Boston Scientific (BSX) reported adjusted earnings per share (EPS) (after considering certain one-time adjustments other than amortization expense) of 14 cents in the second quarter of 2014, a couple of cents ahead of the year-ago adjusted number.

However, considering amortized expense adjustments, the quarter’s adjusted EPS came in at 21 cents, 16.7% ahead of the year-ago adjusted number. This also exceeded the company's adjusted EPS guidance range of 18–20 cents and the Zacks Consensus Estimate of 20 cents.

Without these adjustments, the company reported net loss of $104 million or breakeven EPS in the quarter, a huge slash from the year-ago net income of $152 million or earnings of 10 cents a share, respectively.

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Revenues in the second quarter registered a 4% increase year over year (same at constant exchange rate or CER, excluding divested business) to $1.873 billion. The figure exceeded the Zacks Consensus Estimate of $1.867 billion, but remained within the company-provided guidance range of $1.84–$1.89 billion.

Segment Analysis

Boston Scientific currently has three global reportable segments comprising Cardiovascular, Rhythm Management and MedSurg.

The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales in these sub-segments were $528 million (up 1% year over year at CER) and $211 million (up 3%), respectively, during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) were $310 million, down 1.9%. Despite improvement in drug-eluting stents (DES) performance that increased 3.8% to $298 million, the downfall was due to the poor bare-metal stents performance that plunged 29.4% to $17 million.

The next biggest contributor to Boston Scientific’s top line was Rhythm Management, which includes Cardiac Rhythm Management (CRM) and Electrophysiology. CRM reflected sales improvement of 4% to $497 million at CER.

Worldwide sales from pacemakers (within CRM) improved 6.8% to $142 million, while defibrillators increased 3.8% to $355 million.

Electrophysiology sales surged a massive 54% year over year at CER to $56 million.

Over the recent past, the company has been targeting new product launches to revive the sales of the beleaguered Interventional Cardiology and CRM segments. The improved performance in these core segments in the reported quarter, proved beyond doubt that the measures undertaken are working effectively to counter the ongoing challenges.

Other segments like Endoscopy, Urology/Women’s Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $333 million (up 4% at CER), $133 million (up 7%) and $114 million (up 3%), respectively.

Margins

Gross margin was down 76 basis points (bps) year over year to 69.9%. Adjusted operating margin contracted 130 bps to 17.9% in the quarter. During the reported quarter, selling, general and administrative expenses increased 12.4% to $743 million while research and development expenses dropped 7.6% to $206 million. Royalty expense also plunged 46.7% to $25 million.

Balance Sheet

Boston Scientific exited the second quarter with cash and cash equivalents of $357 million, up from $217 million at the end of fiscal 2013, and had long-term debt of $4.25 billion. The company generated operating cash flow of $286 million in the quarter.

Guidance

Boston Scientific increased its 2014 adjusted EPS guidance to the range of 79–83 cents from earlier 77–82 cents (considering all one-time items including amortized expense). Estimated revenues, on the other hand, have been narrowed to the range of $7.325–$7.425 billion (growth of 3% to 5% on an operational basis) from the earlier guidance of $7.30–$7.50 billion. The current Zacks Consensus Estimate for EPS of 81 cents and revenues of $7.397 billion coincide with the company’s outlook.

For the third quarter of 2014, adjusted earnings are expected to remain in the band of 18–20 cents per share while the company predicts revenues within $1.79–$1.84 billion. The Zacks Consensus Estimate for EPS stands at 20 cents, while that for revenues is $1.82 billion.

Our Take

After several quarters of drag in its core segments amid challenging economic conditions, competitive environment and currency headwind, Boston Scientific has managed to post an impressive performance in the reported quarter with balanced growth across all its segments. The company’s improved guidance for 2014 also helps us to rely on the sustainability of this growth performance.

Over the past few quarters, Boston Scientific has been resorting to all available means in order to return to growth. To revive its top line, the company is focusing on strategic initiatives to drive growth and profitability. These include the recently announced restructuring initiatives, strengthening of the company’s portfolio, targeting suitable acquisitions in areas of unmet medical needs, and focusing on emerging markets. Moreover, Boston Scientific has managed to successfully move on with its strong pipeline of products.

Currently, Boston Scientific retains a Zacks Rank #3 (Hold). Some of the better-placed Medical stocks are Alere Inc. (ALR), CareFusion Corporation (CFN) and Mead Johnson Nutrition Company (MJN), all carrying a Zacks Rank #2 (Buy).

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