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 October 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 December 1, 1997:
468,674,501
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1997 1996 1997 1996
--------- --------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 642,109 $ 598,152 $ 1,288,388 $ 1,199,022
Costs and expenses:
Cost of products sold 158,865 151,060 319,026 306,641
Research and development
expense 70,793 68,257 141,480 133,928
Selling, general, and
administrative expense 196,731 188,964 391,634 380,674
Interest expense 1,886 2,588 3,836 4,611
Interest income (5,263) (8,663) (10,331) (17,321)
--------- --------- ----------- -----------
Total costs and expenses 423,012 402,206 845,645 808,533
--------- --------- ----------- -----------
Earnings before income taxes 219,097 195,946 442,743 390,489
Provision for income taxes 75,588 67,602 152,746 134,719
--------- --------- ----------- -----------
Net earnings $ 143,509 $ 128,344 $ 289,997 $ 255,770
========= ========= =========== ===========
Weighted average shares
outstanding 468,810 479,484 468,598 479,181
Earnings per share $ 0.31 $ 0.27 $ 0.62 $ 0.53
========= ========= =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
October 31, April 30,
1997 1997
----------- -----------
ASSETS (in thousands)
------
Current assets:
Cash and cash equivalents $ 297,943 $ 197,388
Short-term investments 17,260 53,181
Accounts receivable, less allowance for
doubtful accounts of $13,940 and $13,673 542,368 516,984
Inventories:
Finished goods 152,726 123,282
Work in process 68,680 68,034
Raw materials 104,067 91,235
----------- -----------
Total inventories 325,473 282,551
Prepaid expenses and other current assets 201,902 187,805
----------- -----------
Total current assets 1,384,946 1,237,909
Property, plant, and equipment 1,009,733 965,002
Accumulated depreciation (519,443) (477,786)
----------- -----------
Net property, plant, and equipment 490,290 487,216
Goodwill and other intangible assets, net 491,271 490,968
Long-term investments 152,680 125,847
Other assets 90,103 67,270
----------- -----------
Total assets $ 2,609,290 $ 2,409,210
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 100,076 $ 106,375
Accounts payable 79,405 110,337
Accrued liabilities 319,229 301,979
----------- -----------
Total current liabilities 498,710 518,691
Long-term debt 16,116 13,980
Other long-term liabilities 140,947 128,155
Deferred tax liabilities 11,756 2,163
Shareholders' equity:
Common stock--par value $.10 46,854 46,762
Retained earnings 1,978,457 1,784,319
Cumulative translation adjustment (55,650) (56,960)
----------- -----------
1,969,661 1,774,121
Receivable from Employee Stock Ownership Plan (27,900) (27,900)
----------- -----------
Total shareholders' equity 1,941,761 1,746,221
----------- -----------
Total liabilities and shareholders' equity $ 2,609,290 $ 2,409,210
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MEDTRONIC, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six months ended
----------------
Oct. 31, Nov. 1,
1997 1996
--------- ---------
(in thousands)
OPERATING ACTIVITIES:
Net earnings $ 289,997 $ 255,770
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 64,077 70,435
Change in assets and liabilities:
Increase in accounts receivable (19,889) (33,452)
Increase in inventories (43,824) (28,074)
Decrease in accounts payable and
accrued liabilities (8,247) (73,354)
Changes in other operating assets and
liabilities (28,936) (32,792)
--------- ---------
Net cash provided by operating activities 253,178 158,533
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (55,419) (86,453)
Purchases of marketable securities 0 (309,384)
Sales and maturities of marketable securities 35,760 248,333
Acquisition of subsidiary, net of cash acquired 0 (18,873)
Other investing activities (net) (18,096) (39,838)
--------- ---------
Net cash used in investing activities (37,755) (206,215)
FINANCING ACTIVITIES:
(Decrease) increase in short-term borrowings (net) (8,763) 17,444
Increase in long-term debt (net) 2,136 5,821
Dividends to shareholders (51,431) (45,365)
Repurchases of common stock (80,966) 0
Issuance of common stock 22,554 8,238
--------- ---------
Net cash used in financing activities (116,470) (13,862)
Effect of exchange rate changes on cash and
cash equivalents 1,602 (554)
--------- ---------
Net change in cash and cash equivalents 100,555 (62,098)
Cash and cash equivalents at beginning of period 197,388 151,050
--------- ---------
Cash and cash equivalents at end of period $ 297,943 $ 88,952
========= =========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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 July 10, 1997, the Board of Directors approved a two-for-one common stock
split effected September 12, 1997 in the form of a 100 percent stock dividend to
shareholders of record at the close of business on August 29, 1997. The stock
split resulted in the issuance of 234,509 additional shares and the reclass of
$23,451 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 for the current and prior
year have been restated to reflect the split.
