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 August 2, 1996
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 August 30, 1996:
239,613,890
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three months ended
------------------------
August 2, July 28,
1996 1995
--------- ---------
(in thousands, except
per share data)
Net sales $ 600,870 $ 524,943
Costs and expenses:
Cost of products sold 155,581 151,047
Research and development expense 65,671 53,774
Selling, general, and administrative expense 191,710 175,193
Interest expense 2,023 1,765
Interest income (8,658) (6,409)
--------- ---------
Total costs and expenses 406,327 375,370
--------- ---------
Earnings before income taxes 194,543 149,573
Provision for income taxes 67,117 52,252
--------- ---------
Net earnings $ 127,426 $ 97,321
========= =========
Weighted average shares outstanding 239,429 235,273
Earnings per share $ 0.53 $ 0.41
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
August 2, April 30,
1996 1996
----------- -----------
ASSETS (in thousands)
------
Current assets:
Cash and cash equivalents $ 121,090 $ 151,050
Short-term investments 358,902 355,741
Accounts receivable, less allowance for
doubtful accounts of $18,609 and $18,094 475,033 458,090
Inventories:
Finished goods 126,871 118,952
Work in process 60,969 61,000
Raw materials 77,829 77,526
----------- -----------
Total inventories 265,669 257,478
Prepaid expenses and other current assets 207,289 168,914
----------- -----------
Total current assets 1,427,983 1,391,273
Property, plant, and equipment 877,566 835,739
Accumulated depreciation (442,132) (418,826)
----------- -----------
Net property, plant, and equipment 435,434 416,913
Goodwill and other intangible assets, net 456,738 473,027
Long-term investments 190,870 219,964
Other assets 57,182 53,523
----------- -----------
Total assets $ 2,568,207 $ 2,554,700
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 47,141 $ 60,690
Accounts payable 74,834 100,149
Accrued liabilities 337,266 368,309
----------- -----------
Total current liabilities 459,241 529,148
Long-term debt 19,107 15,336
Other long-term liabilities 143,437 128,181
Deferred tax liabilities 27,462 45,744
Shareholders' equity:
Common stock--par value $.10 23,955 23,931
Retained earnings 1,915,864 1,843,707
Cumulative translation adjustment 7,813 (2,675)
----------- -----------
1,947,632 1,864,963
Receivable from Employee Stock Ownership Plan (28,672) (28,672)
----------- -----------
Total shareholders' equity 1,918,960 1,836,291
----------- -----------
Total liabilities and shareholders' equity $ 2,568,207 $ 2,554,700
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
MEDTRONIC, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three months ended
------------------------
Aug. 2, July 28,
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 127,426 $ 97,321
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 38,839 36,211
Change in assets and liabilities:
Increase in accounts receivable (10,747) (8,441)
(Increase) decrease in inventories (3,246) 9,762
Decrease in accounts payable and
accrued liabilities (62,816) (29,792)
Changes in other operating assets and
liabilities (25,148) 3,825
--------- ---------
Net cash provided by operating activities 64,308 108,886
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (39,003) (33,715)
Purchases of marketable securities (185,780) (64,094)
Sales and maturities of marketable securities 164,568 29,549
Other investing activities (net) (2,828) 12,555
--------- ---------
Net cash used in investing activities (63,043) (55,705)
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings (net) (15,649) 10,644
Increase (decrease) in long-term debt (net) 3,610 (357)
Dividends to shareholders (22,664) (15,015)
Repurchases of common stock 0 (3,674)
Issuance of common stock 1,393 1,887
--------- ---------
Net cash used in financing activities (33,310) (6,515)
Effect of exchange rate changes on cash and
cash equivalents 2,085 (727)
--------- ---------
Net Change in Cash and Cash Equivalents (29,960) 45,939
Cash and cash equivalents at beginning of period 151,050 98,292
--------- ---------
Cash and cash equivalents at end of period $ 121,090 $ 144,231
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Note 1 - Basis of Presentation
- ------------------------------
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
that may be expected for the year as a whole.
Note 2 - Acquisitions
- ---------------------
On May 3, 1996, the company issued approximately 1,154,000 shares of its common
stock for all of the outstanding capital stock of AneuRx, Inc. a developer of an
endovascular stented graft and delivery system used in minimally invasive
aneurysm repair therapy.
