WWW.EXFILE.COM -- 888-775-4789 -- BOSTON SCIENTIFIC CORP. -- FORM 10-Q -- 16432


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009
Commission File No. 1-11083
 

 
BOSTON SCIENTIFIC CORPORATION
(Exact Name of Registrant As Specified in Its Charter)

DELAWARE
04-2695240
(State of Incorporation)
(I.R.S. Employer Identification No.)

ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address of Principal Executive Offices)

(508) 650-8000
(Registrant’s Telephone Number)

________________

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 x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o    No 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.
 
Large accelerated filer x
Accelerated filer o 
Non-accelerated filer  o 
Smaller reporting company  o 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Common Stock, $.01 par value
Shares outstanding
as of April 30, 2009
 
1,506,407,068



TABLE OF CONTENTS
 

 
                       Page No.

PART I
FINANCIAL INFORMATION
3
     
Item 1.
Condensed Consolidated Financial Statements
3
     
 
Condensed Consolidated Statements of Operations
3
     
 
Condensed Consolidated Balance Sheets
4
     
 
Condensed Consolidated Statements of Cash Flows
5
     
 
Notes to the Condensed Consolidated Financial Statements
6
     
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
55
Item 4.
Controls and Procedures
56
     
     
     
PART II
OTHER INFORMATION
 
57
Item 1.
Legal Proceedings
 
57
Item 1A.
Risk Factors
 
57
Item 6.
Exhibits                          
57
     
     
     
SIGNATURE
 
58
 
 
 
 
 

 
2

PART I
FINANCIAL INFORMATION
 

ITEM 1.              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
   
Three Months Ended
March 31,
 
in millions, except per share data
 
2009
   
2008
 
             
Net sales
  $ 2,010     $ 2,046  
Cost of products sold
    607       580  
                 
Gross profit
    1,403       1,466  
                 
Operating expenses:
               
Selling, general and administrative expenses
    651       661  
Research and development expenses
    257       244  
Royalty expense
    46       46  
Amortization expense
    128       143  
Purchased research and development
            13  
Gain on divestitures
            (250 )
Restructuring charges
    23       29  
Litigation-related charges
    287          
      1,392       886  
Operating income
    11       580  
                 
Other income (expense):
               
Interest expense
    (102 )     (131 )
Other, net
    (6 )     13  
                 
(Loss) income before income taxes
    (97 )     462  
Income tax (benefit) expense
    (84 )     140  
Net (loss) income
  $ (13 )   $ 322  
                 
Net (loss) income per common share — basic
  $ (0.01 )   $ 0.22  
Net (loss) income per common share — assuming dilution
  $ (0.01 )   $ 0.21  
                 
Weighted-average shares outstanding
               
Basic
    1,504.8       1,494.1  
Assuming dilution
    1,504.8       1,500.1  

See notes to the unaudited condensed consolidated financial statements.
3

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
   
March 31,
   
December 31,
 
in millions, except share data
 
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 897     $ 1,641  
Trade accounts receivable, net
    1,369       1,402  
Inventories
    852       853  
Deferred income taxes
    864       911  
Prepaid expenses and other current assets
    592       645  
Total current assets
    4,574       5,452  
                 
Property, plant and equipment, net
    1,708       1,728  
Goodwill and other intangible assets, net
    19,539       19,665  
Other long-term assets
    284       294  
    $ 26,105     $ 27,139  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Current debt obligations
  $ 5     $ 2  
Accounts payable
    254       239  
Accrued expenses
    2,014       2,612  
Other current liabilities
    158       380  
Total current liabilities
    2,431       3,233  
                 
Long-term debt
    6,242       6,743  
Deferred income taxes
    2,245       2,262  
Other long-term liabilities
    1,911       1,727  
                 
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 and issued 1,506,323,486 shares as of March 31, 2009 and 1,501,635,679 shares as of December 31, 2008
    15       15  
Additional paid-in capital
    15,989       15,944  
Accumulated deficit
    (2,745 )     (2,732 )
Other stockholders' equity (deficit)
    17       (53 )
Total stockholders' equity
    13,276       13,174  
    $ 26,105     $ 27,139  
 
 
See notes to the unaudited condensed consolidated financial statements.
4

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
   
Three Months Ended
March 31,
 
(in millions)
 
2009
   
2008
 
             
Cash provided by operating activities
  $ 261     $ 266  
                 
Investing activities:
               
Purchases of property, plant and equipment
    (60 )     (57 )
Proceeds from sales of publicly traded and privately held equity securities and collections of notes receivable
    50       37  
Payments for acquisitions of businesses, net of cash acquired
    (4 )        
Payments relating to prior period acquisitions
    (502 )     (654 )
Proceeds from business divestitures
            1,300  
Payments for investments in companies and acquisitions of certain technologies
    (1 )     (6 )
 
               
Cash (used for) provided by investing activities
    (517 )     620  
                 
Financing activities:
               
Payments on long-term borrowings
    (500 )     (625 )
Proceeds from issuances of shares of common stock
    12       26  
                 
Cash used for financing activities
    (488 )     (599 )
                 
Net (decrease) increase in cash and cash equivalents
    (744 )     287  
Cash and cash equivalents at beginning of period
    1,641       1,452  
Cash and cash equivalents at end of period
  $ 897     $ 1,739  
 
 
See notes to the unaudited condensed consolidated financial statements.
5

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 



NOTE A – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Certain prior year amounts have been reclassified to conform to the current year presentation. See Note M - Segment Reporting for further details.


NOTE B – FINANCIAL INSTRUMENTS

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 our consolidated financial statements at fair value in accordance with Financial Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. In accordance with Statement No. 133, 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 Statement No. 133.

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 use non-derivatives (primarily European manufacturing operations) and derivatives (currency forward and option contracts) 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 as of March 31, 2009 and December 31, 2008 were cash flow hedges under Statement No. 133.  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 probable that it will not occur, we would 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 $2.475 billion as of March 31, 2009 and $2.587 billion as of December 31, 2008.
6

During the first quarter of 2009, we recognized net gains of $16 million in earnings on our cash flow hedges. All currency cash flow hedges outstanding as of March 31, 2009 mature within 36 months. As of March 31, 2009, $65 million of net gains, 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 $6 million as of December 31, 2008. As of March 31, 2009, $32 million of net gains, 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. Changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.

Non-designated Foreign Currency Contracts

We manage our exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. 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 Statement No. 133; 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 Statement No. 133 outstanding in the contract amount of $1.765 billion as of March 31, 2009 and $1.809 billion as of December 31, 2008.

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 Statement No. 133. We record changes in the fair value of fair value hedges in other, net, which is offset by changes in the fair value of the hedged debt obligation to the extent the hedge is effective. Interest expense includes interest payments made or received under interest rate derivative instruments. 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. All of our interest rate swap contracts outstanding as of March 31, 2009 and December 31, 2008 were designated as cash flow hedges in accordance with Statement No. 133.

We had floating-to-fixed interest rate swaps indexed to three-month LIBOR outstanding in the notional amount of $4.350 billion as of March 31, 2009 and $4.900 billion as of December 31, 2008. The objective of these derivative instruments is to hedge against variability in our future interest payments on our LIBOR-indexed floating-rate loans as a result of changes in LIBOR. Three-month LIBOR approximated 1.192 percent as of March 31, 2009 and 1.425 percent as of December 31, 2008.

7

In addition, in prior years we terminated certain interest rate derivative instruments, including fixed-to-floating interest rate swaps and floating-to-fixed treasury locks. We are amortizing the related gains and losses realized upon termination into earnings over the term of the hedged debt in accordance with Statement No. 133.

During the first quarter of 2009, we recognized $13 million of net losses in earnings related to all currently outstanding and previously terminated interest rate derivative contracts. As of March 31, 2009, $15 million of net losses, net of tax, are recorded in AOCI to recognize the effective portion of our interest rate derivative contracts, as compared to $20 million of net losses as of December 31, 2008. As of March 31, 2009, $16 million of net losses, net of tax, may be reclassified to earnings within the next twelve months.

Counterparty Credit Risk

We do not have significant concentrations of credit risk arising from our derivative financial instruments, whether from an individual counterparty or group of counterparties. We reduce 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 by each counterparty to $50 million, and by actively monitoring their credit ratings and outstanding positions on an on-going basis. Furthermore, none of our derivative transactions are subject to collateral or other security arrangements and do not 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 tables present the effect of our derivative instruments designated as cash flow hedges and those not designated as hedging instruments under Statement No. 133 on our unaudited condensed consolidated statement of operations for the first quarter of 2009 (in millions).
 
Cash Flow Hedges
 
Amount of Gain (Loss) Recognized in OCI
(Effective Portion)
   
Amount of Gain (Loss) Reclassified from AOCI into Earnings
(Effective Portion)
 
Location in
Statement
of Operations
 
Amount of Gain (Loss) Recognized in Earnings on
Ineffective Portion and Amount Excluded from Effectiveness Testing (*)
 
Location in
Statement
of Operations
                       
Interest rate swap contracts
  $ (2 )   $ (10 ) ***
Interest expense
  $ (2 ) **
Interest expense
Foreign exchange contracts
    128       16  
Cost of products sold
       
Cost of products sold
    $ 126     $ 6       $ (2 )  
 
 

 * Other than described in ** below, the amount of gain (loss) recognized in earnings related to the ineffective portion of hedging relationships was de minimis in the first quarter of 2009.
** During the first quarter of 2009, we prepaid $500 million of our term loan, and recognized $2 million of ineffectiveness in accordance with Statement No. 133 on interest rate swaps for which there was no longer an underlying exposure.
*** We had $8 million of gains recorded in AOCI as of March 31, 2009 related to floating-to-fixed treasury locks terminated during 2005 and 2006.  We recognized less than $1 million as a reduction in interest expense during the first quarter of 2009 related to these instruments.
 
