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BSX > SEC Filings for BSX > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for BOSTON SCIENTIFIC CORP


5-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. Our products and technologies are used to diagnose or treat a wide range of medical conditions, including heart, digestive, pulmonary, vascular, urological, women's health, and chronic pain conditions. We continue to innovate in these areas and are intent on extending our innovations into new geographies and high-growth adjacency markets.
Effective as of January 1, 2013, we reorganized our business into fully operationalized global business units. We have three new global reportable segments comprised of Cardiovascular, Rhythm Management, and MedSurg. We have restated prior period information for 2012 to conform to the current year presentation of our segments.
Financial Summary
Three Months Ended September 30, 2013
Our net sales for the third quarter of 2013 were $1.735 billion, consistent with the third quarter of 2012. Excluding the impact of changes in foreign currency exchange rates, which had a $43 million negative impact on our third quarter 2013 net sales as compared to the same period in the prior year, and the decrease in net sales from divested businesses of $30 million, our net sales increased $73 million, or four percent.1 Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business.
Our reported net loss for the third quarter of 2013 was $5 million, or $0.00 per share. Our reported results for the third quarter of 2013 included acquisition-, restructuring-, and litigation-related charges, debt extinguishment charges, and amortization expense totaling $235 million (after-tax), or $0.17 per share. Excluding these items, net income for the third quarter of 2013 was $230 million, or $0.17 per share.1 Our reported net loss for the third quarter of 2012 was $664 million, or $0.48 per share, driven primarily by a goodwill impairment charge related to our former U.S. Cardiac Rhythm Management (CRM) business unit. Our reported results for the third quarter of 2012 included goodwill and other intangible asset impairment charges, acquisition- and divestiture-related net credits, restructuring- and litigation-related charges, discrete tax items and amortization expense totaling $885 million (after-tax), or $0.64 per share. Excluding these items, net income for the third quarter of 2012 was $221 million, or $0.16 per share.1 1 Sales growth rates that exclude the impact of changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.


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The following is a reconciliation of results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview for a discussion of each reconciling item:

                                                               Three Months Ended September 30, 2013
                                                                       Tax                                  Impact per
(in millions, except per share data)            Pre-Tax               Impact             After-Tax            share
GAAP net income (loss)                      $        (40 )       $         35         $         (5 )      $       0.00
Non-GAAP adjustments:
Acquisition-related charges                           30                   (2 )                 28                0.02   *
Restructuring and restructuring-related
net charges                                           26                   (8 )                 18                0.01   *
Litigation-related net charges                        76                  (19 )                 57                0.04   *
Debt extinguishment charges                           70                  (26 )                 44                0.03   *
Amortization expense                                 101                  (13 )                 88                0.07   *
Adjusted net income                         $        263         $        (33 )       $        230        $       0.17


* Assumes dilution of 23.6 million shares for the three months ended September 30, 2013 for all or a portion of these non-GAAP adjustments.

                                                               Three Months Ended September 30, 2012
                                                                        Tax                                 Impact per
(in millions, except per share data)             Pre-Tax               Impact             After-Tax            share
GAAP net income (loss)                      $        (663 )       $         (1 )       $        (664 )     $     (0.48 )
Non-GAAP adjustments:
Goodwill impairment charge                            748                    -                   748              0.54   **
Intangible asset impairment charges                    13                   (3 )                  10              0.01   **
Acquisition-related charges (credits)                 (20 )                  -                   (20 )           (0.01 ) **
Divestiture-related charges (credits)                 (10 )                  2                    (8 )           (0.01 ) **
Restructuring and restructuring-related
net charges                                            58                  (19 )                  39              0.03   **
Litigation-related net charges                         50                  (18 )                  32              0.02   **
Discrete tax items                                      -                    1                     1              0.00   **
Amortization expense                                   99                  (16 )                  83              0.06   **
Adjusted net income                         $         275         $        (54 )       $         221       $      0.16

** Assumes dilution of 6.8 million shares for the three months ended September 30, 2012 for all or a portion of these non-GAAP adjustments.

Cash provided by operating activities was $250 million in the third quarter of 2013, as compared to $271 million in the third quarter of 2012. Our cash generated from operations continued to be a significant source of available funds for investing in our growth and buying back shares of our common stock pursuant to our share repurchase programs. During the third quarter of 2013, we used $75 million of cash generated from operations to repurchase approximately seven million shares of our common stock. As of September 30, 2013, we had total debt of $4.249 billion, cash and cash equivalents of $571 million and working capital of $1.623 billion. Refer to Liquidity and Capital Resources for further discussion.

