Boston Scientific Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Boston Scientific develops and sells medical devices across interventional medical specialties; results are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
- Revenue: Q2 net sales were $1.828 billion, down 7% from $1.975 billion a year earlier. Excluding currency effects and sales from divested businesses, sales declined 4%. First-half sales were $3.694 billion, down 5% reported and 4% on the same adjusted basis.
- Profit and margins: Q2 GAAP operating loss was $3.587 billion and net loss was $3.578 billion, or $2.51 per diluted share, principally due to a $3.602 billion EMEA goodwill impairment. Gross profit was $1.250 billion; gross margin improved to 68.4% from 65.2%. Company-defined adjusted net income was $239 million, or $0.17 per share, versus $262 million, or $0.17, in Q2 2011. First-half GAAP net loss was $3.465 billion; adjusted net income was $459 million versus $598 million.
- Cash flow: Operating cash flow was $407 million in Q2 versus $390 million; first-half operating cash flow was $619 million versus $293 million. The first-half comparison benefited from a $60 million Spanish receivables settlement and from $296 million of DOJ payments in the prior-year period. First-half investing cash used was $257 million and financing cash used was $259 million. Cash increased to $371 million from $267 million at year-end.
- Debt and liquidity: Total debt was $4.257 billion, largely senior notes, versus $4.261 billion at year-end. Working capital was $1.317 billion. The company had a $2.0 billion revolving facility with no borrowings and was in compliance with its covenants; actual leverage and interest coverage ratios were 2.4x and 6.6x, against limits of 3.5x maximum and 3.0x minimum. It also had a $350 million receivables-backed facility, undrawn at quarter-end.
Material changes versus prior comparable periods
- Q2 sales weakness was concentrated in Interventional Cardiology, down 16% reported (13% constant currency), and Cardiac Rhythm Management (CRM), down 10% (8% constant currency). Coronary stent sales fell 21%; U.S. drug-eluting stent sales declined 33%, with estimated U.S. market share falling to 39% from 50% a year earlier. CRM sales decreased amid lower procedural volumes and international pricing pressure.
- Growth in Endoscopy, Peripheral Interventions and Neuromodulation partly offset declines in the larger businesses. Inter-Continental sales rose 11% constant currency in Q2, led by emerging markets; EMEA sales fell 2% constant currency.
- Gross margin improved, supported by conversion to the internally manufactured PROMUS Element stent and manufacturing cost reductions, partly offset by pricing pressure. In Q1 2011, a $50 million credit from a retroactive PROMUS supply-pricing adjustment had benefited the prior-year first-half comparison.
- First-half operating cash flow increased by $326 million year over year. The comparison reflects working-capital management and the Spanish settlement, as well as the prior-year DOJ payment.
- The company repurchased approximately 41 million shares for $250 million in the first half and acquired Cameron Health in June.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no consolidated revenue or earnings guidance. Management expected R&D spending to increase in the second half, in part due to Cameron Health; described planned product launches and emerging-market investment; and expected certain restructuring programs to be substantially complete by the end of 2012 or 2013. Management said EMEA growth and profitability expectations had been reduced because of economic uncertainty, austerity-related volume pressure and lower selling prices.
- Impairments: The $3.602 billion EMEA goodwill charge was an estimate subject to finalization in Q3 2012. Management also recorded a $129 million Sadra in-process R&D impairment after revising estimates of completion effort, timing and cost. U.S. CRM carrying value exceeded estimated fair value; the filing also identified U.S. CRM, Cardiovascular and Neuromodulation goodwill as at higher risk of future impairment.
- Acquisition commitments: Cameron consideration included a $150 million potential payment upon FDA approval and up to $1.05 billion in revenue-based milestone payments. The company reported maximum undiscounted future contingent consideration of approximately $1.9 billion across acquisitions.
- Legal and tax contingencies: Probable and estimable legal reserves were $375 million, up from $299 million at year-end, including $69 million of Q2 net litigation charges. More than 1,600 product-liability cases or claims involved transvaginal mesh products. The IRS asserted $1.162 billion plus interest for disputed tax years; the company contested the assessment and said resolution could nevertheless materially affect financial condition, results or cash flows.
- Other risks: The filing cites ongoing patent disputes, government investigations, product-liability exposure and limited insurance. European sovereign-debt conditions had affected receivables factoring and collections; overdue receivables in Italy, Spain, Greece and Portugal were above historical levels. Restructuring cash costs and up to $1.9 billion of contingent acquisition payments are additional funding considerations.
Investor verification points
- Check the Q3 filing for finalization of the EMEA goodwill impairment and any further impairment indicators or charges.
- Track sales, pricing and market share in coronary stents and CRM, and whether product launches stabilize procedural volumes and revenue.
- Assess whether adjusted earnings and operating cash flow are sustainable, distinguishing recurring performance from settlements, litigation payments and other excluded items.
- Monitor covenant headroom, receivables collection and factoring access in Europe, and cash needs for acquisitions, restructuring and share repurchases.
- Follow developments in the IRS dispute, mesh litigation, other legal matters and Cameron FDA approval and milestone obligations.