UNITED STATES
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, 2000 Commission File Number 0-8672
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ST. JUDE MEDICAL, INC.
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(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1276891
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
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(Address of principal executive offices)
(651) 483-2000
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(Registrant's telephone number, including area code)
Not Applicable
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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; 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 on
July 31, 2000 was 84,170,252.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 300,939 $ 290,659 $ 596,438 $ 557,393
Cost of sales 98,576 99,749 200,554 193,210
---------- ---------- ---------- ----------
Gross profit 202,363 190,910 395,884 364,183
Selling, general & administrative 107,766 104,382 211,065 200,805
Research & development 34,896 33,087 67,290 60,230
Special charges 26,101
In-process research & development 5,000 5,000 47,775
---------- ---------- ---------- ----------
Operating profit 54,701 53,441 86,428 55,373
Other income (expense), net (7,543) (3,834) (14,649) (8,465)
---------- ---------- ---------- ----------
Income before taxes 47,158 49,607 71,779 46,908
Income tax provision 13,039 12,402 21,832 21,760
---------- ---------- ---------- ----------
Net earnings $ 34,119 $ 37,205 $ 49,947 $ 25,148
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.41 $ 0.44 $ 0.60 $ 0.30
========== ========== ========== ==========
Diluted $ 0.40 $ 0.44 $ 0.59 $ 0.30
========== ========== ========== ==========
Average shares outstanding:
Basic 83,862 84,387 83,819 84,289
Diluted 84,925 84,851 84,381 84,580
</TABLE>
See notes to condensed consolidated financial statements.
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ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(Unaudited) 1999 (See Note)
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,940 $ 9,655
Marketable securities 74,594 79,238
Accounts receivable, less allowances
(2000 - $14,287; 1999 - $13,529) 319,363 293,815
Inventories 225,983 235,407
Other current assets 66,777 72,184
-------------- --------------
Total current assets 697,657 690,299
Property, plant and equipment 588,177 574,531
Less accumulated depreciation (258,551) (231,751)
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Net property, plant and equipment 329,626 342,780
Other assets 522,143 520,959
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TOTAL ASSETS $ 1,549,426 $ 1,554,038
============== ==============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 75,300 $
Accounts payable and accrued expenses 225,790 238,822
Income taxes payable 45,438 43,700
-------------- --------------
Total current liabilities 346,528 282,522
Long-term debt 360,675 477,495
Commitments and contingencies
Shareholders' equity
Preferred stock
Common stock 8,410 8,378
Additional paid-in capital 10,476 109
Retained earnings 883,170 833,223
Accumulated other comprehensive income:
Cumulative translation adjustment (63,346) (53,977)
Unrealized gain on available-for-sale securities 3,513 6,288
-------------- --------------
Total shareholders' equity 842,223 794,021
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,549,426 $ 1,554,038
============== ==============
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1999 HAS BEEN DERIVED FROM THE AUDITED
STATEMENTS AT THAT DATE. SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
3 of 18
<PAGE>
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net earnings $ 49,947 $ 25,148
Depreciation and amortization 46,667 40,201
Purchased in-process research and development charge 5,000 47,775
Special charge 26,101
Net investment gain (1,696)
Working capital change, net of business acquisition (67,895) (6,843)
------------ ------------
Net cash provided by operating activities 58,124 106,281
------------ ------------
Investing Activities:
Purchases of property, plant and equipment (18,475) (37,770)
Proceeds from sale or maturity of marketable securities 2,300
Business acquisition (167,000)
Other (8,165) (15,788)
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Net cash used in investing activities (24,340) (220,558)
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Financing Activities:
Proceeds from exercise of stock options 9,377 5,760
Borrowings under debt facilities 2,593,900 327,500
Payments under debt facilities (2,616,100) (217,000)
Repurchase of convertible subordinated debentures (19,320)
------------ ------------
Net cash provided by (used in) financing activities (32,143) 116,260
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Effect of currency exchange rate changes on cash (356) (1,465)
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Increase in cash and cash equivalents 1,285 518
Cash and cash equivalents at beginning of year 9,655 3,775
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Cash and cash equivalents at end of period $ 10,940 $ 4,293
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
NOTE 2 - INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------------------------------------------------
Finished goods $ 113,850 $ 108,449
Work in progress 42,104 41,466
Raw materials 70,029 85,492
-----------------------------------------------------------------------------
Total inventory $ 225,983 $ 235,407
=============================================================================
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------------------------------------------------
Committed credit facility borrowings $ -- $ 299,000
Commercial paper borrowings 330,800 --
Uncommitted credit facility borrowings 94,500 148,500
Convertible subordinated debentures 10,675 29,995
-----------------------------------------------------------------------------
Total debt 435,975 477,495
Less current portion 75,300 --
-----------------------------------------------------------------------------
Total long-term debt $ 360,675 $ 477,495
=============================================================================
Page 5 of 18
<PAGE>
At June 30, 2000, the Company had a $350,000 committed revolving credit facility
that expires in March 2003 and a $150,000 committed revolving credit facility
that expires in March 2001. The Company also borrows from time to time under
uncommitted, due-on-demand credit facilities with various banks.
