Boston Scientific Corporation — FY2015 Form 10-K
Business context and reporting period. Boston Scientific develops, manufactures and sells less-invasive medical devices across cardiovascular, rhythm management and MedSurg markets. This annual report covers the fiscal year ended December 31, 2015; the filing also reports unaudited fourth-quarter results. International sales were approximately 43% of 2015 revenue.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $7.477 billion | $7.380 billion |
| Gross profit / margin | $5.304 billion / 70.9% | $5.170 billion / 70.1% |
| Operating income (loss) | $(327) million | $(301) million |
| Net income (loss) | $(239) million; $(0.18) per share | $(119) million; $(0.09) per share |
| Operating cash flow | $600 million | $1.269 billion |
| Capital expenditures | $247 million | $259 million |
| Cash and cash equivalents at year-end | $319 million | $587 million |
| Total debt at year-end | $5.677 billion | $4.244 billion |
| Working capital at year-end | $1.041 billion | $760 million |
Reported sales increased 1% year over year. Excluding foreign currency effects and divested-business sales, sales grew 8%; currency reduced reported 2015 sales by approximately $505 million. Management’s adjusted net income, a non-GAAP measure excluding specified charges, was $1.267 billion, or $0.93 per share, versus $1.129 billion, or $0.84 per share, in 2014. These adjustments included $705 million after tax of litigation-related charges and $446 million of after-tax amortization expense.
Gross margin rose 80 basis points, principally from manufacturing cost reductions, partly offset by pricing and mix pressure and $36 million of acquired-inventory step-up costs. R&D spending increased 7% to $876 million. Interest expense rose to $284 million from $216 million, including $45 million of debt-extinguishment charges. Cash from operations fell 53%, primarily due to the $600 million payment settling Johnson & Johnson’s Guidant-related lawsuit.
Fourth quarter: sales were $1.978 billion versus $1.887 billion in Q4 2014; operating loss was $271 million versus $493 million, and net loss was $142 million versus $299 million. Quarterly results included substantial specified charges, including litigation and amortization; the filing reports $504 million of after-tax net charges in Q4 2015.
Material changes and business developments
- Completed the $1.616 billion cash acquisition of the AMS male urology portfolio in August 2015; it contributed approximately $158 million of 2015 sales. The deal included up to $50 million in additional sales-based consideration.
- Acquired Xlumena and CeloNova portfolios and made strategic investments, contributing to $1.734 billion of acquisition payments, net of cash acquired, during 2015.
- Constant-currency sales grew across most businesses, while reported sales declined in Interventional Cardiology, CRM and Endoscopy, principally reflecting currency effects. CRM reported sales fell 5%; constant-currency growth was 1%. Drug-eluting stent sales declined to $1.074 billion from $1.151 billion.
- Urology and Pelvic Health sales rose 30% reported, largely due to AMS; Peripheral Interventions grew 6% reported and Neuromodulation 6%. The 2014 Restructuring Plan was substantially completed, with certain plant-network actions continuing into 2016.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or earnings guidance. Management expected approximately $350 million of capital expenditures in 2016 and projected the restructuring plan would produce $200 million of gross annual expense reductions by the end of 2016, with a substantial portion reinvested in growth. The U.S. medical-device excise tax was suspended through December 31, 2017; its status afterward was uncertain.
- Legal exposure: 2015 litigation-related net charges were $1.105 billion; probable and estimable legal accruals totaled $1.936 billion at year-end. More than 35,000 mesh-related cases or claims had been asserted by February 23, 2016; settlement agreements covered over 10,000 cases and claims, subject to participation thresholds. The company stated additional losses could be accrued and paid.
- Mirowski matter: a Maryland appeals court affirmed a $308 million judgment in January 2016; the company planned to seek reconsideration. The filing says the subsequent-event accrual adjustment was reflected in the 2015 financial statements.
- Tax uncertainty: the IRS asserted $1.162 billion plus interest for disputed transfer-pricing and transaction matters covering specified tax years. The company contested the assessments; trial was expected in the second half of 2016. Gross unrecognized tax benefits were $1.056 billion, and gross accrued tax interest and penalties were $500 million.
- Leverage and liquidity: debt increased by $1.433 billion year over year, principally reflecting acquisition financing. The company reported investment-grade ratings and compliance with debt covenants; its $2.0 billion revolving facility was undrawn. It cited operating cash flow and capital-market access as liquidity sources.
- Other material risks include pricing and reimbursement pressure, competition, product quality and regulatory compliance, clinical and launch execution, acquisition integration, supply/manufacturing interruptions, foreign exchange, patent and product-liability litigation, and potential goodwill impairment. Electrophysiology goodwill had approximately 28% fair-value headroom; management identified the unit as more vulnerable to a future impairment test.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported effective disclosure controls and internal controls; the AMS acquisition was excluded from management’s internal-control assessment under the applicable acquired-business transition allowance.
Important facts for investors to verify
- Reconcile reported GAAP losses with management’s non-GAAP adjusted earnings and assess the scale and recurrence of excluded charges, especially litigation and amortization.
- Review the mesh claims, settlement participation conditions, Mirowski judgment and other litigation accruals for potential additional cash requirements.
- Track cash conversion and leverage following the AMS acquisition, including debt maturities, covenant headroom and the ability to sustain investment-grade ratings.
- Assess whether constant-currency growth can offset pricing pressure and currency headwinds, particularly in drug-eluting stents and CRM.
- Monitor the IRS disputes, tax reserves and the possible financial impact of their resolution.
- Evaluate delivery of the restructuring savings, integration of acquisitions, and commercial/regulatory progress for growth products such as WATCHMAN and Lotus.