-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DhtQtQX+6NjHxdk1H5gz8ud1vrI+s3nZ9jMJijtoL6OULghUcTuebVE9HSIN8dR2 4weBBGePIfhO+DcJQHh+9w== 0000897101-03-000421.txt : 20030513 0000897101-03-000421.hdr.sgml : 20030513 20030513151147 ACCESSION NUMBER: 0000897101-03-000421 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST JUDE MEDICAL INC CENTRAL INDEX KEY: 0000203077 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411276891 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12441 FILM NUMBER: 03695368 BUSINESS ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 BUSINESS PHONE: 6514832000 MAIL ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 10-Q 1 stjude032225_10q.txt ST. JUDE MEDICAL, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q __X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________. Commission File Number 0-8672 ------ ST. JUDE MEDICAL, INC. ---------------------- (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 --------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) One Lillehei Plaza, St. Paul, Minnesota 55117 --------------------------------------------- (Address of principal executive offices) (651) 483-2000 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report) 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, and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO _____ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES __X__ NO _____ The number of shares of common stock, par value $.10 per share, outstanding on April 28, 2003 was 179,934,229. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 - -------------------------------------------------------------------------------- Net sales $441,384 $371,193 Cost of sales 139,464 118,788 - -------------------------------------------------------------------------------- Gross profit 301,920 252,405 Selling, general and administrative expense 139,084 122,687 Research and development expense 55,942 46,465 - -------------------------------------------------------------------------------- Operating profit 106,894 83,253 Other income (expense) 1,197 (485) - -------------------------------------------------------------------------------- Earnings before income taxes 108,091 82,768 Income tax expense 28,104 20,692 - -------------------------------------------------------------------------------- Net earnings $ 79,987 $ 62,076 ================================================================================ ================================================================================ Net earnings per share: Basic $ 0.45 $ 0.35 Diluted $ 0.43 $ 0.34 Weighted average shares outstanding: Basic 178,888 175,223 Diluted 186,326 182,385 - -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. 1 ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, 2003 DECEMBER 31, (UNAUDITED) 2002 (SEE NOTE) - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and equivalents $ 497,103 $ 401,860 Accounts receivable, less allowance for doubtful accounts of $29,307 in 2003 and $24,078 in 2002 405,287 381,246 Inventories 231,794 227,024 Deferred income taxes 52,658 56,857 Other 50,821 47,330 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 1,237,663 1,114,317 Property, plant and equipment - at cost 711,674 701,314 Less accumulated depreciation (416,334) (400,833) - ---------------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 295,340 300,481 Other assets Goodwill 326,886 325,575 Other intangible assets, net 87,754 89,491 Deferred income taxes 5,713 12,269 Other 123,162 109,246 - ---------------------------------------------------------------------------------------------------------------------------------- Total other assets 543,515 536,581 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,076,518 $ 1,951,379 ================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 97,742 $ 108,931 Income taxes payable 59,285 51,380 Accrued expenses Employee compensation and related benefits 124,253 135,705 Other 81,121 78,636 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 362,401 374,652 Long-term debt - - Commitments and contingencies - - Shareholders' equity Preferred stock - - Common stock 17,956 17,803 Additional paid-in capital 258,159 216,878 Retained earnings 1,491,181 1,411,194 Accumulated other comprehensive income (loss): Cumulative translation adjustment (58,843) (73,388) Unrealized gain on available-for-sale securities 5,664 4,240 - ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,714,117 1,576,727 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,076,518 $ 1,951,379 ==================================================================================================================================
NOTE: The balance sheet at December 31, 2002 has been derived from the Company's audited financial statements. See notes to condensed consolidated financial statements. 2 ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 2002 ================================================================================================================================= Operating Activities Net earnings $ 79,987 $ 62,076 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation 14,796 14,875 Amortization 1,757 1,499 Deferred income taxes 9,882 (24) Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (19,171) (32,181) Inventories (4,522) 2,161 Other current assets (1,075) (21,952) Accounts payable and accrued expenses (16,172) (8,709) Income taxes payable 19,853 18,257 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 85,335 36,002 Investing Activities Purchase of property, plant and equipment (8,174) (13,105) Business acquisition payments - (9,427) Other (14,511) (10,420) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (22,685) (32,952) Financing Activities Proceeds from exercise of stock options 29,485 23,649 Borrowings under debt facilities - 296,900 Payments under debt facilities - (332,278) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 29,485 (11,729) Effect of currency exchange rate changes on cash 3,108 (774) - --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 95,243 (9,453) Cash and equivalents at beginning of period 401,860 148,335 - --------------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 497,103 $ 138,882 =================================================================================================================================
See notes to condensed consolidated financial statements. 3 ST. JUDE MEDICAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. STOCK-BASED COMPENSATION: The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations. The following table illustrates the effect on net earnings and net earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to its stock-based employee compensation.
