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 June 30, 1996 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
August 2, 1996 was 80,850,529.
This Form 10-Q consists of 11 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 11.
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 and six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1996. 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, 1995.
NOTE 2 - ACQUISITIONS
Effective May 31, 1996, the Company acquired Daig Corporation, a Minnetonka,
Minnesota based manufacturer of specialized cardiovascular devices for the
electrophysiology and interventional cardiology markets.
Each share of Daig common stock was converted into approximately .652 shares of
St. Jude Medical common stock. The Company issued 9,929,897 shares to Daig
shareholders. The transaction was accounted for as a pooling of interests. The
accompanying financial statements, for all periods presented, are presented on a
pooled basis.
The results of Daig's operations have been included in the condensed
consolidated results of operations as if the acquisition had occurred at the
beginning of 1995. These results are not necessarily indicative of the results
that would have occurred had the acquisition actually taken place at the
beginning of 1995, or of the expected future results of operations. Mr. John
Fleischhaker, founder and former chairman of Daig, resigned from the Company in
July.
On January 5, 1996, the Company acquired The Heart Valve Company, previously a
50% owned joint venture with Hancock Jaffee Laboratories (HJL), as well as
certain assets of HJL. Under the agreement, the Company paid $1,000 and issued
149,153 shares of its common stock to HJL shareholders. The acquisition was
accounted for as a purchase and the resulting purchased research and development
charge of $5,000 was recorded in the first quarter 1996.
NOTE 3 - CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. In connection with
two pacemaker lead models, the Company may be subject to future uninsured
claims. The Company's products liability insurance carrier has denied coverage
for these models and has filed suit against the Company seeking rescission of a
products liability policy covering Pacesetter's business retroactive to the date
the Company acquired Pacesetter. The Company was a codefendant in a 1995 class
action suit with respect to these leads. This case was settled in November 1995
and the Company's share of the settlement is estimated to be approximately $5
million. This case is more fully described in Item I Part II of this Quarterly
Report on Form 10-Q. Additional claims could be filed by patients with these
leads who were not class members. Further, claims may be filed in the future
relative to events currently unknown to management. Management believes any
losses that might be sustained from such actions would not have a material
adverse effect on the Company's liquidity or financial position, but could
potentially be material to the net income of a particular future period if
resolved unfavorably.
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 203,217 $ 195,072 $ 402,245 $ 384,210
Cost of sales 62,862 58,985 123,878 120,921
--------- --------- --------- ---------
Gross profit 140,355 136,087 278,367 263,289
Selling, general & administrative 66,887 63,618 133,130 124,177
Research & development 18,397 19,047 36,142 35,683
Purchased research & development -- -- 5,000 --
--------- --------- --------- ---------
Operating profit 55,071 53,422 104,095 103,429
Other income (expense) 2,128 (2,008) 11,346 (4,649)
--------- --------- --------- ---------
Income before taxes 57,199 51,414 115,441 98,780
Income tax provision 20,602 15,801 40,404 30,532
--------- --------- --------- ---------
Net income $ 36,597 $ 35,613 $ 75,037 $ 68,248
========= ========= ========= =========
Earnings per share:
Primary $ .45 $ .44 $ .92 $ .85
========= ========= ========= =========
Fully diluted $ .45 $ .44 $ .92 $ .84
========= ========= ========= =========
Shares outstanding
Primary 81,642 80,775 81,647 80,591
Fully diluted 81,642 80,976 81,647 80,800
</TABLE>
See notes to condensed consolidated financial statements.
