BOSTON SCIENTIFIC CORPORATION Introduction
Boston Scientific Corporation is a global developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. Our products and technologies are used to diagnose or treat a wide range of medical conditions, including cardiovascular, digestive, respiratory, urological, pelvic health and neurological conditions. We continue to innovate in these areas and are committed to the goal of extending our innovations into new geographies and high-growth adjacency markets. When used in this report, the terms, "we," "us," "our," and "the Company" meanBoston Scientific Corporation and its divisions and subsidiaries. COVID-19 Pandemic InDecember 2019 , the novel strain of coronavirus (SARS-Cov-2), and its disease commonly known as COVID-19 (COVID-19), was reported inChina and has since widely impacted the global public health and economic environment. InMarch 2020 , theWorld Health Organization (WHO ) declared COVID-19, including all additional variations and strains thereof, a global pandemic (COVID-19 pandemic). Our business trends through the first two months of the year were in line with internal expectations; however, as COVID-19 reached a global pandemic level, procedural volumes significantly declined, negatively impacting revenue and operating income. While the majority of procedures using our products are deferrable, most of the conditions that we treat are generally fairly acute and cannot be deferred for extended periods. As the pandemic spread worldwide and with COVID-19 cases confirmed in all major geographies, many elective and semi-emergent procedures were postponed, enabling hospital staff to focus critical resources on caring for COVID-19 patients. Some jurisdictions mandated elective procedure bans that include financial penalties for non-compliance. In other jurisdictions, the timing of the pandemic and public health measures have resulted in lower levels of COVID-19 cases, while hospitals have also developed protocols such that elective procedures may be conducted safely and have largely returned to normal practice. Much of the global economy is now in the process of re-opening but, at the same time, the COVID-19 pandemic is intensifying in some areas of the world, including in parts of theU.S. Our second quarter 2020 net sales, gross profit margin, operating income and net income were significantly negatively impacted as a result of the COVID-19 pandemic. Our net sales declined 23.9 percent, with the most significant decline occurring inApril 2020 and relatively smaller declines in May andJune 2020 . We believe our third quarter 2020 net sales will also be lower than the third quarter of 2019. However, we expect our third quarter 2020 sales will improve sequentially compared to the second quarter, and expect further sequential improvement in the fourth quarter. During the second quarter, global sales trends consistently improved compared to the prior month as physicians resumed performing procedures previously deferred. Entering the second quarter of 2020, we implemented cost reduction initiatives, including decreases in travel, meetings and customer events, hiring, clinical programs and certain research and development projects. We also implemented a temporary four-day work week for many employees globally and reduced employee compensation, including temporary significant cuts in the salaries of our Executive Committee and the cash retainer paid to our Board of Directors. In addition, we temporarily closed and/or reduced production levels at certain of our manufacturing sites in an effort to align our build plans to the current and expected demand environment. During the second quarter of 2020, as COVID-19 cases began to decrease in certain geographies, we implemented a careful and tiered approach for employees to return to our sites following state and local ordinances. Employees with the greatest need to access onsite resources to perform their roles have returned first, while thosewho can effectively work remotely will continue to do so in order to facilitate maximum social distancing in our sites and within our communities. All of our plants have now resumed manufacturing and are increasing their utilization levels, but most are expected to remain below full capacity in the third quarter of 2020. In those jurisdictions where temporary four-day work weeks and reductions in employee compensation were in effect, those measures concluded at the beginning of the third quarter and we recently announced the end of the aforementioned reductions in executive officer pay. While we have implemented measures to reduce costs, our operating expenses as a percentage of net sales increased during the second quarter of 2020, as approximately 70 percent of our operating expenses are fixed in nature. Our gross profit margin was also unfavorably impacted during the second quarter of 2020, due primarily to idle capacity in our manufacturing plants. We expect sequential improvement in both gross profit margin and operating expenses as a percentage of net sales in the third quarter of 2020 and further sequential improvement in the fourth quarter of 2020, unless there is a resurgence of COVID-19 infections causing further delays of elective procedures and reducing demand for our products. We continue to focus our efforts on the health and safety of patients, healthcare providers and employees, while executing our mission of transforming lives through innovative medical solutions to improve the health of patients around the world. Since the onset of COVID-19, our global crisis management team has focused on protecting our employees and customers, optimizing our operations and securing our supply chain. We have successfully implemented business continuity plans including establishing a medical advisory group for employees, leveraging work from home infrastructure to facilitate social
39
--------------------------------------------------------------------------------
Table of Contents distancing, limiting sales visits to critical cases and accelerating capabilities to provide remote physician support. While we expect the COVID-19 pandemic will continue to negatively impact our 2020 performance, we continue to believe our long-term fundamentals remain strong and we will manage through these challenges with strategic focus and the winning spirit of our global team. We have evaluated the recoverability of the assets on our unaudited condensed consolidated balance sheet as ofJune 30, 2020 in accordance with relevant authoritative accounting literature. We considered the disruptions caused by COVID-19, including revised forecasted sales and customer demand, a decline in the price of our common stock and macroeconomic factors potentially impacting accounts receivable, inventory, investments, intangible assets, goodwill and other assets and liabilities. Where forward-looking estimates are required, we made a good-faith estimate based on information available as of the balance sheet date. We have continued to monitor for indicators of impairment through the date of this Quarterly Report filed on Form 10-Q, and reflected accordingly in the accompanying condensed consolidated financial statements.
Financial Summary
Three Months Ended
Our net sales for the second quarter of 2020 were$2.003 billion , as compared to$2.631 billion for the second quarter of 2019. This decrease of$628 million , or 23.9 percent, included operational net sales declines of 23.1 percent and the negative impact of 80 basis points from foreign currency fluctuations.1 Operational net sales included$157 million in the second quarter of 2020 associated with the acquisitions ofVertiflex, Inc. (Vertiflex ) in the second quarter of 2019 andBTG plc (BTG) in the third quarter of 2019, each with no prior period related net sales. As the COVID-19 pandemic continued worldwide, the deferral of elective medical procedures had a material adverse impact on our net sales. Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business. Our reported net loss for the second quarter of 2020 was$147 million , or$(0.11) per diluted share. Our reported results for the second quarter of 2020 included certain charges and/or credits totaling$273 million (after-tax), or$0.19 per diluted share. Excluding these items, adjusted net income for the second quarter of 2020 was$120 million , or$0.08 per diluted share.1 Our reported net income for the second quarter of 2019 was$154 million , or$0.11 per diluted share. Our reported results for the second quarter of 2019 included certain charges and/or credits totaling$396 million (after-tax), or$0.28 per diluted share. Excluding these items, adjusted net income for the second quarter of 2019 was$550 million , or$0.39 per diluted share.1
1Operational net sales growth rates, which exclude the impact of foreign currency fluctuations, and adjusted net income (loss) and adjusted net income (loss) per share, which exclude certain items required by generally accepted accounting principles inthe United States (U.S. GAAP), are not prepared in accordance withU.S. GAAP and should not be considered in isolation from, or as a replacement for, the most directly comparable GAAP measure. Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.
