Business context and reporting period
Boston Scientific Corporation (BSX) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company develops and sells medical devices across MedSurg, Rhythm and Neuro, and Cardiovascular businesses. Results were compared with 2020 periods heavily affected by COVID-19 procedure postponements, so the recovery drove substantial year-over-year growth. Preventice, acquired March 1, contributed to results from that date; Specialty Pharmaceuticals was divested on the same date.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $3,077 | $2,003 | $5,829 | $4,546 |
| Gross profit | $2,132 | $1,212 | $3,990 | $2,950 |
| Gross margin | 69.3% | 60.5% | 68.4% | 64.9% |
| Operating income (loss) | $262 | $(71) | $632 | $75 |
| Net income (loss) | $186 | $(147) | $527 | $(137) |
| Net income (loss) available to common stockholders | $172 | $(153) | $500 | $(142) |
| Diluted EPS | $0.12 | $(0.11) | $0.35 | $(0.10) |
| Cash provided by operating activities | Not separately presented here | $927 | $192 |
Management reported adjusted net income available to common stockholders of $577 million, or $0.40 per diluted share, for Q2 2021, versus $120 million, or $0.08, a year earlier. For the first six months, adjusted net income was $1.102 billion, or $0.77 per diluted share, versus $511 million, or $0.36. These are non-GAAP measures; Q2 2021 adjustments included litigation charges, amortization, impairment, and other items.
For Q2, reported sales increased 53.6% (49.6% operational growth, plus 4.0 percentage points from foreign exchange). First-half sales rose 28.2% (25.0% operational growth, plus 3.2 percentage points from foreign exchange). Sales increased across all three reportable segments in Q2: MedSurg $948 million (+64.6%), Rhythm and Neuro $866 million (+65.0%), and Cardiovascular $1.263 billion (+51.4%).
At June 30, cash and cash equivalents were $2.675 billion, total debt was $9.109 billion, and working capital was $2.685 billion. The company had no commercial paper outstanding and had $2.750 billion available under its new revolving credit facility. Its leverage ratio was 3.06x against a 4.25x covenant limit for Q2. Operating cash flow was $927 million; investing activities provided $71 million and financing activities used $93 million. Investing cash flows included $801 million of divestiture proceeds and $706 million paid for Preventice, net of cash acquired.
Material changes versus the prior comparable period
- Revenue and profitability rebounded as elective and semi-emergent procedures resumed; the prior-year comparison reflected the sharp COVID-19-related decline in procedures.
- Gross margin improved, with management citing higher volumes and favorable product mix, as well as prior-year abnormal production costs during pandemic-related manufacturing shutdowns. Price declines, foreign exchange, and inflationary costs partly offset the improvement.
- Q2 included $298 million of litigation-related charges, principally for transvaginal surgical mesh claims; first-half litigation charges were $302 million. No such charges were recorded in the first half of 2020.
- Preventice acquisition accounting added $926 million of preliminary goodwill. The Specialty Pharmaceuticals divestiture generated approximately $800 million of proceeds and a $9 million first-half gain.
- Q2 GAAP earnings also reflected an $85 million contingent-consideration benefit. First-half results included investment losses, including $154 million related to Pulmonx, and a $195 million gain from remeasuring the previously held Preventice interest.
Outlook, commentary, risks, and unusual items
Management said it expected COVID-19 to continue to negatively affect 2021 performance to some extent, while describing long-term fundamentals as strong. Procedure recovery continued into Q2, but renewed infections, variants, uneven vaccination, and restrictions—particularly in parts of Asia Pacific and Latin America—could disrupt procedure volumes and sales. The filing provides no specific numerical full-year revenue or earnings guidance.
Management stated that cash, anticipated operating cash flow, capital-market access, and credit facilities should be sufficient for operations, investment, legal liabilities, taxes, and debt service for at least 12 months. The 2019 restructuring plan, extended and expanded in February 2021, is expected to incur total pretax charges of approximately $375 million to $475 million, with most activity expected to be substantially complete by the end of 2022.
Legal exposure is material and uncertain. The company’s legal accrual was $617 million at June 30, 2021, including $167 million of restricted cash held in a qualified settlement fund. As of July 20, approximately 54,500 mesh-related cases or claims had been asserted; approximately 49,000 of roughly 52,500 cases and claims covered by settlement agreements had become final. The company warned that further losses could materially affect results, cash flows, liquidity, and covenant compliance. Other disclosed matters include a securities class action and SEC investigation concerning the LOTUS Edge valve retirement, and ongoing product-liability, patent, and governmental matters.
Subsequent to quarter-end, on August 6, 2021, the company completed its acquisition of Farapulse. It expected to recognize a gain of at least $150 million in Q3 upon completing valuation work on its previously held interest. The company also had a pending agreement to acquire Lumenis’s global surgical business for approximately $1.070 billion, subject to closing conditions.
Important facts for investors to verify
- Whether procedure volumes and sales recovery persisted after Q2, particularly amid COVID-19 variants, renewed restrictions, and regional disruption.
- The cash and earnings effects of mesh litigation settlements and other legal proceedings, and the remaining covenant headroom as litigation payments are made.
- How much of reported and adjusted earnings growth reflects durable operations versus pandemic-recovery comparisons, acquisitions, divestitures, fair-value changes, and excluded charges.
- Preventice and Farapulse integration, contingent consideration and milestone payments, and the status and economics of the proposed Lumenis acquisition.
- The effects of pricing pressure, inflation, supply constraints, and product-specific issues—including the LOTUS Edge retirement—on margins and future sales.