Edwards Lifesciences Corporation — FY2010 Form 10-K
Business context and reporting period. Edwards Lifesciences develops cardiovascular medical devices, principally in Heart Valve Therapy, Critical Care, Cardiac Surgery Systems and Vascular. This 10-K covers the fiscal year ended December 31, 2010; quarterly figures below identify Q4 separately. The filing was signed February 28, 2011.
Financial performance
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales | $1,447.0 million | $1,321.4 million | +9.5% |
| Gross profit | $1,038.7 million | $922.3 million | +12.6% |
| Gross margin | 71.8% | 69.8% | +2.0 percentage points |
| Income before taxes | $268.2 million | $304.4 million | −11.9% |
| Net income | $218.0 million | $229.1 million | −4.8% |
| Diluted EPS | $1.83 | $1.95 | −6.2% |
| Operating cash flow | $251.4 million | $165.3 million | +$86.1 million |
Q4 2010 net sales were $392.4 million, gross profit $278.9 million, net income $64.8 million and diluted EPS $0.54; Q4 2009 results were $346.7 million, $245.0 million, $47.6 million and $0.40, respectively.
- Revenue mix: Heart Valve Therapy sales rose 17.3% to $838.3 million, led by transcatheter valves. Critical Care was nearly flat at $454.1 million; Cardiac Surgery Systems rose 8.0% to $100.2 million; Vascular fell 11.1% to $54.4 million, mainly reflecting the LifeStent divestiture.
- Geography: International sales increased 14.9% to $879.4 million and represented 61% of sales. U.S. sales rose 2.1% to $567.6 million.
- Costs and margins: SG&A was $550.0 million, up $41.2 million; R&D was $204.4 million, up $28.9 million and equal to 14.1% of sales. Gross-margin improvement reflected product mix, including increased transcatheter valve sales, and manufacturing performance.
- Cash, liquidity and debt: Cash and equivalents were $396.1 million versus $334.1 million; operating cash flow was $251.4 million and capital expenditures were $61.8 million. Current assets were $1,032.6 million and current liabilities $337.8 million. Debt was $41.8 million, classified as short-term, under a $500 million revolving facility due September 2011. The company said it expected to extend or replace the facility, but gave no assurance of comparable terms. Approximately $367 million of cash was held outside the U.S.
Material changes versus the prior period
- Sales growth accelerated to 9.5% from 6.8% in 2009, driven chiefly by Heart Valve Therapy. The Edwards SAPIEN XT contributed $99.0 million of Heart Valve Therapy sales growth.
- Net income and EPS declined despite revenue and gross-margin growth. Special charges were $22.7 million in 2010, compared with net special gains of $63.8 million in 2009, substantially affecting the comparison. FY2010 charges included $8.3 million for discontinuing MONARC, $7.2 million for workforce realignment and $7.2 million for investment impairments.
- Operating cash flow increased from 2009, with the filing citing higher operating profits, lower supplier payments and the absence of the prior-year $39 million payment to terminate Japanese receivables securitization; higher inventory purchases partly offset these factors.
Outlook, commentary and risks
- Management expected SAPIEN and SAPIEN XT to remain significant sales contributors in 2011 and expected newer surgical valve products to support growth. It anticipated a U.S. SAPIEN launch in Q4 2011, subject to FDA approval; this is an expectation, not a guarantee.
- Other development milestones included anticipated CE Mark for the INTUITY valve system in mid-2011, U.S. clinical-trial approvals for INTUITY and SAPIEN XT programs, and U.S. approval of an upgraded FloTrac platform in Q3 2011. The company discontinued MONARC after slow trial enrollment and lack of a significant efficacy advantage in early analysis.
- U.S. healthcare reform provides for a 2.3% excise tax on most medical-device sales beginning in 2013, which the company expected to increase operating expenses. The company projected a 2011 Puerto Rico excise-tax impact of approximately $6 million, expected to be offset by available credits.
- Key risks include regulatory approval and clinical-trial uncertainty, reimbursement and pricing pressure, competition, reliance on certain suppliers, foreign exchange exposure and product liability. The company also cited the risk of future charges from investments, litigation or tax matters.
- Contingencies: A U.S. jury awarded Edwards $73.9 million in its patent case against CoreValve; the court later affirmed the verdict and allowed additional damages and interest, but the decision was appealed and patent reexamination was ongoing. The filing does not establish that the award had been collected. The company also received grand jury subpoenas in an FDA investigation concerning a monitor subject to a 2006 voluntary field recall and said it was cooperating.
- The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of year-end.
Most important facts for investors to verify
- Whether U.S. regulatory approval and the anticipated Q4 2011 launch of SAPIEN occurred, and how transcatheter-valve adoption affected sales and margins.
- Whether the revolving credit facility was extended or replaced at maturity and on what terms.
- Developments in the CoreValve patent appeal and reexamination, including any realization of the damages award.
- Any outcome or financial consequences from the FDA-related investigation involving the Vigilance I Monitor.
- The actual impact of the 2013 medical-device excise tax, foreign-cash repatriation and unresolved tax positions.