Edwards Lifesciences Corporation — 2011 Form 10-K
Business and period: Global medical-device company focused on heart valve therapy, critical care monitoring, cardiac surgery systems, and vascular products. This filing covers the fiscal year ended December 31, 2011; fourth-quarter figures are also provided.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $1,678.6 million | $1,447.0 million | +16.0% |
| Gross profit / gross margin | $1,188.8 million / 70.8% | $1,038.7 million / 71.8% | Margin down 1.0 percentage point |
| Net income | $236.7 million | $218.0 million | +8.6% |
| Diluted EPS | $1.98 | $1.83 | +8.2% |
| Operating cash flow | $314.5 million | $251.4 million | +$63.1 million |
| Capital expenditures | $82.9 million | $61.8 million | +$21.1 million |
- Net sales growth was led by Heart Valve Therapy, up 20.6% to $1,010.7 million, including strong transcatheter valve sales. Critical Care rose 11.9% to $508.3 million; Cardiac Surgery Systems rose 7.3% to $107.5 million; Vascular fell 4.4% to $52.1 million.
- International sales were $1,073.0 million, or 64% of revenue, up 22.0%; U.S. sales rose 6.7%. Management attributed $58.0 million of international sales growth to foreign-exchange movements. Europe was the largest region at $574.0 million.
- SG&A increased to $642.4 million from $550.0 million; R&D rose to $246.3 million from $204.4 million, or 14.7% of sales versus 14.1%. Higher sales and marketing spending supported the transcatheter valve program and U.S. launch.
- Cash and cash equivalents were $171.2 million, with short-term investments of $279.3 million, at year-end. Current assets were $1,168.5 million and current liabilities $335.2 million.
- Long-term debt was $150.4 million, with no short-term debt reported at year-end. The company had a $500 million unsecured credit facility maturing in July 2015. Total stockholders’ equity was $1,337.9 million.
- Cash used in investing activities was $412.8 million, primarily reflecting net purchases of short-term investments, the $42.6 million Embrella acquisition, and capital spending. Cash used in financing was $135.2 million, including $303.4 million of treasury-stock purchases, partly offset by debt proceeds and stock-plan proceeds.
Changes, outlook, and notable matters
- Fourth-quarter 2011 sales were $430.2 million versus $392.4 million a year earlier; net income was $63.1 million versus $64.8 million, and diluted EPS was $0.53 versus $0.54.
- The FDA approved transfemoral Edwards SAPIEN use for certain inoperable patients in November 2011. The filing describes further U.S. and Japan studies and development programs, but provides no numerical 2012 revenue or earnings guidance.
- Gross margin declined, primarily due to foreign exchange and investment in expanded international manufacturing capacity, partly offset by a more favorable product mix. R&D and commercial investment increased to support growth and clinical programs.
- Special charges were $21.6 million in 2011, including $12.8 million for increased risk on Southern European receivables, $5.5 million for workforce realignment, and $3.3 million for a litigation settlement. Net receivables from Italy, Spain, Portugal, and Greece totaled $113.7 million.
- The company restated its 2011 interim balance-sheet and cash-flow presentations: certain bank time deposits were reclassified from cash equivalents to short-term investments, and excess tax benefits from stock plans were corrected in cash-flow classifications. These errors did not affect interim statements of operations.
- Management and the auditor reported a material weakness in internal control over financial reporting involving communication of information affecting financial-statement classification and disclosures. Disclosure controls were deemed ineffective at year-end; remediation began in February 2012. The auditor’s opinion on the financial statements was unqualified.
- Following the interim restatement, the company was in violation of certain credit-facility covenants at December 31, 2011; it obtained a lender waiver after year-end.
- Other risks include regulatory approval and reimbursement uncertainty, especially the pending CMS national coverage decision for TAVR; product liability and quality issues; dependence on some single-source suppliers; competition and pricing pressure; currency exposure; and international collection, tax, and regulatory risks. A 2.3% U.S. medical-device excise tax was scheduled to begin in 2013.
- Edwards reported patent litigation with Medtronic, including an appeal of a $73.9 million jury award to Edwards in the CoreValve dispute, and a federal investigation relating to a 2006 voluntary field recall. The filing says the company was cooperating with the investigation; outcomes were uncertain.
Important facts for investors to verify
- Progress and effectiveness of remediation for the reported material weakness, and whether subsequent filings show sustained control improvements.
- Current compliance with credit-facility covenants, terms of the post-year-end waiver, and debt repayment or refinancing plans.
- Collection performance on Southern European receivables and adequacy of related allowances.
- Commercial adoption, reimbursement coverage, clinical results, and regulatory milestones for SAPIEN and other transcatheter valve products.
- Effects of currency movements, margin investment, and the scheduled medical-device excise tax on earnings and cash flow.
- Developments in patent disputes and the federal investigation, including any resulting financial exposure or business restrictions.