8

 
Derivatives Not Designated
as Hedging Instruments
 
Amount of Gain
Recognized
in Income
 
Location
in Statement of
Operations
         
Foreign exchange contracts
  $ 54  
Other, net
    $ 54    
 
 
We did not have fair value hedges or net investment hedges outstanding as of March 31, 2009. However, prior to 2006, we entered into fixed-to-floating interest rate swaps, which we designated as fair value hedges under Statement No. 133. We terminated these hedges during 2006 and, as of March 31, 2009, the carrying amount of certain of our senior notes included $3 million of unamortized gains and $10 million of unamortized losses related to these interest rate swaps. We recognized approximately $1 million of interest expense during the first quarter of 2009 related to these instruments.

Statement No. 133 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 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 March 31, 2009, we have classified our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by Statement No. 157, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.

The following table presents the fair value of our derivative instruments as they appear in our unaudited condensed consolidated balance sheets as of March 31, 2009 by type of contract and whether it is a qualifying hedge under Statement No. 133.

 
 
 
 
 
9

(in millions)
Location in
Balance Sheet
 
Balance as of
March 31, 2009
 
         
Derivative Assets:
       
         
Designated Hedging Instruments
       
Currency Exchange Contracts
Prepaid expenses and other current assets
  $ 76  
Currency Exchange Contracts
Other long-term assets
    64  
        140  
Non-Designated Hedging Instruments
         
Currency Exchange Contracts
Prepaid expenses and other current assets
    32  
      $ 172  
           
Derivative Liabilities:
         
           
Designated Hedging Instruments
         
Currency Exchange Contracts
Other current liabilities
  $ 19  
Currency Exchange Contracts
Other long-term liabilities
    12  
Interest Rate Swap Contracts
Other current liabilities
    29  
Interest Rate Swap Contracts
Other long-term liabilities
    9  
        69  
Non-Designated Hedging Instruments
         
Currency Exchange Contracts
Other current liabilities
    16  
      $ 85  
 

Other 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. Statement No. 157 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 prices for similar assets or liabilities and market-corroborated inputs.

Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s 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, as well as available-for-sale investments carried at fair value, 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 unaudited condensed consolidated balance sheets, in accordance with our accounting policies, as these funds are highly liquid and readily convertible to known amounts of cash.

Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following as of March 31, 2009:

10

(in millions)
 
Level 1
   
Level 2
 
Level 3
 
Total
 
                     
Assets
                   
Money market funds
  $ 363             $ 363  
Available-for-sale investments
    1               1  
Derivative and hedging contracts
          $ 172         172  
    $ 364     $ 172       $ 536  
                           
Liabilities
                         
Derivative and hedging contracts
          $ 85       $ 85  
            $ 85       $ 85  
 
 
In addition to $363 million invested in money market funds as of March 31, 2009, we had $332 million of cash invested in short-term time deposits, and $202 million in interest bearing and non-interest bearing bank accounts.

As of March 31, 2009, we had no material assets or liabilities that are measured at fair value on either a recurring or non-recurring basis using significant unobservable inputs (Level 3).


NOTE C – SUPPLEMENTAL BALANCE SHEET INFORMATION

The following are the components of various balance sheet items as of March 31, 2009 and December 31, 2008.

Inventories 
 
   
March 31,
   
December 31,
 
(in millions)
 
2009
   
2008
 
             
Finished goods
  $ 537     $ 555  
Work-in-process
    143       135  
Raw materials
    172       163  
    $ 852     $ 853  

Sales of the PROMUS® everolimus-eluting stent system represented approximately eight percent of our total net sales for the first quarter of 2009. We are reliant on Abbott Laboratories for our supply of PROMUS® stent systems. Any production or capacity issues that affect Abbott’s manufacturing capabilities or the process for forecasting, ordering and receiving shipments may impact their ability to increase or decrease the level of supply to us in a timely manner; therefore, our PROMUS® stent system supply may not align with customer demand, which could have an adverse effect on our operating results. At present, we believe that our supply of PROMUS® stent systems from Abbott is sufficient to meet customer demand. Further, our supply agreement with Abbott for PROMUS® stent systems extends through the middle of the fourth quarter of 2009 in Europe, and is currently being reviewed by the European Commission for possible extension; and through the end of the second quarter of 2012 in the U.S. and Japan. We are incurring incremental costs and expending incremental resources in order to develop and commercialize an internally developed and manufactured next-generation everolimus-eluting stent system. We expect to launch this product, the PROMUS® Element™ stent system, in our Europe/Middle East/Africa (EMEA) region and certain Inter-Continental countries in late 2009 and in the U.S. and Japan in mid-2012.
 
In addition, the price we pay for our supply of PROMUS® stent systems is determined by our contracts with Abbott. Our cost is based, in part, on previously fixed estimates of Abbott’s manufacturing costs for PROMUS® stent systems and third-party reports of our average selling price of PROMUS® stent systems. Amounts paid pursuant to this pricing arrangement are subject to a retroactive adjustment at pre-determined intervals based on Abbott’s actual costs to manufacture these stent systems for us and our average selling
11

price of PROMUS® stent systems. During 2009, we may make a payment to or receive a payment from 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 case, with respect to our purchases of PROMUS® stent systems from Abbott during 2006, 2007 and a portion of 2008.
 
Property, plant and equipment, net
 
   
March 31,
   
December 31,
 
(in millions)
 
2009
   
2008
 
             
Property, plant and equipment
  $ 3,113     $ 3,110  
Less: accumulated depreciation
    1,405       1,382  
    $ 1,708     $ 1,728  
 

Goodwill and other intangible assets, net 
 
   
March 31,
   
December 31,
 
(in millions)
 
2009
   
2008
 
             
Goodwill
  $ 12,425     $ 12,421  
Core technology
    6,855       6,855  
Other intangible assets
    2,379       2,381  
      21,659       21,657  
Less: accumulated amortization
    2,120       1,992  
    $ 19,539     $ 19,665  
 
 
Accrued Warranties

Changes in our product warranty accrual during the first quarter of 2009 consisted of the following (in millions):
 
Balance as of December 31, 2008
  $ 62  
Provision
    5  
Settlements/ reversals
    (10 )
Balance as of March 31, 2009
  $ 57  
 

 
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NOTE D – BORROWINGS AND CREDIT ARRANGEMENTS

We had total debt of $6.247 billion as of March 31, 2009 at an average interest rate of 5.84 percent, as compared to total debt of $6.745 billion as of December 31, 2008 at an average interest rate of 5.65 percent. The debt maturity schedule for the significant components of our debt obligations as of March 31, 2009 is as follows:
 
   
Payments due by Period
       
(in millions)
 
2009
   
2010
   
2011
   
2012
   
2013
   
Thereafter
   
Total
 
Term loan
          $ 325     $ 2,000                             $ 2,325  
Abbott Laboratories loan
                    900                               900  
Senior notes
                    850                     $ 2,200       3,050  
    $       $ 325     $ 3,750     $       $       $ 2,200     $ 6,275  
 
 
Note:
The table above does not include discounts associated with our Abbott loan and senior notes, or amounts related to certain interest rate swaps that were used to hedge the fair value of certain of our senior notes.

In February 2009, we amended our term loan and revolving credit facility agreement to increase flexibility under our financial covenants. The amendment provides for an exclusion from the calculation of consolidated EBITDA, as defined by the amended agreement, through the credit agreement maturity in April 2011, of up to $346 million in restructuring charges to support our Plant Network Optimization and other expense reduction initiatives, described in Note F – Restructuring-related Activities; an exclusion for any litigation-related charges and credits until such items are paid or received; and an exclusion of up to $1.137 billion of any cash payments for litigation settlements or damage awards (net of any litigation payments received), and all cash payments (net of cash receipts) related to amounts that were recorded in the financial statements before January 1, 2009. At the same time, we prepaid $500 million of our term loan and reduced our revolving credit facility by $250 million. In addition, the agreement provides for an increase in interest rates on our term loan borrowings from LIBOR plus 1.00 percent to LIBOR plus 1.75 percent at current credit ratings. Further, the interest rate on unused facilities increased from 0.175 percent to 0.500 percent.

In connection with the amendment of our term loan and revolving credit facility, we reduced availability under our credit facility to $1.750 billion. Further reducing our borrowing capacity, in 2008, we issued a $717 million surety bond backed by a $702 million letter of credit and $15 million of cash to secure a damage award related to the Johnson & Johnson patent infringement case pending appeal, described in Note L – Commitments and Contingencies. We also maintain a $350 million credit and security facility secured by our U.S. trade receivables. Use of the borrowings is unrestricted. Borrowing availability under this facility changes based upon the amount of eligible receivables, concentration of eligible receivables and other factors. There were no amounts borrowed under this facility as of March 31, 2009 or December 31, 2008. Further, we have uncommitted credit facilities with two commercial Japanese banks that provide for borrowings and promissory notes discounting of up to 18.5 billion Japanese yen (translated to approximately $187 million as of March 31, 2009 and $205 million as of December 31, 2008). We discounted notes receivable of $173 million as of March 31, 2009 and $190 million as of December 31, 2008. Discounted notes receivable are excluded from accounts receivable in the accompanying unaudited condensed consolidated balance sheets.

