UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 28, 2000
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) 514-4000
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 25, 2000:
1,196,902,599
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------- -----------------------
Jan. 28, Jan. 29, Jan. 28, Jan. 29,
2000 1999 2000 1999
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 1,258.8 $ 1,064.8 $ 3,582.4 $ 3,085.8
Costs and expenses:
Cost of products sold 337.6 304.8 937.3 830.2
Research and development
expense 117.2 108.7 348.4 317.3
Selling, general, and
administrative expense 400.2 348.6 1,140.1 952.9
Non-recurring charges 14.7 287.3 14.7 411.7
Interest expense 3.0 14.1 9.8 24.9
Interest income (6.5) (17.2) (19.8) (40.3)
--------- --------- --------- ---------
Total costs and expenses 866.2 1,046.3 2,430.5 2,496.7
--------- --------- --------- ---------
Earnings before income taxes 392.6 18.5 1,151.9 589.1
Provision for income taxes 129.4 52.6 375.6 273.4
--------- --------- --------- ---------
Net earnings (loss) $ 263.2 $ (34.1) $ 776.3 $ 315.7
========= ========= ========= =========
Earnings (loss) per share:
Basic $ 0.22 $ (0.03) $ 0.65 $ 0.27
========= ========= ========= =========
Diluted $ 0.22 $ (0.03) $ 0.64 $ 0.26
========= ========= ========= =========
Weighted average shares
Outstanding:
Basic 1,193.7 1,187.3 1,193.8 1,171.1
Diluted 1,217.6 1,187.3 1,219.3 1,202.4
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
January 28, April 30,
2000 1999
----------- -----------
ASSETS (in millions)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 154.8 $ 228.5
Short-term investments 82.8 153.8
Accounts receivable, less allowance for
doubtful accounts of $30.9 and $33.2 1,237.9 1,024.8
Inventories:
Finished goods 393.9 314.6
Work-in-process 137.0 105.6
Raw materials 178.9 155.1
--------- ---------
Total inventories 709.8 575.3
Deferred income tax asset, net 240.1 256.0
Prepaid expenses and other current assets 307.9 206.4
--------- ---------
Total current assets 2,733.3 2,444.8
Property, plant, and equipment 1,622.5 1,444.5
Accumulated depreciation (739.5) (672.2)
--------- ---------
Net property, plant, and equipment 883.0 772.3
Goodwill and other intangible assets, net 1,389.5 1,374.2
Long-term investments 230.7 212.7
Long-term deferred tax asset, net 21.4 --
Other assets 163.8 204.4
--------- ---------
Total assets $ 5,421.7 $ 5,008.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 293.2 $ 239.2
Accounts payable 252.9 158.8
Accrued liabilities 574.3 608.2
--------- ---------
Total current liabilities 1,120.4 1,006.2
Long-term debt 24.4 23.4
Deferred income tax liability, net -- 30.8
Other long-term liabilities 157.7 177.2
--------- ---------
Total liabilities 1,302.5 1,237.6
Shareholders' equity:
Common stock--par value $.10 119.5 119.1
Retained earnings 4,143.4 3,773.0
Accumulated other non-owner changes in equity (122.3) (95.1)
--------- ---------
4,140.6 3,797.0
Receivable from Employee Stock Ownership Plan (21.4) (26.2)
--------- ---------
Total shareholders' equity 4,119.2 3,770.8
--------- ---------
Total liabilities and shareholders' equity $ 5,421.7 $ 5,008.4
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
------------------------
January 28, January 29,
2000 1999
----------- -----------
(in millions)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 776.3 $ 315.7
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 168.6 168.5
Non-recurring charges 4.5 268.8
Deferred income taxes (42.5) (99.3)
Change in operating assets and liabilities:
Accounts receivable (226.9) (125.2)
Inventories (139.8) (67.6)
Accounts payable and accrued liabilities 77.4 43.4
Changes in other operating assets and
liabilities (74.3) (121.6)
-------- --------
Net cash provided by operating activities 543.3 382.7
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (220.5) (193.8)
Acquisitions, net of cash acquired -- (923.7)
Purchases of marketable securities (147.0) (664.6)
Sales and maturities of marketable securities 167.0 542.8
Other investing activities, net (50.2) (15.6)
-------- --------
Net cash used in investing activities (250.7) (1,254.9)
FINANCING ACTIVITIES:
Increase in short-term borrowings, net 40.7 107.1
Increase (decrease) in long-term debt, net 2.8 (38.6)
Dividends to shareholders (141.5) (93.9)
Repurchases of common stock (423.6) (106.8)
Issuance of common stock 159.6 834.6
-------- --------
Net cash provided by (used in)
financing activities (362.0) 702.4
Effect of exchange rate changes on cash and
cash equivalents (4.3) 1.1
-------- --------
Net change in cash and cash equivalents (73.7) (168.7)
Cash and cash equivalents at beginning of period 228.5 519.5
-------- --------
Cash and cash equivalents at end of period $ 154.8 $ 350.8
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of results of operations, financial position,
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the Company's results for the periods presented.