THREE MONTHS ENDED MARCH 31, 2003 2002 ================================================================================================================ Net earnings, as reported $ 79,987 $ 62,076 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (8,869) (8,299) - ---------------------------------------------------------------------------------------------------------------- Pro forma net earnings $ 71,118 $ 53,777 ================================================================================================================ Net earnings per share: Basic-as reported $ 0.45 $ 0.35 Basic-pro forma 0.40 0.31 Diluted-as reported $ 0.43 $ 0.34 Diluted-pro forma 0.38 0.29 ================================================================================================================
4 NOTE 2 - INVENTORIES Inventories consist of the following: MARCH 31, DECEMBER 31, 2003 2002 ================================================================================ Finished goods $ 136,856 $ 140,856 Work in process 35,442 27,481 Raw materials 59,496 58,687 - -------------------------------------------------------------------------------- $ 231,794 $ 227,024 ================================================================================ NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS The net carrying amount of goodwill for the first quarter ended March 31, 2003 increased $1,311 to $326,886 due primarily to currency translation fluctuations of non-U.S. dollar denominated goodwill balances. There were no goodwill impairment charges recorded during the three months ended March 31, 2003 or during 2002. Balances of other intangible assets as of March 31, 2003 and December 31, 2002 were as follows: Purchased Technology and Patents Other Total ============================================================================== MARCH 31, 2003 Original cost $ 75,874 $ 33,765 $ 109,639 Accumulated amortization (18,118) (3,767) (21,885) - ------------------------------------------------------------------------------ Net carrying value $ 57,756 $ 29,998 $ 87,754 ============================================================================== DECEMBER 31, 2002 Original cost $ 75,749 $ 33,741 $ 109,490 Accumulated amortization (17,075) (2,924) (19,999) - ------------------------------------------------------------------------------ Net carrying value $ 58,674 $ 30,817 $ 89,491 ============================================================================== The "other" column above primarily represents customer relationships from the acquisition of various businesses involved in the distribution of the Company's products. These assets are amortized on a straight-line basis over ten years. Amortization expense of other intangible assets was $1,757 and $1,499 for the three months ended March 31, 2003 and 2002, respectively. 5 NOTE 4 - COMMITMENTS AND CONTINGENCIES SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in the Company's mechanical heart valves and valve repair products with Silzone(R) coating. Some of these cases are seeking monitoring of patients implanted with Silzone(R)-coated valves and repair products who allege no injury to date. Some of these cases have been settled, some have been dismissed, and others are ongoing. Some of these cases, both in the United States and Canada, are seeking class action status. The Company voluntarily recalled products with Silzone(R) coating on January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to physicians and others. See also Note 6 regarding the special charges associated with this matter. In 2001, the U.S. Judicial Panel on Multi-District Litigation ruled that certain lawsuits filed in U.S. federal district court involving products with Silzone(R) coating should be part of Multi-District Litigation proceedings under the supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result, actions in federal court involving products with Silzone(R) coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings. Certain plaintiffs requested Judge Tunheim to allow some cases to proceed as class actions. Judge Tunheim issued a ruling on plaintiffs' motions for class certification on March 27, 2003. In his ruling, Judge Tunheim conditionally certified one class of plaintiffs (U.S. persons who have a Silzone heart valve which is still implanted) and conditionally certified a second class of plaintiffs (U.S. persons who received a Silzone heart valve and who have sustained physical injuries due to the valve). The Company believes that the ruling is inconsistent with the applicable laws and precedents, and is pursuing its appellate remedies. In the meantime, cases involving Silzone(R) products not seeking class action status which are consolidated before Judge Tunheim are proceeding in accordance with the scheduling orders he has rendered. There are other actions involving products with Silzone(R) coating in various