<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1998
-------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number 0-18724
---------------------------------------
MARQUETTE MEDICAL SYSTEMS, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1046671
--------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8200 W. Tower Avenue, Milwaukee, Wisconsin 53223
--------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(414) 355-5000
--------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
--------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding
at February 28, 1998
-----------------------------
<S> <C>
Class A, $.10 par value 17,759,751 Shares
-----------------------------
Class C, $.01 par value NONE
-----------------------------
</TABLE>
<PAGE>
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
------------------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I - FINANCIAL INFORMATION:
- ------------------------------
Item 1) Financial Statements -
Consolidated Condensed Statements of Income 3
For the Three Months and Nine Months Ended
January 31, 1998 and 1997 (Unaudited)
Consolidated Condensed Balance Sheets As of 4
January 31, 1998 (Unaudited) and
April 30, 1997
Consolidated Condensed Statements of Cash Flows 5
For the Nine Months Ended January 31, 1998
and 1997 (Unaudited)
Notes to Consolidated Condensed Financial 6
Statements (Unaudited)
Item 2) Management's Discussion and Analysis of Financial 7-9
Condition and Results of Operations
SIGNATURE 10
- ---------
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - Financial Statements
- ------ --------------------
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31 January 31,
------------------ -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $143,724 $137,714 $424,360 $399,416
Cost of Sales 73,803 70,234 212,366 205,241
-------- -------- -------- --------
Gross profit 69,921 67,480 211,994 194,175
-------- -------- -------- --------
Engineering Expenses 12,924 12,180 38,511 35,967
Selling Expenses 32,850 33,003 102,595 97,246
General and Administrative
Expenses 11,216 11,705 35,577 33,588
-------- -------- -------- --------
Total operating expenses 56,990 56,888 176,683 166,801
-------- -------- -------- --------
Income (loss) from operations 12,931 10,592 35,311 27,374
Interest Expense 1,481 2,480 4,690 6,669
Other Income, net 152 (1,192) 25 (2,310)
-------- -------- -------- --------
Income (loss) before provision
for income taxes 11,298 9,304 30,596 23,015
Provision for Income Taxes 3,727 3,406 12,025 8,631
-------- -------- -------- --------
Net Income (Loss) $ 7,571 $ 5,898 $ 18,571 $ 14,384
======== ======== ======== ========
Basic Earnings per Share $ .43 $ .37 $ 1.05 $ .89
======== ======== ======== ========
Basic Shares Outstanding 17,747 16,121 17,690 16,252
======== ======== ======== ========
Diluted Earnings per Share $ .41 $ .36 $ 1.01 $ .87
======== ======== ======== ========
Diluted Shares Outstanding 18,434 16,366 18,336 16,498
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
As of As of
ASSETS January 31, April 30,
- ------ 1998 1997
----------- ---------
CURRENT ASSETS: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 3,052 $ 2,704
Accounts receivable, less allowances
of $4,407 and $4,164, respectively 160,374 140,136
Inventories 114,289 110,779
Prepaid expenses and other 4,555 4,850
Deferred income tax benefits 12,041 8,304
-------- --------
Total current assets 294,311 266,773
PROPERTY AND EQUIPMENT, NET 108,575 96,992
OTHER ASSETS, NET 55,765 64,567
-------- --------
$458,652 $428,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Amounts due to bank $ 8,377 $ 11,114
Notes payable to bank 44,680 30,422
Accounts payable 29,311 28,674
Accrued liabilities 52,691 47,381
-------- --------
Total current liabilities 135,059 117,591
-------- --------
LONG-TERM DEBT, less current maturities 46,500 57,000
DEFERRED INCOME TAXES 15,519 16,814
PENSION AND OTHER LONG-TERM LIABILITIES 51,380 45,727
CLASS A COMMON STOCK UNDER
REPURCHASE AGREEMENTS 8,000 8,000
SHAREHOLDERS' EQUITY:
Common Stock, $.10 par value,
30,000,000 shares authorized,
17,753,381 and 17,602,407 shares
issued, respectively 1,775 1,760
Additional paid-in capital 54,993 52,890
Retained earnings 165,913 147,343
Treasury Stock, zero and 18,900 shares,
at cost, respectively -- (312)
Cumulative translation adjustment (12,487) (10,481)
Class A Common Stock under repurchase
agreements (8,000) (8,000)
-------- --------
Total shareholders' equity 202,194 183,200
-------- --------
$458,652 $428,332
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-4-
<PAGE>
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended January 31, 1998 and 1997
(Amounts in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 15,470 $ 5,733
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (19,810) (10,477)
Net cash received from sale of Optical
Devices, Inc. -- 905
-------- --------
Net cash used in investing activities (19,810) (9,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to bank, net 12,721 12,620
Proceeds (payments) on long-term debt (10,500) (2,911)
Proceeds from issuance of common stock 2,430 1,706
Purchase of common stock -- (4,643)
-------- --------
Net cash provided by financing activities 4,651 6,772
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 37 (1,010)
-------- --------
Net increase (decrease) in cash and
cash equivalents 348 1,923
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,704 2,890
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,052 $ 4,813
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 4,959 $ 6,300
Income taxes $ 14,289 $ 9,221
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Per Share Data)
(UNAUDITED)
(1) Basis of Presentation-
---------------------
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. However, in the
opinion of the Company, adequate disclosures have been presented to make
the information not misleading, and all adjustments necessary to present
fair statements of the results of operations, financial position and cash
flows have been included. It is suggested that these consolidated
condensed financial statements be read in conjunction with the consolidated
financial statements included in Marquette Medical Systems, Inc.'s Form
10-K for the fiscal year ended April 30, 1997.
