<PAGE>
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 March 31, 1998
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 April 24, 1998:
Class Number of Shares Outstanding
----- ----------------------------
Common 150,811,810
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Net sales................................................. $ 470.3 $ 266.4
Cost of products sold..................................... 107.4 66.8
------- -------
Gross profit.......................................... 362.9 199.6
Research and development.................................. 62.0 46.0
Sales, marketing, and administrative...................... 135.1 85.4
------- -------
197.1 131.4
------- -------
Income from operations................................ 165.8 68.2
Other income (expenses):
Interest, net......................................... (3.4) (4.9)
Royalties, net........................................ (9.2) 4.5
Amortization.......................................... (3.7) (4.1)
Litigation settlement charge.......................... (60.0) --
Other,net............................................. (4.0) (0.3)
------- -------
(80.3) (4.8)
------- -------
Income before income taxes................................ 85.5 63.4
Income taxes.............................................. 30.2 24.8
------- -------
Net income................................................ $ 55.3 $ 38.6
======= =======
Earnings per share........................................ $ 0.38 $ 0.26
======= =======
Earnings per share-assuming dilution...................... $ 0.37 $ 0.26
======= =======
Dividends paid per share.................................. $0.0125 $0.0125
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents................... $ 23.1 $ 17.7
Short-term investments...................... 6.7 13.3
Accounts receivable, net of allowances
of $11.8(1998) and $9.2 (1997)........... 369.9 371.7
Other receivables........................... 8.5 10.9
Inventories................................. 124.5 120.8
Deferred income taxes....................... 68.2 65.7
Prepaid expenses............................ 17.8 25.0
-------- --------
Total Current Assets..................... 618.7 625.1
Other Assets
Goodwill, net of allowances
of $98.2 (1998) and $95.1 (1997)......... 179.2 182.0
Other intangible assets, net of allowances
of $12.0 (1998) and $11.4 (1997)......... 46.0 6.5
Investments................................. 48.4 46.2
Deferred income taxes....................... 38.0 16.7
Sundry...................................... 21.2 22.4
Property and equipment...................... 582.4 568.7
Less accumulated depreciation............... 252.2 242.6
-------- --------
Property and equipment, net................. 330.2 326.1
-------- --------
$1,281.7 $1,225.0
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -------------
(unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable............................. $ 56.2 $ 51.7
Employee compensation........................ 63.7 109.9
Payable to C.R. Bard......................... 100.0 --
Other liabilities............................ 126.2 126.9
Income taxes payable......................... 62.1 40.6
Current portion of long-term debt............ 42.9 212.2
-------- --------
Total Current Liabilities................. 451.1 541.3
Noncurrent Liabilities
Long-term debt............................... 180.0 80.0
Other........................................ 24.9 21.9
-------- --------
204.9 101.9
Commitments and contingencies................ -- --
Shareholders' Equity
Common stock-no par value:
Authorized shares: 250,000,000
Issued shares: 150,924,000................ 192.5 192.5
Additional paid-in capital................... 202.8 211.1
Retained earnings............................ 315.9 262.5
Deferred cost, ESOP.......................... (44.9) (45.8)
Treasury stock, at cost:
Shares: 146,913 (1998)..................
