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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, or |
For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-11083
BOSTON SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
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04-2695240 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address of principal executive offices)
(508) 650-8000
(Registrants telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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COMMON STOCK, $.01 PAR VALUE PER SHARE
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NEW YORK STOCK EXCHANGE |
(Title of each class)
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(Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes: þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes: o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorted period that the registrant was required to submit and post such files). Yes: þ
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o (Do not check if a smaller reporting
company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes: o No þ
The aggregate market value of the registrants common stock held by non-affiliates was
approximately $8.6 billion based on the closing price of the registrants common stock on June 30,
2010, the last business day of the registrants most recently completed second fiscal quarter.
The number of shares outstanding of the registrants common stock as of January 31, 2011 was
1,523,368,979.
Documents Incorporated by Reference
Portions of the registrants definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with its 2011
Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
The Company
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
improve the quality of patient care and the productivity of healthcare delivery through the
development and advocacy of less-invasive medical devices and procedures. This is accomplished
through the continuing refinement of existing products and procedures and the investigation and
development of new technologies that are least- or less-invasive, reducing risk, trauma, procedure
time and the need for aftercare; cost- and comparatively-effective and, where possible, reduce or
eliminate refractory drug use. When used in this report, the terms we, us, our and the
Company mean Boston Scientific Corporation and its divisions and subsidiaries.
Our history began in the late 1960s when our co-founder, John Abele, acquired an equity interest in
Medi-tech, Inc., a research and development company focused on developing alternatives to surgery.
In 1969, Medi-tech introduced a family of steerable catheters used in some of the first
less-invasive procedures performed. In 1979, John Abele joined with Pete Nicholas to form Boston
Scientific Corporation, which indirectly acquired Medi-tech. This acquisition began a period of
active and focused marketing, new product development and organizational growth. Since then, we
have advanced the practice of less-invasive medicine by helping physicians and other medical
professionals treat a variety of diseases and conditions and improve patients quality of life by
providing alternatives to surgery and other medical procedures that are typically traumatic to the
body.
Our net sales have increased substantially since our formation over thirty years ago. Our growth
has been fueled in part by strategic acquisitions and alliances designed to improve our ability to
take advantage of growth opportunities in the medical device industry. On April 21, 2006, we
consummated our acquisition of Guidant Corporation. With this acquisition, we became a major
provider in the worldwide cardiac rhythm management (CRM) market, enhancing our overall competitive
position and long-term growth potential and further diversifying our product portfolio. This
acquisition has established us as one of the worlds largest cardiovascular device companies and a
global leader in microelectronic therapies. This and other strategic acquisitions have helped us to
add promising new technologies to our pipeline and to offer one of the broadest product portfolios
in the world for use in less-invasive procedures. We believe that the depth and breadth of our
product portfolio has also enabled us to compete more effectively in, and better absorb the
pressures of, the current healthcare environment of cost containment, managed care, large buying
groups, government contracting and hospital consolidation and will generally assist us in
navigating through the complexities of the global healthcare market, including healthcare
reform.
Business Strategy
Our strategy is to lead global markets for less-invasive medical devices by developing and
marketing innovative products, services and therapies that address unmet patient needs, provide
superior clinical outcomes and demonstrate proven economic value. We intend to do so by building
and buying products we understand, through sales forces we already have. The following are the five
elements of our strategic plan:
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Prepare our People |
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We believe that our success will be driven by strong leadership, robust
communication and the high caliber of our employees. We have strengthened our focus on
talent assessment and leadership development, and are committed to developing our people
and providing them with opportunities to contribute to the Companys growth and success.
Recently, we redefined the specific leadership criteria necessary for our people to allow
us to win in our global marketplace. As a demonstration of our commitment to the
preparation of our people, we have also developed a Leadership Academy, a set of
integrated training and enrichment programs designed to support our goal of developing a
culture of leadership at all levels within the organization. |
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Optimize the Company |
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We plan to adapt our existing business model to allow us to operate in a more efficient manner
and allow for enhanced execution, while providing better value to hospitals, better solutions
to physicians and better outcomes to patients. In 2010, we began implementing several
restructuring initiatives designed to strengthen and position us for long-term success,
including the integration of our Cardiovascular and CRM groups into one stronger and more
competitive organization that we believe will improve our ability to deliver innovative
products and technologies, leading clinical science and exceptional service; as well as the
restructuring of certain other businesses and corporate functions. We are centralizing
corporate research and development to refocus and strengthen our innovation efforts, and are
organizing our clinical organization to take full advantage of the global resources available
to conduct more cost-effective clinical studies, accelerate the time to bring new products to
market, and gain access to worldwide technological developments that we can implement across
our product lines. In addition, we will look to transform the way we conduct research and
development, leverage low-cost geographies, and scrutinize our cost structure, which we expect
will generate significant savings over the next three years. |
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Win Global Market Share |
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Through our global presence, we seek to increase net sales and market share, and leverage our
relationships with leading physicians and their clinical research programs. We plan to
re-align our International regions to be more effective in executing our business strategy and
renew our focus on selling in order to maximize our opportunities in countries whose economies
and healthcare sectors are growing rapidly. We expect to invest $30 million to $40 million by
the end of 2011 to introduce new products and strengthen our sales organization in emerging
markets such as Brazil, China and India. |
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Expand our Sales and Marketing Focus |
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We are expanding our focus on sales, using new analytics, best practices and technologies to
improve our sales methods and tools. We are also increasing our global sales focus through
targeted sales force expansions and through delivering new global best practice capabilities
in crucial areas such as training, management, forecasting and planning, and reaching the
economic customer on a global basis. We offer products in numerous product categories, which
are used by physicians throughout the world in a broad range of diagnostic and therapeutic
procedures. The breadth and diversity of our product lines permit medical specialists and
purchasing organizations to satisfy many of their less-invasive medical device requirements
from a single source. In addition, we endeavor to expand our footprint in the hospital beyond
our current product offerings to provide us greater strategic mass. |
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Realign our Business Portfolio |
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We are directing our
research and development and business development efforts to products
with higher returns and increasing our discipline and metrics to improve returns on our
investments. We are realigning our business portfolio through strategic acquisitions and select divestitures in order to reduce risk, optimize operational leverage and accelerate profitable,
sustainable revenue growth, while preserving our ability to meet the needs of physicians and
their patients. We expect to continue to invest in our core franchises, and also investigate
opportunities to further expand our presence in, and diversify into, priority growth areas
including atrial fibrillation, autonomic modulation therapy, coronary artery disease, deep-brain stimulation, diabetes/obesity, endoluminal surgery, endoscopic pulmonary intervention,
hypertension, peripheral vascular disease, structural heart disease, sudden cardiac arrest,
and womens health. We have recently announced several acquisitions targeting many of the
above conditions and disease states, and, in January 2011, closed the sale of our
Neurovascular business to Stryker Corporation. The sale of our Neurovascular business provides
us with increased flexibility to fund acquisitions and repay debt. |
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believe that the execution of this strategy will drive innovation,
accelerate profitable revenue growth
and increase shareholder value.
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Products
During 2010, our products were offered for sale by seven dedicated business groupsCRM;
Cardiovascular, including our Interventional Cardiology and Peripheral Interventions businesses;
Electrophysiology; Endoscopy; Urology/Womens Health; Neuromodulation; and Neurovascular. In 2010,
we began the restructuring of our organization, which we believe will allow us to operate in a more
effective and efficient manner, and includes the integration of our CRM and Cardiovascular groups
into a newly formed Cardiology, Rhythm and Vascular group, which includes an Endovascular unit
encompassing Peripheral Interventions, Imaging and Electrophysiology.
During 2010, we derived 28 percent of our net sales from our CRM business, 42 percent from our
Cardiovascular group, two percent from our Electrophysiology business, 14 percent from our
Endoscopy business, six percent from our Urology/Womens Health business, four percent from our
Neuromodulation business, and four percent from our Neurovascular business. The following section
describes certain of our product offerings:
Cardiac Rhythm Management
We develop, manufacture and market a variety of implantable devices that monitor the heart and
deliver electricity to treat cardiac abnormalities, including:
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Implantable cardioverter defibrillator (ICD) systems used
to detect and treat abnormally fast heart rhythms
(tachycardia) that could result in sudden cardiac death,
including implantable cardiac resynchronization therapy
defibrillator (CRT-D) systems used to treat heart failure;
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Implantable pacemaker systems used to manage slow or
irregular heart rhythms (bradycardia), including
implantable cardiac resynchronization therapy pacemaker
(CRT-P) systems used to treat heart failure. |
A key component of many of our implantable device systems is our remote LATITUDE® Patient
Management System, which enables physicians to monitor device performance remotely while patients
are in their homes, allowing for more frequent monitoring in order to guide treatment decisions. In
2010, we launched several new CRM products, including an upgrade to our LATITUDE® system, providing
enhanced functionality, as well as our new 4-SITE lead delivery system. We have experienced
continued success with our next-generation COGNIS® CRT-D and TELIGEN® ICD systems, as well as our
ALTRUA® family of pacemaker systems and, in 2011 and 2012, we will continue to execute on our
product pipeline with the expected launch of our next-generation INGENIO pacemaker system, and our
next-generation line of defibrillators, INCEPTA, ENERGEN and PUNCTUA. This product line includes
new features designed to improve functionality, diagnostic capability and ease of use.
Interventional Cardiology
Coronary Stent Systems
Our broad, innovative product offerings have enabled us to become a leader in the interventional
cardiology market. This leadership is due in large part to our coronary stent product offerings.
Coronary stents are tiny, mesh tubes used in the treatment of coronary artery disease, which are
implanted in patients to prop open arteries and facilitate blood flow to and from the heart. Our
VeriFLEX (Liberté®) bare-metal coronary stent system is designed to enhance deliverability and
conformability, particularly in challenging lesions. We have further enhanced the outcomes
associated with the use of coronary stents, particularly the processes that lead to
restenosis1, through dedicated internal and external product development, strategic
alliances and scientific research of drug-eluting stent systems. We are the only company in the
industry to offer a two-drug platform strategy with our paclitaxel-eluting and everolimus-eluting
stent system offerings, and are the industry leader for
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1 The growth of neointimal tissue within an artery after angioplasty and stenting. |
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widest range of coronary stent sizes. In 2010, we launched our third-generation TAXUS® Element
paclitaxel-eluting stent system in our Europe/Middle East/Africa (EMEA) region and certain
Inter-Continental countries, and continue to sell our second-generation TAXUS® Liberté®
paclitaxel-eluting stent system in the U.S. and Japan. We also market the PROMUS®
everolimus-eluting stent system, currently supplied to us in the U.S. and Japan by Abbott
Laboratories, as well as our next-generation internally-developed and manufactured
everolimus-eluting stent system, the PROMUS® Element stent system, currently marketed in our EMEA
region and certain Inter-Continental countries. We expect to launch our PROMUS® Element stent
system in the U.S. and Japan in mid-2012, and our TAXUS® Element stent system in the U.S. (to be
commercialized as ION) mid-2011 and Japan in late 2011 or early 2012.
Coronary Revascularization
We market a broad line of products used to treat patients with atherosclerosis. Atherosclerosis, a
principal cause of coronary artery obstructive disease, is characterized by a thickening of the
walls of the coronary arteries and a narrowing of arterial openings caused by the progressive
development of deposits of plaque. Our product offerings include balloon catheters, rotational
atherectomy systems, guide wires, guide catheters, embolic protection devices, and diagnostic
catheters used in percutaneous transluminal coronary angioplasty (PTCA). In 2010, we launched our
Apex pre-dilatation balloon catheter with platinum marker bands for improved radiopacity, our NC
Quantum Apex post-dilatation balloon catheter, developed specifically to address physicians needs
in optimizing coronary stent deployment, which has been received very positively in the market, as
well as our Kinetix family of guidewires. We continue to hold a strong leadership position in the
PTCA balloon catheter market with an estimated 56 percent share
of the U.S. market, and 38 percent
worldwide.
Intraluminal Ultrasound Imaging
We market a family of intraluminal catheter-directed ultrasound imaging catheters and systems for
use in coronary arteries and heart chambers as well as certain peripheral vessels. The iLab®
Ultrasound Imaging System continues as our flagship console and is compatible with our full line of
imaging catheters. This system is designed to enhance the diagnosis and treatment of blocked
vessels and heart disorders.
Structural Heart Therapy
In January 2011, as part of our priority growth initiatives, we completed the acquisition of Sadra
Medical, Inc. Sadra is developing a fully repositionable and retrievable device for percutaneous
aortic valve replacement (PAVR) to treat patients with severe aortic stenosis and recently
completed a series of European feasibility studies for its Lotus Valve System, which 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.
PAVR is one of the fastest growing medical device markets.
Electrophysiology
Within our Electrophysiology business, we develop less-invasive medical technologies used in the
diagnosis and treatment of rate and rhythm disorders of the heart. Included in our product
offerings are radio frequency generators, intracardiac ultrasound and steerable ablation catheters,
and diagnostic catheters. Our leading products include the Blazer line of ablation catheters,
including our next-generation Blazer Prime ablation catheter, designed to deliver enhanced
performance, responsiveness and durability, and the Chilli II® cooled ablation catheter. In January
2011, as part of our priority growth initiatives, we announced the signing of a definitive merger
agreement under which we will acquire Atritech, Inc., subject to customary closing conditions.
Atritech has 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, developed by Atritech, is the first device proven in a randomized
clinical trial to offer an alternative to anticoagulant drugs, and is approved for use in CE Mark
countries.
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Peripheral Interventions
We sell various products designed to treat patients with peripheral disease (disease which appears
in blood vessels other than in the heart and in the biliary tree), including a broad line of
medical devices used in percutaneous transluminal angioplasty and peripheral vascular stenting. Our
peripheral product offerings include stents, balloon catheters, sheaths, wires and vena cava
filters, and we hold the number one position in the worldwide Peripheral Interventions market. We
market the PolarCath peripheral dilatation system used in CryoPlasty® Therapy, an innovative
approach to the treatment of peripheral artery disease in the lower extremities. In 2010, we
successfully launched several of our market-leading products internationally, including the launch
in Japan of our Carotid WALLSTENT® Monorail® Endoprosthesis for the treatment of patients with
carotid artery disease who are at high risk for surgery.
We also sell products designed to treat patients with non-vascular disease (disease which appears
outside the blood system). Our non-vascular suite of products includes biliary stents, drainage
catheters and micro-puncture sets designed to treat, diagnose and ease various forms of benign and
malignant tumors. In 2010, our Express LD Stent System received U.S. Food and Drug Administration
(FDA) approval for an iliac indication, and we continued to market our Express® SD Renal Monorail®
premounted stent system for use as an adjunct therapy to percutaneous transluminal renal
angioplasty in certain lesions of the renal arteries; as well as our Sterling® Monorail® and
Over-the-Wire balloon dilatation catheter for use in the renal and lower extremity arteries, and
our extensive line of Interventional Oncology product solutions.
Embolic Protection
Our FilterWire EZ Embolic Protection System is a low profile filter designed to capture embolic
material that may become dislodged during a procedure, which could otherwise travel into the
microvasculature where it could cause a heart attack or stroke. It is commercially available in the
U.S., our EMEA region and certain Inter-Continental countries for multiple indications, including
the treatment of disease in peripheral, coronary and carotid vessels. It is also available in the
U.S. for the treatment of saphenous vein grafts and carotid artery stenting procedures.
Endoscopy
Gastroenterology
We market a broad range of products to diagnose, treat and ease a variety of digestive diseases,
including those affecting the esophagus, stomach, liver, pancreas, duodenum, and colon. Common
disease states include esophagitis, portal hypertension, peptic ulcers as well as esophageal,
biliary, pancreatic and colonic cancer. We offer the Radial Jaw® 4 Single-Use Biopsy Forceps, which
are designed to enable collection of large high-quality tissue specimens without the need to use
large channel therapeutic endoscopes and, in 2010, expanded our offering of this product to include
a wider variety of sizes. Our exclusive line of RX Biliary System devices are designed to provide
greater access and control for physicians to diagnose and treat challenging conditions of the bile
ducts, such as removing gallstones, opening obstructed bile ducts and obtaining biopsies in
suspected tumors. We also market the Spyglass® Direct Visualization System for direct imaging of
the pancreatico-biliary system. The Spyglass® System is the first single-operator cholangioscopy
device that offers clinicians a direct visualization of the pancreatico-biliary system and includes
supporting devices for tissue acquisition, stone management and lithotripsy. In 2010, we continued
commercialization of our WallFlex® family of stents, in particular, the WallFlex® Biliary line and
WallFlex® Esophageal line; and our Resolution® Clip Device, used to treat gastrointestinal
bleeding. Our Resolution® Clip is the only currently-marketed mechanical clip designed to open and
close, up to five times, before deployment to help enable a physician to see the effects of the
clip before committing to deployment.
Interventional Bronchoscopy
We market devices to diagnose, treat and ease pulmonary disease systems within the airway and
lungs. Our products are designed to help perform biopsies, retrieve foreign bodies from the airway,
open narrowings of an
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airway, stop internal bleeding, and ease symptoms of some types of airway cancers. Our product line
includes pulmonary biopsy forceps, transbronchial aspiration needles, cytology brushes and
tracheobronchial stents used to dilate narrowed airway passages or for tumor management. In
addition, as part of our priority growth initiatives, in October 2010, we completed our acquisition
of Asthmatx, Inc. Asthmatx designs, manufactures and markets a less-invasive, catheter-based
bronchial thermoplasty procedure for the treatment of severe persistent asthma. The
Alair® Bronchial Thermoplasty System, developed by Asthmatx, has both CE Mark and FDA
approval and is the first device-based asthma treatment approved by the FDA.
Urology/Womens Health
Our Urology/Womens Health division develops and manufactures devices to treat various urological
and gynecological disorders. We sell a variety of products designed to treat patients with urinary
stone disease, stress urinary incontinence, pelvic organ prolapse and excessive uterine bleeding.
We offer a full line of stone management products, including ureteral stents, wires, lithotripsy
devices, stone retrieval devices, sheaths, balloons and catheters.
We continue to expand our focus on Womens Health. We market a range of devices for the treatment
of conditions such as female urinary incontinence, pelvic floor reconstruction (rebuilding of the
anatomy to its original state), and menorrhagia (excessive menstrual bleeding). We offer a full
breadth of mid-urethral sling products, sling materials, graft materials, pelvic floor
reconstruction kits, and suturing devices. We recently launched our Genesys Hydro ThermAblator®
(HTA) system, a next-generation endometrial ablation system designed to ablate the endometrial
lining of the uterus in premenopausal women with menorrhagia. The Genesys HTA System features a
smaller and lighter console, simplified set-up requirements, and an enhanced graphic user interface
and is designed to improve operating performance.
Neuromodulation
Within our Neuromodulation business, we market the Precision® Spinal Cord Stimulation (SCS) system,
used for the management of chronic pain. This system delivers pain management by applying an
electrical signal to mask pain signals traveling from the spinal cord to the brain. The Precision
System utilizes a rechargeable battery and features a programming system. In 2010, we received FDA
approval and launched two lead splitters, as well as the Linear 3-4 and Linear 3-6 Percutaneous
Leads for use with our SCS systems, offering a broader range of lead configurations and designed to
provide physicians more treatment options for their chronic pain patients. These leads provide the
broadest range of percutaneous lead configurations in the industry. We believe that we continue to
have a technology advantage over our competitors with proprietary features such as Multiple
Independent Current Control, which is intended to allow the physician to target specific areas of
pain more precisely, and are involved in various studies designed to evaluate the use of spinal
cord stimulation in the treatment of additional sources of pain. As a demonstration of our
commitment to strengthening clinical evidence with spinal cord stimulation, we have initiated a
trial to assess the therapeutic effectiveness and cost-effectiveness of spinal cord stimulation
compared to reoperation in patients with failed back surgery syndrome. We believe that this trial
could result in consideration of spinal cord stimulation much earlier in the continuum of care. In
addition, in late 2010 we initiated a European clinical trial for the treatment of Parkinsons
disease using our Vercise deep-brain stimulation system, and, in January 2011, we completed the
acquisition of Intelect Medical, Inc., a development-stage company developing advanced
visualization and programming for the Vercise system. We believe this acquisition leverages the
core architecture of our Vercise platform and advances the field of deep-brain stimulation.
Neurovascular
In January 2011, we closed the sale of our Neurovascular business to Stryker Corporation. This
business markets a broad line of coated and uncoated detachable coils, micro-delivery stents,
micro-guidewires, micro-catheters, guiding catheters and embolics to neuro-interventional
radiologists and neurosurgeons to treat diseases of the neurovascular system. In 2010, we marketed
the GDC® Coils (Guglielmi Detachable Coil) and Matrix® systems to treat brain aneurysms and, in
late 2010, we received FDA approval for the next-generation family of detachable coils, which
includes an enhanced delivery system designed to reduce coil detachment times, and began a phased
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launch of the product. We also offered the NeuroForm® stent system, and launched the Neuroform EZ
stent system, a fourth-generation intracranial aneurysm stent system designed for use in
conjunction with endovascular coiling to treat wide-necked aneurysm, and the Wingspan® Stent System
with Gateway® PTA Balloon Catheter, each under a Humanitarian Device Exemption approval granted by
the FDA. The Wingspan Stent System is designed to treat atherosclerotic lesions or accumulated
plaque in brain arteries. Designed for the brains fragile vessels, the Wingspan Stent System is a
self-expanding, nitinol stent sheathed in a delivery system that enables it to reach and open
narrowed arteries in the brain. The Wingspan Stent System is currently the only device available in
the U.S. for the treatment of intracranial atherosclerotic disease (ICAD) and is indicated for
improving cerebral artery lumen diameter in patients with ICAD who are unresponsive to medical
therapy.
Innovation
Our approach to innovation combines internally-developed products and technologies with those we
may obtain externally through strategic acquisitions and alliances. Our research and development
efforts are focused largely on the development of next-generation and novel technology offerings
across multiple programs and divisions. Since 1995, we have undertaken strategic acquisitions to
assemble the lines of business necessary to achieve the critical mass that allows us to continue to
be a leader in the medical device industry. We expect to continue to invest in our core franchises,
and also investigate opportunities to further expand our presence in, and diversify into, priority
growth areas including atrial fibrillation, autonomic modulation therapy, coronary artery disease,
deep-brain stimulation, diabetes/obesity, endoluminal surgery, endoscopic pulmonary intervention,
hypertension, peripheral vascular disease, structural heart disease, sudden cardiac arrest, and
womens health. We have recently announced several acquisitions targeting many of the above
conditions and disease states. In 2010, we completed the acquisition of Asthmatx, Inc., and in
January 2011, we completed the acquisitions of Sadra Medical, Inc. and Intelect Medical, Inc., and
announced the signing of a definitive merger agreement to acquire Atritech, Inc., each discussed
above. There can be no assurance that technologies developed internally or acquired through
acquisitions and alliances will achieve technological feasibility, obtain regulatory approvals or
gain market acceptance, and any delay in the development or approval of these technologies may
adversely impact our future growth.
Research and Development
Our investment in research and development is critical to driving our future growth. We expended
$939 million on research and development in 2010, $1.035 billion in 2009 and $1.006 billion in
2008, representing approximately 12 to 13 percent of our net sales each year. Our investment in
research and development reflects:
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regulatory compliance, clinical science, and internal research and
development programs, as well as others obtained through our strategic
acquisitions and alliances; and |
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sustaining engineering efforts which incorporate customer feedback
into continuous improvement efforts for currently marketed and next-generation products. |
We have directed our development efforts toward regulatory compliance and innovative technologies
designed to expand current markets or enter new markets. We are looking to transform the way we
conduct research and development, leverage low-cost geographies, and scrutinize our cost structure,
which we expect will generate significant savings over the next three years. Our approach to new
product design and development is through focused, cross-functional teams. We believe that our
formal process for technology and product development aids in our ability to offer innovative and
manufacturable products in a consistent and timely manner. Involvement of the research and
development, clinical, quality, regulatory, manufacturing and marketing teams early in the process
is the cornerstone of our product development cycle. This collaboration allows these teams to
concentrate resources on the most viable and clinically relevant new products and technologies, and
focus on bringing them to market in a timely and cost-effective manner. In addition to internal
development, we work with hundreds of leading research institutions, universities and clinicians
around the world to develop, evaluate and clinically test our products. We believe our future
success will depend upon the strength of these development efforts.
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Marketing and Sales
During 2010, we marketed our products to over 10,000 hospitals, clinics, outpatient facilities and
medical offices in nearly 100 countries worldwide. The majority of our net sales are derived from
countries in which we have direct sales organizations. A network of distributors and dealers who
offer our products worldwide accounts for our remaining sales. We will continue to leverage our
infrastructure in markets where commercially appropriate and use third parties in those markets
where it is not economical or strategic to establish or maintain a direct presence. We are not
dependent on any single institution and no single institution accounted for more than ten percent
of our net sales in 2010 or 2009; however, large group purchasing organizations, hospital networks
and other buying groups have become increasingly important to our business and represent a
substantial portion of our U.S. net sales. We have a dedicated corporate sales organization in the
U.S. focused principally on selling to major buying groups and integrated healthcare networks. We
consistently strive to understand and exceed the expectations of our customers. Each of our
business groups maintains dedicated sales forces and marketing teams focusing on physicians who
specialize in the diagnosis and treatment of different medical conditions. We believe that this
focused disease state management enables us to develop highly knowledgeable and dedicated sales
representatives and to foster collaborative relationships with physicians. We believe that we have
positive working relationships with physicians and others in the medical industry, which enable us
to gain a detailed understanding of new therapeutic and diagnostic alternatives and to respond
quickly to the changing needs of physicians and their patients.
International Operations
International net sales accounted for 44 percent of our net sales in 2010. Net sales and operating
income attributable to our 2010 geographic regions are presented in
Note PSegment Reporting to
our 2010 consolidated financial statements included in Item 8 of this Annual Report. Our
international structure operates through three international business units: EMEA, consisting of
Europe, the Middle East and Africa; Japan; and Inter-Continental, consisting of our Asia Pacific
and the Americas reporting units. Maintaining and expanding our international presence is an
important component of our long-term growth plan. Through our international presence, we seek to
increase net sales and market share, leverage our relationships with leading physicians and their
clinical research programs, accelerate the time to bring new products to market, and gain access to
worldwide technological developments that we can implement across our product lines. We plan to
invest $30 million to $40 million through the end of 2011 to introduce new products and strengthen
our sales capabilities in emerging markets such as Brazil, China and India. A discussion of the
risks associated with our international operations is included in Item 1A of this Annual Report.
As of December 31, 2010, we had six international manufacturing facilities, including three in
Ireland, two in Costa Rica and one in Puerto Rico. Approximately 55 percent of our products sold
worldwide during 2010 were manufactured at these facilities. Additionally, we maintain
international research and development capabilities in Ireland, as well as physician training
centers in France and Japan.
Manufacturing and Raw Materials
We are focused on continuously improving our supply chain effectiveness, strengthening our
manufacturing processes and increasing operational efficiencies within our organization. By
shifting global manufacturing along product lines, we are able to leverage our existing resources
and concentrate on new product development, including the enhancement of existing products, and
their commercial launch. We are implementing new systems designed to provide improved quality and
reliability, service, greater efficiency and lower supply chain costs, and have substantially
increased our focus on process controls and validations, supplier controls, distribution controls
and providing our operations teams with the training and tools necessary to drive continuous
improvement in product quality. In addition, we continue to focus on examining our operations and
general business activities to identify cost-improvement opportunities in order to enhance our
operational effectiveness, including our Plant Network Optimization program and our recently
completed 2007 Restructuring plan, discussed in Item 7 of this Annual Report.
10
Our
products are designed and manufactured in technology centers around the world,
either by us or third parties. In
most cases, the manufacturing of our products is concentrated
in one or a few locations.
We consistently monitor our inventory levels, manufacturing and
distribution capabilities, and maintain recovery plans to address
potential disruptions that we may encounter; however, any significant interruption in our ability to manufacture these products over an extended duration may result in delays in our ability
to resume production of affected products, due to needs for regulatory approvals. As a result, we
may suffer loss of market share, which we may be unable to recapture, and harm to our reputation,
which could adversely affect our results of operations and financial condition.
Many components
used in the manufacture of our products are readily fabricated from commonly available raw
materials or off-the-shelf items available from multiple supply sources. Certain items are custom
made to meet our specifications. We believe that in most cases, redundant capacity exists at our
suppliers and that alternative sources of supply are available or could be developed within a
reasonable period of time. We also have an on-going program to identify single-source components
and to develop alternative back-up supplies and we regularly re-address the adequacy and abilities of our suppliers to meet our needs. However, in certain cases, we may not be able to
quickly establish additional or replacement suppliers for specific materials, components or
products, largely due to the regulatory approval system and the complex nature of our manufacturing
processes and those of our suppliers. A reduction or interruption in supply, an inability to
develop and validate alternative sources if required, or a significant increase in the price of raw
materials, components or products could adversely affect our operations and financial condition,
particularly materials or components related to our CRM products and drug-eluting stent systems. In
addition, our products require sterilization prior to sale and we utilize a mix of internal
resources and third-party vendors to perform this service. We believe
we have redundant capabilities that are sufficient to sterilize our products; however, to the extent we or our third-party sterilizers are unable
to sterilize our products, whether due to capacity, regulatory or other constraints, we may be unable
to transition to other providers in a timely manner, which could have an adverse impact on our
operations.
Certain products are manufactured for us by third parties. We are currently reliant on Abbott
Laboratories for our supply of everolimus-eluting stent systems in the U.S. and Japan. Our supply
agreement with Abbott for everolimus-eluting stent systems in these regions extends through the end
of the second quarter of 2012. At present, we believe that our supply of everolimus-eluting stent
systems from Abbott, coupled with our current launch plans for our next-generation
internally-developed and manufactured everolimus-eluting stent system in these regions, is
sufficient to meet customer demand. However, any production or capacity issues that affect Abbotts
manufacturing capabilities or our process for forecasting, ordering and receiving shipments may
impact the ability to increase or decrease our level of supply in a timely manner; therefore, our
supply of everolimus-eluting stent systems supplied to us by Abbott may not align with customer
demand, which could have an adverse effect on our operating results. Further, a delay in the launch
of our internally-developed and manufactured next-generation PROMUS® Element everolimus-eluting
stent system in the U.S. and Japan, currently expected in mid-2012, could result in an inability to
meet customer demand for everolimus-eluting stent systems. We launched our PROMUS® Element stent
system in our EMEA region and certain Inter-Continental countries in the fourth quarter of 2009,
quickly gaining market share, exiting 2010 with approximately one
quarter share of the drug-eluting stent market
in EMEA.
Quality Assurance
In January 2006, we received a corporate warning letter from the FDA notifying us of serious
regulatory problems at three of our facilities and advising us that our corporate-wide corrective
action plan relating to three site-specific warning letters issued to us in 2005 was inadequate. We
identified solutions to the quality system issues cited by the FDA and implemented those solutions
throughout our organization. During 2008, the FDA reinspected a number of our facilities and, in
October 2008, informed us that our quality system was in substantial compliance with its Quality
System Regulations. In November 2009 and January 2010, the FDA reinspected two of our sites to
follow up on observations from the 2008 FDA inspections. Both of these FDA inspections confirmed
that all issues at the sites have been resolved and all restrictions related to the corporate
warning letter were removed. On August 11, 2010, we were notified by the FDA that the corporate
warning letter had been lifted.
We are committed to providing high quality products to our customers. To meet this commitment, we
have implemented updated quality systems and concepts throughout our organization. Our quality
system starts with the initial product specification and continues through the design of the
product, component specification process and the manufacturing, sale and servicing of the product.
Our quality system is intended to build in quality and process control and to utilize continuous
improvement concepts throughout the product life. These systems are designed to enable us to
satisfy the various international quality system regulations, including those of the FDA
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with respect to products sold in the U.S. All of our manufacturing facilities, including our U.S.
and European distribution centers, are certified under the ISO13485:2003 quality system standard,
established by the International Standards Organization, for medical devices, which requires, among
other items, an implemented quality system that applies to component quality, supplier control,
product design and manufacturing operations. This certification can be obtained only after a
complete audit of a companys quality system by an independent outside auditor. Maintenance of the
certification requires that these facilities undergo periodic re-examination.
In addition, we maintain an on-going initiative to seek ISO14001 certification at our plants around
the world. ISO14001 is a globally recognized standard for Environmental Management Systems,
established by the International Standards Organization, which provides a voluntary framework to
identify key environmental aspects associated with our business. We engage in continuous
environmental performance improvement efforts, and at present, ten of our 14 manufacturing and
distribution facilities have attained ISO14001 certification. We are committed to achieving
ISO14001 certification at all of our manufacturing facilities and Tier I distribution centers
worldwide.
Competition
We encounter significant competition across our product lines and in each market in which we sell
our products from various companies, some of which may have greater financial and marketing
resources than we do. Our primary competitors include Johnson & Johnson (including its subsidiary,
Cordis Corporation); Medtronic, Inc.; Abbott Laboratories; and St. Jude Medical, Inc.; as well as a
wide range of medical device companies that sell a single or limited number of competitive products
or participate in only a specific market segment. We also face competition from non-medical device
companies, such as pharmaceutical companies, which may offer alternative therapies for disease
states intended to be treated using our products.
We believe that our products compete primarily on their ability to safely and effectively perform
diagnostic and therapeutic procedures in a less-invasive manner, including clinical outcomes, ease
of use, comparative effectiveness, reliability and physician familiarity. In the current
environment of managed care, economically-motivated buyers, consolidation among healthcare
providers, increased competition and declining reimbursement rates, we have been increasingly
required to compete on the basis of price, value, reliability and efficiency. We believe the
current global economic conditions and healthcare reform measures could put additional competitive
pressure on us, including on our average selling prices, overall procedure rates and market sizes.
We recognize that our continued competitive success will depend upon our ability to offer products
with differentiated clinical outcomes; create or acquire innovative, scientifically advanced
technology; apply our technology cost-effectively and with superior quality across product lines
and markets; develop or acquire proprietary products; attract and retain skilled personnel; obtain
patent or other protection for our products; obtain required regulatory and reimbursement
approvals; continually enhance our quality systems; manufacture and successfully market our
products either directly or through outside parties; and supply sufficient inventory to meet
customer demand.
Regulatory Environment
The medical devices that we manufacture and market are subject to regulation by numerous regulatory
bodies, including the FDA and comparable international regulatory agencies. These agencies require
manufacturers of medical devices to comply with applicable laws and regulations governing the
development, testing, manufacturing, labeling, marketing and distribution of medical devices.
Devices are generally subject to varying levels of regulatory control, the most comprehensive of
which requires that a clinical evaluation be conducted before a device receives approval for
commercial distribution.
In the U.S., approval to distribute a new device generally can be met in one of three ways. The
first process requires that a pre-market notification (510(k) Submission) be made to the FDA to
demonstrate that the device is as safe and effective as, or substantially equivalent to, a legally
marketed device that is not subject to pre-market approval (PMA), i.e., the predicate device. An
appropriate predicate device for a pre-market notification is one that (i) was legally marketed
prior to May 28, 1976, (ii) was approved under a PMA but then subsequently reclassified from Class
III to Class II or I, or (iii) has been found to be substantially equivalent and cleared for
12
commercial distribution under a 510(k) Submission. Applicants must submit descriptive data and,
when necessary, performance data to establish that the device is substantially equivalent to a
predicate device. In some instances, data from human clinical trials must also be submitted in
support of a 510(k) Submission. If so, these data must be collected in a manner that conforms to
the applicable Investigational Device Exemption (IDE) regulations. The FDA must issue an order
finding substantial equivalence before commercial distribution can occur. Changes to existing
devices covered by a 510(k) Submission that are not significant can generally be made without
additional 510(k) Submissions. Changes that could significantly affect the safety or effectiveness
of the device, such as significant changes in designs or materials, may require a new 510(k) with
data to support that the modified device remains substantially equivalent. In August 2010, the FDA
released numerous draft proposals on the 510(k) process aimed at increasing transparency and
streamlining the process, while adding more scientific rigor to the review process. In January
2011, the FDA released the implementation plan for changes to the 510(k) Submission program, which
includes additional training of FDA staff, the creation of various guidance documents intended to
provide greater clarity to certain processes, as well as various internal changes to the FDAs
procedures. We have a portfolio of products that includes numerous Class II medical devices.
Several of the FDAs proposals could increase the regulatory burden on our industry, including
those that could increase the cost, complexity and time to market for certain high-risk Class II
medical devices.
The second process requires the submission of an application for PMA to the FDA to demonstrate that
the device is safe and effective for its intended use as manufactured. This approval process
applies to certain Class III devices. In this case, two steps of FDA approval are generally
required before marketing in the U.S. can begin. First, we must comply with the applicable IDE
regulations in connection with any human clinical investigation of the device in the U.S. Second,
the FDA must review our PMA application, which contains, among other things, clinical information
acquired under the IDE. The FDA will approve the PMA application if it finds that there is a
reasonable assurance that the device is safe and effective for its intended purpose.
The third process requires that an application for a Humanitarian Device Exemption (HDE) be made to
the FDA for the use of a Humanitarian Use Device (HUD). A HUD is intended to benefit patients by
treating or diagnosing a disease or condition that affects, or is manifested in, fewer than 4,000
individuals in the U.S. per year. The application submitted to the FDA for an HDE is similar in
both form and content to a PMA application, but is exempt from the effectiveness requirements of a
PMA. This approval process demonstrates that there is no comparable device available to treat or
diagnose the condition, the device will not expose patients to unreasonable or significant risk,
and the benefits to health from use outweigh the risks. The HUD provision of the regulation
provides an incentive for the development of devices for use in the treatment or diagnosis of
diseases affecting smaller patient populations.
The FDA can ban certain medical devices; detain or seize adulterated or misbranded medical devices;
order repair, replacement or refund of these devices; and require notification of health
professionals and others with regard to medical devices that present unreasonable risks of
substantial harm to the public health. The FDA may also enjoin and restrain certain violations of
the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or
initiate action for criminal prosecution of such violations. International sales of medical devices
manufactured in the U.S. that are not approved by the FDA for use in the U.S., or that are banned
or deviate from lawful performance standards, are subject to FDA export requirements. Exported
devices are subject to the regulatory requirements of each country to which the device is exported.
Some countries do not have medical device regulations, but in most foreign countries, medical
devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country
prior to application in the U.S. to take advantage of differing regulatory requirements. Most
countries outside of the U.S. require that product approvals be recertified on a regular basis,
generally every five years. The recertification process requires that we evaluate any device
changes and any new regulations or standards relevant to the device and conduct appropriate testing
to document continued compliance. Where recertification applications are required, they must be
approved in order to continue selling our products in those countries.
In the European Union, we are required to comply with applicable medical device directives
(including the Medical Devices Directive and the Active Implantable Medical Devices Directive) and
obtain CE Mark certification in order to market medical devices. The CE Mark certification, granted
following approval from an independent notified body, is an international symbol of adherence to
quality assurance standards and
13
compliance with applicable European Medical Devices Directives. We are also required to comply with
other foreign regulations such as the requirement that we obtain approval from the Japanese
Ministry of Health, Labor and Welfare (MHLW) before we can launch new products in Japan. The time
required to obtain these foreign approvals to market our products may vary from U.S. approvals, and
requirements for these approvals may differ from those required by the FDA.
We are also subject to various environmental laws, directives and regulations both in the U.S. and
abroad. Our operations, like those of other medical device companies, involve the use of substances
regulated under environmental laws, primarily in manufacturing and sterilization processes. We do
not believe that compliance with environmental laws will have a material impact on our capital
expenditures, earnings or competitive position. However, given the scope and nature of these laws,
there can be no assurance that environmental laws will not have a material impact on our results of
operations. We assess potential environmental contingent liabilities on a regular basis. At
present, we are not aware of any such liabilities that would have a material impact on our
business.
We believe that sound environmental, health and safety performance contributes to our competitive
strength while benefiting our customers, shareholders and employees. We are committed to continuous
improvement in these areas by reducing pollution, the depletion of natural resources, and our
overall environmental footprint. Specifically, we are working to optimize energy and resource
usage, ultimately reducing greenhouse gas emissions and waste. We are certified to the FTSE4Good
Corporate Social Responsibility Index, managed by The Financial Times and the London Stock
Exchange, which measures the performance of companies that meet globally recognized standards of
corporate responsibility. This certification recognizes our dedication to those standards, and it
places us in a select group of companies with a demonstrated commitment to responsible business
practices and sound environmental policies.
Government Affairs
We maintain a global Government Affairs presence, headquartered in Washington D.C., to actively
monitor and influence a myriad of legislative and administrative policies impacting us, both on a
domestic and an international front. The Government Affairs office works closely with members of
Congress, key Congressional committee staff and White House and Administration staff, which
facilitates our active engagement on issues affecting our business. Our proactive approach and
depth of political and policy expertise are aimed at having our positions heard by federal, state
and global decision-makers, while also advancing our business objectives by educating policymakers
on our positions, key priorities and the value of our technologies. The Government Affairs office
also manages our political action committee and works closely with trade groups on issues affecting
our industry and healthcare in general.
Healthcare Reform and Current Economic Climate
Political, economic and regulatory influences are subjecting the healthcare industry to potential
fundamental changes that could substantially affect our results of operations. Government and
private sector initiatives to limit the growth of healthcare costs, including price regulation,
competitive pricing, coverage and payment policies, comparative effectiveness of therapies,
technology assessments and managed-care arrangements, are continuing in many countries where we do
business, including the U.S. These changes are causing the marketplace to put increased emphasis on
the delivery of more cost-effective treatments. Although we believe our less-invasive products and
technologies generate favorable clinical outcomes, value and cost efficiency, the resources
necessary to demonstrate comparative effectiveness may be significant. In addition, uncertainty
remains regarding proposed significant reforms to the U.S. healthcare system.
Further, certain state governments have recently enacted, and the federal government has proposed,
legislation aimed at increasing transparency in relationships between industry and healthcare
professionals (HCPs). As a result, we are required by law to report many types of direct and
indirect payments and other transfers of value to HCPs licensed by certain states and expect that
we will have to make similar reports at the federal level in the near future. We have devoted
substantial time and financial resources in order to develop and implement enhanced structure,
policies, systems and processes in order to comply with these legal and regulatory
14
requirements. These systems are designed to provide enhanced visibility and consistency across our
businesses with respect to our interactions with healthcare professionals. Implementation of these
policies, systems and processes, or failure to comply with these policies could have a negative
impact on our results of operations.
Additionally, our results of operations could be substantially affected by global economic factors
and local operating and economic conditions. Our customers may experience financial difficulties or
be unable to borrow money to fund their operations which may adversely impact their ability or
decision to purchase our products, particularly capital equipment, or to pay for our products they
do purchase on a timely basis, if at all. We cannot predict to what extent global economic
conditions and the increased focus on healthcare systems and costs in the U.S. and abroad may
negatively impact our average selling prices, our net sales and profit margins, procedural volumes
and reimbursement rates from third-party payors.
Third-Party Coverage and Reimbursement
Our products are purchased principally by hospitals, physicians and other healthcare providers
around the world that typically bill various third-party payors, including governmental programs
(e.g., Medicare and Medicaid), private insurance plans and managed care programs, for the
healthcare services provided to their patients. Third-party payors may provide or deny coverage for
certain technologies and associated procedures based on independently determined assessment
criteria. Reimbursement by third-party payors for these services is based on a wide range of
methodologies that may reflect the services assessed resource costs, clinical outcomes and
economic value. These reimbursement methodologies confer different, and sometimes conflicting,
levels of financial risk and incentives to healthcare providers and patients, and these
methodologies are subject to frequent refinements. Third-party payors are also increasingly
adjusting reimbursement rates, often downwards, and challenging the prices charged for medical
products and services. There can be no assurance that our products will be covered automatically by
third-party payors, that reimbursement will be available or, if available, that the third-party
payors coverage policies will not adversely affect our ability to sell our products profitably.
Initiatives to limit the growth of healthcare costs, including price regulation, are also underway
in many countries in which we do business. Implementation of cost containment initiatives and
healthcare reforms in significant markets such as the U.S., Japan, Europe and other international
markets may limit the price of, or the level at which reimbursement is provided for, our products
and may influence a physicians selection of products used to treat patients.
