UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.
Commission File Number 0-8672
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ST. JUDE MEDICAL, INC.
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(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1276891
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
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(Address of principal executive offices)
(651) 483-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO _____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES __X__ NO _____
The number of shares of common stock, par value $.10 per share, outstanding on
April 28, 2003 was 179,934,229.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 2002
- --------------------------------------------------------------------------------
Net sales $441,384 $371,193
Cost of sales 139,464 118,788
- --------------------------------------------------------------------------------
Gross profit 301,920 252,405
Selling, general and administrative expense 139,084 122,687
Research and development expense 55,942 46,465
- --------------------------------------------------------------------------------
Operating profit 106,894 83,253
Other income (expense) 1,197 (485)
- --------------------------------------------------------------------------------
Earnings before income taxes 108,091 82,768
Income tax expense 28,104 20,692
- --------------------------------------------------------------------------------
Net earnings $ 79,987 $ 62,076
================================================================================
================================================================================
Net earnings per share:
Basic $ 0.45 $ 0.35
Diluted $ 0.43 $ 0.34
Weighted average shares outstanding:
Basic 178,888 175,223
Diluted 186,326 182,385
- --------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
1
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 2003 DECEMBER 31,
(UNAUDITED) 2002 (SEE NOTE)
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and equivalents $ 497,103 $ 401,860
Accounts receivable, less allowance for doubtful accounts
of $29,307 in 2003 and $24,078 in 2002 405,287 381,246
Inventories 231,794 227,024
Deferred income taxes 52,658 56,857
Other 50,821 47,330
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,237,663 1,114,317
Property, plant and equipment - at cost 711,674 701,314
Less accumulated depreciation (416,334) (400,833)
- ----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 295,340 300,481
Other assets
Goodwill 326,886 325,575
Other intangible assets, net 87,754 89,491
Deferred income taxes 5,713 12,269
Other 123,162 109,246
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets 543,515 536,581
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TOTAL ASSETS $ 2,076,518 $ 1,951,379
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 97,742 $ 108,931
Income taxes payable 59,285 51,380
Accrued expenses
Employee compensation and related benefits 124,253 135,705
Other 81,121 78,636
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 362,401 374,652
Long-term debt - -
Commitments and contingencies - -
Shareholders' equity
Preferred stock - -
Common stock 17,956 17,803
Additional paid-in capital 258,159 216,878
Retained earnings 1,491,181 1,411,194
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (58,843) (73,388)
Unrealized gain on available-for-sale securities 5,664 4,240
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,714,117 1,576,727
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,076,518 $ 1,951,379
==================================================================================================================================
NOTE: The balance sheet at December 31, 2002 has been derived from the Company's
audited financial statements. See notes to condensed consolidated financial
statements.
2
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 2002
=================================================================================================================================
Operating Activities
Net earnings $ 79,987 $ 62,076
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation 14,796 14,875
Amortization 1,757 1,499
Deferred income taxes 9,882 (24)
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable (19,171) (32,181)
Inventories (4,522) 2,161
Other current assets (1,075) (21,952)
Accounts payable and accrued expenses (16,172) (8,709)
Income taxes payable 19,853 18,257
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 85,335 36,002
Investing Activities
Purchase of property, plant and equipment (8,174) (13,105)
Business acquisition payments - (9,427)
Other (14,511) (10,420)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,685) (32,952)
Financing Activities
Proceeds from exercise of stock options 29,485 23,649
Borrowings under debt facilities - 296,900
Payments under debt facilities - (332,278)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 29,485 (11,729)
Effect of currency exchange rate changes on cash 3,108 (774)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 95,243 (9,453)
Cash and equivalents at beginning of period 401,860 148,335
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 497,103 $ 138,882
=================================================================================================================================
See notes to condensed consolidated financial statements.
3
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the full year.
Preparation of the Company's 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. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
STOCK-BASED COMPENSATION: The Company accounts for its stock-based employee
compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," and related interpretations. The following table illustrates the
effect on net earnings and net earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to its stock-based employee
compensation.
THREE MONTHS ENDED MARCH 31, 2003 2002
================================================================================================================
Net earnings, as reported $ 79,987 $ 62,076
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (8,869) (8,299)
- ----------------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 71,118 $ 53,777
================================================================================================================
Net earnings per share:
Basic-as reported $ 0.45 $ 0.35
Basic-pro forma 0.40 0.31
Diluted-as reported $ 0.43 $ 0.34
Diluted-pro forma 0.38 0.29
================================================================================================================
4
NOTE 2 - INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
================================================================================
Finished goods $ 136,856 $ 140,856
Work in process 35,442 27,481
Raw materials 59,496 58,687
- --------------------------------------------------------------------------------
$ 231,794 $ 227,024
================================================================================
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
The net carrying amount of goodwill for the first quarter ended March 31, 2003
increased $1,311 to $326,886 due primarily to currency translation fluctuations
of non-U.S. dollar denominated goodwill balances. There were no goodwill
impairment charges recorded during the three months ended March 31, 2003 or
during 2002.
