SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of Registrant as specified in its charter)
INDIANA 35-1931722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
(Address of principal executive offices)
Registrant's telephone number, including area code: (317) 971-2000
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
----- -----
The number of shares of common stock outstanding as of July 25, 1997:
Class Number of Shares Outstanding
Common 74,096,960
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $281.0 $265.5 $546.5 $517.6
Cost of sales 72.2 100.0 138.2 177.0
---- ----- ---- ----
Gross profit 208.8 165.5 408.3 340.6
Research and development 42.4 37.0 84.7 73.0
Purchased research and development 57.4 - 57.4 -
Sales, marketing and administrative 89.2 82.4 173.4 159.7
---- ---- ---- -----
189.0 119.4 315.5 232.7
----- ----- ----- -----
Income from operations 19.8 46.1 92.8 107.9
Other income (expenses):
Interest--net (5.1) (6.6) (10.2) (13.9)
Royalties--net 4.9 2.3 9.4 2.4
Amortization (3.8) (6.4) (7.9) (12.3)
Other--net (1.6) (1.9) (1.9) (3.5)
Impairment charges - (66.9) - (66.9)
---- ---- ---- ----
(5.6) (79.5) (10.6) (94.2)
---- ---- ---- ----
Income (loss) before income taxes 14.2 (33.4) 82.2 13.7
Income taxes 5.2 12.8 30.0 31.4
---- ---- ---- ----
Net income (loss) $9.0 ($46.2) $52.2 ($17.7)
==== ======= ===== =======
Earnings (loss) per share $0.12 ($0.64) $0.72 ($0.25)
===== ======= ===== =======
Weighted average shares outstanding 72.30 72.05 72.23 72.02
Dividends paid per share $0.025 $0.025 $0.05 $0.05
====== ======= ===== =======
See notes to consolidated financial statements.
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
June 30, December 31,
1997 1996
---------- ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $11.8 $1.5
Accounts receivable, net of allowances
of $6.6 (1997) and $7.3 (1996) 248.4 212.4
Other receivables 12.5 17.5
Inventories 111.1 102.8
Deferred income taxes 60.5 62.1
Prepaid expenses 20.9 22.6
----- -----
Total Current Assets 465.2 418.9
Other Assets
Goodwill, net of allowances
of $88.4 (1997) and $82.1 (1996) 188.0 197.3
Other intangible assets, net of allowances
of $10.4 (1997) and $8.8 (1996) 7.6 9.1
Investments 41.2 41.3
Sundry 18.4 16.3
Deferred income taxes 12.0 -
Property and equipment 560.6 531.6
Less accumulated depreciation (230.3) (210.6)
----- -----
Property and equipment, net 330.3 321.0
------ ------
$1,062.7 $1,003.9
======== ========
See notes to consolidated financial statements.
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
June 30, December 31,
1997 1996
----------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $38.2 $21.9
Employee compensation 46.1 77.5
Restructuring liabilities 7.0 8.8
Income taxes payable - 2.6
Other liabilities 86.9 67.2
Short-term borrowings 125.7 130.0
----- -----
Total Current Liabilities 303.9 308.0
Noncurrent Liabilities
Long-term debt 256.2 233.5
Other 11.8 14.2
----- -----
268.0 247.7
Commitments and contingencies - -
Shareholders' Equity
Common stock-no par value;
Authorized shares: 250,000,000
Issued shares: 72,316,000 (1997)
72,154,000 (1996) 192.5 192.5
Additional paid-in capital 155.8 150.5
Retained earnings 210.5 162.0
Cumulative currency translation adjustments (25.6) (11.7)
Deferred cost, ESOP (47.5) (51.2)
Unrealized gain on investments, net 8.0 9.4
Treasury stock, at cost:
Shares: 41,627 (1997)
66,763 (1996) (2.9) (3.3)
---- ----
490.8 448.2
----- -----
$1,062.7 $1,003.9
======== ========
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Cash Flow
(Dollars in millions)
(unaudited)
Six Months Ended
June 30,
1997 1996
---- ----
Cash Provided by Operating Activities:
Net income (loss) $52.2 ($17.7)
Adjustments to Reconcile Net Income (Loss) to Cash
Provided by Operating Activities:
Depreciation 24.0 22.1
Amortization of goodwill and other intangibles 7.9 12.3
Provision for inventory and related losses 2.8 36.9
Impairment charges - 66.9
Other noncash expenses 14.7 5.0
---- ----
101.6 125.5
Changes in Operating Assets and Liabilities:
Receivables, increase (39.8) (25.8)
Inventories, increase (14.6) (7.8)
Prepaid expenses, decrease (increase) 1.3 (4.0)
Accounts payable and accrued
liabilities, decrease (2.7) (28.6)
Income taxes payable decrease (2.2) (30.0)
Other liabilities, increase (decrease) 0.6 (1.3)
---- ------
Net Cash Provided by Operating Activities 44.2 28.0
Investing Activities:
Additions of property and equipment, net (36.2) (25.6)
(Additions) reductions of other assets, net (4.1) 5.1
----- ------
Net Cash Used for Investing Activities (40.3) (20.5)
Financing Activities:
Increase (decrease) in borrowings 18.8 (6.3)
Dividends (3.6) (3.6)
Purchases of common stock and other capital
transactions (8.4) -
----- -----
Net Cash Provided by (Used for) Financing Activities 6.8 (9.9)
Effect of Exchange Rate Changes on Cash (0.4) (0.1)
----- -----
Net Increase (Decrease) in Cash and Cash Equivalents 10.3 (2.5)
Cash and Cash Equivalents at Beginning of Period 1.5 3.4
---- ----
