Boston Scientific Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Boston Scientific develops, manufactures, and sells medical devices across cardiovascular, rhythm management, and MedSurg businesses. Amounts are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1.846 billion | $1.735 billion | $5.493 billion | $5.305 billion |
| Gross profit | $1.296 billion | $1.225 billion | $3.842 billion | $3.687 billion |
| Gross margin | 70.2% | 70.6% | 69.9% | 69.5% |
| Operating income (loss) | $64 million | $103 million | $191 million | $(6) million |
| Net income (loss) | $43 million | $(5) million | $180 million | $(229) million |
| Diluted EPS | $0.03 | $(0.00) | $0.13 | $(0.17) |
| Operating cash flow | $346 million | $250 million | $829 million | $835 million |
- Reported sales rose 6% in Q3 and 4% year to date. Excluding currency and divested-business effects, management reported growth of 7% and 5%, respectively; these are non-GAAP measures.
- Q3 gross margin declined year over year, mainly from pricing and product mix, including drug-eluting stent and CRM products, and restructuring-related production transfer costs. Manufacturing cost reductions partly offset these pressures.
- Q3 SG&A increased 13% to $741 million, or 40.1% of sales, partly reflecting acquisitions, launches, commercial programs, employee-related costs, and emerging-market expansion. R&D decreased 2% to $212 million. Year-to-date SG&A rose 10%; R&D fell 5%.
- Interest expense was $54 million in Q3 and $161 million year to date, down from $137 million and $266 million, respectively, in 2013. The company attributed the decline mainly to its 2013 debt refinancing and interest-rate derivatives.
- Management’s adjusted net income, which excludes specified items and is not a GAAP measure, was $273 million ($0.20 per share) in Q3 and $826 million ($0.61 per share) year to date, versus $230 million ($0.17) and $701 million ($0.51) in the comparable 2013 periods.
Financial position and liquidity
- At September 30, 2014, cash and cash equivalents were $246 million, working capital was $1.355 billion, and total debt was $4.252 billion. Long-term debt was $4.249 billion; current debt obligations were $3 million.
- Current assets were $3.175 billion and current liabilities were $1.820 billion. Cash increased $29 million from year-end 2013.
- For the first nine months, investing activities used $662 million, including $487 million for acquisitions and $180 million in capital expenditures. Financing activities used $136 million, including $125 million for share repurchases.
- The company reported no borrowings under its $2.0 billion revolving facility or $300 million receivables-backed facility. It was in compliance with debt covenants; leverage was 2.5x against a 3.5x maximum, and interest coverage was 7.9x against a 3.0x minimum.
- Cash from operations was nearly flat year over year for the first nine months. Management cited higher inventory and tax payments and the prior-year PROMUS supply-agreement receipt as offsets to lower receivables, including cash received through a government-funded Spanish receivables settlement.
Business changes and outlook
- Q3 segment sales increased across Cardiovascular ($723 million, up 8%), Rhythm Management ($534 million, up 7%), and MedSurg ($588 million, up 4%). Electrophysiology sales rose 57% to $54 million, primarily reflecting the Bard EP acquisition; Neuromodulation sales were flat at $115 million.
- The company acquired Bayer AG’s Interventional Division for $414 million cash in August and acquired the remaining IoGyn equity in May. It launched IoGyn’s Symphion system in the U.S. in October. Acquisitions contributed to growth but also increased commercial and integration costs.
- No specific company-wide revenue or earnings guidance is stated in the supplied filing text. Management expects the 2014 restructuring plan to produce approximately $150–$200 million in gross annual pretax operating expense reductions exiting 2015, with a substantial portion reinvested in growth. Estimated total plan charges are $175–$225 million, with substantial completion expected by the end of 2015.
- Product and regulatory outlook includes continued rollout of new defibrillators into 2015; an estimated first-half 2015 FDA decision for WATCHMAN, subject to further FDA review; and clinical work supporting potential SYNERGY and Lotus approvals. The FDA advisory panel voted that WATCHMAN’s benefits outweighed risks and found reasonable assurance of safety, but did not find reasonable assurance of effectiveness.
- Management reported slower Neuromodulation growth amid changed Medicare reimbursement for physician-office SCS trials. Resistant-hypertension market assumptions weakened following competitor trial results, prompting Vessix-related impairments and a revised clinical strategy.
Unusual items, risks, and contingencies
- GAAP results included $139 million of Q3 litigation-related charges and $399 million year to date. Legal accruals were $945 million at September 30, up from $607 million at year-end 2013.
- In September 2014, a court entered a $308 million judgment against the company in the Mirowski license dispute; post-trial motions were denied in October. The company said it planned to appeal. The filing also describes more than 24,000 U.S. transvaginal mesh cases or claims, with outcomes uncertain.
- Gross unrecognized tax benefits were $1.043 billion, and accrued gross tax interest and penalties were $445 million. The company is contesting proposed IRS transfer-pricing adjustments for 2008–2010; final resolution could materially affect financial condition, results, or cash flows.
- Year-to-date intangible-asset impairment charges were $177 million, including charges related to Vessix and Atritech. The company identified Neuromodulation and Electrophysiology goodwill as more exposed to future impairment testing and cited $4.167 billion of CRM-related amortizable intangibles as sensitive to future cash-flow assumptions.
- Maximum undiscounted future contingent consideration was approximately $2.1 billion. The company recorded a $122 million year-to-date fair-value benefit on these obligations, a non-cash item that can fluctuate with estimates and milestones.
- Other disclosed risks include pricing and reimbursement pressure, product and regulatory outcomes, competition, acquisition integration, European receivables collection, currency exposure, and cybersecurity. The company is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims.
Important facts for investors to verify
- Whether sales growth and margin trends persist after currency, divestitures, acquisition effects, and pricing or product-mix changes.
- How much of adjusted earnings converts to recurring operating cash flow, and how acquisition spending, capital expenditures, litigation payments, and share repurchases affect liquidity and debt.
- The amount, timing, and appeal outcome of the $308 million Mirowski judgment, mesh litigation costs, and other legal exposures relative to the $945 million legal accrual.
- Progress on IRS transfer-pricing disputes and potential effects on cash taxes and unrecognized tax benefits.
- Whether restructuring savings reach the stated target and whether impairment risks—especially CRM-related intangibles and the identified reporting units—worsen.
- Regulatory and commercial milestones for WATCHMAN, SYNERGY, Lotus, and new CRM products, alongside reimbursement and clinical-market developments.