Boston Scientific Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless otherwise noted. Boston Scientific develops, manufactures and markets medical devices across cardiovascular, rhythm management and MedSurg businesses.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $2.160 billion | $1.964 billion | Up 10% reported and 10% constant currency |
| Gross profit / margin | $1.510 billion / 69.9% | $1.391 billion / 70.8% | Margin down 0.9 percentage points |
| Operating income | $364 million | $293 million | Up $71 million |
| Net income | $290 million | $202 million | Up $88 million |
| Diluted EPS | $0.21 | $0.15 | Up $0.06 |
| Adjusted net income and adjusted diluted EPS | $397 million / $0.29 | $378 million / $0.28 | Non-GAAP; adjusted EPS up $0.01 |
| Operating cash flow | $114 million | $116 million | Down $2 million |
| Capital expenditures | $112 million | $60 million | Up $52 million |
Reported results include acquisition-related, restructuring, litigation and amortization items. Management’s reconciliation adds back these items, producing adjusted net income of $397 million in Q1 2017 versus $378 million in Q1 2016. Adjusted measures are non-GAAP and are not substitutes for GAAP results.
Management attributed the gross-margin decline primarily to foreign currency effects and approximately 180 basis points of quarter-specific charges, principally related to the Lotus device removal and FUSE System operating losses; manufacturing cost reductions partly offset these pressures. SG&A rose 11% to $794 million, and R&D rose 12% to $235 million.
Revenue and material period changes
- All three reportable segments grew: Cardiovascular sales were $851 million, up 8% constant currency; Rhythm Management was $527 million, up 8%; and MedSurg was $782 million, up 15%.
- Growth drivers cited included WATCHMAN, SYNERGY stents, pacemakers, Endoscopy products, Urology and Pelvic Health, and Neuromodulation. Emerging Markets sales grew 12% constant currency.
- Cash and cash equivalents were $156 million at March 31, down from $196 million at December 31, 2016. Total debt was $5.514 billion, compared with $5.484 billion at year-end.
- Current assets were $3.026 billion and current liabilities $3.490 billion, a working-capital deficit of $464 million. Cash used in investing was $140 million; cash used in financing was $15 million. Cash declined $40 million during the quarter.
- Reported operating income benefited from a $50 million net contingent-consideration fair-value benefit, compared with a $4 million expense in the prior-year quarter. The effective tax rate fell to 4.9% from 11.4%, including a discrete tax benefit related to share-based awards.
Outlook, commentary and significant items
- Liquidity: Management said current cash, expected operating cash generation, capital-market access and credit facilities should fund operations and planned needs for the next 12 months. The company reported compliance with its debt covenants; its actual leverage ratio was 2.40x against a 3.75x maximum, and interest coverage was 9.9x against a 3.0x minimum.
- Debt and planned spending: In April 2017, after quarter-end, the company repaid $350 million of term loans, primarily using revolving-credit borrowings. A $435 million cash acquisition of Symetis was agreed to in March and was expected to close in Q2 2017, subject to customary conditions.
- Products: Boston Scientific voluntarily removed Lotus Valve devices from global commercial and clinical sites in February after reports of premature pin release. It expected a European and other-market return in Q4 2017, a U.S. regulatory submission in Q4 2017 and a U.S. launch in mid-2018. The filing also notes a $0.03 per-share charge associated with the Lotus removal and FUSE-related losses. The company decided to discontinue future FUSE System sales in March.
- Restructuring: The 2016 plan is expected to generate total pretax charges of $175–$225 million through 2018, with $66 million incurred through March 31, 2017. Management expects annual gross expense reductions of approximately $115–$150 million by the end of 2020.
- Tax uncertainty: A proposed IRS transfer-pricing dispute remains subject to finalization of settlement terms. If finalized, the company expects net tax payments of approximately $275 million plus interest within six to 12 months. The filing warns that failure to finalize the settlement could materially affect financial condition, results or cash flows.
- Legal exposure: Accrued legal reserves were $1.751 billion at March 31, 2017. Approximately 43,000 transvaginal mesh cases or claims had been asserted; agreements in principle or final-stage agreements covered about 37,000, with about 12,000 meeting settlement conditions and final. The company says future legal losses could materially affect results, cash flows or liquidity; many individual outcomes cannot be estimated clearly.
- Other risks: Patent disputes involving Edwards Lifesciences include mixed rulings and appeals. The filing also identifies product performance and regulatory risks, reimbursement and pricing pressure, foreign exchange exposure, acquisition integration, and litigation and governmental investigations.
Important facts for investors to verify
- Whether revenue and segment growth continue, and whether gross margin recovers from the 69.9% level after Lotus and FUSE-related costs and foreign-exchange effects.
- Cash generation, working-capital needs and debt levels after the April term-loan repayment, the Symetis transaction and any additional legal or tax payments.
- Progress and timing of the Lotus platform return and U.S. submission, as well as the financial consequences of the device removal and FUSE discontinuation.
- Final resolution and cash-payment timing of the IRS dispute, including the estimated $275 million payment plus interest.
- Mesh settlement participation and payments, adequacy of legal reserves, and developments in patent litigation and government investigations.
- Whether restructuring charges and execution deliver the projected annual savings, and how the company’s non-GAAP adjustments compare with recurring operating costs.