Cash and Cash Equivalents at End of Period $11.8 $0.9
----- ----
See notes to consolidated financial statements.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In millions)
(unaudited)
NOTE 1 - General Information
Guidant Corporation (Guidant or the Company) is a multinational
company that designs, develops, manufactures, and markets a broad
range of medical devices for use in: (i) cardiac rhythm
management; (ii) vascular intervention; and (iii) minimally
invasive systems. Guidant is a global company with principal
operations in the United States, Western Europe and Japan. The
Company generally markets its products through a direct sales
force in the United States and a combination of direct sales
representatives and independent distributors in international
markets.
NOTE 2 - Basis of Presentation
The accompanying unaudited 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 and
footnotes 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, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. 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 December 31, 1996.
NOTE 3 - Inventories
Inventories consisted of the following:
June 30, December 31,
1997 1996
-------- ------------
Finished products $54.9 $48.4
Work in process 32.6 28.8
Raw materials and supplies 23.6 25.6
---- ----
$111.1 $102.8
====== ======
NOTE 4 - Acquisition
In May 1997, the Company acquired the assets of NeoCardia, LLC.
(NeoCardia), a privately held development-stage company in
Houston, Texas for $57.4 million. Under the acquisition
agreement, the Company could pay as much as $77.0 million in
cash, plus subsequent additional bonus and royalty payments
contingent upon achieving certain product development and sales
goals.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In millions)
(unaudited)
NOTE 4 - Acquisition (continued)
NeoCardia, which currently does not have any products available
for commercial sale, has pioneered the use of radiation therapy
for the treatment of restenosis. The Company has financed the
acquisition with its existing credit lines. The results of
NeoCardia's operations have been included in the Company's
consolidated results of operations from the date of acquisition.
The acquisition was accounted for under the purchase method of
accounting. In conjunction with the acquisition, the Company
recorded a pre-tax charge of $57.4 million ($36.4 million after
tax) relating to the appraised value of the in-process research
and development that must be expensed under generally accepted
accounting principles. Substantially all of the possible
additional acquisition cost, when determined, will be treated as
purchased research and development expense. Other than the
purchased research and development charge, the acquisition did
not have a material pro forma impact on the Company's operations.
NOTE 5 - Earnings Per Share
Earnings per share of common stock has been computed by dividing
net income by the weighted average common shares outstanding during
the period. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share. Under Statement
No. 128, which is required to be adopted on December 31, 1997, the
disclosure of fully diluted earnings per share will be mandatory in the
consolidated financial statements. At that time, the Company will be
required to change the method currently used to compute earnings per share
and to restate all prior periods. The impact of the new requirements for
calculating earnings per share is not material for the three and six month
periods ended June 30, 1997 and 1996.
NOTE 6 - Foreign Exchange Risk Management
A portion of the Company's cash flows is derived from
transactions denominated in foreign currencies. The United
States dollar value of transactions denominated in foreign
currencies fluctuates as the United States dollar strengthens or
weakens relative to these foreign currencies. In order to reduce
the uncertainty of foreign exchange rate movements on
transactions denominated in foreign currencies, the Company
enters into derivative financial instruments in the form of
foreign exchange forward and option contracts with major
international financial institutions. These forward and option
contracts, which typically mature within one year, are designed
to hedge anticipated foreign currency transactions, primarily
intercompany inventory purchases for periods consistent with
commitments. These contracts also hedge firm commitments,
primarily intercompany loans, payables and receivables.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In millions)
(unaudited)
NOTE 6 - Foreign Exchange Risk Management (continued)
Realized and unrealized gains or losses on contracts that qualify
as hedges are deferred and recognized in the same period as the
transactions occur. Realized gains and losses on contracts
hedging intercompany inventory purchases are included in cost of
sales while realized gains and losses on firm commitment hedges
are recorded in other income (expenses).
