Boston Scientific Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited fourth-quarter results. Boston Scientific develops and sells medical devices across MedSurg, Rhythm and Neuro, and Cardiovascular segments; international sales represented 44% of revenue.
Financial results and key metrics
- Revenue: $9.823 billion, up 8.6% from $9.048 billion in 2017; operational growth was 8.0%, with a 0.6 percentage-point benefit from foreign exchange. Acquisitions contributed about $78 million to 2018 operational sales.
- Profit and margins: Gross profit was $7.011 billion and gross margin was 71.4%, versus 71.3% in 2017. Operating income was $1.506 billion, up from $1.285 billion. GAAP net income was $1.671 billion ($1.19 diluted EPS), compared with $104 million ($0.08) in 2017. Adjusted net income, a non-GAAP measure, was $2.060 billion ($1.47 per diluted share), versus $1.752 billion ($1.26) in 2017.
- Cash flow: Operating cash flow was $310 million, down from $1.426 billion, primarily reflecting tax settlement payments. Capital expenditures were $316 million; reported free cash flow was $8 million. Adjusted free cash flow was $2.070 billion, a non-GAAP measure that excludes specified payments and other items, including tax settlements and litigation settlements.
- Debt and liquidity: Total debt was $7.056 billion, up from $5.616 billion; $2.253 billion was current. Cash and cash equivalents were $146 million, and working capital was negative $1.257 billion. Commercial paper outstanding was $1.248 billion, with $1.502 billion of capacity available under the backed $2.750 billion program. The company reported compliance with debt covenants.
- Business growth: Neuromodulation grew 22.7%, Urology and Pelvic Health 10.8%, Peripheral Interventions 9.8%, Endoscopy 8.8%, and Interventional Cardiology 7.1%. CRM grew 2.9%, with defibrillator growth partly offset by pacemaker market-share losses.
Fourth-quarter comparison
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Net sales | $2.561 billion | $2.408 billion |
| Operating income | $319 million | $319 million |
| Net income (loss) | $386 million | ($615 million) |
| Diluted EPS | $0.27 | ($0.45) |
The large year-over-year net-income and EPS swing reflects significant unusual tax and other items in 2017; Q4 operating income was unchanged despite higher sales.
Material changes versus prior year
- Revenue rose 8.6%; segment operating income increased across all three reportable segments. Reportable segment presentation changed in 2018 when Neuromodulation moved from MedSurg to Rhythm and Neuro; comparative segment data were recast.
- Operating cash flow fell by $1.116 billion, primarily due to IRS tax settlement payments. Cash used for investing increased to $1.921 billion, including $1.448 billion of net acquisition payments.
- Debt rose by $1.440 billion. The company issued $1.0 billion of 4.0% notes due 2028 and entered new revolving and acquisition-financing facilities.
- GAAP earnings were materially affected by discrete tax benefits and acquisition-related investment remeasurement gains. In 2018, the company recorded a $249 million income tax benefit and $184 million in gains on previously held investments; 2017 results included a substantial one-time tax expense related to U.S. tax reform.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no clear consolidated revenue or EPS guidance. Management expects to continue investing in core franchises, innovation, international expansion and growth adjacencies.
- Restructuring: The 2019 plan is expected to incur $200–$300 million in pretax charges, with gross annual pretax expense reductions of $100–$150 million by the end of 2022; a substantial portion of savings is expected to be reinvested. The earlier 2016 plan is expected to reduce annual expenses by $165–$175 million by the end of 2020.
- Proposed BTG acquisition: The recommended cash offer values BTG at approximately $4.225 billion. Completion was expected in the first half of 2019, subject to shareholder, court and regulatory conditions; the FTC had requested additional information. Financing included a bridge facility and delayed-draw term loans, none drawn at year-end.
- Legal exposure: Legal accruals were $929 million at year-end, including current and long-term reserves. Approximately 53,000 transvaginal mesh cases or claims had been asserted as of February 5, 2019; settlements covering about 50,000 were in principle or final stages, with participation conditions applying. Further losses could affect earnings, cash flow and covenant capacity.
- Supply risk: A contract sterilizer’s Illinois facility was suspended in February 2019. The company said near-term inventory was adequate but warned that failure to implement alternatives could materially affect Urology and Pelvic Health in the first half of 2019.
- Other risks: Pricing and reimbursement pressure, regulatory approval and quality requirements, competition, acquisition integration, foreign exchange, cyber risk, litigation and changes in tax rules. The medical-device excise tax suspension was scheduled to end December 31, 2019; its subsequent status was uncertain.
Important facts for investors to verify
- Reconcile reported and adjusted earnings, particularly the 2018 tax benefit, prior-year tax charge and investment remeasurement gains.
- Assess the sustainability of cash generation: reported operating cash flow was $310 million and free cash flow was $8 million, while adjusted free cash flow excludes substantial tax and litigation payments.
- Review debt maturities, commercial-paper refinancing needs, covenant headroom and financing requirements for the proposed BTG transaction.
- Track the outcome and cash costs of mesh litigation, other legal matters, and the Channel Medsystems dispute.
- Monitor the sterilization transition, the impact of restructuring charges and savings, and commercial performance in slower-growing areas such as pacemakers.