Boston Scientific Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Boston Scientific develops, manufactures, and markets medical devices across cardiovascular, rhythm management, and MedSurg businesses. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2,257 | $2,126 | $4,418 | $4,090 |
| Gross profit | $1,625 | $1,487 | $3,136 | $2,879 |
| Gross margin | 72.0% | 70.0% | 71.0% | 70.4% |
| Operating income (loss) | $225 | $(334) | $589 | $(41) |
| Net income (loss) | $146 | $(207) | $436 | $(5) |
| Diluted EPS | $0.11 | $(0.15) | $0.31 | $(0.00) |
- Sales increased 6% reported and 7% operationally in Q2; for the first half, they rose 8% reported and 9% operationally. Currency reduced reported sales by $23 million in Q2 and $32 million year to date.
- Management’s non-GAAP adjusted net income was $444 million, or $0.32 per diluted share, in Q2 versus $373 million, or $0.27, a year earlier. For the first half it was $841 million, or $0.60 per share, versus $751 million, or $0.55. These measures exclude specified acquisition, restructuring, litigation, impairment, and amortization items and are not GAAP measures.
- Gross-margin improvement reflected manufacturing cost reductions and favorable product mix, partly offset by currency. Q2 operating results included $205 million of litigation charges; first-half charges were $208 million, compared with $618 million and $628 million, respectively, in 2016.
- Q2 R&D expense was $244 million (10.8% of sales), up 10%; SG&A was $815 million (36.0% of sales), up 5%. First-half R&D was $480 million and SG&A $1,609 million.
- Other expense included a $53 million investment impairment charge in Q2. The reported effective tax rate was negative 60.3% for Q2 and negative 10.1% for the first half, reflecting the mix of unusual items and discrete tax effects.
Cash flow, debt, and liquidity
- First-half operating cash flow was $299 million, down from $537 million, primarily due to working-capital changes and litigation-related payments. Investing cash outflow was $619 million, including $392 million net cash paid for acquisitions and $180 million of capital expenditures. Financing provided $317 million; cash ended at $195 million.
- At June 30, total debt was $5.835 billion, versus $5.484 billion at year-end 2016; cash was $195 million and working capital was negative $1.078 billion. Current debt obligations rose to $1.018 billion from $64 million.
- The company launched a $2.0 billion commercial-paper program in June and had $1.013 billion outstanding at quarter-end (23-day weighted-average maturity; 1.7% yield). It reported compliance with debt covenants and access to a $2.0 billion revolving facility and a $400 million receivables-backed facility. Management said available cash, operating cash generation, capital-market access, and facilities should fund needs for the next 12 months.
- After quarter-end, in July 2017, the company repaid the $400 million remaining under its August 2020 term loan. Debt repayment timing and liquidity should be considered alongside litigation, tax, and acquisition-related cash requirements.
Business trends and material developments
- Q2 operational growth was strongest in MedSurg (12%), including Endoscopy (12%), Urology and Pelvic Health (10%), and Neuromodulation (14%). Cardiovascular grew 6% and Rhythm Management 3% operationally. Emerging-market sales grew 15% operationally and represented about 10% of Q2 sales.
- Boston Scientific acquired Swiss structural-heart company Symetis on May 16 for approximately $430 million in cash; $392 million was reported as net cash paid. Preliminary purchase accounting included $185 million of goodwill and $278 million of amortizable intangibles. Integration was expected to be substantially complete by the end of 2018.
- The 2016 restructuring plan is expected to incur $175–$225 million of pretax charges, with estimated annual expense reductions of $115–$150 million by the end of 2020. The plan is expected to be substantially complete by the end of 2018; $82 million of related costs had been recorded through June 30.
Outlook, risks, and contingencies
- The filing provides no overall full-year sales or earnings guidance. It does state product and integration expectations: a return of the Lotus valve platform to the European market by year-end 2017; a U.S. Lotus Edge PMA submission expected in Q4 2017 and launch planned for mid-2018; and expected U.S. commercialization of RESONATE high-voltage devices in late 2017 or early 2018.
- Lotus valves were voluntarily removed from global commercial and clinical sites in February 2017 following reports of premature release of a connecting pin. The company attributed the issue to manufacturing-process tension and said it expected a European return by year-end.
- Legal accruals for probable and estimable matters totaled $1.779 billion at June 30. Approximately 48,000 transvaginal surgical mesh cases or claims had been asserted as of July 26; agreements in principle or final-stage negotiations covered about 38,000, of which approximately 14,500 had met settlement conditions and were final. Management cautioned that additional accruals may be needed and outcomes could materially affect results, cash flows, or liquidity.
- The IRS transfer-pricing and related tax controversy remained contingent. The company expected net payments of approximately $275 million plus interest if the settlement terms were finalized, potentially within three to nine months. Failure to finalize could materially affect financial condition, results, or cash flows. Gross unrecognized tax benefits were $1.116 billion.
- Other disclosed exposures include patent litigation, government investigations and proceedings, product-liability claims, regulatory and reimbursement changes, foreign-exchange risk, competition and pricing pressure, and risks in integrating acquisitions. The company reported no material goodwill impairment in its annual test.
Key investor verification points
- Track operating cash conversion, working-capital needs, commercial-paper balances, and the July term-loan repayment against near-term debt maturities.
- Assess the scale, timing, and cash impact of mesh settlements and other litigation; compare developments with the $1.779 billion legal accrual.
- Verify whether the IRS settlement is finalized and whether the expected $275 million-plus-interest payment changes.
- Monitor Lotus product remediation, regulatory milestones, and the stated launch timetable, alongside integration and returns from Symetis.
- Evaluate reported GAAP performance separately from management’s adjusted measures and review the effect of unusual charges, impairment, tax items, and currency movements.