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 March 31, 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)
(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 April 29, 1994 is 46,463,761.
This Form 10-Q consists of 10 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 9.
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 of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 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).
There were no realized gains or losses on sales of available-for-sale
securities during the first quarter 1994. The net adjustment to
unrealized gain (loss) on available-for-sale securities included as a
separate component of shareholders' equity was a loss of $1,690,000 (net of
$1,036,000 of current deferred income taxes) in the first quarter 1994.
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED MARCH 31
1994 1993
Net sales $66,685 $68,154
Cost of sales 16,871 16,929
Gross profit 49,814 51,225
Operating expenses:
Selling, general &
administrative 13,785 12,793
Research & development 2,690 2,714
Total operating expenses 16,475 15,507
Operating profit 33,339 35,718
Other income 3,776 3,462
Income before taxes 37,115 39,180
Income tax provision 10,578 9,991
Net income $26,537 $29,189
Earnings per share:
Primary $ 0.57 $ 0.61
Fully diluted $ 0.57 $ 0.61
Dividends paid per share $ 0.10 $ 0.10
Shares outstanding
Primary 46,649 47,777
Fully diluted 46,649 47,777
ST. JUDE MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31 December 31
1994 1993
ASSETS
Current assets:
Cash and cash equivalents $ 78,653 $ 26,987
Marketable securities 313,631 342,004
Accounts receivable, less allowance
(1994 - $2,027; 1993 - $1,856) 46,241 40,159
Inventories
Finished goods 14,501 15,414
Work in process 2,902 2,677
Raw materials 13,801 14,422
31,204 32,513
Other current assets 10,357 8,247
Total current assets 480,086 449,910
Property, plant and equipment 68,651 65,962
Less accumulated depreciation (19,824) (18,777)
Net property, plant and equipment 48,827 47,185
Other assets 28,740 29,722
TOTAL ASSETS $557,653 $526,817
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $49,421 $40,912
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 -
46,461,761 shares;
1993 - 46,414,261 4,646 4,641
Additional paid-in capital 27,557 27,411
Retained earnings 477,692 455,798
Cumulative translation adjustment (2,885) (3,609)
Unrealized loss on
available-for-sale securities (442) -
Total Shareholders' equity 506,568 484,241
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $557,653 $526,817
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.
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1994 1993
Operating Activities:
Net income $26,537 $29,189
Depreciation and amortization 2,304 2,025
Working capital change 2,108 170
Net cash provided by operating activities 30,949 31,384
Investing Activities:
Purchases of property,
plant and equipment (2,855) (5,091)
Sales (purchases) of available-for-
sale securities, net 27,931 (15,043)
Other investing activities ( 60) (744)
Net cash provided by (used in)
investing activities 25,016 (20,878)
Financing Activities:
Proceeds from exercise of stock options 149 50
(4,641) (4,752)
Cash dividends paid - (2,498)
Common stock repurchased
Net cash used in financing activities (4,492) (7,200)
Effect of currency exchange
rate changes on cash 193 (39)
Increase (decrease) in cash
and cash equivalents 51,666 3,267
Cash and cash equivalents
at beginning of year 26,987 68,346
Cash and cash equivalents at end of period $ 78,653 $71,613
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 for the first quarter 1994 totalled $66,685, a $1,469
(2.2%) decrease from the $68,154 net sales reported in the first quarter
1993. Over 90% of the Company's net sales continued to be derived from the
sale of mechanical heart valves.
The quarter-over-quarter decrease in net sales was principally attributable
to a strong first quarter 1993 which benefitted from initial inventory
stocking orders in the domestic market for the Hemodynamic Plus series of
the St. Jude Medical mechanical heart valve. Also, healthcare reform in
the United States appears to be having the effect of reducing the number of
open heart procedures, increasing hospital consolidations and decreasing
overall hospital inventory levels, the sum of which reduced first quarter
1994 domestic demand for the Company's products from last year's first
quarter. In addition, foreign currency translation negatively impacted the
net sales comparison by approximately $900, or 1.3%. The overall
mechanical heart valve average selling price was negatively impacted by a
slight geographic mix shift toward the countries where the Company sells
through distributors at prices which are lower than those charged when
selling on a direct basis to the hospital.
GROSS PROFIT. Gross margin in the first quarter 1994 decreased to 74.7%
from 75.2% in the first quarter 1993. The decline was due to a price
increase on purchased mechanical heart valve components, costs associated
with the Company's new mechanical heart valve component manufacturing
facility (the "Woodridge facility") and a higher mix of net sales in
distributor-based lower margin international markets.
