Guidant’s suit originally alleged infringement of four patents by the Company. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant, and the Court of Appeals upheld the lower court’s invalidity determination. In a jury trial involving the two remaining patents (the ‘288 and ‘472 patents), the jury found that these patents were valid and that the Company did not infringe the ‘288 patent. The jury also found that the Company did infringe the ‘472 patent, though such infringement was not willful. The jury awarded damages of $140.0 million to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the ‘472 patent was invalid and also was not infringed by the Company, thereby eliminating the $140.0 million verdict against the Company. The trial court also made other rulings as part of the post-trial order, including a ruling that the ‘288 patent was invalid on several grounds.
In August 2002, Guidant commenced an appeal of certain of the trial judge’s post-trial decisions pertaining to the ‘288 patent. Guidant did not appeal the trial court’s finding of invalidity and non-infringement of the ‘472 patent. As part of its appeal, Guidant requested that the monetary damages awarded by the jury pertaining to the ‘472 patent ($140.0 million) be transferred to the ‘288 patent infringement claim.
On August 31, 2004, a three judge panel of the Court of Appeals for the Federal Circuit (CAFC) issued a ruling on Guidant’s appeal of the trial court decision concerning the ‘288 patent. The CAFC reversed the decision of the trial court judge that the ‘288 patent was invalid. The CAFC also ruled that the trial judge’s claim construction of the ‘288 patent was incorrect and, therefore, the jury’s verdict of non-infringement was set aside. Guidant’s request to transfer the $140.0 million to the ‘288 patent was rejected. The CAFC also ruled on other issues that were raised by the parties. The Company’s request for re-hearing of the matter by the panel and the entire CAFC court was rejected.
The case was returned to the district court in Indiana in November 2004, but since that time, further appellate activity has occurred. In this regard, the U.S. Supreme Court rejected the Company’s request that it review certain aspects of the CAFC decision. In addition, further appellate review has occurred after Guidant brought motion in the district court seeking to have a new judge assigned to handle the case in lieu of the judge that oversaw the prior trial. On a motion for reconsideration, the judge reversed his initial decision in response to Guidant’s motion and agreed to have the case reassigned to a new judge but also certified the issue to the CAFC. On July 20, 2005, the CAFC ruled that the original judge should continue with the case. A hearing on claims construction issues and various motions for summary judgment brought by both parties was held on December 20, 2005, and the district court issued rulings on claims construction and in response to some of the motions for summary judgment on March 1, 2006. In response to the district court ruling, on March 21, 2006, Guidant filed a special request with the CAFC to appeal certain of the March 1, 2006 rulings, or to clarify the August 31, 2005 CAFC decision. The Company filed responses to these filings and on June 2, 2006, the CAFC rejected Guidant’s special request for an appeal. Pursuant to a recent order of the district court, this matter is presently set for trial in April 2007, and it is otherwise proceeding in accordance with the deadlines established by the district court.
The ‘288 patent expired in December 2003. Accordingly, the final outcome of the lawsuit involving the ‘288 patent cannot result in an injunction precluding the Company from selling ICD products in the future. Sales of the Company’s ICD products which Guidant asserts infringed the ‘288 patent were approximately 18% and 16% of the Company’s consolidated net sales during the fiscal years 2003 and 2002, respectively.
On July 30, 2006, in exchange for the Company agreeing not to pursue the recovery of attorneys’ fees or assert certain claims and defenses, Guidant agreed that it would not seek to recover lost profits in the case, that the maximum royalty rate that it would seek for any patents found to be infringed by the Company would not exceed 3% of net sales, and that it would not seek prejudgment interest. These agreements have the effect of limiting the Company’s financial exposure. However, any potential losses arising from any legal settlements or judgments could be material to the Company’s consolidated earnings, financial position and cash flows. The Company has not accrued any amounts for legal settlements or judgments related to the Guidant 1996 patent litigation. Although the Company believes that the assertions and claims in the Guidant 1996 patent litigation are without merit, potential losses arising from any legal settlements or judgments are possible, but not estimable, at this time.
Guidant 2004 Patent Litigation: In February 2004, Guidant sued the Company in federal district court in Delaware alleging that the Company’s Epic® HF ICD, Atlas®+ HF ICD and Frontier™ devices infringe U.S Patent No. RE 38,119E (the ‘119 patent). On January 6, 2006, the district court ruled against the Company in response to a motion for summary judgment it had filed with the district court in June 2005. The Company and Guidant have filed additional summary judgment motions and provided the district court with briefs on claims construction which have yet to be ruled upon by the district court. Pursuant to a recent order of the district court, this matter is presently set for trial in August 2007, and it is otherwise proceeding in accordance with deadlines established by the district court.
A competitor of the Company, Medtronic, Inc., which has a license to the ‘119 patent, contended in a separate lawsuit with Guidant in the same district court that the ‘119 patent was invalid. In July 2005, the district court ruled against Medtronic’s claim of invalidity, and in October 2006, the CAFC upheld the district court’s ruling against Medtronic’s claim of invalidity. By agreement with Guidant, in the initial case involving the ‘119 patent, Medtronic had presented limited arguments of invalidity in its case and did not address infringement. As it proceeds with this case against Guidant, the Company expects to assert invalidity arguments that were not made by Medtronic in its initial case involving the ‘119 patent and also defend against Guidant’s claims of patent infringement.
On July 30, 2006, in exchange for the Company agreeing not to pursue the recovery of attorneys’ fees or assert certain defenses, Guidant agreed that it would not seek to recover lost profits in the case, that the maximum royalty rate that it would seek for any patents found to be infringed by the Company would not exceed 3% of net sales, that it would not seek prejudgment interest, and that it would not pursue an injunction against the Company until all appeals have been exhausted and any judgment of infringement is final and no longer can be appealed. These agreements have the effect of limiting the Company’s financial and operational exposure. However, any potential losses arising from any legal settlements or judgments could be material to the Company’s consolidated earnings, financial position and cash flows. The Company has not accrued any amounts for legal settlements or judgments related to the outstanding Guidant 2004 patent litigation. Although the Company believes that the assertions and claims in the outstanding Guidant 2004 patent litigation are without merit, potential losses arising from any legal settlements or judgments are possible, but not estimable, at this time.
Guidant also sued the Company in February 2004 alleging that the Company’s QuickSite® 1056K pacing lead infringes U.S. Patent No. 5,755,766 (the ‘766 patent). This second suit was initiated in federal district court in Minnesota. Guidant later amended its complaint to allege that the QuickSite® 1056K and the QuickSite® 1056T pacing leads infringe U.S. Patent No. 6,901,288, as well as the ‘766 patent. The parties settled this suit on July 30, 2006 and agreed to a patent cross-license involving the parties’ cardiac rhythm management patent portfolios.
Advanced Bionics Patent Litigation: On July 30, 2006, the Company settled the litigation between its subsidiary, ANS, and Advanced Bionics, a subsidiary of Boston Scientific Corporation. That litigation involved patent infringement claims by both parties. In connection with the settlement, the parties agreed to a cross-license of certain patents related to neuromodulation.
