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 31, 1997
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, 1997:
238,226,085
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MEDTRONIC, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three months ended Nine months ended
--------------------------- ---------------------------
Jan. 31, Jan. 26, Jan. 31, Jan. 26,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 598,749 $ 530,070 $1,797,771 $1,574,993
Costs and expenses:
Cost of products sold 152,314 143,640 458,955 440,710
Research and development
expense 69,531 63,318 203,459 173,038
Selling, general, and
administrative expense 188,517 164,248 569,191 505,686
Interest expense 1,536 1,842 6,148 5,850
Interest income (9,650) (7,031) (26,971) (21,606)
----------- ----------- ----------- -----------
Total costs and expenses 402,248 366,017 1,210,782 1,103,678
----------- ----------- ----------- -----------
Earnings before income taxes 196,501 164,053 586,989 471,315
Provision for income taxes 67,793 57,491 202,511 164,624
----------- ----------- ----------- -----------
Net earnings $ 128,708 $ 106,562 $ 384,478 $ 306,691
=========== =========== =========== ===========
Weighted average shares
outstanding 239,957 238,469 239,703 236,903
Earnings per share $ 0.54 $ 0.45 $ 1.60 $ 1.29
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
January 31, April 30,
1997 1996
----------- -----------
ASSETS (in thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,136 $ 151,050
Short-term investments 454,872 355,741
Accounts receivable, less allowance for
doubtful accounts of $17,456 and $18,094 490,095 458,090
Inventories:
Finished goods 133,485 118,952
Work in process 70,457 61,000
Raw materials 88,615 77,526
----------- -----------
Total inventories 292,557 257,478
Prepaid expenses and other current assets 205,964 168,914
----------- -----------
Total current assets 1,504,624 1,391,273
Property, plant, and equipment 930,196 835,739
Accumulated depreciation (467,570) (418,826)
----------- -----------
Net property, plant, and equipment 462,626 416,913
Goodwill and other intangible assets, net 482,704 473,027
Long-term investments 181,638 219,964
Other assets 63,638 53,523
----------- -----------
Total assets $ 2,695,230 $ 2,554,700
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 87,160 $ 60,690
Accounts payable 94,675 100,149
Accrued liabilities 306,556 368,309
----------- -----------
Total current liabilities 488,391 529,148
Long-term debt 17,734 15,336
Other long-term liabilities 137,668 128,181
Deferred tax liabilities 18,240 45,744
Shareholders' equity:
Common stock--par value $.10 23,970 23,931
Retained earnings 2,070,252 1,843,707
Cumulative translation adjustment (32,353) (2,675)
----------- -----------
2,061,869 1,864,963
Receivable from Employee Stock Ownership Plan (28,672) (28,672)
----------- -----------
Total shareholders' equity 2,033,197 1,836,291
----------- -----------
Total liabilities and shareholders' equity $ 2,695,230 $ 2,554,700
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
MEDTRONIC, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine months ended
----------------------
Jan. 31, Jan. 26,
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 384,478 $ 306,691
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 98,351 91,735
Change in assets and liabilities:
Increase in accounts receivable (42,869) (19,882)
Increase in inventories (50,195) (27,482)
Decrease in accounts payable and
accrued liabilities (70,305) (52,249)
Changes in other operating assets and
liabilities (21,675) 19,337
--------- ---------
Net cash provided by operating activities 297,785 318,150
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (119,738) (95,253)
Purchases of marketable securities (499,640) (418,948)
Sales and maturities of marketable securities 398,375 280,987
Acquisition of subsidiary, net of cash acquired (18,873) 0
Other investing activities (net) (66,474) (18,859)
--------- ---------
Net cash used in investing activities (306,350) (252,073)
FINANCING ACTIVITIES:
Increase in short-term borrowings (net) 31,836 1,003
Decrease in long-term debt (net) (317) (1,592)
Proceeds from stock offering of acquired subsidiary 0 41,538
Dividends to shareholders (68,153) (45,217)
Repurchases of common stock (74,533) (33,574)
Issuance of common stock 35,673 25,376
--------- ---------
Net cash used in financing activities (75,494) (12,466)
Effect of exchange rate changes on cash and
cash equivalents (5,855) (1,482)
--------- ---------
Net increase (decrease) in cash and cash equivalents (89,914) 52,129
Cash and cash equivalents at beginning of period 151,050 98,292
--------- ---------
Cash and cash equivalents at end of period $ 61,136 $ 150,421
========= =========
Supplemental Noncash Investing and Financing Activities
Issuance of common stock for acquisition of
subsidiary, net of cash acquired $ 0 $ 68,951
========= =========
</TABLE>
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.
