SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995 Commission File Number 0-8672
ST. JUDE MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1276891
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
(Address of principal executive offices)
(612) 483-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
The number of shares of common stock, par value $.10 per share, outstanding at
November 2, 1995 is 69,970,635.
This Form 10-Q consists of 10 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 10.
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1995. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
NOTE 2 - STOCK DIVIDEND
Earnings per share and share data have been adjusted throughout this report for
the 50% stock dividend which will be paid on or about November 16, 1995 to
shareholders of record on November 2, 1995.
NOTE 3 - ACQUISITIONS
Effective September 30, 1994, the Company acquired from Siemens AG substantially
all of its worldwide cardiac rhythm management operations ("Pacesetter") for a
price not to exceed $531.3 million. The initial purchase price of $511.3 million
could have been adjusted upward by a maximum of $20 million or downward based
upon the change in the net asset value of Pacesetter from September 30, 1993, to
September 30, 1994. During the third quarter 1995, the Company and Siemens AG
resolved a dispute over Pacesetter's final net asset value and agreed to a final
purchase price of $511.3 million.
The following unaudited pro forma summary information presents the results of
operations of the Company and Pacesetter for the nine months ended September 30,
1994, as if the acquisition had occurred at the beginning of 1993, after giving
effect to certain adjustments including amortization of goodwill, increased
interest expense, decreased interest income and the related income tax effects.
Nine Months Ending
September 30, 1994
(Unaudited)
Net sales $ 500.7 million
Net income $ 82.9 million
Earnings per share $ 1.17
These pro forma results are not necessarily indicative of the results that would
have occurred had the acquisition actually taken place at the beginning of 1993,
or of the expected future results of operations.
NOTE 4 - CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. The Company may be
subject to future uninsured claims in connection with two pacing lead models
which have been the subject of the Hann case as more fully described in Item 1
of this Quarterly Report on Form 10-Q.
The anticipated financial liability related to settlement of the Hann case is
approximately $7 million. At September 30, 1995, the Company adjusted its
purchase price allocation related to its 1994 acquistion of Pacesetter to
establish a liability reserve for claims relating to the aforementioned pacing
lead models. This reserve may be adjusted in the fourth quarter based on a
further evaluation of potential claims.
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1995 1994 1995 1994
Net sales $ 175,953 $62,468 $ 542,003 $195,889
Cost of sales 53,266 15,477 168,219 48,807
Gross profit 122,687 46,991 373,784 147,082
Operating expenses:
Selling, general &
administrative 58,354 13,720 177,707 41,647
Research & development 16,914 2,539 51,362 7,786
Total operating expenses 75,268 16,259 229,069 49,433
Operating profit 47,419 30,732 144,715 97,649
Other income (expense) (1,147) 3,518 (6,113) 10,365
Income before taxes 46,272 34,250 138,602 108,014
Income tax provision 14,345 9,761 42,967 30,784
Net income $ 31,927 $24,489 $ 95,635 $ 77,230
Earnings per share:
Primary $ 0.45 $ 0.35 $ 1.35 $ 1.10
Fully diluted $ 0.45 $ 0.35 $ 1.34 $ 1.10
Dividends paid per share $ 0.00 $ 0.07 $ 0.00 $ 0.20
Shares outstanding
Primary 71,428 70,224 70,927 70,068
Fully diluted 71,616 70,365 71,496 70,335
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
SEPTEMBER 30 DECEMBER 31
1995 1994
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 16,387 $ 11,791
Marketable securities 135,127 125,177
Accounts receivable, less allowance
(1995 - $8,483; 1994 - $5,760) 158,306 146,062
Inventories
Finished goods 70,849 59,534
Work in process 29,112 21,723
Raw materials 52,438 48,750
Total inventories 152,399 130,007
Other current assets 14,177 21,045
Total current assets 476,396 434,082
Property, plant and equipment 182,055 157,017
Less accumulated depreciation (41,241) (24,852)
Net property, plant and equipment 140,814 132,165
Other assets 344,796 353.651
TOTAL ASSETS $ 962,006 $ 919,898
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 151,883 $ 112,680