During the first quarter of 2000, the Company repurchased $19,320 of its
convertible subordinated debentures in open market transactions, recognizing an
immaterial gain. The Company also began issuing commercial paper with maturities
up to 270 days. These commercial paper borrowings are fully backed by committed
credit facilities and bear interest at varying market rates.
The Company classifies the above debt obligations as long-term on its balance
sheet to the extent it has the ability to repay all or a portion of the
short-term obligations with available cash under a long-term, committed credit
facility. Management continually reviews the Company's cash flow projections and
may from time to time repay a portion of the Company's borrowings.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
IRS MATTERS: The Company and the Internal Revenue Service ("IRS") have reached a
verbal agreement to settle the IRS Tax Court suit for the tax periods 1990-1991
and subsequent year disputes for the tax periods 1992-1995. The issues raised by
the IRS related primarily to the Company's Puerto Rican operations. It is
expected that an agreement between the Company and the IRS will be formalized in
writing during the third quarter. The proposed settlement is not expected to
impact the Company's statement of earnings.
LITIGATION: Six separate lawsuits have been asserted against the Company
involving the Company's mechanical heart valves with a Silzone(R) coating. The
Company recalled products with the Silzone(R) coating on January 21, 2000 (see
Note 6 below) and sent a Recall Notice and Advisory concerning the recall to
physicians and others at that time. A number of these cases are seeking
monitoring of patients implanted with Silzone(R)-coated valves who have had no
injury to date. Three of the six cases that have been asserted seek class action
status. The Company intends to defend these cases.
The Company's product liability insurance policies exclude coverage for two
discontinued Pacesetter lead models. These discontinued lead models were the
subject of class action product liability suits that have been settled.
Management believes losses that might be sustained from any such future actions
would not have a material adverse effect on the Company's liquidity or financial
condition, but could potentially be material to the earnings of a particular
future period if resolved unfavorably.
The Company is involved in various other product liability lawsuits, claims and
proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has product liability insurance sufficient
to cover such claims and suits.
Page 6 of 18
<PAGE>
NOTE 5 - SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company's authorized capital consists of 25,000 shares of
$1.00 per share par value preferred stock and 250,000 shares of $0.10 per share
par value common stock. There were no shares of preferred stock issued or
outstanding during 1999 or the first half of 2000. There were 84,101 and 83,781
shares of common stock outstanding at June 30, 2000 and December 31, 1999.
SHARE REPURCHASES: During the third quarter of 1999, the Company's Board of
Directors authorized the repurchase of up to $250,000 of the Company's
outstanding common stock over a three-year period. There were no share
repurchases during the first half of 2000.