Nine Months Ended September 30, 2013
Our net sales for the first nine months of 2013 were $5.305 billion, as compared to net sales of $5.428 billion for the first nine months of 2012, a decrease of $123 million, or two percent. Excluding the impact of changes in foreign currency exchange rates, which had a $113 million negative impact on our net sales for the nine months ended September 30, 2013 as compared to the same period in the prior year, and the decrease in net sales from divested businesses of $34 million, our net sales increased $25 million, remaining consistent with the prior year.1 Refer to Quarterly Results and Business Overview for a discussion of our net sales by business.


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Our reported net loss for the first nine months of 2013 was $229 million, or $0.17 per share, driven primarily by a goodwill impairment charge related to our global Cardiac Rhythm Management (CRM) business unit recorded in conjunction with interim goodwill impairment testing required following the change in composition of our segments and reporting units in the first quarter of 2013. Refer to Quarterly Results and Critical Accounting Policies and Estimates for a discussion of our goodwill valuation and this impairment charge. Our reported net loss for the first nine months of 2013 included goodwill and other intangible asset impairment charges, debt extinguishment charges, acquisition- and divestiture-related credits, restructuring- and litigation-related charges and amortization expense totaling $930 million (after-tax), or $0.68 per share. Excluding these items, net income for the first nine months of 2013 was $701 million, or $0.51 per share.1 Our reported net loss for the first nine months of 2012 was $4.129 billion, or $2.91 per share, driven primarily by goodwill impairment charges related to our former U.S. CRM and Europe, Middle East, and Africa (EMEA) business units. Our reported results for the first nine months of 2012 included goodwill and other intangible asset impairment charges, acquisition- and divestiture-related net credits, restructuring- and litigation-related charges, discrete tax items and amortization expense totaling $4.809 billion (after-tax), or $3.39 per share. Excluding these items, net income for the first nine months of 2012 was $680 million, or $0.48 per share.1 The following is a reconciliation of results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview for a discussion of each reconciling item:

1 Sales growth rates that exclude the impact of changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.

                                                                 Nine Months Ended September 30, 2013
                                                                          Tax                                Impact per
(in millions, except per share data)               Pre-Tax               Impact            After-Tax            share
GAAP net income (loss)                        $        (282 )       $          53       $        (229 )     $     (0.17 )
Non-GAAP adjustments:
Goodwill impairment charge                              423                    (2 )               421              0.31   *
Intangible asset impairment charges                      53                    (8 )                45              0.03   *
Acquisition-related charges (credits)                    (5 )                  (3 )                (8 )           (0.01 ) *
Divestiture-related charges (credits)                   (37 )                  12                 (25 )           (0.02 ) *
Restructuring and restructuring-related
net charges                                              71                   (20 )                51              0.04   *
Litigation-related net charges                          206                   (67 )               139              0.10   *
Debt extinguishment charges                              70                   (26 )                44              0.03   *
Amortization expense                                    305                   (42 )               263              0.20   *
Adjusted net income                           $         804         $        (103 )     $         701       $      0.51


* Assumes dilution of 17.2 million shares for the nine months ended September 30, 2013 for all or a portion of these non-GAAP adjustments.


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                                                               Nine Months Ended September 30, 2012
                                                                         Tax                              Impact per
(in millions, except per share data)               Pre-Tax              Impact          After-Tax            share
GAAP net income (loss)                       $        (4,159 )       $      30       $      (4,129 )     $     (2.91 )
Non-GAAP adjustments:
Goodwill impairment charges                            4,350               (23 )             4,327              3.05   **
Intangible asset impairment charges                      142               (23 )               119              0.09   **
Acquisition-related charges (credits)                    (41 )              11                 (30 )           (0.02 ) **
Divestiture-related charges (credits)                     (7 )               2                  (5 )            0.00   **
Restructuring and restructuring-related
net charges                                              108               (32 )                76              0.05   **
Litigation-related net charges                           119               (47 )                72              0.05   **
Discrete tax items                                         -                 1                   1              0.00   **
Amortization expense                                     294               (45 )               249              0.17   **
Adjusted net income                          $           806         $    (126 )     $         680       $      0.48

** Assumes dilution of 7.2 million shares for the nine months ended September 30, 2012 for all or a portion of these non-GAAP adjustments.

Cash provided by operating activities was $809 million in the first nine months of 2013, as compared to $891 million in the first nine months of 2012. During the first nine months of 2013, we used $275 million of cash generated from operations to repurchase approximately 32 million shares of our common stock.