Securities Class Action Litigation: In April and May 2006, five shareholders, each purporting to act on behalf of a class of purchasers during the period January 25 through April 4, 2006 (the Class Period), separately sued the Company and certain of its officers in federal district court in Minnesota alleging that the Company made materially false and misleading statements during the Class Period relating to financial performance, projected earnings guidance and projected sales of ICDs. The complaints, which all seek unspecified damages and other relief, as well as attorneys’ fees, have all been consolidated. In an August 24, 2006 ruling, lead plaintiffs were appointed by the district court. The plaintiffs filed their amended complaint on October 24, 2006, the Company filed a motion to dismiss on November 22, 2006 and the district court has not yet ruled on the motions. Arguments regarding the motion to dismiss are scheduled for February 26, 2007. The Company intends to vigorously defend against the claims asserted in these actions. The Company’s directors and officers liability insurance provide $75 million of insurance coverage for the Company, the officers and the directors, after a $15 million self-insured retention level has been reached.
On February 2, 2007, a derivative action was filed in state court in Minnesota which purports to bring claims belonging to the Company against the Company’s Board of Directors and various officers and former officers for alleged malfeasance in the management of the Company. The defendants’ response is due March 7, 2007.
Additionally, the Company’s subsidiary, ANS, had outstanding securities class action legal proceedings. In late May 2005, the U.S. District Court for the Eastern District of Texas, Sherman Division, granted an order consolidating three previously filed cases which sought class action status for claims asserted against ANS and certain of the individuals who were serving as ANS’s officers and directors at that time (the ANS Class Action Litigation), on behalf of purchasers of ANS securities between April 24, 2003 and February 16, 2005. On October 6, 2006, the parties entered into a settlement
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agreement to resolve the ANS Class Action Litigation and this settlement was approved by the federal magistrate on January 31, 2007. The final order is expected to be signed by the federal district judge in February 2007. ANS’s directors and officers liability insurance policy covers the amount of the settlement agreed to by the parties.
Other Litigation and Governmental Investigation Matters: The Company has been named in the report of the Independent Inquiry Committee into the United Nations (U.N.) Oil-For-Food Programme as having made payments to the Iraqi government in connection with certain product sales made by the Company to Iraq under the U.N. Oil-For-Food Programme in 2001, 2002 and 2003. The Company is investigating the allegations. In February 2006, the Company received a subpoena from the Securities and Exchange Commission (SEC) requesting the Company to produce documents concerning transactions under the U.N. Oil-for-Food Programme. The Company is cooperating with the SEC’s request.
In late January 2005, ANS received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General (OIG) requesting documents related to certain of its sales and marketing, reimbursement, Medicare and Medicaid billing, and other business practices of ANS. The Company has produced the requested documents and has implemented a compliance program at ANS to ensure its sales and marketing practices comply with applicable law.
In October 2005, the U.S. Department of Justice, acting through the U.S. Attorney’s office in Boston, commenced an industry-wide investigation into whether the provision of payments and/or services by makers of implantable cardiac rhythm devices to doctors or other persons constitutes improper inducements under the federal health care program anti-kickback law. As part of this investigation, the Company received a civil subpoena from the U.S. Attorney’s office in Boston requesting documents on the Company’s practices related to pacemakers, ICDs, lead systems and related products marketed by our CRM segment during the period from January 2000 to date. The Company understands that its principal competitors in the CRM therapy areas received similar civil subpoenas. The Company received an additional subpoena from the U.S. Attorney’s office in Boston in September 2006, requesting documents related to certain employee expense reports and certain pacemaker and ICD purchasing arrangements for the period from January 2002 to date.
On January 16, 2007, the French Conseil de la Concurrence (one of the bodies responsible for the enforcement of antitrust/competition law in France) issued a Statement of Objections alleging that the Company had agreed with the four other main suppliers of ICDs in France to collectively refrain from responding to a 2001 tender for ICDs conducted by a group of 17 University Hospital Centers in France. This alleged collusion is said to be contrary to the French Commercial Code and Article 81 of the European Community Treaty. If the allegations contained in the Statement of Objections are upheld, the most likely outcome is that the Company’s French subsidiary will become liable to pay a civil fine. It is too early in the proceedings to estimate the likely amount of any fine that may be payable. The Company is in the process of evaluating this matter.
The Company is also involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of business.
NOTE 6 – SHAREHOLDERS’ EQUITY
Capital Stock:The Company’s authorized capital consists of 25 million shares of $1.00 per share par value preferred stock and 500 million shares of $0.10 per share par value common stock. The Company has designated 1.1 million of the authorized preferred shares as a Series B Junior Preferred Stock for its shareholder rights plan (seeShareholders’ Rights Planbelow for further discussion). There were no shares of preferred stock issued or outstanding during 2006, 2005 or 2004.
Shareholders’ Rights Plan: The Company has a shareholder rights plan that entitles shareholders to purchase one-tenth of a share of Series B Junior Preferred Stock at a stated price, or to purchase either the Company’s shares or shares of an acquiring entity at half their market value, upon the occurrence of certain events which result in a change in control, as defined by the Plan. The rights related to this plan expire in July 2007.
Share Repurchases: On April 18, 2006, the Company’s Board of Directors authorized a share repurchase program of up to $700.0 million of the Company’s outstanding common stock. The $700.0 million share repurchase program replaced an earlier share repurchase program, under which the Company was authorized to repurchase up to $300.0 million of its outstanding common stock. No stock had been repurchased under the earlier program. The Company began making share repurchases on April 21, 2006, and as of May 26, 2006, had repurchased the maximum amount authorized by the Board of Directors under the repurchase program. The Company repurchased 18.6 million shares for a total of $700.0 million, which was recorded as a $593.5 million aggregate reduction of common stock and additional paid-in capital and a $106.5 million reduction in retained earnings.
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On January 25, 2007, the Company’s Board of Directors authorized a new share repurchase program of up to $1.0 billion of the Company’s outstanding common stock. The Company began making share repurchases on January 29, 2007, and as of February 16, 2007, 12.9 million shares had been repurchased for approximately $546 million.
NOTE 7 – STOCK-BASED COMPENSATION
Stock Compensation Plans
The Company’s stock compensation plans provide for the issuance of stock-based awards, such as restricted stock or stock options, to directors, officers, employees and consultants. Stock option awards under these plans generally have an eight to ten year life, an exercise price equal to the fair market value on the date of grant and a four-year vesting term. Restricted stock awards under these plans generally vest over a four-year period. During the vesting period, ownership of the shares cannot be transferred. Restricted stock is considered issued and outstanding at the grant date and has the same dividend and voting rights as other common stock. Directors can elect to receive half or all of their annual retainer in the form of a restricted stock grant with a six-month vesting term. At December 30, 2006, the Company had 2.8 million shares of common stock available for grant under these plans of which, 0.1 million are available for restricted stock award grants.