NOTE 6 - SPECIAL CHARGES
On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating a
Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will
no longer utilize the Silzone(R) coating. The Company recorded a special charge
accrual totaling $26,101 during the first quarter of 2000 relating to asset
write-downs ($9,465) and other costs, including monitoring expenses, ($16,636)
associated with this recall and product discontinuance. The Company has utilized
$14,193 of this special charge accrual through June 30, 2000. There can be no
assurance that the final costs associated with this recall, including
litigation-related costs, will not exceed management's estimates.
The Company recorded a $9,754 special charge accrual in 1999 relating to the
restructuring of its international operations, of which $6,132 has been utilized
through June 30, 2000. The Company also recorded special charge accruals in 1997
totaling $58,669 relating to various activities, of which $56,374 has been
utilized through June 30, 2000.
Page 7 of 18
<PAGE>
NOTE 7 - NET EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted net earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $ 34,119 $ 37,205 $ 49,947 $ 25,148
=========== =========== =========== ===========
Denominator:
Basic-weighted shares outstanding 83,862 84,387 83,819 84,289
Effect of dilutive securities:
Employee stock options 1,018 431 517 258
Restricted shares 45 33 45 33
----------- ----------- ----------- -----------
Diluted-weighted shares outstanding 84,925 84,851 84,381 84,580
=========== =========== =========== ===========
Basic earnings per share $ .41 $ .44 $ .60 $ .30
=========== =========== =========== ===========
Diluted earnings per share $ .40 $ .44 $ .59 $ .30
=========== =========== =========== ===========
</TABLE>
Net earnings and diluted-weighted average shares outstanding have not been
adjusted for the Company's convertible debentures or for certain employee stock
options and awards since the effect of these securities would have been
anti-dilutive.
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of unrealized gains or losses on
available-for-sale marketable securities and foreign currency translation
adjustments, net of taxes. Other comprehensive income (loss) was $(9,411) and
$48 for the three months ended June 30, 2000 and 1999 and $(12,144) and
$(21,403) for the first six months of 2000 and 1999. Total comprehensive income
(loss) combines reported net earnings (loss) and other comprehensive income
(loss). Total comprehensive income was $24,708 and $37,253 for the three months
ended June 30, 2000 and 1999 and $37,803 and $3,745 for the first six months of
2000 and 1999.
NOTE 9 - ACQUISITIONS
On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco
International Ltd. for $167,000 in cash. On September 27, 1999, the Company
purchased the outstanding common stock of VSI for $75,071 in cash, net of cash
acquired, plus additional contingent consideration related to product
development milestones for regulatory approvals and to future sales. The
Angio-Seal(TM) and VSI acquisitions were recorded using the purchase method of
accounting and the operating results of Angio-Seal(TM) and VSI were included in
the Company's consolidated statement of earnings from the date of acquisition.
Pro forma results of operations have not been presented for these acquisitions
since the effect of these acquisitions was not material to the Company's
consolidated results of operations for the periods presented. See the Company's
1999 Annual Report to Shareholders on Form 10-K for further information on the
Company's Angio-Seal(TM) and VSI acquisitions.
Page 8 of 18
<PAGE>
NOTE 10 - OTHER INCOME (EXPENSE)
Other income (expense), consists of the following:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 678 $ 763 $ 1,352 $ 1,482
Interest expense (7,908) (6,723) (15,707) (12,545)
Net gain on sale of marketable securities 639 -- 1,696 --
Foreign exchange gain (loss) (668) 1,922 (1,668) 2,604
Other (284) 204 (322) (6)
----------- ----------- ----------- -----------
Other income (expense), net $ (7,543) $ (3,834) $ (14,649) $ (8,465)
=========== =========== =========== ===========
</TABLE>
NOTE 11 - SEGMENT INFORMATION
The Company has two reportable segments: Cardiac Rhythm Management (CRM) and
Heart Valve Disease Management (HVDM). The CRM segment, which includes the
results from the Company's Cardiac Rhythm Management Division and Daig Division,
develops, manufactures and distributes bradycardia pulse generator and
tachycardia implantable cardioverter defibrillator systems, electrophysiology
and interventional cardiology catheters and vascular closure devices. The HVDM
segment develops, manufactures and distributes mechanical and tissue heart
valves and valve repair products and is in the process of developing suture-free
devices to facilitate coronary artery bypass graft anastomoses.