Balances of other intangible assets as of March 31, 2003 and December 31, 2002
were as follows:
Purchased
Technology
and Patents Other Total
==============================================================================
MARCH 31, 2003
Original cost $ 75,874 $ 33,765 $ 109,639
Accumulated amortization (18,118) (3,767) (21,885)
- ------------------------------------------------------------------------------
Net carrying value $ 57,756 $ 29,998 $ 87,754
==============================================================================
DECEMBER 31, 2002
Original cost $ 75,749 $ 33,741 $ 109,490
Accumulated amortization (17,075) (2,924) (19,999)
- ------------------------------------------------------------------------------
Net carrying value $ 58,674 $ 30,817 $ 89,491
==============================================================================
The "other" column above primarily represents customer relationships from the
acquisition of various businesses involved in the distribution of the Company's
products. These assets are amortized on a straight-line basis over ten years.
Amortization expense of other intangible assets was $1,757 and $1,499 for the
three months ended March 31, 2003 and 2002, respectively.
5
NOTE 4 - COMMITMENTS AND CONTINGENCIES
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. 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 have been settled, some have been dismissed, and others are
ongoing. Some of these cases, both in the United States and Canada, are seeking
class action status. 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. See also Note 6 regarding the special
charges associated with this matter.
In 2001, the U.S. Judicial Panel on Multi-District 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 under the
supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result,
actions in federal court involving products with Silzone(R) coating have been
and will likely continue to be transferred to Judge Tunheim for coordinated or
consolidated pretrial proceedings.
Certain plaintiffs requested Judge Tunheim to allow some cases to proceed as
class actions. Judge Tunheim issued a ruling on plaintiffs' motions for class
certification on March 27, 2003. In his ruling, Judge Tunheim conditionally
certified one class of plaintiffs (U.S. persons who have a Silzone heart valve
which is still implanted) and conditionally certified a second class of
plaintiffs (U.S. persons who received a Silzone heart valve and who have
sustained physical injuries due to the valve). The Company believes that the
ruling is inconsistent with the applicable laws and precedents, and is pursuing
its appellate remedies.
In the meantime, cases involving Silzone(R) products not seeking class action
status which are consolidated before Judge Tunheim are proceeding in accordance
with the scheduling orders he has rendered. There are other actions involving
products with Silzone(R) coating in various state courts that may or may not be
coordinated with the matters presently before Judge Tunheim. The lawsuits in
Canada are proceeding in accordance with separate schedules issued by the
applicable provincial courts. A hearing concerning the certification of a class
action in Ontario, Canada, is currently scheduled for June 2003.
While it is not possible to predict the outcome of the various cases involving
Silzone(R) products, 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 consolidated 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 the Company did not have a license to certain patents
controlled by Guidant covering ICD products and alleging that the Company was
infringing those patents. St. Jude Medical's contention was that it had obtained
a license from Guidant to the patents in issue when it acquired certain assets
of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude
Medical's position, and in May 2001, a federal district court judge also ruled
that the Guidant patent license with Telectronics had not transferred to St.
Jude Medical.
6
Guidant's suit originally alleged infringement of four patents by St. Jude
Medical. Guidant later dismissed its claim on one patent and a court ruled that
a second patent was invalid. This determination of invalidity was appealed by
Guidant and the Court of Appeals upheld the lower court's invalidity
determination. In a jury trial involving the two remaining patents (the '288 and
'472 patents), the jury found that these patents were valid and that St. Jude
Medical did not infringe the '288 patent. The jury found that the Company did
infringe the '472 patent, though such infringement was not willful. The jury
awarded damages of $140,000 to Guidant. In post-trial rulings, however, the
judge overseeing the jury trial ruled that the '472 patent was invalid and also
was not infringed by St. Jude Medical, thereby eliminating the $140,000 verdict
against the Company. The trial court also made other rulings as part of the
post-trial order, including a ruling that the '288 patent was invalid on several
grounds.
