EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS
INTRODUCTION
St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a leader in the
development, manufacturing and distribution of cardiovascular medical devices
for the global cardiac rhythm management (CRM), cardiology and vascular access
(C/VA), and cardiac surgery (CS) markets. The Company's principal products in
each of these markets are: bradycardia pacemaker systems, tachycardia
implantable cardioverter defibrillator (ICD) systems, and electrophysiology (EP)
catheters in CRM; vascular closure devices, catheters, guidewires and
introducers in C/VA; and mechanical and tissue heart valves, valve repair
products, and suture-free devices to facilitate coronary artery bypass graft
anastomoses in CS.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the
Saturday nearest December 31, but for clarity of presentation, describes all
periods as if the year end is December 31. Fiscal years 2001, 2000 and 1999 each
consisted of fifty-two weeks.
The commentary that follows should be read in conjunction with the Company's
consolidated financial statements and related notes.
ACQUISITIONS
Following is a discussion on the businesses acquired by the Company during the
last three years:
VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the
outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus
additional contingent consideration related to product development milestones
for regulatory approvals and to future sales. VSI was a development-stage
company focused on the development of suture-free devices to facilitate coronary
artery bypass graft anastomoses.
ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)
business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)
manufactured and marketed vascular closure devices.
OTHER: During 2001, 2000 and 1999, the Company acquired various businesses
involved in distribution of the Company's products. Aggregate consideration paid
in cash and common stock, net of any cash acquired, during 2001, 2000 and 1999
was $10,444, $3,264 and $21,056, respectively.
The above acquisitions were recorded using the purchase method of accounting.
The operating results of each of these acquisitions are included in the
Company's consolidated financial statements from the date of each acquisition.
Pro forma results of operations have not been presented for these acquisitions
since the effects of these business acquisitions were not material to the
Company either individually or in aggregate.
NET SALES
Net sales by geographic markets were as follows:
2001 2000 1999
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United States $ 880,086 $ 745,793 $ 689,051
International 467,270 433,013 425,498
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Total net sales $1,347,356 $1,178,806 $1,114,549
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Overall, foreign exchange rate movements had an unfavorable year-to-year impact
on net sales of approximately $16,000 and $34,000 in 2001 and 2000, due
primarily to the strengthening of the U.S. dollar against the major Western
European currencies. This negative effect is not necessarily indicative of the
impact on net earnings due to partially offsetting favorable foreign currency
changes on operating costs and to the Company's hedging activities that occurred
in 2000 and 1999.
Net sales by class of similar products were as follows:
2001 2000 1999
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Cardiac rhythm management $ 965,968 $ 819,117 $ 767,212
Cardiology and vascular access 133,343 102,740 75,905
Cardiac surgery 248,045 256,949 271,432
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Total net sales $1,347,356 $1,178,806 $1,114,549
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Net sales of cardiac rhythm management products increased 17.9% over 2000 due
primarily to increased bradycardia, ICD and EP catheter unit sales, offset in
part by negative foreign currency effects. The increase in bradycardia net sales
in 2001 was driven by the mid-year introduction of the Integrity AFx(R)
pacemaker with atrial fibrillation suppression technology. The increase in ICD
net sales in 2001 was primarily due to the full year sales of the Company's
dual-chamber ICD products, which were introduced into the market in October
2000. Net sales of CRM products in 2000 increased 6.8% over 1999 due primarily
to increased bradycardia and EP catheter unit sales, offset partially by the
negative impact of the strengthening U.S. dollar on foreign sales. The increase
in bradycardia sales in 2000 was mainly due to the Company's on-going rollout of
the Affinity(R) pacemaker family and to an expanded U.S. sales organization.
Net sales of cardiology and vascular access products increased 29.8% and 35.4%
in 2001 and 2000 due primarily to increased Angio-Seal(TM) unit sales.
Net sales of cardiac surgery products decreased 3.5% from 2000 due to the
effects of the stronger U.S. dollar and a clinical preference shift from
mechanical valves to tissue valves in the U.S. market where the Company holds
significant mechanical valve market share and a smaller share of the tissue
valve market. This was offset in part by an increase in aortic connector sales
with the introduction of this technology to the U.S. market during 2001. Net
sales of cardiac surgery products in 2000 decreased 5.3% from 1999 due to the
effects of the stronger U.S. dollar, the impact of
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the first quarter 2000 recall of valve products incorporating a Silzone(R)
coating, and a clinical preference shift from mechanical valves to tissue valves
in the U.S. market.
GROSS PROFIT
Gross profits were as follows:
2001 2000 1999
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Gross profit $888,197 $787,657 $733,647
Percentage of net sales 65.9% 66.8% 65.8%
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The Company's 2001 gross profit margin decreased nearly one percentage point
from 2000 due primarily to the $21,667 of special charges recorded in the third
quarter of 2001 relating to inventory and diagnostic equipment write-offs (see
further details under the discussion of Special charges). Excluding these
special charges, the gross profit percentage was 67.5% in 2001 compared to 66.8%
in 2000, both of which were up from the respective prior year due to higher unit
volumes and improved manufacturing efficiencies in the Company's CRM operations,
offset partially by the unfavorable impact on net sales due to the stronger U.S.
dollar. The Company anticipates making further improvements in its operations
through the use of total quality management techniques, and further investments
in technology in order to continue to improve the Company's gross profit margin
percentage in the future.
OPERATING EXPENSES
Certain operating expenses were as follows:
2001 2000 1999
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Selling, general and administrative $467,113 $416,383 $394,418
Percentage of net sales 34.7% 35.3% 35.4%
Research and development $164,101 $137,814 $125,059
Percentage of net sales 12.2% 11.7% 11.2%
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SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage
of net sales decreased in 2001 due primarily to the increased sales which
leveraged the Company's cost structure. SG&A expense as a percentage of net
sales in 2000 was comparable to 1999. During the fourth quarter of 2001, the
Company reversed through SG&A expense a $15,000 accrued liability relating to
royalties on a license agreement with Guidant that management believed it had
acquired as part of its purchase of assets of the Telectronics cardiac
stimulation device business. In addition, the Company expensed approximately the
same amount of legal fees incurred in relation to the Guidant litigation (see
further discussion on both of these matters in Note 4 to the Company's
Consolidated Financial Statements). During the third quarter of 2000, the
Company received a cash payment related to a non-product arbitration judgement
pertaining to business matters occurring in 1997 and 1998. This cash receipt,
net of other provisions for legal matters and fees, was $15,158 and was credited
to SG&A expense. In addition, during the third quarter of 2000, the Company
recorded additional SG&A expenses related to a $3,500 discretionary contribution
to its charitable foundation, $6,672 primarily for write-offs of certain assets
and related costs, and a $4,900 increase to its allowance for doubtful accounts.
These additional costs and expenses were also recorded in SG&A expense.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2001 and 2000
primarily due to the Company's increased activities relating to ICDs, products
to treat emerging indications in atrial fibrillation and congestive heart
failure, and suture-free devices to facilitate coronary artery bypass graft
anastomoses.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company
recorded purchased in-process research and development charges of $47,775 and
$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI. The
purchased in-process research and development charges were computed by an
independent third-party appraisal company and were expensed at close, except as
noted below, since technological feasibility had not been established and since
there were no alternative future uses for the technology.
During 1999 and 2000, the in-process technologies acquired in the Angio-Seal(TM)
acquisition were completed, necessary regulatory approvals were received, and
the products were released to the market. During 1999, 2000 and 2001, the
Company continued to develop certain of the in-process technologies acquired in
the VSI acquisition. Development of one of the VSI technologies (the proximal
connector) was completed and regulatory approvals and E.U. and U.S. market
releases occurred in 2000 and 2001. A second VSI in-process technology (the
distal connector) received E.U. regulatory approval in 2001; however, the
Company intends to make additional enhancements to this product in 2002 prior to
filing for U.S. regulatory approval and prior to releasing the product to either
the E.U. or U.S. markets. At the date of the VSI acquisition, the total
estimated costs necessary to complete the proximal and distal connector
technologies into commercially viable products and to make certain subsequent
product enhancements were approximately $1,000, all of which were scheduled to
be incurred in 1999 and 2000. Currently, the total estimated costs to complete
the proximal and distal connectors, including the related enhancements, have
increased to $11,000, of which $2,400 remains to be incurred in 2002. Other
in-process technologies acquired in the VSI acquisition continue to be reviewed
for ultimate viability in the developing coronary artery bypass graft
anastomoses market. The original estimated costs to complete these other
technologies into commercially viable products were approximately $6,000, of
which only an immaterial amount has been incurred to date.
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The total appraised value of the VSI purchased in-process research and
development was $95,500, of which $67,453 was recorded at close. The Company
paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000 as certain
product development milestones were achieved. The remaining balance of the
in-process research and development valuation ($13,047) will be recorded in the
Company's financial statements as purchased in-process research and development
expense when payment of the contingent consideration is assured beyond a
reasonable doubt. Contingent consideration payments in excess of the $13,047
will be capitalized as goodwill.