Page 9 of 18
<PAGE>
The following table presents certain financial information about the Company's
reportable segments:
<TABLE>
<CAPTION>
CRM HVDM All Other (1) Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended June 30, 2000
Net sales to external customers $ 234,288 $ 66,651 $ -- $ 300,939
Operating profit 32,988 33,679 (11,966) 54,701
Quarter ended June 30, 1999
Net sales to external customers 218,093 72,566 -- 290,659
Operating profit 23,221 38,741 (8,521) 53,441
Six months ended June 30, 2000
Net sales to external customers 459,546 136,892 -- 596,438
Operating profit 65,082 68,799 (47,453) 86,428
Six months ended June 30, 1999
Net sales to external customers 410,534 146,859 -- 557,393
Operating profit 41,480 78,635 (64,742) 55,373
</TABLE>
(1) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. ALL OTHER OPERATING
PROFIT (LOSS) AMOUNTS INCLUDE A SPECIAL CHARGE TOTALING $26,101 IN 2000 AND
A PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000 AND
$47,775 IN 2000 AND 1999.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement 133), which is required to be adopted in
years beginning after June 15, 2000, although early adoption as of the beginning
of any fiscal quarter is permitted. Statement 133 requires companies to
recognize all derivatives on the balance sheet at fair value. Derivatives not
qualifying as hedges must be adjusted to fair value through earnings. If the
derivative qualifies as a hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Management is continuing to
review the impact of Statement 133 on the Company's financial statements.
Page 10 of 18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
ACQUISITIONS: The Company acquired the Angio-Seal(TM) business of Tyco
International Ltd. on March 16, 1999 and the outstanding common stock of
Vascular Science, Inc. (VSI) on September 27, 1999. These acquisitions have been
recorded using the purchase method of accounting. The operating results of each
of these acquisitions are included in the Company's consolidated statements of
earnings from the date of each acquisition.
NET SALES: Net sales for the second quarter of 2000 totaled $300,939, a 3.5%
increase over the $290,659 reported in the second quarter of 1999. For the first
six months of 2000, net sales totaled $596,438, a 7.0% increase over the
$557,393 reported in the first half of 1999. Unfavorable foreign currency
effects due to a stronger U.S. dollar primarily against the major Western
European currencies reduced 2000 net sales as compared with 1999 by
approximately $7,300 for the second quarter and $15,100 for the first six
months.
Cardiac rhythm management (CRM) net sales for the second quarter of 2000 were
$234,288, a 7.4% increase over the $218,093 recorded in the second quarter of
1999. CRM net sales for the first six months of 2000 were $459,546, an 11.9%
increase over the $410,534 recorded in 1999. The increase in CRM net sales for
the second quarter and first half of 2000 was primarily attributable to
increased bradycardia net sales and increased electrophysiology (EP) catheter
unit sales that were only partially offset by a decline in tachycardia net sales
resulting from fewer single chamber procedures. The increase in bradycardia net
sales is mainly due to the Company's on-going rollout of the Affinity(R)
pacemaker family and to an expanded U.S. sales organization.
Heart valve disease management (HVDM) net sales for the second quarter of 2000
were $66,651, an 8.2% decrease from the $72,566 recorded in 1999. HVDM net sales
for the first six months of 2000 were $136,892 compared with $146,859 recorded
in 1999. The decrease in HVDM net sales for the second quarter and the first six
months was attributable to the effects of the stronger U.S. dollar and a slight
clinical preference shift from mechanical valves to tissue valves in the U.S.
market. HVDM holds significant mechanical valve market share and a smaller share
of the tissue valve market in the U.S.