Operating results for interim periods are not necessarily indicative of results
that may be expected for the fiscal year as a whole. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosures at
the date of the financial statements and during the reporting period. Actual
results could differ from these estimates. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended April 30, 1999.
Note 2 - Merger
- ---------------
On November 5, 1999, the Company issued approximately 21.4 million shares of its
common stock in exchange for all of the outstanding capital stock of Xomed
Surgical Products, Inc. (Xomed). Xomed is a leading developer, manufacturer and
marketer of surgical products for use by ear, nose, and throat (ENT) physicians.
Xomed offers a broad line of products in its ENT market that include powered
tissue-removal systems, nerve monitoring systems, disposable fluid-control
products, image guided surgery systems and bioabsorbable products.
The merger was accounted for as a pooling-of-interests and, accordingly, the
Company's consolidated financial statements have been restated to include the
results of operations, financial position and cash flows of Xomed for all
periods presented.
Net sales and net earnings for the individual entities are as follows (in
millions):
Medtronic Xomed Combined
--------- ----- --------
Three months ended
January 28,2000
Net sales $ 1,223.2 $ 35.6 $ 1,258.8
Net earnings $ 257.5 $ 5.7 $ 263.2
Nine months ended
January 28, 2000
Net sales $ 3,488.8 $ 93.6 $ 3,582.4
Net earnings $ 764.1 $ 12.2 $ 776.3
In connection with this transaction, the Company recorded $14.7 million of
pre-tax charges. These transaction charges include investment banking, legal
fees and distributor termination costs.
<PAGE>
The restated consolidated financial results for the three and nine months ended
January 29, 1999, respectively, include Xomed's results for the three and
nine-month periods ended December 31, 1998, respectively. Effective May 1, 1999,
Xomed's fiscal year end has been changed from December 31 to April 30 to conform
to the Company's fiscal year end. Accordingly, Xomed's results for the one-month
period ended April 30, 1999 have been excluded from the Company's combined
results and have been reported as an adjustment to May 1, 1999 retained
earnings. Xomed's sales and net earnings for the one-month period ended April
30, 1999 were $8.3 million and $0.6 million, respectively.
Note 3 - Shareholders' Equity
- -----------------------------
On August 25, 1999, the Company's shareholders approved an amendment to
Medtronic's Restated Articles of Incorporation to increase the number of
authorized shares of common stock from 800 million to 1.6 billion. On the same
date the Board of Directors approved a two-for-one split of the Company's common
stock effective September 24, 1999, in the form of a 100 percent stock dividend
payable to shareholders of record at the close of business on September 10,
1999. The stock split resulted in the issuance of 587.4 million additional
shares and the reclassification of $58.7 million from retained earnings to
common stock, representing the par value of the shares issued. All references in
the financial statements to earnings per share and average number of shares
outstanding amounts have been restated to reflect the stock split for all
periods presented.
