UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-18724
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MARQUETTE MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1046671
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8200 W. Tower Avenue, Milwaukee, Wisconsin 53223
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(Address of Principal Executive Offices) (Zip Code)
(414) 355-5000
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding
at February 28, 1997
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Class A, $.10 par value 16,187,703 Shares
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Class C, $.01 par value NONE
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
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INDEX
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Page Number
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PART I - FINANCIAL INFORMATION:
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Item 1) Financial Statements -
Consolidated Condensed Statements of Income 3
For the Three Months and Nine Months Ended
January 31, 1997 and 1996 (Unaudited)
Consolidated Condensed Balance Sheets As of 4
January 31, 1997 (Unaudited) and
April 30, 1996
Consolidated Condensed Statements of Cash Flows 5
For the Nine Months Ended January 31, 1997
and 1996 (Unaudited)
Notes to Consolidated Condensed Financial 6
Statements (Unaudited)
Item 2) Management's Discussion and Analysis of Financial 7-9
Condition and Results of Operations
PART II - OTHER INFORMATION
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Item 2) Changes in Securities 10
Item 5) Other Information 10
Item 6) Exhibits and Reports on Form 8-K 10
SIGNATURE 11
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- 2 -
PART I - FINANCIAL INFORMATION
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ITEM 1 - Financial Statements
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
(UNAUDITED)
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net Sales $137,714 $110,309 $399,416 $275,946
Cost of Sales 70,234 56,731 205,241 139,884
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Gross profit 67,480 53,578 194,175 136,062
-------- -------- -------- --------
Engineering Expenses 12,180 8,961 35,967 25,142
Selling Expenses 33,003 26,798 97,246 70,832
General and Administrative
Expenses 11,705 8,233 33,588 21,760
Purchased In-Process R&D Charge -- 35,700 -- 35,700
-------- -------- -------- --------
Total operating expenses 56,888 79,692 166,801 153,434
-------- -------- -------- --------
Income from operations 10,592 (26,114) 27,374 (17,372)
Interest Expense 2,480 1,239 6,669 2,474
Other (Income) Expense, net (1,192) 54 (2,310) (473)
-------- -------- -------- --------
Income before provision
for income taxes 9,304 (27,407) 23,015 (19,373)
Provision for Income Taxes 3,406 3,258 8,631 6,269
-------- -------- -------- --------
Net Income $ 5,898 $(30,665) $ 14,384 $(25,642)
======== ======== ======== ========
Net Income per Class A
Common Share $ .37 $ (1.89) $ .89 $ (1.58)
======== ======== ======== ========
Shares used in per
share calculation 16,121 16,255 16,252 16,238
======== ======== ======= ========
The accompanying notes are an integral part of these statements.
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)
As of As of
January 31, April 30,
ASSETS 1997 1996
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,813 $ 2,890
Accounts receivable, less allowances of $5,279
and $6,430, respectively 143,145 138,455
Inventories 112,932 106,168
Prepaid expenses and other 4,235 5,543
Deferred income tax benefits 7,748 7,904
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Total current assets 272,873 260,960
PROPERTY AND EQUIPMENT, NET 95,142 96,776
OTHER ASSETS 67,398 73,982
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$435,413 $431,718
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Amounts due to bank $ 7,287 $ 7,101
Notes payable to bank 40,920 28,822
Current maturities of long-term debt -- 3,122
Accounts payable 31,684 31,764
Accrued liabilities 47,171 56,954
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Total current liabilities 127,062 127,763
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LONG-TERM DEBT, less current maturities 80,673 81,254
DEFERRED INCOME TAXES 18,747 21,404
PENSION AND OTHER LONG-TERM LIABILITIES 44,160 45,372
CLASS A COMMON STOCK UNDER REPURCHASE AGREEMENTS 8,000 8,000
SHAREHOLDERS' EQUITY:
Class A Common Stock, $.10 par value, 30,000,000
shares authorized, 16,205,295 and 16,060,311
shares issued, respectively 1,621 1,606
Class C Common Stock, $.01 par value, 50,000,000
shares authorized, 0 shares and 26,250,000
shares issued and outstanding, respectively -- 263
Additional paid-in capital 28,999 31,569
Retained earnings 140,536 126,152
Treasury Stock, at cost (312) --
Cumulative translation adjustment (6,073) (3,665)
Class A Common Stock under repurchase agreements (8,000) (8,000)
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Total shareholders' equity 156,771 147,925
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$435,413 $431,718
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The accompanying notes are an integral part of these balance sheets.
