<PAGE>
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, 2000
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 May 3, 2000:
Class Number of Shares Outstanding
----- ----------------------------
Common
306,461,979
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(Dollars in millions, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Net sales................................................ $630.7 $596.4
Cost of products sold.................................... 140.8 148.7
------ ------
Gross profit........................................... 489.9 447.7
Research and development................................. 86.4 85.0
Purchased research and development....................... -- 49.0
Sales, marketing, and administrative..................... 185.6 176.6
Litigation settlement gain, net.......................... (10.8) --
Foundation contribution.................................. 10.8 --
Interest, net............................................ 13.4 12.1
Royalties, net........................................... 14.0 14.0
Amortization............................................. 11.5 8.7
Other, net............................................... 0.3 (12.9)
------ ------
Income before income taxes and cumulative
effect of change in accounting principle................ 178.7 115.2
Income taxes............................................. 59.9 63.6
------ ------
Income before cumulative effect of change
in accounting principle................................. 118.8 51.6
Cumulative effect of change in accounting
principle, net.......................................... -- (3.3)
------ ------
Net income............................................. $118.8 $ 48.3
====== ======
Earnings per share - basic............................... $ 0.39 $ 0.16
====== ======
Earnings per share - assuming dilution................... $ 0.38 $ 0.15
====== ======
</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,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents......................... $ 25.9 $ 27.8
Short-term investments............................ 4.6 --
Accounts receivable, net of allowances
of $15.8(2000) and $15.5(1999)................. 514.7 476.2
Other receivables................................. 15.4 16.5
Inventories....................................... 245.1 242.7
Deferred income taxes............................. 119.8 120.2
Prepaid expenses.................................. 29.1 32.7
-------- --------
Total Current Assets........................... 954.6 916.1
Other Assets
Goodwill, net of allowances
of $112.8(2000) and $105.6(1999)............... 468.4 467.7
Other intangible assets, net of allowances
of $35.3(2000) and $31.0(1999)................. 201.4 199.7
Deferred income taxes............................. 63.2 70.1
Investments....................................... 43.4 46.8
Sundry............................................ 35.9 35.3
Property and equipment, net of accumulated
depreciation of $347.9 (2000) and
$331.9 (1999).................................. 514.2 514.5
-------- --------
$2,281.1 $2,250.2
======== ========
</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,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable..................................... $ 62.4 $ 68.7
Employee compensation................................ 90.1 108.6
Other liabilities.................................... 139.3 179.2
Income taxes payable................................. 35.7 22.0
Current portion of long-term debt.................... 330.0 360.0
-------- --------
Total Current Liabilities......................... 657.5 738.5
Noncurrent Liabilities
Long-term debt....................................... 585.1 527.7
Other................................................ 118.8 116.7
-------- --------
703.9 644.4
Commitments and contingencies
Shareholders' Equity
Common stock-no par value:
Authorized shares: 1,000,000,000
Issued shares: 307,453,000.................... 192.9 192.9
Additional paid-in capital........................... 208.5 257.2
Retained earnings.................................... 651.1 532.2
Deferred cost, ESOP.................................. (37.7) (38.5)
Treasury stock, at cost:
Shares: 677,089 (2000)............................
616,968 (1999)............................ (45.1) (32.8)
Accumulated other comprehensive income............... (50.0) (43.7)
-------- --------
919.7 867.3
-------- --------
$2,281.1 $2,250.2
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Cash Flow
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
------ --------
<S> <C> <C>
(unaudited)
Cash Provided by (Used in) Operating Activities:
Net income.......................................... $118.8 $ 48.3
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation........................................ 20.2 19.6
Amortization of intangible assets................... 11.5 8.7
Provision for inventory and other losses............ 8.2 12.9
Purchased research and development.................. -- 49.0
Cumulative effect of change in accounting
principle, before tax............................. -- 5.3
Other noncash expenses, net......................... 14.3 3.5
------ -------
173.0 147.3
Changes in Operating Assets and Liabilities:
Receivables, increase............................... (44.4) (26.5)
Inventories, increase............................... (11.3) (20.4)
Prepaid expenses and other assets,
decrease (increase)............................... 2.0 (6.3)
Accounts payable and accrued expenses,
decrease.......................................... (23.9) (40.6)
Income taxes payable, increase...................... 14.3 49.5
Other liabilities, decrease......................... (35.3) (7.9)
Payable to Sulzer Medica............................ -- (200.0)
------ -------
Net Cash Provided by (Used in) Operating Activities... 74.4 (104.9)
Investing Activities:
Additions of property and equipment, net............ (27.6) (39.2)
Purchases of available-for-sale securities.......... (0.3) (5.2)
Sale/maturity of available-for-sale securities...... 0.1 11.7
Additions of other assets, net...................... (9.3) (5.1)
Acquisition, net of cash acquired................... -- (598.0)
------ -------