The Company also has an Employee Stock Purchase Savings Plan (ESPP) that allows participating employees to purchase newly issued shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a 12-month offering period whereby employees can purchase shares at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower. The maximum number of shares that employees can purchase is established at the beginning of the offering period. Employees purchased 0.5 million, 0.6 million and 0.6 million shares in 2006, 2005 and 2004, respectively. At December 30, 2006, 0.8 million shares of common stock were available for purchase under the ESPP.
Valuation Assumptions
The Company uses the Black-Scholes standard option pricing model (Black-Scholes model) to determine the fair value of stock options and ESPP purchase rights. The determination of the fair value of the awards on the date of grant using the Black-Scholes model is affected by the Company’s stock price as well as assumptions of other variables, including projected employee stock option exercise behaviors, risk-free interest rate, expected volatility of the Company’s stock price in future periods and expected dividend yield. The weighted average fair values of ESPP purchase rights granted to employees during fiscal years 2006, 2005 and 2004 were $10.12, $12.38 and $8.70, respectively. The fair value of restricted stock is based on the Company’s closing stock price on the date of grant. The weighted average fair values of restricted stock granted during fiscal years 2006, 2005 and 2004 were $34.04, $47.85 and $37.62, respectively.
The following table provides the weighted average fair value of stock options granted to employees during fiscal years 2006, 2005 and 2004 and the related weighted average assumptions used in the Black-Scholes model:
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| | 2006 | | 2005 | | 2004 | | |
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Fair value of options granted | | $ | 11.23 | | $ | 14.71 | | $ | 12.79 | | |
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Assumptions used: | | | | | | | | | | | |
Expected life (years) | | | 4.1 | | | 4.4 | | | 4.8 | | |
Risk-free interest rate | | | 4.5 | % | | 4.4 | % | | 3.5 | % | |
Volatility | | | 27.8 | % | | 26.1 | % | | 29.0 | % | |
Dividend yield | | | 0 | % | | 0 | % | | 0 | % | |
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Expected life: The Company analyzes historical employee exercise and termination data to estimate the expected life assumption. For determining the fair value of stock options under SFAS No. 123(R), the Company uses different expected lives for the general employee population and officers and directors. In preparing to adopt SFAS No. 123(R), the Company examined its historical pattern of stock option exercises to determine if there was a discernable pattern as to how different classes of employees exercised their stock options. The Company’s analysis showed that officers and directors held their stock options for a longer period of time before exercising compared to the rest of the employee population. Prior to adopting SFAS No. 123(R), the Company used the entire employee population for estimating the expected life assumptions.
Risk-free interest rate: The rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options.
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Volatility:The Company estimates the expected volatility of its common stock by using the implied volatility in market traded options in accordance with SEC Staff Accounting Bulletin (SAB) No. 107,Share-Based Payment, which expressed the views of the SEC staff regarding the application of SFAS No. 123(R). The Company’s decision to use implied volatility was based on the availability of actively traded options for the Company’s common stock and the Company’s assessment that implied volatility is more representative of future stock price trends than the historical volatility of the Company’s common stock. Prior to adopting SFAS No. 123(R), the Company used historical volatility to determine the expected volatility.
Dividend yield: The Company does not anticipate paying any cash dividends in the foreseeable future and therefore a dividend yield of zero is assumed.
Stock Option and Restricted Stock Activity
The following table summarizes stock option activity under all stock compensation plans, including options assumed in connection with acquisitions, during the fiscal year ended December 30, 2006:
| | | | | | | | | | | | | |
| | Options
(in thousands) | Weighted
Average
Exercise
Price | | Weighted
Average
Contractual
Term (years) | | Aggregate
Instrinsic
Value
(in thousands) | |
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Outstanding at December 31, 2005 | | | 45,887 | | $ | 23.34 | | | | | | | |
Granted | | | 5,243 | | | 37.94 | | | | | | | |
Canceled | | | (1,118 | ) | | 37.81 | | | | | | | |
Exercised | | | (4,110 | ) | | 14.98 | | | | | | | |
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Outsanding at December 30, 2006 | | | 45,902 | | $ | 25.40 | | | 4.3 | | $ | 603,140 | |
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Vested or expected to vest at December 30, 2006 | | | 43,813 | | $ | 24.64 | | | 4.2 | | $ | 602,131 | |
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Exercisable at December 30, 2006 | | | 33,274 | | $ | 19.71 | | | 3.4 | | $ | 588,041 | |
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The aggregate intrinsic value of options outstanding and options exercisable is based on the Company’s closing stock price on the last trading day of the fiscal year for in-the-money options. The total intrinsic value of options exercised during fiscal years 2006, 2005 and 2004 was $105.6 million, $252.4 million and $313.3 million, respectively.
The following table summarizes restricted stock activity under all stock compensation plans, including restricted stock assumed in connection with acquisitions, during the year ended December 30, 2006:
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| | Restricted Stock
(in thousands) | | Weighted Average
Grant Price | |
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Unvested balance at December 31, 2005 | | 222 | | | $ | 47.79 | |
Granted | | 14 | | | | 34.04 | |
Vested | | (16 | ) | | | 35.90 | |
Canceled | | (10 | ) | | | 46.56 | |
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Unvested balance at December 30, 2006 | | 210 | | | $ | 47.88 | |
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In connection with the acquisition of ANS in November 2005, the Company granted replacement unvested stock options and replacement unvested restricted stock to ANS employees who had unvested stock options and unvested restricted stock outstanding at the date of acquisition. ANS employees are required to render future service in order to vest in the replacement stock options and restricted stock. The Company issued 790,737 replacement St. Jude Medical stock options having a weighted average exercise price of $24.00, which vest over one- to four-year periods. The fair values of the replacement stock options were determined on the replacement grant date using the Black-Scholes model. The weighted average fair value of the replacement stock options was $27.79. Additionally, the Company issued 209,364 shares of replacement St. Jude Medical restricted stock at a weighted average grant price of $48.17, which vest over a four year period. Included in the $70.4 million of total pre-tax stock-based compensation expense recognized for 2006, is $9.4 million of expense relating to these ANS replacement awards, respectively.
At December 30, 2006, there was $93.7 million of total unrecognized stock-based compensation expense, adjusted for estimated forfeitures, which is expected to be recognized over a weighted average period of 1.7 years and will be adjusted for any future changes in estimated forfeitures. Included in total unrecognized stock-based compensation expense is $6.9
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million related to replacement awards that the Company issued in connection with the acquisition of ANS, which is expected to be recognized over a weighted average period of 1.2 years.
