Boston Scientific Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Boston Scientific develops and sells medical devices across interventional cardiology, cardiac rhythm management, endoscopy, peripheral interventions, urology and women’s health, neuromodulation, and electrophysiology.
Key financial results
Amounts are in U.S. dollars; annual figures are for the year ended December 31. Management’s adjusted figures are non-GAAP.
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $7.143 billion | $7.249 billion |
| Gross profit / margin | $4.969 billion / 69.6% | $4.900 billion / 67.6% |
| Operating income (loss) | $120 million | $(3.868) billion |
| GAAP net income (loss) | $(121) million; $(0.09) per share | $(4.068) billion; $(2.89) per share |
| Adjusted net income | $991 million; $0.73 per share | $933 million; $0.66 per share |
| Cash from operating activities | $1.082 billion | $1.260 billion |
| Cash and cash equivalents at year-end | $217 million | $207 million |
| Total debt at year-end | $4.240 billion | $4.256 billion |
| Working capital at year-end | $1.187 billion | $1.250 billion |
Fourth-quarter 2013 sales were $1.838 billion, operating income was $127 million, net income was $108 million, and diluted earnings per share were $0.08. In fourth-quarter 2012, sales were $1.821 billion, operating income was $115 million, net income was $60 million, and diluted earnings per share were $0.04.
Year-over-year reported sales declined 1%. Excluding foreign-exchange effects and sales from divested businesses, sales increased 2%. Gross margin improved 2.0 percentage points, principally from restructuring and manufacturing cost reductions; pricing and product mix partly offset the improvement. The GAAP loss included substantial impairment, litigation, restructuring, debt-extinguishment, and amortization charges. Management’s adjusted net income excludes specified items and should not be viewed as a GAAP measure.
Business changes and capital position
- Endoscopy sales rose 4% reported (7% constant currency); Neuromodulation rose 23% (24% constant currency). Interventional Cardiology declined 8% reported (6% constant currency), including lower coronary-stent sales. CRM declined 1% reported and was approximately flat on a constant-currency basis.
- Coronary stent sales fell 14% to $1.177 billion; management cited competitive launches, price pressure, and lower procedure volumes. CRM sales were $1.886 billion, with defibrillator pricing pressure partly offset by unit-volume gains.
- Operating cash flow decreased $178 million, mainly reflecting higher receivables, debt-extinguishment payments, and litigation payments. Investing activities used $475 million; financing activities used $596 million, including $500 million of share repurchases.
- Cash was $217 million against total debt of $4.240 billion. The company had no borrowings on its $2.0 billion revolving credit facility and reported covenant compliance; leverage was 2.5x versus a maximum 3.5x, and interest coverage was 5.2x versus a 3.0x minimum. Investment-grade ratings were maintained.
- Boston Scientific repurchased approximately 51 million shares for $500 million in 2013. It paid no cash dividend and said it did not currently intend to pay one.
Outlook, commentary, risks, and unusual items
- No specific 2014 revenue or earnings guidance is provided in the supplied filing text. Management expected 2014 capital expenditures of approximately $250 million.
- The 2014 restructuring plan, initiated in late 2013 and expected to be substantially complete by the end of 2015, is estimated to generate $150–$200 million of gross annual pretax operating-expense reductions exiting 2015. Estimated total pretax charges are $175–$225 million, with $160–$210 million expected to require future cash outlays; a substantial portion of savings is intended for reinvestment.
- Reported results included a $423 million noncash goodwill impairment charge following the reorganization into global business units, plus $53 million of intangible-asset impairments. CRM-related amortizable intangibles of $4.374 billion were identified as sensitive to future performance; Neuromodulation goodwill of $1.356 billion had about 16% fair-value headroom.
- The 2.3% U.S. medical-device excise tax resulted in $73 million of 2013 SG&A expense. Management cited ongoing reimbursement and pricing pressure, competition, product development and regulatory uncertainty, foreign-exchange exposure, supply constraints, and acquisition-integration risks.
- Legal accruals were $607 million at year-end, up from $491 million. More than 18,000 product-liability cases or claims relating to transvaginal surgical mesh were pending as of February 25, 2014; the company stated the eventual outcome could materially affect results, financial condition, or liquidity. The company is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims.
- The IRS asserted an additional $1.162 billion plus interest for disputed transfer-pricing and transaction matters relating to specified prior tax years. The company disputed the assessment and intended to contest it; final resolution was uncertain and could have a material effect. The filing also disclosed $1.069 billion of gross unrecognized tax benefits.
- WATCHMAN received a favorable FDA advisory-panel vote, and the company expected a decision in the first half of 2014. The filing also describes supply limitations affecting S-ICD during parts of 2013 and uncertainty about the next steps for its renal-denervation clinical program.
Most important facts for investors to verify
- Whether underlying sales growth and margin improvement continue after separating foreign exchange, divestitures, price/mix, and restructuring effects.
- Whether CRM and coronary-stent performance stabilizes, and whether major launches—including WATCHMAN, SYNERGY, and S-ICD—meet regulatory, supply, and commercial expectations.
- Progress, cash costs, and realized savings under the 2014 restructuring plan, alongside planned reinvestment.
- Developments in mesh litigation, other legal matters, and the IRS tax disputes, including changes to accruals, cash payments, or debt-covenant capacity.
- Debt, operating cash flow, receivables collection—particularly in Southern Europe—and compliance with credit-facility covenants.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2013.