Net Cash Used for Investing Activities................ (37.1) (635.8)
Financing Activities:
Proceeds from long-term borrowings.................. -- 346.4
Increase in borrowings, net......................... 27.8 444.1
Purchases of common stock and other capital
transactions, net of tax........................... (68.0) (28.9)
------ -------
Net Cash (Used for) Provided by Financing Activities.. (40.2) 761.6
Effect of Exchange Rate Changes on Cash............... 1.0 (2.0)
------ -------
Net (Decrease) Increase in Cash and Cash Equivalents.. (1.9) 18.9
Cash and Cash Equivalents at Beginning of Period...... 27.8 17.3
------ -------
Cash and Cash Equivalents at End of Period............ $ 25.9 $ 36.2
====== =======
</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) is a global company that designs,
develops, manufactures, and markets a broad range of innovative, high-quality
therapeutic medical devices for the treatment of cardiovascular and vascular
diseases. Guidant is a leader in the medical device industry and offers: i)
coronary stents, coronary balloon dilatation catheters, and related accessories;
ii) automatic implantable cardioverter defibrillator systems, which are used to
detect and treat abnormally fast heart rhythms (tachycardia); iii) a full line
of implantable pacemaker systems used to manage slow or irregular heart rhythms
(bradycardia); iv) implantable resynchronization therapy for the treatment of
heart failure; v) products for use in minimally invasive vascular surgeries,
including the treatment of abdominal aortic aneurysms; and vi) products for use
in minimally invasive cardiac surgeries, and products to perform cardiac artery
bypass grafting on a beating heart. Guidant has principal operations in the
United States, Western Europe, and Japan. The Company markets its products in
nearly 100 countries 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.
Operating results from interim periods are not necessarily indicative of results
that may be expected for the fiscal year as a whole. 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, 1999.
Note 3 - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- -------------
<S> <C> <C>
Finished products $ 145.6 $ 135.1
Work in process 41.1 39.9
Raw materials and supplies 58.4 67.7
-------- ---------
$ 245.1 $ 242.7
======== =========
</TABLE>
6
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Earnings Per Share
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
Income before cumulative effect of
accounting change.................................. $ 118.8 $ 51.6
Cumulative effect of accounting change, net......... -- (3.3)
-------- --------
Net income.......................................... $ 118.8 $ 48.3
======== ========
Weighted-average common shares outstanding.......... 300.89 300.31
Effect of employee stock options.................... 11.01 11.45
-------- --------
Weighted-average common shares outstanding
and assumed conversions............................ 311.90 311.76
======== ========
Earnings per share - basic:
Income before cumulative effect of
accounting change.................................. $ 0.39 $ 0.17
Cumulative effect of accounting change, net......... -- (0.01)
-------- --------
Earnings per share - basic........................ $ 0.39 $ 0.16
======== ========
Earnings per share - assuming dilution:
Income before cumulative effect of
accounting change.................................. $ 0.38 $ 0.17
Cumulative effect of accounting change, net......... -- (0.02)
-------- --------
Earnings per share - assuming dilution............ $ 0.38 $ 0.15
======== ========
</TABLE>
7
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Comprehensive Income
Comprehensive income comprises net income adjusted for the changes in unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments. For the first quarter of 2000 and 1999, comprehensive
income was $112.5 million and $29.8 million, respectively.
Note 6 - Segment Information
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Geographic Information: 2000 1999
------ -------
<S> <C> <C>
Net Sales(1):
United States $449.1 $431.3
International 181.6 165.1
------ ------
$630.7 $596.4
====== ======
</TABLE>
(1) Revenues are attributed to countries based on location of the customer.
<TABLE>
<CAPTION>
March 31, December 31,
Long-lived Assets: 2000 1999
---------- --------------
<S> <C> <C>
United States $ 469.7 $ 467.6
International 44.5 46.9
--------- -----------
$ 514.2 $ 514.5
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Net Sales of Classes March 31,
of Similar Products: 2000 1999
------ ------
<S> <C> <C>
Vascular intervention $321.3 $324.4
Cardiac rhythm management 288.7 245.6
Cardiac & vascular surgery 20.7 26.4
------ ------
$630.7 $596.4
====== ======
</TABLE>
Note 7 - Subsequent Event
On April 3, 2000, Guidant signed a broad agreement with Johnson & Johnson that
covers various technologies and patents. As part of the agreement, Guidant
obtains an exclusive option from Impulse Dynamics, N.V. to acquire emerging
cardiovascular technology for the treatment of heart failure. Under the terms of
the agreement, Guidant paid Impulse Dynamics $125 million for the exclusive
right to evaluate cardiovascular technology currently under development by
Impulse Dynamics. This payment will be accounted for as a current asset in the
second quarter of 2000 until Guidant determines whether or not to proceed with
the acquisition of the exclusive rights to this technology. If Guidant proceeds
with that acquisition, total payments would be approximately $425 million plus
certain potential contingent payments. In addition, Guidant and Cordis, a wholly
owned subsidiary of Johnson & Johnson, have agreed to dismiss all current
litigation between them and agree to resolve the remaining disputes in future
arbitration proceedings. The first arbitration is scheduled to begin in October
2000. (See Note 8 - Contingencies)
8
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 - Subsequent Event (Continued)
Also as part of this agreement, Cordis and Guidant receive licenses to the
other's patents involved in the disputes to ensure future product availability.
