MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXHIBIT 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our business is focused on the development, manufacturing and distribution of
cardiovascular medical devices for the global cardiac rhythm management (CRM),
cardiac surgery (CS) and cardiology and vascular access (C/VA) therapy areas.
Our principal products in each of these therapy areas are as follows:
CRM
o bradycardia pacemaker systems (pacemakers),
o tachycardia implantable cardioverter defibrillator systems (ICDs), and
o electrophysiology (EP) catheters
CS
o mechanical and tissue heart valves, and
o valve repair products
C/VA
o vascular closure devices,
o angiography catheters,
o guidewires, and
o hemostasis introducers
Our products are sold in more than 120 countries around the world. Our largest
geographic markets are the United States, Europe and Japan.
We compete on the basis of providing reliable products with advanced features.
Our industry has undergone significant consolidation in the last decade and is
very competitive. Our strategy requires significant investments in research and
development in order to introduce new products, particularly in the cardiac
rhythm management and the cardiology and vascular access therapy areas. We have
also sought to improve our operating margins through a variety of techniques,
including maintaining our average selling prices while improving the efficiency
of our manufacturing operations. Our products are generally not affected by
economic cycles. However, we expect cost containment pressure on healthcare
systems to continue to place downward pressure on prices for our products,
particularly in international markets such as Germany and Japan. The industry in
which we operate is characterized by frequent patent litigation and product
liability litigation, which are issues that we must manage.
Pacemakers and ICDs accounted for 43% and 21% of our total 2003 net sales,
respectively. In addition, the pacemaker and ICD markets are the largest markets
we participate in, and our strategy is to increase our sales and market share in
those markets. In 2002, our primary CRM competitors began selling pacemaker and
ICD systems that are capable of pacing the heart from both ventricles, providing
cardiac resynchronization therapy (CRT). By pacing the heart from both
ventricles, many physicians believe that pacemakers and ICDs with CRT provide a
therapeutic advantage over traditional devices for certain patients. In
addition, CRT devices have a higher average selling price over traditional
devices. Currently, we do not have a pacemaker or ICD system with CRT approved
for sale in the
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United States, which is the largest geographic market for these products.
However, we are conducting clinical trials and anticipate introducing pacemakers
and ICDs with CRT in the United States in the second quarter of 2004. We
estimate that approximately 35% of the worldwide market for pacemakers and ICDs
in 2003 was made up of sales of CRT devices.
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
Net sales in 2003 increased approximately 22% over 2002 driven primarily by
growth in our ICD and vascular closure devices, incremental revenue as a result
of our acquisition of Getz Bros. Co., Ltd. in Japan (Getz Japan), and the
positive impact of foreign currency translation as the U.S. dollar weakened
against most currencies during 2003 as compared with 2002. Our ICD net sales
grew approximately 37% to $414 million during 2003. Our vascular closure net
sales increased approximately 40% to $218 million in 2003, strengthening our
leadership position in the vascular closure market.
During 2003, we completed our acquisition of Getz Japan and Getz's related
distribution operations in Australia. The addition of these operations further
strengthened our presence in Japan and Australia.
Net earnings and diluted net earnings per share for 2003 increased approximately
23% and 21%, respectively, over 2002 due primarily to incremental profits
resulting from higher sales.
We ended the year with $461 million of cash and equivalents and $352 million of
long-term debt. We have strong short-term credit ratings, with an A2 rating from
Standard & Poor's and a P2 rating from Moody's. Our cash flows from operations
remained strong during 2003, helping to further strengthen our balance sheet and
provide cash to repay a portion of the funds borrowed in 2003 to finance the
Getz Japan acquisition and the repurchase of 9.25 million shares in August 2003.
We expect to use our future cash flows to fund internal development
opportunities, reduce our debt and potentially purchase the remaining ownership
of Epicor Medical, Inc. (Epicor). See ACQUISTIONS & INVESTMENTS for a discussion
of Epicor.
We utilize a 52/53-week fiscal year ending on the Saturday nearest December 31,
but for simplicity of presentation, describe all periods as if the year end is
December 31. Fiscal year 2003 consisted of 53 weeks, adding three additional
selling days as compared with 2002. The additional selling days occurred between
the Christmas and New Year's Day holidays, which typically are lower volume
selling days due to the elective nature of many hospitals' procedures. These
additional selling days did not have a material impact on our net sales or
results of operations for 2003. Fiscal years 2002 and 2001 each consisted of 52
weeks.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires us to
adopt various accounting policies and to make estimates and assumptions that
affect the reported amounts in the financial statements and accompanying notes.
Our significant accounting policies are disclosed in Note 1 to the consolidated
financial statements.
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 charge
accruals; and legal reserves. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances,
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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.
We believe that the following represent our most critical accounting estimates:
ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS: We grant credit to
customers in the normal course of business, and generally do not require
collateral or any other security to support our accounts receivable. We maintain
an allowance for doubtful accounts for potential credit losses, which primarily
consists of reserves for specific customer balances that we believe may not be
collectible. We determine the adequacy of this allowance by regularly reviewing
the accounts receivable agings, customer financial conditions and credit
histories, and current economic conditions. In some developed markets and in
many emerging markets, payments of certain accounts receivable balances are made
by the individual countries' healthcare systems for which payment is dependent,
to some extent, upon the political and economic environment within those
countries. Although we consider our allowance for doubtful accounts to be
adequate, if the financial condition of our customers or the individual
countries' healthcare systems were to deteriorate and impair their ability to
make payments to us, additional allowances may be required in future periods.
The allowance for doubtful accounts was $31.9 million at December 31, 2003 and
$24.1 million at December 31, 2002.
ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT: Diagnostic equipment is
recorded at cost and is depreciated using the straight-line method over its
estimated useful life of five to eight years. Diagnostic equipment primarily
consists of programmers that are used by physicians and healthcare professionals
to program and analyze data from pacemaker and ICD devices. The estimated useful
life of this equipment is determined based on our estimates of its usage by the
physicians and healthcare professionals, factoring in new technology platforms
and rollouts. To the extent that we experience changes in the usage of this
equipment or there are introductions of new technologies to the market, the
estimated useful lives of this equipment may change in a future period.
Diagnostic equipment had a net carrying value of $68.7 million and $81.0 million
at December 31, 2003 and 2002, respectively. If we had used an estimated useful
life on diagnostic equipment that was one year less than our current estimate,
our 2003 depreciation expense would have been approximately $5 million higher.
INCOME TAXES: As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating the actual
current tax expense as well as assessing temporary differences
in the treatment of items for tax and accounting purposes. These timing
differences result in deferred tax assets and liabilities, which are included in
our consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income, and to the
extent that we believe that recovery is not likely, a valuation allowance must
be established. At December 31, 2003, we had approximately $94 million of gross
deferred tax assets, including net operating loss and tax credit carryforwards
that will expire from 2004 to 2019 if not utilized. We believe that our deferred
tax assets, including the net operating loss and tax credit carryforwards, will
be fully realized based upon our estimates of future taxable income. As such, we
have not recorded any valuation allowance for our deferred tax assets. If our
estimates of future taxable income are not met, a valuation allowance for some
of these deferred tax assets would be required.
We have not recorded U.S. deferred income taxes on certain of our non-U.S.
subsidiaries' undistributed earnings, because such amounts are intended to be
reinvested outside the United States indefinitely. However, should we change our
business and tax strategies in the future and decide to repatriate a
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portion of these earnings to one of our U.S. subsidiaries, including cash
maintained by these non-U.S. subsidiaries (see Liquidity and Capital Resources),
additional U.S. tax liabilities would be incurred.
We operate within multiple taxing jurisdictions and are subject to audit in
these jurisdictions. These audits can involve complex issues, including
challenges 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. The U.S. federal tax
authorities have designated us as a "coordinated industry case," more commonly
known as a "large case," which is an IRS designation used for large companies
that means, among other things, that the IRS will audit essentially all of our
federal income tax return filings. The IRS is currently in the process of
examining our U.S. federal tax returns for the calendar years 1998, 1999 and
2000.
We record our income tax provisions based on our knowledge of all relevant facts
and circumstances, including the existing tax laws, our experience with previous
settlement agreements, the status of current IRS examinations and our
understanding of how the tax authorities view certain relevant industry and
commercial matters. Although we have recorded all probable income tax accruals
in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
"ACCOUNTING FOR CONTINGENCIES" and SFAS No. 109. "ACCOUNTING FOR INCOME TAXES",
our accruals represent accounting estimates that are subject to the inherent
uncertainties associated with the tax audit process, and therefore include
certain contingencies. We believe that any potential tax assessments from the
various tax authorities that are not covered by our income tax provision will
not have a material adverse impact on our consolidated financial position or
liquidity. However, they may be material to our consolidated results of
operations of a future period.
SILZONE(R) SPECIAL CHARGE ACCRUALS: In January 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 we would no longer utilize Silzone(R) coating and recorded a
special charge totaling $26.1 million during the first quarter of 2000 to cover
various asset write-downs and anticipated costs associated with these matters.
In the second quarter of 2002, we increased our Silzone(R) reserves by $11
million to cover additional anticipated costs. We have recorded an accrual for
probable legal costs that we will incur to defend the various cases involving
Silzone(R) devices, and we have recorded a receivable from our product liability
insurance carriers for amounts expected to be recovered. We have not accrued for
any amounts associated with probable legal settlements or judgments because we
cannot reasonably estimate such amounts. However, we believe that no significant
claims will ultimately be allowed to proceed as class actions in the United
States, and, therefore, that all settlements and judgments will be covered under
our remaining product liability insurance coverage (approximately $170 million
at December 31, 2003), subject to the insurance companies' performance under the
policies. As such, we believe that any costs (the material components of which
are settlements, judgments and legal fees) not covered by our product liability
insurance policies or existing reserves will not have a material adverse effect
on our statement of financial position or liquidity, although such costs may be
material to our consolidated results of operations of a future period.
Our remaining product liability insurance for Silzone(R) claims consists of a
number of layers, each of which is covered by one or more insurance companies.
Our next layer of insurance, which is a $30 million layer that would be reached
after the present $35 million layer is exhausted, is covered by Lumberman's
Mutual Casualty Insurance, a unit of the Kemper Insurance Companies
(collectively referred to as Kemper). Kemper's credit rating by A.M. Best has
been downgraded to a "D" (poor). Kemper is currently in "run off," which means
that it is not issuing new policies and is, therefore, not
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generating any new revenue that could be used to cover claims made under
previously-issued policies. In the event Silzone(R) claims were to reach the
Kemper layer and Kemper was unable to pay part or all of such claims, we believe
the other insurance carriers in our program will take the position that we will
be directly liable for any claims and costs that Kemper is unable to pay, and
that insurance carriers at policy layers following Kemper's layer will not
provide coverage for Kemper's layer. Kemper also provides part of the coverage
for Silzone(R) claims in our final layer of insurance ($20 million of the final
$50 million layer).
It is possible that Silzone(R) costs and expenses will reach the Kemper layers
of insurance coverage, and it is possible that Kemper will be unable to meet its
obligations to us. If this were to happen, we could incur a loss of up to $50
million. We have not accrued for any such losses.
LEGAL RESERVES: We operate in an industry that is susceptible to significant
product liability and intellectual property claims. Product liability claims may
be brought by individuals seeking relief for themselves or, increasingly, by
groups seeking to represent a class. In addition, claims may be asserted against
us in the future relative to events that are not known to us at the present
time. Our product liability insurance coverage during most of 2003 was $200
million, with a $50 million deductible per claim. In light of our significant
self-insured retention, our product liability insurance coverage is designed to
help protect against a catastrophic claim. We record a liability in our
consolidated financial statements for any claims where we have assessed that a
loss is probable and an amount can be reasonably estimated.
A substantial amount of intellectual property litigation occurs in our industry.
In November 1996, one of our competitors, Guidant Corporation (Guidant),
initiated a lawsuit against us alleging that we did not have a license to
certain patents which they controlled and as such, we were infringing on those
patents. A jury found against us in July 2000; however, the judge overseeing the
trial issued post-trial rulings in February 2001 which essentially set aside the
jury's $140 million damage assessment. Guidant is appealing certain aspects of
the judge's ruling. While it is not possible to predict the outcome of the
appeal process, we believe that the decision of the trial court in its
post-trial rulings was correct. In February 2004, Guidant initiated another
lawsuit against us alleging that a number of our CRT products infringe two of
its patents. We have not submitted a substantive response to Guidant's February
2004 claims at this time. To date, we have not recorded any liability for any
losses related to these litigation matters. Potential losses arising from the
ultimate resolution of these litigation matters are possible, but not estimable
at this time. The range of such a loss could be material to our consolidated
financial position, liquidity and results of operations.
ACQUISITIONS & INVESTMENTS
Acquisitions can have an impact on the comparison of our operating results and
financial condition from year to year.
On April 1, 2003, we completed the acquisition of Getz Japan, a distributor of
medical technology products in Japan and our largest volume distributor in
Japan. We paid 26.9 billion Japanese Yen in cash to acquire 100% of the
outstanding common stock of Getz Japan. Net consideration paid was $219.2
million, which includes closing costs less $12.0 million of cash acquired.
On April 1, 2003, we also acquired the net assets of Getz Bros. & Co. (Aust.)
Pty. Limited and Medtel Pty. Limited (collectively referred to as Getz
Australia) related to the distribution of our products in Australia for $6.2
million in cash, including closing costs.
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The results of operations of the Getz Japan and Getz Australia (collectively
referred to as Getz) acquisitions have been included in our consolidated results
of operations since April 1, 2003. Pro forma results of operations have not been
presented for the Getz acquisitions since the effects of these acquisitions were
not material to our consolidated financial statements either individually or in
aggregate. Net sales for 2003 included approximately $106 million related to the
Getz Japan and Getz Australia acquisitions. The additional revenue from Getz was
generated from the sale of non-St. Jude Medical manufactured products sold by
Getz and the incremental revenue on the sale of St. Jude Medical manufactured
products. Prior to April 1, 2003, we recognized revenue from the sale of our
products to Getz as our distributor.
In May 2003, we made a $15 million minority investment in Epicor, a development
stage company focused on developing products which use high intensity focused
ultrasound (HIFU) to ablate cardiac tissue. In conjunction with this investment,
we also agreed to acquire the remaining ownership of Epicor in 2004 for an
additional $185 million in cash if Epicor achieves specific clinical and
regulatory milestones by June 30, 2004.
SEGMENT REVIEW
We have two reportable segments, the Cardiac Rhythm Management/Cardiac Surgery
(CRM/CS) segment and the Daig segment, which focus on the development and
manufacture of our products. The primary products produced by each segment are:
CRM/CS - pacemaker and ICD systems, mechanical and tissue heart valves and other
cardiac surgery products; Daig - electrophysiology catheters, vascular closure
devices and other cardiology and vascular access products.
Our reportable segments include end customer revenues from the sale of products
they each develop and manufacture. The costs included in each of the reportable
segments' operating results include the direct costs of the products sold to end
customers and operating expenses managed by each of the segments. Certain costs
of goods sold and operating expenses managed by our selling and corporate
functions are not included in segment operating profit. Because of this, segment
operating profit is not representative of the operating profit of our products
in these segments.
The following table presents certain financial information about our reportable
segments (in thousands):
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CRM/CS DAIG OTHER TOTAL
==================================================================================================================================
FISCAL YEAR ENDED DECEMBER 31, 2003
Net sales $ 1,499,425 $ 366,433 $ 66,656 $ 1,932,514
Operating profit (a) 873,904 202,007 (619,966) 455,945
Total assets 639,724 147,270 1,769,100 2,556,094
- ----------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2002
Net sales $ 1,305,750 $ 284,179 $ - $ 1,589,929
Operating profit (a) 713,341 149,592 (492,978) 369,955
Total assets 723,414 134,610 1,093,355 1,951,379
- ----------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2001 (b)
Net sales $ 1,135,833 $ 211,523 $ - $ 1,347,356
Operating profit (a) 583,030 105,947 (453,161) 235,816
==================================================================================================================================
(a) OTHER OPERATING PROFIT INCLUDES CERTAIN COSTS OF GOODS SOLD AND OPERATING
EXPENSES MANAGED BY THE COMPANY'S SELLING AND CORPORATE FUNCTIONS. IN
FISCAL YEAR 2001, OTHER ALSO INCLUDES SPECIAL CHARGES AND PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.