GROSS PROFIT: Gross profit for the second quarter of 2000 totaled $202,363 or
67.2% of net sales, as compared with $190,910, or 65.7% of net sales, during the
second quarter of 1999. For the first six months of 2000 and 1999, gross profit
was $395,884 or 66.4% of net sales and $364,183, or 65.3% of net sales. The
improvement in the gross profit percentage for the second quarter and the first
half of 2000 is due primarily to higher CRM sales volumes, geographical sales
mix and improved CRM manufacturing efficiencies.
Page 11 of 18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for the second
quarter of 2000 totaled $107,766, a 3.2% increase over the $104,382 reported in
the second quarter of 1999. For the first six months of 2000, SG&A expense
totaled $211,065, a 5.1% increase over the $200,805 recorded in the first half
of 1999. The increase in SG&A expense in the second quarter and first half of
2000 was primarily attributable to increased sales activities and acquisitions.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense in the second quarter of
2000 totaled $34,896, or 11.6% of net sales, compared with $33,087, or 11.4% of
net sales, for the second quarter of 1999. For the first six months of 2000, R&D
expense totaled $67,290, or 11.3% of net sales, compared with $60,230, or 10.8%
of net sales, for the first six months of 1999. The increase in R&D expense and
as a percentage of net sales was primarily attributable to increased CRM
activities relating mainly to ICDs, products treating emerging indications in
atrial fibrillation, congestive heart failure and specialty catheter development
and HVDM vascular closure devices.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: The Company recorded a
purchased in-process research and development charge totaling $5,000 during the
second quarter of 2000 in connection with its acquisition of VSI.
The Company acquired certain in-process technologies in connection with its
acquisition of VSI in September 1999. The appraised value of the VSI in-process
technologies was determined to be $95,500, of which $67,453 was recorded at
close and $5,000 was recorded in the second quarter of 2000. The remaining
balance of the in-process research and development valuation ($23,047) is
expected to be recorded in the Company's financial statements as purchased
in-process research and development when payment of future contingent
consideration is assured beyond a reasonable doubt. The VSI purchase agreement
provides for four separate $5,000 milestone payments and other revenue based
consideration payments. The first such milestone payment was made in the second
quarter of 2000. Each of these milestone payments will be recorded as an
in-process research and development charge. The Company expects to capitalize as
goodwill all other contingent consideration payments in excess of the $23,047.
Management currently anticipates that one additional $5,000 milestone payment
will be made in 2000.
Management believes that the financial statement projections used in the
Angio-Seal and VSI acquisitions are still materially valid; however, there can
be no assurance that the projected results will be achieved. Certain in-process
technologies acquired in the Angio-Seal acquisition have been developed to the
point of commercial production and sale to customers. Management expects to
continue the development of the other in-process technologies acquired in the
Angio-Seal and VSI acquisitions and continues to believe that there is a
reasonable chance of successfully completing such development efforts. However,
there is risk associated with the completion of the in-process technologies and
there can be no assurance that any technologies will meet with either
technological or commercial success. Failure to successfully develop and
commercialize these in-process technologies would result in the loss of the
expected economic return inherent in the original fair value allocation.
Additionally, the value of other intangible assets acquired may become impaired.
Page 12 of 18
<PAGE>
SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide voluntary
recall of all field inventory of heart valve replacement and repair products
incorporating a Silzone(R) coating on the sewing cuff fabric. The Company
concluded that it will no longer utilize the Silzone(R) coating. The Company
recorded a special charge accrual totaling $26,101 during the first quarter of
2000 relating to asset write-downs ($9,465) and other costs, including
monitoring expenses, ($16,636) associated with this recall and product
discontinuance. The Company has utilized $14,193 of this special charge accrual
through June 30, 2000. Other than the effect of this special charge, management
believes that this recall will not materially impact the Company's future
earnings or cash flows based primarily on the fact that the Company's
non-Silzone(R) coated products, which represented 75% of the Company's HVDM
shipments at the time of the recall, are not affected by this recall. However,
there can be no assurance that the final costs associated with this recall,
including litigation-related costs, will not exceed management's estimates.