Finally, the agreement establishes Cordis as a U.S. distributor of rapid-
exchange balloon dilatation catheters supplied by Guidant.
Note 8 - Contingencies
The Company is a party to various legal actions which have arisen in the normal
course of business. The following is a select listing of cases in which Guidant
is a defendant which are required to be disclosed under generally accepted
accounting principles. A listing of cases in which Guidant is a plaintiff is
available in the Company's most recent report on Form 10-K filed with the
Securities and Exchange Commission.
On October 3, 1997, Cordis filed suit against the Company and Advanced
Cardiovascular Systems, Inc., (ACS) the Company's wholly owned subsidiary, in
the District Court of Delaware, alleging that the sale of the ACS MULTI-LINK
Coronary Stent infringes certain patents licensed to Cordis. On April 3, 2000,
the parties agreed to dismiss all patent litigation between them and resolve
remaining disputes in future arbitration proceedings. (See Note 7 - Subsequent
Event)
On December 2, 1997, Cordis filed suit against ACS in the District Court of
Delaware, alleging that the ACS RX ROCKET Coronary Dilatation Catheter infringes
patents owned by Cordis. A separate lawsuit was also filed against the Company
in December 1997 in The Netherlands alleging infringement of the European
equivalents of these patents. On April 3, 2000, the parties agreed to dismiss
all patent litigation between them and resolve remaining disputes in future
arbitration proceedings. (See Note 7 - Subsequent Event)
On November 6, 1997, Medtronic, Inc., (Medtronic) filed suit against ACS in the
District Court of Minnesota, alleging that the ACS RX MULTI-LINK Coronary Stent
infringes a patent owned by Medtronic. Trial by jury commenced on October 18,
1999, and in late November 1999, the court granted ACS' and Guidant's motions
for a directed verdict of non-infringement. A Final Judgment of non-infringement
was entered on January 12, 2000. Medtronic has appealed. Medtronic filed a
second complaint in a separate suit to add allegations of infringement of the
same patent by the ACS MULTI-LINK OTW, the ACS MULTI-LINK RX DUET, the ACS
MULTI-LINK OTW DUET, and SOLO Coronary Stents and MEGALINK Peripheral Stent. In
this new complaint, as well as the complaint in the earlier action, Medtronic
also seeks injunctive relief and monetary damages. In view of the appeal in the
first lawsuit, the parties have agreed to a stay of all actions in the second
lawsuit pending the outcome of the appeal.
On February 18, 1998, Arterial Vascular Engineering, Inc., (AVE) (n/k/a
Medtronic AVE) filed suit against ACS in the District Court of Delaware alleging
that the sale of the ACS MULTI-LINK Coronary Stent infringes certain patents
owned by Medtronic AVE. The suit is consolidated with a suit by ACS alleging
infringement by Medtronic AVE of certain ACS stent patents. The Medtronic
lawsuit also alleges misappropriation of trade secrets and breach of a
confidentiality agreement by ACS. In the lawsuit, Medtronic AVE is seeking
injunctive relief, monetary damages, and to invalidate ACS stent patents
asserted against Medtronic AVE.
9
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 - Contingencies (Continued)
On December 29, 1998, SciMed Life Systems, Inc., (SciMed) a subsidiary of Boston
Scientific Corporation (BSC), filed suit against the Company in The Hague, The
Netherlands, alleging infringement of a European patent owned by SciMed by the
ACS RX ECLIPSE Coronary Dilatation Catheter, ACS RX MULTI-LINK, ACS RX MULTI-
LINK HP, and ACS MULTI-LINK RX DUET Coronary Stent Systems. The court held a
hearing on November 5, 1999. On February 16, 2000, the Court asked the Dutch
Patent Office for an advisory opinion on the validity of the patent. On January
13, 1999, SciMed also filed suit against the Company, ACS, and Guidant Sales
Corporation (GSC) in the Northern District of California alleging that the same
coronary stent systems infringe certain of SciMed's U.S. patents. On September
17, 1999, the California district court dismissed SciMed's claims against the
ACS RX MULTI-LINK, without prejudice. In both suits, SciMed is seeking
injunctive relief and monetary damages.
On March 31, 1999, Pacesetter, Inc., filed suit against GSC and Cardiac
Pacemakers, Inc., (CPI) a wholly owned subsidiary of the Company, in the Central
District of California, alleging that rate responsive pacemakers or
defibrillators having rate responsive pacing (including, by name, the VIGOR SR
and VIGOR DR pacemakers) infringe two patents owned by Pacesetter. In the
lawsuit, Pacesetter is seeking injunctive relief and monetary damages.
