01—Abstract
Summary
Summary of the 10-K/A filed June 2, 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 for $2.1 billiona in cash, which drove a 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 grew 22% to $2.23 billionb, with U.S. sales up about 30% helped by the third-quarter launch of the NIR coronary stent. However, the headline loss was driven by a $671 million (pre-tax) write-off of purchased in-process R&D tied to Schneider, plus $31 million for a NIR stent recall and restructuring items. Excluding merger-related and special charges, net income was $262 million, or $0.66 per share, roughly flat with 1997.
Underlying profitability weakened. Gross margin fell to 67.1%c from 70.2%, reflecting inventory write-downs, pricing pressure from managed care, and the lower-margin NIR stent mix. Management attributes the margin pressure partly to a weakened supply chain from multiple acquisitions and has launched a global supply chain program expected to finish by year-end 1999.
Operating cash flow was $258 milliond, but working capital swung to a deficit of $353 million, and the balance sheet took on $1.36 billion of long-term debt plus about $1.0 billion of commercial paper, which pushed the debt-to-capitalization ratio to roughly 64% against a covenant maximum of 70% through 1999 and 60% thereafter. Investors should weigh several risks. The company plans to raise equity and convertible securities in 1999 to refinance credit facilities and comply with its debt covenant, and $1.2 billion of 364-day facilities expire in September 1999.
The SEC is reviewing the Schneider in-process R&D allocation and could require restatement, and a Japanese subsidiary revenue-recognition irregularity has triggered 16 shareholder class actions and a DOJ investigation. Patent litigation with Johnson & Johnson, Cordis, and Advanced Cardiovascular Systems is ongoing.
02—Key points
Key Highlights
- Net loss of $264 million ($0.68 per diluted share) versus 1997 net income of $110 million ($0.28), driven by a $671 million Schneider purchased R&D charge and $667 million in total special charges.
- Net sales rose 22% to $2.23 billion; U.S. sales grew about 30% to $1.39 billion, aided by U.S. coronary stent launch (NIR stent sales about $211 million in 2H 1998).
- Gross margin contracted to 67.1% from 70.2%, reflecting excess inventory write-downs, declining selling prices, and lower-margin NIR stent mix.
- Schneider acquisition ($2.1 billion cash, closed September 10, 1998) added roughly $1.2 billion of goodwill and intangibles; total assets grew to $3.89 billion from $1.92 billion.
- Balance sheet strain: working capital deficit of $353 million, long-term debt of $1.36 billion, and debt-to-capitalization of about 64% against a 70% covenant limit through 1999.
- Management plans equity and convertible financing in 1999; $1.2 billion of 364-day credit facilities expire September 1999 and need extension or refinancing.
- Regulatory and legal overhang: SEC review of Schneider purchased R&D allocation, Japan subsidiary revenue irregularities, 16 class action suits, and a DOJ probe into the NIR ON Ranger stent recall.
03—Questions
Frequently Asked Questions
Why did Boston Scientific report a net loss in 1998 after a profit in 1997?
The loss stems mainly from a $671 million pre-tax charge for purchased in-process R&D from the Schneider acquisition, along with a $31 million NIR stent recall provision and restructuring charges. Excluding merger-related and special charges, 1998 net income was $262 million, or $0.66 per diluted share, compared with $266 million, or $0.67, in 1997.
How strong is the company's balance sheet and liquidity position?
Liquidity is tight. Cash and short-term investments were only $75 million, and current liabilities exceeded current assets by $353 million. Commercial paper of about $1.0 billion and $1.36 billion of long-term debt were incurred largely to finance Schneider. The company's debt-to-capitalization ratio was about 64%, below the 70% covenant limit through 1999 but above the 60% limit thereafter, so it intends to raise equity.
What is driving the decline in gross margins?
Gross margin fell to 67.1% from 70.2% due to inventory and excess-obsolescence write-downs, a weakened supply chain following multiple acquisitions, falling average selling prices from healthcare cost pressure and competition, and a higher mix of lower-margin NIR coronary stents. A global supply chain optimization program is expected to be completed by the end of 1999.
What regulatory or legal risks could affect the company?
The SEC is reviewing the Schneider purchase price allocation, particularly the in-process R&D amount, and could require further disclosure changes or restated prior results that would affect EPS. Sixteen shareholder class action suits were filed over the Japan subsidiary's improper revenue recognition, and the Department of Justice is investigating the NIR ON Ranger stent recall. The company also faces multiple patent suits, including with Johnson & Johnson, Cordis, and Advanced Cardiovascular Systems.
What is the company's outlook for 1999 based on this filing?
The filing points to continued growth in U.S. coronary stent sales, with NIR stents potentially exceeding 20% of worldwide sales in 1999, and expected returns from Schneider's in-process projects, which are anticipated to begin generating significant revenue in 1999. Management also expects a $50-75 million annualized cost savings from its rationalization plan, about 2,000 position displacements, and a slightly higher effective tax rate. Key uncertainties include financing needs, the 364-day facility expiration, supply chain execution, and managed-care pricing pressure.
04—Continue