Proprietary Rights and Patent Litigation
We rely on a combination of patents, trademarks, trade secrets and non-disclosure agreements to
protect our intellectual property. We generally file patent applications in the U.S. and foreign
countries where patent protection for our technology is appropriate and available. As of December
31, 2010, we held more than 15,000 patents, and had approximately 9,000 patent applications pending
worldwide that cover various aspects of our technology. In addition, we hold exclusive and
non-exclusive licenses to a variety of third-party technologies covered by patents and patent
applications. There can be no assurance that pending patent applications will result in the
issuance of patents, that patents issued to or licensed by us will not be challenged or
circumvented by competitors, or that these patents will be found to be valid or sufficiently broad
to protect our technology or to provide us with a competitive advantage. In the aggregate, these
intellectual property assets and licenses are of material importance to our business; however, we
believe that no single patent, technology, trademark, intellectual property asset or license,
except for those relating to our drug-eluting coronary stent systems, is material in relation to
our business as a whole.
We rely on non-disclosure and non-competition agreements with employees, consultants and other
parties to protect, in part, trade secrets and other proprietary technology. There can be no
assurance that these agreements will not be breached, that we will have adequate remedies for any
breach, that others will not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary knowledge.
15
There has been substantial litigation regarding patent and other intellectual property rights in
the medical device industry, particularly in the areas in which we compete. We continue to defend
ourselves against claims and legal actions alleging infringement of the patent rights of others.
Adverse determinations in any patent litigation could subject us to significant liabilities to
third parties, require us to seek licenses from third parties, and, if licenses are not available,
prevent us from manufacturing, selling or using certain of our products, which could have a
material adverse effect on our business. Additionally, we may find it necessary to initiate
litigation to enforce our patent rights, to protect our trade secrets or know-how and to determine
the scope and validity of the proprietary rights of others. Patent litigation can be costly and
time-consuming, and there can be no assurance that our litigation expenses will not be significant
in the future or that the outcome of litigation will be favorable to us. Accordingly, we may seek
to settle some or all of our pending litigation, particularly to manage risk over time. Settlement
may include cross licensing of the patents that are the subject of the litigation as well as our
other intellectual property and may involve monetary payments to or from third parties.
See
Item 3 and Note L Commitments and Contingencies to our 2010 consolidated financial
statements included in Item 8 of this Annual Report for a discussion of intellectual property and
other litigation and proceedings in which we are involved. In managements opinion, we are not
currently involved in any legal proceeding other than those specifically identified in Note L,
which, individually or in the aggregate, could have a material effect on our financial condition,
results of operations or liquidity.
Risk Management
The testing, marketing and sale of human healthcare products entails an inherent risk of product
liability claims. In the normal course of business, product liability and securities claims are
asserted against us. Product liability and securities claims may be asserted against us in the
future related to events unknown at the present time. We are substantially self-insured with
respect to product liability and intellectual property infringement claims. We maintain insurance
policies providing limited coverage against securities claims. The absence of significant
third-party insurance coverage increases our potential exposure to unanticipated claims or adverse
decisions. Product liability claims, securities and commercial litigation and other litigation in
the future, regardless of outcome, could have a material adverse effect on our business. We believe
that our risk management practices, including limited insurance coverage, are reasonably adequate
to protect against anticipated product liability and securities litigation losses. However,
unanticipated catastrophic losses could have a material adverse impact on our financial position,
results of operations and liquidity.
Employees
As of December 31, 2010, we had approximately 25,000 employees, including approximately 13,000 in
operations; 6,000 in selling, marketing and distribution; 4,000 in clinical, regulatory and
research and development; and 2,000 in administration. Of these employees, we employed
approximately 10,000 outside the U.S., approximately 7,000 of whom are in the operations function.
We believe that the continued success of our business will depend, in part, on our ability to
attract and retain qualified personnel, and we are committed to developing our people and providing
them with opportunities to contribute to our growth and success.
Community Outreach
In line with our corporate mission to improve the quality of patient care and the productivity of
healthcare delivery, we are committed to making more possible in the communities where we live and
work. We bring this commitment to life by supporting global, national and local health and
education initiatives, striving to improve patient advocacy, adhering to strong ethical standards
that deliver on our commitments, and minimizing our impact on the environment. A prominent example
of our ongoing commitment to patients is our Close the Gap program, which addresses disparities in
cardiovascular care for the underserved patient populations of women, black Americans, and Latino
Americans. Close the Gap increases awareness of cardiovascular risk factors, teaches healthcare
providers about cultural beliefs and barriers to treatment, and advocates for measures that help
ensure all patients receive the cardiovascular care they need.
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Through the Boston Scientific Foundation, we fund non-profit organizations in our local communities
and medical education fellowships at institutions throughout the U.S. Our community
grants support programs aimed at improving the lives of those with unmet needs by engaging in
partnerships that promote long-term, systemic change. The Foundation is committed to funding
organizations focused on increasing access to quality healthcare and improving educational
opportunities, particularly with regards to science, technology, engineering and math. We have
committed to contributing $15 million to our Close the Gap program and Science, Technology,
Engineering and Math (STEM) education over the next three years.
Seasonality
Our worldwide sales do not reflect any significant degree of seasonality; however, customer
purchases have historically been lighter in the third quarter of the year, as compared to other
quarters. This reflects, among other factors, lower demand during summer months, particularly in
European countries.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge on our website
(www.bostonscientific.com) as soon as reasonably practicable after we electronically file the
material with or furnish it to the U.S. Securities and Exchange
Commission (SEC). Printed copies of these posted materials are also available
free of charge to shareholders who request them in writing from Investor Relations, One Boston
Scientific Place, Natick, MA 01760-1537. Information on our website or connected to our website is
not incorporated by reference into this Annual Report.
Safe Harbor for Forward-Looking Statements
Certain statements that we may make from time to time, including statements contained in this
report and information incorporated by reference into this report, constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may be identified by words like
anticipate, expect, project, believe, plan, may, estimate, intend and similar
words. These forward-looking statements are based on our beliefs, assumptions and estimates using
information available to us at the time and are not intended to be guarantees of future events or
performance. These forward-looking statements include, among other things, statements regarding our
financial performance; our growth strategy; our intentions and expectations regarding our business
strategy; the completion of planned acquisitions, divestitures and strategic investments, as well
as integration of acquired businesses; our ability to successfully separate our Neurovascular
business; the timing and impact of our restructuring initiatives, expected costs and cost savings;
our intention not to pay dividends and to instead use our cash flow to repay debt and invest in our
business; changes in the market and our market share;
product development and iterations; timing of regulatory approvals; our regulatory and quality
compliance; expected research and development efforts and the reallocation of research and
development expenditures; new and existing product launches, including their timing in new
geographies and their impact on our market share and financial position; our sales and marketing
strategy and our investments in our sales organization; reimbursement practices; our market
position in the marketplace for our products; our initiatives regarding plant certifications and
reductions; the ability of our suppliers and sterilizers to meet our requirements; our ability to
meet customer demand for our products; the effect of new accounting pronouncements on our financial
results; competitive pressures; the impact of new or recently enacted excise taxes; the effect of
proposed tax laws; the outcome of matters before taxing authorities; our tax position; intellectual
property, governmental proceedings and litigation matters; anticipated expenses and capital
expenditures and our ability to finance them; and our ability to meet the financial covenants
required by our term loan and revolving credit facility, or to renegotiate the terms of or obtain
waivers for compliance with those covenants. If our underlying assumptions turn out to be
incorrect, or if certain risks or uncertainties materialize, actual results could vary materially
from the expectations and projections expressed or implied by our forward-looking statements. As a
result, readers are cautioned not to place undue reliance on any of our forward-looking statements.
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Except as required by law, we do not intend to update any forward-looking statements even if new
information becomes available or other events occur in the future. We have identified these
forward-looking statements, which are based on certain risks and uncertainties, including the risk
factors described in Item 1A of this Annual Report. Factors that could cause actual results to
differ materially from those expressed in forward-looking statements are contained below and
described further in Item 1A.
CRM Business
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Our ability to minimize loss of and recapture market share following
the ship hold and product removal of our ICD and CRT-D systems in the
U.S.; |
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Our ability to retain and attract key members of our CRM sales force
and other key CRM personnel, particularly following the ship hold and
product removal of our ICD and CRT-D systems in the U.S.; |
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Our estimates for the U.S. and worldwide CRM markets, as well as our
ability to increase CRM net sales and recapture market share; |
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The overall performance of, and referring physician, implanting
physician and patient confidence in, our and our competitors CRM
products and technologies, including our COGNIS®
CRT-D and TELIGEN® ICD systems and our
LATITUDE® Patient Management System; |
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The results of CRM clinical trials and market studies undertaken by
us, our competitors or other third parties; |
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Our ability to successfully launch next-generation products and
technology features worldwide, including our INGENIO pacemaker system
and our next-generation INCEPTA, ENERGEN and PUNCTUA defibrillators
in additional geographies; |
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Our ability to grow sales of both new and replacement implant units; |
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Competitive offerings in the CRM market and related declines in
average selling prices, as well as the timing of receipt of regulatory
approvals to market existing and anticipated CRM products and
technologies; and |
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Our ability to avoid disruption in the supply of certain components,
materials or products; or to quickly secure additional or replacement
components, materials or products on a timely basis. |
Coronary Stent Business
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Volatility in the coronary stent market, our estimates for the worldwide coronary stent market, our
ability to increase coronary stent system net sales, competitive offerings and the timing of receipt of
regulatory approvals, both in the U.S. and internationally, to market existing and anticipated
drug-eluting stent technology and other stent platforms; |
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Our ability to successfully launch next-generation products and technology features, including our
PROMUS® Element and TAXUS® Element stent systems in
additional geographies; |
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The results of coronary stent clinical trials undertaken by us, our competitors or other third parties; |
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Our ability to maintain or expand our worldwide market positions through reinvestment in our two
drug-eluting stent programs; |
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Our ability to manage the mix of net sales of everolimus-eluting stent systems supplied to us by Abbott
relative to our total drug-eluting stent system net sales and to launch on-schedule in the U.S. and
Japan our PROMUS® Element next-generation internally-developed and manufactured everolimus-eluting
stent system with gross profit margins more comparable to our TAXUS® stent
systems; |
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Our share of the U.S. and worldwide drug-eluting stent markets, the average number of stents used per
procedure, average selling prices, and the penetration rate of drug-eluting stent technology in the
U.S. and international markets; |
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The overall performance of, and continued physician confidence in, our and other drug-eluting stent
systems; |
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Our reliance on Abbotts manufacturing capabilities and supply chain in the U.S. and Japan, and our
ability to align our everolimus-eluting stent system supply from Abbott with customer demand in these
regions; |
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Enhanced requirements to obtain regulatory approval in the U.S. and around the world and the associated
impact on new product launch schedules and the cost of product approval and compliance; and |
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Our ability to retain and attract key members of our cardiology sales force and other key personnel. |
Other Businesses
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The overall performance of, and continued physician confidence in, our products and technologies; |
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Our ability to successfully launch next-generation products and technology features in a timely manner; |
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The results of clinical trials undertaken by us, our competitors or other third parties; and |
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Our ability to maintain or expand our worldwide market positions through investments in next-generation
technologies. |
Litigation and Regulatory Compliance
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Risks generally associated with our regulatory compliance and quality systems in the U.S. and
around the world; |
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Our ability to minimize or avoid future field actions or FDA warning letters relating to our
products and the on-going inherent risk of potential physician advisories or field actions related
to medical devices; |
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Heightened global regulatory enforcement arising from political and regulatory changes as well as
economic pressures; |
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The effect of our litigation and risk management practices, including self-insurance, and
compliance activities on our loss contingencies, legal provision and cash flows; |
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The impact of, diversion of management attention, and costs to resolve, our stockholder derivative
and class action, patent, product liability, contract and other litigation, governmental
investigations and legal proceedings; |
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Costs associated with our on-going compliance and quality activities and sustaining organizations; |
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The impact of increased pressure on the availability and rate of third-party reimbursement for our
products and procedures worldwide; and |
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Legislative or regulatory efforts to modify the product approval or reimbursement process,
including a trend toward demonstrating clinical outcomes, comparative effectiveness and cost
efficiency. |
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Innovation
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Our ability to complete planned clinical trials successfully, to obtain regulatory approvals and to
develop and launch products on a timely basis within cost estimates, including the successful completion
of in-process projects from purchased research and development; |
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Our ability to manage research and development and other operating expenses consistent with our expected
net sales growth; |
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Our ability to develop and launch next-generation products and technologies successfully across all of
our businesses; |
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Our ability to fund with cash or common stock any acquisitions or alliances, or to fund contingent
payments associated with these acquisitions or alliances; |
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Our ability to achieve benefits from our focus on internal research and development and external
alliances and acquisitions as well as our ability to capitalize on opportunities across our businesses; |
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Our failure to succeed at, or our decision to discontinue, any of our growth initiatives, as well as
competitive interest in the same or similar technologies; |
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Our ability to integrate the strategic acquisitions we have consummated or may consummate in the future; |
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Our ability to prioritize our internal research and development project portfolio and our external
investment portfolio to identify profitable revenue growth opportunities and keep expenses in line with expected
revenue levels, or our decision to sell, discontinue, write down or reduce the funding of any of these
projects; |
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The timing, size and nature of strategic initiatives, market opportunities and research and development
platforms available to us and the ultimate cost and success of these initiatives; and |
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Our ability to successfully identify, develop and market new products or the ability of others to
develop products or technologies that render our products or technologies noncompetitive or obsolete. |
International Markets
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Our dependency on international net sales to achieve growth; |
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Changes in our international structure and leadership; |
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Risks associated with international operations, including compliance
with local legal and regulatory requirements as well as changes in
reimbursement practices and policies; |
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Our ability to maintain or expand our worldwide market positions
through investments in emerging markets; |
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The potential effect of foreign currency fluctuations and interest
rate fluctuations on our net sales, expenses and resulting margins;
and |
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Uncertainties related to economic conditions. |
Liquidity
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Our ability to generate sufficient cash flow to fund operations,
capital expenditures, litigation settlements |
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and strategic investments and acquisitions, as well as to effectively manage our debt levels and
covenant compliance; |
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Our ability to access the public and private capital markets when
desired and to issue debt or equity securities on terms reasonably
acceptable to us; |
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Our ability to resolve open tax matters favorably and realize
substantially all of our deferred tax assets and the impact of changes
in tax laws; and |
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The impact of examinations and assessments by domestic and
international taxing authorities on our tax provision, financial
condition or results of operations. |
Strategic Initiatives
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Our ability to implement, fund, and achieve timely and sustainable cost improvement measures consistent
with our expectations, including our 2010 Restructuring plan and Plant Network Optimization program; |
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Our ability to maintain or expand our worldwide market positions in the various markets in which we compete
or seek to compete, as we diversify our product portfolio and focus on emerging markets; |
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Risks associated with significant changes made or to be made to our organizational structure pursuant to
our 2010 Restructuring plan and Plant Network Optimization program, or to the membership and
responsibilities of our executive committee or Board of Directors; |
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Our ability to direct our
research and development efforts to conduct more cost-effective clinical studies,
accelerate the time to bring new products to market, and develop products with higher returns; |
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The successful separation of divested businesses, including the performance of related transition services; |
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Our ability to retain and attract key employees and avoid business disruption and employee distraction as
we execute our global compliance program, restructuring plans and divestitures of assets or businesses; and |
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Our ability to maintain management focus on core business activities while also concentrating on
implementing strategic and restructuring initiatives. |
Several important factors, in addition to the specific risk factors discussed in connection with
forward-looking statements individually and the risk factors described in Item 1A under the heading
Risk Factors, could affect our future results and growth rates and could cause those results and
rates to differ materially from those expressed in the forward-looking statements and the risk
factors contained in this report. These additional factors include, among other things, future
economic, competitive, reimbursement and regulatory conditions; new product introductions;
demographic trends; intellectual property, litigation and government investigations; financial
market conditions; and future business decisions made by us and our competitors, all of which are
difficult or impossible to predict accurately and many of which are beyond our control. Therefore,
we wish to caution each reader of this report to consider carefully these factors as well as the
specific factors discussed with each forward-looking statement and risk factor in this report and
as disclosed in our filings with the SEC. These factors, in some cases, have affected and in the
future (together with other factors) could affect our ability to implement our business strategy
and may cause actual results to differ materially from those contemplated by the statements
expressed in this Annual Report.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Annual Report and the exhibits hereto, the
following risk factors should be considered carefully in evaluating our business. Our business,
financial condition, cash flows or
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results of operations could be materially adversely affected by any of these risks. This section
contains forward-looking statements. You should refer to the explanation of the qualifications and
limitations on forward-looking statements set forth at the end of Item 1 of this Annual Report.
Additional risks not presently known to us or that we currently deem immaterial may also adversely
affect our business, financial condition, cash flows or results of operations.
We face various risks and uncertainties as a result of the ship hold and removal of field inventory
of all implantable cardioverter defibrillator (ICD) and cardiac resynchronization therapy
defibrillator (CRT-D) systems offered by our Cardiac Rhythm Management (CRM) business in the U.S.,
which we announced on March 15, 2010. Those risks and uncertainties include harm to our business,
reputation, financial condition and results of operations.
On March 15, 2010, we announced the ship hold and removal of field inventory of all ICD systems and
CRT-D systems offered by our CRM division in the U.S., after determining that certain instances of
changes in the manufacturing process related to these products were not submitted for approval to
the U.S. Food and Drug Administration (FDA). We have since submitted the required documentation
and, on April 15, 2010, we resumed U.S. distribution of our COGNIS® CRT-D systems and TELIGEN® ICD
systems, and, on May 21, 2010, we resumed U.S. distribution of all of our remaining CRT-D and ICD
devices, in each case following required FDA clearance. As a result of these actions, we have
suffered and may continue to suffer loss of market share for these products in the U.S. While we
continue to work on recapturing lost market share, our on-going net sales and results of operations
will likely continue to be negatively impacted. We may be unable to minimize this impact, or to
offset with the release of future products, and we may suffer on-going harm to our reputation,
among other risks and uncertainties, each of which may have an adverse impact on our business,
financial condition and results of operations.
Declines in average selling prices for our products, particularly our drug-eluting coronary stent
systems, may materially adversely affect our results of operations.
We have experienced pricing pressures across many of our businesses due to competitive activity,
increased market power of our customers as the healthcare industry consolidates, economic pressures
experienced by our customers, and the impact of managed care organizations and other third-party
payors. Competitive pricing pressures, including aggressive pricing offered by market entrants,
have particularly affected our drug-eluting coronary stent system offerings. We estimate that the
average selling price of our drug-eluting stent systems in the U.S. decreased nine percent in 2010
as compared to the prior year. Continued declines in average selling prices of our products due to
pricing pressures may have an adverse impact on our results of operations.
We derive a significant portion of our net sales from the sale of drug-eluting coronary stent
systems and CRM products. Declines in market size, average selling prices, procedural volumes, and
our share of the markets in which we compete; increased competition; market perceptions of studies
published by third parties; interruption in supply of everolimus-eluting stent systems in the U.S.
and Japan; changes in our sales personnel; or product launch delays may materially adversely affect
our results of operations and financial condition, including potential future write-offs of our
goodwill and other intangible assets balances.
Net sales from drug-eluting coronary stent systems represented approximately 20 percent of our
consolidated net sales during 2010. In 2010, lower average selling prices driven by competitive
and other pricing pressures resulted in a decline in our share of the U.S. drug-eluting stent
market, as well as an overall decrease in the size of the market. Recent competitive launches and
clinical trial enrollment limiting our access to certain drug-eluting stent system customers
negatively impacted our share of the worldwide drug-eluting stent market. There can be no
assurance that these and other factors will not further impact our share of the U.S. or worldwide
drug-eluting stent markets, that we will regain share of the U.S. or worldwide drug-eluting stent
markets, or that the size of the U.S. drug-eluting stent market will reach previous levels or will
not decline further, all of which could materially adversely affect our results of operations or
financial condition. In addition, we expect to launch our internally-developed and manufactured
next-generation everolimus-eluting stent system, the PROMUS® Element platinum chromium coronary
stent system, in the U.S. and Japan in mid-2012, and we expect to launch our next-generation TAXUS®
Element stent system in the U.S. in mid-2011 and Japan in late 2011 or early 2012. A delay in the
timing of the launch of next-generation products may result in a further decline in our market
share and have an adverse impact on our results of operations.
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We share, with Abbott Laboratories, rights to everolimus-eluting stent technology, and are reliant
on Abbott for our supply of PROMUS® everolimus-eluting stent systems in the U.S. and Japan. Any
production or capacity issues that affect Abbotts manufacturing capabilities or our process for
forecasting, ordering and receiving shipments may impact our ability to increase or decrease the
level of supply to us in a timely manner; therefore, our supply of everolimus-eluting stent systems
supplied to us by Abbott may not align with customer demand. Our supply agreement for the PROMUS®
stent system from Abbott extends through the end of the second quarter of 2012 in the U.S. and
Japan. Our inability to obtain regulatory approval and timely launch our PROMUS® Element stent
system in these regions could result in an inability to meet customer demand for everolimus-eluting
stent systems and may materially adversely affect our results of operations or financial condition.
Net sales from our CRM group represented approximately 28 percent of our consolidated net sales in
2010. Worldwide CRM market growth rates, including the U.S. ICD market, remain low. Further,
physician reaction to study results published by the Journal of the American Medical Association
regarding evidence-based guidelines for ICD implants and the U.S. Department of Justice
investigation into ICD implants may have a negative impact on the size of the CRM market. Our U.S.
ICD sales represented approximately 48 percent of our worldwide CRM net sales in 2010, and any
changes in this market could have a material adverse effect on our financial condition or results
of operations. We have suffered, and may continue to suffer, loss of net sales and market share in
the U.S. due to the ship hold and removal of field inventory of all of our ICDs and CRT-Ds offered
in the U.S., which we announced on March 15, 2010. There can be no assurance that the size of the
CRM market will increase above existing levels or that we will be able to increase CRM market share
or increase net sales in a timely manner, if at all. Decreases in market size or our share of the
CRM market and decreases in net sales from our CRM products could have a significant impact on our
financial condition or results of operations. In addition, our inability to increase our worldwide
CRM net sales could result in future goodwill and other intangible asset impairment charges. We
expect to launch our next-generation wireless pacemaker in our Europe/Middle East/Africa (EMEA)
region and certain Inter-Continental countries during the second half of 2011, and in the U.S. in
late 2011 or early 2012. Variability in the timing of the launch of next-generation products may
result in excess or expired inventory positions and future inventory charges, which may result in a
loss of market share and adversely impact our results of operations.
The profit margin of everolimus-eluting stent systems supplied to us by Abbott Laboratories,
including any improvements or iterations approved for sale during the term of the applicable supply
arrangements and of the type that could be approved by a supplement to an approved FDA pre-market
approval, is significantly lower than that of our TAXUS® stent systems, TAXUS® Element stent
systems and PROMUS® Element stent systems, and an increase in sales of everolimus-eluting stent
systems supplied to us by Abbott relative to TAXUS® stent system, TAXUS® Element stent system and
PROMUS® Element stent system net sales may continue to adversely impact our gross profit and
operating profit margins. The price we pay Abbott for our supply of everolimus-eluting stent
systems supplied to us by Abbott is further impacted by our arrangements with Abbott and is subject
to retroactive adjustment, which may also negatively impact our profit margins.
As a result of the terms of our supply arrangement with Abbott, the gross profit and operating
profit margin of everolimus-eluting stent systems supplied to us by Abbott, including any
improvements or iterations approved for sale during the term of the applicable supply arrangements
and of the type that could be approved by a supplement to an approved FDA pre-market approval, are
significantly lower than that of our TAXUS® stent system, TAXUS® Element stent system and PROMUS®
Element stent system. Therefore, if sales of everolimus-eluting stent systems supplied to us by
Abbott continue to increase in relation to our total drug-eluting stent system sales, our profit
margins will continue to decrease. Further, the price we pay for our supply of everolimus-eluting
stent systems supplied to us by Abbott is determined by our contracts with Abbott. Our cost is
based, in part, on previously fixed estimates of Abbotts manufacturing costs for
everolimus-eluting stent systems and third-party reports of our average selling price of these
stent systems. Amounts paid pursuant to this pricing arrangement are subject to a retroactive
adjustment approximately every two years based on their actual costs to manufacture these stent
systems for us and our average selling price of everolimus-eluting stent systems supplied to us by
Abbott. Pursuant to these adjustments, we may make a payment to Abbott based on the differences
between their actual manufacturing costs and the contractually stipulated manufacturing costs and
differences between our actual average selling price and third-party reports of our average selling
price, in each
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case, with respect to our purchases of everolimus-eluting stent systems from Abbott. As a result,
our profit margins in the years in which we record payments related to purchases of
everolimus-eluting stent systems from Abbott may decrease.
Consolidation in the healthcare industry could lead to increased demands for price concessions or
the exclusion of some suppliers from certain of our significant market segments, which could have
an adverse effect on our business, financial condition or results of operations.
The cost of healthcare has risen significantly over the past decade and numerous initiatives and
reforms by legislators, regulators and third-party payors to curb these costs have resulted in a
consolidation trend in the healthcare industry, including hospitals. This consolidation has
resulted in greater pricing pressures, decreased average selling prices, and the exclusion of
certain suppliers from important market segments as group purchasing organizations, independent
delivery networks and large single accounts continue to consolidate purchasing decisions for some
of our hospital customers. While our strategic initiatives include measures to address these
trends, there can be no assurance that these measures will succeed. We expect that market demand,
government regulation, third-party reimbursement policies, government contracting requirements, and
societal pressures will continue to change the worldwide healthcare industry, resulting in further
business consolidations and alliances among our customers and competitors, which may reduce
competition and continue to exert further downward pressure on the prices of our products and
adversely impact our business, financial condition or results of operations.
We face intense competition and may not be able to keep pace with the rapid technological changes
in the medical devices industry, which could have an adverse effect on our business, financial
condition or results of operations.
The medical device markets in which we primarily participate are highly competitive. We encounter
significant competition across our product lines and in each market in which our products are sold
from various medical device companies, some of which may have greater financial and marketing
resources than we do. Our primary competitors include Johnson & Johnson (including its subsidiary,
Cordis Corporation); Medtronic, Inc.; Abbott Laboratories; and St. Jude Medical, Inc.; as well as a
wide range of companies that sell a single or a limited number of competitive products or which
participate in only a specific market segment. We also face competition from non-medical device
companies, including pharmaceutical companies, which may offer alternative therapies for disease
states intended to be treated using our products.
Additionally, the medical device market is characterized by extensive research and development, and
rapid technological change. Developments by other companies of new or improved products, processes
or technologies may make our products or proposed products obsolete or less competitive and may
negatively impact our net sales. We are required to devote continued efforts and financial
resources to develop or acquire scientifically advanced technologies and products, apply our
technologies cost-effectively across product lines and markets, attract and retain skilled
development personnel, obtain patent and other protection for our technologies and products, obtain
required regulatory and reimbursement approvals and successfully manufacture and market our
products consistent with our quality standards. If we fail to develop new products or enhance
existing products, it could have a material adverse effect on our business, financial condition or
results of operations.
Because we derive a significant amount of our net sales from international operations and a
significant percentage of our future growth is expected to come from international operations,
changes in international economic or regulatory conditions could have a material impact on our
business, financial condition or results of operations.
Sales outside the U.S. accounted for approximately 44 percent of our net sales in 2010.
Additionally, a significant percentage of our future growth is expected to come from international
operations, including from investments in emerging markets such as Brazil, China and India. As a
result, our sales growth and operating profits from our international operations may be limited by
risks and uncertainties related to economic conditions in these regions, foreign currency
fluctuations, interest rate fluctuations, regulatory and reimbursement approvals, competitive
offerings, infrastructure development, rights to intellectual property and our ability to implement
our overall business strategy. Further, international markets are also being affected by economic
pressure to contain
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reimbursement levels and healthcare costs; and international markets may also be impacted by
foreign government efforts to understand healthcare practices and pricing in other countries, which
could result in increased pricing transparency across geographies and pressure to harmonize
reimbursement and ultimately reduce the selling prices of our products. Certain foreign governments
may allow favorable reimbursements for locally-manufactured products, which may put us at a
competitive disadvantage and negatively affect our market share. The trend in countries around the
world, including Japan, toward more stringent regulatory requirements for product clearance,
changing reimbursement models and more rigorous inspection and enforcement activities has generally
caused or may cause medical device manufacturers to experience more uncertainty, delay, risk and
expense. In addition, most international jurisdictions have adopted regulatory approval and
periodic renewal requirements for medical devices, and we must comply with these requirements in
order to market our products in these jurisdictions. Any significant changes in the competitive,
political, legal, regulatory, reimbursement or economic environment where we conduct international
operations may have a material impact on our business, financial condition or results of
operations. We have recently realigned our international structure and are devoting resources to
focus on increasing net sales in emerging markets. Sales practices in certain international
markets may be inconsistent with our desired business practices and U.S. legal requirements, which
may impact our ability to expand as planned.
We incurred substantial indebtedness in connection with our acquisition of Guidant and if we are
unable to manage our debt levels, it could have an adverse effect on our financial condition or
results of operations.
We had total debt of $5.438 billion as of December 31, 2010, attributable in large part to our 2006
acquisition of Guidant Corporation. During 2010, we completed the refinancing of the majority of
our 2011 debt maturities, establishing a $1.0 billion term loan and syndicating a new $2.0 billion
revolving credit facility, and prepaid in full our $900 million loan from Abbott Laboratories and
all $600 million of our senior notes due in June 2011. Additionally, in January 2011, we prepaid
$250 million of our senior notes due in January 2011 and borrowed $250 million under our credit and
security facility secured by our U.S. trade receivables, using the proceeds to pre-pay all $100
million of our 2011 term loan maturities and $150 million of our 2012 term loan maturities. As
part of our strategy to increase operational leverage and continue to strengthen our financial
flexibility, we are continuing to assess opportunities for improved operational effectiveness and
efficiency, closed the sale of our Neurovascular business and implemented other strategic
initiatives to generate proceeds that would be available for debt repayment. There can be no
assurance that we will be able to repay our indebtedness. Further, certain of our current credit
ratings are below investment grade and our inability to regain investment grade credit ratings
could increase our cost of borrowing funds in the future. Any disruption in our cash flow or our
ability to effectively manage our debt levels could have an adverse effect on our financial
condition or results of operations. In addition, our term loan and revolving credit facility
agreement contains financial covenants that require us to maintain specified financial ratios. If
we are unable to satisfy these covenants, we may be required to obtain waivers from our lenders and
no assurance can be made that our lenders would grant such waivers on favorable terms or at all,
and we could be required to repay any borrowings under this facility on demand.
We may record future goodwill impairment charges related to one or more of our business units,
which could materially adversely impact our results of operations.
We test our April 1 goodwill balances for impairment during the second quarter of each year, or
more frequently if indicators are present or changes in circumstances suggest that impairment may
exist. We assess goodwill for impairment at the reporting unit level and, in evaluating the
potential for impairment of goodwill, we make assumptions regarding estimated revenue projections,
growth rates, cash flows and discount rates. In 2010, we recorded a goodwill impairment charge of
$1.817 billion associated with our U.S. CRM reporting unit. In addition, as a result of signing of
a definitive agreement to sell our Neurovascular business, we performed an interim impairment test
on our international reporting units, excluding the assets of that business, and determined that
the remaining goodwill balances were not impaired. However, we have identified four reporting units
with a material amount of goodwill that are at higher risk of potential failure of the first step
of the impairment test in future reporting periods. These reporting units include our U.S. CRM
unit, our U.S. Cardiovascular unit, our U.S. Neuromodulation unit, and our EMEA region, which
together hold approximately $9 billion of allocated goodwill. Although we use consistent methodologies in
developing the assumptions and estimates underlying the fair value calculations used in our
impairment tests, these estimates are uncertain by nature and
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can vary from actual results. For each of these reporting units, relatively small declines in the
future performance and cash flows of the reporting unit or small changes in other key assumptions
may result future goodwill impairment charges, which could materially adversely impact our results
of operations.
Failure to integrate acquired businesses into our operations successfully could adversely affect
our business.
As
part of our strategy to realign our business portfolio, we have
recently completed or announced several
acquisitions and may pursue additional acquisitions in the future. Our integration of the operations
of acquired businesses requires significant efforts, including the coordination of information
technologies, research and development, sales and marketing, operations, manufacturing and finance.
These efforts result in additional expenses and involve significant amounts of managements time.
Factors that will affect the success of our acquisitions include the strength of the acquired
companies underlying technology and ability to execute, results of clinical trials, regulatory
approvals and reimbursement levels of the acquired products and related procedures, our ability to
adequately fund acquired in-process research and development projects and retain key employees, and
our ability to achieve synergies with our acquired companies, such as increasing sales of our
products, achieving cost savings and effectively combining technologies to develop new products.
Our failure to manage successfully and coordinate the growth of the combined acquired companies
could have an adverse impact on our business. In addition, we cannot be certain that the
businesses we acquire will become profitable or remain so and if our acquisitions are not
successful, we may record related asset impairment charges in the future.
We may not be successful in our strategy relating to future strategic acquisitions of, investments
in, or alliances with, other companies and businesses, which have been a significant source of
historical growth for us, and will be key to our diversification into new markets and technologies.
Our strategic acquisitions, investments and alliances are intended to further expand our ability to
offer customers effective, high quality medical devices that satisfy their interventional needs. If
we are unsuccessful in our acquisitions, investments and alliances, we may be unable to grow our
business. These acquisitions, investments and alliances have been a significant source of our
growth. The success of our strategy relating to future acquisitions, investments or alliances will
depend on a number of factors, including:
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our ability to identify suitable opportunities for acquisition, investment or alliance, if at all; |
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our ability to finance any future acquisition, investment or alliance on terms acceptable to us, if at all; |
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whether we are able to establish an acquisition, investment or alliance on terms that are satisfactory to
us, if at all; and |
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intellectual property and litigation related to these technologies. |
Any potential future acquisitions we consummate may be dilutive to our earnings and may require
additional debt or equity financing, depending on size or nature.
We may not realize the expected benefits from our restructuring and Plant Network Optimization
initiatives; our long-term expense reduction programs may result in an increase in short-term
expense; and our efforts may lead to additional unintended consequences.
In February 2010, we announced our 2010 Restructuring plan designed to strengthen and position us
for long-term success. Key activities under the plan include the integration of our Cardiovascular
and CRM businesses, as well as the restructuring of certain other businesses and corporate
functions; the centralization of our research and development organization; the realignment of our
international structure; and the reprioritization and diversification of our product portfolio. In
connection with this plan and our strategy to reduce risk, increase operational leverage, realign
our business portfolio and accelerate profitable revenue growth, we recently closed the sale of our
Neurovascular business and may explore opportunities to divest additional select businesses or
assets in the future. However, our ability to complete further divestitures may be limited by the
inability to locate a buyer or to agree to terms that are favorable to us. Additionally, in January
2009, we announced our Plant Network
26
Optimization program, aimed at simplifying our plant network, reducing our manufacturing costs and
improving gross margins. Cost reduction initiatives under both plans include cost improvement
measures, including resource reallocations, head count reductions, the sale of certain non-strategic
assets and efforts to streamline our business, among other actions. These measures could yield
unintended consequences, such as distraction of our management and employees, business disruption,
attrition beyond our planned reduction in workforce and reduced employee productivity. We may be
unable to attract or retain key personnel. Attrition beyond our planned reduction in workforce or a
material decrease in employee morale or productivity could negatively affect our business, sales,
financial condition and results of operations. In addition, head count reductions may subject us to
the risk of litigation, which could result in substantial cost. Moreover, our expense reduction
programs result in charges and expenses that impact our operating results. We cannot guarantee that
these measures, or other expense reduction measures we take in the future, will result in the
expected cost savings.
The divestiture of our Neurovascular business could pose significant risks and may materially
adversely affect our business, financial condition and operating results.
As part of our strategy to realign our business portfolio, in January 2011, we closed the sale of
our Neurovascular business to Stryker Corporation. The divestiture of this business may involve a
number of risks, including the diversion of management and employee attention and significant costs
and expenses, particularly unexpected costs and delays occurring during the period of separation.
In addition, we will provide post-closing services through a transition services agreement, and
will also supply products to Stryker. These transition services and supply agreements are expected
to be effective for a period of approximately 24 months following the closing of the transaction,
subject to extension, and could involve the expenditure of significant employee resources, among
other resources, and under which we will be reliant on third parties for the provision of services.
Our inability to effectively manage the post-separation activities and events could adversely
affect our business, financial condition and results of operations.
Current economic conditions could adversely affect our results of operations.
The recent global financial crisis caused extreme disruption in the financial markets, including
severely diminished liquidity and credit availability. There can be no assurance that there will
not be further deterioration in the global economy. Our customers may experience financial
difficulties or be unable to borrow money to fund their operations which may adversely impact their
ability or decision to purchase our products, particularly capital equipment, or to pay for our
products they do purchase on a timely basis, if at all. For example, our net sales have been
adversely impacted by reductions in procedural volumes due to unemployment levels and other
economic factors, and these reductions may continue. Further, we have experienced significant
delays in the collectability of receivables in certain international countries and there can be no
assurance that these payments will ultimately be collected. Conditions in the financial markets
and other factors beyond our control may also adversely affect our ability to borrow money in the
credit markets and to obtain financing for acquisitions or other general corporate and commercial
purposes. The strength and timing of any economic recovery remains uncertain, and we cannot
predict to what extent the global economic slowdown may negatively impact our average selling
prices, our net sales and profit margins, procedural volumes and reimbursement rates from third
party payors. In addition, current economic conditions may adversely affect our suppliers, leading
them to experience financial difficulties or to be unable to borrow money to fund their operations,
which could cause disruptions in our ability to produce our products.
Healthcare policy changes, including recently passed healthcare reform legislation, may have a
material adverse effect on our business, financial condition, results of operations and cash flows.
Political, economic and regulatory influences are subjecting the healthcare industry to potential
fundamental changes that could substantially affect our results of operations. Government and
private sector initiatives to limit the growth of healthcare costs, including price regulation,
competitive pricing, coverage and payment policies, comparative effectiveness of therapies,
technology assessments and managed-care arrangements, are continuing in many countries where we do
business, including the U.S. These changes are causing the marketplace to put increased emphasis
on the delivery of more cost-effective treatments. Our strategic initiatives include measures to address this trend; however, there can be no assurance that any of our
strategic measures will successfully address this trend.
27
The Patient Protection and Affordable Care Act and Health Care and Education Affordability
Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. As a U.S.
headquartered company with significant sales in the U.S., this healthcare reform legislation will
materially impact us. Certain provisions of the legislation will not be effective for a number of
years, there are many programs and requirements for which the details have not yet been fully
established or consequences not fully understood, and it is unclear what the full impact of the
legislation will be. The legislation imposes on medical device manufacturers a 2.3 percent excise
tax on U.S. sales of Class I, II and III medical devices beginning in 2013. U.S. net sales
represented 56 percent of our worldwide net sales in 2010 and, therefore, this tax burden may have
a material, negative impact on our results of operations and our cash flows. Other provisions of
this legislation, including Medicare provisions aimed at improving quality and decreasing costs,
comparative effectiveness research, an independent payment advisory board, and pilot programs to
evaluate alternative payment methodologies, could meaningfully change the way healthcare is
developed and delivered, and may adversely affect our business and results of operations. Further,
we cannot predict what healthcare programs and regulations will be ultimately implemented at the
federal or state level, or the effect of any future legislation or regulation in the U.S. or
internationally. However, any changes that lower reimbursements for our products or reduce medical
procedure volumes could adversely affect our business and results of operations.
Healthcare cost containment pressures and legislative or administrative reforms resulting in
restrictive reimbursement practices of third-party payors or preferences for alternate therapies
could decrease the demand for our products, the prices which customers are willing to pay for those
products and the number of procedures performed using our devices, which could have an adverse
effect on our business, financial condition or results of operations.
Our products are purchased principally by hospitals, physicians and other healthcare providers
around the world that typically bill various third-party payors, including governmental programs
(e.g., Medicare and Medicaid), private insurance plans and managed care programs, for the
healthcare services provided to their patients. The ability of customers to obtain appropriate
reimbursement for their products and services from private and governmental third-party payors is
critical to the success of medical technology companies. The availability of reimbursement affects
which products customers purchase and the prices they are willing to pay. Reimbursement varies from
country to country and can significantly impact the acceptance of new products and services. After
we develop a promising new product, we may find limited demand for the product unless reimbursement
approval is obtained from private and governmental third-party payors. Further legislative or
administrative reforms to the reimbursement systems in the U.S., Japan, or other international
countries in a manner that significantly reduces reimbursement for procedures using our medical
devices or denies coverage for those procedures, including price regulation, competitive pricing,
coverage and payment policies, comparative effectiveness of therapies, technology assessments and
managed-care arrangements, could have a material adverse effect on our business, financial
condition or results of operations.
Major third-party payors for hospital services in the U.S. and abroad continue to work to contain
healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of
healthcare expenditures by both private health insurers and employers, has resulted in increased
discounts and contractual adjustments to hospital charges for services performed, has lead to
increased physician employment by hospitals in the U.S., and has shifted services between inpatient
and outpatient settings. Initiatives to limit the increase of healthcare costs, including price
regulation, are also underway in several countries in which we do business. Hospitals or physicians
may respond to these cost-containment pressures by substituting lower cost products or other
therapies for our products. In connection with Guidants product recalls, certain third-party
payors have sought, and others may seek, recourse against us for amounts previously reimbursed.
We are subject to extensive and dynamic medical device regulation, which may impede or hinder the
approval or sale of our products and, in some cases, may ultimately result in an inability to
obtain approval of certain products or may result in the recall or seizure of previously approved
products.
28
Our products, marketing, sales and development activities and manufacturing processes are subject
to extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic
Act (FDC Act), by comparable agencies in foreign countries, and by other regulatory agencies and
governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before
they can be commercially marketed in the U.S. The FDA has recently been reviewing its clearance
process in an effort to make it more rigorous, and there have been a number of recommendations made
by various task forces and working groups to change the 510(k) Submission program. Some of these
proposals, if enacted, could increase the level and complexity of premarket data requirements for
certain higher-risk Class II products. Others could increase the cost of maintaining the legal
status of Class II devices entered into the market via 510(k) Submissions. We have a portfolio of
products that includes numerous Class II medical devices. If implemented as currently proposed, the
changes to the 510(k) Submission program could substantially increase the cost, complexity and time
to market for certain higher-risk Class II medical devices. In addition, most major markets for
medical devices outside the U.S. require clearance, approval or compliance with certain standards
before a product can be commercially marketed. The process of obtaining marketing approval or
clearance from the FDA for new products, or with respect to enhancements or modifications to
existing products, could:
|
|
|
take a significant period of time; |
|
|
|
|
require the expenditure of substantial resources; |
|
|
|
|
involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance; |
|
|
|
|
require changes to products; and |
|
|
|
|
result in limitations on the indicated uses of products. |
Countries around the world have adopted more stringent regulatory requirements than in the past and
that have added or are expected to add to the delays and uncertainties associated with new product
releases, as well as the clinical and regulatory costs of supporting those releases. Even after
products have received marketing approval or clearance, product approvals and clearances by the FDA
can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial approval. There can be no assurance that we will receive the required
clearances for new products or modifications to existing products on a timely basis or that any
approval will not be subsequently withdrawn or conditioned upon extensive post-market study
requirements.
In addition, regulations regarding the development, manufacture and sale of medical devices are
subject to future change. We cannot predict what impact, if any, those changes might have on our
business. Failure to comply with regulatory requirements could have a material adverse effect on
our business, financial condition and results of operations. Later discovery of previously unknown
problems with a product or manufacturer could result in fines, delays or suspensions of regulatory
clearances, seizures or recalls of products, physician advisories or other field actions, operating
restrictions and/or criminal prosecution. We may also initiate field actions as a result of a
failure to strictly comply with our internal quality policies. The failure to receive product
approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of
products, physician advisories or other field actions, or the withdrawal of product approval by the
FDA could have a material adverse effect on our business, financial condition or results of
operations.