40
--------------------------------------------------------------------------------
Table of Contents The following is a reconciliation of our results of operations prepared in accordance withU.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview and Additional Information for a discussion of these reconciling items: Three Months Ended June 30, 2020 (in millions, except per share data) Net Income (Loss)* Impact per Share(1) Reported $ (153) $ (0.11) Non-GAAP adjustments: Amortization expense 177 0.12 Intangible asset impairment charges 27 0.02 Acquisition/divestiture-related net charges (credits) 50 0.04 Restructuring and restructuring-related net charges (credits) 20 0.01 EU Medical device regulation (MDR) implementation costs 6 0.00 Deferred tax expenses (benefits) (18) (0.01) Discrete tax items 11 0.01 Adjusted $ 120 $ 0.08 (1) Assumes dilution of 12.6 million shares for all or a portion of the non-GAAP adjustments. * Net income (loss) available to common stockholders Three Months Ended June 30, 2019 (in millions, except per share data) Net Income (Loss) Impact per Share Reported $ 154 $ 0.11 Non-GAAP adjustments: Amortization expense 144 0.10 Intangible asset impairment charges 35 0.02 Acquisition-related net charges (credits) 177 0.13 Restructuring and restructuring-related net charges (credits) 10 0.01 Litigation-related net charges (credits) 12 0.01 Investment impairment charges 1 0.00 Discrete tax items 18 0.01 Adjusted $ 550 $ 0.39 41
--------------------------------------------------------------------------------
Table of Contents Six Months EndedJune 30, 2020 Our net sales for the first six months of 2020 were$4.546 billion , as compared to$5.124 billion for the first six months of 2019. This decrease of$578 million , or 11.3 percent, included operational net sales declines of 10.3 percent and the negative impact of 100 basis points from foreign currency fluctuations. Operational net sales included$314 million in the first six months of 2020 due to the acquisitions ofVertiflex, Inc. (Vertiflex ) in the second quarter of 2019 andBTG plc (BTG) in the third quarter of 2019, each with no prior period related net sales. As the COVID-19 pandemic expanded and continued worldwide, the deferral of elective medical procedures had a material adverse impact on our net sales. Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business. Our reported net loss for the first six months of 2020 was$137 million , or$(0.10) per diluted share. Our reported results for the first six months of 2020 included certain charges and/or credits totaling$653 million (after-tax), or$0.46 per diluted share. Excluding these items, adjusted net income for the first six months of 2020 was$511 million , or$0.36 per diluted share. Our reported net income for the first six months of 2019 was$578 million , or$0.41 per diluted share. Our reported results for the first six months of 2019 included certain charges and/or credits totaling$462 million (after-tax), or$0.33 per diluted share. Excluding these items, adjusted net income for the first six months of 2019 was$1.040 billion , or$0.74 per diluted share. 42
--------------------------------------------------------------------------------
Table of Contents The following is a reconciliation of our results of operations prepared in accordance withU.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview and Additional Information for a discussion of these reconciling items: Six Months Ended June 30, 2020 (in millions, except per share data) Net Income (Loss)* Impact per share(1) Reported $ (142) $ (0.10) Non-GAAP adjustments: Amortization expense 356 0.25 Intangible asset impairment charges 195 0.14 Acquisition/divestitures-related net charges (credits) 13 0.01 Restructuring and restructuring-related net charges (credits) 45 0.03 EU MDR implementation costs 11 0.01 Deferred tax expenses (benefits) 8 0.01 Discrete tax items 24 0.02 Adjusted $ 511 $ 0.36 (1) Assumes dilution of 14.4 million shares for all or a portion of the non-GAAP adjustments. * Net income (loss) available to common stockholders Six Months Ended June 30, 2019 (in millions, except per share data) Net income (loss) Impact per share Reported $ 578 $ 0.41 Non-GAAP adjustments: Amortization expense 287 0.20 Intangible asset impairment charges 97 0.07 Acquisition-related net charges (credits) 155 0.11 Restructuring and restructuring-related net charges (credits) 19 0.01 Litigation-related net charges (credits) (116) (0.08) Investment impairment charges 2 0.00 Discrete tax items 18 0.01 Adjusted $ 1,040 $ 0.74 Cash provided by operating activities was$192 million for the first six months of 2020. As ofJune 30, 2020 , we had total debt of$9.532 billion , Cash and cash equivalents of$1.724 billion and working capital of$2.694 billion . Refer to Liquidity and Capital Resources for further discussion. 43
--------------------------------------------------------------------------------
Table of Contents Quarterly Results and Business Overview The following section describes an overview of our product offerings and results of operations by business unit. For additional information on our businesses and their product offerings, see Item 1. Business of our most recent Annual Report on Form 10-K. Our seven core businesses are organized into three reportable segments: MedSurg, Rhythm and Neuro, and Cardiovascular. Following our acquisition of BTG, which closed during the third quarter of 2019, we have included BTG's Interventional Medicine business within our Peripheral Interventions operating segment, within the Cardiovascular reportable segment. We presentBTG's Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments.
The following table provides our net sales by business and the relative change
in growth on a reported basis. Our reported revenues were unfavorably impacted
by the deferral of medical procedures across our businesses driven by the
COVID-19 pandemic, particularly in the second quarter, when the pandemic
disrupted all of the major regions in which we operate.
Three Months Ended June 30,
(in millions) 2020 2019 Change
Endoscopy $ 348 $ 470 (26.0)%
Urology and Pelvic Health 228 348 (34.5)%
MedSurg 576 818
(29.6)%
Cardiac Rhythm Management 351 498 (29.4)% Electrophysiology 51 84 (39.2)% Neuromodulation 122 204 (40.0)% Rhythm and Neuro 525 786 (33.2)% Interventional Cardiology 495 706
(29.9)%
Peripheral Interventions 340 320 6.0% Cardiovascular 834 1,026 (18.7)% Medical Devices 1,935 2,631 (26.5)% Specialty Pharmaceuticals 68 - n/a Net Sales$ 2,003 $ 2,631 (23.9)% Six Months Ended June 30, (in millions) 2020 2019 Change Endoscopy$ 790 $ 910 (13.2)% Urology and Pelvic Health 560 674
(16.9)%
MedSurg 1,350 1,584
(14.8)%
Cardiac Rhythm Management 788 989 (20.3)% Electrophysiology 126 164 (23.2)% Neuromodulation 313 390 (19.8)% Rhythm and Neuro 1,228 1,543 (20.4)% Interventional Cardiology 1,128 1,367
(17.5)%
Peripheral Interventions 732 631 16.0% Cardiovascular 1,860 1,998 (6.9)% Medical Devices 4,437 5,124 (13.4)% Specialty Pharmaceuticals 109 - n/a Net Sales$ 4,546 $ 5,124 (11.3)% 44
--------------------------------------------------------------------------------
Table of Contents MedSurg Endoscopy Our Endoscopy business develops and manufactures devices to diagnose and treat a broad range of gastrointestinal (GI) and pulmonary conditions with innovative, less-invasive technologies. Our net sales of Endoscopy products for the second quarter of 2020 were$348 million or 17 percent of our consolidated net sales and for the first half of 2020 were$790 million or 17 percent of our consolidated net sales. Our Endoscopy net sales decreased$122 million , or 26.0 percent, in the second quarter of 2020 and decreased$120 million , or 13.2 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this decrease included operational net sales declines of 25.5 percent and a negative impact of 50 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this decrease included operational net sales declines of 12.4 percent and a negative impact of 80 basis points from foreign currency fluctuations, compared to the prior year period. These year-over-year changes were primarily driven by declines in elective or semi-emergent upper endoscopy, colonoscopy and biliary procedures due to the COVID-19 pandemic environment.
