Boston Scientific Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Boston Scientific develops, manufactures, and sells medical devices globally across Cardiovascular, Rhythm Management, and MedSurg. The results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1.964 billion | $1.768 billion |
| Gross profit / margin | $1.391 billion / 70.8% | $1.248 billion / 70.6% |
| Operating income | $293 million | $24 million |
| Net income (loss) | $202 million | ($1 million) |
| Diluted EPS | $0.15 | ($0.00) |
| Cash from operations | $116 million | ($197 million) |
- Sales increased 11% as reported and 13% excluding foreign-exchange effects; currency reduced Q1 2016 sales by $58 million. Management-reported adjusted net income was $378 million, or $0.28 per diluted share, versus $286 million, or $0.21, in Q1 2015. These are non-GAAP measures.
- Gross margin improved 0.2 percentage points. Manufacturing cost reductions contributed 1.8 points, partly offset by acquired-inventory step-up charges, currency, pricing/mix, and other costs. The AMS inventory step-up charge was $22 million.
- Operating cash flow improved by $313 million year over year, mainly because Q1 2015 included a $300 million payment to Johnson & Johnson under a $600 million settlement.
- Cash and cash equivalents were $338 million at quarter-end; working capital was $556 million. Total debt was $5.677 billion, including $253 million current debt and $5.424 billion long-term debt. Interest expense was $59 million; the average borrowing rate was 3.9%.
- The company had no borrowings under its $2.0 billion revolving facility and reported covenant compliance. Actual leverage was 2.9x against a 4.5x maximum; interest coverage was 7.0x against a 3.0x minimum.
Changes versus the prior comparable period
- Growth was strongest in MedSurg, with reported sales up 26%, including Urology and Pelvic Health up 85%; approximately $98 million of the latter’s sales came from the AMS portfolio acquired in August 2015. Cardiovascular sales rose 11% and Rhythm Management declined 4%.
- Cardiac Rhythm Management sales fell 5%, reflecting lower defibrillator replacement volumes, CRT-D declines in some regions, and competitive share losses; pacemaker revenue grew on a constant-currency basis.
- Operating income rose substantially, in part because litigation-related charges fell to $10 million from $193 million in Q1 2015. Reported net income also benefited from lower unusual charges. The effective tax rate was 11.4%, compared with 97.5%, with the difference driven by items taxed at different rates and discrete tax items.
- SG&A rose 7% in dollars but declined as a share of sales, to 36.5% from 37.8%. R&D increased 9% in dollars and declined slightly as a share of sales.
Outlook, commentary, risks, and unusual items
- Management said cash, expected operating cash generation, capital-market access, and available facilities should fund operations, investment, legal liabilities, and debt service for the next 12 months. No full-year revenue or earnings guidance is stated in the provided filing text.
- The 2014 restructuring plan is expected to produce approximately $200 million in gross annual expense reductions by the end of 2016, with a substantial portion reinvested in growth. Estimated total charges are $255–$270 million; $242 million had been recorded through March 31, 2016.
- Watchman FLX’s European initial market release was suspended near quarter-end after a higher-than-expected device embolization rate; the company was evaluating the data. The filing also noted expected FDA approval of the Lotus Valve System in late 2017, subject to regulatory review.
- Legal exposure remains significant. Accrued legal reserves were $1.895 billion. More than 36,000 transvaginal mesh-related cases or claims had been asserted as of May 2, 2016; settlement agreements covered approximately 11,000, of which approximately 6,000 had been settled. The company cautioned that outcomes and future accruals could materially affect results, cash flows, or liquidity.
- Tax disputes with the IRS include proposed incremental tax liability of $1.162 billion plus interest for specified years, principally involving transfer pricing. The company contests the assessments; final resolution is uncertain and could materially affect financial results or cash flows. Accrued gross tax interest and penalties were $516 million.
- Other risks include patent and product-liability litigation, regulatory and reimbursement changes, competition and pricing, foreign exchange, acquisition integration, and product performance. The company reported no material subsequent events requiring adjustment.
Most important facts for investors to verify
- Whether constant-currency growth and adjusted earnings are sustained, and how they reconcile to GAAP results.
- Whether restructuring savings materialize as planned and how much is reinvested versus retained.
- Developments in transvaginal mesh claims, the IRS tax dispute, and other material litigation, including cash payments and reserve adequacy.
- Watchman FLX evaluation outcomes and the commercial and regulatory progress of key product launches.
- Cash generation, debt maturities, covenant headroom, and the company’s ability to fund legal and other obligations.