<PAGE>1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 1994
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 1-7707
MEDTRONIC, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0793183
(State of incorporation) (I.R.S. Employer
Identification No.)
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
(Address of principal executive offices)
Telephone number: (612) 574-4000
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
Shares of common stock, $.10 par value, outstanding on February 28, 1994:
57,351,993
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
MEDTRONIC, INC.
STATEMENT OF CONSOLIDATED EARNINGS
(Unaudited)
Three months ended Nine months ended
__________________ __________________
Jan. 28, Jan. 29, Jan. 28, Jan. 29,
1994 1993 1994 1993
________ ________ ________ ________
(In thousands, except per share data)
Net sales $334,601 $308,206 $997,964 $969,924
Costs and expenses:
Cost of products sold 103,237 97,485 309,067 307,287
Research and development
expense 38,986 32,976 112,964 96,493
Selling, general, and
administrative expense 107,947 106,676 342,851 356,590
Interest expense 1,956 2,531 6,189 8,323
Interest income (2,471) (2,335) (6,332) (6,330)
Gain on sale of subsidiary -- -- (13,962) --
Litigation settlement -- -- -- (50,000)
Intangible asset amortization -- -- -- 18,000
Foundation commitment -- -- -- 12,000
________ ________ ________ ________
Total costs and expenses 249,655 237,333 750,777 742,363
________ ________ ________ ________
Earnings before income taxes 84,946 70,873 247,187 227,561
Provision for income taxes 28,034 23,033 81,574 73,957
________ ________ ________ ________
Net earnings before cumulative
effect of accounting changes 56,912 47,840 165,613 153,604
Cumulative effect of
accounting changes:
Postretirement benefits (net
of deferred taxes of $5,674) -- -- -- (9,256)
Income taxes -- -- -- (5,100)
________ ________ ________ ________
Net earnings $ 56,912 $ 47,840 $165,613 $139,248
======== ======== ======== ========
Weighted average shares
outstanding 57,219 59,715 57,405 59,597
Earnings per share:
Earnings before cumulative
effect of accounting changes $ .99 $ 0.80 $ 2.88 $ 2.58
Cumulative effect of
accounting changes -- -- -- (.24)
________ ________ ________ ________
Net earnings per share $ .99 $ 0.80 $ 2.88 $ 2.34
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
January 28, April 30,
1994 1993
___________ __________
ASSETS (in thousands)
Current Assets:
Cash and cash equivalents $ 118,986 $ 76,994
Short-term investments 87,721 78,984
Trade accounts receivable, less allowance for
doubtful accounts of $18,638 and $9,456 297,067 331,248
Other accounts receivable, net 21,795 18,741
__________ __________
Total accounts receivable 318,862 349,989
Inventories:
Finished goods 85,548 90,046
Work in process 40,911 45,658
Raw materials 60,935 53,362
__________ __________
Total inventories 187,394 189,066
Prepaid expenses 81,307 79,655
__________ __________
Total current assets 794,270 774,688
Property, plant, and equipment 562,446 550,450
Accumulated depreciation (295,615) (267,667)
__________ __________
Net property, plant, and equipment 266,831 282,783
Goodwill and other intangible assets, net 139,740 139,558
Other assets 114,098 89,421
__________ __________
Total assets $1,314,939 $1,286,450
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 27,685 $ 91,864
Accounts payable 65,581 82,176
Accrued liabilities 190,194 174,056
__________ __________
Total current liabilities 283,460 348,096
Long-term liabilities 105,794 91,864
Deferred income taxes 5,386 5,012
Shareholders' equity:
Common stock--par value $.10 5,734 5,782
Retained earnings 969,347 870,303
Cumulative translation adjustment (21,232) (1,057)
__________ __________
953,849 875,028
Receivable from Employee Stock Ownership Plan (33,550) (33,550)
__________ __________
Total shareholders' equity 920,299 841,478
__________ __________
Total liabilities and shareholders' equity $1,314,939 $1,286,450
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
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MEDTRONIC, INC.