In August 2002, Guidant commenced an appeal of certain of the trial judge's
post-trial decisions pertaining to the '288 patent. Guidant did not appeal the
trial court's finding of invalidity and non-infringement of the '472 patent. The
parties are currently in the briefing phase of this appeal. While it is not
possible to predict the outcome of the appeal process, the Company believes that
it has meritorious defenses against the claims asserted by Guidant and Guidant's
continued pursuit of this case.
OTHER LITIGATION MATTERS: The Company is involved in various other product
liability lawsuits, claims and proceedings that arise in the ordinary course of
business. Subject to self-insured retentions, the Company believes it has
product liability insurance sufficient to cover such claims and suits.
NOTE 5 - PRODUCT WARRANTIES
The Company offers a warranty on various products, the most significant of which
relate to its pacemaker and ICD systems. The Company estimates the costs that
may be incurred under its warranties and records a liability in the amount of
such costs at the time the product is sold. Factors that affect the Company's
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims and cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary. Changes in the Company's product warranty liability during the first
quarter of 2003 and 2002 were as follows:
MARCH 31, MARCH 31,
2003 2002
===============================================================================
Balance at beginning of period $ 14,755 $ 11,369
Warranty expense recognized 1,060 2,661
Warranty credits issued (259) (557)
- -------------------------------------------------------------------------------
Balance at end of period $ 15,556 $ 13,473
===============================================================================
7
NOTE 6 - 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
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. In the second
quarter of 2002, the Company determined that the Silzone(R) reserves for other
costs should be increased by $11,000 due primarily to difficulties in obtaining
certain reimbursements from the Company's insurance carriers under its product
liability insurance policies. This additional accrual was included in selling,
general and administrative expenses for the second quarter ended June 30, 2002.
The Company has utilized $23,360 of these special charge accruals through March
31, 2003, consisting of $9,465 of asset write-downs and $13,895 of other costs.
The Company estimates that the remaining accruals will be utilized primarily
during 2003 and 2004. The Company has approximately $200,000 remaining in
product liability insurance currently available for the Silzone(R)-related
matters. 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.
NOTE 7 - SHAREHOLDERS' EQUITY
The Company's authorized capital consists of 25,000 shares of $1.00 per share
par value preferred stock and 250,000 shares of $0.10 per share par value common
stock. There were no shares of preferred stock issued or outstanding during 2002
or the first quarter of 2003. There were 179,558 and 178,028 shares of common
stock outstanding at March 31, 2003 and December 31, 2002.
NOTE 8 - NET EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted net earnings per
share:
THREE MONTHS ENDED MARCH 31, 2003 2002
==============================================================================
Numerator:
Net earnings $ 79,987 $ 62,076
Denominator:
Basic-weighted average shares outstanding 178,888 175,223
Effect of dilutive securities:
Employee stock options 7,428 7,140
Restricted shares 10 22
- ------------------------------------------------------------------------------
Diluted-weighted average shares outstanding 186,326 182,385
==============================================================================
Basic net earnings per share $ 0.45 $ 0.35
==============================================================================
Diluted net earnings per share $ 0.43 $ 0.34
==============================================================================
8
Diluted-weighted average shares outstanding have not been adjusted for certain
employee stock options and awards where the effect of those securities would
have been anti-dilutive.
NOTE 9 - COMPREHENSIVE INCOME
Other comprehensive income (loss) consists of unrealized gains or losses on
available-for-sale marketable securities and foreign currency translation
adjustments, net of taxes. Other comprehensive income (loss) was $15,969 and
$(4,559) for the three months ended March 31, 2003 and 2002. Total comprehensive
income combines reported net earnings and other comprehensive income (loss).
Total comprehensive income was $95,956 and $57,517 for the three months ended
March 31, 2003 and 2002.
NOTE 10 - OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
THREE MONTHS ENDED MARCH 31, 2003 2002
================================================================================
Interest income $ 2,003 $ 1,063
Interest expense (197) (923)
Other (609) (625)
- --------------------------------------------------------------------------------
$ 1,197 $ (485)
================================================================================
NOTE 11 - SEGMENT AND GEOGRAPHICAL INFORMATION
SEGMENT INFORMATION: The Company manages its business on the basis of one
reportable segment - the development, manufacture and distribution of
cardiovascular medical devices for the global cardiac rhythm management (CRM),
cardiac surgery (CS) and cardiology and vascular access (C/VA) markets. The
Company's principal products in each of these markets are: bradycardia pacemaker
systems, tachycardia implantable cardioverter defibrillator (ICD) systems, and
electrophysiology catheters in CRM; mechanical and tissue heart valves, valve
repair products, and suture-free devices to facilitate coronary artery bypass
graft anastomoses in CS; and vascular closure devices, catheters, guidewires and
introducers in C/VA.
