BSX

Business Context and Reporting Period

Company: Boston Scientific Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: A worldwide developer, manufacturer, and marketer of medical devices for less invasive procedures. The company operates in four geographic segments: United States, Europe, Japan, and Emerging Markets. The reporting period includes the full impact of the Schneider Worldwide acquisition completed in September 1998.

Key Financial Metrics

Note: Working capital improved significantly in Q2 1999 due to the repayment of short-term commercial paper using proceeds from a public equity offering.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 49% in Q2 and 52% YTD compared to the prior year. On a pro forma basis (including Schneider in 1998), sales grew 25% in Q2 and 28% YTD.
• Profitability: Net income increased 63% in Q2 and 65% YTD. Operating income rose 84% in Q2 and 90% YTD.
• Margin Compression: Gross margin decreased from 69.5% to 67.6% due to supply chain inefficiencies, inventory write-downs, and costs associated with product recalls (Discovery catheter and BANDIT PTCA catheter).
• Expense Increases: Interest expense surged from $8M to $35M in Q2 due to higher debt levels from the Schneider acquisition. Amortization expense increased from $8M to $23M in Q2.
• Liquidity Shift: The company refinanced $1.7 billion of commercial paper with revolving credit facilities and completed a public offering of 14.95 million shares, raising approximately $578 million in net proceeds to repay debt.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Supply Chain: Management is executing a global supply chain optimization program to reduce inventory and manufacturing costs, expected to be substantially completed by the end of 1999.
• Product Mix: Growth is heavily driven by U.S. sales of the NIR(R) coronary stent, which accounted for approximately 20% of worldwide sales. The company holds $182 million in NIR(R) inventory and is committed to purchasing an additional $90 million in 1999.
• Integration: The company expects to complete the integration of Schneider by the end of 1999.

Unusual Items and Contingencies

• Product Recall: On August 6, 1999, the company voluntarily recalled Rotablator(R) RotaLink(TM) systems due to a brake failure issue. Sales of these devices in the first half of 1999 were approximately $60 million.
• Restructuring: An accrual of $64 million exists for restructuring and merger-related charges, primarily related to Schneider integration and facility rationalization. Estimated remaining cash obligations are $47 million.
• Legal Proceedings: The company is involved in extensive patent litigation with Advanced Cardiovascular Systems (ACS), Johnson & Johnson (Cordis/Ethicon), Medtronic, and others. A recent court judgment awarded $10.8 million in damages to C.R. Bard, Inc., which the company is appealing.
• Regulatory Investigation: The U.S. Department of Justice is investigating the voluntary recall of the NIR ON(R) Ranger(TM) with Sox(TM) coronary stent system.
• Class Action: Shareholders have filed class action suits alleging accounting irregularities regarding revenue recognition in Japan.

Investor Verification Checklist

• Debt Structure: Verify the status of the $600 million 364-day credit facility expiring in September 1999 and the success of the extension negotiations.
• Inventory Levels: Monitor the $182 million NIR(R) stent inventory and the risk of write-downs if sales mix or pricing declines.
• Legal Exposure: Track outcomes of pending patent trials (specifically against ACS, J&J, and Medtronic) and the appeal of the C.R. Bard judgment.
• Recall Impact: Assess the financial impact of the Rotablator recall and the timeline for resuming sales.
• Supply Chain Execution: Confirm progress on the supply chain optimization program and its effect on gross margins in the second half of 1999.