178,021 (1997).................. (10.7) (10.8)
Unrealized gain on investments, net.......... 5.5 4.2
Cumulative currency translation adjustments.. (35.4) (31.9)
-------- --------
625.7 581.8
-------- --------
$1,281.7 $1,225.0
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Cash Flow
(In millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
Cash Provided by Operating Activities:
Net income....................................... $ 55.3 $ 38.6
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation..................................... 12.0 11.8
Amortization of intangible assets................ 3.7 4.1
Change in deferred income taxes.................. (24.6) (0.9)
Other noncash expenses, net...................... 14.4 5.7
------ -------
60.8 59.3
Changes in Operating Assets and Liabilities:
Receivables, increase............................ (1.3) (19.7)
Inventories, increase............................ (7.4) (6.5)
Prepaid expenses, decrease (increase)............ 7.2 (1.4)
Accounts payable and accrued expenses, decrease.. (41.5) (23.4)
Income taxes payable, increase................... 24.7 34.9
Other liabilities, increase (decrease)........... 2.7 (1.4)
Payable to C.R. Bard............................. 100.0 --
------ ------
Net Cash Provided by Operating Activities.......... 145.2 41.8
Investing Activities:
Additions of property and equipment, net......... (19.1) (16.7)
Purchases of available-for-sale securities....... (0.7) (4.5)
Sale/maturity of available-for-sale securities... 7.2 7.0
Additions to other assets, net................... (40.1) (2.2)
------ -------
Net Cash Used for Investing Activities............. (52.7) (16.4)
Financing Activities:
Decrease in borrowings........................... (69.1) (12.8)
Dividends........................................ (1.8) (1.8)
Purchases of common stock and other capital
transactions................................... (16.1) (7.4)
------ -------
Net Cash Used for Financing Activities............. (87.0) (22.0)
Effect of Exchange Rate Changes on Cash............ (0.1) (0.3)
------ -------
Net Increase in Cash and Cash Equivalents.......... 5.4 3.1
Cash and Cash Equivalents at Beginning of Period... 17.7 4.0
------ -------
Cash and Cash Equivalents at End of Period......... $ 23.1 $ 7.1
====== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In millions)
(unaudited)
Note 1 - General Information
Guidant Corporation (Guidant or the Company) designs, develops, manufactures,
and markets a broad range of medical devices for use in: (i)cardiac rhythm
management; (ii) vascular intervention; and (iii) cardiac and vascular surgery.
Guidant is a global company with principal operations in the United States,
Western Europe, and Japan. The Company generally distributes 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
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 accruals) considered necessary for a
fair presentation of the Company's results for the periods presented. 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 December 31, 1997.
Note 3 - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Finished products $ 58.9 $ 52.6
Work in process 33.5 35.0
Raw materials and supplies 32.1 33.2
------ ------
$124.5 $120.8
====== ======
</TABLE>
6
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 Intellectual Property Agreement
On April 4, 1998, the Company entered into an agreement with C.R. Bard, Inc.
(Bard), that grants Guidant paid-up licenses to certain patents and settles two
patent infringement lawsuits. The agreement also grants Bard licenses to certain
non-stent Guidant patents. As a result of this agreement, Guidant recorded a
pre-tax charge of $60 million against 1998 first quarter earnings. An additional
$40 million was capitalized in other intangible assets and will be amortized
over the remaining useful life of the patent, which is in excess of ten years.
Note 5 - Earnings Per Share
The following table sets forth the computation of earnings per share:
Three Months Ended
-------------------
March 31,
---------
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Net income $ 55.3 $ 38.6
======= =======
Weighted-average common shares outstanding 147.26 146.92
Effect of employee stock options 3.68 2.08
------- -------
Weighted-average common shares outstanding
and assumed conversions 150.94 149.00
======= =======
Earnings per share $ 0.38 $ 0.26
======= =======
Earnings per share--assuming dilution $ 0.37 $ 0.26
======= =======
</TABLE>
Note 6 - Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which establishes new rules
for the reporting and display of comprehensive income and its components.
Statement 130 requires companies to report, in addition to net income, other
components of comprehensive income including unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $52.7 and $28.0, respectively based on the adjustments referred to in the
preceding sentence. Adoption of this disclosure standard had no effect on the
Company's results of operations or financial position as reported elsewhere in
the consolidated financial statements.
7
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
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 the Company alleging patent
infringement related to certain of the Company's defibrillator and pacemaker
models. Intermedics is seeking injunctive and monetary relief of an unspecified
amount.
On May 3, 1996, Pacesetter, Inc., filed suit against the Company. The complaint,
as subsequently amended, alleges infringement of certain Pacesetter patents and
seeks injunctive relief, unspecified damages, and an award of attorney fees.
Also in May 1996, Angeion Corporation filed suit against the Company. The
complaint, as subsequently amended, alleges infringement of certain Angeion
defibrillator patents and seeks injunctive relief, unspecified monetary damages,
and an award of attorney fees.
