Boston Scientific Corporation: Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Boston Scientific develops and sells medical devices across cardiovascular, endosurgery, neuromodulation and other markets. The quarter was dominated by U.S. ship-hold and field-inventory removal actions for implantable cardioverter defibrillator (ICD) and cardiac resynchronization therapy defibrillator (CRT-D) systems, announced March 15. The company reported that FDA clearance for two manufacturing changes was received April 15, after quarter-end, allowing distribution of its COGNIS CRT-D and TELIGEN ICD systems to resume.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $1,960 | $2,010 |
| Gross profit | $1,297 | $1,403 |
| Gross margin | 66.2% | 69.8% |
| Operating income (loss) | $(1,486) | $11 |
| Net income (loss) | $(1,589) | $(13) |
| Diluted loss per share | $(1.05) | $(0.01) |
| Operating cash flow | $(284) | $261 |
- Sales fell 3% as reported and 6% on a constant-currency basis; foreign exchange added $63 to sales. U.S. sales declined 9%; international sales rose 7% as reported but declined 1% excluding currency effects.
- Management’s non-GAAP net income was $251, or $0.16 per share, versus $289, or $0.19 per share, in Q1 2009. These measures exclude specified impairment, restructuring, acquisition, litigation, tax and amortization items and are not GAAP results.
- Gross margin declined 3.6 percentage points, principally from lower sales and pricing of higher-margin TAXUS drug-eluting stents and increased PROMUS mix; currency effects also reduced margin.
- Cash and equivalents were $519 at March 31, down from $864 at December 31, 2009. Total debt was $5,921 and net debt was $5,402, compared with $5,918 and $5,054, respectively, at year-end.
- Operating cash use reflected, primarily, the $1.0 billion payment to Johnson & Johnson (J&J) under a patent settlement. Offsetting items included a $250 milestone receipt from Abbott, a $163 federal tax refund and improved working capital. Capital expenditures were $70.
- Current assets were $3,747 and current liabilities $2,913. The company had no revolver borrowings at quarter-end, but a $745 letter of credit reduced availability under its $1.75 billion facility. It reported compliance with its debt covenants.
Material changes versus the prior comparable period
- The March product actions were estimated to have reduced Q1 2010 sales by $72 versus the prior year. U.S. CRM sales fell 18%; worldwide CRM sales fell 8% to $538.
- The company recorded a $1,848 goodwill impairment for its U.S. CRM reporting unit and a $60 impairment of Peripheral Interventions intangible assets. The goodwill charge was an estimate to be finalized in Q2; management said it did not affect cash flow or covenant compliance.
- The U.S. defibrillator actions were expected to reduce the company’s U.S. defibrillator market share by approximately 400 basis points exiting 2010 and lower 2010 U.S. CRM revenue by approximately $300. Management cautioned that sales and profitability could remain adversely affected.
- A $250 Abbott milestone for Japanese approval of the XIENCE V stent was recorded as a gain. Q1 2009 included $287 of litigation-related charges and a $63 tax benefit from a favorable ruling, among other items.
- Coronary stent sales declined to $444 from $489. Worldwide drug-eluting stent share was estimated at 38%, down from 44%; U.S. share was estimated at 45%, down from 50%.
Outlook, management commentary and risks
- No consolidated full-year revenue or earnings guidance is stated in the provided filing text. Management estimated the 2010 worldwide CRM market at approximately $11.5 billion, a slight increase from $11.1 billion in 2009, and the worldwide coronary stent market at approximately $5.0 billion, flat with 2009.
- Management expected approximately $350–$400 of 2010 capital expenditures. The company planned to refinance most of its 2011 debt maturities and renew its revolving credit facility by mid-2010; $1.75 billion of debt and the $1.75 billion revolver were due to mature in the first half of 2011.
- The 2010 restructuring plan was expected to cost $180–$200 pre-tax, including $170–$180 of future cash outlays, eliminate approximately 1,000–1,300 positions and be substantially completed by the end of 2011. Management estimated gross annual pre-tax operating expense reductions of $200–$250 once completed, with some savings to be reinvested.
- The 2007 restructuring plan and Plant Network Optimization program had estimated total costs of $425–$435 and $135–$150, respectively. The latter program was expected to generate annual manufacturing cost reductions of approximately $65–$80 by 2012.
- The J&J settlement totaled $1.725 billion plus interest. After the $1.0 billion Q1 payment, $725 remained payable by January 3, 2011. Probable and estimable legal accruals were $1.310 billion at March 31, versus $2.316 billion at year-end.
- Other significant exposures include ongoing patent disputes, product-liability and securities claims, and governmental investigations. After quarter-end, a court declined to accept a proposed Guidant plea agreement tied to approximately $296 in fines and forfeitures; the DOJ also notified the company of a related civil False Claims Act investigation.
- The FDA had removed restrictions related to the company’s corporate warning letter following inspections, but the warning letter remained in place pending FDA administrative procedures. The company also identified risks from competition and pricing, product launches and regulatory approvals, Abbott’s stent supply, litigation, reimbursement, foreign exchange and the 2.3% U.S. medical-device excise tax beginning in 2013.
Important facts for investors to verify
- Whether the CRM impairment estimate is finalized in Q2 and whether further impairment is recorded; monitor actual U.S. CRM sales, market share and the recovery of physician and patient confidence.
- Progress and any additional FDA actions concerning earlier-generation ICD/CRT-D products, manufacturing-change documentation and related investigations.
- Cash generation and liquidity after the J&J payment, the remaining $725 obligation, revolver availability after the letter of credit, covenant headroom and the planned 2011 refinancing.
- Developments in material legal and governmental matters, including the J&J patent disputes and the proposed Guidant resolution and related DOJ inquiry; legal outcomes and potential losses may differ from recorded accruals.
- Whether restructuring costs, timing and savings meet management’s estimates, and how product mix, pricing and Abbott-supplied PROMUS stents affect margins.