Long-term debt 140,000 255,000
Contingencies
Shareholders' equity:
Preferred stock, par value $1.00 per share -
25,000,000 shares authorized; no shares issued --- ---
Common stock, par value $.10 per share -
100,000,000 shares authorized; issued and
outstanding 1995 - 69,970,915 shares;
1994 - 69,718,623 6,997 6,972
Additional paid-in capital 31,055 25,947
Retained earnings 616,731 521,097
Cumulative translation adjustment 6,944 (2,484)
Unrealized gain on available-for-sale securities 8,396 686
Total shareholders' equity 670,123 552,218
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $962,006 $919,898
NOTE: The balance sheet at December 31, 1994 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1995 1994
Operating Activities:
Net income $ 95,635 $ 77,230
Depreciation and amortization 30,565 6,825
Working capital change 6,375 (8,702)
Net cash provided by operating activities 132,575 75,353
Investment Activities:
Purchases of property, plant and equipment (23,288) (11,931)
Sales of available-for-sale securities, net 2,484 237,399
Acquisition (Note 3) 13,000 (524,300)
Other investing activities (11,215) (19,470)
Net cash used in investing activities (19,019) (318,302)
Financing Activities:
Proceeds from exercise of stock options 5,133 788
Cash dividends paid --- (13,935)
Proceeds from issuance of long-term debt --- 250,000
Repayment of long-term debt (115,000) ---
Net cash provided by (used in) financing activities (109,867) 236,853
Effect of currency exchange rate changes on cash 907 674
Increase (decrease) in cash and cash equivalents 4,596 (5,422)
Cash and cash equivalents at beginning of year 11,791 26,987
Cash and cash equivalents at end of period $ 16,387 $ 21,565
ST. JUDE MEDICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS:
INTRODUCTION: Effective September 30, 1994, St. Jude Medical, Inc. acquired from
Siemens AG substantially all the worldwide assets of its cardiac rhythm
management operations ("Pacesetter"). The acquisition significantly expanded the
Company's product offerings. The Company's third quarter and year-to-date 1995
financial results include Pacesetter's operations. Results between 1995 and 1994
are not directly comparable due to the Pacesetter acquisition.
NET SALES. Net sales for the third quarter 1995 totalled $175,953, including
approximately $111,000 from Pacesetter operations. Total net sales increased
$113,485, or 182%, over net sales in the 1994 third quarter. For the first nine
months of 1995, net sales totalled $542,003, a $346,114, or 177%, increase over
the comparable period of 1994.
Third quarter net sales in 1995, exclusive of the Pacesetter net sales, as
compared to the third quarter of 1994 increased by over $2,500, or approximately
4%. For the first nine months, the 1995 increase over 1994 exceeded $7,400, or
about 4%. These increases were mainly attributable to higher mechanical heart
valve net sales, particularly in emerging markets. In addition, tissue heart
valve and cardiac assist device net sales increased over 1994 levels. Also a
favorable foreign currency translation effect due to the weaker U.S. dollar
added approximately $1,000 and $4,800 to net sales in the third quarter and
first nine months of 1995, respectively.
Pacesetter net sales totalled approximately $111,000 for the quarter and
$339,000 for the first nine months of 1995. Compared to proforma 1994 results,
net sales increased approximately 10% and 11% for the quarter and first nine
months, respectively. The increase principally resulted from strong domestic
performance and was favorably impacted by new product introductions, competitor
problems and a continuing shift toward higher price, superior performance
products.
GROSS PROFIT. The third quarter 1995 gross profit was $122,687, or 69.7% of net
sales as compared to $46,991, or 75.2% of net sales during the comparable 1994
period. For the first nine months of 1995 and 1994, gross profit was $373,784,
or 69.0% of net sales, and $147,082, or 75.1% of net sales, respectively. The
gross profit margin decreased in 1995 primarily because the Pacesetter margins
are lower than the margins of the Company's heart valve operations. In addition,
acquired Pacesetter fixed assets were recorded at fair market value resulting in
higher depreciation charges. Higher mechanical heart valve component costs and
sales into lower margin emerging markets, together with the commencement of
depreciation of costs associated with the new valve manufacturing plant also
decreased the gross profit margin.