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 31, 1997 were $128.7 million,
or $0.54 per share. Earnings per share reflect an increase of 20.0 percent over
the $0.45 per share reported on earnings of $106.6 million for the third quarter
last year. Net earnings increased 25.4 percent to $384.5 million for the
nine-month period ended January 31, 1997, compared to $306.7 million for the
same period last year. Earnings per share for the nine-month period ended
January 31, 1997 were $1.60, an increase of 24.0 percent over the $1.29 reported
in the prior year.
Sales
- -----
Sales for the quarter and nine-month period ended January 31, 1997 increased
13.0 percent and 14.1 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 31, 1997 increased 15.0 percent and
16.7 percent, respectively, over the comparable periods last year. Sales growth
in the quarter and nine-month period was negatively impacted by $10.8 million
and $40.6 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, Tachyarrhythmia
Management and Ablation Systems. After removing the impact of foreign exchange
rate fluctuations, worldwide sales of the Pacing business grew 11.2 percent and
12.6 percent during the quarter and nine-month period ended January 31, 1997,
respectively, compared to the same periods a year ago. Bradycardia pacemaker
sales of Thera(R) and Thera(R) i-series(TM) pacemakers, combined with CapSure(R)
leads, continued to reflect strong growth in both U.S. and non-U.S. markets.
Pacemakers of the new Medtronic.Kappa(TM) generation were released in Europe at
the end of the quarter. Tachyarrhythmia management's Micro Jewel(TM) II device,
currently the world's smallest and lightest defibrillator, which received U.S.
Food and Drug Administration (FDA) approval in November 1996, continued to gain
market share position in the highly competitive defibrillator marketplace.
Sales within the Other Cardiovascular business, (consisting of balloon and
guiding catheters, stents, interventional neuroradiology, heart valves,
perfusion and blood management systems, cannulae and surgical accessories)
increased 8.1 percent and 10.5 percent, respectively, on a comparable operations
basis for the quarter and nine-month periods ended January 31, 1997. This
increase was primarily attributable to continued growth made by the Medtronic
Wiktor(R) coronary stent in Japan, and gains in Europe by the Wiktor(R)-i and
beStent(TM), which was commercially released in Europe and other world markets
outside the U.S. in November 1996. The stent market is becoming increasingly
competitive, particularly outside the U.S. Also contributing to the revenue
growth were strong sales gains in devices for interventional neuroradiology.
Strong revenue contributions were also made by surgical cannulae and heart
valves during the quarter. Unit sales of balloon and guiding catheters remain
solid, however, continued downward pricing pressures for balloon catheters more
than offset the unit growth. Sales of perfusion products were flat compared to
last year's comparable quarter. The Maxima Forte(TM) blood oxygenator received
FDA approval in January 1997.
Exclusive of the effects of foreign currency translation, sales of the
Neurological and Other Businesses, consisting primarily of implantable
neurostimulation devices, drug administration systems, neurosurgery and
developing businesses, grew 58.4 percent and 68.3 percent, respectively, for the
quarter and nine-month periods ended January 31, 1997 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. In December 1996, the AlgoMed(TM) implantable
drug infusion system, a new patient-activated device for cancer patients, was
launched in European markets. 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 nine-month
periods ended January 31, 1997 was 25.4 percent and 25.5 percent, respectively,
compared to 27.1 percent and 28.0 percent for the comparative periods last year.
The decrease in the cost of products sold as a percent of sales resulted
primarily from the impact of favorable product and geographic mixes combined
with substantially increased volumes.