On October 3, 1997, Cordis Corporation (Cordis), a subsidiary of Johnson and
Johnson, filed suit against the Company alleging that the sale of the ACS RX
MULTI-LINK Coronary Stent infringes certain patents licensed to Cordis. In
addition, on October 8, 1997, Cordis filed a motion for a preliminary injunction
in this lawsuit seeking to prevent the Company from selling the ACS MULTI-LINK
Coronary Stent other than in certain limited circumstances and subject to
certain conditions. On October 21, 1997, Cordis amended its complaint to include
Arterial Vascular Engineering, Inc., Boston Scientific Corporation, and SciMed
Life Systems, Inc., as additional defendants. A hearing on the motion for a
preliminary injunction was held during the week of February 9, 1998. In the
lawsuit, Cordis is seeking injunctive relief and unspecified monetary damages.
On November 5, 1997, Medtronic, Inc., filed suit against the Company alleging
that the ACS RX MULTI-LINK Coronary Stent infringes a patent owned by Medtronic.
In the lawsuit, Medtronic is seeking injunctive relief, monetary damages, and
attorney fees.
On December 2, 1997, Cordis filed suit against the Company alleging that the ACS
RX ROCKET Coronary Dilatation Catheter infringes a patent owned by Cordis. In
the lawsuit, Cordis is seeking injunction relief, monetary damages, and attorney
fees.
8
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 - Contingencies (continued)
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 the legal actions brought against it, or to provide an estimate of
the losses, if any, that may arise, the Company believes the costs associated
with all of these actions will not have a material adverse effect on its
consolidated financial position or liquidity, but could possibly be material to
the consolidated results of operations.
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.
Note 8 - Subsequent Event
On April 27, 1998, the conditions which require the payment of the additional
consideration for the asset acquisition of NeoCardia LLC. were met. As a result,
the Company will record an expense of $28.7 million in the second quarter of
1998 which will be treated as purchased research and development expense. See
Part II, Item 1 Legal Proceedings. In addition, see Note 4 to the Company's
consolidated financial statements for the year ended December 31, 1997.
9
<PAGE>
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
global company that designs, develops, manufactures, and markets a broad range
of innovative, high-quality therapeutic devices for use in: (i) cardiac rhythm
management (CRM), (ii) vascular intervention (VI), and (iii) cardiac and
vascular surgery (CVS). 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 arrhythmias. 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 minimally invasive cardiac, vascular, and general surgeries.
10
<PAGE>
The following tables are summaries of the Company's net sales and major costs
and expenses:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(Dollars in millions)
(unaudited)
<S> <C> <C>
Cardiac rhythm management $185.4 $149.0
Vascular intervention 267.0 100.8
Cardiac & vascular surgery 17.9 16.6
------ ------
Total net sales $470.3 $266.4
Cost of products sold 107.4 66.8
------ ------
Gross profit 362.9 199.6
Research and development 62.0 46.0
Sales, marketing, and administrative 135.1 85.4
------ ------
197.1 131.4
Income from operations $165.8 $ 68.2
====== ======
</TABLE>
<TABLE>
<CAPTION>
As a Percent of Net Sales
-------------------------
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Cardiac rhythm management 39.4% 55.9%
Vascular intervention 56.8 37.8
Cardiac & vascular surgery 3.8 6.3
----- -----
Total net sales 100.0% 100.0%
Cost of products sold 22.8 25.1
----- -----
Gross profit 77.2 74.9
Research and development 13.2 17.3
Sales, marketing, and administrative 28.7 32.0
----- -----
41.9 49.3
Income from operations 35.3% 25.6%
===== =====
</TABLE>
11
<PAGE>
Operating Results -- Three Months Ended March 31, 1998
The Company had worldwide net sales of $470.3 million for the three months ended
March 31, 1998, reflecting an increase of $203.9 million or 77% over the same
period in 1997. Growth in unit volume of 86% was partially offset by net sales
price declines, which includes changes in worldwide product mix, of
approximately 7% and unfavorable fluctuations in foreign currency exchange rates
of approximately 2%.
Net sales of VI products for the three months ended March 31, 1998, were $267.0
million, an increase of $166.2 million or 165% from the first quarter of 1997.