(b) DURING 2001, THE COMPANY COMPLETED A REORGANIZATION OF ITS GLOBAL SALES
ACTIVITIES, WHICH RESULTED IN CHANGES TO ITS INTERNAL MANAGEMENT AND
FINANCIAL REPORTING STRUCTURE. DUE TO THIS RESTRUCTURING, INFORMATION
RELATING TO 2001 TOTAL ASSETS HAS NOT BEEN COMPILED AS IT IS
IMPRACTICABLE TO DO SO.
We do not generally manage our business or allocate resources based on the
measure of segment operating profit or loss because these measures are not
indicative of the operating results of the products sold by these segments.
Rather, we utilize the segment results to measure performance against targets
for each segment's controllable activities. Additionally, we review global and
product line sales information to assess performance of the business.
The following discussion of the changes in our net sales is provided by class of
similar products, which is the primary focus of our sales activities. That
analysis sufficiently describes the changes in our sales results for our two
reportable segments.
NET SALES
Net sales by geographic markets were as follows (in thousands):
2003 2002 2001
==============================================================================================
United States $1,129,055 $1,042,766 $ 880,086
International
Europe 465,369 347,936 294,852
Japan 207,431 95,813 83,361
Other 130,659 103,414 89,057
- ----------------------------------------------------------------------------------------------
803,459 547,163 467,270
- ----------------------------------------------------------------------------------------------
$1,932,514 $1,589,929 $1,347,356
- ----------------------------------------------------------------------------------------------
Foreign currency translation relating to our international operations can have a
significant impact on our operating results from year to year. Foreign currency
translation had a favorable impact on 2003 net sales as compared with 2002 by
approximately $71 million due primarily to the strengthening of the
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Euro against the U.S. dollar. Foreign currency translation had a net favorable
impact on 2002 net sales as compared with 2001 by approximately $9 million due
primarily to the strengthening of the Euro against the U.S. dollar, offset in
part by the weakening of the Brazilian Real against the U.S. dollar. These
amounts are not indicative of the net earnings impact of foreign currency
translation for 2003 and 2002 due to partially offsetting unfavorable foreign
currency translation impacts on cost of sales and operating expenses.
Net sales by class of similar products were as follows (in thousands):
2003 2002 2001
========================================================================================================================
CARDIAC RHYTHM MANAGEMENT
Pacemaker systems $ 826,121 $ 751,575 $ 689,223
ICD systems 414,255 303,218 200,511
Electrophysiology catheters 124,836 92,696 76,234
- ------------------------------------------------------------------------------------------------------------------------
1,365,212 1,147,489 965,968
CARDIAC SURGERY
Heart valves 250,840 232,986 240,829
Other cardiac surgery products 20,093 17,971 7,216
- ------------------------------------------------------------------------------------------------------------------------
270,933 250,957 248,045
CARDIOLOGY AND VASCULAR ACCESS
Vascular closure devices 218,215 156,474 101,591
Other cardiology and vascular access products 78,154 35,009 31,752
- ------------------------------------------------------------------------------------------------------------------------
296,369 191,483 133,343
- ------------------------------------------------------------------------------------------------------------------------
$1,932,514 $1,589,929 $1,347,356
========================================================================================================================
2003 NET SALES COMPARED TO 2002
In cardiac rhythm management, net sales of pacemaker systems increased 9.9% in
2003 due to an increase in pacemaker unit sales of approximately 5% from 2002,
approximately $33 million of favorable impact from foreign currency translation
and $29 million of favorable impact from the Getz acquisitions. Pacemaker net
sales in 2003 benefited from the worldwide launches of our Identity(R) ADx,
Integrity(R) ADx and Verity(TM) ADx pacemaker product families. These increases
were offset in part by average selling price declines of approximately 3%. Net
sales of ICD systems increased 36.6% in 2003 due to growth in ICD unit sales of
approximately 39%, offset in part by average selling price declines of
approximately 6%. ICD net sales in 2003 benefited from the worldwide launch in
mid-2003 of our Epic(TM)+ DR ICD containing AF Suppression(TM) technology. Net
sales of ICD systems in 2003 also included approximately $12 million of
favorable impact from foreign currency translation. Electrophysiology catheter
net sales increased 34.7% in 2003 due primarily to a 9% increase in unit sales,
$18 million of favorable impact from the Getz acquisitions and approximately $4
million of favorable impact from foreign currency translation.
In cardiac surgery, heart valve net sales increased 7.7% in 2003 due primarily
to approximately $12 million of favorable impact from foreign currency
translation and $10 million of favorable impact from the Getz acquisitions.
These increases were partially offset by a global average selling price decline
of approximately 4% due to a larger portion of our sales mix coming from
lower-priced international markets. Net sales of other cardiac surgery products
increased 11.8% in 2003 due primarily to $13 million of favorable impact from
the Getz acquisitions, offset in part by a 60% decrease in aortic connector unit
sales.
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In cardiology and vascular access, net sales of vascular closure devices
increased 39.5% in 2003 due to an increase of 37% in Angio-Seal(TM) unit sales
and approximately $8 million of favorable impact from foreign currency
translation. These increases were partially offset by a global average selling
price decline of approximately 3% due to a larger portion of our sales mix
coming from lower-priced international markets. Net sales in 2003 benefited from
the global launch of our fifth-generation Angio-Seal(TM) vascular closure
product, the STS Plus, in the third quarter. Net sales of other cardiology and
vascular access products increased 123.2% in 2003 due primarily to $36 million
of sales of non-St. Jude Medical manufactured products distributed in Japan by
Getz, a 19% increase in unit sales and approximately $2 million of favorable
impact from foreign currency translation.
2002 NET SALES COMPARED TO 2001
In cardiac rhythm management, net sales of pacemaker systems increased 9.0% in
2002 due primarily to an increase in unit sales of 9%, attributable to the
ongoing success of our Identity(R) family of pacemakers and other devices that
incorporate BEAT-BY-BEAT AutoCapture(TM) and AF Suppression(TM) technology.
Foreign currency translation had a favorable impact on 2002 net sales of
pacemakers of approximately $3.5 million. Net sales of ICD systems increased
51.2% in 2002 due primarily to increased ICD unit sales of 48% and approximately
$2 million of favorable impact from foreign currency translation. Our ICD net
sales benefited from the ongoing success of the Atlas(R) ICD, the new Epic(TM)
ICD that was launched worldwide in the fourth quarter of 2002 and the Riata(R)
family of ICD leads. EP catheter net sales increased 21.6% in 2002 due primarily
to increased unit sales.
In cardiac surgery, heart valve net sales decreased 3.3% in 2002 due primarily
to an ongoing clinical preference shift from mechanical valves to tissue valves
in the U.S. market, where we hold significant mechanical valve market share and
a smaller share of the tissue valve market. Heart valve net sales were favorably
impacted in 2002 by approximately $1.5 million due to foreign currency
translation. Net sales of other cardiac surgery products increased 149% in 2002
due primarily to an increase in aortic connector sales as a result of the
ongoing rollout of this product in the U.S. market.
In cardiology and vascular access, net sales of vascular sealing devices
increased 54.0% in 2002 due primarily to increased Angio-Seal(TM) unit sales of
approximately 50%. Net sales in 2002 benefited from the worldwide launch in
early 2002 of our newest vascular closure device platform, the Angio-Seal(TM)
STS. Net sales of other cardiology and vascular access products increased 10.3%
in 2002 due primarily to an increase in unit sales.
GROSS PROFIT
Gross profits were as follows (in thousands):
2003 2002 2001
- ----------------------------------------------------------------------------------------
Gross profit $1,329,423 $1,083,983 $888,197
Percentage of net sales 68.8% 68.2% 65.9%
- ----------------------------------------------------------------------------------------
Our 2003 gross profit percentage increased 0.6 percentage points over 2002
despite a 1.6 percentage point reduction as a result of our Getz Japan
acquisition. The increase in our gross profit percentage during 2003 is
primarily a result of reduced material costs and increased labor efficiencies
due to continued improvements in our CRM manufacturing processes, and to lower
overhead costs per unit as a result of higher CRM production volumes. In
addition, our ongoing cost management efforts helped to improve our gross profit
percentage.
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On April 1, 2003, we valued the Getz Japan-owned inventory of pacemaker systems
and heart valves at fair value in accordance with acquisition accounting rules.
This fair value was established as the price at which we had sold the inventory
to Getz. As these inventory items were sold subsequent to April 1, 2003, our
gross profit percentage was reduced since the gross profit recognized by Getz
Japan was less than our historical gross profit related to the sale of these
items to Getz Japan as our distributor. Once the original Getz Japan-owned
inventory is sold, our gross profit percentage will improve. In 2004, we
anticipate that our gross profit percentage will increase to a range of 70.5% to
71.5% due primarily to completing the sale of the remaining original Getz-owned
inventory and to additional anticipated cost savings in our CRM operations.
Our 2002 gross profit percentage increased 2.3 percentage points over 2001 due
primarily to the $21.7 million of inventory write-downs and equipment write-offs
in 2001 which did not recur in 2002 (see further details under SPECIAL CHARGES).
The remaining 0.7 percentage point improvement in gross profit percentage is due
primarily to reduced material costs and increased labor efficiencies as a result
of improvements in our CRM manufacturing processes, lower overhead costs per
unit as a result of higher CRM production volumes and to ongoing cost management
efforts.
OPERATING EXPENSES
Certain operating expenses were as follows (in thousands):
2003 2002 2001
=============================================================================================
Selling, general and administrative $632,395 $513,691 $467,113
Percentage of net sales 32.7% 32.3% 34.7%
Research and development $241,083 $200,337 $164,101
Percentage of net sales 12.5% 12.6% 12.2%
=============================================================================================
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage
of net sales increased 0.4 percentage points in 2003. This increase is due
primarily to the addition of the Getz direct sales organization beginning April
1, 2003, which included approximately 400 sales, sales support and marketing
personnel. In addition, we incurred increased selling and marketing expenses in
2003 in anticipation of our entry into the CRT segments of the U.S. pacemaker
and ICD markets in 2004. These headcount increases in our worldwide selling
organizations were offset, in part, by the effects of spreading certain
relatively fixed elements of our selling and administrative costs over a revenue
base that grew 22% in 2003. We anticipate that SG&A expense as a percentage of
net sales will increase to a range of 33.5% to 34.0% in 2004 as a result of
increased spending in our sales and marketing areas in support of our
anticipated 2004 launch of our CRT products in the United States and the Getz
results in our income statement for the full year in 2004 versus nine months in
2003.
SG&A expense as a percentage of net sales decreased by 2.4 percentage points in
2002. Approximately $28 million, or 1.8 percentage points of the decrease in
SG&A expense as a percentage of net sales, resulted from the elimination of
goodwill amortization expense in 2002 as a result of our adoption of SFAS No.
142, "GOODWILL AND OTHER INTANGIBLE ASSETS," effective January 1, 2002. The
remaining SG&A improvement as a percentage of net sales represented the effects
of spreading certain relatively fixed elements of our selling and administrative
costs over a revenue base that grew 18% in 2002. During the second quarter of
2002, we received a cash payment of $18.5 million relating to the settlement of
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certain patent litigation, which was recorded as a reduction of SG&A expense.
Also during the second quarter of 2002, we recorded in SG&A an $11 million
charge to increase the reserve for expenses related to the Silzone(R) recall
(see SPECIAL CHARGES) and a $7.5 million discretionary contribution to our
charitable foundation, the St. Jude Medical Foundation.
During the fourth quarter of 2001, we reversed through SG&A expense a $15
million accrued liability relating to royalties on a license agreement with
Guidant that we believed we had acquired as part of our purchase of assets of
the Telectronics cardiac stimulation device business. This accrual reversal was
necessary as a result of various legal conclusions in the Guidant litigation,
including the judge's rulings in February 2002 (see Note 5 to our Consolidated
Financial Statements), when it was determined that we would never have to pay
any royalties under the license. In addition, during this same quarter we
expensed approximately $15 million of legal fees incurred in relation to the
Guidant litigation that were subject to recoverability under an indemnification
agreement between us and the seller of the Telectronics cardiac stimulation
device business. This write-off occurred as a result of the same legal
conclusions referred to above, when it was determined that our realization of
the indemnity receivable was impaired.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2003 and 2002
due primarily to our increased spending on the development of new products and
related clinical trials, including our CRT devices and other products to treat
emerging indications including atrial fibrillation.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In September 1999, we
recorded purchased in-process research and development charges of $67.5 million
in connection with our acquisition of Vascular Science, Inc. (VSI). The
purchased in-process research and development charges were computed by an
independent third-party appraisal company and were expensed at the close of the
acquisition, except as noted below, since technological feasibility had not been
established and since there were no alternative future uses for the technology.
To date, we have capitalized $.6 million of intangible assets related to the VSI
acquisition.
The total appraised value of the VSI purchased in-process research and
development was $95.5 million, of which $67.5 million was recorded at the close
of the acquisition. We paid additional contingent consideration of $10 million
in 2001 and $5 million in 2000 as certain regulatory approvals for the proximal
and distal connector technologies were obtained. These additional payments were
also expensed as purchased in-process research and development at the time of
payment. The remaining balance of the purchased in-process research and
development valuation ($13 million) will be recorded in our 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 million will be capitalized as
goodwill.
Since 1999, we have continued to develop certain of the in-process technologies
acquired in the VSI acquisition. Development of 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, we decided to not release
the product to the market until we were able to make additional enhancements.
The 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.
11
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 million, all of which were scheduled to be incurred in 1999 and 2000. Through
December 2003, we have incurred approximately $10 million to complete the
proximal connector and the distal connector. The original estimated costs to
complete the other in-process technologies into commercially viable products
were approximately $6 million, of which only an immaterial amount has been
incurred to date.
During 2003, our proximal and distal connector products did not continue to
develop as they did during 2001 and 2002 nor as we had originally anticipated in
September 1999. Product sales declined 54% to $8.2 million during 2003 after
increasing 149% to $18.0 million in 2002. We believe that additional investments
in research and development and clinical studies to support these products will
be required. There can be no assurance that the VSI technologies will achieve
the technological or commercial success which we originally anticipated in
September 1999.
The VSI purchase agreement requires us to make additional payments to the former
VSI shareholders upon the achievement of certain regulatory milestones and
minimum sales levels. To date, we have paid $15 million related to the
achievement of three regulatory milestones. Achievement of the final regulatory
milestone, U.S. regulatory approval of the distal connector, requires an
additional $5 million payment. This contractual commitment continues
indefinitely.
The contingent consideration tied to sales requires us to make additional
payments totaling 5% of sales once cumulative sales exceed $50 million for the
proximal and distal connectors collectively. There is no maximum amount of
contingent consideration that could be paid related to sales. This contractual
commitment ceases in 2009 if the minimum sales threshold is not attained prior
to such date. If the minimum sales threshold is met prior to 2009, the
commitment will extend for 10 years from the date the minimum sales threshold is
met. Cumulative proximal and distal connector sales totaled $33 million through
December 31, 2003.
There can be no assurance that we will be able to complete the development of
these technologies into commercially viable products. Additionally, we are not
able to reasonably predict the level of proximal or distal connector sales over
a period of time which could extend beyond the next 10 years. As a result of
these factors, we are not able to predict the amount of additional contingent
consideration, if any, that may become due. However, we believe that any amounts
which may ultimately become due in the next 5 years will not be material to our
results of operations, financial position or liquidity.
