Edwards Lifesciences Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Edwards develops and sells products for structural heart disease and critical care, including surgical and transcatheter heart valves and hemodynamic monitoring systems.
Financial results and liquidity
- Revenue: $459.2, up 13.5% from $404.5 a year earlier. Transcatheter Heart Valve sales rose 67.2% to $121.5; Surgical Heart Valve Therapy sales rose 2.7% to $203.6; Critical Care sales were essentially flat at $134.1.
- Profit and margins: Gross profit was $331.9, with gross margin of 72.3% versus 71.1%. Net income was $65.1 versus $63.9; diluted EPS was $0.55 versus $0.53. Pretax income was $85.6 versus $84.6.
- Expenses: SG&A increased to $177.2 from $150.3, and R&D to $68.6 from $59.0, primarily reflecting spending to support the U.S. transcatheter valve launch and related clinical and development work. Other expense, net, was $0.5 compared with income of $6.2, largely reflecting lower investment gains.
- Cash flow: Operating activities used $30.7, compared with providing $14.9 in Q1 2011. Management cited the effect of excess stock-plan tax benefits and supplier-payment timing. Investing activities provided $68.4, mainly from net proceeds from short-term investments; financing activities used $3.1. Cash and equivalents ended at $213.3, up from $171.2 at year-end.
- Liquidity and debt: Short-term investments were $196.2, making cash and short-term investments $409.5 in total. Long-term debt was $179.4, outstanding under the $500 credit facility maturing in July 2015. The company reported compliance with its covenants. It held $371.0 of cash and short-term investments outside the United States; repatriation may be restricted or taxed.
- Capital returns: The company repurchased 1.2 million shares during the quarter for approximately $100.2, including the $54.0 accelerated share repurchase (ASR) payment.
Material changes and operating developments
- U.S. sales increased 25.2%, driven primarily by the Edwards SAPIEN transcatheter valve launch in late 2011. International sales rose 6.7%; growth included SAPIEN XT and surgical tissue valves.
- Gross margin improved with a more favorable U.S. product mix, particularly transcatheter valves, and foreign-exchange effects; higher one-time manufacturing costs partly offset the gains.
- The company received CE Mark in Europe for its EDWARDS INTUITY system and began a limited launch of the IntraClude device.
- The 2011 comparative cash-flow statement was restated for classification of bank time deposits as short-term investments rather than cash equivalents. The correction did not affect total current assets or the statement of operations. The filing also describes earlier 2011 interim restatements involving cash/investment classification and cash-flow presentation.
Outlook, risks, contingencies, and unusual items
- Management expected transcatheter heart valves to remain a strong contributor to 2012 sales. An FDA advisory panel was scheduled for June 13, 2012 to consider the Cohort A application for SAPIEN in high-risk patients; the filing provides no quantified earnings or revenue guidance.
- Disclosure controls were deemed ineffective at March 31, 2012 because a previously identified material weakness remained: controls did not ensure timely communication of information affecting financial-statement classification and disclosure. Remediation measures had begun but were not yet operating long enough to establish effectiveness.
- Patent litigation with Medtronic is ongoing, including appeals and other patent disputes involving transcatheter valves and related products. Edwards also disclosed a U.S. Attorney’s Office investigation concerning a previously recalled monitor and stated it was cooperating. The company could not estimate losses for certain legal matters; management did not expect currently pending lawsuits, individually or collectively, to materially affect financial position, results, or liquidity.
- Uncertain tax-position liabilities were $84.2, or $75.6 net of estimated offsetting tax benefits. The federal research credit had expired and was not included in the 2012 effective tax-rate calculation. Foreign government customers in certain European countries may pay more slowly amid economic and sovereign-credit pressures.
- Foreign-exchange exposure includes substantial forward contracts: $762.5 notional value at quarter-end. The company reported no hedge ineffectiveness in the quarter and said it did not use derivatives for speculation.
Important facts for investors to verify
- Whether transcatheter valve growth and the anticipated FDA decision translate into continued sales growth, and what regulatory or competitive developments follow.
- Progress in remediating the material weakness and whether controls become effective in subsequent filings.
- Operating cash conversion, including the effects of supplier-payment timing and stock-plan tax benefits, and the company’s use of repurchases alongside debt.
- Developments in Medtronic-related patent cases, the monitor investigation, and any resulting financial exposure; the filing does not provide a clear loss estimate for certain matters.
- Collection trends from European government customers, tax-authority examinations, and any costs associated with repatriating offshore funds.