OurUrology and Pelvic Health business develops and manufactures devices to treat various urological and pelvic conditions for both male and female anatomies. Our net sales ofUrology and Pelvic Health products for the second quarter of 2020 were$228 million or 11 percent of our consolidated net sales and for the first half of 2020 were$560 million or 12 percent of our consolidated net sales. OurUrology and Pelvic Health net sales decreased$120 million , or 34.5 percent, in the second quarter of 2020 and decreased$114 million , or 16.9 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this decrease included operational net sales declines of 34.1 percent and a negative impact of 40 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this decrease included operational net sales declines of 16.2 percent and a negative impact of 70 basis points from foreign currency fluctuations, compared to the prior year period. These year-over-year changes were primarily due to the deferral of elective and semi-emergent procedures in the COVID-19 pandemic environment, notably impacting prosthetic urology and our stone franchise given its significance to our business.
Rhythm and Neuro
Cardiac Rhythm Management
Our Cardiac Rhythm Management (CRM) business develops and manufactures a variety of implantable devices that monitor the heart and deliver electricity to treat cardiac abnormalities. Our net sales of CRM products for the second quarter of 2020 were$351 million or 18 percent of our consolidated net sales and for the first half of 2020 were$788 million or 17 percent of our consolidated net sales. Our CRM net sales decreased$146 million , or 29.4 percent, in the second quarter of 2020 and decreased$200 million , or 20.3 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this decrease included operational net sales declines of 28.8 percent and a negative impact of 60 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this decrease included operational net sales declines of 19.4 percent and a negative impact of 90 basis points from foreign currency fluctuations, compared to the prior year period. These year-over-year changes were primarily due to a decline in both defibrillator and pacemaker procedures, with semi-emergent and emergent procedures deferred in the COVID-19 pandemic environment. InJune 2020 , we announcedU.S. 510 (k) clearance for the LUX-Dx Insertable Cardiac Monitor (ICM) system, a new, long-term diagnostic device implanted in patients to detect arrhythmias associated with conditions such as atrial fibrillation (AF), cryptogenic stroke, and syncope. We startedU.S. commercialization of this technology in the third quarter of 2020.
Electrophysiology
Our Electrophysiology business develops and manufactures less-invasive medical technologies used in the diagnosis and treatment of rate and rhythm disorders of the heart. Our net sales of Electrophysiology products for the second quarter of 2020 were$51 million or 3 percent of our consolidated net sales and for the first half of 2020 were$126 million or 3 percent of our consolidated net sales. Our Electrophysiology net sales decreased$33 million , or 39.2 percent, in the second quarter of 2020 and decreased$38 million , or 23.2 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this decrease included operational net sales declines of 38.9 percent and a negative impact of 30 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this decrease included operational net sales declines of 22.6 percent and a negative impact of 60 basis points from foreign currency fluctuations, compared to the prior year period. Sales of our mapping and navigation products and our core diagnostic and therapeutic devices declined year over year due to the impact of COVID-19 and deferral of elective Electrophysiology procedures. InJune 2020 , we announced theU.S.
45
--------------------------------------------------------------------------------
Table of Contents launch of the DirectSense™ Technology, a tool for monitoring radiofrequency (RF) energy delivery during cardiac ablation procedures available on the Rhythmia™ Mapping System. Additionally, in the second quarter of 2020 we received CE mark approval for the INTELLANAV STABLEPOINT™ Ablation Catheter enabled with DIRECTSENSE and contact force assessment. This technology along with our early 2020 CE mark approval for the POLARx™ Cryoablation product began European commercialization in the third quarter of 2020.
Neuromodulation
Our Neuromodulation business develops and manufactures devices to treat various neurological movement disorders and manage chronic pain. Our net sales of Neuromodulation products for the second quarter of 2020 were$122 million or 6 percent of our consolidated net sales and for the first half of 2020 were$313 million or 7 percent of our consolidated net sales. Our Neuromodulation net sales decreased$82 million , or 40.0 percent, in the second quarter of 2020 and decreased$77 million , or 19.8 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this decrease included operational net sales declines of 39.7 percent and a negative impact of 30 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this decrease included operational net sales declines of 19.2 percent and a negative impact of 60 basis points from foreign currency fluctuations, compared to the prior year period. These year-over-year changes were primarily due to sales declines in our spinal cord stimulation (SCS) systems and our deep brain stimulation (DBS) systems due to deferral of elective procedures in the COVID-19 pandemic environment. The unfavorable impact was partially offset by higher Superion™ Indirect Decompression System sales purchased as part of ourVertiflex acquisition in the second quarter of 2019. Cardiovascular Interventional Cardiology Our Interventional Cardiology business develops and manufactures technologies for diagnosing and treating coronary artery disease and structural heart conditions. Our net sales of Interventional Cardiology products for the second quarter of 2020 were$495 million or 25 percent of our consolidated net sales and for the first half of 2020 were$1.128 billion or 25 percent of our consolidated net sales. Our Interventional Cardiology net sales decreased$211 million , or 29.9 percent, in the second quarter of 2020 and decreased$239 million , or 17.5 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this decrease included operational net sales declines of 28.8 percent and a negative impact of 110 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this decrease included operational net sales declines of 16.2 percent and a negative impact of 130 basis points from foreign currency fluctuations, compared to the prior year period. These year-over-year changes were primarily driven by our coronary stent and other complex percutaneous coronary intervention (PCI) franchises, with a significant slowdown in procedural volumes in the COVID-19 pandemic environment. Within our structural heart business, sales of our WATCHMAN™ Left Atrial Appendage Closure (LAAC) device were also negatively impacted due to the deferral of elective procedures. We receivedU.S. FDA approval for the next generation WATCHMAN FLX™ device and plan to launch in theU.S. in the third quarter of 2020.
Peripheral Interventions
Our Peripheral Interventions business develops and manufactures products to diagnose and treat peripheral arterial and venous diseases, as well as products to diagnose, treat and ease various forms of cancer. In the third quarter of 2019, we completed the acquisition of BTG. We are integrating BTG's Interventional Medicine (IM) portfolio into the Peripheral Interventions division, adding complementary technologies in the areas of venous disease and interventional oncology. Our net sales of Peripheral Interventions products for the second quarter of 2020 were$340 million or 17 percent of our consolidated net sales and for the first half of 2020 were$732 million or 16 percent of our consolidated net sales. Our Peripheral Interventions net sales increased$19 million , or 6.0 percent, in the second quarter of 2020 and increased$101 million , or 16.0 percent, in the first half of 2020, compared to the prior year periods. In the second quarter of 2020, this increase included operational net sales growth of 7.0 percent and a negative impact of 100 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, this increase included operational net sales growth of 17.1 percent and a negative impact of 110 basis points from foreign currency fluctuations, compared to the prior year period. These year-over-year changes were primarily driven by sales performance of the BTG IM portfolio, driven by TheraSphere™Y-90 radioactive glass microspheres. Excluding BTG and the related divestiture of our drug-eluting and bland embolic microsphere portfolio, our Peripheral Interventions net sales decreased$55 million , or 17.4 percent, in the second quarter of 2020 and decreased$61 million , or 9.9 percent, in the first half of 2020, compared to the prior year periods, primarily due to the deferral of semi-emergent and elective procedures in the COVID-19 pandemic environment, notably impacting core peripheral technologies.