SELLING, GENERAL & ADMINISTRATIVE. Selling, general & administrative (SG&A)
expenses increased in the third quarter 1995 to $58,354 from $13,720 in the
comparable period of 1994. As a percentage of net sales, SG&A increased in 1995
to 33.2% from 22.0% in 1994. On a year-to-date basis, 1995 SG&A expenses
totalled $177,707, a $136,060 increase over the $41,647 recorded during the
first nine months of 1994.
Pacesetter related goodwill has been included in 1995 SG&A. As a percentage of
sales, Pacesetter SG&A was higher than heart valve operations because Pacesetter
uses a commission based third party distributor sales force in the U.S. and
international markets, except Western Europe. The Company also established a
Western European distribution infrastructure as a result of the Pacesetter
acquisition which increased SG&A expenses.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses were $16,914
and $2,539 for the third quarters of 1995 and 1994, respectively. For the first
nine months, R&D expenses totalled $51,362 and $7,786 for 1995 and 1994,
respectively. As a percentage of net sales, the first nine months R&D expense
increased in 1995 to 9.5% from 4.0% in 1994.
The higher spending level primarily reflects Pacesetter bradycardia, tachycardia
and programmer projects. In addition, R&D expenses increased in the tissue heart
valve technology area.
OTHER INCOME/(EXPENSE). The $511,300 Pacesetter acquisition was funded by debt
and internal funds. Consequently, interest income significantly decreased and
the Company began to incur interest expense. Interest expense was approximately
$2,900 in the third quarter and $10,600 for the first nine months of 1995.
Interest income totalled about $1,600 in the third quarter and $4,900 in the
first nine months of 1995 versus nearly $4,100 and $11,500 in the comparable
periods of 1994.
INCOME TAX PROVISION. The Company's 1995 effective tax rate was 31%, a 2.5
percentage point increase over the 28.5% effective tax rate in 1994. The higher
effective tax rate was due to reduced tax exempt interest income as a result of
the Pacesetter acquisition, lower tax benefits derived from the Company's Puerto
Rican operations as a result of Internal Revenue Code (IRC) changes passed in
1993 and generally higher taxed income from Pacesetter operations.
OUTLOOK. The Company expects further consolidation within the worldwide health
care industry and continued emphasis on cost effective outcome based
technological advancements. Competitive pressures, hospital consolidations and
various health care reform agendas may negatively impact product sales and
restrict pricing flexibility.
An Internal Revenue Service proposed change to IRC Section 936 regulations
pertaining to the computation of Puerto Rican profits would, if finalized in its
current form, reduce the benefits the Company derives from its Puerto Rican
operations. The Company cannot predict when or if the proposed regulation will
become final. No provision has been made for this proposed regulation change.
The Company continues to seek further diversification opportunities in the form
of acquisitions, joint ventures, partnerships and investments in emerging
technology companies as well as through internal R&D. The size, timing and
financial impact of such efforts cannot be predicted.
FINANCIAL CONDITION:
The financial condition of the Company at September 30, 1995, continues to be
strong. Long-term debt was reduced to $140,000, a $65,000 decrease during the
third quarter and a $115,000 decrease during the first nine months of 1995. The
ratio of current assets to current liabilities was 3.1 to 1 at September 30,
1995.
Total assets increased $2,159 during the third quarter of 1995. Cash and
marketable securities increased $7,073 primarily as a result of cash flow from
operations after debt repayment. Accounts receivable decreased $5,223 mainly as
a result of a focused collection effort in Western Europe and a lower sales
level from the previous quarter. Inventories increased $6,332 during the quarter
primarily as a result of a gradual ramp-up in heart valve production in
anticipation of purchasing less mechanical heart valve components from our
supplier in 1996 and new product offerings.
Shareholders' equity increased $45,150 during the quarter to $670,123. The
increase resulted from net income of $31,927, a net unrealized gain on
investments of $6,277, $1,087 associated with the exercise of stock options and
the issuance of restricted shares, and a foreign currency translation adjustment
of $5,859.
