Edwards Lifesciences Corporation: Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Edwards Lifesciences develops and sells products for structural heart disease and critical care, including surgical and transcatheter heart valves and hemodynamic monitoring systems. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $482.0 million | $431.2 million | $941.2 million | $835.7 million |
| Gross profit | $352.2 million | $303.4 million | $684.1 million | $591.1 million |
| Gross margin | 73.1% | 70.4% | 72.7% | 70.7% |
| Net income | $67.8 million | $58.1 million | $132.9 million | $122.0 million |
| Diluted EPS | $0.57 | $0.48 | $1.12 | $1.01 |
| Operating cash flow | Not presented by quarter | $116.1 million | $99.4 million, restated |
Q2 sales rose 11.8% year over year; six-month sales rose 12.6%. Q2 net income increased about 17%, and diluted EPS increased about 19%. Sales growth was led by Transcatheter Heart Valves: Q2 sales were $145.8 million, up 70.8%, while six-month sales were $267.3 million, up 69.1%. Surgical Heart Valve Therapy was broadly flat for the first half, and Critical Care sales declined 1.6%.
Higher transcatheter valve sales and favorable currency and hedging effects supported gross-margin expansion. Management said voluntary recalls reduced gross margin by 1.9 percentage points in Q2 and 1.0 point for the first half. SG&A was $182.4 million in Q2 and $359.6 million for six months; R&D was $74.0 million and $142.6 million, respectively, reflecting commercial support and investment in transcatheter valve studies and development. Effective tax rates were 24.6% for Q2 and 24.3% for the first half, compared with 20.2% and 22.5% a year earlier.
Cash, liquidity and capital
At June 30, cash and cash equivalents were $304.3 million and short-term investments were $201.7 million, totaling $506.0 million, compared with $450.5 million at year-end 2011. Cash increased $133.1 million during the first half. Operating cash flow was $116.1 million; investing activities provided $25.7 million, primarily from net short-term investment proceeds, while financing activities used $8.2 million. Capital expenditures were $39.2 million.
Long-term debt was $185.1 million, up from $150.4 million at December 31, 2011. Borrowings were under a $500 million unsecured credit facility maturing July 2015; the company reported compliance with its covenants. The company repurchased 1.8 million shares for an aggregate $150.2 million during the first half, including prepaid amounts under an accelerated share repurchase agreement. A further $50 million ASR agreement remained open at quarter-end, with settlement scheduled by August 31, 2012. Cash and short-term investments held outside the U.S. totaled $477.5 million and were largely considered indefinitely reinvested; repatriation could involve taxes or restrictions.
Business developments, outlook and risks
- Outlook: Management expected transcatheter heart valves to remain a strong contributor to 2012 sales. The filing provides no quantified full-year revenue or earnings guidance. The FDA advisory panel recommended approval of Edwards SAPIEN for high-risk surgical patients in June; the company was awaiting FDA action.
- Product and regulatory developments: Edwards received a CE Mark for its EDWARDS INTUITY minimally invasive valve system and U.S. IDE approvals to begin clinical trials for INTUITY and a next-generation tissue treatment platform. U.S. and European approvals were received for the ProPlege device; limited launches began in Europe in June and the U.S. in July.
- Unusual charges: Q2 included $7.0 million of special charges for two intellectual-property licenses whose products remained under development and subject to approval uncertainty. Separately, voluntary recalls of certain heart valves and Critical Care catheters generated an $8.1 million charge to gross profit during the quarter.
- Cash-flow comparability: First-half 2012 operating cash flow benefited from improved performance and collections, including a nonrecurring $26.3 million collection in Spain and the sale of Greek bonds. Supplier-payment timing and the treatment of excess tax benefits also affected comparisons.
- Legal, credit and tax contingencies: The company disclosed ongoing patent litigation with Medtronic/CoreValve, including appeals and reexamination proceedings, and a separate Medtronic claim concerning heart-pacing methods used in SAPIEN implantation. The company was also cooperating with a U.S. Attorney’s Office investigation related to a 2006 voluntary field recall of a monitoring product. European government customers’ weaker credit conditions could delay or impair receivable collections. Uncertain tax-position liabilities were $86.5 million before estimated offsetting benefits.
- Controls and prior-period correction: Management concluded disclosure controls were not effective because a previously identified material weakness remained under remediation. The filing restated 2011 interim balance-sheet classifications of cash equivalents and short-term investments and cash-flow presentations for those investments and excess tax benefits; the errors did not affect the statements of operations.
Most important facts for investors to verify
- Whether FDA approval for the SAPIEN high-risk indication was obtained, and how U.S. transcatheter valve adoption and sales developed after Q2.
- The scope, duration and financial effects of the voluntary product recalls, including any further costs or regulatory consequences.
- Progress and testing of remediation for the material weakness, and whether future filings report effective disclosure controls.
- Developments in the Medtronic/CoreValve litigation and the government investigation, including any reserve changes or material financial exposure.
- Collection trends and credit exposure to European public-sector customers, as well as the tax and liquidity implications of substantial overseas cash.
- Final settlement of the May ASR agreement and the company’s use of remaining repurchase authorization and credit-facility capacity.