Quarterly Results and Business Overview
Effective as of January 1, 2013, we reorganized our business into fully operationalized global business units. We have three new global reportable segments comprised of Cardiovascular, Rhythm Management, and MedSurg. Net Sales
We manage our global businesses on a constant currency basis, and we manage market risk from currency exchange rate changes at the corporate level. Management excludes the impact of changes in foreign currency exchange rates for purposes of reviewing global revenue growth rates to facilitate an evaluation of current operating performance and comparison to past operating performance. To calculate revenue growth rates that exclude the impact of changes in foreign currency exchange rates, we convert actual net sales from local currency to U.S. dollars using constant foreign currency exchange rates in the current and prior period. The constant currency growth rates in the tables below can be recalculated from our net sales presented in Note L - Segment Reporting to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.


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The following table provides our worldwide net sales by business and the relative change on an as reported and constant currency basis, both excluding and including divested businesses. Net sales that exclude the impact of changes in foreign currency exchange rates are not financial measures prepared in accordance with U.S. GAAP and should not be considered in isolation from, or as a replacement for, the most directly comparable GAAP financial measure. Refer to Additional Information for a further discussion of management's use of this non-GAAP financial measure.

                                                                        Change
                                    Three Months Ended
                                       September 30,           As Reported     Constant
                                                                Currency       Currency
(in millions)                         2013           2012         Basis         Basis
   Interventional Cardiology    $      472         $   494         (4 )   %      (2 )  %
   Peripheral Interventions            195             189          3     %       7    %
Cardiovascular                         667             683         (2 )   %       1    %

   Cardiac Rhythm Management           464             462          1     %       1    %
   Electrophysiology                    34              35         (3 )   %      (1 )  %
Rhythm Management                      498             497          0     %       1    %

   Endoscopy                           322             310          4     %       8    %
   Urology and Women's Health          131             125          5     %       8    %
   Neuromodulation                     115              88         32     %      32    %
 MedSurg                               568             523          9     %      12    %

Subtotal Core Businesses             1,733           1,703          2     %       4    %
Divested Businesses                      2              32        (95 )   %     (95 )  %
Worldwide                       $    1,735         $ 1,735          0     %       2    %

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely.

                                                                       Change
                                    Nine Months Ended
                                      September 30,           As Reported     Constant
                                                               Currency       Currency
(in millions)                        2013           2012         Basis         Basis
   Interventional Cardiology    $    1,497        $ 1,646         (9 )   %      (7 )  %
   Peripheral Interventions            585            575          2     %       5    %
Cardiovascular                       2,082          2,221         (6 )   %      (3 )  %

   Cardiac Rhythm Management         1,417          1,451         (2 )   %      (1 )  %
   Electrophysiology                   105            109         (4 )   %      (3 )  %
Rhythm Management                    1,522          1,560         (2 )   %      (2 )  %

   Endoscopy                           956            922          4     %       7    %
   Urology and Women's Health          373            371          1     %       3    %
   Neuromodulation                     315            263         20     %      20    %
 MedSurg                             1,644          1,556          6     %       8    %

Subtotal Core Businesses             5,248          5,337         (2 )   %       0    %
Divested Businesses                     57             91        (38 )   %     (38 )  %
Worldwide                       $    5,305        $ 5,428         (2 )   %       0    %

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely.


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Cardiovascular
Interventional Cardiology
Our Interventional Cardiology division develops, manufactures and markets technologies for diagnosing and treating coronary artery disease and other cardiovascular disorders. Product offerings include coronary stents, including drug-eluting and bare metal stent systems, balloon catheters, rotational atherectomy systems, guide wires, guide catheters, embolic protection devices, and diagnostic catheters used in percutaneous transluminal coronary angioplasty (PTCA) procedures, as well as intravascular ultrasound (IVUS) imaging systems. During the fourth quarter of 2012, we received CE Mark approval for our next generation SYNERGY™ Everolimus-Eluting Platinum Chromium Coronary Stent System featuring an ultra-thin abluminal (outer) bioabsorbable polymer coating and commenced a limited commercial launch. We expect to expand the launch in Europe in the first half of 2014. The SYNERGY Stent System is unique in that its polymer is gone shortly after drug elution is complete at three months. This innovation has the potential to improve post-implant vessel healing and eliminate long-term polymer exposure, a possible cause of late adverse events. We have completed patient enrollment in the EVOLVE II clinical trial, which is designed to further assess the safety and effectiveness of the SYNERGY Stent System and support U.S. Food and Drug Administration (FDA) and Japanese regulatory approvals for this technology. In the first quarter of 2013, we received CE Mark approval and launched our Promus PREMIER™ Everolimus-Eluting Platinum Chromium Coronary Stent System in Europe and other select geographies. The Promus PREMIER Stent System is designed to provide physicians improved drug-eluting stent (DES) performance in treating patients with coronary artery disease. We expect to launch the Promus PREMIER Stent System in the U.S. in the fourth quarter of 2013 following FDA approval.
Our worldwide net sales of Interventional Cardiology products were $472 million in the third quarter of 2013, or approximately 27 percent of our consolidated net sales in the third quarter of 2013. Our worldwide net sales of Interventional Cardiology products decreased $22 million, or four percent, in the third quarter of 2013, as compared to 2012. Excluding the impact of changes in foreign currency exchange rates, which had a $13 million negative impact on our Interventional Cardiology net sales in the third quarter of 2013, as compared to the same period in the prior year, net sales of these products decreased $9 million, or two percent. This decrease was primarily due to lower coronary stent system sales, partially offset by higher sales of our non-stent Interventional Cardiology products.
Our coronary stent system sales represent a significant portion of our Interventional Cardiology net sales. The following are the components of our worldwide coronary stent system sales:

                           Three Months Ended                          Three Months Ended
(in millions)              September 30, 2013                          September 30, 2012
                    U.S.        International      Total        U.S.        International      Total
Drug-eluting    $   106        $           156    $  262    $   123        $           160    $  283
Bare-metal            5                     10        15          6                     15        21
                $   111        $           166    $  277    $   129        $           175    $  304

Our worldwide net sales of coronary stent systems decreased $27 million, or nine percent, in the third quarter of 2013, as compared to 2012. Excluding the impact of changes in foreign currency exchange rates, which had a $8 million negative impact on our coronary stent system net sales in the third quarter of 2013, as compared to the same period in the prior year, net sales of these products decreased $19 million, or six percent. This decrease was primarily related to declines in U.S. DES revenue due to lower procedural volumes and declines in average selling prices. We believe that our U.S. DES market share was stable during the third quarter of 2013 as compared to both the second quarter of 2013 and the third quarter of 2012. Our international DES revenue grew two percent, excluding the impact of changes in foreign currency exchange rates, driven by our Promus PREMIER and SYNERGY stent system launches in Europe and growth in the emerging markets of China and India, partially offset by pricing declines in Europe and a loss of DES sales in Germany due to an injunction during the third quarter of 2013. Refer to Note J - Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for further discussion of legal matters. Historically, the worldwide coronary stent market has been dynamic and highly competitive with significant market share volatility. We believe that we will continue to maintain a strong position within the worldwide DES market for a variety of reasons, including:
• the performance benefits of our current and future technology;

• the strength of our pipeline of DES products, which has shown favorable results in clinical trials to date;

• the breadth and depth of our interventional cardiology product portfolio;


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• the broad and consistent long-term results of our clinical trials;

• our overall position in the interventional medical device market and our experienced interventional cardiology sales force;

• the strength of our clinical, selling, marketing and manufacturing capabilities; and

• our increased presence and investment in rapidly growing emerging markets, including Brazil, Russia, India and China.

However, a decline in net sales from our DES systems could have a significant adverse impact on our operating results. Significant variables that may impact the size of the DES market and our position within this market include, but are not limited to:
• the impact of competitive pricing pressure on average selling prices of DES systems available in the market;

• the impact and outcomes of on-going and future clinical trials involving our or our competitors' products, including those trials sponsored by our competitors or other third parties, or perceived product performance of our or our competitors' products;

• new product launches by our competitors;

• our ability to timely and successfully launch new or next-generation products and technologies, in line with our commercialization strategies;

• physician and patient confidence in our current and next-generation technology;

• changes in the overall number of percutaneous coronary intervention procedures performed, drug-eluting stent penetration rates and the average number of stents used per procedure;

• delayed or limited regulatory approvals and unfavorable reimbursement policies; and

• the outcome of intellectual property litigation.

In January 2011, we completed the acquisition of Sadra Medical, Inc. (Sadra). Through our acquisition of Sadra, we have developed a fully repositionable and retrievable device for transcatheter aortic valve replacement (TAVR) to treat patients with severe aortic stenosis. The Lotus™ Valve System consists of a stent-mounted tissue valve prosthesis and catheter delivery system for guidance and placement of the valve. The low-profile delivery system and introducer sheath are designed to enable accurate positioning, repositioning and retrieval at any time prior to release of the aortic valve implant. In April 2013, we completed enrollment in the REPRISE II clinical trial to evaluate the safety and performance of the Lotus™ Valve System. In October 2013, we received CE Mark approval for the Lotus ™ Valve System.
In March 2011, we completed the acquisition of Atritech, Inc. (Atritech). Atritech developed a novel device designed to close the left atrial appendage in patients with atrial fibrillation who are at risk for ischemic stroke. The WATCHMAN® Left Atrial Appendage Closure Technology is the first device proven in a randomized clinical trial to offer an alternative to anticoagulant drugs, and is marketed in CE Mark countries. In the U.S., we completed the PREVAIL trial to evaluate the safety and efficacy of the WATCHMAN® device in patients with . . .

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