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
(UNAUDITED) (SEE NOTE)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43,802 $ 34,767
Marketable securities 140,860 152,615
Accounts receivable, less allowance
(1996 - $9,160; 1995 - $9,328) 184,273 169,690
Inventories
Finished goods 90,473 82,176
Work in process 24,725 27,544
Raw materials 44,643 53,583
----------- -----------
Total inventories 159,841 163,303
Other current assets 18,323 31,839
----------- -----------
Total current assets 547,099 552,214
Property, plant and equipment 247,954 217,589
Less accumulated depreciation (64,379) (55,519)
----------- -----------
Net property, plant and equipment 183,575 162,070
Other assets 335,493 339,532
----------- -----------
TOTAL ASSETS $ 1,066,167 $ 1,053,816
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 188,386 $ 197,443
Long-term debt 49,000 120,000
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 -
250,000,000 shares authorized; issued and
outstanding 1996 - 80,828,637 shares; 1995 - 8,083 7,992
79,921,597 shares
Additional paid-in capital 59,272 34,769
Retained earnings 755,079 680,042
Cumulative translation adjustment 3,443 4,319
Unrealized gain on available-for-sale securities 3,344 9,691
Receivable - stock issued (440) (440)
----------- -----------
Total shareholders' equity 828,781 736,373
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,066,167 $ 1,053,816
=========== ===========
</TABLE>
NOTE: The balance sheet at December 31, 1995 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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Operating Activities:
Net income $ 75,037 $ 68,248
Depreciation and amortization 21,554 20,795
Purchased research and development 5,000 --
Gain on sale of business (10,486) --
Working capital change (31,112) (15,137)
-------- --------
Net cash provided by operating activities 59,993 73,906
-------- --------
Investment Activities:
Purchases of property, plant and equipment (35,101) (14,276)
Sales of available-for-sale securities, net 15,000 3,139
Acquisition, net of cash acquired (606) --
Proceeds from sale of business 24,204 --
Other investing activities (1,956) (4,329)
-------- --------
Net cash provided by (used in) investing activities 1,541 (15,466)
-------- --------
Financing Activities:
Proceeds from exercise of stock options 18,594 4,045
Repayment of long-term debt (71,000) (50,000)
-------- --------
Net cash used in financing activities (52,406) (45,955)
-------- --------
Effect of currency exchange rate changes on cash (93) 821
-------- --------
Increase in cash and cash equivalents 9,035 13,306
Cash and cash equivalents at beginning of year 34,767 20,086
-------- --------
Cash and cash equivalents at end of period $ 43,802 $ 33,392
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
MANAGEMENT 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 second quarter 1996 totalled $203,217, an $8,145 or
4.2% increase over net sales in the second quarter 1995. Excluding net sales
from the cardiac assist division which was sold in January 1996, second quarter
net sales increased almost 6% over the prior year comparable period. For the
first six months of 1996, net sales totalled $402,245, a 4.7% increase over net
sales in the first six months of 1995. Unfavorable foreign currency effects due
to the stronger U.S. dollar reduced 1996 net sales compared to 1995 by
approximately $2,200 and $1,100 for the quarter and first six months,
respectively.
Second quarter 1996 net sales and percentage increases from last year's second
quarter were as follows: heart valve - $68 million, a 2% increase; cardiac
rhythm management - $124 million, a 7% increase; and interventional
cardiology/electrophysiology - $11 million, an 18% increase. On a year-to-date
basis, 1996 net sales and percentage increases from last year's comparative
period were as follows: heart valve - $139 million, a 5% increase; cardiac
rhythm management - $241 million, a 6% increase; and interventional
cardiology/electrophysiology - $22 million, a 22% increase. Heart valve second
quarter 1996 sales levels compared to 1995 were negatively affected by a
substantial non-recurring second quarter 1995 sale to a Middle Eastern country.
In addition, the domestic market continues to exhibit only slight growth.
Cardiac rhythm management domestic net sales continue to be affected by the lack
of a competitive auto mode switching feature in the Company's TrilogyTM
pacemaker line. The Company expects to receive FDA approval for its TrilogyTM
DR+ pacemaker, which has this feature, in the fourth quarter of 1996.
International pacemaker unit sales were strong in the second quarter 1996 as the
Company has approval for nearly all its state-of-the-art pacemakers in almost
all countries outside the U.S.