Note 4 - Other Non-Owner Changes in Equity
- ------------------------------------------
In addition to net earnings, other non-owner changes in equity include, as
applicable, unrealized gains and losses on available for sale securities,
foreign currency translation adjustments and minimum pension liability. For the
nine-month periods ended January 28, 2000 and January 29, 1999, the Company's
other non-owner changes in equity were $749.1 million and $310.2 million,
respectively.
Note 5 - Non-Recurring Charges
- ------------------------------
During the third quarter of fiscal 2000 and in connection with the Xomed merger,
the Company recorded pre-tax transaction-related charges totaling $14.7 million.
Applications during the third quarter of fiscal 2000 against non-recurring
charges were as follows (amounts in millions):
Balance at New Charges Balance at
Oct. 29, 1999 Charges Utilized Jan. 28, 2000
- --------------------------------------------------------------------------------
Transaction related costs $ -- $ 14.7 $(10.2) $ 4.5
Facility reductions 1.8 -- (.8) 1.0
Severance and related costs 57.1 -- (16.0) 41.1
Noncancelable contractual
obligations and other 17.7 -- (5.6) 12.1
Litigation reserve 33.3 -- (10.2) 23.1
- --------------------------------------------------------------------------------
Total $109.9 $ 14.7 $(42.8) $81.8
<PAGE>
The Company has completed substantially all initiatives related to the
restructuring of its vascular, spinal surgery and cardiac surgery organizations.
Remaining initiatives to be completed include the closure of two plants which
are scheduled to close in March and June, 2000 and the settlement of certain
lease obligations. In addition, the Company continues to pay severance costs to
terminated employees, primarily in Europe. Of the 3,950 employees originally
identified for termination, approximately 3,550 have been terminated to date.
The Company also continues to incur costs to conclude cases related to the
Company's spinal system for pedicle fixation. As these remaining initiatives are
expected to be completed within the year, the remaining reserve balance at
January 28, 2000 is included in current accrued liabilities.
Note 6 - New Accounting Pronouncements
- --------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
This statement will require that companies recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
SFAS No. 133 is required to be adopted for years beginning after June 15, 1999.
In June 1999, Statement No. 137 effectively deferred the effective date of SFAS
No. 133 for one year. The Company is in the process of determining if earlier
application would be feasible and what effect the adoption of SFAS No. 133 will
have on the Company's results of operations, financial position and cash flows.
Note 7 - Segment and Geographic Information
- -------------------------------------------
The Company operates its business in four operating business units, which are
aggregated into one reportable segment - the manufacture and sale of
device-based medical therapies. Net sales by business unit were as follows (in
millions):
Three months ended Three months ended
January 28, 2000 January 29, 1999
------------------ ------------------
Cardiac Rhythm Management $ 609.0 $ 531.0
Neurological, Spinal and ENT 319.0 271.6
Vascular 216.2 168.7
Cardiac Surgery 114.6 93.5
-------- --------
$1,258.8 $1,064.8
Nine months ended Nine months ended
January 28, 2000 January 29, 1999
---------------- ----------------
Cardiac Rhythm Management $1,804.3 $1,517.7
Neurological, Spinal and ENT 899.8 716.2
Vascular 537.9 566.9
Cardiac Surgery 340.4 285.0
-------- --------
$3,582.4 $3,085.8
<PAGE>
Geographic information:
<TABLE>
<CAPTION>
Three months ended
United Asia Other Elimi- Consoli-
January 28, 2000 States Europe Pacific Foreign nations dated
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 827.0 $ 218.6 $ 106.1 $ 107.1 $ -- $1,258.8
Intergeographic sales 203.1 61.0 .1 3.8 (268.0) --
- -----------------------------------------------------------------------------------------------
Total sales $1,030.1 $ 279.6 $ 106.2 $ 110.9 $ (268.0) $1,258.8
- -----------------------------------------------------------------------------------------------
