Boston Scientific Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars unless noted.
Business context and results
Boston Scientific develops and sells medical devices globally through its MedSurg and Cardiovascular segments. Management attributed growth to its product portfolio, execution, market growth and acquisitions.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.527B | $3.170B | $10.515B | $9.440B |
| Gross profit | $2.426B | $2.191B | $7.317B | $6.495B |
| Gross margin | 68.8% | 69.1% | 69.6% | 68.8% |
| Operating income | $693M | $358M | $1.759B | $1.247B |
| Net income attributable to common stockholders | $505M | $174M | $1.065B | $516M |
| Diluted EPS | $0.34 | $0.12 | $0.73 | $0.36 |
| Cash from operations | Not separately presented | Not separately presented | $1.546B | $719M |
Revenue, margins and material changes
- Q3 sales rose 11.2% reported, 11.1% operational (excluding currency) and 10.2% organic. Nine-month sales rose 11.4% reported, 12.6% operational and 11.9% organic; foreign exchange reduced reported growth by 1.2 percentage points.
- Q3 segment sales increased 10.6% in MedSurg and 11.6% in Cardiovascular. For the nine months, increases were 10.2% and 12.2%, respectively. Q3 growth included strong Cardiology, Endoscopy and Peripheral Interventions results; Neuromodulation grew 3.7%.
- Q3 gross margin declined 0.3 percentage points year over year, with currency and period expenses partly offset by favorable mix and manufacturing improvements. Nine-month margin improved 0.8 points.
- Reported Q3 diluted EPS was $0.34; adjusted diluted EPS was $0.50, versus $0.12 and $0.43, respectively, in Q3 2022. Nine-month reported and adjusted diluted EPS were $0.73 and $1.50, versus $0.36 and $1.26. Adjusted measures exclude specified items and are non-GAAP.
- The preferred shares automatically converted into about 24 million common shares on June 1, 2023, ending an annualized preferred dividend payment of approximately $55M. Weighted-average diluted shares increased to 1.475B in Q3 from 1.440B a year earlier.
Cash, debt and liquidity
- Cash and cash equivalents were $952M at September 30, 2023, versus $928M at December 31, 2022. Including restricted cash, cash and restricted cash totaled $1.132B.
- Nine-month investing cash outflow was $1.521B, including $1.018B for Apollo and Acotec acquisitions and $444M for property, equipment and software. Financing cash outflow was $10M.
- Total debt was $8.900B, including $513M current and $8.386B long-term. No commercial paper or revolving-credit borrowings were outstanding; the $2.750B revolving facility was available and scheduled to mature in May 2027.
- The company reported covenant compliance: leverage was 2.34x against a maximum of 3.75x. Management said existing cash, operating cash generation, capital-market access and credit facilities should fund needs for the next 12 months and foreseeable future.
- Management expects full-year 2023 gross margin to improve slightly versus 2022. The filing provides no clear full-year revenue or EPS guidance in the text provided.
Acquisitions, unusual items and risks
- Boston Scientific completed its Apollo acquisition for $636M and acquired approximately 65% of Acotec for $519M upfront. It announced a planned Relievant Medsystems acquisition for $850M upfront plus contingent sales-based payments, expected to close in the first half of 2024, subject to conditions.
- Q3 included a $111M litigation-related credit ($86M after tax) from settlement of offensive patent litigation. Q3 reported results also reflected amortization, acquisition and restructuring costs, among other adjustments. Nine-month intangible-asset impairment charges were $58M, primarily related to cancellation of an R&D program.
- Legal accruals for probable and estimable matters were $407M at quarter-end. Risks include mesh-product claims, patent disputes, government investigations, regulatory and product-liability exposure; the company is substantially self-insured for product liability and fully self-insured for IP infringement claims. A jury awarded $42M to the University of Texas in a patent case; post-trial motions remained pending. The LOTUS-related class action settlement was only an agreement in principle and required definitive documents and court approval.
- Management cited supply-chain constraints and inflation, wage and distribution costs, foreign exchange, higher interest rates, geopolitical tensions, cybersecurity, reimbursement and regulatory changes, litigation, and acquisition integration as risks. Management reported disclosure controls were effective; implementation of a new ERP system is ongoing and future phases may materially affect internal controls.
Important facts for investors to verify
- Whether sales growth and margin performance continue, including the effects of foreign exchange, pricing, product mix and acquired businesses.
- Cash conversion and working capital: inventories rose to $2.404B from $1.867B at year-end, while operating cash flow improved substantially year over year.
- Debt, covenant headroom and liquidity relative to the Relievant purchase price and any contingent acquisition or legal payments.
- Resolution and potential financial impact of pending mesh, patent, LOTUS-related and governmental matters; the filing says losses for certain proceedings cannot be reasonably estimated.
- Progress and final purchase accounting for Apollo and Acotec, and whether expected benefits from acquisitions and the 2023 restructuring plan are realized.