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 26, 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 February 29, 1996:
234,131,829
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three months ended Nine months ended
------------------- ---------------------
Jan 26, Jan. 27 Jane. 26, Jan. 27,
1996 1995 1996 1995
--------- --------- ---------- ----------
(in thousands, except per share data)
Net sales $529,203 $413,723 $1,573,011 $1,225,670
Costs and expenses:
Cost of products sold 143,194 129,186 439,837 383,345
Research and development
expense 61,203 46,756 167,870 135,891
Selling, general, and
administrative expense 162,977 132,181 502,919 398,476
Interest expense 1,739 2,049 5,721 6,765
Interest income (6,368) (3,780) (20,283) (8,850)
--------- --------- ---------- ----------
Total costs and expenses 362,745 306,392 1,096,064 915,627
--------- --------- ---------- ---------
Earnings before income taxes 166,458 107,331 476,947 310,043
Provision for income taxes 57,428 35,955 164,547 103,864
--------- --------- ---------- ---------
Net earnings $109,030 $ 71,376 $ 312,400 $ 206,179
========= ========= ========== =========
Weighted average shares
outstanding 233,592 230,096 232,835 230,346
Net earnings per share $ 0.47 $ 0.31 $ 1.34 $ 0.90
========= ========= ========== =========
See accompanying Notes to Condensed Consolidated Financial Statements.
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
January 26, April 30,
1996 1995
--------- ---------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents $ 120,131 $ 98,292
Short-term investments 306,202 225,357
Accounts receivable, less allowance for
doubtful accounts of $21,207 and $22,416 420,313 413,942
Inventories:
Finished goods 101,195 97,048
Work in process 66,496 59,311
Raw materials 77,533 65,573
--------- ---------
Total inventories 245,224 221,932
Prepaid expenses and other current assets 145,489 144,386
--------- ---------
Total current assets 1,237,359 1,103,909
Property, plant, and equipment 780,351 715,476
Accumulated depreciation (417,290) (384,415)
--------- ---------
Net property, plant, and equipment 363,061 331,061
Goodwill and other intangible assets, net 375,720 363,346
Other assets 254,137 148,416
--------- ---------
Total assets $2,230,277 $1,946,732
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 30,521 $ 33,474
Accounts payable 67,616 123,012
Accrued liabilities 292,231 299,643
--------- ---------
Total current liabilities 390,368 456,129
Long-term liabilities 144,904 119,734
Deferred tax liabilities 39,383 35,856
Shareholders' equity:
Common stock--par value $.10 23,401 23,102
Retained earnings 1,660,525 1,318,043
Cumulative translation adjustment 1,676 23,848
--------- ---------
1,685,602 1,364,993
Receivable from Employee Stock Ownership Plan (29,980) (29,980)
--------- ---------
Total shareholders' equity 1,655,622 1,335,013
--------- ---------
Total liabilities and shareholders' equity $2,230,277 $1,946,732
See accompanying notes to condensed consolidated financial statements.
MEDTRONIC, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine months ended
-----------------
Jan. 26, Jan. 27,
1996 1995
------- --------
(in thousands)
OPERATING ACTIVITIES:
Net earnings $312,400 $206,179
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 91,629 77,397
Change in assets and liabilities:
(Increase) decrease in accounts receivable (19,085) 5,950
(Increase) decrease in inventories (27,565) 4,863
Decrease in accounts payable and
accrued liabilities (53,136) (8,801)
Changes in other operating assets and
liabilities 24,641 (28,180)
------- --------
Net cash provided by operating activities 328,884 257,408
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (94,698) (65,737)
Purchases of marketable securities (418,948) (140,542)
Sales of marketable securities 280,987 100,196
Other investing activities (net) (18,859) 8,450
---------- -------
Net cash used in investing activities (251,518) (97,633)
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings (net) 962 (17,590)
Reductions in long-term debt (net) (1,592) (5,078)
Decrease in acquisition price payable 0 (39,130)
Dividends to shareholders (45,217) (35,394)
Repurchase of common stock (33,574) (59,079)
Issuance of common stock 25,376 17,108
-------- -------
Net cash used in financing activities (54,045) (139,163)
Effect of exchange rate changes on cash and
cash equivalents (1,482) (81)
-------- -------
Net Change in Cash and Cash Equivalents 21,839 20,531
Cash and cash equivalents at beginning of period 98,292 108,720
--------- -------
Cash and cash equivalents at end of period $120,131 $129,251
========= ========
Supplemental Noncash Investing and Financing Activities
Issuance of common stock for acquisition of
subsidiary, net of cash acquired $ 68,951 $ 0
========= ========
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.