The Company believes that it has substantial and meritorious defenses against
the above infringement claims and intends to vigorously contest them. The
Company has filed suit and has lawsuits and other legal actions currently
outstanding against most of the companies discussed above. While it is not
possible to predict or determine the outcomes of the legal actions brought
against it, or to provide an estimate of any additional 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 of any one 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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Guidant Corporation (Guidant or the Company) is a global company that designs,
develops, manufactures, and markets a broad range of innovative, high-quality
therapeutic medical devices for the treatment of cardiovascular and vascular
diseases. Guidant is a leader in the medical device industry and offers: i)
coronary stents, coronary balloon dilatation catheters, and related accessories;
ii) automatic implantable cardioverter defibrillator (AICD) systems, which are
used to detect and treat abnormally fast heart rhythms (tachycardia); iii) a
full line of implantable pacemaker systems used to manage slow or irregular
heart rhythms (bradycardia); iv) implantable resynchronization therapy for the
treatment of heart failure; v) products for use in minimally invasive vascular
surgeries, including the treatment of abdominal aortic aneurysms (AAA); and vi)
products for use in minimally invasive cardiac surgeries, and products to
perform cardiac artery bypass grafting (CABG) on a beating heart. Guidant has
principal operations in the United States, Western Europe, and Japan. The
Company markets its products in nearly 100 countries through a direct sales
force in the United States and a combination of direct sales representatives and
independent distributors in international markets.
Cardiovascular disease continues to be the leading cause of death in the United
States. Guidant's product portfolio has made it a leader in the cardiovascular
markets it serves, but Guidant is also committed to developing innovative
products that will address significant remaining unmet clinical needs. Guidant's
business strategy is to design therapeutic products which improve the quality of
patient care and reduce treatment costs. In implementing this strategy, the
Company focuses on the following three areas which it believes are critical to
its future success: (i) global product innovation, (ii) economic partnerships
with customers worldwide, and (iii) organizational excellence.
11
<PAGE>
The following tables are summaries of the Company's net sales and major costs
and expenses excluding the impact of special items. For purposes of analysis
and discussion herein, the Company employs a concept of operating income, which
is defined as gross profit less research and development and sales, marketing,
and administrative expenses, excluding special items.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
-------- --------
(Dollars in millions)
(unaudited)
<S> <C> <C>
Total net sales $630.7 $596.4
Cost of products sold 140.8 141.8
------ ------
Gross profit 489.9 454.6
Research and development 86.4 84.5
Sales, marketing, and administrative 185.6 175.7
------ ------
272.0 260.2
Operating income $217.9 $194.4(1)
====== ======
</TABLE>
<TABLE>
<CAPTION>
As a Percent of Net Sales
-------------------------
Three Months Ended
March 31,
------------------
2000 1999
------ --------
<S> <C> <C>
Total net sales 100.0% 100.0%
Cost of products sold 22.3 23.8
------ --------
Gross profit 77.7 76.2
Research and development 13.7 14.2
Sales, marketing, and administrative 29.5 29.4
------ --------
43.2 43.6
Operating income 34.5% 32.6%(1)
====== ========
</TABLE>
/(1)/Excludes purchased research and development charge of $49.0 million. Also
excludes the impact of stay-pay and the purchase accounting write-up of acquired
Intermedics inventory sold for a total of $8.3 million. Therefore, the cost of
products sold, gross profit, research and development, and sales, marketing, and
administrative lines displayed above do not agree to the reported consolidated
statement of income presentation for 1999.
12
<PAGE>
Operating Results - Three Months Ended March 31, 2000
The Company had worldwide net sales of $630.7 million for the three months ended
March 31, 2000, reflecting an increase of $34.3 million or 6% over 1999. Growth
in unit volume of 9% increased net sales, while price declines and fluctuations
in foreign currency exchange rates decreased net sales 2% and 1%, respectively.
Sales growth was driven by AICDs and pacemakers, offset somewhat by a decline in
stent revenues and the sale of the general surgery product line in July 1999.
General surgery product sales in the first quarter of 1999 were $15.7 million.
Excluding unfavorable exchange rate impact and 1999 revenues from general
surgery, revenue growth in the quarter would have totaled 10%.
AICD systems sales grew 14.4% for the three months ended March 31, 2000, as
compared to the three months ended March 31, 1999, due to the full market launch
of the VENTAK PRIZM in the U.S. in February 2000. AICD systems sales were
$159.6 million for the three months ended March 31, 2000. The VENTAK PRIZM is
Guidant's next-generation defibrillator product and is the smallest dual-chamber
implantable defibrillator commercially available with a unique pacemaker-like
shape and longevity that exceeds that of comparably sized devices by a factor of
years.
Pacemaker product sales were $129.1 million for the three months ended March 31,
2000, compared to $106.0 million for the three months ended March 31, 1999.