Our products, including those of our cardiovascular businesses, are continually subject to clinical
trials conducted by us, our competitors or other third parties, the results of which may be
unfavorable, or perceived as unfavorable by the market, and could have a material adverse effect on
our business, financial condition or results of operations.
As a part of the regulatory process of obtaining marketing clearance for new products, we conduct
and participate in numerous clinical trials with a variety of study designs, patient populations
and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical
trials conducted by us, by our competitors or by third parties, or the markets perception of this
clinical data, may adversely impact our ability
29
to obtain product approvals, our position in, and share of, the markets in which we participate and
our business, financial condition, results of operations or future prospects.
Our future growth is dependent upon the development of new products, which requires significant
research and development, clinical trials and regulatory approvals, all of which are very expensive
and time-consuming and may not result in commercially viable products.
In order to develop new products and improve current product offerings, we focus our research and
development programs largely on the development of next-generation and novel technology offerings
across multiple programs and businesses. We expect to launch our internally-manufactured
next-generation everolimus-eluting stent system, the PROMUS® Element platinum chromium coronary
stent, in the U.S. and Japan in mid-2012, subject to regulatory approval. In addition, we expect to
continue to invest in our CRM technologies, including our LATITUDE® Patient Management System and
our next-generation products and technologies. If we are unable to develop and launch these and
other products as anticipated, our ability to maintain or expand our market position in the
drug-eluting stent and CRM markets may be materially adversely impacted. Further, we are continuing
to investigate, and have completed several acquisitions involving, opportunities to further expand
our presence in, and diversify into, areas including, but not limited to, atrial fibrillation,
underserved defibrillator populations, coronary artery disease, peripheral vascular disease,
structural heart disease, hypertension, womens health, endoluminal surgery, diabetes/obesity,
endoscopic pulmonary intervention and deep-brain stimulation. Expanding our focus beyond our
current businesses is expensive and time-consuming. Further, there can be no assurance that we will
be able to access these technologies on terms favorable to us, or that these technologies will
achieve commercial feasibility, obtain regulatory approval or gain market acceptance. A delay in
the development or approval of these technologies or our decision to reduce our investments may
adversely impact the contribution of these technologies to our future growth.
The medical device industry is experiencing greater scrutiny and regulation by governmental
authorities and is the subject of numerous investigations, often involving marketing and other
business practices. These investigations could result in the commencement of civil and criminal
proceedings; substantial fines, penalties and administrative remedies; divert the attention of our
management; impose administrative costs and have an adverse effect on our financial condition,
results of operations and liquidity; and may lead to greater governmental regulation in the future.
The medical devices we design, develop, manufacture and market are subject to rigorous regulation
by the FDA and numerous other federal, state and foreign governmental authorities. These
authorities have been increasing their scrutiny of our industry. We have received subpoenas and
other requests for information from Congress and other state and federal governmental agencies,
including, among others, the U.S. Department of Justice (DOJ), the Office of Inspector General of
the Department of Health and Human Services (HHS), and the Department of Defense. These
investigations relate primarily to financial arrangements with healthcare providers, regulatory
compliance and product promotional practices. We are cooperating with these investigations and are
responding to these requests. We cannot predict when the investigations will be resolved, the
outcome of these investigations or their impact on us. An adverse outcome in one or more of these
investigations could include the commencement of civil and criminal proceedings; substantial fines,
penalties and administrative remedies, including exclusion from government reimbursement programs,
entry into Corporate Integrity Agreements (CIAs) with governmental agencies and amendments to
existing CIAs. In addition, resolution of any of these matters could involve the imposition of
additional and costly compliance obligations. For example, in 2009, we entered into a civil
settlement with the DOJ regarding the DOJs investigation relating to certain post-market surveys
conducted by Guidant Corporation before we acquired Guidant in 2006. As part of the settlement, we
entered into a CIA with the Office of Inspector General for HHS. The CIA requires enhancements to
certain compliance procedures related to financial arrangements with healthcare providers. The
obligations imposed upon us by the CIA and cooperation with ongoing investigations will involve
employee resources costs and diversion of employee focus. Cooperation typically also involves
document production costs. We may incur greater future costs to fulfill the obligations imposed
upon us by the CIA. Further, the CIA, and if any of the ongoing investigations continue over a long
period of time, could further divert the attention of management from the day-to-day operations of
our business and impose significant additional administrative burdens on us. These potential
consequences, as well as any adverse outcome from these investigations, could have a material
adverse effect on our financial condition, results of operations and liquidity.
30
In addition, certain state governments (including that of Massachusetts, where we are
headquartered) have enacted, and the federal government has proposed, legislation aimed at
increasing transparency of our interactions with healthcare professionals (HCPs). As a result, we
are required by law to disclose payments and other transfers for value to HCPs licensed by certain
states and expect similar requirements at the federal level in the future. Any failure to comply
with the enhanced legal and regulatory requirements could impact our business. In addition, we
devoted substantial additional time and financial resources to further develop and implement
enhanced structure, policies, systems and processes to comply with enhanced legal and regulatory
requirements, which may also impact our business.
Further, recent Supreme Court case law has clarified that the FDAs authority over medical devices
preempts state tort laws, but legislation has been introduced at the Federal level to allow state
intervention, which could lead to increased and inconsistent regulation at the state level. We
anticipate that the government will continue to scrutinize our industry closely and that we will be
subject to more rigorous regulation by governmental authorities in the future.
Changes in tax laws, unfavorable resolution of tax contingencies, or exposure to additional income
tax liabilities could have a material impact on our financial condition, results of operations and
liquidity.
We are subject to income taxes as well as non-income based taxes, in both the U.S. and various
foreign jurisdictions. We are subject to ongoing tax audits in various jurisdictions. Tax
authorities may disagree with certain positions we have taken and assess additional taxes. We
regularly assess the likely outcomes of these audits in order to determine the appropriateness of
our tax provision and have established contingency reserves for material, known tax exposures,
including potential tax audit adjustments related to transfer pricing in connection with the
technology license agreements between domestic and foreign subsidiaries of Guidant Corporation, in
relation to which we recently received Notices of Deficiency from the Internal Revenue Service for
the 2001-2003 tax years. However, there can be no assurance that we will accurately predict the
outcomes of these audits or issues raised by tax authorities will be resolved at a financial cost
that does not exceed our related reserves, and the actual outcomes of these audits could have a
material impact on our results of operations or financial condition. Additionally, changes in tax
laws or tax rulings could materially impact our effective tax rate. For example, proposals for
fundamental U.S. corporate tax reform, if enacted, could have a significant adverse impact on our
future results of operations. In addition, the recently enacted Patient Protection and Affordable
Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 impose on
medical device manufacturers a 2.3 percent excise tax on U.S. sales of Class I, II and III medical
devices beginning in 2013. U.S. net sales represented 56 percent of our worldwide net sales in 2010
and, therefore, this tax burden may have a material, negative impact on our results of operations
and our cash flows.
We may not effectively be able to protect our intellectual property rights, which could have a
material adverse effect on our business, financial condition or results of operations.
The medical device market in which we primarily participate is largely technology driven. Physician
customers, particularly in interventional cardiology, have historically moved quickly to new
products and new technologies. As a result, intellectual property rights, particularly patents and
trade secrets, play a significant role in product development and differentiation. However,
intellectual property litigation is inherently complex and unpredictable. Furthermore, appellate
courts can overturn lower court patent decisions.
In addition, competing parties frequently file multiple suits to leverage patent portfolios across
product lines, technologies and geographies and to balance risk and exposure between the parties.
In some cases, several competitors are parties in the same proceeding, or in a series of related
proceedings, or litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending and potentially
related and unrelated cases. In addition, although monetary and injunctive relief is typically
sought, remedies and restitution are generally not determined until the conclusion of the trial
court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are
difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in
other geographies.
31
Several third parties have asserted that our current and former product offerings infringe patents
owned or licensed by them. We have similarly asserted that products sold by our competitors
infringe patents owned or licensed by us. Adverse outcomes in one or more of the proceedings
against us could limit our ability to sell certain products in certain jurisdictions, or reduce our
operating margin on the sale of these products and could have a material adverse effect on our
financial condition, results of operations or liquidity.
Patents and other proprietary rights are and will continue to be essential to our business, and our
ability to compete effectively with other companies will be dependent upon the proprietary nature
of our technologies. We rely upon trade secrets, know-how, continuing technological innovations,
strategic alliances and licensing opportunities to develop, maintain and strengthen our competitive
position. We pursue a policy of generally obtaining patent protection in both the U.S. and abroad
for patentable subject matter in our proprietary devices and attempt to review third-party patents
and patent applications to the extent publicly available in order to develop an effective patent
strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor
the patent claims of others. We currently own numerous U.S. and foreign patents and have numerous
patent applications pending. We also are party to various license agreements pursuant to which
patent rights have been obtained or granted in consideration for cash, cross-licensing rights or
royalty payments. No assurance can be made that any pending or future patent applications will
result in the issuance of patents, that any current or future patents issued to, or licensed by, us
will not be challenged or circumvented by our competitors, or that our patents will not be found
invalid. In addition, we may have to take legal action in the future to protect our patents, trade
secrets or know-how or to assert them against claimed infringement by others. Any legal action of
that type could be costly and time consuming and no assurances can be made that any lawsuit will be
successful. We are generally involved as both a plaintiff and a defendant in a number of patent
infringement and other intellectual property-related actions.
The invalidation of key patents or proprietary rights that we own, or an unsuccessful outcome in
lawsuits to protect our intellectual property, could have a material adverse effect on our
business, financial condition or results of operations.
Pending and future intellectual property litigation could be costly and disruptive to us.
We operate in an industry that is susceptible to significant intellectual property litigation and,
in recent years, it has been common for companies in the medical device field to aggressively
challenge the patent rights of other companies in order to prevent the marketing of new devices. We
are currently the subject of various patent litigation proceedings and other proceedings described
in more detail under Item 3. Legal Proceedings and Note L- Commitments and Contingencies to our
2010 consolidated financial statements included in Item 8 of this Annual Report. Intellectual
property litigation is expensive, complex and lengthy and its outcome is difficult to predict.
Adverse outcomes in one or more of these matters could have a material adverse effect on our
ability to sell certain products and on our operating margins, financial condition, results of
operation or liquidity. Pending or future patent litigation may result in significant royalty or
other payments or injunctions that can prevent the sale of products and may significantly divert
the attention of our technical and management personnel. In the event that our right to market any
of our products is successfully challenged, we may be required to obtain a license on terms which
may not be favorable to us, if at all. If we fail to obtain a required license or are unable to
design around a patent, our business, financial condition or results of operations could be
materially adversely affected.
Pending and future product liability claims and other litigation, including private securities
litigation, shareholder derivative suits and contract litigation, may adversely affect our
business, reputation and ability to attract and retain customers.
The design, manufacture and marketing of medical devices of the types that we produce entail an
inherent risk of product liability claims. Many of the medical devices that we manufacture and sell
are designed to be implanted in the human body for long periods of time or indefinitely. A number
of factors could result in an unsafe condition or injury to, or death of, a patient with respect to
these or other products that we manufacture or sell, including component failures, manufacturing
flaws, design defects or inadequate disclosure of product-related risks or product-related
information. These factors could result in product liability claims, a recall of one or more
32
of our products or a safety alert relating to one or more of our products. Product liability claims
may be brought by individuals or by groups seeking to represent a class.
The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify.
Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts,
including not only actual damages, but also punitive damages. The magnitude of the potential losses
relating to these lawsuits may remain unknown for substantial periods of time. In addition, the
cost to defend against any future litigation may be significant. Further, we are substantially
self-insured with respect to product liability and intellectual property infringement claims. We
maintain insurance policies providing limited coverage against securities claims. The absence of
significant third-party insurance coverage increases our potential exposure to unanticipated claims
and adverse decisions. Product liability claims, securities and commercial litigation and other
litigation in the future, regardless of the outcome, could have a material adverse effect on our
financial condition, results of operations or liquidity.
Any failure to meet regulatory quality standards applicable to our manufacturing and quality
processes could have an adverse effect on our business, financial condition and results of
operations.
As a medical device manufacturer, we are required to register with the FDA and are subject to
periodic inspection by the FDA for compliance with its Quality System Regulation requirements,
which require manufacturers of medical devices to adhere to certain regulations, including testing,
quality control and documentation procedures. In addition, the Federal Medical Device Reporting
regulations require us to provide information to the FDA whenever there is evidence that reasonably
suggests that a device may have caused or contributed to a death or serious injury or, if a
malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with
applicable regulatory requirements is subject to continual review and is monitored rigorously
through periodic inspections by the FDA which may result in observations on Form 483, and in some
cases warning letters, that require corrective action. In the European Community, we are required
to maintain certain International Standards Organization (ISO) certifications in order to sell our
products and must undergo periodic inspections by notified bodies to obtain and maintain these
certifications. If we, or our manufacturers, fail to adhere to quality system regulations or ISO
requirements, this could delay production of our products and lead to fines, difficulties in
obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or
consent decrees, or other consequences, which could, in turn, have a material adverse effect on our
financial condition or results of operations.
Interruption of our manufacturing operations could adversely affect our results of operations and
financial condition.
Our
products are designed and manufactured in technology centers around
the world, either by us or third parties. In most cases,
the manufacturing of our products is concentrated in
one or a few locations. Factors such as a failure to follow specific internal protocols and
procedures, equipment malfunction, environmental factors or damage to one or more of our facilities
could adversely affect our ability to manufacture our products. In the event of an interruption in
manufacturing, we may be unable to quickly move to alternate means of producing affected products
or to meet customer demand. In some instances, for example, if the interruption is a result of a
failure to follow regulatory protocols and procedures, we may experience delays in resuming
production of affected products due primarily to needs for regulatory approvals. As a result, we may suffer
loss of market share, which we may be unable to recapture, and harm to our reputation, which could
adversely affect our results of operations and financial condition.
We rely on external manufacturers to supply us with certain materials, components and products.
Any disruption in our sources of supply or the price of inventory supplied to us could adversely
impact our production efforts and could materially adversely affect our business, financial
condition or results of operations.
We purchase many of the materials and components used in manufacturing our products, some of which
are custom made from third-party vendors. Certain supplies are purchased from single-sources due to
quality considerations, expertise, costs or constraints resulting from regulatory requirements. In
the event of a disruption
33
in supply, we may not be able to establish additional or replacement suppliers for certain
components, materials or products in a timely manner largely due to the complex nature of our and
many of our suppliers manufacturing processes. In addition, our products require sterilization
prior to sale and we rely on a mix of internal resources and third-party vendors to perform this
service. Production issues, including capacity constraint; the inability to sterilize our products;
quality issues affecting us or our suppliers; an inability to develop and validate alternative
sources if required; or a significant increase in the price of materials or components could
adversely affect our results of operations and financial condition.
Our share price will fluctuate, and accordingly, the value of an investment in our common stock may
also fluctuate.
Stock markets in general, and our common stock in particular, have experienced significant price
and volume volatility over recent years. The market price and trading volume of our common stock
may continue to be subject to significant fluctuations due not only to general stock market
conditions, but also to variability in the prevailing sentiment regarding our operations or
business prospects, as well as, among other things, changing investment priorities of our
shareholders.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our world headquarters are located in Natick, Massachusetts, with additional support provided from
regional headquarters located in Tokyo, Japan and Paris, France. As of December 31, 2010, our
principal manufacturing and technology centers were located in Minnesota, California, Florida,
Indiana, and Utah within the U.S; as well as internationally in Ireland, Costa Rica and Puerto
Rico. Our products are distributed worldwide from customer fulfillment centers in Massachusetts,
The Netherlands and Japan. As of December 31, 2010, we maintained 14 manufacturing facilities,
including eight in the U.S., three in Ireland, two in Costa Rica, and one in Puerto Rico, as well
as various distribution and technology centers around the world. Many of these facilities produce
and manufacture products for more than one of our divisions and include research facilities. The
following is a summary of our facilities as of December 31, 2010 (in approximate square feet):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
Leased |
|
|
Total |
|
|
|
|
U.S. |
|
|
5,386,000 |
|
|
|
1,141,000 |
|
|
|
6,527,000 |
|
International |
|
|
1,513,000 |
|
|
|
960,000 |
|
|
|
2,473,000 |
|
|
|
|
|
|
|
6,899,000 |
|
|
|
2,101,000 |
|
|
|
9,000,000 |
|
|
|
|
In connection with our Plant Network Optimization program, described in Items 1 and 8 of this
Annual Report, we intend to close one of our manufacturing plants in the U.S. by the end of 2012,
representing a total of approximately 350,000 owned square feet. In addition, as part of the
January 2011 sale of our Neurovascular business to Stryker Corporation, we intend to
transfer portions of certain owned and leased facilities to Stryker. We regularly evaluate the
condition and capacity of our facilities to ensure they are suitable for the development,
manufacturing, and marketing of our products, and provide adequate capacity for current and
expected future needs.
ITEM 3. LEGAL PROCEEDINGS
See
Note LCommitments and Contingencies to our 2010 consolidated financial statements included in
Item 8 of this Annual Report.
ITEM 4. [REMOVED AND RESERVED]
34
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol BSX. The
following table provides the market range for the closing price of our common stock for each of the
last eight quarters based on reported sales prices on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
9.62 |
|
|
$ |
6.80 |
|
Second Quarter |
|
|
7.35 |
|
|
|
5.44 |
|
Third Quarter |
|
|
6.59 |
|
|
|
5.13 |
|
Fourth Quarter |
|
|
7.85 |
|
|
|
5.97 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
9.41 |
|
|
$ |
6.14 |
|
Second Quarter |
|
|
10.42 |
|
|
|
8.05 |
|
Third Quarter |
|
|
11.75 |
|
|
|
9.63 |
|
Fourth Quarter |
|
|
10.29 |
|
|
|
7.99 |
|
The closing price of our common stock on February 10, 2011 was $6.91.
We did not pay a cash dividend in 2010 or 2009. We currently do not intend to pay dividends, and
intend to retain all of our earnings to repay indebtedness and invest in the continued growth of
our business. We may consider declaring and paying a dividend in the future; however, there can be
no assurance that we will do so.
We did not repurchase any of our common stock in 2010 or 2009. There are approximately 37 million
remaining under previous share repurchase authorizations, which do not expire.
As of February 10, 2011, there were 17,524 holders of record of our common stock.
35
Stock Performance Graph
The graph below compares the five-year total return to stockholders on our common stock with the
return of the Standard & Poors (S&P) 500 Stock Index and the S&P Health Care
Equipment Index. The graph assumes $100 was invested in our common stock in each of the named
indices on December 31, 2005, and that all dividends were reinvested.
36
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
(in millions, except per share data)
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Net sales |
|
$ |
7,806 |
|
|
$ |
8,188 |
|
|
$ |
8,050 |
|
|
$ |
8,357 |
|
|
$ |
7,821 |
|
Gross profit |
|
|
5,207 |
|
|
|
5,612 |
|
|
|
5,581 |
|
|
|
6,015 |
|
|
|
5,614 |
|
Total operating expenses |
|
|
5,863 |
|
|
|
6,506 |
|
|
|
7,086 |
|
|
|
6,029 |
|
|
|
8,563 |
|
Operating loss |
|
|
(656 |
) |
|
|
(894 |
) |
|
|
(1,505 |
) |
|
|
(14 |
) |
|
|
(2,949 |
) |
Loss before income taxes |
|
|
(1,063 |
) |
|
|
(1,308 |
) |
|
|
(2,031 |
) |
|
|
(569 |
) |
|
|
(3,535 |
) |
Net loss |
|
|
(1,065 |
) |
|
|
(1,025 |
) |
|
|
(2,036 |
) |
|
|
(495 |
) |
|
|
(3,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.70 |
) |
|
$ |
(0.68 |
) |
|
$ |
(1.36 |
) |
|
$ |
(0.33 |
) |
|
$ |
(2.81 |
) |
Assuming dilution |
|
$ |
(0.70 |
) |
|
$ |
(0.68 |
) |
|
$ |
(1.36 |
) |
|
$ |
(0.33 |
) |
|
$ |
(2.81 |
) |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Cash, cash equivalents and marketable securities |
|
$ |
213 |
|
|
$ |
864 |
|
|
$ |
1,641 |
|
|
$ |
1,452 |
|
|
$ |
1,668 |
|
Working capital* |
|
|
1,006 |
|
|
|
1,577 |
|
|
|
2,219 |
|
|
|
2,691 |
|
|
|
3,399 |
|
Total assets |
|
|
22,128 |
|
|
|
25,177 |
|
|
|
27,139 |
|
|
|
31,197 |
|
|
|
30,882 |
|
Borrowings (long-term and short-term) |
|
|
5,438 |
|
|
|
5,918 |
|
|
|
6,745 |
|
|
|
8,189 |
|
|
|
8,902 |
|
Stockholders equity |
|
|
11,296 |
|
|
|
12,301 |
|
|
|
13,174 |
|
|
|
15,097 |
|
|
|
15,298 |
|
Book value per common share |
|
$ |
7.43 |
|
|
$ |
8.14 |
|
|
$ |
8.77 |
|
|
$ |
10.12 |
|
|
$ |
10.37 |
|
|
|
|
* |
|
In 2010, we reclassified certain assets to the assets held for sale caption
in our consolidated balance sheets. These assets are labeled as current to
give effect to the short term nature of those assets that were divested in the
first quarter of 2011 in connection with the sale of our Neurovascular
business, or assets that are expected to be sold in 2011. We have reclassified
2009 balances for comparative purposes on the face of the consolidated balance
sheets, as well as in the working capital metric above. We have not restated
working capital for these items in years prior to 2009 above. |
See also the notes to our 2010 consolidated financial statements included in Item 8 of this Annual Report.
37
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial
statements and accompanying notes included in Item 8 of this Annual Report.
Executive Summary
Financial Highlights and Trends
In 2010, we generated net sales of $7.806 billion, as compared to $8.188 billion in 2009, a
decrease of $382 million, or five percent. Foreign currency fluctuations contributed $62 million to
our net sales in 2010, as compared to 2009. Excluding the impact of foreign currency, our net sales
decreased $444 million, or five percent, as compared to the prior year. This decrease was
attributable in part to the ship hold and removal of field inventory of all implantable
cardioverter defibrillator (ICD) systems and cardiac resynchronization therapy defibrillator
(CRT-D) systems offered by our Cardiac Rhythm Management (CRM) division in the U.S., which we
announced on March 15, 2010, after determining that certain instances of changes in the
manufacturing process related to these products were not submitted for approval to the U.S. Food
and Drug Administration (FDA). We have since submitted the required documentation and, on April 15,
2010, we received clearance from the FDA for certain of the manufacturing changes and immediately
resumed distribution of our COGNIS® CRT-D systems and TELIGEN® ICD systems, which represent
virtually all of our defibrillator implant volume in the U.S. We returned earlier generations of
these products to the U.S. market on May 21, 2010, following required FDA clearance. We are working
with our physician and patient customers to recapture market share lost as a result of the ship
hold and have experienced better-than-expected recovery to date. However, our U.S. CRM net sales
decreased $237 million in 2010, as compared to our market share
exiting 2009, and we estimate that our U.S. defibrillator
market share decreased approximately 300 basis points exiting 2010, as compared to the prior year,
due primarily to these product actions.
In addition, throughout 2010 we continued to experience competitive and other pricing pressures
across our businesses and, particularly, on our drug-eluting coronary stent system offerings. Net
sales of our drug-eluting coronary stent systems decreased $171 million in 2010, as compared to
2009, and we estimate that the average selling price of our drug-eluting stent systems in the U.S.
decreased nine percent in 2010, as compared to the prior year. Further, our net sales have been
adversely impacted by reductions in procedural volumes, due to unemployment levels and other
economic factors.
During 2010, net sales from our Endoscopy, Urology/Womens Health, and Neuromodulation businesses
increased $117 million, or eight percent, as compared to 2009, on the strength of new product
introductions, increased sales investments and further expansion into international markets. Refer
to the Business and Market Overview and Results of Operations sections for more discussion of our
net sales by division and region.
Our reported net loss in 2010 was $1.065 billion, or $0.70 per share, and was driven primarily by a
goodwill impairment charge related to our U.S. CRM reporting unit following the ship hold and
product removal actions described above. Our reported results for 2010 included goodwill and
intangible asset impairment charges; acquisition-, divestiture-, litigation- and
restructuring-related net charges; discrete tax items and amortization expense (after-tax) of
$2.116 billion, or $1.39 per share. Excluding these items, net income for 2010 was $1.051 billion,
or $0.69 per share. Our reported net loss in 2009 was $1.025 billion, or $0.68 per share. Our
reported results for 2009 included intangible asset impairment charges; acquisition-, divestiture-,
litigation- and restructuring-related net charges; discrete tax items and amortization expense of
$2.207 billion (after-tax), or $1.46 per share. Excluding these items, net income for 2009 was
$1.182 billion, or $0.78 per share.
Net income and net income per share that exclude certain
items are not measures prepared in
accordance with generally accepted accounting principles in the United States (U.S. GAAP). See
Additional Information for an explanation of managements use of these non-GAAP measures. The
following is a reconciliation of our results of operations prepared in accordance with U.S. GAAP to
those adjusted results considered by management. Refer to Results of Operations for a discussion of
each reconciling item:
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Impact per |
|
|
|
in millions, except per share data |
|
Pre-Tax |
|
|
Impact |
|
|
After-Tax |
|
|
share |
|
|
|
|
GAAP results |
|
$ |
(1,063 |
) |
|
$ |
(2 |
) |
|
$ |
(1,065 |
) |
|
$ |
(0.70 |
) |
|
|
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge |
|
|
1,817 |
|
|
|
|
|
|
|
1,817 |
|
|
|
1.20 |
|
* |
|
Intangible asset impairment charges |
|
|
65 |
|
|
|
(10 |
) |
|
|
55 |
|
|
|
0.03 |
|
* |
|
Acquisition-related credits |
|
|
(245 |
) |
|
|
34 |
|
|
|
(211 |
) |
|
|
(0.13 |
) |
* |
|
Divestiture-related charges |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
0.00 |
|
* |
|
Restructuring-related charges |
|
|
169 |
|
|
|
(48 |
) |
|
|
121 |
|
|
|
0.08 |
|
* |
|
Litigation-related net credits |
|
|
(104 |
) |
|
|
27 |
|
|
|
(77 |
) |
|
|
(0.05 |
) |
* |
|
Discrete tax items |
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
(0.01 |
) |
* |
|
Amortization expense |
|
|
513 |
|
|
|
(93 |
) |
|
|
420 |
|
|
|
0.27 |
|
* |
|
|
|
|
|
|
Adjusted results |
|
$ |
1,154 |
|
|
$ |
(103 |
) |
|
$ |
1,051 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Assumes dilution of 10.0 million shares for the year ended December 31, 2010 for all or
a portion of these non-GAAP adjustments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Impact per |
|
|
|
in millions, except per share data |
|
Pre-Tax |
|
|
Impact |
|
|
After-Tax |
|
|
share |
|
|
|
|
GAAP results |
|
$ |
(1,308 |
) |
|
$ |
283 |
|
|
$ |
(1,025 |
) |
|
$ |
(0.68 |
) |
|
|
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset impairment charges |
|
|
12 |
|
|
|
(2 |
) |
|
|
10 |
|
|
|
0.01 |
|
|
|
Acquisition-related charges |
|
|
21 |
|
|
|
(1 |
) |
|
|
20 |
|
|
|
0.01 |
|
|
|
Divestiture-related credits |
|
|
(8 |
) |
|
|
1 |
|
|
|
(7 |
) |
|
|
0.00 |
|
|
|
Restructuring-related charges |
|
|
130 |
|
|
|
(33 |
) |
|
|
97 |
|
|
|
0.06 |
|
|
|
Litigation-related net charges |
|
|
2,022 |
|
|
|
(251 |
) |
|
|
1,771 |
|
|
|
1.17 |
|
* |
|
Discrete tax items |
|
|
|
|
|
|
(106 |
) |
|
|
(106 |
) |
|
|
(0.07 |
) |
* |
|
Amortization expense |
|
|
511 |
|
|
|
(89 |
) |
|
|
422 |
|
|
|
0.28 |
|
* |
|
|
|
|
|
|
Adjusted results |
|
$ |
1,380 |
|
|
$ |
(198 |
) |
|
$ |
1,182 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Assumes dilution of 8.0 million shares for the year ended December 31, 2009 for all or
a portion of these non-GAAP adjustments. |
Cash generated by operating activities was $325 million in 2010 and $835 million in 2009, and
included approximately $1.6 billion of litigation-related net payments in 2010, as compared to
approximately $800 million in 2009, as well as the receipt of an
acquisition-related milestone payment of $250 million.
Our cash generated by operations continues to be a significant source of funds for servicing our
outstanding debt obligations and investing in our growth. As of December 31, 2010, we had total
debt of $5.438 billion, cash and cash equivalents of $213 million and working capital of $1.006
billion. During 2010, we completed the refinancing of the majority of our 2011 debt maturities,
establishing a $1.0 billion term loan and syndicating a new $2.0 billion revolving credit facility,
and prepaid in full our $900 million loan from Abbott and all $600 million of our senior notes due
in June 2011. Further, in January 2011, we paid at maturity $250 million of our senior notes. In
2009, Standard & Poors upgraded our credit rating to investment grade with a stable outlook. In
2010, Fitch Ratings upgraded our outlook to positive from stable, and Moodys raised our liquidity
rating to its highest level. We believe these rating improvements reflect the strength of our
product portfolio, our commitment to debt reduction, our improving financial fundamentals, and the
progress we are making towards driving profitable sales growth.
Recent Events
As part of our strategy, we are realigning our business portfolio through select divestitures and
targeted acquisitions in order to reduce risk, optimize operational leverage and accelerate
profitable, sustainable revenue
growth, while preserving our ability to meet the needs of physicians and their patients. We have
recently announced several acquisitions targeting many of our priority growth areas, and, in
January 2011, closed the sale of our Neurovascular business to Stryker Corporation.
39
Acquisitions
We expect to continue to invest in our core franchises, and are also investigating opportunities to
further expand our presence in, and diversify into, priority growth areas including atrial
fibrillation, autonomic modulation therapy, coronary artery disease, deep-brain stimulation,
diabetes/obesity, endoluminal surgery, endoscopic pulmonary intervention, hypertension, peripheral
vascular disease, structural heart disease, sudden cardiac arrest, and womens health. In late 2010
and early 2011, we announced the acquisitions of Asthmatx, Inc.; Sadra Medical, Inc.; Atritech,
Inc.; and Intelect Medical, Inc., targeting many of the above conditions and disease states. Each
of these acquisitions is discussed in the Business and Market Overview section below.
Business Divestiture
In January 2011, we closed the sale of our Neurovascular business to Stryker Corporation for a
purchase price of $1.5 billion in cash. We received $1.450 billion at closing, including an upfront
payment of $1.426 billion, and $24 million which was placed into escrow to be released upon the
completion of local closings in certain foreign jurisdictions, and will receive an additional $50
million contingent upon the transfer or separation of certain manufacturing facilities, which we
expect will be completed over a period of approximately 24 months. We will provide transitional
services through a transition services agreement, and will also supply products to Stryker. These
transition services and supply agreements are expected to be effective for a period of up to 24
months following the closing of the transaction, subject to extension. Due to our continuing
involvement in the operations of the Neurovascular business, the divestiture does not meet the
criteria for presentation as a discontinued operation. Refer to
Note C Divestitures and Assets
Held for Sale to our 2010 consolidated financial statements
included in Item 8 of this Annual
Report for more information.
Business and Market Overview
Cardiac Rhythm Management (CRM)
Our CRM division develops, manufactures and markets a variety of implantable devices that monitor
the heart and deliver electricity to treat cardiac abnormalities. Worldwide net sales of these
products of $2.180 billion represented approximately 28 percent of our consolidated net sales in
2010. Our worldwide CRM net sales decreased $233 million, or ten percent, in 2010, as compared to
2009. Foreign currency fluctuations did not materially impact our CRM net sales in 2010, as
compared to the prior year. This decrease was driven primarily by the negative impact of the ship
hold and product removal actions associated with our ICD and CRT-D systems earlier in the year. We
experienced market share loss in the U.S. as a result of these actions; however, we believe that
our products, including our COGNIS® CRT-D and TELIGEN® ICD systems, among the worlds smallest and
thinnest high-energy devices, will continue to be successful in the global market.
While we have recaptured a portion of our lost market share, the extent and timing of our recovery
is difficult to predict. We estimate that our U.S. defibrillator market share exiting 2010
decreased approximately 300 basis points, as compared to our market share exiting 2009, due
primarily to these product actions. Further, overall expectations of future CRM market growth have
declined, driven primarily by competitive and other pricing pressures, as well as fewer launches of
market-expanding technologies than previously anticipated. We estimate that the worldwide CRM
market approximated $11.4 billion in 2010, representing a slight increase over the 2009 market size
of $11.1 billion. In addition, physician reaction to study results published by the Journal of the
American Medical Association regarding evidence-based guidelines for ICD implants and the U.S.
Department of Justice investigation into ICD implants may have a negative impact on the CRM market.
However, in September 2010, we received FDA approval for an exclusive expanded indication for use
of our CRT-D systems with certain patients in earlier stages of heart failure. We believe this
indication could potentially create an opportunity to expand the worldwide CRM market by
approximately $250 million to $350 million over the next few years, and further enhance our
position within that market.
40
The following are the components of our worldwide CRM net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
(in millions) |
|
December 31, 2010 |
|
December 31, 2009 |
|
|
U.S. |
|
|
International |
|
|
Total |
|
|
U.S. |
|
|
International |
|
|
Total |
|
|
|
|
|
|
Defibrillator systems |
|
$ |
1,037 |
|
|
$ |
562 |
|
|
$ |
1,599 |
|
|
$ |
1,248 |
|
|
$ |
544 |
|
|
$ |
1,792 |
|
Pacemaker systems |
|
|
320 |
|
|
|
261 |
|
|
|
581 |
|
|
|
346 |
|
|
|
275 |
|
|
|
621 |
|
|
|
|
|
|
CRM products |
|
$ |
1,357 |
|
|
$ |
823 |
|
|
$ |
2,180 |
|
|
$ |
1,594 |
|
|
$ |
819 |
|
|
$ |
2,413 |
|
|
|
|
|
|
Our U.S. CRM net sales decreased $237 million, or 15 percent, in 2010 as compared to 2009,
driven primarily by the ship hold and product removal actions involving our ICD and CRT-D systems,
discussed above. We are committed to advancing our technologies to strengthen our CRM business. In
2010, we continued to execute on our product pipeline and expect to launch our next-generation line
of defibrillators in the U.S. in late 2011 or early 2012, which include new features designed to
improve functionality, diagnostic capability and ease of use. Due in part to anticipated changes to
current FDA regulatory requirements industry-wide, which would increase the number of patients and
length of time needed for certain clinical studies, we now expect to launch our next-generation
INGENIO pacemaker system, which leverages the strength of our high-voltage platform and will be
compatible with our LATITUDE® Patient Management System, in the U.S. in late 2011 or early 2012,
depending on final FDA requirements. Refer to Regulatory
Environment included in Item 1 of this
Annual Report for more information.
Our international CRM net sales increased $4 million, or less than one percent, in 2010, as
compared to 2009. International net sales of our defibrillator systems increased $18 million, or
three percent, in 2010, as compared to 2009, driven by strong market acceptance of our COGNIS®
CRT-D and TELIGEN® ICD systems, and our recently-launched 4-SITE lead delivery system. In addition,
in July 2009, we received CE Mark approval for our LATITUDE® Patient Management System and have
since launched this technology in the majority of our European markets. The LATITUDE® technology,
which is designed to enable physicians to monitor device performance remotely while patients are in
their homes, is a key component of many of our CRM systems. In late 2010, we received CE Mark
approval for our next-generation line of defibrillators, INCEPTA, ENERGEN and PUNCTUA, and plan
to launch these products in our Europe/Middle East/Africa (EMEA) region and certain
Inter-Continental countries in the first half of 2011. These products provide physicians and their
patients with more options to customize therapy and enhance our market advantage in size, shape and
longevity. We also plan to launch our next-generation INGENIO pacemaker system in these regions in
the second half of 2011 and believe that these launches position us well within the worldwide CRM
market.
Net sales from our CRM products represent a significant source of our overall net sales. Therefore,
increases or decreases in our CRM net sales could have a significant impact on our results of
operations. The variables that may impact the size of the CRM market and/or our share of that
market include, but are not limited to:
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our ability to retain and attract key members of our CRM sales force and other key CRM
personnel; |
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|
our ability to recapture lost market share following the ship hold and product removal
of our ICD and CRT-D systems in the U.S.; |
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the impact of market and economic conditions on average selling prices and the overall
number of procedures performed; |
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the ability of CRM manufacturers to maintain the trust and confidence of the
implanting physician community, the referring physician community and prospective
patients in CRM technologies; |
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future product field actions or new physician advisories by us or our competitors; |
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our ability to successfully develop and launch next-generation products and technology; |
41
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clinical trials that may provide opportunities to expand indications for use,
particularly in light of anticipated changes to current FDA regulatory requirements
industry-wide; |
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variations in clinical results, reliability or product performance of our and our
competitors products; |
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delayed or limited regulatory approvals and unfavorable reimbursement policies; and |
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new competitive launches. |
Coronary Stent Systems
Our coronary stent system offerings include
the VeriFLEX
(Liberté®) bare-metal coronary stent system,
designed to enhance deliverability and conformability, particularly in challenging lesions, as well
as drug-eluting coronary stent systems. We are the only company in the industry to offer a two-drug
platform strategy, which has enabled us to maintain our leadership position in the drug-eluting
stent market. We currently market our TAXUS® paclitaxel-eluting stent line, including our
third-generation TAXUS® Element stent system, launched in our EMEA region and certain
Inter-Continental countries during the second quarter of 2010. The CE Mark approval for our TAXUS®
Element stent system includes a specific indication for treatment in diabetic patients. We also
offer our everolimus-eluting stent line, consisting of the PROMUS® stent system, currently supplied
to us by Abbott Laboratories, and our next-generation internally-developed and manufactured
everolimus-eluting stent system, the PROMUS® Element stent system, which we launched in our EMEA
region and certain Inter-Continental countries in the fourth quarter of 2009. In September 2010, we
received CE Mark approval for expanded indications for the use of our PROMUS® Element stent system
in diabetic and heart attack patients. Our Element stent platform incorporates a unique platinum
chromium alloy designed to offer greater radial strength and flexibility than older alloys,
enhanced visibility and reduced recoil. The innovative stent design improves deliverability and
allows for more consistent lesion coverage and drug distribution. These product offerings
demonstrate our commitment to drug-eluting stent market leadership and continued innovation. We
expect to launch our TAXUS® Element stent system in the U.S. (to be commercialized as ION) in
mid-2011 and Japan in late 2011 or early 2012. We expect to launch our PROMUS® Element stent
system in the U.S. and Japan in mid-2012.
Net sales of our coronary stent systems, including bare-metal stent systems, of $1.670 billion
represented approximately 21 percent of our consolidated net sales in 2010. Worldwide sales of
these products decreased $209 million, or 11 percent, in 2010, as compared to the prior year.
Excluding the impact of foreign currency fluctuations, which contributed $26 million to our
coronary stent system net sales in 2010, as compared to 2009, net sales of these products decreased
12 percent, as compared to the prior year. Despite continued competition and pricing pressures
resulting in a decline in sales of these products, we maintained our leadership position in 2010
with an estimated 36 percent share of the worldwide drug-eluting stent market, as compared to 41
percent in 2009. We estimate that the worldwide coronary stent market approximated $5.0 billion in
2010, consistent with the 2009 market size. The size of the coronary stent market is driven
primarily by the number of percutaneous coronary intervention (PCI) procedures performed, as well
as the percentage of those in which stents are implanted; the number of devices used per procedure;
average selling prices; and the drug-eluting stent penetration
rate2.
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2
A measure of the mix between bare-metal and drug-eluting stents used across procedures. |
42
The following are the components of our worldwide coronary stent system sales:
|
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|
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|
|
|
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|
|
|
|
Year Ended |
|
Year Ended |
(in millions) |
|
December 31, 2010 |
|
December 31, 2009 |
|
|
U.S. |
|
|
International |
|
|
Total |
|
|
U.S. |
|
|
International |
|
|
Total |
|
|
|
|
|
|
TAXUS® |
|
$ |
277 |
|
|
$ |
223 |
|
|
$ |
500 |
|
|
$ |
431 |
|
|
$ |
596 |
|
|
$ |
1,027 |
|
PROMUS® |
|
|
528 |
|
|
|
282 |
|
|
|
810 |
|
|
|
480 |
|
|
|
201 |
|
|
|
681 |
|
PROMUS® Element |
|
|
|
|
|
|
227 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug-eluting stent systems |
|
|
805 |
|
|
|
732 |
|
|
|
1,537 |
|
|
|
911 |
|
|
|
797 |
|
|
|
1,708 |
|
Bare-metal stent systems |
|
|
44 |
|
|
|
89 |
|
|
|
133 |
|
|
|
57 |
|
|
|
114 |
|
|
|
171 |
|
|
|
|
|
|
|
|
$ |
849 |
|
|
$ |
821 |
|
|
$ |
1,670 |
|
|
$ |
968 |
|
|
$ |
911 |
|
|
$ |
1,879 |
|
|
|
|
|
|
Our U.S. net sales of drug-eluting stent systems decreased $106 million, or 12 percent, in
2010, as compared to 2009. This decrease resulted primarily from a decline in our share of the U.S.
drug-eluting stent market, as well as an overall decrease in the size of this market, resulting
principally from lower average selling prices driven by competitive and other pricing pressures. We
estimate our share of the U.S. drug-eluting stent market approximated 46 percent for the last five
quarters, as compared to an average of 49 percent during 2009, and estimate that the average
selling price of drug-eluting stent systems in the U.S. decreased approximately nine percent in
2010, as compared to 2009. This decline was due primarily to lower sales of our TAXUS® drug-eluting
stent systems, which we believe was due to customer perceptions of data from a single-center,
non-double-blinded, underpowered study sponsored by one of our competitors. We believe that average
drug-eluting stent penetration rates in the U.S. were 77 percent in 2010, as compared to an average
of 75 percent during 2009, which partially offset the impact of lower average selling prices on the
size of the U.S. drug-eluting stent market. We believe we have maintained our leadership position
in this market due to the success of our two-drug platform strategy and the breadth of our product
offerings, including the industrys widest range of coronary stent sizes.
Our international drug-eluting stent system net sales decreased $65 million, or eight percent, in
2010, as compared to 2009. Net sales of our drug-eluting stent systems in Japan decreased $49
million, or 19 percent, in 2010, as compared to the prior year and our estimated share of the
drug-eluting stent market in Japan declined to an average of 39 percent in 2010 (exiting at 36
percent), as compared to an average of 49 percent in 2009 (exiting at 44 percent). We believe that
aggressive pricing offered by market entrants and clinical trial enrollment limiting our access to
certain customers contributed to the decline in our market share in Japan in 2010, as compared to
the prior year. This decrease was partially offset by our first quarter 2010 launch of the PROMUS®
stent system in Japan, enabling us to begin the execution of our two-drug platform strategy in this
region. Our net sales of drug-eluting stent systems in our EMEA region decreased $26 million, or
eight percent in 2010, as compared to 2009, due primarily to declines in average selling prices,
partially offset by increased penetration rates. However, in the second quarter of 2010, we
launched our third-generation TAXUS® Element stent system in our EMEA region and certain
Inter-Continental countries. We believe that this launch, coupled with the November 2009 launch of
our PROMUS® Element stent system, which has quickly gained market share, exiting 2010 with
approximately one quarter share of the drug-eluting stent market in EMEA, position us well in this
market going forward. Net sales of drug-eluting stent systems in our Inter-Continental region
increased $10 million, or five percent, driven by an increase in penetration rates and procedural
volume.