(2) Inventories-
------------
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, 1998 April 30, 1997
---------------- --------------
<S> <C> <C>
Raw materials and component parts $ 34,846 $ 31,629
Work in process and finished goods 56,928 56,434
Demonstration inventory 22,515 22,716
-------- --------
$114,289 $110,779
======== ========
</TABLE>
(3) In the period ended January 31, 1998, the Company adopted SFAS No. 128
"Earnings per Share". As a result, earnings per share figures have been
restated on the income statement to reflect the diluted earnings per share
in addition to the basic earnings per share. The dilutive impact is
attributable to the Company's outstanding employee stock options.
-6-
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
Results of Operations - Three-Month and Nine-Month Periods Ended January 31,
- ----------------------------------------------------------------------------
1998
- ----
Net sales for the three-month period ended January 31, 1998 increased 4.4% to
$143.7 million from $137.7 million for the three-month period ended January 31,
1997. The Company's Monitoring Group achieved sales growth of 11.7% for the
three-month period while the Cardiology Group had flat sales for the current
three-month period as compared to the three-month period ended January 31, 1997.
The Supplies and Service business unit experienced a 6.1% decrease in sales for
the current three-month period. The Monitoring Group achieved the strong sales
growth in the quarter as a result of the continued demand for its newest modular
monitors. In addition, all of the product lines experienced increased demand
internationally. For the quarter, 39.5% of the Company's net sales were outside
of the United States. The sales growth in the quarter was adversely affected by
negative currency conversions due to a stronger U. S. dollar and the devaluation
of certain Asian currencies. A stable U. S. dollar as compared to the previous
year's quarter would have provided additional net sales of $7.2 million, or
5.0%.
Net sales for the nine-month period ended January 31, 1998 increased 6.2% to
$424.4 million from $399.4 million for the nine-month period ended January 31,
1997. The Company's Monitoring Group and Cardiology Group achieved sales growth
of 14.5% and 0.4%, respectively, in the current nine-month period. The Supplies
and Service unit had a decrease in net sales in the current nine-month period of
2.9%. For the nine-month period, the Company experienced softer market
conditions in Europe for all products. However, the increased demand in the
U.S., particularly for the modular monitors, has more than offset the level of
demand internationally. In addition, certain strategic alliances are beginning
to provide benefits which are positively impacting net sales, for the Monitoring
Group in particular. The negative currency conversions also adversely affected
the sales growth in the nine-month period. A stable U. S. dollar as compared to
the previous year's nine-month period would have provided additional net sales
of $19.8 million, or 4.7%. International net sales for the current nine-month
period comprised 35.5% of total net sales as compared with approximately 39% for
the previous year's nine-month period. This decrease is attributable to the
weaker markets in Western Europe as well as the stronger U. S. dollar versus
most foreign currencies.
Gross profit for the three-month period ended January 31, 1998 increased 3.6% to
$69.9 million from $67.5 million for the three-month period ended January 31,
1997. For the nine-month period ended January 31, 1998, gross profit increased
9.2% to $212.0 million from $194.2 million in the comparable period last year.
