01—Abstract
Summary
Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.
Boston Scientific's 1998 10-K shows a company in transition.
Net sales rose 22% to $2.23 billiona, driven by the September 1998 acquisition of Schneider Worldwide ($2.1 billion in cash) and strong U.S. coronary stent sales led by the NIR stent. However, the company reported a net loss of $264 million, or $(0.68) per diluted share, because of a $671 million non-cash purchased in-process R&D charge tied to Schneider and about $667 million in total special charges. Excluding those items, net income was roughly $262 million, or $0.66 per share, versus $0.67 in 1997, so underlying earnings were essentially flat.
The balance sheet and liquidity picture is the main concern for investors. Working capital turned to a deficit of $353 millionb, long-term debt reached $1.36 billion, and the company refinanced its commercial paper into 364-day revolving facilities expiring in September 1999. Management said it intends to raise equity and convertible securities in 1999 and acknowledged that an extension of the facilities will be needed if it does not obtain additional financing.
The company also reported an accounting irregularity at its Japanese subsidiary, which led to securities class actions, and a U.S. Department of Justice investigation tied to the recall of the NIR ON Ranger with SOX stent. Gross margin fell to 67.1%c from 70.2%, and a global supply chain program is intended to recover it.
Leadership also changed, with James R. Tobin appointed President and CEO on March 18, 1999.
02—Key points
Key Highlights
- Net sales grew 22% to $2,233.6 million in 1998, up from $1,830.8 million in 1997, with U.S. sales up about 30% and international sales up about 11%.
- The 1998 net loss of $264.4 million ($0.68 per diluted share) was driven by a $671 million purchased in-process R&D charge from the Schneider acquisition. Excluding special charges, net income was $262 million ($0.66 per share), compared with $0.67 in 1997.
- Gross margin declined to 67.1% from 70.2%, reflecting lower average selling prices, the lower-margin NIR stent mix, and inventory write-downs. A global supply chain optimization program targets completion by the end of 1999.
- Working capital moved to a deficit of $353 million, and long-term debt rose to $1.36 billion after the $2.1 billion Schneider acquisition was financed mainly with commercial paper.
- Liquidity risk is elevated: $1.2 billion of 364-day credit facilities expire in September 1999, and management plans to raise equity and convertible securities in 1999. The debt-to-capitalization covenant of 64% must drop to 60% by 2000 (70% through 1999).
- Restructuring under the Schneider rationalization plan will displace about 2,000 positions and close five Schneider facilities, with projected annual savings of $50 to $75 million.
- Legal and regulatory exposure is significant: securities class actions over the Japan irregularities, a U.S. Department of Justice investigation tied to the NIR ON Ranger with SOX recall, and multiple patent suits, including Cook and Medtronic AVE litigation filed in March 1999.
03—Questions
Frequently Asked Questions
Why did Boston Scientific report a net loss in 1998 when sales grew 22%?
The loss came mainly from a $671 million non-cash charge for purchased in-process research and development acquired with Schneider Worldwide, plus other special charges that brought the total to about $667 million pre-tax. Operating income was negative at $(207) million. Excluding these charges, the company earned about $262 million, or $0.66 per diluted share.
How is Boston Scientific funding its debt and is there refinancing risk?
The $2.1 billion Schneider acquisition was initially funded with commercial paper, which was later refinanced into revolving credit facilities totaling $2.2 billion. Of that, $1.2 billion consists of 364-day facilities expiring in September 1999, which may be extended only under certain conditions. Management intends to raise equity and convertible securities in 1999 and has said it will need an extension or additional financing if it does not complete an equity offering. There is no assurance such financing will be obtained.
What are the main legal and regulatory risks disclosed?
The company faces securities class actions (16 suits) alleging that revenue recognition irregularities at its Japanese subsidiary made prior financials misleading. The U.S. Department of Justice is investigating matters related to the NIR ON Ranger with SOX stent recall. There are numerous patent infringement suits, including cases from Cook, Johnson & Johnson/Cordis, Arterial Vascular Engineering, and Advanced Cardiovascular Systems, plus a March 1999 Dutch cross-border suit by Medtronic AVE. Management believes these cases will not have a material effect, but outcomes are uncertain.
Why did gross margins decline, and what is being done about it?
Gross margin fell to 67.1% from 70.2%. Causes include lower average selling prices under managed care pressure, a heavier mix of the lower-margin NIR stent (which is supplied by Medinol at a cost tied to selling prices), and write-downs for excess and obsolete inventory. The company has a global supply chain optimization program aimed at lowering inventory, manufacturing costs, and write-downs, with completion targeted for the end of 1999.
What leadership and strategic changes occurred?
James R. Tobin, formerly CEO of Biogen, was appointed President and CEO and joined the board on March 18, 1999, while founder Pete Nicholas remains Chairman. Management has emphasized integration of Schneider, a rationalization plan, and four global task forces covering supply chain, quality, innovation, and organizational development. The company does not expect significant acquisitions in 1999.
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