Boston Scientific Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are U.S. dollars.
Business context
Boston Scientific develops and sells medical devices across interventional cardiology, cardiac rhythm management (CRM), endoscopy, peripheral interventions, urology/women’s health, neuromodulation and electrophysiology. International markets generated approximately 50% of 2012 sales. The company continued to invest in emerging markets and growth adjacencies, including through acquisitions.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $7.249 billion | $7.622 billion |
| Gross profit / margin | $4.900 billion / 67.6% | $4.963 billion / 65.1% |
| Operating income (loss) | $(3.868) billion | $904 million |
| Net income (loss) | $(4.068) billion | $441 million |
| Diluted earnings (loss) per share | $(2.89) | $0.29 |
| Cash provided by operating activities | $1.260 billion | $1.008 billion |
| Cash and cash equivalents at year-end | $207 million | $267 million |
| Working capital | $1.250 billion | $1.298 billion |
| Total debt | $4.256 billion | $4.261 billion |
The 2012 GAAP loss included $4.492 billion of goodwill and intangible-asset impairment charges, primarily $3.602 billion for EMEA goodwill and $748 million for U.S. CRM goodwill. Management’s non-GAAP adjusted net income was $933 million, or $0.66 per share, compared with $1.018 billion, or $0.67 per share, in 2011; these measures exclude specified items and are not GAAP results.
Fourth-quarter 2012 sales were $1.821 billion versus $1.848 billion in fourth-quarter 2011. Gross profit was $1.238 billion versus $1.188 billion; operating income was $115 million versus $170 million; and net income was $60 million versus $107 million.
Material changes versus the prior year
- Sales declined 5% as reported. Excluding foreign exchange and divested-business sales, core sales declined 3% on a constant-currency basis. Foreign exchange reduced year-over-year sales by $123 million.
- Interventional Cardiology sales fell 13% to $2.179 billion, including a 16% decline in coronary stent systems. CRM sales fell 9% to $1.908 billion.
- Growth in Endoscopy (+5%), Peripheral Interventions (+6%) and Neuromodulation (+9%) partly offset declines in the two largest businesses.
- Gross margin rose 250 basis points, primarily from manufacturing cost reductions and the shift to internally developed, self-manufactured PROMUS Element stents; pricing pressure remained a headwind.
- Operating cash flow increased by $252 million. The comparison benefited from approximately $300 million of litigation payments made in 2011 and from working-capital reductions in 2012.
- Cash used for share repurchases was $600 million in 2012, versus $492 million in 2011. The company paid no cash dividend and stated it did not intend to pay one.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide clear consolidated 2013 sales or earnings guidance. Management expected approximately $300 million of capital expenditures in 2013. A restructuring-plan expansion was expected to reduce gross annual pretax operating expenses by $100 million to $115 million exiting 2013; the total 2011 program, including the expansion, was projected to yield $340 million to $375 million of gross annual savings, with a substantial portion reinvested in growth initiatives.
- Medical-device excise tax: A 2.3% U.S. medical-device sales tax took effect in January 2013. The company estimated its 2013 liability could be up to $80 million.
- Impairment sensitivity: Management identified U.S. CRM, U.S. Cardiovascular and U.S. Neuromodulation goodwill as at elevated risk of further impairment. U.S. CRM carrying value exceeded estimated fair value; CRM-related amortizable intangibles of $4.636 billion were also sensitive to future business performance and cash-flow assumptions.
- Debt and liquidity: The company reported investment-grade ratings from all three major agencies and compliance with credit-facility covenants at year-end. It had an undrawn $2.0 billion revolving facility; covenant thresholds and actual ratios were 3.5x versus 2.4x maximum leverage and 3.0x versus 6.9x minimum interest coverage.
- Legal and tax contingencies: Probable and estimable legal accruals were $491 million at year-end, up from $299 million. More than 3,900 product-liability cases or claims involving transvaginal surgical mesh were reported as of February 22, 2013. The IRS asserted an additional $1.162 billion plus interest for disputed historical tax years; the company contested the assessment and stated that resolution could have a material impact.
- Other risks: Management cited competitive pricing and market contraction, reimbursement and procedure-volume pressures, regulatory and product-quality requirements, clinical and product-launch execution, acquisition integration, supply and sterilization continuity, foreign-exchange exposure, and collection/factoring risks in Southern Europe.
Important facts for investors to verify
- Whether the declines in CRM and coronary stent sales and pricing stabilize, and whether new products—including S-ICD and next-generation stents—gain adoption.
- Whether restructuring savings are achieved on schedule and after the expected reinvestment and restructuring cash costs.
- Whether further goodwill or intangible-asset impairments are required, particularly for CRM, Cardiovascular and Neuromodulation.
- Developments in mesh litigation, other significant legal matters, and the IRS tax dispute, including their potential cash and covenant effects.
- 2013 impact of the medical-device excise tax, capital spending, cash generation, debt maturities and continued share repurchases.