United States and international sales of these products increased 18.3% and
28.3%, respectively, for the three months ended March 31, 2000, compared to the
three months ended March 31, 1999. The first quarter of 1999 reflects the
impact of the Intermedics acquisition for only two months, as that transaction
was completed February 1, 1999, and was accounted for using the purchase method
of accounting. In addition, pacemaker sales growth in the first quarter of 2000
was driven by the DISCOVERY and PULSAR MAX pacing devices. On January 12, 2000,
Guidant released the next generation in pacemaker devices, the PULSAR MAX II and
the DISCOVERY II, in Europe.
The ACS MULTI-LINK RX TRISTAR and the ACS MULTI-LINK OTW TRISTAR Coronary Stent
Systems were approved for release in the U.S. on December 22, 1999. The ACS
MULTI-LINK TRISTAR is Guidant's next-generation stent, featuring delivery system
13
<PAGE>
improvements using S.T.E.P. (Short Transitional Edge Protection) Balloon
Technology, a unique balloon design which creates a step-shaped taper at each
end of the stent. This design minimizes the amount of vessel dilated outside of
the stent. Sales of coronary stents in the United States during the three months
ended March 31, 2000, were $167.3 million compared to $186.6 million during the
same period in 1999. The average selling price of these products in the U.S.
declined 8% from the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 2000. As compared to the fourth quarter of 1999, average selling
prices for Guidant coronary stent products in the U.S. declined by 2% in the
first quarter of 2000. International sales of these products during the first
quarter of 2000 were $60.2 million compared to $55.1 million during the first
quarter of 1999. International unit growth of 22% was offset by average selling
price declines of 11% and a 2% foreign exchange rate impact. The first quarter
of 1999 stent sales of $241.7 million was Guidant's highest stent sales quarter
ever and reflected peak sales of the ACS MULTI-LINK DUET, released in the U.S.
in November 1998. Worldwide sales of coronary stents during the first quarter of
2000 of $227.5 million represented an increase of $25.2 million or 12.5% over
the fourth quarter of 1999. Guidant's stent revenues are impacted by average
selling prices, overall market conditions, the introduction of competitor
stents, and the product evaluations by clinicians that are common when new stent
products are introduced.
Angioplasty sales of $85.5 million increased 7.8% for the period ending March
31, 2000, as compared to March 31, 1999, driven by growth internationally.
Guidant launched the CROSSAIL Coronary Dilatation Catheter outside the U.S. on
March 23, 2000. The CROSSAIL offers the smallest profile of any rapid exchange
dilatation catheter currently available.
Sales of Guidant's ANCURE system and accessories were $7.3 million in the first
quarter of 2000. Guidant's ANCURE system received FDA approval in September
1999, providing a less-invasive approach for treating AAA. The ANCURE has
precisely positioned hooks and a one-piece polyester body that allows the
implant to adapt to changes that occur over time within the aorta, while
maintaining the implant's original position. Guidant's fourth quarter 1999
revenues from the sale of these products were $2.9 million. Over 350 vascular
surgery centers and 700 physicians are now trained in the use of the ANCURE
product line.
14
<PAGE>
Sales of cardiac surgery products were $13.2 million in the first quarter of
2000 as compared to $9.6 million in the first quarter of 1999. Cardiac surgery
sales include the VASOVIEW UNIPORT PLUS Endoscopic Vessel Harvesting System and
products produced by CardioThoracic Systems, Inc. (CTS). CTS was acquired in a
pooling of interests transaction on November 15, 1999. CTS introduced the
VORTEX Stabilization System during the first quarter of 2000 which is designed
to enable the physician to immobilize a portion of a coronary artery while
performing beating heart bypass. The VORTEX Stabilization System is designed to
enable physicians to perform coronary artery bypass surgery on a beating heart,
rather than using the traditional surgical method of stopping the heart.
Beating heart procedures potentially reduce post-operative hospital stay, cost
and surgical complications, while preserving the clinical outcomes associated
with conventional surgery.
The Company experienced sales growth both in the United States and international
markets during the first quarter of 2000. For the quarter ended March 31, 2000,
U.S. net sales increased 4.1% to $449.1 million and international net sales
increased 10.0% to $181.6 million, as compared to the first quarter of 1999.
U.S. net sales growth was primarily due to the VENTAK PRIZM and sales of
pacemaker systems such as DISCOVERY and PULSAR MAX. International net sales
growth was primarily driven by pacemaker product sales and angioplasty sales,
particularly in Japan. The first quarter of 1999 includes only two months of
Intermedics sales as that transaction closed February 1, 1999.
For the quarter ended March 31, 2000, cost of products sold represents 22.3% of
net sales. Cost of products sold for the quarter ended March 31, 1999, includes
the impact of purchase accounting adjustments related to the write-up of
acquired Intermedics inventory and the impact of stay-pay for Intermedics
manufacturing personnel during the shut-down of the acquired facilities. The
impact of these two items was $6.9 million during the first quarter of 1999.