Net sales by class of similar products were as follows:
THREE MONTHS ENDED MARCH 31,
NET SALES 2003 2002
================================================================================
Cardiac rhythm management $ 318,423 $ 267,798
Cardiac surgery 66,153 62,882
Cardiology and vascular access 56,808 40,513
- --------------------------------------------------------------------------------
$ 441,384 $ 371,193
================================================================================
9
GEOGRAPHICAL INFORMATION: The following tables present certain geographical
financial information:
THREE MONTHS ENDED MARCH 31,
NET SALES* 2003 2002
================================================================================
United States $ 277,015 $ 245,830
International 164,369 125,363
- --------------------------------------------------------------------------------
$ 441,384 $ 371,193
================================================================================
MARCH 31, DECEMBER 31,
LONG-LIVED ASSETS** 2003 2002
================================================================================
United States $ 682,807 $ 674,119
International 150,335 150,674
- --------------------------------------------------------------------------------
$ 833,142 $ 824,793
================================================================================
* NET SALES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF THE CUSTOMERS.
** LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES.
NOTE 12 - SUBSEQUENT EVENTS
ACQUISITIONS: On April 1, 2003, the Company completed its acquisition of Getz
Bros. Co., Ltd. (Getz Japan), a distributor of medical technology products in
Japan and the Company's largest volume distributor in Japan. The Company paid
26.9 billion Japanese yen in cash, or approximately $230,000, to acquire 100% of
the outstanding common stock of Getz Japan. The purchase price was financed by a
portion of the Company's existing cash balances and 24.6 billion yen of
borrowings under a short-term, bank credit agreement.
On April 1, 2003, the Company also acquired the net assets of Getz Bros. & Co.
(Aust.) Pty. Limited and Medtel Pty. Limited related to the distribution of the
Company's products in Australia for approximately $6,500 in cash.
The results of operations of the above-mentioned business acquisitions will be
included in the Company's consolidated results of operations beginning in the
second quarter of 2003.
INVESTMENTS: On May 1, 2003, the Company made a $15,000 minority investment in a
development stage company that is focused on developing technologies to treat
patients with atrial fibrillation. In conjunction with this investment, the
Company also agreed to acquire the remaining ownership of the business in 2004
for an additional $185,000 in cash, provided a number of specific clinical and
regulatory milestones are achieved. The Company will account for the initial
$15,000 investment using the cost method of accounting.
DEBT: On April 1, 2003, the Company borrowed 24.6 billion Japanese yen, or
approximately $210,000, under a short-term, unsecured bank credit agreement to
partially finance the Getz Japan acquisition. Borrowings under this agreement
bore interest at an average rate of .58% per annum and were repaid in May 2003.
10
In May 2003, the Company issued 7-year, unsecured term notes totaling 20.9
billion yen, or approximately $178,000. The Company also obtained a short-term,
unsecured bank credit agreement which provides for borrowings of up to 3.8
billion yen, or approximately $32,000. Proceeds from the issuance of the term
notes and from borrowings under the short-term, bank credit agreement were used
to repay the 24.6 billion yen of short-term bank borrowings. The term notes bear
interest at a fixed rate of 1.02% per annum and mature in May 2010. The
short-term, unsecured bank credit agreement bears interest at the floating yen
LIBOR rate plus 0.50% per annum and is due in November 2003.
The term notes and the short-term, bank credit agreement contain various
restrictive covenants such as minimum financial ratios, limitations on
additional liens or indebtedness and limitations on certain acquisitions,
investments and dispositions of assets. However, these agreements do not include
provisions for the termination of the agreements or acceleration of repayment
due to changes in the Company's credit ratings.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies to prepare the consolidated
financial statements in accordance with accounting principles generally accepted
in the United States. Our significant accounting policies are disclosed in Note
1 to the consolidated financial statements included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
Preparation of our 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. On an ongoing basis, we
evaluate our estimates and assumptions, including those related to accounts
receivable allowance for doubtful accounts, estimated useful lives of property,
plant and equipment, income taxes, Silzone(R) special charges and legal
proceedings. We base our estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, and the
results form the basis for making judgments about the reported values of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Our most critical accounting estimates are discussed in the
Management's Discussion and Analysis section of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
RESULTS OF OPERATIONS
NET SALES: Net sales for the first quarter ended March 31, 2003 and 2002 by
class of similar products were as follows:
Three months ended March 31, 2003 2002
================================================================================
Cardiac rhythm management $ 318,423 $ 267,798
Cardiac surgery 66,153 62,882
Cardiology and vascular access 56,808 40,513
- --------------------------------------------------------------------------------
$ 441,384 $ 371,193
================================================================================
Overall, net sales increased 18.9% in the first quarter of 2003 over the first
quarter of 2002. Foreign currency translation had a net favorable impact on
first quarter 2003 net sales as compared with 2002 of $15,700 due primarily to
the strengthening of the Euro against the U.S. dollar. This amount is not
indicative of the impact of foreign currency on net earnings for the first
quarter of 2003 due to partially offsetting unfavorable foreign currency
translation impacts on operating costs.