Management believes that the financial statement projections used in the
Angio-Seal(TM) and VSI acquisitions are still materially valid; however, there
can be no assurance that the projected results will be achieved. In addition,
there are risks associated with being able to complete development of the VSI
in-process technologies, and there can be no assurance that these technologies
will meet with either technological or commercial success. Failure to
successfully complete the development and commercialize these in-process
technologies would result in the loss of the expected economic return inherent
in the original fair value allocation.
SPECIAL CHARGES: In July 2001, the Company initiated efforts to streamline its
heart valve operations, consolidate its U.S. sales activities and restructure
its international sales organization. As a result of these activities, the
Company recorded pre-tax special charges of $20,657 in the third quarter of
2001, consisting of employee severance costs resulting from the elimination of
approximately 90 production and administrative positions ($5,293), inventory
write-offs and scrap ($9,490), capital equipment write-offs ($3,379) and other
costs related primarily to lease terminations and other facility exit costs due
to the closing and consolidation of sales offices ($2,495). The Company has
utilized $13,500 of these special charge accruals through December 31, 2001,
consisting of $2,468 of employee severance costs, $7,301 of inventory write-offs
and scrap, $3,379 of capital equipment write-offs, and $352 of other costs. The
Company estimates that the remaining accruals will be utilized primarily during
2002.
During the third quarter of 2001, the Company also wrote off $12,177 of certain
diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer
technology equipment which received U.S. regulatory approvals in late 2000 and
early 2001, and was launched earlier in 2001.
The charges relating to employee severance costs, capital equipment write-offs
and other costs have been recorded in operating expenses as special charges. The
inventory and diagnostic equipment write-offs are included in cost of sales as
special charges.
On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating
Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will
no longer utilize Silzone(R) coating. The Company recorded a special charge
accrual totaling $26,101 during the first quarter of 2000 relating to asset
write-downs ($9,465) and other costs ($16,636), including monitoring expenses,
associated with this recall and product discontinuance. Additionally, the
Company maintains product liability coverage for litigation related costs in
excess of its self-insured retention. The Company has utilized $20,701 of this
special charge accrual through December 31, 2001, consisting of $9,465 of asset
write-downs and $11,236 of other costs. The Company estimates that the remaining
accrual will be utilized primarily during 2002. There can be no assurance that
the final costs associated with this recall that are not covered by insurance,
including litigation-related costs, will not exceed management's estimates.
The Company recorded a $9,754 special charge accrual in 1999 related to the
restructuring of its international operations. Substantially all accruals
related to this restructuring have been utilized through December 31, 2001.
OTHER INCOME (EXPENSE)
Net interest expense was $9,306 in 2001, $25,929 in 2000 and $25,378 in 1999.
The decrease in net interest expense in 2001 was due to lower debt levels
resulting from debt repayments, as well as lower interest rates in 2001 compared
with 2000 and 1999.
INCOME TAXES
The Company's reported effective income tax rates were 24.3% in 2001, 27.2% in
2000, and 63.8% in 1999. Exclusive of the purchased in-process research and
development and special charges, the Company's effective income tax rate was 25%
for each of these periods. The VSI-related purchased in-process research and
development charges are not deductible for income tax purposes and the special
charges were recorded in taxing jurisdictions where income tax rates vary from
the Company's blended 25% effective tax rate.
The Company anticipates that its effective income tax rate before in-process
research and development and special charges will increase beginning in 2003 due
to a larger percentage of the Company's forecasted taxable income being
generated in higher taxing jurisdictions.
The Company has not recorded U.S. deferred income taxes on certain of its
non-U.S. subsidiaries' undistributed earnings as such amounts are intended to be
reinvested outside the U.S. indefinitely. However, should the Company change its
business and tax strategies in the future and decide to repatriate a portion of
these earnings to one of the Company's U.S. subsidiaries, including cash
maintained by these non-U.S. subsidiaries (see Liquidity), additional U.S. tax
liabilities would be incurred.
At December 31, 2001, the Company has approximately $52,000 of deferred tax
assets related principally to U.S. tax loss carryforwards,
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arising primarily from acquisitions, which expire from 2003 to 2021, for which
no valuation allowance has been recorded. The Company believes that these loss
carryforwards will be fully utilized based upon its estimates of future taxable
income. If these estimates of future taxable income are not met, a valuation
allowance for some of these deferred tax assets would be required.
The Company from time to time faces challenges from tax authorities regarding
the amount of taxes due. These challenges include questions regarding the timing
and amount of deductions and the allocation of income among various tax
jurisdictions. The Company's U.S. Federal tax filings prior to 1998 have been
examined by the Internal Revenue Service (IRS) and the Company has settled all
differences arising out of those examinations. Consistent with the Company's
status with the U.S. Federal tax authorities as a "coordinated industry case,"
the IRS is currently in the process of examining the Company's U.S. Federal tax
returns for the calendar years 1998, 1999 and 2000. Although the Company
believes it has recorded an appropriate income tax provision, there can be no
assurance that the IRS will not take positions contrary to those taken by the
Company. The Company further believes that any costs not covered by the
Company's income tax provision will not have a material adverse impact on the
Company's consolidated financial position or liquidity, but may be material to
the consolidated results of operations of a future period.
NET EARNINGS
Reported net earnings and diluted net earnings per share were $172,592, or $1.93
per share in 2001, $129,094, or $1.51 per share, in 2000, and $24,227, or $0.29
per share, in 1999. Net earnings, exclusive of purchased in-process research and
development and special charges and related income taxes, were $203,109 in 2001,
$156,307 in 2000, and $143,989 in 1999.
OUTLOOK
The Company expects that market demand, government regulation and reimbursement
policies, and societal pressures will continue to change the worldwide health
care industry resulting in further business consolidations and alliances. The
Company participates with industry groups to promote the use of advanced medical
device technology in a cost-conscious environment. Customer service in the form
of cost-effective clinical outcomes will continue to be a primary focus for the
Company.
The global medical technology industry is highly competitive. Competitors have
historically employed litigation to gain a competitive advantage. In addition,
the Company's products must continually improve technologically and provide
improved clinical outcomes due to the competitive nature of the industry.
The cardiac surgery market is highly competitive, and consists of mechanical
heart valves, tissue heart valves, and repair products. Since 1999, the market
has shifted to tissue valves and repair products from mechanical heart valves,
resulting in an overall market share loss for the Company. Competition is
anticipated to continue to place pressure on pricing and terms, including a
trend toward vendor owned (consignment) inventory at the hospitals, and health
care reform is expected to result in further hospital consolidations over time.
The cardiac rhythm management market is also highly competitive and has
undergone consolidation. There are currently three principal suppliers in this
market, including the Company, and the Company's two principal competitors each
have substantially more assets and sales than the Company. Rapid technological
change in the CRM market is expected to continue, requiring the Company to
invest heavily in R&D and to effectively market its products.
The Company operates in an industry that is susceptible to significant product
liability claims. These claims may be brought by individuals seeking relief for
themselves or, increasingly, by groups seeking to represent a class. In
addition, product liability claims may be asserted against the Company in the
future relative to events that are not known to management at the present time.
While it is not possible to predict the outcome of every claim, the Company
believes that it has adequate product liability insurance to cover the costs
associated with them. The Company further believes that any costs not covered by
product liability insurance, including the Company's self-insured deductible,
will not have a material adverse impact on the Company's consolidated financial
position or liquidity, but may be material to the consolidated results of
operations of a future period.
Subsequent to the tragic events of September 2001, the product liability
insurance market has dramatically changed. The Company has secured product
liability coverage for 2002, however the self-insured retention and insurance
premiums are significantly higher than in prior years. There can be no assurance
that this trend will reverse in the near future. As a result of the increased
self-insured retention for 2002, the Company has increased financial exposure in
the event of significant product liability matters. However, management believes
that any payment under the Company's 2002 policy self-insured retention would
not have a material adverse impact on the Company's consolidated financial
position or liquidity, but may be material to the consolidated results of
operations of a future period.
Group purchasing organizations (GPOs) in the U.S. continue to consolidate the
purchasing for some of the Company's customers. Several such GPOs have executed
contracts with the Company's CRM market competitors, which exclude the Company.
These contracts, if enforced, may adversely affect the Company's sales of these
products to members of these GPOs.
On January 1, 1999, eleven of the fifteen member countries of the European
Economic Community (EEC) adopted the Euro as the legal common currency for their
countries. On January 1, 2002, these countries issued new Euro-denominated bills
and coins for
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use in cash transactions. The Company believes that the adoption of a single
Euro currency will result in greater transparency of product pricing, making
those countries a more competitive business environment. During 2001, the
Company completed the necessary changes to its computer systems to accommodate
the Euro, and the conversion to the Euro did not have a material impact on the
Company's consolidated results of operations or financial position.
MARKET RISK
The Company is exposed to foreign currency exchange rate fluctuations due to its
transactions denominated primarily in Euros, Canadian Dollars, Brazilian Reais,
British Pounds, and Swedish Kroners. The Company is also exposed to interest
rate risk on its interest-bearing debt and equity market risk on its marketable
equity security investments. A hypothetical 10% change in short-term interest
rates compared to interest rates on the Company's interest-bearing debt at
December 31, 2001, would not have a material impact on the Company's
consolidated results of operations.
