01—Abstract
Summary
Summary of the 10-K filed February 17, 2011. Cited figures are marked; the original filing is the authoritative source.
Boston Scientific's FY2010 10-K (filed February 17, 2011) shows a year of significant strain: net sales fell 5% to $7.806 billiona, and the company posted a GAAP net loss of $1.065 billion ($0.70 per share).
The loss was driven primarily by a $1.817 billionb goodwill impairment on the U.S. Cardiac Rhythm Management (CRM) unit, which followed the March 2010 ship hold and removal of field inventory of its ICD and CRT-D defibrillators. Excluding these and other non-GAAP items, adjusted net income was $1.051 billion, or $0.69 per share. Operating cash flow fell to $325 million, reduced by about $1.6 billion of litigation payments, most notably the $1.725 billion Johnson & Johnson patent settlement.
The balance sheet is still heavily levered, with total debt of $5.438 billionc, and the company is working to reduce it. In January 2011 it closed the $1.5 billion sale of its Neurovascular business to Stryker, prepaid $250 million of senior notes and pre-paid part of its term loan, and announced or completed several acquisitions (Sadra Medical, Intelect Medical, and Atritech) to expand into structural heart, deep-brain stimulation, and atrial fibrillation. Management also flagged significant risks: continued pricing pressure on drug-eluting stents (U.S. average selling prices down about nine percent), loss of defibrillator share, goodwill impairment exposure in four reporting units holding roughly $9 billion of goodwill, the 2.3% medical device excise tax beginning in 2013, and ongoing patent and government investigations.
The company paid no dividend and does not plan to, prioritizing debt repayment. For investors, the central questions are whether CRM share can be recaptured, whether the stent franchise can stabilize as next-generation Element platforms launch, and whether asset sales and cost restructuring can meaningfully reduce leverage and litigation overhang.
02—Key points
Key Highlights
- Net sales declined 5% to $7.806 billion in 2010, with U.S. sales down 7% and international sales down 1% (flat excluding currency is not claimed; constant-currency decline was 5% overall).
- GAAP net loss of $1.065 billion ($0.70 per share), driven mainly by a $1.817 billion goodwill impairment on the U.S. CRM reporting unit; adjusted net income was $1.051 billion ($0.69 per share).
- Gross margin fell to 66.7% from 68.5%, pressured by drug-eluting stent mix shifting to lower-margin Abbott-supplied PROMUS and by lower average selling prices.
- Operating cash flow dropped to $325 million from $835 million, reflecting about $1.6 billion of litigation payments, including the $1.725 billion Johnson & Johnson settlement.
- Total debt was $5.438 billion at year-end; the company closed the $1.5 billion Neurovascular divestiture to Stryker in January 2011 and used proceeds to repay debt.
- Four reporting units with about $9 billion of allocated goodwill are at higher risk of future impairment, including U.S. CRM, which already has carrying value above fair value.
- No dividend was paid in 2010 or 2009, and none is planned; the company will prioritize debt repayment and investment in growth.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2010, Boston Scientific Corp lost $0.14.
- Revenue$7.81B100.0%
- Cost of revenue−$2.60B33.3%
- Gross profit$5.21B66.7%
- Operating costs−$5.86B75.1%
- Operating income−$656.0M8.4%
- Interest, other & tax−$409.0M5.2%
- Net income−$1.06B13.6%
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 17, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $7.81B$8.19B | −4.7% |
| Cost of Revenue | $2.60B$2.58B | +0.9% |
| Gross Profit | $5.21B$5.61B | −7.2% |
| SG&A Expenses | $2.58B$2.63B | −2.1% |
| Operating Expenses | $5.86B$6.51B | −9.9% |
| Operating Income | -$656.00M-$894.00M | +26.6% |
| Interest Expense | $393.00M$407.00M | −3.4% |
| Net Income | -$1.06B-$1.02B | −3.9% |
| EPS (Basic) | $-0.70$-0.68 | −2.9% |
| EPS (Diluted) | $-0.70$-0.68 | −2.9% |
| Shares Outstanding (Basic) | 1.52B1.51B | +0.7% |
| Shares Outstanding (Diluted) | 1.52B1.51B | +0.7% |
05—Questions
Frequently Asked Questions
Why did Boston Scientific report a large net loss in 2010?
The main cause was a $1.817 billion goodwill impairment charge on the U.S. Cardiac Rhythm Management unit. The charge followed the March 2010 ship hold and removal of U.S. ICD and CRT-D devices, which cut market share and lowered forecasted CRM sales. Excluding this and other non-GAAP items, the company reported adjusted net income of $1.051 billion, or $0.69 per share.
How heavy is the company's debt load and what is it doing about it?
Total debt was $5.438 billion at December 31, 2010, largely from the 2006 Guidant acquisition. During 2010 the company refinanced most 2011 maturities, prepaid the $900 million Abbott loan, and prepaid $600 million of senior notes. In January 2011 it repaid $250 million of notes, prepaid $250 million of term loans using a new receivables facility, and used Neurovascular sale proceeds for further repayment.
What are the biggest risks to future growth?
Key risks include loss of U.S. defibrillator share and weak CRM market growth, falling drug-eluting stent prices and share (U.S. ASPs down about nine percent in 2010), dependence on Abbott for everolimus-eluting stent supply through mid-2012, further goodwill impairments, the 2.3% medical device excise tax starting in 2013, and substantial ongoing patent litigation and government investigations.
What strategic moves did the company make around the time of this filing?
It completed the Neurovascular sale to Stryker in January 2011 for $1.5 billion and acquired Sadra Medical (structural heart, about $193 million), Intelect Medical (deep-brain stimulation, about $60 million), and agreed to acquire Atritech (left atrial appendage closure, $100 million at closing plus up to $275 million in contingent payments). Management is also restructuring operations, with expected savings of $200 million to $250 million and roughly 1,000 to 1,300 positions eliminated by 2012.
Will Boston Scientific pay dividends to shareholders?
No. The company did not pay a cash dividend in 2010 or 2009 and states it does not currently intend to pay dividends. It plans to retain earnings to repay indebtedness and fund growth, though it may reconsider in the future. Investors seeking income should note that there is no dividend yield, and any return depends on share price appreciation.
06—Continue