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended January 31, 1997 and 1996
(Amounts in Thousands)
(UNAUDITED)
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES $ 5,733 $ 17,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (10,477) (8,303)
Net cash paid for purchase of
E for M Corporation (see schedule below) -- (88,112)
Net cash received from sale of Optical
Devices, Inc. 905 --
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Net cash used in investing activities (9,572) (96,415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from notes payable to bank, net 12,620 (5,522)
Proceeds (payments) on long-term debt (2,911) 87,000
Proceeds from issuance of common stock 1,706 1,036
Purchase of common stock (4,643) --
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Net cash provided by (used in)
financing activities 6,772 82,514
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (1,010) (588)
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Net increase (decrease) in cash and
cash equivalents 1,923 3,032
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,890 3,330
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,813 $ 6,362
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 6,300 $ 2,386
Income taxes $ 9,221 $ 6,662
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
The Company purchased all of the capital stock
of E for M Corporation for $88,112. In
conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $214,937
Cash paid for capital stock 88,112
Stock Options converted 3,083
--------
Liabilities assumed $123,742
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The accompanying notes are an integral part of these statements.
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Per Share Data)
(UNAUDITED)
(1) Basis of Presentation-
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Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. However, in the
opinion of the Company, adequate disclosures have been presented to make
the information not misleading, and all adjustments necessary to present
fair statements of the results of operations, financial position and cash
flows have been included. It is suggested that these consolidated condensed
financial statements be read in conjunction with the consolidated financial
statements included in Marquette Medical Systems, Inc.'s Form 10-K for the
fiscal year ended April 30, 1996, and the Company's Current Reports on Form
8-K dated December 26, 1996, August 22, 1996 and February 21, 1996.
(2) Inventories-
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Inventories consist of the following:
January 31, 1997 April 30, 1996
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Raw materials and component parts $ 34,812 $ 35,716
Work in process and finished goods 51,858 45,869
Demonstration inventory 26,262 24,583
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$112,932 $106,168
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(3) Acquisition of E for M Corporation
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Effective January 1, 1996, the Company acquired 100% of the common stock of
E for M Corporation, an international medical equipment, software and
supplies company serving patient monitoring and cardiology, which includes
cardiac catheterization and electrophysiology laboratories. Related to this
purchase, the Company borrowed $90,000 under bank loan agreements payable
periodically over the next five years. The acquisition has been accounted
for as a purchase and the excess of the purchase price over the fair value
of the net assets acquired has been allocated to goodwill. Based on a
preliminary allocation of purchase price, the approximate value of such
goodwill is $26,775. In addition, the Company acquired intangible assets
related to in-process research and development (R&D), product technologies
and tradenames with values of $35,700, $12,672 and $8,468, respectively.
The acquired in-process R&D was entirely written-off at the acquisition
date. The remaining intangibles have estimated useful lives ranging from 7
to 40 years.
Unaudited pro-forma results of operations, assuming the acquisition of E
for M as of the beginning of the period indicated below, would be as
follows:
Three Months Ended Nine Months Ended
January 31, 1996 January 31, 1996
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Net Sales $141,016 $400,589
Net Income (34,639) (31,267)
Net Income per Class A Common Share (2.13) (1.93)
(4) Stock Offering
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On March 11, 1997, the Company offered 1,000,000 shares of Class A Common
Stock in a public offering at a price of $18.375 per share. In addition,
the Company has granted the Underwriters a 30-day option to purchase up to
373,422 shares of Common Stock on the same terms per share solely to cover
over-allotments. The Company is estimating to receive net proceeds of
approximately $17.2 million ($23.7 million if the Underwriters over-
allotment option is exercised in full) after deducting the Underwriting
discounts and commissions and estimated offering expenses. All of the net
proceeds will be used to repay bank term debt.
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ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three-Month and Nine-Month Periods Ended January 31,
1997
Net sales for the three-month period ended January 31, 1997 were $137.7 million,
an increase of 24.8% from $110.3 million for the three-month period ended
January 31, 1996. Net sales for the nine-month period ended January 31, 1997
increased 44.7% to $399.4 million from $275.9 million for the same period in the
previous fiscal year. The results for the nine-month period ended January 31,
1996 include one-month of operations of E for M Corporation. Marquette Medical
Systems, Inc. purchased the stock of E for M, an international medical
equipment, software and supplies company serving patient monitoring and
cardiology in January, 1996.
The Company's patient monitoring, diagnostic cardiology and supplies and service
product lines achieved sales growth of 12.2%, 41.8% and 34.9%, respectively, for
the three-month period ended January 31, 1997. For the nine-month period ended
January 31, 1997, sales growth of 29.4%, 75.3% and 43.4% was achieved in the
patient monitoring, diagnostic cardiology and supplies and service product
lines, respectively. The increase in net sales for both comparable periods was
primarily attributable to the E for M acquisition, which resulted in expanded
product lines as well as improved distribution. In addition to the E for M
products, the introduction of new products in both the patient monitoring and
diagnostic cardiology product lines have contributed to the strong sales growth.