Our term loan and revolving credit facility agreement requires that we maintain certain financial covenants, as follows:
 
 
Covenant
Requirement
Actual as of
March 31, 2009
Maximum leverage ratio (1)
4.0 to 1.0
2.9 to 1.0
Minimum interest coverage ratio (2)
3.0 to 1.0
4.9 to 1.0
 
 
(1)
Ratio of total debt to EBITDA, as defined by the agreement, as amended, for the preceding four fiscal quarters. The maximum permitted leverage ratio steps down to 3.5 to 1.0 on September 30, 2009.

 
(2)
Ratio of EBITDA, as defined by the agreement, as amended, to interest expense for the preceding four consecutive fiscal quarters.

As of March 31, 2009, we were in compliance with the required covenants. If at any time we are not able to maintain these covenants, we could be required 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.
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NOTE E – ACQUISITIONS

Purchased Research and Development

Our policy is to record certain costs associated with strategic alliances as purchased research and development. In accordance with this policy, we recorded $13 million of purchased research and development charges in the first quarter of 2008, associated with entering certain licensing and development arrangements. Our adoption of FASB Statement No. 141(R), Business Combinations, as of January 1, 2009, did not change this policy with respect to asset purchases. For any future business combinations that we consummate, we will recognize purchased research and development as an intangible asset, in accordance with Statement No. 141(R). Our research and development projects acquired in connection with prior business combinations and alliances are progressing in line with the estimates set forth in our 2008 Annual Report on Form 10-K.

Payments Related to Prior Period Acquisitions

Certain of our acquisitions involve the payment of contingent consideration. Payment of the 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, which we made during the first quarter of 2009. During the first quarter of 2009, we made total payments of $502 million related to prior period acquisitions. As of March 31, 2009, the estimated maximum potential amount of future contingent consideration (undiscounted) that we could be required to make associated with our prior business combinations is approximately $650 million. The milestones associated with the contingent consideration must be reached in certain future periods ranging from 2009 through 2022. The estimated cumulative specified revenue level associated with these maximum future contingent payments is approximately $2.4 billion.


NOTE F – 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), which resulted in the elimination of approximately 2,300 positions worldwide. We are providing affected employees with severance packages, outplacement services and other appropriate assistance and support.  The plan is 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 include 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 (R&D) projects; and the transfer of certain production lines among facilities. We initiated these activities in the fourth quarter of 2007 and expect to be substantially complete in 2010.

We expect that the execution of this plan will result in total pre-tax expenses of approximately $425 million to $450 million. We are recording a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations. We expect the plan to result in cash payments of approximately $395 million to $415 million.  The following provides a summary of our expected total costs associated with the plan by major type of cost:
 
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Type of cost
Total estimated amount expected to be incurred
Restructuring charges:
 
Termination benefits
$225 million to $230 million
Fixed asset write-offs
$20 million
Other (1)
$65 million to $70 million
   
Restructuring-related expenses:
 
Retention incentives
$75 million to $80 million
Accelerated depreciation
$10 million to $15 million
Transfer costs (2)
$30 million to $35 million
   
 
$425 million to $450 million
 
(1) 
Consists primarily of consulting fees and contractual cancellations.
(2) 
Consists primarily of costs to transfer product lines among facilities, including costs of transfer teams,freight and product line validations.


In addition, in January 2009, our Board of Directors approved, and we committed to, a Plant Network Optimization plan, which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and by closing certain other facilities. The plan, a complement to our 2007 Restructuring plan, is intended to improve overall gross profit margins. Activities under the Plant Network Optimization plan were initiated in the first quarter of 2009 and are expected to be substantially complete by the end of 2011.

We estimate that the execution of this plan will result in total pre-tax charges of approximately $135 million to $150 million, and that approximately $120 million to $130 million of these charges will result in future cash outlays.  The following provides a summary of our estimates of costs associated with the plan by major type of cost:
 
Type of cost
Total estimated amount expected to be incurred
Restructuring charges:
 
Termination benefits
$45 million to $50 million
   
Restructuring-related expenses:
 
Accelerated depreciation
$15 million to $20 million
Transfer costs (1)
$75 million to $80 million
   
 
$135 million to $150 million
 
(1) 
Consists primarily of costs to transfer product lines among facilities, including costs of transfer teams, freight and product line validations.

During the first quarter of 2009, we recorded $23 million of restructuring charges.  In addition, we recorded $14 million of expenses within other lines of our unaudited condensed consolidated statements of operations related to our restructuring initiatives. The following presents these costs by major type and line item within our unaudited condensed consolidated statements of operations, as well as by plan:
 
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(in millions)
 
Termination
Benefits
   
Retention
Incentives
   
Accelerated Depreciation
   
Transfer
Costs
   
Other
   
Total
 
Restructuring charges
  $ 18                           $ 5     $ 23  
                                               
Restructuring-related expenses:
                                             
Cost of products sold
          $ 1     $ 2     $ 7               10  
Selling, general and administrative expenses
            3                               3  
Research and development expenses
            1                               1  
              5       2       7               14  
    $ 18     $ 5     $ 2     $ 7     $ 5     $ 37  
 

 
 
(in millions)
 
Termination
Benefits
   
Retention
Incentives
   
Accelerated
Depreciation
   
Transfer
Costs
   
Other
   
Total
 
2007 Restructuring plan
  $ 3     $ 5     $ 1     $ 4     $ 5     18  
Plant Network Optimization plan
    15               1       3               19  
    $ 18     $ 5     $ 2     $ 7     $ 5     $ 37  
 
 
 
 
During the first quarter of 2008, we recorded $29 million of restructuring charges.  In addition, we recorded $15 million of expenses within other lines of our unaudited condensed consolidated statements of operations related to our restructuring initiatives. The following presents these costs by major type and line item within our unaudited condensed consolidated statements of operations:
 
(in millions)
 
Termination
Benefits
   
Retention
Incentives
   
Accelerated Depreciation
   
Transfer
Costs
   
Other
   
Total
 
Restructuring charges
  $ 20                           $ 9     $ 29  
                                               
Restructuring-related expenses:
                                             
Cost of products sold
          $ 3     $ 1                       4  
Selling, general and administrative expenses
            6       3                       9  
Research and development expenses
            2                               2  
              11       4                       15  
    $ 20     $ 11     $ 4     $       $ 9     $ 44  
 
 
 
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 FASB Statement No. 112, Employer’s Accounting for Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. We expect to record the additional termination benefits throughout 2009 and 2010 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 are being recorded over the future service period during which eligible employees must remain employed with us in order to retain the payment.  Other restructuring costs, which represent primarily consulting fees, are being recognized and measured at their fair value in the period in which the liability is incurred in accordance with Statement No. 146. Accelerated depreciation is being recorded over the new remaining useful life of the related assets, and production line transfer costs are being recorded as incurred.

We have incurred cumulative restructuring and restructuring-related costs of $354 million since we committed to each plan. The following presents these costs by major type and by plan:
 
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(in millions)
 
2007
Restructuring
   
Plant Network
Optimization
   
Total
 
Termination benefits
  $ 195     $ 15     $ 210  
Retention incentives
    53               53  
Fixed asset write-offs
    18               18  
Accelerated depreciation
    12       1       13  
Transfer costs
    8       3       11  
Other
    49               49  
    $ 335     $ 19     $ 354  
 
During the first quarter of 2009, we made cash payments of approximately $20 million associated with restructuring initiatives pursuant to our 2007 Restructuring plan, which related to termination benefits, retention incentives, production line transfer costs and other restructuring costs.  We have made cumulative cash payments of approximately $247 million since we committed to the 2007 Restructuring plan. These payments were made using cash generated from our operations.  We expect to record the remaining costs associated with the 2007 Restructuring plan during 2009 and make the remaining cash payments throughout 2009 and into 2010 using cash generated from operations. During the first quarter of 2009, we made cash payments of approximately $3 million associated with our Plant Network Optimization plan, which related to termination benefits and production line transfer costs, and represent the total amounts paid since committing to the Plant Network Optimization plan.  These payments were made using cash generated from our operations.  We expect to record the remaining costs associated with the Plant Network Optimization plan throughout 2009 and 2010, and make the remaining cash payments through 2011 using cash generated from operations.

The following is a rollforward of the liability associated with our restructuring initiatives, since the inception of the respective plan, which is reported as a component of accrued expenses included in our accompanying unaudited condensed consolidated balance sheets.
 
   
2007 Restructuring
   
Plant Network Optimization
       
(in millions)
 
Termination
Benefits
   
Other
   
Subtotal
   
Termination
Benefits
   
Total
 
Charges
  $ 158     $ 10     $ 168           $ 168  
Cash payments
    (23 )     (8 )     (31 )           (31 )
Balance as of December 31, 2007
    135       2       137             137  
Charges
    34       34       68             68  
Cash payments
    (128 )     (35 )     (163 )           (163 )
Balance as of December 31, 2008
    41       1       42             42  
Charges
    3       5       8     $ 15       23  
Cash payments
    (9 )     (5 )     (14 )             (14 )
Balance as of March 31, 2009
  $ 35     $ 1     $ 36     $ 15     $ 51  
 
In addition to the amounts in the rollforward above, we have incurred cumulative charges of $91 million associated with retention incentives, asset write-offs, accelerated depreciation and transfer costs pursuant to our 2007 Restructuring plan, and made cumulative cash payments of $35 million associated with retention incentives and $8 million associated with transfer costs. We have also incurred cumulative charges of $4 million associated with accelerated depreciation and transfer costs pursuant to our Plant Network Optimization plan and made cumulative cash payments of $3 million.
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NOTE G – DIVESTITURES

During 2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous Access and Fluid Management businesses were no longer strategic to our on-going operations. We completed the sale of these businesses in the first quarter of 2008, receiving pre-tax proceeds of approximately $1.3 billion, and recognized a pre-tax gain of $250 million associated with these divestitures.

