Boston Scientific Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 17, 2011. Boston Scientific develops and sells medical devices used in less-invasive procedures. Its major businesses include cardiac rhythm management (CRM), cardiovascular, endoscopy, urology/women’s health, neuromodulation and neurovascular.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $7.806 billion | $8.188 billion |
| Gross profit / gross margin | $5.207 billion / 66.7% | $5.612 billion / 68.5% |
| Operating loss | $656 million | $894 million |
| Net loss / diluted loss per share | $1.065 billion / $0.70 | $1.025 billion / $0.68 |
| Cash from operating activities | $325 million | $835 million |
| Cash and cash equivalents at year-end | $213 million | $864 million |
| Working capital | $1.006 billion | $1.577 billion |
| Total debt | $5.438 billion | $5.918 billion |
FY2010 quarterly results included fourth-quarter sales of $2.002 billion and net income of $236 million, compared with fourth-quarter 2009 sales of $2.079 billion and a net loss of $1.075 billion. Fourth-quarter 2009 results included substantial litigation-related charges.
FY2010 GAAP results included a $1.817 billion non-cash goodwill impairment charge for the U.S. CRM reporting unit and $65 million of intangible-asset impairments. Management reported non-GAAP adjusted net income of $1.051 billion, or $0.69 per share, versus $1.182 billion, or $0.78 per share, in 2009. These are company-defined non-GAAP measures and exclude significant items.
Operating cash flow fell by $510 million year over year, primarily reflecting approximately $1.6 billion of net litigation-related payments, partly offset by a $250 million milestone receipt from Abbott and $104 million received from Medinol. Capital expenditures were $272 million; the company expected $300 million to $350 million in 2011. Interest expense was $393 million, and the average borrowing rate was 6.0%.
Material changes versus FY2009
- Sales declined 5% as reported and 5% excluding currency effects. The U.S. accounted for $4.335 billion of sales, down 7%; international sales were $3.467 billion, down 1% as reported.
- CRM sales fell 10% to $2.180 billion, principally following the 2010 U.S. ship hold and field inventory removal of ICD and CRT-D systems. U.S. CRM sales decreased $237 million; estimated U.S. defibrillator share declined about 300 basis points exiting 2010.
- Coronary stent sales fell 11% to $1.670 billion. Estimated worldwide drug-eluting stent share declined to 36% from 41%, while U.S. drug-eluting stent average selling prices fell an estimated 9%.
- Endoscopy sales increased 7% to $1.079 billion; Urology/Women’s Health rose 5% to $481 million; Neuromodulation rose 7% to $304 million. Cardiovascular group sales fell 7% to $3.271 billion.
- Gross margin declined 1.8 percentage points, mainly from drug-eluting stent pricing and mix, including a greater share of Abbott-supplied PROMUS products, whose margins were lower than the company’s TAXUS and internally manufactured PROMUS Element products. CRM ship-hold effects also reduced margin.
- Research and development expense decreased 9% to $939 million, reflecting project reprioritization and delayed clinical trials. SG&A declined 2% to $2.580 billion, although SG&A as a share of sales rose to 33.1% from 32.2%.
Outlook, strategy and notable items
- No specific consolidated revenue or earnings forecast is provided in the supplied filing text. Management expected ongoing pricing pressure to weigh on gross margin and anticipated lower-margin Neurovascular product sales to Stryker to affect 2011 margins.
- The 2010 restructuring plan targets $200 million to $250 million of gross annual pre-tax operating-expense reductions when completed in 2012, with some savings to be reinvested; it is expected to eliminate 1,000 to 1,300 positions. Estimated plan charges are $180 million to $200 million.
- The Plant Network Optimization program targets approximately $65 million of annualized manufacturing-cost reductions exiting 2012, with estimated total pre-tax charges of $135 million to $150 million. Management also planned to invest $30 million to $40 million through 2011 in emerging-market products and sales capabilities.
- In January 2011, Boston Scientific completed the sale of Neurovascular to Stryker for $1.5 billion in cash consideration: $1.450 billion was received at closing, with $50 million contingent on facility transfers or separation. Transition services and product-supply arrangements may continue for up to 24 months.
- Acquisitions broadened the portfolio: Asthmatx was acquired in October 2010; Sadra Medical and Intelect Medical were acquired in January 2011; and an Atritech acquisition agreement was announced, subject to closing conditions. The filing describes potential milestone-based payments for several transactions.
- Debt refinancing included a new $1.0 billion term loan and a $2.0 billion revolving facility. The company reported covenant compliance at year-end, with a 2.3x leverage ratio versus a 3.85x maximum and 6.1x interest coverage versus a 3.0x minimum. After year-end, it received Neurovascular sale proceeds and made debt and litigation payments.
- The company paid no dividend in 2010 or 2009 and did not intend to pay one, citing debt repayment and business investment priorities.
Risks, contingencies and unusual items
- CRM execution and quality: The U.S. ICD/CRT-D ship hold followed unsubmitted manufacturing-process changes. FDA clearance allowed shipments to resume in April and May 2010, and the FDA lifted its corporate warning letter in August 2010. Market-share recovery, physician confidence and future product launches remain uncertain.
- Legal exposure: Legal accruals were $588 million at year-end, down from $2.316 billion, largely after payment of the $1.725 billion Johnson & Johnson patent settlement. The company is substantially self-insured for product-liability and intellectual-property claims. The filing identifies continuing patent disputes, governmental investigations and securities/product-liability matters; additional losses could affect cash flow and covenant capacity.
- Tax uncertainty: The IRS asserted an additional $525 million plus interest for Guidant’s 2001–2003 transfer-pricing positions. The company disputed the assessment and planned to petition Tax Court; resolution could take years. The filing also notes $965 million of gross unrecognized tax benefits and a 2.3% U.S. medical-device excise tax scheduled to begin in 2013.
- Impairment risk: Besides the $1.817 billion 2010 CRM goodwill impairment, management identified approximately $9 billion of goodwill across U.S. CRM, U.S. Cardiovascular, U.S. Neuromodulation and EMEA reporting units as at higher risk of future impairment.
- Liquidity and supply: Year-end cash was $213 million against $5.438 billion of debt. Boston Scientific relied on Abbott for U.S. and Japan PROMUS supply through the second quarter of 2012, while developing its own next-generation product. The company also cited reimbursement cuts, economic weakness, foreign exchange, manufacturing concentration, supplier/sterilization interruptions and regulatory delays as risks.
- Non-GAAP caveat: Adjusted earnings exclude impairment, amortization, restructuring, litigation, acquisition and other items; these exclusions do not eliminate their economic or cash-flow effects.
Investor verification priorities
- Track CRM sales and U.S. defibrillator market-share recovery after the ship hold, alongside launch timing and regulatory status of next-generation products.
- Check drug-eluting stent pricing, market share, product mix and gross-margin effects, including Abbott supply dependence and the timing of internally manufactured PROMUS Element launches.
- Reconcile reported losses and operating cash flow with excluded non-GAAP items, litigation payments and the goodwill impairment assumptions.
- Verify post-sale cash proceeds, contingent Neurovascular consideration, transition-service costs, debt repayments, refinancing and ongoing covenant headroom.
- Monitor litigation and investigations, the IRS transfer-pricing dispute, the 2013 device excise tax, and potential further goodwill or intangible-asset impairments.
- Assess whether restructuring savings and growth from acquisitions, emerging markets and newer product lines materialize without undermining sales execution or margins.