Boston Scientific Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Boston Scientific develops and sells medical devices globally. Comparisons are with the corresponding 2020 periods unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2.932 billion | $2.659 billion | $8.761 billion | $7.204 billion |
| Gross margin | 69.3% | 67.3% | 68.7% | 65.8% |
| Operating income (loss) | $387 million | $(205) million | $1.019 billion | $(130) million |
| Net income (loss) | $419 million | $(155) million | $946 million | $(292) million |
| Net income (loss) available to common stockholders | $405 million | $(169) million | $905 million | $(311) million |
| Diluted EPS | $0.28 | $(0.12) | $0.63 | $(0.22) |
| Cash from operating activities | — | $1.392 billion | $835 million |
Q3 sales increased 10.3% reported (9.7% operational); nine-month sales rose 21.6% reported (19.3% operational). Management attributed growth mainly to recovering elective and semi-emergent procedure volumes, with acquisition contributions and favorable currency also affecting results. Gross-margin improvement reflected higher volumes and mix and fewer prior-year pandemic-related production and inventory impacts; inflation, including labor, raw-material and freight costs, and pricing pressure partly offset gains.
Management’s non-GAAP adjusted net income available to common stockholders was $581 million, or $0.41 per diluted share, in Q3 and $1.683 billion, or $1.17 per diluted share, for the nine months. These measures exclude specified charges and credits and are not GAAP results; Q3 2021 adjustments included amortization, impairment, acquisition/divestiture items and tax-related items.
By reportable segment, Q3 sales were MedSurg $917 million (+11.2%), Rhythm and Neuro $819 million (+8.2%), and Cardiovascular $1.196 billion (+19.4%). Interventional Cardiology grew 26.9%, while Neuromodulation grew 2.4%.
Liquidity, debt and capital
At September 30, 2021, cash and cash equivalents were $1.947 billion, total debt was $9.085 billion, and working capital was $2.207 billion. The company reported $1.392 billion of operating cash flow for the first nine months, compared with $835 million a year earlier. Investing cash outflow was $1.136 billion, including $2.014 billion net cash paid for acquisitions, partly offset by divestiture and asset-sale proceeds. Capital expenditures were $288 million.
The company had no commercial paper outstanding and had $2.750 billion of unused revolving credit capacity. Its leverage ratio was 2.89x against a 4.00x covenant limit for Q3; the limit steps down to 3.75x beginning in Q4 2021. Management said available cash, operating cash flow, capital-market access and credit facilities should fund operations and commitments for at least 12 months. No common shares were repurchased; the full $1.0 billion authorization remained available.
Material changes, outlook and risks
- Acquisitions and divestiture: The company acquired Preventice, Farapulse and Lumenis in 2021, paying $2.014 billion net of acquired cash. It completed the Specialty Pharmaceuticals divestiture for approximately $800 million. It announced agreements to acquire Devoro Medical for upfront cash of $320 million plus potential milestones, and Baylis Medical for $1.75 billion, subject to closing conditions. These transactions add integration and funding commitments.
- Unusual items: Nine-month results included $302 million of litigation-related charges, principally for transvaginal mesh claims; Q3 had no such charge. Intangible-asset impairment charges were $128 million in Q3 and $173 million for the nine months. Other income included remeasurement gains on previously held Preventice and Farapulse interests; Q3 also included investment losses.
- Litigation: As of October 20, approximately 54,500 mesh-related cases or claims had been asserted; settlement agreements covered approximately 52,500, of which about 50,500 were final. The company had a $548 million accrual for probable and estimable legal matters at quarter-end. Management cautioned that further losses and payments may occur and could materially affect results, cash flows or covenant compliance.
- Operating outlook: Management said COVID-19 was expected to continue affecting 2021 performance. Delta-related procedure disruptions, uneven vaccination and restrictions, healthcare labor shortages, supply-chain constraints, and inflation in labor, materials and distribution costs could pressure sales and margins. The filing provides no specific numerical earnings or sales guidance.
- Other exposure: Pricing and reimbursement changes, product and regulatory matters, intellectual-property disputes, foreign exchange, integration execution and contingent consideration remain risks. Future contingent consideration for completed acquisitions could reach $919 million undiscounted.
Key facts for investors to verify
- How much reported growth is sustainable organically, apart from procedure recovery, currency effects and acquisitions.
- Whether COVID-related disruptions, labor costs, inflation and supply constraints continue to affect procedure volumes and gross margins.
- The adequacy and cash timing of mesh-litigation reserves and settlements, along with potential effects on covenant headroom.
- Acquisition integration, contingent payments and funding needs, including the announced Devoro and Baylis transactions.
- Cash conversion and inventory growth: inventories were $1.603 billion at September 30, up from $1.351 billion at year-end 2020.
- The contribution of non-GAAP adjustments to reported earnings; compare adjusted results with GAAP results and the reconciliation in the filing.