CONDENSED STATEMENT OF
CONSOLIDATED CASH FLOWS
(Unaudited)
Nine months ended
____________________
Jan. 28, Jan. 29,
1994 1993
________ ________
(in thousands)
OPERATING ACTIVITIES:
Net earnings $165,613 $139,248
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 59,261 50,311
Gain on sale of subsidiary (9,424) --
Change in assets and liabilities excluding
effects of divestiture:
Decrease (increase) in accounts receivable 11,914 (15,777)
Increase in inventories (3,724) (19,666)
Decrease in accounts payable and
accrued liabilities (6,696) (14,997)
Increase in postretirement benefit accrual 2,305 16,368
Increase in deferred income 2,515 22,018
Changes in other operating assets and liabilities (5,648) 20,052
________ ________
Net cash provided by operating activities 216,116 197,557
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (37,064) (53,539)
Acquisition of subsidiary, net of cash acquired -- (18,668)
Proceeds from sale of subsidiary 21,000 --
Purchases of marketable securities (87,596) (59,737)
Sales of marketable securities 63,858 13,134
Other investing activities,net (13,887) 454
_________ ________
Net cash used in investing activities (53,689) (118,356)
FINANCING ACTIVITIES:
Decrease in short-term borrowings (net) (57,454) (23,119)
Additions to long-term debt (net) 3,911 7,991
Dividends to shareholders (29,199) (25,045)
Repurchase of common stock (52,026) (11,945)
Issuance of common stock 14,607 15,746
________ ________
Net cash used in financing activities (120,161) (36,372)
Effect of exchange rate changes on cash and
cash equivalents (274) (100)
________ ________
NET CHANGE IN CASH AND CASH EQUIVALENTS 41,992 42,729
Cash and cash equivalents at beginning of period 76,994 100,816
________ ________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $118,986 $143,545
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Accounting Policies
The unaudited condensed consolidated financial statements include the accounts
of Medtronic, Inc. and all of its subsidiaries, after elimination of all
significant intercompany transactions and accounts. In the opinion of
management, all adjustments necessary for a fair presentation of operating
results have been made. All such adjustments are of a normal, recurring
nature. Operating results for interim periods are not necessarily indicative
of results which may be expected for the year as a whole. Certain prior
period amounts have been reclassified to present data on a consistent basis.
Other accounts receivable consist primarily of amounts due under royalty
agreements and receivables retained from divested subsidiaries and product
lines. Amounts are reported net of allowances for potentially uncollectible
amounts of $7.6 million and $7.0 million at January 28, 1994 and April 30,
1993, respectively.
The company adopted Statement of Financial Accounting Standards (SFAS) No. 112
"Employers' Accounting for Post-Employment Benefits" during the quarter ended
July 30, 1993. SFAS No. 112 requires that a liability be recorded for the
estimated cost of benefits to be provided to former or inactive employees who
have not reached retirement. In adopting SFAS No. 112, the company recognized
a charge of $2.3 million in selling, general, and administrative expenses.
Note 2--Divestiture
On July 9, 1993, the company sold substantially all of the assets of its
Medtronic Andover Medical, Inc. (AMI) subsidiary to CONMED for $21.0 million,
recognizing a pretax gain of $14.0 million. AMI developed, manufactured, and
marketed external electrodes used primarily with electrical nerve stimulation
and neuromuscular stimulation devices. On an annual basis, the sale of AMI
will not have a material impact on the operating results of the company.
Annual sales of AMI were approximately $23 million.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
_____________________
Net Earnings
____________
Net earnings for the third quarter ended January 28, 1994 were $56.9 million,
representing a 19.0 percent increase over the $47.8 million of the same
quarter a year ago. Earnings per share were $0.99, an increase of 23.8 percent
over the $0.80 per share of the third quarter of last year. Net earnings for
the nine-month period ended January 28, 1994 increased 18.9 percent to $165.6
million compared to $139.2 million for the same period last year.
Sales
_____
Excluding the effects of foreign currency translation and divestitures, sales
for the third quarter ended January 28, 1994 increased 14.9 percent over last
year, while sales for the nine-month period then ended increased 11.1 percent.
Sales growth in the quarter and nine-month period was negatively impacted by
$5.7 million and $27.6 million, respectively, of unfavorable exchange rate
movements primarily caused by the strengthening of the U.S. dollar versus
major European currencies.
Sales of the pacing business, excluding the effects of foreign currency
translation and divestitures, grew 18.2 percent in the quarter and 11.9
percent in the nine-month period ended January 28, 1994, compared to the same
periods a year ago. This increase is attributable to both the tachyarrthmia
management and bradycardia businesses. Sales growth within the tachyarrthymia
management business is attributable to commercial release of the implantable
pacer/cardioverter/defibrillator (PCD(R)) device in February 1993 as well as
more recent clinical product introductions. In December 1993, the U.S. Food
and Drug Administration cleared Transvene(R) leads for commercial sale, thus
establishing the Medtronic PCD(R) system as the only complete tiered-therapy
tachyarrhythmia system cleared for transvenous implant in the United States.
