Edwards Lifesciences Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Edwards develops cardiovascular products, including heart valve therapy and critical care products.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $412.7 | $348.9 | $1,248.4 | $1,054.6 |
| Gross profit | $287.1 | $253.1 | $878.2 | $759.8 |
| Gross margin | 69.6% | 72.5% | 70.3% | 72.0% |
| Income before taxes | $57.6 | $66.2 | $215.0 | $198.1 |
| Net income | $51.6 | $48.0 | $173.6 | $153.2 |
| Diluted EPS | $0.43 | $0.40 | $1.45 | $1.29 |
- Q3 sales increased 18.3% and nine-month sales increased 18.4%. International sales growth and favorable currency translation contributed substantially; foreign currency added $29.9 million to Q3 sales and $72.7 million to nine-month sales.
- Heart Valve Therapy was the largest growth area: sales rose 22.7% in Q3 and 23.2% for the nine months. Critical Care sales increased 14.2% and 14.8%, respectively. Vascular sales declined in both periods.
- Q3 net income rose 7.5% year over year despite lower pretax income; the Q3 effective tax rate fell to 10.4% from 27.5%, including a $6.9 million benefit from Swiss tax rulings. Nine-month effective tax rates were 19.3% and 22.7%, respectively.
- Gross margin contracted 2.9 percentage points in Q3 and 1.7 points for the nine months. Management cited currency and hedging effects and investment in international manufacturing capacity; improved product mix partly offset these pressures.
- SG&A was $165.5 million in Q3 and $479.0 million year to date; R&D was $61.7 million and $185.6 million. Spending increases included commercial support and development of transcatheter heart valves.
- Operating cash flow for the nine months was $171.4 million, versus $157.4 million a year earlier. Capital expenditures were $50.6 million; acquisition spending was $42.6 million. Cash increased to $451.1 million from $396.1 million at year-end 2010.
- At September 30, cash exceeded reported debt by $276.1 million: cash was $451.1 million and debt was $175.0 million, all classified as long-term. The company had a $500 million unsecured revolving facility maturing July 2015 and was in compliance with its covenants. Current assets were $1,181.9 million versus current liabilities of $302.0 million.
- The company spent $263.3 million on treasury stock purchases in the nine-month period. At September 30, remaining repurchase authorization was $637.9 million following approval of an additional $500 million program.
Material changes and unusual items
- The March 2011 acquisition of Embrella Cardiovascular cost $42.6 million in cash, including $34.6 million allocated to goodwill and $12.1 million to acquired intangible assets. Embrella is developing a cerebral embolic protection device for cardiovascular procedures.
- Nine-month special charges were $4.0 million, including a reserve for increased collection risk on Greek receivables. The comparable 2010 period included $12.2 million of charges, including the MONARC program discontinuation and investment impairment.
- Other income in the first nine months included a $3.1 million remeasurement gain on Edwards’ previously held Embrella interest. Currency movements also affected earnings and accumulated other comprehensive income.
Outlook, risks, and contingencies
- The filing provides no clear quantitative financial guidance. Management expected transcatheter heart valves to remain a strong sales contributor in 2011 and described regulatory and clinical milestones, but cautioned that forward-looking results are subject to substantial risks and uncertainties.
- After quarter-end, in November 2011, the FDA approved transfemoral use of the Edwards SAPIEN valve for inoperable patients with severe symptomatic aortic stenosis. Edwards also reported conditional IDE approval for the PARTNER II Cohort A trial; the filing expected Cohort B enrollment to be close to completion by year-end. These developments are not Q3-period results.
- Key business risks include competition, pricing and cost pressures, regulatory approvals and clinical trial outcomes, currency movements, and collection risk from European government customers. The company recorded a $4.0 million Greece receivables reserve; further deterioration or sovereign default could affect collections and results.
- Legal matters include patent disputes with Medtronic/CoreValve, including an appealed $73.9 million jury award to Edwards and a separate Medtronic patent suit concerning the SAPIEN valve. The company also reported a U.S. Attorney investigation related to a 2006 voluntary recall of a Vigilance I Monitor. Management said it could not estimate certain potential losses and that charges could adversely affect income or cash flow.
- Uncertain tax position liabilities were $72.2 million at September 30, up from $55.1 million at year-end; the company was pursuing appeals on transfer-pricing issues and the IRS was examining 2009–2010 tax years. Most overseas cash was considered indefinitely reinvested and could face taxes or restrictions if repatriated.
Important facts for investors to verify
- How much reported sales growth reflects underlying volume and product mix versus currency translation, and whether gross margins recover from currency and capacity-expansion pressures.
- Commercial adoption and profitability of SAPIEN and SAPIEN XT, and progress in U.S. and international regulatory trials and approvals.
- Collection trends for Greek and other European receivables, and any change in reserves or exposure.
- Developments in the Medtronic/CoreValve patent disputes and the Vigilance I investigation, including potential financial effects.
- Resolution of tax audits and uncertain tax positions, and the implications of overseas cash restrictions and the expanded share-repurchase authorization.