SPECIAL CHARGES: During the first half of 2001, we undertook a review of the
organizational structure of our sales operations and our heart valve operations.
At that time, the structure our sales organization included four separate sales
groups. Additionally, the cardiac surgery markets were experiencing a shift in
clinical preference away from mechanical heart valves in favor of tissue heart
valves and repair product for certain patients. These changes had the potential
to impact the future performance of our heart valve operations. As a result of
these reviews, in July 2001 we approved two restructuring plans. The first plan
included a restructuring of our sales organizations into two geographically
oriented groups (one group focused on the United States and one group focused on
locations outside the United States) and changes within each of these new
organizations to harmonize their operations within each of their geographies.
12
The second plan included the elimination of excess capacity in our heart valve
operations workforce, facilities and equipment and the discontinuance of certain
heart valve product lines.
As a result of these restructuring plans, we recorded pre-tax charges totaling
$20.7 million in the third quarter of 2001 consisting of inventory write-downs
($9.5 million), capital equipment write-offs ($3.4 million), employee
termination costs ($5.3 million) and lease termination and other exit costs
($2.5 million).
Inventory write-downs represented the estimated net carrying value of various
inventory items that would be scrapped in connection with the decision to
terminate two heart valve product lines. Capital equipment write-offs were a
result of the elimination of certain excess capacity in our heart valve
operations. Employee termination costs related to the severance costs for
approximately 90 individuals whose positions were eliminated. Lease termination
and other exit costs included office closings for international locations,
contractual obligations under certain programs that were cancelled and lease
termination costs.
A summary of the employee termination costs and lease termination and other exit
costs activity is as follows (in thousands):
LEASE
EMPLOYEE TERMINATION
TERMINATION AND OTHER
COSTS EXIT COSTS TOTAL
===========================================================================================================
Initial expense and accrual in 2001 $ 5,293 $ 2,495 $ 7,788
Cash payments (2,468) (352) (2,820)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 2,825 2,143 4,968
Cash payments (1,676) (1,970) (3,646)
Changes in estimates (639) (53) (692)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 510 120 630
Cash payments (510) (120) (630)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ - $ - $ -
===========================================================================================================
In addition to the above restructuring activities, we identified a trend early
in the third quarter of 2001 related to the usage of certain diagnostic
equipment, also referred to as programmers. We noted that customer acceptance of
our new programmer, which received FDA regulatory approval in late December 2000
and was subsequently launched during the first and second quarters of 2001,
significantly exceeded our expectations, necessitating a special analysis of the
recoverability of the older programmers that were not yet fully depreciated.
After a review of the situation, we approved a plan to abandon certain older
programmer models during the third quarter of 2001. As a result of this plan, we
wrote off the remaining net book value of the abandoned programmers ($12.2
million) to cost of sales.
The charges relating to employee termination costs, capital equipment write-offs
and other costs ($11.2 million) were recorded in operating expenses as special
charges. The inventory and diagnostic equipment write-offs ($21.7 million) were
included in cost of sales as 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
13
concluded that we would no longer utilize Silzone(R) coating. As a result of the
voluntary recall and product discontinuance, we recorded a special charge
totaling $26.1 million during the first quarter of 2000. The $26.1 million
special charge consisted of asset write-downs ($9.5 million), legal and patient
monitoring costs ($14.4 million) and customer returns and related costs ($2.2
million).
The $9.5 million of asset write-downs related to inventory write-offs associated
with the physical scrapping of inventory with Silzone(R) coating ($8.6 million),
and to the write-off of a prepaid license asset and related costs associated
with the Silzone(R) coating technology ($0.9 million). The $14.4 million of
legal and patient monitoring costs related to our product liability insurance
deductible ($3.5 million) and patient monitoring costs ($10.9 million) related
to contractual and future monitoring activities directly related to the product
recall and discontinuance. The $2.2 million of customer returns and related
costs represented costs associated with the return of customer-owned Silzone(R)
inventory.
In the second quarter of 2002, we determined that the Silzone(R) reserves should
be increased by $11 million as a result of difficulties in obtaining certain
reimbursements from our insurance carriers under our product liability insurance
policies ($4.6 million), an increase in our estimate of the costs associated
with future patient monitoring costs as a result of extending the time period in
which we planned to perform patient monitoring activities ($5.8 million) and an
increase in other related costs ($0.6 million). This additional accrual was
included in selling, general and administrative expense during the second
quarter ended June 30, 2002.
Our product liability insurance coverage for Silzone(R) claims consists of a
number of policies with different carriers. During 2002, we observed a trend
where various insurance companies were not reimbursing us or outside legal
counsel for a variety of costs incurred, which we believed should be paid under
the product liability insurance policies. These insurance companies were either
refusing to pay the claims or had delayed providing an explanation for
non-payment for an extended period of time. Although we believe we have legal
recourse from these insurance carriers for the costs they are refusing to pay,
the additional costs we would need to incur to resolve these disputes may exceed
the amount we would recover. As a result of these developments, we increased the
Silzone(R) reserves by $4.6 million in the second quarter of 2002, which
represents the existing disputed costs already incurred at that time plus the
anticipated future costs where we expect similar resistance from the insurance
companies on reimbursement.
During the fourth quarter of 2003, we reclassified $15.7 million of existing
accruals to the Silzone(R) special charge accrual from other current assets.
This amount related to probable future legal costs associated with the
Silzone(R) litigation. Previously, these accruals were offset against a
receivable from our insurance carriers.
A summary of the legal and monitoring costs and customer returns and related
costs activity is as follows (in thousands):
14
LEGAL AND CUSTOMER
MONITORING RETURNS AND
COSTS RELATED COSTS TOTAL
===========================================================================================================
Initial expense and accrual in 2000 $ 14,397 $ 2,239 $ 16,636
Cash payments (5,955) (2,239) (8,194)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 8,442 - 8,442
Cash payments (3,042) - (3,042)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 5,400 - 5,400
Additional expense 10,433 567 11,000
Cash payments (2,442) (59) (2,501)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 13,391 508 13,899
Cash payments (1,206) (22) (1,228)
Reclassification of legal accruals 15,721 - 15,721
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 27,906 $ 486 $ 28,392
- -----------------------------------------------------------------------------------------------------------
In addition to the amounts available under the above Silzone(R) reserves, we
have approximately $170 million remaining in product liability insurance
currently available for the Silzone(R)-related matters. See discussion of Kemper
under CRITICAL ACCOUNTING POLICIES AND ESTIMATES - SILZONE(R) SPECIAL CHARGE
ACCRUALS.
OTHER INCOME (EXPENSE)
Other income (expense) consists of the following (in thousands):
2003 2002 2001
==========================================================================================
Interest income $ 7,031 $ 5,481 $ 3,261
Interest expense (3,746) (1,754) (12,567)
Other (593) (324) 1,468
- ------------------------------------------------------------------------------------------
Other income (expense) $ 2,692 $ 3,403 $ (7,838)
- ------------------------------------------------------------------------------------------
The decrease in other income (expense) during 2003 as compared with 2002 was due
primarily to higher levels of interest expense as a result of borrowings for our
Getz Japan acquisition in 2003 and our August 2003 share repurchase, offset in
part by higher levels of interest income as a result of higher average invested
cash balances.
The change in other income (expense) during 2002 as compared with 2001 was due
primarily to reduced interest expense as a result of lower debt levels, lower
interest rates on our borrowings in 2002 and higher levels of interest income as
a result of the increase in cash and equivalents in 2002.
INCOME TAXES
Our reported effective income tax rates were 26.0% in 2003 and 2002, and 24.3%
in 2001. Excluding the purchased in-process research and development and special
charges in 2001, our effective income tax rate was 25.0%. The purchased
in-process research and development charges were not deductible for income tax
purposes, and the special charges were recorded in taxing jurisdictions where
income tax rates varied from our blended 25.0% effective tax rate. Our higher
effective income tax rate in 2003 and 2002 as compared to 2001 was due to a
larger percentage of our taxable income being generated in higher tax rate
jurisdictions.
15
NET EARNINGS
Net earnings were $339.4 million in 2003, a 22.8% increase over 2002, and
diluted net earnings per share was $1.83 in 2003, a 21.2% increase over 2002.
Net earnings were $276.3 million in 2002, a 36.0% increase over 2001, and
diluted net earnings per share was $1.51 in 2002, a 32.5% increase over 2001.
The 2001 net earnings included $42.8 million of pre-tax special charges and
purchased in-process research and development charges, or $0.17 per diluted
share.
In August 2003, we repurchased 9.25 million shares, which we funded through
existing cash balances and borrowings under a short-term credit facility and
commercial paper program. Our share repurchase decreased our weighted average
shares outstanding during 2003 by 3.6 million shares. This impact, offset by the
foregone interest income and additional interest expense we incurred, resulted
in an immaterial increase to our net earnings per share for 2003.
STOCK SPLIT
On May 16, 2002, our Board of Directors declared a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record on June 10, 2002.
Net earnings per share, shares outstanding and weighted average shares
outstanding have been restated to reflect this stock split.
GOVERNMENT REGULATION, COMPETITION AND OTHER CONSIDERATIONS
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 pacemaker and ICD markets are highly competitive. There are currently three
principal suppliers to these markets, including us, and our two principal
competitors each have substantially more assets and sales than us. Rapid
technological change in these markets is expected to continue, requiring us to
invest heavily in R&D and to effectively market our products. Two trends began
to emerge in these markets during 2002. The first involved a shift of some
traditional pacemaker patients to ICD devices in the United States, and the
second involved the increasing use of resynchronization devices in both the U.S.
ICD and pacemaker markets. Our competitors in CRM have U.S. regulatory approval
to market ICD and pacemaker devices with resynchronization features. We
currently have both a cardiac resynchronization ICD and pacemaker product in
U.S. clinical studies. We currently anticipate U.S. approval of these products
during the second quarter of 2004. If the approvals of these products are
delayed or not received, our pacemaker and ICD sales could be adversely affected
if the markets continue to shift towards products with cardiac resynchronization
capabilities. We have experienced a modest decline in average selling prices for
ICDs in the U.S. market during 2003, which will likely continue until we obtain
U.S. approval of our cardiac resynchronization ICD.
The cardiac surgery markets, which include mechanical heart valves, tissue heart
valves and valve repair products, are also highly competitive. Since 1999,
cardiac surgery therapies have 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
16
toward vendor-owned (consignment) inventory at the hospitals. Also, healthcare
reform is expected to result in further hospital consolidations over time with
related pressure on pricing and terms.
The cardiology and vascular access therapy area is also growing and has numerous
competitors. Over 70% of our sales in this area are comprised of vascular
closure devices. The market for vascular closure devices is highly competitive,
and there are several companies, in addition to St. Jude Medical, that
manufacture and market these products worldwide. Additionally, we anticipate
other large companies will enter this market in the coming years, which will
likely increase competition.
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. In some circumstances, our inability to obtain a contract with a
GPO or IDN could adversely affect our efforts to sell our products to that
organization's hospitals.
MARKET RISK
We are exposed to foreign currency exchange rate fluctuations due to
transactions denominated primarily in Euros, Japanese Yen, Canadian Dollars,
Brazilian Reals, British Pounds, and Swedish Kronor. Although we elected not to
enter into any hedging contracts during 2003, 2002 or 2001, historically we
have, from time to time, hedged a portion of our 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. We do not enter into contracts
for trading or speculative purposes. We continue to evaluate our foreign
currency exchange rate risk and the different mechanisms for use in managing
such risk. We had no forward exchange or option contracts outstanding at
December 31, 2003 or 2002. A hypothetical 10% change in the value of the U.S.
dollar in relation to our most significant foreign currency exposures would have
had an impact of approximately $55 million on our 2003 net sales. This amount is
not indicative of the hypothetical net earnings impact due to partially
offsetting impacts on cost of sales and operating expenses.
With our acquisition of Getz Japan during 2003, we significantly increased our
exposure to foreign currency exchange rate fluctuations due to transactions
denominated in Japanese Yen. We elected to naturally hedge a portion of our
Yen-based net asset exposure by issuing 1.02%Yen-based 7-year notes, the
proceeds of which were used to repay the short-term bank debt that we used to
fund a portion of the Getz Japan purchase price. Excess cash flows from our Getz
Japan operations will be used to fund principal and interest payments on the
Yen-based borrowings. We have not entered into any Yen-based hedging contracts
to mitigate any remaining foreign currency exchange rate risk.
We are exposed to interest rate risk on our short-term, Yen-based bank credit
agreement which has a variable interest rate tied to the floating Yen London
InterBank Offered Rate (LIBOR). In the United States, we issue short-term,
unsecured commercial paper that bears interest at varying market rates. We also
have two committed credit facilities that have variable interest rates tied to
the LIBOR. Our variable interest rate borrowings had a notional value of $169.5
million at December 31, 2003. A hypothetical 10% change in interest rates
assuming the current level of borrowings would have had an impact of
approximately $0.2 million on our 2003 interest expense, which is not material
to our consolidated results of operations.
We are exposed to fair value risk on our 1.02% Yen-based fixed-rate notes. A
hypothetical 10% change in interest rates would have an impact of approximately
$1.3 million on the fair value of these notes, which is not material to our
financial position or consolidated results of operations.
17
We are also exposed to equity market risk on our marketable equity security
investments. We periodically invest in marketable equity securities of emerging
technology companies. Our investments in these companies had a fair value of
$23.7 million and $13.7 million at December 31, 2003 and 2002, which are subject
to the underlying price risk of the public equity markets.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" (FIN 46).
FIN 46 requires the consolidation of variable interest entities in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity. FIN 46 is
effective for the first quarter of 2004. We do not expect our adoption of FIN 46
to have an impact on our consolidated results of operations, financial position
or cash flows.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" (Statement
150). Statement 150 establishes standards for issuer classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. In accordance with this standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. Statement 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. Our adoption of
Statement 150 did not have an impact on our consolidated results of operations,
financial position or cash flows.
Emerging Issues Task Force (EITF) Issue No. 00-21, "ACCOUNTING FOR REVENUE
ARRANGEMENTS WITH MULTIPLE DELIVERABLES," addresses certain aspects of the
accounting by a vendor for arrangements under which multiple revenue-generating
activities are performed. EITF Issue No. 00-21 establishes three principles:
revenue arrangements with multiple deliverables should be divided into separate
units of accounting; arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values; and revenue
recognition criteria should be considered separately for separate units of
accounting. EITF Issue No. 00-21 was effective for all revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Our adoption of
EITF Issue No. 00-21 did not have an impact on our consolidated results of
operations, financial position or cash flows.
In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 104, "REVENUE RECOGNITION" (SAB 104). SAB 104 clarifies
existing guidance regarding revenue recognition. Our adoption of SAB 104 did not
have a material impact on our consolidated results of operation, financial
position or cash flows.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and cash flows remained strong during 2003. Cash provided by
operating activities was $474.3 million for 2003, up $57.1 million from 2002 due
primarily to increased earnings and an increase in the tax benefit realized from
the exercise of employee stock options. Offsetting these improvements was an
increase in our finished goods inventory levels as a result of fourth quarter
2003 new product launches. Cash provided by operating activities was $417.2
million in 2002, up $107.1 million from 2001 due primarily to increased earnings
and to a reduction of our inventory levels during 2002. Our inventory, expressed
as the number of days of cost of sales on hand (DIOH), declined from
18
199 days at the end of 2001 to 160 days at the end of 2002 due mostly to more
focused inventory management across our business.
At December 31, 2003, substantially all 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, assuming we accomplished a repatriation under current law
by paying a dividend, the amount paid would be subject to additional U.S. taxes
upon repatriation which could total as much as 33% of the amount repatriated.