Note 2 - Stockholders' Equity
On August 30, 1995, the Board of Directors approved a two-for-one common stock
split, paid September 29, 1995 in the form of a 100 percent stock dividend to
shareholders of record at the close of business on September 14, 1995. The stock
split resulted in the issuance of 115,599 additional shares and the reclass of
$11,560 from retained earnings to common stock, representing the par value of
the shares issued. All references in the financial statements to average number
of shares outstanding and earnings per share amounts have been restated to
reflect the split.
Note 3 - Acquisitions
On November 2, 1995, the company acquired all of the outstanding capital stock
of Pudenz-Schulte Medical Corporation ("PS Medical") at a cost of $70.1 million.
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. Additional future payments are
contingent upon achieving specified milestones. These contingent payments, if
any, will be reflected as acquisition costs when the contingencies are resolved.
PS Medical manufactures and distributes cerebrospinal fluid shunts and
neurosurgical implants such as catheters, reservoirs and fluid drainage systems.
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.
On November 3, 1995, the company issued approximately 1,246 shares of its common
stock for all of the outstanding capital stock of Micro Interventional Systems,
Inc.("MIS") a developer of products for the minimally invasive treatment of
stroke and other diseases. The merger has been accounted for as a
pooling-of-interests and, accordingly the company's consolidated financial
statements for the first two quarters of FY96 have been restated to include the
results of operations, financial positions, and cash flows of MIS. Prior years
activity has not been restated as the impact of the merger in prior 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 MIS Combined
---------- ------- -----------
Three months ended
July 28, 1995
Net sales $523,757 $682 $524,439
Net earnings (loss) 99,749 (546) 99,203
Three months ended
October 27, 1995
Net sales $518,553 $816 $519,369
Net earnings (loss) 104,649 (482) 104,167
Nine months ended
January 26, 1996
Net sales $1,570,946 $2,065 $1,573,011
Net earnings (loss) 314,088 (1,688) 312,400
These acquisitions will be integrated into, and will complement, the company's
neurological business.
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 26, 1996 were $109.0 million,
or $0.47 per share. Earnings per share reflect an increase of 51.6 percent over
the $0.31 per share reported on earnings of $71.4 million in the same quarter
last year. Net earnings increased 51.5 percent to $312.4 million for the nine
months ended January 26, 1996, compared to $206.2 million for the same period in
the prior year. Earnings per share for the nine-month period ended January 26,
1996 were $1.34, an increase of 48.9 percent over the $0.90 reported last year.
Sales
Sales for the quarter and nine month period ended January 26, 1996 increased
27.9 percent and 28.3 percent, respectively, compared to the same periods last
year. Exclusive of the effects of foreign currency translation, sales for the
quarter and nine month period ended January 26, 1996 increased 26.2 percent and
25.5 percent, respectively, over the comparable periods last year. Sales growth
in the quarter and nine-month period was positively impacted by $7.1 million and
$35.1 million, respectively, of favorable exchange rate movements caused
primarily by the weakening of the U.S. dollar versus major European currencies
and the Japanese Yen.