ST. JUDE MEDICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands except per share amounts)
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
St. Jude Medical, Inc. sued Electromedics and Medtronic, Inc. in
1994 in district court in Minnesota to recover a $3 million
termination fee which was due to St. Jude under an acquisition
agreement between St. Jude and Electomedics when Electomedics
elected to be acquired by Medtronic. The district court ruled
against St. Jude but the Minnesota Court of Appeals reversed the
lower court and held that St. Jude was entitled to recover the $3
million fee. In October the Minnesota Supreme Court denied
Medtronic's request to review the decision of the Court of
Appeals. No further appeal is possible.
From 1987 to 1991 Siemens through its Pacesetter and other
Affiliates ("Siemens") manufactured and sold approximately 32,000
model 1016T and 1026T pacemaker leads of which approximately
25,000 were sold in the U.S. In 1991 Siemens ceased selling these
products and issued a safety alert to physicians explaining that
these pacemaker leads had a higher than expected failure rate due
to an inner insulation problem. The safety alert recommended
monitoring steps to minimize any risk posed by the devices. The
FDA treated this notice as a Class I recall.
In March, 1993 Siemens was sued in federal district court in
Cincinnati, Ohio. ("the Wilson case"). The suit alleged that the
model 1016T leads were negligently designed and manufactured. The
suit sought class action status for patients whose 1016T leads had
malfunctioned up to that time. The class status was granted by the
court in November 1993. When St. Jude acquired from Siemens
substantially all of its worldwide cardiac rhythm management
business ("Pacesetter") on October 1, 1994, the Purchase Agreement
specifically provided that Siemens retain all liability for the
Wilson case as well as all other litigation that was pending or
threatened before October 1, 1994. The Purchase Agreement also
provided that St. Jude would assume liability for other product
liability claims which arose after September 30, 1994.
Siemens and St. Jude were named defendants in a class action suit
filed in March 1995 in Houston, Texas for alleged defects in
models 1016T and 1026T pacing leads (the "Hann case"). The suit
sought class action status for patients who had inner insulation
failures of these leads after March 22, 1993 and who were not
members of the Wilson class. Siemens and St. Jude settled the
Wilson and Hann cases in November 1995. St. Jude's anticipated
financial responsibility for the settlement is approximately $7.0
million. The precise number of class members, and the
corresponding financial liability, could increase or decrease as
the process for filing claims is completed. The Settlement
Agreement has an "opt out" provision for class members and the
Settlement Agreement is subject to approval by the court.
St. Jude's product liability insurance carrier, Steadfast, a
wholly owned subsidiary of Zurich Insurance Company ("Zurich"),
has denied coverage for this case and has filed suit against St.
Jude in federal district court in Minneapolis seeking rescission
of the policy covering Pacesetter business retroactive to the date
St. Jude acquired Pacesetter. Zurich alleges that St. Jude made
material negligent misrepresentations to Zurich including failure
to disclose the Wilson case in order to procure the insurance
policy. St. Jude has filed an answer denying Zurich's claim and
has alleged that Zurich specifically had knowledge of the Wilson
case.
The terms of the product liability insurance policy which Zurich
is seeking to rescind provide that St. Jude would be entitled to
$10 million in coverage for the 1016T and 1026T pacemaker lead
claims after payment by St. Jude of a self insured retention. St.
Jude is investigating whether it may have claims against any
entities, in addition to Zurich, arising from this situation.
Item 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
Item 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
2 Not applicable
4 Amended and Restated Rights Agreement
dated as of June 26, 1990 between the
Company and Norwest Bank Minneapolis,
N.A., as Rights Agent including the
Certificate of Designation, Preferences
and Rights of Series A Junior
Participating Preferred Stock is
incorporated by reference to Exhibit 1
of the Registrant's Form 8 Amendment 2
to Form 8-A dated July 6, 1990.
10 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
NOVEMBER 1, 1995 /s/ STEPHEN L. WILSON
DATE STEPHEN L. WILSON
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)