While gross margin can be affected by geographic sales mix, product sales
mix and manufacturing site production mix, the Company expects that 1994
gross margins will be less than 1993 gross margins as a result of increased
costs of purchased components, higher costs associated with the Woodridge
facility and increased sales in countries where the Company utilizes
distributors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses in the first quarter 1994 increased $992, or 7.8%, over the
comparable 1993 period. As a percentage of net sales, SG&A in the first
quarter 1994 increased to 20.7% from 18.8% in 1993. The higher expense
level was primarily associated with new domestic marketing programs and an
expanded domestic direct sales force which were instituted in response to
the Food and Drug Administration's September 1993 approval of a
competitor's mechanical heart valve. In addition, the Company incurred
significant expenses related to obtaining ISO 9000 certification which,
when received, will further improve the Company's competitive position
internationally.
RESEARCH AND DEVELOPMENT. Research and development expenses totalled
$2,690 in the first quarter 1994, a $24 (.9%) decrease from the comparable
1993 period. The decrease 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. In addition,
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 in the first quarter 1994 increased $314, or
9.1%, over the first quarter 1993. The increase was due primarily to the
additional interest on higher investment balances which was partially
offset by lower investment rates of return. Maturing investments are
currently being invested for shorter durations in anticipation of the
Company's execution of its diversification strategy, and accordingly, a
reduced investment rate of return will be reflected in future earnings.
INCOME TAX PROVISION. The Company's effective income tax rate was 28.5% in
the first quarter 1994, a three percentage point increase over the 25.5%
effective income tax rate in the first quarter 1993. The higher effective
tax rate was mainly attributable to reduced tax benefits derived from the
Company's Puerto Rican operations as a result of changes to Internal
Revenue Code (IRC) section 936 which were enacted as part of The Omnibus
Budget Tax Reconciliation Act of 1993.
NET INCOME. Net income in the first quarter 1994 of $26,537 decreased 9.1%
from the $29,189 in the first quarter 1993. Earnings per share decreased
6.6% from $.61 to $.57 per share between the two quarters.
OUTLOOK. While the Company's core mechanical heart valve business remains
strong, competitive pressures, hospital consolidations and healthcare
reform agendas continue to negatively impact product sales and pricing
flexibility.
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.
The Company is actively seeking diversification 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 financial condition of the Company at March 31, 1994, continues to be
strong. Cash and marketable securities increased to $392,284 at March 31,
1994, an increase of $23,293 from $368,991 at December 31, 1993,
principally as a result of cash flow from operations. The ratio of current
assets to current liabilities was 9.7 to 1 at March 31, 1994.
Total assets increased $30,836 during the first quarter 1994. In addition
to the increase in cash and marketable securities, accounts receivable
increased by $6,082 in the quarter as first quarter 1994 net sales were
$8,087 higher than fourth quarter 1993 net sales.
The $8,509 increase in current liabilities was principally due to an
increase in accrued income taxes, most of which will be payable in the
second quarter.
Shareholders' equity increased $22,327 during the quarter to $506,568. The
increase resulted from net income of $26,537, a foreign currency
translation adjustment of $724 and $149 associated with the exercise of
stock options and the issuance of restricted stock, less cash dividends of
$4,641 and a net unrealized loss on investments of $442.
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 defendants' 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. RESULTS OF VOTES OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 4, 1994.
In conjunction therewith, proxies were solicited in accordance with
Regulation 14A. The following actions were taken:
(1) Ronald A. Matricaria, Charles V. Owens, Jr., and Walter L.
Sembrowich were elected to the Board of Directors for terms ending
in 1997. Shareholders approved management's nominees to the Board
of Directors by votes as follows: 35,723,208, 35,729,498 and
35,741,298 in favor, 436,390, 430,100 and 418,300 withheld for
Messrs. Matricaria, Owens and Sembrowich, respectively. Six other
directors are serving unexpired terms as follows: James S. Womack,
Frank A. Ehmann and William R. Miller - through 1995; and Lawrence
A. Lehmkuhl, Thomas H. Garrett III and Roger G. Stoll - through
1996.
(2) The shareholders approved the St. Jude Medical, Inc. 1994 Stock
Option Plan by a vote of 21,511,215 in favor of the Plan, 3,875,397
opposed to the Plan and 636,938 abstained from voting.
(3) The shareholders approved the reappointment of Ernst & Young as the
Company's independent auditing firm for the current fiscal year by
a vote of 35,792,541 in favor of the reappointment, 186,098 opposed to
the reappointment and 180,959 abstained from voting.
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
(b) Form 8-K Dated January 4, 1994.
Item 2. Acquisition or Disposition of Assets
Termination of the Agreement and Plan of Merger with
Electromedics, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
DATE STEPHEN L. WILSON
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
