x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF
1934
|
For
the quarterly period ended: September 30,
2007
|
DELAWARE
|
04-2695240
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
One
Boston Scientific Place, Natick,
Massachusetts
|
01760-1537
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Class
|
Shares
Outstanding
as
of October 31,
2007
|
Common
Stock, $.01 Par Value
|
1,490,785,766
|
Page
No.
|
||
PART
I
|
FINANCIAL
INFORMATION
|
3 |
Item
1.
|
Condensed
Consolidated Financial Statements
|
3
|
Condensed
Consolidated Statements of Operations
|
3
|
|
Condensed
Consolidated Balance Sheets
|
4
|
|
Condensed
Consolidated Statements of Cash Flows
|
5
|
|
Notes
to the Condensed Consolidated Financial Statements
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of
Operations
|
34
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
61
|
Item
4.
|
Controls
and Procedures
|
62
|
PART
II
|
OTHER
INFORMATION
|
63
|
Item
1.
|
Legal
Proceedings
|
63
|
Item
1A.
|
Risk Factors |
63
|
Item
6.
|
Exhibits
|
64
|
SIGNATURE
|
65
|
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
(in
millions, except per share data)
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
Net
sales
|
$ |
2,048
|
$ |
2,026
|
$ |
6,204
|
$ |
5,756
|
||||||||
Cost
of products sold
|
575
|
630
|
1,706
|
1,681
|
||||||||||||
Gross
profit
|
1,473
|
1,396
|
4,498
|
4,075
|
||||||||||||
Operating
expenses
|
||||||||||||||||
Selling,
general and administrative expenses
|
719
|
719
|
2,205
|
1,917
|
||||||||||||
Research
and development expenses
|
271
|
272
|
835
|
741
|
||||||||||||
Royalty
expense
|
48
|
57
|
151
|
177
|
||||||||||||
Amortization
expense
|
155
|
153
|
467
|
356
|
||||||||||||
Purchased
research and development
|
75
|
72
|
4,117
|
|||||||||||||
Loss
on assets held for sale
|
352
|
352
|
||||||||||||||
1,620
|
1,201
|
4,082
|
7,308
|
|||||||||||||
Operating
(loss) income
|
(147 | ) |
195
|
416
|
(3,233 | ) | ||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
expense
|
(147 | ) | (143 | ) | (433 | ) | (291 | ) | ||||||||
Fair-value
adjustment for the sharing of proceeds feature of the Abbott
Laboratories
stock purchase
|
(13 | ) | (8 | ) | (100 | ) | ||||||||||
Other,
net
|
35
|
12
|
52
|
(80 | ) | |||||||||||
(Loss)
income before income taxes
|
(259 | ) |
51
|
27
|
(3,704 | ) | ||||||||||
Income
tax expense (benefit)
|
13
|
(25 | ) |
64
|
150
|
|||||||||||
Net
(loss) income
|
$ | (272 | ) | $ |
76
|
$ | (37 | ) | $ | (3,854 | ) | |||||
Net
(loss) income per common share — basic
|
$ | (0.18 | ) | $ |
0.05
|
$ | (0.02 | ) | $ | (3.19 | ) | |||||
Net
(loss) income per common share — assuming
dilution
|
$ | (0.18 | ) | $ |
0.05
|
$ | (0.02 | ) | $ | (3.19 | ) | |||||
Weighted-average
shares outstanding:
|
||||||||||||||||
Basic
|
1,489.8
|
1,472.8
|
1,485.5
|
1,207.0
|
||||||||||||
Assuming
dilution
|
1,489.8
|
1,486.7
|
1,485.5
|
1,207.0
|
September
30,
|
December
31,
|
|||||||
(in
millions, except share data)
|
2007
|
2006
|
||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ |
1,237
|
$ |
1,668
|
||||
Trade
accounts receivable, net
|
1,487
|
1,398
|
||||||
Inventories
|
814
|
733
|
||||||
Deferred
income taxes
|
637
|
583
|
||||||
Assets
held for sale (see Note C)
|
196
|
333
|
||||||
Prepaid
expenses and other current assets
|
316
|
475
|
||||||
Total
current assets
|
$ |
4,687
|
$ |
5,190
|
||||
Property,
plant and equipment, net
|
