shall be paid for all unused vacation time as of the date of Termination.
(b) Floating Holidays. An Eligible Employee shall forfeit any unused floating holidays as of the date of Termination.
(c) Other Benefits. An Eligible Employee may receive other benefits in accordance with the provisions of the applicable benefit program.
Section 4.5 Limitations.
(a) If, after an Eligible Employees Termination qualifying the Employee for Severance Pay as provided in Section 4.2., the Employer discovers that the Eligible Employee
engaged in conduct during his or her employment with the Employer which, if previously known to the Employer, would have provided a basis for a dismissal of the Eligible Employee for cause (as defined in Section 2.1.(n)(iii)), all installment payments of Severance Pay shall cease without prior notice to the Eligible Employee, and the Eligible Employee shall forfeit his or her right to further payments under the Plan.
(b) In the case of an Eligible Employee who is a party to a Change in Control Severance Agreement (or similar agreement) with an Employer (a Change in Control Severance Agreement), the Eligible Employee shall not be entitled to Severance Pay under this Plan (or, if the Eligible Employee has commenced receiving installments of Severance Pay pursuant to this Plan, such installment payments shall terminate), if and to the extent provided by the Eligible Employees Change in Control Severance Agreement. In such event, the Eligible Employee shall be notified of the application of his or her Change in Control Severance Agreement and the Eligible Employee shall have no right (or no further right, as the case may be) to any benefit under this Plan.
ARTICLE V
ADMINISTRATION OF PLAN
Section 5.1 General. The Plan shall be administered by the Plan Administrator. The Plan Administrator may delegate any of his or her administrative duties, including, without limitation, duties with respect to the processing, review, investigation, approval and payment of Severance Pay and provision of Severance Benefits, to designated individuals or committees. The Company shall be the administrator and a named fiduciary under the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
Section 5.2 Regulations. The Plan Administrator shall promulgate any rules and regulations which he or she deems necessary in order to carry out the purposes of the Plan or to interpret the terms and conditions of the Plan; provided, however, that no rule, regulation or interpretation shall be contrary to the provisions of the Plan. The rules, regulations and interpretations made by the Plan Administrator shall be final and binding on any employee or former employee of an Employer or any successor in interest of either.
Section 5.3 Claims Procedure. The Plan Administrator shall determine the rights of any employee or former employee of an Employer to any Severance Pay and Severance Benefits hereunder. The Plan Administrator has the sole and absolute power and authority to interpret and apply the provisions of this Plan to a particular circumstance, make all factual and legal determinations, construe uncertain or disputed terms and make eligibility and benefit determinations (including, without limitation, determining whether a Termination under the Plan has occurred) in such manner and to such extent as the Plan Administrator in his or her sole discretion may determine. Any employee or former employee of an Employer who believes that he or she is entitled to receive Severance Pay and Severance Benefits under the Plan, including Severance Pay and Severance Benefits other than those initially determined by the Plan Administrator, may file a claim in writing with the Plan Administrator. No later than 90 days after the receipt of the claim the Plan Administrator shall either allow or deny the claim in writing.
A denial of a claim, in whole or in part, shall be written in a mariner calculated to be understood by the claimant and shall include:
(a) the specific reason or reasons for the denial;
(b) specific reference to pertinent Plan provisions on which the denial is based;
(c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
(d) an explanation of the claim review procedure.
A claimant whose claim is denied (or his or her duly authorized representative) may within 60 days of receipt of the denial of his or her claim:
(a) request a review upon written application to the Administrative Committee or its designee;
(b) review pertinent documents; and
(c) submit issues and comments in writing.
The Administrative Committee, or its designee, shall notify the claimant of his or her decision on review within 60 days after receipt of a request for review unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. Notice of the decision on review shall be in writing. The Administrative Committee decision on review shall be final and binding on any claimant or any successor in interest.
