Boston Scientific Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. The interim financial statements are unaudited. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Boston Scientific develops, manufactures and sells medical devices globally. Its reportable regions are the United States, EMEA, Japan and Inter-Continental. Management’s strategy emphasizes product innovation, quality, profitable growth and cost reductions.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $2.025 billion | $1.978 billion | $6.109 billion | $6.048 billion |
| Gross profit | $1.396 billion | $1.323 billion | $4.242 billion | $4.209 billion |
| Gross margin | 68.9% | 66.9% | 69.4% | 69.6% |
| Operating income | $51 million | $28 million | $337 million | $912 million |
| Net income (loss) | $(94) million | $(62) million | $51 million | $358 million |
| Diluted earnings (loss) per share | $(0.06) | $(0.04) | $0.03 | $0.24 |
- Revenue growth: Reported sales rose 2% in Q3 and 1% year to date. Excluding currency and divested-business sales, management reported 3% Q3 growth; the filing’s segment table shows 4% year-to-date constant-currency growth for continuing segment sales.
- Costs and margins: Q3 gross margin improved, helped by currency effects, lower inventory charges and product mix; year-to-date margin edged down, with the shift from higher-margin TAXUS stents toward Abbott-supplied PROMUS stents a key factor. SG&A was $665 million in Q3 and $1.987 billion year to date; R&D was $258 million and $778 million, respectively.
- Cash flow: Operating cash flow was $1.164 billion for the first nine months, nearly unchanged from $1.162 billion in 2008. Investing used $733 million and financing used $693 million. Cash decreased $260 million to $1.381 billion.
- Debt and liquidity: Book debt was $6.030 billion at September 30, down from $6.745 billion at year-end 2008; net debt was $4.649 billion versus $5.104 billion. The company had $4.962 billion in current assets and $3.176 billion in current liabilities. It reported compliance with debt covenants; actual leverage was 2.6x against a 3.5x maximum, and interest coverage was 5.9x against a 3.0x minimum. The $1.75 billion revolving facility was fully available after the October settlement payment described below.
Changes versus prior comparable periods
- Q3 sales increased $47 million year over year, while reported net loss widened to $94 million from $62 million. The quarter included $236 million of net litigation-related charges and $28 million of restructuring and related costs before tax.
- Nine-month sales rose $61 million, but net income fell to $51 million from $358 million. 2008 results included a $250 million Abbott milestone gain and $250 million of divestiture gains; 2009 results included $523 million of net litigation charges before tax and $94 million of restructuring and related costs.
- Q3 sales growth was led by Neuromodulation (+21%), Endoscopy (+9%) and the Cardiac Rhythm Management group (+6%). Interventional Cardiology, excluding stents, declined 7%; Neurovascular declined 2%. Year-to-date reported international sales were down 3%, substantially affected by currency; constant-currency international sales grew 4%.
- Interest expense declined to $91 million in Q3 and $285 million year to date, from $112 million and $361 million, respectively, reflecting lower average debt and borrowing rates.
Outlook, management commentary and key risks
- No consolidated earnings or revenue guidance is stated in the provided filing text. Management expected 2009 capital expenditures of $325–$350 million and planned to refinance 2011 maturities by mid-2010. It expected a $250 million Abbott milestone receipt in Q4 2009, subject to Japanese approval of Abbott’s XIENCE V stent.
- Management expected the 2007 restructuring plan, estimated at $425–$450 million in total pretax expense, to be substantially complete in the first half of 2010. The Plant Network Optimization program was estimated at $135–$150 million and was expected to be substantially complete by the end of 2011. Management estimated combined future manufacturing-cost savings from these initiatives of approximately $100–$120 million annually in 2012.
- On November 3, 2009, the company reached an agreement in principle with the U.S. Department of Justice to pay approximately $296 million to resolve a Guidant investigation concerning 2005 product advisories. A $294 million net charge was recognized in Q3 as a recognized subsequent event. Guidant was expected to plead to two misdemeanor charges; a definitive agreement remained pending.
- In October 2009, the company paid Johnson & Johnson $716 million under a settlement resolving 14 intellectual-property matters; the payment was within previously established reserves. Separate patent litigation remained, including a damages trial scheduled for February 2010. The legal accrual was $1.562 billion at September 30, 2009, and additional losses could be accrued.
- Regulatory, product and market risks include the continuing FDA corporate warning letter pending remediation of certain reporting issues; product recalls; litigation and limited insurance coverage; competitive pricing and clinical-data effects; reimbursement and proposed healthcare reforms, including a possible medical-device excise tax; and currency, supplier and debt-refinancing risks.
- Boston Scientific relied on Abbott for U.S. and Japanese PROMUS stent supply, and said Abbott-supplied PROMUS margins were approximately half those of TAXUS. Abbott supply arrangements and a potential retroactive pricing adjustment could affect future supply, margins and results. The company announced CE Mark approval and a European and selected-market launch of its internally manufactured PROMUS Element system in November 2009.
Important facts for investors to verify
- Final DOJ settlement terms, payment timing and any consequences of Guidant’s expected misdemeanor pleas.
- Cash, borrowing availability and covenant headroom after the October 2009 $716 million J&J payment and $250 million term-loan prepayment.
- Developments in remaining J&J and other patent proceedings, including potential damages and effects on product sales.
- Resolution of the Abbott milestone and retroactive pricing adjustment, plus the timing and economics of internally manufactured PROMUS Element launches.
- Execution costs, cash outlays and realized savings from restructuring and plant optimization, alongside sales growth and product mix effects on margins.
- FDA warning-letter remediation, product recalls, and any reimbursement or healthcare-reform changes affecting demand, pricing or costs.