We market the PROMUS® everolimus-eluting coronary stent system, a private-labeled XIENCE V® stent
system supplied to us by Abbott Laboratories. As of the closing of Abbotts 2006 acquisition of
Guidant Corporations vascular intervention and endovascular solutions businesses, we obtained a
perpetual license to the intellectual property used in Guidants drug-eluting stent system program
purchased by Abbott. We believe that being the only company to offer two distinct drug-eluting
stent platforms provides us a considerable advantage in the drug-eluting stent market and has
enabled us to sustain our worldwide leadership position. However, under the terms of our supply
arrangement with Abbott, the gross profit and operating profit margin of everolimus-eluting stent
systems supplied to us by Abbott, including any improvements or iterations approved for sale during
the term of the applicable supply arrangements and of the type that could be approved by a supplement
to an approved FDA pre-market approval, is significantly lower than that of our TAXUS® and PROMUS®
Element stent systems. Specifically, the PROMUS® stent system has operating profit margins that
approximate half of our TAXUS® stent system operating profit margin. Therefore, if sales of
everolimus-eluting stent systems supplied to
43
us by Abbott increase in relation to our total
drug-eluting stent system sales, our profit margins will decrease. Refer to our Gross Profit
discussion for more information on the impact this sales mix has had on our gross profit margins.
Our internally-developed and manufactured PROMUS® Element everolimus-eluting stent system,
launched in our EMEA region and certain Inter-Continental countries in the fourth quarter of 2009,
generates gross profit margins more favorable than the PROMUS® stent system and we expect will
positively affect our overall gross profit and operating profit margins in these
regions as sales shift from PROMUS® to PROMUS® Element.
Further, the price we pay for our supply of everolimus-eluting stent systems from Abbott is
determined by contracts with Abbott and is based, in part, on previously fixed estimates of
Abbotts manufacturing costs for everolimus-eluting stent systems and third-party reports of our
average selling price of these stent systems. Amounts paid pursuant to this pricing arrangement are
subject to a retroactive adjustment approximately every two years based on Abbotts actual costs to
manufacture these stent systems for us and our average selling price of everolimus-eluting stent
systems supplied to us by Abbott. Our gross profit margin may be positively or negatively impacted
in the future as a result of this adjustment process.
We are currently reliant on Abbott for our supply of everolimus-eluting stent systems in the U.S.
and Japan. Our supply agreement with Abbott for everolimus-eluting stent systems in the U.S. and
Japan extends through the end of the second quarter of 2012. At present, we believe that our supply
of everolimus-eluting stent systems from Abbott, coupled with our current launch plans for our
internally-developed and manufactured PROMUS® Element everolimus-eluting stent system, is
sufficient to meet customer demand. However, any production or capacity issues that affect Abbotts
manufacturing capabilities or our process for forecasting, ordering and receiving shipments may
impact the ability to increase or decrease our level of supply in a timely manner; therefore, our
supply of everolimus-eluting stent systems supplied to us by Abbott may not align with customer
demand, which could have an adverse effect on our operating results. Further, a delay in the launch
of our internally-developed and manufactured PROMUS® Element everolimus-eluting stent system in
the U.S. and Japan, currently expected in mid-2012, could result in an inability to meet customer
demand for everolimus-eluting stent systems.
Historically, the worldwide coronary stent market has been dynamic and highly competitive with
significant market share volatility. In addition, in the ordinary course of our business, we
conduct and participate in numerous clinical trials with a variety of study designs, patient
populations and trial end points. Unfavorable or inconsistent clinical data from existing or future
clinical trials conducted by us, our competitors or third parties, or the markets perception of
these clinical data, may adversely impact our position in, and share of, the drug-eluting stent
market and may contribute to increased volatility in the market.
We believe that we can sustain our leadership position within the worldwide drug-eluting stent
market in the foreseeable future for a variety of reasons, including:
|
|
|
our two-drug platform strategy, including specialty stent sizes; |
|
|
|
|
the broad and consistent long-term results of our TAXUS® clinical trials, and
the favorable results of the XIENCE V®/PROMUS® and PROMUS® Element stent system
clinical trials to date; |
|
|
|
|
the performance benefits of our current and future technology; |
|
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|
|
the strength of our pipeline of drug-eluting stent products, including our
PROMUS® Element and TAXUS® Element stent systems, in additional geographies; |
|
|
|
|
our overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales force; and |
|
|
|
|
the strength of our clinical, selling, marketing and manufacturing capabilities. |
44
However, a decline in net sales from our drug-eluting stent systems could have a significant
adverse impact on our operating results and operating cash flows. The most significant variables
that may impact the size of the drug-eluting stent market and our position within this market
include, but are not limited to:
|
|
|
the impact of competitive pricing pressure on average selling prices of
drug-eluting stent systems available in the market; |
|
|
|
|
the impact and outcomes of on-going and future clinical results involving our
or our competitors products, including those trials sponsored by our
competitors, or perceived product performance of our or our competitors
products; |
|
|
|
|
physician and patient confidence in our current and next-generation technology; |
|
|
|
|
our ability to successfully launch next-generation products and technology
features, including the PROMUS® Element and TAXUS® Element stent systems in
additional geographies; |
|
|
|
|
changes in drug-eluting stent penetration rates, the overall number of PCI
procedures performed and the average number of stents used per procedure; |
|
|
|
|
delayed or limited regulatory approvals and unfavorable reimbursement policies; |
|
|
|
|
new competitive product launches; and |
|
|
|
|
the outcome of intellectual property litigation. |
During 2009 and early 2010, we successfully negotiated closure of several long-standing legal
matters, including multiple matters with Johnson & Johnson; all outstanding litigation between us
and Medtronic, Inc. with respect to interventional cardiology and endovascular repair cases; and
all outstanding litigation between us and Bruce Saffran, M.D., Ph.D. However, there continues to be
significant intellectual property litigation particularly in the coronary stent market. In
particular, although we have resolved multiple litigation matters with Johnson & Johnson, we
continue to be involved in patent litigation with them, particularly relating to drug-eluting stent
systems. Adverse outcomes in one or more of these matters could have a material adverse effect on
our ability to sell certain products and on our operating margins, financial position, results of
operations or liquidity.
Interventional Cardiology (excluding coronary stent systems)
In addition to coronary stent systems, our Interventional Cardiology business markets 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 ultrasound imaging systems. Our worldwide net sales of these products
decreased to $932 million in 2010, as compared to $980 million in 2009, a decrease of $48 million,
or five percent. Excluding the impact of foreign currency fluctuations which contributed $12
million to our Interventional Cardiology (excluding coronary stent systems) net sales in 2010, as
compared to the prior year, net sales of these products decreased $60 million, or six percent. Our
U.S. net sales of these products were $394 million in 2010, as compared to $409 million in 2009.
Our international net sales of these products were $538 million in 2010, as compared to $571
million for the prior year. This decrease was the result of a delay in new product introductions,
pricing pressures and competitive product launches. We continue to hold a strong leadership
position in the PTCA balloon catheter market, maintaining an
estimated 56 percent average share of
the U.S. market and 38 percent worldwide in 2010. We have executed and are planning a number of
additional new product launches during 2011, including the full launch of our Apex pre-dilatation
balloon catheter with platinum marker bands for improved radiopacity, launched in limited markets
during the second quarter of 2010. In June 2010, we launched the NC Quantum Apex post-dilatation
balloon catheter, developed specifically to address physicians needs in optimizing coronary stent deployment, which
has been received positively in the market. In addition, we began a phased launch of our Kinetix
family of guidewires in the U.S., our EMEA region and certain Inter-Continental countries in April
2010.
45
As part of our strategic plan, we are investigating opportunities to further expand our presence
in, and diversify into, other areas and disease states, including structural heart. In January
2011, we completed the acquisition of Sadra Medical, Inc. Sadra is developing a repositionable
and retrievable device for percutaneous aortic valve replacement (PAVR) to treat patients with
severe aortic stenosis and recently completed a series of European feasibility studies for its
Lotus Valve System, which 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. PAVR is one of the fastest growing medical
device markets.
Peripheral Interventions
Our Peripheral Interventions business product offerings include stents, balloon catheters, sheaths,
wires and vena cava filters, which are used to diagnose and treat peripheral vascular disease, and
we continue to hold the number one position in the worldwide Peripheral Interventions market. Our
worldwide net sales of these products increased to $669 million in 2010, as compared to $661
million in 2009, an increase of $8 million, or one percent. Excluding the impact of foreign
currency fluctuations, which contributed $6 million to our Peripheral Interventions net sales in
2010, as compared the prior year, net sales of these products increased $2 million, or less than
one percent, as compared to 2009. Our U.S. net sales of these products were $310 million in 2010,
as compared to $320 million for the prior year. Our international net sales were $359 million in
2010, as compared to $341 million in 2009, driven by several international product launches,
including the second quarter 2010 launch in Japan of our Carotid WALLSTENT® Monorail®
Endoprosthesis. We look forward to new product launches, including our next-generation percutaneous
transluminal angioplasty balloon, expected in the second half of 2011 and believe that these
launches, coupled with the strength of our Express® SD Renal Monorail® premounted stent system; our
Express LD Stent System, which received FDA approval in the first quarter of 2010 for an iliac
indication; our Sterling® Monorail® and Over-the-Wire balloon dilatation catheter and our extensive
line of Interventional Oncology product solutions, will continue to position us well in the growing
Peripheral Interventions market.
Electrophysiology
We develop less-invasive medical technologies used in the diagnosis and treatment of rate and
rhythm disorders of the heart. Our leading products include the Blazer line of ablation catheters,
including our next-generation Blazer Prime ablation catheter, designed to deliver enhanced
performance, responsiveness and durability, which we launched in the U.S. in the fourth quarter of
2009. Worldwide net sales of our Electrophysiology products decreased to $147 million in 2010, as
compared to $149 million in 2009, a decrease of $2 million, or two percent, due principally to
product availability constraints with our Chilli II catheter line. Foreign currency fluctuations
did not materially impact our Electrophysiology net sales in 2010, as compared to the prior year.
Our U.S. net sales of these products were $112 million, as compared to $116 million for the prior
year, and our international net sales were $35 million in 2010, as compared to $33 million in 2009.
We have begun a limited launch of our Blazer Prime ablation catheter in the U.S., our EMEA region
and certain Inter-Continental countries, and believe that with the increasing adoption of this
technology and other upcoming product launches, we are well-positioned within the Electrophysiology
market. As part of our strategic plan, we are investigating opportunities to further expand our
presence in, and diversify into, other areas and disease states, including atrial fibrillation. In
January 2011, we announced the signing of a definitive merger agreement under which we will acquire
Atritech, Inc., subject to customary closing conditions. Atritech has 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, developed
by Atritech, is the first device proven in a randomized clinical trial to offer an alternative to
anticoagulant drugs, and is approved for use in CE Mark countries.
Endoscopy
Our Endoscopy division develops and manufactures devices to treat a variety of medical conditions
including diseases of the digestive and pulmonary systems. Our worldwide net sales of these
products increased to $1.079 billion in 2010, as compared to $1.006 billion in 2009, an increase of
$73 million, or seven percent.
46
Excluding the impact of foreign currency fluctuations, which
contributed $9 million to our Endoscopy net sales in 2010, as compared to the prior year, net sales
of these products increased $64 million, or six percent, as compared to 2009. Our U.S. net sales of
these products were $541 million in 2010, as compared to $517 million for the prior year, and our
international net sales were $538 million in 2010, as compared to $489 million in 2009. These
increases were due primarily to higher net sales within our stent franchise, driven by the
continued commercialization and adoption of our WallFlex® family of stents, in particular, the
WallFlex Biliary line and WallFlex Esophageal line. In addition, our hemostasis franchise net sales
benefited from increased utilization of our Resolution® Clip Device, an endoscopic mechanical clip
to treat gastrointestinal bleeding, and our biliary franchise drove solid growth on the strength of
our rapid exchange biliary devices. During 2010, we introduced expanded sizes of our Radial® Jaw 4
biopsy forceps, and have launched a number of new products targeting the biliary interventional
market. As part of our strategic plan, we are investigating opportunities to further expand our
presence in, and diversify into, other areas and disease states, including endoscopic pulmonary
intervention. On October 26, 2010, we completed our acquisition of Asthmatx, Inc. Asthmatx designs,
manufactures and markets a less-invasive, catheter-based bronchial thermoplasty procedure for the
treatment of severe persistent asthma. The Alair® Bronchial Thermoplasty
System, developed by Asthmatx, has both CE Mark and FDA approval and is the first device-based
asthma treatment approved by the FDA. We expect this technology to strengthen our existing offering
of pulmonary devices and contribute to the mid- to long-term growth and diversification of the
Endoscopy business.
Urology/Womens Health
Our Urology/Womens Health division develops and manufactures devices to treat various urological
and gynecological disorders. Our worldwide net sales of these products increased to $481 million in
2010 from $456 million in 2009, an increase of $25 million, or five percent. Foreign currency
fluctuations did not materially impact our Urology/Womens Health net sales in 2010, as compared to
the prior year. Our U.S. net sales of these products were $365 million in 2010, as compared to $353
million in 2009, and our international net sales were $116 million in 2010, as compared to $103
million for the prior year. These increases were driven by new product introductions and increased
sales investments. In 2011, we plan to expand the launch of our recently-approved Genesys Hydro
ThermAblator® (HTA) system, a next-generation endometrial ablation system designed to ablate the
endometrial lining of the uterus in premenopausal women with menorrhagia. The Genesys HTA System
features a smaller and lighter console, simplified set-up requirements, and an enhanced graphic
user interface and is designed to improve operating performance. We believe this new product
offering will enable us to increase our share of this market.
Neuromodulation
Within our Neuromodulation business, we market the Precision® Spinal Cord Stimulation (SCS) system,
used for the management of chronic pain. Our worldwide net sales of Neuromodulation products
increased to $304 million in 2010, as compared to $285 million in 2009, an increase of $19 million,
or seven percent. Foreign currency fluctuations did not materially impact our Neuromodulation net
sales in 2010, as compared to the prior year. Our U.S. net sales of these products were $288
million in 2010 as compared to $271 million for the prior year, and our international net sales of
these products were $16 million in 2010, as compared to $14 million in 2009, driven by an increase
in procedural volume and new product launches. In 2010, we received FDA approval and launched two
lead splitters, as well as the Linear 3-4 and Linear 3-6 Percutaneous Leads for use with our SCS
systems, offering a broader range of lead configurations and designed to provide physicians more
treatment options for their chronic pain patients. These represent the broadest range of
percutaneous lead configurations in the industry. We believe that we continue to have a technology
advantage over our competitors with proprietary features such as Multiple Independent Current
Control, which is intended to allow the physician to target specific areas of pain more precisely,
and are involved in various studies designed to evaluate the use of spinal cord stimulation in the
treatment of additional sources of pain. As a demonstration of our commitment to strengthening
clinical evidence with spinal cord stimulation, we have initiated a trial to assess the therapeutic
effectiveness and cost-effectiveness of spinal cord stimulation compared to reoperation in patients
with failed back surgery syndrome. We believe that this trial could result in consideration of
spinal cord stimulation much earlier in the continuum of care. In addition, in late 2010 we
initiated a European clinical trial for the treatment of Parkinsons disease using our Vercise
deep-brain stimulation system, and, in January 2011, we completed the
47
acquisition of Intelect
Medical, Inc., a development-stage company developing advanced visualization and programming for
the Vercise system. We believe this acquisition leverages the core architecture of our Vercise
platform and advances the field of deep-brain stimulation.
Neurovascular
In January 2011, we closed the sale our Neurovascular business to Stryker Corporation. We will
provide transitional services through a transition services agreement, and will also supply
products to Stryker. These transition services and supply agreements are expected to be effective
for a period of up to 24 months following the closing of the transaction, subject to extension, and
we will recognize net sales on the sale of Neurovascular products in certain countries during this
period. Our future sales of Neurovascular products to Stryker will be significantly lower than our
2010 Neurovascular net sales and will be at significantly reduced gross margins. The Neurovascular
business markets a broad line of coated and uncoated detachable coils, micro-delivery stents,
micro-guidewires, micro-catheters, guiding catheters and embolics to neuro-interventional
radiologists and neurosurgeons to treat diseases of the neurovascular system. Our worldwide net
sales of Neurovascular products decreased to $340 million in 2010, as compared to $348 million in
2009, a decrease of $8 million, or two percent. Excluding the impact of foreign currency
fluctuations, which contributed $7 million to Neurovascular net sales in 2010, as compared to the
prior year, net sales of these products decreased $15 million, or four percent, in 2010, as
compared to 2009. Our U.S. net sales of these products were $120 million, as compared to $125
million for the prior year, and our international net sales were $220 million in 2010, as compared
to $223 million in 2009. These decreases resulted primarily from new competitive launches and a
delay in the launch of the next-generation family of detachable coils, as well the impact of a
field action initiated during the third quarter with respect to selective lots of the Matrix®
Detachable Coil. However, in October 2010, we received FDA approval for the next-generation family
of detachable coils, which includes an enhanced delivery system designed to reduce coil detachment
times and began a phased launch of the product in 2010. In 2010, we also launched the Neuroform EZ
stent system, the fourth-generation intracranial aneurysm stent system designed for use in
conjunction with endovascular coiling to treat wide-necked aneurysms, in the U.S. and our EMEA
region.
FDA Matters
In January 2006, we received a corporate warning letter from the FDA notifying us of serious
regulatory problems at three of our facilities and advising us that our corporate-wide corrective
action plan relating to three site-specific warning letters issued to us in 2005 was inadequate. We
identified solutions to the quality system issues cited by the FDA and implemented those solutions
throughout our organization. During 2008, the FDA reinspected a number of our facilities and, in
October 2008, informed us that our quality system was in substantial compliance with its Quality
System Regulations. In November 2009 and January 2010, the FDA reinspected two of our sites to
follow-up on observations from the 2008 FDA inspections. Both of these FDA inspections confirmed
that all issues at the sites have been resolved and all restrictions related to the corporate
warning letter were removed. On August 11, 2010, we were notified by the FDA that the corporate
warning letter had been lifted.
In August 2010, the FDA released numerous draft proposals on the 510(k) process aimed at increasing
transparency and streamlining the process, while adding more scientific rigor to the review
process. In January 2011, the FDA released the implementation plan for changes to the 510(k)
Submission program, which includes additional training of FDA staff, the creation of various
guidance documents intended to provide greater clarity to certain processes, as well as various
internal changes to the FDAs procedures. We have a portfolio of products that includes numerous
Class II medical devices. Several of the FDAs proposals could increase the regulatory burden on
our industry, including those that could increase the cost, complexity and time to market for
certain high-risk Class II medical devices.
Restructuring Initiatives
We are a diversified worldwide medical device leader and hold number one or two positions in the
majority of the markets in which we compete. Since our inception, we have generated significant
revenue growth driven by product innovation, strategic acquisitions and robust investments in
research and development. We generate
48
strong cash flow, which has enabled us to reduce our debt
obligations and further invest in our growth. On an on-going basis, we monitor the dynamics of the
economy, the healthcare industry, and the markets in which we compete; and we continue to assess
opportunities for improved operational effectiveness and efficiency, and better alignment of
expenses with revenues, while preserving our ability to make the investments in research and
development projects, capital and our people that are essential to our long-term success. As a
result of these assessments, we have undertaken various restructuring initiatives in order to
enhance our growth potential and position us for long-term success. These initiatives are
described below, and additional information can be found in
Results of Operations and Note I
Restructuring-related Activities to our 2010 consolidated financial statements included in Item 8
of this Annual Report.
2010 Restructuring plan
On February 6, 2010, our Board of Directors approved, and we committed to, a series of management
changes and restructuring initiatives (the 2010 Restructuring plan) designed to focus our business,
drive innovation, accelerate profitable revenue growth and increase both accountability and shareholder
value. Key activities under the plan include the integration of our Cardiovascular and CRM
businesses, as well as the restructuring of certain other businesses and corporate functions; the
centralization of our research and development organization; the re-alignment of our international
structure to reduce our administrative costs and invest in expansion opportunities including
significant investments in emerging markets; and the reprioritization and diversification of our
product portfolio. We estimate that the execution of this plan will result in gross reductions in
pre-tax operating expenses of approximately $200 million to $250 million, once completed in 2012.
We expect to reinvest a portion of the savings into customer-facing and other activities to help
drive future sales growth and support the business. Activities under the 2010 Restructuring plan
were initiated in the first quarter of 2010 and are expected to be substantially complete by the
end of 2012. We expect the execution of the 2010 Restructuring plan will result in the elimination
of approximately 1,000 to 1,300 positions worldwide.
Plant Network Optimization
In January 2009, our Board of Directors approved, and we committed to, a Plant Network Optimization
program, which is intended to simplify our manufacturing plant structure by transferring certain
production lines among facilities and by closing certain other facilities. The program is a
complement to our 2007 Restructuring plan, discussed below, and is intended to improve overall
gross profit margins. We estimate that the program will result in annualized run-rate reductions of
manufacturing costs of approximately $65 million exiting 2012. These savings are in
addition to the estimated $35 million of annual reductions of manufacturing costs from activities
under our 2007 Restructuring plan, discussed below. Activities under the Plant Network Optimization
program were initiated in the first quarter of 2009 and are expected to be substantially complete
by the end of 2012.
2007 Restructuring plan
In October 2007, our Board of Directors approved, and we committed to, an expense and head count
reduction plan (the 2007 Restructuring plan). The plan was intended to bring expenses in line with
revenues as part of our initiatives to enhance short- and long-term shareholder value. Key
activities under the plan included the restructuring of several businesses, corporate functions and
product franchises in order to better utilize resources, strengthen competitive positions, and
create a more simplified and efficient business model; the elimination, suspension or reduction of
spending on certain research and development projects; and the transfer of certain production lines
among facilities. The execution of this plan enabled us to reduce research and development and
selling, general and administrative expenses by an annualized run rate of approximately $500
million exiting 2008. We have partially reinvested our savings from these initiatives into targeted
head count increases, primarily in customer-facing positions. In addition, we expect reductions of
annualized run-rate manufacturing costs of approximately $35 million exiting 2010 as a result of
transfers of certain production lines. Due to the longer term
nature of these initiatives, we do not expect to achieve the full benefit of these reductions in
manufacturing costs until 2012. We initiated activities under the plan in the fourth quarter of
2007. The transfer of certain production lines contemplated under the 2007 Restructuring plan was
completed as of December 31, 2010; all other major
49
activities under the plan, with the exception of
final production line transfers, were completed as of December 31, 2009.
Healthcare Reform
The Patient Protection and Affordable Care Act and Health Care and Education Affordability
Reconciliation Act were enacted into law in the U.S. in 2010. Certain provisions of the legislation
will not be effective for a number of years and there are many programs and requirements for which
the details have not yet been fully established or consequences not fully understood, and it is
unclear what the full impact will be from the legislation. The legislation imposes on medical
device manufacturers a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices
beginning in 2013. U.S. net sales represented 56 percent of our worldwide net sales in 2010 and,
therefore, this tax burden may have a material negative impact on our results of operations and
cash flows. Other provisions of this legislation, including Medicare provisions aimed at improving
quality and decreasing costs, comparative effectiveness research, an independent payment advisory
board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change
the way healthcare is developed and delivered, and may adversely affect our business and results of
operations. Further, we cannot predict what healthcare programs and regulations will be ultimately
implemented at the federal or state level, or the effect of any future legislation or regulation in
the U.S. or internationally. However, any changes that lower reimbursements for our products or
reduce medical procedure volumes could adversely affect our business and results of operations.
Results of Operations
Net Sales
We manage our international operating segments on a constant currency basis, and we manage market
risk from currency exchange rate changes at the corporate level. Management excludes the impact of
foreign exchange for purposes of reviewing regional and divisional 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 currency exchange, we
convert current period and prior period net sales from local currency to U.S. dollars using current
period currency exchange rates. The regional constant currency growth rates in the tables below can
be recalculated from our net sales by reportable segment as presented
in Note P Segment
Reporting to our 2010 consolidated financial statements included in Item 8 of this Annual Report.
As of December 31, 2010, we had four reportable segments based on geographic regions: the United
States; EMEA, consisting of Europe, the Middle East and Africa; Japan; and Inter-Continental,
consisting of our Asia Pacific and the Americas operating segments. The reportable segments
represent an aggregate of all operating divisions within each segment.
The following tables provide our worldwide net sales by region and the relative change on an as
reported and constant currency basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 versus 2009 |
|
2009 versus 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported |
|
Constant |
|
As Reported |
|
Constant |
|
|
Year Ended December 31, |
|
|
Currency |
|
Currency |
|
Currency |
|
Currency |
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Basis |
|
Basis |
|
Basis |
|
Basis |
|
|
|
|
|
|
|
|
|
United States |
|
$ |
4,335 |
|
|
$ |
4,675 |
|
|
$ |
4,487 |
|
|
|
(7) |
% |
|
|
(7) |
% |
|
|
4 |
% |
|
|
4 |
% |
|
EMEA |
|
|
1,759 |
|
|
|
1,837 |
|
|
|
1,960 |
|
|
|
(4) |
% |
|
|
(1) |
% |
|
|
(6) |
% |
|
|
1 |
% |
Japan |
|
|
968 |
|
|
|
988 |
|
|
|
861 |
|
|
|
(2) |
% |
|
|
(8) |
% |
|
|
15 |
% |
|
|
4 |
% |
Inter-Continental |
|
|
740 |
|
|
|
677 |
|
|
|
673 |
|
|
|
9 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
3,467 |
|
|
|
3,502 |
|
|
|
3,494 |
|
|
|
(1) |
% |
|
|
(3) |
% |
|
|
0 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
7,802 |
|
|
|
8,177 |
|
|
|
7,981 |
|
|
|
(5) |
% |
|
|
(5) |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested Businesses |
|
|
4 |
|
|
|
11 |
|
|
|
69 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
7,806 |
|
|
$ |
8,188 |
|
|
$ |
8,050 |
|
|
|
(5) |
% |
|
|
(5) |
% |
|
|
2 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides our worldwide net sales by division and the relative change on an
as reported and constant currency basis.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 versus 2009 |
|
2009 versus 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported |
|
Constant |
|
As Reported |
|
Constant |
|
|
Year Ended December 31, |
|
|
Currency |
|
Currency |
|
Currency |
|
Currency |
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Basis |
|
Basis |
|
Basis |
|
Basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Rhythm Management |
|
$ |
2,180 |
|
|
$ |
2,413 |
|
|
$ |
2,286 |
|
|
|
(10) |
% |
|
|
(10) |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional Cardiology |
|
|
2,602 |
|
|
|
2,859 |
|
|
|
2,879 |
|
|
|
(9) |
% |
|
|
(10) |
% |
|
|
(1) |
% |
|
|
0 |
% |
Peripheral Interventions |
|
|
669 |
|
|
|
661 |
|
|
|
684 |
|
|
|
1 |
% |
|
|
0 |
% |
|
|
(3) |
% |
|
|
(2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular Group |
|
|
3,271 |
|
|
|
3,520 |
|
|
|
3,563 |
|
|
|
(7) |
% |
|
|
(8) |
% |
|
|
(1) |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrophysiology |
|
|
147 |
|
|
|
149 |
|
|
|
153 |
|
|
|
(2) |
% |
|
|
(2) |
% |
|
|
(2) |
% |
|
|
(1) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurovascular |
|
|
340 |
|
|
|
348 |
|
|
|
360 |
|
|
|
(2) |
% |
|
|
(4) |
% |
|
|
(3) |
% |
|
|
(2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy |
|
|
1,079 |
|
|
|
1,006 |
|
|
|
943 |
|
|
|
7 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Urology/Womens Health |
|
|
481 |
|
|
|
456 |
|
|
|
431 |
|
|
|
5 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuromodulation |
|
|
304 |
|
|
|
285 |
|
|
|
245 |
|
|
|
7 |
% |
|
|
7 |
% |
|
|
17 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
7,802 |
|
|
|
8,177 |
|
|
|
7,981 |
|
|
|
(5) |
% |
|
|
(5) |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested Businesses |
|
|
4 |
|
|
|
11 |
|
|
|
69 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
7,806 |
|
|
$ |
8,188 |
|
|
$ |
8,050 |
|
|
|
(5) |
% |
|
|
(5) |
% |
|
|
2 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The divisional constant currency growth rates in the tables above can be recalculated from the
reconciliations provided below. Growth rates are based on actual, non-rounded amounts and may not
recalculate precisely. Please see Additional Information for further information regarding
managements use of these non-GAAP measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Net Sales as compared to 2009 |
|
2009 Net Sales as compared to 2008 |
|
|
Change |
|
|
Estimated |
|
|
Change |
|
|
Estimated |
|
|
|
As Reported |
|
|
Constant |
|
|
Impact of |
|
|
As Reported |
|
|
Constant |
|
|
Impact of |
|
|
|
Currency |
|
|
Currency |
|
|
Foreign |
|
|
Currency |
|
|
Currency |
|
|
Foreign |
|
in millions |
|
Basis |
|
|
Basis |
|
|
Currency |
|
|
Basis |
|
|
Basis |
|
|
Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Rhythm Management |
|
$ |
(233 |
) |
|
$ |
(230 |
) |
|
$ |
(3 |
) |
|
$ |
127 |
|
|
$ |
168 |
|
|
$ |
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional Cardiology |
|
|
(257 |
) |
|
|
(295 |
) |
|
|
38 |
|
|
|
(20 |
) |
|
|
2 |
|
|
|
(22 |
) |
Peripheral Interventions |
|
|
8 |
|
|
|
2 |
|
|
|
6 |
|
|
|
(23 |
) |
|
|
(13 |
) |
|
|
(10 |
) |
|
|
|
|
|
Cardiovascular Group |
|
|
(249 |
) |
|
|
(293 |
) |
|
|
44 |
|
|
|
(43 |
) |
|
|
(11 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrophysiology |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
1 |
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurovascular |
|
|
(8 |
) |
|
|
(15 |
) |
|
|
7 |
|
|
|
(12 |
) |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy |
|
|
73 |
|
|
|
64 |
|
|
|
9 |
|
|
|
63 |
|
|
|
74 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Urology/ Womens Health |
|
|
25 |
|
|
|
21 |
|
|
|
4 |
|
|
|
25 |
|
|
|
27 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuromodulation |
|
|
19 |
|
|
|
19 |
|
|
|
0 |
|
|
|
40 |
|
|
|
41 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
(375 |
) |
|
|
(437 |
) |
|
|
62 |
|
|
|
196 |
|
|
|
288 |
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested Businesses |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
0 |
|
|
|
(58 |
) |
|
|
(58 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
(382 |
) |
|
$ |
(444 |
) |
|
$ |
62 |
|
|
$ |
138 |
|
|
$ |
230 |
|
|
$ |
(92 |
) |
|
|
|
|
|
U.S. Net Sales
During 2010, our U.S. net sales decreased $340 million, or seven percent, as compared to 2009. The
decrease was driven primarily by lower U.S. CRM net sales of $237 million, due primarily to the
ship hold and product removal actions impacting our ICD and CRT-D systems discussed above, as well
as a decline in U.S. coronary stent system net sales of $119 million, due primarily to a decline in
our share of the U.S. drug-eluting stent market as well as lower average selling prices. In
addition, U.S. net sales of our Interventional Cardiology (excluding coronary stent systems)
business decreased $15 million in 2010, as compared to the prior year. These decreases were
partially offset by increases of U.S. net sales in 2010 from our Endoscopy business of $24 million,
$12 million attributable to our Urology/Womens Health business, and $17 million of growth in our
Neuromodulation
51
business, as compared to 2009. Refer to the Business and Market Overview section
for further discussion of our net sales.
During 2009, our U.S. net sales increased $188 million, or four percent, as compared to 2008. The
increase was driven primarily by an increase in U.S. CRM net sales of $125 million and an increase
of $47 million in U.S. net sales of our coronary stent systems. In addition, U.S. net sales in 2009
from our Endoscopy business grew $40 million, our Urology/Womens Health net sales increased $18
million, and our Neuromodulation division
increased U.S. net sales $37 million in 2009, as compared to 2008. These increases were partially offset by
declines in U.S. net sales from our Interventional Cardiology (excluding coronary stent systems)
business of $52 million and a decrease of $16 million in Peripheral Interventions U.S. net sales in
2009, as compared to the prior year.
International Net Sales
During 2010, our international net sales decreased $35 million, or one percent, as compared to
2009. Foreign currency fluctuations contributed $62 million to our international net sales in 2010,
as compared to the prior year. Excluding the impact of foreign currency fluctuations, net sales in
our EMEA region decreased $21 million, or one percent, in 2010, as compared the prior year. Our net
sales in Japan decreased $81 million, or eight percent, excluding the impact of foreign currency
fluctuations in 2010, as compared to 2009, due primarily to competitive launches of drug-eluting
stent system technology and clinical trial enrollment limiting our access to certain drug-eluting
stent system customers, as well as reductions in average selling prices. Net sales in our
Inter-Continental region, excluding the impact of foreign currency fluctuations, increased $5
million, or one percent, in 2010, as compared to the prior year. Refer to the Business and Market
Overview section for further discussion of our net sales.
During 2009, our international net sales increased $8 million, or less than one percent, as
compared to 2008. Foreign currency fluctuations contributed a negative $92 million to our
international net sales, as compared to the prior year. Excluding
the impact of foreign currency fluctuations, net sales in our EMEA region increased $11 million, or
one percent, in 2009, as compared to 2008. Our net sales in Japan increased $37 million, or four
percent, excluding the impact of foreign currency fluctuations in 2009, as compared to 2008, due
primarily to an increase in coronary stent system sales following the launch of our
second-generation TAXUS® Liberté® stent system in that
region. Net sales in our Inter-Continental region increased $52 million, or eight percent,
excluding the impact of foreign currency fluctuations, in 2009, as compared to the prior year.
Gross Profit
Our gross profit was $5.207 billion in 2010, $5.612 billion in 2009, and $5.581 billion in 2008. As
a percentage of net sales, our gross profit decreased to 66.7 percent in 2010, as compared to 68.5
percent in 2009 and 69.3 percent in 2008. The following is a reconciliation of our gross profit
margins and a description of the drivers of the change from period to period:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2010 |
|
2009 |
Gross
profit - prior year |
|
|
68.5 |
% |
|
|
69.3 |
% |
Drug-eluting stent system sales mix and pricing |
|
|
(1.7) |
% |
|
|
(1.4) |
% |
Impact of CRM ship hold |
|
|
(0.4) |
% |
|
|
|
|
Net impact of foreign currency |
|
|
0.1 |
% |
|
|
0.9 |
% |
All other |
|
|
0.2 |
% |
|
|
(0.3) |
% |
|
|
|
|
|
Gross
profit - current year |
|
|
66.7 |
% |
|
|
68.5 |
% |
|
|
|
|
|
The primary factor contributing to the reduction in our gross profit margin during 2010 and
2009, as compared to the prior years, was, in each year, a further decrease in sales of our
higher-margin TAXUS® drug-eluting stent systems and an increasing shift towards the PROMUS® stent
system, as well as declines in the average selling prices of drug-eluting stent systems. Sales of
the PROMUS® stent system represented approximately 52 percent of our worldwide drug-eluting stent
system sales in 2010, 40 percent in 2009, and 19 percent in 2008. As a result of the terms of our
supply arrangement with Abbott, the gross profit margin of a PROMUS® stent system, supplied to us
by Abbott, is significantly lower than that of our TAXUS® stent system. In the fourth quarter of
2009, we launched our next-generation internally-developed and manufactured PROMUS® Element
everolimus-eluting
52
stent system in our EMEA region and certain Inter-Continental countries. This
product generates gross profit margins more favorable than the PROMUS® stent system, and has
positively affected our overall gross profit and operating profit margins. We expect to launch our
PROMUS® Element stent system in the U.S. and Japan in mid-2012. In addition, the average selling
prices of drug-eluting stent systems have decreased, including an estimated nine percent decline in
the U.S., in 2010, as compared to 2009. Our gross profit margin in 2010 was also
negatively impacted by the ship hold and product removal actions associated with our U.S. CRM
business previously discussed.
We expect our gross profit, as a percentage of net sales, will continue to be negatively impacted
by declines in average selling prices across our businesses. In addition, our 2011 gross profit
percentage will be negatively impacted as a result of our expected low-margin sales of
Neurovascular product to Stryker under the terms of our transitional supply agreements.
Operating Expenses
The following table provides a summary of certain of our operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
(in millions) |
|
$ |
|
|
Sales |
|
|
$ |
|
|
Sales |
|
|
$ |
|
|
Sales |
Selling, general and administrative expenses |
|
|
2,580 |
|
|
|
33.1 |
|
|
|
2,635 |
|
|
|
32.2 |
|
|
|
2,589 |
|
|
|
32.2 |
|
Research and development expenses |
|
|
939 |
|
|
|
12.0 |
|
|
|
1,035 |
|
|
|
12.6 |
|
|
|
1,006 |
|
|
|
12.5 |
|
Royalty expense |
|
|
185 |
|
|
|
2.4 |
|
|
|
191 |
|
|
|
2.3 |
|
|
|
203 |
|
|
|
2.5 |
|
Selling, General and Administrative (SG&A) Expenses
In 2010, our SG&A expenses decreased $55 million, or two percent, as compared to 2009. This
decrease was related primarily to savings from our restructuring initiatives driven by lower
head count and lower consulting and travel spending, as compared to the prior year. These decreases
were partially offset by an $11 million unfavorable impact from foreign currency fluctuations. As a
percentage of net sales, our SG&A expenses were slightly higher than 2009 due to the impact of
maintaining compensation levels for our U.S. CRM sales force, despite the reduction in our net
sales of our CRM products in the U.S. We plan to increase our investment in SG&A in 2011 to
introduce new products; strengthen our sales organization in emerging markets such as Brazil, China
and India; and to support our acquired businesses; as a result, our SG&A expenses are likely to
increase slightly as a percentage of net sales in 2011, as compared to 2010.
In 2009, our SG&A expenses increased by $46 million, or two percent, as compared to 2008. This
increase was related primarily to the addition of direct selling expenses and head count, including
expanding our global sales force and an increase in costs associated with various
litigation-related matters. These increases were partially offset by a benefit from foreign
currency fluctuations of approximately $22 million.
Research and Development (R&D) Expenses
In 2010, our R&D expenses decreased $96 million, or nine percent, as compared to 2009. This
decrease was due to the on-going re-prioritization of R&D projects and the re-allocation of
spending as part of our efforts to focus on products with higher returns, as well as the delay of
certain of our clinical trials. We remain committed to advancing medical technologies and investing
in meaningful research and development projects across our businesses in order to maintain a
healthy pipeline of new products that we believe will contribute to profitable sales growth.
In 2009, our R&D expenses increased $29 million, or three percent, as compared to 2008. As a
percentage of net sales, our R&D expenses in 2009 were relatively flat with the prior year.
Royalty Expense
53
In 2010, our royalty expense decreased $6 million, or three percent, as compared to 2009. This
decrease was due primarily to lower sales of our drug-eluting coronary stent systems, partially
offset by the continued shift in the mix of our drug-eluting stent system sales towards the
PROMUS® and PROMUS® Element stent systems. The
royalty rate applied to sales of these stent systems is, on average, higher than that associated
with sales of our
TAXUS® stent systems.
In 2009, our royalty expense decreased $12 million, or six percent, as compared to 2008. The
decrease was primarily the result of a reduction in royalty expense of $29 million attributable to
the expiration of a CRM royalty agreement during the first quarter of 2009. Partially offsetting
this decrease was an increase in royalty expense of $20 million as a result of an increase in sales
of our drug-eluting stent systems, as well as the shift in the mix of our drug-eluting stent system
sales towards the
PROMUS® stent system, following its launch in the U.S. in
mid-2008.
Loss on Program Termination
In the second quarter of 2009, we discontinued one of our internal R&D programs in order to focus
on those with a higher likelihood of success. As a result, we recorded a pre-tax loss of $16
million, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 420, Exit or Disposal Cost Obligations (formerly FASB Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities), associated with future payments
that we believe we remain contractually obligated to make. We continue to focus on developing new
technologies that we believe will contribute to profitable sales growth in the future and do not
believe that the cancellation of this program will have a material adverse impact on our future
results of operations or cash flows.
Amortization Expense
Amortization expense was $513 million in 2010, as compared to $511 million in 2009, an increase of
$2 million, or less than one percent. This non-cash charge is excluded by management for purposes
of evaluating operating performance and assessing liquidity.
Amortization expense was $511 million in 2009, as compared to $543 million in 2008, a decrease of
$32 million, or six percent. This decrease was due primarily to the impact of certain
Interventional Cardiology-related intangible assets reaching the end of their accounting useful
life during 2008, as well as the write-down of certain intangible assets to their fair values in
2009 and 2008, described in Other Intangible Asset Impairment Charges below.
Goodwill Impairment Charges
We test our April 1 goodwill balances during the second quarter of each year for impairment, or
more frequently if indicators are present or changes in circumstances suggest that impairment may
exist. The ship hold and product removal actions associated with our U.S. ICD and CRT-D products,
which we announced on March 15, 2010, and the expected corresponding financial impact on our
operations created an indication of potential impairment of the goodwill balance attributable to
our U.S. CRM reporting unit. Therefore, we performed an interim impairment test in accordance with
our accounting policies and recorded a goodwill impairment charge of $1.817 billion, on both a
pre-tax and after-tax basis, associated with our U.S. CRM reporting unit. This charge does not
impact our compliance with our debt covenants or our cash flows, and is excluded by management for
purposes of evaluating operating performance and assessing liquidity.
At the time we performed our interim goodwill impairment test, we estimated that our U.S.
defibrillator market share would decrease approximately 400 basis points exiting 2010 as a result
of the ship hold and product removal actions, as compared to our market share exiting 2009, and
that these actions would negatively impact our 2010 U.S. CRM revenues by approximately $300
million. In addition, we expected that, our on-going U.S. CRM net sales and profitability would
likely continue to be adversely impacted as a result of the ship hold and product removal actions.
Therefore, as a result of these product actions, as well as lower expectations of market growth in
new areas and increased competitive and other pricing pressures, we lowered our estimated average
U.S. CRM net sales growth rates within our 15-year discounted cash flow (DCF) model, as well as our
terminal
54
value growth rate, by approximately a couple of hundred basis points to derive the fair
value of the U.S. CRM reporting unit. The reduction in our forecasted 2010 U.S. CRM net sales, the
change in our expected sales growth rates thereafter and the reduction in profitability as a result
of the recently enacted excise tax on medical device
manufacturers were several key factors contributing to the impairment charge. Partially offsetting
these factors was a 50 basis point reduction in our estimated market-participant risk-adjusted
weighted-average cost of capital (WACC) used in determining our discount rate.
In the second quarter of 2010, we performed our annual goodwill impairment test for all of our
reporting units. We updated our U.S. CRM assumptions to reflect our market share position at that
time, our most recent operational budgets and long range strategic plans. In conjunction with our
annual test, the fair value of each reporting unit exceeded its carrying value, with the exception
of our U.S. CRM reporting unit. Based on the remaining book value of our U.S. CRM reporting unit
following the goodwill impairment charge, the carrying value of our U.S. CRM business unit
continues to exceed its fair value, due primarily to the book value of amortizable intangible
assets allocated to this reporting unit. The book value of our amortizable intangible assets which
have been allocated to our U.S. CRM reporting unit is approximately $3.5 billion as of December 31,
2010. We tested these amortizable intangible assets for impairment on an undiscounted cash flow
basis as of March 31, 2010, and determined that these assets were not impaired, and there have been
no impairment indicators related to these assets subsequent to that test. The assumptions used in
our annual goodwill impairment test related to our U.S. CRM reporting unit were substantially
consistent with those used in our first quarter interim impairment test; therefore, it was not
deemed necessary to proceed to the second step of the impairment test in the second quarter of
2010.
In the fourth quarter of 2010, we performed an interim impairment test on our international
reporting units as a result of the announced divestiture of our Neurovascular business. We
allocated a portion of our goodwill from our each of our international reporting units to the
Neurovascular business. We then tested each of our international reporting units for impairment in
accordance with ASC Topic 350, Intangibles Goodwill and Other. Our testing did not identify any
reporting units whose carrying values exceeded their calculated fair values. Refer to Critical
Accounting Estimates for a discussion of our goodwill balances as of December 31, 2010, including
our assessment of reporting units with a higher risk of future impairment.
