Boston Scientific Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Boston Scientific develops and sells medical devices across Cardiovascular, Rhythm Management, and MedSurg. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1.888B | $1.846B | $5.499B | $5.493B |
| Gross profit | $1.349B | $1.296B | $3.899B | $3.842B |
| Gross margin | 71.5% | 70.2% | 70.9% | 69.9% |
| Operating income (loss) | $(299)M | $64M | $(56)M | $191M |
| Net income (loss) | $(198)M | $43M | $(97)M | $180M |
| Diluted EPS | $(0.15) | $0.03 | $(0.07) | $0.13 |
| Operating cash flow | $408M | $346M | $271M | $829M |
Management reported non-GAAP adjusted net income of $326M ($0.24 per share) for Q3 and $905M ($0.67 per share) for the first nine months, excluding specified items including litigation, amortization, acquisition-related and restructuring charges. These are non-GAAP measures and are not substitutes for reported results.
- Revenue and segments: Reported sales rose 2% in Q3 and were essentially flat for the nine-month period. Excluding foreign-exchange effects and divested businesses, management reported growth of 9% and 7%, respectively. Q3 constant-currency growth was strongest in Urology and Pelvic Health (50%, including the AMS acquisition), Peripheral Interventions (13%), and Endoscopy (7%); CRM was flat.
- Margins and expenses: Gross margin improved, mainly from manufacturing cost reductions, partly offset by pricing and product mix. Q3 SG&A fell to $729M from $741M, while R&D increased to $221M from $212M. Q3 included $457M of litigation-related charges; nine-month litigation charges were $649M.
- Cash and liquidity: At September 30, cash was $350M, working capital $1.224B, and total debt $5.859B. Nine-month operating cash flow was $271M, down from $829M, primarily reflecting $600M paid in the Johnson & Johnson settlement. Investing cash outflow was $2.016B, including $1.642B for acquisitions; financing cash inflow was $1.513B.
- Debt and covenants: Debt increased from $4.262B at December 31, 2014. The company issued $1.85B of senior notes, took a $750M term loan, and redeemed $1.0B of older notes. It reported covenant compliance; leverage was 3.1x against a 4.5x maximum, and interest coverage was 6.7x against a 3.0x minimum. The $2.0B revolving facility had no borrowings outstanding.
Material changes and unusual items
- Completed the $1.616B upfront acquisition of Endo’s AMS male urology portfolio on August 3, 2015, with up to $50M additional consideration tied to 2016 sales. The acquisition contributed about $57M of Q3 Urology and Pelvic Health sales. The company also acquired Xlumena and made strategic investments in Preventice and Frankenman.
- Reported losses chiefly reflect unusual charges: Q3 litigation charges of $457M, acquisition/divestiture-related net charges of $80M, amortization of $131M, and pension termination charges of $36M. Nine-month results also included a $45M debt-extinguishment charge.
- The company recorded $10M of intangible impairment charges in Q3 and $19M for the nine months, versus $177M for the comparable 2014 nine-month period. The annual goodwill test found reporting-unit fair values above carrying values, but Electrophysiology was identified as more exposed to a potential future impairment test.
Outlook, risks, and contingencies
- No specific consolidated revenue or earnings guidance is stated in the supplied filing text. Management expects the 2014 restructuring plan to generate approximately $175M–$225M of annual gross expense reductions exiting 2016, with a substantial portion reinvested in growth; plan costs are estimated at $250M–$300M.
- Management said cash, expected operating cash flow, capital-market access, and available credit should be sufficient for operations, investment, legal liabilities, and debt service over the next 12 months. This outlook depends on operating performance, market access, and legal and tax outcomes.
- Legal matters are significant. Accrued legal reserves were $1.559B at quarter-end. More than 30,000 transvaginal mesh product-liability cases or claims were pending as of November 2, 2015; settlement agreements covering over 6,000 cases and claims were reported, subject to participation thresholds. Further losses could materially affect results, cash flow, liquidity, or covenant compliance.
- The IRS asserted $1.162B plus interest in proposed tax liabilities for specified years, principally concerning transfer pricing. The company disputes the assessments and considers its reserves adequate, but states final resolution could materially affect its financial condition, results, or cash flows. Gross unrecognized tax benefits were $1.086B.
- Other risks include foreign-exchange exposure, competitive and pricing pressure, reimbursement and regulatory changes, product performance and approval risks, acquisition integration, contingent consideration (up to approximately $1.893B undiscounted), and overdue receivables in certain European countries. Management reported $28M of net receivables in Italy, Spain, Portugal, and Greece more than 180 days past due.
Most important facts for investors to verify
- Whether sales growth excluding currency effects translates into sustained reported growth, especially after acquisition contributions and foreign-exchange headwinds.
- Whether cash generation recovers after the settlement-related outflow and can support the higher debt burden, acquisition integration, and future legal payments.
- The development of mesh litigation settlements, participation thresholds, legal reserves, and any additional judgments or cash requirements.
- Progress and outcomes in the IRS tax disputes, including whether assessments or reserve changes create material cash or earnings impacts.
- Execution of the AMS integration and restructuring savings, and the risk of additional contingent consideration or impairment charges.
- Covenant headroom and liquidity under the company’s debt agreements, including the effect of litigation, tax, and operating results.