Gross profit for the three-month period ended January 31, 1997 increased 26.0%
to $67.5 million from $53.6 million for the same period in the previous fiscal
year. For the nine-month period, gross profit increased 42.7% to $194.2 million
as compared to $136.1 million in the previous fiscal year. The increased gross
profits for the periods is mainly attributable to the E for M acquisition as
well as the increased level of net sales.
Gross margin for the three-month period ended January 31, 1997 increased to
49.0% from 48.6% for the same period in the previous fiscal year. This increase
is attributable to more efficient utilization of capacity at the Company's
manufacturing facilities and the continued benefits associated with the
integration of E for M's operations into the Company's operations. Gross margin
for the nine-month period ended January 31, 1997 decreased to 48.6% as compared
to 49.3% for the previous fiscal year. The decrease was mainly attributable to
the historically lower gross margins of the E for M products.
Engineering expenses for the three-month period ended January 31, 1997 increased
35.9% to $12.2 million from $9.0 million for the same period in the previous
fiscal year. For the nine-month period, engineering expenses increased 43.1% to
$36.0 million from $25.1 million in the previous fiscal year. The increase for
both periods is primarily related to the E for M acquisition. Engineering
expenses as a percentage of sales were 8.8% in the current three-month period as
compared to 8.1% in the three-month period in the previous fiscal year. For the
nine-month period, engineering expenses as a percentage of sales decreased
slightly to 9.0% as compared to 9.1% in the previous fiscal year. Engineering
expenses have remained relatively constant as a percentage of sales, and the
Company will continue to invest significantly in both new product developments
and continued enhancements to current products. Due to the competitiveness and
technological nature of the medical systems and equipment industry, this
investment is necessary in order to maintain the Company's competitive position
in the healthcare industry.
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Selling expenses for the three-month period ended January 31, 1997 increased
23.2% to $33.0 million from $26.8 million for the same period in the previous
fiscal year. For the nine-month period, selling expenses increased 37.3% to
$97.2 million from $70.8 million in the previous fiscal year period. The
increased expenses were primarily attributable to the addition of E for M
selling expenses in the current year and the increased sales levels in the
current year. As a percentage of net sales, selling expenses decreased in both
the three-month and nine-month periods ended January 31, 1997 as compared to
last year. Selling expenses were 24.0% of net sales for the current three-month
period as compared to 24.3% for the same period last year. For the nine-month
period, selling expenses were 24.3% of net sales as compared to 25.7% last year.
This decrease was primarily attributable to restructuring and consolidation of
the distribution function, primarily in Europe.
General and administrative expenses for the three-month period ended January 31,
1997 increased 42.2% to $11.7 million from $8.2 million for the same period in
the previous fiscal year. For the nine-month period, general and administrative
expenses increased 54.4% to $33.6 million from $21.8 million in the previous
fiscal year. E for M operations accounted for a significant portion of the
increase. General and administrative expenses as a percentage of net sales were
8.5% for the three-month period ended January 31, 1997 as compared to 7.5% for
the same period in the previous fiscal year. For the nine-month period, the
expenses were 8.4% of net sales as compared to 7.9% of net sales in the previous
year.
Operating income for the three-month period ended January 31, 1997 was $10.6
million as compared to an operating loss of $26.1 million for the same period in
the previous fiscal year. The loss of the three-month period ended January 31,
1996 was attributable to a one-time charge of $35.7 million related to the
write-off of in-process research and development associated with the E for M
acquisition.
Excluding this one-time charge, operating income for the three-month period
ended January 31, 1996 was $9.6 million. For the nine-month period, operating
income for the current year was $27.4 million as compared to an operating loss
of $17.4 million for the previous fiscal year. Operating income for the nine-
month period in the previous fiscal year was $18.3 million excluding the one-
time charge. The increased operating income for both the three-month and nine-
month periods is related to the incremental E for M operations in the current
year, strong sales levels and benefits realized with respect to the
restructuring plan which began in the preceding year's fourth quarter. The
restructuring plan consists of a consolidation of offices in Europe as well as
the integration of E for M's activities into Marquette's activities. During the
quarter, $1.4 million of the restructuring charges accrued in the previous
fiscal year were paid. In addition, with respect to Marquette's worldwide
restructuring plan, $0.9 million was paid out during the quarter.
Interest expense for the three-month period ended January 31, 1997 increased to
$2.5 million from $1.2 million for the same period in the previous fiscal year.