Gross margin for the current three-month period was 48.6% as compared to 49.0%
for the previous year's quarter. The decrease in the gross margin is related to
a shift in the product mix in the quarter towards lower margin products and to
international customers which historically have lower margins. For the nine-
month period ended January 31, 1998, the gross margin was 50.0% as compared to
48.6% in the comparable period last year. The increased gross margin for the
nine-month period was attributable to both product mix and an increased domestic
net sales as a percentage of total net sales. For the nine-month period, the
product mix was weighted more towards higher margin products such as modular
monitors as compared to the previous year's period. In addition, the geographic
distribution in the current nine-month period resulted in a greater percentage
of domestic sales, especially in the early months of the period, which generally
provide a greater gross margin than do the Company's international sales.
-7-
<PAGE>
Engineering expenses for the three-month period ended January 31, 1998 increased
6.1% to $12.9 million from $12.2 million for the same period in the previous
fiscal year. Engineering expenses as a percentage of net sales increased
slightly to 9.0% of net sales as compared to 8.8% of net sales for the previous
year's quarter. For the nine-month period ended January 31, 1998, engineering
expenses increased 7.1% to $38.5 million as compared to $36.0 million for the
nine-month period ended January 31, 1997. For the nine-month period,
engineering expenses were 9.1% of net sales for the current period as compared
to 9.0% for the previous year's period. The Company will continue to invest
significantly in both new product developments and continued enhancements to
current products. Due to the competitiveness and technological nature of the
medical systems and equipment industry, this investment is necessary in order to
maintain the Company's competitive position in the health care industry.
Selling expenses for the three-month period ended January 31, 1998 decreased
0.5% to $32.9 million from $33.0 million for the three-month period ended
January 31, 1997. Selling expenses as a percentage of net sales decreased in
the current quarter to 22.9% as compared to 24.0% for the previous year's
quarter. The decrease is attributable to management's efforts to reduce the
Company's selling expenses. A headcount reduction in Europe earlier in the
fiscal year is resulting in the reduction in the selling expenses. For the
nine-month period ended January 31, 1998, selling expenses increased by 5.5% to
$102.6 million from $97.2 million. This increase relates to both the higher net
sales volume in the nine-month period as well as severance costs associated with
the headcount reduction in Europe. As a percentage of net sales, selling
expenses remained relatively constant for the nine-month period ended January
31, 1998 at 24.2% of net sales as compared to 24.3% of net sales for the
comparable period in the previous year.
General and administrative expenses for the three-month period ended January 31,
1998 decreased 4.2% to $11.2 million from $11.7 million for the three-month
period ended January 31, 1997. As a percentage of net sales, general and
administrative expenses were 7.8% of net sales for the current quarter as
compared to 8.5% in the previous year's quarter. The reduction is attributable
to the European headcount reduction as a part of management's strategy to
increase operating margins. For the nine-month period ended January 31, 1998,
general and administrative expenses increased 5.9% to $35.6 million from $33.6
million. The increase relates to the ongoing conversion costs associated with
the conversion of business systems. As a percentage of net sales, general and
administrative expenses for the nine-month period ended January 31, 1998
remained constant at 8.4% of net sales as compared to the previous year's
period.
Operating income for the three-month period ended January 31, 1998 increased
22.1% to $12.9 million from $10.6 million for the same period in the previous
fiscal year. For the nine-month period, operating income increased 29.0% from
$27.4 million to $35.3 million. The increase in operating income for the three-
month period is attributable to both the increased net sales as well as the
reduction in the operating expenses. The focus on controlling operating expenses
resulted in an operating margin of 9.0% for the three-month period ended January
31, 1998 as compared to an operating margin of 7.7% in the previous year's
quarter. The increased operating income for the nine-month period is
attributable to increased net sales and to the increased gross margins.
Interest expense for the three-month period ended January 31, 1998 decreased to
$1.5 million from $2.5 million for the same period in the previous fiscal year.
For the nine-month period, interest expense decreased to $4.7 million from $6.7
million. The decreases are attributable to the use of proceeds from a public
stock offering completed in March, 1997 for repayment of a portion of bank term
debt.
-8-
<PAGE>
The provision for income taxes for the three-month period ended January 31, 1998
was $3.7 million, or an effective tax rate of 33.0%, as compared to $3.4
million, or an effective tax rate of 36.6% for the same period in the previous
fiscal year. The decreased effective tax rate is a result of the utilization of
net operating losses in Europe which had not been previously benefited.