During 2007, we announced our intent to monetize those investments in our portfolio determined to be non-strategic. During 2008, we entered transactions to sell the majority of our investments in, and notes receivable from, certain publicly traded and privately held entities, and received pre-tax proceeds for investments sold of $149 million. During the first quarter of 2009, we substantially completed the sale of our non-strategic investments, and received additional proceeds and collections of notes receivable of approximately $50 million.


NOTE H – COMPREHENSIVE INCOME

The following table provides a summary of our comprehensive income:

   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2009
   
2008
 
Net (loss) income
  $ (13 )   $ 322  
Foreign currency translation adjustment
    (6 )     10  
Net change in derivative financial instruments
    76       (93 )
Net change in equity investments
            (7 )
Other
            (2 )
Comprehensive income
  $ 57     $ 230  
 


NOTE I – WEIGHTED-AVERAGE SHARES OUTSTANDING

The following is a reconciliation of weighted-average shares outstanding for basic and diluted earnings per share computations:

   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2009
   
2008
 
Weighted average shares outstanding - basic
    1,504.8       1,494.1  
Net effect of common stock equivalents
            6.0  
Weighted average shares outstanding - assuming dilution
    1,504.8       1,500.1  
 
 
Weighted-average shares outstanding, assuming dilution, excludes the impact of 3.9 million common stock equivalents for the first quarter of 2009 due to our net loss position in that period.

Additionally, weighted-average shares outstanding, assuming dilution, excludes the impact of 65 million stock options for the first quarter of 2009, and 57 million for the first quarter of 2008 due to the exercise prices of these stock options being greater than the average market price of our common stock during those periods.

We issued approximately five million shares of our common stock during the first quarter of 2009, and four million during the first quarter of 2008 following the exercise of the underlying stock options or vesting of the underlying deferred stock units, or purchase under our employee stock purchase plan.

 
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NOTE J – STOCK-BASED COMPENSATION

The following presents the impact of stock-based compensation expense on our unaudited condensed consolidated statements of operations:
 
   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2009
   
2008
 
Cost of products sold
  $ 6     $ 6  
Selling, general and administrative expenses
    29       28  
Research and development expenses
    10       7  
      45       41  
Less: Income tax benefit
    (15 )     (12 )
    $ 30     $ 29  
                 
Impact on net (loss) income per common share - basic
  $ (0.02 )   $ (0.02 )
Impact on net (loss) income per common share - assuming dilution
  $ (0.02 )   $ (0.02 )
 

NOTE K – INCOME TAXES

Tax Rate
 
The following table provides a summary of our reported tax rate:
 
   
Three Months Ended
March 31,
   
Percentage
Point
Increase
 
   
2009
   
2008
   
(Decrease)
 
Reported tax rate
   
   86.6%
   
30.3%
     
  56.3%
 
Impact of certain charges*
   
(65.6)%
     
(6.7)%
     
(58.9)%
 
 
*These charges are taxed at different rates than our effective tax rate. 

The increase in our reported tax rate for the first quarter of 2009, as compared to the same period in the prior year, related primarily to the impact of certain charges that are taxed at different rates than our effective tax rate. In the first quarter of 2009, these charges included restructuring and litigation-related charges; a favorable tax ruling on a divestiture-related gain recognized in a prior period, resulting in a $63 million tax benefit; and discrete items associated primarily with state law changes.  In 2008, these charges included restructuring and restructuring-related charges, a gain on the divestiture of certain non-strategic businesses, and discrete tax items associated with the resolution of various tax matters.  

As of January 1, 2009, we adopted FASB Statement No. 141(R), Business Combinations, which requires that we recognize changes in acquired income tax uncertainties (applied to acquisitions before and after the adoption date) as income tax expense or benefit. As of March 31, 2009, we had $1.116 billion of gross unrecognized tax benefits, $993 million of which, if recognized, would affect our effective tax rate. As of December 31, 2008, we had $1.107 billion of gross unrecognized tax benefits, $978 million of which, if recognized, would affect our effective tax rate.

We recognize interest and penalties related to income taxes as a component of income tax expense.  We recognized interest expense of $11 million in the first quarter of 2009.  The total amount of interest and penalties recognized in the first quarter of 2008 was a reduction of expense of $2 million due to the settlement of previously recorded tax matters.  We had $286 million accrued for gross interest and penalties as of March 31, 2009 and $268 million as of December 31, 2008.
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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. During the first quarter of 2009, we resolved certain matters and paid taxes related to a foreign audit.  As a result of payments related to these matters, we decreased our reserve for uncertain tax positions by $7 million.

During 2008, we received the Revenue Agent’s Report for Guidant’s federal examination covering years 2001 through 2003, which contained significant proposed adjustments related primarily to the allocation of income between our U.S. and foreign affiliates.  We disagree with the proposed adjustment and we intend to contest this matter through applicable IRS and judicial procedures, as appropriate.  Although the final resolution of the proposed adjustments is uncertain, we believe that our income tax reserves are adequate and that the resolution will not have a material impact on our financial condition or results of operations.

It is reasonably possible that within the next 12 months we will resolve multiple issues including transfer pricing, research and development tax credit and transactional related issues; with foreign, federal and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $161 million.


NOTE L – COMMITMENTS AND CONTINGENCIES

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 to defend or create market advantage is inherently complex and unpredictable. Furthermore, appellate courts frequently 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 proceedings and are frequently 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 our current and former stent systems infringe patents owned or licensed by them. We have similarly asserted that stent systems or 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 stent 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, we are engaged in significant patent litigation with Johnson & Johnson relating to stent systems, balloon catheters and stent delivery systems.  We have each asserted that products of the other infringe patents owned or exclusively licensed by each of us.  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 and securities claims are asserted against us. In addition, requests for information from governmental entities have increased in recent years which may evolve into legal proceedings. Product liability and securities claims may be asserted against us and requests for information may be received in the future related to events not known to management at the present time.
 
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We are substantially self-insured with respect to product liability claims, and maintain an insurance policy 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, product recalls, securities litigation, requests for information and other legal proceedings in the future, regardless of their outcome, could have a material adverse effect on our financial position, results of operations or liquidity.
 
We 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 FASB Statement No. 5, Accounting for Contingencies, we accrue anticipated costs of settlement and damages 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.

Our accrual for legal matters that are probable and estimable was $1.340 billion as of March 31, 2009 and $1.089 million as of December 31, 2008, and includes estimated costs of settlement, damages and defense.  The increase in our accrual is due primarily to first quarter charges of $237 million as a result of a ruling in a patent infringement case brought against us by Johnson & Johnson, and $50 million related to the settlement of a patent infringement case brought against us by Bruce Saffran, M.D., Ph.D. described below. Partially offsetting this increase was a decrease of $15 million due to first quarter payments related to the 2008 settlement of certain litigation between us and Medtronic, Inc., and $18 million attributable to payments made during the quarter related to the Guidant multi-district product liability litigation (MDL) settlement, described below. We continue to assess certain litigation and claims to determine the amounts that management believes will be paid as a result of these litigation and claims and, therefore, additional losses may be accrued in the future, which could adversely impact our operating results, cash flows and our ability to comply with our debt covenants.

In management’s opinion, we are not currently involved in any legal proceedings other than those specifically identified below or as disclosed in our 2008 Annual Report on Form 10-K, which, individually or in the aggregate, could have a material effect on our financial condition, operations and/or cash flows. Unless included in our legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding can not be estimated. Except as disclosed below, there have been no material developments with regard to the litigation or other proceedings disclosed in our 2008 Annual Report on Form 10-K.

Litigation with Johnson & Johnson

On October 22, 1997, Cordis Corporation, a subsidiary of Johnson & Johnson, filed a suit for patent infringement against us and Boston Scientific Scimed, Inc. (f/k/a SCIMED Life Systems, Inc.), our wholly owned subsidiary, alleging that the importation and use of the NIR® stent infringes two patents owned by Cordis. On April 13, 1998, Cordis filed another suit for patent infringement against Boston Scientific Scimed and us, alleging that our NIR® stent infringes two additional patents owned by Cordis. The suits were filed in the U.S. District Court for the District of Delaware seeking monetary damages, injunctive relief and that the patents be adjudged valid, enforceable and infringed. A jury trial on both actions found that the NIR® stent infringed one claim of one Cordis patent and awarded damages of approximately $324 million to Cordis. On May 16, 2002, the Court set aside the verdict of infringement, requiring a new trial. On March 24, 2005, in a second trial, a jury found that a single claim of a Cordis patent was valid and infringed. Our appeals of the infringement decision were denied. On September 30, 2008, the District Court entered final judgment against us and awarded Cordis $702 million in damages and interest. As a result of the Court’s ruling, we increased our accrual for litigation-related matters by $334 million in the third quarter of 2008. This accrual is in addition to $368 million of previously established accruals related to this matter. On October 10, 2008, we appealed the damage award. A hearing is scheduled for June 5, 2009.
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On February 14, 2002, we, and certain of our subsidiaries, filed suit for patent infringement against Johnson & Johnson and Cordis alleging that certain balloon catheters and stent delivery systems sold by Johnson & Johnson and Cordis infringe five U.S. patents owned by us. The complaint was filed in the U.S. District Court for the Northern District of California seeking monetary and injunctive relief. On October 15, 2002, Cordis filed a counterclaim alleging that certain balloon catheters and stent delivery systems sold by us infringe three U.S. patents owned by Cordis and seeking monetary and injunctive relief. On December 6, 2002, we filed an amended complaint alleging that two additional patents owned by us are infringed by the Cordis’ products. On October 31, 2007, a jury found that we infringe a patent of Cordis. The jury also found four of our patents invalid and infringed by Cordis. No damages were determined because the judge found that Cordis failed to submit evidence sufficient to enable a jury to make a damage assessment. On April 9, 2009, the District Court awarded Cordis a post judgment royalty on certain sales after November 2007. We intend to appeal the jury’s findings regarding infringement, as well as the District Court’s damages award.