During the fourth quarter of 2008, the decline in our stock price and our market capitalization
created an indication of potential impairment of our goodwill balance. Therefore, we performed an
interim impairment test and recorded a $2.613 billion goodwill impairment charge associated with
our U.S. CRM reporting unit. The impact of economic conditions, and the related increase in
volatility in the equity and credit markets, on our risk-adjusted weighted-average cost of capital,
along with reductions in market demand for products in our U.S. CRM reporting unit relative to our
assumptions at the time of our acquisition of Guidant, were the key factors contributing to the
impairment charge.
Intangible Asset Impairment Charges
During the first quarter of 2010, due to lower than anticipated net sales of one of our Peripheral
Interventions technology offerings, as well as changes in our expectations of future market
acceptance of this technology, we lowered our sales forecasts associated with the product. In
addition, during the third quarter of 2010, as part of our initiatives to reprioritize and
diversify our product portfolio, we discontinued one of our internal research and development
programs to focus on those with a higher likelihood of success. As a result of these factors, we
tested the related intangible assets for impairment and recorded $65 million of intangible asset
impairment charges during 2010 to write down the balance of these intangible assets to their fair
value. We do not believe that these impairments, or the factors causing these impairments, will
have a material impact on our future operations or cash flows.
In 2009, we recorded intangible asset impairment charges of $12 million, associated primarily with
lower than anticipated market penetration of one of our Urology technology offerings. We do not
believe that these impairments will have a material impact on our future operations or cash flows.
55
In 2008, we recorded intangible asset impairment charges of $177 million, including a $131 million
write-down of certain of our Peripheral Interventions-related intangible assets, and a $46 million
write-down of certain Urology-related intangible assets. We do not believe that the write-down of
these assets will have a material impact on future operations or cash flows.
These non-cash charges are excluded by management for purposes of evaluating operating performance
and assessing liquidity. Refer to Critical Accounting Estimates
and Note D - Goodwill and Other
Intangible Assets to our 2010 consolidated financial statements included in Item 8 of this Annual
Report for more information on our intangible asset impairment charges.
Purchased Research and Development
On January 1, 2009, we adopted the provisions of FASB Statement No. 141(R), Business Combinations
(codified within ASC Topic 805, Business Combinations). Among other changes to accounting for
business combinations, Statement No. 141(R) superseded FASB Interpretation No. 4, Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, which required
research and development assets acquired in a business combination that had no alternative future
use to be measured at their fair values and expensed at the acquisition date. Statement No. 141(R)
now requires that purchased research and development acquired in a business combination be
recognized as an indefinite-lived intangible asset until the completion or abandonment of the
associated research and development efforts. Accordingly, we have accounted for purchased research
and development acquired in connection with our 2010 business combinations as intangible assets in
our 2010 consolidated financial statements included in Item 8 of this Annual Report.
Our policy is to record certain costs associated with strategic investments outside of business
combinations as purchased research and development. Our adoption of Statement No. 141(R) (Topic
805) did not change this policy with respect to asset purchases. In accordance with this policy, we
recorded purchased research and development charges of $21 million in 2009, associated with
entering certain licensing and development arrangements. Since the technology purchases did not
involve the transfer of processes or outputs as defined by Statement No. 141(R) (Topic 805), the
transactions did not qualify as business combinations.
In 2008, we recorded $43 million of purchased research and development charges, including $17
million associated with our acquisition of Labcoat, Ltd., $8 million attributable to our
acquisition of CryoCor, Inc., and $18 million associated with entering certain licensing and
development arrangements. These acquisition-related charges are excluded by management for purposes
of evaluating operating performance and assessing liquidity.
Contingent Consideration Expense
In connection with our 2010 acquisitions, we may be required to pay future consideration that is
contingent upon the achievement of certain revenue-based milestones. As of the
respective acquisition dates, we recorded total contingent liabilities of $69 million, representing
the estimated fair value of the contingent consideration we expect to pay to the former
shareholders of the acquired businesses. In accordance with ASC Topic 805, we re-measure this liability each reporting
period and record changes in the fair value through a separate line item within our consolidated
statements of operations. Increases or decreases in the fair value of the contingent consideration
liability can result from changes in discount periods and rates, as well as changes in the timing
and amount of revenue estimates. During 2010, we recorded expense of $2 million representing the
increase in the estimated fair value of this obligation. This acquisition-related charge is
excluded by management for purposes of evaluating operating performance and assessing liquidity.
Acquisition-related Milestone
In connection with Abbott Laboratories 2006 acquisition of Guidants vascular intervention and
endovascular solutions businesses, Abbott agreed to pay us a milestone payment of $250 million upon
receipt of an approval from the Japanese Ministry of Health, Labor and Welfare (MHLW) to market the
XIENCE V® stent system in Japan. The MHLW approved the XIENCE
V® stent system in the first quarter of 2010 and we received the
56
milestone
payment from Abbott, which we recorded as a $250 million pre-tax gain. This non-recurring
acquisition-related credit is excluded by management for purposes of evaluating operating
performance and assessing liquidity.
Gain on Divestitures
During 2008, we recorded a $250 million gain in connection with the sale of our Fluid Management
and Venous Access businesses and our TriVascular EVAR program. This divestiture-related gain is
excluded by management for purposes of evaluating operating performance and assessing liquidity.
Refer to Note C Divestitures and Assets Held for Sale to our 2010 consolidated financial
statements included in Item 8 of this Annual Report for more information on these transactions.
Restructuring Charges and Restructuring-related Activities
In October 2007, our Board of Directors approved, and we committed to, an expense and head count
reduction plan (the 2007 Restructuring plan). The plan was intended to bring expenses in line with
revenues as part of our initiatives to enhance short- and long-term shareholder value. Key
activities under the plan included the restructuring of several businesses, corporate functions and
product franchises in order to better utilize resources, strengthen competitive positions, and
create a more simplified and efficient business model; the elimination, suspension or reduction of
spending on certain research and development projects; and the transfer of certain production lines
among facilities. The execution of this plan enabled us to reduce research and development and
selling, general and administrative expenses by an annualized run rate of approximately $500
million exiting 2008. We have partially reinvested our savings from these initiatives into targeted
head count increases, primarily in customer-facing positions. In addition, the plan has reduced
annualized run-rate reductions of manufacturing costs by approximately $35 million exiting 2010 as
a result of transfers of certain production lines. We initiated activities under the plan in the
fourth quarter of 2007. The transfer of certain production lines contemplated under the 2007
Restructuring plan was completed as of December 31, 2010; all
other major activities under the plan, with the exception of final
production line transfers, were completed as of December 31, 2009.
The execution of this plan resulted in total pre-tax expenses of $427 million and required cash
outlays of $380 million, of which we have paid $370 million to date. We recorded a portion of these
expenses as restructuring charges and the remaining portion through other lines within our
consolidated statements of operations. The following provides a summary of total costs associated
with the plan by major type of cost:
|
|
|
Type of cost |
|
Total amount incurred |
|
Restructuring charges: |
|
|
Termination benefits
|
|
$204 million |
Fixed asset write-offs
|
|
$31 million |
Other (1)
|
|
$67 million |
|
|
|
Restructuring-related expenses: |
|
|
Retention incentives
|
|
$66 million |
Accelerated depreciation
|
|
$16 million |
Transfer costs (2)
|
|
$43 million |
|
|
|
|
|
|
$427 million |
|
|
|
|
|
|
(1) |
|
Consists primarily of consulting fees, contractual cancellations, relocation costs and other costs. |
|
(2) |
|
Consists primarily of costs to transfer product lines among facilities, including costs of
transfer teams, freight and product line validations. |
In January 2009, our Board of Directors approved, and we committed to, a Plant Network
Optimization program, which is intended to simplify our manufacturing plant structure by
transferring certain production lines among facilities and by closing certain other facilities. The
program is a complement to our 2007 Restructuring plan, discussed above, and is intended to improve
overall gross profit margins. We estimate that the program will result in annualized run-rate
reductions of manufacturing costs of approximately $65 million exiting 2012. These
savings are in addition to the estimated $35 million of annual reductions of manufacturing
57
costs
from activities under our 2007 Restructuring plan. Activities under the Plant Network Optimization
program were initiated in the first quarter of 2009 and are expected to be substantially complete
by the end of 2012. Activities under the Plant Network Optimization program were initiated in the
first quarter of 2009 and are expected to be substantially complete by the end of 2012.
We expect that the execution of the Plant Network Optimization program will result in total pre-tax
charges of approximately $135 million to $150 million, and
that approximately $115 million to $125
million of these charges will result in cash outlays, of which we
have made payments of $40 million
to date. We have recorded related costs of $79 million since the inception of the plan, and are
recording a portion of these expenses as restructuring charges and the remaining portion through
other lines within our consolidated statements of operations. The following provides a summary of
our estimates of costs associated with the Plant Network Optimization program by major type of
cost:
|
|
|
|
|
Total estimated amount expected to |
Type of cost |
|
be incurred |
|
Restructuring charges: |
|
|
Termination benefits
|
|
$30 million to $35 million |
|
|
|
Restructuring-related expenses: |
|
|
Accelerated depreciation
|
|
$20 million to $25 million |
Transfer costs (1)
|
|
$85 million to $90 million |
|
|
|
|
|
|
$135 million to $150 million |
|
|
|
|
|
|
(1) |
|
Consists primarily of costs to transfer product lines among
facilities, including costs of transfer teams, freight, idle facility
and product line validations. |
On February 6, 2010, our Board of Directors approved, and we committed to, a series of
management changes and restructuring initiatives (the 2010 Restructuring plan) designed to focus
our business, drive innovation, accelerate profitable revenue growth and increase both accountability and
shareholder value. Key activities under the plan include the integration of our Cardiovascular and
CRM businesses, as well as the restructuring of certain other businesses and corporate functions;
the centralization of our research and development organization; the re-alignment of our
international structure to reduce our administrative costs and invest in expansion opportunities
including significant investments in emerging markets; and the reprioritization and diversification
of our product portfolio. We estimate that the execution of this plan will result in gross
reductions in pre-tax operating expenses of approximately $200 million to $250 million, once
completed in 2012. We expect to reinvest a portion of the savings
into customer-facing and other
activities to help drive future sales growth and support the business. Activities under the 2010
Restructuring plan were initiated in the first quarter of 2010 and are expected to be substantially
complete by the end of 2012. We expect the execution of the 2010 Restructuring plan will result in
the elimination of approximately 1,000 to 1,300 positions worldwide by the end of 2012.
We estimate that the 2010 Restructuring plan will result in total pre-tax charges of approximately
$180 million to $200 million, and that approximately $165 million to $175 million of these charges
will result in cash outlays, of which we have made payments of $69 million to date. We have
recorded related costs of $110 million since the inception of the plan, and are recording a portion
of these expenses as restructuring charges and the remaining portion through other lines within our
consolidated statements of operations. The following provides a summary of our expected total costs
associated with the plan by major type of cost:
58
|
|
|
|
|
Total estimated amount expected to |
Type of cost |
|
be incurred |
|
Restructuring charges: |
|
|
Termination benefits |
|
$95 million to $100 million |
Fixed asset write-offs |
|
$10 million to $15 million |
Other (1) |
|
$55 million to $60 million |
|
|
|
Restructuring-related expenses: |
|
|
Other (2) |
|
$20 million to $25 million |
|
|
|
|
|
|
|
$180 million to $200 million |
|
|
|
(1) |
|
Includes primarily consulting fees and costs associated with contractual
cancellations. |
|
|
(2) |
|
Comprised of other costs directly related to restructuring plan, including accelerated
depreciation and infrastructure-related costs. |
We recorded restructuring charges pursuant to our restructuring plans of $116 million during
2010, $63 million during 2009, and $78 million during 2008. In addition, we recorded expenses
within other lines of our accompanying consolidated statements of operations related to our
restructuring initiatives of $53 million during 2010, $67 million during 2009, and $55 million
during 2008. The following presents these costs by major type and line item within our 2010
consolidated statements of operations included in Item 8 of this Annual Report, as well as by
program:
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Retention |
|
|
Accelerated |
|
|
Transfer |
|
|
Fixed Asset |
|
|
|
|
|
|
|
(in millions) |
|
Benefits |
|
|
Incentives |
|
|
Depreciation |
|
|
Costs |
|
|
Write-offs |
|
|
Other |
|
|
Total |
|
|
Restructuring charges |
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
$ |
35 |
|
|
$ |
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
|
|
|
|
|
|
|
$ |
7 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
48 |
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
41 |
|
|
|
|
|
|
|
5 |
|
|
|
53 |
|
|
|
|
|
|
$ |
70 |
|
|
|
|
|
|
$ |
7 |
|
|
$ |
41 |
|
|
$ |
11 |
|
|
$ |
40 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Retention |
|
|
Accelerated |
|
|
Transfer |
|
|
Fixed Asset |
|
|
|
|
|
|
|
(in millions) |
|
Benefits |
|
|
Incentives |
|
|
Depreciation |
|
|
Costs |
|
|
Write-offs |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Restructuring plan |
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
$ |
33 |
|
|
$ |
110 |
|
Plant Network Optimization program |
|
|
4 |
|
|
|
|
|
|
$ |
7 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
2007 Restructuring plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
7 |
|
|
|
20 |
|
|
|
|
|
|
$ |
70 |
|
|
|
|
|
|
$ |
7 |
|
|
$ |
41 |
|
|
$ |
11 |
|
|
$ |
40 |
|
|
$ |
169 |
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Retention |
|
|
Accelerated |
|
|
Transfer |
|
|
Fixed Asset |
|
|
|
|
|
|
|
(in millions) |
|
Benefits |
|
|
Incentives |
|
|
Depreciation |
|
|
Costs |
|
|
Write-offs |
|
|
Other |
|
|
Total |
|
|
Restructuring charges |
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13 |
|
|
$ |
16 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
|
|
|
$ |
5 |
|
|
$ |
8 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Selling, general and administrative expenses |
|
|
|
|
|
|
10 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
14 |
|
Research and development expenses |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
11 |
|
|
|
37 |
|
|
|
|
|
|
|
1 |
|
|
|
67 |
|
|
|
|
|
|
$ |
34 |
|
|
$ |
18 |
|
|
$ |
11 |
|
|
$ |
37 |
|
|
$ |
13 |
|
|
$ |
17 |
|
|
$ |
130 |
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Retention |
|
|
Accelerated |
|
|
Transfer |
|
|
Fixed Asset |
|
|
|
|
|
|
|
(in millions) |
|
Benefits |
|
|
Incentives |
|
|
Depreciation |
|
|
Costs |
|
|
Write-offs |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Network Optimization program |
|
$ |
22 |
|
|
|
|
|
|
$ |
6 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
$ |
40 |
|
2007 Restructuring plan |
|
|
12 |
|
|
$ |
18 |
|
|
|
5 |
|
|
|
25 |
|
|
$ |
13 |
|
|
$ |
17 |
|
|
|
90 |
|
|
|
|
|
|
$ |
34 |
|
|
$ |
18 |
|
|
$ |
11 |
|
|
$ |
37 |
|
|
$ |
13 |
|
|
$ |
17 |
|
|
$ |
130 |
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Retention |
|
|
Accelerated |
|
|
Transfer |
|
|
Fixed Asset |
|
|
|
|
|
|
|
(in millions) |
|
Benefits |
|
|
Incentives |
|
|
Depreciation |
|
|
Costs |
|
|
Write-offs |
|
|
Other |
|
|
Total |
|
|
Restructuring charges |
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10 |
|
|
$ |
34 |
|
|
$ |
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
|
|
|
$ |
9 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Selling, general and administrative expenses |
|
|
|
|
|
|
27 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
Research and development expenses |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
8 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
$ |
34 |
|
|
$ |
43 |
|
|
$ |
8 |
|
|
$ |
4 |
|
|
$ |
10 |
|
|
$ |
34 |
|
|
$ |
133 |
|
|
|
|
Restructuring and restructuring-related costs recorded in 2008 related entirely to our 2007
Restructuring plan.
Termination benefits represent amounts incurred pursuant to our on-going benefit arrangements and
amounts for one-time involuntary termination benefits, and have been recorded in accordance with
ASC Topic 712, Compensation Non-retirement Postemployment Benefits (formerly FASB Statement No.
112, Employers Accounting for Postemployment Benefits) and ASC Topic 420, Exit or Disposal Cost
Obligations (formerly FASB Statement 146, Accounting for Costs Associated with Exit or Disposal
Activities). We expect to record additional termination benefits related to our Plant Network
Optimization program and 2010 Restructuring plan in 2011 and 2012 when we identify with more
specificity the job classifications, functions and locations of the remaining head count to be
eliminated. Retention incentives represent cash incentives, which were recorded over the service
period during which eligible employees remained employed with us in order to retain the payment.
Other restructuring costs, which represent primarily consulting fees, are being recorded as
incurred in accordance with Topic 420. Accelerated depreciation is being recorded over the adjusted
remaining useful life of the related assets, and production line transfer costs are being recorded
as incurred.
We
have incurred cumulative restructuring charges of $433 million and restructuring-related costs
of $183 million since we committed to each plan. The following presents these costs by major type
and by plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
Plant |
|
|
2007 |
|
|
|
|
|
|
Restructuring |
|
|
Network |
|
|
Restructuring |
|
|
|
|
(in millions) |
|
plan |
|
|
Optimization |
|
|
plan |
|
|
Total |
|
|
Termination benefits |
|
$ |
66 |
|
|
$ |
26 |
|
|
$ |
204 |
|
|
$ |
296 |
|
Fixed asset write-offs |
|
|
11 |
|
|
|
|
|
|
|
31 |
|
|
|
42 |
|
Other |
|
|
28 |
|
|
|
|
|
|
|
67 |
|
|
|
95 |
|
|
|
|
Total restructuring charges |
|
|
105 |
|
|
|
26 |
|
|
|
302 |
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention incentives |
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
66 |
|
Accelerated depreciation |
|
|
|
|
|
|
13 |
|
|
|
16 |
|
|
|
29 |
|
Transfer costs |
|
|
|
|
|
|
40 |
|
|
|
43 |
|
|
|
83 |
|
Other |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
Restructuring-related expenses |
|
|
5 |
|
|
|
53 |
|
|
|
125 |
|
|
|
183 |
|
|
|
|
|
|
$ |
110 |
|
|
$ |
79 |
|
|
$ |
427 |
|
|
$ |
616 |
|
|
|
|
60
We made total cash payments associated with restructuring initiatives pursuant to these plans of
$133 million during 2010 and have made total cash payments of $479 million since committing to each
plan. Each of these payments was made using cash generated from operations, and are comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
Plant |
|
|
2007 |
|
|
|
|
|
|
Restructuring |
|
|
Network |
|
|
Restructuring |
|
|
|
|
(in millions) |
|
plan |
|
|
Optimization |
|
|
plan |
|
|
Total |
|
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits |
|
$ |
45 |
|
|
|
|
|
|
$ |
16 |
|
|
$ |
61 |
|
Retention incentives |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Transfer costs |
|
|
|
|
|
$ |
28 |
|
|
|
13 |
|
|
|
41 |
|
Other |
|
|
24 |
|
|
|
|
|
|
|
5 |
|
|
|
29 |
|
|
|
|
|
|
$ |
69 |
|
|
$ |
28 |
|
|
$ |
36 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program to Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits |
|
$ |
45 |
|
|
|
|
|
|
$ |
195 |
|
|
$ |
240 |
|
Retention incentives |
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
66 |
|
Transfer costs |
|
|
|
|
|
$ |
40 |
|
|
|
43 |
|
|
|
83 |
|
Other |
|
|
24 |
|
|
|
|
|
|
|
66 |
|
|
|
90 |
|
|
|
|
|
|
$ |
69 |
|
|
$ |
40 |
|
|
$ |
370 |
|
|
$ |
479 |
|
|
|
|
Litigation-related Net Charges
We record certain significant litigation-related activity as a separate line item in our
consolidated statements of operations, and these charges are excluded by management for purposes of
evaluating operating performance. During 2010, we reached a settlement with Medinol Ltd., resolving
the dispute we had with them that had been subject of arbitration before the American Arbitration
Association. Under the terms of the settlement, we received proceeds of $104 million from Medinol,
which we recorded as a pre-tax gain in our 2010 consolidated financial statements included in Item
8 of this Annual Report.
In 2009, we recorded litigation-related net charges of $2.022 billion, associated primarily with an
agreement to settle three patent disputes with Johnson & Johnson for $1.725 billion, plus interest.
In addition, in 2009, we reached an agreement in principle with the U.S. Department of Justice,
which was formally accepted by the District Court in 2011, under which we paid $296 million in
January 2011 in order resolve the U.S. Government investigation of Guidant Corporation related to
product advisories issued in 2005. We recorded a net charge of $294 million related to this matter
in 2009, representing $296 million associated with the agreement, net of a $2 million reversal of a
related accrual. Further, in 2009, we reduced previously recorded reserves associated with certain
litigation-related matters following certain favorable court rulings, resulting in a credit of $60
million and recorded a pre-tax charge of $50 million associated with the settlement of all
outstanding litigation with Bruce Saffran, M.D., Ph.D.
In 2008, we recorded litigation-related charges of $334 million as a result of a ruling by a
federal judge in a patent infringement case brought against us by Johnson & Johnson. This charge
was in addition to previous charges related to this matter. In 2009, we made the associated
settlement payment of $716 million, including penalties and interest. See discussion of our
material legal proceedings in Note L Commitments and Contingencies to our 2010 consolidated
financial statements included in Item 8 of this Annual Report.
Interest Expense
Our interest expense decreased to $393 million in 2010, as compared to $407 million in 2009. The
decrease in our interest expense was a result of lower average debt levels, due to term loan
prepayments throughout 2009, as well as the 2010 prepayment of our $900 million loan from Abbott
Laboratories and a slight decrease in our average borrowing rate. Our average borrowing rate was
6.0 percent in 2010 and 6.1 percent in 2009. In addition, our 2010 interest expense included $15
million of write-offs of debt issuance costs and impacts of the early termination of interest rate
contracts associated with term loan prepayments during the year, as compared to $34 million in
2009. These decreases were partially offset by the write-off of the related remaining $10 million
discount attributable to
61
the Abbott loan upon prepayment. Refer to the Liquidity and Capital Resources section and Note G
Borrowings and Credit Arrangements to our 2010 consolidated financial statements included in Item
8 of this Annual Report for information regarding our debt obligations.
Our interest expense decreased to $407 million in 2009, as compared to $468 million in 2008. The
decrease in our interest expense was a result of lower average debt levels, due to term loan
repayments during 2009. Partially offsetting these decreases were losses of $27 million associated
with the early termination of interest rate contracts for which there was no longer an underlying
exposure and the write-off of $7 million of debt issuance costs following prepayments of our term
loan, as well as a slight increase in our average borrowing rate. Our average borrowing rate was
6.1 percent in 2009 and 6.0 percent in 2008.
Other, net
Our other, net reflected expense of $14 million in 2010, $7 million in 2009, and $58 million in
2008. The following are the components of other, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest income |
|
$ |
13 |
|
|
$ |
7 |
|
|
$ |
47 |
|
Foreign currency (losses) gains |
|
|
(9 |
) |
|
|
(5 |
) |
|
|
5 |
|
Net (losses) gains on investments and notes receivable |
|
|
(12 |
) |
|
|
3 |
|
|
|
(93 |
) |
Other expense, net |
|
|
(6 |
) |
|
|
(12 |
) |
|
|
(17 |
) |
|
|
|
|
|
$ |
(14 |
) |
|
$ |
(7 |
) |
|
$ |
(58 |
) |
|
|
|
Our
interest income increased in 2010, as compared to 2009, due primarily
to the collection of interest on outstanding accounts receivable. Our
interest income decreased in 2009, as compared to 2008, due primarily
to lower average
investment rates available in the market, as well as lower average cash balances.
Other, net included net losses of $12 million in 2010, net gains of $3 million in 2009 and net
losses of $93 million in 2008, associated with our investment portfolio. The $93 million of losses
in 2008 relate primarily to the sale of our non-strategic investments, described in Note F
Investments and Notes Receivable to our 2010 consolidated financial statements included in Item 8
of this Annual Report.
Tax Rate
The following provides a summary of our reported tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Point Increase (Decrease) |
|
|
Year Ended December 31, |
|
2010 |
|
2009 |
|
|
2010 |
|
2009 |
|
2008 |
|
vs. 2009 |
|
vs. 2008 |
Reported tax rate |
|
|
0.2 |
% |
|
|
(21.6 |
) % |
|
|
0.2 |
% |
|
|
21.8 |
% |
|
|
(21.8 |
) % |
Impact of certain receipts/ charges |
|
|
18.0 |
% |
|
|
39.1 |
% |
|
|
18.9 |
% |
|
|
(21.1 |
) % |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.2 |
% |
|
|
17.5 |
% |
|
|
19.1 |
% |
|
|
0.7 |
% |
|
|
(1.6 |
) % |
|
|
|
|
|
|
|
|
|
|
|
The change in our reported tax rate for 2010, as compared to 2009, and 2009, as compared to
2008, relates primarily to the impact of certain receipts and charges that are taxed at different
rates than our effective tax rate. In 2010, these receipts and charges included goodwill and
intangible asset impairment charges, a gain associated with the receipt of an acquisition-related
milestone payment, a gain associated with a litigation-related settlement receipt, and
restructuring-related charges. Our reported tax rate was also net favorably affected by discrete
items, related primarily to the re-measurement of an uncertain tax position resulting from a
favorable court ruling issued in a similar third-party case, a resolution of an uncertain tax
position resulting from a favorable taxpayer motion issued in a similar third-party case as well as
conclusion of the appeals process for the federal examination for certain years. In 2009, these
receipts and charges included intangible asset impairment charges, purchased research and
development charges, restructuring and litigation-related net charges, a favorable tax ruling on a
divestiture-related gain recognized in a prior period, and discrete tax items associated primarily
with resolutions of uncertain tax positions related to audit settlements and changes in estimates
for tax benefits
62
claimed related to prior periods. In 2008, these charges included gains and losses associated with
the divestiture of certain non-strategic businesses and investments, goodwill and intangible asset
impairment charges, litigation-related charges. Changes in the geographic mix of our sales also
impacted our reported tax rate in 2010, as compared to 2009, and in 2009, as compared to 2008.
We are subject to U.S. federal income tax as well as income tax of multiple state and foreign
jurisdictions. We have concluded all U.S. federal income tax matters through 2000 and substantially
all material state, local, and foreign income tax matters through 2001. We resolved a number of
foreign examinations during 2010. As a result of these activities, we decreased our reserve for
uncertain tax positions by $9 million, inclusive of $3 million of interest and penalties. In
addition, as a result of the expiration of statutes of limitations in various foreign and state
jurisdictions, we decreased our reserve for uncertain tax positions by $20 million, inclusive of $7
million of interest and penalties. Further, during 2010, we concluded the appeals process for the
federal tax examination for Boston Scientific (excluding Guidant) covering years 2002-2005 and
decreased our reserve for uncertain tax positions by $72 million, inclusive of $21 million of
interest and penalties, net of payments. We also re-measured an uncertain tax position due to a
favorable court ruling issued in a similar third-party case and resolved another uncertain tax
position resulting from a favorable taxpayer motion issued in a similar third-party case, which
resulted in a decrease of $91 million, inclusive of $25 million of interest and penalties.
During 2009, we received favorable foreign court decisions and resolved certain foreign matters. As
a result of these activities, we decreased our reserve for uncertain tax positions by $20 million,
inclusive of $7 million of interest and penalties. In addition, statutes of limitations expired in
various foreign and state jurisdictions, as a result, decreased our reserve for uncertain tax
positions by $29 million, inclusive of interest and penalties. We also resolved certain
litigation-related matters, described in our 2009 Annual Report filed on Form 10-K. Based on the
outcome of the settlements, we reassessed the reserve for uncertain tax positions previously
recorded on certain positions and decreased our reserve by $22 million, inclusive of $1 million of
interest.
During 2008, we resolved certain matters in federal, state, and foreign jurisdictions for Guidant
and Boston Scientific for the years 1998- 2005. We settled multiple federal issues at the Internal
Revenue Service (IRS) examination and Appellate levels, including issues related to Guidants
acquisition of Intermedics, Inc., and various litigation settlements, described in Note L
Commitments and Contingencies to our 2010 consolidated financial statements included in Item 8 of
this Annual Report, or our 2009 Annual Report filed on Form 10-K. We also received favorable
foreign court decisions and a favorable outcome related to our foreign research credit claims. As
a result of these audit activities, we decreased our reserve for uncertain tax positions, excluding
tax payments, by $156 million, inclusive of $37 million of interest and penalties.
On December 17, 2010, we received Notices of Deficiency from the IRS reflecting proposed audit
adjustments for Guidant Corporation for the 2001-2003 tax years. The incremental tax liability
asserted by the IRS is $525 million, plus interest. The primary issue in dispute is the transfer
pricing used in connection with the technology license agreements between domestic and foreign
subsidiaries of Guidant. We believe we have meritorious defenses for our tax filings and we intend
to file a petition to the U.S. Tax Court in early 2011. No payments will be made on the issue
until it is resolved, which may take several years. We believe that our income tax reserves
associated with this matter are adequate and the final resolution will not have a material impact
on our financial condition or results of operations. However, both the final resolution and
potential impact of that resolution are uncertain and could have a material impact on our financial
condition or results of operations.
The federal tax returns of Guidant Corporation for the 2004 through April 2006 tax years and of
Boston Scientific Corporation for the 2006-2007 tax years are currently under examination by the
IRS. The relevant statutes of limitations for these examinations expire during December 2011 and
September 2011, respectively. We do not anticipate that at the conclusion of these examinations,
we will be able to reach an agreement with the IRS regarding our federal tax liabilities for these
years. We expect that final resolution of these tax liabilities will require that we avail
ourselves of applicable IRS appellate and judicial procedures, as appropriate.
63
Liquidity and Capital Resources
As of December 31, 2010, we had $213 million of cash and cash equivalents on hand, comprised of
$105 million invested in prime money market and government funds, $16 million invested in
short-term time deposits, and $92 million in interest bearing and non-interest bearing bank
accounts. Our policy is to invest excess cash in short-term marketable securities earning a market
rate of interest without assuming undue risk to principal, and we limit our direct exposure to
securities in any one industry or issuer.
Subsequent to year-end, in January 2011, we closed the sale of our Neurovascular business to
Stryker Corporation and received pre-tax proceeds of $1.450 billion at closing, including an
upfront payment of $1.426 billion, and $24 million, which was placed into escrow to be released
upon the completion of local closings in certain foreign jurisdictions, and will receive $50
million contingent upon the transfer or separation of certain manufacturing facilities, which we
expect will be completed over a period of approximately 24 months. In January 2011, we paid at
maturity $250 million of our senior notes, and a $296 million litigation-related settlement
associated with the U.S. Department of Justice matter described previously, using cash on hand. We
also have full access to our $2.0 billion revolving credit facility.
The following provides a summary and description of our cash inflows (outflows) for the years ended
December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash provided by operating activities |
|
$ |
325 |
|
|
$ |
835 |
|
|
$ |
1,216 |
|
Cash (used for) provided by investing activities |
|
|
(480 |
) |
|
|
(793 |
) |
|
|
324 |
|
Cash used for financing activities |
|
|
(496 |
) |
|
|
(820 |
) |
|
|
(1,350 |
) |
Operating Activities
During 2010, cash provided by operating activities was $325 million, as compared to $835 million in
2009, a decrease of $510 million. This decrease was driven primarily by the payment of $1.725
billion to Johnson & Johnson related to a patent litigation settlement, as compared to
approximately $837 million of legal settlements paid in 2009. This cash outflow was partially
offset by the receipt of a $250 million milestone payment from Abbott and $104 million received in
connection with a litigation settlement with Medinol, each described in Results of Operations.
During 2009, cash provided by operating activities was $835 million, as compared to $1.216 billion
in 2008, a decrease of $381 million. This decrease was due primarily to litigation-related payments
of $837 million, consisting primarily of payments to Johnson & Johnson associated with patent
litigation settlements. These cash outflows were partially offset by lower net tax payments of $370
million and lower interest payments of $50 million, due to lower average debt balances, as well as
improvements in working capital.
Investing Activities
During 2010, our investing activities were comprised primarily of capital expenditures of $272
million, as well as payments of approximately $200 million to acquire Asthmatx, Inc. and certain
other strategic assets, described in Note B Acquisitions to our 2010 consolidated financial
statements included in Item 8 of this Annual Report. We expect to incur total capital expenditures
of approximately $300 million to $350 million during 2011, which includes capital expenditures to
further upgrade our information systems infrastructure, and to enhance our manufacturing
capabilities to support continued growth in our business units.
During 2009, our investing activities included $523 million of payments related to prior period
acquisitions, comprised primarily of a final fixed payment of approximately $500 million related to
our prior period acquisition of Advanced Bionics Corporation, described in Note B Acquisitions
to our 2010 consolidated financial statements included in Item 8 of this Annual Report. Our
investing activities in 2009 also included capital expenditures of $312 million, payments for
investments in privately held companies, and acquisitions of
64
businesses and certain technology rights of $54 million, which were offset by proceeds from the
sale of investments in, and collection of notes receivable from, certain publicly traded and
privately held companies, of $91 million.
During 2008, our investing activities included proceeds of approximately $1.3 billion associated
with the divestiture of certain businesses, and $149 million of proceeds associated with the sale
of investments and collections of notes receivable. These cash inflows were partially offset by
$675 million in payments related to prior period acquisitions, associated primarily with Advanced
Bionics; and $39 million of net cash payments for investments in privately held companies, and
acquisitions of certain technology rights. In addition, we made capital expenditures of $362
million and paid $21 million, net of cash acquired, to acquire CryoCor, Inc. and $17 million, net
of cash acquired, to acquire Labcoat, Ltd. Refer to Note F Investments and Notes Receivable and
Note B Acquisitions to our 2010 consolidated financial statements included in Item 8 of this
Annual Report for more information regarding these transactions.
Financing Activities
Our cash flows from financing activities reflect issuances and repayments of debt and proceeds from
stock issuances related to our equity incentive programs.
Debt
We made payments on debt, net of proceeds from borrowings, of $527 million in 2010, $853 million in
2009, and $1.425 billion in 2008, and had total debt of $5.438 billion as of December 31, 2010 and
$5.918 billion as of December 31, 2009. The debt maturity schedule for the significant components
of our debt obligations as of December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Term loan |
|
$ |
250 |
|
|
$ |
50 |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,000 |
|
Senior notes |
|
|
250 |
|
|
|
|
|
|
|
|
|
|
$ |
600 |
|
|
$ |
1,250 |
|
|
$ |
2,350 |
|
|
|
4,450 |
|
|
|
|
|
|
$ |
500 |
|
|
$ |
50 |
|
|
$ |
700 |
|
|
$ |
600 |
|
|
$ |
1,250 |
|
|
$ |
2,350 |
|
|
$ |
5,450 |
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
The table above does not include discounts associated
with our senior notes, or amounts related to interest
rate contracts used to hedge the fair value of
certain of our senior notes. |
There were no amounts borrowed under our credit facilities as of December 31, 2010 or December
31, 2009. As of December 31, 2010, we had outstanding letters of credit of $120 million, as
compared to $123 million as of December 31, 2009, which consisted primarily of bank guarantees and
collateral for workers compensation insurance arrangements. As of December 31, 2010 and 2009, none
of the beneficiaries had drawn upon the letters of credit or guarantees; accordingly, we have not
recognized a related liability for our outstanding letters of credit in our consolidated balance
sheets as of December 31, 2010 or 2009. We believe we will generate sufficient cash from
operations and intend to fund these payments without drawing on the letters of credit.
In
January 2011, we paid at maturity $250 million of our senior notes; in
addition, we borrowed $250 million under our credit and security facility secured by our U.S. trade
receivables and used the proceeds to pre-pay all $100 million of our 2011 term loan maturities and
$150 million of our 2012 term loan maturities. These prepayments are reflected as current in the
table above, as well as in our consolidated balance sheets included in Item 8 of this Annual
Report. As a result, quarterly principal payments of $50 million will commence in the fourth
quarter of 2012.
65
Our revolving credit facility agreement requires that we maintain certain financial covenants, as
follows:
|
|
|
|
|
|
|
|
|
Actual as of |
|
|
Covenant |
|
December 31, |
|
|
Requirement |
|
2010 |
Maximum leverage ratio (1)
|
|
3.85 times
|
|
2.3 times |
Minimum interest coverage ratio (2)
|
|
3.0 times
|
|
6.1 times |
|
(1) |
|
Ratio of total debt to consolidated EBITDA, as
defined by the agreement, for the preceding
four consecutive fiscal quarters. Requirement
decreases to 3.5 times after March 31, 2011. |
|
|
(2) |
|
Ratio of consolidated EBITDA, as defined by the
agreement, to interest expense for the
preceding four consecutive fiscal quarters. |
The credit agreement provides for an exclusion from the calculation of consolidated EBITDA, as
defined by the agreement, through the credit agreement maturity, of up to $258 million in
restructuring charges and restructuring-related expenses related to our previously-announced
restructuring plans, plus an additional $300 million for any future restructuring initiatives. As
of December 31, 2010, we had $470 million of the aggregate restructuring charge exclusion
remaining. In addition, any litigation-related charges and credits are excluded from the
calculation of consolidated EBITDA until such items are paid or received; as well as up to $1.5
billion of any future cash payments for future litigation settlements or damage awards (net of any
litigation payments received); and litigation-related cash payments (net of cash receipts) of up to
$1.310 billion related to amounts that were recorded in the financial statements as of March 31,
2010. As of December 31, 2010, we had $2.154 billion of the aggregate legal payment exclusion
remaining.
As of and through December 31, 2010, we were in compliance with the required covenants. Our
inability to maintain compliance with these covenants could require us to seek to renegotiate the
terms of our credit facilities or seek waivers from compliance with these covenants, both of which
could result in additional borrowing costs. Further, there can be no assurance that our lenders
would grant such waivers.
Equity
During 2010, we received $31 million in proceeds from stock issuances related to our stock option
and employee stock purchase plans, as compared to $33 million in 2009 and $71 million in 2008.
Proceeds from the exercise of employee stock options and employee stock purchases vary from period
to period based upon, among other factors, fluctuations in the trading price of our common stock
and in the exercise and stock purchase patterns of employees. Stock-based compensation expense
related to our stock ownership plans was $150 million in 2010, $144 million in 2009, and $138
million in 2008.
Contractual Obligations and Commitments
The following table provides a summary of certain information concerning our obligations and
commitments to make future payments, and is based on conditions in existence as of December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
(in millions) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
|
|
Litigation settlements |
|
$ |
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
296 |
|
Long-term debt obligations |
|
|
500 |
|
|
$ |
50 |
|
|
$ |
700 |
|
|
$ |
600 |
|
|
$ |
1,250 |
|
|
$ |
2,350 |
|
|
|
5,450 |
|
Interest payments (1) |
|
|
286 |
|
|
|
280 |
|
|
|
262 |
|
|
|
229 |
|
|
|
193 |
|
|
|
1,300 |
|
|
|
2,550 |
|
Operating lease obligations (1) |
|
|
83 |
|
|
|
69 |
|
|
|
46 |
|
|
|
24 |
|
|
|
15 |
|
|
|
45 |
|
|
|
282 |
|
Purchase obligations (1) |
|
|
205 |
|
|
|
51 |
|
|
|
8 |
|
|
|
4 |
|
|
|
1 |
|
|
|
2 |
|
|
|
271 |
|
Minimum royalty obligations (1) |
|
|
13 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
20 |
|
Unrecognized tax benefits |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
$ |
1,391 |
|
|
$ |
451 |
|
|
$ |
1,017 |
|
|
$ |
858 |
|
|
$ |
1,460 |
|
|
$ |
3,700 |
|
|
$ |
8,877 |
|
|
|
|
|
(1) |
|
In accordance with generally accepted accounting principles in the
United States, these obligations relate to expenses associated with
future periods and are not reflected in our consolidated balance
sheets. |
66
The litigation settlement obligation noted above relates to our settlement with the U.S.
Department of Justice for $296 million, discussed in Note L Commitments and Contingencies to our
2010 consolidated financial statements included in Item 8 of this Annual Report, and was paid in
January 2011. Refer to Note G Borrowings and Credit Arrangements to our 2010 consolidated
financial statements included in Item 8 of this Annual Report for further information regarding our
debt obligations and associated interest obligations.
The amounts in the table above with respect to operating lease obligations represent amounts
pursuant to contractual arrangements for the lease of property, plant and equipment used in the
normal course of business. Purchase obligations relate primarily to non-cancellable inventory
commitments and capital expenditures entered in the normal course of business. Royalty obligations
reported above represent minimum contractual obligations under our current royalty agreements. The
table above does not reflect unrecognized tax benefits of $1.242 billion, the timing of which is
uncertain. Refer to Note K Income Taxes to our 2010 consolidated financial statements included
in Item 8 of this Annual Report for more information on these unrecognized tax benefits.
Certain of our acquisitions involve the potential payment of contingent consideration, including
our 2010 acquisition of Asthmatx, Inc. The table above does not reflect any such obligations, as
the timing and amounts are uncertain. See Note B Acquisitions to our 2010 consolidated financial
statements included in Item 8 of this Annual Report for the estimated maximum potential amount of
future contingent consideration we could be required to pay associated with prior acquisitions.
Legal Matters
The medical device market in which we primarily participate is largely technology driven. Physician
customers, particularly in interventional cardiology, have historically moved quickly to new
products and new technologies. As a result, intellectual property rights, particularly patents and
trade secrets, play a significant role in product development and differentiation. However,
intellectual property litigation is inherently complex and unpredictable. Furthermore, appellate
courts can overturn lower court patent decisions.
In addition, competing parties frequently file multiple suits to leverage patent portfolios across
product lines, technologies and geographies and to balance risk and exposure between the parties.
In some cases, several competitors are parties in the same proceeding, or in a series of related
proceedings, or litigate multiple features of a single class of devices. These forces frequently
drive settlement not only for individual cases, but also for a series of pending and potentially
related and unrelated cases. In addition, although monetary and injunctive relief is typically
sought, remedies and restitution are generally not determined until the conclusion of the trial
court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are
difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in
other geographies. Several third parties have asserted that certain of our current and former product offerings infringe patents owned or licensed by them. We have similarly asserted that other
products sold by our competitors infringe patents owned or licensed by us. Adverse outcomes in one
or more of the proceedings against us could limit our ability to sell certain products in certain
jurisdictions, or reduce our operating margin on the sale of these products and could have a
material adverse effect on our financial position, results of operations or liquidity.
In particular, although we have resolved multiple litigation matters with Johnson & Johnson, we
continue to be involved in patent litigation with them, particularly relating to drug-eluting stent
systems. Adverse outcomes in one or more of these matters could have a material adverse effect on
our ability to sell certain products and on our operating margins, financial position, results of
operation or liquidity.
In the normal course of business, product liability, securities and commercial claims are asserted
against us. Similar claims may be asserted against us in the future related to events not known to
management at the present time. We are substantially self-insured with respect to product liability
claims and intellectual property infringement, and maintain an insurance policy providing limited
coverage against securities claims. The absence
67
of significant third-party insurance coverage increases our potential exposure to unanticipated
claims or adverse decisions. Product liability claims, securities and commercial litigation, and
other legal proceedings in the future, regardless of their outcome, could have a material adverse
effect on our financial position, results of operations and liquidity. In addition, the medical
device industry is the subject of numerous governmental investigations often involving regulatory,
marketing and other business practices. These investigations could result in the commencement of
civil and criminal proceedings, substantial fines, penalties and administrative remedies, divert
the attention of our management and have an adverse effect on our financial position, results of
operations and liquidity.
Our accrual for legal matters that are probable and estimable was $588 million as of December 31,
2010 and $2.316 billion as of December 31, 2009, and includes estimated costs of settlement,
damages and defense. The decrease in our accrual is due primarily to the payment of $1.725 billion
to Johnson & Johnson in connection with the patent litigation settlement discussed in Note L
Commitments and Contingencies to our 2010 consolidated financial statements included in Item 8 of
this Annual Report. We continue to assess certain litigation and claims to determine the amounts,
if any, that management believes will be paid as a result of such claims and litigation and,
therefore, additional losses may be accrued and paid in the future, which could materially
adversely impact our operating results, cash flows and our ability to comply with our debt
covenants. See further discussion of our material legal proceedings in Note L.
