Boston Scientific Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Boston Scientific develops and sells medical devices across cardiovascular, digestive, respiratory, urological, pelvic-health and neurological markets. The quarter began in line with management expectations, but COVID-19-related postponements of elective and semi-emergent procedures materially affected sales as the pandemic spread.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $2.543 billion | $2.493 billion; up 2.0% reported and 3.2% operational |
| Gross profit / margin | $1.737 billion / 68.3% | $1.763 billion / 70.7% |
| Operating income | $146 million | $541 million |
| Net income | $11 million; $0.01 diluted EPS | $424 million; $0.30 diluted EPS |
| Adjusted net income / diluted EPS | $391 million / $0.28 | $490 million / $0.35 |
| Operating cash flow | $(77) million | $350 million |
| Cash and cash equivalents | $370 million at March 31 | $217 million at December 31, 2019 |
| Total debt | $10.336 billion | $10.008 billion at December 31, 2019 |
| Working capital | $848 million | — |
Q1 GAAP results included $380 million of after-tax charges and credits, or $0.27 per diluted share, in management’s reconciliation to adjusted earnings. Adjustments included amortization, intangible-asset impairments, acquisition-related items, restructuring and tax items. Adjusted results are non-GAAP measures and should be considered alongside GAAP results.
Gross margin fell 2.4 percentage points. Management cited $26 million of excess and obsolete inventory charges related to lower expected demand, $18 million of amortization of the BTG inventory fair-value step-up, and pricing pressure, partly offset by manufacturing savings and favorable currency effects. The reported effective tax rate was 52.3%, compared with 7.1% a year earlier; management attributed the change mainly to geographic earnings mix and the tax treatment of specified charges and receipts.
At quarter-end, current assets were $4.823 billion and current liabilities were $3.976 billion. Cash, cash equivalents and restricted cash totaled $700 million, including $288 million of current and $42 million of long-term restricted cash. The company reported a 4.10x leverage ratio against a 4.50x covenant maximum as of March 31 and said it was compliant.
Material changes versus the prior-year quarter
- Reported sales rose 2.0%, but acquisitions contributed $157 million of Q1 2020 sales without comparable prior-period sales; foreign exchange reduced reported growth by 120 basis points.
- Performance varied by business: Cardiovascular sales increased 5.5%, including BTG-related growth in Peripheral Interventions; Rhythm and Neuro sales declined 7.2%, including an 11.0% decline in Cardiac Rhythm Management. MedSurg grew 1.1%.
- Operating income and GAAP net income declined substantially. Q1 2019 included a $148 million litigation-related net credit, while Q1 2020 included higher impairment charges and a $108 million contingent-consideration benefit.
- Operating cash flow moved from $350 million provided to $77 million used. The filing attributes the broader operating environment to COVID-19 disruption but does not give a complete quantified bridge for this year-over-year cash-flow change.
Outlook, management commentary and risks
- Management expected Q2 2020 to be more adversely affected than Q1 as procedure deferrals continued. It anticipated sequential improvement in gross margin and operating expenses in Q3 and further improvement in Q4, while warning that 2020 performance would remain negatively affected. The filing provides no specific sales or earnings guidance.
- Management expected near-term gross-margin pressure from idle manufacturing capacity and higher operating expenses as a percentage of sales because approximately 70% of operating expenses were fixed. Cost actions included reduced travel and events, hiring restrictions, lower clinical and certain R&D activity, temporary reduced workweeks and compensation, and manufacturing adjustments.
- On April 21, 2020, after quarter-end, the company entered into a $1.25 billion term loan to support liquidity and amended credit covenants. Amendments set deemed quarterly EBITDA of $671 million for Q2–Q4 2020 and raised the permitted leverage ratio to 4.75x through the remainder of 2020, with step-downs beginning Q1 2021. Management said it believed it could comply with the amended covenant for the next 12 months.
- Management stated that cash, expected operating cash generation, capital-market access and existing credit facilities should fund operations and obligations for the next 12 months. This outlook depends on procedure recovery, cash generation, access to funding and covenant compliance. The company anticipated deferred payroll-tax payments would help preserve cash.
- COVID-19 risks include continued procedure cancellations, a potentially constrained recovery due to patient reluctance or provider capacity, supply-chain or site disruptions, lower collections and cash flows, and heightened leverage, impairment and liquidity risks. Management said the pandemic’s duration and financial impact were difficult to predict.
- Legal matters include approximately 54,000 asserted transvaginal surgical mesh cases or claims as of April 22, 2020; agreements in principle or final stages covered approximately 52,000, of which approximately 46,000 had met settlement conditions and were final. The company reported $413 million of accrued legal matters at March 31 and warned that further losses could materially affect results, cash flows or covenant compliance.
- Other unusual items included $198 million of intangible-asset impairment charges, primarily related to acquired developed technology and changes to commercialization or R&D plans; a $108 million contingent-consideration benefit reflecting reduced milestone expectations; and no litigation-related net charge in Q1 2020. Q1 2019 included the Edwards settlement credit.
Most important facts for investors to verify
- How procedure volumes, sales and the expected recovery trajectory developed after Q1, particularly against management’s warning that Q2 would be more severely affected.
- Whether margins and operating cash flow recover as anticipated, and whether fixed costs, inventory charges and manufacturing utilization continue to pressure results.
- Liquidity, total debt and covenant compliance under the April 2020 amendments, including the effect of additional borrowing and slower-than-expected recovery.
- Progress and final costs of mesh and other litigation, and whether legal accruals or contingent obligations require revision.
- Whether further impairments, acquisition-related adjustments or changes to milestone estimates arise, and how GAAP results compare with management’s non-GAAP measures.