Cost of products sold, as adjusted to exclude these two items, represented 23.8%
of net sales for the quarter ended March 31, 1999. This improvement in 2000 in
the cost of products sold as a percentage of net sales is a result of lower
overall production costs for pacemakers and defibrillators in the quarter. In
addition, the first quarter of 1999 reflected the lower gross margins associated
with the sale of Intermedics pacemaker products, which are now only sold on a
limited basis outside the U.S.
15
<PAGE>
The Company continued to invest aggressively in research and development.
Research and development expense was $86.4 million in the first quarter of 2000
or 13.7% of sales as compared to $84.5 million in the first quarter of 1999,
excluding stay-pay related to the Intermedics acquisition in 1999. The 1999
research and development spending also excludes a $49 million pre-tax charge
related to the appraised value of in-process research and development for the
Intermedics acquisition. Research and development spending in 2000 includes:
(i) development of implantable resynchronization therapy for the treatment of
heart failure; (ii) development of treatments for atrial arrhythmias; (iii)
development of radiotherapy devices for coronary and peripheral restenosis; (iv)
research related to local drug delivery efforts; and (v) future generations of
current products. The Company intends to continue its aggressive research and
development spending to maintain its commitment to bring new technologies to the
market and provide cost-effective therapies to treat cardiovascular and vascular
diseases.
Sales, marketing, and administrative expenses increased $9.9 million or 5.6% for
the three months ended March 31, 2000, compared to the same period in 1999. This
increase in spending was due primarily to: (i) costs related to product
launches; (ii) investment in the United States sales organization; and (iii)
increased legal costs associated with various litigation.
Operating income, as previously defined, was $217.9 million for the three months
ended March 31, 2000, and $194.4 million for the three months ended March 31,
1999. Growth of 12.1% in operating income was driven by net sales growth of
5.8%, a decrease in the cost of products sold as a percent of sales, and
controlled growth in operating expenses.
Net other expenses for the first quarter of 2000 were $39.2 million which
includes interest, royalties, amortization, and other. Net other expenses,
excluding a non-cash gain on the sale of an equity investment, were $36.3
million for the three months ended March 31, 1999. The increase of $2.9 million
in other expenses excluding the special item in 1999 is due to one additional
month of interest and amortization expense related to the Intermedics
acquisition in 2000 over the first quarter of 1999 and an increase in borrowing
interest rates.
Without considering the effect of the special charges in 1999, the effective
income tax rates for the quarters ended March 31, 2000, and 1999, were 33.5% and
37.8%,
16
<PAGE>
respectively. This improvement in the as adjusted tax rate reflects the benefit
of increased overseas manufacturing and the fact that CTS losses were not
deductible in the first quarter of 1999. CTS was acquired in the fourth quarter
of 1999 in a tax-free stock-for-stock transaction. Guidant's reported effective
tax rate was 55.2% for the first quarter of 1999. The Company's effective tax
rate will continue to be positively impacted as overseas manufacturing continues
to expand.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) was
$223.8 million for the three months ended March 31, 2000. Excluding special
items, EBITDA was $198.5 million for the three months ended March 31, 1999. The
12.7% improvement in EBITDA is primarily driven by operating income growth.
Net income and earnings per share, assuming dilution, were $118.8 million and
$0.38, respectively, for the first quarter of 2000. Net income and earnings per
share for the quarter ended March 31, 1999, excluding the impact of the special
items, was $98.3 million and $0.32 per share, assuming dilution. Reported net
income in 1999 also includes the net impact of $3.3 million for the cumulative
effect of a change in accounting principle, net of income taxes. This
represents an increase in adjusted net income of $20.5 million or 20.9% and is a
result of the growth in operating income and the decrease in the effective tax
rate. Reported net income for the quarter ended March 31, 1999, was $48.3
million.
Liquidity and Financial Condition
The Company generated cash flows which were more than sufficient to fund
operations during the three months ended March 31, 2000. Cash and cash
equivalents were $25.9 million at March 31, 2000, a slight decline from $27.8
million at December 31, 1999.
Working capital of $297.1 million at March 31, 2000, increased by $119.5 million
from the prior year-end level. The increase is attributable to an increase in
accounts receivable related to sales growth; a decrease in employee compensation
liabilities due to bonus payments in the first quarter; a decrease in other
current liabilities related to periodic interest payments on the long-term
seven-year notes and payments related to liabilities associated with the
Intermedics and CTS acquisitions; and a decrease in the portion of borrowings
classified as short-term. The current ratio at March 31, 2000, was 1.5:1
compared to 1.2:1 at December 31, 1999. The Company believes its cash from
operations is sufficient to fund essentially all future working capital needs
and discretionary operating spending requirements.
17
<PAGE>
Net cash used for investing activities totaled $37.1 million for the three
months ended March 31, 2000, compared to $635.8 million for the same period in
1999. The acquisition of Intermedics net of cash acquired was a $598 million
use of cash in the first quarter of 1999. The payment of the Intermedics
litigation settlement of $200 million in the first quarter of 1999 is included
in operating activities. Net additions of property and equipment of $27.6
million for the three months ended March 31, 2000, compared to $39.2 million for
the same period in 1999, were also a significant use of cash for investing
activities during both periods.