1,764
|
1,715
|
||||||
Investments
|
435
|
596
|
||||||
Intangible
assets, net
|
24,272
|
23,360
|
||||||
Other
assets
|
176
|
235
|
||||||
Total
assets
|
$ |
31,334
|
$ |
31,096
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Current
debt obligations
|
$ |
254
|
$ |
7
|
||||
Accounts
payable and accrued expenses
|
2,620
|
2,056
|
||||||
Liabilities
associated with assets held for sale (see Note C)
|
56
|
68
|
||||||
Other
current liabilities
|
446
|
540
|
||||||
Total
current liabilities
|
$ |
3,376
|
$ |
2,671
|
||||
Long-term
debt
|
7,903
|
8,895
|
||||||
Deferred
income taxes
|
2,424
|
2,743
|
||||||
Other
long-term liabilities
|
2,114
|
1,489
|
||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity
|
||||||||
Preferred
stock, $ .01 par value - authorized 50,000,000 shares,
none issued and
outstanding
|
||||||||
Common
stock, $ .01 par value - authorized 2,000,000,000 shares,
1,490,192,338
shares issued at September 30, 2007 and 1,486,403,445 shares
issued at
December 31, 2006
|
15
|
15
|
||||||
Treasury
stock, at cost - 11,728,643 shares at December 31,
2006
|
(334 | ) | ||||||
Additional
paid-in capital
|
15,730
|
15,734
|
||||||
Retained
deficit
|
(239 | ) | (174 | ) | ||||
Other
stockholders’ equity
|
11
|
57
|
||||||
15,517
|
15,298
|
|||||||
Total
liabilities and stockholders’
equity
|
$ |
31,334
|
$ |
31,096
|
||||
Nine
Months Ended
September
30,
|
||||||||
(in
millions)
|
2007
|
2006
|
||||||
Cash
provided by operating activities
|
$ |
626
|
$ |
1,480
|
||||
Investing
activities:
|
||||||||
Net
purchases of property, plant and equipment
|
(245 | ) | (213 | ) | ||||
Proceeds
from maturities of marketable securities
|
159
|
|||||||
Acquisitions
|
||||||||
Payments
for the Guidant acquisition
|
(15,394 | ) | ||||||
Cash
acquired from the Guidant acquisition, including proceeds
from Guidant’s
sale of its vascular intervention and endovascular solutions
businesses
|
6,730
|
|||||||
Payments
for acquisitions of other businesses, net of cash acquired
|
(80 | ) | ||||||
Payments
relating to prior period acquisitions
|
(213 | ) | (282 | ) | ||||
Other
investing activity
|
||||||||
Proceeds
from sales of investments in and collections of notes receivable
from portfolio
companies
|
149
|
20
|
||||||
Payments
for investments in and acquisitions of certain
technologies
|
(47 | ) | (77 | ) | ||||
Cash
used for investing activities
|
(436 | ) | (9,057 | ) | ||||
Financing
activities:
|
||||||||
Debt
|
||||||||
Net
payments on commercial paper
|
(149 | ) | ||||||
Net
(payments on) proceeds from revolving borrowings, notes
payable, capital
leases and long-term borrowings
|
(754 | ) |
7,037
|
|||||
Equity
|
||||||||
Proceeds
from issuances of shares of common stock to Abbott
Laboratories
|
1,400
|
|||||||
Proceeds
from issuances of shares of common stock to employees
|
130
|
137
|
||||||
Cash
(used for) provided by financing activities
|
(624 | ) |
8,425
|
|||||
Effect
of foreign exchange rates on cash
|
3
|
4
|
||||||
Net
(decrease) increase in cash and cash equivalents
|
(431 | ) |
852
|
|||||
Cash
and cash equivalents at beginning of period
|
1,668
|
689
|
||||||
Cash
and cash equivalents at end of period
|
$ |
1,237
|
$ |
1,541
|
||||
Supplemental
Information:
|
||||||||
Stock
and stock equivalents issued for acquisitions
|
$ |
91
|
$ |
12,964
|
Cash
|
$ |
6,708
|
||
Intangible
assets subject to amortization
|
7,719
|
|||
Goodwill
|