46
--------------------------------------------------------------------------------
Table of ContentsSpecialty Pharmaceuticals Following the closing of the BTG acquisition in the third quarter of 2019, we presentBTG's Specialty Pharmaceuticals business as a standalone operating segment alongside our reportable segments. OurSpecialty Pharmaceuticals business develops and manufactures acute care antidotes to treat overexposure to certain medications and toxins. These products are sold primarily in theU.S. through small, specialist sales teams and through commercial partners elsewhere, where approved or permitted. Our net sales ofSpecialty Pharmaceuticals products for the second quarter of 2020 were$68 million or 3 percent of our consolidated net sales and for the first half of 2020 were$109 million or 2 percent of our consolidated net sales, and have not been significantly impacted by the COVID-19 pandemic. Emerging Markets As part of our strategic imperative to drive global expansion, we are seeking to grow net sales and market share by expanding our global presence, including in Emerging Markets. We define Emerging Markets as the 20 countries that we believe have strong growth potential based on their economic conditions, healthcare sectors and our global capabilities. Periodically, we assess our list of Emerging Markets, which is currently comprised of the following countries:Argentina ,Brazil ,Chile ,China ,Colombia ,Czech Republic ,India ,Indonesia ,Malaysia ,Mexico ,Philippines ,Poland ,Russia ,Saudi Arabia ,Slovakia ,South Africa ,South Korea ,Thailand ,Turkey andVietnam . Our Emerging Markets net sales represented 13 percent of our consolidated net sales in the second quarter of 2020 and 12 percent in the second quarter of 2019. Our Emerging Markets net sales represented 11 percent of our consolidated net sales in the first half of 2020 and 12 percent in the first half of 2019. In the second quarter of 2020, our Emerging Markets net sales declined 19.7 percent on a reported basis including operational net sales declines of 14.6 percent and a negative impact of 510 basis points from foreign currency fluctuations, compared to the prior year period. In the first half of 2020, our Emerging Markets net sales declined 15.1 percent on a reported basis including operational net sales declines of 10.2 percent and a negative impact of 490 basis points from foreign currency fluctuations, compared to the prior year period. The decline in the second quarter of 2020 was largely driven by the impact of COVID-19 on our sales inBrazil , as the situation deteriorated inLatin America . In addition, the decline in the first half of 2020 was also largely driven by the impact of COVID-19 on our first quarter 2020 sales inChina , where COVID-19 first emerged and was the most prevalent for the duration of the quarter.
Gross Profit
Our Gross profit was$1.212 billion for the second quarter of 2020,$1.873 billion for the second quarter of 2019,$2.950 billion for the first six months of 2020 and$3.636 billion for the first six months of 2019. As a percentage of net sales, our Gross profit decreased to 60.5 percent in the second quarter of 2020, as compared to 71.2 percent in the second quarter of 2019. As a percentage of net sales, our Gross profit decreased to 64.9 percent in the first six months of 2020, as compared to 71.0 percent in the first six months of 2019. The following is a reconciliation of our gross profit margins and a description of the drivers of the changes from period to period:
Percentage of
Three Months Six Months
Gross profit margin - period ended June 30, 2019 71.2% 71.0%
Abnormal production variances (6.3) (2.8)
Sales pricing and mix (4.1) (2.2)
Manufacturing cost reductions 1.4 1.0
Net impact of foreign currency fluctuations 0.9 0.7
All other, including inventory charges and other
period expense (2.6) (2.8)
Gross profit margin - period ended June 30, 2020 60.5% 64.9%
The primary factors contributing to the decrease in our gross profit margin in
the second quarter and first six months of 2020, as compared to the same periods
in 2019, were approximately $125 million of idle manufacturing costs resulting
from plant shutdowns and reduced operating levels, as well as excess and
obsolete inventory charges due to lower forecasted demand for certain of our
products as a result of COVID-19, along with unfavorable product mix due to the
deferral of procedures using higher-margin products. In addition, we experienced
price declines related primarily to sales of our coronary drug-eluting stent
products, as well as the amortization of the inventory fair value step up
recorded in connection with our acquisition of BTG. These decreases were
partially offset by manufacturing cost reductions driven by our process
improvement programs as well as favorable foreign currency fluctuations. As we
anticipate customer demand for our products to increase sequentially during the
remainder of 2020, we expect that our gross profit margins will improve. Refer
to COVID-19 Pandemic for information
47
--------------------------------------------------------------------------------
Table of Contents regarding our response to and expected impacts of COVID-19, including declines in our gross profit margins starting in the second quarter of 2020.
Operating Expenses
The following table provides a summary of certain of our operating expenses:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
% of Net % of Net % of Net % of Net
(in millions) $ Sales $ Sales $ Sales $ Sales
Selling, general and administrative (SG&A)
expenses $ 798 39.9 % $ 968 36.8 % $ 1,776 39.1 % $ 1,837 35.9 %
Research and development (R&D) expenses 242 12.1 % 280 10.6 % 542 11.9 % 559 10.9 %
Royalty expense 8 0.4 % 17 0.6 % 20 0.4 % 32 0.6 %
SG&A Expenses
In the second quarter of 2020, our SG&A expenses decreased $170 million , or 18
percent, as compared to the second quarter of 2019 and were 310 basis points
higher as a percentage of net sales. In the first six months of 2020, our SG&A
expenses decreased $61 million , or 3 percent, as compared to the first six
months of 2019 and were 320 basis points higher as a percentage of net sales.
The increase in SG&A expenses as a percentage of net sales for the second
quarter and first six months of 2020, as compared to the same periods in the
prior year, was due primarily to lower than expected sales resulting from the
COVID-19 pandemic, as our SG&A expenses are largely fixed and include primarily
headcount. However, in order to minimize the impact, we implemented several cost
reduction initiatives, including decreases in travel, meetings and customer
events, hiring and other variable spending. We also implemented a temporary
four-day work week for most employees and reduced employee compensation,
including temporary significant cuts in the salaries of our Executive Committee
and cash retainer paid to our Board of Directors. As we anticipate our sales to
improve sequentially through the remainder of the year, we expect our SG&A
expenses as a percentage of net sales will improve.
R&D Expenses
We remain committed to advancing medical technologies and investing in meaningful R&D projects across our businesses. In the second quarter of 2020, our R&D expenses decreased$38 million , or 14 percent, as compared to the second quarter of 2019 and were 150 basis points higher as a percentage of net sales. In the first six months of 2020, our R&D expenses decreased$18 million , or 3 percent, as compared to the first six months of 2019, and were 100 basis points higher as a percentage of net sales. R&D expenses decreased in the second quarter and first six months of 2020, as compared to the same periods in the prior year, due to spend reductions on certain longer payoff research and development projects. As we seek to recover from the COVID-19 pandemic, we expect to continue to make investments across our businesses in order to maintain a pipeline of new products that we believe will contribute to profitable sales growth.
Royalty Expense
In the second quarter of 2020, our Royalty expense decreased$8 million , or 51 percent, as compared to the second quarter of 2019, and was 20 basis points lower as a percentage of net sales. In the first six months of 2020, our Royalty expense decreased$12 million , or 38 percent, as compared to the first six months of 2019, and was 20 basis points lower as a percentage of net sales. The decrease in Royalty expense in the second quarter and first six months of 2020, as compared to the same periods in the prior year, relates primarily to the expiration of certain royalty agreements.
