Boston Scientific Corporation — Q3 2017 Form 10-Q
Business context and reporting period. Boston Scientific develops, manufactures and markets medical devices across Cardiovascular, Rhythm Management and MedSurg. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Amounts are in U.S. dollars.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2.222B | $2.105B | $6.640B | $6.195B |
| Gross profit | $1.585B | $1.511B | $4.721B | $4.390B |
| Operating income | $377M | $348M | $967M | $307M |
| Net income | $283M | $228M | $719M | $223M |
| Diluted earnings per share | $0.20 | $0.17 | $0.52 | $0.16 |
- Q3 reported sales grew 5.6%; operational sales growth, excluding currency effects, was 5.7%. Nine-month reported and operational growth were 7.2% and 7.7%, respectively.
- Gross margin was 71.3% in Q3 versus 71.8% a year earlier; nine-month margin was 71.1% versus 70.9%. Cost reductions supported margins, while currency and other period costs weighed on Q3.
- Management’s non-GAAP adjusted net income was $432M ($0.31 per share) in Q3, versus $368M ($0.27) in Q3 2016. For nine months, adjusted net income was $1.272B ($0.91 per share), versus $1.119B ($0.81). These measures exclude specified items and are not GAAP.
- Operating cash flow for the first nine months was $554M, compared with $506M. Investing cash outflow was $721M, including $392M for Symetis and $240M of capital spending; financing cash inflow was $178M. Cash and equivalents ended at $210M.
- At September 30, total debt was $5.682B, including $1.266B current debt and $4.416B long-term debt. Debt was $5.484B at December 31, 2016. The company reported a $1.350B working-capital deficit. It had $1.260B of commercial paper outstanding and stated that $990M of program capacity and a $400M receivables-backed facility were available.
Material changes and business developments
- MedSurg was the fastest-growing reportable segment in Q3: sales increased 10.2% as reported (10.3% operationally). Cardiovascular grew 4.1% (4.5% operationally); Rhythm Management grew 1.5% (1.2% operationally). CRM sales declined 0.6%, while Electrophysiology grew 17.8%.
- Q3 reported operating income improved to $377M from $348M. Nine-month operating income rose to $967M from $307M, substantially reflecting lower litigation-related charges: $196M in the first nine months of 2017 versus $632M in 2016.
- The company completed the $430M cash acquisition of Symetis in May 2017. After quarter-end, it completed the Apama Medical acquisition for $175M upfront, with up to $125M in milestone payments.
- A new $2.250B revolving credit facility, maturing in August 2022, replaced the prior $2.000B facility. The company reported covenant compliance and a leverage ratio of 2.3 times against a 3.5-times maximum.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management said existing cash, expected operating cash flows, capital-market access and credit facilities should be sufficient for operations and obligations over the next 12 months.
- The 2016 restructuring plan is expected to incur $175M–$225M of total pretax charges through 2018 and to reduce annual expenses by approximately $115M–$150M by the end of 2020. $108M of charges had been recorded through September 30, 2017.
- Management expected the Lotus EDGE valve system to return to European markets in Q1 2018, with a U.S. submission expected in Q4 2017 or January 2018 and a U.S. launch planned for mid-2018. These plans followed voluntary removal of Lotus devices after reports of a delivery-system pin issue.
- Legal and tax exposures remain significant. Accrued legal matters were $1.690B. Approximately 48,500 transvaginal mesh cases or claims had been asserted as of October 25, 2017; settlement arrangements covered about 44,000, with approximately 15,500 final. The company cautioned that further losses could materially affect results, cash flows or liquidity.
- A proposed IRS resolution of transfer-pricing matters remained contingent. If finalized, Boston Scientific expected net tax payments of about $275M plus interest, potentially within nine months; failure to finalize could materially affect financial condition, results or cash flows.
- Other unusual items included a $53M investment impairment charge in Q2 and a $78M nine-month benefit from remeasurement of contingent consideration. Q3’s reported results also included $149M after tax of specified adjustments, including amortization and restructuring-related items.
Investor verification priorities
- Reconcile GAAP earnings with management’s adjusted earnings, including the treatment of litigation, amortization, restructuring and contingent-consideration items.
- Track mesh settlement participation, final payment requirements, legal accrual adequacy and potential effects on liquidity and debt covenants.
- Monitor the IRS settlement conditions, timing and cash payment, as well as the company’s broader unrecognized tax benefits.
- Assess refinancing and liquidity needs given commercial paper borrowings, the working-capital deficit and scheduled debt maturities.
- Verify progress and commercial timing for Lotus EDGE, Symetis integration, Apama development and other planned product launches.