Boston Scientific Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. This is an annual report, not a standalone fourth-quarter filing.
Business context and reporting period
Boston Scientific develops and sells medical devices across interventional specialties. Its three reportable segments are MedSurg, Rhythm and Neuro, and Cardiovascular; Specialty Pharmaceuticals was presented separately and classified as held for sale at year-end. The business operates globally, with international sales accounting for 42% of 2020 net sales.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $9.913 billion | $10.735 billion |
| Gross profit / gross margin | $6.448 billion / 65.0% | $7.620 billion / 71.0% |
| Operating income (loss) | $(80) million | $1.518 billion |
| Net income (loss) | $(82) million | $4.700 billion |
| Net income (loss) available to common stockholders | $(115) million | $4.700 billion |
| Diluted earnings (loss) per common share | $(0.08) | $3.33 |
| Cash provided by operating activities | $1.508 billion | $1.836 billion |
| Cash and cash equivalents | $1.734 billion | $217 million |
| Working capital | $3.013 billion | $(168) million |
| Total debt | $9.143 billion | $10.008 billion |
Management’s non-GAAP adjusted net income available to common stockholders was $1.378 billion, or $0.96 per diluted share, compared with adjusted net income of $2.234 billion, or $1.58 per share, in 2019. These measures exclude specified items and should be considered alongside GAAP results. The 2019 GAAP result included a $4.102 billion deferred tax benefit from an intra-entity intellectual-property transfer.
Operating cash flow declined $328 million, primarily because of pandemic-related revenue declines, partly offset by spending controls. Capital expenditures were $376 million. The company reported $2.750 billion of undrawn revolving credit availability and stated that cash, expected operating cash flow, capital-market access, and credit facilities should fund operations and obligations for at least 12 months. It was in compliance with its amended leverage covenant at year-end: actual leverage was 3.48 times against a 4.75-times maximum.
Material changes versus the prior comparable period
- Net sales decreased 7.7% year over year; operational sales declined 7.8%, with currency adding 0.1 percentage point. COVID-19-related postponements of elective and semi-emergent procedures were the principal driver.
- Gross margin fell 600 basis points to 65.0%. Drivers included $149 million of abnormal production costs, $119 million of LOTUS inventory charges, the WATCHMAN FLX consignment transition, unfavorable product mix, price declines, and acquisition-related inventory step-up amortization.
- Reported operating income moved from $1.518 billion to an $80 million loss. The 2020 result included $460 million of intangible-asset impairment, $73 million of goodwill impairment, $278 million of litigation-related charges, and other acquisition, restructuring, and regulatory costs.
- Segment sales declined in MedSurg (7.3%), Rhythm and Neuro (12.4%), and Cardiovascular (7.9%). Peripheral Interventions grew 13.3%, mainly due to BTG’s interventional oncology portfolio and drug-eluting products; excluding acquired BTG sales and the related divestiture effects, its sales declined 2.5%.
- Operating cash flow decreased from $1.836 billion to $1.508 billion. Total debt fell by $865 million, while cash and cash equivalents increased by $1.517 billion.
- The company issued approximately $975 million net each of common stock and mandatory convertible preferred stock in May 2020. It repurchased approximately $535 million of common stock in the fourth quarter.
Fourth-quarter 2020 sales were $2.708 billion, versus $2.905 billion in fourth-quarter 2019 and $2.659 billion in third-quarter 2020. Fourth-quarter 2020 net income was $210 million and income available to common stockholders was $196 million, or $0.14 per diluted share. Quarterly results included substantial specified charges or credits; the filing does not provide a directly comparable quarterly adjusted figure in the supplied text.
Outlook, commentary, risks, and unusual items
- Management said pandemic-related procedure delays, renewed restrictions, new variants, patient reluctance, and healthcare-provider capacity constraints could continue to pressure 2021 sales, gross margin, and operating expenses as a percentage of sales. It provided no clear numerical 2021 revenue or earnings guidance in the supplied filing text.
- Management reported improved sales trends in the second half of 2020 as deferred procedures resumed, but noted renewed restrictions in some markets late in the year. It described long-term fundamentals as strong while emphasizing substantial uncertainty.
- The company voluntarily recalled unused LOTUS Edge inventory and discontinued the LOTUS platform. It recorded $119 million of inventory charges and $8 million of intangible impairment related to the discontinuation; additional restructuring charges were expected in early 2021. The filing also describes related securities litigation and an SEC investigation.
- Legal and product-liability accruals totaled $569 million at year-end. Approximately 54,000 transvaginal surgical mesh cases or claims had been asserted as of January 27, 2021; settlement arrangements covered many claims, but further losses could be accrued. The company is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims.
- The company agreed to sell Specialty Pharmaceuticals for $800 million, subject to adjustments, with closing expected in the first half of 2021, subject to conditions. The sale led to a $73 million goodwill impairment.
- In January 2021, Boston Scientific agreed to acquire the remaining interest in Preventice for an expected net cash payment of approximately $720 million, plus up to $230 million contingent on a commercial milestone. Closing was expected in the first half of 2021, subject to conditions.
- Other key risks include competitive pricing and reimbursement pressure, regulatory approval and EU MDR implementation costs, clinical and product-performance uncertainty, supply-chain disruptions, acquisition integration, foreign-exchange exposure, cybersecurity, tax matters, and litigation. The 2019 Restructuring Plan was extended and expanded; total estimated pre-tax charges are $375 million to $475 million, with expected gross annual operating-expense savings of $200 million to $250 million by the end of 2023.
Most important facts for investors to verify
- Whether procedure volumes and sales recover, and whether 2021 pandemic effects or capacity constraints persist.
- How much of the 2020 gross-margin decline is temporary versus ongoing, including the effects of pricing, mix, and manufacturing costs.
- The composition and cash timing of litigation reserves, especially mesh claims, and the outcomes of the LOTUS-related securities matters and SEC investigation.
- Completion terms and proceeds from the Specialty Pharmaceuticals sale, and the funding and integration implications of the Preventice acquisition.
- Debt reduction, liquidity, covenant headroom, and the effect of mandatory convertible preferred dividends and eventual conversion.
- The assumptions behind adjusted earnings and impairment estimates; reported results include material non-GAAP adjustments and a significant investment remeasurement gain, including a $363 million Pulmonx gain.