Boston Scientific Corporation — FY 2017 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2017; “2017 Q4” refers to the final quarter within that fiscal year, not a standalone quarterly filing. Boston Scientific develops and sells medical devices across Cardiovascular, Rhythm Management and MedSurg. International sales were about 43% of revenue.
Key financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $9.048 billion | $8.386 billion |
| Gross profit / margin | $6.455 billion / 71.3% | $5.962 billion / 71.1% |
| Operating income | $1.285 billion | $447 million |
| Net income (GAAP) | $104 million | $347 million |
| Diluted EPS (GAAP) | $0.08 | $0.25 |
| Operating cash flow | $1.426 billion | $1.182 billion |
| Capital expenditures | $319 million | $376 million |
| Total debt at year-end | $5.616 billion | $5.484 billion |
| Cash and cash equivalents at year-end | $188 million | $196 million |
Sales increased 7.9% as reported and 7.8% on an operational, constant-currency basis. The MedSurg segment grew 12.5%, Cardiovascular 6.3%, and Rhythm Management 3.9%. Among businesses, Neuromodulation grew 14.2%, Electrophysiology 14.5%, Endoscopy 12.4%, and Urology and Pelvic Health 11.8%.
Adjusted net income, a non-GAAP measure that excludes specified items, was $1.752 billion ($1.26 per diluted share), versus $1.534 billion ($1.11 per diluted share) in 2016. This is not a substitute for GAAP results. Manufacturing cost reductions supported gross margin; foreign exchange was a 1.3 percentage-point headwind to the 2017 margin bridge.
Material changes and unusual items
- GAAP net income fell despite higher sales and operating income, primarily reflecting the $861 million after-tax estimated charge associated with the Tax Cuts and Jobs Act (TCJA), plus amortization and litigation-related costs. The fourth-quarter net loss was $615 million, including $1.095 billion of after-tax specified charges, principally the TCJA charge.
- Litigation-related net charges declined to $285 million from $804 million in 2016; management attributed most of these charges to transvaginal surgical mesh product-liability matters.
- The company recorded a $80 million net benefit from changes in fair value of contingent consideration, compared with a $29 million expense in 2016. It also recorded $56 million of investment impairment charges.
- 2017 acquisitions included Symetis, focused on transcatheter aortic valve replacement, and Apama Medical, developing an atrial-fibrillation treatment system. Acquisitions contributed about $105 million to 2017 sales, including EndoChoice and Symetis.
Liquidity, debt and outlook
Working capital was negative $1.832 billion at year-end, compared with negative $348 million in 2016. Current debt obligations were $1.801 billion, including $1.197 billion of commercial paper and $600 million of notes due in 2018. The company reported $1.053 billion of remaining capacity under its $2.250 billion commercial-paper program, backed by a revolving credit facility; it also had $400 million available under a receivables-secured facility. The leverage covenant limit was 3.5 times, versus an actual ratio of 2.2 times, and the company reported compliance with debt covenants.
The cash-flow statement reports $1.017 billion of cash, cash equivalents and restricted cash at year-end; this includes $803 million of restricted cash in current assets and should not be confused with the $188 million of cash and cash equivalents on the balance sheet. Management stated that available cash, operating cash generation, capital-market access and credit facilities should be sufficient for operations, investment, legal payments, taxes and debt service.
The filing provides no clear numerical sales or earnings guidance for 2018. Management emphasized investment in core franchises, growth adjacencies and international markets. The 2016 restructuring plan was expected to be substantially complete by the end of 2018, with total pretax charges of $275 million to $325 million and gross annual expense reductions of $165 million to $175 million by the end of 2020; a substantial portion of savings was expected to be reinvested.
Risks and contingencies
- Product litigation: As of January 31, 2018, about 49,000 transvaginal mesh cases or claims had been asserted. Agreements in principle or final-stage negotiations covered about 44,000 claims; about 20,000 had met settlement conditions and were final. The company had a $1.612 billion accrual for probable and estimable legal matters, but says additional losses may be accrued and paid. It is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims.
- Tax: The TCJA charge was an estimate. The company recorded a provisional $1.044 billion transition-tax amount and estimated net payment of about $463 million after tax attributes, payable over eight years. A separate IRS transfer-pricing settlement remained contingent; if finalized, expected net payments were about $275 million plus interest.
- Market and execution: Competitive pressure, healthcare-provider consolidation, reimbursement and pricing constraints, regulatory approvals, product performance and clinical outcomes could affect sales and margins. Integration of recent acquisitions and delivery of restructuring savings also carry execution risks.
- International, regulatory and operational exposure: Risks include foreign-exchange movements, evolving medical-device rules, Brexit uncertainty, supply interruptions, quality or product actions, and cyber/privacy incidents. The filing identifies ongoing intellectual-property, product-liability and governmental matters; outcomes and potential losses for certain proceedings are uncertain.
Important facts for investors to verify
- Reconcile GAAP earnings with adjusted earnings, especially the TCJA-related tax charge and its final measurement.
- Track mesh settlement participation, cash payments, legal accrual adequacy and any further litigation charges.
- Assess near-term refinancing and repayment needs, commercial-paper usage, working-capital deficit and covenant headroom.
- Evaluate whether segment growth and acquisition contributions persist, and whether restructuring costs and promised savings meet expectations.
- Monitor the IRS tax settlement, transition-tax payments and the medical-device excise-tax suspension, which was extended through December 31, 2019.
- Note that the filing reports unqualified audit opinions on the financial statements and internal control over financial reporting; cash-flow figures were affected by adoption of accounting guidance on restricted cash.