NOTE 8 – PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D) AND SPECIAL CHARGES (CREDITS)
IPR&D Charges
The Company is responsible for the valuation of purchased in-process research and development. The fair value assigned to IPR&D was estimated by discounting each project to its present value using the after-tax cash flows expected to result from the project once it has reached technological feasibility. The Company discounts the after-tax cash flows using an appropriate risk-adjusted rate of return (ANS – 17%, Velocimed – 22%, ESI – 16%, IBI – 16%) that takes into account the uncertainty surrounding the successful development of the projects through obtaining regulatory approval to market the underlying products in an applicable geographic region. In estimating future cash flows, the Company also considered other tangible and intangible assets required for successful development of the resulting technology from the IPR&D projects and adjusted future cash flows for a charge reflecting the contribution of these other tangible and intangible assets to the value of the IPR&D projects.
At the time of acquisition, the Company expects all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of these projects will actually be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing and conducting clinical trials necessary to obtain regulatory approvals. The risks associated with achieving commercialization include, but are not limited to, delay or failure to obtain regulatory approvals to conduct clinical trials, failure of clinical trials, delay or failure to obtain required market clearances, and patent litigation. If commercial viability were not achieved, the Company would not realize the original estimated financial benefits expected for these projects. The Company funds all costs to complete IPR&D projects with internally generated cash flows.
Fiscal Year 2005
Savacor, Inc.: In December 2005, the Company acquired privately-held Savacor to complement the Company’s development efforts in heart failure diagnostic and therapy guidance products. At the date of acquisition, $45.7 million of the purchase price was expensed as IPR&D related to projects that had not yet reached technological feasibility and had no future alternative use. The IPR&D acquired relates to in-process projects for a device in clinical trials both in the United States and internationally that measures left atrial pressure and body temperature. Through December 30, 2006, the Company has incurred costs of approximately $6 million related to these projects. The Company expects to incur approximately $15 million to bring the device to commercial viability on a worldwide basis within four years. Because Savacor is a development-stage company, the excess of the purchase price over the fair value of the net assets acquired is allocated on a pro-rata basis to the net assets acquired. Accordingly, the majority of the excess purchase price was allocated to IPR&D, the principal asset acquired.
Advanced Neuromodulation Systems, Inc.: In November 2005, the Company acquired ANS to expand the Company’s implantable microelectronics technology programs and provide the Company immediate access to the neuromodulation segment of the medical device industry. At the date of acquisition, $107.4 million of the purchase price was expensed as IPR&D related to projects that had not yet reached technological feasibility and had no future alternative use. The majority of the IPR&D acquired relates to in-process projects for next-generation Eon™ and Genesis® rechargeable implantable pulse generator (IPG) devices as well as next-generation leads that deliver electrical impulses to targeted nerves that are causing pain.
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A summary of the fair values assigned to each in-process project acquired and the estimated total cost to complete each project as of the acquisition date is presented below (in millions):
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Development Projects | | Assigned
Fair Value | | Estimated Total
Cost to Complete | |
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Eon™ | | $ | 67.2 | | $ | 6.9 | |
Genesis™ | | | 15.3 | | | 2.7 | |
Leads | | | 23.7 | | | 0.2 | |
Other | | | 1.2 | | | 0.9 | |
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| | $ | 107.4 | | $ | 10.7 | |
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Through December 30, 2006, the Company has incurred costs of $7.2 million related to these projects. The Company expects to incur an additional $10.7 million through 2009 to bring these technologies to commercial viability.
Velocimed, LLC: In April 2005, the Company acquired the business of Velocimed to further enhance the Company’s portfolio of products in the interventional cardiology market. At the date of acquisition, $13.7 million of the purchase price was expensed as IPR&D related to projects for the Proxis™ embolic protection device that had not yet reached technological feasibility in the U.S. and other geographies and had no future alternative use. The device is used to help minimize the risk of heart attack or stroke if plaque or other debris is dislodged into the blood stream during interventional cardiology procedures. Through December 30, 2006, the Company has incurred $6.8 million in costs related to these projects. The Company expects to incur an additional $0.6 million in 2007 to bring this technology to commercial viability.
Endocardial Solutions, Inc.: In January 2005, the Company acquired ESI to further enhance the Company’s portfolio of products used to treat heart rhythm disorders. At the date of acquisition, $12.4 million of the purchase price was expensed as IPR&D related to system upgrades that had not yet reached technological feasibility and had no future alternative use. These major system upgrades are part of the EnSite® system which is used for the navigation and localization of diagnostic and therapeutic catheters used in atrial fibrillation ablation and other EP catheterization procedures. During 2005, the Company incurred $0.7 million in costs related to these projects and in the third quarter of 2005, the Company achieved commercial viability and launched EnSite® system version 5.1 and the EnSite® Verismo™ segmentation tool.
Fiscal Year 2004
Irvine Biomedical, Inc.: In October 2004, the Company acquired IBI to further enhance the Company’s portfolio of products used to treat heart rhythm disorders. At the date of acquisition, $9.1 million of the purchase price was expensed for IPR&D related to projects for an ablation system and therapeutic catheters that had not yet reached technological feasibility and had no future alternative use. The majority of the IPR&D relates to devices that are part of an ablation system in which catheters are connected to a generator which delivers radiofrequency or ultrasound energy through the catheter to create lesions through ablation of cardiac tissue. In 2005 and 2004, the Company incurred $0.5 million and $0.2 million, respectively, in costs related to these projects and in the fourth quarter of 2005, the Company achieved commercial viability and received FDA approval to market the Cardiac Ablation Generator and Therapy™ EP catheters, expanding the Company’s therapeutic EP portfolio. The remaining IPR&D relates to a cool path ablation catheter that allows for the infusion of saline to cool the catheter tip electrode. Through December 30, 2006, the Company had incurred approximately $3 million in costs related to this device and expects to receive FDA approval in 2007 to market this product.
Special Charges (Credits)
Fiscal Year 2006
Restructuring Activities: During the third quarter of 2006, Company management performed a review of the organizational structure of the Company’s Cardiac Surgery and Cardiology divisions and its international selling organization. In August 2006, Company management approved restructuring plans to streamline its operations within its Cardiac Surgery and Cardiology divisions and combine them into one new Cardiovascular division, effective January 1, 2007, and also to implement changes in its international selling organization to enhance the efficiency and effectiveness of sales and customer service operations in certain international geographies. This strategic reorganization and operational restructuring will allow the Company to enhance operating efficiencies and increase investment in product development.
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As a result of these restructuring plans, the Company recorded pre-tax special charges totaling $34.8 million in the third quarter of 2006 consisting of employee termination costs ($14.7 million), inventory write-downs ($8.7 million), asset write-downs ($7.3 million) and other exit costs ($4.1 million). Of the total $34.8 million special charge, $15.1 million was recorded in cost of sales and $19.7 million was recorded in operating expenses. In order to enhance segment comparability and reflect management’s focus on the ongoing operations of the Company, the restructuring special charges have not been recorded in the individual reportable segments.