On January 13, 2003, Cordis filed suit for patent infringement against Boston Scientific Scimed and us alleging that our Express 2® coronary stent infringes a U.S. patent owned by Cordis. The suit was filed in the U.S. District Court for the District of Delaware seeking monetary and injunctive relief. We filed a counterclaim alleging that certain Cordis products infringe a patent owned by us. On August 4, 2004, the Court granted a Cordis motion to add our Liberté® coronary stent and two additional patents to the complaint. On June 21, 2005, a jury found that our TAXUS® Express 2®, Express 2®, Express® Biliary, and Liberté® stents infringe a Johnson & Johnson patent and that the Liberté® stent infringes a second Johnson & Johnson patent. With respect to our counterclaim, a jury found on July 1, 2005, that Johnson & Johnson’s Cypher®, Bx Velocity®, Bx Sonic® and Genesis™ stents infringe our patent. On March 31, 2009, the Court of Appeals upheld the District Court’s decision that Johnson & Johnson’s Cypher®, Bx Velocity®, Bx Sonic® and Genesis™ stent systems infringe our patent and that the patent is valid. The Court of Appeals instructed the District Court to dismiss with prejudice the infringement claims against our TAXUS Liberté® stent. The Court of Appeals affirmed the District Court’s ruling that our TAXUS® Express 2®, Express 2®, Express® Biliary, and Liberté® stents infringe one Johnson & Johnson patent and that the patent is valid. The Court of Appeals also affirmed that our Liberté® stent infringes a second Johnson & Johnson patent and that the patent is valid. Damages will be determined in a future court proceeding. In conjunction with the March 31, 2009 Court of Appeals decision, we recorded a litigation-related charge of $237 million during the first quarter of 2009.  This amount represents an estimate of the low end of the range of potential outcomes related to this matter.  The range is subject to substantial estimation, including attempting to determine the possible future findings of a jury.  As such, the high end of the range cannot be reasonably estimated at this time. Both parties have filed a request for a rehearing and a rehearing en banc with the Court of Appeals.

On March 13, 2003, Boston Scientific Scimed and we filed suit for patent infringement against Johnson & Johnson and Cordis, alleging that its Cypher® drug-eluting stent infringes one of our patents. The suit was filed in the U.S. District Court for the District of Delaware seeking monetary and injunctive relief. Cordis filed a counterclaim against us alleging that the patent is not valid and is unenforceable. On July 1, 2005, a jury found that Johnson & Johnson’s Cypher® drug-eluting stent infringes the patent and upheld the validity of the patent. On January 15, 2009, the U.S. Court of Appeals reversed the lower Court’s decision and found the patent invalid. On February 12, 2009, we filed a request for a rehearing and a rehearing en banc with the U.S. Court of Appeals and on March 24, 2009, our request was denied. We are considering our options for further appellate review.
 
On August 5, 2004, we (through our subsidiary Schneider Europe GmbH) filed suit in the District Court of Brussels, Belgium against the Belgian subsidiaries of Johnson & Johnson, Cordis and Janssen Pharmaceutica alleging that Cordis’ Bx Velocity® stent, Bx Sonic® stent, Cypher® stent, Cypher® Select stent, Aqua T3™ balloon and U-Pass balloon infringe one of our European patents and seeking injunctive and monetary relief. On September 12, 2008, the District Court issued a decision and ruled that a technical expert be appointed. On December 1, 2008, we filed a partial appeal of the decision in the Brussels Court of Appeals. In December 2005, the Johnson & Johnson subsidiaries filed a nullity action in France. On January 25, 2008, we filed a counterclaim infringement action in France, and a hearing is scheduled for December 1, 2009. In January 2006, the same Johnson & Johnson subsidiaries filed nullity actions in Italy and Germany. On October 23, 2007, the German Federal Patent Court found the patent valid. We then filed a counterclaim infringement action in Italy and an infringement action in Germany. On February 10, 2009, the District Court of Dusseldorf issued a decision dismissing the German infringement action. On March 24, 2009, we filed an appeal with the Court of Appeals in Dusseldorf, Germany. A hearing is scheduled in Italy for October 7, 2009.
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On May 12, 2004, we filed suit against two of Johnson & Johnson’s Dutch subsidiaries, alleging that Cordis’ Bx Velocity® stent, Bx Sonic® stent, Cypher® stent, Cypher® Select stent, and Aqua T3 balloon delivery systems for those stents, and U-Pass angioplasty balloon catheters infringe one of our European patents. The suit was filed in the District Court of The Hague in The Netherlands seeking injunctive and monetary relief. On June 8, 2005, the Court found the Johnson & Johnson products infringe our patent. An appeal decision was received on March 15, 2007, finding the patent valid but not infringed. We appealed the finding and on March 6, 2009, the Dutch Supreme Court dismissed our appeal.
 
On September 27, 2004, Boston Scientific Scimed filed suit against a German subsidiary of Johnson & Johnson alleging the Cypher® drug-eluting stent infringes one of our European patents. The suit was filed in Mannheim, Germany seeking monetary and injunctive relief. A hearing was held on September 21, 2007, in Mannheim, Germany, and a further hearing is scheduled for August 7, 2009.

On November 29, 2007, Boston Scientific Scimed filed suit against a German subsidiary of Johnson & Johnson alleging the Cypher® and Cypher® Select drug-eluting stents infringe one of our European patents. The suit was filed in Mannheim, Germany seeking monetary and injunctive relief. On October 17, 2008, the Court ruled that a technical expert be appointed to evaluate infringement. A hearing has been scheduled for August 7, 2009.

On September 25, 2006, Johnson & Johnson filed a lawsuit against us, Guidant and Abbott in the U.S. District Court for the Southern District of New York. The complaint alleges that Guidant breached certain provisions of the amended merger agreement between Johnson & Johnson and Guidant (Merger Agreement) as well as the implied duty of good faith and fair dealing. The complaint further alleges that Abbott and we tortiously interfered with the Merger Agreement by inducing Guidant’s breach. The complaint seeks certain factual findings, damages in an amount no less than $5.5 billion and attorneys’ fees and costs. On August 29, 2007, the judge dismissed the tortious interference claims against us and Abbott and the implied duty of good faith and fair dealing claim against Guidant. On February 20, 2009, Johnson & Johnson filed a motion to amend its complaint to reinstate its tortious interference claims against us and Abbott and to add additional breach allegations against Guidant. On March 27, 2009, we filed an opposition to the motion. A trial date has not yet been scheduled.

On October 17, 2008, Cordis Corporation filed a complaint for patent infringement against us alleging that our TAXUS® Liberté® stent product, when launched in the United States, will infringe a U.S. patent owned by them. The suit was filed in the United States District Court of Delaware seeking monetary and injunctive relief. A preliminary injunction hearing is scheduled for May 27, 2009.

Litigation with St. Jude Medical, Inc.  

Guidant Sales Corp., Cardiac Pacemakers, Inc. (CPI) and Mirowski are plaintiffs in a patent infringement suit originally filed against St. Jude Medical, Inc. and its affiliates in November 1996 in the District Court in Indianapolis. On March 1, 2006, the District Court issued a ruling related to damages which granted St. Jude’s motion to limit damages to a subset of the accused products but which denied their motion to limit damages to only U.S. sales. On March 26, 2007, the District Court issued a ruling which found the patent infringed but invalid. On December 18, 2008, the Court of Appeals upheld the District Court’s ruling of infringement and overturned the invalidity ruling. On January 21, 2009, St. Jude and we filed requests for rehearing and rehearing en banc with the Court of Appeals. On March 6, 2009 the Court of Appeals granted St. Jude’s request for a rehearing en banc on a damages issue and denied our requests. The en banc hearing has been set for May 29, 2009.
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Litigation with Medinol Ltd.
 
On September 25, 2002, we filed suit against Medinol alleging Medinol’s NIRFlex™ and NIRFlex™ Royal products infringe a patent owned by us. The suit was filed in the District Court of The Hague, The Netherlands seeking cross-border, monetary and injunctive relief. On September 10, 2003, the Dutch Court ruled that the patent was invalid. On December 14, 2006, an appellate decision was rendered upholding the trial court ruling. On March 6, 2009, the Dutch Supreme Court reversed the appellate court decision and sent the case back to the appellate court for further proceedings.

Other Stent System Patent Litigation

On August 6, 2008, Boston Scientific Scimed and we filed suit against Wall Cardiovascular Technologies, in the U.S. District Court for the District of Delaware seeking a declaratory judgment of invalidity and unenforceability due to inequitable conduct and prosecution history laches of a U.S. patent owned by them, and of non-infringement of the patent by our PROMUS® coronary stent system. On January 2, 2009, we filed an amended complaint to include noninfringement of the patent by our TAXUS® Liberté® stent delivery system and to add Cardio Holdings LLC as a defendant. On February 27, 2009, Wall and Cardio Holdings filed a motion to dismiss.

