BOSTON SCIENTIFIC CORP quarterly report, Q1 FY2015

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Boston Scientific Corporation — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015. Boston Scientific develops and sells medical devices across Cardiovascular, Rhythm Management and MedSurg businesses. Figures are in U.S. dollars; amounts are in millions unless noted.

Financial performance and liquidity

  • Revenue: $1,768, down $6 (approximately flat) from $1,774 a year earlier. Excluding foreign-exchange effects and divested-business sales, revenue grew 6% at constant currency. Currency movements reduced Q1 2015 sales by approximately $117.
  • Segment sales: Cardiovascular $712 (reported +2%; constant currency +10%); Rhythm Management $514 (−2%; +4%); MedSurg $542 (−1%; +4%).
  • Profit and margins: Gross profit was $1,248, or 70.6% of sales, versus $1,237 and 69.7%. Operating income was $24, compared with $197; the 2015 result included $193 of litigation charges. Net loss was $1, or approximately $0.00 per diluted share, versus net income of $133, or $0.10 per share.
  • Adjusted results (non-GAAP): Management reported adjusted net income of $286, or $0.21 per share, versus $268, or $0.20. Adjustments include litigation, restructuring, acquisition-related items, pension termination charges and amortization; these measures are not GAAP and should be considered alongside reported results.
  • Cash flow: Operating activities used $197, versus $198 provided in Q1 2014. Management attributed the decline primarily to approximately $300 of legal payments, including the Johnson & Johnson settlement, and the prior-year $80 receipt related to Spanish receivables. Investing activities used $51; financing activities used $94. Cash fell by $345 to $242.
  • Balance sheet and debt: Total debt was $4,268, compared with $4,262 at year-end; cash was $242 and working capital was $726. Current assets were $3,189 and current liabilities $2,463. The company reported compliance with its credit covenants at quarter-end: leverage ratio 2.4x against a 3.5x maximum, and interest coverage 8.0x against a 3.0x minimum. No borrowings were outstanding under its $2.0 billion revolving facility.

Changes from the prior comparable period

  • Reported sales were nearly unchanged, but constant-currency growth was 6%; all three reportable segments grew on that basis.
  • Gross margin improved by 0.9 percentage points, primarily from manufacturing cost reductions, partly offset by pricing and product mix.
  • Operating income declined sharply, with litigation-related charges moving from a $7 net credit in Q1 2014 to $193 of charges in Q1 2015. The prior-year quarter also included a $55 intangible impairment charge and a $12 divestiture gain.
  • Interest expense increased to $60 from $54. The reported effective tax rate was 97.5%, versus 8.9%; the company cited the effects of items taxed at different rates and discrete tax items.
  • Q1 2015 operating cash flow was materially weaker, largely reflecting legal payments and the absence of the prior-year Spanish receivables settlement receipt. The company paid $99 of acquisition-related contingent consideration, versus $12 a year earlier.

Outlook, commentary and significant matters

  • Management outlook: The company said existing cash, expected operating cash flow and access to capital markets and credit facilities should fund operations, investment, legal liabilities, potential acquisitions and debt service for the next 12 months. It did not provide a clear consolidated full-year revenue or earnings forecast in the supplied filing text.
  • Restructuring: The active 2014 plan is expected to produce $175–$225 of gross annual pretax operating-expense savings exiting 2015, with a substantial portion reinvested in growth. Estimated total charges are $250–$300, with $235–$285 expected to involve cash outlays; activities are expected to be substantially complete by year-end 2015.
  • Acquisitions and financing: The proposed AMS urology portfolio acquisition is for $1.6 billion upfront plus a potential $50 milestone payment, with closing expected in Q3 2015 subject to customary conditions. Subsequent to quarter-end, Boston Scientific entered into a $2.0 billion revolving facility, a conditional $750 million term loan to help fund the acquisition, and a conditional $250 million interim facility. It also acquired Xlumena in April for approximately $63 upfront, with additional potential payments.
  • Products and regulatory milestones: The company received FDA approval for WATCHMAN in March 2015 and began its U.S. commercial launch. Management expected FDA approval of the SYNERGY stent in late 2015 and the Acuity X4 lead in the first half of 2016; launch and approval timing remain uncertain.
  • Legal and tax exposures: Accrued legal reserves were $1,453 at March 31. More than 26,000 transvaginal mesh cases or claims were pending as of May 5; an April settlement agreement would pay approximately $119 to resolve 2,970 claims, subject to participation thresholds. The company also disclosed substantial unresolved tax matters: $1,056 of gross unrecognized tax benefits and ongoing IRS transfer-pricing disputes that could materially affect results, financial condition or cash flows.
  • Other unusual items: The company recorded $8 of pension termination charges and expected an additional approximately $50 charge in Q4 2015. It also reported elevated aged receivables in Italy, Spain, Portugal and Greece, including $25 more than 180 days past due.
  • Key risks: Litigation outcomes and cash settlements, tax disputes, foreign-exchange and pricing pressure, product approvals and clinical results, reimbursement and regulatory changes, acquisition integration and execution, and the company’s ability to sustain cash generation and covenant compliance.

Important facts for investors to verify

  • Whether constant-currency growth and margin improvement continue, and how much reported performance remains exposed to currency movements and pricing.
  • The timing, financing, closing conditions and eventual leverage impact of the AMS acquisition and related credit facilities.
  • The total cash cost and resolution pace of mesh litigation and other legal matters, including whether the April settlement participation thresholds are met.
  • The outcome and potential cash or earnings impact of IRS transfer-pricing disputes and other tax matters.
  • Whether restructuring savings, product launch milestones and stated regulatory timelines are achieved without disrupting operations or requiring additional charges.