Employee termination costs relate to severance and benefits costs for approximately 140 individuals. The charges for employee termination costs were recorded after management determined that such severance and benefits were probable and estimable, in accordance with SFAS No. 112,Employers’ Accounting for Postemployment Benefits. Inventory write-downs represent the net carrying value of inventory relating to product lines discontinued in connection with the reorganization. Asset write-downs represent the net book value of assets that will no longer be utilized as a result of the reorganization and restructuring, including $4.2 million of trademarks acquired in connection with the Company’s 2003 acquisition of Getz Japan as well as other assets relating to product lines discontinued in connection with the reorganization. Other exit costs primarily represent contract termination costs.
A summary of the activity relating to the restructuring accrual for fiscal year 2006 is as follows (in thousands):
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termination
costs | | Inventory
write-downs | | Asset
write-downs | | Other | | Total | |
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Balance at December 31, 2005 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
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Restructuring charges | | | 14,710 | | | 8,694 | | | 7,361 | | | 4,062 | | | 34,827 | |
Non-cash charges used | | | — | | | (8,694 | ) | | (7,361 | ) | | — | | | (16,055 | ) |
Cash payments | | | (3,642 | ) | | — | | | — | | | (586 | ) | | (4,228 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006 | | $ | 11,068 | | $ | — | | $ | — | | $ | 3,476 | | $ | 14,544 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005
Symmetry™ Bypass System Aortic Connector Litigation: During the third quarter of 2005, over 90% of the cases and claims asserted involving the Symmetry™ device were resolved. As a result, the Company reversed $14.8 million of the pre-tax $21.0 million special charge that was recorded in the third quarter of 2004 to accrue for legal fees in connection with claims involving the Symmetry™ device. Additionally, the Company recorded a pre-tax charge of $3.3 million in the third quarter of 2005 to accrue for settlement costs negotiated in these related cases. These adjustments resulted in a net pre-tax benefit of $11.5 million that the Company recorded in the third quarter of 2005 related to Symmetry™ device product liability litigation. See Note 5 for further details on the outstanding litigation against the Company relating to the Symmetry™ device.
Fiscal Year 2004
Symmetry™ Bypass System Aortic Connector Product Line Discontinuance: On September 23, 2004, management committed the Company to a plan to discontinue developing, manufacturing, marketing and selling its Symmetry™ device. The decision was based on operating losses incurred related to the product over the previous three years and the prospect of ongoing operating losses, resulting from a decrease in the number of coronary artery bypass graft surgery cases and an apparent slow down in the adoption of off-pump procedures for which the Symmetry™ device was developed.
In conjunction with the plan, the Company recorded a pre-tax charge in the third quarter of 2004 of $14.4 million. The charge was comprised of $4.4 million of inventory write-offs, $4.1 million of fixed asset write-offs, $3.6 million of sales returns, $1.3 million of contract termination and other costs, primarily related to a leased facility and $1.0 million in workforce reduction costs. These activities and all payments required in connection with the charge have been completed.
Symmetry™ Bypass System Aortic Connector Litigation: The Company has been sued in various jurisdictions by claimants who allege that the Company’s Symmetry™ device caused bodily injury or might cause bodily injury. During the third quarter of 2004, the number of lawsuits involving the Symmetry™ device increased and the number of persons asserting claims outside of litigation increased as well. The Company determined that it was probable future legal fees to defend the cases would be incurred and that the amount of such fees was reasonably estimable. As a result, the Company
49
recorded a pre-tax charge of $21.0 million in the third quarter of 2004 to accrue for legal fees in connection with claims involving the Symmetry™ device.
Edwards LifeSciences Corporation: In December 2004, the Company settled a patent infringement lawsuit with Edwards LifeSciences Corporation and recorded a pre-tax charge of $5.5 million.
NOTE 9 – OTHER INCOME (EXPENSE)
| | | | | | | | | | |
(in thousands) | | 2006 | | 2005 | | 2004 | |
|
|
|
|
|
|
|
|
|
Interest income | | $ | 9,266 | | $ | 19,523 | | $ | 10,093 | |
Interest expense | | | (33,883 | ) | | (10,028 | ) | | (4,810 | ) |
Equity method losses | | | — | | | — | | | (2,091 | ) |
Other | | | 2,175 | | | (821 | ) | | (1,958 | ) |
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|
|
|
|
|
|
|
|
|
|
Other income (expense) | | $ | (22,442 | ) | $ | 8,674 | | $ | 1,234 | |
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|
|
|
|
|
|
|
|
|
NOTE 10 – INCOME TAXES
The Company’s earnings before income taxes were generated from its U.S. and international operations as follows (in thousands):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
|
|
|
|
|
|
|
|
U.S. | | $ | 554,581 | | $ | 347,281 | | $ | 327,617 | |
International | | | 166,060 | | | 274,123 | | | 209,575 | |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes | | $ | 720,641 | | $ | 621,404 | | $ | 537,192 | |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consists of the following (in thousands):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
|
|
|
|
|
|
|
|
Current: | | | | | | | | | | |
U.S. federal | | $ | 144,115 | | $ | 158,075 | | $ | 96,156 | |
U.S. state and other | | | 12,121 | | | 22,881 | | | 9,814 | |
International | | | 27,081 | | | 42,125 | | | 30,628 | |
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|
|
|
|
|
|
|
|
|
|
Total current | | | 183,317 | | | 223,081 | | | 136,598 | |
| | | | | | | | | | |
Deferred | | | (10,927 | ) | | 4,833 | | | (9,340 | ) |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense | | $ | 172,390 | | $ | 227,914 | | $ | 127,258 | |
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|
|
|
|
|
|
|
|
|
|
50
The tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes are as follows (in thousands):
| | | | | | | |
| | 2006 | | 2005 | |
|
|
|
|
|
|
Deferred income tax assets: | | | | | | | |
Net operating loss carryforwards | | $ | 24,060 | | $ | 58,399 | |
Tax credit carryforwards | | | 36,160 | | | 33,800 | |
Inventories | | | 101,530 | | | 83,539 | |
Stock-based compensation | | | 20,686 | | | — | |
Accrued liabilities and other | | | 41,847 | | | 30,237 | |
|
|
|
|
|
|
|
|
Deferred income tax assets | | | 224,283 | | | 205,975 | |
|
|
|
|
|
|
|
|
Deferred income tax liabilities: | | | | | | | |
Unrealized gain on available-for-sale securities | | | (14,733 | ) | | (13,804 | ) |
Property, plant and equipment | | | (51,174 | ) | | (39,030 | ) |
Intangible assets | | | (204,382 | ) | | (210,312 | ) |
|
|
|
|
|
|
|
|
Deferred income tax liabilities | | | (270,289 | ) | | (263,146 | ) |
|
|
|
|
|
|
|
|
Net deferred income tax liability | | $ | (46,006 | ) | $ | (57,171 | ) |
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|
|
|
|
|
|
The Company has not recorded any valuation allowance for its deferred tax assets as of December 30, 2006 or December 31, 2005 as the Company believes that its deferred tax assets, including the net operating loss and tax credit carryforwards, will be fully realized based upon its estimates of future taxable income.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows (in thousands):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
|
|
|
|
|
|
|
|
Income tax expense at the U.S. federal statutory rate of 35% | | $ | 252,225 | | $ | 217,491 | | $ | 188,017 | |
U.S. state income taxes, net of federal tax benefit | | | 14,105 | | | 16,225 | | | 12,917 | |
International taxes at lower rates | | | (46,448 | ) | | (47,606 | ) | | (40,409 | ) |
Tax benefits from extraterritorial income exclusion | | | (9,625 | ) | | (9,143 | ) | | (7,945 | ) |
Tax benefits from domestic manufacturer’s deduction | | | (5,230 | ) | | (3,955 | ) | | — | |
Research and development credits | | | (25,435 | ) | | (23,509 | ) | | (14,031 | ) |
Non-deductible IPR&D charges | | | — | | | 68,086 | | | 3,185 | |
Section 965 repatriation | | | — | | | 26,000 | | | — | |
Finalization of tax examinations | | | — | | | (13,700 | ) | | (13,982 | ) |
Other | | | (7,202 | ) | | (1,975 | ) | | (494 | ) |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense | | $ | 172,390 | | $ | 227,914 | | $ | 127,258 | |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Effective income tax rate | | | 23.9 | % | | 36.7 | % | | 23.7 | % |
|
|
|
|
|
|
|
|
|
|
|
The 2005 and 2004 effective income tax rates include the reversal of $13.7 million and $14.0 million, respectively, of previously recorded income tax expense due to the finalization of certain tax examinations. The Company’s effective income tax rate is favorably affected by Puerto Rican tax exemption grants which result in Puerto Rico earnings being partially tax exempt through the year 2012.