The growth over last year was led by strong contributions and continuing
market-share gains from the Pacing business, which includes bradycardia pacing
and tachyarrhythmia management. After removing the impact of foreign exchange
rate fluctuations, worldwide sales of the Pacing business grew 30.9 percent and
31.4 percent, during the quarter and nine-month period ended January 26, 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, primarily
on the strength of the Thera(R) pacemaker family worldwide and the improved
Thera(R) i-series(TM) pacemaker in Europe and the U.S. The Thera(R) i-series(TM)
pacemakers were commercially released in the U.S. in November 1995.
Tachyarrthymia management sales more than doubled last year's performance for
the comparable periods as the company's Jewel(R) PCD(R) implantable
cardioverter-defibrillator continues to hold a strong market share position.
Sales outside the United States were also led by Jewel(R) products offering
single lead Active Can(TM) technology. The Jewel(R) Active Can(TM) models were
commercially released in the U.S. in December 1995 and have received strong
market acceptance. Subsequent to quarter end, the innovative successors to these
Pacing products, a new family of dual-sensor pacemakers and the Micro Jewel(TM)
implantable defibrillator, entered clinical evaluation in Europe.
Sales within the other cardiovascular business, consisting of interventional
vascular and cardiac surgery (includes heart valves, cardiopulmonary, DLP and
blood management) increased 9.1 percent and 10.1 percent on a comparable
operations basis for the quarter and nine-month period ended January 26, 1996,
respectively. This growth was primarily attributable to the interventional
vascular business which experienced strong sales growth led by significant gains
made by the Medtronic Wiktor(R) coronary stent in Europe and Japan. In addition,
guiding catheters were solid sales performers. Balloon catheter sales remain
solid, however, pricing pressures more than offset the unit growth.
Quarter-to-quarter revenues from the cardiac surgery business were relatively
flat with those of the prior year. Continued progress by the cannulae and
surgical accessories of Medtronic DLP was offset by less than anticipated
results of the other cardiac surgery businesses. Growth in the cardiopulmonary
and blood management businesses has continued to be impacted by delays in the
release of certain new products.
Exclusive of the effects of foreign currency translation, sales of the
neurological and other businesses grew 44.5 percent and 28.4 percent for the
quarter and nine month period ended January 26, 1996, respectively, compared to
the same periods in the prior year. This growth was led by two new products -
the Mattrix(R) implantable drug infusion system, introduced in worldwide
markets, and the Itrel(R)3 spinal cord stimulation system, launched in Europe
and the U.S. The Itrel(R)3 was launched in the U.S. in November 1995. In
addition, this growth was led by contributions from the November 1995
acquisitions of PS Medical and MIS.
Costs of Products Sold
Cost of products sold as a percent of sales for the quarter and the nine month
period ended January 26, 1996 was 27.1 percent and 28.0 percent, respectively,
compared to 31.2 percent and 31.3 percent, respectively, for the quarter and the
nine month period 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, and
the favorable impact of foreign exchange rate fluctuations.
Research and Development Expense
Research and development expense was $61.2 million for the quarter and $167.9
million for the nine month period ended January 26, 1996, an increase of 30.9
percent and 23.5 percent, respectively, over the comparable periods of the prior
year. The increase in research and development expense over the prior year
comparable periods reflects the company's continued financial commitment and
strategy to grow revenue and market share by developing technologically advanced
medical devices to meet patient needs.
Selling, General, and Administrative Expense (SG&A)
SG&A expense for the quarter ended January 26, 1996, was $163.0 million compared
to $132.2 million for the comparable period last year. SG&A as a percent of
sales decreased from 31.9 percent a year ago to 30.8 percent for the current
quarter. The decrease in SG&A as a percent of sales is attributable to strong
sales growth combined with effective spending controls.
