Edwards Lifesciences Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Edwards develops and sells products for advanced cardiovascular disease, across Heart Valve Therapy, Critical Care, Cardiac Surgery Systems, and Vascular.
Financial performance
| Metric | Q1 2011 | Q1 2010 / prior balance | Change |
|---|---|---|---|
| Net sales | $404.5 million | $340.5 million | Up 18.8% |
| Gross profit / gross margin | $287.7 million / 71.1% | $241.9 million / 71.0% | Margin up 0.1 percentage point |
| SG&A | $150.3 million; 37.2% of sales | $134.0 million; 39.4% of sales | Expense up $16.3 million |
| R&D | $59.0 million; 14.6% of sales | $45.2 million; 13.3% of sales | Expense up $13.8 million |
| Income before taxes | $84.6 million | $65.5 million | Up $19.1 million |
| Net income / diluted EPS | $63.9 million / $0.53 | $47.7 million / $0.40 | Net income up 34.0% |
| Operating cash flow | $14.9 million | $13.0 million | Up $1.9 million |
Cash and cash equivalents were $433.8 million at March 31, 2011, versus $396.1 million at December 31, 2010. Current assets were $1,150.3 million and current liabilities were $445.2 million. Short-term debt was $149.5 million, up from $41.8 million at year-end, under a $500 million revolving facility maturing September 29, 2011. The company said it expected to replace the facility before maturity and was compliant with its covenants.
Investing cash use was $52.5 million, primarily the $42.6 million Embrella acquisition and $13.9 million of capital expenditures. Financing provided $59.5 million, including net debt proceeds of $105.3 million, partly offset by $75.8 million of share repurchases. Cash increased $37.7 million during the quarter. Approximately $427.2 million of cash was held outside the United States; repatriation may involve jurisdictional restrictions and taxes.
Sales trends and material changes
- Heart Valve Therapy sales rose 24.5% to $244.9 million, led by transcatheter heart valves, up $33.7 million, and surgical tissue valves, up $10.9 million.
- Critical Care sales rose 14.8% to $120.6 million. Cardiac Surgery Systems grew 5.5% to $26.1 million; Vascular fell 7.5% to $12.9 million, primarily following the discontinuation of artificial implantable graft distribution.
- International sales increased 26.3% to $255.4 million, including a $5.0 million favorable currency effect; U.S. sales increased 7.8% to $149.1 million. Europe was the largest regional growth contributor, with sales of $137.8 million versus $104.1 million.
- Management attributed gross-margin improvement to a more profitable international mix, especially transcatheter valves, partly offset by manufacturing performance and capacity-expansion investment. SG&A growth reflected selling and marketing support for the transcatheter program; R&D growth reflected clinical and development investment.
Outlook, risks, and unusual items
- No consolidated full-year revenue or earnings guidance is stated in the supplied filing text. Management expected transcatheter valves to remain a strong contributor to 2011 sales and anticipated a U.S. SAPIEN launch for inoperable patients later in 2011, subject to FDA approval.
- Other stated development expectations included U.S. and Europe launch of the Physio Tricuspid ring in Q2 2011; U.S. FDA clearance for VolumeView and EV1000 in Q3 2011; CE Mark for INTUITY in mid-2011; and additional SAPIEN XT clinical-trial milestones. These are forward-looking expectations, not assured outcomes.
- On March 11, 2011, Edwards acquired Embrella for $42.6 million. The preliminary allocation included $34.7 million of goodwill and $12.1 million of intangible assets; allocation remained subject to change. The acquisition also produced a $3.1 million gain on remeasurement of Edwards’ prior investment. Acquisition-related costs were $0.9 million.
- Other income included a $3.1 million Embrella remeasurement gain and other investment and foreign-exchange gains; the filing reports total other income of $6.2 million. Earnings also reflected a lower effective tax rate, 24.5% versus 27.2%.
- CoreValve patent litigation included a $73.9 million jury award to Edwards and a court ruling affirming the decision and providing for additional damages and interest; both parties appealed, and patent reexamination remained ongoing. Cook patent appeals in Germany were pending. The company was cooperating with a U.S. Attorney’s Office investigation relating to a 2006 Vigilance I Monitor recall. Management said pending lawsuits were not expected to materially affect financial position, results, or liquidity, while acknowledging possible charges above reserves.
- Uncertain-tax-position liabilities were $59.6 million at quarter-end. The company also reported foreign-currency hedging exposure, investment valuation risk, and potential litigation and regulatory uncertainty. Management considered liquidity sources sufficient for current requirements.
Important facts for investors to verify
- Regulatory approval timing and commercial launch prospects for SAPIEN and other transcatheter valve products, alongside clinical-trial progress.
- Whether revenue growth, particularly in Heart Valve Therapy and international markets, translates into sustained margins and cash generation as capacity and R&D spending rise.
- Refinancing or replacement of the revolving credit facility before its September 2011 maturity, and the effect of additional borrowing and repurchases on liquidity.
- Final Embrella purchase-price allocation, development progress, and the commercial potential of its embolic-protection system.
- Outcomes and potential financial effects of the CoreValve and Cook litigation, the FDA-related investigation, and tax examinations.