NOTE 7 - Contingencies
The Company is a party to various legal actions which have
occurred in the normal course of business. In May 1995,
Intermedics, Inc., a division of Sulzermedica USA, Inc., filed
suit against Guidant alleging patent infringement related to
certain Guidant defibrillator and pacemaker models. Intermedics
is seeking injunctive and monetary relief of an unspecified amount.
The Company has also been named as a defendant, along with
Schneider (USA), Inc., and Schneider (Europe), AG, wholly owned
subsidiaries of Pfizer, Inc., in an action brought in 1995 by
Boston Scientific Corporation and its subsidiary, SciMed Life
Systems, Inc. The lawsuit alleges violation of federal and state
antitrust laws, as well as state unfair competition and
abuse of process laws. Boston Scientific and SciMed allege that
the violations are based on the misuse of the United States
patent laws as a result of agreements concerning certain rapid
exchange catheter patents. The lawsuit seeks injunctive relief,
unspecified monetary damages, and a declaration that certain
patents are unenforceable.
On May 3, 1996, Pacesetter, Inc. filed suit against the Company
in the United States District Court for the District of Delaware.
The lawsuit was subsequently transferred to the United States District
Court for Minnesota. The complaint, as subsequently amended, alleges
infringement of certain patents related to the Company's VIGOR
pacemaker and programmers. The initial complaint also asserted, in
conjunction with Angeion Corporation, certain patents of Angeion which,
at that time, were licensed to Pacesetter. In July 1997, the portion
of the lawsuit dealing with the Angeion patents was separated into a
separate lawsuit with Angeion as the sole plaintiff. In this
lawsuit, Angeion is asserting infringement of certain of its patents
by the VENTAK MINI and VENTAK MINI II family of devices. Both lawsuits
seek injunctive relief, unspecified monetary damages and an award
of attorneys' fees.
On June 6, 1997, C.R. Bard, Inc. filed suit against the Company
in the U.S. District Court, District of Delaware. The Complaint
alleges that certain unspecified dilatation catheters infringe
two patents owned by Bard. Bard is seeking monetary and
injunctive relief.
The Company is a party to certain other legal actions arising in
the ordinary course of its business. While it is not possible to
predict or determine the outcome of these legal actions, the
Company believes the costs associated with these actions will not
have a material adverse effect on its consolidated financial
position or liquidity, but could possibly
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In millions)
(unaudited)
NOTE 7 - Contingencies (continued)
be material to the consolidated results of operations in any one
accounting period.
Further, product liability claims may be asserted in the future
relative to events currently unknown to management. Management
believes that the Company's risk-management practices, including
insurance coverage, are reasonably adequate to protect against
potential product liability losses.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Guidant Corporation (Guidant or the Company), an Indiana
corporation, is a multinational company that designs, develops,
manufactures, and markets a broad range of products for use in:
(i) cardiac rhythm management (CRM), (ii) vascular intervention (VI),
and (iii) other forms of minimally invasive systems (MIS). In CRM,
the Company is a worldwide leader in automatic implantable cardioverter
defibrillator (AICD) systems. The Company also designs,
manufactures, and markets a full line of implantable pacemaker
systems used in the treatment of slow or irregular heartbeats.
In VI, the Company is a worldwide leader in minimally invasive
procedures used for opening blocked coronary arteries. In
addition, the Company develops, manufactures, and markets
products for use in MIS procedures with products for access,
vision, dissection, retraction, and fixation, focusing on
laparoscopic market opportunities in both general and
cardiovascular surgeries.
The Company was formed after Eli Lilly and Company (Lilly)
transferred its ownership interests in several businesses in its
Medical Devices and Diagnostics Division to Guidant. The Company
consummated an initial public offering (IPO) of its common stock
in December 1994. Lilly, whose beneficial ownership was reduced to
approximately 80% after the IPO, disposed of its remaining ownership
interest in September 1995 by means of a tax-free split-off.