Although in 2001 management elected not to enter into any hedging contracts,
from time to time the Company minimizes a portion of its foreign currency
exchange rate risk through the use of forward exchange or option contracts. The
gains or losses on these contracts are intended to offset changes in the fair
value of the anticipated foreign currency transactions. It is the Company's
practice to not enter into contracts for trading purposes. The Company is
continuing to evaluate its foreign currency exchange rate risk and the different
mechanisms in which to help manage such risk. The Company had no forward
exchange or option contracts outstanding at December 31, 2001 or 2000.
The Company periodically enters into interest rate swap or option contracts to
reduce its exposures to interest rate fluctuations. During the third quarter of
1999, the Company entered into an interest rate swap contract to hedge a
substantial portion of its variable interest rate risk through January 2000 on
$138,000 of revolving credit facility borrowings. The impact of this contract on
1999 earnings was not material. The Company did not enter into any other
interest rate contracts during 1999, 2000 or in 2001.
The Company periodically invests in marketable equity securities of emerging
technology companies. The Company's investments in these companies had a fair
value of $21,616 and $16,173 at December 31, 2001 and 2000, which is subject to
the underlying price risk of the public equity markets.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," management identified the most
critical accounting principles upon which our financial status depends. We
determined the critical accounting principles by considering accounting policies
that involve the most complex or subjective decisions or assessments. We
identified our most critical accounting policies to be those related to income
taxes, product liability accruals, accounts receivable allowance for doubtful
accounts, estimated useful lives of property, plant and equipment and special
charges. We discuss these accounting policies in the notes to the consolidated
financial statements and in relevant sections in this discussion and analysis.
NEW ACCOUNTING PRONOUNCEMENTS
The Company is required to adopt Statements of Financial Accounting Standards
No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other
Intangible Assets (Statement 142), on January 1, 2002. These Statements change
the accounting for business combinations, goodwill, and intangible assets. Under
Statement 141, all business combinations initiated after June 30, 2001, are to
be accounted for using the purchase method. Under Statement 142, goodwill will
no longer be amortized but will be reviewed at least annually for impairment.
The Company's pre-tax goodwill amortization expense was approximately $28,000,
$29,000 and $27,000 in 2001, 2000 and 1999. During 2002, the Company will
perform the first of the required goodwill impairment tests under Statement 142,
however management does not expect the outcome of this test to have a material
impact on the Company's consolidated results of operations or financial
position.
The Company is also required to adopt Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144). Statement 144 addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. Statement 144
retains and expands upon the fundamental provisions of existing guidance related
to the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of by
sale. The impact of adopting Statement 144 on January 1, 2002, was not material
to the Company's consolidated results of operations or financial position.
FINANCIAL CONDITION
LIQUIDITY
The Company's liquidity and cash flows remained strong during 2001. Cash
provided by operating activities was $310,135 in 2001, up approximately $106,000
from 2000 reflecting increased earnings and improved working capital management.
The Company's current ratio was 2.5 to 1 at December 31, 2001.
Cash and equivalents increased $97,896 during 2001 due primarily to earnings
generated by the Company's non-U.S. subsidiaries. At December 31, 2001,
substantially all of the Company's cash and equivalents were maintained by the
Company's non-U.S. subsidiaries and would be subject to additional U.S. tax if
repatriated to one of the Company's U.S. subsidiaries (see Income Taxes).
The Company had interest-bearing debt of $123,128 at December 31, 2001, a
decrease of $171,372 from December 31, 2000, due to
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debt repayments using primarily cash generated from operations and the proceeds
from employee stock option exercises. As of March 6, 2002, the Company had
$350,000 of committed credit facilities that are available to back the Company's
commercial paper program borrowings and for general purposes. These committed
credit facilities expire in March 2003. The Company classifies all of its credit
facility and commercial paper borrowings as long-term on its balance sheet as
the Company has the ability to repay any short-term maturity with available cash
from its existing long-term, committed credit facility. Management continually
reviews the Company's cash flow projections and may from time to time repay a
portion of the Company's borrowings.
At the present time, management expects 2002 capital expenditures and business
acquisition payments to be approximately $125,000. In 2003 through 2005,
management currently expects these amounts to be approximately $105,000 per
year.
The Company leases various facilities under noncancelable operating lease
arrangements. Future minimum lease payments under these leases are as follows:
$9,460 in 2002; $9,461 in 2003; $8,233 in 2004; $7,470 in 2005; $6,910 in 2006;
$22,674 in years thereafter.
Management believes that cash generated from operations and cash available under
its credit facilities will be sufficient to meet the Company's working capital
and capital investment needs in the near term. Should suitable investment
opportunities arise, management believes that the Company's earnings, cash flows
and balance sheet will permit the Company to obtain additional debt or equity
capital, if necessary.
CAPITAL STRUCTURE
The Company's capital structure consists of interest-bearing debt and equity.
Interest-bearing debt as a percent of the Company's total capitalization
decreased from 24% at December 31, 2000, to 9% at December 31, 2001, due
primarily to the paydown of debt.
In September 1999, the Company's Board of Directors authorized the repurchase of
up to $250,000 of the Company's outstanding common stock over a three-year
period. The Company repurchased 977,500 shares of its common stock for $29,826
during 1999. No additional shares were repurchased during 2001 or 2000.
DIVIDENDS
The Company did not declare or pay any dividends during 2001, 2000 or 1999.
Management currently intends to utilize the Company's earnings for operating and
investment purposes, including the repurchase of its common stock from time to
time.
CAUTIONARY STATEMENTS
In this discussion and in other written or oral statements made from time to
time, we have included and may include statements that may constitute
"forward-looking statements" within the meaning of the safe harbor provisions of
the Private Litigation Securities Reform Act of 1995. These forward-looking
statements are not historical facts but instead represent our belief regarding
future events, many of which, by their nature, are inherently uncertain and
beyond our control. These statements relate to our future plans and objectives,
among other things. By identifying these statements for you in this manner, we
are alerting you to the possibility that our actual results may differ, possibly
materially, from the results indicated by these forward-looking statements. We
undertake no obligation to update any forward-looking statements.
Various factors contained in the previous discussion and those described below
may affect the Company's operations and results. Since it is not possible to
foresee all such factors, you should not consider these factors to be a complete
list of all risks or uncertainties. Risk factors include the following:
1. Legislative or administrative reforms to the U.S. Medicare and
Medicaid systems or similar reforms of international reimbursement
systems in a manner that significantly reduces reimbursement for
procedures using the Company's medical devices or denies coverage for
such procedures.
2. Acquisition of key patents by others that have the affect of excluding
the Company from market segments or require the Company to pay
royalties.
3. Economic factors, including inflation, changes in interest rates and
changes in foreign currency exchange rates.
4. Product introductions by competitors which have advanced technology,
better features or lower pricing.
5. Price increases by suppliers of key components, some of which are
sole-sourced.
6. A reduction in the number of procedures using the Company's devices
caused by cost containment pressures or preferences for alternate
therapies.
7. Safety, performance or efficacy concerns about the Company's marketed
products, many of which are expected to be implanted for many years,
leading to recalls and advisories with the attendant expenses and
declining sales.
8. Changes in laws, regulations or administrative practices affecting
government regulation of the Company's products, such as FDA laws and
regulations, that increase pre-approval testing requirements for
products or impose additional burdens on the manufacture and sale of
medical devices.
9. Difficulties obtaining, or the inability to obtain, appropriate levels
of product liability insurance.
10. A serious earthquake affecting the Company's facilities in Sunnyvale
or Sylmar, California.
11. Health care industry consolidation leading to demands for price
concessions or the exclusion of some suppliers from significant market
segments.
12. Adverse developments in litigation including product liability
litigation and patent litigation or other intellectual property
litigation including that arising from the Telectronics and Ventritex
acquisitions.
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REPORT OF MANAGEMENT
The management of St. Jude Medical, Inc. is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
financial statements were prepared in accordance with accounting principles
generally accepted in the United States and include amounts which reflect
management's best estimates based on its informed judgement and consideration
given to materiality. Management is also responsible for the accuracy of the
related data in the annual report and its consistency with the financial
statements.
In the opinion of management, the Company's accounting systems and procedures,
and related internal controls, provide reasonable assurance that transactions
are executed in accordance with management's intention and authorization, that
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, and that assets are properly accounted
for and safeguarded. The concept of reasonable assurance is based on the
recognition that there are inherent limitations in all systems of internal
control, and that the cost of such systems should not exceed the benefits to be
derived therefrom. Management reviews and modifies the system of internal
controls to improve its effectiveness. The effectiveness of the controls system
is supported by the selection, retention and training of qualified personnel, an
organizational structure that provides an appropriate division of responsibility
and a strong budgeting system of control.
St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and business conduct. This responsibility is
reflected in the Company's business ethics policy.