Long-lived assets $2,418.6 $ 209.0 $ 50.4 10.4 $ -- $2,688.4
- -----------------------------------------------------------------------------------------------
January 29, 1999
- -----------------------------------------------------------------------------------------------
Revenues from external
customers $ 684.7 $ 202.8 $ 84.1 $ 93.2 $ -- $1,064.8
Intergeographic sales 141.7 28.9 -- 2.4 (173.0) --
- -----------------------------------------------------------------------------------------------
Total sales $ 826.4 $ 231.7 $ 84.1 $ 95.6 $ (173.0) $1,064.8
- -----------------------------------------------------------------------------------------------
Long-lived assets $2,272.2 $ 230.8 $ 51.5 $ 9.1 $ -- $2,563.6
- -----------------------------------------------------------------------------------------------
Nine months ended
January 28, 2000
- -----------------------------------------------------------------------------------------------
Revenues from external
customers $2,334.6 $ 642.5 $ 305.0 $ 300.3 $ -- $3,582.4
Intergeographic sales 635.0 159.2 .1 11.4 (805.7) --
- -----------------------------------------------------------------------------------------------
Total sales $2,969.6 $ 801.7 $ 305.1 $ 311.7 $ (805.7) $3,582.4
- -----------------------------------------------------------------------------------------------
January 29, 1999
- -----------------------------------------------------------------------------------------------
Revenues from external
customers $2,010.5 $ 581.4 $ 243.6 $ 250.3 $ -- $3,085.8
Intergeographic sales 430.5 94.0 -- 7.7 (532.2) --
- -----------------------------------------------------------------------------------------------
Total sales $2,441.0 $ 675.4 $ 243.6 $ 258.0 $ (532.2) $3,085.8
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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 28, 2000 were $263.2 million as
compared to a net loss of $34.1 million for the quarter ended January 29, 1999.
Earnings per share for the quarter were $0.22 per diluted share compared to a
loss of $0.03 per share for the same period last year. Net earnings were $776.3
million or $0.64 per diluted share for the nine-month period ended January 28,
2000, compared to earnings of $315.7 million, or $0.26 per diluted share for the
comparable period last year. Without the $14.7 million pre-tax non-recurring
charge related to the merger of the Company and Xomed, net earnings for the
quarter ended January 28, 2000, would have been $275.3 million, or $0.23 per
diluted share, as compared to net earnings of $215.9 million or $0.18 per
diluted share before the $305.1 million non-recurring pre-tax charges related to
the mergers of the Company with Arterial Vascular Engineering, Inc. (AVE) and
Sofamor Danek Group, Inc. during the quarter ended January 29, 1999. Without the
$14.7 million pre-tax charge in fiscal 2000 and the $429.5 million pre-tax
charges in fiscal 1999, which include charges incurred in connection with the
merger of the Company with Physio-Control during the second quarter of fiscal
1999, net earnings for the nine-month periods ended January 28, 2000 and January
29, 1999, respectively, would have been $788.4 million or $0.65 per diluted
share, and $668.8 million or $0.56 per diluted share.
Sales
- -----
Sales for the quarter and nine-month period ended January 28, 2000 increased
18.2 percent and 16.1 percent, respectively, compared to the same periods last
year. Sales growth in the quarter was negatively impacted by $17.7 million of
unfavorable exchange rates of the value of the U.S. dollar versus major European
currencies and the Japanese yen. Excluding the effects of foreign currency
translation, sales for the quarter and nine-month period ended January 28, 2000
increased 19.9 percent and 16.6 percent, respectively.
Net sales of cardiac rhythm management products, which consist primarily of
products for bradycardia pacing, tachyarrhythmia management, external
defibrillation, and ablation, increased 16.5 percent and 19.6 percent during the
quarter and nine-month period ended January 28, 2000, after excluding the impact
of foreign exchange rate fluctuations, compared to the same periods a year ago.
