Edwards Lifesciences Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Edwards develops and sells surgical and transcatheter heart valves, heart valve repair products, critical-care monitoring systems, and vascular products.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $1,899.6 million | $1,678.6 million | +13.2% |
| Gross profit | $1,405.0 million | $1,188.8 million | +18.2% |
| Gross margin | 74.0% | 70.8% | +3.2 percentage points |
| Net income | $293.2 million | $236.7 million | +23.9% |
| Diluted EPS | $2.48 | $1.98 | +25.3% |
| Operating cash flow | $373.8 million | $314.5 million | +$59.3 million |
- Fourth-quarter 2012 sales were $510.5 million, net income was $91.1 million, and diluted EPS was $0.77.
- 2012 sales by product group: Transcatheter Heart Valves (THV) $552.1 million, up 65.4%; Surgical Heart Valve Therapy $787.5 million, up 0.4%; Critical Care $560.0 million, down 0.1%.
- THV sales growth was driven by the U.S. launch of the SAPIEN valve and international SAPIEN XT sales. THV represented about 29% of sales, versus 20% in 2011.
- U.S. sales rose 34.1% to $812.1 million. International sales increased 1.3% to $1,087.5 million; a $42.4 million adverse foreign-exchange effect weighed on international growth. International markets generated 57% of sales.
- SG&A was $705.3 million, up $62.9 million, primarily reflecting U.S. THV launch spending. R&D rose $45.0 million to $291.3 million, or 15.3% of sales, largely for THV trials and development.
- Cash and cash equivalents were $310.9 million and short-term investments were $210.5 million at year-end, totaling $521.4 million. Long-term debt was $189.3 million; no current debt was reported. The $500 million unsecured credit facility matures in July 2015, and the company reported covenant compliance.
- Capital expenditures were $120.7 million. Financing cash use was $155.6 million, including substantial share repurchases. The company repurchased 4.0 million shares for an aggregate $350.3 million during 2012 and paid no cash dividend.
Material changes versus the prior period
- Sales growth accelerated principally because of THV: sales increased by $218.3 million, while the other two product groups were approximately flat combined.
- Gross margin improved 3.2 percentage points, reflecting foreign exchange and a more profitable U.S. product mix, especially THV; voluntary product recalls and manufacturing inefficiencies partly offset the improvement.
- Net income rose faster than sales. The income tax provision increased to $97.9 million from $46.9 million, and the effective tax rate rose to approximately 25% from approximately 17%. The filing attributes tax-rate effects to several factors, including income mix and tax items; the 2012 provision excluded an $8.4 million federal research-credit benefit expected to be recorded in Q1 2013 after retroactive reinstatement.
- Operating cash flow improved, supported by operating performance, lower inventory builds and collections, including a non-recurring $26.3 million collection in Spain and sale of Greek bonds. Cash generation was partly offset by timing of supplier payments and excess stock-plan tax benefits.
- Cash and short-term investments together increased by $70.9 million from year-end 2011, while long-term debt increased by $38.9 million.
Outlook, commentary, risks and unusual items
- Management said it expected THV sales to continue growing in 2013. The filing provides no clear numerical company-wide revenue or earnings guidance.
- U.S. FDA approvals in 2012 expanded SAPIEN use to certain high-risk surgical patients; SAPIEN XT remained under U.S. clinical evaluation. The company was advancing SAPIEN 3 and other valve and monitoring programs, all subject to development, trial and regulatory uncertainty.
- The 2.3% U.S. medical-device excise tax began in 2013 and was expected to increase operating expenses. Management projected Puerto Rico excise-tax effects would be offset by credits.
- Second-quarter voluntary recalls of certain heart valves and Critical Care catheters resulted in an $8.1 million gross-profit charge. Total special charges were $16.0 million, including $9.0 million for a workforce realignment affecting 92 employees and $7.0 million for intellectual-property licenses tied to products still under development.
- Key risks include medical-device regulation and clinical outcomes, product quality and liability, competition and pricing/reimbursement pressure, dependence on innovation, single-source suppliers, foreign exchange, and international collections. Net receivables from Italy, Spain, Portugal and Greece were $104.7 million; the filing notes ongoing sovereign and collection risks.
- Uncertain tax-position liabilities were $113.6 million, or $118.8 million including interest, and could change as audits and transfer-pricing matters proceed. The company also had $1,135.9 million of undistributed foreign earnings treated as indefinitely reinvested.
- Patent litigation with Medtronic/CoreValve remained active. An appeals court affirmed a $73.9 million damages award and ordered reconsideration of an injunction request; further damages and other patent cases remained unresolved. Management stated it could not estimate losses for some legal contingencies and did not expect currently pending matters to materially affect financial position, results or liquidity.
- Management and the independent auditor reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether THV growth, U.S. adoption and SAPIEN XT/SAPIEN 3 regulatory progress meet expectations, and how THV growth affects product mix and margins.
- Subsequent developments and costs related to the 2012 recalls, manufacturing issues, and any further quality or safety actions.
- Actual effect of the medical-device excise tax, reimbursement changes and pricing pressure on 2013 expenses and demand.
- Collection performance and credit exposure in Southern Europe, including the $104.7 million receivable balance.
- Outcomes of patent litigation, including additional damages or injunction proceedings, and the potential effect on product sales.
- Resolution of tax audits and uncertain tax positions, use of foreign-held cash, and whether expected tax-credit benefits are realized.
- Cash deployment: the company spent $350.3 million on share repurchases in 2012 while funding $120.7 million of capital expenditures and holding $189.3 million of debt.