On March 16, 2009, OrbusNeich Medical, Inc. filed suit against us in the Eastern District of Virginia alleging that our Liberté® coronary stent system infringes two U.S. patents owned by them. The complaint also alleges breach of contract and misappropriation of trade secrets and seeks monetary and injunctive relief. On April 13, 2009, we answered denying the allegations and filed a motion to transfer the case to Minnesota as well as a motion to dismiss the state law claims. A trial has been scheduled for November 30, 2009, if the Court does not grant our motion to transfer.

CRM Litigation

Approximately 19 product liability class action lawsuits and more than 615 individual lawsuits involving approximately 1,012 individual plaintiffs remain pending in various state and federal jurisdictions against Guidant alleging personal injuries associated with defibrillators or pacemakers involved in certain 2005 and 2006 product communications. The majority of the cases in the United States are pending in federal court but approximately 244 cases are currently pending in state courts. On November 7, 2005, the Judicial Panel on Multi-District Litigation established MDL-1708 (MDL) in the United States District Court for the District of Minnesota and appointed a single judge to preside over all the cases in the MDL. In April 2006, the personal injury plaintiffs and certain third-party payors served a Master Complaint in the MDL asserting claims for class action certification, alleging claims of strict liability, negligence, fraud, breach of warranty and other common law and/or statutory claims and seeking punitive damages. The majority of claimants allege no physical injury, but sue for medical monitoring and anxiety. On July 12, 2007, we reached an agreement to settle certain claims, including those associated with the 2005 and 2006 product communications, which was amended on November 19, 2007. Under the terms of the amended agreement, subject to certain conditions, we will pay a total of up to $240 million covering up to 8,550 patient claims, including all of the claims that have been consolidated in the MDL as well as other filed and unfiled claims throughout the United States. On June 13, 2006, the Minnesota Supreme Court appointed a single judge to preside over all Minnesota state court lawsuits involving cases arising from the product communications. The plaintiffs in those cases are eligible to participate in the settlement, and activities in all Minnesota State court cases are currently stayed pending individual plaintiff’s decisions whether to participate in the settlement. More than 8,000 claims have been approved for participation in the MDL settlement.  As a result, we have made payments of approximately $225 million related to the MDL settlement and, if certain agreed-upon requirements are met, may make substantially all of the remaining $15 million payment during the second quarter of 2009. On April 6, 2009, the judge in the MDL issued an order dismissing with prejudice most of the plaintiffs’ claims which have been resolved through the settlement agreement.  Further dismissal orders are expected as additional claimants are approved for participation in the settlement.

We are aware of more than 18 Guidant product liability lawsuits pending internationally associated with defibrillators or pacemakers, including devices involved in the 2005 and 2006 product communications. Nine of those suits pending in Canada are putative class actions, seven of which are stayed pending the outcome of two lead class actions. On April 10, 2008, the Court certified a class of all persons in whom defibrillators were implanted in Canada and a class of family members with derivative claims. The second of these lead putative class actions encompasses all persons in whom pacemakers were implanted in Canada. A hearing on whether this putative class action should be certified concluded on February 12, 2009.
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Securities Related Litigation

On September 23, 2005, Srinivasan Shankar, on behalf of himself and all others similarly situated, filed a purported securities class action suit in the U.S. District Court for the District of Massachusetts on behalf of those who purchased or otherwise acquired our securities during the period March 31, 2003 through August 23, 2005, alleging that we and certain of our officers violated certain sections of the Securities Exchange Act of 1934. Four other plaintiffs, on behalf of themselves and all others similarly situated, each filed additional purported securities class action suits in the same Court on behalf of the same purported class. On February 15, 2006, the Court ordered that the five class actions be consolidated and appointed the Mississippi Public Employee Retirement System Group as lead plaintiff. A consolidated amended complaint was filed on April 17, 2006. The consolidated amended complaint alleges that we made material misstatements and omissions by failing to disclose the supposed merit of the Medinol litigation and DOJ investigation relating to the 1998 NIR ON® Ranger with Sox stent recall, problems with the TAXUS® drug-eluting coronary stent systems that led to product recalls, and our ability to satisfy FDA regulations concerning medical device quality. The consolidated amended complaint seeks unspecified damages, interest, and attorneys’ fees. The defendants filed a motion to dismiss the consolidated amended complaint on June 8, 2006, which was granted by the Court on March 30, 2007. On April 16, 2008, the First Circuit reversed the dismissal of only plaintiff’s TAXUS® stent recall related claims and remanded the matter for further proceedings. On February 25, 2009, the Court certified a class of investors who acquired our securities during the period November 30, 2003 through July 15, 2004. A trial has not yet been scheduled.

Governmental Proceedings – Guidant

On January 16, 2007, the French Competition Council (Conseil de la Concurrence which is one of the bodies responsible for the enforcement of antitrust/competition law in France) issued a Statement of Objections alleging that Guidant France SAS (Guidant France) had agreed with the four other main suppliers of implantable cardiac defibrillators (ICDs) in France to collectively refrain from responding to a 2001 tender for ICDs conducted by a group of seventeen (17) University Hospital Centers in France. This alleged collusion is alleged to be contrary to the French Commercial Code and Article 81 of the European Community Treaty. On December 19, 2007, the Council found that the suppliers had violated competition law and assessed monetary fines, however, each of the suppliers were fined amounts considerably less than originally recommended. The French Ministry of the Economy and Finance filed an incidental recourse seeking aggravated sanctions against all defendants. On April 8, 2009, the Paris Court of Appeals dismissed the Minister's request for increased sanctions and confirmed the monetary fines previously assessed.

Other Proceedings   

On July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain of our Schneider Worldwide subsidiaries and Pfizer Inc. and certain of its affiliates as defendants, alleging that Pfizer failed to pay Dr. Bonzel amounts owed under a license agreement involving Dr. Bonzel’s patented Monorail® balloon catheter technology. This and similar suits were dismissed in state and federal courts in Minnesota. On April 24, 2007, we received a letter from Dr. Bonzel’s counsel alleging that the 1995 license agreement with Dr. Bonzel may have been invalid under German law.  On October 5, 2007, Dr. Bonzel filed a complaint against us and Pfizer in Kassel, Germany, alleging the 1995 license agreement is invalid under German law and seeking monetary damages. On May 16, 2008, we answered denying the allegations in the complaint. A hearing has been scheduled for May 8, 2009.

FDA Warning Letters
 
In January 2006, legacy Boston Scientific 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
 
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plan relating to three site-specific warning letters issued to us in 2005 was inadequate. We have identified solutions to the quality system issues cited by the FDA and have made significant progress in transitioning our organization to implement those solutions. The FDA reinspected a number of our facilities and, in October 2008, informed us that our quality system is now in substantial compliance with its Quality System Regulations. The FDA has approved all of our requests for final approval of Class III submissions previously on hold due to the corporate warning letter and has approved all eligible requests for Certificates to Foreign Governments. The corporate warning letter remains in place pending final remediation of certain Medical Device Report filing issues, which we are actively working with the FDA to resolve. We have informed the FDA that we are ready for reinspection of the impacted sites and expect reinspections to begin shortly.
 
During the first quarter of 2009, we acquired a third-party sterilization facility currently subject to a warning letter from the FDA. The FDA has requested documentation and explanation regarding various corrective actions related to the facility. This information has been provided and we are currently working with the FDA to resolve remaining issues. We do not expect this warning letter to have an impact on the resolution of our corporate warning letter.  

Matters Concluded Since January 1, 2009

On April 2, 1997, Ethicon and other Johnson & Johnson subsidiaries filed a cross-border proceeding in The Netherlands alleging that the NIR® stent infringes a European patent licensed to Ethicon. In January 1999, Johnson & Johnson amended the claims of the patent and changed the action from a cross-border case to a Dutch national action. The Dutch Court asked the Dutch Patent Office for technical advice on the validity of the amended patent. On August 31, 2005, the Dutch Patent Office issued its technical advice that the amended patent was valid and on October 8, 2008, the Dutch Court found the patent valid. In light of a prior finding of noninfringement, we have determined not to appeal the finding.

On March 1, 2006, Medtronic Vascular, Inc. filed suit against Boston Scientific Scimed and us, alleging that our balloon products infringe four U.S. patents owned by Medtronic Vascular. The suit was filed in the U.S. District Court for the Eastern District of Texas seeking monetary and injunctive relief. On January 23, 2009, the parties executed a settlement and stand-still agreement settling the action.

On April 4, 2005, Angiotech and we filed suit against Sahajanand Medical Technologies Pvt. Ltd. in The Hague, The Netherlands seeking a declaration that Sahajanand’s drug-eluting stent products infringe patents owned by Angiotech and licensed to us. On May 3, 2006, the Court found that the asserted patents were infringed and valid, and provided for injunctive and monetary relief. On January 27, 2009, the Court of Appeals affirmed that the patent was valid and infringed by Sahajanand.

On August 12, 2008, we filed suit for patent infringement against Medtronic, Inc. and certain of its subsidiaries alleging that the sale of certain balloon catheters and stent delivery systems infringe four U.S. patents owned by us. The complaint was filed in the United States District Court for the Northern District of California seeking monetary and injunctive relief. On January 23, 2009, the parties executed a settlement and stand-still agreement and the case was dismissed on January 29, 2009.

On July 25, 2007, the U.S. District Court for the Northern District of California granted our motion to intervene in an action filed February 15, 2006 by Medtronic Vascular and certain of its affiliates against Advanced Cardiovascular Systems, Inc. and Abbott Laboratories. As a counterclaim plaintiff in this litigation, we were seeking a declaratory judgment of patent invalidity and of non-infringement by our PROMUS® coronary stent system relating to two U.S. patents owned by Medtronic. On January 23, 2009, the parties executed a settlement and stand-still agreement and the case was dismissed on January 30, 2009.

