Edwards Lifesciences Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts are in U.S. dollars. Edwards develops and sells products for cardiovascular disease, including heart valve therapy, critical care, cardiac surgery systems, and vascular products.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $431.2 million | $365.2 million | $835.7 million | $705.7 million |
| Gross profit | $303.4 million | $264.8 million | $591.1 million | $506.7 million |
| Net income | $58.1 million | $57.5 million | $122.0 million | $105.2 million |
| Diluted EPS | $0.48 | $0.48 | $1.01 | $0.88 |
- Q2 sales grew 18.1% year over year; six-month sales grew 18.4%. Q2 net income increased about 1%, while six-month net income rose about 16%.
- Gross margin was 70.4% in Q2 and 70.7% for the first half, down 2.1 and 1.1 percentage points, respectively, from the comparable periods.
- Q2 SG&A was $163.2 million, up $22.6 million; R&D was $64.9 million, up $14.3 million. For the first half, SG&A was $313.5 million and R&D was $123.9 million. Management attributed increases mainly to sales and marketing support for transcatheter valves and greater clinical and development spending.
- Operating cash flow for the first half was $74.2 million, versus $61.0 million a year earlier. Capital expenditures were $31.1 million; investing cash outflow was $63.8 million, including the $42.6 million Embrella acquisition. Financing cash inflow was $40.8 million, including net debt proceeds, partly offset by share repurchases.
- Cash and equivalents were $468.2 million at June 30, compared with $396.1 million at year-end. Debt was $174.8 million, classified as long-term; there was no short-term debt. Current assets were $1,216.8 million and current liabilities $313.3 million.
Material changes and business drivers
- Heart Valve Therapy sales rose 22.5% in Q2 and 23.5% for the first half, led by transcatheter heart valves, including SAPIEN XT, and surgical tissue valves. Critical Care sales rose 15.6% and 15.2%, respectively. Cardiac Surgery Systems grew modestly; Vascular sales declined.
- International sales rose 26.9% in Q2 and 26.6% for the first half; U.S. sales rose 4.6% and 6.1%. Currency translation contributed $22.8 million to Q2 international sales growth and $27.8 million for the first half. Consolidated sales increases also included currency effects of $26.9 million and $42.8 million, respectively.
- Management cited currency and manufacturing-capacity investment as factors reducing gross margin, partly offset by a more profitable international product mix. Foreign currency also increased reported SG&A.
- In March, Edwards acquired Embrella Cardiovascular for $42.6 million, adding a cerebral embolic protection development program. Preliminary purchase accounting included $34.7 million of goodwill and $12.1 million of intangible assets.
Outlook, risks, and unusual items
- Management expected transcatheter heart valves to remain a strong sales contributor in 2011 and anticipated a U.S. SAPIEN launch during 2011. An FDA advisory panel recommended approval for certain inoperable patients in July; this was not itself FDA approval. The filing gives no clear numerical full-year earnings or revenue guidance.
- The company anticipated an additional $7–8 million tax benefit from final settlement of a prior-year European tax audit, expected to be recorded in Q3 2011. Q2 and first-half 2011 tax rates included a $2.5 million benefit from a partial settlement; prior-year comparative rates included a $9.8 million audit-settlement benefit.
- A $4.0 million charge was recorded for increased collection risk on Greek receivables. Management warns that further deterioration or sovereign default in Greece or other countries could impair collections.
- In July, Edwards entered into a new unsecured, four-year revolving credit facility of up to $500 million, maturing July 29, 2015. It carries LIBOR-based borrowing costs and financial covenants, including leverage and interest-coverage tests. The company said it believed cash, operations, and available credit were sufficient for current needs; $445.5 million of cash was held outside the U.S., with potential restrictions and tax costs on repatriation.
- Legal matters include an Edwards patent judgment against CoreValve/Medtronic, with a $73.9 million jury award and additional damages ordered, both sides appealing; new Medtronic patent suits against Edwards; and an ongoing government investigation relating to a 2006 monitor recall. The company says certain legal losses cannot be estimated and could affect income or cash flows, while management did not expect pending litigation to materially affect overall financial position, results, or liquidity.
- Other notable items: the MONARC program was discontinued in 2010 after slow trial enrollment, resulting in an $8.3 million charge; a global workforce realignment had $1.9 million of remaining severance obligations at June 30. The company repurchased 1.8 million shares for $156.3 million in the first half, with $241.7 million of authorization remaining.
Key investor verification points
- Confirm the drivers and sustainability of transcatheter-valve growth, U.S. approval and launch timing, and clinical-trial milestones.
- Separate organic performance from currency contributions and assess the effect of currency hedges on gross margin and earnings.
- Monitor gross-margin pressure, elevated R&D and launch-related selling costs, and conversion of reported earnings into operating cash flow.
- Track Greek and other sovereign receivables, uncertain tax positions, and realization and timing of the anticipated tax benefit.
- Review the credit-facility terms and covenant headroom, overseas cash accessibility, capital spending, and continued share repurchases.
- Follow the patent appeals, new Medtronic litigation, and government investigation; the filing does not quantify potential losses for some contingencies.