Critical Accounting Estimates
Our financial results are affected by the selection and application of accounting policies. We have
adopted accounting policies to prepare our consolidated financial statements in conformity with
generally accepted accounting principles in the United States (U.S. GAAP). We describe these
accounting polices in Note ASignificant Accounting Policies to our 2010 consolidated financial
statements included in Item 8 of this Annual Report.
To prepare our consolidated financial statements in accordance with U.S. GAAP, management makes
estimates and assumptions that may affect the reported amounts of our assets and liabilities, the
disclosure of contingent liabilities as of the date of our financial statements and the reported
amounts of our revenues and expenses during the reporting period. Our actual results may differ
from these estimates. We consider estimates to be critical if (i) we are required to make
assumptions about material matters that are uncertain at the time of estimation or if (ii)
materially different estimates could have been made or it is reasonably likely that the accounting
estimate will change from period to period. The following are areas requiring managements judgment
that we consider critical:
Revenue Recognition
We generally allow our customers to return defective, damaged and, in certain cases, expired
products for credit. We base our estimate for sales returns upon historical trends and record these
amounts as a reduction of revenue when we sell the initial product. In addition, we may allow
customers to return previously purchased products for next-generation product offerings. For these
transactions, we defer recognition of revenue on the sale of the earlier generation product based
upon an estimate of the amount to be returned when the next-generation products are shipped to the
customer. Uncertain timing of next-generation product approvals, variability in product launch
strategies, product recalls and variation in product utilization all affect our estimates related
to sales returns and could cause actual returns to differ from these estimates.
Many of our CRM product offerings combine the sale of a device with our LATITUDE® Patient
Management System, which represents a future service obligation. In accordance with accounting
guidance regarding multiple-element arrangements applicable through December 31, 2010, we deferred
revenue on the undelivered service element based on verifiable objective evidence of fair value,
using the residual method of allocation, and recognized the associated revenue over the related
service period. The use of an alternative method of allocation or estimate of fair value could
result in a different amount of revenue deferral in any given period. On January 1, 2011, we
adopted ASC Update No. 2009-13, Revenue Recognition (Topic 605)- Multiple-Deliverable Revenue
Arrangements. The consensus in Update No. 2009-13 supersedes certain guidance in Topic 605
(formerly Emerging
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Issues Task Force (EITF) Issue No. 00-21, Multiple-Element Arrangements). Update No. 2009-13
provides principles and application guidance to determine whether multiple deliverables exist, how
the individual deliverables should be separated and how to allocate the revenue in the arrangement
among those separate deliverables, including requiring the use of the relative selling price
method. The adoption of Update No. 2009-13 did not have a material impact on our results of
operations or financial position.
Inventory Provisions
We base our provisions for excess, expired and obsolete inventory primarily on our estimates of
forecasted net sales. A significant change in the timing or level of demand for our products as
compared to forecasted amounts may result in recording additional provisions for excess, expired
and obsolete inventory in the future. Further, the industry in which we participate is
characterized by rapid product development and frequent new product introductions. Uncertain timing
of next-generation product approvals, variability in product launch strategies, product recalls and
variation in product utilization all affect our estimates related to excess, expired and obsolete
inventory.
Valuation of Intangible Assets
We base the fair value of identifiable intangible assets acquired in a business combination,
including purchased research and development, on detailed valuations that use information and
assumptions provided by management, which consider managements best estimates of inputs and
assumptions that a market participant would use. Further, for those arrangements that involve
potential future contingent consideration, we record on the date of acquisition a liability equal
to the discounted fair value of the estimated additional consideration we may be obligated to make
in the future. We re-measure this liability each reporting period and record changes in the fair
value through a separate line item within our consolidated statements of operations. Increases or
decreases in the fair value of the contingent consideration liability can result from changes in
discount periods and rates, as well as changes in the timing and amount of revenue estimates. The
use of alternative valuation assumptions, including estimated revenue projections; growth rates;
cash flows and discount rates and alternative estimated useful life assumptions, or probabilities
surrounding the achievement of clinical, regulatory or revenue-based milestones could result in
different purchase price allocations and amortization expense in current and future periods.
We review intangible assets subject to amortization quarterly to determine if any adverse
conditions exist or a change in circumstances has occurred that would indicate impairment or a
change in the remaining useful life. If an impairment indicator exists, we test the intangible
asset for recoverability. If the carrying value of the intangible asset is not recoverable, as
discussed in Note A, we will write the carrying value down to fair value in the period identified.
In addition, we test our indefinite-lived intangible assets at least annually for impairment and
reassess their classification as indefinite-lived assets. To test our indefinite-lived intangible
assets for impairment, we calculate the fair value of these assets and compare the calculated fair
values to the respective carrying values. If the carrying value exceeds the fair value of the
indefinite-lived intangible asset, we write the carrying value down to the fair value.
We generally calculate fair value of our intangible assets as the present value of estimated future
cash flows we expect to generate from the asset using a risk-adjusted discount rate. In determining
our estimated future cash flows associated with our intangible assets, we use estimates and
assumptions about future revenue contributions, cost structures and remaining useful lives of the
asset (asset group). The use of alternative assumptions, including estimated cash flows, discount
rates, and alternative estimated remaining useful lives could result in different calculations of
impairment.
Goodwill Valuation
We allocate any excess purchase price over the fair value of the net tangible and identifiable
intangible assets acquired in a business combination to goodwill. We test our April 1 goodwill
balances during the second quarter of each year for impairment, or more frequently if indicators
are present or changes in circumstances suggest that impairment may exist. In performing the
assessment, we utilize the two-step approach prescribed under ASC
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Topic 350, Intangibles-Goodwill and Other (formerly FASB Statement No. 142, Goodwill and Other
Intangible Assets). The first step requires a comparison of the carrying value of the reporting
units, as defined, to the fair value of these units. We assess goodwill for impairment at the
reporting unit level, which is defined as an operating segment or one level below an operating
segment, referred to as a component. We determine our reporting units by first identifying our
operating segments, and then assess whether any components of these segments constitute a business
for which discrete financial information is available and where segment management regularly
reviews the operating results of that component. We aggregate components within an operating
segment that have similar economic characteristics. For our April 1, 2010 annual impairment
assessment, we identified our reporting units to be our seven U.S. operating segments, which in
aggregate make up the U.S. reportable segment, and our four international operating segments. When
allocating goodwill from business combinations to our reporting units, we assign goodwill to the
reporting units that we expect to benefit from the respective business combination at the time of
acquisition. In addition, for purposes of performing our annual goodwill impairment test, assets
and liabilities, including corporate assets, which relate to a reporting units operations, and
would be considered in determining its fair value, are allocated to the individual reporting units.
We allocate assets and liabilities not directly related to a specific reporting unit, but from
which the reporting unit benefits, based primarily on the respective revenue contribution of each
reporting unit.
During 2010, 2009, and 2008, we used only the income approach, specifically the discounted cash
flow (DCF) method, to derive the fair value of each of our reporting units in preparing our
goodwill impairment assessment. This approach calculates fair value by estimating the after-tax
cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a
present value using a risk-adjusted discount rate. We selected this method as being the most
meaningful in preparing our goodwill assessments because we believe the income approach most
appropriately measures our income producing assets. We have considered using the market approach
and cost approach but concluded they are not appropriate in valuing our reporting units given the
lack of relevant market comparisons available for application of the market approach and the
inability to replicate the value of the specific technology-based assets within our reporting units
for application of the cost approach. Therefore, we believe that the income approach represents the
most appropriate valuation technique for which sufficient data is available to determine the fair
value of our reporting units.
In applying the income approach to our accounting for goodwill, we make assumptions about the
amount and timing of future expected cash flows, terminal value growth rates and appropriate
discount rates. The amount and timing of future cash flows within our DCF analysis is based on our
most recent operational budgets, long range strategic plans and other estimates. The terminal value
growth rate is used to calculate the value of cash flows beyond the last projected period in our
DCF analysis and reflects our best estimates for stable, perpetual growth of our reporting units.
We use estimates of market-participant risk-adjusted weighted-average costs of capital (WACC) as a
basis for determining the discount rates to apply to our reporting units future expected cash
flows.
If the carrying value of a reporting unit exceeds its fair value, we then perform the second step
of the goodwill impairment test to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the estimated fair value of a reporting units goodwill to
its carrying value. If we were unable to complete the second step of the test prior to the issuance
of our financial statements and an impairment loss was probable and could be reasonably estimated,
we would recognize our best estimate of the loss in our current period financial statements and
disclose that the amount is an estimate. We would then recognize any adjustment to that estimate in
subsequent reporting periods, once we have finalized the second step of the impairment test.
Although we use consistent methodologies in developing the assumptions and estimates underlying the
fair value calculations used in our impairment tests, these estimates are uncertain by nature and
can vary from actual results. The use of alternative valuation assumptions, including estimated
revenue projections, growth rates, cash flows and discount rates could result in different fair
value estimates.
We have identified a total of four reporting units with a material amount of goodwill that are at
higher risk of potential failure of the first step of the goodwill impairment test in future
reporting periods. These reporting units include our U.S. CRM unit, which holds $1.5 billion of
allocated goodwill, our U.S. Cardiovascular unit, which holds $2.2 billion of allocated goodwill,
our U.S. Neuromodulation unit, which holds $1.2 billion of allocated
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goodwill, and our EMEA unit, which holds $3.9 billion of allocated goodwill. The level of excess
fair value over carrying value for these reporting units identified as being at higher risk (with
the exception of the U.S. CRM reporting unit, whose carrying value continues to exceed its fair
value) ranged from approximately six percent to 23 percent. On a quarterly basis, we monitor the
key drivers of fair value for these reporting units to detect changes that would warrant an interim
impairment test. The key variables that drive the fair value of our reporting units are estimated
revenue growth rates, levels of profitability and perpetual growth rate assumptions, as well as the
WACC. These assumptions are subject to uncertainty, including our ability to grow revenue and
improve profitability levels. For each of these reporting units, relatively small declines in the
future performance and cash flows of the reporting unit or small changes in other key assumptions
may result in the recognition of significant goodwill impairment charges. For example, keeping all
other variables constant, a 50 basis point increase in the WACC applied would require that we
perform the second step of the goodwill impairment test for our U.S. CRM, U.S. Neuromodulation, and
EMEA reporting units failing the first step of the goodwill impairment test. In addition, keeping
all other variables constant, a 100 basis point decrease in perpetual growth rates would require
that we perform the second step of the goodwill impairment test for all four of the reporting units
with higher risk of impairment. The estimates used for our future cash flows and discount rates are
our best estimates and we believe they are reasonable, but future declines in the business
performance of our reporting units may impair the recoverability of our goodwill. See Note D
Goodwill and Other Intangible Assets to our 2010 consolidated financial statements included in Item
8 of this Annual Report for further discussion of our 2010 and 2008 goodwill impairment charges, as
well as a discussion of future events that could have a negative impact on the fair value of these
reporting units.
Income Taxes
We provide for potential amounts due in various tax jurisdictions. In the ordinary course of
conducting business in multiple countries and tax jurisdictions, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Judgment is required in determining our
worldwide income tax provision. In our opinion, we have made adequate provisions for income taxes
for all years subject to audit. Although we believe our estimates are reasonable, the final outcome
of these matters may be different from that which we have reflected in our historical income tax
provisions and accruals. Such differences could have a material impact on our income tax provision
and operating results.
We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available
evidence, it is more likely than not that we will not realize some portion or all of the deferred
tax assets. We consider relevant evidence, both positive and negative, to determine the need for a
valuation allowance. Information evaluated includes our financial position and results of
operations for the current and preceding years, the availability of deferred tax liabilities and
tax carrybacks, as well as an evaluation of currently available information about future years.
New Accounting Pronouncements
Standards Implemented
ASC Update No. 2010-06
In January 2010, the FASB issued ASC Update No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820) Improving Disclosures about Fair Value Measurements. Update No. 2010-06 requires
additional disclosure within the rollforward of activity for assets and liabilities measured at
fair value on a recurring basis, including transfers of assets and liabilities between Level 1 and
Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances
and settlements of assets and liabilities within Level 3 of the fair value hierarchy. In addition,
Update No. 2010-06 requires enhanced disclosures of the valuation techniques and inputs used in the
fair value measurements within Level 2 and Level 3. We adopted Update No. 2010-06 for our first
quarter ended March 31, 2010, except for the disclosure of purchases, sales, issuances and
settlements of Level 3 measurements, for which disclosures will be required for our first quarter
ending March 31, 2011. During 2010, we did not have any transfers of assets or liabilities between
Level 1 and Level 2 of the fair value hierarchy. Refer to Note E Fair Value Measurements to our
2010 consolidated financial statements included in Item 8 of this Annual Report for
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disclosures surrounding our fair value measurements, including information regarding the valuation
techniques and inputs used in fair value measurements for assets and liabilities within Level 2 and
Level 3 of the fair value hierarchy.
ASC Update No. 2009-17
In December 2009, the FASB issued ASC Update No. 2009-17, Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which
formally codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). Update No.
2009-17 and Statement No. 167 amend Interpretation No. 46(R), Consolidation of Variable Interest
Entities, to require that an enterprise perform an analysis to determine whether the enterprises
variable interests give it a controlling financial interest in a variable interest entity (VIE).
The analysis identifies the primary beneficiary of a VIE as the enterprise that has both 1) the
power to direct activities of a VIE that most significantly impact the entitys economic
performance and 2) the obligation to absorb losses of the entity or the right to receive benefits
from the entity. Update No. 2009-17 eliminated the quantitative approach previously required for
determining the primary beneficiary of a VIE and requires ongoing reassessments of whether an
enterprise is the primary beneficiary. We adopted Update No. 2009-17 for our first quarter ended
March 31, 2010. The adoption of Update No. 2009-17 did not have any impact on our results of
operations or financial position.
ASC Update No. 2010-20
In July 2010, the FASB issued ASC Update No. 2010-20, Receivables (Topic 310) - Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses. Update No. 2010-20
requires expanded qualitative and quantitative disclosures about financing receivables, including
trade accounts receivable, with respect to credit quality and credit losses, including a
rollforward of the allowance for credit losses. The enhanced disclosure requirements are generally
effective for interim and annual periods ending after December 15, 2010. We adopted Update No.
2010-20 for our year ended December 31, 2010, except for the rollforward of the allowance for
credit losses, for which disclosure will be required for our first quarter ending March 31, 2011.
Refer to Note A Significant Account Policies to our 2010 consolidated financial statements
included in Item 8 of this Annual Report for disclosures surrounding concentrations of credit risk
and our policies with respect to the monitoring of the credit quality of customer accounts.
Standards to be Implemented
ASC Update No. 2009-13
In October 2009, the FASB issued ASC Update No. 2009-13, Revenue Recognition (Topic 605 )-
Multiple-Deliverable Revenue Arrangements. The consensus in Update No. 2009-13 supersedes certain
guidance in Topic 605 (formerly EITF Issue No. 00-21, Multiple-Element Arrangements). Update No.
2009-13 provides principles and application guidance to determine whether multiple deliverables
exist, how the individual deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. Update No. 2009-13 also expands the disclosure
requirements for multiple-deliverable revenue arrangements. We adopted Update No. 2009-13 as of
January 1, 2011. The adoption did not
have a material impact on our results of operations or financial position.
ASC Update No. 2010-29
In December 2010, the FASB issued ASC Update No. 2010-29, Business Combinations (Topic 805) -
Disclosure of Supplementary Pro Forma Information for Business Combinations. Update No. 2010-29
clarifies paragraph 805-10-50-2(h) to require public entities that enter into business combinations
that are material on an individual or aggregate basis to disclose pro forma information for such
business combinations that occurred in the current reporting period, including pro forma revenue
and earnings of the combined entity as though the acquisition date had been as of the beginning of
the comparable prior annual reporting period only. We are required to adopt Update No. 2010-29 for
material business combinations for which the acquisition date is on or after January 1, 2011.
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Additional Information
Use of Non-GAAP Financial Measures
Use and Economic Substance of Non-GAAP Financial Measures Used by Boston Scientific
To supplement our consolidated financial statements presented on a GAAP basis, we disclose certain
non-GAAP measures, including adjusted net income and adjusted net income per share that exclude
certain amounts, and regional and divisional revenue growth rates that exclude the impact of
foreign exchange. These non-GAAP measures are not in accordance with, or an alternative for,
generally accepted accounting principles in the United States.
The GAAP measure most comparable to adjusted net income is GAAP net income (loss); the GAAP measure
most comparable to adjusted net income per share is GAAP net income (loss) per share. To calculate
regional and divisional revenue growth rates that exclude the impact of foreign exchange, we
convert actual current-period net sales from local currency to U.S. dollars using constant foreign
exchange rates. The GAAP measure most comparable to this non-GAAP measure is growth rate
percentages based on GAAP revenue. Reconciliations of each of these non-GAAP financial measures to
the corresponding GAAP measure are included elsewhere in this Annual Report.
Management uses these supplemental non-GAAP measures to evaluate performance period over period, to
analyze the underlying trends in our business, to assess our performance relative to our
competitors, and to establish operational goals and forecasts that are used in allocating resources
and determining compensation. In addition, management uses these non-GAAP measures to further its
understanding of the performance of operating segments. The adjustments excluded from our non-GAAP
measures are consistent with those excluded from our reportable segments measure of profit or
loss. These adjustments are excluded from the segment measures that are reported to our Chief
Operating Decision Maker and are used to make operating decisions and assess performance.
The following is an explanation of each of the adjustments that management excluded as part of its
non-GAAP measures for the years ended December 31, 2010, 2009 and 2008, as well as reasons for
excluding each of these individual items:
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Goodwill and other intangible asset impairment charges - These
amounts represent non-cash write-downs of the goodwill balance
attributable to our U.S. Cardiac Rhythm Management business, as
well as certain intangible assets balances. Following our
acquisition of Guidant Corporation in 2006, and the related
increase in debt, we have heightened our focus on cash generation
and debt pay down. We remove the impact of these charges from
operating performance to assist in assessing cash generated from
operations. We believe this is a critical metric in measuring our
ability to generate cash and pay down debt. Therefore, these
charges are excluded from managements assessment of operating
performance and are also excluded from the measures used to set
employee compensation. Accordingly, management believes this may
be useful information to users of its financial statements and
therefore has excluded these charges for purposes of calculating
these non-GAAP measures to facilitate an evaluation of current
operating performance, particularly in terms of liquidity. |
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Acquisition-related charges (credits) - These adjustments consist
of (a) purchased research and development charges, (b) contingent
consideration expense, (c) gains on acquisition-related milestone
receipts, (d) due diligence and other fees, and (e) inventory
step-up adjustments. Purchased research and development is a
highly variable charge based on the extent and nature of external
technology acquisitions during the period. Contingent
consideration expense represents accounting adjustments to state
our contingent consideration liabilities at their estimated fair
value. These adjustments can be highly variable depending on the
assessed likelihood of making future contingent consideration
payments. In addition, contingent consideration expense was not
recognized based on accounting principles in place previous to
2009, and, therefore, is not comparable to periods prior to 2009.
Acquisition-related gains resulted from receipts related to
Guidant Corporations sale of its vascular intervention and
endovascular solutions businesses to Abbott Laboratories, and are
not indicative of future operating results. Due diligence and
other fees include legal, tax and other one time expenses
associated with recent acquisitions that are not representative of
on-going operations. Inventory step-up adjustments are non-cash
charges related to acquired inventory directly attributable to
acquisitions and is not indicative of the our on-going operations,
or on-going cost of products sold. Management therefore removes
the impact of these (credits) charges from our operating results
to facilitate an evaluation of current operating performance and a
comparison to past operating performance. |
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Divestiture-related charges (credits) These amounts represent
fees associated with business divestitures and gains and related
tax impacts that we recognized related to the sale of certain
non-strategic investments. These gains and losses are not
indicative of future operating performance and are not used by
management to assess operating performance. Accordingly,
management excludes these amounts for purposes of calculating
these non-GAAP measures to facilitate an evaluation of current
operating performance and a comparison to past operating
performance. |
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Restructuring and restructuring-related costs - These adjustments
represent costs associated with our 2010 Restructuring plan, Plant
Network Optimization program and 2007 Restructuring plan. These
expenses are excluded by management in assessing operating
performance, as well as from our operating segments measures of
profit and loss used for making operating decisions and assessing
performance. Accordingly, management excludes these charges for
purposes of calculating these non-GAAP measures to facilitate an
evaluation of current operating performance and a comparison to
past operating performance. |
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Litigation-related net (credits) charges - These amounts are
attributable to certain significant patent litigation and other
legal matters, none of which reflect expected on-going operating
expenses. Accordingly, management excluded these (credits) charges
for purposes of calculating these non-GAAP measures to facilitate
an evaluation of current operating performance and for comparison
to past operating performance. |
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Discrete tax items - These items represent adjustments of certain
tax positions, which were initially established in prior periods
as a result of acquisition-, divestiture-, restructuring- or
litigation-related charges (credits). These adjustments do not
reflect expected on-going operating results. Accordingly,
management excludes these amounts for purposes of calculating
these non-GAAP measures to facilitate an evaluation of current
operating performance and for comparison to past operating
performance. |
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Amortization expense - Amortization expense is a non-cash charge
and does not impact our liquidity or compliance with the covenants
included in our debt agreements. Management removes the impact of
amortization from our operating performance to assist in assessing
cash generated from operations. Management believes this is a
critical metric in measuring our ability to generate cash and pay
down debt. Therefore, amortization expense is excluded from
managements assessment of operating performance and is also
excluded from the measures management uses to set employee
compensation. Accordingly, management believes this may be useful
information to users of its financial statements and therefore
excludes amortization expense for purposes of calculating these
non-GAAP measures to facilitate an evaluation of current operating
performance, particularly in terms of liquidity. |
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Foreign exchange on net sales - The impact of foreign exchange is
highly variable and difficult to predict. Accordingly, management
excludes the impact of foreign exchange for purposes of reviewing
regional and divisional revenue growth rates to facilitate an
evaluation of current operating performance and comparison to past
operating performance. |
Material Limitations Associated with the Use of Non-GAAP Financial Measures
Adjusted net income, adjusted net income per diluted share, and regional and divisional revenue
growth rates that exclude the impact of foreign exchange may have limitations as analytical tools,
and these non-GAAP measures should not be considered in isolation from or as a replacement for GAAP
financial measures. Some of the limitations associated with the use of these non-GAAP financial
measures are:
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Amortization expense and goodwill and other intangible asset
impairment charges, though not directly affecting our cash flows,
represent a net reduction in value of goodwill and other
intangible assets. The net loss associated with this reduction in
value is not included in our adjusted net income or adjusted net
income per diluted share and therefore these measures do not
reflect the full effect of the reduction in value of those assets. |
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Acquisition- and divestiture-related charges (credits) reflect
economic costs and benefits and are not reflected in adjusted net
income and adjusted net income per diluted share. |
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Items such as restructuring and restructuring-related costs,
litigation-related net (credits) charges, and discrete tax items
that are excluded from adjusted net income and adjusted net income
per diluted share can have a material impact on cash flows and
GAAP net income (loss) and net income (loss) per diluted share. |
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Revenue growth rates stated on a constant currency basis, by their
nature, exclude the impact of foreign exchange, which may have a
material impact on GAAP net sales. |
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Other companies may calculate adjusted net income, adjusted net
income per diluted share, or regional and divisional revenue
growth rates that exclude the impact of foreign exchange
differently than us, limiting the usefulness of those measures for
comparative purposes. |
Compensation for Limitations Associated with Use of Non-GAAP Financial Measures
We compensate for the limitations on non-GAAP financial measures by relying upon GAAP results to
gain a complete picture of performance. The non-GAAP measures focus instead upon the core business,
which is only a subset, albeit a critical one, of overall performance. We provide detailed
reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure
elsewhere in this Annual Report, and encourage investors to review these reconciliations.
Usefulness of Non-GAAP Financial Measures to Investors
We believe that presenting adjusted net income, adjusted net income per share, and regional and
divisional revenue growth rates that exclude the impact of foreign exchange, in addition to the
related GAAP measures, provides investors greater transparency to the information used by
management for its financial and operational decision-making and allows investors to see our
results through the eyes of management. We further believe that providing this information better
enables our investors to understand our operating performance and to evaluate the methodology used
by management to evaluate and measure such performance.
Rule 10b5-1 Trading Plans
Periodically, certain of our executive officers adopt written stock trading plans in accordance
with Rule 10b5-1 under the Securities Exchange Act of 1934 and our own Stock Trading Policy. A Rule
10b5-1 Trading Plan is a written document that pre-establishes the amounts, prices and dates (or
formula(s) for determining the amounts, prices and dates) of future purchases or sales of our
stock, including the exercise and sale of stock options, and is
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entered into at a time when the person is not in possession of material non-public information
about the company.
On February 16, 2010, Kenneth J. Pucel, our Executive Vice President, Global Operations and
Technology, entered into a Rule 10b5-1 Trading Plan. Mr. Pucels plan covered the sale of 5,000
shares of our stock to be acquired upon the exercise of 5,000 stock options and expired on July 25,
2010. Transactions under Mr. Pucels plan were based upon pre-established dates and stock price
thresholds and were disclosed publicly through appropriate filings with the Securities and Exchange
Commission (SEC).
On March 1, 2010, Joseph M. Fitzgerald, our Senior Vice President and President, Endovascular,
entered into a Rule 10b5-1 Trading Plan. Mr. Fitzgeralds plan covers the sale of up to 19,500
shares of our stock to be acquired upon the exercise of 4,000 stock options expiring on May 9,
2010; 4,000 stock options expiring on July 25, 2010; 4,000 stock options expiring on October 31,
2010; and 7,500 stock options expiring on February 27, 2011. Transactions under Mr. Fitzgeralds
plan are based upon pre-established dates and stock price thresholds and will expire once all of
the shares have been sold or February 25, 2011, whichever is earlier. Any transaction under Mr.
Fitzgeralds plan will be disclosed publicly through appropriate filings with the SEC.
On March 1, 2010, Jean F. Lance, our Senior Vice President and Chief Compliance Officer, entered
into a Rule 10b5-1 Trading Plan. Ms. Lances plan covers the sale of 80,868 shares of our stock to
be acquired upon the exercise of 24,200 stock options expiring on May 9, 2010; 30,000 stock options
expiring on July 25, 2010; and 26,668 stock options expiring on December 6, 2010. Transactions
under Ms. Lances plan were based upon pre-established dates and stock price thresholds and expired
on December 6, 2010. Any transaction under Ms. Lances plan were disclosed publicly through
appropriate filings with the SEC.
On November 18, 2010, Michael P. Phalen, our Executive Vice President and President, International,
entered into a Rule 10b5-1 Trading Plan. Mr. Phalens plan covers the sale of 25,000 shares of our
stock to be acquired upon the exercise of 15,000 stock options expiring on February 27, 2011 and
10,000 stock options expiring on December 17, 2011. Transactions under Mr. Phalens plan are based
upon pre-established dates and stock price thresholds and will expire once all of the shares have
been sold or December 9, 2011, whichever is earlier. Any transaction under Mr. Phalens plan will
be disclosed publicly through appropriate filings with the SEC.
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Managements Report on Internal Control over Financial Reporting
As the management of Boston Scientific Corporation, we are responsible for establishing and
maintaining adequate internal control over financial reporting. We designed our internal control
process to provide reasonable assurance to management and the Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
We assessed the effectiveness of our internal control over financial reporting as of December 31,
2010. In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal ControlIntegrated Framework. Based on our
assessment, we believe that, as of December 31, 2010, our internal control over financial reporting
is effective at a reasonable assurance level based on these criteria.
Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on
the effectiveness of our internal control over financial reporting. This report in which they
expressed an unqualified opinion is included below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ J. Raymond Elliott |
|
|
|
/s/ Jeffrey D. Capello |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Raymond Elliott
|
|
|
|
|
|
Jeffrey D. Capello |
|
|
|
|
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
Executive Vice President and Chief
Financial Officer |
|
|
77
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Boston Scientific Corporation
We have audited Boston Scientific Corporations internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Boston
Scientific Corporations management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Boston Scientific Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Boston Scientific Corporation as of
December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2010 of Boston
Scientific Corporation and our report dated February 17, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2011
78
|
|
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We develop, manufacture and sell medical devices globally and our earnings and cash flows are
exposed to market risk from changes in currency exchange rates and interest rates. We address these
risks through a risk management program that includes the use of derivative financial instruments.
We operate the program pursuant to documented corporate risk management policies. We do not enter
derivative transactions for speculative purposes. Gains and losses on derivative financial
instruments substantially offset losses and gains on underlying hedged exposures. Furthermore, we
manage our exposure to counterparty risk on derivative instruments by entering into contracts with
a diversified group of major financial institutions and by actively monitoring outstanding
positions.
Our currency risk consists primarily of foreign currency denominated firm commitments, forecasted
foreign currency denominated intercompany and third-party transactions and net investments in
certain subsidiaries. We use both nonderivative (primarily European manufacturing operations) and
derivative instruments to manage our earnings and cash flow exposure to changes in currency
exchange rates. We had currency derivative instruments outstanding in the contract amount of $5.077
billion as of December 31, 2010 and $4.742 billion as of December 31, 2009. We recorded $82 million
of other assets and $189 million of other liabilities to recognize the fair value of these
derivative instruments as of December 31, 2010, as compared to $56 million of other assets and $110
million of other liabilities as of December 31, 2009. A ten percent appreciation in the U.S.
dollars value relative to the hedged currencies would increase the derivative instruments fair
value by $297 million as of December 31, 2010 and $271 million as of December 31, 2009. A ten
percent depreciation in the U.S. dollars value relative to the hedged currencies would decrease
the derivative instruments fair value by $363 million as of December 31, 2010 and by $331 million
as of December 31, 2009. Any increase or decrease in the fair value of our currency exchange rate
sensitive derivative instruments would be substantially offset by a corresponding decrease or
increase in the fair value of the hedged underlying asset, liability or forecasted transaction,
resulting in minimal impact on our consolidated statements of operations.
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar
cash investments, or net debt. As of December 31, 2010, $4.433 billion of our outstanding debt
obligations, or approximately 85 percent of our net debt, was at fixed interest rates. We did not
have any interest rate derivative instruments outstanding as of December 31, 2010 or 2009. In the
first quarter of 2011, we entered interest rate derivative contracts having a notional amount of
$850 million to convert fixed-rate debt into floating-rate debt.
See Note E Fair Value Measurements to our 2010 consolidated financial statements included in
Item 8 of this Annual Report for further information regarding our derivative financial
instruments.
79
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Boston Scientific Corporation
We have audited the accompanying consolidated balance sheets of Boston Scientific Corporation as of
December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2010. Our
audits also included the financial statement schedule listed in the Index at Item 15(a)2. These
financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Boston Scientific Corporation at December 31, 2010
and 2009, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Boston Scientific Corporations internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 17, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2011
80
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
7,806 |
|
|
$ |
8,188 |
|
|
$ |
8,050 |
|
Cost of products sold |
|
|
2,599 |
|
|
|
2,576 |
|
|
|
2,469 |
|
|
|
|
Gross profit |
|
|
5,207 |
|
|
|
5,612 |
|
|
|
5,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
2,580 |
|
|
|
2,635 |
|
|
|
2,589 |
|
Research and development expenses |
|
|
939 |
|
|
|
1,035 |
|
|
|
1,006 |
|
Royalty expense |
|
|
185 |
|
|
|
191 |
|
|
|
203 |
|
Loss on program termination |
|
|
|
|
|
|
16 |
|
|
|
|
|
Amortization expense |
|
|
513 |
|
|
|
511 |
|
|
|
543 |
|
Goodwill impairment charges |
|
|
1,817 |
|
|
|
|
|
|
|
2,613 |
|
Intangible asset impairment charges |
|
|
65 |
|
|
|
12 |
|
|
|
177 |
|
Purchased research and development |
|
|
|
|
|
|
21 |
|
|
|
43 |
|
Contingent consideration expense |
|
|
2 |
|
|
|
|
|
|
|
|
|
Acquisition-related milestone |
|
|
(250 |
) |
|
|
|
|
|
|
(250 |
) |
Gain on divestitures |
|
|
|
|
|
|
|
|
|
|
(250 |
) |
Restructuring charges |
|
|
116 |
|
|
|
63 |
|
|
|
78 |
|
Litigation-related net (credits) charges |
|
|
(104 |
) |
|
|
2,022 |
|
|
|
334 |
|
|
|
|
|
|
|
5,863 |
|
|
|
6,506 |
|
|
|
7,086 |
|
|
|
|
Operating loss |
|
|
(656 |
) |
|
|
(894 |
) |
|
|
(1,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(393 |
) |
|
|
(407 |
) |
|
|
(468 |
) |
Other, net |
|
|
(14 |
) |
|
|
(7 |
) |
|
|
(58 |
) |
|
|
|
Loss before income taxes |
|
|
(1,063 |
) |
|
|
(1,308 |
) |
|
|
(2,031 |
) |
Income tax expense (benefit) |
|
|
2 |
|
|
|
(283 |
) |
|
|
5 |
|
|
|
|
Net loss |
|
$ |
(1,065 |
) |
|
$ |
(1,025 |
) |
|
$ |
(2,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.70 |
) |
|
$ |
(0.68 |
) |
|
$ |
(1.36 |
) |
Assuming dilution |
|
$ |
(0.70 |
) |
|
$ |
(0.68 |
) |
|
$ |
(1.36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1,517.8 |
|
|
|
1,507.9 |
|
|
|
1,498.5 |
|
Assuming dilution |
|
|
1,517.8 |
|
|
|
1,507.9 |
|
|
|
1,498.5 |
|
(See notes to the consolidated financial statements)
81
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(in millions, except per share data) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
213 |
|
|
$ |
864 |
|
Trade accounts receivable, net |
|
|
1,320 |
|
|
|
1,375 |
|
Inventories |
|
|
894 |
|
|
|
891 |
|
Deferred income taxes |
|
|
429 |
|
|
|
572 |
|
Assets held for sale |
|
|
576 |
|
|
|
578 |
|
Prepaid expenses and other current assets |
|
|
183 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,615 |
|
|
|
4,599 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
1,697 |
|
|
|
1,722 |
|
Goodwill |
|
|
10,186 |
|
|
|
11,936 |
|
Other intangible assets, net |
|
|
6,343 |
|
|
|
6,667 |
|
Other long-term assets |
|
|
287 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
22,128 |
|
|
$ |
25,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current debt obligations |
|
$ |
504 |
|
|
$ |
3 |
|
Accounts payable |
|
|
184 |
|
|
|
212 |
|
Accrued expenses |
|
|
1,626 |
|
|
|
2,609 |
|
Other current liabilities |
|
|
295 |
|
|
|
198 |
|
|
|
|
Total current liabilities |
|
|
2,609 |
|
|
|
3,022 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
4,934 |
|
|
|
5,915 |
|
Deferred income taxes |
|
|
1,644 |
|
|
|
1,875 |
|
Other long-term liabilities |
|
|
1,645 |
|
|
|
2,064 |
|
|
|
|
|
|
|
|
|
|
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; issued 1,520,780,112 shares as of December 31, 2010
and 1,510,753,934 shares as of December 31, 2009 |
|
|
15 |
|
|
|
15 |
|
Additional paid-in capital |
|
|
16,232 |
|
|
|
16,086 |
|
Accumulated deficit |
|
|
(4,822 |
) |
|
|
(3,757 |
) |
Accumulated other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(50 |
) |
|
|
8 |
|
Unrealized loss on derivative financial instruments |
|
|
(65 |
) |
|
|
(37 |
) |
Unrealized costs associated with certain retirement plans |
|
|
(14 |
) |
|
|
(14 |
) |
|
|
|
Total stockholders equity |
|
|
11,296 |
|
|
|
12,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
22,128 |
|
|
$ |
25,177 |
|
|
|
|
(See notes to the consolidated financial statements)
82
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Comprehensive |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Deferred Cost, ESOP |
|
Accumulated |
|
|
Comprehensive |
|
|
Income |
|
|
|
Shares Issued |
|
|
Par Value |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Income (Loss) |
|
|
(Loss) |
|
|
|
|
Balance as of January 1, 2008 |
|
|
1,491,234,911 |
|
|
$ |
15 |
|
|
$ |
15,788 |
|
|
|
951,566 |
|
|
$ |
(22 |
) |
|
$ |
(693 |
) |
|
$ |
9 |
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,036 |
) |
|
|
|
|
|
$ |
(2,036 |
) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
(67 |
) |
Net change in available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
(16 |
) |
Net change in derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
33 |
|
Net change in certain retirement amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(12 |
) |
Impact of stock-based compensation plans, net of tax |
|
|
10,400,768 |
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401 (k) ESOP transactions |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(951,566 |
) |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
1,501,635,679 |
|
|
$ |
15 |
|
|
$ |
15,944 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(2,732 |
) |
|
$ |
(53 |
) |
|
$ |
(2,098 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,025 |
) |
|
|
|
|
|
|
(1,025 |
) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
Net change in derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Impact of stock-based compensation plans, net of tax |
|
|
9,118,255 |
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
1,510,753,934 |
|
|
$ |
15 |
|
|
$ |
16,086 |
|
|
|
|
|
|
|
|
|
|
$ |
(3,757 |
) |
|
$ |
(43 |
) |
|
$ |
(1,015 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,065 |
) |
|
|
|
|
|
|
(1,065 |
) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58 |
) |
|
|
(58 |
) |
Net change in derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
(28 |
) |
Impact of stock-based compensation plans, net of tax |
|
|
10,026,178 |
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
|
1,520,780,112 |
|
|
$ |
15 |
|
|
$ |
16,232 |
|
|
|
|
|
|
|
|
|
|
$ |
(4,822 |
) |
|
$ |
(129 |
) |
|
$ |
(1,151 |
) |
|
|
|
(See notes to the consolidated financial statements)
83
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,065 |
) |
|
$ |
(1,025 |
) |
|
$ |
(2,036 |
) |
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
816 |
|
|
|
834 |
|
|
|
864 |
|
Deferred income taxes |
|
|
(110 |
) |
|
|
(64 |
) |
|
|
(334 |
) |
Stock-based compensation expense |
|
|
150 |
|
|
|
144 |
|
|
|
138 |
|
Goodwill impairment charges |
|
|
1,817 |
|
|
|
|
|
|
|
2,613 |
|
Intangible asset impairment charges |
|
|
65 |
|
|
|
12 |
|
|
|
177 |
|
Net losses (gains) on investments and notes receivable |
|
|
12 |
|
|
|
(9 |
) |
|
|
78 |
|
Purchased research and development |
|
|
|
|
|
|
21 |
|
|
|
43 |
|
Other non-cash acquisition- and divestiture-related charges (credits) |
|
|
2 |
|
|
|
|
|
|
|
(250 |
) |
Other, net |
|
|
11 |
|
|
|
(3 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash flows from operating assets and liabilities,
excluding the effect of acquisitions and divestitures: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
|
|
52 |
|
|
|
1 |
|
|
|
96 |
|
Inventories |
|
|
(5 |
) |
|
|
(92 |
) |
|
|
(120 |
) |
Other assets |
|
|
132 |
|
|
|
276 |
|
|
|
(21 |
) |
Accounts payable and accrued expenses |
|
|
(1,148 |
) |
|
|
462 |
|
|
|
392 |
|
Other liabilities |
|
|
(404 |
) |
|
|
278 |
|
|
|
(416 |
) |
|
|
|
Cash provided by operating activities |
|
|
325 |
|
|
|
835 |
|
|
|
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(272 |
) |
|
|
(312 |
) |
|
|
(362 |
) |
Proceeds on disposals |
|
|
5 |
|
|
|
5 |
|
|
|
2 |
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions of businesses, net of cash acquired |
|
|
(199 |
) |
|
|
(4 |
) |
|
|
(21 |
) |
Payments relating to prior period acquisitions |
|
|
(12 |
) |
|
|
(523 |
) |
|
|
(675 |
) |
Other investing activity |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from business divestitures |
|
|
|
|
|
|
|
|
|
|
1,287 |
|
Payments for investments in and acquisitions of certain technologies |
|
|
(6 |
) |
|
|
(50 |
) |
|
|
(56 |
) |
Proceeds from sales of investments and collections of notes receivable |
|
|
4 |
|
|
|
91 |
|
|
|
149 |
|
|
|
|
Cash (used for) provided by investing activities |
|
|
(480 |
) |
|
|
(793 |
) |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings, net of debt issuance costs |
|
|
973 |
|
|
|
1,972 |
|
|
|
|
|
Payments on long-term borrowings |
|
|
(1,500 |
) |
|
|
(2,825 |
) |
|
|
(1,175 |
) |
Proceeds from borrowings on revolving credit facility |
|
|
200 |
|
|
|
|
|
|
|
|
|
Payments on revolving credit facility borrowings |
|
|
(200 |
) |
|
|
|
|
|
|
(250 |
) |
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuances of shares of common stock |
|
|
31 |
|
|
|
33 |
|
|
|
71 |
|
Excess tax benefit relating to stock options |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
Cash used for financing activities |
|
|
(496 |
) |
|
|
(820 |
) |
|
|
(1,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash |
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(651 |
) |
|
|
(777 |
) |
|
|
189 |
|
Cash and cash equivalents at beginning of year |
|
|
864 |
|
|
|
1,641 |
|
|
|
1,452 |
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
213 |
|
|
$ |
864 |
|
|
$ |
1,641 |
|
|
|
|
|
SUPPLEMENTAL INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (received) paid for income taxes, net |
|
$ |
(286 |
) |
|
$ |
46 |
|
|
$ |
416 |
|
Cash paid for interest |
|
|
328 |
|
|
|
364 |
|
|
|
414 |
|
(See notes to the consolidated financial statements)
84
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of Boston Scientific Corporation and our
wholly-owned subsidiaries. Through December 31, 2009, we assessed the terms of our investment
interests to determine if any of our investees met the definition of a variable interest entity
(VIE) in accordance with accounting standards effective through that date, and would have
consolidated any VIEs in which we were the primary beneficiary. Our evaluation considered both
qualitative and quantitative factors and various assumptions, including expected losses and
residual returns. In December 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Codification (ASC) Update No. 2009-17, Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which
formally codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). Update No.
2009-17 and Statement No. 167 amend Interpretation No. 46(R), Consolidation of Variable Interest
Entities, to require that an enterprise perform an analysis to determine whether the enterprises
variable interests give it a controlling financial interest in a VIE. The analysis identifies the primary beneficiary of a
VIE as the enterprise that has both 1) the power to direct activities of a VIE that most
significantly impact the entitys economic performance and 2) the obligation to absorb losses of
the entity or the right to receive benefits from the entity. Update No. 2009-17 eliminated the
quantitative approach previously required for determining the primary beneficiary of a VIE and
requires ongoing reassessments of whether an enterprise is the primary beneficiary. We adopted
Update No. 2009-17 for our first quarter ended March 31, 2010. Based on our assessments under the
applicable guidance, we did not consolidate any VIEs during the years ended December 31, 2010,
2009, or 2008.
We account for investments in entities over which we have the ability to exercise significant
influence under the equity method if we hold 50 percent or less of the voting stock and the entity
is not a VIE in which we are the primary beneficiary. We record these investments initially at
cost, and adjust the carrying amount to reflect our share of the earnings or losses of the
investee, including all adjustments similar to those made in preparing consolidated financial
statements. We account for investments in entities in which we have less than a 20 percent
ownership interest under the cost method of accounting if we do not have the ability to exercise
significant influence over the investee.
In the first quarter of 2008, we completed the divestiture of certain non-strategic businesses. Our
operating results for the year ended December 31, 2008 include the results of these businesses
through the date of separation, as these divestitures did not meet the criteria for discontinued
operations. On January 3, 2011, we closed the sale of our Neurovascular business to Stryker
Corporation. We are providing transitional services to Stryker through a transition services
agreement, and will also supply products to Stryker. These transition services and supply
agreements are expected to be effective for a period of up to 24 months, subject to extension. Due
to our continuing involvement in the operations of the Neurovascular business, the divestiture does
not meet the criteria for presentation as a discontinued operation and, therefore, the results of
the Neurovascular business are included in our results of operations for all periods presented.
Refer to Note C Divestitures and Assets Held for Sale for a description of these business
divestitures.