On August 12, 2008, we and Endovascular Technologies, Inc. filed suit for patent infringement against Medtronic, Inc. and certain of its subsidiaries alleging that the sale of Medtronic’s AAA products infringe ten U.S. patents owned by the us. The complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division, seeking monetary and injunctive relief. On January 23, 2009, the parties executed a settlement and stand-still agreement and the case was dismissed on February 2, 2009.

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On August 13, 2008, Medtronic, Inc. and certain of its subsidiaries filed suit for patent infringement against us, Boston Scientific Scimed, Inc., Abbott and certain of Abbott’s subsidiaries alleging infringement of one U.S. patent owned by them. The complaint was filed in the United States District Court for the Eastern District of Texas, Marshall Division, seeking monetary and injunctive relief. On January 23, 2009, the parties executed a settlement and stand-still agreement and the case was dismissed on February 2, 2009.

On April 4, 2007, SciCo Tec GmbH filed suit against us alleging certain of our balloon catheters infringe a U.S. patent owned by SciCo Tec GmbH. The suit was filed in the U. S. District Court for the Eastern District of Texas seeking monetary and injunctive relief. On May 10, 2007, SciCo Tec filed an amended complaint alleging certain additional balloon catheters and stent delivery systems infringe the same patent. On February 7, 2009, the parties settled this suit and on April 20, 2009, the parties executed a definitive settlement agreement. On May 6, 2009, the District Court dismissed the case with prejudice.

On April 19, 2007, SciCo Tec GmbH, filed suit against us and our subsidiary, Boston Scientific Medizintechnik GmbH, alleging certain of our balloon catheters infringe a German patent owned by SciCo Tec GmbH. The suit was filed in Mannheim, Germany.   On February 7, 2009, the parties settled this suit and on April 21, 2009, the parties executed a definitive settlement agreement.

On March 26, 2002, we and our wholly owned subsidiary, Target Therapeutics, Inc., filed suit for patent infringement against Cordis alleging that certain detachable coil delivery systems infringe three U.S. patents, owned by or exclusively licensed to Target. The complaint was filed in the U.S. District Court for the Northern District of California seeking monetary and injunctive relief. On February 27, 2009, the parties executed a definitive settlement agreement and on March 11, 2009, the case was formally dismissed.

On December 16, 2005, Bruce N. Saffran, M.D., Ph.D. filed suit against us alleging that our TAXUS® Express® coronary stent system infringes a patent owned by Dr. Saffran. The suit was filed in the U.S. District Court for the Eastern District of Texas and seeks monetary and injunctive relief. On February 11, 2008, the jury found that our TAXUS® Express® and TAXUS® Liberté® stent products infringe Dr. Saffran’s patent and that the patent is valid. No injunction was requested, but the jury awarded damages of $431 million. The District Court awarded Dr. Saffran $69 million in pre-judgment interest and entered judgment in his favor. On March 16, 2009, Bruce N. Saffran, M.D., PhD. and we agreed to settle all outstanding litigation between us. As a result of this agreement, we recorded a litigation-related charge of $50 million during the first quarter of 2009. A joint motion to dismiss the appeal with prejudice was granted on March 20, 2009. On April 3, 2009, a related complaint was also dismissed.

With respect to ANCURE System claims, Guidant litigated coverage claims with its insurers in the Circuit Court of DuPage County Illinois and the Superior Court of Marion County, Indiana. Three of the insurers settled in 2008 and Guidant settled with the other insurers in March 2009. In April 2009, both the Illinois and the Indiana lawsuits were dismissed.


NOTE M – SEGMENT REPORTING

During the first quarter of 2009, we reorganized our international structure to provide more direct sales focus in the marketplace. Accordingly, we have revised our reportable segments to reflect the way we currently manage and view our business. Each of our reportable segments generates revenues from the sale of medical devices. As of March 31, 2009, 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 Asia Pacific and the Americas. The reportable segments represent an aggregate of all operating divisions within each segment. We measure and evaluate our reportable segments based on segment net sales and operating income. We exclude from segment operating income certain corporate and manufacturing-related expenses, as our corporate and manufacturing functions do not meet the definition of a segment, as defined
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by FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. In addition, certain transactions or adjustments that our Chief Operating Decision Maker considers to be non-recurring and/or non-operational, such as amounts related to acquisition-, divestiture-, litigation- and restructuring-related activities; as well as amortization expense, are excluded from segment operating income. Although we exclude these amounts from segment operating income, they are included in reported consolidated operating income and are included in the reconciliation below.

We manage our international operating segments on a constant currency basis. Sales generated from reportable segments and divested businesses, as well as operating results of reportable segments and expenses from manufacturing operations, are based on internally derived standard currency exchange rates, which may differ from year to year, and do not include intersegment profits. We have restated the segment information for the first quarter of 2008 based on our standard currency exchange rates used for 2009, in order to remove the impact of currency fluctuations. In addition, we have reclassified previously reported segment results to be consistent with the 2009 presentation. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographic distribution that would occur if the segments were not interdependent. A reconciliation of the totals reported for the reportable segments to the applicable line items in our unaudited condensed consolidated statements of operations is as follows:

   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2009
   
2008
 
             
Net sales
           
             
United States
  $ 1,170     $ 1,117  
EMEA
    473       457  
Japan
    207       211  
Inter-Continental
    168       156  
Net sales allocated to reportable segments
    2,018       1,941  
Sales generated from divested businesses
    4       32  
Impact of foreign currency fluctuations
    (12 )     73  
    $ 2,010     $ 2,046  
                 
(Loss) income before income taxes
               
                 
United States
  $ 274     $ 280  
EMEA
    228       217  
Japan
    116       126  
Inter-Continental
    78       75  
Operating income allocated to reportable segments
    696       698  
Manufacturing operations
    (106 )     (101 )
Corporate expenses and currency exchange
    (127 )     (67 )
Acquisition-, divestiture-, litigation-, and restructuring- related net (charges) credits
    (324 )     193  
Amortization expense
    (128 )     (143 )
      11       580  
Other expense
    (108 )     (118 )
    $ (97 )   $ 462  

 
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NOTE N – NEW ACCOUNTING PRONOUNCEMENTS

Statement No. 141(R)

In December 2007, the FASB issued Statement No. 141(R), Business Combinations, a replacement for Statement No. 141. Statement No. 141(R) retains the fundamental requirements of Statement No. 141, but requires the recognition of all assets acquired and liabilities assumed in a business combination at their fair values as of the acquisition date. It also requires the recognition of assets acquired and liabilities assumed arising from contractual contingencies at their acquisition date fair values. Additionally, Statement No. 141(R) supersedes 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 be recognized as an intangible asset and amortized over its estimated useful life. We are required to adopt Statement No. 141(R) prospectively for any acquisitions on or after January 1, 2009. During the first quarter of 2009, we did not consummate any material business combinations.

Statement No. 161

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, which amends Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. Statement No. 161 requires increased qualitative, quantitative, and credit-risk disclosures, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position and financial performance.  We adopted Statement No. 161 as of the first quarter ended March 31, 2009. Refer to Note B – Financial Instruments for these disclosures.
 
 
 
 
 
 
 
 
 
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ITEM 2.                   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Introduction
 
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our business strategy is to lead global markets for less-invasive medical devices by developing and delivering products and therapies that address unmet patient needs, provide superior clinical outcomes and demonstrate compelling economic value. We intend to achieve leadership, drive profitable sales growth and increase shareholder value by focusing on:

·    
Customers
·    
Innovation
·    
Quality
·    
People
·    
Financial strength

In the first quarter of 2008, we completed the divestiture of certain non-strategic businesses. We are involved in several post-closing separation activities through transition service agreements, some from which we continue to generate net sales. These transition service agreements expire throughout 2009 and 2010. Refer to Strategic Initiatives and Note G – Divestitures to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report for a description of these business divestitures.
 
 
Financial Summary

Our net sales for the first quarter of 2009 were $2.010 billion, including sales from divested businesses of $4 million, as compared to net sales of $2.046 billion for the first quarter of 2008, including sales from divested businesses of $32 million, a decrease of $36 million or two percent. Excluding the impact of foreign currency, which contributed a negative $85 million to net sales, and sales from divested businesses, our net sales increased four percent for the first quarter of 2009, as compared to the same period in the prior year. See Quarterly Results for a discussion of our net sales. Our reported net loss for the first quarter of 2009 was $13 million, or $0.01 per share, as compared to net income of $322 million, or $0.21 per share, for the first quarter of 2008. Our reported results for the first quarter of 2009 included acquisition-, divestiture-, litigation- and restructuring-related charges; and discrete tax items (after-tax) of $201 million, or $0.13 per share, consisting primarily of:

·    
$240 million ($287 million pre-tax) of litigation-related charges associated with various litigation matters;
·    
$26 million ($37 million pre-tax) of restructuring and restructuring-related charges associated with our Plant Network Optimization and 2007 Restructuring plans; and
·    
a $63 million credit, on both a pre-tax and after-tax basis, for discrete tax items related to certain tax positions associated with prior period divestiture-related credits.
 
Our reported results for the first quarter of 2008 included acquisition-, divestiture-, litigation- and restructuring-related net credits (after-tax) of $74 million, consisting of gains of $114 million associated with the divestiture of certain of our non-strategic businesses, partially offset by $32 million of restructuring and restructuring-related costs, and $8 million of purchased research and development charges.