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 October 31, 1997 were $143.5 million,
or $0.31 per share. Earnings per share reflects an increase of 14.8 percent over
the $0.27 per share reported on earnings of $128.3 million for the second
quarter last year. Net earnings were $290.0 million for the six-month period
ended October 31, 1997, compared to $255.8 million for the same period last
year. Earnings per share for the six-month period ended October 31, 1997 was
$0.62, an increase of 17.0 percent over the $0.53 reported in the prior year.
Sales
Sales for the quarter and six-month period ended October 31, 1997 increased 7.3
percent and 7.5 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 October 31, 1997 increased 12.7 percent and 12.1
percent, respectively, over the comparable periods last year. Sales growth in
the quarter and six-month period was negatively impacted by $32.0 million and
$55.7 million, respectively, of unfavorable exchange rate movements caused
primarily by the strengthening of the U.S. dollar against major European
currencies and the Japanese Yen.
<PAGE>
After removing the impact of foreign exchange rate fluctuations, worldwide sales
of the Pacing Business, which consists primarily of Bradycardia Pacing and
Tachyarrhythmia Management, grew 9.1 percent and 9.0 percent during the quarter
and six-month period ended October 31, 1997, respectively, compared to the same
periods a year ago. This growth was lead by strong contributions from
Tachyarrhythmia Management's Micro Jewel II implantable
cardioverter-defibrillator, which continues to hold a strong market share
position in the highly competitive defibrillator marketplace. The Gem DR, part
of the next generation Gem family of defibrillators, is currently in clinical
evaluations in Europe and the U.S. Bradycardia Pacing gained sales momentum
during the quarter lead by strong non-U.S. sales of the Medtronic.Kappa(TM)400
series of pacemakers. The Medtronic.Kappa(TM)400 series of pacemakers is
currently awaiting FDA clearance in the U.S. Its successor product, the
Medtronic.Kappa 700 series family of pacemakers entered clinical evaluations in
Europe in November 1997.
Sales within the Other Cardiovascular Business, (consisting of balloon and
guiding catheters, stents, interventional neuroradiology products, heart valves,
perfusion and blood management systems, cannulae and surgical accessories)
increased 14.5 percent and 10.9 percent for the quarter and six-month period
ended October 31, 1997, respectively, after excluding the effects of foreign
currency translation. This growth was attributable in significant part to U.S.
sales of the Wiktor(R) Prime coronary stent, which has been positively received
in the marketplace since its launch in July. The stent market has become
increasingly competitive, particularly in international locations. Also
contributing to the growth was strong sales of surgical cannulae and tissue
heart valves along with sales of the Maxima Forte(TM) blood oxygenator. Sales of
blood management systems were nearly flat compared to last year's comparable
quarter. In mid-September, the endovascular stent-graft system used for
minimally-invasive treatment of abdominal aortic aneurysms was launched in
European markets. Balloon catheter sales decreased significantly from the same
quarter in the prior year as significant price competition continued.
Exclusive of the effects of foreign currency translation, sales of the
Neurological and Diversified Businesses, consisting primarily of implantable
neurostimulation devices, drug administration systems, neurosurgery products,
diagnostic systems and developing businesses, grew 28.3 percent and 31.1
percent, respectively, for the quarter and six-month period ended October 31,
1997 compared to the same periods last year. Particularly strong sales growth
was achieved in the drug delivery business as a result of continued increased
demand for the SynchroMed(R) drug infusion system for delivery of Lioresal(R)
(baclofen, USP) Intrathecal for treatment of cerebral and spinal spasticity and
for delivery of morphine for treatment of chronic pain, especially non-malignant
chronic pain. Another strong growth factor was the continued rapid sales growth
in Europe of Medtronic Activa(TM) neurostimulation therapy for control of
essential tremor and tremor associated with Parkinson's disease. This therapy
received U.S. clearance from the FDA in August 1997. The company is currently
working to actively train centers and develop this market on a worldwide basis.
Also, the Mattrix(R) and Itrel(R) 3 spinal cord stimulation systems continue to
hold strong market share positions. In late September, the company received FDA
clearance to market its Interstim Continence Control Therapy. In addition,
neurosurgery (PS Medical) shunts for hydrocephalus contributed to the strong
growth.
