Boston Scientific Corporation (NYSE: BSX) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Filed February 17, 2012. Boston Scientific develops and sells less-invasive medical devices across cardiovascular, endoscopy, peripheral intervention, urology/women’s health, neuromodulation and electrophysiology markets.
Financial performance
| Metric | Q4 2011 | Q4 2010 | FY 2011 | FY 2010 |
|---|---|---|---|---|
| Net sales | $1.848 billion | $2.002 billion | $7.622 billion | $7.806 billion |
| Gross profit | $1.188 billion | $1.342 billion | $4.963 billion | $5.207 billion |
| Gross margin | 64.3% | 67.0% | 65.1% | 66.7% |
| Operating income (loss) | $170 million | $349 million | $904 million | $(656) million |
| Net income (loss) | $107 million | $236 million | $441 million | $(1.065) billion |
| Diluted EPS | $0.07 | $0.15 | $0.29 | $(0.70) |
FY 2011 operating cash flow was $1.008 billion, versus $325 million in 2010. Investing activities provided $769 million, principally reflecting $1.440 billion in net proceeds from the Neurovascular sale, partly offset by acquisitions and capital spending. Capital expenditures were $304 million. Cash and cash equivalents were $267 million at year-end; working capital was $1.298 billion. Debt declined to $4.261 billion from $5.438 billion. The $2.0 billion revolving facility and $350 million receivables facility were unused at year-end; the company reported compliance with its debt covenants.
Management’s non-GAAP adjusted FY 2011 net income was $1.018 billion, or $0.67 per share, compared with $1.051 billion, or $0.69 per share, in 2010. These measures exclude specified impairment, amortization, acquisition, divestiture, restructuring, litigation and tax items and are not GAAP results.
Material changes versus prior periods
- Reported FY sales fell 2%. Excluding currency and divested businesses, core sales declined 2%; favorable currency contributed $204 million year over year. The Neurovascular divestiture reduced sales by about $200 million.
- Interventional Cardiology sales declined 4% as reported (9% constant currency), and CRM sales declined 4% (7% constant currency). Endoscopy grew 10% as reported (6% constant currency); Peripheral Interventions grew 9% (5% constant currency); Neuromodulation grew 11% (10% constant currency).
- Gross margin fell to 65.1% from 66.7%, mainly due to lower-margin Neurovascular transition supply sales and $54 million in transition-related inventory charges. A $50 million Abbott pricing true-up and improved internally manufactured stent mix partly offset the pressure.
- The company recorded a $697 million non-deductible goodwill impairment for U.S. CRM, following a $1.817 billion impairment in 2010. FY 2011 also included a $778 million pretax gain on the Neurovascular divestiture and $421 million of amortization expense.
- Interest expense declined to $281 million from $393 million, reflecting lower average debt and borrowing rates. The company prepaid its remaining $1.0 billion term loan and repaid $250 million of senior notes at maturity.
Outlook, management commentary and risks
- No formal consolidated revenue or earnings guidance is stated in the supplied filing text. Management expected launches of PROMUS Element in Japan and the INGENIO pacemaker family in 2012, subject to regulatory and launch timing; U.S. WATCHMAN trial enrollment was expected to finish by year-end 2012, with FDA approval targeted for 2013.
- The 2011 restructuring plan is expected to reduce annual pretax operating expenses by $225–$275 million exiting 2013, with some savings reinvested. Estimated plan charges are $155–$210 million. The 2010 restructuring plan targets $200–$250 million of gross pretax expense reductions by completion in 2012; the Plant Network Optimization program targets approximately $65 million of annualized manufacturing cost reductions exiting 2012.
- Management expects approximately $300 million of capital expenditures in 2012. The company also planned a $150 million investment in China over five years.
- Key commercial pressures include declining prices, lower procedure volumes and competitive share losses, particularly in U.S. drug-eluting stents and CRM. U.S. drug-eluting stent prices declined an estimated 7% in 2011; U.S. CRM sales fell 10%.
- A 2.3% U.S. medical-device excise tax was scheduled to begin in 2013. The company also cited reimbursement and healthcare reform uncertainty, evolving regulatory requirements, product quality and supply interruption risks, integration and restructuring execution, and foreign currency and economic risks.
- Four reporting units were identified as having elevated impairment risk, including U.S. CRM, U.S. Cardiovascular, U.S. Neuromodulation and EMEA. U.S. CRM carrying value exceeded estimated fair value after the impairment; further impairment charges remain possible.
- Material contingencies include ongoing patent and product-liability litigation, governmental investigations, and an IRS dispute asserting $1.162 billion of additional tax plus interest. Management stated the tax dispute outcome is uncertain. Accrued legal matters considered probable and estimable totaled $299 million at year-end.
Most important facts for investors to verify
- Whether CRM and coronary stent sales, market share and pricing stabilize, and whether planned product launches occur on schedule.
- Whether stated restructuring savings are achieved after implementation costs and planned reinvestment.
- Future goodwill impairment exposure, especially in the four identified higher-risk reporting units.
- Cash generation and debt reduction, including covenant headroom and access to receivables financing amid European collection risks.
- Outcomes and potential cash costs of the IRS assessment, patent disputes, mesh product-liability cases and government matters.
- Impact of the 2013 device excise tax, reimbursement changes and ongoing price pressure on margins.
- Shareholder capital allocation: $492 million was spent repurchasing approximately 82 million shares in 2011; no cash dividend was paid, and management did not intend to pay one.