On April 1, 2003, we borrowed 24.6 billion Japanese Yen, or approximately $208
million, under a short-term, unsecured bank credit agreement to partially
finance the Getz Japan acquisition. These borrowings bore interest at an average
rate of 0.58% per annum and were repaid in May 2003. In May 2003, we issued
7-year, 1.02% unsecured notes totaling 20.9 billion Yen, or $194.4 million at
December 31, 2003. We also obtained a short-term, unsecured bank credit
agreement which provides for borrowings of up to 3.8 billion Yen. Proceeds from
the issuance of the 7-year 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. Outstanding borrowings under our short-term bank credit agreement
were approximately 1.3 billion Yen, or $12.1 million, at December 31, 2003.
Borrowings under the short-term, bank credit agreement bear interest at the
floating Yen LIBOR plus 0.50% per annum (effective rate of 0.54% at December 31,
2003) and are due in May 2004.
On July 22, 2003, the Board of Directors authorized a share repurchase program
of up to $500 million of our outstanding common stock and the establishment of a
$500 million credit facility. The share repurchases could be made at the
direction of management through transactions in the open market and/or privately
negotiated transactions, including the use of options, futures, swaps and
accelerated share repurchase contracts.
On August 7, 2003, we repurchased approximately 9.25 million shares, or about
five percent of our outstanding common stock, for $500 million under a
privately-negotiated transaction with an investment bank. The investment bank
borrowed the 9.25 million shares to complete the transaction and purchased
replacement shares in the open market over a three month period which ended
November 7, 2003. We entered into a related accelerated stock buyback contract
with the same investment bank which, in return for a separate payment to the
investment bank, included a price-protection feature. The price-protection
feature provided that if the investment bank's per share purchase price of the
replacement shares was lower than the initial share purchase price for the 9.25
million shares ($54.06), then the investment bank would, at our election, make a
payment or deliver additional shares to us in the amount of the difference
between the initial share purchase price and their replacement price, subject to
a maximum amount. In addition, the price-protection feature provided that if the
investment bank's replacement price was greater than the initial share purchase
price, we would not be required to make any further payments. On November 7,
2003, the investment bank completed its purchase of replacement shares. The
market price of our shares during this replacement period exceeded the initial
purchase price, resulting in no additional exchange of consideration.
In July 2003, we obtained a $400 million short-term revolving credit facility to
partially fund our $500 million share repurchase in August 2003. Borrowings
under this facility bore interest at an average rate of 1.73% per annum and were
repaid in September 2003. In September 2003, we obtained a $150 million
unsecured, revolving credit facility that expires in September 2004 and a $350
million unsecured, revolving credit facility that expires in September 2008.
These credit facilities bear interest at the LIBOR plus 0.625% and 0.60% per
annum, respectively, subject to adjustment in the event of a
19
change in our debt ratings. There were no outstanding borrowings under these
credit facilities at December 31, 2003.
During September 2003, we began issuing short-term, unsecured commercial paper
with maturities up to 270 days. Outstanding commercial paper borrowings totaled
$157.4 million at December 31, 2003. These commercial paper borrowings bear
interest at varying market rates (effective rate of 1.2% at December 31, 2003).
The debt that we incurred to partially fund our $500 million share repurchase
reflected our decision to increase the debt component of our current
capitalization. Our decision was influenced by a number of factors, including
the relatively low interest rates on our borrowings, the relatively low interest
rates that we were earning on our excess cash investments, the outlook for our
cash flows from operations for the next 1 to 2 years and the adequacy of those
cash flows to repay the debt and continue to fund our operations and investments
in growth opportunities while maintaining our investment grade status with the
debt rating agencies.
We classify all of our commercial paper borrowings as long-term on the balance
sheet as we have the ability to repay any short-term maturity with available
cash from our existing long-term, committed credit facility. We continually
review our cash flow projections and may from time to time repay a portion of
the borrowings.
In May 2003, we made a $15 million minority investment in Epicor, a development
stage company focused on developing products which use high intensity focused
ultrasound (HIFU) to ablate cardiac tissue. This investment is accounted for
under the cost method and is included in other long-term assets on the balance
sheet. In conjunction with this investment, we also agreed to acquire the
remaining ownership of Epicor in 2004 for an additional $185 million in cash if
Epicor receives approval from the FDA by June 30, 2004 to begin marketing its
device for general cardiac tissue ablation and if Epicor achieves certain
success criteria, as defined in the purchase agreement, in connection with its
European clinical study. In addition, we have an option to purchase the
remaining ownership of Epicor for $185 million even if FDA approval is not
received and the success criteria are not achieved. This option to purchase
Epicor expires on June 30, 2004.
Our 7-year notes, short-term bank credit agreement and revolving credit
facilities contain various operating and financial covenants (see Note 4 to our
Consolidated Financial Statements). We were in compliance with all of our debt
covenants at December 31, 2003. We believe that these covenants will not have a
material impact on our ability to borrow in the future.
We believe that our existing cash balances, borrowings under our committed
credit facilities and future cash generated from operations will be sufficient
to meet our working capital and capital investment needs over the next twelve
months and in the foreseeable future thereafter. Should suitable investment
opportunities arise, we believe that our earnings, cash flows and balance sheet
position will permit us to obtain additional debt financing or equity capital,
if necessary.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet financing arrangements other than operating leases
for various facilities and equipment as noted below in the table of contractual
obligations and other commitments.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Presented below is a summary of our contractual obligations and other
commitments as of December 31, 2003 (in thousands). See Note 4 to our
Consolidated Financial Statements for additional
20
information regarding short-term and long-term debt, and Note 5 for additional
information regarding operating leases and contingent acquisitions.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
=====================================================================================================================
Short-term bank credit agreement $ 12,115 $ 12,115 $ - $ - $ -
Long-term debt (1) 351,813 - - 157,400 194,413
Operating leases (2) 108,040 16,349 29,732 24,950 37,009
Purchase commitments (2)(3) 209,583 132,064 40,919 36,600 -
Contingent acquisitions (2)(4) 255,230 209,589 26,851 16,090 2,700
- ---------------------------------------------------------------------------------------------------------------------
Total $936,781 $ 370,117 $97,502 $ 235,040 $234,122
=====================================================================================================================
(1) LONG-TERM DEBT INCLUDES $194.4 MILLION OF LONG-TERM NOTES DUE IN MAY 2010
AND $157.4 MILLION OF COMMERCIAL PAPER BORROWINGS THAT ARE BACKED BY OUR
COMMITTED CREDIT FACILITY THAT EXPIRES IN SEPTEMBER 2008. WE MAY REPAY THE
COMMERICAL PAPER BORROWINGS PRIOR TO THE EXPIRATION OF OUR LONG-TERM
COMMITTED CREDIT FACILITY.
(2) IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES, THESE OBLIGATIONS ARE NOT RECORDED IN THE CONSOLIDATED BALANCE
SHEET.
(3) THESE AMOUNTS INCLUDE COMMITMENTS FOR INVENTORY PURCHASES AND CAPITAL
EXPENDITURES THAT DO NOT EXCEED OUR PROJECTED REQUIREMENTS OVER THE
RELATED TERMS AND ARE IN THE NORMAL COURSE OF BUSINESS.
(4) THESE AMOUNTS INCLUDE A $185 MILLION COMMITMENT TO ACQUIRE THE REMAINING
OWNERSHIP OF EPICOR IN 2004 PROVIDED THAT SPECIFIC CLINICAL AND REGULATORY
MILESTONES ARE ACHIEVED, AND CONTINGENT COMMITMENTS TO ACQUIRE VARIOUS
BUSINESSES INVOLVED IN THE DISTRIBUTION OF OUR PRODUCTS. WHILE IT IS NOT
CERTAIN IF AND/OR WHEN THESE PAYMENTS WILL BE MADE, WE HAVE INCLUDED THE
PAYMENTS IN THE TABLE BASED ON OUR ESTIMATE OF THE EARLIEST DATE WHEN THE
MILESTONES OR CONTINGENCIES MAY BE MET.
DIVIDENDS
We did not declare or pay any cash dividends during 2003, 2002 or 2001. We
currently intend to utilize our earnings for operating and investment purposes.
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 Securities Litigation 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 its 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 our operations and results. We believe the most significant factors
that could affect our future operations
21
and results are set forth in the list below. 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.
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.
9. Regulatory actions arising from the concern over Bovine Spongiform
Encephalopathy (BSE), sometimes referred to as "mad cow disease", that
have the effect of limiting the Company's ability to market products
using collagen, such as Angio-SealTM, or that impose added costs on the
procurement of collagen.
10. Difficulties obtaining, or the inability to obtain, appropriate levels
of product liability insurance.
11. The ability of our Silzone(R) product liability insurers, especially
Kemper, to meet their obligations to us.
12. A serious earthquake affecting our facilities in Sunnyvale or Sylmar,
California, or a hurricane affecting our operations in Puerto Rico.
13. Healthcare industry consolidation leading to demands for price
concessions or the exclusion of some suppliers from significant market
segments.
14. 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.
15. Enactment of a U.S. law repealing the tax benefit of the
extraterritorial income exclusion.
22
REPORT OF MANAGEMENT
We are 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 judgment and consideration given to materiality. We are also
responsible for the accuracy of the related data in the annual report and its
consistency with the financial statements.
In our opinion, our 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.
We review and modify 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.
We also recognize our responsibility for fostering a strong ethical climate so
that our affairs are conducted according to the highest standards of personal
and business conduct. This responsibility is reflected in our Code of Business
Conduct.
The adequacy of our internal accounting controls, the accounting principles
employed in our 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
Chairman and Chief Executive Officer
/s/ JOHN C. HEINMILLER
John C. Heinmiller
Vice President, Finance and Chief Financial Officer
23
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, 2003 and 2002 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, 2003. 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, 2003 and 2002 and the consolidated results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
January 26, 2004
24
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED DECEMBER 31, 2003 2002 2001
===============================================================================================================================
Net sales $ 1,932,514 $ 1,589,929 $ 1,347,356
Cost of sales:
Cost of sales before special charges 603,091 505,946 437,492
Special charges - - 21,667
- -------------------------------------------------------------------------------------------------------------------------------
Total cost of sales 603,091 505,946 459,159
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 1,329,423 1,083,983 888,197
Selling, general and administrative expense 632,395 513,691 467,113
Research and development expense 241,083 200,337 164,101
Purchased in-process research and development charges - - 10,000
Special charges - - 11,167
- -------------------------------------------------------------------------------------------------------------------------------
Operating profit 455,945 369,955 235,816
Other income (expense) 2,692 3,403 (7,838)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 458,637 373,358 227,978
Income tax expense 119,246 97,073 55,386
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 339,391 $ 276,285 $ 172,592
===============================================================================================================================
===============================================================================================================================
NET EARNINGS PER SHARE:
Basic $ 1.92 $ 1.56 $ 1.00
Diluted $ 1.83 $ 1.51 $ 0.97
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 176,956 176,570 172,428
Diluted 185,377 183,002 178,767
===============================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 2003 2002
================================================================================================================
ASSETS
Current Assets
Cash and equivalents $ 461,253 $ 401,860
Accounts receivable, less allowances for doubtful accounts 501,759 381,246
Inventories 311,761 227,024
Deferred income taxes 112,376 56,857
Other 105,188 47,330
- ----------------------------------------------------------------------------------------------------------------
Total current assets 1,492,337 1,114,317
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 145,405 126,471
Machinery and equipment 431,839 393,726
Diagnostic equipment 173,851 181,117
- ----------------------------------------------------------------------------------------------------------------
Property, plant and equipment at cost 751,095 701,314
Less accumulated depreciation (449,442) (400,833)
- ----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 301,653 300,481
OTHER ASSETS
Goodwill 407,013 325,575
Other intangible assets, net 154,404 89,491
Deferred income taxes - 12,269
Other 200,687 109,246
- ----------------------------------------------------------------------------------------------------------------
Total other assets 762,104 536,581
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,556,094 $ 1,951,379
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 12,115 $ -
Accounts payable 128,206 108,931
Income taxes payable 72,376 51,380
Accrued expenses
Employee compensation and related benefits 190,152 135,705
Other 107,466 78,636
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 510,315 374,652
LONG-TERM DEBT 351,813 -
DEFERRED INCOME TAXES 89,719 -
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock (173,014,167 and 178,028,129 shares issued and
outstanding at December 31, 2003 and 2002, respectively) 17,301 17,803
Additional paid-in capital 35,627 216,878
Retained earnings 1,544,499 1,411,194
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (4,246) (73,388)
Unrealized gain on available-for-sale securities 11,066 4,240
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,604,247 1,576,727
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,556,094 $ 1,951,379
================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ACCUMULATED
------------------------ ADDITIONAL OTHER TOTAL
NUMBER OF PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2001 170,672,572 $ 17,067 $ 47,190 $ 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 of $928 1,515 1,515
Foreign currency translation
adjustment, net of taxes
of $(19,393) (10,401) (10,401)
-----------------
Other comprehensive loss (8,886)
-----------------
Comprehensive income 163,706
=================
Common stock issued under stock
plans and other, net 3,746,140 375 57,566 57,941
Tax benefit from stock plans 21,249 21,249
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 174,418,712 17,442 126,005 1,134,909 (94,611) 1,183,745
Comprehensive income:
Net earnings 276,285 276,285
Other comprehensive income (loss):
Unrealized loss on investments,
net of taxes of $(3,021) (4,930) (4,930)
Foreign currency translation
adjustment, net of taxes
of $4,291 30,393 30,393
-----------------
Other comprehensive income 25,463
-----------------
Comprehensive income 301,748
=================
Common stock issued under stock
plans and other, net 3,609,417 361 65,644 66,005
Tax benefit from stock plans 25,229 25,229
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 178,028,129 17,803 216,878 1,411,194 (69,148) 1,576,727
Comprehensive income:
Net earnings 339,391 339,391
Other comprehensive income (loss):
Unrealized gain on investments,
net of taxes of $4,183
and reclassification
adjustment (see below) 6,826 6,826
Foreign currency translation
adjustment, net of taxes
of $16,719 69,142 69,142
-----------------
Other comprehensive income 75,968
-----------------
Comprehensive income 415,359
=================
Common stock issued under stock
plans and other, net 4,234,583 423 89,279 89,702
Tax benefit from stock plans 42,484 42,484
Common stock repurchased,
including related costs (9,248,545) (925) (313,014) (206,086) (520,025)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 173,014,167 $ 17,301 $ 35,627 $ 1,544,499 $ 6,820 $ 1,604,247
===================================================================================================================================
Other comprehensive income reclassification adjustments for realized losses on
the write-down of marketable securities, net of income taxes, were $620 in 2003.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31 2003 2002 2001
==============================================================================================================================
OPERATING ACTIVITIES
Net earnings $339,391 $276,285 $ 172,592
Adjustments to reconcile net earnings to net
cash from operating activities:
Depreciation 64,695 67,224 58,404
Amortization 11,988 7,696 31,895
Purchased in-process research and development charges - - 10,000
Special charges - - 32,834
Deferred income taxes 33,146 37,695 (11,681)
Changes in operating assets and liabilities, net of
business acquisitions:
Accounts receivable (31,315) (39,146) (23,941)
Inventories (17,388) 15,784 (32,373)
Other current assets (40,273) (8,719) 13,605
Accounts payable and accrued expenses 52,714 48,376 12,907
Income taxes payable 61,327 12,005 45,893
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 474,285 417,200 310,135
INVESTING ACTIVITIES
Purchase of property, plant and equipment (49,565) (62,176) (63,129)
Proceeds from sale or maturity of marketable securities - 7,000 15,000
Business acquisition payments, net of cash acquired (230,839) (29,500) (20,444)
Minority investment in Epicor Medical, Inc. (15,505) - -
Other (50,691) (31,088) (26,220)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (346,600) (115,764) (94,793)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock issued 89,702 66,005 57,941
Common stock repurchased, including related costs (520,025) - -
Net borrowings under short-term debt facilities 9,454 - -
Issuance of long-term notes 173,350 - -
Borrowings under debt facilities 1,111,450 352,000 2,115,028
Payments under debt facilities (954,050) (475,128) (2,286,400)
==============================================================================================================================
NET CASH USED IN FINANCING ACTIVITIES (90,119) (57,123) (113,431)
Effect of currency exchange rate changes on cash and equivalents 21,827 9,212 (4,015)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 59,393 253,525 97,896
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 401,860 148,335 50,439
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $461,253 $401,860 $ 148,335
==============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
==============================================================================================================================
Cash paid during the year for:
Interest $ 3,557 $ 1,473 $ 10,663
Income taxes 57,217 51,243 21,424
- ------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OVERVIEW: St. Jude Medical, Inc. (St. Jude Medical or the Company)
develops, manufactures and distributes cardiovascular medical devices for the
global cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and
vascular access (C/VA) therapy areas. The Company's principal products in each
of these therapy areas are as follows:
CRM
o bradycardia pacemaker systems (pacemakers),
o tachycardia implantable cardioverter defibrillator systems (ICDs), and
o electrophysiology (EP) catheters
CS
o mechanical and tissue heart valves, and
o valve repair products
C/VA
o vascular closure devices,
o angiography catheters,
o guidewires, and
o hemostasis introducers
The Company markets and sells its products primarily through a direct sales
force. The principal geographic markets for the Company's products are the
United States, Europe and Japan.
