Boston Scientific Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Boston Scientific develops and sells medical devices across Cardiovascular, Rhythm Management, and MedSurg. Reported Q2 sales declined amid substantial foreign-exchange headwinds, while sales grew on a constant-currency basis. Management’s constant-currency and adjusted earnings measures are non-GAAP.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $1,843 | $1,873 | $3,611 | $3,647 |
| Gross profit / margin | $1,303 / 70.7% | $1,310 / 69.9% | $2,551 / 70.6% | $2,547 / 69.8% |
| Operating income (loss) | $219 | $(69) | $243 | $128 |
| Net income | $102 | $4 | $101 | $137 |
| Diluted EPS | $0.08 | $0.00 | $0.07 | $0.10 |
| Operating cash flow | $60 | $286 | $(137) | $483 |
- Q2 sales fell 2% as reported; excluding currency effects and divested businesses, sales increased 6%. Currency reduced Q2 sales by $141 million. First-half sales fell 1% as reported but increased 6% on the same adjusted basis; currency reduced sales by $258 million.
- Q2 GAAP net income was $102 million, versus $4 million a year earlier. Management reported adjusted net income of $294 million ($0.22 per share), versus $285 million ($0.21 per share); these are non-GAAP figures. First-half adjusted net income was $580 million ($0.43 per share), versus $553 million ($0.41 per share).
- Gross margin improved primarily from manufacturing cost reductions and restructuring/process improvements, partly offset by pricing and product mix. Q2 R&D expense rose 7% to $220 million; SG&A declined 6% to $700 million.
- At June 30, cash and cash equivalents were $903 million; working capital was $1.836 billion. Total debt was $5.112 billion, up from $4.262 billion at year-end 2014. Current debt was $43 million and long-term debt $5.069 billion.
- First-half operating cash use of $137 million was mainly attributed to $600 million of payments under the Johnson & Johnson settlement. Cash increased by $316 million to $903 million, supported by $752 million of financing cash flow.
Material changes and significant transactions
- Q2 constant-currency growth was strongest in Peripheral Interventions (+16%), Interventional Cardiology (+7%), Endoscopy (+6%), and Neuromodulation (+9%). CRM sales declined 1% on a constant-currency basis, reflecting lower U.S. replacement procedures and pacemaker sales; segment growth rates are company-reported.
- In May, Boston Scientific issued $1.85 billion of senior notes, including 2020, 2022, and 2025 maturities, and redeemed $1.0 billion of higher-coupon notes. The refinancing generated a $45 million debt-extinguishment charge. Debt and interest expense increased.
- On August 3, 2015, after quarter-end, the company completed its $1.6 billion cash acquisition of Endo’s American Medical Systems male urology portfolio, with a potential additional $50 million sales-based payment. Funding included $750 million cash, a $750 million term loan, and approximately $175 million drawn under the receivables-backed credit facility.
- Other strategic activity included the April acquisition of Xlumena for approximately $63 million upfront plus contingent payments, and minority investments in Preventice and Frankenman.
Outlook, risks, and unusual items
- Management said available cash, expected operating cash generation, capital-market access, and credit facilities should fund operations, investment, legal liabilities, acquisitions, and debt service for the next 12 months. No specific full-year sales or earnings guidance is provided in the filing text.
- The 2014 restructuring plan is expected to yield $175–$225 million of gross annual expense reductions exiting 2016, with a substantial portion reinvested in growth. Estimated total charges are $250–$300 million; activities were expected to be substantially complete by end-2015, with certain plant-network actions continuing into 2016.
- The company expects an additional approximately $50 million pension termination charge in Q4 2015. Q2 2015 also included $9 million of intangible impairment, $49 million of acquisition/divestiture-related net charges, and $45 million of debt-extinguishment charges. Q2 2014 included $110 million of impairment charges and $267 million of litigation charges.
- Legal accruals were $1.117 billion at June 30, down from $1.577 billion at year-end. More than 27,000 transvaginal mesh product-liability cases or claims were pending as of August 5; settlement agreements covering specified groups were subject to claimant-participation conditions. The company cautioned that additional losses may be accrued and paid.
- The IRS has asserted $1.162 billion plus interest in proposed tax adjustments for 2001–2007, with further proposed adjustments for 2008–2010 based on related transfer-pricing issues. Boston Scientific disputes the positions, says reserves are adequate, and warns resolution could materially affect results, financial condition, or cash flows.
- The company identified its Electrophysiology reporting unit as more exposed to a future goodwill impairment test; its fair value exceeded carrying value by about 28% at the annual test. Other principal risks include pricing and competition, product performance and regulatory approvals, reimbursement, litigation, foreign exchange, tax disputes, acquisition integration, and receivables collection. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether constant-currency growth translates into reported growth, particularly given CRM weakness, pricing pressure, and foreign-exchange exposure.
- Post-acquisition leverage, liquidity, integration costs, and performance of the AMS portfolio, including any contingent payment.
- Cash-flow trends after the $600 million settlement payments and further legal and restructuring cash outlays.
- Developments in mesh litigation and IRS disputes, including accrual adequacy and potential cash or covenant effects.
- Progress against restructuring savings and the expected Q4 pension termination charge; monitor Electrophysiology impairment assumptions.