The following tables are summaries of the Company's net sales and
major costs and expenses:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in millions)
(unaudited)
Net sales:
Cardiac rhythm management $164.4 $144.2 $313.4 $278.0
Vascular intervention 101.1 109.1 201.9 216.0
Minimally invasive systems 15.5 12.2 31.2 23.6
---- ---- ---- ----
Total net sales $281.0 $265.5 $546.5 $517.6
Cost of sales 72.2 100.0(2) 138.2 177.0(2)
---- ---- ---- -----
Gross profit 208.8 165.5 408.3 340.6
Research and development 42.4 37.0 84.7 73.0
Purchased research and development(1) 57.4 - 57.4 -
Sales, marketing and administrative 89.2 82.4 173.4 159.7
---- ---- ----- -----
Income from operations $19.8 $46.1 $92.8 $107.9
===== ===== ===== ======
As a Percent of Net Sales
-----------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
Net sales:
Cardiac rhythm management 58.5% 54.3% 57.4% 53.7%
Vascular intervention 36.0 41.1 36.9 41.7
Minimally invasive systems 5.5 4.6 5.7 4.6
--- ---- ---- ----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 25.7 37.7(2) 25.3 34.2(2)
---- ---- ---- ----
Gross profit 74.3 62.3 74.7 65.8
Research and development 15.1 13.9 15.5 14.1
Purchased research and development(1) 20.5 - 10.5 -
Sales, marketing and administrative 31.7 31.0 31.7 30.9(2)
Income from operations 7.0% 17.4% 17.0% 20.8%
===== ===== ===== =====
(1) In conjunction with the asset acquisition of NeoCardia, LLC., the entire
initial purchase price of $57.4 million represented the appraised value
of in-process research and development which must be expensed under
generally accepted accounting principles for purchase accounting.
(2) Includes the impact of $28.8 million in special noncash obsolescence
charges taken in 1996 on CRM products and programmers.
Operating Results -- Three and Six Months Ended June 30, 1997
The Company had record worldwide net sales of $281.0 million for
the three months ended June 30, 1997, reflecting an increase of
$15.5 million or 6% over the same period in 1996. Growth in unit
volume of 18% was offset by net sales price decreases, including
changes in product mix, and unfavorable fluctuations in foreign
currency exchange rates of 9% and 3%, respectively.
The Company had worldwide net sales of $546.5 million for the six
months ended June 30, 1997, an increase of $28.9 million or 6%
over the six months ended June 30, 1996. Growth in unit volume
of 17% was offset by net sales price decreases of 8%, which also
includes changes in product mix, and unfavorable fluctuations in
foreign currency exchange rates of 3% during this period.
Net sales of CRM products grew $20.2 million or 14.0% for the three
months ended June 30, 1997 as compared to the same period in 1996.
CRM net sales grew $35.4 million or 12.7% for the six months ended
June 30, 1997 over the comparable period in 1996. This growth was led
by the VENTAK AV, released in Europe in November 1996; strong worldwide
sales of the VENTAK MINI II advanced, tiered-therapy AICD, released in
the United States in July 1996; and the VENTAK MINI HC released in the
United States in May 1996. The technologically advanced VENTAK AV, which
incorporates sophisticated dual-chamber pacemaker therapy and proven
defibrillation capabilities, sets a new standard for treating patients
with life-threatening rapid heart arrhythmias. The Company's adaptive-rate
pacemaker products also contributed to sales growth during the period, led
by the VIGOR DR and VIGOR SR.
Management believes that sales growth in AICDs is partially
driven by the recent United States Food and Drug Administration
approval to expand the Company's product labeling for these
devices to cover patients identified by the Multicenter Automatic
Defibrillator Implantation Trial (MADIT) to be at high risk for
sudden cardiac death. The MADIT study, the first large,
randomized clinical trial comparing AICDs with conventional
antiarrhythmic drug therapy, was terminated early because of
significant improvement in survival rates of patients with AICDs.
Currently, the Company is the only manufacturer of AICDs to have
approved labeling that includes the patient population identified
by the MADIT study.
Net sales of vascular intervention products for the three months
ended June 30, 1997 decreased $8.0 million or 7.3% from the same
period in 1996. For the six months ended June 30, 1997, vascular
intervention net sales decreased $14.1 million or 6.5% from 1996.