Basis of Presentation
The accompanying consolidated financial statements of Boston Scientific Corporation have been
prepared in accordance with accounting principles generally accepted in the United States (U.S.
GAAP) and with the instructions to Form 10-K and Article 10 of Regulation S-X.
We have reclassified certain prior year amounts to conform to the current years presentation,
including those to reclassify certain balances to assets held for sale classification. See Note C
Divestitures and Assets Held for Sale, Note D Goodwill and Other Intangible Assets, Note J
Supplemental Balance Sheet Information, and Note P Segment Reporting for further details.
85
Subsequent Events
We evaluate events occurring after the date of our accompanying consolidated balance sheets for
potential recognition or disclosure in our financial statements. We did not identify any material
subsequent events requiring adjustment to our accompanying consolidated financial statements
(recognized subsequent events). Those items requiring disclosure (unrecognized subsequent events)
in the financial statements have been disclosed accordingly. Refer to Note C Divestitures and
Assets Held for Sale,
Note G Borrowings and Credit Arrangements,
Note L Commitments and Contingencies, and Note R Subsequent Events for
more information.
Accounting Estimates
To prepare our consolidated financial statements in accordance with U.S. GAAP, management makes
estimates and assumptions that may affect the reported amounts of our assets and liabilities, the
disclosure of contingent liabilities as of the date of our financial statements and the reported
amounts of our revenues and expenses during the reporting period. Our actual results may differ
from these estimates. Refer to Critical Accounting Estimates included in Item 7 of this Annual
Report for further discussion.
Cash and Cash Equivalents
We record cash and cash equivalents in our consolidated balance sheets at cost, which approximates
fair value. Our policy is to invest excess cash in short-term marketable securities earning a
market rate of interest without assuming undue risk to principal, and we limit our direct exposure
to securities in any one industry or issuer. We consider all highly liquid investments purchased
with a remaining maturity of three months or less at the time of acquisition to be cash
equivalents.
We record available-for-sale investments at fair value and exclude unrealized gains and temporary
losses on available-for-sale securities from earnings, reporting such gains and losses, net of tax,
as a separate component of stockholders equity, until realized. We compute realized gains and
losses on sales of available-for-sale securities based on the average cost method, adjusted for any
other-than-temporary declines in fair value. We record held-to-maturity securities at amortized
cost and adjust for amortization of premiums and accretion of discounts through maturity. We
classify investments in debt securities or equity securities that have a readily determinable fair
value that we purchase and hold principally for selling them in the near term as trading
securities. All of our cash investments as of December 31, 2010 and 2009 had maturity dates at date
of purchase of less than three months and, accordingly, we have classified them as cash and cash
equivalents in our accompanying consolidated balance sheets.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and cash equivalents, derivative financial instrument contracts and accounts and
notes receivable. Our investment policy limits exposure to concentrations of credit risk and
changes in market conditions. Counterparties to financial instruments expose us to credit-related
losses in the event of nonperformance. We transact our financial instruments with a diversified
group of major financial institutions and actively monitor outstanding positions to limit our
credit exposure.
We provide credit, in the normal course of business, to hospitals, healthcare agencies, clinics,
doctors offices and other private and governmental institutions and generally do not require
collateral. We perform on-going credit evaluations of our customers and maintain allowances for
potential credit losses, based on historical information and managements best estimates. Amounts
determined to be uncollectible are written off against this reserve. We recorded write-offs of
uncollectible accounts receivable of $15 million in 2010, $14 million in 2009, and $11 million in
2008. We are not dependent on any single institution and no single customer accounted for more than
ten percent of our net sales in 2010, 2009 or 2008. We closely monitor outstanding receivables for
potential collection risks, including those that may arise from economic conditions, in both the
U.S. and international economies. The credit and economic conditions within Greece, Italy, Spain,
Portugal and Ireland, among other members of the European Union, have deteriorated throughout 2010.
These conditions have resulted in, and may
86
continue to result in, an increase in the average length of time that it takes to collect on our
accounts receivable outstanding in these countries and, in some cases, write-offs of uncollectible
amounts.
Revenue Recognition
We generate revenue primarily from the sale of single-use medical devices, and present revenue net
of sales taxes in our consolidated statements of operations. We consider revenue to be realized or
realizable and earned when all of the following criteria are met: persuasive evidence of a sales
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectibility is reasonably assured. We generally meet these criteria at the
time of shipment, unless a consignment arrangement exists or we are required to provide additional
services. We recognize revenue from consignment arrangements based on product usage, or implant,
which indicates that the sale is complete. For our other transactions, we recognize revenue when
our products are delivered and risk of loss transfers to the customer, provided there are no
substantive remaining performance obligations required of us or any matters requiring customer
acceptance, and provided we can form an estimate for sales returns. Many of our Cardiac Rhythm
Management (CRM) product offerings combine the sale of a device with our LATITUDE® Patient
Management System, which represents a future service obligation. In accordance with accounting
guidance regarding multiple-element arrangements applicable through December 31, 2010, we deferred
revenue on the undelivered service element based on verifiable objective evidence of fair value,
using the residual method of allocation, and recognized the associated revenue over the related
service period. On January 1, 2011, we adopted ASC Update No. 2009-13, Revenue Recognition (Topic
605)- Multiple-Deliverable Revenue Arrangements. The consensus in Update No. 2009-13 supersedes
certain guidance in Topic 605 (formerly EITF Issue No. 00-21, Multiple-Element Arrangements).
Update No. 2009-13 provides principles and application guidance to determine whether multiple
deliverables exist, how the individual deliverables should be separated and how to allocate the
revenue in the arrangement among those separate deliverables, including requiring the use of the
relative selling price method. The adoption of Update No. 2009-13 did not have a material impact on
our results of operations or financial position.
We generally allow our customers to return defective, damaged and, in certain cases, expired
products for credit. We base our estimate for sales returns upon historical trends and record the
amount as a reduction to revenue when we sell the initial product. In addition, we may allow
customers to return previously purchased products for next-generation product offerings. For these
transactions, we defer recognition of revenue on the sale of the earlier generation product based
upon an estimate of the amount of product to be returned when the next-generation products are
shipped to the customer.
We also offer sales rebates and discounts to certain customers. We treat sales rebates and
discounts as a reduction of revenue and classify the corresponding liability as current. We
estimate rebates for products where there is sufficient historical information available to predict
the volume of expected future rebates. If we are unable to estimate the expected rebates
reasonably, we record a liability for the maximum rebate percentage offered. We have entered
certain agreements with group purchasing organizations to sell our products to participating
hospitals at negotiated prices. We recognize revenue from these agreements following the same
revenue recognition criteria discussed above.
Warranty Obligations
We offer warranties on certain of our product offerings. Approximately 85 percent of our warranty
liability as of December 31, 2010 related to implantable devices offered by our CRM business, which
include defibrillator and pacemaker systems. Our CRM products come with a standard limited warranty
covering the replacement of these devices. We offer a full warranty for a portion of the period
post-implant, and a partial warranty over the remainder of the useful life of the product. We
estimate the costs that we may incur under our warranty programs based on the number of units sold,
historical and anticipated rates of warranty claims and cost per claim, and record a liability
equal to these estimated costs as cost of products sold at the time the product sale occurs. We
assess the adequacy of our recorded warranty liabilities on a quarterly basis and adjust these
amounts as necessary.
Changes in our product warranty accrual during
2010, 2009 and 2008 consisted of the
following (in millions):
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
55 |
|
|
$ |
62 |
|
|
$ |
66 |
|
Provision |
|
|
15 |
|
|
|
29 |
|
|
|
35 |
|
Settlements/ reversals |
|
|
(27 |
) |
|
|
(36 |
) |
|
|
(39 |
) |
|
|
|
Ending balance |
|
$ |
43 |
|
|
$ |
55 |
|
|
$ |
62 |
|
|
|
|
Inventories
We state inventories at the lower of first-in, first-out cost or market. We base our provisions for
excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A
significant change in the timing or level of demand for our products as compared to forecasted
amounts may result in recording additional provisions for excess, expired and obsolete inventory in
the future. Further, the industry in which we participate is characterized by rapid product
development and frequent new product introductions. Uncertain timing of next-generation product
approvals, variability in product launch strategies, product recalls and variation in product
utilization all affect our estimates related to excess, expired and obsolete inventory.
Approximately 40 percent of our finished goods inventory as of December 31, 2010 and 2009 was at
customer locations pursuant to consignment arrangements.
Property, Plant and Equipment
We state property, plant, equipment, and leasehold improvements at historical cost. We charge
expenditures for maintenance and repairs to expense and capitalize additions and improvements that
extend the life of the underlying asset. We generally provide for depreciation using the
straight-line method at rates that approximate the estimated useful lives of the assets. We
depreciate buildings and improvements over a 20 to 40 year life; equipment, furniture and fixtures
over a three to ten year life; and leasehold improvements over the shorter of the useful life of
the improvement or the term of the related lease. Depreciation expense was $303 million in 2010,
$323 million in 2009, and $321 million in 2008.
Valuation of Business Combinations
We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we
assume based on their fair values at the dates of acquisition, including identifiable intangible
assets and purchased research and development which either arise from a contractual or legal right
or are separable from goodwill. We base the fair value of identifiable intangible assets acquired
in a business combination, including purchased research and development, on detailed valuations
that use information and assumptions provided by management, which consider managements best
estimates of inputs and assumptions that a market participant would use. We allocate any excess
purchase price over the fair value of the net tangible and identifiable intangible assets acquired
to goodwill. The use of alternative valuation assumptions, including estimated revenue projections;
growth rates; cash flows and discount rates and alternative estimated useful life assumptions, or
probabilities surrounding the achievement of clinical, regulatory or revenue-based milestones could
result in different purchase price allocations and amortization expense in current and future
periods. Transaction costs associated with these acquisitions are expensed as incurred through
selling, general and administrative costs.
As of January 1, 2009, we adopted FASB Statement No. 141(R), Business Combinations (codified within
ASC Topic 805, Business Combinations). Pursuant to the guidance in Statement No. 141(R) (Topic
805), in those circumstances where an acquisition involves a contingent consideration arrangement,
we recognize a liability equal to the estimated discounted fair value of the contingent payments we
expect to make as of the acquisition date. We re-measure this liability each reporting period and
record changes in the fair value through a separate line item within our consolidated statements of
operations. Increases or decreases in the fair value of the contingent consideration liability can
result from changes in discount periods and rates, as well as changes in the timing and amount of
revenue estimates. For acquisitions consummated prior to January 1, 2009, we will continue to
record contingent consideration as an additional element of cost of the acquired entity when the
contingency is resolved and consideration is issued or becomes issuable.
88
Purchased Research and Development
Our purchased research and development represents intangible assets acquired in a business
combination that are used in research and development activities but have not yet reached
technological feasibility, regardless of whether they have alternative future use. The primary
basis for determining the technological feasibility of these projects is obtaining regulatory
approval to market the underlying products in an applicable geographic region. Through December 31,
2008, we expensed the value attributable to these in-process projects at the time of the
acquisition in accordance with accounting standards effective through that date. As discussed
above, as of January 1, 2009, we adopted FASB Statement No. 141(R), Business Combinations (codified
within ASC Topic 805, Business Combinations), a replacement for Statement No. 141. Statement No.
141(R) also superseded FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, which required research and development assets
acquired in a business combination that had no alternative future use to be measured at their fair
values and expensed at the acquisition date. Topic 805 requires that purchased research and
development acquired in a business combination be recognized as an indefinite-lived intangible
asset until the completion or abandonment of the associated research and development efforts. For
our 2010 business combinations, we have recognized purchased research and development as an
intangible asset.
In addition, we expense certain costs associated with strategic alliances outside of business
combinations as purchased research and development as of the acquisition date. Our adoption of
Statement No. 141(R) (Topic 805) did not change this policy with respect to asset purchases.
We use the income approach to determine the fair values of our purchased research and development
at the date of acquisition. This approach calculates fair value by estimating the after-tax cash
flows attributable to an in-process project over its useful life and then discounting these
after-tax cash flows back to a present value. We base our revenue assumptions on estimates of
relevant market sizes, expected market growth rates, expected trends in technology and expected
levels of market share. In arriving at the value of the in-process projects, we consider, among
other factors: the in-process projects stage of completion; the complexity of the work completed
as of the acquisition date; the costs already incurred; the projected costs to complete; the
contribution of core technologies and other acquired assets; the expected regulatory path and
introduction dates by region; and the estimated useful life of the technology. We apply a
market-participant risk-adjusted discount rate to arrive at a present value as of the date of
acquisition. We believe that the estimated in-process research and development amounts so
determined represent the fair value at the date of acquisition and do not exceed the amount a third
party would pay for the projects. However, if the projects are not successful or completed in a
timely manner, we may not realize the financial benefits expected for these projects or for the
acquisition as a whole.
We test our purchased research and development intangible assets acquired in a business combination
for impairment at least annually, and more frequently if events or changes in circumstances
indicate that the assets may be impaired. The impairment test consists of a comparison of the fair
value of the intangible assets with their carrying amount. If the carrying amount exceeds its fair
value, we would record an impairment loss in an amount equal to the excess. Upon completion of the
associated research and development efforts, we will determine the useful life of the technology
and begin amortizing the assets to reflect their use over their remaining lives; upon permanent
abandonment we would write-off the remaining carrying amount of the associated purchased research
and development intangible asset.
Amortization and Impairment of Intangible Assets
We record intangible assets at historical cost and amortize them over their estimated useful lives.
We use a straight-line method of amortization, unless a method that better reflects the pattern in
which the economic benefits of the intangible asset are consumed or otherwise used up can be
reliably determined. The approximate useful lives for amortization of our intangible assets is as
follows: patents and licenses, two to 20 years; definite-lived core and developed technology, five
to 25 years; customer relationships, five to 25 years; other intangible assets, various.
89
We review intangible assets subject to amortization quarterly to determine if any adverse
conditions exist or a change in circumstances has occurred that would indicate impairment or a
change in the remaining useful life.
Conditions that may indicate impairment include, but are not limited to, a significant adverse
change in legal factors or business climate that could affect the value of an asset, a product
recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we
test the intangible asset for recoverability. For purposes of the recoverability test, we group
our amortizable intangible assets with other assets and liabilities at the lowest level of
identifiable cash flows if the intangible asset does not generate cash flows independent of other
assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the
undiscounted cash flows expected to result from the use and eventual disposition of the intangible
asset (asset group), we will write the carrying value down to the fair value in the period
identified.
We generally calculate fair value of our intangible assets as the present value of estimated future
cash flows we expect to generate from the asset using a risk-adjusted discount rate. In determining
our estimated future cash flows associated with our intangible assets, we use estimates and
assumptions about future revenue contributions, cost structures and remaining useful lives of the
asset (asset group). The use of alternative assumptions, including estimated cash flows, discount
rates, and alternative estimated remaining useful lives could result in different calculations of
impairment. However, we believe our assumptions and estimates are accurate and represent our best
estimates. See Note D - Goodwill and Other Intangible Assets for more information related to
impairments of intangible assets during 2010, 2009, and 2008.
For patents developed internally, we capitalize costs incurred to obtain patents, including
attorney fees, registration fees, consulting fees, and other expenditures directly related to
securing the patent. Legal costs incurred in connection with the successful defense of both
internally-developed patents and those obtained through our acquisitions are capitalized and
amortized over the remaining amortizable life of the related patent.
Goodwill Valuation
We allocate any excess purchase price over the fair value of the net tangible and identifiable
intangible assets acquired in a business combination to goodwill. We test our April 1 goodwill
balances during the second quarter of each year for impairment, or more frequently if indicators
are present or changes in circumstances suggest that impairment may exist. In performing the
assessment, we utilize the two-step approach prescribed under ASC Topic 350, Intangibles-Goodwill
and Other (formerly FASB Statement No. 142, Goodwill and Other Intangible Assets). The first step
requires a comparison of the carrying value of the reporting units, as defined, to the fair value
of these units. We assess goodwill for impairment at the reporting unit level, which is defined as
an operating segment or one level below an operating segment, referred to as a component. We
determine our reporting units by first identifying our operating segments, and then assess whether
any components of these segments constitute a business for which discrete financial information is
available and where segment management regularly reviews the operating results of that component.
We aggregate components within an operating segment that have similar economic characteristics. For
our April 1, 2010 annual impairment assessment, we identified our reporting units to be our seven
U.S. operating segments, which in aggregate make up the U.S. reportable segment, and our four
international operating segments. When allocating goodwill from business combinations to our
reporting units, we assign goodwill to the reporting units that we expect to benefit from the
respective business combination at the time of acquisition. In addition, for purposes of performing
our annual goodwill impairment test, assets and liabilities, including corporate assets, which
relate to a reporting units operations, and would be considered in determining its fair value, are
allocated to the individual reporting units. We allocate assets and liabilities not directly
related to a specific reporting unit, but from which the reporting unit benefits, based primarily
on the respective revenue contribution of each reporting unit.
During 2010, 2009, and 2008, we used only the income approach, specifically the discounted cash
flow (DCF) method, to derive the fair value of each of our reporting units in preparing our
goodwill impairment assessment. This approach calculates fair value by estimating the after-tax
cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a
present value using a risk-adjusted discount rate. We selected this method as being the most
meaningful in preparing our goodwill assessments because we believe the income approach most
appropriately measures our income producing assets. We have considered using the market approach
and cost approach but concluded they are not appropriate in valuing our reporting units given
90
the
lack of relevant market comparisons available for application of the market approach and the
inability to replicate the value of the specific technology-based assets within our reporting units
for application of the cost approach.
Therefore, we believe that the income approach represents the most appropriate valuation technique
for which sufficient data is available to determine the fair value of our reporting units.
In applying the income approach to our accounting for goodwill, we make assumptions about the
amount and timing of future expected cash flows, terminal value growth rates and appropriate
discount rates. The amount and timing of future cash flows within our DCF analysis is based on our
most recent operational budgets, long range strategic plans and other estimates. The terminal value
growth rate is used to calculate the value of cash flows beyond the last projected period in our
DCF analysis and reflects our best estimates for stable, perpetual growth of our reporting units.
We use estimates of market-participant risk-adjusted weighted-average costs of capital (WACC) as a
basis for determining the discount rates to apply to our reporting units future expected cash
flows.
If the carrying value of a reporting unit exceeds its fair value, we then perform the second step
of the goodwill impairment test to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the estimated fair value of a reporting units goodwill to
its carrying value. If we were unable to complete the second step of the test prior to the issuance
of our financial statements and an impairment loss was probable and could be reasonably estimated,
we would recognize our best estimate of the loss in our current period financial statements and
disclose that the amount is an estimate. We would then recognize any adjustment to that estimate in
subsequent reporting periods, once we have finalized the second step of the impairment test.
Investments in Publicly Traded and Privately Held Entities
We account for our publicly traded investments as available-for-sale securities based on the quoted
market price at the end of the reporting period. We compute realized gains and losses on sales of
available-for-sale securities based on the average cost method, adjusted for any
other-than-temporary declines in fair value. We account for our investments in privately held
entities, for which fair value is not readily determinable, in accordance with ASC Topic 323,
Investments Equity Method and Joint Ventures.
We account for investments in entities over which we have the ability to exercise significant
influence under the equity method if we hold 50 percent or less of the voting stock and the entity
is not a VIE in which we are the primary beneficiary. We record these investments initially at
cost, and adjust the carrying amount to reflect our share of the earnings or losses of the
investee, including all adjustments similar to those made in preparing consolidated financial
statements. We account for investments in entities in which we have less than a 20 percent
ownership interest under the cost method of accounting if we do not have the ability to exercise
significant influence over the investee.
Each reporting period, we evaluate our investments to determine if there are any events or
circumstances that are likely to have a significant adverse effect on the fair value of the
investment. Examples of such impairment indicators include, but are not limited to: a significant
deterioration in earnings performance; recent financing rounds at reduced valuations; a significant
adverse change in the regulatory, economic or technological environment of an investee; or a
significant doubt about an investees ability to continue as a going concern. If we identify an
impairment indicator, we will estimate the fair value of the investment and compare it to its
carrying value. Our estimation of fair value considers all available financial information related
to the investee, including valuations based on recent third-party equity investments in the
investee. If the fair value of the investment is less than its carrying value, the investment is
impaired and we make a determination as to whether the impairment is other-than-temporary. We deem
impairment to be other-than-temporary unless we have the ability and intent to hold an investment
for a period sufficient for a market recovery up to the carrying value of the investment. Further,
evidence must indicate that the carrying value of the investment is recoverable within a reasonable
period. For other-than-temporary impairments, we recognize an impairment loss equal to the
difference between an investments carrying value and its fair value. Impairment losses on our
investments are included in other, net in our consolidated statements of operations.
91
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, we
determine deferred tax assets and liabilities based on differences between the financial reporting
and tax bases of our assets and liabilities. We measure deferred tax assets and liabilities using
the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We
reduce our deferred tax assets by a valuation allowance if, based upon the weight of available
evidence, it is more likely than not that we will not realize some portion or all of the deferred
tax assets. We consider relevant evidence, both positive and negative, to determine the need for a
valuation allowance. Information evaluated includes our financial position and results of
operations for the current and preceding years, the availability of deferred tax liabilities and
tax carrybacks, as well as an evaluation of currently available information about future years.
We do not provide income taxes on unremitted earnings of our foreign subsidiaries where we have
indefinitely reinvested such earnings in our foreign operations. It is not practical to estimate
the amount of income taxes payable on the earnings that are indefinitely reinvested in foreign
operations. Unremitted earnings of our foreign subsidiaries that we have indefinitely reinvested in
foreign operations are $9.193 billion as of December 31, 2010 and $9.355 billion as of December 31,
2009.
We provide for potential amounts due in various tax jurisdictions. In the ordinary course of
conducting business in multiple countries and tax jurisdictions, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Judgment is required in determining our
worldwide income tax provision. In our opinion, we have made adequate provisions for income taxes
for all years subject to audit. Although we believe our estimates are reasonable, the final outcome
of open tax matters may be different from that which we have reflected in our historical income tax
provisions and accruals. Such differences could have a material impact on our income tax provision
and operating results.
Legal, Product Liability Costs and Securities Claims
We are involved in various legal and regulatory proceedings, including intellectual property,
breach of contract, securities litigation and product liability suits. In some cases, the claimants
seek damages, as well as other relief, which, if granted, could require significant expenditures or
impact our ability to sell our products. We are also the subject of certain governmental
investigations, which could result in substantial fines, penalties, and administrative remedies. We
are substantially self-insured with respect to product liability and intellectual property
infringement claims. We maintain insurance policies providing limited coverage against securities
claims. We generally record losses for claims in excess of the limits of purchased insurance in
earnings at the time and to the extent they are probable and estimable. In accordance with ASC
Topic 450, Contingencies (formerly FASB Statement No. 5, Accounting for Contingencies), we accrue
anticipated costs of settlement, damages, losses for general product liability claims and, under
certain conditions, costs of defense, based on historical experience or to the extent specific
losses are probable and estimable. Otherwise, we expense these costs as incurred. If the estimate
of a probable loss is a range and no amount within the range is more likely, we accrue the minimum
amount of the range. We analyze litigation settlements to identify each element of the arrangement.
We allocate arrangement consideration to patent licenses received based on estimates of fair value,
and capitalize these amounts as assets if the license will provide an on-going future benefit. See
Note L - Commitments and Contingencies for discussion of our individual material legal proceedings.
Costs Associated with Exit Activities
We record employee termination costs in accordance with ASC Topic 712, Compensation - Nonretirement
and Postemployment Benefits (formerly FASB Statement No. 112, Employers Accounting for
Postemployment Benefits), if we pay the benefits as part of an on-going benefit arrangement, which
includes benefits provided as part of our domestic severance policy or that we provide in
accordance with international statutory requirements. We accrue employee termination costs
associated with an on-going benefit arrangement if the obligation is attributable to prior services
rendered, the rights to the benefits have vested and the payment is probable and we can reasonably
estimate the liability.
We account for employee termination benefits that represent a one-time
benefit in accordance with ASC Topic 420, Exit or Disposal Cost Obligations (formerly FASB
Statement No. 146, Accounting for
92
Costs Associated with Exit or Disposal Activities). We record
such costs into expense over the employees future service period, if any. In addition, in
conjunction with an exit activity, we may offer voluntary termination
benefits to employees. These benefits are recorded when the employee accepts the termination
benefits and the amount can be reasonably estimated. Other costs associated with exit activities
may include contract termination costs, including costs related to leased facilities to be
abandoned or subleased, and impairments of long-lived assets.
Translation of Foreign Currency
We translate all assets and liabilities of foreign subsidiaries from local currency into U.S.
dollars using the year-end exchange rate, and translate revenues and expenses at the average
exchange rates in effect during the year. We show the net effect of these translation adjustments
in our consolidated financial statements as a component of accumulated other comprehensive loss.
For any significant foreign subsidiaries located in highly inflationary economies, we would
re-measure their financial statements as if the functional currency were the U.S. dollar. We did
not record any highly inflationary economy translation adjustments in 2010, 2009 or 2008.
Foreign currency transaction gains and losses are included in other, net in our consolidated
statements of operations, net of losses and gains from any related derivative financial
instruments. We recognized net foreign currency transaction losses of $9 million in 2010, $5
million in 2009, and gains of $5 million in 2008.
Financial Instruments
We recognize all derivative financial instruments in our consolidated financial statements at fair
value in accordance with ASC Topic 815, Derivatives and Hedging (formerly FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities). In accordance with Topic 815, for
those derivative instruments that are designated and qualify as hedging instruments, the hedging
instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash
flow hedge, or a hedge of a net investment in a foreign operation. The accounting for changes in
the fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, further, on the type of hedging
relationship. Our derivative instruments do not subject our earnings or cash flows to material
risk, as gains and losses on these derivatives generally offset losses and gains on the item being
hedged. We do not enter into derivative transactions for speculative purposes and we do not have
any non-derivative instruments that are designated as hedging instruments pursuant to Topic 815.
Refer to Note E Fair Value Measurements for more information on our derivative instruments.
Shipping and Handling Costs
We generally do not bill customers for shipping and handling of our products. Shipping and handling
costs of $88 million in 2010, $82 million in 2009, and $72 million in 2008 are included in selling,
general and administrative expenses in the accompanying consolidated statements of operations.
Research and Development
We expense research and development costs, including new product development programs, regulatory
compliance and clinical research as incurred. Refer to Purchased Research and Development for our
policy regarding in-process research and development acquired in connection with our business
combinations and strategic alliances.
Employee Retirement Plans
In connection with our 2006 acquisition of Guidant Corporation, we now sponsor the Guidant
Retirement Plan, a frozen noncontributory defined benefit plan covering a select group of current
and former employees. The funding policy for the plan is consistent with U.S. employee benefit and
tax-funding regulations. Plan assets, which are maintained in a trust, consist primarily of equity
and fixed-income instruments.
93
We
maintain an Executive Retirement Plan, a defined benefit plan covering executive
officers and division presidents. Participants may retire with unreduced benefits once retirement
conditions have been satisfied. Further, we sponsor the Guidant Supplemental Retirement Plan, a
frozen, nonqualified defined benefit plan for certain former officers and employees of
Guidant. The Guidant Supplemental Retirement Plan was funded through a Rabbi Trust that contains
segregated company assets used to pay the benefit obligations related to the plan. In addition,
certain current and former U.S. and Puerto Rico employees of Guidant are eligible to receive a
portion of their healthcare retirement benefits under a frozen defined benefit plan. We also
maintain retirement plans covering certain international employees.
We use a December 31 measurement date for these plans and record the underfunded portion as a
liability, recognizing changes in the funded status through other comprehensive income. The
outstanding obligation as of December 31, 2010 and 2009 is as follows:
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As of December 31, 2010 |
|
As of December 31, 2009 |
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Projected |
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Projected |
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Benefit |
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Underfunded |
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Benefit |
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Underfunded |
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Obligation |
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Fair value of |
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PBO |
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Obligation |
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Fair value of |
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|
PBO |
|
(in millions) |
|
(PBO) |
|
|
Plan Assets |
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|
Recognized |
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|
(PBO) |
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Plan Assets |
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|
Recognized |
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|
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|
|
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|
|
|
Executive Retirement Plan |
|
$ |
11 |
|
|
|
|
|
|
|
11 |
|
|
$ |
14 |
|
|
|
|
|
|
$ |
14 |
|
Guidant Retirement Plan (frozen) |
|
|
101 |
|
|
$ |
77 |
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|
|
24 |
|
|
|
98 |
|
|
$ |
68 |
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|
|
30 |
|
Guidant Supplemental Retirement Plan (frozen) |
|
|
30 |
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|
|
|
|
|
|
30 |
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|
|
29 |
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|
|
29 |
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|
Guidant Healthcare Retirement Benefit Plan (frozen) |
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|
10 |
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|
|
|
|
|
|
10 |
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|
|
14 |
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|
|
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|
|
14 |
|
International Retirement Plans |
|
|
72 |
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|
|
36 |
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|
|
36 |
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|
|
59 |
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|
|
28 |
|
|
|
31 |
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|
|
|
|
|
|
|
$ |
224 |
|
|
$ |
113 |
|
|
$ |
111 |
|
|
$ |
214 |
|
|
$ |
96 |
|
|
$ |
118 |
|
|
|
|
|
|
The value of the Rabbi Trust assets used to pay the Guidant Supplemental Retirement Plan
benefits included in our accompanying consolidated financial statements was approximately $30
million as of December 31, 2010 and 2009.
The assumptions associated with our employee retirement plans as of December 31, 2010 are as
follows:
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Long-Term |
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Healthcare |
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Rate of |
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Discount |
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Expected Return |
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Cost |
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Compensation |
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Rate |
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on Plan Assets |
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Trend Rate |
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Increase |
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Executive Retirement Plan |
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5.00% |
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3.50% |
Guidant Retirement Plan (frozen) |
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6.00% |
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7.75% |
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Guidant Supplemental Retirement Plan (frozen) |
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5.50% |
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Healthcare Retirement Benefit Plan (frozen) |
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4.75% |
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5.00% |
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International Retirement Plans |
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1.25% - 5.00% |
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2.50% - 4.10% |
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3.00% |
We base our discount rate on the rates of return available on high-quality bonds with
maturities approximating the expected period over which benefits will be paid. The rate of
compensation increase is based on historical and expected rate increases. We review external data
and historical trends in healthcare costs to determine healthcare cost trend rate assumptions. We
base our rate of expected return on plan assets on historical experience, our investment guidelines
and expectations for long-term rates of return.
A rollforward of the changes in the fair value of
plan assets for our funded retirement plans during 2010 and 2009 is as follows:
94
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|
Year Ended December 31, |
(in millions) |
|
2010 |
|
|
2009 |
|
|
Beginning fair value |
|
$ |
96 |
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$ |
76 |
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Actual return on plan assets |
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|
8 |
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|
|
18 |
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Employer contributions |
|
|
19 |
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|
|
6 |
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Benefits paid |
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|
(14 |
) |
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|
(6) |
|
Net transfers in (out) |
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|
1 |
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|
|
3 |
|
Foreign currency exchange |
|
|
3 |
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|
|
(1) |
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|
|
Ending fair value |
|
$ |
113 |
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|
$ |
96 |
|
|
|
|
Our investment policy with respect to these plans is to maximize the ability to meet plan
liabilities while minimizing the need to make future contributions to the plans. Plan assets are
invested primarily in equity securities and debt securities.
We also sponsor a voluntary 401(k) Retirement Savings Plan for eligible employees. We match
employee contributions equal to 200 percent for employee contributions up to two percent of
employee compensation, and fifty percent for employee contributions greater than two percent, but
not exceeding six percent, of pre-tax employee compensation. Total expense for our matching
contributions to the plan was $64 million in 2010, $71 million in 2009, and $63 million in 2008.
In connection with our acquisition of Guidant, we previously sponsored the Guidant Employee Savings
and Stock Ownership Plan, which allowed for employee contributions of a percentage of pre-tax
earnings, up to established federal limits. Our matching contributions to the plan were in the form
of shares of stock, allocated from the Employee Stock Ownership Plan (ESOP). Refer to Note N
Stock Ownership Plans for more information on the ESOP. Effective June 1, 2008, this plan was
merged into our 401(k) Retirement Savings Plan, described above. Prior to this merger, expense for
our matching contributions to the plan was $12 million in 2008.
Net Income (Loss) per Common Share
We base net income (loss) per common share upon the weighted-average number of common shares and
common stock equivalents outstanding during each year. Potential common stock equivalents are
determined using the treasury stock method. We exclude stock options whose effect would be
anti-dilutive from the calculation.
NOTE B ACQUISITIONS
During 2010, we paid approximately $200 million in cash to acquire Asthmatx, Inc. and certain other
strategic assets. We did not consummate any material acquisitions during 2009. During 2008, we paid
approximately $40 million in cash to acquire CryoCor, Inc. and Labcoat, Ltd. Each of these
acquisitions is described in further detail below. The purchase price allocations presented for
our 2010 acquisitions are preliminary, pending finalization of the valuation surrounding deferred tax
assets and liabilities, and will be finalized in 2011.
Our consolidated financial statements include the operating results for each acquired entity from
its respective date of acquisition. We do not present pro forma information for these acquisitions
given the immateriality of their results to our consolidated financial statements.
2010 Acquisitions
Asthmatx, Inc.
On October 26, 2010, we completed the acquisition of 100 percent of the fully diluted equity of
Asthmatx, Inc. Asthmatx designs, manufactures and markets a less-invasive, catheter-based bronchial
thermoplasty procedure for the treatment of severe persistent asthma. The acquisition was intended
to broaden and diversify our product portfolio by expanding into the area of endoscopic pulmonary
intervention. We are integrating the operations of
95
the Asthmatx business into our Endoscopy
division. We paid approximately $194 million at the closing of the transaction using cash on hand,
and may be required to pay future consideration up to $250 million that is contingent upon the
achievement of certain revenue-based milestones.
As of the acquisition date, we recorded a contingent liability of $54 million, representing the
estimated fair value of the contingent consideration we currently expect to pay to the former
shareholders of Asthmatx upon the achievement of certain revenue-based milestones. The acquisition
agreement provides for payments on product sales using technology acquired from Asthmatx of up to
$200 million through December 2016 and, in addition, we may be obligated to pay a one-time
revenue-based milestone payment of $50 million, no later than 2019, for a total of $250 million in
maximum future consideration.
The fair value of the contingent consideration liability associated with the $200 million of
potential payments was estimated by discounting, to present value, the contingent payments expected
to be made based on our estimates of the revenues expected to result from the acquisition. We used
a risk-adjusted discount rate of 20 percent to
reflect the market risks of commercializing this technology, which we believe is appropriate and
representative of market participant assumptions. For the $50 million milestone payment, we used a
probability-weighted scenario approach to determine the fair value of this obligation using
internal revenue projections and external market factors. We applied a rate of probability to each
scenario, as well as a risk-adjusted discount factor, to derive the estimated fair value of the
contingent consideration as of the acquisition date. This fair value measurement is based on
significant unobservable inputs, including management estimates and assumptions and, accordingly,
is classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value
Measurements and Disclosures (formerly FASB Statement No. 157, Fair Value Measurements).
In
accordance with ASC Topic 805, Business Combinations (formerly FASB Statement No. 141(R), Business
Combinations), we will re-measure this liability each reporting period and record changes in the
fair value through a separate line item within our consolidated statements of operations. Increases
or decreases in the fair value of the contingent consideration liability can result from changes in
discount periods and rates, as well as changes in the timing and amount of revenue estimates.
During the fourth quarter of 2010, we recorded expense of $2 million in the accompanying statements
of operations representing the increase in fair value of this obligation between the acquisition
date and December 31, 2010.
The components of the preliminary purchase price as of the acquisition date for our 2010
acquisitions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
(in millions) |
|
Asthmatx |
|
|
Other |
|
|
Total |
|
|
Cash |
|
$ |
194 |
|
|
$ |
5 |
|
|
$ |
199 |
|
Fair value of contingent consideration |
|
|
54 |
|
|
|
15 |
|
|
|
69 |
|
|
|
|
|
|
$ |
248 |
|
|
$ |
20 |
|
|
$ |
268 |
|
|
|
|
We accounted for these acquisitions as business combinations and, in accordance with Topic
805, we have recorded the assets acquired and liabilities assumed at their respective fair values
as of the acquisition date.
The following summarizes the preliminary purchase price allocations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
(in millions) |
|
Asthmatx |
|
|
Other |
|
|
Total |
|
|
Goodwill |
|
$ |
68 |
|
|
$ |
5 |
|
|
$ |
73 |
|
Amortizable intangible assets |
|
|
176 |
|
|
|
3 |
|
|
|
179 |
|
Indefinite-lived intangible assets |
|
|
45 |
|
|
|
12 |
|
|
|
57 |
|
Other net assets |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Deferred income taxes |
|
|
(43 |
) |
|
|
|
|
|
|
(43) |
|
|
|
|
|
|
$ |
248 |
|
|
$ |
20 |
|
|
$ |
268 |
|
|
|
|
96
Transaction costs associated with these acquisitions were expensed as incurred through
selling, general and administrative costs in the statement of operations and were not material in
2010.
We allocated the preliminary purchase price to specific intangible asset categories as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Range of Risk- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Adjusted Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Rates used in |
|
|
|
Amount Assigned |
|
|
Period |
|
|
Purchase Price |
|
|
|
(in millions) |
|
|
(in years) |
|
|
Allocation |
|
|
|
Asthmatx |
|
|
All Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology - core |
|
$ |
168 |
|
|
|
|
|
|
$ |
168 |
|
|
|
12.0 |
|
|
|
28.0 |
% |
Technology - developed |
|
|
8 |
|
|
$ |
3 |
|
|
|
11 |
|
|
|
5.5 |
|
|
|
27.0% - 35.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
176 |
|
|
|
3 |
|
|
|
179 |
|
|
|
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased research and development |
|
|
45 |
|
|
|
12 |
|
|
|
57 |
|
|
|
|
|
|
|
29.0% - 36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
221 |
|
|
$ |
15 |
|
|
$ |
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology consists of technical processes, intellectual property, and institutional
understanding with respect to products and processes that we will leverage in future products or
processes and will carry forward from one product generation to the next. Developed technology
represents the value associated with marketed products that have received regulatory approval,
primarily the Alair® Bronchial Thermoplasty System acquired from Asthmatx, which is
approved for distribution in CE Mark countries and received FDA approval in April 2010. The
amortizable intangible assets are being amortized on a straight-line basis over their assigned
useful lives.
Purchased research and development represents the estimated fair value of acquired in-process
research and development projects, including the second generation of the Alair®
product, which have not yet reached technological feasibility. The indefinite-lived intangible
assets will be tested for impairment on an annual basis, or more frequently if impairment
indicators are present, in accordance with our accounting policies described in Note A- Significant
Accounting Policies, and amortization of the purchased research and development will begin upon
completion of the project. As of the acquisition date, we estimate that the total cost to complete
the in-process research and development programs acquired from Asthmatx is between $10 million and
$15 million. We currently expect to launch the second generation of the Alair® product
in the U.S. in 2014, in our Europe/Middle East/Africa (EMEA) region and certain Inter-Continental
countries in 2016, and Japan in 2017, subject to regulatory approvals. We expect material net cash
inflows from such products to commence in 2014, following the launch of this technology in the U.S.
We believe that the estimated intangible asset values so determined represent the fair value at the
date of each acquisition and do not exceed the amount a third party would pay for the assets. We
used the income approach, specifically the discounted cash flow method, to derive the fair value of
the amortizable intangible assets and purchased research and development. These fair value
measurements are based on significant unobservable inputs, including management estimates and
assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed
by Topic 820.
We recorded the excess of the purchase price over the estimated fair values of the identifiable
assets as goodwill, which is non-deductible for tax purposes. Goodwill was established due
primarily to revenue and cash flow projections associated with future technology, as well as
synergies expected to be gained from the integration of these businesses into our existing
operations, and has been allocated to our reportable segments as follows based on the relative
expected benefit from the business combinations, as follows:
97
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Asthmatx |
|
|
All
Other |
|
|
Total |
|
|
U.S. |
|
$ |
17 |
|
|
$ |
5 |
|
|
$ |
22 |
|
EMEA |
|
|
44 |
|
|
|
|
|
|
|
44 |
|
Inter-Continental |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Japan |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
$ |
68 |
|
|
$ |
5 |
|
|
$ |
73 |
|
|
|
|
2009 Acquisitions
Our policy is to expense certain costs associated with strategic investments outside of business
combinations as purchased research and development as of the acquisition date. Our adoption of
Statement No. 141(R) (Topic 805) did not change this policy with respect to asset purchases. In
accordance with this policy, we recorded purchased research and development charges of $21 million
in 2009, associated with entering certain licensing and development arrangements. Since the
technology purchases did not involve the transfer of processes or outputs as defined by Statement
No. 141(R) (Topic 805), the transactions did not qualify as business combinations.
2008 Acquisitions
Labcoat, Ltd.
In December 2008, we completed the acquisition of the assets of Labcoat, Ltd., a development-stage
drug-coating company, for a purchase price of $17 million, net of cash acquired.
CryoCor, Inc.
In May 2008, we completed our acquisition of 100 percent of the fully diluted equity of CryoCor,
Inc., and paid a cash purchase price of $21 million, net of cash acquired. CryoCor was developing
products using cryogenic technology for use in treating atrial fibrillation.
In 2008, in accordance with accounting guidance applicable at the time, we consummated the
acquisitions of Labcoat and CryoCor and recorded $43 million of purchased research and development
charges, including $17 million associated with Labcoat and $8 million attributable to CryoCor, as
well as $18 million associated with entering certain licensing and development arrangements. During
2010, we suspended the Labcoat and CryoCor in-process research and development projects.
Payments Related to Prior Period Acquisitions
Certain of our acquisitions involve contingent consideration arrangements. Payment of additional
consideration is generally contingent on the acquired company reaching certain performance
milestones, including attaining specified revenue levels, achieving product development targets or
obtaining regulatory approvals. In August 2007, we entered an agreement to amend our 2004 merger
agreement with the principal former shareholders of Advanced Bionics Corporation. Previously, we
were obligated to pay future consideration contingent primarily on the achievement of future
performance milestones. The amended agreement provided a new schedule of consolidated, fixed
payments, consisting of $650 million that was paid in 2008, and a final $500 million payment, paid
in 2009. We received cash proceeds of $150 million in 2008 related to our sale of a controlling
interest in the Auditory business acquired with Advanced Bionics, and received additional proceeds
of $40 million in 2009 related to the sale of our remaining interest in this business. Refer to
Note C Divestitures and Assets Held for Sale for a discussion of this transaction. During 2010,
we made total payments of $12 million related to prior period acquisitions. During 2009, including
the $500 million payment to the former shareholders of Advanced Bionics, we made total payments of
$523 million related to prior period acquisitions. During 2008, we paid $675 million related to
prior period acquisitions, consisting primarily of the $650 million payment made to the principal
former shareholders of Advanced Bionics.
As of December 31, 2010, the estimated maximum potential amount of future contingent consideration
(undiscounted) that we could be required to make associated with acquisitions consummated prior to
2010 is
98
approximately $260 million. In accordance with accounting guidance applicable at the time
we consummated these acquisitions, we do not recognize a liability until the contingency is
resolved and consideration is issued or becomes issuable. Topic 805 now requires the recognition of
a liability equal to the expected fair value of future contingent payments at the acquisition date
for all acquisitions consummated after January 1, 2009. In connection with our 2010 business
combinations, we recorded liabilities of $69 million representing the estimated fair value of
contingent payments expected to be made, including $54 million associated with Asthmatx and $15
million attributable to other acquisitions. The maximum amount of future contingent consideration
(undiscounted) that we could be required to make associated with our 2010 acquisitions is
approximately $275 million. Included in the accompanying consolidated balance sheets is accrued
contingent consideration of $71 million as of December 31, 2010 and $6 million as of December 31,
2009.