This growth was led by a 23 percent gain in defibrillator sales during the
quarter. Revenue growth in the U.S. for defibrillators was 24 percent,
benefiting from the full market launch of the Gem(TM) II family, as well as
market share gains and the continued strong market adoption of dual chamber
devices. International tachyarrhythmia revenues grew by approximately 21
percent. Worldwide pacing revenues grew 11 percent reflecting market growth and
market share gains. Revenue growth in the U.S was 6 percent, while international
revenues grew by approximately 17 percent. This growth was fueled by the breadth
and depth of the Company's bradycardia product line, across all price points.
The Medtronic.Kappa(R) 700 pacemaker continues to have strong market acceptance
in the U.S. as does the Vitatron(R) brand, whose
<PAGE>
revenues have risen significantly and consistently throughout the year.
Physio-Control's revenues grew 23 percent during the quarter, as it continues to
benefit from the market's move to automatic external defibrillators.
Net sales of neurological, spinal and ENT products, consisting primarily of
implantable neurostimulation devices, drug administration systems, spinal
products, neurosurgery products, functional diagnostics and surgical products
used by ENT physicians, increased 18.4 percent and 25.9 percent for the quarter
and nine-month period ended January 28, 2000, after excluding the effects of
foreign currency translation. Sales of core neurological product lines
(consisting of neurostimulation, drug administration systems, and functional
diagnostics) increased 19 percent from the prior year comparative period. Sales
of spinal and neurosurgery product lines (consisting of Sofamor Danek, Surgical
Navigation Technologies, PS Medical and Midas Rex) achieved revenue growth of 15
percent for the quarter, led by a 26 percent growth rate in spinal surgery
products and offset by an 11 percent decline in neurologic technologies as a
result of customer order postponements. Revenues from newly merged Xomed
increased 37 percent from the same period a year ago.
Net sales of vascular product lines, consisting of stents, balloon and guiding
catheters, and peripheral vascular products, increased 29.9 percent for the
third quarter ended January 28, 2000 from the prior year comparative period, and
decreased 4.9 percent for the nine-month period ended January 28, 2000 from the
same period a year ago. Revenue growth during the quarter was driven by two
successful U.S product launches: the Medtronic S670 with Discrete Technology(TM)
coronary stent system and the Medtronic AneuRx(TM) endovascular stent graft
system for the minimally invasive treatment of abdominal aortic aneurysms.
Net sales of cardiac surgery product lines, consisting of heart valves,
perfusion systems, cannulae, and surgical accessories, increased 25.0 percent
and 20.6 percent during the quarter and nine months ended January 28, 2000,
respectively, after excluding the effects of foreign currency translation.
AVECOR Cardiovascular, Inc., which was acquired in March 1999, and which was
accounted for as a purchase, provided significant contributions during the
quarter. Revenue growth was also favorably impacted by the continuing strength
of the Octopus(R) 2 tissue stabilization device, which continues to maintain a
market leading position in the rapidly growing market for off-pump minimally
invasive cardiac surgery procedures, and by the recent approval of the
Hancock(R) II bioprosthetic heart valve in the U.S.
Costs of Products Sold
- ----------------------
Cost of products sold as a percent of sales for the quarter and nine-month
period ended January 28, 2000 was 26.8 percent and 26.2 percent, respectively
compared to 28.6 percent and 26.9 percent for the same periods a year ago. Cost
of sales as a percentage of revenues increased from the 26.3 percent reported
for the second quarter of fiscal 2000 primarily as a result of the negative
impact of foreign exchange rate fluctuations and costs incurred in connection
with recent product launches.
Research and Development Expense
- --------------------------------
The Company remains committed to spending aggressively on research and
development (R&D) to develop technological enhancements and new indications for
existing products, as well as to develop less invasive and new technologies to
address unmet patient needs and to help reduce patient care costs and length of
hospital stay. R&D expense was $117.2 million and $348.4 million for the quarter
and nine months ended January 28, 2000 or 9.3 percent
<PAGE>
and 9.7 percent of net sales, respectively. This compares to $108.7 million or
10.2 percent and $317.3 million 10.3 percent for the same periods a year ago.