OTHER INCOME (EXPENSE): Other expense was $7,543 during the second quarter of
2000 as compared with $3,834 in 1999. For the first six months other expense
totaled $14,649 and $8,465 for 2000 and 1999. The increase in other expense was
due primarily to higher debt levels resulting primarily from the Company's
acquisitions and share repurchases in 1999.
INCOME TAXES: The Company's effective income tax rate was 25% for the second
quarters and first six months of 2000 and 1999, exclusive of the 2000 special
charge and the 2000 and 1999 purchased in-process research and development
charges. The special charge and in-process research and development charges were
primarily recorded in taxing jurisdictions with a low income tax rate.
OUTLOOK: The Company expects that market demand, government regulation and
societal pressures will continue to change the worldwide health care industry
resulting in further business consolidations and alliances. The Company
participates with industry groups to promote the use of advanced medical device
technology in a cost conscious environment. Customer service in the form of
cost-effective clinical outcomes will continue to be a primary focus for the
Company.
The Company's HVDM business is in a highly competitive market. The market is
segmented between mechanical heart valves, tissue heart valves, and repair
products. During 1999 and the first half of 2000, the U.S. market continued its
slight shift to tissue valve and repair products from mechanical heart valves
resulting in a small market share loss. Competition is anticipated to place
pressure on pricing and terms, and health care reform is expected to result in
further hospital consolidations over time.
Page 13 of 18
<PAGE>
The Company's CRM business is also in a highly competitive industry that is
undergoing consolidation. The number of principal suppliers has decreased from
four to three. The Company's two principal competitors each have substantially
more assets, sales and sales personnel than the Company. In addition, the
Company's two principal competitors in the ICD market have dual-chamber ICDs on
the market that represent an increasing percentage of the overall ICD market.
The Company began clinical evaluation of a dual-chamber ICD in late 1999, and
also received CE mark approval in March 2000. However, until the Company
commercially introduces a dual-chamber ICD into the U.S. and other global
markets, the continued growth of dual-chamber ICDs at the expense of
single-chamber ICDs could adversely affect the Company. Rapid technological
change is expected to continue, requiring the Company to invest heavily in R&D
and to effectively market its products.
The global medical device market is highly competitive. Competitors have
historically employed litigation to gain a competitive advantage. In addition,
the Company's products must continually improve technologically and provide
improved clinical outcomes due to the competitive nature of the industry.
Group purchasing organizations (GPOs) in the U.S. continue to consolidate the
purchasing for some of the Company's customers. Several such GPOs have executed
contracts with the Company's CRM market competitors, which exclude the Company.
These contracts, if enforced, may adversely affect the Company's sales of CRM
products to members of these GPOs.
The Company and the Internal Revenue Service ("IRS") have reached a verbal
settlement regarding litigation over a tax issue. See Part II, Item 1, Legal
Proceedings below for further discussion.
As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of 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 affected by legislative or administrative reforms to the U.S.
Medicare and Medicaid systems and non-U.S. reimbursement systems in a manner
that would significantly reduce reimbursement for procedures using the Company's
medical devices, the acquisition of key patents by competitors that would 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 better features
and benefits or lower prices, fewer procedures performed in a cost-conscious
environment, and the lengthy approval time by the FDA or other government
authorities to clear implantable medical devices for commercial release. 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, a number of which are sole sourced. Operations could be affected by
the Company's ability to execute its diversification strategy or to integrate
acquired companies, a serious earthquake affecting the Company's facilities in
Sylmar or Sunnyvale, California, adverse developments in the litigation arising
from the acquisitions of Telectronics and Ventritex, unanticipated product
failures and attempts by competitors to gain market share through aggressive
marketing programs.
Page 14 of 18
<PAGE>
FINANCIAL CONDITION
The Company's liquidity and cash flows remained strong through June 30, 2000.
The Company's current assets to current liabilities ratio was 2.0 to 1 at June
30, 2000 as compared with 2.4 to 1 at December 31, 1999. The decrease in the
current ratio was due to the reclassification of certain interest-bearing debt
as a current liability at June 30, 2000 (see the discussion below).