48
--------------------------------------------------------------------------------
Table of Contents
The following table provides a summary of certain of our other operating expenses, which are excluded by management for purposes of evaluating operating performance, refer to Additional Information for a further description of certain operating expenses:
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2020 2019 2020 2019
Amortization expense $ 197 $ 161 $ 398 $ 321
Intangible asset impairment charges 34 37 233 105
Contingent consideration expense
(benefit) - 10 (108) (18)
Restructuring charges (credits) 3 1 13 7
Litigation-related net charges (credits) - 15 - (133)
Amortization Expense
In the second quarter of 2020, our Amortization expense increased $37 million ,
or 23 percent, as compared to second quarter of 2019. In the first six months of
2020, our Amortization expense increased $78 million , or 24 percent, as compared
to first six months of 2019. The increase in Amortization expense in the second
quarter and first six months of 2020, as compared to the same periods in the
prior year, was driven by an increase in the balance of amortizable intangible
assets due to recent acquisitions, including BTG.
Intangible Asset Impairment Charges
Our Intangible asset impairment charges were$34 million in the second quarter of 2020,$37 million in the second quarter of 2019,$233 million in the first six months of 2020 and$105 million in the first six months of 2019. The impairment charges recorded in the second quarter and first six months of 2020 were primarily associated with amortizable developed technology that were initially established following our acquisition of nVisionMedical Corporation (nVision). In general, these charges were recorded as a result of management's decision to change commercial launch plans or discontinue certain R&D programs based on cost to complete, time to market, overall economic viability, and specific to nVision, our understanding of the clinical evidence necessary to commercialize the technology. Refer to Note C -Goodwill and Other Intangible Assets to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and Critical Accounting Estimates in Item 7 of our most recent Annual Report on Form 10-K for additional details for a discussion of key assumptions used in our goodwill and intangible asset impairment testing and future events that could have a negative impact on the recoverability of our goodwill and intangible assets.
Contingent Consideration Expense (Benefit)
To recognize changes in the fair value of our contingent consideration liability, we recorded net expenses in the second quarter of 2020 and second quarter of 2019. We recorded net benefits in the first six months of 2020 and first six months of 2019. The$108 million benefit recorded in the first six months of 2020 related to a reduction in the contingent consideration liability for certain prior acquisitions for which we reduced the probability of achievement of associated revenue and/or regulatory milestones upon which payment is conditioned, or in the case of nVision for milestones that would not be achieved due to management's discontinuation of the R&D program. Refer to Note B - Acquisitions and Strategic Investments to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for additional details related to our contingent consideration arrangements.
Restructuring Charges (Credits)
In
In addition, inNovember 2018 , our Board of Directors approved, and we committed to, a new global restructuring program (the 2019 Restructuring Plan). The 2019 Restructuring Plan is expected to result in total pre-tax charges of approximately$200 million to$300 million and approximately$180 million to$280 million of these charges are expected to result in cash outlays. A substantial portion of the savings are being reinvested in strategic growth initiatives.
49
--------------------------------------------------------------------------------
Table of Contents Restructuring charges, net of credits, pursuant to these programs were$3 million in the second quarter of 2020,$1 million in the second quarter of 2019,$13 million in the first six months of 2020 and$7 million in first six months of 2019. Refer to Note G - Restructuring-related Activities to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional details related to our restructuring plans.
Litigation-related net charges (credits)
We did not record any litigation-related net charges during the second quarter and first six months of 2020. In first six months of 2019, our litigation-related net credits included a gain of$148 million , which represents a portion of the total$180 million one-time settlement payment received from Edwards inJanuary 2019 . We record certain legal and product liability charges, credits and costs of defense, which we consider to be unusual or infrequent and significant as Litigation-related net charges (credits) in our unaudited condensed consolidated financial statements. All other legal and product liability charges, credits and costs are recorded within SG&A expenses. As such, a portion of the related gain from the Edwards settlement was recorded in SG&A expenses on our unaudited condensed consolidated financial statements. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation, and therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with the financial covenant required by our credit arrangements. Refer to Note H - Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for discussion of our material legal proceedings. Interest Expense The following table provides a summary of our Interest expense and average borrowing rate: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Interest expense (in millions)$ (91) $ (89) $ (179) $ (198) Average borrowing rate 3.5 % 3.7 % 3.5 % 4.2 % Interest expense remained relatively flat in the second quarter of 2020 and decreased in the first six months of 2020, both as compared to the same periods in the prior year, primarily due to the issuance of euro-denominated bonds inNovember 2019 , which carry lower interest rates than our prior period debt portfolio. In addition, Interest expense in the first six months of 2019 included charges related to the termination of the Bridge Facility, which we entered into onNovember 20, 2018 . Refer to Liquidity and Capital Resources and Note E - Contractual Obligations and Commitments to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for information regarding our debt obligations.
Other, net
The following are the components of Other, net:
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2020 2019 2020 2019
Interest income $ - $ 14 $ 1 $ 21
Net foreign currency gain (loss) (5) (156) (12) (127)
Net gains (losses) on investments (12) (4) (34) (12)
Other income (expense), net (2) (4) (10) (7)
$ (18) $ (150) $ (54) $ (125)
As of June 30, 2019 , we had outstanding certain non-designated forward currency
contracts that we entered into for the purpose of managing our exposure to
currency exchange rate risk related to the British pound sterling-denominated
purchase price of BTG. In the third quarter of 2019, we settled all outstanding
contracts. We recognized a $151 million loss in the second quarter of 2019 and a
$116 million loss in the first six months of 2019 in Other, net due to changes
in fair value of the contracts. These amounts are included in
Acquisition/divestiture-related net charges (credits) presented in the
reconciliation of our results of operations prepared in accordance with U.S.
GAAP to those adjusted results considered by management. Refer to Financial
50
--------------------------------------------------------------------------------
Table of Contents Summary for the reconciliation and Additional Information for a discussion of management's use of non-GAAP financial measures.
Tax Rates
Our effective tax rate from continuing operations is presented below:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Effective tax rate from continuing
operations 18.4 % (5.9) % 13.7 % 4.0 %
The change in our reported tax rates for the second quarter and first six months
of 2020, as compared to the same periods in 2019, relates primarily to a shift
in geographical mix of earnings to higher-tax jurisdictions, partially offset by
the impact of certain receipts and charges that are taxed at different rates
than our effective tax rate. These receipts and charges include intangible asset
impairment charges, acquisition/divestiture-related net charges, restructuring
and restructuring-related net charges, litigation-related net charges as well as
certain discrete tax items primarily related to share-based payments and impacts
of the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on
March 27, 2020 .
Economic stimulus legislation has been enacted in many countries in response to
COVID-19. In the U.S. , the CARES Act was signed into law on March 27, 2020 and
provides an estimated $2.2 trillion in COVID-19 pandemic related relief, and
included tax relief and government loans, subsidies and other relief for
entities in affected industries. While we have not applied for government loans,
we are evaluating other aid available. We have also taken advantage of the
benefits offered in multiple jurisdictions including the U.S. provision allowing
taxpayers to defer payment of the employer portion of certain payroll taxes
through the end of 2020. This allows us to preserve cash generated from
operations to service our debt obligations and other near-term commitments.
Critical Accounting Policies and Estimates
Our financial results are affected by the selection and application of
accounting policies and methods. In the six months ended June 30, 2020 , there
were no changes to the application of critical accounting policies previously
disclosed in our most recent Annual Report on Form 10-K. We have included below
information relating to our annual goodwill impairment test performed in the
second quarter of 2020.