This growth in VI sales was primarily due to the continued enthusiastic market-
acceptance of the ACS RX MULTI-LINK Coronary Stent System, which was released in
the United States in October 1997. Net sales of the ACS RX MULTI-LINK Coronary
Stent System during the period were in excess of $180 million. As competitors
continue to enter the coronary stent market, there can be no assurances that
sales of the ACS RX MULTI-LINK Coronary Stent System will continue at the first
quarter's rate. International sales of coronary stents contributed to the
quarter's sales growth, due primarily to the February 1998 receipt of approval
from Japan's Ministry of Health and Welfare for reimbursement of the ACS RX
MULTI-LINK Coronary Stent System and the recent CE Mark approval to launch the
ACS MULTI-LINK DUET RX Coronary Stent System in Europe. The ACS MULTI-LINK DUET
RX System, the Company's new generation coronary stent, was designed
specifically to deliver, deploy, and post-dilate the stent with lower delivery
profiles, enhanced radiopacity, increased radial strength and flexibility. The
Company also experienced significant sales growth in rapid exchange coronary
dilatation catheters, primarily due to the ACS RX ROCKET, released in the United
States in November 1997 and in international markets in June 1997. Sales growth
during the quarter was partially offset by unit volume declines in perfusion and
over-the-wire coronary dilatation and atherectomy catheters, and by lower net
average selling prices of most coronary dilatation catheters and guide wires in
the United States and Europe. These lower net average selling prices include the
impact of product mix changes due to sales growth of rapid exchange coronary
dilatation catheters, which have a lower average selling price than perfusion
catheters. The Company believes that net average selling prices for coronary
dilatation catheters in the market may continue to decline.
12
<PAGE>
Net sales of CRM products for the three months ended March 31, 1998, were $185.4
million, an increase of $36.4 million or 24.4% over the same period in 1997. The
Company experienced record sales during the quarter in AICD systems. Sales
growth was led by the VENTAK AV, market released in the United States in July
1997; the VENTAK AV II DR, market released in Europe in November 1997 and in the
United States in March 1998; the VENTAK AV II DDD, market released in the United
States in February 1998 (herein after referred to collectively as VENTAK AV II);
and strong worldwide sales of the VENTAK MINI III, released to the U.S. market
in late January. The VENTAK AV II DR, the world's first implantable
defibrillator system to incorporate dual-chamber adaptive-rate pacing
capability, includes comprehensive therapy and diagnostic options to detect and
treat tachyarrhythmias, including antitachycardia pacing, cardioversion, and
defibrillation. The VENTAK MINI III, the Company's newest in a series of
downsized AICDs, is a full featured device that includes single-chamber
bradycardia pacing therapy. The device possesses a range of sensing, detection,
and diagnostic capabilities required for treating complex arrhythmias. The
Company's adaptive-rate pacemaker products also contributed to sales growth
during the period, particularly in the United States where sales of these
products increased 14% from the same period in 1997. In mid March, the Company
announced the European market release of three new pacemaker systems--the CPI
DISCOVERY, CPI MERIDIAN and CPI PULSAR devices. The new pacemaker families
include single and dual-chamber models featuring adaptive-rate pacing designed
to match pacing rates to the patient's activity level. These pacemaker systems
include advanced diagnostics designed to provide information that allows the
physician to efficiently manage patient therapy decisions and advanced software
interfaces for more efficient programming and routine follow up.
Net sales of CVS products for the three months ended March 31, 1998, were $17.9
million, an increase of $1.3 million or 7.8% over the first quarter of 1997.
Sales growth occurred primarily in the United States and was driven by the
VASOVIEW Balloon Dissection system, the ORIGIN TACKER endoscopic fixation device
and custom configurations which incorporate this device along with other CVS
products.
13
<PAGE>
The Company experienced sales growth both in the United States and international
markets. Net sales in the United States increased 119% to $358.0 million, while
international net sales increased 9% to $112.3 million for the first quarter of
1998 compared to the first quarter of 1997. U.S. net sales growth was primarily
due to sales of the ACS RX MULTI-LINK Coronary Stent System, VENTAK AV, VENTAK
AV II, VENTAK MINI II, VENTAK MINI III, and ACS RX ROCKET. International net
sales growth was primarily driven by the ACS RX MULTI-LINK and ACS MULTI-LINK
DUET RX Coronary Stent Systems, VENTAK MINI II, VENTAK MINI III, VENTAK AV II,
and VENTAK AV. Sales of the ACS RX ROCKET in Europe also contributed to the
international sales growth. An unfavorable foreign currency exchange rate
impact, due to the strengthening United States dollar, reduced net sales during
the quarter by $7.0 million compared to the same period in 1997. This negative
impact on gross profit was partially offset by gains from foreign exchange
derivative contracts, which were recorded in cost of products sold.