On June 28, 1996, the company issued approximately 3,852,000 shares of its
common stock for all of the outstanding capital stock of InStent Inc. InStent
designs, develops, manufactures and markets a variety of self-expanding and
balloon-expandable stents used in a broad range of medical indications.
These acquisitions will be integrated into, and will complement, the company's
vascular business. These two mergers have been accounted for as
poolings-of-interests and, accordingly the company's consolidated financial
statements for FY96 have been restated to include the results of operations,
financial positions, and cash flows of AneuRx and InStent. Activity for years
prior to FY96 has not been restated as the impact of these mergers in such years
is not considered material and restatement is therefore not required. Net sales
and net earnings (loss) for the individual entities are as follows:
Medtronic AneuRx InStent Combined
---------- -------- -------- ----------
Three months ended
July 28, 1995
Net sales $ 524,439 $ -- $ 504 $ 524,943
Net earnings (loss) 99,203 (1,389) (493) 97,321
Twelve months ended
April 30, 1996
Net sales $2,169,114 $ -- $ 2,986 $2,172,100
Net earnings (loss) 437,804 (7,233) (2,265) 428,306
Three months ended
August 2, 1996
Net sales $ 599,868 $ -- $ 1,002 $ 600,870
Net earnings (loss) 132,380 (1,859) (3,095) 127,426
The restated consolidated financial statements for the three month and twelve
month periods ended July 28, 1995 and April 30, 1996, respectively, include
InStent's results for the three month period ended June 30, 1995 and twelve
month period ended March 31, 1996, respectively. Effective May 1, 1996,
InStent's fiscal year end has been changed from December 31 to April 30 to
conform to the company's fiscal year end. Accordingly, InStent's net loss of
$2,645 for the one month period ended April 30, 1996 has been excluded from the
company's combined results and has been reported as an adjustment to May 1, 1996
retained earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Net Earnings
- ------------
Net earnings for the first quarter ended August 2, 1996 were $127.4 million, or
$0.53 per share. Earnings per share reflect an increase of 29.3 percent over the
$0.41 per share reported on earnings of $97.3 million for the first quarter last
year.
Sales
- -----
Sales for the quarter ended August 2, 1996 increased 14.5 percent compared to
the same period last year. Exclusive of the effects of foreign currency
translation, sales for the quarter increased 18.7 percent over the comparable
period last year. Sales growth in the quarter was negatively impacted by $22.0
million of unfavorable exchange rate movements caused primarily by the
strengthening of the U.S. dollar versus major European currencies and the
Japanese Yen.
The growth over last year was led by strong contributions from the Pacing
business, which consists primarily of Bradycardia Pacing and Tachyarrhythmia
Management. After removing the impact of foreign exchange rate fluctuations,
worldwide sales of the Pacing business grew 13.0 percent during the quarter
compared to the same period a year ago. Bradycardia sales continued to reflect
strong growth in both U.S. and non-U.S. markets, as its Thera(R) pacemaker and
Thera(R) i-series(TM) devices continued to capture worldwide market share.
Pacemakers of the new Medtronic.Kappa(TM) generation entered clinical evaluation
in Europe shortly after the quarter ended. Tachyarrthymia management's Jewel(R)
Active Can(TM) implantable cardioverter-defibrillator and model 7220C Jewel
Plus(TM) Active Can(TM) device, which received U.S. Food and Drug Administration
(FDA) approval in May 1996, continue to hold a strong market share position.
Following clearance of the Micro Jewel(TM) Model 7221 device for marketing by
the FDA in early July 1996, sales of implantable defibrillators increased
significantly over sales in the comparable period last year.
Sales within the Other Cardiovascular business, (consisting of balloon and
guiding catheters, stents, ablation systems, interventional neuroradiology,
heart valves, perfusion and blood management systems, cannulae and surgical
accessories) increased 17.2 percent on a comparable operations basis for the
quarter. This increase was primarily attributable to continued strong gains made
by the Medtronic Wiktor(R) coronary stent in Europe and Japan. Also contributing
to the revenue growth were strong sales gains in ablation systems and devices
for interventional neuroradiology. Unit sales of balloon and guiding catheters
remain solid, however, continued downward pricing pressures for balloon
catheters more than offset the unit growth. Solid revenue contributions were
also made by surgical cannulae and tissue heart valves during the quarter.