Improved profitability in the European operations is allowing the Company to
offset the quarterly profits with the net operating losses. The effective tax
rate for the nine-month period is 39.3% as compared to 37.5% for the comparable
period in the previous year. This increased effective tax rate is a result of
net operating losses generated in Europe which have not been fully benefited.
Liquidity and Capital Resources
Working capital was $159.3 million at January 31, 1998 as compared to $149.2
million at April 30, 1997. Accounts receivable increased 14.4% to $160.4
million reflecting increased sales levels. Inventories increased 3.2% to $114.3
million primarily due to increased sales levels and to give the Company the
continued ability to effectively manage its backlog.
As of January 31, 1998, the Company had $16.7 million outstanding on U.S. lines
of credit of $25.0 million. In addition, the Company had $28.0 million, U. S.
dollar equivalent, outstanding on foreign lines of credit of $49.7 million. As
of April 30, 1997, the amounts outstanding on the U. S. and foreign lines of
credit were $8.0 million and $22.4 million, respectively. A portion of the
foreign currency denominated borrowings are used to reduce the currency risks
associated with the foreign currency receivables.
Net capital expenditures for the nine-month period ended January 31, 1998 were
$19.8 million, compared with $10.5 million for the same period in the previous
fiscal year. The increase was due to the continued capital expenditures related
to the acquisition of a new business system. In addition, the prior year net
capital expenditure amount includes the proceeds from a sale of German land.
The capital purchases were funded by both cash flow from operations as well as
with draws from the working capital line.
As of January 31, 1998, the Company has $46.5 million of long-term debt compared
with $57.0 million of long-term debt as of April 30, 1997. Of the total long-
term debt, $30.0 million is senior long-term fixed rate debt which was incurred
during the year ended April 30, 1997 in order to refinance a portion of bank
long-term debt. This senior debt accrues interest at a fixed rate of 7.46% per
annum and matures on August 29, 2008. The remaining long-term debt consists of
three variable rate bank term loans. During the nine-months ended January 31,
1998, $10.5 million of bank term debt was repaid by the Company with draws from
its working capital line of credit. The next required installment owed by the
Company is $5.25 million on April 30, 2000 with the final installment on the
bank term debt of $11.25 million owed by the Company on October 31, 2000. The
$16.5 million of remaining bank term debt outstanding on January 31, 1998
accrued interest at a rate equal to the LIBOR rate plus one percent, reset
monthly. At January 31, 1998, the rate was 6.6563% per annum. The Company
intends to pay the interest and retire the remaining long-term debt through cash
flow from operations.
Management believes the Company has the financial resources to meet its short
term and long term cash requirements. Management believes its cash flow from
operations will be sufficient to continue to fund its current obligations as
well as fund the internal growth of the Company. The current U. S. inflation
rate has little impact on Company operations.
The Company is currently in the process of investigating all of its products to
determine if any have a potential incompatability with the Year 2000. Most
products are currently compatible with the Year 2000. In addition, the Company
has been converting its internal systems to an entirely new business system.
This new business system has addressed the Year 2000 issues regarding all
internal systems. The Company does not believe any further Year 2000 compliance
costs will be material to its financial statements.
The Management Discussion and Analysis of Financial conditions and Results of
Operations section in this report may contain certain forward-looking statements
regarding the Company and its products. These forward-looking statements are
based on current expectations and the Company assumes no obligation to update
this information. The Company's actual results could differ materially from
those discussed in this document.
-9-
<PAGE>
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.
Marquette Medical Systems, Inc.
----------------------------------
(Registrant)
Date: March 11, 1998 /s/ Mary M. Kabacinski
----------------- -------------------------------
Mary M. Kabacinski
Principal Financial Officer
and Duly Authorized Officer
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED JANUARY 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 3,052
<SECURITIES> 0
<RECEIVABLES> 164,781
<ALLOWANCES> 4,407
<INVENTORY> 114,289
<CURRENT-ASSETS> 294,311
<PP&E> 176,336
<DEPRECIATION> 67,761
<TOTAL-ASSETS> 458,652
<CURRENT-LIABILITIES> 135,059
<BONDS> 46,500
0
0
<COMMON> 1,775
<OTHER-SE> 200,419
<TOTAL-LIABILITY-AND-EQUITY> 458,652
<SALES> 424,360
<TOTAL-REVENUES> 424,360
<CGS> 212,366
<TOTAL-COSTS> 176,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,690
<INCOME-PRETAX> 30,596
<INCOME-TAX> 12,025
<INCOME-CONTINUING> 18,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,571
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.01
</TABLE>