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 52/53-week fiscal year ending on the
Saturday nearest December 31. For simplicity of presentation, the Company
describes all periods as if the year end is December 31. Fiscal year 2003
consisted of 53 weeks and fiscal years 2002 and 2001 consisted of 52 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 consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
CASH EQUIVALENTS: The Company considers highly liquid 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, money market funds and
instruments, commercial paper investments and repurchase agreements
collateralized by U.S. government agency securities. The Company performs
periodic evaluations of the relative credit
29
standing of the financial institutions and issuers of its cash equivalents and
limits the amount of credit exposure with any one issuer.
MARKETABLE SECURITIES: Marketable securities consist of publicly-traded equity
securities. 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. The following table summarizes the
Company's available-for-sale marketable securities as of December 31 (in
thousands):
2003 2002
===============================================================================
Adjusted cost $ 5,826 $ 6,826
Gross unrealized gains 18,461 8,639
Gross unrealized losses (613) (1,800)
- -------------------------------------------------------------------------------
Fair value $ 23,674 $ 13,665
===============================================================================
Unrealized gains and losses, net of related incomes taxes, are recorded in other
comprehensive income (loss) in shareholders' equity. Realized gains and losses
from the sale of marketable securities are recorded in other income (expense)
and are computed using the specific identification method.
The Company's policy for assessing recoverability of its available-for-sale
securities is to record a charge against net earnings when the Company
determines that a decline in the fair value of a security drops below the cost
basis and judges that decline to be other-than-temporary. During 2003, the
Company recorded a $1 million write-down on one of its equity securities, which
is included in other income (expense).
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. The Company maintains an allowance for doubtful
accounts for potential credit losses. The allowance for doubtful accounts was
$31.9 million at December 31, 2003 and $24.1 million at December 31, 2002.
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 at December 31 (in thousands):
2003 2002
==================================================================
Finished goods $ 209,236 $ 140,856
Work in process 32,547 27,481
Raw materials 69,978 58,687
- ------------------------------------------------------------------
$ 311,761 $ 227,024
==================================================================
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost and are depreciated using the straight-line method over their estimated
useful lives, ranging from 15 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 primarily consists of programmers
that are used by physicians and healthcare professionals to program and analyze
data from pacemaker and ICD devices. The estimated useful lives of this
equipment are based on
30
management's estimates of its usage by the physicians and healthcare
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 introductions of new technologies to the market, the estimated
useful lives of this equipment may change in a future period. Diagnostic
equipment had a net carrying value of $68.7 million and $81.0 million at
December 31, 2003 and 2002. Accelerated depreciation methods are used for income
tax purposes.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost
over the fair value of identifiable net assets of businesses acquired. The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"GOODWILL AND OTHER INTANGIBLE ASSETS" (Statement 142), effective January 1,
2002. Under Statement 142, goodwill is no longer amortized, but is subject to
annual impairment tests. See Note 3 for pro forma 2001 net earnings and net
earnings per share exclusive of goodwill amortization.
Other intangible assets consist of purchased technology and patents,
distribution agreements, customer relationships, trademarks and licenses and are
amortized on a straight-line basis using lives ranging from 10 to 20 years.
Statement 142 requires that goodwill for each reporting unit be reviewed for
impairment at least annually. The Company has three reporting units at December
31, 2003, consisting of its three operating segments (see Note 11). The Company
tests goodwill for impairment using the two-step process prescribed in Statement
142. In the first step, the Company compares the fair value of each reporting
unit, as computed primarily by present value cash flow calculations, to its book
carrying value, including goodwill. If the fair value exceeds the carrying
value, no further work is required and no impairment loss is recognized. If the
carrying value exceeds the fair value, the goodwill of the reporting unit is
potentially impaired and the Company would then complete step 2 in order to
measure the impairment loss. In step 2, the Company would calculate the implied
fair value of goodwill by deducting the fair value of all tangible and
intangible net assets (including unrecognized intangible assets) of the
reporting unit from the fair value of the reporting unit (as determined in step
1). If the implied fair value of goodwill is less than the carrying value of
goodwill, the Company would recognize an impairment loss equal to the
difference.
Management also reviews other intangible assets for impairment at least annually
to determine if any adverse conditions exist that would indicate impairment. If
the carrying value of other intangible assets exceeds the undiscounted cash
flows, the carrying value is written down to fair value in the period
identified. Indefinite-lived intangible assets are reviewed at least annually
for impairment by calculating the fair value of the assets and comparing with
their carrying value. In assessing fair value, management generally utilizes
present value cash flow calculations using an appropriate risk-adjusted discount
rate.
During the fourth quarters of 2003 and 2002, management completed its annual
goodwill and other intangible asset impairment reviews with no impairments to
the carrying values identified.
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 pacemaker and ICD systems. 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. The costs deferred under this license are recorded on
the balance sheet in other long-term assets.
31
PRODUCT WARRANTIES: The Company offers a warranty on various products, the most
significant of which relate to 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 2003 and 2002 were as follows (in thousands):
2003 2002
==============================================================================
Balance at beginning of year $ 14,755 $ 11,369
Warranty expense recognized 3,035 5,174
Warranty credits issued (2,569) (1,788)
- ------------------------------------------------------------------------------
Balance at end of year $ 15,221 $ 14,755
==============================================================================
REVENUE RECOGNITION: The Company sells its products to hospitals primarily
through a direct sales force. In certain international markets, the Company
sells its products through independent distributors. The Company recognizes
revenue when persuasive evidence of a sales arrangement exists, delivery of
goods occurs through the transfer of title and risks and rewards of ownership,
the selling price is fixed or determinable and collectibility is reasonably
assured. In most markets where the Company has a direct sales force, the Company
consigns inventory to hospitals. For consigned products, revenue is recognized
at the time the product is used by a physician at the hospital. For products
that are not consigned, revenue recognition occurs upon shipment to the hospital
or, in the case of distributors, when title transfers under the contract. The
Company records estimated sales returns, discounts and rebates as a reduction of
net sales in the same period revenue is recognized.
RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense
as incurred. Purchased in-process research and development charges are
recognized in business acquisitions 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 accounts for its stock-based employee
compensation plans (see Note 6) under the recognition and measurement principles
of APB 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 SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to its
stock-based employee compensation (in thousands, except per share amounts):
32
2003 2002 2001
==================================================================================================
Net earnings, as reported $ 339,391 $ 276,285 $ 172,592
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (38,030) (33,194) (26,619)
- --------------------------------------------------------------------------------------------------
Pro forma net earnings $ 301,361 $ 243,091 $ 145,973
==================================================================================================
==================================================================================================
Net earnings per share:
Basic-as reported $ 1.92 $ 1.56 $ 1.00
Basic-pro forma 1.70 1.38 0.85
Diluted-as reported $ 1.83 $ 1.51 $ 0.97
Diluted-pro forma 1.63 1.33 0.82
==================================================================================================
The weighted-average fair value of options granted and the assumptions used in
the Black-Scholes option-pricing model are as follows:
2003 2002 2001
================================================================================
Fair value of options granted $ 21.75 $ 12.95 $ 12.84
Assumptions used:
Expected life (years) 5 5 5
Risk-free rate of return 3.2% 3.3% 4.4%
Volatility 35.0% 35.0% 30.9%
Dividend yield 0% 0% 0%
================================================================================
NET EARNINGS PER SHARE: Basic net earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares during the
period, exclusive of restricted shares. Diluted net earnings per share is
computed by dividing net earnings by the weighted average number of outstanding
common shares and dilutive securities.
The table below sets forth the computation of basic and diluted net earnings per
share (in thousands, except per share amounts).
33
2003 2002 2001
=========================================================================================
Numerator:
Net earnings $ 339,391 $ 276,285 $ 172,592
Denominator:
Basic-weighted average shares outstanding 176,956 176,570 172,428
Effect of dilutive securities:
Employee stock options 8,410 6,410 6,269
Restricted shares 11 22 70
- -----------------------------------------------------------------------------------------
Diluted-weighted average shares outstanding 185,377 183,002 178,767
=========================================================================================
Basic net earnings per share $ 1.92 $ 1.56 $ 1.00
=========================================================================================
Diluted net earnings per share $ 1.83 $ 1.51 $ 0.97
- -----------------------------------------------------------------------------------------
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.
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 period-end
exchange rates. Gains and losses from translation of net assets of foreign
operations, net of related income taxes, are recorded in other comprehensive
income (loss). Foreign currency transaction gains and losses are included in
other income (expense).
NEW ACCOUNTING PRONOUNCEMENTS: In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES" (FIN 46). FIN 46 requires the consolidation of
variable interest entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. FIN 46 is effective for the first quarter of 2004. The
Company does not expect its adoption of FIN 46 to have an impact on its
consolidated results of operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" (Statement
150). Statement 150 establishes standards for issuer classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. In accordance with this standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. Statement 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. The Company's
adoption of Statement 150 did not have an impact on its consolidated results of
operations, financial position or cash flows.
Emerging Issues Task Force (EITF) Issue No. 00-21, "ACCOUNTING FOR REVENUE
ARRANGEMENTS WITH MULTIPLE DELIVERABLES," addresses certain aspects of the
accounting by a vendor for arrangements under which multiple revenue-generating
activities are performed. EITF Issue No. 00-21 establishes three principles:
revenue arrangements with multiple deliverables should be divided into separate
units of accounting; arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values; and revenue
recognition criteria should be considered separately for separate units of
accounting. EITF Issue No. 00-21 was effective for all revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company's
adoption
34
of EITF Issue No. 00-21 did not have an impact on its consolidated results of
operations, financial position or cash flows.
In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 104, "REVENUE RECOGNITION" (SAB 104). SAB 104 clarifies
existing guidance regarding revenue recognition. The Company's adoption of SAB
104 did not have a material impact on its consolidated results of operation,
financial position or cash flows.
NOTE 2--ACQUISITIONS & MINORITY INVESTMENT
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 to acquire 100% of the outstanding common
stock of Getz Japan. Net consideration paid was $219.2 million, which includes
closing costs less $12.0 million of cash acquired.
On April 1, 2003, the Company also acquired the net assets of Getz Bros. & Co.
(Aust.) Pty. Limited and Medtel Pty. Limited (collectively referred to as Getz
Australia) related to the distribution of the Company's products in Australia
for $6.2 million in cash, including closing costs.
The Company acquired Getz Japan and Getz Australia (collectively referred to as
Getz) in order to further strengthen its presence in the Japanese and Australian
medical technology markets. The purchase price for Getz was based on the future
cash flows of the businesses. In addition, Getz Japan had equity securities
which traded on a Japanese stock exchange. The goodwill recognized as part of
the Getz acquisitions relates primarily to the operating efficiencies that these
businesses were able to achieve and the increased levels of efficiencies
anticipated in the future as the Company expands its presence in the Japanese
and Australian medical technology markets. The goodwill recorded in connection
with the Getz acquisitions has been allocated entirely to the Company's Cardiac
Rhythm Management/Cardiac Surgery (CRM/CS) reportable segment.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as a result of these acquisitions (in thousands):
=========================================================
Current assets $ 124,961
Goodwill 67,465
Intangible assets 64,106
Other long-term assets 33,945
- ---------------------------------------------------------
Total assets acquired $ 290,477
Current liabilities $ 27,724
Deferred income taxes 25,390
- ---------------------------------------------------------
Total liabilities assumed $ 53,114
- ---------------------------------------------------------
Net assets acquired $ 237,363
=========================================================
The goodwill recorded as a result of these acquisitions is not deductible for
income tax purposes.
In connection with the acquisitions of Getz, the Company recorded intangible
assets valued at $64.1 million that each have a weighted average useful life of
10 years. Total intangible assets subject to amortization include distribution
agreements of $44.9 million, customer lists and relationships of $9.5
35
million, and licenses and other of $5.6 million. Intangible assets not subject
to amortization include trademarks of $4.1 million.
The Getz acquisitions did not provide for the payment of any contingent
consideration. The third party appraisal used by the Company for purposes of the
purchase price allocation did not include any in-process research and
development. There are no material unresolved items relating to the purchase
price allocation.
During 2003, 2002 and 2001, the Company also acquired various businesses
involved in the distribution of the Company's products. Aggregate consideration
paid in cash during 2003, 2002 and 2001 was $5.4 million, $24.5 million and
$10.4 million, respectively.
In December 2002, the Company acquired the assets of a catheter business for $5
million in cash. Substantially all of the purchase price was allocated to
technology and patents with estimated useful lives of 15 years.
The results of operations of the above-mentioned business acquisitions have been
included in the Company's consolidated results of operations since the date of
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.
During 2001, the Company paid $10 million relating to the September 1999
acquisition of Vascular Science, Inc. (VSI - see Note 7).
MINORITY INVESTMENT: In May 2003, the Company made a $15 million minority
investment in Epicor Medical, Inc. (Epicor), a development stage company focused
on developing products which use high intensity focused ultrasound (HIFU) to
ablate cardiac tissue. This investment is accounted for under the cost method
and is included in other long-term assets on the balance sheet. In conjunction
with this investment, the Company also agreed to acquire the remaining ownership
of Epicor in 2004 for an additional $185 million in cash if Epicor receives
approval from the U.S. Food and Drug Administration (FDA) by June 30, 2004 to
begin marketing its device to ablate cardiac tissue and if Epicor achieves
certain success criteria, as defined in the purchase agreement, in connection
with its European clinical study. In addition, the Company has an option to
purchase the remaining ownership of Epicor for $185 million even if FDA approval
is not received and the success criteria are not achieved. This option to
purchase Epicor expires on June 30, 2004.