The new, smaller Jewel(TM) PCD devices, recently released in markets outside the
United States, also contributed to tachyarrhythmia revenues. Bradycardia
pacing revenues in the quarter again surpassed the rate of market growth due
to continued demand for dual chamber, rate responsive pacemakers and the
company's broad line of pacing leads.
Sales of the other cardiovascular business (consisting of interventional
vascular, heart valves, and cardiopulmonary) increased 8.3 percent and 8.8
percent on a comparable operations basis in the quarter and nine-month period
ended January 28, 1994, respectively. The interventional vascular business
continued its strong double digit growth trend with sales of the Spirit(TM)
and 14K(R) balloon catheters. Sales of bioprosthetic heart valves, especially
tissue valves, also continued to reflect solid growth. Sales within the
cardiopulmonary business continued to be affected by a moderation in the
growth rate of major cardiac procedures, with a decline in sales of the
Maxima(R) oxygenator in the current quarter compared to the same period last
year.
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Sales of the neurological and other businesses increased 8.5 percent and 11.7
percent in the quarter and nine-month period ended January 28, 1994,
respectively, compared to the same periods in the prior year. The neurological
business was led by sales of the Medtronic SynchoMed(R) implantable drug
infusion system. Medtronic was notified on February 4, 1994 that the U.S.
Health Care Financing Administration authorized Medicare reimbursement for the
SynchroMed(R) system when used to treat severe spasticity and malignant or non-
malignant pain.
Costs of Products Sold
______________________
Costs of products sold as a percentage of sales was 30.9 percent for the
quarter and 31.0 percent for the nine-months ended January 28, 1994 compared
to 31.6 percent and 31.7 percent, respectively, for the same periods a year
ago. These favorable results reflect the efficiencies of higher production
levels and effective cost controls.
Research and Development Expense
________________________________
Research and development expense was $39.0 million for the quarter and $113.0
million for the nine-month period ended January 28, 1994, an increase of 18.2
percent and 17.1 percent, repectively, over the comparable periods of the
prior year. Research and development expense as a percent of sales was 11.7
percent for the quarter and 11.3 percent for the nine months ended January 28,
1994 compared to 11.3 percent and 9.9 percent, respectively, for the same
periods last year. The increase in research and development expense reflects
the company's continued commitment and strategy to increase revenue and market
share by developing the most technologically advanced medical devices to meet
patient needs.
Selling, General, and Administrative Expense (SG&A)
___________________________________________________
SG&A expense for the quarter ended January 28, 1994 was $107.9 million
compared with $106.7 million in the third quarter of fiscal 1993. As a percent
of sales, SG&A spending decreased during the third quarter from 34.6 percent
last year to 32.3 percent this year. SG&A as a percent of sales for the nine-
months ended January 28, 1994 was 34.4 percent compared to 36.8 percent last
year. The decrease in SG&A for the quarter and nine-month period is primarily
the result of cost control efforts and reduced costs associated with
divestitures of certain businesses in prior periods, as well as a charge
incurred in the prior period relating to the devaluation of certain European
currencies. SG&A for the nine-months ended January 28, 1994 includes $14.3
million of non-recurring charges which primarily relate to the impact of
adoption of a new accounting principle as discussed in Note 1 of Notes to
Condensed Consolidated Financial Statements and a provision for potentially
uncollectible trade and other receivables.
Tax Rate
________
Federal tax legislation has been passed which could have a significant impact
on the company's future operating results. The most significant changes
include an increase in the U.S. federal tax rate, limitations on the benefits
from operations in Puerto Rico, and retroactive reinstatement of research tax
credits.
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The increase in the federal tax rate and Puerto Rico benefit limitations will
put upward pressure on the company's effective tax rate. Income taxes are
estimated to be 33.0 percent of earnings before income taxes for fiscal 1994
compared to an effective tax rate of 32.5 percent for fiscal 1993. However,
the effective tax rate in future years will be primarily dependant upon the
level of the company's operating activity in Puerto Rico and research
activities. Accordingly, the company cannot determine the impact the tax
legislation will have on future operating results.
