Boston Scientific Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Boston Scientific develops and sells medical devices globally. Its reportable segments are MedSurg and Cardiovascular; prior periods were recast to reflect a 2022 operating-structure reorganization.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3.170bn | $2.932bn | $9.440bn | $8.761bn |
| Gross margin | 69.1% | 69.3% | 68.8% | 68.7% |
| Operating income | $358m | $387m | $1.247bn | $1.019bn |
| Net income available to common stockholders | $174m | $405m | $516m | $905m |
| Diluted GAAP EPS | $0.12 | $0.28 | $0.36 | $0.63 |
| Operating cash flow | Not separately provided | Not separately provided | $719m | $1.392bn |
Q3 reported sales increased 8.1%, including 13.7% operational growth and a 550-basis-point foreign-exchange headwind. For the nine months, sales rose 7.7%, including 11.9% operational growth and a 420-basis-point FX headwind. Q3 adjusted net income available to common stockholders was $620m, or $0.43 per diluted share, versus $581m, or $0.41, a year earlier. Nine-month adjusted figures were $1.816bn and $1.26 per share, versus $1.683bn and $1.17. These are non-GAAP measures and should be considered alongside GAAP results.
Q3 sales growth was led by Cardiology, up 10.2%, and Urology and Pelvic Health, up 12.6%; Neuromodulation was essentially flat. The nine-month operating cash flow decline was attributed mainly to working-capital changes. Capital spending was $376m for the nine months.
Balance sheet and liquidity
At September 30, 2022, cash and cash equivalents were $338m, compared with $1.925bn at December 31, 2021. Total debt was $8.584bn, down from $9.065bn; stockholders’ equity was $17.640bn. Current assets were $5.144bn and current liabilities $3.549bn. The company reported $2.750bn available under its revolving credit facility and no commercial paper outstanding. It was in compliance with its leverage covenant, reporting a 2.50x ratio against a 3.75x maximum.
Material changes and unusual items
- Q3 GAAP net income available to common stockholders fell to $174m from $405m, while adjusted net income rose to $620m from $581m. GAAP results included substantial amortization, impairment and acquisition-related adjustments; nine-month 2022 results also included $194m of debt-extinguishment charges.
- Q3 gross margin declined 0.2 percentage points year over year. Management cited inflation in materials, components, labor and freight, and manufacturing inefficiencies from constrained material availability. Favorable product mix, currency hedges and cost improvements partly offset those pressures.
- In March 2022, the company issued €3.0bn of senior notes and used proceeds largely to refinance notes, recording the debt-extinguishment charge. The Baylis Medical acquisition closed in February for $1.463bn net of cash acquired. The company also reported acquisition payments and contingent consideration outflows.
- Intangible-asset impairment charges were $125m in Q3, primarily related to Vertiflex assets and lower revenue expectations amid reimbursement challenges.
Outlook, risks and contingencies
The filing provides no specific numerical full-year sales or earnings guidance. Management expected macroeconomic pressures to continue weighing on gross margin through the remainder of 2022 and into 2023, and said COVID-related effects, healthcare staffing shortages and supply constraints could continue to affect demand and operations. Management stated that available cash, operating cash generation, capital-market access and credit facilities should fund operations and obligations for the next 12 months and the foreseeable future.
Key risks include inflation, supply-chain and labor constraints, foreign-exchange movements, geopolitical developments, reimbursement and regulatory changes, cybersecurity threats, and integration and performance of acquisitions. The company had $304m accrued for probable and estimable legal matters. It disclosed approximately 55,000 U.S. and 2,700 international transvaginal-mesh claims; outcomes of unresolved claims remain uncertain. In October 2022, it received a U.S. Attorney’s Office subpoena following a whistleblower allegation of possible FCPA violations in Vietnam; the company said it was cooperating and investigating. A patent case involving the University of Texas was scheduled for trial in January 2023. The company also reported a confidential $85m settlement with Nevro in July 2022.
Important facts for investors to verify
- Whether operational sales growth and product demand persist after separating acquisition contributions, foreign-exchange effects and changing procedure volumes.
- Whether supply, labor and inflation pressures continue to affect gross margin and whether management’s expected recovery assumptions prove achievable.
- Cash conversion and working-capital trends, given nine-month operating cash flow fell by $673m year over year and cash balances declined materially.
- Debt, refinancing needs and covenant headroom, alongside the company’s capacity to fund litigation, acquisitions and other obligations.
- Developments in mesh litigation, the Vietnam FCPA investigation, the scheduled patent trial and other legal contingencies.
- Whether Vertiflex reimbursement challenges, other impairment indicators and acquisition-related contingent payments affect future earnings or cash flows.