Net cash used for financing activities totaled $40.2 million for the three
months ended March 31, 2000. This reflects $68.0 million of net cash outlays
under the Company's systematic stock repurchase program used to offset dilution
resulting from issuance of stock under employee stock option and award plans.
During the first quarter of 2000, approximately 2 million shares were
repurchased at an average price of $64.06. During the first quarter of 1999,
approximately 1 million shares were purchased at an average price of $58.63.
Net proceeds of $346.4 million were received from the issuance of seven year,
6.15% long-term notes in the first quarter of 1999. In addition, commercial
paper was issued to finance the acquisition of Intermedics on February 1, 1999.
At March 31, 2000, the Company had outstanding borrowings of $915.1 million
through the issuance of commercial paper, bank borrowings, and long-term notes
due in 2006. Bank borrowings represent short-term uncommitted credit facilities
with various commercial banks. The commercial paper borrowings are supported by
two credit facilities aggregating $850 million. There are currently no
outstanding borrowings under these facilities. The Company expects that
approximately $238 million of commercial paper borrowings will remain
outstanding for the next twelve months and, as a result, has classified this
amount as long-term at March 31, 2000.
The Company expects its cash from operations to be adequate to meet its
obligations to make interest payments on its debt and other anticipated
operating cash needs, including planned capital expenditures. Capital
expenditures are expected to be approximately $175 million in 2000, primarily
due to continued investment in the Company's U.S. manufacturing and
administrative facilities. On April 3, 2000, the Company signed an agreement
with Johnson & Johnson covering various technologies and patents. As a result
of this agreement, Guidant paid $125 million for the exclusive right to evaluate
cardiovascular technology currently under development by Impulse
18
<PAGE>
Dynamics. If Guidant chooses to acquire exclusive rights to this technology, the
total payments would be approximately $425 million plus potential contingent
payments. The total payments could be financed by a combination of debt, equity,
and equity-linked securities. The initial $125 million payment was financed
through the issuance of commercial paper and will be recorded in the second
quarter of 2000. The Company believes that amounts available through existing
commercial paper programs should be adequate to fund maturities of short-term
borrowings.
The Company has recognized net deferred tax assets aggregating $183.0 million at
March 31, 2000, compared to $190.3 million at December 31, 1999. 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.
Private Securities Litigation Reform Act of 1995
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties which may cause actual results to differ
materially from those projected. Economic, competitive, governmental,
technological, and other factors which may affect the Company's operations are
discussed in Exhibit 99.1 filed herewith.
19
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 12, 1998, ACS and GSC filed suit against BSC and SciMed in the
Southern District of Indiana alleging that SciMed's NIR stent infringes certain
patents of ACS. In the lawsuit ACS is seeking injunctive relief and monetary
damages. The trial, which was originally scheduled to begin in February 2000,
has been postponed while the Court considers the outstanding motions filed by
the parties.
On October 10, 1995, ACS filed suit against Medtronic in the Northern District
of California alleging that the Medtronic FALCON coronary dilatation catheter
infringes a patent of ACS. In addition, on March 12, 1996, ACS filed a separate
lawsuit alleging that the product infringes another patent of ACS. Both
lawsuits have been consolidated. On August 25, 1999, the court granted ACS'
motions for summary judgment of infringement, validity and enforceability of the
patent. A jury trial was held from October 25, 1999 to November 3, 1999 on ACS'
claim of willful infringement and damages. On November 3, 1999, the jury
returned its verdict finding that Medtronic had willfully infringed the patent
and awarded ACS $5.4 million in damages. The court held a hearing on December
15, 1999, on ACS' requests for injunctive relief, enhanced damages, pre-judgment
interest, costs, and to declare the case exceptional and on Medtronic's motion
for a new trial. On April 14, 2000, the court granted ACS' request for enhanced
damages and denied Medtronic's motion for a new trial.
20
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
On April 3, 2000, the Company and Cordis Corporation, a subsidiary of Johnson
and Johnson (J&J), agreed to dismiss all patent litigation between the companies
and to resolve remaining disputes in future arbitration proceedings. (See
Footnote 7 - Subsequent Event) The first arbitration proceeding is scheduled
to begin in October 2000. The agreement covers:
1. The lawsuit filed on August 26, 1997, by J&J and Expandable Grafts
Partnership (EGP) against the Company's subsidiary Guidant Canada
Corporation in the Federal Court of Canada alleging that the sale of the
ACS MULTI-LINK coronary stent in Canada infringes patents licensed to J&J
by EGP.
2. The lawsuit filed on October 3, 1997, by Cordis against the Company and ACS
in the District Court for the District of Delaware alleging that the sale
of the ACS MULTI-LINK Coronary Stent by ACS infringes certain patents
licensed to Cordis, which was later amended to add the ACS MULTI-LINK DUET
Coronary and MEGALINK Biliary Stents.
