Boston Scientific's Interesting Expenses
Financial reporting data results in Boston Scientific having an AGR score of 2, indicating more accounting and governance risk than 98% of comparable companies.
Boston Scientific is in upheaval. After buying Guidant for around $27 billion in 2006, it has struggled against high debt levels, product recalls, and the weak economy. On Feb. 10, 2010, its then-CEO Raymond Elliott spearheaded a plan to combine its cardiovascular group and cardiac rhythm management group into one. Hank Kucheman, who had most recently served as president of the former group, was promoted to lead the new organization. Then Elliott stepped down in October 2011, and Kucheman became CEO for the interim until Michael Mahoney takes the role this November 1. Now Boston Scientific is planning to separate the two main divisions of its biggest business, according to a Reuters report.
When then-CEO Elliott had announced the combination, he had promised to immediately begin initiatives designed to improve Boston Scientific’s “effectiveness and efficiency.” He said the plan would slash gross expenses during the next two years and result in a head count reduction from Boston Scientific's "non direct labor base," partially offset by things such as the “selective redeployment of expenses and head count into important sales and research initiatives.” Boston Scientific said its staff size dropped by 1,000 people to 24,000 between 2011 and 2010; the staff to go all worked in operations, whereas the numbers of sales and administrative people remained constant.
Comparably low selling, general and administrative expenses can mean that a company has grown more efficient and profitable in its operations, but it is also an easy number to manipulate, as managers have the discretion to decide what counts as a cost more directly related to the production of goods. The trailing twelve month average of Boston Scientific’s selling, general and administrative expenses dropped to around $2.71 billion as of the quarter ended June 30, or nearly 26% of total operating expenses versus the industry median of nearly 40%. In the June quarter of 2011, Boston Scientific’s selling, general and administrative expenses amounted to $2.73 billion, or 41% of the total.
While Boston Scientific’s overhead seems to have fallen to an astoundingly low level, it’s actually tough to say what happened; management decided to adjust an earlier asset estimate downward during this quarter, which resulted in a charge that made operating expenses zoom upward and thus throw comparisons out of whack. Even before the mammoth Guidant deal, Boston Scientific had said the amount it overpaid for its acquisitions was 24% of its total assets as of December 2005, which means that an unusually hefty chunk of its earnings consisted of estimates rather than tangibles. In every quarter since at least September 2009, Boston Scientific’s goodwill always amounted to well over 40% of its assets. On July 26, CEO Kucheman and his team revised their goodwill estimates for the three months ended in June downward by more than $3.4 billion, noting “slightly lower projected long-term growth rates due to macroeconomic factors and its performance in the European market” associated with the company's Europe, Middle East and Africa reporting unit. As a result Boston Scientific’s goodwill as of June declined to nearly $6.5 billion, or more than 36% of its total assets.
When Mahoney takes the reins in the coming months, perhaps he will revise those estimates again, as well as reorient the people who have been working on the sales and research initiatives that Elliott had deemed important.
Region: North America
Country: United States
Industry: Advanced Medical Equipment
Market Cap: $7,804.4 million (Large Cap)
ESG Rating: F
AGR Rating: Very Aggressive (2)