At December 30, 2006, the Company has $62.2 million of U.S. federal net operating loss carryforwards and $1.9 million of U.S. tax credit carryforwards that will expire from 2018 through 2024 if not utilized. The Company also has state net operating loss carryforwards of $26.1 million that will expire from 2010 through 2013 and tax credit carryforwards of $51.8 million that have an unlimited carryforward period. These amounts are subject to annual usage limitations. The Company’s net operating loss carryforwards arose primarily from acquisitions.
The Company has not recorded U.S. deferred income taxes on $576.7 million of its non-U.S. subsidiaries’ undistributed earnings, because such amounts are intended to be reinvested outside the United States indefinitely.
51
NOTE 11 – RETIREMENT PLANS
Defined Contribution Plans: The Company has a 401(k) profit sharing plan that provides retirement benefits to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of their annual compensation, subject to Internal Revenue Service limitations, with the Company matching a portion of the employees’ contributions. The Company also contributes a portion of its earnings to the plan based upon Company performance. The Company’s matching and profit sharing contributions are at the discretion of the Company’s Board of Directors. In addition, the Company has defined contribution programs for employees in certain countries outside the United States. Company contributions under all defined contribution plans totaled $47.1 million, $38.0 million and $27.7 million in 2006, 2005 and 2004, respectively.
The Company has a non-qualified deferred compensation plan that provides certain officers and employees the ability to defer a portion of their compensation until a later date. The deferred amounts and earnings thereon are payable to participants, or designated beneficiaries, at specified future dates upon retirement, death or termination from the Company. The deferred compensation liability, which is classified as other liabilities, was approximately $106 million at December 30, 2006 and approximately $76 million at December 31, 2005.
Defined Benefit Plans: The Company has funded and unfunded defined benefit plans for employees in certain countries outside the United States. The Company had an accrued liability totaling $23.8 million and $17.6 million at December 30, 2006 and December 31, 2005, respectively, which approximated the actuarially calculated unfunded liability. The related pension expense was not material.
NOTE 12 – SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information: The Company’s five operating segments are Cardiac Rhythm Management (CRM), Cardiac Surgery (CS), Neuromodulation (Neuro), Cardiology (CD) and Atrial Fibrillation (AF). The Company formed the Neuro operating segment in November 2005 in connection with the acquisition of ANS. Each operating segment focuses on developing and manufacturing products for its respective therapy area. The primary products produced by each operating segment are: CRM – ICDs and pacemakers; CS – mechanical and tissue heart valves and valve repair products; Neuro – neurostimulation devices; CD – vascular closure devices, guidewires, hemostasis introducers and other interventional cardiology products; and AF – EP introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.
The Company has aggregated the five operating segments into two reportable segments based upon their similar operational and economic characteristics: CRM/CS/Neuro and CD/AF. Net sales of the Company’s reportable segments include end-customer revenues from the sale of products they each develop and manufacture. The costs included in each of the reportable segments’ operating results include the direct costs of the products sold to end-customers and operating expenses managed by each of the reportable segments. Certain operating expenses managed by our selling and corporate functions, including all stock-based compensation expense, are not included in our reportable segments’ operating profit. Because of this, reportable segment operating profit is not representative of the operating profit of the products in these reportable segments. Additionally, certain assets are managed by the Company’s selling and corporate functions, principally including end-customer receivables, inventory, corporate cash and cash equivalents and deferred income taxes. For management reporting purposes, the Company does not compile capital expenditures by reportable segment and, therefore, this information has not been presented as it is impracticable to do so.
Effective January 1, 2007, the Company combined the Cardiac Surgery and Cardiology divisions into a new Cardiovascular division which will incorporate all activities previously managed by the Cardiac Surgery division and by the Cardiology division. Segment information will be reclassified in 2007 to reflect the new Cardiovascular division. In order to enhance segment comparability and reflect management’s focus on our ongoing operations, the related restructuring special charges have not been recorded in the individual reportable segments.
