Business context and reporting period
Boston Scientific Corporation is a global medical-device company. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.631B | $2.490B | $5.124B | $4.870B |
| Gross profit / margin | $1.873B / 71.2% | $1.751B / 70.3% | $3.636B / 71.0% | $3.458B / 71.0% |
| Operating income | $384M | $392M | $925M | $799M |
| GAAP net income | $154M | $555M | $578M | $853M |
| GAAP diluted EPS | $0.11 | $0.40 | $0.41 | $0.61 |
| Adjusted net income / diluted EPS (non-GAAP) | $550M / $0.39 | $568M / $0.41 | $1.040B / $0.74 | $1.023B / $0.73 |
- Reported sales increased 5.6% in Q2 and 5.2% for the six months. Management reported operational growth, excluding currency effects, of 8.0% and 7.9%, respectively; foreign exchange reduced reported growth by 2.4 and 2.7 percentage points.
- Q2 gross margin improved year over year, chiefly from manufacturing cost reductions and favorable currency effects, partly offset by product mix. Six-month margin was unchanged.
- Operating cash flow was $642M for the first six months, versus cash used of $210M in 2018. Investing used $1.030B, including $763M for acquisitions; financing provided $2.383B.
- At June 30, cash and equivalents were $123M, total debt $9.541B (versus $7.056B at year-end), and working capital $1.484B. Cash included $2.298B of restricted proceeds earmarked for the proposed BTG acquisition; it was not freely available for general use. Commercial paper outstanding was $1.946B, leaving $804M of program capacity. The company reported covenant compliance and a 2.72x leverage ratio against a 3.75x maximum; acquisition-prefunding debt was excluded from that calculation.
Material changes versus prior period
- GAAP net income declined substantially, while adjusted earnings were down in Q2 but modestly higher for the six-month period. Comparisons were affected by unusual items and tax effects: Q2 2018 included a $209M income-tax benefit, while 2019 included acquisition-related and currency-hedging costs. Adjusted results exclude specified items and are non-GAAP.
- Q2 reportable sales growth was strongest in Urology and Pelvic Health (+13.0%) and MedSurg (+9.0%); Rhythm and Neuro grew 1.4%. Cardiac Rhythm Management sales were nearly flat. Growth in U.S. pacemakers and neuromodulation was challenged by competitive pressure and market weakness, respectively.
- SG&A rose to 36.8% of sales in Q2 from 35.6%, reflecting acquisition initiatives and commercial launches. Six-month SG&A remained 35.9% of sales.
- Debt increased following a February $4.3B senior-notes issuance intended partly to finance BTG; proceeds also refinanced near-term notes and a term loan.
Outlook, commentary and risks
- Management said available cash, operating cash generation, capital-market access and credit facilities should be sufficient for the next 12 months, including operations, legal liabilities, debt service and potential acquisitions. No specific full-year revenue or earnings guidance is stated in the supplied filing text.
- The proposed BTG acquisition, valued at approximately $4.2B, was expected to become effective in August 2019, subject to conditions. Financing included $2.298B in restricted cash and $2.0B of delayed-draw term-loan commitments. If the acquisition failed to close by the specified deadline, certain notes would be subject to mandatory redemption at 101% of principal. On July 2, the parties announced an agreement to sell Boston Scientific’s embolic microsphere portfolio to Varian, conditional on completion of the BTG acquisition.
- BTG-related forward currency contracts generated a $151M Q2 loss and a $116M net loss for the first six months, recorded in other expense; management noted the impact would be recognized until settlement.
- Legal accruals were $604M at June 30, down from $929M at year-end, mainly reflecting mesh-case settlement payments. Approximately 53,000 mesh-related cases or claims had been asserted; about 42,000 of approximately 52,000 covered by settlement agreements had met conditions and were final. Further losses remain possible and could affect earnings, cash flow and covenant capacity.
- The FDA ordered manufacturers to stop U.S. sales and distribution of transvaginal mesh products for pelvic organ prolapse; Boston Scientific said it ceased global sales and distribution of those products. Risks also include product liability and intellectual-property litigation, regulation and reimbursement changes, supply and sterilization disruptions, foreign-exchange exposure, taxes, and international-market and Brexit uncertainty.
Most important facts for investors to verify
- Progress, closing conditions, funding and any redemption implications for the BTG acquisition, including the planned Varian portfolio sale.
- Whether reported sales growth and margins persist after currency effects and acquisition contributions are considered.
- The drivers of the gap between GAAP and adjusted earnings, especially tax effects, acquisition-related costs and BTG hedge losses.
- Cash available for general purposes versus restricted cash, debt maturities, commercial-paper refinancing capacity and covenant headroom.
- Updates to mesh litigation settlements and accruals, and any related cash payments or additional legal exposure.