Exclusive of the effects of foreign currency translation, sales of the
Neurological and Other Businesses, primarily consisting of implantable
neurostimulation devices, drug administration systems, neurosurgery and
developing businesses, grew 76.4 percent for the quarter compared to the same
period last year. A strong contributing growth factor was rapid sales growth in
Europe of neurostimulation therapy for control of essential tremor and tremor
associated with Parkinson's disease. This therapy employs leads implanted in the
thalamus and stimulation by an implanted device. This therapy is currently in
clinical evaluation in the U.S. Another significant new therapy, delivery of
Lioresal(R) (baclofen, USP) Intrathecal by the SynchroMed(R) drug infusion
system for spasticity of cerebral origin, received FDA clearance in June 1996.
Also, the Mattrix(R) and Itrel(R) 3 spinal cord stimulation systems continue to
hold strong market share positions. In addition, PS Medical and Synectics, which
were acquired in November 1995 and April 1996, respectively, also contributed to
the strong growth.
Costs of Products Sold
- ----------------------
Cost of products sold as a percent of sales was 25.9 percent for the quarter
compared to 28.8 percent for the same quarter a year ago. The decrease in the
cost of products sold as a percent of sales resulted from increased
productivity, the impact of favorable product and geographic mix combined with
substantially increased volumes.
Research and Development Expense
- --------------------------------
Research and development expense was $65.7 million for the quarter, an increase
of 22.1 percent over the comparable period last year. This increase in research
and development expense over the prior year reflects the company's continued
financial commitment and strategy to grow revenue and market share by developing
technological enhancements and new indications for existing products as well as
developing minimally invasive and new technologies to address unmet patient
needs and to help reduce procedural cost and length of hospital stay.
Selling, General, and Administrative Expense (SG&A)
- ---------------------------------------------------
SG&A expense for the quarter ended August 2, 1996, was $191.7 million compared
to $175.2 million for the comparable period last year. SG&A as a percent of
sales decreased from 33.4 percent a year ago to 31.9 percent for the current
quarter. The decrease in SG&A as a percent of sales is attributable to
accelerated revenue growth combined with continued overall cost efficiencies.
Interest
- --------
Interest expense of $2.0 million for the quarter was slightly higher than the
$1.8 million for the same period last year. Interest income of $8.7 million for
the quarter increased 35.1 percent from the $6.4 million for the same period
last year, and was primarily due to increased average investment balances over
the prior year.
Income Taxes
- ------------
The estimated effective tax rate for the company's current fiscal year is 34.5
percent compared to an effective rate of 35.0 percent, after restatement for the
acquisitions of AneuRx and InStent, for the fiscal year ended April 30, 1996.
However, the company continues to experience upward pressure on the tax rate,
resulting from the Omnibus Budget Reconciliation Act of 1993 which increased the
U.S. corporate income tax rate and reduced U.S. tax benefits derived from
operations in Puerto Rico. Although these changes in the tax code will continue
to put upward pressure on the company's effective tax rate in the future,
management believes that the adverse impact can be minimized by other tax
planning initiatives.
Liquidity and Capital Resources
- -------------------------------
Operating activities provided $64.3 million of cash and cash equivalents for the
quarter ended August 2, 1996 compared to $108.9 million for the same period a
year ago. Working capital was $968.7 million at August 2, 1996, an increase of
$106.6 million over the $862.1 million at April 30, 1996. The current ratio
increased to 3.1:1 at August 2, 1996, compared to 2.6:1 at April 30, 1996. Cash
and cash equivalents decreased $30.0 million during the quarter. Significant
uses of cash during the quarter included the reduction of accounts payable,
accrued liabilities and short-term borrowings, purchases of marketable
securities, purchases of property, plant and equipment, and dividends paid to
shareholders.
Government Regulation and Other Matters
- ---------------------------------------
The company operates in an industry susceptible to significant product liability
claims. In recent years, there has been an increased public interest in product
liability claims for implanted medical devices, including pacemakers and leads.
These claims may be brought by individuals seeking relief for themselves or,
increasingly, by groups seeking to represent a class, and the company has
experienced an increase in such claims. In June 1996, the company lost a case
(Lohr v. Medtronic) before the U.S. Supreme Court to determine whether a device
cleared by the FDA for commercial release can later be challenged as unsafe.
