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BOSTON SCIENTIFIC CORP Annual Report, Year Ended Dec 31, 1997

Filing Date
Filed March 31, 1998
Period End
December 31, 1997
Security
BSX
In the record · 2016–202610-K1310-Q328-K181

BSX filed 13 annual reports (10-K), 32 quarterly reports (10-Q) and 181 current reports (8-K) between 2016 and 2026.

  1. Material agreement8-K · Aug ’17Aug ’17
  2. Material agreement8-K · Nov ’19Nov ’19
  3. Leadership change8-K · Nov ’21Nov ’21
  4. Leadership change8-K · Nov ’25Nov ’25

01—Abstract

Summary

Summary of the 10-K filed March 31, 1998. Cited figures are marked; the original filing is the authoritative source.

Boston Scientific's 1997 10-K shows a company with strong top-line growth but a difficult year on profitability and execution.

Net sales rose 21% to $1.87 billiona (about 26% excluding currency effects), with international sales reaching 43% of the total. However, reported net income fell to $139 million ($0.70 diluted EPS) from $167 million, weighed down by $259 million of merger-related and special charges, a $21 million accounting change for EITF 97-13, and inventory write-downs. Excluding special items, net income rose 12% to $331 million.

Management attributed the margin pressure to European and Japanese reimbursement cuts, unfavorable currency movements (about $82 millionb of negative impact), supply chain and legacy systems problems, and rising inventory and receivables that pushed days sales outstanding to 77 from 68. Balance sheet and cash flow deserve investor attention. Cash from operations fell to $80 million from $142 million, inventory rose $150 million (much of it NIR stent stock ahead of an expected 1998 U.S. launch), and commercial paper climbed to $423 million.

The company issued $500 millionc of 6.625% notes due 2005 in March 1998 to repay commercial paper. Gross margin fell to 70.6% from 72.4%, and the company expects operating expense growth to outpace sales through the first half of 1998. Investment in the business is heavy, with R&D at $167 million (about 9% of sales) and capex planned at roughly $230 million for 1998.

The outlook depends largely on regulatory timing. The NIR and Radius coronary stents are awaiting FDA approval, and the company is also defending several significant patent suits, including Circon, Cordis, Johnson & Johnson, and Advanced Cardiovascular Systems. Management acknowledges that integration of Target Therapeutics runs through the end of 1998 and that execution risk remains significant.

02—Key points

Key Highlights

  1. Net sales grew 21% to $1,872 million in 1997 (about 26% excluding currency), with international sales at 43% of the total, up from 35% in 1995.
  2. Reported net income was $139 million, or $0.70 diluted EPS, down from $167 million in 1996, after $259 million in merger and special charges. Excluding these items, net income rose 12% to $331 million.
  3. Gross margin declined to 70.6% from 72.4%, driven by inventory write-downs, lower average selling prices in Europe and Japan, and about $82 million of unfavorable FX impact.
  4. Operating cash flow fell to $80 million from $142 million, as inventory rose $150 million and days sales outstanding increased to 77 from 68.
  5. Commercial paper rose to $423 million, and the company planned a $500 million 6.625% notes offering in March 1998 to refinance it.
  6. NIR and Radius stents were under FDA review (PMA filed January 1998), with U.S. launch expected in 1998; the NIR stent represents significant inventory exposure of about $75 million in committed purchases.
  7. Ongoing patent litigation with Circon, Cordis, Johnson & Johnson, Advanced Cardiovascular Systems, and others carries risk, with management stating it believes it has meritorious defenses.

03—Questions

Frequently Asked Questions

  1. Why did reported earnings decline in 1997 even though sales grew 21%?

    Reported net income fell to $139 million from $167 million because of $259 million in pre-tax merger-related and special charges, including $146 million of merger expenses, $29 million of purchased R&D, $34 million of litigation reserves, $19 million of inventory write-downs, and a $21 million after-tax cumulative accounting change. Excluding these items, net income rose 12% to $331 million.

  2. What are the main risks to cash flow and balance sheet quality?

    Operating cash flow dropped to $80 million from $142 million. Receivables and inventory growth absorbed cash, with DSO rising to 77 days from 68 and inventory up $150 million, partly from pre-building NIR stents. Commercial paper rose to $423 million, although the planned $500 million note issuance is expected to replace much of it. Management noted that supply chain improvements are needed to bring inventory to acceptable levels.

  3. What could drive growth in 1998?

    The key drivers are U.S. approval and launch of the NIR and Radius coronary stents, which the company expects by mid-to-late 1998, along with the stent category's growth (management cited a $1.2 billion global market). The 1998 global SAP-based supply chain system is also expected to improve efficiency. However, management said operating expenses would continue to grow faster than sales in the first half of 1998, and regulatory approval is not assured.

  4. How significant is currency and pricing pressure on the business?

    Significant. Foreign exchange reduced 1997 international sales by about $82 million and hurt gross margins. Price cuts in France and Germany and reimbursement delays in Japan cost the company more than $200 million in planned revenue, much of which fell to earnings. The company also notes that managed care and group purchasing organizations are pushing down U.S. selling prices.

04—Continue

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