Boston Scientific Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Boston Scientific develops, manufactures, and sells medical devices worldwide. Figures are in U.S. dollars; amounts are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,774 | $1,761 |
| Gross profit / margin | $1,237 / 69.7% | $1,183 / 67.2% |
| Operating income (loss) | $197 | $(330) |
| Net income (loss) | $133 | $(354) |
| Diluted EPS | $0.10 | $(0.26) |
| Cash from operations | $198 | $187 |
- Reported sales increased 1%; constant-currency growth was 2%. Excluding divested-business sales and currency effects, management reported 4% growth.
- Management’s non-GAAP adjusted net income was $268 million, or $0.20 per diluted share, versus $224 million, or $0.16, in Q1 2013. Adjustments included impairment, amortization, restructuring, litigation, and acquisition- and divestiture-related items; these non-GAAP measures are not substitutes for GAAP results.
- Gross margin improved 250 basis points, principally from lower sales of lower-margin divested businesses and manufacturing cost reductions; pricing and mix were a partial offset.
- SG&A rose 6% to $666 million, equal to 37.5% of sales, while R&D fell 6% to $191 million, or 10.8% of sales. Interest expense declined to $54 million from $65 million.
- Q1 operating cash flow included approximately $80 million received from a government-funded settlement of long-outstanding Spanish receivables. Investing activities used $65 million and financing activities used $160 million; cash declined to $191 million from $217 million at year-end.
- At March 31, cash was $191 million, working capital was $1.217 billion, total debt was $4.249 billion, and stockholders’ equity was $6.534 billion. Current assets were $2.936 billion and current liabilities were $1.719 billion.
- The company had no borrowings on its $2.0 billion revolving facility or $300 million receivables-secured facility. It was in compliance with debt covenants: leverage was 2.4x against a 3.5x maximum; interest coverage was 5.6x against a 3.0x minimum.
Material changes versus the prior period
- The swing to GAAP profit mainly reflects the absence of the prior-year $423 million goodwill impairment and $130 million litigation charge. Q1 2014 included a $55 million impairment of Vessix-related intangible assets, a $7 million litigation credit, and a $20 million restructuring charge.
- Core-business sales grew 4% on a constant-currency basis, but reported worldwide sales growth was limited by a $25 million currency headwind and a $34 million year-over-year reduction in sales from divested businesses.
- MedSurg sales increased 7% as reported, including 23% growth in Neuromodulation. Rhythm Management increased 2%, while Cardiovascular was essentially flat. CRM sales fell 3%; coronary stent sales declined 7% worldwide.
- SG&A increased, partly due to acquisitions and emerging-market expansion; R&D declined amid cost-reduction efforts and program timing.
Outlook, commentary, risks, and unusual items
- No overall full-year revenue or earnings guidance is provided in the supplied filing text. The 2014 restructuring plan is expected to reduce annual pre-tax operating expenses by approximately $150–$200 million exiting 2015, with a substantial portion expected to be reinvested in growth. Estimated plan charges are $175–$225 million, with $160–$210 million expected to require cash outlays; completion is expected by the end of 2015.
- Management expects Neuromodulation growth to slow in 2014, citing Medicare reimbursement changes that reduced physician-office trialing volumes and tougher comparisons following the Precision Spectra launch.
- The Vessix impairment followed lower market estimates for resistant hypertension after a competitor’s clinical-trial results. Management said it was assessing available data and next steps for the Vessix clinical program.
- Product, pricing, reimbursement, regulatory, supply, currency, and competitive pressures remain significant risks. CRM and coronary stent pricing and market-share trends warrant attention.
- Probable and estimable legal accruals were $596 million. More than 20,000 transvaginal surgical mesh product-liability cases or claims were reported as of May 7, 2014; management said the ultimate outcome was uncertain and could materially affect results, financial condition, or liquidity. The company is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims.
- The IRS proposed significant transfer-pricing audit adjustments for 2008–2010 based on methodologies contested for earlier years. The company disputes the approach and says reserves are adequate, but resolution could materially affect financial results or cash flows. Gross unrecognized tax benefits were $1.034 billion at March 31.
- Subsequent events disclosed include completion on May 7 of the IoGyn acquisition for a net cash payment of $65 million; the company expected a U.S. launch of its Symphion system in the second half of 2014. On May 5, it received an HHS Inspector General subpoena concerning the 2008 Cognis and Teligen device launches, device performance, and a physician education program; it said it was cooperating.
Important facts for investors to verify
- Whether underlying sales growth and the improved gross margin persist after adjusting for currency, divestitures, and product mix.
- CRM and coronary stent sales, average selling prices, competitive position, and product-launch execution.
- Cash generation excluding the one-time Spanish receivables settlement, and the collectibility of overdue European receivables.
- Potential cash requirements from mesh litigation, other legal matters, and the IRS transfer-pricing dispute, including implications for debt covenants.
- Delivery of restructuring savings against estimated charges and cash costs, and performance of the IoGyn acquisition and planned product launches.