Boston Scientific Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Boston Scientific develops, manufactures and sells medical devices globally. In Q1 2022, it reorganized its reporting structure into MedSurg and Cardiovascular segments; prior periods were recast. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $3.244 billion | $3.077 billion | $6.270 billion | $5.829 billion |
| Gross profit margin | 68.8% | 69.3% | 68.6% | 68.4% |
| Operating income | $423 million | $262 million | $889 million | $632 million |
| Net income available to common stockholders | $246 million | $172 million | $342 million | $500 million |
| Diluted EPS | $0.17 | $0.12 | $0.24 | $0.35 |
| Adjusted net income available to common stockholders (non-GAAP) | $635 million | $577 million | $1.197 billion | $1.102 billion |
| Adjusted diluted EPS (non-GAAP) | $0.44 | $0.40 | $0.83 | $0.77 |
- Q2 reported sales rose 5.4%; operational growth, excluding currency, was 9.6%. First-half reported sales rose 7.6%, with operational growth of 11.1%. Currency reduced reported growth by 420 basis points in Q2 and 350 basis points for the first half.
- Q2 GAAP net income improved year over year, while first-half GAAP net income declined. The first half of 2021 included an acquisition-related gain and other unusual items. Adjusted results are non-GAAP and exclude specified charges and credits; they should be considered alongside GAAP results.
- Q2 gross margin fell 0.5 percentage point year over year. Management cited inflation in materials, labor and freight, and manufacturing inefficiencies from constrained material availability. First-half margin increased 0.2 point, supported by product mix and currency effects.
- Q2 sales by reportable business were $1.248 billion for MedSurg (+4.5%) and $1.996 billion for Cardiovascular (+6.0%). First-half sales were $2.402 billion (+6.6%) and $3.868 billion (+8.6%), respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $249 million, down from $927 million in 2021; management attributed the decrease primarily to working-capital changes. Capital expenditures and internal-use software purchases were $226 million, versus $181 million.
- Investing cash outflow was $1.603 billion, including $1.471 billion paid for Baylis Medical. Financing cash outflow was $350 million. Cash, cash equivalents and restricted cash totaled $458 million at June 30, including $276 million of unrestricted cash, versus $2.168 billion in total cash and restricted cash at year-end 2021.
- Total debt was $8.971 billion, including $170 million current debt, compared with $9.065 billion at December 31, 2021. The company issued €3.0 billion of euro-denominated notes, generating $3.270 billion net proceeds, largely used to tender for or redeem $3.275 billion of existing notes. It recorded $194 million of debt-extinguishment charges in the first half.
- The $2.750 billion revolving credit facility had no direct borrowings; $155 million of commercial paper was outstanding, leaving $2.595 billion of stated facility availability. The company was in covenant compliance: leverage was 2.61 times versus a 3.75-times maximum. Management said available cash, operating cash flow, capital-market access and credit facilities should fund needs for at least the next 12 months.
- Current assets were $5.083 billion and current liabilities $3.883 billion at June 30. Inventories rose to $1.752 billion from $1.610 billion at year-end.
Management outlook, material changes and risks
- No quantified full-year sales or earnings guidance is provided in the supplied filing text. Management expects inflation, supply constraints and related cost pressures to continue to weigh on gross margin through 2022 while those conditions persist, and says it expects the COVID-19 pandemic to continue to affect performance to some extent.
- Management attributed growth to acquisitions, portfolio performance, market growth and commercial execution. Cardiology growth included WATCHMAN, diagnostics and structural-heart products; Urology and Pelvic Health growth benefited materially from the Lumenis acquisition. Neuromodulation sales declined in Q2, partly against strong prior-year procedure volumes.
- Baylis Medical was acquired in February for $1.471 billion net of acquired cash. A definitive agreement to acquire approximately 64% of M.I. Tech for about $230 million was announced in June; closing was expected in the second half of 2022, subject to customary conditions.
- Material risk factors include COVID-related procedure disruption, supply-chain constraints and inflation, labor availability and cost, foreign-exchange movements, cybersecurity and geopolitical risks, product and regulatory matters, and the successful integration of acquisitions.
- Legal matters remain significant. The company reported a $514 million accrual for probable and estimable legal matters, primarily associated with transvaginal surgical mesh. It disclosed approximately 55,000 U.S. mesh cases or claims and approximately 2,700 outside the U.S.; resolution of remaining claims remains uncertain. A Brazil competition investigation and a Vietnam FCPA whistleblower allegation were also disclosed. After quarter-end, on July 29, the company agreed to pay Nevro $85 million to settle pending litigation.
- The company recorded $42 million of litigation-related charges in the first half, compared with $302 million in the prior-year period. It also reported $411 million of gross unrecognized tax benefits at June 30.
Important facts for investors to verify
- Whether operational sales growth and procedure volumes continue, and how currency movements affect reported growth.
- Whether supply, labor and inflation pressures persist or further reduce gross margins.
- Cash-flow conversion and liquidity trends after the large acquisition outlay and the decline in cash balances.
- Debt, covenant headroom and future cash requirements, including contingent acquisition payments and litigation settlements.
- Progress and final costs of mesh litigation, the Nevro settlement payment, and developments in the Brazil and Vietnam matters.
- Closing and integration of M.I. Tech, and the commercial returns from recent acquisitions.