Selling, General, and Administrative Expense (SG&A)
- ---------------------------------------------------
SG&A expense for the three-month period ended January 28, 2000, was $400.2
million, or 31.8 percent of net sales, as compared to SG&A expense of 32.7
percent for the comparable period last year. The decrease in SG&A as a
percentage of sales for the third quarter of fiscal 2000 as compared to the same
period a year ago, is the result of significant marketing expenses incurred in
1999 to launch certain cardiac rhythm management products and of higher costs
resulting from fragmented vascular sales forces which are now fully integrated,
partially offset by higher litigation costs during the third quarter of fiscal
2000. SG&A expense for the nine-month period ended January 28, 2000 was $1,140.1
million or 31.8 percent of net sales, as compared to 30.9 percent for the same
period a year ago. The increase in SG&A as a percent of sales for the first nine
months of 2000 as compared to the same period a year ago, is primarily
attributable to increased goodwill and other intangibles amortization expense in
fiscal 2000 as a result of AVE's October 1998 acquisition of the coronary
catheter lab business of C.R. Bard, Inc.
Non-recurring Charges
- ---------------------
In the third quarter of fiscal 2000, the Company recorded pre-tax transaction
charges of $14.7 million related to the merger of the Company with Xomed. Fiscal
1999's three and nine-month results include $305.1 million and $429.5 million,
respectively, of pre-tax, non-recurring charges. The 1999 charges related
primarily to transaction costs for the merger of the Company with AVE, Sofamor
Danek and Physio-Control, to the restructuring of the vascular and spinal
surgery organizations, and to purchased in-process research and development
expenses related to the acquisition of the coronary catheter lab business of
C.R. Bard and World Medical Manufacturing Corporation by AVE (see Note 5 to the
financial statements).
Interest
- --------
Interest expense for the quarter was $3.0 million as compared to $14.1 million
of interest expense for the same period last year. This improvement is the
result of the Company immediately paying off debt of pooled entities. Interest
income during the quarter was $6.5 million compared to $17.2 million for the
same period last year. The decrease in interest income is the result of
decreased average investment balances. Average investment balances for the third
quarter of last year were significantly higher as a result of the September 1998
secondary stock offering.
Income Taxes
- ------------
The Company's effective income tax rate for the current year is approximately
32.6 percent, as compared to an effective income tax rate of 42.9 percent for
fiscal 1999. Excluding non-recurring pre-tax charges of $14.7 million in fiscal
2000 and $554.2 million in fiscal 1999, the effective income tax rates would
have been 32.4 percent and 34.0 percent, respectively. The reduction in the
fiscal 2000 effective income tax rate is due to tax planning initiatives
including profits generated in low tax jurisdictions.
Liquidity and Capital Resources
- -------------------------------
Operating activities provided $543.3 million of cash and cash equivalents for
the nine-month period ended January 28, 2000 compared to $382.7 million for the
same period a year ago. Working capital was $1,612.9 million at January
<PAGE>
28, 2000, an increase of $174.3 million over the $1,438.6 million at April 30,
1999. The current ratio was 2.4:1 at January 28, 2000 and at April 30, 1999.
Account receivable balances have increased by approximately $213 million since
April 30, 1999 primarily as a result of increased sales. Inventories have
increased by approximately $135 million since April 30, 1999 as the Company has
built inventories in anticipation of product launches and plant closures. Cash
and cash equivalents decreased $73.7 million during the nine-month period. Other
significant uses of cash during the period included purchases of property,
plant, and equipment, repurchases of common stock under the Company's systematic
stock repurchase plan, and payment of dividends to shareholders.
Year 2000 Update
- ----------------
The Company had a formal program in place since 1996 with assigned Year 2000
staff to ensure that its critical areas, related to business information
systems, products, facilities, non-information systems with embedded technology
and key third party suppliers, would operate normally before, during and after
the Year 2000.
Since entering the year 2000, the Company has not experienced any major
disruptions to its business related to the Year 2000 issue, and reported that
its products, facilities and systems operated normally after the changeover. The
Company received no patient, hospital or physician reports of Year 2000 problems
with its implantable devices, and none were expected, since the delivery of
therapy through these devices is not dependent upon any external calendar date.