The Company experienced unit sales growth in certain angioplasty
systems including: (i) the ACS RX MULTI-LINK Coronary Stent
System (rapid exchange stent delivery), launched in Europe and
other international markets in April 1996; (ii) rapid exchange
coronary dilatation catheters, primarily the ACS RX COMET,
released in international markets in June 1996 and in the United
States market in November 1996 and its high-pressure
counterparts, the ACS RX COMET VP, and the ACS RX ROCKET recently
released in international markets; and (iii) the ACS Tx2000
coronary dilatation catheter, a high-pressure over-the-wire
catheter (OTW). The high pressure ACS RX ROCKET has a nylon
balloon and hydrophilic coating resulting in improved tracking
and recrossing of lesions in the coronary anatomy. This unit sales
growth in certain angioplasty systems was offset by sales
declines in perfusion, OTW, and atherectomy catheters, guide
wires and lower net average selling prices of most dilatation
catheters in the United States and Europe. Lower net average
selling prices of coronary dilatation catheters include the
impact of product mix changes due to the sales growth in rapid
exchange catheters which have a lower average selling price than
perfusion catheters. The Company believes that, in addition to
this shift in product mix, net average selling prices in the
market may continue to decline.
Net sales of MIS products for the three months ended June 30,
1997 were $15.5 million, an increase of $3.3 million or 27.0%
over the same period in the previous year. MIS net sales for the
six months ended June 30, 1997 were $31.2 million, an increase of
32.2% over the comparable period in 1996. The Company
experienced MIS sales growth in both United States and
international markets as the Company continued to expand the
marketing of its innovative laparoscopic technologies. Sales
growth was primarily driven by the ORIGIN TACKER endoscopic
fixation device; custom procedural kits which incorporate this
device along with other MIS products; and, to some degree, the
VASOVIEW Balloon Dissection system market released in September
1996.
Sales growth occurred in both the United States and international
markets. Net sales in the United States increased 4.0% to $170.9
million and international net sales increased 8.8% to $110.1
million for the three months ended June 30, 1997 in comparison to
the same period in 1996. For the six months ended June 30, 1997,
United States net sales increased 2.7% to $333.8 million and
international net sales increased 10.4% to $212.7 million, as
compared to the six months ended June 30, 1996. United States
net sales growth was primarily due to CRM sales of the VENTAK
MINI II, VENTAK MINI, VENTAK MINI HC, VIGOR DR, VIGOR SR, ORIGIN
TACKER and related custom procedural kits. International net
sales growth was primarily driven by European sales of the ACS RX
MULTI-LINK Coronary Stent System, VENTAK AV, VENTAK MINI II, and
VENTAK MINI HC. Sales of the ACS RX COMET in Europe and Japan,
and ACS RX ROCKET in Europe also contributed to the international
sales growth. The unfavorable foreign currency exchange rate impact,
due to the strengthening United States dollar, reduced net sales by
$8.0 million and $16.5 million, respectively, for the three and six
months ended June 30, 1997, compared to the same periods in 1996.
This negative impact on gross profit was partially offset by foreign
exchange gains, which were recorded in cost of sales, relating to the
Company's hedging activities established for this purpose.
Cost of sales was $72.2 million for the three months ended June
30, 1997, and represented 25.7% of net sales. Cost of sales was
$100.0 million during the comparable period in 1996 due to the
recording of special noncash obsolescence charges of $28.8 million
on certain CRM products and programmers. Cost of sales, without
considering the effect of these special obsolescence charges,
would have been $71.2 million or 26.8% of net sales for the three
months ended June 30, 1996. This reduction in 1997 cost of sales
as a percentage of net sales was due to: (i) gains of $3.9 million
realized on the foreign exchange hedges referred to above, (ii)
increased manufacturing volume, and (iii) enhanced manufacturing
efficiencies. Cost of sales for the six months ended June 30,
1997 was $138.2 million or 25.3% of net sales. For the six months
ended June 30, 1996, cost of sales, without the effect of the
obsolescence charges, would have been $148.2 million or 28.6% of
net sales. The reasons for the reduction in cost of sales as a
percentage of net sales during the six months ended June 30, 1997
are similar to those listed above.
The Company continued its commitment to achieving long-term
growth by investing significant resources in research and
development. Research and development expenses of $42.4 million
for the three months ended June 30, 1997 increased $5.4 million
or 14.6% compared to the same period in 1996. These expenses
represented 15.1% and 13.9% of net sales in 1997 and 1996,
respectively. For the six months ended June 30, 1997, research
and development expenses increased $11.7 million or 16.0% and
increased as a percentage of net sales to 15.5% from 14.1% for
the same period last year. Increased research and development
spending resulted primarily from new product development costs
related to the development of future generations of AICD and
pacemaker products, the clinical evaluation of implantable device
systems for the treatment of congestive heart failure, and the
development of stent technology for other parts of the vascular
anatomy such as carotid arteries.
