Boston Scientific Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Boston Scientific develops and sells medical devices across cardiovascular, rhythm and neuro, and MedSurg businesses. Results were materially affected by COVID-19-related reductions and delays in medical procedures.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2.659 billion | $2.707 billion | $7.204 billion | $7.831 billion |
| Gross margin | 67.3% | 71.3% | 65.8% | 71.1% |
| Operating income (loss) | $(205) million | $383 million | $(130) million | $1.308 billion |
| Net income (loss) available to common stockholders | $(169) million | $126 million | $(311) million | $704 million |
| Diluted loss (income) per share | $(0.12) | $0.09 | $(0.22) | $0.50 |
- Adjusted results (non-GAAP): Q3 adjusted net income available to common stockholders was $530 million, or $0.37 per share, versus $550 million, or $0.39, in Q3 2019. For the first nine months, it was $1.040 billion, or $0.73 per share, versus $1.590 billion, or $1.13.
- Cash flow and liquidity: Operating cash flow was $835 million for the first nine months, down from $1.144 billion. Cash and cash equivalents were $2.022 billion at September 30; working capital was $2.858 billion. The company also had full access to its $2.750 billion revolving credit facility.
- Debt: Total debt was $9.336 billion, versus $10.008 billion at December 31, 2019. The company reported a 3.40x leverage ratio against a 4.75x maximum covenant limit and said it was in compliance. All debt principal was at fixed rates as of quarter-end; average borrowing rate was 3.4% for Q3.
Material changes versus comparable periods
- Sales declined 1.8% in Q3 and 8.0% year to date; operational sales fell 2.5% and 7.6%, respectively. Management reported improving sales trends as procedures resumed, but Q3 sales remained below the prior year.
- Medical-device sales were pressured across most businesses. Q3 Interventional Cardiology sales fell 16.3%; Peripheral Interventions grew 16.1%, primarily reflecting BTG-related sales. For the first nine months, all reported businesses except Peripheral Interventions declined.
- Gross margin fell 4.0 percentage points in Q3 and 5.3 points year to date. Drivers included low production levels, product mix, pricing, inventory charges and the WATCHMAN FLX transition.
- Q3 operating results included $219 million of intangible-asset impairment charges and $260 million of litigation-related charges. Year-to-date impairment charges were $452 million. The 2020 nine-month comparison also included a $102 million contingent-consideration benefit, while the prior-year period included a litigation-related credit.
- The company raised approximately $975 million each from May 2020 preferred-stock and common-stock offerings and issued $1.7 billion of senior notes. It used proceeds in part to repay term-loan and revolving-credit borrowings.
Outlook, commentary and risks
- Management said the pandemic continued to weigh on sales, margins and earnings, and warned that renewed restrictions or procedure delays could adversely affect Q4 2020 results. It gave no specific numerical earnings or revenue guidance in the provided filing text.
- Management anticipated an additional negative gross-margin impact in Q4 from the ongoing conversion of WATCHMAN LAAC customers to a consignment inventory model. The Q3 transition generated $63 million in revenue charges.
- The company said its cash, expected operating cash flow, capital-markets access and credit facilities should fund operations and obligations for the next 12 months, and stated it believed it could comply with its amended covenant over that period. Covenant terms were adjusted during 2020 in response to pandemic-related risks.
- Legal exposure remains significant. The company recorded a $600 million legal accrual at September 30 and reported approximately 54,000 transvaginal mesh cases or claims; settlement agreements covering approximately 52,000 were in process or agreed in principle, with approximately 47,500 meeting settlement conditions and final. Additional losses could be material.
- Other notable items include a $91 million Q3 tax benefit from resolving the IRS examination of 2014–2016 tax years, and a $65 million non-cash gain from revaluing a portfolio investment. Management also cited risks from impairment estimates, supply and production disruptions, competition, litigation, regulatory matters and future access to financing.
Important facts for investors to verify
- Whether procedure volumes and sales recover, or renewed COVID-19 restrictions constrain demand and hospital capacity.
- How quickly gross margins normalize as production rises and the WATCHMAN FLX consignment transition proceeds.
- The assumptions behind adjusted earnings and the scale and timing of further impairment, restructuring or litigation charges.
- Progress in managing debt, leverage and covenant headroom, including the effects of future cash flows and legal payments.
- Final participation, payment requirements and potential additional exposure from mesh and other legal proceedings.