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 November 1, 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 December 2, 1996:
240,031,835
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three months ended Six months ended
------------------ ----------------
Nov. 1, Oct. 27, Nov. 1, Oct. 27,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands, except per share data)
Net sales $598,152 $519,980 $1,199,022 $1,044,923
Costs and expenses:
Cost of products sold 151,060 146,023 306,641 297,070
Research and development
expense 68,257 55,946 133,928 109,720
Selling, general, and
administrative expense 188,964 166,245 380,674 341,438
Interest expense 2,588 2,243 4,611 4,008
Interest income (8,663) (8,166) (17,321) (14,575)
--------- --------- --------- ----------
Total costs and expenses 402,206 362,291 808,533 737,661
--------- --------- --------- ---------
Earnings before income taxes 195,946 157,689 390,489 307,262
Provision for income taxes 67,602 54,881 134,719 107,133
--------- --------- --------- ---------
Net earnings $128,344 $102,808 $255,770 $ 200,129
========= ========= ========= =========
Weighted average shares
outstanding 239,742 236,682 239,590 236,066
Earnings per share $ 0.54 $ 0.43 $ 1.07 $ 0.85
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
November 1, April 30,
1996 1996
--------- ---------
ASSETS (in thousands)
------
Current assets:
Cash and cash equivalents $ 88,952 $ 151,050
Short-term investments 393,376 355,741
Accounts receivable, less allowance for
doubtful accounts of $18,106 and $18,094 493,028 458,090
Inventories:
Finished goods 131,424 118,952
Work in process 70,906 61,000
Raw materials 83,200 77,526
--------- ---------
Total inventories 285,530 257,478
Prepaid expenses and other current assets 206,364 168,914
--------- ---------
Total current assets 1,467,250 1,391,273
Property, plant, and equipment 916,848 835,739
Accumulated depreciation (460,332) (418,826)
--------- ---------
Net property, plant, and equipment 456,516 416,913
Goodwill and other intangible assets, net 495,374 473,027
Long-term investments 197,989 219,964
Other assets 55,359 53,523
--------- ---------
Total assets $2,672,488 $2,554,700
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 78,433 $ 60,690
Accounts payable 76,516 100,149
Accrued liabilities 316,114 368,309
--------- ---------
Total current liabilities 471,063 529,148
Long-term debt 20,400 15,336
Other long-term liabilities 135,548 128,181
Deferred tax liabilities 25,750 45,744
Shareholders' equity:
Common stock--par value $.10 23,993 23,931
Retained earnings 2,025,100 1,843,707
Cumulative translation adjustment (694) (2,675)
--------- ---------
2,048,399 1,864,963
Receivable from Employee Stock Ownership Plan (28,672) (28,672)
--------- ---------
Total shareholders' equity 2,019,727 1,836,291
--------- ---------
Total liabilities and shareholders' equity $2,672,488 $2,554,700
========== ==========
See accompanying notes to condensed consolidated financial statements.
MEDTRONIC, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six months ended
----------------
Nov. 1, Oct. 27,
1996 1995
-------- --------
(in thousands)
OPERATING ACTIVITIES:
Net earnings $255,770 $200,129
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 70,435 65,655
Change in assets and liabilities:
Increase in accounts receivable (33,452) (8,743)
Increase in inventories (28,074) (8,681)
Decrease in accounts payable and
accrued liabilities (73,354) (49,805)
Changes in other operating assets and
liabilities (32,792) (24,360)
-------- --------
Net cash provided by operating activities 158,533 174,195
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (86,453) (58,544)
Purchases of marketable securities (309,384) (169,105)
Sales and maturities of marketable securities 248,333 107,688
Acquisition of subsidiary, net of cash acquired (18,873) 0
Other investing activities (net) (39,838) 4,480
-------- --------
Net cash used in investing activities (206,215) (115,481)
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings (net) 17,444 (7,459)
Increase (decrease) in long-term debt (net) 5,821 (720)
Proceeds from stock offering of acquired subsidiary 0 41,538
Dividends to shareholders (45,365) (29,990)
Repurchases of common stock 0 (3,674)
Issuance of common stock 8,238 4,436
-------- -------
Net cash provided by (used in)
financing activities (13,862) 4,131
Effect of exchange rate changes on cash and
cash equivalents (554) (484)
-------- -------
Net increase (decrease) in cash and cash equivalents (62,098) 62,361
Cash and cash equivalents at beginning of period 151,050 98,292
-------- -------
Cash and cash equivalents at end of period $ 88,952 $160,653
========= ========
See accompanying notes to condensed consolidated financial statements.
