Boston Scientific Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are to Q1 2018 unless noted. Boston Scientific develops and sells medical devices across cardiovascular, rhythm and neuro, and MedSurg businesses.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2.493 billion | $2.379 billion | +4.8% reported; +7.8% operational, with a 300-basis-point foreign-exchange headwind |
| Gross profit margin | 70.7% | 71.7% | Down 1.0 percentage point |
| Operating income | $541 million | $407 million | +33% |
| Net income | $424 million | $298 million | +42% |
| Diluted EPS | $0.30 | $0.21 | +43% |
| Adjusted net income | $490 million | $455 million | +8% |
| Adjusted diluted EPS | $0.35 | $0.33 | +6% |
| Cash from operations | $350 million | $193 million | Up $157 million |
Gross margin pressure reflected unfavorable product mix, mesh-related inventory reserves, and manufacturing variances; manufacturing cost reductions and favorable currency effects partly offset these factors. SG&A was $869 million and R&D was $280 million. The effective tax rate was 7.1%, versus 8.0%.
Sales increased across all three reportable segments: MedSurg +7.7% to $766 million, Rhythm and Neuro +2.8% to $757 million, and Cardiovascular +4.2% to $972 million. Urology and Pelvic Health (+11.4%) and Neuromodulation (+10.5%) were notable business-unit growers; Cardiac Rhythm Management declined 0.4% on a reported basis.
Balance sheet, cash flow and liquidity
- At March 31, 2019, total debt was $9.228 billion, up from $7.056 billion at year-end 2018. Cash and cash equivalents were $139 million; working capital was $1.755 billion.
- Cash from investing activities was a $410 million outflow, including $321 million for the Millipede acquisition and $63 million of capital expenditures. Financing activities provided $2.127 billion, principally reflecting new debt issuance and repayments.
- The company issued $4.3 billion of senior notes in February, repaid $1.45 billion of senior notes due in 2020 and a $1.0 billion term loan, and retained $2.302 billion of restricted cash intended to fund the proposed BTG acquisition.
- Commercial paper outstanding was $1.630 billion, leaving $1.120 billion of capacity under the $2.750 billion program. The revolving credit facility had no direct borrowings. The leverage ratio was 2.49x against a 3.75x covenant maximum; the company reported compliance with its debt covenants.
- Management stated existing cash, operating cash generation, capital-market access and credit facilities should be sufficient for the next 12 months, including operations, legal liabilities and debt service.
Reported operating cash flow benefited materially from a one-time $180 million payment from Edwards Lifesciences. The reported cash balance excludes restricted cash; total cash, cash equivalents and restricted cash was $2.896 billion.
Material developments, outlook and risks
- Litigation settlement: Edwards Lifesciences paid $180 million to settle worldwide patent disputes. Boston Scientific recorded $148 million as litigation-related credits, with part of the settlement benefit reported in SG&A. The settlement contributed to the year-over-year increase in reported earnings and operating cash flow.
- Transvaginal mesh: Approximately 53,000 product-liability cases or claims had been asserted as of April 23, 2019. About 41,000 claims had met conditions for final settlement. The legal accrual was $699 million at March 31, down from $929 million at year-end, principally due to settlement payments.
- FDA action after quarter-end: On April 16, 2019, the FDA ordered manufacturers to stop selling and distributing transvaginal mesh for pelvic organ prolapse in the U.S.; Boston Scientific said it ceased global sales and distribution of these products. It recorded approximately $25 million in subsequent-event pre-tax charges, primarily for inventory, intangible write-offs and sales-return reserves.
- BTG acquisition: The proposed cash acquisition was valued at approximately $4.317 billion. The company expected it to become effective in mid-2019, subject to conditions and regulatory review. If it does not close by the specified deadline or is terminated, certain newly issued notes are subject to mandatory redemption at 101% of principal plus accrued interest.
- Other risks: Management highlighted product-liability and intellectual-property litigation, regulatory and reimbursement changes, foreign-exchange exposure, international-market risks, supply and sterilization disruptions, and acquisition execution. A contract sterilizer’s Illinois facility had suspended operations; the FDA approved an alternative U.S. sterilization facility for affected men’s-health products, while approvals outside the U.S. remained in process.
- Guidance: The filing provides no specific numerical full-year sales or earnings guidance. Management’s outlook is qualified by the risks and uncertainties described in the filing.
Key facts for investors to verify
- Whether operational sales growth continues to translate into reported growth despite foreign-exchange effects, and whether gross margin recovers from 70.7%.
- How much of Q1 earnings and operating cash flow reflects the one-time Edwards settlement versus recurring operations.
- Progress, financing and any mandatory-redemption implications of the proposed BTG acquisition.
- Developments in mesh-related litigation, the adequacy of the $699 million legal accrual, and the financial effects of the FDA action.
- Debt levels, interest expense, covenant headroom and available liquidity after acquisition funding and legal payments.