NOTE 3-- GOODWILL AND OTHER INTANGIBLE ASSETS
The Company ceased amortizing goodwill effective January 1, 2002 as discussed in
Note 1 - GOODWILL AND OTHER INTANGIBLE ASSETS. The following table provides pro
forma fiscal year 2001 net earnings and net earnings per share had Statement 142
been effective January 1, 2001 (in thousands, except per share amounts):
36
2001
===============================================================================
NET EARNINGS:
As reported $ 172,592
Goodwill amortization, net of taxes 21,323
- -------------------------------------------------------------------------------
Pro forma net earnings $ 193,915
===============================================================================
BASIC NET EARNINGS PER SHARE:
As reported $ 1.00
Goodwill amortization, net of taxes 0.12
- -------------------------------------------------------------------------------
Pro forma basic net earnings per share $ 1.12
===============================================================================
DILUTED NET EARNINGS PER SHARE:
As reported $ 0.97
Goodwill amortization, net of taxes 0.12
- -------------------------------------------------------------------------------
Pro forma diluted net earnings per share $ 1.08
===============================================================================
The changes in the carrying amount of goodwill for each of the Company's
reportable segments for the fiscal year ended December 31, 2003 are as follows
(in thousands):
CRM/CS DAIG TOTAL
=========================================================================================================
Balance at December 31, 2002 $ 270,829 $ 54,746 $ 325,575
Goodwill recorded from the Getz acquisitions 67,465 - 67,465
Foreign currency translation 13,372 123 13,495
Other 478 - 478
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 352,144 $ 54,869 $ 407,013
=========================================================================================================
The following table provides the gross carrying amount of other intangible
assets and related accumulated amortization at December 31 (in thousands):
2003 2002
==========================================================================================================
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ----------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Purchased technology and patents $76,189 $ 21,253 $75,749 $ 17,075
Distribution agreements 49,348 3,701 - -
Customer lists and relationships 50,511 7,278 33,306 2,822
Licenses and other 6,679 610 435 102
- ----------------------------------------------------------------------------------------------------------
$ 182,727 $ 32,842 $ 109,490 $ 19,999
==========================================================================================================
Unamortized intangible assets:
Trademarks $ 4,519
- ----------------------------------------------------------------------------------------------------------
37
Amortization expense of other intangible assets was $12.0 million, $7.7 million
and $3.8 million for the fiscal years ended December 31, 2003, 2002 and 2001,
respectively. Estimated amortization expense for fiscal years 2004 through 2008
based on the current carrying value of other intangible assets is approximately
$14 million per year.
NOTE 4-- DEBT
On April 1, 2003, the Company borrowed 24.6 billion Japanese Yen, or
approximately $208 million, 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 0.58% per annum and were repaid in May 2003.
In May 2003, the Company issued 7-year, 1.02% unsecured notes totaling 20.9
billion Yen. The Company also obtained a short-term, unsecured bank credit
agreement that provides for borrowings of up to 3.8 billion Yen. Proceeds from
the issuance of the 7-year 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. Outstanding borrowings under the Company's short-term bank credit
agreement were approximately 1.3 billion Yen, or $12.1 million, at December 31,
2003. Borrowings under the short-term, bank credit agreement bear interest at
the floating Yen London InterBank Offered Rate (LIBOR) plus 0.50% per annum
(effective rate of 0.54% at December 31, 2003) and are due in May 2004.
In July 2003, the Company obtained a $400 million short-term revolving credit
facility to partially fund its $500 million share repurchase in August 2003.
Borrowings under this facility bore interest at an average rate of 1.73% per
annum and were repaid in September 2003. In September 2003, the Company obtained
a $150 million unsecured, revolving credit facility that expires in September
2004 and a $350 million unsecured, revolving credit facility that expires in
September 2008. These credit facilities bear interest at the LIBOR plus 0.625%
and 0.60% per annum, respectively, subject to adjustment in the event of a
change in the Company's debt ratings. There were no outstanding borrowings under
these credit facilities at December 31, 2003.
During September 2003, the Company began issuing short-term, unsecured
commercial paper with maturities up to 270 days. These commercial paper
borrowings bear interest at varying market rates (effective rate of 1.2% at
December 31, 2003).
The Company's long-term debt consisted of the following at December 31, 2003 (in
thousands):
- -------------------------------------------------------------------------------
1.02% Yen-denominated notes, due 2010 $ 194,413
Commercial paper borrowings 157,400
- -------------------------------------------------------------------------------
$ 351,813
===============================================================================
The Company classifies all of its 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.
The Company's 7-year notes, short-term bank credit agreement and revolving
credit facilities contain various operating and financial covenants.
Specifically, the Company must have a ratio of total debt to total
capitalization not exceeding 55%, have a leverage ratio (defined as the ratio of
total debt to EBITDA (net earnings before interest, income taxes, depreciation
and amortization) and the ratio of
38
total debt to EBIT (net earnings before interest and income taxes)) not
exceeding 3.0 to 1.0, and an interest coverage ratio (defined as the ratio of
EBITDA to interest expense and the ratio of EBIT to interest expense) not less
than 3.0 to 1.0. The Company also has 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. The Company was in compliance with all of its debt
covenants at December 31, 2003.
NOTE 5--COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases various facilities and equipment under noncancelable
operating lease arrangements. Future minimum lease payments under these leases
are as follows: $16.3 million in 2004; $15.5 million in 2005; $14.2 million in
2006; $13.3 million in 2007; $11.7 million in 2008; and $37.0 million in years
thereafter. Rent expense under all operating leases was $16.5 million, $10.2
million and $8.9 million in 2003, 2002 and 2001.
SILZONE(R) LITIGATION: In July 1997, the Company began marketing mechanical
heart valves which incorporated a Silzone(R) coating. The Company later began
marketing heart valve repair products incorporating a Silzone(R) coating. The
Silzone(R) coating was intended to reduce the risk of endocarditis, a bacterial
infection affecting heart tissue, which is associated with replacement heart
valves.
In January 2000, the Company voluntarily recalled all field inventories of
Silzone(R) devices after receiving information from a clinical study that
patients with a Silzone valve had a small, but statistically significant,
increased incidence of explant due to paravalvular leak compared to patients in
that clinical study with non-Silzone(R) heart valves.
Subsequent to the Company's voluntary recall, the Company has been sued in the
United States, Canada, and United Kingdom by some patients who received a
Silzone(R) device. Some of these claims allege bodily injuries as a result of an
explant or other complications, which they attribute to the Silzone(R) devices.
Others, who have not had their device explanted, seek compensation for past and
future costs of special monitoring they allege they need over and above the
medical monitoring all replacement heart valve patients receive. Some of the
lawsuits seeking the cost of monitoring have been initiated by patients who are
asymptomatic and who have no apparent clinical injury to date. The Company has
vigorously defended against the claims that have been asserted, and expects to
continue to do so with respect to any remaining claims.
The Company has settled a number of these Silzone(R)-related cases and others
have been dismissed. Cases filed in the United States in federal courts have
been consolidated in the federal district court for the district of Minnesota
under Judge Tunheim. A number of class action complaints have been consolidated
into one case seeking certification of two separate classes. One proposed class
in the consolidated complaint seeks injunctive relief in the form of medical
monitoring. A second class in the consolidated complaint seeks an unspecified
amount of money damages. The Court also certified a class action for patients
claiming relief under Minnesota's Consumer Protection Statutes.
On January 5, 2004, the judge ruled on the ability of certain claims to proceed
as class actions. The judge declined to grant class action status to personal
injury claims; however, he granted class action status for patients from a
limited group of states to proceed with medical monitoring claims. Further
39
briefing is pending on exactly which states fall into this category and how a
class action proceeding involving such claims would proceed.
In addition, there have been 39 individual Silzone(R) cases filed in federal
court where plaintiffs are each requesting damages ranging from an unspecified
amount to $120.5 million. These cases are proceeding in accordance with the
orders issued by Judge Tunheim. There have also been 25 individual state court
suits filed involving 42 patients. The complaints in these cases each request
damages ranging from an unspecified amount to $70,000. These state court cases
are proceeding in accordance with the orders issued by the judges in those
matters.
Four class action cases have been filed against the Company in Canada. In one
such case in Ontario, the court certified that a class action may proceed
involving Silzone(R) patients. The most recent certification decision was issued
on January 16, 2004. In the United Kingdom, one case involving one plaintiff has
been filed. The complaint in this case requests damages of an unspecified
amount. This matter is in its very early stages.
The Company is not aware of any unasserted claims related to Silzone(R) devices.
Company management believes that the final resolution of the Silzone(R) cases
will take several years. At this time, management cannot reasonably estimate the
time frame in which any potential settlements or judgments would be paid out.
The Company accrues for contingent losses when it is probable that a loss has
been incurred and the amount can be reasonably estimated. The Company has
recorded an accrual for probable legal costs that it will incur to defend the
various cases involving Silzone(R) devices, and the Company has recorded a
receivable from its product liability insurance carriers for amounts expected to
be recovered (see Note 7). The Company has not accrued for any amounts
associated with probable settlements or judgments because management cannot
reasonably estimate such amounts. However, management believes that no
significant claims will ultimately be allowed to proceed as class actions in the
United States and, therefore, that all settlements and judgments will be covered
under the Company's remaining product liability insurance coverage
(approximately $170 million at December 31, 2003), subject to the insurance
companies' performance under the policies (see Note 7 for further discussion on
the Company's insurance carriers). As such, management believes that any costs
(the material components of which are settlements, judgments and legal fees) not
covered by its product liability insurance policies or existing reserves will
not have a material adverse effect on the Company's statement of financial
position or liquidity, although such costs may be material to the Company's
consolidated results of operations of a future period.
GUIDANT 1996 PATENT 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.
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 also found that the Company
did infringe the `472 patent, though such
40
infringement was not willful. The jury awarded damages of $140 million to
Guidant. In post-trial rulings, however, the judge overseeing the jury trial
ruled that the `472 patent was invalid and also was not infringed by St. Jude
Medical, thereby eliminating the $140 million verdict against the Company. The
trial court also made other rulings as part of the post-trial order, including a
ruling that the `288 patent was invalid on several grounds.
In August 2002, Guidant commenced an appeal of certain of the trial judge's
post-trial decisions pertaining to the `288 patent. Guidant did not appeal the
trial court's finding of invalidity and non-infringement of the `472 patent. As
part of its appeal, Guidant requested that the monetary damages awarded by the
jury pertaining to the `472 patent ($140 million) be transferred to the `288
patent infringement claim. The Company maintains that such a request is not
supported by the facts or law. After the briefing for this appeal was completed,
oral argument before the Court of Appeals occurred on September 4, 2003. The
Company expects that the Appellate Court will issue a decision concerning
Guidant's appeal sometime later in 2004. While it is not possible to predict the
outcome of the appeal process, the Company believes that the decision of the
trial court in its post-trial rulings, which is publicly available, was correct.
The `288 patent expired in December 2003. Accordingly, the final outcome of the
appeal process cannot involve an injunction precluding the Company from selling
ICD products in the future. Sales of the Company's ICD products which Guidant
asserts infringed the `288 patent were approximately 18%, 16% and 13% of the
Company's consolidated net sales during the fiscal years ended December 31,
2003, 2002 and 2001, respectively.
The Company has not accrued any amounts for losses related to the Guidant 1996
patent litigation. Although the Company believes that the assertions and claims
in these matters are without merit, potential losses arising from this
litigation are possible, but not estimable, at this time. The range of such
losses could be material to the operations, financial position and liquidity of
the Company.
GUIDANT 2004 PATENT LITIGATION: In February 2004, Guidant sued the Company
alleging that the Company's Epic(TM) HF ICD, Atlas(R)+ HF ICD and Frontier(TM)
device infringe U.S Patent No. RE 38,119E (the `119 patent). Guidant also sued
the Company in February 2004 alleging that the Company's QuickSite(TM) 1056K
pacing lead infringes U.S. Patent No. 5,755,766 (the `766 patent). Guidant is
seeking an injunction against the manufacture and sale of these devices by the
Company in the United States and compensation for what it claims are infringing
sales of these products up through the effective date of the injunction. Sales
of the above St. Jude Medical devices in the United States were not material
during fiscal years 2003, 2002 and 2001, although it is anticipated that once
the Company receives FDA approval to market these products during 2004, sales of
these devices could become material in the future. The Company has not submitted
a substantive response to Guidant's claims at this time. Another competitor of
the Company, Medtronic, Inc., which has a license to the `119 patent, is
contending in a separate lawsuit with Guidant that the `119 patent is invalid.
The Company has not accrued any amounts for losses related to the Guidant 2004
patent litigation. Potential losses arising from this litigation are possible,
but not estimable, at this time. The range of such losses could be material to
the operations, financial position and liquidity of the Company.
SYMMETRY(TM) LITIGATION: The Company has been sued in six cases in the United
States alleging that its Symmetry(TM) Bypass System Aortic Connector
(Symmetry(TM) device) caused bodily injury or might cause bodily injury. The
firST such suit was filed against the Company on August 5, 2003, and the
41
most recently initiated case was served upon the Company on January 28, 2004.
Each of the complaints in these cases request damages ranging from an
unspecified amount to $100,000. Three of the six cases are seeking class-action
status. One of the cases seeking class-action status has been dismissed but the
dismissal is being appealed by the plaintiff. The Company believes that those
cases seeking class-action status will request damages for injuries and
monitoring costs.
The Company's Symmetry(TM) device was cleared through a 510(K) submission to the
FDA, and therefore, is not eligible for the defense under the doctrine of
federal preemption that such suits are prohibited. Given the Company's
self-insured retention levels under its product liability insurance policies,
the Company expects that it will be solely responsible for these lawsuits,
including any costs of defense, settlements and judgments. The Company
management believes that class action status is not appropriate for the claims
asserted based on existing facts and case law. Discovery is in the very early
stages in these cases.
The Company has not accrued any amounts for losses related to the Symmetry(TM)
litigation. Potential losses arising from this litigation are possible, but not
estimable, at this time. The range of such losses could be material to the
operations, financial position and liquidity of the Company. At this time,
Company management cannot reasonably estimate the time frame in which this
litigation will be resolved, including when potential settlements or judgments
would be paid out, if any.
OTHER LITIGATION MATTERS: The Company is involved in various other product
liability lawsuits, claims and proceedings of a nature considered normal to its
business.
OTHER CONTINGENCIES: The Company has agreed to acquire the remaining ownership
of Epicor in 2004 for $185 million in cash, provided that specific clinical and
regulatory milestones are achieved (see Note 2 for further discussion on
Epicor). The Company also has contingent commitments to acquire various
businesses involved in the distribution of its products that could total
approximately $70 million in aggregate during 2004 to 2010, provided that
certain contingencies are satisfied. The purchase prices of the individual
businesses range from approximately $0.1 million to $7.0 million. In addition,
the Company is required to make additional payments for the acquisition of VSI
upon the achievement of certain regulatory milestones and minimum sales levels
(see Note 7 for further discussion on these contingent payments).
NOTE 6--SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company has 250,000,000 authorized shares of $0.10 per share
par value common stock. The Company also has 25,000,000 authorized shares of
$1.00 par value per share preferred stock. The Company has designated 1,100,000
of the authorized preferred shares as a Series B Junior Preferred Stock for its
shareholder rights plan (see SHAREHOLDERS' RIGHTS PLAN below for further
discussion). There were no shares of preferred stock issued or outstanding
during 2003, 2002 or 2001.
SHARE REPURCHASE: On July 22, 2003, the Company's Board of Directors authorized
a share repurchase program of up to $500 million of the Company's outstanding
common stock. The share repurchases could be made at the direction of the
Company's management through transactions in the open market and/or privately
negotiated transactions, including the use of options, futures, swaps and
accelerated share repurchase contracts.
42
On August 7, 2003, the Company repurchased approximately 9.25 million shares, or
about five percent of its outstanding common stock, for $500 million under a
privately-negotiated transaction with an investment bank. The investment bank
borrowed the 9.25 million shares to complete the transaction and purchased
replacement shares in the open market over a three month period which ended on
November 7, 2003. The Company entered into a related accelerated stock buyback
contract with the same investment bank which, in return for a separate payment
to the investment bank, included a price-protection feature. The
price-protection feature provided that if the investment bank's per share
purchase price of the replacement shares was lower than the initial share
purchase price for the 9.25 million shares ($54.06), then the investment bank
would, at the Company's election, make a payment or deliver additional shares to
the Company in the amount of the difference between the initial share purchase
price and their replacement price, subject to a maximum amount. In addition, the
price-protection feature provided that if the investment bank's replacement
price was greater than the initial share purchase price, the Company would not
be required to make any further payments.