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. The fiscal year 1996 amounts have
been restated to reflect the May and June 1996 acquisitions of AneuRx, Inc. and
InStent Inc. which were accounted for as poolings of interests.
Note 2 - Acquisition
- --------------------
On August 29, 1996, the company acquired substantially all of the assets and
liabilities of Avalon Laboratories, Inc. (Avalon) for approximately $19.0
million in cash. This acquisition has been accounted for as a purchase and,
accordingly, the results of operations have been included in the consolidated
financial statements since the date of acquisition. Avalon develops,
manufactures and sells cannulae and other surgical products. Pro forma financial
information is not presented as the results of the acquisition, assuming that
the transaction was consummated at the beginning of each year presented, would
not be materially different from the results reported.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Net Earnings
- ------------
Net earnings for the second quarter ended November 1, 1996 were $128.3 million,
or $0.54 per share. Earnings per share reflect an increase of 25.6 percent over
the $0.43 per share reported on earnings of $102.8 million for the second
quarter last year. Net earnings increased 27.8 percent to $255.8 million for the
six-month period ended November 1, 1996, compared to $200.1 million for the same
period last year. Earnings per share for the six-month period ended November 1,
1996 were $1.07, an increase of 25.9 percent over the $0.85 reported in the
prior year.
Sales
- -----
Sales for the quarter and six-month period ended November 1, 1996 increased 15.0
percent and 14.7 percent, respectively, compared to the same periods last year.
Exclusive of the effects of foreign currency translation, sales for the quarter
and six-month period ended November 1, 1996 increased 16.5 percent and 17.6
percent, respectively, over the comparable periods last year. Sales growth in
the quarter and six-month period was negatively impacted by $7.8 million and
$29.9 million, respectively, 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 12.9 percent and 13.0 percent during
the quarter and six-month period ended November 1, 1996, respectively, compared
to the same periods a year ago. Bradycardia sales continued to reflect strong
growth in both U.S. and non-U.S. markets, as its Thera(R) and Thera(R)
i-series(TM) pacemakers, combined with CapSure(R) leads, continued to capture
worldwide market share. Pacemakers of the new Medtronic.Kappa(TM) generation
entered clinical evaluation in Europe in August 1996. Tachyarrthymia
management's Jewel(R) and Jewel Plus(TM) Active Can(TM) implantable
cardioverter-defibrillator devices, and the Micro Jewel(TM) device, which
received U.S. Food and Drug Administration (FDA) approval in July 1996, continue
to hold a strong market share position in the highly competitive defibrillator
marketplace. Subsequent to quarter end, the FDA cleared for commercial marketing
the successor product, the Micro Jewel(TM) II, the world's smallest and lightest
defibrillator.
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 7.4 percent and 12.3 percent, respectively, on a
comparable operations basis for the quarter and six-month periods ended November
1, 1996. This increase was primarily attributable to continued gains made by the
Medtronic Wiktor(R) coronary stent in Europe and Japan, and by the Wiktor(R)-i
coronary stent which was released in Europe and other world markets outside the
U.S. in October 1996. Subsequent to quarter end, the beStent(TM) was released in
Europe and other world markets outside the U.S. Also contributing to the revenue
growth were strong sales gains in ablation systems and devices for
interventional neuroradiology. The Millenia(TM) high-pressure balloon catheter
received FDA approval in October 1996. 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 heart valves during the quarter. Sales
of perfusion and blood management systems were flat compared to last year's
comparable 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 72.7 percent and 74.5 percent, respectively, for the
quarter and six-month periods ended November 1, 1996 compared to the same
periods 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 is currently in clinical
evaluation in the U.S. Another therapy, delivery of Lioresal(R) (baclofen, USP)
Intrathecal by the SynchroMed(R) drug infusion system for spasticity of cerebral
origin, continues to gain increasing worldwide acceptance. In addition, the
Mattrix(R) and Itrel(R) 3 spinal cord stimulation systems continue to hold
strong market share positions. Also, PS Medical and Synectics, which were
acquired in November 1995 and April 1996, respectively, contributed to the
strong growth.
Costs of Products Sold
- ----------------------
Cost of products sold as a percent of sales for the quarter and six-month
periods ended November 1, 1996 was 25.3 percent and 25.6 percent, respectively,
compared to 28.1 percent and 28.4 percent for the comparative periods last year.
The decrease in the cost of products sold as a percent of sales resulted from
increased productivity, the impact of favorable product and geographic mixes
combined with substantially increased volumes.