12,572
|
|||
Other
assets
|
2,271
|
|||
Purchased
research and development
|
4,169
|
|||
Current
liabilities
|
(2,014 | ) | ||
Net
deferred income taxes
|
(2,475 | ) | ||
Other
long-term liabilities
|
(592 | ) | ||
$ |
28,358
|
(in
millions)
|
Balance
at
December
31, 2006
|
Purchase
Price Adjustments
|
Charges
Utilized
|
Balance
at
September
30, 2007
|
||||||||||||
Workforce
reductions
|
$ |
163
|
$ | (46 | ) | $ | (75 | ) | $ |
42
|
||||||
Relocation
costs
|
10
|
(6 | ) |
4
|
||||||||||||
Contractual
commitments
|
25
|
(6 | ) | (5 | ) |
14
|
||||||||||
$ |
198
|
$ | (52 | ) | $ | (86 | ) | $ |
60
|
|||||||
in
millions, except per share data
|
Nine
Months Ended September
30,2006
|
|||
Net
sales
|
$ |
6,468
|
||
Net
loss
|
(4,185 | ) | ||
Net
loss per share - basic
|
$ | (2.84 | ) | |
Net
loss per share - assuming dilution
|
$ | (2.84 | ) |
September
30,
|
December
31,
|
|||||||
(in
millions)
|
2007
|
2006
|
||||||
Trade
accounts receivable, net
|
$ |
24
|
$ |
26
|
||||
Inventories
|
22
|
16
|
||||||
Prepaid
expenses and other current assets
|
1
|
2
|
||||||
Property,
plant and equipment, net
|
11
|
11
|
||||||
Goodwill
and intangible assets, net
|
137
|
276
|
||||||
Other
long-term assets
|
1
|
2
|
||||||
Assets
held for sale
|
$ |
196
|
$ |
333
|
||||
Accounts
payable and accrued expenses
|
$ |
4
|
$ |
11
|
||||
Other
current liabilities
|
13
|
16
|
||||||
Non-current
deferred tax liabilities
|
39
|
41
|
||||||
Liabilities
associated with assets held for sale
|
$ |
56
|
$ |
68
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
Net
sales
|
$ |
29
|
$ |
22
|
$ |
80
|
$ |
64
|
||||||||
Operating
loss
|
$ | (5 | ) | $ | (8 | ) | $ | (23 | ) | $ | (30 | ) |
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
Net
(loss) income
|
$ | (272 | ) | $ |
76
|
$ | (37 | ) | $ | (3,854 | ) | |||||
Foreign
currency translation adjustment
|
11
|
5
|
36
|
51
|
||||||||||||
Net
change in derivative financial instruments
|
(69 | ) | (4 | ) | (74 | ) | (24 | ) | ||||||||
Net
change in equity investments
|
(18 | ) | (3 | ) | (9 | ) | (23 | ) | ||||||||
Comprehensive
(loss) income
|
$ | (348 | ) | $ |
74
|
$ | (84 | ) | $ | (3,850 | ) |
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
Weighted-average
shares outstanding - basic
|
1,489.8
|
1,472.8
|
1,485.5
|
1,207.0
|
||||||||||||
Net
effect of common stock equivalents
|
13.9
|
|||||||||||||||
Weighted-average
shares outstanding - assuming dilution
|
1,489.8
|
1,486.7
|
1,485.5
|
1,207.0
|
||||||||||||
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
Cost
of products sold
|
$ |
6
|
$ |
4
|
$ |
14
|
$ |
12
|
||||||||
Selling,
general and administrative expenses
|
16
|
16
|
60
|
59
|
||||||||||||
Research
and development expenses
|
7
|
6
|
21
|
18
|
||||||||||||
29
|
26
|
95
|
89
|
|||||||||||||
Income
tax benefit
|
9
|
6
|
28
|
24
|
||||||||||||
$ |
20
|
$ |
20
|
$ |
67
|
$ |
65
|
September
30,
|
December
31,
|
||||||||
(in
millions)
|
2007
|
2006
|
|||||||
Finished
goods
|
$ |
495
|
$ |
443
|
|||||
Work-in-process
|
161
|
141
|
|||||||
Raw
materials
|
158
|
149
|
|||||||
$ |
814
|
$ |
733
|
||||||
September
30,
|
December
31,
|
||||||||
(in
millions)
|
2007
|
2006
|
|||||||
Property,
plant and equipment
|
$ |
2,940
|
$ |
2,678
|
|||||
Less:
accumulated depreciation
|
1,176
|
963
|
|||||||
$ |
1,764
|
$ |
1,715
|
September
30,
|
December
31,
|
||||||||
(in
millions)
|
2007
|
2006
|
|||||||
