Boston Scientific Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Boston Scientific develops and sells medical devices across its MedSurg and Cardiovascular businesses. Figures are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $3.389 billion | $3.026 billion |
| Gross profit / margin | $2.349 billion / 69.3% | $2.071 billion / 68.4% |
| Operating income | $552 million | $466 million |
| Net income attributable to common stockholders | $300 million | $97 million |
| Diluted GAAP EPS | $0.21 | $0.07 |
| Operating cash flow | $190 million | $(58) million |
- Sales grew 12.0% reported, 14.9% operationally excluding foreign exchange, and 14.0% organically. Foreign currency reduced reported growth by 2.9 percentage points.
- Management-reported adjusted net income attributable to common stockholders was $673 million, or $0.47 per diluted share, versus $562 million, or $0.39, a year earlier. These non-GAAP measures exclude specified charges and credits.
- Gross margin improved 0.9 percentage points, reflecting favorable sales mix and manufacturing and supply-cost improvements, partly offset by foreign exchange and other period expenses. SG&A rose to 35.9% of sales from 35.0%; R&D was 9.9% of sales versus 10.5%.
- Investing cash outflow was $484 million, including $375 million net cash paid for Acotec; financing cash outflow was $69 million. Capital expenditure and internal-use software purchases were $111 million.
Business and changes versus prior year
- Cardiovascular sales were $2.110 billion, up 12.7%; MedSurg sales were $1.280 billion, up 11.0%. Cardiology grew 14.1%, led by WATCHMAN and other cardiac franchises; Urology grew 13.5%, Endoscopy 8.6%, Neuromodulation 11.9%, and Peripheral Interventions 8.2%.
- Emerging-market sales grew 20.2% reported, with management citing demand recovery in China as a key contributor.
- Acotec: Boston Scientific acquired approximately 65% on February 20 for $519 million upfront. Acotec results after closing are omitted from Q1 statements because the company consolidates them on a one-quarter lag. The April 4 Apollo Endosurgery acquisition for approximately $615 million occurred after quarter-end.
- Q1 2022 included $194 million of debt-extinguishment charges. Accordingly, the year-over-year improvement in reported earnings and interest expense ($65 million versus $279 million) partly reflects this prior-year unusual item.
Liquidity, debt and outlook
- At March 31, cash and cash equivalents were $570 million; cash, cash equivalents and restricted cash totaled $763 million. Total debt was $9.005 billion, including $510 million current obligations. Current assets were $5.704 billion and current liabilities $4.083 billion.
- The amended $2.75 billion revolving credit facility was undrawn at quarter-end; the company reported covenant compliance, with leverage of 2.52 times against a 3.75-times maximum. Approximately $400 million of commercial paper was outstanding after quarter-end to partially fund Apollo, reducing facility availability.
- Management said cash, expected operating cash generation, capital-market access and credit facilities should be sufficient for operations, investment, legal liabilities, debt service and potential acquisitions for at least the next 12 months and foreseeable future.
- Management expected gross margin in the first half of 2023 to exceed the second half, primarily because of the timing of foreign-exchange movements in the prior-year comparison. The filing provides no clear numerical full-year sales or earnings guidance in the supplied text.
Risks, contingencies and unusual items
- The company began a new global restructuring plan and recorded $20 million of restructuring charges and $24 million of related charges in Q1.
- Legal accruals were $416 million at quarter-end. In a patent case, a jury found a UT patent valid and willfully infringed and awarded $42 million; post-trial motions were pending. The company disputes the finding and is seeking judgment or a new trial.
- Other disclosed matters include transvaginal mesh product-liability claims, a Brazil competition investigation, a U.S. investigation concerning alleged Vietnam FCPA violations, and a DOJ subpoena received April 5 seeking information about the ambulatory electrocardiography monitoring business. The filing states some potential losses cannot be reasonably estimated.
- Management cited supply constraints and input-cost inflation, labor costs, foreign-exchange volatility, geopolitical tensions, cybersecurity, regulatory and reimbursement changes, litigation, and acquisition integration as risks. The company is substantially self-insured for product liability and fully self-insured for intellectual-property infringement claims.
Key facts for investors to verify
- Whether organic growth, product mix and margin improvements persist, and how foreign exchange affects reported results.
- Cash generation and working-capital trends, particularly rising inventories and receivables; quarter-end unrestricted cash was $570 million.
- Post-quarter funding and integration costs for Apollo, Acotec’s contribution under the one-quarter reporting lag, and acquisition-related obligations.
- Debt maturities, commercial-paper usage, covenant headroom and the effect of future litigation payments on liquidity.
- Developments in the $42 million patent verdict, mesh claims and government investigations, including any change in accruals or exposure.