Research and Development Expense
- --------------------------------
Research and development expense was $68.3 million for the quarter and $133.9
million for the six-month period ended November 1, 1996, an increase of 22.0
percent and 22.1 percent, respectively, over the comparable periods last year.
This increase 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 November 1, 1996, was $189.0 million compared
to $166.2 million for the comparable period last year. SG&A as a percent of
sales decreased from 32.0 percent a year ago to 31.6 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 $2.6 million for the quarter was slightly higher than the
$2.2 million for the same period last year. Interest income of $8.7 million for
the quarter increased 6.1 percent from the $8.2 million for the same period last
year, and was primarily the result of 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 recent tax legislation which reduces U.S. tax benefits derived
from operations in Puerto Rico. Management believes that the adverse impact can
be minimized by other tax planning initiatives.
Liquidity and Capital Resources
- -------------------------------
Operating activities provided $158.5 million of cash and cash equivalents for
the six-month period ended November 1, 1996 compared to $174.2 million for the
same period a year ago. Working capital was $996.2 million at November 1, 1996,
an increase of $134.1 million over the $862.1 million at April 30, 1996. The
current ratio increased to 3.1:1 at November 1, 1996, compared to 2.6:1 at April
30, 1996. Cash and cash equivalents decreased $62.1 million during the six-month
period ended November 1, 1996, compared with an increase of $62.4 million during
the same period last year. The prior year comparative period includes $41.5
million of proceeds from the stock offering of a subsidiary which was acquired
in June 1996, and accounted for as a pooling of interests. Significant uses of
cash during the six-month period ended November 1, 1996 included the reduction
of accounts payable and accrued liabilities, 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.
In 1994, governmental authorities in Germany began an investigation into certain
business and accounting practices by heart valve manufacturers. As part of this
investigation, documents were seized from the Company and certain other
manufacturers. Subsequently, the United States Securities and Exchange
Commission (the "SEC") also began an inquiry into this matter. In August 1996,
the SEC issued a formal non-public order of investigation to the Company, as it
had to at least one other manufacturer. Based upon currently available
information, the Company does not expect these investigations to have a
materially adverse impact on the Company's financial position, results of
operations or liquidity.
PART II -- OTHER INFORMATION
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 November 1, 1996, the company filed 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. Subsequent to the quarter ended
November 1, 1996, the company filed a Report on Form 8-K dated
November 22, 1996 reporting under Item 5 the announcement of
financial results for the fiscal second quarter ended November
1, 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: December 16, 1996 /S/ WILLIAM W. GEORGE
------------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: December 16, 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 Six months ended
------------------ -----------------
Nov. 1, Oct. 27, Nov. 1, Oct.27,
1996 1995 1996 1995
------- -------- ------- -------
PRIMARY
- ----------------------------------
Shares outstanding:
Weighted average outstanding 239,742 236,682 239,590 236,066
Share equivalents (1)(2) 4,576 4,792 4,426 4,474
------- ------- ------- -------
Adjusted shares outstanding (2) 244,318 241,474 244,016 240,540
======= ======= ======= =======
FULLY DILUTED
- ----------------------------------
Shares outstanding:
Weighted average outstanding 239,742 236,682 239,590 236,066
Share equivalents (1)(2) 4,915 5,380 4,915 5,380
------- ------- ------- -------
Adjusted shares outstanding (2) 244,657 242,062 244,505 241,446
======= ======= ======= =======
- -----------------------
(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 FOR
THE QUARTERLY PERIOD ENDED NOVEMBER 1,1996 FILED WITH THE SEC ON FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> NOV-01-1996
<CASH> 88,952
<SECURITIES> 393,376
<RECEIVABLES> 511,134
<ALLOWANCES> (18,106)
<INVENTORY> 285,530
<CURRENT-ASSETS> 1,467,250
<PP&E> 916,848
<DEPRECIATION> (460,332)
<TOTAL-ASSETS> 2,672,488
<CURRENT-LIABILITIES> 471,063
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0
0
<COMMON> 23,993
<OTHER-SE> 1,995,734
<TOTAL-LIABILITY-AND-EQUITY> 2,672,488
<SALES> 1,199,022
<TOTAL-REVENUES> 1,199,022
<CGS> 306,641
<TOTAL-COSTS> 306,641
<OTHER-EXPENSES> 497,281
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<INCOME-PRETAX> 390,489
<INCOME-TAX> 134,719
<INCOME-CONTINUING> 255,770
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