Accounts receivable increased $25,548 from December 31, 1999 to June 30, 2000
primarily due to higher sales in the first half of 2000 as compared with the
second half of 1999. Total interest bearing debt decreased $41,520 from December
31, 1999 through June 30, 2000 mainly as the result of cash flow from
operations.
The Company classifies its interest-bearing debt obligations as long-term on its
balance sheet to the extent it has the ability to repay all or a portion of its
short-term, interest-bearing debt obligations with available cash under a
long-term, committed credit facility. Management continually reviews the
Company's cash flow projections and may from time to time repay a portion of the
Company's borrowings.
During the third quarter of 1999, the Company's Board of Directors authorized
the repurchase of up to $250,000 of the Company's outstanding common stock over
a three-year period. There were no share repurchases during the first half of
2000.
Management believes that cash generated from operations and cash available under
its credit facilities will be sufficient to meet the Company's working capital
and share repurchase plan needs in the near term. Should suitable investment
opportunities arise, management believes that the Company's earnings, cash flows
and balance sheet will permit the Company to obtain additional debt financing or
equity capital, if necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from December 31, 1999 through June
30, 2000 in the Company's market risk, other than the maturity in January 2000
of its interest rate swap contract that hedged a substantial portion of the
Company's variable interest rate risk on $138,000 of the Company's revolving
credit facility borrowings.
For further information on market risk, refer to Item 7A in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
Page 15 of 18
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GUIDANT LITIGATION
Guidant's Claims Against SJM On November 26, 1996, Guidant Corporation (a
competitor of Pacesetter and Ventritex) ("Guidant") and related parties filed a
lawsuit against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc.
("Pacesetter"), Ventritex, Inc. ("Ventritex") and certain members of the
Telectronics Group in State Superior Court in Marion County, Indiana (the
"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant
to an agreement entered into in 1993, certain Guidant parties granted Ventritex
intellectual property licenses relating to cardiac stimulation devices, and that
such licenses would terminate upon the consummation of the merger of Ventritex
into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an
agreement entered into in 1994 (the "Telectronics Agreement"), certain Guidant
parties granted the Telectronics Group intellectual property licenses relating
to cardiac stimulation devices. The lawsuit seeks declaratory and injunctive
relief, among other things, to prevent and invalidate the transfer of the
Telectronics Agreement to Pacesetter in connection with Pacesetter's acquisition
of Telectronics' assets (the "Telectronics Acquisition") and the application of
license rights granted under the Telectronics Agreement to the manufacture and
sale by Pacesetter of Ventritex's products following the consummation of the
Merger. The court overseeing this case issued a stay of this matter in July 1998
so that the issues could be addressed in an arbitration requested by the
Telectronics Group and Pacesetter.
Guidant and related parties also filed suit against St. Jude Medical,
Pacesetter and Ventritex on November 26, 1996 in the United States District
Court for the Southern District of Indiana. This second lawsuit seeks (i) a
declaratory judgment that Pacesetter's manufacture, use or sale of cardiac
stimulation devices of the type or similar to the type which Ventritex
manufactured and sold at the time the Guidant parties filed their complaint
would, upon consummation of the Merger, be unlicensed and constitute an
infringement of patent rights owned by certain Guidant parties, (ii) to enjoin
the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of
cardiac stimulation devices of the type which Ventritex manufactured at the time
the Guidant parties filed their complaint, and (iii) certain damages and costs.
This second lawsuit was stayed by the court in July 1998 given the order to
arbitrate which is mentioned below.
St. Jude Medical believes that the foregoing state and federal court
complaints contain a number of significant factual inaccuracies concerning the
Telectronics Acquisition and the terms and effects of the various intellectual
property license agreements referred to in such complaints. For these reasons
and others, St. Jude Medical believes that the allegations set forth in the
complaints are without merit. St. Jude Medical has vigorously defended its
interests in these cases, and will continue to do so.