During the period, the Company acquired the assets of NeoCardia,
LLC. (NeoCardia), a privately-held development-stage company for
$57.4 million. Under the acquisition agreement, the Company could
pay as much as $77.0 million in cash, plus subsequent additional
bonus and royalty payments contingent upon achieving product
development and sales goals. The Company financed this
acquisition with commercial paper and bank borrowings. The
results of NeoCardia's operations have been included in the
Company's consolidated statement of income from the date of
acquisition.
The acquisition was accounted for under the purchase method of
accounting. As a result, the Company recorded a pre-tax charge
of $57.4 million relating to the appraised value of the in-
process research and development. Substantially all of the
possible additional acquisition cost, when determined, will also
be treated as purchased research and development expense.
Sales, marketing and administrative expenses grew $6.8 million or
8.3% for the three months ended June 30, 1997 compared to the same
period in the prior year. For the six months ended June 30, 1997,
sales, marketing and administrative expenses increased 8.6% in
comparison to the same period the prior year. Variable CRM selling
expenses associated with the growth in sales of the VENTAK AV and
VENTAK MINI family of AICDs were among the primary reasons for
this increased spending during the period. Increased legal
expenses during the period also contributed to this increase in
sales, marketing and administrative spending.
Income from operations for the three months ended June 30, 1997
and 1996 were $19.8 million and $46.1 million, respectively.
Excluding the impact of the aforementioned purchased research and
development charge in 1997 and special obsolescence charges in
1996, income from operations would have been $77.2 million and
$74.9 million for the three months ended June 30, 1997 and 1996,
respectively. This 3% growth in income from operations resulted
from increased net sales combined with lower manufacturing costs
partially offset by increased research and development, and
sales, marketing and administrative spending.
For the three months ended June 30, 1997, the Company had net
other expenses of $5.6 million compared to $79.5 million for the
same period in the prior year. The Company had net other
expenses of $10.6 million and $94.2 million for the six months
ended June 30, 1997 and 1996, respectively. Included in net
other expenses in 1996 are noncash impairment charges of $66.9
million taken by the Company against its atherectomy-related
goodwill and other intangible assets. Without the effect of
these special charges, net other expenses would have been $12.6
million for the three months ended June 30, 1996. The decrease in
net other expenses was primarily due to: (i) lower interest expenses
due to the decline in average outstanding borrowings and lower
interest rates during the period, (ii) increased net royalties
received on certain vascular intervention technology patents, and
(iii) reduced amortization expense resulting from lower intangible
assets following the aforementioned impairment charges taken in 1996.
The Company increased its borrowings in May 1997 to finance the
acquisition of NeoCardia.
The Company's effective income tax rate, without considering the
effect of the special obsolescence and impairment charges in
1996, was 36.6% and 36.5% for the three and six months ended June
30, 1997, respectively, compared to 39.2% and 39.3% for each of
the same periods in 1996. The decline in the effective income
tax rate was primarily due to: (i) reduced state income taxes,
(ii) lower income taxes in certain international locations, (iii)
increased income tax credits, and (iv) the reduced impact of
nondeductible expenses.
Net income for the three months ended June 30, 1997 was $9.0
million, and earnings per share were $0.12. The Company
experienced a net loss for the three months ended June 30, 1996
of $46.2 million, and a corresponding loss per share of $0.64.
For the six months ended June 30, 1997 and 1996, the Company has
net income of $52.2 million and a net loss of $17.7 million,
respectively. Without the purchased research and development
charge, net income would have been a record $45.4 million, and
earnings per share would have been $0.63 for the three months
ended June 30, 1997. Without the special obsolescence and
impairment charges, net income would have been $37.9 million, and
earnings per share would have been $0.53 for the three months
ended June 30, 1996. On an adjusted basis, net income growth in
the second quarter of 1997 was 20% over the second quarter of
1996. Growth in income from operations along with a decline in
net other expenses and a lower effective income tax rate
accounted for this increase in adjusted net income.
For the six months ended June 30, 1997, net income would have been
$88.6 million and $1.23 per share without these special charges.
Net income for the six months ended June 30, 1996, excluding the
impact of the special obsolescence and impairment charges, would
have been $66.4 million and $0.92 per share.
Liquidity and Financial Condition
The Company generated cash flows which were more than sufficient
to fund operations. For the six months ended June 30, 1997, net
cash provided by operating activities was $44.2 million compared
to $28.0 million for the same period in 1996. This increase in
cash provided by operating activities was primarily due to growth
in net income during the period and the final income tax payments
in 1996 under a tax-sharing agreement with Lilly. Working
capital was $161.3 million at June 30, 1997, a $50.4 million
increase from the prior year end level. This increase was
primarily due to payments of performance-based compensation
arrangements and the resultant reduction in employee compensation
accruals, increased accounts receivable resulting from sales
growth during the period and increased inventories. The current
ratio at June 30, 1997 was 1.5:1 compared to 1.4:1 at December
31, 1996. The Company expects to generate sufficient cash to
fund future working capital needs.