The adequacy of the Company's internal accounting controls, the accounting
principles employed in its financial reporting, and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. The independent auditors meet with, and
have confidential access to, the Audit Committee to discuss the results of their
audit work.
/s/ Terry L. Shepherd
Terry L. Shepherd
Chief Executive Officer
/s/ John C. Heinmiller
John C. Heinmiller
Vice President, Finance and Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
St. Jude Medical, Inc.
We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Jude Medical,
Inc. and subsidiaries at December 31, 2001 and 2000 and the consolidated results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 28, 2002,
except for Note 4,
as to which the date
is February 13, 2002
7
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Fiscal Year Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Net sales $ 1,347,356 $ 1,178,806 $ 1,114,549
Cost of sales:
Cost of sales before special charges 437,492 391,149 380,902
Special charges 21,667 -- --
- ------------------------------------------------------------------------------------------------------------
Total cost of sales 459,159 391,149 380,902
- ------------------------------------------------------------------------------------------------------------
Gross profit 888,197 787,657 733,647
Selling, general and administrative expense 467,113 416,383 394,418
Research and development expense 164,101 137,814 125,059
Purchased in-process research and development charges 10,000 5,000 115,228
Special charges 11,167 26,101 9,754
- ------------------------------------------------------------------------------------------------------------
Operating profit 235,816 202,359 89,188
Other income (expense) (7,838) (25,050) (22,184)
- ------------------------------------------------------------------------------------------------------------
Earnings before income taxes 227,978 177,309 67,004
Income tax expense 55,386 48,215 42,777
Net earnings $ 172,592 $ 129,094 $ 24,227
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Net earnings per share:
Basic $ 2.00 $ 1.53 $ 0.29
Diluted $ 1.93 $ 1.51 $ 0.29
Weighted average shares outstanding:
Basic 86,214 84,253 84,274
Diluted 89,384 85,817 84,735
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
8
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, 2001 2000
- --------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 148,335 $ 50,439
Accounts receivable, less allowances for doubtful accounts 320,683 303,307
Inventories 240,390 222,238
Deferred income taxes 36,563 35,566
Other 51,575 74,139
- --------------------------------------------------------------------------------------------
Total current assets 797,546 685,689
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 112,902 114,045
Machinery and equipment 352,294 328,553
Diagnostic equipment 165,938 176,794
- --------------------------------------------------------------------------------------------
Property, plant and equipment at cost 631,134 619,392
Less accumulated depreciation (335,491) (302,213)
- --------------------------------------------------------------------------------------------
Net property, plant and equipment 295,643 317,179
OTHER ASSETS
Goodwill and other intangible assets, net 389,929 417,921
Deferred income taxes 67,238 57,482
Other 78,371 54,445
- --------------------------------------------------------------------------------------------
Total other assets 535,538 529,848
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,628,727 $ 1,532,716
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 88,925 $ 81,340
Income taxes payable 63,475 58,224
Accrued expenses
Employee compensation and related benefits 102,191 81,576
Other 67,263 76,227
- --------------------------------------------------------------------------------------------
Total current liabilities 321,854 297,367
LONG-TERM DEBT 123,128 294,500
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock -- --
Common stock 8,721 8,534
Additional paid-in capital 134,726 55,723
Retained earnings 1,134,909 962,317
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (103,781) (93,380)
Unrealized gain on available-for-sale securities 9,170 7,655
- --------------------------------------------------------------------------------------------
Total shareholders' equity 1,183,745 940,849
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,628,727 $ 1,532,716
- --------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Common Stock Accumulated
--------------------- Additional Other Total
Number of Paid-In Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1999 84,174,699 $8,417 $ 6,656 $ 816,940 $ (25,793) $ 806,220
Comprehensive income:
Net earnings 24,227 24,227
Other comprehensive income (loss):
Unrealized loss on investments, net of taxes
and reclassification adjustment (see below) (1,161) (1,161)
Foreign currency translation adjustment (20,735) (20,735)
--------------
Other comprehensive loss (21,896)
--------------
Comprehensive income 2,331
--------------
Issuance of common stock, including
exercise of stock options, net 381,206 38 8,855 8,893
Tax benefit from stock options 969 969
Issuance of common stock for
business acquisition 161,072 16 3,984 4,000
Issuance of common stock
in settlement of obligation 41,108 4 1,430 1,434
Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 83,780,585 8,378 109 833,223 (47,689) 794,021
Comprehensive income:
Net earnings 129,094 129,094
Other comprehensive income (loss):
Unrealized gain on investments, net of taxes
and reclassification adjustment (see below) 1,367 1,367
Foreign currency translation adjustment (39,403) (39,403)
--------------
Other comprehensive loss (38,036)
--------------
Comprehensive income 91,058
--------------
Issuance of common stock, including
exercise of stock options, net 1,245,166 125 38,506 38,631
Tax benefit from stock options 6,464 6,464
Issuance of common stock for conversion of
subordinated debentures 310,535 31 10,644 10,675
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 85,336,286 8,534 55,723 962,317 (85,725) 940,849
Comprehensive income:
Net earnings 172,592 172,592
Other comprehensive income (loss):
Unrealized gain on investments, net of taxes 1,515 1,515
Foreign currency translation adjustment, net
of taxes (10,401) (10,401)
--------------
Other comprehensive loss (8,886)
--------------
Comprehensive income 163,706
--------------
Issuance of common stock, including
exercise of stock options, net 1,873,070 187 57,754 57,941
Tax benefit from stock options 21,249 21,249
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 87,209,356 $8,721 $134,726 $1,134,909 $ (94,611) $1,183,745
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities,
net of income taxes:
1999 $ 2,875
2000 2,519
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
10
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 172,592 $ 129,094 $ 24,227
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation 58,404 56,699 54,588
Amortization 31,895 35,650 31,114
Purchased in-process research and development charges 10,000 5,000 115,228
Special charges 32,834 26,101 9,754
Net investment gain -- (4,062) (848)
Deferred income taxes (11,681) (5,439) 369
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable (23,941) (40,845) (26,319)
Inventories (32,373) 4,621 14,466
Other current assets 13,605 (6,519) (6,722)
Accounts payable and accrued expenses 12,907 (17,317) (1,998)
Income taxes 45,893 20,988 42,208
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 310,135 203,971 256,067
INVESTING ACTIVITIES
Purchase of property, plant and equipment (63,129) (39,699) (69,419)
Proceeds from sale or maturity of marketable securities 15,000 29,082 17,552
Business acquisition payments (20,444) (8,264) (259,127)
Other (26,220) (10,752) (19,438)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (94,793) (29,633) (330,432)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock issued 57,941 38,631 8,893
Common stock repurchased -- -- (29,826)
Borrowings under debt facilities 2,115,028 3,703,287 989,500
Payments under debt facilities (2,286,400) (3,856,287) (887,000)
Repurchase of convertible subordinated debentures -- (19,320) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (113,431) (133,689) 81,567
Effect of currency exchange rate changes on cash (4,015) 135 (1,322)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 97,896 40,784 5,880
Cash and equivalents at beginning of year 50,439 9,655 3,775
- ---------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 148,335 $ 50,439 $ 9,655
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 10,663 $ 32,467 $ 28,934
Income taxes 21,424 35,704 21,200
- ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OVERVIEW: St. Jude Medical, Inc. ("St. Jude Medical" or the "Company")
is a leader in the development, manufacturing and distribution of cardiovascular
medical devices for the global cardiac rhythm management (CRM), cardiology and
vascular access (C/VA), and cardiac surgery (CS) markets. The Company's
principal products in each of these markets are: bradycardia pacemaker systems,
tachycardia implantable cardioverter defibrillator (ICD) systems, and
electrophysiology (EP) catheters in CRM; vascular closure devices, catheters,
guidewires and introducers in C/VA; and mechanical and tissue heart valves,
valve repair products, and suture-free devices to facilitate coronary artery
bypass graft anastomoses in CS. The Company markets its products primarily in
the United States, Western Europe and Japan through both a direct employee-based
sales organization and independent distributors.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation.
FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year
ending on the Saturday nearest December 31. For clarity of presentation, the
Company describes all periods as if the year end is December 31. Fiscal years
2001, 2000 and 1999 each consisted of fifty-two weeks.
USE OF ESTIMATES: Preparation of the Company's consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH EQUIVALENTS: The Company considers highly liquid temporary investments with
an original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market. The Company's cash
equivalents include bank certificates of deposit, commercial paper investments
and repurchase agreements collateralized by U.S. government agency securities.
MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank
certificates of deposit, U.S. government obligations, commercial paper, notes
and bonds. Marketable securities are classified as available-for-sale, recorded
at fair market value based upon quoted market prices, and are classified with
other current assets on the balance sheet. Gross unrealized gains totaling
$14,790, $12,347 and $10,142, net of taxes of $5,620, $4,692 and $3,854, were
recorded in shareholders' equity at December 31, 2001, 2000 and 1999. Realized
gains from the sale of marketable securities have been recorded in other income
and are computed using the specific identification method.
