BOSTON SCIENTIFIC CORP annual report, FY2022

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Boston Scientific Corporation — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Financial figures are in U.S. dollars unless otherwise noted.

Business context

Boston Scientific develops and sells medical devices in interventional specialties, organized into MedSurg and Cardiovascular reporting segments. Its growth strategy emphasizes leadership in core categories, expansion into high-growth markets and adjacencies, international growth, and investment in product development. The company reported approximately 45,000 employees and sales in 130 countries.

Financial performance and liquidity

  • Revenue: Net sales were $12.682 billion, up 6.7% from $11.888 billion in 2021. Growth was 11.1% operational, excluding currency effects, and 8.7% organic, excluding currency and certain acquisition/divestiture effects. Foreign exchange reduced reported growth by 440 basis points.
  • Segments: MedSurg sales were $4.911 billion, up 6.0%; Cardiovascular sales were $7.831 billion, up 8.1%. Cardiology sales rose 9.4% to $5.932 billion. Reported growth was strongest in Urology, up 12.0%; Neuromodulation grew 0.9%.
  • Profit and margins: GAAP operating income was $1.649 billion, compared with $1.199 billion in 2021. Gross profit was $8.727 billion, with gross margin unchanged at 68.8%. Net income was $698 million and net income available to common stockholders was $642 million, or $0.45 per diluted share, versus $985 million, or $0.69, in 2021.
  • Adjusted results: Management-reported adjusted net income available to common stockholders was $2.459 billion, or $1.71 per diluted share, versus $2.336 billion, or $1.63, in 2021. These are non-GAAP measures and exclude substantial items, including amortization, impairments, litigation and restructuring charges, and tax items.
  • Cash flow and investment: Operating cash flow was $1.526 billion, down from $1.870 billion, primarily due to working-capital changes, including higher inventory and receivables. Investing cash outflow was $2.011 billion, including $1.542 billion of net acquisition payments and $588 million for property, equipment and internal-use software. Financing cash outflow was $548 million.
  • Liquidity: Cash and cash equivalents were $928 million at year-end, compared with $1.925 billion a year earlier. Current assets were $5.760 billion and current liabilities were $3.803 billion. The company reported $2.220 billion of additional available liquidity under its revolving-credit arrangements at year-end, no commercial paper outstanding, and stated that available cash, operating cash flow, capital-market access and credit facilities should fund expected needs.
  • Debt: Total debt was $8.935 billion, versus $9.065 billion in 2021; approximately all was fixed-rate. The company issued €3.0 billion of euro-denominated notes and used the proceeds to refinance or redeem $3.275 billion of senior notes, recording $194 million of debt-extinguishment charges. It was in compliance with its leverage covenant: actual leverage was 2.57 times against a 3.75-times maximum.
  • Other: The reported tax rate was 38.9%, compared with 3.3% in 2021, reflecting earnings mix and items taxed at differing rates. The company paid no common-stock cash dividend in 2022 and reported the full $1.0 billion share-repurchase authorization remained unused.

Changes versus 2021

  • Sales increased, supported by underlying market growth, commercial execution and acquisitions; currency movements materially reduced reported growth.
  • Gross margin held at 68.8%. Supply-chain constraints and inflation increased manufacturing costs, partly offset by currency-hedging gains.
  • GAAP net income available to common stockholders declined, while adjusted earnings increased. The difference reflects, among other items, larger 2022 debt-extinguishment and tax charges and lower impairment and litigation charges than in 2021.
  • Operating cash flow fell by $344 million, with higher receivables and inventory among the stated drivers. Cash declined, while total debt decreased modestly.
  • Baylis Medical was acquired in February 2022 for $1.463 billion, net of cash acquired. Its results and acquired technology contributed to the Cardiovascular business.

Outlook, commentary, risks and unusual items

  • Management expected the effects of macroeconomic and supply-chain conditions in 2023 to be similar to 2022. The filing does not provide a clear numerical 2023 revenue or earnings guidance figure in the supplied text.
  • On February 22, 2023, the company committed to a restructuring plan expected to run through 2025. It estimates pre-tax charges of $450 million to $550 million, including $350 million to $450 million of future cash outlays, and gross annual pre-tax expense reductions of $225 million to $275 million by the end of 2025. Management expects to reinvest a substantial portion of savings in growth initiatives.
  • Acotec was acquired after year-end, on February 20, 2023, for approximately $520 million. Agreements to acquire Apollo Endosurgery for approximately $615 million and a majority stake in M.I. Tech for approximately $230 million were pending at the filing date, subject to closing conditions or approvals.
  • Legal exposure remains material. Accruals for probable and estimable legal matters were $443 million at year-end, including mesh-related matters; the company recorded $173 million of litigation-related charges in 2022 and paid $282 million in litigation-related cash outflows. Management cautions that additional losses may be accrued and paid.
  • A January 2023 jury awarded the University of Texas System $42 million in a patent case involving the Synergy stent; Boston Scientific said it intended to appeal. The company also disclosed a pending Brazilian competition matter and a government investigation following allegations of Foreign Corrupt Practices Act violations in Vietnam; it is cooperating with authorities.
  • Other notable items include a $60 million sales-reserve adjustment for disputed Italian government payback provisions and $132 million of intangible-asset impairments, primarily related to Vertiflex following reimbursement challenges. The company identifies inflation, supply and sterilization disruptions, reimbursement and pricing pressure, regulation, litigation, acquisitions, foreign exchange, cybersecurity and geopolitical conditions as risks.
  • Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The control assessment excluded Baylis Medical, which represented less than 1% of year-end assets and approximately 1% of 2022 sales.

Most important facts for investors to verify

  • Reconcile GAAP earnings to adjusted earnings and assess the recurring nature of the adjustments, particularly amortization, litigation, restructuring, debt-refinancing and tax items.
  • Track organic growth, procedure volumes, pricing and currency effects by segment, especially the contribution and profitability of WATCHMAN, electrophysiology and acquired products.
  • Monitor working capital, inventory, receivables and operating cash flow, alongside acquisition spending and the resulting cash balance and debt.
  • Evaluate whether the 2023 restructuring achieves its estimated savings and cash costs without disrupting manufacturing, product launches or growth investments.
  • Review developments in mesh litigation, the $42 million patent verdict and appeal, the Italian payback dispute, and the disclosed government investigations and legal accruals.
  • Confirm the closing and integration of pending acquisitions, and assess their financing, regulatory requirements and contribution to earnings and cash generation.