NOTE C DIVESTITURES AND ASSETS HELD FOR SALE
Neurovascular Divestiture
On
January 3, 2011, we closed the sale of our Neurovascular business to Stryker Corporation
for a purchase price of $1.5 billion, payable in cash. We received $1.450 billion at closing,
including an upfront payment of $1.426 billion, and $24 million which was placed into escrow to be
released upon the completion of local closings in certain foreign jurisdictions, and will receive
$50 million contingent upon the transfer or
separation of certain manufacturing facilities, which we expect will be completed over a period of
approximately 24 months. We are providing transitional services to Stryker through a transition
services agreement, and will also supply products to Stryker. These transition services and supply
agreements are expected to be effective for a period of up to 24 months, subject to extension. Due
to our continuing involvement in the operations of the Neurovascular business, the divestiture does
not meet the criteria for presentation as a discontinued operation. We acquired the Neurovascular
business in 1997 with our acquisition of Target Therapeutics. The 2010 revenues generated by the
Neurovascular business were $340 million, or approximately four percent of our consolidated net
sales.
In accordance with ASC Topic 360-10-45, Impairment or Disposal of Long-lived Assets, we
reclassified as of the October 28, 2010 announcement date, and have presented separately, the
assets of the Neurovascular business as assets held for sale in the accompanying consolidated
balance sheets. As of the announcement date, we ceased amortization and depreciation of the assets
to be transferred. Pursuant to the divestiture agreement, Stryker did not assume any liabilities
recorded as of the closing date associated with the Neurovascular business.
The assets held for
sale included in the accompanying consolidated balance sheets
attributable to the divestiture consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
(in millions) |
|
2010 |
|
|
2009 |
|
|
Inventories |
|
$ |
30 |
|
|
$ |
29 |
|
Property, plant and equipment, net |
|
|
4 |
|
|
|
4 |
|
Goodwill |
|
|
478 |
|
|
|
468 |
|
Other intangible assets, net |
|
|
59 |
|
|
|
64 |
|
|
|
|
|
|
$ |
571 |
|
|
$ |
565 |
|
|
|
|
We also reclassified to assets held for sale certain property, plant and equipment that we intend
to sell within the next twelve months having a net book value of $5 million as of December 31, 2010
and $13 million as of December 31, 2009. The assets classified as held for sale in our
accompanying consolidated balance sheets, excluding goodwill and intangible assets, which we do not
allocate to our reportable segments, are primarily located in the U.S. and Ireland, and were
previously included in our U.S. and EMEA reportable segments.
99
Other Divestitures
In 2008, we completed the sale of certain non-strategic businesses for gross proceeds of
approximately $1.3 billion. We sold a controlling interest in our Auditory business and drug pump
development program, acquired with Advanced Bionics Corporation in 2004, to entities affiliated
with the principal former shareholders of Advanced Bionics for an aggregate purchase price of $150
million in cash. Under the terms of the agreement, we retained an equity interest in the limited
liability company formed for purposes of operating the Auditory business and, in 2009, received
proceeds of $40 million from the subsequent sale of this investment. In addition, we sold our
Cardiac Surgery and Vascular Surgery businesses to the Getinge Group for net cash proceeds of
approximately $700 million. We acquired the Cardiac Surgery business in April 2006 with our
acquisition of Guidant Corporation and acquired the Vascular Surgery business in 1995. Further, we
sold our Fluid Management and Venous Access businesses to Navilyst Medical (affiliated with Avista
Capital Partners) for net cash proceeds of approximately $400 million, and recorded a gain of $234
million during 2008 associated with the transaction. We acquired the Fluid Management business as
part of our acquisition of Schneider Worldwide in 1998. Further, we sold our Endovascular Aortic
Repair program obtained in connection with our 2005 acquisition of TriVascular, Inc. for $30
million in cash, and recorded a gain of $16 million during 2008 associated with the transaction.
NOTE D GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying amount of goodwill and other intangible assets and the related accumulated
amortization for intangible assets subject to amortization
and accumulated write-offs of goodwill
as of December 31, 2010 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Gross Carrying |
|
|
Amortization/ |
|
|
Gross Carrying |
|
|
Amortization/ |
|
(in millions) |
|
Amount |
|
|
Write-offs |
|
|
Amount |
|
|
Write-offs |
|
|
|
|
|
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology - core |
|
$ |
6,658 |
|
|
$ |
(1,424 |
) |
|
$ |
6,490 |
|
|
$ |
(1,107 |
) |
Technology - developed |
|
|
1,026 |
|
|
|
(966 |
) |
|
|
1,013 |
|
|
|
(798 |
) |
Patents |
|
|
527 |
|
|
|
(309 |
) |
|
|
543 |
|
|
|
(304 |
) |
Other intangible assets |
|
|
808 |
|
|
|
(325 |
) |
|
|
805 |
|
|
|
(266 |
) |
|
|
|
|
|
|
|
|
9,019 |
|
|
|
(3,024 |
) |
|
|
8,851 |
|
|
|
(2,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
14,616 |
|
|
|
(4,430 |
) |
|
|
14,549 |
|
|
|
(2,613 |
) |
Technology - core |
|
|
291 |
|
|
|
|
|
|
|
291 |
|
|
|
|
|
In-process research and development |
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,964 |
|
|
$ |
(4,430 |
) |
|
$ |
14,840 |
|
|
$ |
(2,613 |
) |
2010 Goodwill Impairment Charge
We test our April 1 goodwill balances during the second quarter of each year for impairment, or
more frequently if indicators are present or changes in circumstances suggest that impairment may
exist. The ship hold and product removal actions associated with our U.S. implantable cardioverter
defibrillator (ICD) and cardiac resynchronization therapy defibrillator (CRT-D) products, which we
announced on March 15, 2010, described in Item 7 of this Annual Report, and the expected
corresponding financial impact on our operations created an indication of potential impairment of
the goodwill balance attributable to our U.S. Cardiac Rhythm Management (CRM) reporting unit.
Therefore, we performed an interim impairment test in accordance with our accounting policies
described in Note A Significant Accounting Policies, and recorded a $1.848 billion, on both a
pre-tax and after-tax basis, goodwill impairment charge associated with our U.S. CRM reporting
unit. Due to the timing of the product actions and the procedures required to complete the two step
goodwill impairment test, the goodwill impairment charge was an estimate, which we finalized in the
second quarter of 2010. During the second quarter of 2010, we recorded a $31 million reduction of
the charge, resulting in a final goodwill impairment charge of $1.817 billion. This charge does not
impact our compliance with our debt covenants or our cash flows.
100
At the time we performed our interim goodwill impairment test, we estimated that our U.S.
defibrillator market share would decrease approximately 400 basis points exiting 2010 as a result
of the ship hold and product removal actions, as compared to our market share exiting 2009, and
that these actions would negatively impact our 2010 U.S. CRM revenues by approximately $300
million. In addition, we expected that our on-going U.S. CRM net sales and profitability would
likely continue to be adversely impacted as a result of the ship hold and product removal actions.
Therefore, as a result of these product actions, as well as lower expectations of market growth in
new areas and increased competitive and other pricing pressures, we lowered our estimated average
U.S. CRM net sales growth rates within our 15-year discounted cash flow (DCF) model, as well as our
terminal value growth rate, by approximately a couple of hundred basis points to derive the fair
value of the U.S. CRM reporting unit. The reduction in our forecasted 2010 U.S. CRM net sales, the
change in our expected sales growth rates thereafter and the reduction in profitability as a result
of the recently enacted excise tax on medical device manufacturers, discussed in Item 7 of this
Annual Report, were several key factors contributing to the impairment charge. Partially offsetting
these factors was a 50 basis point reduction in our estimated market-participant risk-adjusted
weighted-average cost of capital (WACC) used in determining our discount rate.
In the second quarter of 2010, we performed our annual goodwill impairment test for all of our
reporting units. We updated our U.S. CRM assumptions to reflect our market share position at that
time, our most recent operational budgets and long range strategic plans. In conjunction with our
annual test, the fair value of each reporting unit exceeded its carrying value, with the exception
of our U.S. CRM reporting unit. Based on the remaining book value of our U.S. CRM reporting unit
following the goodwill impairment charge, the carrying value of our U.S. CRM reporting unit
continues to exceed its fair value, due primarily to the book value of amortizable intangible
assets allocated to this reporting unit. The remaining book value of our amortizable intangible
assets which have been allocated to our U.S. CRM reporting unit is approximately $3.5 billion as of
December 31, 2010. We tested these amortizable intangible assets for impairment on an undiscounted
cash flow
basis as of March 31, 2010, and determined that these assets were not impaired, and there have been
no impairment indicators related to these assets subsequent to the performance of that test. The
assumptions used in our annual goodwill impairment test related to our U.S. CRM reporting unit were
substantially consistent with those used in our first quarter interim impairment test.
In the fourth quarter of 2010, we performed an interim impairment test on our international
reporting units as a result of the announced divestiture of our Neurovascular business, discussed
in Note C Divestitures and Assets Held for Sale. As part of the divestment, we allocated a
portion of our goodwill from our international reporting units to the Neurovascular business being
sold. We then tested each of our international reporting units for impairment in accordance with
ASC Topic 350, Intangibles Goodwill and Other. Our testing did not identify any reporting units
whose carrying values exceeded the calculated fair values. However, the level of excess fair value
over carrying value for our EMEA region is approximately six percent, a decrease from 14 percent in
the second quarter.
Goodwill Impairment Monitoring
We have identified a total of four reporting units with a material amount of goodwill that are at
higher risk of potential failure of the first step of the impairment test in future reporting
periods. These reporting units include our U.S. CRM unit, which holds $1.5 billion of allocated
goodwill, our U.S. Cardiovascular unit, which holds $2.2 billion of allocated goodwill, our U.S.
Neuromodulation unit, which holds $1.2 billion of allocated goodwill, and our EMEA region, which
holds $3.9 billion of allocated goodwill. The level of excess fair value over carrying value for
these reporting units identified as being at higher risk (with the exception of the U.S. CRM
reporting unit, whose carrying value continues to exceed its fair value) ranged from approximately
six percent to 23 percent. On a quarterly basis, we monitor the key drivers of fair value for these
reporting units to detect events or other changes that would warrant an interim impairment test.
The key variables that drive the cash flows of our reporting units are estimated revenue growth
rates, levels of profitability and perpetual growth rate assumptions, as well as the WACC. These
assumptions are subject to uncertainty, including our ability to grow revenue and improve
profitability levels. For each of these reporting units, relatively small declines in the future
performance and cash flows of the reporting unit or small changes in other key assumptions may
result in the recognition of significant goodwill impairment charges. For example, keeping all
other variables constant, a 50 basis point increase in the WACC applied would require that we
perform the second step of the goodwill impairment test for
101
our U.S. CRM, U.S. Neuromodulation, and
EMEA reporting units. In addition, keeping all other variables constant, a 100 basis point
decrease in perpetual growth rates would require that we perform the second step of the goodwill
impairment test for all four of the reporting units with higher risk of impairment. The estimates
used for our future cash flows and discount rates are our best estimates and we believe they are
reasonable, but future declines in the business performance of our reporting units may impair the
recoverability of our goodwill. Future events that could have a negative impact on the fair value
of the reporting units include, but are not limited to:
|
|
|
decreases in estimated market sizes or market growth rates due to
greater-than-expected pricing pressures, product actions, product
sales mix, disruptive technology developments, government cost
containment initiatives and healthcare reforms, and/or other economic
conditions; |
|
|
|
|
declines in our market share and penetration assumptions due to
increased competition, an inability to develop or launch new products,
and market and/or regulatory conditions that may cause significant
launch delays or product recalls; |
|
|
|
|
declines in revenue as a result of loss of key members of our sales
force and other key personnel; |
|
|
|
|
negative developments in intellectual property litigation that may
impact our ability to market certain products or increase our costs to
sell certain products; |
|
|
|
|
adverse legal decisions resulting in significant cash outflows; |
|
|
|
|
increases in the research and development costs necessary to obtain
regulatory approvals and launch new products, and the level of success
of on-going and future research and development efforts; |
|
|
|
|
decreases in our profitability due to an inability to successfully
implement and achieve timely and sustainable cost improvement measures
consistent with our expectations, increases in our market-participant tax rate, and/or changes in tax laws; |
|
|
|
|
increases in our market-participant risk-adjusted WACC; and |
|
|
|
|
changes in the structure of our business as a result of future
reorganizations or divestitures of assets or businesses. |
Negative changes in one or more of these factors could result in additional impairment charges.
2008 Goodwill Impairment Charge
During the fourth quarter of 2008, the decline in our stock price and our market capitalization
created an indication of potential impairment of our goodwill balance. Therefore, we performed an
interim impairment test and recorded a $2.613 billion goodwill impairment charge associated with
our U.S. CRM reporting unit. As a result of economic conditions and the related increase in
volatility in the equity and credit markets, which became more pronounced starting in the fourth
quarter of 2008, our estimated risk-adjusted WACC increased 150 basis points from 9.5 percent
during our 2008 second quarter annual goodwill impairment assessment to 11.0 percent during our
2008 fourth quarter interim impairment assessment. This change, along with reductions in market
demand for products in our U.S. CRM reporting unit relative to our assumptions at the time of the
Guidant acquisition, were the key factors contributing to the impairment charge. At the time we
acquired the CRM business from Guidant Corporation in 2006, we expected average U.S. CRM net sales
growth rates in the mid-teens; however, due to changes in end market demand, we reduced our
estimates of average U.S. CRM sales growth rates to the mid-to-high single digits. Our estimated
risk-adjusted market-participant WACC decreased 50 basis points from 11.0 percent during our 2008
fourth quarter interim impairment assessment to 10.5 percent
102
during our 2009 second quarter annual
goodwill impairment assessment, and our other significant assumptions remained largely consistent.
Our 2009 goodwill impairment test did not identify any reporting units whose carrying values
exceeded estimated fair values. See Note A Significant Accounting Policies for further
discussion of our policies and methodologies related to goodwill impairment testing.
Other Intangible Asset Impairment Charges
During 2010, due to lower than anticipated net sales of one of our Peripheral Interventions
technology offerings, as well as changes in our expectations of future market acceptance of this
technology, we lowered our sales forecasts associated with the product. In addition, as part of our
initiatives to reprioritize and diversify our product portfolio, we discontinued one of our
internal research and development programs to focus on those with a higher likelihood of success.
As a result of these factors, and in accordance with our accounting policies described in Note A,
we tested the related intangible assets for impairment and recorded intangible asset impairment
charges of $65 million to write down the balance of these intangible assets to their fair values.
We have recorded these amounts in the intangible asset impairment charges caption in our
accompanying consolidated statements of operations.
During 2009, we recorded $12 million of intangible asset impairment charges to write down the value
of certain intangible assets to their fair value, due primarily to lower than anticipated market
penetration of one of our Urology technology offerings.
During 2008, we reduced our future revenue and cash flow forecasts associated with certain of our
Peripheral Interventions-related intangible assets, primarily as a result of a recall of one of our
products. Therefore, we tested these intangible assets for impairment, and determined that these
assets were impaired, resulting in a $131
million charge to write down these intangible assets to their fair value. Further, as a result of
significantly lower than forecasted sales of certain of our Urology products, due to lower than
anticipated market penetration, we determined that certain of our Urology-related intangible assets
were impaired, resulting in a $46 million impairment charge to write down these intangible assets
to their fair value.
The intangible asset category and associated write downs recorded in 2010, 2009 and 2008 were as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Technology - developed |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
Technology - core |
|
|
47 |
|
|
$ |
10 |
|
|
$ |
126 |
|
Other intangible assets |
|
|
|
|
|
|
2 |
|
|
|
51 |
|
|
|
|
|
|
$ |
65 |
|
|
$ |
12 |
|
|
$ |
177 |
|
|
|
|
Estimated amortization expense for each of the five succeeding fiscal years based upon our
intangible asset portfolio as of December 31, 2010 is as follows:
|
|
|
|
|
|
|
Estimated |
|
|
|
Amortization |
|
|
|
Expense |
|
Fiscal Year |
|
(in millions) |
|
|
2011 |
|
$ |
430 |
|
2012 |
|
|
385 |
|
2013 |
|
|
371 |
|
2014 |
|
|
367 |
|
2015 |
|
|
366 |
|
Our core technology that is not subject to amortization represents technical processes,
intellectual property and/or institutional understanding acquired through business combinations
that is fundamental to the on-going operations of our business and has no limit to its useful life.
Our core technology that is not subject to
103
amortization is comprised primarily of certain purchased
stent and balloon technology, which is foundational to our continuing operations within the
Cardiovascular market and other markets within interventional medicine. We test our
indefinite-lived intangible assets at least annually for impairment and reassess their
classification as indefinite-lived assets. Our 2009 impairment test did not identify any
indefinite-lived intangible assets whose carrying value exceeded its estimated fair value. We
amortize all other core technology over its estimated useful life.
Goodwill as of December 31, 2010 as allocated to our U.S., EMEA, Japan, and Inter-Continental
reportable segments for purposes of our goodwill impairment testing is presented below. Our U.S.
goodwill is further allocated to our U.S. reporting units for our goodwill testing in accordance
with Topic 350.
The following is a rollforward of our goodwill balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter- |
|
|
|
|
(in millions) |
|
United States |
|
|
EMEA |
|
|
Japan |
|
|
Continental |
|
|
Total |
|
|
Balance as of January 1, 2009 |
|
$ |
7,160 |
|
|
$ |
4,073 |
|
|
$ |
597 |
|
|
$ |
591 |
|
|
$ |
12,421 |
|
Purchase price adjustments |
|
|
(21 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(27 |
) |
Goodwill acquired |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
4 |
|
Contingent consideration |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Goodwill reclassified to assets held for sale* |
|
|
(164 |
) |
|
|
(193 |
) |
|
|
(48 |
) |
|
|
(63 |
) |
|
|
(468 |
) |
|
|
|
Balance as of December 31, 2009 |
|
$ |
6,983 |
|
|
$ |
3,875 |
|
|
$ |
549 |
|
|
$ |
529 |
|
|
$ |
11,936 |
|
Purchase price adjustments |
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
Goodwill acquired |
|
|
22 |
|
|
|
44 |
|
|
|
3 |
|
|
|
4 |
|
|
|
73 |
|
Contingent consideration |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Goodwill written off |
|
|
(1,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817 |
) |
Adjustments to goodwill classified as held for sale |
|
|
(7 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(10 |
) |
|
|
|
Balance as of December 31, 2010 |
|
$ |
5,189 |
|
|
$ |
3,915 |
|
|
$ |
551 |
|
|
$ |
531 |
|
|
$ |
10,186 |
|
|
|
|
|
* |
|
As of December 31, 2010, in conjunction with the January 2011 sale of our Neurovascular
business, we present separately the assets of the disposal group, including the related
goodwill, as assets held for sale within our accompanying consolidated balance sheets.
The 2009 reclassification and balances as of December 31, 2009 are presented are for
comparative purposes and were not classified as held for sale at that date. Refer to Note C
Divestitures and Assets Held for Sale for more information regarding this transaction,
and for the major classes of assets, including goodwill, classified as held for sale. |
The 2009 and 2010 purchase price adjustments related primarily to adjustments in taxes payable and
deferred income taxes, including changes in the liability for unrecognized tax benefits.
The following is a rollforward of accumulated goodwill write-offs by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter- |
|
|
|
|
(in millions) |
|
United States |
|
|
EMEA |
|
|
Japan |
|
|
Continental |
|
|
Total |
|
|
Accumulated write-offs as of January 1, 2009 |
|
$ |
(2,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,613 |
) |
Goodwill written off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated write-offs as of December 31, 2009 |
|
|
(2,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,613 |
) |
Goodwill written off |
|
|
(1,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817 |
) |
|
|
|
Accumulated write-offs as of December 31, 2010 |
|
$ |
(4,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,430 |
) |
|
|
|
NOTE E FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
We develop, manufacture and sell medical devices globally and our earnings and cash flows are
exposed to market risk from changes in currency exchange rates and interest rates. We address these
risks through a risk management program that includes the use of derivative financial instruments,
and operate the program pursuant to documented corporate risk management policies. We recognize all
derivative financial instruments in
104
our consolidated financial statements at fair value in
accordance with FASB ASC Topic 815, Derivatives and Hedging (formerly FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities). In accordance with Topic 815, for
those derivative instruments that are designated and qualify as hedging instruments, the hedging
instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash
flow hedge, or a hedge of a net investment in a foreign operation. The accounting for changes in
the fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, further, on the type of hedging
relationship. Our derivative instruments do not subject our earnings or cash flows to material
risk, as gains and losses on these derivatives generally offset losses and gains on the item being
hedged. We do not enter into derivative transactions for speculative purposes and we do not have
any non-derivative instruments that are designated as hedging instruments pursuant to Topic 815.
Currency Hedging
We are exposed to currency risk consisting primarily of foreign currency denominated monetary
assets and liabilities, forecasted foreign currency denominated intercompany and third-party
transactions and net investments in certain subsidiaries. We manage our exposure to changes in
foreign currency on a consolidated basis to take advantage of offsetting transactions. We use both
derivative instruments (currency forward and option contracts), and non-derivative transactions
(primarily European manufacturing and distribution operations) to reduce the risk that our earnings
and cash flows associated with these foreign currency denominated balances and transactions will be
adversely affected by currency exchange rate changes.
Designated Foreign Currency Hedges
All of our designated currency hedge contracts outstanding as of December 31, 2010 and December 31,
2009 were cash flow hedges under Topic 815 intended to protect the U.S. dollar value of our
forecasted foreign currency denominated transactions. We record the effective portion of any change
in the fair value of foreign currency cash flow hedges in other comprehensive income (OCI) until
the related third-party transaction occurs. Once the related third-party transaction occurs, we
reclassify the effective portion of any related gain or loss on the foreign
currency cash flow hedge to earnings. In the event the hedged forecasted transaction does not
occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or
loss on the related cash flow hedge to earnings at that time. We had currency derivative
instruments designated as cash flow hedges outstanding in the contract amount of $2.679 billion as
of December 31, 2010 and $2.760 billion as of December 31, 2009.
We recognized net losses of $30 million in earnings on our cash flow hedges during 2010, as
compared to net gains of $4 million during 2009 and net losses of $67 million during 2008. All
currency cash flow hedges outstanding as of December 31, 2010 mature within 36 months. As of
December 31, 2010, $71 million of net losses, net of tax, were recorded in accumulated other
comprehensive income (AOCI) to recognize the effective portion of the fair value of any currency
derivative instruments that are, or previously were, designated as foreign currency cash flow
hedges, as compared to net losses of $44 million as of December 31, 2009. As of December 31, 2010,
$47 million of net losses, net of tax, may be reclassified to earnings within the next twelve
months.
The success of our hedging program depends, in part, on forecasts of transaction activity in
various currencies (primarily Japanese yen, Euro, British pound sterling, Australian dollar and
Canadian dollar). We may experience unanticipated currency exchange gains or losses to the extent
that there are differences between forecasted and actual activity during periods of currency
volatility. In addition, changes in currency exchange rates related to any unhedged transactions
may impact our earnings and cash flows.
During 2009, we directed our EMEA sales offices to converge differing operating structures to a
consistent limited risk distribution sales structure beginning in the third quarter of 2010. This
change impacted our EMEA transaction flow and effectively moved our foreign exchange risk from
third-party sales to intercompany sales. While the convergence has not had a significant impact on
the magnitude of foreign currency exposure, we de-designated certain cash flow hedges of
third-party sales. We reclassified net losses of $5 million from AOCI to current earnings during
2009 related to these de-designated cash flow hedges.
105
Non-designated Foreign Currency Contracts
We use currency forward contracts as a part of our strategy to manage exposure related to foreign
currency denominated monetary assets and liabilities. These currency forward contracts are not
designated as cash flow, fair value or net investment hedges under Topic 815; are marked-to-market
with changes in fair value recorded to earnings; and are entered into for periods consistent with
currency transaction exposures, generally one to six months. We had currency derivative instruments
not designated as hedges under Topic 815 outstanding in the contract amount of $2.398 billion as of
December 31, 2010 and $1.982 billion as of December 31, 2009.
Interest Rate Hedging
Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar
cash investments. We use interest rate derivative instruments to manage our earnings and cash flow
exposure to changes in interest rates by converting floating-rate debt into fixed-rate debt or
fixed-rate debt into floating-rate debt.
We designate these derivative instruments either as fair value or cash flow hedges under Topic 815.
We record changes in the value of fair value hedges in interest expense, which is generally offset
by changes in the fair value of the hedged debt obligation. Interest payments made or received
related to our interest rate derivative instruments are included in interest expense. We record the
effective portion of any change in the fair value of derivative instruments designated as cash flow
hedges as unrealized gains or losses in OCI, net of tax, until the hedged cash flow occurs, at
which point the effective portion of any gain or loss is reclassified to earnings. We record the
ineffective portion of our cash flow hedges in interest expense. In the event the hedged cash flow
does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of
any gain or loss on the related cash flow hedge to interest expense at that time. During 2009, our
interest rate derivative instruments either matured as scheduled or were terminated in connection
with the prepayment of our bank term loan, discussed further in Note G Borrowings and Credit
Arrangements. We recognized $27 million of losses within interest expense during 2009 due to the
early termination of these interest rate contracts. We had no interest rate derivative instruments
outstanding as of December 31, 2010 or December 31, 2009. In the first quarter of 2011, we
entered interest rate derivative contracts having a notional amount of $850 million to convert
fixed-rate debt into floating-rate debt, which we have designated as fair value hedges.
In prior years we terminated certain interest rate derivative instruments, including
fixed-to-floating interest rate contracts, designated as fair value hedges, and floating-to-fixed
treasury locks, designated as cash flow hedges. In accordance with Topic 815, we are amortizing the
gains and losses of these derivative instruments upon termination into earnings over the term of
the hedged debt. The carrying amount of certain of our senior notes included unamortized gains of
$2 million as of December 31, 2010 and $3 million as of December 31, 2009, and unamortized losses
of $5 million as of December 31, 2010 and $8 million as of December 31, 2009, related to the
fixed-to-floating interest rate contracts. We recognized approximately $2 million of interest
expense during 2010 and 2009 related to these derivative instruments. In addition, we had pre-tax
net gains within AOCI related to terminated floating-to-fixed treasury locks of $8 million as of
December 31, 2010 and $11 million as of December 31, 2009. We recognized approximately $3 million
as a reduction of interest expense during 2010 and $2 million as a reduction in interest expense
related to these derivative instruments during 2009. As of December 31, 2010, $5 million of net
gains, net of tax, are recorded in AOCI to recognize the effective portion of these instruments, as
compared to $7 million of net gains as of December 31, 2009. As of December 31, 2010, an immaterial
amount of net gains, net of tax, may be reclassified to earnings within the next twelve months from
amortization of our previously terminated interest rate derivative instruments.
During 2010, we recognized in earnings an immaterial amount of net gains related to our previously
terminated interest rate derivative contracts. During 2009, we recognized in earnings $70 million
of net losses, inclusive of the $27 million of interest rate contract termination losses described
above, related to our interest rate derivative instruments, including previously terminated
interest rate derivative contracts. During 2008, we recognized in earnings $20 million of net
losses related to our interest rate contracts.
106
Counterparty Credit Risk
We do not have significant concentrations of credit risk arising from our derivative financial
instruments, whether from an individual counterparty or a related group of counterparties. We
manage our concentration of counterparty credit risk on our derivative instruments by limiting
acceptable counterparties to a diversified group of major financial institutions with investment
grade credit ratings, limiting the amount of credit exposure to each counterparty, and by actively
monitoring their credit ratings and outstanding fair values on an on-going basis. Furthermore, none
of our derivative transactions are subject to collateral or other security arrangements and none
contain provisions that are dependent on our credit ratings from any credit rating agency.
We also employ master netting arrangements that reduce our counterparty payment settlement risk on
any given maturity date to the net amount of any receipts or payments due between us and the
counterparty financial institution. Thus, the maximum loss due to credit risk by counterparty is
limited to the unrealized gains in such contracts net of any unrealized losses should any of these
counterparties fail to perform as contracted. Although these protections do not eliminate
concentrations of credit, as a result of the above considerations, we do not consider the risk of
counterparty default to be significant.
Fair Value of Derivative Instruments
The following presents the effect of our derivative instruments designated as cash flow hedges
under Topic 815 on our accompanying consolidated statements of operations during 2010 and 2009:
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Pre- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Pre- |
|
|
tax Gain (Loss) |
|
|
|
|
|
|
Amount of Pre-tax Gain |
|
|
|
|
|
|
tax Gain (Loss) |
|
|
Reclassified from |
|
|
|
|
|
|
(Loss) Recognized in |
|
|
|
|
|
|
Recognized in |
|
|
AOCI into |
|
|
|
|
|
|
Earnings on Ineffective |
|
|
|
|
|
|
OCI |
|
|
Earnings |
|
|
|
|
|
|
Portion and Amount |
|
|
|
|
|
|
(Effective |
|
|
(Effective |
|
|
Location in Statement of |
|
|
Excluded from |
|
|
Location in Statement of |
|
(in millions) |
|
Portion) |
|
|
Portion) |
|
|
Operations |
|
|
Effectiveness Testing* |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
$ |
3 |
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
$ |
(74 |
) |
|
|
(30 |
) |
|
Cost of products sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(74 |
) |
|
$ |
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
(24 |
) |
|
$ |
(41 |
) |
|
Interest expense |
|
$ |
(27 |
) |
|
Interest expense |
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
|
(57 |
) |
|
|
9 |
|
|
Cost of products sold |
|
|
(5 |
) |
|
Cost of products sold |
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(81 |
) |
|
$ |
(32 |
) |
|
|
|
|
|
$ |
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Other than described in **, the amount of gain (loss) recognized in earnings related to the
ineffective portion of hedging relationships was de minimis in 2010 and 2009.
** We prepaid $2.825 billion of our term loan debt in 2009 and recognized ineffectiveness of $27
million on interest rate swaps for which there was no longer an underlying exposure.
*** Represents amount reclassified from AOCI to earnings in 2009 related to de-designated cash flow
hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized |
|
|
|
Location |
|
|
in Earnings (in millions) |
|
Derivatives Not Designated as |
|
in Statement of |
|
|
Year Ended December 31, |
|
Hedging Instruments |
|
Operations |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
Other, net |
|
$ |
(77 |
) |
|
|
|
|
Currency hedge contracts |
|
Cost of products sold |
|
|
|
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(77 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
Losses and gains on currency hedge contracts not designated as hedged instruments were
substantially offset by net gains from foreign currency transaction exposures of $68 million during
2010, and $5 million during 2009. As a result, we recorded net foreign currency losses of $9
million during 2010 and $5 million during 2009, within other, net in our accompanying consolidated
financial statements.
107
Topic 815 requires all derivative instruments to be recognized at their fair values as either
assets or liabilities on the balance sheet. We determine the fair value of our derivative
instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and
Disclosures (formerly FASB Statement No. 157, Fair Value Measurements), by considering the
estimated amount we would receive to sell or transfer these instruments at the reporting date and
by taking into account current interest rates, currency exchange rates, the creditworthiness of the
counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may
utilize financial models to measure fair value. Generally, we use inputs that include quoted prices
for similar assets or liabilities in active markets; quoted prices for identical or similar assets
or liabilities in markets that are not active; other observable inputs for the asset or liability;
and inputs derived principally from, or corroborated by, observable market data by correlation or
other means. As of December 31, 2010, we have classified all of our derivative assets and
liabilities within Level 2 of the fair value hierarchy prescribed by Topic 820, as discussed below,
because these observable inputs are available for substantially the full term of our derivative
instruments.
The following are the balances of our derivative assets and liabilities as of December 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(in millions) |
|
Location in Balance Sheet (1) |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
Prepaid expenses and other current assets |
|
$ |
32 |
|
|
$ |
20 |
|
Currency hedge contracts |
|
Other long-term assets |
|
|
27 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
32 |
|
Non-Designated Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
Prepaid expenses and other current assets |
|
|
23 |
|
|
|
24 |
|
|
|
|
|
|
|
|
Total Derivative Assets |
|
|
|
|
|
$ |
82 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
Other current liabilities |
|
$ |
87 |
|
|
$ |
64 |
|
Currency hedge contracts |
|
Other long-term liabilities |
|
|
71 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
|
|
93 |
|
Non-Designated Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
Other current liabilities |
|
|
31 |
|
|
|
17 |
|
|
|
|
|
|
|
|
Total Derivative Liabilities |
|
|
|
|
|
$ |
189 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We classify derivative assets and liabilities as current when the
remaining term of the derivative contract is one year or less. |
Other Fair Value Measurements
Recurring Fair Value Measurements
On a recurring basis, we measure certain financial assets and financial liabilities at fair value
based upon quoted market prices, where available. Where quoted market prices or other observable
inputs are not available, we apply valuation techniques to estimate fair value. Topic 820
establishes a three-level valuation hierarchy for disclosure of fair value measurements. The
categorization of financial assets and financial liabilities within the valuation hierarchy is
based upon the lowest level of input that is significant to the measurement of fair value. The
three levels of the hierarchy are defined as follows:
|
|
|
Level 1 Inputs to the valuation methodology are quoted market prices for identical assets or
liabilities. |
|
|
|
|
Level 2 Inputs to the valuation methodology are other observable inputs, including quoted market |
108
|
|
|
prices for similar assets or liabilities and market-corroborated inputs. |
|
|
|
|
Level 3 Inputs to the valuation methodology are unobservable inputs based on managements best estimate
of inputs market participants would use in pricing the asset or liability at the measurement date, including
assumptions about risk. |
Our investments in money market funds are generally classified within Level 1 of the fair value
hierarchy because they are valued using quoted market prices. Our money market funds are classified
as cash and cash equivalents within our accompanying consolidated balance sheets, in accordance
with our accounting policies.
Assets and liabilities measured at fair value on a recurring basis consist of
the following as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
As of December 31, 2009 |
|
(in millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
105 |
|
|
|
|
|
|
|
|
|
|
$ |
105 |
|
|
$ |
405 |
|
|
|
|
|
|
|
|
|
|
$ |
405 |
|
Currency hedge contracts |
|
|
|
|
|
$ |
82 |
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
$ |
105 |
|
|
$ |
82 |
|
|
|
|
|
|
$ |
187 |
|
|
$ |
405 |
|
|
$ |
56 |
|
|
|
|
|
|
$ |
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency hedge contracts |
|
|
|
|
|
$ |
189 |
|
|
|
|
|
|
$ |
189 |
|
|
|
|
|
|
$ |
110 |
|
|
|
|
|
|
$ |
110 |
|
Accrued
contingent consideration |
|
|
|
|
|
|
|
|
|
$ |
71 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
189 |
|
|
$ |
71 |
|
|
$ |
260 |
|
|
|
|
|
|
$ |
110 |
|
|
|
|
|
|
$ |
110 |
|
|
|
|
|
|
In addition to $105 million invested in money market and government funds as of December 31,
2010, we had $16 million of cash invested in short-term time deposits, and $92 million in interest
bearing and non-interest bearing bank accounts. In addition to $405 million invested in money
market and government funds as of December 31, 2009, we had $346 million of cash invested in
short-term time deposits, and $113 million in interest bearing and non-interest bearing bank
accounts.
Changes in the fair value of recurring fair value measurements using significant unobservable
inputs (Level 3) during the year ended December 31, 2010 were as follows (in millions):
|
|
|
|
|
Balance
as of December 31, 2009 |
|
|
|
|
Contingent consideration liability recorded |
|
$ |
(69 |
) |
Fair value adjustment |
|
|
(2 |
) |
|
|
|
Balance
as of December 31, 2010 |
|
$ |
(71 |
) |
|
|
|
Non-Recurring Fair Value Measurements
We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in
periods subsequent to initial recognition. The fair value of a cost method investment is not
estimated if there are no identified events or changes in circumstances that may have a significant
adverse effect on the fair value of the investment. The aggregate carrying amount of our cost
method investments was $43 million as of December 31, 2010 and $58 million as of December 31, 2009.
During 2010, we recorded $1.882 billion of impairment charges to adjust our goodwill and certain
intangible assets to their fair values, and $16 million of losses to write down certain cost method
investments to their fair values, because we deemed the decline in the values of the investments to
be other-than-temporary. We wrote down goodwill attributable to our U.S. CRM reporting unit,
discussed in Note D Goodwill and Other Intangible Assets, with a carrying amount of $3.296
billion to its estimated fair value of $1.479 billion, resulting in a write-down of $1.817 billion.
In addition, we recorded a loss of $60 million to write down certain of our Peripheral
Interventions intangible assets, discussed in Note D, to their estimated fair values of $14
million; and a loss of $5 million, discussed in Note D, to write off the remaining value associated
with certain other intangible assets. These adjustments fall within Level 3 of the fair value
hierarchy, due to the use of significant unobservable inputs
109
to determine fair value. The fair
value measurements were calculated using unobservable inputs, primarily using the income approach,
specifically the discounted cash flow method. The amount and timing of future cash flows within our
analysis was based on our most recent operational budgets, long range strategic plans and other
estimates.
The fair value of our outstanding debt obligations was $5.654 billion as of December 31, 2010 and
$6.111 billion as of December 31, 2009, which was determined by using primarily quoted market
prices for our publicly registered senior notes, classified as Level 1 within the fair value
hierarchy. Refer to Note G Borrowings and Credit Arrangements for a discussion of our debt
obligations.
NOTE F INVESTMENTS AND NOTES RECEIVABLE
We have historically entered a significant number of alliances with publicly traded and privately
held entities in order to broaden our product technology portfolio and to strengthen and expand our
reach into existing and new markets. During 2007, we announced our intent to sell the majority of
our investment portfolio in order to monetize those investments determined to be non-strategic. In
June 2008, we signed definitive agreements with Saints Capital and Paul Capital Partners to sell
the majority of our investments in, and notes receivable from, certain publicly traded and
privately held entities for gross proceeds of approximately $140 million. In connection with these
agreements, we received proceeds of $95 million in 2008, and an additional $45 million in 2009. In
addition, we received proceeds of $46 million in 2009 and $54 million in 2008 from other
transactions to monetize certain other non-strategic investments.
In 2010, we recorded gains of $4 million and other-than-temporary impairments of $16 million
associated with our investment portfolio. Gains and losses associated with our investments and
notes receivable are recorded in other, net within our consolidated statements of operations. As of
December 31, 2010, we held investments with a book value of $7 million that we accounted for under
the equity method of accounting.
The aggregate carrying amount of our cost method investments was $43
million as of December 31, 2010.
In 2009, we recorded gains of $23 million and other-than-temporary impairments of $14 million
associated with our investment portfolio. In addition, we recorded losses of $6 million associated
with our equity method investments. As of December 31, 2009, we held investments with a book value
of $8 million that we accounted for under the equity method of accounting.
The aggregate carrying amount of our cost method investments was $58
million as of December 31, 2009.
In 2008, we recorded other-than-temporary impairments of $130 million associated with our
investment portfolio, and gains of $52 million related to the sale of non-strategic investments.
The other-than-temporary impairments included $127 million related to non-strategic investments and
notes receivable which we had sold or intended to sell, and $3 million related to our strategic
equity investments. We also recognized other costs of $5 million associated with the Saints and
Paul agreements. We recorded losses of $10 million, reported in other, net, in our accompanying
consolidated statements of operations associated with our equity method investments.
We had notes receivable from certain portfolio companies of approximately $40 million as of
December 31, 2010 and 2009.
NOTE G BORROWINGS AND CREDIT ARRANGEMENTS
We had total debt of $5.438 billion as of December 31, 2010 and $5.918 billion as of December 31,
2009. During the second quarter of 2010, we refinanced the majority of our 2011 debt obligations,
including the establishment of a new $1.0 billion three-year, senior unsecured term loan facility,
and used $900 million of the proceeds to prepay in full our loan due to Abbott Laboratories without
any premium or penalty. During 2010, we also prepaid all $600 million of our senior notes due June
2011.
The following are the components of our debt obligations as of December 31, 2010 and 2009:
110
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(in millions) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Term loan |
|
$ |
250 |
|
|
|
|
|
Senior notes |
|
|
250 |
|
|
|
|
|
Other |
|
|
4 |
|
|
$ |
3 |
|
|
|
|
|
|
Current debt obligations |
|
|
504 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Term loan |
|
|
750 |
|
|
|
|
|
Abbott loan |
|
|
|
|
|
|
900 |
|
Senior notes |
|
|
4,200 |
|
|
|
5,050 |
|
Fair value adjustment (1) |
|
|
|
|
|
|
(5 |
) |
Discounts |
|
|
(17 |
) |
|
|
(32 |
) |
Other |
|
|
1 |
|
|
|
2 |
|
|
|
|
Long-term debt obligations |
|
|
4,934 |
|
|
|
5,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,438 |
|
|
$ |
5,918 |
|
|
|
|
|
|
|
(1) |
|
Represents net unamortized losses
related to interest rate contracts
to hedge the fair value of certain
of our senior notes. See
Note E -
Fair Value Measurements for further
discussion regarding the accounting
treatment for these contracts. |
The debt maturity schedule for the significant components of our debt obligations as of
December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Term loan |
|
$ |
250 |
|
|
$ |
50 |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,000 |
|
Senior notes |
|
|
250 |
|
|
|
|
|
|
|
|
|
|
$ |
600 |
|
|
$ |
1,250 |
|
|
$ |
2,350 |
|
|
|
4,450 |
|
|
|
|
|
|
$ |
500 |
|
|
$ |
50 |
|
|
$ |
700 |
|
|
$ |
600 |
|
|
$ |
1,250 |
|
|
$ |
2,350 |
|
|
$ |
5,450 |
|
|
|
|
|
|
|
Note: |
|
The table above does not include discounts associated with our
senior notes, or amounts related to interest rate contracts used
to hedge the fair value of certain of our senior notes. |
Term Loan and Revolving Credit Facility
Our term loan facility requires quarterly principal payments of $50 million commencing in the third
quarter of 2011, with the remaining principal amount due at the credit facility maturity date,
currently June 2013, with up to two one-year extension options subject to certain conditions.
However, in January 2011, we prepaid $250 million of these obligations using borrowings from our
credit and security facility discussed below, and, accordingly, have presented the full prepayment
within 2011 above, as well as within current debt obligations in our accompanying consolidated
balance sheets. As a result, quarterly principal payments of $50 million will commence in the
fourth quarter of 2012. Term loan borrowings bear interest at LIBOR plus an interest margin of
between 1.75 percent and 3.25 percent, based on our corporate credit ratings (currently 2.75
percent).
In the second quarter of 2010, we syndicated a new $2.0 billion revolving credit facility, maturing
in June 2013, with up to two one-year extension options subject to certain conditions, to replace
our existing $1.75 billion revolving credit facility maturing in April 2011. Any revolving credit
facility borrowings bear interest at LIBOR plus an interest margin of between 1.55 percent and
2.625 percent, based on our corporate credit ratings (currently 2.25 percent). In addition, we are
required to pay a facility fee based on our credit ratings and the total amount of revolving credit
commitments, regardless of usage, under the agreement (currently 0.50 percent per year). Any
borrowings under the revolving credit facility are unrestricted and unsecured. There were no
amounts borrowed under our revolving credit facilities as of December 31, 2010 or December 31,
2009.
In
connection with our 2009 patent litigation settlement with Johnson & Johnson discussed in Note L
Commitments and Contingencies, we borrowed $200 million against our revolving credit facility
during the first quarter of 2010 to
111
fund a portion of the settlement, and subsequently repaid these
borrowings during the quarter without any premium or penalty. Further, in February 2010, we posted
a $745 million letter of credit under our credit facility as collateral for the remaining Johnson &
Johnson obligation. In August 2010, we prepaid the remaining Johnson & Johnson obligation of $725
million, plus interest, using cash on hand and cancelled the related letter of credit. We now have
full access to our $2.0 billion revolving credit facility to support operational needs. As of
December 31, 2010, we had outstanding letters of credit of $120 million, as compared to $123 million as of
December 31, 2009, which consisted primarily of bank guarantees and collateral for workers
compensation insurance arrangements. As of December 31, 2010 and 2009, none of the beneficiaries
had drawn upon the letters of credit or guarantees; accordingly, we have not recognized a related
liability for our outstanding letters of credit in our consolidated balance sheets as of December
31, 2010 or 2009. We believe we will generate sufficient cash from operations to fund these
payments and intend to fund these payments without drawing on the letters of credit.
Our revolving credit facility agreement requires that we maintain certain financial covenants, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual as of |
|
|
Covenant |
|
December 31, |