01—Abstract
Summary
Summary of the 10-K filed April 2, 2001. Cited figures are marked; the original filing is the authoritative source.
Boston Scientific's fiscal 2000 10-K shows a company under pressure but with a clear recovery plan.
Net sales fell 6% to $2,664 milliona from $2,842 million, driven mainly by a 9% decline in U.S. revenue as coronary stent sales dropped from $604 million to $427 million and balloon sales from $429 million to $357 million. Net income was $373 million, or $0.91 diluted EPS, roughly flat versus $371 million in 1999, and operating income of $580 million fell from $689 million. Gross margin improved to 68.8% from 65.3%, largely because 1999 carried a $62 million NIR stent inventory charge, but SG&A rose to 33% of sales from 30%, reflecting sales force retention and international expansion costs.
The main investor concerns are the NIR stent franchise and legal exposure. Coronary stents depend heavily on Medinol, which supplies the NIR stent, and management describes that relationship as contentious. A December 2000 jury found the NIR stent infringed one Cordis (Johnson & Johnson) patent, and the Company could owe about $324 millionb plus interest, with a range of $0 to $344 million disclosed for reasonably possible losses.
The company also faces a DOJ investigation tied to the NIR ON Ranger recall, an FTC suit, and securities class actions. Management is responding with a global operations plan targeting about $100 millionc of pre-tax savings in 2001 and $250 million annualized thereafter, plus acquisitions of IVT, Embolic Protection, Quanam and Catheter Innovations, which carry $100 million to $200 million in expected contingent payments in 2001. Management guides to lower 2001 operating margins, higher R&D spending, and gross margin pressure from more expensive gold-coated stents.
Balance sheet strength is adequate. Total assets were $3,427 milliond and stockholders' equity was $1,935 million, with long-term debt down to $562 million and the debt-to-capitalization covenant at about 26% against a 60% limit. Share repurchases of $222 million and the planned acquisition spending will test free cash flow, which was $739 million in operating cash flow less $76 million of capex in 2000.
02—Key points
Key Highlights
- Net sales declined 6% to $2,664 million (from $2,842 million), led by U.S. sales down 9% to $1,577 million as coronary stent and balloon revenues fell sharply.
- Diluted EPS was $0.91 versus $0.90 in 1999; net income of $373 million was essentially flat year over year.
- Gross margin rose to 68.8% from 65.3%, mainly because 1999 included a $62 million excess NIR stent inventory charge, not because of underlying pricing gains.
- A December 2000 jury verdict found the NIR stent infringed a Cordis patent; damages could reach about $324 million plus interest, a material contingent liability.
- Dependence on Medinol-supplied NIR stents (about 15% of 2000 sales, down from 20% in 1999) and a contentious supplier relationship remain key operating risks.
- The global operations plan targets about $100 million of pre-tax savings in 2001 and $250 million annualized thereafter, against about $115 million of total restructuring cash outlays.
- Four 2001 acquisitions (IVT for about $345 million cash, Embolic Protection for about $75 million cash, Quanam, Catheter Innovations) add integration risk and $100 million to $200 million of expected contingent payments in 2001.
03—Questions
Frequently Asked Questions
Why did Boston Scientific's sales decline in 2000?
Net sales fell 6% to $2,664 million, mainly because worldwide coronary stent revenue dropped from $604 million to $427 million and coronary balloon revenue fell from $429 million to $357 million. Management attributes this to increased competition, new products from rivals, a trend toward fewer balloons per stent procedure, and volatility in the stent market. U.S. sales fell about 9%, while international sales were down about 1%.
What is the biggest legal risk facing the company?
The most significant risk is the December 2000 jury verdict that the NIR coronary stent infringed one Cordis (Johnson & Johnson) patent. The company could owe about $324 million in damages for past sales, plus interest and additional damages for later sales. The 10-K discloses a reasonably possible loss range of $0 to $344 million. A final judgment is pending post-trial motions, and the company expects to appeal and post bond. The company also faces a DOJ investigation related to the NIR ON Ranger recall and an FTC suit alleging violation of a consent order.
How will the company's margins and profitability change in 2001?
Management expects lower operating margins in 2001. Newly launched NIR stent systems use more expensive gold-coated stents and delivery systems, which pressure gross margins. Higher R&D spending, a larger sales force cost base, and about $70 million of pre-tax plant optimization costs in cost of sales will also weigh on results. The global operations plan's savings of roughly $30 million incremental in 2001 are intended to partly offset these pressures. The 2001 effective tax rate is expected to be about 30%, though acquisitions could push it higher.
Is the balance sheet strong enough to fund acquisitions and buybacks?
The balance sheet is reasonably sound. At year-end 2000, total assets were $3,427 million, stockholders' equity was $1,935 million, and long-term debt had fallen to $562 million. Commercial paper and bank obligations were modest, and the revolving credit facility covenant ratio was about 26% against a 60% maximum. Operating cash flow was $739 million. Management believes operating cash flow, borrowing capacity, and existing cash can cover 2001 capex of about $100 million and the announced acquisitions. However, a Medinol acquisition would require additional financing, and a large adverse judgment in the Cordis case could strain liquidity.
04—Continue