The Company recorded the cost of the shares repurchased and the payment for the
price-protection feature, totaling $520 million, as a reduction of shareholders'
equity on the date of share repurchase (August 7, 2003). On November 7, 2003,
the investment bank completed its purchase of replacement shares. The market
price of the Company's shares during this replacement period exceeded the
initial purchase price, resulting in no additional exchange of consideration.
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.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase
savings plan allows participating employees to purchase, through payroll
deductions, newly issued shares of the Company's common stock at 85% of the fair
market value at specified dates. Employees purchased 0.3 million, 0.2 million
and 0.3 million shares in 2003, 2002 and 2001, respectively, under this plan. At
December 31, 2003, 1.2 million shares of additional 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, employees and consultants. Stock option awards under these
plans generally have an eight to ten year life, an exercise price equal to the
fair market value on the date of grant and a four-year vesting term. Under the
Company's current stock plans, a majority of the stock option awards have an
eight-year life. At December 31, 2003, the Company had 4.5 million 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, 2003 are as follows:
43
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
=====================================================================================================
Balance at January 1, 2001 26,539,640 $ 18.24
Granted 6,373,310 35.94
Canceled (762,734) 21.08
Exercised (3,467,214) 15.27
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 28,683,002 22.45
Granted 5,041,340 35.60
Canceled (716,452) 26.89
Exercised (3,312,968) 16.66
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 2002 29,694,922 25.22
Granted 4,552,336 60.03
Canceled (721,246) 31.53
Exercised (3,962,865) 20.30
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 2003 29,563,147 $ 31.09
- -----------------------------------------------------------------------------------------------------
Stock options totaling 16.3 million, 15.4 million and 12.6 million were
exercisable at December 31, 2003, 2002 and 2001, respectively.
The following tables summarize information concerning currently outstanding and
exercisable stock options at December 31, 2003:
OPTIONS OUTSTANDING
======================================================================================================
WEIGHTED AVERAGE
RANGES OF NUMBER REMAINING CONTRAC- WEIGHTED AVERAGE
EXERCISE PRICES OUSTANDING TUAL LIFE (YEARS) EXERCISE PRICE
======================================================================================================
$ 9.29 - $19.02 8,804,726 3.7 $ 14.94
19.03 - 25.37 1,419,478 3.0 20.50
25.38 - 31.71 5,137,790 4.9 26.71
31.72 - 38.05 9,057,277 6.3 35.73
38.06 - 50.74 1,170,520 6.7 44.51
50.75 - 63.36 3,973,356 7.9 61.77
- ------------------------------------------------------------------------------------------------------
29,563,147 5.4 $ 31.09
======================================================================================================
OPTIONS EXERCISABLE
======================================================================================================
RANGES OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUSTANDING EXERCISE PRICE
======================================================================================================
$ 9.29 - $19.02 8,614,356 $ 14.95
19.03 - 25.37 967,278 20.68
25.38 - 31.71 3,292,158 26.48
31.72 - 38.05 3,266,046 35.93
38.06 - 50.74 181,215 40.63
50.75 - 63.36 28,000 51.70
- ------------------------------------------------------------------------------------------------------
16,349,053 $ 22.15
======================================================================================================
44
The Company also granted 18,796 shares of restricted common stock during the
three years ended December 31, 2003, under the Company's stock compensation
plans. The value of restricted stock awards as of the date of grant is charged
to expense over the periods during which the restrictions lapse.
NOTE 7--PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND SPECIAL CHARGES
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In September 1999, the
Company purchased VSI for $75.1 million in cash, net of cash acquired, plus
additional contingent consideration related to product development milestones
for regulatory approvals and to future sales. The total consideration paid at
close was allocated to the fair value of the net assets acquired ($7.6 million)
and in-process research and development ($67.5 million). The Company paid
additional amounts totaling $10 million in 2001 and $5 million 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 original $95.5 million in-process research and development valuation ($13
million) will be recorded in the Company's consolidated 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 million will be capitalized as
goodwill.
The VSI purchase agreement requires the Company to make additional payments to
the former VSI shareholders upon the achievement of certain regulatory
milestones and minimum sales levels. To date, the Company has paid $15 million
related to the achievement of three regulatory milestones. Achievement of the
final regulatory milestone, U.S. regulatory approval of the distal connector,
requires an additional $5 million payment. This contractual commitment continues
indefinitely.
The contingent consideration tied to sales requires the Company to make
additional payments totaling 5% of sales once cumulative sales exceed $50
million for the proximal and distal connectors collectively. There is no maximum
amount of contingent consideration that could be paid related to sales. This
contractual commitment ceases in 2009 if the minimum sales threshold is not
attained prior to such date. If the minimum sales threshold is met prior to
2009, the commitment will extend for 10 years from the date the minimum sales
threshold is met. Cumulative proximal and distal connector sales totaled $33
million through December 31, 2003.
Company management continues to evaluate the additional research and development
expenditures necessary to develop the distal and other connector technologies
into commercially viable products. There can be no assurance that the Company
will be able to complete the development of these technologies into commercially
viable products. Additionally, the Company is not able to reasonably predict the
level of proximal or distal connector sales over a period of time which could
extend beyond the next 10 years. As a result of these factors, the Company is
not able to predict the amount of additional contingent consideration, if any,
that may become due. However, the Company believes that any amounts which may
ultimately become due in the next 5 years will not be material to the Company's
results of operations, financial position or liquidity.
2001 SPECIAL CHARGE: During the first half of 2001, Company management undertook
a review of the organizational structure of the Company's sales operations and
its heart valve operations. At that time, the structure of the Company's sales
organization included four separate sales groups. Additionally, the cardiac
surgery markets were experiencing a shift in clinical preference away from
mechanical heart
45
valves in favor of tissue heart valves and repair products for certain patients.
These changes had the potential to impact the future performance of the
Company's heart valve operations. As a result of these reviews, in July 2001
Company management approved two restructuring plans. The first plan included a
restructuring of the Company's sales organizations into two geographically
oriented groups (one group focused on the United States and one group focused on
locations outside the United States) and changes within each of these new
organizations to harmonize their operations within each of their geographies.
The second plan included the elimination of excess capacity in the Company's
heart valve operations workforce, facilities and equipment and the
discontinuance of certain heart valve product lines. As a result of these
restructuring plans, the Company recorded pre-tax charges totaling $20.7 million
in the third quarter of 2001 consisting of inventory write-downs ($9.5 million),
capital equipment write-offs ($3.4 million), employee termination costs ($5.3
million) and lease termination and other exit costs ($2.5 million).
Inventory write-downs represented the estimated net carrying value of various
inventory items that would be scrapped in connection with the decision to
terminate two heart valve product lines. Capital equipment write-offs were a
result of the elimination of certain excess capacity in the Company's heart
valve operations. Employee termination costs related to the severance costs for
approximately 90 individuals whose positions were eliminated. Lease termination
and other exit costs included office closings for international locations,
contractual obligations under certain programs that were cancelled and lease
termination costs.
A summary of the employee termination costs and lease termination and other exit
costs activity is as follows (in thousands):
LEASE
EMPLOYEE TERMINATION
TERMINATION AND OTHER
COSTS EXIT COSTS TOTAL
==============================================================================================
Initial expense and accrual in 2001 $ 5,293 $ 2,495 $ 7,788
Cash payments (2,468) (352) (2,820)
- ----------------------------------------------------------------------------------------------
Balance at December 31, 2001 2,825 2,143 4,968
Cash payments (1,676) (1,970) (3,646)
Changes in estimates (639) (53) (692)
- ----------------------------------------------------------------------------------------------
Balance at December 31, 2002 510 120 630
Cash payments (510) (120) (630)
- ----------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ - $ - $ -
==============================================================================================
In addition to the above restructuring activities, Company management identified
a trend early in the third quarter of 2001 related to the usage of certain
diagnostic equipment, also referred to as programmers. Management noted that
customer acceptance of its new programmer, which received FDA regulatory
approval in late December 2000 and was subsequently launched during the first
and second quarters of 2001, significantly exceeded its expectations,
necessitating a special analysis of the recoverability of the older programmers
that were not yet fully depreciated. After a review of the situation, Company
management approved a plan to abandon certain older programmer models during the
third quarter of 2001. As a result of this plan, the Company wrote off the
remaining net book value of the abandoned programmers ($12.2 million) to cost of
sales.
46
The charges relating to employee termination costs, capital equipment write-offs
and other costs ($11.2 million) were recorded in operating expenses as special
charges. The inventory and diagnostic equipment write-offs ($21.7 million) were
included in cost of sales as special charges.
SILZONE(R) 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. As a
result of the voluntary recall and product discontinuance, the Company recorded
a special charge totaling $26.1 million during the first quarter of 2000. The
$26.1 million special charge consisted of asset write-downs ($9.5 million),
legal and patient monitoring costs ($14.4 million) and customer returns and
related costs ($2.2 million).
The $9.5 million of asset write-downs related to inventory write-offs associated
with the physical scrapping of inventory with Silzone(R) coating ($8.6 million),
and to the write-off of a prepaid license asset and related costs associated
with the Silzone(R) coating technology ($0.9 million). The $14.4 million of
legal and patient monitoring costs related to the Company's product liability
insurance deductible ($3.5 million) and patient monitoring costs ($10.9 million)
related to contractual and future monitoring activities directly related to the
product recall and discontinuance. The $2.2 million of customer returns and
related costs represented costs associated with the return of customer-owned
Silzone(R) inventory.
In the second quarter of 2002, the Company determined that the Silzone(R)
reserves should be increased by $11 million as a result of difficulties in
obtaining certain reimbursements from the Company's insurance carriers under its
product liability insurance policies ($4.6 million), an increase in management's
estimate of the costs associated with future patient monitoring costs as a
result of extending the time period in which it planned to perform patient
monitoring activities ($5.8 million) and an increase in other related costs
($0.6 million). This additional accrual was included in selling, general and
administrative expense during the second quarter ended June 30, 2002.
The Company's product liability insurance coverage for Silzone(R) claims
consists of a number of policies with different carriers. During 2002, Company
management observed a trend where various insurance companies were not
reimbursing the Company or outside legal counsel for a variety of costs
incurred, which the Company believed should be paid under the product liability
insurance policies. These insurance companies were either refusing to pay the
claims or had delayed providing an explanation for non-payment for an extended
period of time. Although the Company believes it has legal recourse from these
insurance carriers for the costs they are refusing to pay, the additional costs
the Company would need to incur to resolve these disputes may exceed the amount
the Company would recover. As a result of these developments, the Company
increased the Silzone(R) reserves by $4.6 million in the second quarter of 2002,
which represents the existing disputed costs already incurred at that time plus
the anticipated future costs where the Company expects similar resistance from
the insurance companies on reimbursement.
During the fourth quarter of 2003, the Company reclassified $15.7 million of
existing accruals to the Silzone(R) special charge accrual from other current
assets. This amount related to probable future legal costs associated with the
Silzone(R) litigation. Previously, these accruals were offset against a
receivable from the Company's insurance carriers.
A summary of the legal and monitoring costs and customer returns and related
costs activity is as follows (in thousands):
47
LEGAL AND CUSTOMER
MONITORING RETURNS AND
COSTS RELATED COSTS TOTAL
=========================================================================================================
Initial expense and accrual in 2000 $ 14,397 $ 2,239 $ 16,636
Cash payments (5,955) (2,239) (8,194)
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 8,442 - 8,442
Cash payments (3,042) - (3,042)
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 5,400 - 5,400
Additional expense 10,433 567 11,000
Cash payments (2,442) (59) (2,501)
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 13,391 508 13,899
Cash payments (1,206) (22) (1,228)
Reclassification of legal accruals 15,721 - 15,721
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 27,906 $ 486 $ 28,392
- ---------------------------------------------------------------------------------------------------------
In addition to the amounts available under the above Silzone(R) reserves, the
Company has approximately $170 million remaining in product liability insurance
currently available for the Silzone(R)-related matters. The Company's remaining
product liability insurance for Silzone(R) claims consists of a number of
layers, each of which is covered by one or more insurance companies. The next
layer of insurance, which is a $30 million layer that would be reached after the
present $35 million layer is exhausted, is covered by Lumberman's Mutual
Casualty Insurance, a unit of the Kemper Insurance Companies (collectively
referred to as Kemper). Kemper's credit rating by A.M. Best has been downgraded
to a "D" (poor). Kemper is currently in "run off," which means that it is not
issuing new policies and is, therefore, not generating any new revenue that
could be used to cover claims made under previously-issued policies. In the
event Silzone(R) claims were to reach the Kemper layer and Kemper was unable to
pay part or all of such claims, the Company believes the other insurance
carriers in its program will take the position that the Company will be directly
liable for any claims and costs that Kemper is unable to pay, and that insurance
carriers at policy layers following Kemper's layer will not provide coverage for
Kemper's layer. Kemper also provides part of the coverage for Silzone(R) claims
in the Company's final layer of insurance ($20 million of the final $50 million
layer).
It is possible that Silzone(R) costs and expenses will reach the Kemper layers
of insurance coverage, and it is possible that Kemper will be unable to meet its
obligations to the Company. If this were to happen, the Company could incur a
loss of up to $50 million. The Company has not accrued for any such losses.
NOTE 8--OTHER INCOME (EXPENSE)
Other income (expense) consists of the following (in thousands):
2003 2002 2001
================================================================================
Interest income $ 7,031 $ 5,481 $ 3,261
Interest expense (3,746) (1,754) (12,567)
Other (593) (324) 1,468
- --------------------------------------------------------------------------------
Other income (expense) $ 2,692 $ 3,403 $ (7,838)
================================================================================
48
NOTE 9--INCOME TAXES
The Company's earnings before income taxes were generated from its U.S. and
international operations as follows (in thousands):
2003 2002 2001
================================================================================
U.S. $285,214 $270,595 $83,128
International 173,423 102,763 144,850
- --------------------------------------------------------------------------------
Earnings before income taxes $458,637 $373,358 $227,978
================================================================================
Income tax expense consists of the following (in thousands):
2003 2002 2001
================================================================================
Current:
U.S. federal $56,669 $48,459 $48,844
U.S. state and other 4,285 4,732 4,994
International 25,146 6,187 13,229
- --------------------------------------------------------------------------------
Total current 86,100 59,378 67,067
Deferred 33,146 37,695 (11,681)
- --------------------------------------------------------------------------------
Income tax expense $119,246 $97,073 $55,386
================================================================================
The tax effects of the cumulative temporary differences between the tax bases of
assets and liabilities and their carrying amounts for financial statement
purposes are as follows (in thousands):
2003 2002
================================================================================
Deferred income tax assets:
Net operating loss carryforwards $ 3,088 $ 12,732
Tax credit carryforwards 20,272 30,554
Inventories 53,395 34,403
Intangible assets - 3,552
Accrued liabilities and other 16,801 11,569
- --------------------------------------------------------------------------------
Deferred income tax assets 93,556 92,810
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized gain on available-for-sale securities (6,782) (2,599)
Property, plant and equipment (30,955) (21,085)
Intangible assets (33,162) -
- --------------------------------------------------------------------------------
Deferred income tax liabilities (70,899) (23,684)
- --------------------------------------------------------------------------------
Net deferred income tax asset $ 22,657 $ 69,126
- --------------------------------------------------------------------------------
The increase in the Company's current deferred income taxes during 2003 was due
primarily to an increase in the book to tax differences related to profits on
intercompany sales of inventory and to various differences related to the
acquisition of Getz Japan. The change in the Company's long-term deferred income
tax asset/liability during 2003 was due primarily to the utilization of net
operating losses and tax credits, the acquisition of Getz Japan, and increases
in the book to tax differences related to depreciation of fixed assets and
amortization of goodwill and other intangible assets. The
49
Company has not recorded any valuation allowance for its deferred tax assets as
of December 31, 2003 or 2002.
