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, 1994 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
October 31, 1994 is 46,481,622.
This Form 10-Q consists of 11 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 11.
<PAGE>
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
NOTES TO 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, 1994 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1994. 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, 1993.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under this pronouncement, debt securities that the
Company does not have the positive intent to hold to maturity and all marketable
equity securities are classified as available-for-sale and are carried at fair
value. Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders' equity.
The Company adopted the provisions of the new standard for investments held or
acquired after January 1, 1994 and has classified all investments as
available-for-sale. Previously, the Company had classified its investments as
available-for-sale and carried them at amortized cost. In accordance with the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle; however, the effect of this change to
reflect the net unrealized holding gains on securities classified as
available-for-sale was to increase shareholders' equity at December 31, 1993 by
$1,248,000 (net of $764,000 of current deferred income taxes).
A net realized loss of $416,000 was recorded on sales of available-for-sale
securities during the third quarter and first nine months of 1994. The net
adjustment to unrealized holding gains (losses) on available-for-sale securities
included as a separate component of shareholders' equity was a gain of $924,000
(net of $567,000 of current deferred income taxes) for the third quarter of 1994
and a loss of $644,000 (net of $395,000 of current deferred income taxes) for
the first nine months of 1994.
<PAGE>
NOTE 3 - BUSINESS COMBINATION
Effective September 30, 1994, the Company acquired substantially all the assets
of the worldwide cardiac rhythm management business of Siemens AG (the
"Business"), pursuant to two asset purchase agreements. The Business consisted
of the tangible and intangible assets, properties, rights and goodwill.
The Company paid $524.3 million for the Business pending final adjustments based
on the audited net book value of the net assets transferred to the Company. The
acquisition was funded by a combination of cash ($274.3 million) and debt
($250.0 million).
Since the acquisition was effective at the close of the last business day of the
quarter and the purchase price allocation was not final, the accompanying
financial statements reflect the estimated allocation of the purchase price.
The acquisition was accounted for as a purchase. Since the purchase price and
the allocation of the purchase price were not final, an estimate of the effect
of the acquisition was included in the September 30, 1994 balance sheet. The
components of the allocation were: accounts receivable ($87,000), inventories
($84,000), property plant and equipment ($84,000), goodwill ($334,300) and
accounts payable and accrued expenses ($65,000). The purchase price and the
allocation of same is expected to be finalized in the fourth quarter.
NOTE 4 - CONTINGENCY
Due to the January, 1994 California earthquake, earthquake insurance is
currently difficult to procure, extremely costly, and restrictive in terms of
coverage. For these reasons, the Company has not procurred earthquake and
related business interruption insurance for its operations located in Los
Angeles County, California. Although certain losses resulting from an earthquake
are covered under other insurance policies owned by the Company, the absence of
earthquake insurance represents a potential exposure for the Company. Any
uninsured loss could have an adverse impact on the Company.
