01—Abstract
Summary
Summary of the 10-K/A filed April 28, 1999. Cited figures are marked; the original filing is the authoritative source.
Boston Scientific's 1998 results were dominated by the September 1998 acquisition of Schneider Worldwide (from Pfizer) for about $2.1 billiona in cash, which drove a sharp swing to a net loss of $264 million, or $0.68 per diluted share, from net income of $110 million, or $0.28, in 1997.
Net sales rose 22% to $2.23 billionb, with U.S. sales up roughly 30% on the launch of the NIR coronary stent, while international sales grew about 11%. Operating results were hit by a $671 million charge for purchased in-process R&D, $527 million after tax in total special charges, and a $31 million recall provision for the NIR ON Ranger with Sox stent. Excluding merger-related and special charges, net income was $262 million, or $0.66 per share, roughly flat versus 1997.
Gross margin fell to 67.1% from 70.2%, reflecting supply chain problems, pricing pressure, and the lower-margin NIR stent mix. The balance sheet and liquidity picture weakened considerably. Total assets nearly doubled to $3.89 billion, and stockholders' equity fell to $821 millionc from $957 million.
Commercial paper of about $1.8 billiond was used to fund the acquisition, and the company refinanced much of it in Q1 1999 with short-term borrowings under its revolving credit facilities at roughly 5.75%. Working capital was negative $353 million. The revolving facilities carry a debt-to-capitalization covenant of 70% through 1999 (the company reported about 64%), and $1.2 billion of 364-day facilities expire in September 1999.
Management intends to raise equity and convertible securities in 1999 to refinance debt and restore covenant headroom, so further dilution is likely. Investors also face significant regulatory and legal risk. A Japanese subsidiary's revenue-recognition irregularities led to 16 shareholder class actions and prompted restated 1998 quarterly results.
The SEC is reviewing the Schneider purchased in-process R&D allocation and could require restatement of prior results, potentially affecting future EPS. The Department of Justice is investigating the NIR stent recall, and the company faces numerous patent suits, including a $10.8 million judgment to C.R. Bard.
Management expects integration and rationalization to conclude in 1999, with roughly 2,000 positions displaced and cost savings of $50 to $75 million projected. This is a 10-K/A that supplements MD&A and the notes; it does not change the reported financial statements.
02—Key points
Key Highlights
- Net loss of $264 million ($0.68 per diluted share) in 1998, versus net income of $110 million ($0.28) in 1997, driven by the Schneider acquisition charges.
- Net sales up 22% to $2.23 billion, with U.S. sales up about 30% on NIR coronary stent launch; NIR was about 13% of worldwide sales and could exceed 20% in 1999.
- $671 million purchased in-process R&D charge from the $2.1 billion cash acquisition of Schneider Worldwide (closed September 10, 1998), with total special charges of $667 million pre-tax.
- Gross margin declined to 67.1% from 70.2%, due to supply chain weakness, inventory write-downs, pricing pressure, and lower-margin NIR stent sales.
- Heavy leverage: total assets of $3.89 billion, stockholders' equity of $821 million, commercial paper of about $1.8 billion, and negative working capital of $353 million; the company plans equity and convertible issuance in 1999.
- Revolving credit facilities covenant ratio of about 64% against a 70% limit through 1999, and $1.2 billion of 364-day facilities expiring September 1999.
- Regulatory and legal exposure: SEC review of Schneider IPR&D allocation, DOJ investigation of the NIR stent recall, a Japan subsidiary revenue irregularity, and 16 shareholder class actions.
03—Questions
Frequently Asked Questions
Why did Boston Scientific report a net loss in 1998 after profits in 1997?
The loss was driven mainly by the September 1998 Schneider Worldwide acquisition. A $671 million purchased in-process R&D charge, restructuring and merger-related charges, and a $31 million NIR stent recall provision reduced pre-tax income to a loss of $275 million. Excluding merger-related and special charges, net income was $262 million, or $0.66 per diluted share, versus $266 million in 1997.
How did the company finance the $2.1 billion Schneider acquisition, and what are the near-term debt risks?
It was financed mainly with about $2.1 billion of commercial paper, which was later refinanced under revolving credit facilities at about 5.75% in Q1 1999 because the commercial paper market was limited. The company also issued $500 million of 6.625% notes due 2005. The $1.2 billion of 364-day facilities expire in September 1999 and need extension or replacement, and management plans equity and convertible offerings to address this.
Is the NIR coronary stent a key growth driver, and what are the risks?
NIR sales were about $211 million in the second half of 1998 and represented about 13% of worldwide sales, possibly rising above 20% in 1999. The stent is supplied by Medinol, so any supply interruption or change in purchase price could hurt results. The company also faces patent litigation from Johnson & Johnson, Cordis, and AVE over the NIR stent, and a Department of Justice investigation tied to a recall of a related stent system.
What accounting or regulatory issues could change previously reported results?
The SEC is reviewing the Schneider purchase price allocation, especially the $671 million in-process R&D charge, and has requested additional disclosures on prior acquisitions and special charges. The company said the SEC could require changes or restatement of prior results, which could materially affect future EPS. Separately, a Japanese subsidiary's improperly recorded sales led to restated 1998 quarterly results and class action lawsuits.
What are the expected benefits from the integration and rationalization plan?
The rationalization plan will displace about 2,000 positions in 1999, mostly in manufacturing, and close five Schneider facilities. Costs are estimated at about $62 million, with about $36 million capitalized and $26 million expensed. Management expects annualized savings of $50 to $75 million from the Target facility actions and aims to complete Schneider integration by the end of 1999, with a supply chain initiative expected to lower inventory and improve gross margins.
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