52
The following table presents certain financial information by reportable segment (in thousands):
| | | | | | | | | | | | | | |
| | CRM/CS/Neuro | | CD/AF | | Other | | Total | |
|
|
|
|
|
|
|
|
|
| |
Fiscal Year 2006 | | | | | | | | | | | | | |
Net sales | | $ | 2,524,445 | | $ | 778,002 | | $ | — | | $ | 3,302,447 | |
Operating profit | | | 1,523,339 | | | 316,384 | | | (1,096,640 | ) | | 743,083 | |
Depreciation and amortization expense | | | 91,839 | | | 25,413 | | | 49,560 | | | 166,812 | |
Total assets | | | 1,991,832 | | | 702,275 | | | 2,095,687 | | | 4,789,794 | |
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|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal Year 2005 | | | | | | | | | | | | | |
Net sales | | $ | 2,223,701 | | $ | 691,579 | | $ | — | | $ | 2,915,280 | |
Operating profit | | | 1,231,144 | (a) | | 263,211 | (b) | | (881,625 | ) | | 612,730 | |
Depreciation and amortization expense | | | 67,761 | | | 21,795 | | | 40,653 | | | 130,209 | |
Total assets | | | 1,936,915 | | | 679,973 | | | 2,227,952 | | | 4,844,840 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal Year 2004 | | | | | | | | | | | | | |
Net sales | | $ | 1,748,749 | | $ | 545,424 | | $ | — | | $ | 2,294,173 | |
Operating profit | | | 1,015,621 | (c) | | 254,270 | (d) | | (733,933) | | | 535,958 | |
Depreciation and amortization expense | | | 38,533 | | | 11,105 | | | 36,117 | | | 85,755 | |
Total assets | | | 695,330 | | | 339,090 | | | 2,196,327 | | | 3,230,747 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
(a) | Included in CRM/CS/Neuro 2005 operating profit are IPR&D charges of $107.4 million and $45.7 million relating to the acquisitions of ANS and Savacor, respectively. Also included is an $11.5 million special credit relating to a reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs. |
| |
(b) | Included in CD/AF 2005 operating profit are IPR&D charges of $13.7 million and $12.4 million relating to the acquisitions of Velocimed and ESI, respectively. |
| |
(c) | Included in CRM/CS/Neuro 2004 operating profit are special charges of $35.4 million related to Symmetry™ device product line discontinuance and product liability litigation. |
| |
(d) | Included in CD/AF 2004 operating profit is an IPR&D charge of $9.1 million relating to the IBI acquisition. |
Net sales by class of similar products for the respective fiscal years were as follows (in thousands):
| | | | | | | | | | |
Net Sales | | 2006 | | 2005 | | 2004 | |
|
|
|
|
|
|
|
|
|
| |
Cardiac rhythm management | | $ | 2,055,765 | | $ | 1,924,846 | | $ | 1,473,770 | |
Cardiac surgery | | | 289,317 | | | 273,873 | | | 274,979 | |
Neuromodulation | | | 179,363 | | | 24,982 | | | — | |
Cardiology | | | 452,295 | | | 437,769 | | | 388,584 | |
Atrial fibrillation | | | 325,707 | | | 253,810 | | | 156,840 | |
|
|
|
|
|
|
|
|
|
| |
| | $ | 3,302,447 | | $ | 2,915,280 | | $ | 2,294,173 | |
|
|
|
|
|
|
|
|
|
| |
Geographic Information: The Company markets and sells its products primarily through a direct sales force. The principal geographic markets for the Company’s products are the United States, Europe and Japan. The Company attributes net sales to geographic markets based on the location of the customer. Other than the United States, Europe and Japan, no one geographic market is greater than 5% of consolidated net sales.
53
Net sales by significant geographic market for the respective fiscal years were as follows (in thousands):
| | | | | | | | | | |
Net Sales | | 2006 | | 2005 | | 2004 | |
|
|
|
|
|
|
| |
United States | | $ | 1,920,623 | | $ | 1,709,911 | | $ | 1,264,756 | |
International | | | | | | | | | | |
Europe | | | 806,544 | | | 683,014 | | | 577,058 | |
Japan | | | 289,716 | | | 286,660 | | | 267,723 | |
Other | | | 285,564 | | | 235,695 | | | 184,636 | |
|
|
|
|
|
|
|
|
|
| |
| | | 1,381,824 | | | 1,205,369 | | | 1,029,417 | |
|
|
|
|
|
|
|
|
|
| |
| | $ | 3,302,447 | | $ | 2,915,280 | | $ | 2,294,173 | |
|
|
|
|
|
|
|
|
|
| |
Long-lived assets by significant geographic market were as follows (in thousands):
| | | | | | | | | | |
Long-Lived Assets | | December 30, 2006 | | December 31, 2005 | | January 1, 2005 | |
|
|
|
|
|
|
| |
United States | | $ | 2,765,936 | | $ | 2,596,513 | | $ | 1,042,690 | |
International | | | | | | | | | | |
Europe | | | 124,071 | | | 100,068 | | | 102,172 | |
Japan | | | 120,503 | | | 125,962 | | | 148,312 | |
Other | | | 89,119 | | | 81,156 | | | 74,356 | |
|
|
|
|
|
|
|
|
|
| |
| | | 333,693 | | | 307,186 | | | 324,840 | |
|
|
|
|
|
|
|
|
|
| |
| | $ | 3,099,629 | | $ | 2,903,699 | | $ | 1,367,530 | |
|
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|
|
|
|
|
|
|
| |
54
NOTE 13 – QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2006 and 2005 is as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006: | | | | | | | | | | | | | |
Net sales | | $ | 784,416 | | $ | 832,922 | | $ | 821,278 | | $ | 863,831 | |
Gross profit | | | 575,969 | | | 605,958 | | | 580,991 | | | 626,016 | |
Net earnings | | | 137,069 | | | 141,032 | | | 115,540 | (a) | | 154,610 | (b) |
Basic net earnings per share | | $ | 0.37 | | $ | 0.39 | | $ | 0.33 | | $ | 0.43 | |
Diluted net earnings per share | | $ | 0.36 | | $ | 0.38 | | $ | 0.32 | | $ | 0.42 | |
| | | | | | | | | | | | | |
Fiscal Year 2005: | | | | | | | | | | | | | |
Net sales | | $ | 663,909 | | $ | 723,655 | | $ | 737,780 | | $ | 789,936 | |
Gross profit | | | 476,026 | | | 522,637 | | | 537,045 | | | 582,811 | |
Net earnings | | | 119,351 | (c) | | 101,481 | (d) | | 167,787 | (e) | | 4,871 | (f) |
Basic net earnings per share | | $ | 0.33 | | $ | 0.28 | | $ | 0.46 | | $ | 0.01 | |
Diluted net earnings per share | | $ | 0.32 | | $ | 0.27 | | $ | 0.44 | | $ | 0.01 | |
| | | | | | | | | | | | | |
| |
(a) | Includes special charges of $22.0 million, net of taxes, related to restructuring activities in the Company’s Cardiac Surgery and Cardiology divisions and international selling organization. |
| |
(b) | Includes a $12.8 million reduction in income tax expense related to the retroactive portion of the research and development tax credit for the first nine months of 2006. |
| |
(c) | Includes an IPR&D charge of $12.4 million relating to the acquisition of ESI. |
| |
(d) | Includes an IPR&D charge of $13.7 million relating to the acquisition of Velocimed, as well as income tax expense of $27.0 million on the repatriation of $500 million under the provisions of the American Jobs Creation Act of 2004. |
| |
(e) | Includes a special credit of $7.2 million, net of taxes, for the reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs. Also includes a $13.7 million reversal of previously recorded income tax expense due to the finalization of certain tax examinations as well as a contribution of $6.2 million, net of taxes, to the Foundation. |
| |
(f) | Includes IPR&D charges of $153.1 million relating to the acquisitions of ANS and Savacor, as well as a reduction in income tax expense of $1.0 million on the repatriation of $500 million under the provisions of the American Jobs Creation Act of 2004. |
55
Five-Year Summary Financial Data
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | |
| | 2006 (a) | | 2005 (b) | | 2004 (c) | | 2003 | | 2002 | |
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|
