Boston Scientific Corporation — 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016; the requested “2016 Q4” is the fourth quarter within that annual report. Boston Scientific develops and sells medical devices across Cardiovascular, Rhythm Management and MedSurg, through seven core businesses. Approximately 43% of 2016 sales were international.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $8.386 billion | $7.477 billion |
| Gross profit / margin | $5.962 billion / 71.1% | $5.304 billion / 70.9% |
| Operating income (loss) | $447 million | $(327) million |
| Net income (loss) | $347 million; diluted EPS $0.25 | $(239) million; diluted EPS $(0.18) |
| Operating cash flow | $972 million | $600 million |
| Capital expenditures | $376 million | $247 million |
| Total debt | $5.484 billion | $5.677 billion |
| Cash and cash equivalents | $196 million | $319 million |
| Working capital | $(348) million | $1.041 billion |
Management’s non-GAAP adjusted net income was $1.534 billion, or $1.11 per diluted share, versus $1.267 billion, or $0.93 per share, in 2015. These measures exclude significant charges, including litigation, amortization, acquisition and restructuring items, and are not GAAP measures. 2016 included $804 million of litigation-related charges and $545 million of amortization expense. Interest expense was $233 million, down from $284 million.
Fourth-quarter 2016 net sales were $2.191 billion, operating income was $140 million and net income was $124 million, or $0.09 per diluted share. Fourth-quarter 2015 sales were $1.978 billion, with an operating loss of $271 million and net loss of $142 million.
Material changes versus the prior comparable period
- Full-year sales increased 12% reported and 12% on a constant-currency basis; foreign exchange reduced reported sales by $99 million. Growth was broad, with notable contributions from acquired businesses.
- Urology and Pelvic Health sales rose 45% to $1.005 billion, including approximately $226 million from the AMS male urology acquisition. Interventional Cardiology grew 12% to $2.281 billion; Endoscopy grew 10% to $1.440 billion; Neuromodulation grew 11% to $556 million.
- Cardiac Rhythm Management sales increased 2% to $1.850 billion. Pacemaker sales rose to $576 million from $494 million, while defibrillator sales declined to $1.274 billion from $1.313 billion.
- Gross margin improved 20 basis points. Manufacturing cost reductions were the main benefit; currency, pricing/mix and inventory-related items partly offset the improvement.
- Cash from operations increased $372 million, primarily reflecting improved net income, partly offset by roughly $100 million more in litigation payments. Investing cash outflow fell to $887 million from $2.186 billion, principally because 2015 included substantially larger acquisition spending.
- Reported results returned to profitability, although litigation charges remained substantial. The 2016 reported tax benefit was $170 million, producing a highly unusual reported effective tax rate; management attributed the rate largely to items taxed at different rates and discrete tax effects.
Outlook, management commentary, risks and unusual items
- Management expects existing cash, operating cash generation and access to capital markets and credit facilities to fund operations, investment, legal liabilities, taxes, acquisitions and debt service. It planned approximately $300 million of 2017 capital expenditures; no specific consolidated revenue or earnings guidance is provided in the filing text.
- The 2016 restructuring plan is expected to be substantially complete by the end of 2018, incur $175–$225 million of pre-tax charges and reduce gross annual expenses by approximately $115–$150 million by the end of 2020. Management expects to reinvest a substantial portion of savings in growth initiatives.
- Boston Scientific expected to resume the Lotus valve platform in Europe and other regions in Q4 2017, submit a U.S. PMA application for Lotus EDGE in Q4 2017 and target a U.S. launch in mid-2018. These plans follow voluntary removals: Lotus EDGE inventory was withdrawn in October 2016, and all Lotus valve devices were removed from commercial and clinical sites globally in February 2017 over reports of premature release of a connecting pin. The company attributed the issue to manufacturing-process tension in the pin mechanism.
- The Watchman FLX European initial release was suspended in 2016 after a higher-than-expected device embolization rate; design enhancements were being pursued before a return to market.
- Mesh-related product liability is a major contingency. As of February 21, 2017, approximately 43,000 transvaginal surgical mesh cases or claims had been asserted; agreements in principle or final stages covered approximately 31,000, with about 12,000 meeting settlement conditions and final. The legal accrual was $2.023 billion at year-end 2016. Further losses and cash payments remain possible; the company is substantially self-insured for product liability.
- A proposed IRS transfer-pricing resolution remained contingent. If finalized, expected net tax payments were approximately $275 million plus interest, anticipated within nine to 18 months. Failure to finalize could materially affect financial condition, results or cash flows.
- Other principal risks include pricing and reimbursement pressure, competition and product performance, regulatory approvals and quality, clinical outcomes, acquisition integration, supply interruptions, currency exposure, tax uncertainty, patent disputes, cybersecurity and covenant compliance. The company reported compliance with debt covenants and investment-grade ratings at all three major agencies.
- The 2.3% U.S. medical-device excise tax was suspended through December 31, 2017; its status afterward was uncertain. The filing also noted uncertainty around healthcare policy changes and Brexit-related economic and regulatory effects.
Most important facts for investors to verify
- Whether reported sales growth and margins persist after separating organic growth, acquisition contributions, foreign exchange and non-GAAP adjustments.
- Future cash costs, settlement participation and ultimate exposure from mesh litigation, and whether the $2.023 billion legal accrual proves adequate.
- Execution and commercial timing of the Lotus remediation, Watchman FLX redesign and other clinical or regulatory programs.
- Final IRS settlement terms, payment timing and the effect of any change in U.S. tax policy or medical-device excise tax.
- Liquidity and refinancing needs given the working-capital deficit, cash balance, debt maturities and substantial legal and tax commitments.
- Whether restructuring savings and acquired-business integration deliver expected benefits without disrupting manufacturing, quality or sales.