Goodwill Valuation
We did not record any goodwill impairment charges in the second quarter and
first six months of 2020 or 2019. We test our goodwill balances in the second
quarter of each year as of April 1 for impairment, or more frequently if
impairment indicators are present or changes in circumstances suggest an
impairment may exist. In the second quarter of 2020, we performed our annual
goodwill impairment test for all of our reporting units and concluded that the
fair value of each reporting unit exceeded its carrying value.
We assess goodwill for impairment at the reporting unit level, which is defined
as an operating segment or one level below an operating segment, referred to as
a component. We identified the following reporting units in our 2020 annual
goodwill impairment test: Interventional Cardiology, Peripheral Interventions,
Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic
Health , Neuromodulation and Specialty Pharmaceuticals . We aggregated the Cardiac
Rhythm Management and Electrophysiology reporting units, components of the
Rhythm Management operating segment, based on the criteria prescribed in FASB
ASC Topic 350, Intangibles - Goodwill and Other.
In 2020, we utilized the qualitative assessment approach to test all of our
reporting units. We assessed recent events, including the COVID-19 pandemic, as
well as changes in macroeconomic factors, industry and market conditions,
overall financial performance and other entity-specific factors since the most
recently performed quantitative test. After assessing the totality of events, we
determined that it is more likely than not that the fair value of each of our
reporting units has sufficient excess over its carrying value, and concluded
that goodwill was not impaired or at risk of impairment in the second quarter of
2020.
Liquidity and Capital Resources
We are currently in a strong financial position with solid liquidity, a prudent
debt maturity profile, and have credit arrangements with a broad, global, and
robust commercial banking syndicate. We believe our long-term fundamentals
remain strong given our innovative product portfolio and pipeline, our category
leadership strategy and talented global team. As a result of the
51
--------------------------------------------------------------------------------
Table of Contents impact of the COVID-19 pandemic on our business, we took proactive steps in the second quarter of 2020 to reduce costs and ensure we are in a strong position to support customers and patients as healthcare systems recover and elective procedures resume. These actions included increasing available liquidity and preemptively amending our financial covenant requirement for our outstanding credit arrangements, implementing significant reductions in travel, meetings and customer events, as well as freezing all but the most critical new hires and slowing planned capital expenditures. In addition, we temporarily closed and/or reduced production levels at certain of our manufacturing sites, implemented a temporary four-day work week for many employees globally and reduced employee compensation, including temporary significant cuts in the salaries of our Executive Committee and the cash retainer paid to our Board of Directors, and where possible, temporarily reduced work weeks and the associated compensation for non-sales employees. All of our plants have now resumed manufacturing and are increasing their utilization levels, but most are expected to remain below full capacity in the third quarter of 2020. In those jurisdictions where temporary four-day work weeks and reductions in employee compensation were in effect, those measures concluded at the beginning of the third quarter and we recently announced the end of the aforementioned reductions in executive officer pay. Despite implementing these measures to reduce costs, our operating expenses as a percentage of net sales increased during the second quarter of 2020, both sequentially and as compared to the prior year, as approximately 70 percent of our operating expenses are fixed in nature. Our gross profit margin was also unfavorably impacted in the second quarter of 2020, both sequentially and as compared to the prior year, primarily due to idle capacity in our manufacturing plants as we better aligned inventory with end market demand. We expect sequential improvement in both gross profit margin and operating expenses as a percentage of net sales in the third quarter of 2020 and further sequential improvement in the fourth quarter of 2020, unless there is a resurgence of COVID-19 infections causing further delays of elective procedures and reducing demand for our products. We have a cross-functional strategic cash management team to take appropriate actions to ensure we continue to optimize funds in the near and long-term to execute our core mission. To prepare for the temporary adverse impacts of COVID-19 on our business, we have taken steps to manage outstanding borrowings and increase available liquidity. InMay 2020 , we completed an offering of$1.700 billion in aggregate principal amount of senior notes and used the net proceeds to prepay$1.250 billion of amounts outstanding under ourFebruary 2021 andApril 2021 Term Loan and pay related fees, expenses and premiums, as well as to refinance$450 million of amounts outstanding under our Revolving Credit Facility. We now have full access to the$2.750 billion of available liquidity under our Revolving Credit Facility. InMay 2020 , we also completed public equity offerings of preferred stock and common stock, as discussed below, and used a portion of the combined net proceeds to repay in full the remaining amounts outstanding under theApril 2021 Term Loan. For additional details related to our debt obligations, including our financial covenant requirement, refer to Note E - Contractual Obligations and Commitments to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. Based on our current business plan, we believe our existing balance of Cash and cash equivalents, future cash generated from operations, access to capital markets and existing credit facilities will be sufficient to fund our operations, invest in our infrastructure, pay our legal-related liabilities, pay taxes due and service and repay our existing debt for the next 12 months.
Financial Covenant
As of and through
OnApril 21, 2020 , we entered into an agreement with our banking syndicates to amend the financial covenant requirement for all of our outstanding credit arrangements as follows: (i) establish a deemed Consolidated EBITDA of$671 million for the second, third and fourth quarters of 2020, reflecting average quarterly Consolidated EBITDA, as defined in the credit agreements, for 2018 and 2019; and (ii) maintain the maximum permitted leverage ratio of 4.75 times through the remainder of 2020, with a step-down for each succeeding fiscal quarter end to 4.50 times, 4.25 times, 4.00 times and ultimately 3.75 times for the fourth quarter of 2021 and through the remaining term of the facility. In addition, pursuant to theApril 21, 2020 Revolving Credit Facility andFebruary 2021 Term Loan amendments, the definition of "Material Adverse Effect" has been amended to remove the direct and indirect effects of the COVID-19 pandemic from what constitutes a material adverse effect. We believe that we have the ability to comply with the amended covenant requirement for the next 12 months. Contractual Obligations and Commitments Certain of our acquisitions involve the payment of contingent consideration. See Note B - Acquisitions and Strategic Investments to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for further details regarding the estimated potential amount of future contingent consideration we could be required to pay associated with our acquisitions. 52
--------------------------------------------------------------------------------
Table of Contents In response to the COVID-19 pandemic, we are optimizing operational output and continuing to work with suppliers to renegotiate open purchase obligations. As we execute these plans, there may be reductions to our future minimum purchase obligations and commitments as reported in our most recent Annual Report filed on Form 10-K. These purchase obligations relate primarily to non-cancellable raw material supply commitments and capital expenditures entered in the normal course of business. In addition, recent transactions within our debt portfolio may result in changes to our interest payment schedule and amounts within. There have been no other material changes to our contractual obligations and commitments as reported in our most recent Annual Report filed on Form 10-K, with the exception of our debt obligations discussed in Liquidity and Capital Resources and Note E - Contractual Obligations and Commitments to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.