While this outcome could potentially increase the cost to the company, and other
medical device makers, to defend product liability claims, it is not expected to
have a material adverse financial impact on the company. In addition, product
liability claims may be asserted against the company in the future relative to
events not known to management at the present time. Management believes that the
company's risk management practices, including insurance coverage, are
reasonably adequate to protect against potential product liability losses.
PART II -- OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the company's 1996 Annual Meeting of Shareholders held on August 28, 1996,
the shareholders approved the following:
(a) A proposal to set the size of the Board of Directors at 12 and
elect four Class I directors of the company to serve for three-year terms ending
in 1999, as follows:
Director Votes For Votes Withheld
- -------- --------- --------------
Glen D. Nelson, M.D. 197,461,814 1,540,715
Jack W. Schuler 197,492,828 1,509,701
Gerald W. Simonson 197,368,792 1,633,737
Richard A. Swalin, Ph.D. 197,361,724 1,640,805
There were no broker non-votes. In addition, the terms of the following
directors continued after the meeting: Class II directors for a term ending in
1997-William W. George, Bernadine P. Healy, M.D., Richard L. Schall and Gordon
M. Sprenger; and Class III directors for a term ending in 1998-F. Caleb
Blodgett, Arthur D. Collins, Jr., Antonio M. Gotto, Jr., M.D. and Thomas E.
Holloran.
(b) A proposal to ratify the appointment of Price Waterhouse LLP to
serve as independent auditors of the company for the fiscal year ending April
30, 1997. The proposal received 198,196,210 votes for, and 300,409 against,
ratification. There were 505,910 abstentions and no broker non-votes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Statement on computation of per share earnings
27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
During the quarter ended August 2, 1996, the company filed
(i) a Report on Form 8-K dated May 23, 1996 reporting under
Item 5 the announcement of financial results for the fiscal
year ended April 30, 1996 and (ii) a Report on Form 8-K
dated June 28, 1996 reporting under Item 2 the completion
of the previously announced transaction with InStent Inc.
Subsequent to the quarter ended August 2, 1996, the company
filed (i) a Report on Form 8-K dated August 19, 1996
reporting under Item 5 the announcement of financial
results for the fiscal first quarter ended August 2, 1996.
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: September 12, 1996 /S/ WILLIAM W. GEORGE
----------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: September 12, 1996 /S/ ROBERT L. RYAN
----------------------------------
Robert L. Ryan
Senior Vice President
and Chief Financial Officer
EXHIBIT 11
STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS
MEDTRONIC, INC.
(Unaudited)
(in thousands)
Three months ended
-------------------
Aug. 2, July 28,
1996 1995
-------- --------
PRIMARY
- -----------------------------------
Shares outstanding:
Weighted average outstanding 239,429 235,273
Share equivalents (1)(2) 4,510 2,037
------- -------
Adjusted shares outstanding (2) 243,939 237,310
======= =======
FULLY DILUTED
- -----------------------------------
Shares outstanding:
Weighted average outstanding 239,429 235,273
Share equivalents (1)(2) 4,675 2,333
------- -------
Adjusted shares outstanding (2) 244,104 237,606
======= =======
- --------------------
(1) Share equivalents consist primarily of nonqualified stock options.
(2) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEET
FROM THE QUARTERLY PERIOD ENDED AUGUST 2, 1996 FILED WITH THE SEC ON FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> AUG-02-1996
<CASH> 121,090
<SECURITIES> 358,902
<RECEIVABLES> 493,642
<ALLOWANCES> (18,609)
<INVENTORY> 265,669
<CURRENT-ASSETS> 1,427,983
<PP&E> 877,566
<DEPRECIATION> (442,132)
<TOTAL-ASSETS> 2,568,207
<CURRENT-LIABILITIES> 459,241
<BONDS> 0
0
0
<COMMON> 23,955
<OTHER-SE> 1,895,005
<TOTAL-LIABILITY-AND-EQUITY> 2,568,207
<SALES> 600,870
<TOTAL-REVENUES> 600,870
<CGS> 155,581
<TOTAL-COSTS> 155,581
<OTHER-EXPENSES> 248,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,023
<INCOME-PRETAX> 194,543
<INCOME-TAX> 67,117
<INCOME-CONTINUING> 127,426
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,426
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
</TABLE>