ACCOUNTS RECEIVABLE: The Company grants credit to customers in the normal course
of business but generally does not require collateral or any other security to
support its receivables. Within the European Economic Union and in many emerging
markets, payments of certain accounts receivable balances are made by the
individual countries' health care system for which payment is dependent, to a
certain extent, upon the political and economic environment within those
countries. The allowance for doubtful accounts was $17,210 at December 31, 2001
and $13,831 at December 31, 2000.
12
INVENTORIES: Inventories are stated at the lower of cost or market with cost
determined using the first-in, first-out method.
Inventories consist of the following:
2001 2000
- -----------------------------------------------------------------------
Finished goods $135,543 $123,696
Work in process 35,984 35,640
Raw materials 68,863 62,902
- -----------------------------------------------------------------------
$240,390 $222,238
- -----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated
using the straight-line method over their estimated useful lives, ranging from
31 to 39 years for buildings and improvements, three to seven years for
machinery and equipment, and five to eight years for diagnostic equipment.
Diagnostic equipment is used by physicians and health care professionals to
program and analyze data from the Company's CRM devices. The estimated useful
lives of this equipment are based on management's estimates of its usage by the
physicians and health care professionals, factoring in new technology platforms
and rollouts by the Company. To the extent that the Company experiences changes
in the usage of this equipment or rollouts of new technologies to the market,
their estimated useful lives may change in a future period. Accelerated
depreciation methods are used for income tax purposes.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets
consists primarily of goodwill at December 31, 2001 and 2000. Goodwill
represents the excess of cost over the fair value of identifiable net assets of
businesses acquired. Other intangible assets consist primarily of purchased
technology, patents and customer relationships. Goodwill and other intangible
assets are amortized on a straight-line basis using lives ranging from 5 to 20
years. Accumulated amortization totaled $173,377 and $147,006 at December 31,
2001 and 2000. The Company periodically reviews its long-lived assets, including
property, plant and equipment, for indicators of impairment using an estimate of
the undiscounted cash flows generated by those assets. Effective January 1,
2002, the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (Statement 142). Under Statement 142,
goodwill is no longer amortized, but is subject to annual impairment tests. See
"New Accounting Pronouncements" for further discussion of Statement 142 and its
anticipated impact on the Company's consolidated financial statements.
TECHNOLOGY LICENSE AGREEMENT: The Company has a technology license agreement
that provides access to a significant number of patents covering a broad range
of technology used in the Company's CRM products. The agreement provides for
payments through September 2004 at which time the Company will have a fully
paid-up license, granting access to the underlying patents which expire at
various dates through the year 2014. The Company recognizes the total estimated
costs under this license agreement as an expense over the term of the underlying
patents' lives.
REVENUE RECOGNITION: The Company generally recognizes revenue at such time title
to the goods transfers to the customer. For certain products, the Company
maintains consigned inventory at customer locations. For these products, revenue
is recognized at the time the customer has used the inventory.
RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense
as incurred. Purchased in-process research and development is recognized in
business combinations for the portion of the purchase price allocated to the
appraised value of in-process technologies. The portion assigned to in-process
research and development technologies excludes the value of core and developed
technologies, which are recognized as intangible assets.
STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of
accounting for its employee stock-based compensation. Pro forma information
related to the fair value method of accounting is provided in Note 5.
EARNINGS PER SHARE: Basic earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares, exclusive
of restricted shares, during the period. Diluted net earnings per share is
computed by dividing net earnings, adjusted for convertible debenture interest
in 2000, by the weighted average number of outstanding common shares and
dilutive securities.
13
The table below sets forth the computation of basic and diluted net earnings per
share:
2001 2000 1999
- --------------------------------------------------------------------------------
Numerator:
Net earnings $ 172,592 $ 129,094 $ 24,227
Convertible debenture
interest, net of taxes -- 95 --
- --------------------------------------------------------------------------------
Adjusted net earnings $ 172,592 $ 129,189 $ 24,227
Denominator:
Basic-weighted average
shares outstanding 86,214,000 84,253,000 84,274,000
Effect of dilutive securities:
Employee stock options 3,135,000 1,448,000 414,000
Restricted shares 35,000 38,000 47,000
Convertible debentures -- 78,000 --
- --------------------------------------------------------------------------------
Diluted-weighted average 89,384,000 85,817,000 84,735,000
shares outstanding
- --------------------------------------------------------------------------------
Basic net earnings per share $ 2.00 $ 1.53 $ 0.29
- --------------------------------------------------------------------------------
Diluted net earnings per share $ 1.93 $ 1.51 $ 0.29
- --------------------------------------------------------------------------------
Net earnings and diluted-weighted average shares outstanding for certain periods
have not been adjusted for the Company's convertible debentures or for certain
employee stock options and awards where the effect of those securities would
have been anti-dilutive.
FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign
currencies are translated at average exchange rates in effect throughout the
year. Assets and liabilities of foreign operations are translated at year-end
exchange rates. Gains and losses from translation of net assets of foreign
operations are recorded in other comprehensive income. Taxes totaling $19,393
have been offset against the cumulative translation adjustment at December 31,
2001. Foreign currency transaction gains and losses are included in other income
(expense).
FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management
periodically utilizes derivative financial instruments to help manage a portion
of the Company's exposure to foreign currencies and interest rates. Management
generally utilizes forward exchange or option contracts to manage anticipated
foreign currency exposures and interest rate swaps to manage interest rate
exposures. Management does not enter into derivative financial instruments for
trading purposes. The Company records the fluctuation in the fair value of the
forward exchange or option contracts in other income (expense) and the
fluctuation in the fair value of the interest rate swaps in interest expense.
There were no forward exchange or option contracts, or interest rate swap
contracts outstanding at December 31, 2001 or 2000.
NEW ACCOUNTING PRONOUNCEMENTS: The Company is required to adopt Statements of
Financial Accounting Standards No. 141, Business Combinations (Statement 141),
and No. 142, Goodwill and Other Intangible Assets (Statement 142), on January 1,
2002. These Statements change the accounting for business combinations,
goodwill, and intangible assets. Under Statement 141, all business combinations
initiated after June 30, 2001, are to be accounted for using the purchase
method. Under Statement 142, goodwill will no longer be amortized but will be
reviewed at least annually for impairment. The Company's pre-tax goodwill
amortization expense was approximately $28,000, $29,000 and $27,000 in 2001,
2000 and 1999. During 2002, the Company will perform the first of the required
goodwill impairment tests under Statement 142, however management does not
expect the outcome of this test to have a material impact on the Company's
consolidated results of operations or financial position.
14
The Company is also required to adopt Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144). Statement 144 addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. Statement 144
retains and expands upon the fundamental provisions of existing guidance related
to the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of by
sale. The impact of adopting Statement 144 on January 1, 2002, was not material
to the Company's consolidated results of operations or financial position.
NOTE 2--ACQUISITIONS
VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the
outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus
additional contingent consideration related to product development milestones
for regulatory approvals and to future sales. VSI was a development-stage
company focused on the development of suture-free devices to facilitate coronary
artery bypass graft anastomoses.
An independent appraisal firm performed a valuation of VSI's identifiable
intangible assets ($580) and in-process research and development ($95,500). The
total consideration paid at close was allocated to the fair value of the net
assets acquired ($7,618) and in-process research and development ($67,453). The
Company paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000,
which were recorded as purchased in-process research and development expenses,
as certain product development milestones were achieved. The remaining balance
of the in-process research and development valuation ($13,047) will be recorded
in the Company's financial statements as purchased in-process research and
development expense when payment of the contingent consideration is assured
beyond a reasonable doubt. Contingent consideration payments in excess of the
$13,047 will be capitalized as goodwill.
ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)
business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)
manufactured and marketed vascular closure devices. Total consideration for
Angio-Seal(TM), including the fair value of the net assets acquired and
acquisition accounting adjustments, was $177,714, which was originally allocated
to in-process research and development ($47,775), various other identifiable
intangible assets ($90,025), and goodwill ($39,914). Valuation of the in-process
research and development and other identifiable intangible assets was based upon
an independent appraisal. During 2001, the Company reviewed the identifiable
intangible assets and will reclassify $24,599 to goodwill effective January 1,
2002, based upon the guidance provided in Statements of Financial Accounting
Standards Nos. 141 and 142.
OTHER: During 2001, 2000 and 1999, the Company acquired various businesses
involved in distribution of the Company's products. Aggregate consideration paid
in cash and common stock, net of any cash acquired, during 2001, 2000 and 1999
was $10,444, $3,264 and $21,056, respectively.
The above acquisitions were recorded using the purchase method of accounting.
The operating results of each of these acquisitions are included in the
Company's consolidated financial statements from the date of each acquisition.
The values assigned to in-process research and development were expensed at
close, except as noted above, because technological feasibility had not been
established and because there were no alternative future uses for the
technology. Pro forma results of operations have not been presented for these
acquisitions since the effects of these business acquisitions were not material
to the Company either individually or in aggregate.
