Boston Scientific Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited; amounts are in millions except per-share data. Boston Scientific develops and sells medical devices. Effective January 1, 2013, it reorganized into Cardiovascular, Rhythm Management, and MedSurg reporting segments.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,809 | $1,828 | $3,570 | $3,694 |
| Gross profit | $1,279 | $1,250 | $2,462 | $2,485 |
| Gross margin | 70.7% | 68.4% | 69.0% | 67.3% |
| Operating income (loss) | $220 | $(3,587) | $(109) | $(3,390) |
| Net income (loss) | $130 | $(3,578) | $(224) | $(3,465) |
| Diluted EPS | $0.10 | $(2.51) | $(0.17) | $(2.42) |
- Q2 sales fell 1% as reported but grew 1% on a constant-currency basis; excluding currency effects and divested-business sales, management reported 2% growth. First-half sales declined 3% as reported and 1% excluding currency and divested-business effects.
- Management’s non-GAAP adjusted net income was $247 ($0.18 per share) in Q2 and $471 ($0.35 per share) in the first half of 2013. These measures exclude specified impairment, acquisition/divestiture, restructuring, litigation, and amortization items; they are not GAAP results.
- Gross margin improved year over year, principally from manufacturing cost reductions and a retroactive PROMUS supply-pricing adjustment, partly offset by pricing pressure. The company said it did not anticipate further adjustments under that supply arrangement.
- First-half operating cash flow was $559, down from $619. Investing activities used $39 and financing activities used $196; cash increased by $323 to $530. Q2 operating cash flow was $396 versus $407.
- At June 30, cash was $530, working capital was $1,021, total debt was $4,252, and stockholders’ equity was $6,603. Debt was essentially unchanged from $4,256 at year-end 2012. Current debt obligations were $605, versus $4 at year-end.
- The company had no borrowings on its $2.0 billion revolving facility and reported covenant compliance: leverage ratio 2.4x against a 3.5x maximum; interest coverage 6.9x against a 3.0x minimum. Approximately 100% of debt was fixed-rate.
Material changes and operating trends
- The reported first-half loss included a $423 goodwill impairment charge for the global Cardiac Rhythm Management (CRM) reporting unit, following the reporting-unit reorganization. Q2 included $53 of intangible-asset impairment charges. By comparison, Q2 2012 included a $3,602 goodwill impairment charge, primarily for the former EMEA reporting unit.
- Q2 segment trends were mixed: MedSurg sales rose 6% as reported (9% constant currency), while Cardiovascular fell 4% (1% constant currency) and Rhythm Management fell 3% (2% constant currency). Neuromodulation grew 21% as reported; Interventional Cardiology declined 5%, reflecting lower stent sales, competitive pressure, and pricing.
- Q2 operating results also reflected $18 of contingent-consideration benefit and $34 of divestiture gain; first-half litigation-related charges were $130. The first-half legal accrual rose to $625 from $491 at year-end.
- The company repurchased about 26 million shares for $200 in the first half and had approximately $960 remaining under its 2013 repurchase authorization at June 30.
Outlook, commentary, risks, and unusual items
- The filing does not provide a consolidated revenue or earnings forecast. Management expected the expanded 2011 restructuring plan to generate $340–$375 of gross annual pre-tax operating-expense reductions exiting 2013, with a substantial portion to be reinvested in growth initiatives. Estimated total plan charges were $300–$355; activities were expected to be substantially complete by year-end 2013.
- Management described product and regulatory milestones as expectations, not guarantees: anticipated European launch of the Lotus valve in Q4 2013; expected U.S. launch of Promus PREMIER in Q4 2013, subject to FDA approval; and expected FDA approval and launch of WATCHMAN in the first half of 2014. S-ICD supply constraints had limited shipments since early March; the company expected to resume a controlled launch in Q3 2013 as capacity improved.
- In June, Boston Scientific agreed to acquire Bard EP for $275 in cash, subject to customary closing conditions, with closing expected in the second half of 2013. In August, after quarter-end, it entered a $400 unsecured term loan and intended to use proceeds to redeem part of its $600 of 5.45% notes due June 2014.
- Goodwill and intangible-asset valuations remain sensitive to forecasts. Neuromodulation had $1,356 of goodwill and only 16% excess fair value over carrying value. CRM-related amortizable intangibles totaled $4,510 and were identified as at higher risk of failing a future recoverability test.
- Material legal and tax exposures include more than 12,000 mesh-related product-liability cases or claims; self-insurance for most product-liability and intellectual-property claims; and a disputed IRS assessment of $1,162 plus interest. Management said reserves were adequate but acknowledged that resolution could materially affect financial condition, results, or cash flows. Gross unrecognized tax benefits were $1,060.
- Maximum undiscounted future contingent consideration was approximately $2,328. The company also reported $66 of net receivables more than 180 days past due in Italy, Spain, Portugal, and Greece, including $18 more than 365 days past due.
- Foreign-exchange movements, competitive pricing, product launches and supply, regulatory approvals, reimbursement, litigation, and restructuring execution are among the stated business risks. The company reported effective disclosure controls as of June 30, 2013.
Important facts for investors to verify
- Underlying revenue and margin trends by segment, including the effect of currency, divestitures, competitive stent pricing, and the PROMUS adjustment.
- Whether restructuring savings are achieved on schedule and how much is reinvested versus retained as operating leverage.
- CRM performance and the assumptions supporting recovery of CRM-related intangible assets; monitor Neuromodulation goodwill headroom.
- Progress on S-ICD supply, Bard EP closing and financing, and stated product-approval and launch timelines.
- Changes in legal reserves, mesh litigation, IRS proceedings, contingent-consideration liabilities, and overdue European receivables.
- Debt classification and maturities, covenant headroom, and the use and impact of the post-quarter $400 term loan.