Net sales of cardiac rhythm management (CRM) products increased 18.9% in the
first quarter of 2003 over 2002 due primarily to increased implantable
cardioverter defibrillator (ICD) and electrophysiology catheter unit sales. ICD
net sales for the first quarter of 2003 benefited from the full quarter
availability of the Epic(TM) family of ICDs released into the U.S. market in the
12
fourth quarter of 2002 and from continued market expansion. Foreign currency
translation also had a $10,900 favorable impact on first quarter 2003 CRM net
sales as compared with 2002.
Cardiac surgery (CS) net sales increased 5.2% in the first quarter of 2003 over
2002 due to the favorable impact of foreign currency translation of $2,600 and
to increased heart valve unit sales in international markets.
Cardiology and vascular access (C/VA) net sales increased 40.2% in the first
quarter of 2003 over 2002 due primarily to increased Angio-Seal(TM) vascular
closure unit sales. Foreign currency translation also had a $2,200 favorable
impact on first quarter 2003 C/VA net sales as compared with 2002.
GROSS PROFIT: Gross profit for the first quarter of 2003 totaled $301,920, or
68.4% of net sales, as compared with $252,405, or 68.0% of net sales, for the
first quarter of 2002. The improvement in the gross profit percentage is due
primarily to higher manufacturing volumes and improved manufacturing
efficiencies. We anticipate additional improvements in our gross profit
percentage in the future due to increasing sales volumes and to the use of total
quality management techniques and further investments in technology. Offsetting
these improvements for 2003 will be inventory acquisition accounting adjustments
related to the acquisition of Getz Bros. Co., Ltd. (Getz Japan) in the second
quarter of 2003 and the addition of non-St. Jude Medical manufactured products
sold by Getz Japan, which generally have a lower gross profit margin. For the
full year 2003, we expect our gross profit percentage to be approximately 68.5%
to 69.0% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for the first
quarter of 2003 totaled $139,084, or 31.5% of net sales, as compared with
$122,687, or 33.1% of net sales, for the first quarter of 2002. The decrease in
SG&A expense as a percentage of net sales for the first quarter of 2003 was
primarily due to the leveraging effect of higher sales volumes. We expect our
SG&A expense as a percentage of net sales to increase in the remaining quarters
of 2003 due to the addition of the Getz direct sales organization of
approximately 400 sales and support personnel and to an increase of
approximately 200 U.S. sales and support personnel in anticipation of our 2004
entry into the cardiac resynchronization segment of the U.S. CRM market.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expenses in the first quarter of
2003 totaled $55,942, or 12.7% of net sales, compared with $46,465, or 12.5% of
net sales, for the first quarter of 2002. The increase in R&D expenses as a
percentage of net sales is primarily attributable to increased CRM activities
relating primarily to ICDs and products treating emerging indications in atrial
fibrillation and heart failure.
SPECIAL CHARGES: On January 21, 2000, we 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. We concluded that it
would no longer utilize Silzone(R) coating. We 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. In the second quarter of 2002, we
determined that the Silzone(R) reserves for other costs should be increased by
$11,000 due primarily to difficulties in obtaining certain reimbursements from
our insurance carriers under the product liability insurance policies. This
additional accrual was included in selling, general and administrative
13
expenses for the second quarter ended June 30, 2002. We have utilized $23,360 of
these special charge accruals through March 31, 2003, consisting of $9,465 of
asset write-downs and $13,895 of other costs. We estimate that the remaining
accruals will be utilized primarily during 2003 and 2004. We have approximately
$200,000 remaining in product liability insurance currently available for the
Silzone(R)-related matters. 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.
OTHER INCOME (EXPENSE): The change in other income (expense) during the first
quarter of 2003 as compared with 2002 is due primarily to higher levels of
interest income resulting from the increase in cash and equivalents and reduced
interest expense as a result of the repayment of our debt in the first quarter
of 2002.
INCOME TAXES: Our effective income tax rate was 26% for the first quarter of
2003 and 25% for the first quarter of 2002. The increase in our effective income
tax rate in 2003 is due to a larger percentage of our taxable income being
generated in higher taxing jurisdictions. We anticipate that our effective
income tax rate will increase in the years following 2003 as a larger percentage
of our forecasted taxable income is generated in higher taxing jurisdictions.