Interventional cardiology net sales growth is slowing as the introducer business
continues to become more competitive and as other interventional cardiology
companies move toward bundling a significant number of products for sale to the
catheter laboratory where these products are used. Electrophysiology net sales
continue to grow at a rapid rate as more electrophysiologists become familiar
with diagnostic and therapeutic applications for electrophysiology catheters.
GROSS PROFIT. Second quarter 1996 gross profit totalled $140,355, or 69.1% of
net sales, as compared to $136,087, or 69.8% of net sales during the comparable
1995 period. For the first six months of 1996 and 1995, gross profit was
$278,367 or 69.2% of net sales, and $263,289 or 68.5% of net sales,
respectively. The lower comparative second quarter gross margin resulted mainly
from average selling price decreases due to increasing sales in developing
markets, negative currency impacts on net sales, higher costs of purchased heart
valve components and slight pricing pressure in the cardiac rhythm management
business. On a year-to-date basis, the 1996 gross margin improved over 1995
mainly because of the elimination of a 2% mechanical heart valve royalty payment
as of the end of the first quarter 1995.
SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative (SG&A)
expenses in the second quarter 1996 of $66,887, increased $3,269 or 5.1% over
the second quarter 1995. As a percentage of net sales, 1996 SG&A expenses
increased to 32.9% from 32.6% in 1995. On a year-to-date basis, 1996 SG&A
expenses totalled $133,130, a $8,953 or 7.2% increase over 1995. The increases
resulted primarily from the establishment of a direct sales organization in
Canada, infrastructure investments in the European and Asia Pacific markets and
enhancements to information technology systems.
RESEARCH AND DEVELOPMENT. Second quarter 1996 research and development (R&D)
expenses were $18,397, a $650 decrease from the second quarter 1995. The first
half 1996 R&D expenses totalled $36,142, a $459 increase over the comparable
period in 1995. The second quarter decrease was due to the completion of certain
Pacesetter projects; however, Pacesetter continues to invest in major ongoing
bradycardia, tachycardia and programmer R&D projects.
PURCHASED RESEARCH AND DEVELOPMENT. The $5,000 non-cash purchased R&D charge,
representing the appraised value of in-process R&D which must be expensed under
generally accepted accounting principles for purchase accounting, related to the
acquisition of The Heart Valve Company (see Note 2 - Acquisitions).
OTHER INCOME/EXPENSE. Other income in the second quarter 1996 totalled $2,128
compared to other expense of $2,008 in the second quarter 1995. For the first
six months of 1996 other income totalled $11,346 versus other expense of $4,649
in the comparable period in 1995.
Interest expense in the second quarter 1996 decreased to approximately $1,000
from $3,700 in the second quarter of 1995. This decrease was due mainly to
reduced Pacesetter acquisition related debt. In 1996, gains on the sale of
investments increased other income by $882 over the second quarter 1995. On a
year-to-date basis, several non-recurring 1996 transactions increased other
income/expense over 1995 levels, including a gain on sale of the cardiac assist
business, successful completion of litigation related to a termination fee in
connection with the Electromedics' acquisition, and transaction costs associated
with the Daig acquisition.
INCOME TAX PROVISION. The Company's effective income tax rate was 36% in the
second quarter 1996 compared to 31% in the second quarter of 1995. The increase
was caused by changes to Internal Revenue Code (IRC) Section 936 regulations
that were finalized during the quarter and made retroactive to the beginning of
1996. These regulation changes reduced the tax benefits derived from the
Company's Puerto Rican operations.
The year-to-date 1996 effective income tax rate was 35% compared to 31% for
1995. The increase resulted from the second quarter change in IRC Section 936
regulations, as well as from non-deductible expenses associated with the Daig
transaction and previously legislated changes to taxes on Puerto Rican related
income.