15
NOTE 3--LONG-TERM DEBT
Long-term debt consisted of the following:
2001 2000
- -------------------------------------------------------------------------------
Commercial paper borrowings $123,128 $223,000
Uncommitted credit facility borrowings -- 71,500
- -------------------------------------------------------------------------------
Total long-term debt $123,128 $294,500
- -------------------------------------------------------------------------------
COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving
credit facility that expires in March 2003. The Company also has a $150,000
committed revolving credit facility, which will expire in March 2002. These
credit facilities have variable interest rates tied primarily to the London
Interbank Offered Rate. The Company's commercial paper borrowings are backed by
these committed credit facilities. There were no outstanding borrowings under
these credit facilities at December 31, 2001 or 2000.
COMMERCIAL PAPER BORROWINGS: The Company issues short-term, unsecured commercial
paper with maturities up to 270 days. These commercial paper borrowings are
backed by the Company's committed credit facilities and bear interest at varying
market rates. The weighted-average interest rate on these borrowings was 2.9%
and 6.9% at December 31, 2001 and 2000.
UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under
unsecured, due-on-demand credit facilities with various banks. These credit
facilities provide for interest at varying market rates. The weighted-average
interest rate on these borrowings was 7.1% at December 31, 2000.
OTHER: The Company's credit facility agreements contain various restrictive
covenants such as minimum financial ratios, limitations on additional liens or
indebtedness, and limitations on certain acquisitions and investments, all of
which the Company was in compliance with at December 31, 2001.
The Company classifies all of its credit facility and commercial paper
borrowings as long-term on its balance sheet as the Company has the ability to
repay any short-term maturity with available cash from its existing long-term,
committed credit facility. Management continually reviews the Company's cash
flow projections and may from time to time repay a portion of the Company's
borrowings.
NOTE 4--COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases various facilities under noncancelable operating
lease arrangements. Future minimum lease payments under these leases are as
follows: $9,460 in 2002; $9,461 in 2003; $8,233 in 2004; $7,470 in 2005; $6,910
in 2006; $22,674 in years thereafter. Rent expense under all operating leases
was $8,853, $7,028 and $7,397 in 2001, 2000 and 1999.
SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in
the Company's mechanical heart valves and valve repair products with Silzone(R)
coating. The Company voluntarily recalled products with Silzone(R) coating on
January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to
physicians and others. Some of these cases are seeking monitoring of patients
implanted with Silzone(R)-coated valves and repair products who allege no injury
to date. Some of these cases are seeking class action status. See also Note 6
regarding the 2000 special charge for the voluntary recall of products
incorporating Silzone(R) coating.
On April 18, 2001, the U.S. Judicial Panel on Multi-Litigation ruled that
certain lawsuits filed in U.S. federal district court involving products with
Silzone(R) coating should be part of Multi District Litigation proceedings,
which will take place under the supervision of U.S. District court Judge John
Tunheim in Minnesota. As a result, a number of actions involving products with
Silzone(R) coating are being transferred to Judge Tunheim's court in Minnesota
for coordinated or consolidated pretrial proceedings.
16
While it is not possible to predict the outcome of these cases, the Company
believes that it has adequate product liability insurance to cover the costs
associated with them. The Company further believes that any costs not covered by
product liability insurance will not have a material adverse impact on the
Company's financial position or liquidity, but may be material to the
consolidated results of operations of a future period.
GUIDANT LITIGATION: In November 1996 Guidant Corporation ("Guidant") sued St.
Jude Medical alleging that St. Jude Medical did not have a license to certain
patents controlled by Guidant covering ICD products and alleging that St. Jude
Medical was infringing those patents.
St. Jude Medical's contention that it had obtained its patent license from
Guidant to the patents in issue when it acquired certain assets of Telectronics
in November 1996 was rejected by an arbitrator in July 2000. In May 2001, a
federal district court judge also ruled that the Guidant patent license with
Telectronics had not transferred to St. Jude Medical.
Guidant's suit in the United States District Court for the Southern District of
Indiana originally alleged infringement by St. Jude Medical of four patents.
Guidant later dismissed its claim on one patent (the `678 patent). In addition,
in response to a stipulation by the parties, the court ruled that a second
patent (the `191 patent) was invalid. Guidant has appealed the ruling of
invalidity concerning the `191 patent and the Court of Appeals for the Federal
Circuit held oral arguments on the `191 appeal on February 5, 2002.
A jury trial involving the two remaining patents asserted by Guidant (the `288
and `472 patents) commenced in June 2001. The jury issued its verdict on July 3,
2001, finding that both the `472 and `288 patents were valid and that St. Jude
Medical did not infringe the `288 patent. The jury also found that St. Jude did
infringe the `472 patent, which expired on March 4, 2001, but that the
infringement was not willful. The jury awarded damages of $140,000 to Guidant.
On February 13, 2002, the judge overseeing the jury trial issued his rulings on
the various post-trial motions. In particular, the judge ruled that the `472
patent was invalid on two grounds: lack of proper written description and double
patenting. The judge also ruled that claim 18 was not infringed and that claim 1
was infringed in only a limited manner.
The judge further ruled that the `288 patent was invalid for both obviousness
and failure to disclose the best mode.
The judge also found that St. Jude Medical was entitled to a new trial on the
issue of damages in the event the court's rulings on the other matters were
reversed on appeal. Finally, the judge held that in the event his other rulings
were reversed, St. Jude Medical would be entitled to a new trial because of
misconduct by Guidant and its attorneys during the first trial and that, in such
an event, Guidant would have to pay certain attorney's fees of St. Jude Medical.
The court ruled on several other motions, not summarized here.
The effect of the court's post-trial rulings was to eliminate the $140,000
verdict against St. Jude Medical. The Company expects that Guidant will appeal
the judge's decision.
Since the date of St. Jude Medical's acquisition of Ventritex in May 1997 and
the inception of the Company's sales of ICD products, St. Jude Medical accrued a
3% royalty on its ICD sales under a license with Guidant that it believed it had
acquired as part of its purchase of assets of the Telectronics cardiac
stimulation device business. As a result of the July 2001 jury verdict that St.
Jude Medical's ICD products do not infringe Guidant's `288 patent, the Company
ceased further royalty accruals. The historical accruals under this license at
that time, which totaled approximately $15,000, remained on the Company's
balance sheet pending further developments in the case. The Company evaluated
the facts and circumstances of this case, including the judge's ruling issued on
February 13, 2002, and concluded that the probability that the Company would
have to pay any royalty under the license agreement was remote. As such, the
Company reversed the $15,000 liability through selling, general and
administrative expense in the fourth quarter of 2001.
17
In addition, the Company incurred legal fees in relation to the Guidant
litigation that were subject to recoverability under an indemnification
agreement between the Company and the seller of the Telectronics cardiac
stimulation device business. The Company now has reason to believe that the
indemnitor will resist payment and, therefore, wrote off approximately $15,000
of its indemnity claim through selling, general and administrative expense in
the fourth quarter of 2001.
OTHER LITIGATION MATTERS: The Company is involved in various product liability
lawsuits, claims and proceedings of a nature considered normal to its business.
Subject to self-insured retentions, the Company believes it has product
liability insurance sufficient to cover such claims and suits.
NOTE 5--SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of
$1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per
share par value common stock. There were no shares of preferred stock issued or
outstanding during 2001, 2000 or 1999.
SHARE REPURCHASES: In September 1999, the Company's Board of Directors
authorized the repurchase of up to $250,000 of the Company's outstanding common
stock over a three-year period. The Company repurchased 977,500 shares of its
common stock for $29,826 during 1999. No additional shares were repurchased
during 2001 or 2000.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase
savings plan allows participating employees to purchase, through payroll
deductions, shares of the Company's un-issued common stock at 85% of the fair
market value at specified dates. Employees purchased 143,181, 114,040 and 94,386
shares in 2001, 2000 and 1999 under this plan. At December 31, 2001, 856,819
shares of additional un-issued common stock were available for purchase under
the plan.
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 and employees. 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. At December 31,
2001, the Company had 334,761 shares of common stock available for grant under
these plans.
Stock option transactions under these plans during each of the three years in
the period ended December 31, 2001, are as follows:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
- --------------------------------------------------------------------------------
Balance at January 1, 1999 9,769,281 $32.12
Granted 3,046,880 28.10
Cancelled (1,146,767) 35.39
Exercised (257,781) 22.88
- --------------------------------------------------------------------------------
Balance at December 31, 1999 11,411,613 30.93
Granted 3,731,633 50.86
Cancelled (739,340) 33.19
Exercised (1,134,086) 30.11
- --------------------------------------------------------------------------------
Balance at December 31, 2000 13,269,820 36.47
Granted 3,186,655 71.87
Cancelled (381,367) 42.16
Exercised (1,733,607) 30.53
- --------------------------------------------------------------------------------
Balance at December 31, 2001 14,341,501 $44.90
- --------------------------------------------------------------------------------
Stock options totaling 6,311,837, 5,402,529 and 4,976,093 were exercisable at
December 31, 2001, 2000 and 1999.