Equity
OnMay 27, 2020 , we completed an offering of 10,062,500 shares of 5.50% Mandatory Convertible Preferred Stock, Series A (MCPS) at a price to the public and liquidation preference of$100 per share. The net proceeds from the MCPS offering were approximately$975 million after deducting underwriting discounts and commissions and offering expenses. OnMay 27, 2020 , we also completed an offering of 29,382,500 shares of common stock at a public offering price of$34.25 per share. The net proceeds from the common stock offering were approximately$975 million after deducting underwriting discounts and commissions and offering expenses. We used a portion of the net proceeds to repay remaining amounts outstanding under theApril 2021 Term Loan and to pay related fees, expenses and premiums as discussed in Note E - Contractual Obligations and Commitments to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. The remaining proceeds will be used for general corporate purposes, which may include refinancing or repayment of other outstanding indebtedness and funding potential future acquisitions and investments. We received$48 million in the first six months of 2020 and$63 million in the first six months of 2019 in proceeds from stock issuances related to our stock option and employee stock purchase plans. Proceeds from the exercise of employee stock options and employee stock purchases vary from period to period based upon, among other factors, fluctuations in the trading price of our common stock and in the exercise and stock purchase patterns of our employees. We did not repurchase any shares of our common stock in the first six months of 2020 or 2019. As ofJune 30, 2020 , the remaining authorization to repurchase shares under our 2013 share repurchase program was$535 million .
Legal Matters
For a discussion of our material legal proceedings see Note H - Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and Note J - Commitments and Contingencies to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K. Recent Accounting Pronouncements Information regarding new accounting pronouncements implemented sinceDecember 31, 2019 is included in Note A - Basis of Presentation and information regarding new accounting pronouncements to be implemented is included in Note N - New Accounting Pronouncements to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. Additional Information Cybersecurity We have established controls and procedures to escalate enterprise level issues, including cybersecurity matters, to the appropriate management levels within our organization and our Board of Directors, or members or committees thereof, as appropriate. Under our framework, cybersecurity issues are analyzed by subject matter experts and a crisis committee for potential financial, operational, and reputational risks, based on, among other factors, the nature of the matter and breadth of impact. Matters determined to present potential material impacts to the Company's financial results, operations, and/or reputation are immediately reported by management to the Board of Directors, or individual members or committees thereof, as appropriate, in accordance with our escalation framework. In addition, we have established procedures to ensure that management responsible for overseeing the effectiveness of disclosure controls is informed in a timely manner of known
53
--------------------------------------------------------------------------------
Table of Contents cybersecurity risks and incidents that may materially impact our operations and that timely public disclosure is made as appropriate. Stock Trading Policy Our directors and executive officers are subject to our Stock Trading Policy, which is designed to facilitate compliance with insider trading laws and governs transactions in our common stock and related derivative securities. Our policy designates certain regular periods, dictated by release of financial results, in which trading is restricted for individuals in information-sensitive positions, including directors and executive officers. In addition, additional periods of trading restriction may be imposed as determined by the President, General Counsel, or Chief Financial Officer in light of material pending developments. Further, during permitted windows, individuals in information-sensitive positions are required to seek pre-clearance for trades from the General Counsel,who assesses whether there are any important pending developments, including cybersecurity matters, which need to be made public before the individual may participate in the market. Periodically, certain of our executive officers adopt written stock trading plans in accordance with Rule 10b5-1 under the Exchange Act and our own Stock Trading Policy. A Rule 10b5-1 Trading Plan is a written document that pre-establishes the amount, prices and dates (or formulas for determining the amounts, prices and dates) of future purchases or sales of our stock, including shares issued upon exercise of stock options or vesting of deferred stock units. These plans are entered into at a time when the person is not in possession of material non-public information about our Company. We disclose details regarding individual Rule 10b5-1 Trading Plans by our executive officers on the Investor Relations section of our website, under the Governance Overview section.
Use of Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP financial measures, including adjusted net income (loss) and adjusted net income (loss) per share (EPS) that exclude certain amounts and operational net sales growth that exclude the impact of foreign currency fluctuations. These non-GAAP financial measures are not in accordance with generally accepted accounting principles inthe United States and should not be considered in isolation from or as a replacement for the most directly comparable GAAP financial measures. Further, other companies may calculate these non-GAAP financial measures differently than we do, which may limit the usefulness of those measures for comparative purposes. To calculate adjusted net income (loss) and adjusted net income (loss) per share we exclude certain charges (credits) from GAAP net income available to common stockholders. Amounts are presented after-tax using our effective tax rate, unless the amount is a significant unusual or infrequently occurring item in accordance with FASB ASC section 740-270-30, "General Methodology and Use of Estimated Annual Effective Tax Rate." Please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our most recent Annual Report filed on Form 10-K filed with theSecurities and Exchange Commission (SEC) for an explanation of each of these adjustments and the reasons for excluding each item.
The GAAP financial measures most directly comparable to adjusted net income (loss) and adjusted net income (loss) per share are GAAP net income (loss) and GAAP net income (loss) per share available to common stockholders, respectively.
To calculate operational net sales growth rates, which exclude the impact of foreign currency fluctuations, we convert actual net sales from local currency toU.S. dollars using constant foreign currency exchange rates in the current and prior period. The GAAP financial measure most directly comparable to operational growth rate percentages is growth rate percentages using net sales on a GAAP basis.
Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP financial measure are included in the relevant sections of this Quarterly Report.
Management uses these supplemental non-GAAP financial measures to evaluate
performance period over period, to analyze the underlying trends in our
business, to assess our performance relative to our competitors and to establish
operational goals and forecasts that are used in allocating resources. In
addition, management uses these non-GAAP financial measures to further its
understanding of the performance of our operating segments. The adjustments
excluded from our non-GAAP financial measures are consistent with those excluded
from our operating segments' measures of net sales and profit or loss. These
adjustments are excluded from the segment measures reported to our chief
operating decision maker that are used to make operating decisions and assess
performance.
54--------------------------------------------------------------------------------
Table of Contents We believe that presenting adjusted net income (loss) , adjusted net income (loss) per share that exclude certain amounts and operational net sales growth that exclude the impact of changes in foreign currency exchange rates, in addition to the corresponding GAAP financial measures, provides investors greater transparency to the information used by management for its operational decision-making and allows investors to see our results "through the eyes" of management. We further believe that providing this information assists our investors in understanding our operating performance and the methodology used by management to evaluate and measure such performance.
Safe Harbor for Forward-Looking Statements
Certain statements that we may make from time to time, including statements contained in this Quarterly Report on Form 10-Q and information incorporated by reference herein, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by words like "anticipate," "expect," "project," "believe," "plan," "estimate," "intend," "aiming" and similar words. These forward-looking statements are based on our beliefs, assumptions and estimates using information available to us at the time and are not intended to be guarantees of future events or performance. If our underlying assumptions turn out to be incorrect, or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q are based on certain risks and uncertainties, including the risk factors described in Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and the specific risk factors discussed herein and in connection with forward-looking statements throughout this Quarterly Report on Form 10-Q, which could cause actual results to vary materially from the expectations and projections expressed or implied by our forward-looking statements. These risks and uncertainties, in some cases, have affected and in the future could affect our ability to implement our business strategy and may cause actual results to differ materially from those contemplated by the statements expressed in this Quarterly Report. As a result, readers are cautioned not to place undue reliance on any of our forward-looking statements. Risks and uncertainties that may cause such differences include, among other things: the impact of the COVID-19 pandemic on our operations and financial results, futureU.S. and global economic, political, competitive, reimbursement and regulatory conditions, new product introductions and the market acceptance of those products, markets for our products, expected pricing environment, expected procedural volumes, the closing and integration of acquisitions, clinical trial results, demographic trends, intellectual property rights, litigation, financial market conditions, the execution and effect of our restructuring program, the execution and effect of our business strategy, including our cost-savings and growth initiatives and future business decisions made by us and our competitors. New risks and uncertainties may arise from time to time and are difficult to predict, including those that have emerged or have increased in significance or likelihood as a result of COVID-19. All of these factors are difficult or impossible to predict accurately and many of them are beyond our control. For a further list and description of these and other important risks and uncertainties that may affect our future operations, see Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K filed with theSEC , which we may update in Part II, Item 1A. Risk Factors in subsequent Quarterly Reports on Form 10-Q that we will file hereafter, and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. We disclaim any intention or obligation to publicly update or revise any forward-looking statement to reflect any change in our expectations or in events, conditions, or circumstances on which those expectations may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this Quarterly Report. The following are some of the important risk factors that could cause our actual results to differ materially from our expectations in any forward-looking statements. For further discussion of these and other risk factors, see Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.