<PAGE>
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net sales $62,468 $58,946 $195,889 $194,044
Cost of sales 15,477 13,998 48,807 47,254
------- ------- -------- --------
Gross profit 46,991 44,948 147,082 146,790
Operating expenses:
Selling, general & administrative 13,720 11,601 41,647 37,035
Research & development 2,539 2,778 7,786 8,319
------- ------- ------- -------
Total operating expenses 16,259 14,379 49,433 45,354
------- ------- ------- -------
Operating profit 30,732 30,569 97,649 101,436
Other income 3,518 3,542 10,365 10,570
------- ------- -------- --------
Income before taxes 34,250 34,111 108,014 112,006
Income tax provision 9,761 8,139 30,784 28,002
------- ------ ------- -------
Net income $24,489 $25,972 $77,230 $84,004
======= ======= ======== =======
Earnings per share:
Primary $ 0.52 $ 0.55 $ 1.65 $ 1.77
======== ======== ======== ========
Fully diluted $ 0.52 $ 0.55 $ 1.65 $ 1.77
======== ======== ======== ========
Dividends paid per share $ 0.10 $ 0.10 $ 0.30 $ 0.30
======== ======== ======== ========
Shares outstanding
Primary 46,816 47,114 46,712 47,407
Fully diluted 46,910 47,114 46,890 47,433
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
ASSETS (Unaudited) (Note)
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,565 $ 26,987
Marketable securities 103,961 342,004
Accounts receivable, less allowance
(1994 - $1,984; 1993 - $1,856) 135,408 40,159
Inventories
Finished goods 100,481 15,414
Work in process 2,380 2,677
Raw materials 15,180 14,422
--------- ----------
118,041 32,513
Other current assets 10,534 8,247
--------- ----------
Total current assets 389,509 449,910
Property, plant and equipment 160,403 65,962
Less accumulated depreciation (21,110) (18,777)
--------- ----------
Net property, plant and equipment 139,293 47,185
Other assets 380,648 29,722
--------- ----------
TOTAL ASSETS $ 909,450 $ 526,817
========= ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 108,223 $ 40,912
Long term debt 250,000 --
Deferred income taxes 1,664 1,664
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 1994 - 46,481,122 shares;
1993 - 46,414,261 4,648 4,641
Additional paid-in capital 28,192 27,411
Retained earnings 519,093 455,798
Cumulative translation adjustment (1,726) (3,609)
Unrealized loss on available-for-sale securities (644) --
--------- ----------
Total shareholders' equity 549,563 484,241
--------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 909,450 $ 526,817
========= ==========
</TABLE>
NOTE: The balance sheet at December 31, 1993 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.
<PAGE>
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1994 1993
---------- ----------
<S> <C> <C>
Operating Activities:
Net income $ 77,230 $ 84,004
Depreciation and amortization 6,825 6,533
Working capital change (8,702) (1,104)
---------- ----------
Net cash provided by operating activities 75,353 89,453
---------- ----------
Investment Activities:
Purchases of property, plant and equipment (11,931) (13,356)
Sales (purchases) of available-for-sale securities, net 237,399 (56,466)
Acquisition (Note 3) (524,300) --
Other investing activities (19,470) (13,983)
---------- ----------
Net cash used in investing activities (318,302) (83,805)
---------- ----------
Financing Activities:
Proceeds from exercise of stock options 788 1,688
Cash dividends paid (13,935) (14,144)
Common stock repurchased -- (31,762)
Proceeds from issuance of long-term debt 250,000 --
---------- ----------
Net cash provided by (used in) financing activities 236,853 (44,218)
---------- ----------
Effect of currency exchange rate changes on cash 674 (227)
---------- ----------
Decrease in cash and cash equivalents (5,422) (38,797)
Cash and cash equivalents at beginning of year 26,987 68,346
---------- ----------
Cash and cash equivalents at end of period $ 21,565 $ 29,549
========== ==========
</TABLE>
<PAGE>
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:
NET SALES. Net sales totalled $62,468 and $58,946 in the third quarter 1994 and
1993, respectively; a 6.0% increase. For the first nine months of 1994, net
sales totalled $195,889, a $1,845 or 1.0% increase from net sales recorded in
the comparable period of 1993. Most of the net sales were derived from the sale
of mechanical heart valves.
The increase in net sales for the quarter as compared to 1993 was primarily
attributable to mechanical heart valve unit sales improvements in all markets
except Western Europe which experienced a small decline in unit sales. In
addition, foreign currency translation increased net sales by approximately
$870, or 1.5%.
During the first nine months of 1994, net sales increased primarily because of
mechanical heart valve domestic price increases and market penetration in
certain developing countries. Foreign currency translation decreased net sales
by approximately $575, or .3%
GROSS PROFIT. The third quarter 1994 gross profit was $46,991, or 75.2% of net
sales, as compared to $44,948, or 76.3% of net sales, during the comparable 1993
period. For the first nine months of 1994 and 1993, gross profit was $147,082,
or 75.1% of net sales, and $146,790, or 75.6% of net sales, respectively.