3. The lawsuit filed on December 2, 1997, by Cordis against Guidant and ACS in
the United States District Court for the District of Delaware alleging that
the ACS RX ROCKET Coronary Dilatation Catheter infringes patents owned by
Cordis, and the lawsuit filed by Cordis against the Company in December
1997 in The Netherlands alleging infringement of the European equivalents
of these patents.
4. The lawsuit filed on February 22, 1999, by ACS against Cordis in the United
States District Court for the Northern District of California alleging
infringement of several ACS patents by the Cordis CROWN stent.
21
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
On February 7, 2000, Medtronic filed suit against the Company and CTS in the
Northern District of California. The lawsuit alleges false advertising, unfair
competition and patent infringement by Guidant and CTS for making, using and
selling the VORTEX Stabilization System. In the lawsuit, Medtronic is seeking
injunctive relief, damages, attorneys' fees and costs. On March 30, 2000, the
Company and CTS filed an answer asserting invalidity and noninfringement of
Medtronic's patents and filed a counterclaim alleging infringement of a CTS
patent involving similar technology.
On December 24, 1996, certain entities affiliated with Telectronics Holdings
Ltd. (the Telectronics Parties) and Pacesetter filed suit against the Company,
CPI, GSC and Lilly in the United States District Court for the District of
Minnesota alleging that the claims made in the State Court Case are subject to
an arbitration provision in the license agreement entered into in 1994 among
CPI, Lilly and the Telectronics Parties (Telectronics Agreement). In the
lawsuit, the Telectronics Parties and Pacesetter are seeking declaratory and
injunctive relief and an award of costs. On May 4, 1998, the United States
Court of Appeals for the Eighth Circuit (the Eighth Circuit) held that an
arbitrator (rather than a court) should decide whether the disputes set forth in
the State Court Case are subject to arbitration. On July 9, 1998, the Minnesota
District Court entered an Order referring the matter to arbitration, subject to
the qualification that "the arbitrator shall determine what role, if any,
Pacesetter should have in the arbitration proceeding." The arbitrator
subsequently ruled that Pacesetter was not a party to the arbitration. The
Telectronics Parties and the Company have completed the procedures for selecting
an arbitrator and have commenced the arbitration process. The arbitration began
on April 17, 2000.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following documents are filed as exhibits to this report:
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 reports on Form 8-K.
23
<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 9, 2000 /s/ Keith E. Brauer
--------------------------------
Keith E. Brauer
Vice President, Finance and
Chief Financial Officer
Date May 9, 2000 /s/ Michael A. Sherman
--------------------------------
Michael A. Sherman
Corporate Controller and
Chief Accounting Officer
24
<PAGE>
Exhibit List
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results
25
<PAGE>
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. 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 rate s.
2. Delays and uncertainties in the regulatory approval process in the United
States and other countries, resulting in lost market opportunities.
3. Unexpected safety, performance, 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, performance or efficacy concerns,
inability to obtain necessary regulatory approvals, unanticipated restrictions
imposed on approved indications, 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 litigation of product liability claims, antitrust
litigation, environmental matters, and patent or other intellectual property
disputes.
7. Future difficulties obtaining necessary components or materials used in
manufacturing the Company's products as the Company cannot quickly establish
additional or replacement suppliers for certain materials, largely due to the
FDA approval system and the complex nature of the manufacturing processes
employed by many suppliers. In addition, certain supplies are from single
sources.
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.
27
<PAGE>
10. Governmental factors including laws and regulations, policies and judicial
decisions that affect the regulation and reimbursement 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 and other
governmental programs, 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. The ability of the Company to recruit and retain highly skilled personnel
needed to compete in an intensely competitive market and to successfully
develop, market, and sell new products.
14. Internal factors such as change in business strategies and the impact of
restructuring and business combinations.
15. The ability of the Company to implement its strategy that includes the
potential acquisition of one or more businesses and difficulties in achieving
the integration of the operations of acquired businesses in a cost-effective
manner and in implementing strategies necessary for the realization of
anticipated synergies.
16. The Euro Conversion's impact on the competitive environment in which the
Company operates or its impact on the Company's fundamental risk management
philosophy.
17. Factors beyond the control of the Company, including earthquakes
(particularly in light of the fact that the Company has significant facilities
located near major earthquake fault lines), floods, fires, or explosions.
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 531
<ALLOWANCES> 16
<INVENTORY> 245
<CURRENT-ASSETS> 955
<PP&E> 862
<DEPRECIATION> 348
<TOTAL-ASSETS> 2,281
<CURRENT-LIABILITIES> 658
<BONDS> 585
0
0
<COMMON> 193
<OTHER-SE> 727
<TOTAL-LIABILITY-AND-EQUITY> 2,281
<SALES> 631
<TOTAL-REVENUES> 631
<CGS> 141
<TOTAL-COSTS> 141
<OTHER-EXPENSES> 86
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 179
<INCOME-TAX> 60
<INCOME-CONTINUING> 119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.38
</TABLE>