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Business and Market Overview

Cardiac Rhythm Management

Net sales of our Cardiac Rhythm Management (CRM) products (excluding Electrophysiology) represented approximately 29 percent of our consolidated net sales for the first quarter of 2009 and 28 percent in the first quarter of 2008. We estimate that the worldwide CRM market will approach $11.0 billion in 2009. Worldwide CRM market growth rates over the past three years, including the implantable converter defibrillator (ICD) market, have been below those experienced in prior years, resulting primarily from previous industry field actions and a lack of new indications for use. However, for the last five consecutive quarters, we have seen consistent growth in the worldwide ICD market.

The following are the components of our worldwide CRM sales:
 
(in millions)
 
Three Months Ended
March 31, 2009
   
Three Months Ended
March 31, 2008
 
   
U.S.
   
International
   
Total
   
U.S.
   
International
   
Total
 
ICD systems
  $ 312     $ 132     $ 444     $ 274     $ 137     $ 411  
Pacemaker systems
    84       61       145       82       72       154  
CRM products
    396       193       589       356       209       565  
Electrophysiology products
    29       8       37       29       9       38  
Total CRM
  $ 425     $ 201     $ 626     $ 385     $ 218     $ 603  
 
Our U.S. sales of CRM products in the first quarter of 2009 increased $40 million, or 11 percent, as compared to the first quarter of 2008, representing the fourth consecutive quarter of double digit growth. Our U.S. sales benefited from an increase in the size of the U.S. CRM market and from the successful launch of our next-generation COGNIS® cardiac resynchronization therapy defibrillator (CRT-D) and TELIGEN® ICD systems, as well as the launches of our CONFIENT® ICD system, the LIVIAN® CRT-D system, and the ALTRUA™ family of pacemaker systems. 

Our international CRM product sales decreased $16 million in the first quarter of 2009, or eight percent, as compared to the first quarter of 2008, due primarily to foreign currency exchange, which contributed a negative $27 million to first quarter 2009 sales as compared to the same period in the prior year. In addition, our net sales and market share in Japan have been negatively impacted as we move to a direct sales model for our CRM products in this region and, until we fully implement this model, our net sales and market share in Japan may continue to be negatively impacted.

During 2008, we received more than a dozen new CRM product approvals. We will continue to expand our product pipeline and expect to begin offering our LATITUDE® Patient Management System in certain European countries in the second quarter of 2009. The LATITUDE® technology, which enables physicians to monitor device performance remotely while patients are in their homes, is a key component of many of our implantable device systems. In addition, we expect to launch our COGNIS® and TELIGEN® systems in Japan in the fourth quarter of 2009, subject to regulatory approval. We also plan to launch our next-generation pacemaker system, INGENIO™, in the U.S., our EMEA (Europe/Middle East/Africa) region and certain Inter-Continental countries in the first half of 2011 and believe that these launches position us for sustainable growth 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 net sales from our CRM products could have a significant impact on our results of operations. We believe we are well positioned within the CRM market; however, the following variables may impact the size of the CRM market and/or our share of that market:

·  
our ability to maintain the trust and confidence of the implanting physician community, the referring physician community and prospective patients in our technology;

·  
future product field actions or new physician advisories by us or our competitors;

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·  
our ability to successfully launch next-generation products and technology;

·  
the successful conclusion and positive outcomes of on-going and future clinical trials that may provide opportunities to expand indications for use;

·  
variations in clinical results, reliability or product performance of our and our competitors’ products;

·  
delayed or limited regulatory approvals and unfavorable reimbursement policies;

·  
our ability to retain key members of our sales force and other key personnel;

·  
new competitive launches; and

·  
average selling prices and the overall number of procedures performed.


Coronary Stents

Net sales of our coronary stent systems represented approximately 24 percent of our consolidated net sales in the first quarters of 2009 and 2008. During the first quarter of 2009, we increased our leadership position in the worldwide drug-eluting stent market with an estimated 44 percent market share. The size of the coronary stent market is driven primarily by the number of percutaneous coronary intervention procedures performed, as well as the percentage of those that are actually stented; the number of devices used per procedure; average selling prices; and the drug-eluting stent penetration rate (a measure of the mix between bare-metal and drug-eluting stents used across procedures). We estimate that the worldwide coronary stent market will approximate $5.0 billion in 2009. Uncertainty regarding the efficacy of drug-eluting stent systems, as well as the perceived risk of late stent thrombosis1 following the use of drug-eluting stent systems, contributed to a decline in the worldwide drug-eluting stent market size during 2006 and 2007. However, data addressing this risk and supporting the safety of drug-eluting stent systems positively affected trends in the growth of the drug-eluting stent market throughout 2008 and into 2009, as referring cardiologists regained confidence in this technology.

We are the only company in the industry to offer a two-drug platform strategy with our TAXUS® paclitaxel-eluting stent system and the PROMUS® everolimus-eluting stent system. The following are the components of our worldwide coronary stent system sales:
 
(in millions)
 
Three Months Ended
March 31, 2009
   
Three Months Ended
March 31, 2008
 
   
U.S.
   
International
   
Total
   
U.S.
   
International
   
Total
 
TAXUS®
  $ 132     $ 162     $ 294     $ 218     $ 192     $ 410  
PROMUS®
    114       37       151               18       18  
Drug-eluting
    246       199       445       218       210       428  
Bare-metal
    16       28       44       26       36       62  
    $ 262     $ 227     $ 489     $ 244     $ 246     $ 490  

U.S. sales of our drug-eluting stent systems increased $28 million, or 13 percent, in the first quarter of 2009, as compared to the same period in the prior year. Despite an increase in competition following two new market entrants in 2008, during the first quarter of 2009, we maintained our leadership position with an estimated 50 percent share of the U.S. drug-eluting stent market, as compared to 47 percent share during the fourth quarter
__________________
1  Late stent thrombosis is the formation of a clot, or thrombus, within the stented area one year or more after implantation of the stent.
 
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of 2008 and 50 percent share during the first quarter of 2008. Included in our net sales for the first quarter of 2009 was a $14 million reduction of our sales returns reserves following the completion of our planned transition from our TAXUS® Express2 drug-eluting stent system to our second-generation TAXUS Liberté®  stent system. We believe we have maintained our position within the U.S. drug-eluting stent market due to the success of our two-drug platform strategy and the strength of the TAXUS® Liberté® stent system and our TAXUS® Express2® Atom™ stent system, both of which we launched in the U.S. during the fourth quarter of 2008. In addition, increases in the number of stent procedures performed in the U.S. during the first quarter of 2009, as compared to the same period in the prior year, as well as increasing penetration rates, have had a positive effect on the size of the U.S. drug-eluting stent market and our net sales. Average drug-eluting stent penetration rates in the U.S. were 75 percent during the first quarter of 2009, as compared to 63 percent during the first quarter of 2008. Penetration rates in the U.S. have steadily increased for five consecutive quarters, indicating the on-going recovery of the U.S. drug-eluting stent market. Partially offsetting the impact of increased penetration rates on the market were reductions in average selling prices in the first quarter of 2009, as compared to the first quarter of 2008, due to competitive pricing pressure.

Our international drug-eluting stent system sales decreased $11 million, or five percent, in the first quarter of 2009 as compared to the first quarter of 2008, due primarily to the impact of foreign currency exchange, which contributed a negative $16 million to our first quarter sales, as compared to the same period in the prior year. Within our international business, net sales of our drug-eluting stent systems in Japan increased $13 million, or 23 percent, driven primarily by the February launch of our second-generation TAXUS® Liberté® stent system. We estimate that our share of the drug-eluting stent market in Japan was 54 percent for the first quarter of 2009, as compared to 44 percent for the first quarter of 2008. We expect to launch PROMUS® Element™ in our EMEA region and certain Inter-Continental countries in late 2009 and in the U.S. and Japan in mid-2012. We expect to launch the PROMUS® everolimus-eluting coronary stent system during the fourth quarter of 2009 in Japan, subject to regulatory approval.

In July 2008, Abbott Laboratories launched its XIENCE V™ everolimus-eluting coronary stent system in the U.S., and, simultaneously, we launched the PROMUS® everolimus-eluting coronary stent system, supplied to us by Abbott. As of the closing of Abbott’s 2006 acquisition of Guidant Corporation’s vascular intervention and endovascular solutions businesses, we obtained a perpetual license to the intellectual property used in Guidant’s 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 a PROMUS® stent system is significantly lower than that of our TAXUS® stent system. The PROMUS® stent system has operating profit margins that approximate half of our TAXUS® stent system operating profit margin. Therefore, if sales of the PROMUS® stent system 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. Further, the price we pay for our supply of PROMUS® stent systems is determined by our contracts with Abbott.  Our cost is based, in part, on previously fixed estimates of Abbott’s manufacturing costs for PROMUS® stent systems and third-party reports of our average selling price of PROMUS® stent systems. Amounts paid pursuant to this pricing arrangement are subject to a retroactive adjustment at pre-determined intervals based on Abbott’s actual costs to manufacture these stent systems for us and our average selling price of PROMUS® stent systems. During 2009, we may make a payment to or receive a payment from 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 case, with respect to our purchases of PROMUS® stent systems from Abbott during 2006, 2007 and a portion of 2008. As a result, during 2009, we may record a gain or loss based on this retroactive adjustment, and our on-going profit margins on the PROMUS® stent system may increase or decrease.

We are reliant on Abbott for our supply of PROMUS® stent systems. Any production or capacity issues that affect Abbott’s manufacturing capabilities or the process for forecasting, ordering and receiving shipments may impact their ability to increase or decrease the level of supply to us in a timely manner; therefore, our supply of PROMUS® stent systems may not align with customer demand, which could have an adverse effect on our operating results. At present, we believe that our supply of PROMUS® stent systems from Abbott is sufficient to meet custo