Boston Scientific Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars unless noted.
Business context and financial performance
Boston Scientific develops, manufactures and sells medical devices across cardiovascular, rhythm and neurology, and MedSurg businesses. It completed the acquisition of BTG plc on August 19, 2019; BTG contributed $71 million of sales through September 30.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2.707 billion | $2.393 billion | $7.831 billion | $7.262 billion |
| Operating income | $383 million | $388 million | $1.308 billion | $1.187 billion |
| Net income | $126 million | $432 million | $704 million | $1.285 billion |
| Diluted GAAP EPS | $0.09 | $0.31 | $0.50 | $0.92 |
| Operating cash flow | Not provided for the quarter | $1.144 billion | $291 million |
Q3 sales rose 13.1% as reported and 14.2% operationally, with foreign exchange reducing growth by 1.1 percentage points. Nine-month sales rose 7.8% as reported and 10.0% operationally, with a 2.2-point foreign-exchange headwind. Growth reflected multiple businesses and acquired products; Q3 reported sales included $122 million from acquisitions with no prior-period sales.
Gross margin was 71.3% in Q3 versus 71.9% a year earlier, and 71.1% for nine months versus 71.3%. Management cited product mix and period expenses as drags, partly offset by manufacturing cost reductions and favorable currency effects. Q3 SG&A rose to 37.4% of sales from 36.4%; R&D was 11.3% versus 12.1%.
Balance sheet, debt and liquidity
At September 30, cash and cash equivalents were $277 million, total debt was $10.888 billion, and working capital was $593 million. Current assets were $4.847 billion and current liabilities $4.254 billion. Debt increased from $7.056 billion at December 31, 2018, primarily reflecting acquisition financing. The company reported $1.293 billion of commercial paper outstanding and $1.457 billion of available borrowing capacity under its $2.750 billion program. It was in compliance with debt covenants; its leverage ratio was 4.27x against a temporary 4.75x maximum following the BTG acquisition.
Cash used for investing activities was $4.992 billion for the first nine months, including $4.382 billion for acquisitions. Financing activities provided $3.697 billion. These flows, together with operating cash generation, resulted in a $153 million decrease in cash, cash equivalents and restricted cash from the start of the year. Management said existing cash, operating cash flow, capital-market access and credit facilities were expected to be sufficient for the next 12 months to fund operations, investment, legal liabilities and debt service.
Material changes, outlook and notable items
- BTG acquisition: The acquisition added $1.549 billion of preliminary goodwill and $1.869 billion of preliminary identifiable intangible assets; purchase accounting remained preliminary. The company borrowed $2.0 billion under delayed-draw term loans and used other financing to fund the transaction. It also sold an embolic microsphere portfolio to Varian for $90 million and recorded a $16 million guarantee liability related to transferred contingent consideration.
- Earnings comparability: Q3 GAAP net income fell to $126 million from $432 million, despite sales growth. Results included $207 million of Q3 and $323 million of nine-month losses on currency contracts used to hedge the BTG purchase price. Q3 “other, net” also compared with $126 million of income in 2018, which included acquisition-related gains on previously held investments.
- Adjusted results: Management reported Q3 adjusted net income of $550 million, or $0.39 per diluted share, versus $485 million, or $0.35, in 2018. Nine-month adjusted net income was $1.590 billion, or $1.13 per share, versus $1.508 billion, or $1.08. These are non-GAAP measures and exclude specified charges and credits.
- Legal and regulatory matters: The company had $568 million accrued for probable and estimable legal matters. Approximately 53,000 mesh-related cases or claims had been asserted; about 43,500 were reported as having met settlement conditions. The company ceased sales of surgical mesh products for transvaginal pelvic organ prolapse after an FDA order. Further litigation losses could affect earnings, cash flow and covenant compliance.
- Other uncertainties: Risks include medical-device regulation and reimbursement, product liability and intellectual-property litigation, reliance on third-party suppliers and sterilizers, foreign exchange and international-market exposure, tax disputes, and acquisition integration. The filing provides no specific numeric earnings or sales guidance. The company was exploring a possible divestiture of the BTG-acquired Zytiga royalty stream.
Most important facts for investors to verify
- Underlying sales and operating trends excluding acquisition contributions and currency effects.
- BTG integration, final purchase-price allocation, expected benefits, and the status of any Zytiga royalty-stream divestiture.
- Debt reduction plans, interest expense, covenant headroom and refinancing or tender-offer outcomes.
- Mesh-litigation settlement participation, adequacy of legal reserves, and any new claims or cash payments.
- The sustainability of cash generation and margins, including the effects of acquisition costs, foreign exchange and product mix.