For the nine-month period ended January 31, 1997, interest expense increased to
$6.7 million as compared to $2.5 million for the previous fiscal year. The
increase for both periods is related to increased borrowings related to the E
for M acquisition.
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Financial Outlook
In as much as the Company's principal product lines are all related to the
healthcare industry, they are subject to the current uncertainty surrounding the
industry including consolidation of hospital groups and a move towards managed
care. While the Company cannot predict the impact, if any, that such
modifications might have on its business, the Company's operating results are
closely linked to the healthcare economy. If revenue or earnings fail to meet
expectations of the investment community, there could be a significant impact on
the trading price for the Company's stock. Management believes the introduction
of new products will put the Company in a competitive position as the healthcare
economy's demand for new equipment increases.
Liquidity and Capital Resources
Working capital was $145.8 million at January 31, 1997 compared to $133.2
million at April 30, 1996. Receivables increased by 3.4% to $143.1 million at
January 31, 1997, from $138.5 million at April 30, 1996, primarily due to strong
European sales. Inventories increased by $6.8 million primarily due to new
product introductions.
As of January 31, 1997, the Company had $12.3 million outstanding on U.S. lines
of credit of $25.0 million. In addition, the Company had $28.6 million, U.S.
dollar equivalent, in foreign currency loans outstanding on foreign lines of
credit. The foreign currency denominated borrowings are used to reduce the
currency risks associated with foreign currency receivables. Notes payable
increased $12.1 million over the April 30, 1996 amounts. Of this increase, $4.6
million was used by the Company to repurchase 281,400 shares of Common Stock at
a price of $16.50 per share in October, 1996. Of the remaining increase, $2.9
million was used to retire long-term debt, and the remainder was used to finance
working capital requirements and to purchase capital additions.
Capital expenditures for the nine-month period ended January 31, 1997 were $12.6
million, compared with $8.3 million for the same period of the previous fiscal
year. The increase was due to the acquisition of a new business system offset by
the disposal of land in Germany.
In January 1, 1996, the Company acquired E for M for $90.3 million. The
acquisition price was funded by three variable rate bank term loans each in the
amount of $30.0 million. Each bank term loan is payable in eight equal semi-
annual installments of $3.75 million each beginning on April 30, 1997 and
continuing on each October 31 and April 30 thereafter through October 31, 2000.
As of January 31, 1997, the Company had repaid or refinanced $39.0 million of
such bank term debt. Cash flow from operations was used to repay approximately
$9.0 million of such debt, and the remaining $30.0 million was converted into
longer term fixed-rate senior debt. This senior debt accrues interest at a fixed
rate of 7.46% per annum and matures on August 29, 2008. The $51.0 million of
bank term debt that remained outstanding as of January 31, 1997 accrued interest
at a rate equal to the LIBOR rate plus one percent, reset monthly. At January
31, 1997, the rate was 6.475% per annum.
The Company will repay approximately $17.2 million of the bank term loans in
March, 1997 with the estimated net proceeds received from a public offering of
Class A Common Stock of 1,000,000 shares at a price of $18.375 per share.
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PART II - OTHER INFORMATION
ITEM 2 - Changes in Securities
On December 20, 1996, Michael J. Cudahy transferred to the Company all of his
26,250,000 Class C Common Shares in exchange for 262,500 Class A Common Shares
delivered by the Company from its treasury shares. This exchange of shares is
exempt from registration under Section 4(2) of the Securities Act of 1933.
ITEM 5 - Other Information
On March 11, 1997, the Company offered 1,000,000 shares of Class A Common Stock
in a public offering at a price of $18.375 per share. In addition, the Company
has granted the Underwriters a 30-day option to purchase up to 373,422 shares of
Common Stock on the same terms per share solely to cover over-allotments. The
Company is estimating to receive net proceeds of approximately $17.2 million
($23.7 million if the Underwriters over-allotment option is exercised in full)
after deducting the Underwriting discounts and commissions and estimated
offering expenses.
ITEM 6 - Exhibits and Reports on Form 8-K
A report on Form 8-K was filed on December 26, 1996 related to the Company's
adoption of a shareholder's rights plan and the Board of Directors' declaration
of a dividend of one preferred share purchase right for each outstanding share
of Class A Common Stock.
A report on Form 8-K was filed on February 11, 1997 related to the Company's
third quarter earnings press release.
A report on Form 8-K was filed on February 26, 1997 related to the Company's
strategic alliance agreement with Physio-Control Corporation.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Marquette Medical Systems, Inc.
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(Registrant)
Date: March 13, 1997
----------------- /s/ Mary M. Kabacinski
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Mary M. Kabacinski
Principal Financial Officer
and Duly Authorized Officer
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