Page 16 of 18
<PAGE>
Order to Arbitrate - As a result of the state and federal lawsuits
brought by Guidant and related parties, the Telectronics Group and Pacesetter
filed a lawsuit in the United States District Court for the District of
Minnesota seeking (i) a declaratory judgment that the Guidant parties' claims,
as reflected in the Telectronics Action, are subject to arbitration pursuant to
the arbitration provisions of the Telectronics Agreement, (ii) an order that the
defendants arbitrate their claims against the Telectronics Group and Pacesetter
in accordance with the arbitration provisions of the Telectronics Agreement,
(iii) to enjoin the defendants preliminarily and permanently from litigating
their dispute with the Telectronics Group and Pacesetter in any other forum, and
(iv) certain costs. After the Eighth Circuit Court of Appeals ruled on an appeal
in favor of the Telectronics Group and Pacesetter in May 1998, the United States
District Court for the District of Minnesota issued an order on July 8, 1998
directing the arbitration requested by the Telectronics Group and Pacesetter to
proceed.
Status of Arbitration - The arbitrator selected for the arbitration
initially ruled that Pacesetter and St. Jude Medical should not participate in
the arbitration proceeding which would determine whether the Telectronics
Agreement transferred to Pacesetter. Based on this ruling, the Telectronics
Group and the Guidant parties were the ones participating in the arbitration
proceeding. This proceeding occurred in late April 2000, and, on July 10, 2000,
the arbitrator issued a decision ruling that the attempted assignment and
transfer of patent licenses in the Telectronics Agreement by the Telectronics
Group to Pacesetter was ineffective. As a result of this decision, the Guidant
parties filed papers with the U.S. District Court for the Southern District of
Indiana seeking to lift the stay of the patent infringement court proceedings in
that court which been entered in June 1998.
Background Concerning Patents Involved In Guidant's Claims - In the
patent infringement case in federal court in Indiana, the Guidant parties
asserted claims against St. Jude Medical and its Pacesetter subsidiary involving
four separate patents. One of these patents expired May 3, 1998. The other
patents involved expire March 7, 2001, February 25, 2003 and December 22, 2003
respectively. Although Guidant has requested injunctive relief and damages as
part of the federal court lawsuit in Indiana, the request for an injunction
would be barred for any expired patent. Guidant's may seek damages for the time
period prior to expiration of a patent.
St. Jude Medical continues to believe that the patent infringement claims
raised by the Guidant parties in the patent infringement case are without merit,
and will continue to vigorously defend its interests in these cases.
IRS LITIGATION
The Company and the Internal Revenue Service ("IRS") have reached a
verbal agreement to settle the IRS Tax Court suit for the tax periods 1990-1991
and subsequent year disputes for the tax periods 1992-1995. The issues raised by
the IRS related primarily to the Company's Puerto Rican operations. It is
expected that an agreement between the Company and the IRS will be formalized in
writing during the third quarter. The proposed settlement is not expected to
impact the Company's statement of earnings.
Page 17 of 18
<PAGE>
SILZONE(R) MATTERS
Six separate lawsuits have been asserted against the Company involving
the Company's mechanical heart valves with a Silzone(R) coating. The Company
recalled products with the Silzone(R) coating on January 21, 2000 (see Note 6 to
the Company's June 30, 2000 financial statements) and sent a Recall Notice and
Advisory concerning the recall to physicians and others at that time. A number
of these cases are seeking monitoring of patients implanted with
Silzone(R)-coated valves who have had no injury to date. Three of the six cases
that have been asserted seek class action status. The Company intends to defend
these cases.
AUSTRALIA CLASS ACTION LITIGATION
A class action suit has been filed against the Company in Australia
seeking damages arising from the Company's advisory notice relating to certain
Tempo and Mehta pacemakers. The Company intends to vigorously defend this case.
OTHER LITIGATION AND PROCEEDINGS
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial data schedule
(b) Reports on Form 8-K
None
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.
August 14, 2000 /s/ John C. Heinmiller
--------------- ----------------------------
DATE JOHN C. HEINMILLER
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 18 of 18