Research and Development Expense
- --------------------------------
Research and development expense as a percent of sales was 11.6 percent and 11.3
percent, respectively, for the quarter and nine-month periods ended January 31,
1997, compared to 11.9 percent and 11.0 percent, respectively, for the
comparative periods last year. Research and development expense was $69.5
million for the quarter and $203.5 million for the nine-month period ended
January 31, 1997, an increase of 9.8 percent and 17.6 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 January 31, 1997, was $188.5 million compared
to $164.2 million for the comparable period last year. SG&A as a percent of
sales for the quarter ended January 31, 1997 was 31.5 percent compared to 31.0
percent for the comparative period last year. The increase in SG&A as a percent
of sales is attributable to a decrease in the dollar amount of gains recognized
in the current quarter from hedging activities as compared to the comparative
period last year partially offset by gains recognized in the current quarter
from the sale of certain available-for-sale equity securities.
Interest
- --------
Interest expense of $1.5 million for the quarter was slightly lower than the
$1.8 million for the same period last year. Interest income of $9.7 million for
the quarter increased $2.7 million from the $7.0 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 $297.8 million of cash and cash equivalents for
the nine-month period ended January 31, 1997 compared to $318.2 million for the
same period a year ago. Working capital was $1,016.2 million at January 31,
1997, an increase of $154.1 million over the $862.1 million at April 30, 1996.
The current ratio increased to 3.1:1 at January 31, 1997, compared to 2.6:1 at
April 30, 1996. Cash and cash equivalents decreased $89.9 million during the
nine-month period ended January 31, 1997, compared with an increase of $52.1
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 nine-month period ended January 31, 1997
included the reduction of accounts payable and accrued liabilities, 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, 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 January 31, 1997, the company
filed a Report on Form 8-K dated November 19, 1996
reporting under Item 5 the announcement of financial
results for the fiscal second quarter ended November 1,
1996. Subsequent to the quarter ended January 31, 1997, the
company filed a Report on Form 8-K dated February 18, 1997
reporting under Item 5 the announcement of financial
results for the fiscal third quarter ended January 31,
1997.
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 13, 1997 /S/ WILLIAM W. GEORGE
------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: March 13, 1997 /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. 31, Jan. 26, Jan. 31, Jan. 26,
1997 1996 1997 1996
------- ------- ------- -------
PRIMARY
- -------------------------------
Shares outstanding:
Weighted average outstanding 239,957 238,469 239,703 236,903
Share equivalents (1)(2) 4,432 4,526 4,136 4,175
------- ------- ------- -------
Adjusted shares outstanding (2) 244,389 242,995 243,839 241,078
======= ======= ======= =======
FULLY DILUTED
- -------------------------------
Shares outstanding:
Weighted average outstanding 239,957 238,469 239,703 236,903
Share equivalents (1)(2) 4,655 4,837 4,655 4,837
------- ------- ------- -------
Adjusted shares outstanding (2) 244,612 243,306 244,358 241,740
======= ======= ======= =======
- ----------------------
(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>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEET FOR
THE QUARTERLY PERIOD ENDED JANUARY 31, 1997 FILED WITH THE SEC ON FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 61,136
<SECURITIES> 454,872
<RECEIVABLES> 507,551
<ALLOWANCES> (17,456)
<INVENTORY> 292,557
<CURRENT-ASSETS> 1,504,624
<PP&E> 930,196
<DEPRECIATION> (467,570)
<TOTAL-ASSETS> 2,695,230
<CURRENT-LIABILITIES> 488,391
<BONDS> 0
0
0
<COMMON> 23,970
<OTHER-SE> 2,009,227
<TOTAL-LIABILITY-AND-EQUITY> 2,695,230
<SALES> 1,797,771
<TOTAL-REVENUES> 1,797,771
<CGS> 458,955
<TOTAL-COSTS> 458,955
<OTHER-EXPENSES> 745,679
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,148
<INCOME-PRETAX> 586,989
<INCOME-TAX> 202,511
<INCOME-CONTINUING> 384,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 384,478
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.57
</TABLE>