Goodwill
|
$ |
15,680
|
$ |
14,480
|
|||||
Technology
- core
|
7,219
|
7,134
|
|||||||
Other
intangible assets
|
2,930
|
2,878
|
|||||||
25,829
|
24,492
|
||||||||
Less:
accumulated amortization
|
1,557
|
1,132
|
|||||||
$ |
24,272
|
$ |
23,360
|
From: | To: | ||
4.5 times to 3.5 times on March 31, 2008 | 4.5 times to 4.0 times on March 31, 2009, and | ||
4.0 times to 3.5 times on September 30, 2009 |
Three
Months Ended
September
30,
|
Percentage
Point
|
|||||||
2007
|
2006
|
Increase
(Decrease)
|
||||||
Reported
tax rate
|
(5)%
|
|
(49)%
|
|
44%
|
|||
Impact
of certain charges*
|
(18)%
|
|
(72)%
|
|
54%
|
Nine
Months Ended
September
30,
|
Percentage
Point
|
|||||||
2007
|
2006
|
Increase
(Decrease)
|
||||||
Reported
tax rate
|
237%
|
|
(4)%
|
|
241%
|
|||
Impact
of certain charges*
|
219%
|
|
(27)%
|
|
246%
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
Net
sales
|
||||||||||||||||
United
States
|
$ |
1,207
|
$ |
1,273
|
$ |
3,697
|
$ |
3,579
|
||||||||
Europe
|
373
|
385
|
1,212
|
1,131
|
||||||||||||
Asia
Pacific
|
312
|
243
|
862
|
696
|
||||||||||||
Inter-Continental
|
103
|
111
|
311
|
332
|
||||||||||||
Net
sales allocated to reportable segments
|
$ |
1,995
|
$ |
2,012
|
$ |
6,082
|
$ |
5,738
|
||||||||
Foreign
exchange
|
53
|
14
|
122
|
18
|
||||||||||||
$ |
2,048
|
$ |
2,026
|
$ |
6,204
|
$ |
5,756
|
|||||||||
(Loss)
income before income taxes
|
||||||||||||||||
United
States
|
$ |
315
|
$ |
394
|
$ |
1,016
|
$ |
1,301
|
||||||||
Europe
|
185
|
190
|
601
|
582
|
||||||||||||
Asia
Pacific
|
186
|
124
|
492
|
362
|
||||||||||||
Inter-Continental
|
47
|
52
|
140
|
161
|
||||||||||||
Operating
income allocated to reportable segments
|
$ |
733
|
$ |
760
|
$ |
2,249
|
$ |
2,406
|
||||||||
Manufacturing
operations
|
(159 | ) | (157 | ) | (477 | ) | (397 | ) | ||||||||
Corporate
expenses and foreign exchange
|
(129 | ) | (121 | ) | (431 | ) | (386 | ) | ||||||||
Acquisition-
and divestiture-related charges
|
(437 | ) | (134 | ) | (458 | ) | (4,500 | ) | ||||||||
Amortization
expense
|
(155 | ) | (153 | ) | (467 | ) | (356 | ) | ||||||||
(147 | ) |
195
|
416
|
(3,233 | ) | |||||||||||
Other
expense
|
(112 | ) | (144 | ) | (389 | ) | (471 | ) | ||||||||
$ | (259 | ) | $ |
51
|
$ |
27
|
$ | (3,704 | ) |
Three
Months Ended
September
30, 2007
|
Three
Months Ended
September
30, 2006
|
|||||||||||||||||||||||
(in
millions)
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
||||||||||||||||||
Drug-eluting
|
$ |
240
|
$ |
208
|
$ |
448
|
$ |
384
|
$ |
188
|
$ |
572
|
||||||||||||
Bare
metal
|
28
|
31
|
59
|
13
|
22
|
35
|
||||||||||||||||||
$ |
268
|
$ |
239
|
$ |
507
|
$ |
397
|
$ |
210
|
$ |
607
|
·
|
the
broad and consistent long-term results of our TAXUS clinical
trials,
including up to five years of clinical follow
up;
|
·
|
the
performance benefits of our current
technology;
|
·
|
the
strength of our pipeline of drug-eluting stent products,
including
opportunities to expand indications for use through FDA review
of existing
and additional randomized trial data in extended use
subsets;
|
·
|
our
overall position in the worldwide interventional medicine
market and our
experienced interventional cardiology sales
force;
|
·
|
our
sales, clinical, marketing and manufacturing capabilities;
and
|
·
|
our
second drug-eluting stent platform (the PROMUS™ everolimus-eluting
coronary stent system) obtained as a result of the Guidant
acquisition.