Interest
Interest expense of $1.7 million for the quarter ended January 26, 1996 was
slightly lower than the $2.0 million for the same period last year. Interest
income of $6.4 million for the quarter ended January 26, 1996 increased
significantly from the $3.8 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 33.5 percent for the fiscal year ended
April 30, 1995. The company continues to experience upward pressure on the tax
rate, resulting from tax legislation passed in 1993 which increased the U.S.
corporate income tax rate and reduced U.S. tax benefits derived from operations
in Puerto Rico. The impact of the federal tax legislation on the effective tax
rate in future years will be primarily dependent upon the level of operating
activity in Puerto Rico. Accordingly, the company cannot yet determine the
impact the tax legislation will have on future operating results.
Liquidity and Capital Resources
Operating activities provided $328.9 million of cash and cash equivalents for
the nine month period ended January 26, 1996 compared to $257.4 million for the
same period a year ago. Working capital was $847.0 million at January 26, 1996,
an increase of $199.2 million over the $647.8 million at April 30, 1995. The
current ratio increased to 3.2:1 at January 26, 1996, compared to 2.4:1 at April
30, 1995. Cash and cash equivalents increased $21.8 million during the nine
months ended January 26, 1996, compared with an increase of $20.5 million during
the same period last year. Significant uses of cash during the nine month period
ended January 26, 1996 included the reduction of trade accounts payable,
purchases of marketable securities, purchases of property, plant and equipment,
dividends paid to shareholders, and repurchases of common stock.
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. The Company has
experienced an increase in such claims and currently has 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. The outcome
of this case could potentially have a significant impact on the cost to the
company, and other medical device makers, to defend product liability claims.
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 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
No report on Form 8-K was filed by the company during the
quarter ended January 26, 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: March 5, 1996 /s/ William W. George
William W. George
President
and Chief Executive Officer
Date: March 5, 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 Nine months ended
------------------ -----------------
Jan. 26, Jan. 27, Jan. 26, Jan. 27,
1996 1995 1996 1995
------- ------- ------- ------
PRIMARY
- ----------------------------------
Shares outstanding:
Weighted average outstanding 233,592 230,096 232,835 230,346
Share equivalents (1)(2) 4,526 2,852 4,175 2,408
------- ------- ------- -------
Adjusted shares outstanding (2) 238,118 232,948 237,010 232,754
======= ======= ======= =======
FULLY DILUTED
- ----------------------------------
Shares outstanding:
Weighted average outstanding 233,592 230,096 232,835 230,346
Share equivalents (1)(2) 4,837 3,738 4,837 3,738
------- ------- ------- -------
Adjusted shares outstanding (2) 238,429 233,834 237,672 234,084
======= ======= ======= =======
- ----------------------------------
(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>
Exhibit 27
MEDTRONIC, INC.
FINANCIAL DATA SCHEDULE
January 26, 1996
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEET FOR
THE QUARTERLY PERIOD ENDED JANUARY 26, 1996 FILED WITH THE SEC ON FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
THE FIRST TWO QUARTERS OF FY96 HAVE BEEN RESTATED TO REFLECT THE NOVEMBER 1995
ACQUISITION OF MICRO INTERVENTIONAL SYSTEMS, INC. WHICH WAS ACCOUNTED FOR AS A
POOLING OF INTERESTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> JAN-26-1996
<CASH> 120,131
<SECURITIES> 306,202
<RECEIVABLES> 441,520
<ALLOWANCES> (21,207)
<INVENTORY> 245,224
<CURRENT-ASSETS> 1,237,359
<PP&E> 780,351
<DEPRECIATION> (417,290)
<TOTAL-ASSETS> 2,230,277
<CURRENT-LIABILITIES> 390,368
<BONDS> 0
0
0
<COMMON> 23,401
<OTHER-SE> 1,632,221
<TOTAL-LIABILITY-AND-EQUITY> 2,230,277
<SALES> 1,573,011
<TOTAL-REVENUES> 1,573,011
<CGS> 439,837
<TOTAL-COSTS> 439,837
<OTHER-EXPENSES> 650,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,721
<INCOME-PRETAX> 476,947
<INCOME-TAX> 164,547
<INCOME-CONTINUING> 312,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,400
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.31
</TABLE>