Net cash used for investing activities totaled $40.3 million for
the six months ended June 30, 1997, compared to $20.5 million for
the same period in 1996. The most significant use of cash for
investing activities related to net additions of property and
equipment of $36.2 million.
Net cash provided by financing activities totaled $6.8 million
for the six months ended June 30, 1997. During the comparable
period in the prior year, the Company used $9.9 million for
financing activities. This change in cash provided by financing
activities was primarily due to the increase in borrowings
associated with the acquisition of NeoCardia, partially offset by
capital transactions such as the purchase of treasury stock.
At June 30, 1997, the Company had outstanding borrowings of
$381.9 through the issuance of commercial paper and bank
borrowings at a weighted average interest rate of 5.82%. The
commercial paper borrowings are supported by a credit facility
aggregating $600.0 million that permits borrowings through
January 8, 2001. This credit facility, under which there are
currently no outstanding borrowings, carries a variable market
rate of interest. The Company expects that a minimum of
approximately $256.2 million of borrowings will remain
outstanding through the next twelve months and, accordingly, has
classified this portion of borrowings as long-term at June 30,
1997.
The Company expects its cash from operations to be adequate to meet
its obligations to make interest payments on its debt and other
anticipated cash needs including planned capital expenditures which
are expected to be approximately $70.0 million in 1997.
The Company has recognized net deferred tax assets aggregating
$72.5 million at June 30, 1997 and $61.9 million at December 31,
1996. The assets relate principally to the establishment of
inventory and product related reserves, the acquisition of
NeoCardia, the acquisition of certain intangible assets, and
charges associated with the 1993 restructuring. In view of the
consistent profitability of its past operations, the Company
believes that all these assets will be substantially recovered
and that no significant additional valuation allowances are
necessary.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
In March 1995, Sam F. Liprie filed suit against Omnitron
International, Inc. and Neocardia LLC. in the 215th District
Court of Harris County, Texas. In the Complaint, Mr. Liprie, a
former employee of Omnitron, alleges that he has exclusive rights
to certain technology developed at Omnitron relating to the
treatment of restenosis with radiation. In March 1997, U.S.
Surgical Corporation was joined in the lawsuit and has also
claimed it has exclusive rights to this technology through Mr.
Liprie. The Company acquired certain assets from Omnitron/Neocardia
on May 7, 1997. The exclusive right to use certain of these assets
is the subject of this litigation. On July 3, 1997, Guidant and its
subsidiary, ACS Delaware Corporation, were joined in the litigation.
The lawsuit seeks monetary damages and injunctive relief.
On June 6, 1997, C.R. Bard, Inc. filed suit against the
Company and its subsidiary, Advanced Cardiovascular Systems, Inc.
("ACS"), in the U. S. District Court, District of Delaware. The
Complaint alleges that certain unspecified ACS dilatation
catheters infringe two patents owned by Bard. Bard is seeking
monetary and injunctive relief.
On June 10, 1997, SciMed Life Systems, Inc. filed suit
against ACS in the San Jose Division of the Northern District
Court of California. The Complaint alleges that the ACS RX COMET
coronary dilatation catheter infringes a patent owned by SciMed.
The lawsuit seeks monetary and injunctive relief. Previously, on
May 1, 1997, SciMed formally requested an arbitration as to
whether the ACS RX COMET coronary dilatation catheter is covered
under a covenant-not-to-sue in a previous settlement agreement
entered into between ACS and SciMed. ACS has requested the Court
to stay or dismiss the litigation pending outcome of the arbitration.
See also Note 7 - Contingencies in Notes to Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Company's Annual Meeting of Shareholders was held
on May 19, 1997.
(b) At the meeting, the following directors were re-elected
to three year terms:
J.M. Cornelius
M. Novitch
E.L. Step
In addition, the following directors continue in office for terms
ending in the year indicated:
M.A. Cox - 1998
R.W. Dollens - 1998
E.C. Falla - 1998
J.B. King - 1999
S.B. King - 1999
J.K. Moore - 1999
R.E. Wager - 1999
(c) The following matters were voted on at the meeting:
Election of Directors:
Name For Withheld
---- --- --------
J.M. Cornelius 66,914,867 1,335,004
M. Novitch 66,911,166 1,338,705
E.L. Step 66,901,397 1,348,474
Ratification of appointment of Ernst & Young LLP as
Independent Auditors:
For Against Abstain No Vote
--- ------- ------- -------
68,093,582 61,164 95,125 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following documents are filed as exhibits
to this Report:
11.1 Statement of Computation of Per-Share Earnings
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results.
