Business Context and Reporting Period
Boston Scientific Corporation (NYSE: BSX) filed this Form 10-K for the fiscal year ended December 31, 2019. It develops and sells medical devices across MedSurg, Rhythm and Neuro, and Cardiovascular; following its August 2019 acquisition of BTG plc, it also reports BTG’s Specialty Pharmaceuticals business separately. The quarterly figures below identify the fourth quarter where relevant.
Financial Results and Key Metrics
Amounts are in U.S. dollars. Fiscal-year results compared with 2018:
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $10.735 billion | $9.823 billion |
| Reported sales growth | 9.3% | 8.6% |
| Operational sales growth | 11.1% | 8.0% |
| Gross profit / margin | $7.620 billion / 71.0% | $7.011 billion / 71.4% |
| Operating income | $1.518 billion | $1.506 billion |
| Net income | $4.700 billion | $1.671 billion |
| Diluted EPS | $3.33 | $1.19 |
| Adjusted net income / diluted EPS (non-GAAP) | $2.234 billion / $1.58 | $2.060 billion / $1.47 |
| Cash from operating activities | $1.836 billion | $310 million |
| Adjusted free cash flow (non-GAAP) | $2.007 billion | $2.070 billion |
Fourth-quarter net sales were $2.905 billion, versus $2.561 billion in Q4 2018. Reported Q4 net income was $3.996 billion and diluted EPS was $2.83, primarily reflecting the tax benefit described below.
At December 31, 2019, cash and cash equivalents were $217 million, working capital was a deficit of $168 million, total debt was $10.008 billion and stockholders’ equity was $13.877 billion. Debt increased from $7.056 billion at year-end 2018. The company had $711 million of commercial paper outstanding and $2.039 billion of remaining availability under its commercial paper program. It reported compliance with debt covenants; its leverage ratio was 3.83x against a 4.75x temporary covenant limit following the BTG acquisition.
Material Changes Versus the Prior Comparable Period
- Reported sales rose 9.3%; operational growth was 11.1%, partly offset by a 180-basis-point adverse foreign-currency effect. Acquisitions contributed $378 million to operational sales, and BTG contributed $226 million in post-acquisition sales.
- Cardiovascular sales increased 11.4%, MedSurg 10.0%, and Rhythm and Neuro 3.3%. Stronger areas included Peripheral Interventions, Urology and Pelvic Health, and Neuromodulation. CRM sales declined 0.6% as foreign exchange and U.S. low-voltage pacemaker share loss offset high-voltage growth.
- Gross margin eased 0.4 percentage points. Management cited pricing pressure, particularly on coronary drug-eluting stents, scrap from new product launches, excess and obsolete inventory, and $46 million of acquired-inventory step-up costs; manufacturing savings and favorable currency effects partly offset these pressures.
- Reported net income rose sharply, but is not representative of underlying earnings: the company recorded a $4.102 billion non-cash deferred tax benefit from intra-entity intellectual-property transfers. Adjusted net income increased to $2.234 billion from $2.060 billion.
- Operating cash flow improved from 2018, when substantial IRS tax settlement payments weighed on cash generation. 2019 investing cash outflow increased to $5.041 billion, including $4.382 billion for acquisitions, net of cash acquired.
Outlook, Management Commentary, Risks and Unusual Items
- The filing provides no specific 2020 sales or earnings guidance. Management’s stated strategy emphasizes category leadership, high-growth adjacencies, international expansion, and investment in product development.
- Management anticipated that the novel coronavirus situation could reduce sales through lower procedure volumes in China and disrupt supply chains. The size of the effect was uncertain at filing time.
- The BTG acquisition expanded the portfolio but increased debt and integration demands. The company also completed acquisitions of Vertiflex and Millipede during 2019.
- The 2019 restructuring plan is expected to incur $200 million to $300 million in total pre-tax charges and generate $100 million to $150 million in annual pre-tax operating expense reductions by the end of 2022; a substantial portion of savings is expected to be reinvested. Most activities are expected to be completed by the end of 2021.
- The company expects approximately $150 million of EU Medical Device Regulation implementation expenditures over three years. New EU requirements begin applying to new product registrations in May 2020, with transition provisions for certain existing certificates.
- Legal exposure remains significant: accrued legal matters probable and estimable totaled $697 million at year-end, and the company is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims. Approximately 54,000 transvaginal mesh cases or claims had been asserted; about 46,000 had satisfied settlement conditions.
- In Q4 2019, the company recorded a $223 million litigation charge primarily related to Channel Medsystems. In February 2020, it settled that dispute for an undisclosed amount and surrendered its equity interest. Separately, the company received a $180 million one-time settlement payment from Edwards Lifesciences in January 2019.
- The filing’s results are also affected by acquisition-related costs, amortization, impairment and restructuring charges, currency movements, pricing and reimbursement pressure, regulatory requirements, and the possibility of further litigation losses. The medical-device excise tax was permanently repealed in December 2019.
Most Important Facts for Investors to Verify
- Underlying sales and profit trends excluding foreign exchange, acquisitions, and the company’s non-GAAP adjustments; reported 2019 earnings were materially affected by the one-time non-cash tax benefit.
- BTG integration, acquisition contribution, and the company’s ability to manage debt, liquidity, and covenant headroom.
- Whether gross-margin pressures, including pricing and inventory charges, persist or are offset by manufacturing savings.
- Cash conversion and the sustainability of operating cash flow, considering acquisition spending, legal payments, and working-capital needs.
- Developments in mesh and other litigation, including settlement payments and the adequacy of legal accruals; the Channel settlement amount was not disclosed in the filing.
- Effects of coronavirus-related procedure and supply disruption, and implementation costs and timing for EU MDR compliance.