The decreases in gross margin for the quarter and the nine month period were
principally associated with a price increase on purchased mechanical heart valve
components, costs relating to the Company's new mechanical heart valve component
manufacturing facility, a lower worldwide average selling price attributable to
a higher percentage of distributor based sales partially offset by price
increases and certain manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE. For the third quarter 1994, selling,
general and administrative (SG&A) expenses were $13,720, a $2,119, or 18.3%
increase over the $11,601 recorded in the third quarter 1993. On a year-to-date
basis, 1994 SG&A expenses totalled $41,647, a $4,612, or 12.5% increase over the
$37,035 recorded in 1993.
The quarterly and nine month increases were primarily associated with the
expansion of the Company's sales forces in response to increased worldwide
competition, higher marketing expenditures attributable to product line
extensions and new products and costs relating to obtaining ISO 9000
certification.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses were $2,539
and $2,778 for the third quarters of 1994 and 1993, respectively. For the first
nine months, R&D expenses totalled $7,786 and $8,319 for 1994 and 1993,
respectively.
<PAGE>
The decrease from 1993 for both the quarter and the first nine months was
attributable to reduced funding of the Hancock Jaffe Laboratories joint venture
due to the completion of the development phase of the new SJM X-CellTM tissue
heart valve. Also, lower expense levels were incurred in connection with the
development of an advanced intra-aortic balloon pump as that product moved
closer to completion.
OTHER INCOME. Other income for the third quarter 1994 decreased $24 to $3,518 as
compared to the third quarter 1993. For the first nine months, other income
totalled $10,365 and $10,570 for 1994 and 1993, respectively. The quarter and
nine month decreases resulted from lower investment rates of return as longer
term investments were reinvested for short terms in anticipation of the
acquisition, unrealized losses on foreign exchange contracts due to the decline
in the value of the U.S. dollar, and increased joint venture costs and
partnership losses.
INCOME TAX PROVISION. The Company's 1994 effective income tax rate was 28.5% as
compared to 23.9% and 25.0% in 1993 for the third quarter and first nine months,
respectively. The increase was principally attributable to reduced tax benefits
available from the Company's Puerto Rican operations as a result of The Omnibus
Budget Tax Reconciliation Act of 1993. In addition, last year's third quarter
tax provision was favorably affected by a one half of one percentage point
reduction in the Company's full year expected effective tax rate for 1993.
NET INCOME. Net income for the third quarter 1994 of $24,489 decreased $1,483,
or 5.7%, from the $25,972 reported in the third quarter 1993. Earnings per share
decreased to $.52 from $.55 between the two quarters. The Company's 1994 income
before taxes of $34,250 increased slightly from last year's level.
For the first nine months, net income was $77,230 and $84,004 for 1994 and 1993,
respectively. Earnings per share in 1994 on a year-to-date basis decreased 6.8%
to $1.65 from $1.77 in the first nine months of 1993.
OUTLOOK. The Company's core mechanical heart valve business remains strong;
however, domestic as well as international competitive pressures, hospital
consolidations and healthcare reform on a worldwide scale may have the effect of
further reducing pricing flexibility and unit sales growth.
An Internal Revenue Service proposed change to IRC Section 936 regulations
pertaining to the computation of Puerto Rican profits would, if enacted, further
reduce the tax 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.
During the third quarter, the Company acquired the worldwide cardiac rhythm
management business of Siemens AG for approximately $525,000. The acquisition
was effective September 30, 1994. For the year ended September 30, 1993, net
sales of this business approximated $360,000. The Company will continue to
actively seek other diversification
<PAGE>
opportunities in the form of acquisitions, joint ventures, partnerships and
investments in emerging technology companies, as well as through internal
research and development. The Company cannot predict the size or timing of such
diversification activities.
FINANCIAL CONDITION: The acquisition of the Siemens cardiac rhythm management
business (Pacesetter) significantly changed the Company's capital structure. The
Pacesetter acquisition cost of $524,300 was funded by a combination of cash
($274,300) and bank debt ($250,000).
The financial condition of the Company at September 30, 1994, continues to be
strong. Cash and marketable securities totalled $125,526 at September 30, 1994,
a decrease of $277,848 from the June 30, 1994 balance of $403,374. The decrease
principally resulted from the Pacesetter acquisition. The ratio of current
assets to current liabilities was 3.6 to 1 at September 30, 1994.