Our Businesses
•The impact of the COVID-19 pandemic on the
•The timing of when semi-emergent procedures will be permitted in various markets we serve, following measures to limit such procedures as a result of the COVID-19 pandemic,
•Our ability to recover and increase net sales, expand the market, capture market share and adapt to market volatility,
•The ongoing impact on our business of physician alignment to hospitals, governmental investigations and audits of hospitals and other market and economic conditions on the overall number of procedures performed,
•Competitive offerings and related declines in average selling prices for our products,
55
--------------------------------------------------------------------------------
Table of Contents
•The performance of, and physician and patient confidence in, our products and technologies or those of our competitors,
•The impact and outcome of ongoing and future clinical trials and market studies undertaken by us, our competitors or other third parties or perceived product performance of our or our competitors' products,
•Variations in clinical results, reliability or product performance of our and our competitors' products,
•Our ability to acquire or develop, launch and supply new or next-generation products and technologies worldwide and in line with our commercialization strategies in a timely and successful manner and with respect to our recent acquisitions,
•The effect of consolidation and competition in the markets in which we do business or plan to do business,
•Disruption in the manufacture or supply of certain components, materials or products, or the failure to secure in a timely manner alternative manufacturing or additional or replacement components, materials or products,
•Our ability to achieve our projected level or mix of product sales, as some of our products are more profitable than others,
•The impact of COVID-19 on our global manufacturing and distribution system,
•Our ability to retain and attract key personnel, including those associated with recent acquisitions,
•The inability of certain of our employees to return to work full time following reduced work schedules, or our inability to recruit personnel into direct labor roles,
•The impact of natural disasters, public health crises, including the COVID-19 pandemic, and other catastrophic events,
•The impact of enhanced requirements to obtain regulatory approval in theU.S. and around the world, including EU MDR and the associated timing and cost of product approval, and •The impact of increased pressure on the availability and rate of third-party reimbursement for our products and procedures in theU.S. and around the world, including with respect to the timing and costs of creating and expanding markets for new products and technologies.
Regulatory Compliance, Litigation and Data Protection
•The impact of healthcare policy changes and legislative or regulatory efforts in theU.S. , the EU and around the world to modify product approval or reimbursement processes, including a trend toward demonstrating clinical outcomes, comparative effectiveness and cost efficiency, as well as the impact of other healthcare reform legislation,
•Risks associated with our regulatory compliance and quality systems and
activities in the
•Our ability to minimize or avoid future field actions or FDA warning letters relating to our products and processes and the ongoing inherent risk of potential physician advisories related to our or our competitors' products,
•The impact of increased scrutiny of and heightened global regulatory
enforcement facing the medical device industry arising from political and
regulatory changes, economic pressures or otherwise, including under
•Costs and risks associated with current and future asserted litigation,
•The effect of our litigation and risk management practices, including self-insurance and compliance activities on our loss contingencies, legal provision and cash flows,
56
--------------------------------------------------------------------------------
Table of Contents •The impact of, diversion of management attention as a result of, and costs to cooperate with, litigate and/or resolve governmental investigations and our class action, product liability, contract and other legal proceedings,
•The possibility of failure to protect our intellectual property rights and the outcome of patent litigation, and
•Our ability to operate properly our information systems that support our business operations and protect our data integrity and products from a cyber-attack or other breach that has a material adverse effect on our business, reputation or results of operations.
Innovation and Certain Growth Initiatives
•The timing, size and nature of our strategic growth initiatives and market opportunities, including with respect to our internal research and development platforms and externally available research and development platforms and technologies and the ultimate cost and success of those initiatives and opportunities, •Our ability to complete planned clinical trials successfully, obtain regulatory approvals and launch new and next generation products in a timely manner consistent with cost estimates, including the successful completion of projects from in-process research and development, •Our ability to identify and prioritize our internal research and development project portfolio and our external investment portfolio on profitable net sales growth opportunities as well as to maintain the estimated timing and costs of such projects and expected revenue levels for the resulting products and technologies, •Our ability to develop, manufacture and market new products and technologies successfully and in a timely manner and the ability of our competitors and other third parties to develop products or technologies that render our products or technologies noncompetitive or obsolete, •Our ability to execute appropriate decisions to discontinue, write-down or reduce the funding of any of our research and development projects, including projects from in-process research and development from our acquisitions, in our growth adjacencies or otherwise, •Our dependence on acquisitions, alliances or investments to introduce new products or technologies and to enter new or adjacent growth markets and our ability to fund them or to fund contingent payments with respect to those acquisitions, alliances and investments, and
•The potential failure to successfully integrate and realize the expected benefits from the strategic acquisitions, alliances and investments we have consummated or may consummate in the future.
International Markets
•Our dependency on international net sales to achieve growth, including in emerging markets,
•The timing and collectability of customer payments, as well as our ability to continue factoring customer receivables where we have factoring arrangements,
•Geopolitical and economic conditions,
•The United Kingdom's departure from the
•Protection of our intellectual property,
•Our ability to comply with established and developing
•Our ability to comply with
•The impact of changes in reimbursement practices and policies,
57
--------------------------------------------------------------------------------
Table of Contents •Our ability to maintain or expand our worldwide market positions in the various markets in which we compete or seek to compete, including through investments in product diversification and emerging markets such asBrazil ,Russia ,India andChina ,
•Our ability to execute and realize anticipated benefits from our investments in emerging markets, and
•The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses and resulting margins.
Liquidity
•Our ability to generate sufficient cash flow to fund operations, capital expenditures, global expansion initiatives, any litigation settlements and judgments, share repurchases and strategic investments and acquisitions as well as maintaining our investment grade ratings and managing our debt levels and financial covenant compliance, particularly in light of the COVID-19 pandemic and lower demand for our products,
•Our ability to access the public and private capital markets when desired and to issue debt or equity securities on terms reasonably acceptable to us,
•The unfavorable resolution of open tax matters, exposure to additional tax
liabilities and the impact of changes in
•The impact of examinations and assessments by domestic and international taxing authorities on our tax provision, financial condition or results of operations,
•The issuance of new or revised accounting standards by the
•The possibility of counterparty default on our derivative financial instruments,
•The impact of potential intangible asset impairment charges, including on our results of operations, and
•Our ability to collect outstanding and future receivables and/or sell receivables under our factoring programs.
Cost Reduction and Optimization Initiatives
•Risks associated with changes made or expected to be made to our organizational and operational structure, pursuant to our restructuring plans as well as any further restructuring or optimization plans we may undertake in the future and our ability to recognize benefits and cost reductions from such programs and
•Business disruption and employee distraction as we execute our global compliance program, restructuring and optimization plans and divestitures of assets or businesses and implement our other strategic and cost reduction initiatives.
58
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