|
·
|
the
entry of additional competitors into the
market;
|
·
|
physician
and patient confidence in our technology and attitudes toward
drug-eluting
stents, including expected abatement of prior concerns regarding
the risk
of late stent thrombosis;
|
·
|
drug-eluting
stent penetration rates, the average number of stents used
per procedure,
the overall number of PCI procedures performed, and declines
in average
selling prices of drug-eluting stent
systems;
|
·
|
variations
in clinical results or perceived product performance of our
or our
competitors’ products;
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
·
|
the
outcomes of intellectual property
litigation;
|
·
|
our
ability to launch next-generation products and technology
features,
including our TAXUS LibertéTM
paclitaxel-eluting coronary stent
system and our PROMUS drug-eluting stent system, in the U.S.
market;
|
·
|
our
ability to retain key members of our sales force;
and
|
·
|
changes
in FDA clinical trial data and post-market surveillance requirements
and
the associated impact on new product launch schedules and
the cost of
compliance.
|
Three
Months Ended
September
30, 2007
|
Three
Months Ended
September
30, 2006
|
|||||||||||||||||||||||
(in
millions)
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
||||||||||||||||||
ICDs
|
$ |
261
|
$ |
111
|
$ |
372
|
$ |
221
|
$ |
94
|
$ |
315
|
||||||||||||
Pacemakers
|
82
|
63
|
145
|
75
|
56
|
131
|
||||||||||||||||||
$ |
343
|
$ |
174
|
$ |
517
|
$ |
296
|
$ |
150
|
$ |
446
|
·
|
future
product field actions or new physician advisories by us or
our
competitors;
|
·
|
our
ability to re-establish the trust and confidence of the implanting
community, the referring community and prospective patients
in our
technology;
|
·
|
variations
in clinical results, reliability or product performance of
our and our
competitors’ products;
|
·
|
our
ability to retain key members of our sales
force;
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
·
|
our
ability to launch next-generation products and technology
features in a
timely manner;
|
·
|
new
competitive launches;
|
·
|
declines
in average selling prices and the overall number of procedures
performed;
and
|
·
|
the
outcome of legal proceedings related to our CRM
business.
|
Three
Months Ended
|
Change
|
|||||||||||||||
September
30,
|
As
Reported
|
Constant
|
||||||||||||||
Currency
|
Currency
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
Basis
|
Basis
|
||||||||||||
United
States
|
$ |
1,207
|
$ |
1,273
|
(5 | %) | (5 | %) | ||||||||
Europe
|
418
|
400
|
4 | % | (3 | %) | ||||||||||
Asia
Pacific
|
311
|
239
|
30 | % | 29 | % | ||||||||||
Inter-Continental
|
112
|
114
|
(1 | %) | (7 | %) | ||||||||||
International
|
841
|
753
|
12 | % | 7 | % | ||||||||||
$ |
2,048
|
$ |
2,026
|
1 | % | (1 | %) | |||||||||
Nine
Months Ended
|
Change
|
|||||||||||||||
September
30,
|
As
Reported
|
Constant
|
||||||||||||||
Currency
|
Currency
|
|||||||||||||||
(in
millions)
|
2007
|
2006
|
Basis
|
Basis
|
||||||||||||
United
States
|
$ |
3,697
|
$ |
3,579
|
3 | % | 3 | % | ||||||||
Europe
|
1,327
|