Boston Scientific Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Boston Scientific develops and sells medical devices across cardiovascular, digestive, respiratory, urological, pelvic-health and neurological markets. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change or context |
|---|---|---|---|
| Net sales | $2,379 | $2,160 | Up 10.1% reported; up 6.2% operational, excluding currency effects |
| Gross profit / margin | $1,707 / 71.7% | $1,510 / 69.9% | Margin increased 1.8 percentage points |
| Operating income | $407 | $364 | Up $43 |
| Net income | $298 | $290 | Diluted EPS was $0.21 in both periods |
| Adjusted net income and diluted EPS | $455 / $0.33 | $397 / $0.29 | Non-GAAP; excludes specified items |
| Operating cash flow | $193 | $(7) | Improved $200, principally from lower mesh-related litigation payments and working-capital changes |
| Total debt | $5,765 | $5,616 at Dec. 31, 2017 | Quarter-end cash and cash equivalents were $287 |
SG&A was $860, or 36.1% of sales, versus $794, or 36.8%; R&D was $261, about 11% of sales, versus $235. Interest expense was $61 versus $57. The effective tax rate was 8.0%, compared with 4.9%.
Quarter-end total current assets were $4,080 and current liabilities $4,988, a working-capital deficit of $908. Cash, cash equivalents and restricted cash totaled $1,168, including $881 of restricted cash; only $287 was reported as cash and cash equivalents. Operating, investing and financing cash flows were $193, $(173) and $130, respectively. Investing outflows included $60 of capital spending and $103 for strategic investments and technology acquisitions, principally the Millipede investment.
Business trends and changes versus prior year
- All three reportable segments grew operationally: MedSurg 7.4%, Rhythm and Neuro 6.4%, and Cardiovascular 5.2%. Neuromodulation was reassigned from MedSurg to the newly created Rhythm and Neuro segment effective January 1, 2018; prior-year segment figures were recast.
- Emerging Markets sales grew 17.2% operationally and represented 10.7% of sales, versus 9.6% a year earlier.
- Gross margin benefited from manufacturing-cost reductions and restructuring efficiencies, as well as a prior-year Lotus valve removal impact; currency movements partly offset these gains. SG&A declined as a share of sales amid cost-reduction initiatives.
- Reported 2018 income included $157 of after-tax charges, or $0.11 per share, compared with $107, or $0.08 per share, in Q1 2017. Adjusted results are non-GAAP and should be considered alongside GAAP results.
Liquidity, outlook, risks and unusual items
- Management said available cash, operating cash generation, capital-market access and credit facilities should fund operations, investment, legal payments, taxes and debt service for the next 12 months. At quarter-end, $886 of commercial paper was outstanding; reported availability was $1,364 under the commercial-paper/revolving facility and $330 under the receivables-secured facility. The leverage covenant was 2.2x against a 3.5x maximum, and the company reported covenant compliance.
- In February, the company issued $1,000 of 4.0% senior notes due 2028, using proceeds partly to repay $600 of notes due in October 2018 and partly to reduce commercial paper. Total debt rose from year-end; commercial paper declined. A working-capital deficit and reliance on short-term commercial paper and receivables programs remain relevant liquidity considerations.
- The 2016 restructuring plan was expected to incur total pre-tax costs of $275–$325 and generate $165–$175 of annual gross expense reductions by the end of 2020, with a substantial portion reinvested in growth. The plan was expected to be substantially complete by the end of 2018.
- The company reported a $1,511 accrual for probable and estimable legal matters. Approximately 49,500 mesh-related product-liability cases or claims had been asserted; agreements in principle or final stages covered about 47,500, of which about 21,000 had met settlement conditions and were final. The company cautioned that additional losses could materially affect results, cash flows or liquidity.
- An IRS transfer-pricing dispute remained contingent. If the settlement conditions are finalized, the company expected net tax payments of approximately $275 plus interest, potentially within six months. The IRS had asserted $1,162 plus interest for the relevant years; the company said reserves were adequate but warned that failure to finalize the settlement could have a material effect.
- Q1 adoption of revenue-recognition Topic 606 reduced opening retained earnings by $177, primarily for future non-contractual post-implant support costs, and added related liabilities. The company also recorded an $852 provisional net tax benefit related to the Tax Cuts and Jobs Act; estimates and tax analysis remained subject to refinement.
- After quarter-end, the company announced closing the nVision acquisition on April 16 and NxThera on April 30. NxThera involved $306 upfront and up to $100 in milestones before the effect of an existing minority investment; nVision involved $150 upfront and up to $125 in milestones. These transactions were not included in quarter-end results.
- No specific consolidated earnings or sales guidance was provided in the supplied filing text. Management described product launches, innovation, international expansion and cost reductions as business priorities. Risks include competition and pricing, product and regulatory matters, foreign exchange, litigation, tax uncertainty, reimbursement, acquisitions and execution of restructuring plans.
Important facts for investors to verify
- Whether operational growth and margin improvement persist after separating currency effects, product mix and restructuring benefits.
- Progress and cash requirements for mesh settlements, other litigation and the contingent IRS resolution.
- Liquidity and refinancing needs, including commercial-paper maturities, the working-capital deficit and legal-payment outflows.
- Integration, commercial performance and contingent payments associated with Millipede, nVision and NxThera.
- Final effects of Topic 606 and the Tax Cuts and Jobs Act estimates as additional information and guidance become available.