<PAGE>
Cost of Products Sold
Cost of products sold as a percent of sales for the quarter and six-month period
ended October 31, 1997 was 24.7 percent and 24.8 percent, respectively, compared
to 25.3 percent and 25.6 percent for the same periods last year. The decrease in
the cost of products sold as a percent of sales resulted from the impact of
increased volumes combined with lower product costs, partially offset by pricing
pressures on certain products and costs related to new product introductions.
Research and Development Expense
Research and development expense was $70.8 million for the quarter and $141.5
million for the six-month period ended October 31, 1997, respectively. Research
and development expense as a percentage of net sales was 11.0 percent for both
periods and 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 less invasive and
new technologies to address unmet patient needs.
Selling, General, and Administrative Expense (SG&A)
SG&A expense for the quarter ended October 31, 1997, was $196.7 million compared
to $189.0 million for the comparable period last year. SG&A as a percent of
sales decreased from 31.6 percent a year ago to 30.6 percent for the current
quarter. The decrease in SG&A as a percent of sales is attributable to continued
overall cost efficiencies.
Interest
Interest expense was $1.9 million for the quarter as compared to $2.6 million
for the same period last year. Due to decreased average investment balances over
the prior year as a result of significant repurchases of common stock during the
third and fourth quarters of fiscal 1997, interest income decreased to $5.3
million for the quarter as compared to $8.7 million for the same period a year
ago.
Income Taxes
The estimated effective tax rate for the company's current fiscal year is 34.5
percent which is consistent with the effective tax rate for the fiscal year
ended April 30, 1997. The company continues to experience upward pressure on the
tax rate resulting from tax legislation which reduces U.S. tax benefits derived
from the company's operations in Puerto Rico. Management believes that further
adverse impact can be minimized by other tax planning initiatives.
<PAGE>
Liquidity and Capital Resources
Operating activities provided $253.2 million of cash and cash equivalents for
the six-month period ended October 31, 1997 compared to $158.5 million for the
same period a year ago. Working capital was $886.2 million at October 31, 1997,
an increase of $167.0 million over the $719.2 million at April 30, 1997. The
current ratio increased to 2.8:1 at October 31, 1997, compared to 2.4:1 at April
30, 1997. Cash and cash equivalents increased $100.6 million during the quarter.
Significant uses of cash during the quarter included purchases of property,
plant and equipment, repurchases of common stock and dividends paid to
shareholders.
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 October 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: December 11, 1997 /S/ WILLIAM W. GEORGE
--------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: December 11, 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 Six months ended
------------------ ----------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1997 1996 1997 1996
------- ------- ------- -------
PRIMARY
- -------------------------------
Shares outstanding:
Weighted average outstanding 468,810 479,484 468,598 479,181
Share equivalents (1)(2) 7,840 9,152 7,425 8,851
------- ------- ------- -------
Adjusted shares outstanding (2) 476,650 488,636 476,023 488,032
======= ======= ======= =======
FULLY DILUTED
- -------------------------------
Shares outstanding:
Weighted average outstanding 468,810 479,484 468,598 479,181
Share equivalents (1)(2) 8,071 9,830 7,680 9,830
------- ------- ------- -------
Adjusted shares outstanding (2) 476,881 489,314 476,278 489,011
======= ======= ======= =======
- -----------------
(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 OCTOBER 31, 1997 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> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 297,943
<SECURITIES> 17,260
<RECEIVABLES> 556,308
<ALLOWANCES> (13,940)
<INVENTORY> 325,473
<CURRENT-ASSETS> 1,384,946
<PP&E> 1,009,733
<DEPRECIATION> (519,443)
<TOTAL-ASSETS> 2,609,290
<CURRENT-LIABILITIES> 498,710
<BONDS> 0
0
0
<COMMON> 46,854
<OTHER-SE> 1,894,907
<TOTAL-LIABILITY-AND-EQUITY> 2,609,290
<SALES> 1,288,388
<TOTAL-REVENUES> 1,288,388
<CGS> 319,026
<TOTAL-COSTS> 319,026
<OTHER-EXPENSES> 522,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,836
<INCOME-PRETAX> 442,743
<INCOME-TAX> 152,746
<INCOME-CONTINUING> 289,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,997
<EPS-PRIMARY> .62
<EPS-DILUTED> .61
</TABLE>
