Boston Scientific Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Boston Scientific develops, manufactures and sells medical devices globally. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $3.599B | $3.244B | $6.988B | $6.270B |
| Gross profit | $2.542B | $2.233B | $4.891B | $4.304B |
| Operating income | $514M | $423M | $1.066B | $889M |
| Net income attributable to common stockholders | $261M | $246M | $561M | $342M |
| Diluted EPS | $0.18 | $0.17 | $0.39 | $0.24 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $848M | $249M |
- Q2 sales grew 11.0% reported, including 12.0% operational growth and a 1.0 percentage-point foreign-exchange headwind. Organic growth was 11.6%. First-half reported sales grew 11.5%, with 13.4% operational growth, 12.8% organic growth and a 1.9 percentage-point FX headwind.
- Gross margin rose to 70.6% in Q2 from 68.8%, and to 70.0% for the first half from 68.6%. Management cited favorable product mix and improved manufacturing and supply costs, partly offset by FX and other period expenses.
- GAAP net income increased modestly in Q2 and more substantially in the first half. Adjusted net income attributable to common stockholders, a non-GAAP measure, was $777M ($0.53 diluted EPS) in Q2 versus $635M ($0.44) and $1.449B ($1.00) for the first half versus $1.197B ($0.83). Adjusted results exclude specified items; they are not GAAP results.
- Q2 effective tax rate was 36.6%, up from 24.7%; the first-half rate was 32.9%, up from 26.1%. The filing attributes changes mainly to items taxed at different rates and discrete tax items.
Business and period-over-period changes
- Q2 Cardiovascular sales increased 12.2% to $2.239B; MedSurg increased 9.0% to $1.360B. For the first half, Cardiovascular grew 12.4% and MedSurg 9.9%.
- Growth drivers included WATCHMAN FLX, Farapulse, interventional cardiology products, Endoscopy biliary and hemostasis products, and Peripheral Interventions products. Management also cited strong demand and market expansion in several underlying markets.
- Cash provided by operations increased to $848M from $249M for the first half. Investing cash outflow was $1.324B, including $1.018B for the Apollo and Acotec transactions; financing cash outflow was $26M.
- Cash and cash equivalents were $426M at June 30, 2023, down from $928M at December 31, 2022. Cash, cash equivalents and restricted cash totaled $620M. Total debt was $9.053B, including $559M current debt obligations; long-term debt was $8.494B.
- Available capacity under the $2.750B revolving credit facility was $2.709B, after $41M of commercial paper outstanding. The company reported covenant compliance: leverage ratio 2.48x against a 3.75x maximum.
Outlook, commentary, risks and unusual items
- Management said existing cash, expected operating cash generation, capital-market access and credit facilities should be sufficient for operations and obligations over the next 12 months and foreseeable future. No quantified full-year revenue or EPS guidance is provided in the filing text. Management expected first-half gross margin to exceed second-half margin, principally due to the timing of prior-year FX movements.
- Acquisitions: Boston Scientific acquired Apollo Endosurgery for $636M net of cash acquired and a roughly 65% stake in Acotec for $519M upfront at closing exchange rates. It also acquired a 9.9% minority stake in M.I. Tech after the original majority-stake agreement was terminated because some regulatory approvals could not be obtained.
- Q2 results included $57M of intangible impairment, primarily from cancellation of an in-process R&D program; restructuring charges and related costs; acquisition-related costs; and EU MDR implementation costs. The company recorded no litigation-related net charges in the first half, versus $42M in the comparable 2022 period. The 2023 global restructuring plan was approved in February.
- On June 1, outstanding mandatory convertible preferred shares converted into approximately 24M common shares, eliminating the preferred dividend obligation going forward. The conversion increases common shares outstanding.
- Material legal matters include a $158M jury award to Boston Scientific in the Cook patent case, followed by a July 26, 2023 settlement in principle; a $42M jury award against the company in the University of Texas patent case, with post-trial motions pending; and ongoing product-liability claims, including transvaginal mesh matters. The legal accrual was $419M at June 30. The company also disclosed a Vietnam FCPA-related inquiry and a DOJ subpoena concerning its ambulatory ECG monitoring business; it said it is cooperating.
- Management identified risks from supply-chain constraints and inflation, FX and interest-rate movements, geopolitical tensions, cybersecurity, reimbursement and pricing pressures, product and regulatory requirements, acquisition integration, and litigation or government investigations. The company is substantially self-insured for product liability and fully self-insured for IP infringement claims.
Important facts for investors to verify
- Whether sales growth and improved gross margin continue, particularly given FX exposure and management’s expectation of lower second-half gross margin relative to the first half.
- Cash conversion and working-capital needs: inventories rose to $2.250B from $1.867B, while first-half operating cash flow improved substantially.
- Acquisition performance, integration costs and the final purchase-price allocations for Apollo and Acotec, which were preliminary at quarter-end.
- Developments and potential cash impact in the Cook settlement, University of Texas case, mesh claims, and government investigations; the filing does not provide a clear estimated loss range for several matters.
- Debt, covenant headroom and liquidity, including the current debt classification and continued access to commercial-paper and capital markets.