A reconciliation of the U.S. federal statutory income tax rate to the Company's
effective income tax rate is as follows (in thousands):
2003 2002 2001
========================================================================================================
Income tax expense at the U.S. federal
statutory rate of 35% $ 160,523 $ 130,675 $79,792
U.S. state income taxes, net of federal tax benefit 12,533 8,378 3,654
International taxes at lower rates (39,032) (29,972) (20,089)
Tax benefits from extraterritorial income exclusion (7,173) (3,675) (3,681)
Research and development credits (11,013) (9,467) (5,984)
Non-deductible purchased in-process research
and development charges - - 3,912
Other 3,408 1,134 (2,218)
- --------------------------------------------------------------------------------------------------------
Income tax expense $ 119,246 $97,073 $55,386
========================================================================================================
Effective income tax rate 26.0% 26.0% 24.3%
- --------------------------------------------------------------------------------------------------------
At December 31, 2003, the Company has $8.8 million of U.S. federal net operating
loss carryforwards and $6.6 million of U.S. tax credit carryforwards that will
expire from 2004 through 2019 if not utilized. The Company also has state tax
credit carryforwards of $13.7 million that have an unlimited carryforward
period. These amounts are subject to annual usage limitations. The Company's net
operating loss carryforwards arose primarily from acquisitions.
The Company has not recorded U.S. deferred income taxes on $547 million of its
non-U.S. subsidiaries' undistributed earnings, because such amounts are intended
to be reinvested outside the United States indefinitely.
NOTE 10--RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS: The Company has a 401(k) profit sharing plan that
provides retirement benefits to substantially all full-time U.S. employees.
Eligible employees may contribute a percentage of their annual compensation,
subject to Internal Revenue Service limitations, with the Company matching a
portion of the employees' contributions. The Company also contributes a portion
of its earnings to the plan based upon Company performance. The Company's
matching and profit sharing contributions are at the discretion of the Company's
Board of Directors. In addition, the Company has defined contribution programs
for employees in certain countries outside the United States. Company
contributions under all defined contribution plans totaled $24.0 million, $18.8
million and $16.2 million in 2003, 2002 and 2001, respectively.
DEFINED BENEFIT PLANS: The Company has funded and unfunded defined benefit plans
for employees in certain countries outside the United States. The Company had an
accrued liability totaling $16.0 million and $10.7 million at December 31, 2003
and 2002, respectively, which approximated the actuarially calculated unfunded
liability. The related pension expense was not material.
50
NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION: The Company develops, manufactures and distributes
cardiovascular medical devices for the global cardiac rhythm management (CRM),
cardiac surgery (CS) and cardiology and vascular access (C/VA) therapy areas.
The Company has three operating segments, Cardiac Rhythm Management (CRM),
Cardiac Surgery (CS) and Daig, which focus on the development and manufacture of
products for the three therapy areas. The primary products produced by each
segment are: CRM - pacemaker and ICD systems; CS - mechanical and tissue heart
valves; Daig - electrophysiology catheters, vascular closure devices and other
cardiology and vascular access products. The Company has aggregated the CRM and
CS segments into one reportable segment based primarily upon their similar
operational and economic characteristics.
The Company's reportable segments include end customer revenues from the sale of
products they each develop and manufacture. The costs included in each of the
reportable segments' operating results include the direct costs of the products
sold to end customers and operating expenses managed by each of the segments.
Certain costs of goods sold and operating expenses managed by the Company's
selling and corporate functions are not included in segment operating profit.
Consequently, segment operating profit presented below is not representative of
the operating profit of the Company's products in these segments.
The following table presents certain financial information about the Company's
reportable segments (in thousands):
51
CRM/CS DAIG OTHER TOTAL
====================================================================================================================================
FISCAL YEAR ENDED DECEMBER 31, 2003
Net sales $ 1,499,425 $ 366,433 $ 66,656 $ 1,932,514
Operating profit (a) 873,904 202,007 (619,966) 455,945
Depreciation and
amortization expense 29,836 8,307 38,540 76,683
Total assets (b)(c) 639,724 147,270 1,769,100 2,556,094
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2002
Net sales $ 1,305,750 $ 284,179 $ - $ 1,589,929
Operating profit (a) 713,341 149,592 (492,978) 369,955
Depreciation and
amortization expense 33,819 7,158 33,943 74,920
Total assets (b)(c) 723,414 134,610 1,093,355 1,951,379
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2001 (D)
Net sales $ 1,135,833 $ 211,523 $ - $ 1,347,356
Operating profit (a) 583,030 105,947 (453,161) 235,816
====================================================================================================================================
(a) OTHER OPERATING PROFIT INCLUDES CERTAIN COSTS OF GOODS SOLD AND OPERATING
EXPENSES MANAGED BY THE COMPANY'S SELLING AND CORPORATE FUNCTIONS. IN
FISCAL YEAR 2001, OTHER ALSO INCLUDES SPECIAL CHARGES AND PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.
(b) OTHER TOTAL ASSETS INCLUDE THE ASSETS MANAGED BY THE COMPANY'S SELLING
AND CORPORATE FUNCTIONS, INCLUDING END CUSTOMER RECEIVABLES, INVENTORY,
CORPORATE CASH AND EQUIVALENTS AND DEFERRED INCOME TAXES.
(c) THE COMPANY DOES NOT COMPILE EXPENDITURES FOR LONG-LIVED ASSETS BY
SEGMENT AND, THEREFORE, HAS NOT INCLUDED THIS INFORMATION AS IT IS
IMPRACTICABLE TO DO SO.
(d) DURING 2001, THE COMPANY COMPLETED A REORGANIZATION OF ITS GLOBAL SALES
ACTIVITIES, WHICH RESULTED IN CHANGES TO ITS INTERNAL MANAGEMENT AND
FINANCIAL REPORTING STRUCTURE. DUE TO THIS RESTRUCTURING, INFORMATION
RELATING TO DEPRECIATION AND AMORTIZATION, TOTAL ASSETS AND EXPENDITURES
FOR LONG-LIVED ASSETS FOR FISCAL YEAR 2001 BY CURRENT REPORTING SEGMENTS
HAS NOT BEEN COMPILED AS IT IS IMPRACTICABLE TO DO SO.
Net sales by class of similar products were as follows (in thousands):
NET SALES 2003 2002 2001
================================================================================================
Cardiac rhythm management $ 1,365,212 $ 1,147,489 $ 965,968
Cardiac surgery 270,933 250,957 248,045
Cardiology and vascular access 296,369 191,483 133,343
- ------------------------------------------------------------------------------------------------
$ 1,932,514 $ 1,589,929 $ 1,347,356
================================================================================================
52
GEOGRAPHIC INFORMATION: The following tables present certain geographical
financial information (in thousands):
NET SALES (a) 2003 2002 2001
================================================================================================
United States $ 1,129,055 $ 1,042,766 $ 880,086
International
Europe 465,369 347,936 294,852
Japan 207,431 95,813 83,361
Other (b) 130,659 103,414 89,057
- ------------------------------------------------------------------------------------------------
803,459 547,163 467,270
- ------------------------------------------------------------------------------------------------
$ 1,932,514 $ 1,589,929 $ 1,347,356
================================================================================================
LONG-LIVED ASSETS (b) 2003 2002 2001
================================================================================================
United States $ 744,445 $ 674,119 $ 626,140
International
Europe 96,520 88,194 76,542
Japan 152,772 267 46
Other 70,020 62,213 61,215
- ------------------------------------------------------------------------------------------------
319,312 150,674 137,803
- ------------------------------------------------------------------------------------------------
$ 1,063,757 $ 824,793 $ 763,943
================================================================================================
(a) NET SALES ARE ATTRIBUTED TO GEOGRAPHIES BASED ON LOCATION OF THE CUSTOMER.
(b) NO ONE GE0GRAPHIC MARKET IS GREATER THAN 2% OF CONSOLIDATED NET SALES.
(c) LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES.
53
NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2003 and 2002 is as follows (in thousands, except
per share amounts):
QUARTER
FIRST SECOND THIRD FOURTH
============================================================================================
FISCAL YEAR ENDED DECEMBER 31, 2003:
Net sales $441,384 $495,093 $477,454 $518,583
Gross profit 301,920 333,793 330,741 362,969
Net earnings 79,987 81,932 84,621 92,851
Basic net earnings per share 0.45 0.45 0.48 0.54
Diluted net earnings per share $ 0.43 $ 0.43 $ 0.46 $ 0.51
FISCAL YEAR ENDED DECEMBER 31, 2002:
Net sales $371,193 $404,348 $404,857 $409,531
Gross profit 252,405 275,386 276,476 279,716
Net earnings 62,076 69,555 (a) 71,680 72,974
Basic net earnings per share 0.35 0.39 0.40 0.41
Diluted net earnings per share $ 0.34 $ 0.38 $ 0.39 $ 0.40
============================================================================================
(a) INCLUDES A CASH RECEIPT OF $18.5 MILLION RELATING TO THE SETTLEMENT OF
CERTAIN PATENT LITIGATION, WHICH WAS RECORDED AS A REDUCTION OF SG&A
EXPENSE. ALSO, THE COMPANY RECORDED IN SG&A AN $11 MILLION CHARGE TO
INCREASE THE RESERVE FOR EXPENSES RELATED TO THE SILZONE(R)RECALL AND A $7.5
MILLION DISCRETIONARY CONTRIBUTION TO THE COMPANY'S CHARITABLE FOUNDATION,
THE ST. JUDE MEDICAL FOUNDATION.
54
FIVE-YEAR SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
2003 2002 (a) 2001 (b) 2000 (c) 1999 (d)
===============================================================================================================================
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:
Net sales $1,932,514 $1,589,929 $1,347,356 $1,178,806 $1,114,549
Gross profit $1,329,423 $1,083,983 $ 888,197 $ 787,657 $ 733,647
Percent of net sales 68.8% 68.2% 65.9% 66.8% 65.8%
Operating profit $ 455,945 $ 369,955 $ 235,816 $ 202,359 $ 89,188
Percent of net sales 23.6% 23.3% 17.5% 17.2% 8.0%
Net earnings $ 339,391 $ 276,285 $ 172,592 $ 129,094 $ 24,227
Percent of net sales 17.6% 17.4% 12.8% 11.0% 2.2%
Diluted net earnings per share $ 1.83 $ 1.51 $ 0.97 $ 0.75 $ 0.14
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END:
Cash and equivalents $ 461,253 $ 401,860 $ 148,335 $ 50,439 $ 9,655
Working capital (e) 982,022 739,665 475,692 388,322 389,768
Total assets 2,556,094 1,951,379 1,628,727 1,532,716 1,554,038
Long-term debt 351,813 - 123,128 294,500 477,495
Shareholders' equity $1,604,247 $1,576,727 $1,183,745 $ 940,849 $ 794,021
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Diluted weighted average
shares outstanding 185,377 183,002 178,767 171,634 169,470
===============================================================================================================================
FISCAL YEAR 2003 CONSISTED OF 53 WEEKS. ALL OTHER FISCAL YEARS NOTED ABOVE
CONSISTED OF 52 WEEKS. THE COMPANY DID NOT DECLARE OR PAY ANY CASH DIVIDENDS
DURING 1999 THROUGH 2003.
(a) RESULTS FOR 2002 INCLUDE A CASH RECEIPT OF $18.5 MILLION RELATING TO THE
SETTLEMENT OF CERTAIN PATENT LITIGATION, WHICH WAS RECORDED AS A REDUCTION
OF SG&A EXPENSE. ALSO, THE COMPANY RECORDED IN SG&A AN $11 MILLION CHARGE TO
INCREASE THE RESERVE FOR EXPENSES RELATED TO THE SILZONE(R) RECALL AND A
$7.5 MILLION DISCRETIONARY CONTRIBUTION TO THE COMPANY'S CHARITABLE
FOUNDATION, THE ST. JUDE MEDICAL FOUNDATION.
(b) RESULTS FOR 2001 INCLUDE A $32.8 MILLION SPECIAL CHARGE AND PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $10 MILLION. THE IMPACT OF
THESE ITEMS ON 2001 NET EARNINGS WAS $30.5 MILLION, OR $0.17 PER DILUTED
SHARE.
(c) RESULTS FOR 2000 INCLUDE A $26.1 MILLION SPECIAL CHARGE AND A PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5 MILLION. THE IMPACT OF
THESE ITEMS ON 2000 NET EARNINGS WAS $27.2 MILLION, OR $0.16 PER DILUTED
SHARE.
(d) RESULTS FOR 1999 INCLUDE A $9.8 MILLION SPECIAL CHARGE AND PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES TOTALING $115.2 MILLION. THE
IMPACT OF THESE ITEMS ON 1999 NET EARNINGS WAS $119.8 MILLION, OR $0.71 PER
DILUTED SHARE.
(e) TOTAL CURRENT ASSETS LESS TOTAL CURRENT LIABILITIES.
55
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 43023
Providence, Rhode Island 02940-3023
1.877.498.8861
www.equiserve.com (Account Access Availability)
Hearing impaired #TDD: 1.800.952.9245
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:30 a.m. on Wednesday, May
12, 2004, at the Minnesota Historical Center, 345 Kellogg Boulevard West, St.
Paul, Minnesota, 55102. Parking is available.
INVESTOR CONTACT
Laura C. Merriam, Director, 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 55117-9983
The Investor Relations (IR) section on St. Jude Medical's
Web site includes all SEC filings, a list of analyst coverage, and a calendar of
upcoming earnings announcements and IR events. St. Jude Medical's Newsroom
features news 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.
CORPORATE GOVERNANCE
(SEE COMPANY INFORMATION ON WEB SITE- WWW.SJM.COM)
o Corporate Governance Charter
o Code of Business Conduct
o SEC Filings
COMPANY STOCK SPLITS
2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89, 4/30/90 and 6/10/02;
3:2 on 11/16/95
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: STJ
The range of high and low prices per share for the Company's common stock for
fiscal 2003 and 2002 is set forth below. As of February 17, 2004, the Company
had 3,234 shareholders of record.
Fiscal Year Ended December 31 2003 2002
========================================================================
Quarter High Low High Low
========================================================================
First $49.48 $38.76 $40.80 $35.75
Second $63.60 $47.50 $43.13 $36.20
Third $59.10 $48.10 $41.00 $30.52
Fourth $64.00 $52.49 $40.35 $31.16
TRADEMARKS
Aescula(TM), AF Suppression(TM), Alliance(TM), Angio-Seal(TM),
Apeel(TM), Atlas(R), AutoCapture(TM), BEAT-BY-BEAT(TM), BiLinx(TM), Epic(TM),
Fast Cath(TM), Fast Cath Duo(TM), FaSt Path(TM), FlexCuff(TM), Frontier(TM),
GuideRight(TM), Housecall Plus(TM), HydraSteer(TM), Identity(R), Integrity(R),
IsoFlex(R), Linx(TM), LIvewire(TM), Livewire Cannulator(TM), Livewire Spiral
HP(TM), Livewire TC(TM), Microny(R), Maximum(TM), NaviFlex(TM), Pacel(TM),
Passive PLus(R), Photon(R), QuickSite(TM), Reflexion(TM), Reflexion
Cannulator(TM), Response(TM), Riata(R), Seal-Away(TM), SJM(R), SJM Biocor(TM),
SJM Epic(TM), SJM Regent(TM), SJM Tailor(TM), Spyglass(TM), St. Jude Medical(R),
Supreme(TM), Symmetry(TM), Telesheath(TM), Tendril(R), Toronto Root(TM), Toronto
SPV(R), TVL(R), Ultimum(TM), Verity(TM), Victory(TM).
(C)2004 ST. JUDE MEDICAL, INC.
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