Boston Scientific Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Boston Scientific develops and sells medical devices. Effective January 1, 2013, it reorganized from geographic regions into three global reportable segments: Cardiovascular, Rhythm Management, and MedSurg. Prior-period segment information was restated.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $1.761 billion | $1.866 billion; down 6% reported and 4% excluding currency effects and divested businesses |
| Gross profit / margin | $1.183 billion / 67.2% | $1.235 billion / 66.2% |
| Operating income (loss) | $(330) million | $196 million |
| Net income (loss) | $(354) million; $(0.26) per diluted share | $113 million; $0.08 per diluted share |
| Management-adjusted net income (non-GAAP) | $224 million; $0.16 per share | $220 million; $0.15 per share |
| Cash from operating activities | $163 million | $212 million |
| Cash and cash equivalents | $268 million at March 31 | $207 million at December 31, 2012 |
| Total debt | $4.254 billion | $4.256 billion at December 31, 2012 |
| Working capital | $1.466 billion | Comparable prior-period value not stated in the cited discussion |
Gross margin improved 1.0 percentage point, driven mainly by manufacturing cost reductions and savings from the internally manufactured PROMUS Element stent; pricing and product mix partly offset these benefits. Operating cash flow fell $49 million, mainly due to higher working capital, partly offset by a litigation-related cash receipt. Investing activities used $11 million, including $53 million of capital purchases offset by $53 million of proceeds from the Natick headquarters sale. Financing activities used $90 million, including $100 million for share repurchases.
Material changes and business drivers
- Reported sales declined $105 million. Foreign exchange had a $35 million negative impact; the change in sales from divested businesses was $7 million.
- Cardiovascular segment sales were $696 million, down 12% reported (10% constant currency); Interventional Cardiology fell 16% reported, principally from lower drug-eluting stent share and pricing pressure.
- Rhythm Management sales were $513 million, down 5% reported (4% constant currency). CRM sales declined 5%, reflecting ICD pricing pressure, lower replacement procedures following historical recalls, and a weaker pacemaker market.
- MedSurg sales were $516 million, up 2% reported (4% constant currency). Endoscopy and Neuromodulation grew; Urology/Women’s Health declined slightly.
- SG&A fell 4% to $631 million and R&D fell 5% to $204 million, but both increased as a share of sales. The filing attributes reductions mainly to restructuring and cost initiatives; the new U.S. medical-device excise tax added approximately $17 million to SG&A.
Outlook, unusual items, and risks
- The reported loss included a $423 million non-cash goodwill impairment charge for the global CRM reporting unit, $130 million of litigation-related charges, amortization, restructuring charges, and acquisition- and divestiture-related credits. The impairment estimate remained subject to finalization in Q2.
- Excluding specified items, management reported adjusted net income of $224 million versus $220 million in Q1 2012. These non-GAAP figures are management measures and are not substitutes for GAAP results.
- No consolidated full-year revenue or earnings guidance is provided in the filing text. Management described expected product milestones: Promus PREMIER U.S. launch targeted for Q4 2013, Lotus Valve European and select international launch expected in Q4 2013, and a limited S-ICD supply in Q2 with a controlled launch expected to resume in the second half of 2013.
- The 2011 restructuring plan, including its 2013 expansion, is expected to be substantially complete by year-end 2013. Estimated total pre-tax charges are $300–$355 million, of which $270–$300 million are expected to require future cash outlays.
- Goodwill and intangible impairment remains a risk. Neuromodulation had approximately 17% fair-value headroom and $1.356 billion of goodwill; Electrophysiology had approximately 56% headroom and $154 million of goodwill. CRM-related amortizable intangibles totaled $4.569 billion and were identified as sensitive to future performance assumptions.
- Probable and estimable legal accruals were $648 million, up from $491 million at year-end; the quarter included $130 million of litigation charges. More than 5,000 transvaginal mesh product-liability cases or claims were reported as of May 6, 2013. New Orbus patent suits challenge Element-design stents; a German preliminary injunction was granted April 30 and appealed that day.
- The IRS asserts an additional $1.162 billion tax liability plus interest for specified historical tax years. The company disputes the assessment and says payment is not due until final resolution, but acknowledges that an adverse resolution could materially affect financial condition, results, or cash flows. Gross accrued tax interest and penalties were $378 million.
- Liquidity and credit: the company had no borrowings under its $2.0 billion revolving facility and was compliant with covenants. Actual leverage and interest coverage ratios were 2.4x and 6.9x against limits of 3.5x maximum and 3.0x minimum. European receivables over 180 days past due in Italy, Spain, Portugal, and Greece were $55 million.
Important facts for investors to verify
- Whether CRM sales and cash-flow trends improve, and whether the estimated goodwill impairment is finalized or further impairment is required.
- Progress and commercial availability of key launches, particularly S-ICD, Promus PREMIER, Lotus Valve, and related regulatory approvals.
- Developments in stent patent litigation, mesh claims, legal reserves, and the IRS tax dispute, including potential cash and covenant effects.
- Execution and cash costs of the restructuring plan, and whether cost savings can offset competitive pricing and market pressures.
- Collection of overdue European receivables and continued compliance with debt covenants; assess adjusted results alongside GAAP performance.