Boston Scientific Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request refers to 2014 Q4, this filing is an annual report; it also provides unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars.
Business context
Boston Scientific develops, manufactures and sells medical devices for interventional medical specialties, including cardiology, rhythm management, endoscopy, peripheral interventions, urology and women’s health, neuromodulation, and electrophysiology. International markets generated approximately 47% of 2014 net sales. The company’s stated priorities include growing market share, expanding in higher-growth areas and emerging markets, and improving operating efficiency.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $7.380 billion | $7.143 billion |
| Gross profit / gross margin | $5.170 billion / 70.1% | $4.969 billion / 69.6% |
| Operating income (loss) | $(301) million | $120 million |
| Net income (loss) | $(119) million; $(0.09) per share | $(121) million; $(0.09) per share |
| Cash from operating activities | $1.269 billion | $1.110 billion |
| Cash and cash equivalents, year-end | $587 million | $217 million |
| Working capital, year-end | $760 million | $1.187 billion |
| Total debt, year-end | $4.262 billion | $4.240 billion |
Capital expenditures were $259 million; acquisitions used $486 million of cash, net of cash acquired. Cash from operations less capital expenditures was approximately $1.010 billion (calculated from reported figures). The company had a $2.0 billion revolving credit facility with no amount drawn at year-end and stated it expected available cash, operating cash flow and borrowing capacity to fund the next 12 months, including legal obligations.
Material changes versus the prior comparable period
- Sales increased 3% as reported and 5% excluding currency effects; currency reduced sales by $99 million, while sales from divested businesses declined by $54 million. Excluding both effects, management reported 6% growth.
- Gross margin improved 0.5 percentage points, mainly due to manufacturing cost reductions; pricing and product mix, particularly in drug-eluting stents and CRM, partly offset those gains.
- Operating cash flow rose 14%. Year-end cash increased, while working capital fell by $427 million.
- Reported operating results included $1.036 billion of net litigation-related charges and $195 million of intangible-asset impairment charges. No goodwill impairment was recorded in 2014, compared with $423 million in 2013.
- CRM sales grew 1%; Interventional Cardiology grew 3%; Endoscopy grew 3%; Peripheral Interventions grew 5%; and Electrophysiology grew 47%, substantially reflecting the 2013 Bard EP acquisition. The acquired Bayer Interventional Division contributed after its 2014 acquisition.
Management’s non-GAAP adjusted net income was $1.129 billion, or $0.84 per diluted share, versus $991 million, or $0.73, in 2013. These measures exclude specified items, including impairment, litigation, restructuring and amortization, and are not GAAP results.
Fourth quarter: Net sales were $1.887 billion, gross profit was $1.327 billion, operating loss was $493 million, and net loss was $299 million, or $0.23 per share. The filing attributes the large quarterly loss chiefly to unusual charges, including litigation-related costs.
Outlook, management commentary and significant risks
- The 2014 restructuring plan was expected to be substantially complete by the end of 2015. Estimated total pre-tax charges were $250–$300 million, with expected gross annual pre-tax expense reductions of $175–$225 million by the end of 2015; management expected to reinvest a substantial portion of savings in growth initiatives.
- Management cited continued pricing and reimbursement pressure, healthcare-provider consolidation, competition, foreign-exchange exposure, and regulatory approval requirements as challenges. It gave no clear consolidated 2015 revenue or earnings guidance in the filing text.
- On February 13, 2015, the company agreed to pay Johnson & Johnson $600 million to settle litigation arising from the Guidant acquisition. The filing recorded the charge in 2014; payments of $300 million were due within 10 and 60 days of the agreement, funded through cash, operations and the revolving facility.
- Other material exposures include more than 25,000 pending transvaginal mesh product-liability cases; a $308 million judgment in the Mirowski contract dispute, which the company appealed; and an IRS assertion of $1.162 billion plus interest for disputed tax years, with additional years under examination. The company said it disagreed with the IRS positions and believed its tax reserves adequate, while acknowledging an adverse resolution could be material.
- Impairment estimates remain sensitive to business performance. The company identified CRM-related amortizable intangibles of $4.097 billion as at higher risk of failing an initial recoverability test in future periods. Electrophysiology goodwill headroom declined to approximately 26% after an interim fourth-quarter test.
- Other risks include product quality or recalls, clinical-trial outcomes, intellectual-property litigation, supply interruptions, cybersecurity, acquisition integration, and foreign-market collections and currency movements. The company reported effective internal control over financial reporting, with an unqualified auditor opinion.
Most important facts for investors to verify
- Timing and cash funding of the $600 million Johnson & Johnson settlement, and the effect on debt, liquidity and covenant headroom.
- Developments in mesh litigation, the Mirowski appeal, other material legal proceedings, and the $1.577 billion year-end legal accrual.
- Progress in resolving the IRS transfer-pricing disputes, including the asserted $1.162 billion plus interest and related unrecognized tax benefits.
- Whether CRM and Electrophysiology performance supports the carrying values of their substantial intangible assets and goodwill.
- Durability of underlying sales growth and gross-margin improvement after currency, divestitures, acquisition effects, pricing pressure and restructuring savings are considered.
- Execution and cash costs of restructuring, product launches and acquisitions, alongside the company’s debt maturities and continued access to credit facilities.