From time to time, we face 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. Our
U.S. Federal tax filings prior to 1998 have been examined by the Internal
Revenue Service (IRS), and we have settled all differences arising out of those
examinations. Consistent with our status with the U.S. Federal tax authorities
as a "coordinated industry case," the IRS is currently in the process of
examining our U.S. Federal tax returns for the calendar years 1998, 1999 and
2000. Although we believe we have recorded an appropriate income tax provision,
there can be no assurance that the IRS or other tax authorities will not take
positions contrary to those taken by us. We further believe that any taxes not
covered by our income tax provision will not have a material adverse impact on
our consolidated financial position or liquidity, but may be material to the
consolidated results of operations of a future period.
OUTLOOK: We expect that market demand, government regulation and reimbursement
policies, and societal pressures will continue to change the worldwide
healthcare industry resulting in further business consolidations and alliances.
We participate with industry groups to promote the use of advanced medical
device technology in a cost-conscious environment.
The global medical technology industry is highly competitive and is
characterized by rapid product development and technological change. Our
products must continually improve technologically and provide improved clinical
outcomes due to the competitive nature of the industry. In addition, competitors
have historically employed litigation to gain a competitive advantage.
The cardiac rhythm management market is highly competitive. There are currently
three principal suppliers in this market, including us, and our 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
us to invest heavily in R&D and to effectively market our products. Two trends
began to emerge in the CRM market during 2002 and have continued into 2003. The
first involved a possible shift of some traditional pacemaker patients to ICD
14
devices and the second involved the increasing use of resynchronization devices
in both the ICD and pacemaker markets. Our competitors in the CRM market have
U.S. regulatory approval to market CRM devices with resynchronization features.
We currently have both a cardiac resynchronization ICD and pacemaker product in
U.S. clinical studies. If the approvals of these products are delayed or not
received, our CRM sales could be adversely affected if the CRM market continues
to shift towards products with cardiac resynchronization capabilities.
The cardiac surgery market, which includes mechanical heart valves, tissue heart
valves and valve repair products, is also highly competitive. In the past few
years, the market has shifted to tissue valves and repair products from
mechanical heart valves, resulting in an overall market share loss for us.
Competition is anticipated to continue to place pressure on pricing and terms,
including a trend toward vendor-owned (consignment) inventory at the hospitals.
Healthcare reform is expected to result in further hospital consolidations over
time, which could lead to increased demands for price concessions.
The cardiology and vascular access market is a growing market with numerous
competitors. More than 80% of our sales in this market are for vascular closure
devices. The market for vascular closure devices is highly competitive, and
there are several companies, in addition to us, that manufacture and market
these products worldwide.
We operate 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 us 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, we believe that we have adequate product
liability insurance to cover the costs associated with them. The product
liability insurance market has changed dramatically since September 2001. Our
self-insured retentions and insurance premiums have increased and are expected
to increase further in the future. Our insurance program, as a result, is
designed to prevent a catastrophic loss. We further believe that any costs not
covered by product liability insurance, including our self-insured deductible,
will not have a material adverse impact on our consolidated financial position
or liquidity, but may be material to the consolidated results of operations of a
future period.
Group purchasing organizations (GPOs) and independent delivery networks (IDNs)
in the United States continue to consolidate purchasing decisions for some of
our hospital customers. We have contracts in place with many of these
organizations. One large GPO has executed contracts with our CRM market
competitors that exclude us. The enforcement of these contracts may adversely
affect our sales of CRM products to members of this GPO.
FINANCIAL CONDITION
Our liquidity and cash flows remained strong during the first quarter of 2003.
Cash provided by operating activities was $85,335 for the three months ended
March 31, 2003, a $49,333 increase over the same period one year ago reflecting
increased earnings and improved working capital management. Our current assets
to current liabilities ratio (computed as current assets divided by current
liabilities) was 3.4 to 1 at March 31, 2003, as compared with 3.0 to 1 at
December 31, 2002.
15
At March 31, 2003 and December 31, 2002, approximately one-half of our cash and
equivalents were held by our non-U.S. subsidiaries. These funds are available
for use by our U.S. operations; however, they would be subject to additional
U.S. tax upon repatriation to the United States.
During the first quarter of 2003, our $350,000 unsecured revolving credit
facility expired. We elected not to renew the facility due to our existing cash
balances, anticipated future cash flows from operations and the expenses
associated with maintaining such a facility.