Cost of products sold increased 61% to $107.4 million for the three months ended
March 31, 1998, and represented 22.8% of net sales versus 25.1% for the same
period last year. This reduction in costs of products sold as a percentage of
net sales was due primarily to increased manufacturing volume and favorable mix
impact in product sales during the quarter along with continued progress in
manufacturing efficiencies.
Research and development expenses of $62.0 million increased $16.0 million or
35% during the first quarter of 1998 compared to the same period in 1997.
Increased research and development spending during this period resulted
primarily from: (i) development of stent technology for other parts of the
vascular anatomy, such as carotid arteries; (ii) development of radiation
therapy devices for coronary restenosis; (iii) increased performance-based
compensation; (iv) new product development costs related to future generations
of AICDs, pacemakers, and programmers; and (v) PMA preparation activities and
increased personal costs related to the development of the Company's
endovascular grafting systems. Management believes research and development as a
percentage of net sales for the year ended December 31, 1998, will be in the
14%-16% range.
14
<PAGE>
Sales, marketing and administrative expenses grew $49.7 million or 58% for the
first quarter of 1998 compared to the same period in 1997. This increase was due
to: i) variable selling expenses, such as commissions and bonuses, associated
with the growth in sales; (ii) increased legal costs associated with various
litigation; (iii) promotional expenses related to the recent release of new
products; (iv) costs related to the implementation of direct operations in
certain emerging markets; (v) increased allowances for uncollectible accounts;
(vi) increased investment in the U.S. field-sales force; and (vii) additional
spending at CVS including personnel costs associated with the ramp up of
business activities at EndoVascular Technologies, Inc.
During the quarter, the Company attained record levels of operating income.
Income from operations of $165.8 million represented 35.3% of net sales during
the first quarter of 1998. Income from operations was 25.6% of net sales during
the same period in 1997. Sales growth combined with increased gross profit and
controlled growth in operating expenses resulted in an increase in income from
operations of 143% during the three months ended March 31, 1998, compared to the
same period last year.
On April 4, 1998, the Company, entered into an agreement with C.R. Bard, Inc.
(Bard) that grants the Company paid-up licenses to certain patents and settles
two patent infringement lawsuits. As a result, the Company recognized a non-
recurring, pre-tax charge of $60 million ($38.8 million after tax) against 1998
first quarter earnings in other expenses. An additional $40 million will be
capitalized and amortized over the remaining useful life of the patent.
Net other expenses for the three months ended March 31, 1998, without the
aforementioned charge, were $20.3 million compared to $4.8 million during the
same period in 1997. This increase was due primarily to decreased royalty income
on certain vascular intervention technology patents and increased royalty
expenses on coronary stents, rapid exchange coronary dilatation catheters, and
AICDs. Charges associated with certain obsolete engineering, manufacturing, and
support equipment also contributed to the increase in other expenses.
The Company reduced its effective income tax rate in the first quarter of 1998
to 35.3% from 39.1% for the same period in 1997. This decline in the effective
income tax rate was primarily due to the realization of benefits from certain
tax losses. Management believes the Company's effective income tax rate will
remain at or near the current level throughout the year.
15
<PAGE>
Net income for the three months ended March 31, 1998, was $55.3 million.
Reported earnings per share-assuming dilution was $0.37. Excluding the
aforementioned litigation settlement charge, net income would have been $94.1
million during the first quarter of 1998, compared to $38.6 million in the first
quarter of 1997 which represents growth of 144%. Increased other expenses were
offset by the reduced effective income tax rate. Earnings per share-assuming
dilution, exclusive of the above charge, was $0.62 for the three months ended
March 31, 1998, and $0.26 for the same period in 1997.
Liquidity and Financial Condition
The Company generated cash flows which were more than sufficient to fund
operations in the first quarter of 1998. Cash and cash equivalents increased to
$23.1 million at March 31, 1998, from $17.7 million at December 31, 1997. For
the three months ended March 31, 1998, cash provided by operating activities was
$145.2 million compared to $41.8 million for the same period in 1997. This
increase in cash provided by operating activities was primarily due to the
Company's improved net income and amounts payable to Bard at March 31, 1998.
