Edwards Lifesciences Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts are in millions of dollars, except per-share data. The company develops and sells cardiovascular products, including surgical and transcatheter heart valves and critical-care monitoring products.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $447.9 | $412.7 | $1,389.1 | $1,248.4 |
| Gross profit | $336.2 | $287.1 | $1,020.3 | $878.2 |
| Gross margin | 75.1% | 69.6% | 73.5% | 70.3% |
| Income before taxes | $93.4 | $57.6 | $268.9 | $215.0 |
| Net income | $69.2 | $51.6 | $202.1 | $173.6 |
| Diluted EPS | $0.58 | $0.43 | $1.71 | $1.45 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $247.4 | $214.8 |
Q3 sales rose 8.5%; nine-month sales rose 11.3%. Transcatheter Heart Valve (THV) sales increased 49.9% in Q3 and 62.5% for the nine-month period. Surgical Heart Valve Therapy and Critical Care sales declined slightly for both periods. U.S. sales increased 28.5% in Q3 and 30.2% year to date, led by the U.S. SAPIEN launch; international sales were affected by currency weakness.
Gross margin expanded 5.5 percentage points in Q3 and 3.2 points year to date. Management attributed the gains primarily to foreign exchange and hedging effects, and to a more profitable U.S. product mix, particularly higher THV sales. SG&A was $167.8 in Q3 and $527.4 year to date; R&D was $73.8 and $216.4, respectively. R&D growth reflected increased clinical-study and product-development investment, particularly in THV.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $305.8; short-term investments were $316.7. Current assets totaled $1,387.7.
- Long-term debt was $175.4, all under the company’s unsecured $500 million revolving credit facility, which matures July 2015. The company reported covenant compliance.
- Nine-month operating cash flow of $247.4 increased $32.6 year over year. Investing cash use was $106.2, including $64.9 of capital expenditures; financing cash use was $8.7, including $166.3 of treasury-stock purchases.
- The company said cash, investments, credit availability and operating cash flow were sufficient for current requirements. Cash and short-term investments held outside the U.S. totaled $573.7 and may be subject to repatriation restrictions and taxes.
Material changes, outlook and notable items
- Product and market performance: THV sales growth was driven by SAPIEN, including its U.S. launch in Q4 2011, and international SAPIEN XT sales. Management expected THV to remain a strong contributor to 2012 sales; the filing gives no numerical full-year sales or earnings guidance.
- Regulatory and development: In October 2012, FDA approval was received for SAPIEN transfemoral and transapical delivery for high-risk patients. The company continued the PARTNER II trial and received approval to add a larger SAPIEN XT valve and delivery approaches. Clinical work also advanced for EDWARDS INTUITY and the GLX tissue-treatment platform.
- Recall costs: Voluntary recalls of certain heart valves and Critical Care catheters led to an $8.1 charge to gross profit in Q2 2012; $3.5 of related inventory reserves remained at quarter-end.
- Licensing charges: Nine-month special charges were $7.0, comprising upfront fees for two developmental intellectual-property licenses. Approval and commercialization of the licensed products remain uncertain.
- Acquisition after quarter-end: On October 9, the company acquired BMEYE for approximately $42 million in cash to develop non-invasive hemodynamic-monitoring technology. The accounting impact was still being evaluated.
- Taxes: The effective tax rate was 25.9% in Q3 and 24.8% year to date, compared with 10.4% and 19.3% in 2011; the prior-year rates included Swiss tax-authority benefits. The federal research credit had expired and was not assumed in 2012 rates. Uncertain-tax-position liabilities were $94.9 at quarter-end.
- Legal and regulatory matters: Patent litigation with Medtronic remained ongoing, including appeals and reexamination proceedings. The company disclosed that the U.S. Attorney’s Office advised in October 2012 that it would not pursue criminal investigation or prosecution at that time concerning the 2006 Vigilance I Monitor recall. Management said currently pending lawsuits were not expected to materially affect financial position, results or liquidity, while noting that legal outcomes could produce charges exceeding reserves.
- Restatement and controls: The 2011 comparative cash-flow figures were restated for cash-equivalent/short-term-investment classification and excess stock-plan tax-benefit presentation; the errors did not affect 2011 operating results. Management reported the prior material weakness in controls over completeness and timeliness of classification and disclosure information as fully remediated by September 30, 2012.
Key facts for investors to verify
- Whether THV growth and U.S. adoption continued, and how FX, product mix and recall-related costs affected margins.
- Subsequent SAPIEN and other product regulatory, clinical-trial and commercialization developments.
- The financial-statement impact of the BMEYE acquisition and the cash/investment position after the purchase.
- Developments in Medtronic patent disputes, tax examinations and uncertain tax positions, and any changes in exposure or reserves.
- Whether the reported remediation of the material weakness remains effective in subsequent filings.