|
|
|
|
|
|
|
|
|
|
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR: | | | | | | | | | | | | | |
Net sales | | $ | 3,302,447 | | $ | 2,915,280 | | $ | 2,294,173 | | $ | 1,932,514 | | $ | 1,589,929 | |
Gross profit | | $ | 2,388,934 | | $ | 2,118,519 | | $ | 1,615,123 | | $ | 1,329,423 | | $ | 1,083,983 | |
Percent of net sales | | | 72.3 | % | | 72.7 | % | | 70.4 | % | | 68.8 | % | | 68.2 | % |
Operating profit | | $ | 743,083 | | $ | 612,730 | | $ | 535,958 | | $ | 455,945 | | $ | 369,955 | |
Percent of net sales | | | 22.5 | % | | 21.0 | % | | 23.4 | % | | 23.6 | % | | 23.3 | % |
Net earnings | | $ | 548,251 | | $ | 393,490 | | $ | 409,934 | | $ | 336,779 | | $ | 276,285 | |
Percent of net sales | | | 16.6 | % | | 13.5 | % | | 17.9 | % | | 17.4 | % | | 17.4 | % |
Diluted net earnings per share | | $ | 1.47 | | $ | 1.04 | | $ | 1.10 | | $ | 0.91 | | $ | 0.75 | |
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|
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|
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|
|
|
|
|
FINANCIAL POSITION AT YEAR END: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 79,888 | | $ | 534,568 | | $ | 688,040 | | $ | 461,253 | | $ | 401,860 | |
Working capital (d) | | | 1,013,958 | | | 406,759 | | | 1,327,419 | | | 1,031,190 | | | 770,304 | |
Total assets | | | 4,789,794 | | | 4,844,840 | | | 3,230,747 | | | 2,553,482 | | | 1,951,379 | |
Long-term debt, including current portion | | | 859,376 | | | 1,052,970 | | | 234,865 | | | 351,813 | | | — | |
Shareholders’ equity | | $ | 2,968,987 | | $ | 2,883,045 | | $ | 2,333,928 | | $ | 1,601,635 | | $ | 1,576,727 | |
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|
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|
OTHER DATA: | | | | | | | | | | | | | | | | |
Diluted weighted average shares outstanding | | | 372,830 | | | 379,106 | | | 370,992 | | | 370,753 | | | 366,004 | |
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|
|
|
|
|
|
Fiscal year 2003 consisted of 53 weeks. All other fiscal years noted above consisted of 52 weeks. The Company did not declare or pay any cash dividends during 2002 through 2006.
| | |
| (a) | Results for 2006 include after-tax special charges of $22.0 million related to restructuring activities in the Company’s Cardiac Surgery and Cardiology divisions and international selling organization. The Company also recorded after-tax stock-based compensation expense of $49.4 million resulting from the adoption of SFAS No. 123(R), on January 1, 2006. The impact of these items on 2006 net earnings was $71.4 million, or $0.19 per diluted share. |
| | |
| (b) | Results for 2005 include $179.2 million of IPR&D charges relating to the acquisitions of ANS, Savacor, Velocimed and ESI. Additionally, the Company recorded an after-tax special credit of $7.2 million for the reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs. The Company also recorded after-tax expense of $6.2 million as a result of a contribution to the St. Jude Medical Foundation. The Company also recorded the reversal of $13.7 million of previously recorded income tax expense due to the finalization of certain tax examinations, as well as $26.0 million of income tax expense on the repatriation of $500 million under the provisions of the American Jobs Creation Act of 2004. The impact of all of these items on 2005 net earnings was $190.5 million, or $0.50 per diluted share. |
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| (c) | Results for 2004 include after-tax special charges of $21.9 million relating to the discontinuance of the Symmetry™ device product line and product liability litigation, as well as an after-tax special charge of $3.4 million resulting from the settlement of certain patent infringement litigation. Additionally, the Company recorded $9.1 million of IPR&D in conjunction with the acquisition of IBI. Also, the Company recorded the reversal of $14.0 million of previously recorded income tax expense due to the finalization of certain tax examinations. The impact of all of these items on 2004 net earnings was $20.4 million, or $0.06 per diluted share. |
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| (d) | Total current assets less total current liabilities. |
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Certifications
The Company has filed as exhibits to its Annual Report on Form 10-K for the year ended December 30, 2006, the Chief Executive Officer and Chief Financial Officer certifications required by section 302 of the Sarbanes-Oxley Act. The Company has also submitted the required annual Chief Executive Officer certifications to the New York Stock Exchange.
Transfer Agent
Requests concerning the transfer or exchange of shares, lost stock certificates, duplicate mailings, or change of address should be directed to the Company’s Transfer Agent at:
Computershare Trust Company, N.A.
P.O. Box 43023
Providence, Rhode Island 02940-3023
1.877.498.8861
www.equiserve.com (Account Access Availability)
Hearing impaired #TDD: 1.800.952.9245
Annual Meeting of Shareholders
The annual meeting of shareholders will be held at
9:30 a.m. on Wednesday, May 16, 2007, at the Minnesota Historical Center, 345 Kellogg Boulevard West,
St. Paul, Minnesota, 55102.
Investor Contact
To obtain information about the Company call 1.800.552.7664, visit our website atwww.sjm.comor write to:
Investor Relations
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, Minnesota 55117-9983
The Investor Relations (IR) section on St. Jude Medical’s website includes all SEC filings, a list of analyst coverage, webcasts and presentations, financial information and a calendar of upcoming earnings announcements and IR events. St. Jude Medical’s Newsroom features press releases, company background information, fact sheets, executive bios, a product photo portfolio, and other media resources. Patient profiles can be found on our website, including the patients featured in this year’s annual report.
Corporate Governance
(See Company Information on website -www.sjm.com)
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• | Principles of Corporate Governance |
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• | Code of Business Conduct |
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• | SEC Filings |
Company Stock Splits
2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89, 4/30/90, 6/10/02 and 11/1/04. 3:2 on 11/16/95
Stock Exchange Listings
New York Stock Exchange
Symbol: STJ
The range of high and low prices per share for the Company’s common stock for fiscal years 2006 and 2005 is set forth below. As of February 14, 2007, the Company had 3,067 shareholders of record.
| | | | | | | | | | | | | |
| | Fiscal Year | |
| | 2006 | | 2005 | |
|
Quarter | | High | | Low | | High | | Low | |
|
First | | $ | 54.75 | | $ | 40.30 | | $ | 41.85 | | $ | 35.80 | |
Second | | $ | 42.00 | | $ | 31.20 | | $ | 44.50 | | $ | 34.48 | |
Third | | $ | 40.00 | | $ | 31.50 | | $ | 48.36 | | $ | 42.89 | |
Fourth | | $ | 39.07 | | $ | 32.40 | | $ | 52.80 | | $ | 44.00 | |
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Trademarks
All product names appearing in this document are trademarks owned by, or licensed to, St. Jude Medical Inc.
©2007 St. Jude Medical, Inc.