Working capital of $167.6 million at March 31, 1998, doubled from the prior year
end level. This increase was primarily due to payments on borrowings and
performance-based compensation arrangements which reduced employee compensation
accruals. The current ratio at March 31, 1998, was 1.4:1 compared to 1.2:1 at
December 31, 1997. The Company believes its cash from operations is sufficient
to fund essentially all future working capital needs and discretionary spending
requirements.
Net cash used for investing activities totaled $52.7 million for the three
months ended March 31, 1998, compared to $16.4 million for the same period in
1997. The most significant use of cash for investing activities related to $40
million of intangibles acquired as part of the settlement with Bard. Net
additions of property and equipment of $19.1 million for the first quarter of
1998 compared to $16.7 million in the first quarter of 1997 were also a
significant use of cash from investing activities for both periods.
Net cash used for financing activities totaled $87.0 million and $22.0 million
for the three months ended March 31, 1998 and 1997, respectively. Reduction of
its borrowings by $69.1 million in the first quarter of 1998 and $12.8 million
in the first quarter of 1997, was the Company's most significant use of cash for
financing activities. In April 1998, the Company paid $100 million pursuant to
its agreement with Bard through the issuance of commercial paper.
16
<PAGE>
At March 31, 1998, the Company had outstanding borrowings of $222.9 through the
issuance of commercial paper and bank borrowings at a weighted average interest
rate of 5.61%. 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 $180.0 million of borrowings will remain outstanding
through the next twelve months and, accordingly, has classified this portion of
borrowings as long-term at March 31, 1998. This represents an increase in long-
term debt of $100 million from December 31, 1997, which is related to the
agreement reached with Bard in the first quarter of 1998.
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 $85.0 million in 1998.
The Company has recognized net deferred tax assets aggregating $106.2 million at
March 31, 1998, and $82.4 million at December 31, 1997. The assets relate
principally to the establishment of inventory and product related loss reserves,
purchased research and development, and, in 1998, the litigation settlement with
Bard. 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.
17
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On December 15, 1995, Boston Scientific Corporation and its subsidiary, SciMed
Life Systems, Inc. (collectively "BSC") filed suit against the Company's
subsidiary, Advanced Cardiovascular Systems, Inc., in the United States District
Court of Massachusetts alleging violation of federal and state antitrust laws,
as well as state unfair competition and abuse of process law. On October 27,
1997, the Court granted ACS' motion to dismiss the lawsuit. On April 3, 1998,
BSC withdrew with prejudice their appeal of the Court's decision.
On May 28, 1996, Origin filed suit against General Surgical Innovation, Inc.
(GSI) in the Northern District of California alleging that GSI's Spacemaker
balloon products infringe a patent of Origin. On April 16, 1998, the Court
granted GSI's motion for summary judgement and held that the Origin patent is
unenforceable.
On April 10, 1998, ACS filed suit against Arterial Vascular Engineering, Inc. in
the United States District Court for the Northern District of California
alleging infringement of an ACS patent. In the lawsuit, ACS is seeking
injunctive relief and monetary damages.
On June 6, 1997, C.R. Bard, Inc. ("Bard") filed suit against the Company and 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.
In addition, on March 18, 1998, Bard filed another lawsuit against ACS, in the
U.S. District Court, District of Delaware, alleging infringement of a patent
owned by Bard. On April 4, 1998, the Company and Bard entered into an agreement
that grants the Company paid-up licenses to certain patents and settles the
lawsuit. See Notes 4 and 7 to the consolidated financial statements.
On April 27, 1998, the Company settled a lawsuit filed by Sam F. Liprie. See
Note 8 to the consolidated financial statements. In addition, see Part I, Item 3
of the Company's Form 10-K for the year ended December 31, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as exhibits to this
report:
Exhibit 27. Financial Data Schedule
(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.
18
<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.
GUIDANT CORPORATION
-------------------
(Registrant)
Date May 01, 1998 /s/Keith E. Brauer
--- ------------------------------
Keith E. Brauer
Vice President, Finance and
Chief Financial Officer
Date May 01, 1998 /s/Roger Marchetti
--- ------------------------------
Roger Marchetti
Corporate Controller and
Chief Accounting Officer
19
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