ARTICLE VI
AMENDMENT OR TERMINATION OF PLAN
Notwithstanding anything in the Plan to the contrary, the Companys Corporate Vice President of Human Resources or other designated officer of the Company shall have the right at any time, and without prior or other approval of any employee or former employee, and without prior notice, to change, modify, amend or terminate the Plan in any particular or particulars whatsoever. This right shall be unlimited, even if exercised in anticipation of specific action taken by the Company or a specific event upon which benefits would otherwise be provided under the Plan. All such changes, modifications, amendments or terminations may be retroactive to any date up to and including the Effective Date of this Plan, and shall be retroactive to such Effective Date unless other provisions are specifically made; provided, however, that no such amendment, modification, change or termination shall adversely affect any Severance Pay or Severance Benefit under the Plan previously paid, or payable to an Eligible Employee following a Termination that occurred prior to such amendment, modification, change or termination.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Limitation on Rights. The Plan is strictly a voluntary undertaking on the part of the Employers and shall not be deemed to constitute a contract between any Employer and any Eligible Employee. Participation in the Plan shall not give any Eligible Employee the right to be retained in the service of the Employer or any rights to any benefits whatsoever, except to the extent specifically set forth herein.
Section 7.2 Headings. Headings of Articles and Sections in this instrument are for convenience only, and do not constitute any part of the Plan.
Section 7.3 Severability. If any provision of this Plan or the rules and regulations made pursuant to the Plan are held to be invalid or illegal for any reason, such illegality or invalidity shall not affect the remaining portions of this Plan.
Section 7.4 Governing Law. The Plan shall be construed and enforced in accordance with ERISA and the laws of the State of California to the extent such laws are not preempted by ERISA.
Section 7.5 Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Employers and their successors and assigns and shall be binding upon and inure to the benefit of an Eligible Employee and his -or her legal representatives, heirs and assigns. No rights, obligations or liabilities of an Eligible Employee hereunder shall be assignable without the prior written consent of the Employer. In the event of the death of an Eligible Employee after Termination and prior to receipt of Severance Pay to which he or she is entitled hereunder, such Severance Pay shall be paid to his or her estate.
Section 7.6 Administration. The Plan shall be administrated on a Plan Year basis.
Section 7.7 Section 409A. This Plan is intended to comply with the requirements of Code Section 409A. Accordingly, all provisions herein shall be construed and interpreted to comply with Code Section 409A and if necessary, any such provision shall be deemed amended to comply with Code Section 409A and the regulations thereunder. The installment payments to which an Eligible Employee becomes entitled in accordance with the Plan will be treated as a right to a series of separate payments for purposes of Code Section 409A.
Notwithstanding any provision to the contrary in this Plan, no payments or benefits to which an Eligible Employee becomes entitled under this Plan in connection with the termination of such persons employment with the Employer shall be made or paid to such person prior to the earlier of (i) the first day of the seventh (7th) month following the date of such persons Separation from Service due to such termination of employment or (ii) the date of such persons death, if such person is deemed, pursuant to the procedures established by the Company in accordance with the applicable standards of Code Section 409A and the Treasury Regulations thereunder and applied on a consistent basis for all for all non-qualified deferred compensation plans subject to Code Section 409A, to be a specified employee at the time of such Separation from Service and such delayed commencement is otherwise required in order to avoid a
prohibited distribution under Code Section 409A(a)(2). Upon the expiration of any applicable Code Section 409A(a)(2)(B)(i) deferral period, all payments deferred pursuant to this section shall be paid in a lump sum to the Eligible Employee, and any remaining payments due under this Plan shall be paid in accordance with the normal payment dates specified for them herein.
Executed this 23rd day of April 2013.
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EDWARDS LIFE SCIENCES CORPORATION | ||
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By: |
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/s/ Christine McCauley |
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Its: |
Corporate Vice President, Human Resources |
Exhibit A
Excluded Divisions or Facilities
Special Adoption Dates
EDWARDS LIFESCIENCES CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Michael A. Mussallem, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Edwards Lifesciences Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 6, 2013 | By: | /s/ MICHAEL A. MUSSALLEM Michael A. Mussallem Chairman of the Board and Chief Executive Officer |
EDWARDS LIFESCIENCES CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Thomas M. Abate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Edwards Lifesciences Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 6, 2013 | By: | /s/ THOMAS M. ABATE Thomas M. Abate Corporate Vice President, Chief Financial Officer (Chief Accounting Officer) |
EDWARDS LIFESCIENCES CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Edwards Lifesciences Corporation (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Michael A. Mussallem, Chairman of the Board and Chief Executive Officer of the Company, and Thomas M. Abate, Corporate Vice President, Chief Financial Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 6, 2013 | /s/ MICHAEL A. MUSSALLEM Michael A. Mussallem Chairman of the Board and Chief Executive Officer |
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May 6, 2013 |
/s/ THOMAS M. ABATE Thomas M. Abate Corporate Vice President, Chief Financial Officer (Chief Accounting Officer) |