On April 1, 2003, we completed our acquisition of Getz Japan. We paid 26.9
billion Japanese yen in cash, or approximately $230,000, to acquire 100% of the
outstanding common stock of Getz Japan. The purchase price was financed by a
portion of our existing cash balances and 24.6 billion yen of borrowings under a
short-term, bank credit agreement.
On April 1, 2003, we also acquired the net assets of Getz Bros. & Co. (Aust.)
Pty. Limited and Medtel Pty. Limited for approximately $6,500 in cash.
The results of operations of the above-mentioned business acquisitions will be
included in our consolidated results of operations beginning in the second
quarter of 2003. We estimate that these acquisitions will be neutral to earnings
per share in 2003 and accretive in 2004 and thereafter.
On April 1, 2003, we borrowed 24.6 billion Japanese yen, or approximately
$210,000, under a short-term, unsecured bank credit agreement to partially
finance the Getz Japan acquisition. These borrowings were repaid in May 2003.
In May 2003, we issued fixed-rate, 7-year, unsecured term notes totaling 20.9
billion yen, or approximately $178,000. We also obtained a short-term, unsecured
bank credit agreement which provides for borrowings of up to 3.8 billion yen, or
approximately $32,000. Proceeds from the issuance of the term notes and from
borrowings under the short-term, bank credit agreement were used to repay the
24.6 billion yen of short-term bank borrowings.
On May 1, 2003, we made a $15,000 minority investment in a development stage
company that is focused on developing technologies to treat patients with atrial
fibrillation. In conjunction with this investment, we also agreed to acquire the
remaining ownership of the business in 2004 for an additional $185,000 in cash,
provided a number of specific clinical and regulatory milestones are achieved.
We believe that our cash balances will be sufficient to fund the 2004 cash
payment if we complete the acquisition.
We have no off-balance sheet financing arrangements other than certain operating
leases previously disclosed in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2002. With the acquisition of Getz Japan on April 1,
2003, we assumed numerous noncancelable operating lease arrangements for various
facilities in Japan. The future minimum lease payments related to these lease
agreements are approximately $3,000 each year for years 2003 through 2007 and an
aggregate of $15,000 for all years thereafter. There have been no other
significant changes in our operating lease obligations since December 31, 2002.
We believe that our existing cash balances and future cash generated from
operations will be sufficient to meet our working capital and capital investment
needs in the near term. Should
16
suitable investment opportunities arise, we believe that our earnings, cash
flows and balance sheet will permit us to obtain additional debt financing or
equity capital, if necessary.
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 our medical devices or denies coverage for such
procedures. Adverse decisions relating to our products by
administrators of such systems in coverage or reimbursement issues.
2. Acquisition of key patents by others that have the effect of excluding
us from market segments or require us 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 our devices caused by
cost-containment pressures or preferences for alternate therapies.
7. Safety, performance or efficacy concerns about our marketed products,
many of which are expected to be implanted for many years, leading to
recalls and/or advisories with the attendant expenses and declining
sales.
8. Changes in laws, regulations or administrative practices affecting
government regulation of our 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.
17
9. Difficulties obtaining, or the inability to obtain, appropriate levels
of product liability insurance.
10. A serious earthquake affecting our 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 those arising from the Telectronics and Ventritex
acquisitions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On April 1, 2003, we completed our acquisition of Getz Japan. In May 2003, we
issued fixed-rate, 7-year, unsecured term notes totaling 20.9 billion yen, or
approximately $178,000, to partially finance the acquisition purchase price. We
also obtained a short-term, unsecured bank credit agreement which provides for
borrowings of up to 3.8 billion yen, or approximately $32,000.
We are exposed to foreign currency exchange rate fluctuations due to
transactions associated with the acquired Getz business that are denominated in
Japanese yen, including borrowings under the short-term, bank credit agreement
and the long-term, unsecured term notes issued in May 2003. We are also exposed
to interest rate risk on the short-term, bank credit agreement which has a
variable interest rate tied to the floating yen LIBOR rate. A hypothetical 10%
change in short-term interest rates as compared to the current interest rate
under the bank credit agreement would not have a material impact on our
consolidated results of operations.
There have been no other material changes from December 31, 2002 in our market
risk. For further information on market risk, refer to Item 7A in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934) refer to the
controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days prior to the filing of this
quarterly report, and they have concluded that such controls and
procedures are effective at ensuring that required information will be
disclosed on a timely basis in the Company's reports filed under the
Exchange Act.
(b) Changes in Internal Controls
----------------------------
There have been no significant changes to the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the most recent evaluation.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. 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 have been settled, some have been dismissed, and others are
on-going. Some of these cases, both in the United States and Canada, are seeking
class action status. 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.
