Boston Scientific (BSX - Analyst Report) reported adjusted earnings per share (EPS) (after considering certain one-time adjustments other than amortization expense) of 13 cents in the third quarter of 2014, 30% ahead of the year-ago adjusted number.

However, considering amortized expense adjustments, the quarter’s adjusted EPS came in at 20 cents, 17.6% ahead of the year-ago adjusted number. This coincides with the upper end of the company's adjusted EPS guidance range of 18–20 cents and is on par with the Zacks Consensus Estimate.

Without these adjustments, the company reported net income of $43 million or EPS of 3 cents in the quarter, a huge increase from the year-ago net loss of $5 million or breakeven earnings a share, respectively.

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Revenues in the third quarter registered a 6.4% increase year over year (7% growth at constant exchange rate or CER, excluding divested business) to $1.846 billion. The figure exceeded the Zacks Consensus Estimate of $1.822 billion. Earlier, the company had provided third quarter revenue expectation in the range of $1.79–$1.84 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 $508 million (up 8% year over year at CER) and $215 million (up 9%), respectively, during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) were $298 million, up 7.6%. The improvement in drug-eluting stents (DES) performance that increased 9.2% to $286 million was partially offset by the poor bare-metal stents performance that plunged 20% to $12 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 $480 million at CER.

Worldwide sales from pacemakers (within CRM) dropped 1.5% to $132 million, while defibrillators increased 5.5% to $348 million.

Electrophysiology sales surged a massive 57% year over year at CER to $54 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 $336 million (up 7% at CER), $137 million (up 5%) and $115 million (no growth), respectively.

Margins

Gross margin was down 40 basis points (bps) year over year to 70.2%. Adjusted operating margin contracted 112 bps to 17.4% in the quarter. During the reported quarter, selling, general and administrative expenses increased 12.6% to $741 million while research and development expenses dropped 2.3% to $212 million. Royalty expense also plunged 25% to $21 million.

Balance Sheet

Boston Scientific exited the third quarter with cash and cash equivalents of $246 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 $346 million in the quarter.

Guidance

Boston Scientific increased the lower end of its 2014 adjusted EPS guidance to the range of 81–83 cents from the earlier guided 79–83 cents (considering all one-time items including amortized expense). Estimated revenues, on the other hand, have been narrowed to $7.370–$7.420 billion (growth of 3% to 4% on an operational basis) from the earlier guidance of $7.325–$7.425 billion (growth of 3% to 5%). The current Zacks Consensus Estimate for EPS of 82 cents and revenues of $7.394 billion coincide with the company’s outlook.

For the fourth quarter of 2014, adjusted earnings are expected to remain in the band of 20–22 cents per share while the company predicts revenues within $1.875−$1.925 million. The Zacks Consensus Estimate for EPS stands at 21 cents, while that for revenues is $1.919 billion.

Our Take

Despite challenging economic conditions, a competitive environment, pressure on margins and currency headwinds, Boston Scientific posted a decent third-quarter 2014, in line with our estimates on both the earnings and revenue front. The companyhas managed to post an impressive performance with balanced growth across all its segments. Moreover, the improved guidance for 2014 also helps us to rely on the sustainability of this growth performance.

We are also optimistic about the recent update on the company’s growth objectives. Boston Scientific is focusing on strategic initiatives like portfolio expansion, restructuring initiatives which include the 2014 restructuring plan, focus on emerging markets and share repurchases.

Moreover, Boston Scientific has a strong pipeline of products under development, the launch of which should drive the top line. We are, at the same time, encouraged by the focus on emerging markets, especially India and China.

We take a note that recently the company closed the acquisition of the Interventional Division of Bayer AG which it expects to boost growth in peripheral atherectomy and thrombectomy categories.

Currently, Boston Scientific retains a Zacks Rank #3 (Hold). Some of the better-placed Medical Product stocks are Abaxis, Inc. (ABAX - Analyst Report), Alere Inc. (ALR - Snapshot Report) and ICU Medical, Inc. (ICUI - Snapshot Report), all carrying a Zacks Rank #2 (Buy).