Total assets increased $382,633 during the first nine months of 1994 principally
due to the Pacesetter acquisition. In the third quarter the Company made an
equity investment of $12,000 in EndoVascular Technologies, Inc., a medical
device manufacturer targeting the repair of abdominal aortic aneurysms. Also in
the third quarter, the Company made an additional equity investment of $4,070 in
InControl, Inc. a medical device manufacturer addressing atrial fibrillation.
As previously announced, the Company's Board of Directors elected to discontinue
the Company's $.10 per share quarterly cash dividend effective with the
September 30, 1994 closing of the Pacesetter acquisition.
Shareholder's equity increased $65,322 during the first nine months of 1994 to
$549,563. The increase resulted from net income of $77,230, a foreign currency
translation adjustment of $1,883 and $788 associated with the exercise of stock
options and the issuance of restricted stock less cash dividends of $13,935 and
a net unrealized loss on investments of $644.
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a named defendant in a purported class action
captioned Weisburgh, et al. v. St. Jude Medical, Inc., et al.
filed July 2, 1992, in the United States District Court for the
District of Minnesota and later amended. The second amended
complaint also names as defendants certain officers and directors
alleged to control the Company. The plaintiff purports to
represent a class consisting of all persons who purchased common
stock of the Company during the period from December 17, 1991,
through July 2, 1992. The second amended complaint alleges that
the defendants deceived the investing public regarding the
Company's finances, financial condition and present and future
prospects and induced the plaintiff class to purchase the
Company's common stock during the period prior to July 2, 1992, at
inflated prices. The second amended complaint asserts claims for
federal securities fraud, common law fraud and negligent
misrepresentation. The second amended complaint seeks damages
(including punitive damages) in an unspecified amount, attorneys'
fees, costs and expenses. On March 2, 1993, the Company and the
other defendants moved to dismiss all claims for failure to state
a claim for relief and failure to plead fraud with particularity.
In its Order dated May 28, 1993, the court denied the defendant's
motion at that time but directed the plaintiff to file a second
amended complaint with more particularized allegations of fraud.
The plaintiff has filed a second amended complaint and on June 28,
1993, the Company and the other defendants moved to dismiss the
second amended complaint for failure to state a claim for relief
and failure to plead fraud with particularity. The plaintiff has
moved for a class certification. Both motions are under
advisement. The Company believes that the second amended complaint
is without merit and intends to pursue a vigorous defense of the
action.
The Company is unaware of any other pending legal proceedings
which it regards as likely to have a material adverse effect on
its business.
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
<PAGE>
Item 6.EXHIBITS and REPORTS ON FORM 8-K
The exhibit index can be found on page 11. There were no Reports
on Form 8-K filed during the quarter.
(a) Exhibits
Exhibit Exhibit
Number
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
27 Financial Data Schedule (filed in
electronic format for SEC use only).
(b) Form 8K
Item 2. Acquisition or Disposition of Assets
On October 14, 1994, the registrant
filed an 8-K dated September 30, 1994,
in respect of the acquisition of the
worldwide cardiac rhythm management
business of Siemens, AG, pursuant to two
asset purchase agreements.
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.
10/31/94 /STEPHEN L. WILSON/
DATE STEPHEN L. WILSON
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 21,565
<SECURITIES> 103,961
<RECEIVABLES> 137,392
<ALLOWANCES> 1,984
<INVENTORY> 118,041
<CURRENT-ASSETS> 389,509
<PP&E> 160,403
<DEPRECIATION> 21,110
<TOTAL-ASSETS> 909,450
<CURRENT-LIABILITIES> 108,223
<BONDS> 0
<COMMON> 4,648
0
0
<OTHER-SE> 544,915
<TOTAL-LIABILITY-AND-EQUITY> 909,450
<SALES> 195,889
<TOTAL-REVENUES> 195,889
<CGS> 48,807
<TOTAL-COSTS> 48,807
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 108,014
<INCOME-TAX> 30,784
<INCOME-CONTINUING> 77,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,230
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
</TABLE>