18
The following tables summarize information concerning currently outstanding and
exercisable stock options at December 31, 2001:
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
RANGES OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
- --------------------------------------------------------------------------------
$17.55-26.32 857,060 2.5 $22.28
26.32-35.10 5,275,751 6.2 29.51
35.10-43.87 1,761,929 5.4 38.97
43.87-52.64 3,241,756 6.9 52.45
52.64-70.19 351,475 7.3 62.51
70.19-87.74 2,853,530 7.9 73.06
- --------------------------------------------------------------------------------
14,341,501 6.4 $44.90
- --------------------------------------------------------------------------------
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
WEIGHTED-
AVERAGE
RABGES OF NUMBER EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$17.55-26.32 749,540 $21.92
26.32-35.10 3,398,989 29.67
35.10-43.87 1,416,454 38.70
43.87-52.64 703,260 52.30
52.64-70.19 34,969 63.33
70.19-87.74 8,625 85.39
- --------------------------------------------------------------------------------
6,311,837 $33.56
- --------------------------------------------------------------------------------
The Company also granted 46,481 shares of restricted common stock during the
three years ended December 31, 2001, under the Company's stock compensation
plans. The value of restricted stock awards as of the date of grant is charged
to income over the periods during which the restrictions lapse.
The Company's net earnings and diluted net earnings per share would have been
reduced by $26,619, or $0.30 per share, in 2001, $18,875, or $0.22 per share, in
2000, and $18,614, or $0.22 per share, in 1999, had the fair value based method
of accounting been used for valuing the employee stock based awards.
The weighted-average fair value of options granted and the assumptions used in
the Black-Scholes options pricing model are as follows:
2001 2000 1999
- --------------------------------------------------------------------------------
Fair value of options granted $25.69 $21.09 $11.12
Assumptions used:
Expected life (years) 5 5 5
Risk-free rate of return 4.4% 5.3% 5.8%
Volatility 30.9% 35.6% 33.2%
Dividend yield 0% 0% 0%
- --------------------------------------------------------------------------------
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 2007.
NOTE 6--SPECIAL CHARGES
2001 SPECIAL CHARGE: In July 2001, the Company initiated efforts to streamline
its heart valve operations, consolidate its U.S. sales activities and
restructure its international sales organization. As a result of these
activities, the Company recorded pre-tax special charges of $20,657 in the third
quarter of 2001, consisting of employee severance costs resulting from the
elimination of approximately 90 production and administrative positions
($5,293), inventory write-offs and scrap ($9,490), capital equipment write-offs
($3,379) and other costs related primarily to lease terminations and other
facility exit costs due to the closing and consolidation of sales offices
($2,495). The Company has utilized $13,500 of these special charge accruals
through December 31, 2001, consisting of $2,468 of employee severance costs,
$7,301 of inventory write-offs and scrap, $3,379 of capital equipment
write-offs, and $352 of other costs. The Company estimates that the remaining
accruals will be utilized primarily during 2002.
19
During the third quarter of 2001, the Company also wrote off $12,177 of certain
diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer
technology equipment which received U.S. regulatory approvals in late 2000 and
early 2001, and was launched earlier in 2001.
The charges relating to employee severance costs, capital equipment write-offs
and other costs have been recorded in operating expenses as special charges. The
inventory and diagnostic equipment write-offs are included in cost of sales as
special charges.
2000 SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide
voluntary recall of all field inventory of heart valve replacement and repair
products incorporating Silzone(R) coating on the sewing cuff fabric. The Company
concluded that it would no longer utilize Silzone(R) coating. The Company
recorded a special charge accrual totaling $26,101 during the first quarter of
2000 relating to asset write-downs ($9,465) and other costs ($16,636) including
monitoring expenses, associated with this recall and product discontinuance.
Additionally, the Company maintains product liability coverage for litigation
related costs in excess of its self-insured retention. The Company has utilized
$20,701 of this special charge accrual through December 31, 2001, consisting of
$9,465 of asset write-downs and $11,236 of other costs. The Company estimates
that the remaining accrual will be utilized primarily during 2002. There can be
no assurance that the final costs associated with this recall that are not
covered by insurance, including litigation-related costs, will not exceed
management's estimates.
1999 SPECIAL CHARGE: The Company recorded a $9,754 special charge accrual in
1999 related to the restructuring of its international operations. Substantially
all accruals related to this restructuring have been utilized through December
31, 2001.
NOTE 7--OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Interest expense, net $(9,306) $(25,929) $(25,378)
Other 1,468 879 3,194
- -----------------------------------------------------------------------------------------------
Other income (expense) $(7,838) $(25,050) $(22,184)
- -----------------------------------------------------------------------------------------------
NOTE 8--INCOME TAXES
The Company's earnings before income taxes were generated from domestic and
foreign operations as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Domestic $ 83,128 $ 75,538 $ 2,408
International 144,850 101,771 64,596
- ------------------------------------------------------------------------------------------------
Earnings before income taxes $227,978 $177,309 $67,004
- ------------------------------------------------------------------------------------------------
Income tax expense consists of the following:
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Current:
Federal $ 48,844 $31,859 $28,641
State and Puerto Rico Section 936 4,994 3,815 2,810
International 13,229 17,980 10,957
- -----------------------------------------------------------------------------------------------
Total current 67,067 53,654 42,408
Deferred (11,681) (5,439) 369
- -----------------------------------------------------------------------------------------------
Income tax expense $ 55,386 $48,215 $42,777
- -----------------------------------------------------------------------------------------------
The tax effects of the cumulative temporary differences between the tax bases of
assets and liabilities and their carrying amount for financial statement
purposes are as follows:
2001 2000
- -----------------------------------------------------------------------------------------------
Deferred income tax assets:
Net operating loss carryforwards $ 52,349 $ 42,611
Tax credit carryforwards 31,678 26,095
Inventories 30,403 30,212
Intangible assets 14,002 17,497
Accrued liabilities and other 1,746 741
- -----------------------------------------------------------------------------------------------
Deferred income tax assets 130,178 117,156
- -----------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized gain on marketable securities (5,620) (4,692)
Property, plant and equipment (20,757) (19,416)
- -----------------------------------------------------------------------------------------------
Deferred income tax liabilities (26,377) (24,108)
- -----------------------------------------------------------------------------------------------
Net deferred income tax asset $103,801 $ 93,048
- -----------------------------------------------------------------------------------------------
20
A reconciliation of the U.S. federal statutory income tax rate to the Company's
effective income tax rate is as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Income tax expense at the $ 79,792 $ 62,058 $ 23,451
U.S. federal statutory rate
State income taxes,
net of federal benefit 3,654 2,725 1,811
International taxes at lower rates (20,089) (12,451) (1,567)
Tax benefits from foreign sales
corporation and extraterritorial
income exclusion (3,681) (2,280) (3,309)
Research and development credits (5,984) (4,464) (3,679)
Non-deductible purchased
in-process research and
development charges 3,912 2,141 23,608
Other (2,218) 486 2,462
- ------------------------------------------------------------------------------------------------
Income tax expense $ 55,386 $ 48,215 $ 42,777
- ------------------------------------------------------------------------------------------------
Effective income tax rate 24.3% 27.2% 63.8%
- ------------------------------------------------------------------------------------------------
At December 31, 2001, the Company has net operating loss and general business
and foreign tax credit carryforwards of approximately $149,569 and $26,757 that
will expire from 2003 through 2021 if not utilized; such amounts are subject to
annual usage limitations. The Company's net operating loss carryforwards arose
primarily from acquisitions. The Company also has alternative minimum tax credit
carryforwards of $4,921 that have an unlimited carryforward period.
The Company has not recorded U.S. deferred income taxes on $329,388 of its
non-U.S. subsidiaries' undistributed earnings as such amounts are intended to be
reinvested outside the U.S. indefinitely.
NOTE 9--RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that
provide retirement benefits to substantially all full-time U.S. employees.
Eligible employees may contribute a percentage of their annual compensation,
subject to IRS limitations, with the Company matching a portion of the
employees' contributions. The Company also contributes a portion of its profits
to the plans 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 outside
the United States. The benefits under the Company's plans are based primarily on
compensation levels. Company contributions under all defined contribution plans
totaled $16,249, $13,170 and $11,416 in 2001, 2000 and 1999.
DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for
employees in certain countries outside the U.S. The Company has an accrued
liability totaling approximately $7,600 at December 31, 2001, which approximates
the actuarially calculated unfunded liability. The related pension expense was
not material.
21
NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION: The Company historically reported under two segments.
During 2001, the Company completed a reorganization of its global sales
activities (see Note 6), which resulted in changes to its internal management
and financial reporting structure. As such, the Company now manages its business
on the basis of one reportable segment--the development, manufacture and
distribution of cardiovascular medical devices. See Note 1 for a brief
description of the Company's primary markets and principal products.