In 2001, the U.S. Judicial Panel on Multi-District 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 under the
supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result,
actions in federal court involving products with Silzone(R) coating have been
and will likely continue to be transferred to Judge Tunheim for coordinated or
consolidated pretrial proceedings.
Certain plaintiffs requested Judge Tunheim to allow some cases to proceed as
class actions. Judge Tunheim issued a ruling on plaintiffs' motions for class
certification on March 27, 2003. In his ruling, Judge Tunheim conditionally
certified one class of plaintiffs (U.S. persons who have a Silzone heart valve
which is still implanted) and conditionally certified a second class of
plaintiffs (U.S. persons who received a Silzone heart valve and who have
sustained physical injuries due to the valve). The Company believes that the
ruling is inconsistent with the applicable laws and precedents, and is pursuing
its appellate remedies.
In the meantime, cases involving Silzone(R) products not seeking class action
status which are consolidated before Judge Tunheim are proceeding in accordance
with the scheduling orders he has rendered. There are other actions involving
products with Silzone(R) coating in various state courts that may or may not be
coordinated with the matters presently before Judge Tunheim. The lawsuits in
Canada are proceeding in accordance with separate schedules issued by the
applicable provincial courts. A hearing concerning the certification of a class
action in Ontario, Canada, is currently scheduled for June 2003.
While it is not possible to predict the outcome of the various cases involving
Silzone(R) products, 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 consolidated 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 the Company did not have a license to certain patents
controlled by Guidant covering ICD products and alleging that the Company was
infringing those patents. St. Jude Medical's contention was that it had obtained
a license from Guidant to the patents in issue when it acquired certain assets
of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude
Medical's position, and in May 2001, a federal district court judge also ruled
that the Guidant patent license with Telectronics had not transferred to St.
Jude Medical.
20
Guidant's suit originally alleged infringement of four patents by St. Jude
Medical. Guidant later dismissed its claim on one patent and a court ruled that
a second patent was invalid. This determination of invalidity was appealed by
Guidant and the Court of Appeals upheld the lower court's invalidity
determination. In a jury trial involving the two remaining patents (the '288 and
'472 patents), the jury found that these patents were valid and that St. Jude
Medical did not infringe the '288 patent. The jury found that the Company did
infringe the '472 patent, though such infringement was not willful. The jury
awarded damages of $140,000 to Guidant. In post-trial rulings, however, the
judge overseeing the jury trial ruled that the '472 patent was invalid and also
was not infringed by St. Jude Medical, thereby eliminating the $140,000 verdict
against the Company. The trial court also made other rulings as part of the
post-trial order, including a ruling that the '288 patent was invalid on several
grounds.
In August 2002, Guidant commenced an appeal of certain of the trial judge's
post-trial decisions pertaining to the '288 patent. Guidant did not appeal the
trial court's finding of invalidity and non-infringement of the '472 patent. The
parties are currently in the briefing phase of this appeal. While it is not
possible to predict the outcome of the appeal process, the Company believes that
it has meritorious defenses against the claims asserted by Guidant and Guidant's
continued pursuit of this case.
OTHER LITIGATION MATTERS: The Company is involved in various other product
liability lawsuits, claims and proceedings that arise in the ordinary course of
business. Subject to self-insured retentions, the Company believes it has
product liability insurance sufficient to cover such claims and suits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification by Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification by Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A Form 8-K was filed on March 21, 2003, to disclose under Item 5 an
Amendment, dated as of December 20, 2002, to the Rights Agreement dated
as of June 16, 1997, between St. Jude Medical, Inc. and American Stock
Transfer and Trust Company, as Rights Agent.
A Form 8-K was also filed on March 31, 2003, to disclose under Item 9
that the U.S. District Court for the District of Minnesota issued a
ruling on plaintiffs' requests to allow claims against the Company
involving Silzone(R) coating to proceed as class actions.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
May 12, 2003 /s/ JOHN C. HEINMILLER
- ------------ ----------------------
DATE JOHN C. HEINMILLER
Vice President - Finance
and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
22
CERTIFICATION
I, Terry L. Shepherd, certify that:
1. I have reviewed this quarterly report on Form 10-Q of St. Jude Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/s/ TERRY L. SHEPHERD
- ---------------------
Terry L. Shepherd
Chairman and Chief Executive Officer
23
CERTIFICATION
I, John C. Heinmiller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of St. Jude Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/s/ JOHN C. HEINMILLER
- ----------------------
John C. Heinmiller
Chief Financial Officer
24