The Company will continue to monitor its critical areas over the next several
months, but does not anticipate any significant impacts due to Year 2000
exposures from its internal systems as well as from the activities of its
suppliers or customers.
The Company incurred approximately $26 million in external and internal costs on
a pre-tax basis to address its Year 2000 readiness issues. These costs were
incurred largely throughout fiscal 1998, 1999 and 2000. No significant future
expenses are expected to be incurred.
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
Certain statements contained in this document and other written and oral
statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "should", "will," "forecast" and similar words or
expressions. The Company's forward-looking statements generally relate to its
growth strategies, financial results, product development and regulatory
approval programs, and sales efforts. One must carefully consider
forward-looking statements and understand that such statements involve a variety
of risks and uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed in the section entitled
"Government Regulation and Other Matters" and "Cautionary Factors That May
Affect Future Results" in the Company's Annual Report and Form 10-K.
Consequently, no forward-looking statement can be guaranteed and actual results
may vary materially.
The Company undertakes no obligation to update any forward-looking statement,
but investors are advised to consult any further disclosures by the Company on
this subject in its filings with the Securities and Exchange Commission,
<PAGE>
especially on Forms 10-K, 10-Q and 8-K (if any), in which the Company discusses
in more detail various important factors that could cause actual results to
differ from expected or historic results. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995. It is not
possible to foresee or identify all such factors. As such, investors should not
consider any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In 1993, AcroMed Corporation commenced a patent infringement lawsuit against
Sofamor Danek in U.S. District Court in Cleveland, Ohio. Sofamor Danek obtained
summary judgment as to two of four patents and tried claims with respect to the
remaining two patents in May 1999. The jury found that certain Sofamor Danek
spinal fixation products infringed these two patents and an injunction was
issued by the court in December 1999. The court also imposed damages, including
pre-judgment interest in the amount of $48 million. The Company has appealed
the judgment to the Court of Appeals for the Federal Circuit, Washington, D.C.
and believes that meritorious bases exist for its reversal. The litigation
focuses on a relatively minor portion of Sofamor Danek's products, many of which
have been superseded by newer designs, and will not have a material impact on
the Company's financial position, results of operations or liquidity.
The stent industry is currently characterized by extensive patent litigation and
the Company's newly acquired subsidiary, Medtronic AVE, Inc., is both a
plaintiff and a defendant in lawsuits with Johnson & Johnson, Guidant
Corporation, and Boston Scientific Corporation over their respective patents,
with plaintiffs in each case alleging patent infringement and seeking injunctive
relief and monetary damages. The Company sued Guidant Corporation and Boston
Scientific Corp. in U.S. District Court in Minneapolis claiming that Guidant's
ACS RX Multi-Link(R) coronary stent and Boston Scientific's Nir(R) stent
infringed the Company's Wiktor(R) stent patent. Following a patent claims
construction ruling in favor of Guidant and Boston Scientific, the Company
consented to entry of judgment and has filed an appeal with the Court of Appeals
for the Federal Circuit in Washington, D.C. The Company will continue to
aggressively enforce its patent rights.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
During the quarter ended January 28, 2000, the Company filed (i) a
Report on Form 8-K dated November 3,1999 reporting under Item 5 the conversion
ratio for its proposed merger with Xomed Surgical Products, Inc., and (ii)a
Report on Form 8-K dated November 5, 1999 reporting under Item 2 the completion
of the previously announced transaction with Xomed Surgical Products, Inc.
<PAGE>
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 9, 2000 /S/ WILLIAM W. GEORGE
-----------------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: March 9, 2000 /S/ ROBERT L. RYAN
-----------------------------------------
Robert L. Ryan
Senior Vice President
and Chief Financial Officer
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THE QUARTERLY PERIOD ENDED JANUARY 28, 2000 FILED WITH THE SEC ON FORM 10-Q AND
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