BSX

Business Context and Reporting Period

Company: Boston Scientific Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: A worldwide developer, manufacturer, and marketer of medical devices for less invasive procedures, operating in four geographic segments: United States, Europe, Japan, and Inter-Continental.

Key Financial Metrics

Note: Total Debt includes $190M commercial paper, $146M bank obligations, and $835M long-term debt as of June 30, 2002.

Material Changes vs. Prior Period

• Profitability Turnaround: The Company reported a net income of $25 million for the quarter, a significant improvement from a net loss of $172 million in the same period of 2001. For the six months, net income was $107 million versus a loss of $177 million in 2001.
• Revenue Growth: Net sales increased 5% year-over-year for the quarter ($708M vs. $672M) and 4% for the six-month period ($1,383M vs. $1,326M). International revenue grew 7% in the quarter, driven by the launch of the Express coronary stent.
• Margin Expansion: Gross margin improved to 68.2% in Q2 2002 from 60.1% in Q2 2001. This improvement is attributed to operational efficiencies from the global operations plan and a shift in product mix, excluding a $49M inventory provision taken in 2001.
• Amortization Reduction: Amortization expense dropped significantly to $17 million in Q2 2002 from $52 million in Q2 2001, primarily due to the adoption of FASB Statement No. 142, which eliminated goodwill amortization.
• Acquisition Activity: The Company completed acquisitions of Enteric Medical Technologies (EMT) and BEI Medical Systems in June 2002, resulting in a $45 million charge for purchased research and development related to EMT.

Outlook, Risks, and Management Commentary

• Product Outlook: Management anticipates a continued decline in market share for the NIR(R) coronary stent due to competition from drug-eluting stents. The Company is launching the Express coronary stent in the U.S. in the second half of 2002 and is advancing the TAXUS drug-eluting stent program, with regulatory filings expected in late 2003 for the U.S.
• Global Operations: The plant optimization initiative was substantially completed, consolidating manufacturing and displacing approximately 1,700 employees. The plan is expected to generate $220 million in pre-tax savings in 2002 and $250 million annually thereafter.
• Liquidity: Working capital decreased to $15 million from $275 million at year-end 2001 due to increased short-term borrowings and acquisition obligations. The Company maintains $1.6 billion in revolving credit facilities.
• Legal Risks: Significant litigation remains with Johnson & Johnson (Cordis) regarding NIR(R) stent patents, where a previous $324M damage award was set aside pending a new trial. Litigation with Medtronic regarding patent infringement is ongoing, with a $169M arbitration award pending appeal. The estimated range of loss for reasonably possible contingencies is $0 to $80 million plus interest.
• Self-Insurance: The Company elected to become substantially self-insured for general and product liability claims beginning in Q3 2002 due to insurance market conditions.

Investor Verification Checklist

• Stent Market Dynamics: Verify the rate of decline in NIR(R) stent sales versus the uptake of the new Express and TAXUS drug-eluting stents.
• Legal Exposure: Monitor the status of the Johnson & Johnson (Cordis) retrial and the Medtronic appeal, as outcomes could materially impact financial results.
• Acquisition Integration: Assess the realization of synergies and the commercial success of the EMT (Enteryx) and BEI acquisitions.
• Debt Structure: Review the maturity profile of the $1.6 billion credit facility and the reliance on commercial paper ($510M outstanding).
• Regulatory Approvals: Track the timeline for U.S. and international regulatory approvals for the TAXUS drug-eluting stent program.