Liquidity and Capital Resources
_______________________________
Operating activities provided $216.1 million of cash and cash equivalents for
the nine months ended January 28, 1994 compared to $197.6 million in the same
period a year ago. Included in the prior year is $75.0 million of cash
received in connection with a patent litigation settlement. Working capital
was $510.8 million at January 28, 1994, an increase of $84.2 million from
April 30, 1993. The current ratio at January 28, 1994 was 2.8:1 compared to
2.3:1 at April 30, 1993. Cash and cash equivalents increased $42.0 million
during the nine months ended January 28, 1994 compared to an increase of $42.7
million during the same period last year. Primary sources of cash from other
than operating activities include $21.0 million in proceeds from the sale of
AMI discussed in Note 2 of Notes to Condensed Consolidated Financial
Statements and $63.9 million from the sale of marketable securities. Primary
uses of cash were $37.1 million for additions to property, plant, and
equipment, $87.6 million for purchases of marketable securities, $57.5 million
for repayments of short term borrowings, $29.2 million for dividends to
shareholders, and $52.0 million for repurchases of 841,000 shares of common
stock.
In December, 1993 the company entered into a merger agreement to acquire all
of the common stock of Electromedics, Inc. for $6.875 per share, payable in
cash, shares of company stock, or a combination thereof. Under terms of the
agreement, the cash payment is limited to 50 percent of the total
consideration to be exchanged for Electromedics' common stock. Assuming the
maximum conversion of shares for cash, the company estimates that the total
cash to be paid will be approximately $48 million. The merger is subject to
approval by vote of Electromedics' shareholders; no approval is required by
Medtronic's shareholders. Electromedics designs, manufactures and markets
blood management and blood conservation equipment for use in autotransfusion
during major medical procedures. Electromedics currently has approximately 14
million shares of common stock outstanding. Electromedics reported sales of
$39.1 million for its year ended December 31, 1992.
The company's strong financial position contributes to its ability to fund
ongoing diversification strategies which include research and development,
internal ventures, and acquisitions. The company intends to continue exploring
potential mergers and acquisitions to enhance current businesses and to add
complementary new ones.
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Government Regulation
_____________________
President Clinton's Administration has introduced a health care reform bill
which would cause significant changes in health care delivery. Congress is
currently considering this bill and others proposing significant health care
reforms. It is generally expected that Congress will pass a health care
reform bill in some form which will affect health care expenditures. Similar
initiatives to reduce health care costs are also underway in several other
countries in which the company does business. Because of the uncertainty as
to the outcome of any proposed legislation, the company cannot predict the
impact any such legislation may have on future operating results.
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Statement on computation of per share earnings
(b) Reports on Form 8-K
No report on Form 8-K was filed by the company during the
quarter ended January 28, 1994.
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SIGNATURES
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.
Medtronic, Inc
____________________________________
(Registrant)
Date: March 3, 1994 /s/ WILLIAM W. GEORGE
____________________________________
William W. George
President
and Chief Executive Officer
Date: March 3, 1994 /s/ ROBERT L. RYAN
____________________________________
Robert L. Ryan
Senior Vice President
and Chief Financial Officer
<PAGE>11
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
11 Statement on computation of per 12
share earnings.
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EXHIBIT NUMBER 11
STATEMENT ON COMPUTATION OF
PER SHARE EARNINGS
MEDTRONIC, INC.
(Unaudited)
Three months ended Nine months ended
__________________ _________________
Jan. 28, Jan. 29, Jan. 28, Jan. 29,
1994 1993 1994 1993
________ ________ ________ ________
(In thousands, except per share data)
PRIMARY
_______________________________
Shares outstanding:
Weighted average outstanding 57,219 59,715 57,405 59,597
Share equivalents (1) 568 818 451 761
________ ________ ________ ________
Adjusted shares outstanding 57,787 60,533 57,856 60,358
======== ======== ======== ========
Net earnings $56,912 $47,840 $165,613 $139,248
======== ======== ======== ========
FULLY DILUTED
_______________________________
Shares outstanding:
Weighted average outstanding 57,219 59,715 57,405 59,597
Share equivalents (1) 683 898 683 864
________ ________ ________ _________
Adjusted shares outstanding 57,902 60,613 58,088 60,461
======== ======== ======== =========
Net earnings $56,912 $47,840 $165,613 $139,248
======== ======== ======== ========
(1) Share equivalents consist primarily of nonqualified stock options.