GEOGRAPHIC INFORMATION: The following tables present certain geographical
financial information:
NET SALES 2001 2000 1999
- --------------------------------------------------------------------------------------------------
United States $ 880,086 $ 745,793 $ 689,051
International 467,270 433,013 425,498
- --------------------------------------------------------------------------------------------------
$1,347,356 $1,178,806 $1,114,549
- --------------------------------------------------------------------------------------------------
LONG-LIVED ASSETS* 2001 2000 1999
- --------------------------------------------------------------------------------------------------
United States $ 547,999 $ 585,118 $ 607,851
International 137,573 149,982 187,448
- --------------------------------------------------------------------------------------------------
$ 685,572 $ 735,100 $ 795,299
- --------------------------------------------------------------------------------------------------
*Long-lived assets exclude deferred income taxes and other assets.
Net sales by class of similar products were as follows:
NET SALES 2001 2000 1999
- --------------------------------------------------------------------------------------------------
Cardiac rhythm management $ 965,968 $ 819,117 $ 767,212
Cardiology and vascular access 133,343 102,740 75,905
Cardiac surgery 248,045 256,949 271,432
- --------------------------------------------------------------------------------------------------
$1,347,356 $1,178,806 $1,114,549
- --------------------------------------------------------------------------------------------------
NOTE 11--QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2001 and 2000 is as follows:
QUARTER
FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 2001
Net sales $326,065 $336,062 $337,029 $348,200
Gross profit 218,988 225,839 207,040(2) 236,330
Net earnings 47,074 43,819(1) 31,434(2) 50,265(5)
Diluted net earnings per share $ 0.53 $ 0.49 $ 0.35 $ 0.56
Fiscal Year Ended December 31, 2000
Net sales $295,499 $300,939 $286,969 $295,399
Gross profit 193,521 202,363 193,961 197,812
Net earnings 15,828(3) 34,119(1) 37,999(4) 41,148
Diluted net earnings per share $ 0.19 $ 0.40 $ 0.44 $ 0.47
- ----------------------------------------------------------------------------------------------------
(1) INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF
$5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION.
(2) INCLUDES PRE-TAX SPECIAL CHARGE OF $32,834 RELATING TO A RESTRUCTURING OF
ITS U.S. AND INTERNATIONAL SALES ORGANIZATIONS, A STREAMLINING OF ITS HEART
VALVE OPERATIONS, AND A WRITE-OFF OF CERTAIN DIAGNOSTIC EQUIPMENT. $21,667
OF THIS SPECIAL CHARGE WAS RECORDED IN COST OF SALES, AND THE REMAINING
$11,167 WAS RECORDED IN OPERATING EXPENSES.
(3) INCLUDES PRE-TAX SPECIAL CHARGE OF $26,101 RELATING TO THE SILZONE(R)
RECALL.
(4) INCLUDES A CASH RECEIPT RELATED TO A NON-PRODUCT ARBITRATION JUDGEMENT
PERTAINING TO BUSINESS MATTERS OCCURRING IN 1997 AND 1998. THIS CASH
RECEIPT, NET OF OTHER PROVISIONS FOR LEGAL MATTERS AND FEES, WAS $15,158
AND WAS CREDITED TO SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ALSO, THE
COMPANY RECORDED ADDITIONAL EXPENSES FOR A $3,500 DISCRETIONARY
CONTRIBUTION TO ITS CHARITABLE FOUNDATION, $6,672 PRIMARILY FOR WRITE-OFFS
OF CERTAIN ASSETS AND RELATED COSTS, AND A $4,900 INCREASE TO ITS ALLOWANCE
FOR DOUBTFUL ACCOUNTS. THESE ADDITIONAL COSTS AND EXPENSES WERE ALSO
RECORDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
(5) INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF
$5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, $15,000 OF
INCOME RELATING TO THE REVERSAL OF AN ACCRUED LIABILITY UNDER A LICENSE
AGREEMENT WITH GUIDANT, AND APPROXIMATELY $15,000 OF LEGAL FEE EXPENSES
INCURRED IN RELATION TO THE GUIDANT LITIGATION.
22
FIVE-YEAR SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
2001* 2000** 1999*** 1998 1997****
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations for the Fiscal Year:
Net sales $1,347,356 $1,178,806 $1,114,549 $1,015,994 $ 994,396
- ---------------------------------------------------------------------------------------------------------------------
Gross profit $ 888,197 $ 787,657 $ 733,647 $ 643,054 $ 628,679
- ---------------------------------------------------------------------------------------------------------------------
Percent of sales 65.9% 66.8% 65.8% 63.3% 63.2%
- ---------------------------------------------------------------------------------------------------------------------
Operating profit $ 235,816 $ 202,359 $ 89,188 $ 193,952 $ 86,817
- ---------------------------------------------------------------------------------------------------------------------
Percent of sales 17.5% 17.2% 8.0% 19.1% 8.7%
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 172,592 $ 129,094 $ 24,227 $ 129,082 $ 53,140
- ---------------------------------------------------------------------------------------------------------------------
Percent of sales 12.8% 11.0% 2.2% 12.7% 5.3%
- ---------------------------------------------------------------------------------------------------------------------
Diluted net earnings per share $ 1.93 $ 1.51 $ 0.29 $ 1.50 $ 0.58
- ---------------------------------------------------------------------------------------------------------------------
Financial Position at Year End:
Cash and equivalents $ 148,335 $ 50,439 $ 9,655 $ 3,775 $ 28,530
- ---------------------------------------------------------------------------------------------------------------------
Working capital 475,692 388,322 389,768 471,090 491,688
- ---------------------------------------------------------------------------------------------------------------------
Total assets 1,628,727 1,532,716 1,554,038 1,384,612 1,453,116
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt 123,128 294,500 477,495 374,995 220,000
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity 1,183,745 940,849 794,021 806,220 987,022
- ---------------------------------------------------------------------------------------------------------------------
Other Data:
Diluted weighted average shares outstanding 89,384 85,817 84,735 86,145 92,052
- ---------------------------------------------------------------------------------------------------------------------
EXCEPT FOR 1997, ALL FISCAL YEARS NOTED ABOVE CONSISTED OF FIFTY-TWO WEEKS.
FISCAL YEAR 1997 CONSISTED OF FIFTY-THREE WEEKS. THE COMPANY DID NOT DECLARE OR
PAY ANY DIVIDENDS DURING 1997 THROUGH 2001.
*RESULTS FOR 2001 INCLUDE A $32,834 SPECIAL CHARGE AND PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT CHARGES OF $10,000.
**RESULTS FOR 2000 INCLUDE A $26,101 SPECIAL CHARGE AND A PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT CHARGE OF $5,000.
***RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228.
****RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES.
23
INVESTOR INFORMATION
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:
Equiserve Trust Company N.A.
P.O. Box 2500
Jersey City, New Jersey 07303-2500
1.800.317.4445
www.equiserve.com (Account Access Availability)
Hearing impaired #TDD: 201.222.4955
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May
16, 2002, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,
Minneapolis, Minnesota.
INVESTOR CONTACT
Laura C. Merriam, Director of Investor Relations
To obtain information about the Company call 1.800.552.7664, visit our web site
at www.sjm.com, or write to:
Investor Relations
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, Minnesota 55117
The Investor Relations section on our web site includes all SEC filings, a list
of analyst coverage, analyst estimates, and a calendar of upcoming earnings
announcements and IR events. Our NewsRoom features St. Jude Medical's press
releases, company background information, fact sheets, executive bios, a product
photo portfolio and other media resources. Patient profiles can be found on our
web site, including the patients featured in this year's annual report.
COMPANY STOCK SPLITS
2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90
3:2 on 11/16/95
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Chicago Board Options Exchange (CB)
Symbol: STJ
The range of high and low prices per share for the Company's common stock for
fiscal 2001 and 2000 is set forth below. As of February 13, 2002, the Company
had 3,451 shareholders of record.
Fiscal Year Ended December 31, 2001 2000
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
First $64.55 $44.45 $31.25 $23.63
Second $66.00 $49.60 $44.25 $24.19
Third $72.06 $57.75 $51.63 $36.88
Fourth $78.08 $66.95 $62.50 $46.38
- --------------------------------------------------------------------------------
TRADEMARKS
Aescula(TM), AF Suppression(TM), AFx(TM), Affinity(R), Alliance(TM),
Angio-Seal(TM), Angio-Seal(TM) STS, Atlas(TM), AutoCapture(TM),
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Overdrive(TM), Fast Cath(TM), Fast Cath Duo(TM), FlatCap(TM), Frontier(TM),
Genesis(TM) System, GuideRight(TM), Housecall(TM), HydraSteer(TM), Identity(TM),
Integrity(R), Livewire(TM), Livewire TC(TM), Livewire TC Compass(TM),
Microny(R), Maximum(TM), Photon(R), Response(TM) CV, Riata(TM), Seal-Away(TM),
Secure Cap(TM), SJM(R), SJM Biocor(TM), SJM Epic(TM), SJM Regent(TM), SJM
Tailor(TM), Spyglass(TM), St. Jude Medical(R), Supreme(TM), Supreme Spiral
SC(TM), Sure-Lock(TM), Symmetry(TM) Bypass System, Tendril(R), Toronto Root(TM),
Toronto SPV(R), TVL(R), Ultimum(TM).
Harmony(TM) INR Monitoring System is a trademark of LifeScan, Inc., a Johnson &
Johnson company.
24