(b) Reports on Form 8-K. During the quarter for which this
Report on Form 10-Q is filed, the Registrant filed no Report on
Form 8-K.
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.
GUIDANT CORPORATION
-------------------
(Registrant)
Date: July 31, 1997 /s/Keith E. Brauer
------------------------------
Keith E. Brauer
Vice President, Finance and
Chief Financial Officer
Date: July 31, 1997 /s/Roger Marchetti
------------------------------
Roger Marchetti
Corporate Controller and
Chief Accounting Officer
Exhibit List
11.1 Statement of Computation of Per-Share Earnings
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results
GUIDANT CORPORATION and Subsidiaries
EXHIBIT 11.1
Statement Regarding Computation of Per-Share Earnings
on Primary and Fully Diluted Bases
(In millions, except per-share data)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Primary:
Net income $9.0 ($46.2) $52.2 ($17.7)
Weighted average common shares outstanding 72.30 72.05 72.23 72.02
Incremental shares:
Stock plans 1.80 - 1.67 -
---- ---- ---- ----
Adjusted average common shares outstanding 74.10 72.05 73.90 72.02
Primary earnings per share $0.12 ($0.64) $0.71 ($0.25)
===== ======= ===== ======
Fully Diluted:
Net income $9.0 ($46.2) 52.2 ($17.7)
Weighted average common shares outstanding 72.30 72.05 72.23 72.02
Incremental shares:
Stock plans 2.03 - 2.03 -
---- ---- ---- ----
Adjusted average common shares outstanding 74.33 72.05 74.26 72.02
Fully diluted earnings per share $0.12 ($0.64) $0.70 ($0.25)
===== ======= ===== ======
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%.
GUIDANT CORPORATION
Exhibit 99.1
Factors Possibly Affecting Future Operating Results
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. These statements may also be made from time
to time by Company spokespersons. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes that a variety
of factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of the
Company's business include the following:
1. Economic factors over which the Company has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.
2. Delays and uncertainties in the regulatory approval process
in the United States and other countries, resulting in lost
market opportunities.
3. Unexpected safety or efficacy concerns arising with respect
to marketed products, whether or not scientifically justified,
leading to product recalls, withdrawals or declining sales.
4. Unexpected interruptions of manufacturing operations as a
result of regulatory enforcement actions by the FDA or other
regulatory authorities.
5. The difficulties and uncertainties inherent in new product
development, including new products that appear promising during
development but fail to reach the market as a result of safety or
efficacy concerns, inability to obtain necessary regulatory
approvals, excessive costs to manufacture, infringement of
patents or other intellectual property rights of others, or
technological advances by a competitor of the Company.
6. Litigation and other legal factors which could preclude
commercialization of products or negatively affect the level of
sales or profitability of existing products, including
unanticipated litigation of product liability claims, antitrust
litigation, environmental matters and patent disputes.
7. Future difficulties obtaining necessary components or
materials used in manufacturing the Company's products.
8. Future difficulties obtaining or the inability to obtain
appropriate levels of product liability insurance.
9. Competitive factors including the ability of the Company to
obtain patent rights or other intellectual property rights
sufficient to keep competitors from marketing competing products,
the introduction of new products or therapies by competitors or
scientific or medical developments that render the Company's
products obsolete, uneconomical or otherwise non-competitive or
the acquisition of patents by competitors that prevent the
Company from selling a product or including key features in the
Company's products.
10. Governmental factors including laws and regulations and
judicial decisions that affect the regulation of medical devices,
product liability, health care reform or tax laws.
11. Health care industry factors, including increased customer
demands for price concessions, reductions in third-party
(Medicare, Medicaid, private health care insurance and managed
care plans) reimbursement levels for procedures using the
Company's products and limits imposed by customers on the number
of manufacturers or vendors which the customer will purchase
products from.
12. Accounting requirements to write off obsolete inventory or
goodwill which reduces reported earnings or changes in accounting
standards applicable to the Company.
13. Internal factors such as retention of key employees, change
in business strategies and the impact of restructuring and
business combinations.
14. The ability of the Company to implement its strategy that
includes the potential acquisition of one or more businesses.
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<PERIOD-START> APR-01-1997
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