OUTLOOK. The Company's goal is to increase earnings per share 15% each year. Due
mainly to the dilutive impact of the Daig acquisition and the revision to IRC
Section 936 regulations affecting the Company's Puerto Rican operations, the
Company will not meet this goal in 1996. As provided for under the Private
Securities Litigation Reform Act of 1995, the Company cautions investors that
many factors could cause actual future results of operations to vary from those
anticipated in previously made forward-looking statements and any other
forward-looking statements made in this document and elsewhere by or on behalf
of the Company. Net sales could be materially adversely affected by legislative
or administrative reforms to the U.S. Medicare and Medicaid systems in a manner
that significantly reduces reimbursement for procedures using the Company's
medical devices, acquisitions of key patents by competitors that could have the
effect of excluding the Company from new market segments, health care industry
consolidation resulting in customer demands for price concessions, products
introduced by competitors with advanced technology and fewer procedures being
performed in a cost conscious environment. Cost of sales could be materially
affected by unfavorable developments in the area of products liability and price
increases from the Company's suppliers of critical components, some of which are
sole-sourced. Operations could be affected by the Company's ability to execute
its diversification strategy and integrate acquired companies, a serious
earthquake affecting the Company's Pacesetter facility in Los Angeles,
California and attempts by competitors to gain market share through aggressive
marketing programs. In addition, recently passed legislation will further
reduce, and ultimately eliminate, the Company's tax benefits derived under
Internal Revenue Code Section 936.
FINANCIAL CONDITION:
The Company's financial condition at June 30, 1996 continues to remain strong.
Long-term debt was reduced to $49,000, a $32,000 decrease during the second
quarter and a $71,000 decrease during the first six months of 1996. The ratio of
current assets to current liabilities was 2.9 to 1 at June 30, 1996.
Total assets increased $51,072 during the 1996 second quarter. Cash and
marketable securities increased $9,478 mainly due to cash flow from operations
and the cash acquired in the Daig transaction. Accounts receivable increased
$14,613 principally due to Daig receivables and higher sales in certain European
markets. Inventories increased $3,359 due to acquisition of the Daig inventory.
Net property, plant and equipment increased $24,399 as a result of the Daig
acquisition and investments in pacemaker manufacturing facilities in Stockholm
and Phoenix.
Shareholders' equity increased $79,371 during the quarter to $828,781. The
increase resulted from net income of $36,597, the Daig equity consolidation
totalling $35,734, the exercise of stock options of $13,071, a net unrealized
loss on investments of $6,373 and a foreign currency translation adjustment of
$342.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From 1987 to 1991, Siemens AG 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 March
1993 Siemens was sued in federal court in Cincinnati, Ohio ("the Wilson case").
The suit alleged that the model 1016T leads were negligently designed and
manufactured. Class action status was granted by the court in September 1993.
When St. Jude acquired from Siemens substantially all of its worldwide cardiac
rhythm management business ("Pacesetter") on September 30, 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 products 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 pacemaker
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. Management currently estimates the Company's share
of the settlement to be approximately $5 million; however, 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. Apart from this class action
settlement, additional claims could be made or lawsuits brought by patients with
these leads whose leads fail at a later date or whose leads fail for reasons
outside the class definition.
St. Jude's products 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 products 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, and has
brought suit against its former insurance broker, Johnson & Higgins.
The Company is unaware of any other pending legal proceeding which it regards as
likely to have a material adverse effect on its business.
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.
August 12, 1996 /s /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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 43,802
<SECURITIES> 140,860
<RECEIVABLES> 193,433
<ALLOWANCES> 9,160
<INVENTORY> 159,841
<CURRENT-ASSETS> 547,099
<PP&E> 247,954
<DEPRECIATION> 64,379
<TOTAL-ASSETS> 1,066,167
<CURRENT-LIABILITIES> 188,386
<BONDS> 0
0
0
<COMMON> 8,083
<OTHER-SE> 820,698
<TOTAL-LIABILITY-AND-EQUITY> 1,066,167
<SALES> 402,245
<TOTAL-REVENUES> 402,245
<CGS> 123,878
<TOTAL-COSTS> 123,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 185
<INTEREST-EXPENSE> 2,612
<INCOME-PRETAX> 115,441
<INCOME-TAX> 40,404
<INCOME-CONTINUING> 75,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,037
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
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