state courts that may or may not be coordinated with the matters presently before Judge Tunheim. The lawsuits in Canada are proceeding in accordance with separate schedules issued by the applicable provincial courts. A hearing concerning the certification of a class action in Ontario, Canada, is currently scheduled for June 2003. While it is not possible to predict the outcome of the various cases involving Silzone(R) products, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The Company further believes that any costs not covered by product liability insurance will not have a material adverse impact on the Company's consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. GUIDANT LITIGATION: In November 1996, Guidant Corporation ("Guidant") sued St. Jude Medical alleging that the Company did not have a license to certain patents controlled by Guidant covering ICD products and alleging that the Company was infringing those patents. St. Jude Medical's contention was that it had obtained a license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude Medical's position, and in May 2001, a federal district court judge also ruled that the Guidant patent license with Telectronics had not transferred to St. Jude Medical. 6 Guidant's suit originally alleged infringement of four patents by St. Jude Medical. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant and the Court of Appeals upheld the lower court's invalidity determination. In a jury trial involving the two remaining patents (the '288 and '472 patents), the jury found that these patents were valid and that St. Jude Medical did not infringe the '288 patent. The jury found that the Company did infringe the '472 patent, though such infringement was not willful. The jury awarded damages of $140,000 to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the '472 patent was invalid and also was not infringed by St. Jude Medical, thereby eliminating the $140,000 verdict against the Company. The trial court also made other rulings as part of the post-trial order, including a ruling that the '288 patent was invalid on several grounds. In August 2002, Guidant commenced an appeal of certain of the trial judge's post-trial decisions pertaining to the '288 patent. Guidant did not appeal the trial court's finding of invalidity and non-infringement of the '472 patent. The parties are currently in the briefing phase of this appeal. While it is not possible to predict the outcome of the appeal process, the Company believes that it has meritorious defenses against the claims asserted by Guidant and Guidant's continued pursuit of this case. OTHER LITIGATION MATTERS: The Company is involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. NOTE 5 - PRODUCT WARRANTIES The Company offers a warranty on various products, the most significant of which relate to its pacemaker and ICD systems. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company's warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Changes in the Company's product warranty liability during the first quarter of 2003 and 2002 were as follows: MARCH 31, MARCH 31, 2003 2002 =============================================================================== Balance at beginning of period $ 14,755 $ 11,369 Warranty expense recognized 1,060 2,661 Warranty credits issued (259) (557) - ------------------------------------------------------------------------------- Balance at end of period $ 15,556 $ 13,473 =============================================================================== 7 NOTE 6 - SPECIAL CHARGES On January 21, 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating Silzone(R) coating on the sewing cuff fabric. The Company concluded that it would no longer utilize Silzone(R) coating. The Company recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636), including monitoring expenses, associated with this recall and product discontinuance. In the second quarter of 2002, the Company determined that the Silzone(R) reserves for other costs should be increased by $11,000 due primarily to difficulties in obtaining certain reimbursements from the Company's insurance carriers under its product liability insurance policies. This additional accrual was included in selling, general and administrative expenses for the second quarter ended June 30, 2002. The Company has utilized $23,360 of these special charge accruals through March 31, 2003, consisting of $9,465 of asset write-downs and $13,895 of other costs. The Company estimates that the remaining accruals will be utilized primarily during 2003 and 2004. The Company has approximately $200,000 remaining in product liability insurance currently available for the Silzone(R)-related matters. There can be no assurance that the final costs associated with this recall that are not covered by insurance, including litigation-related costs, will not exceed management's estimates. NOTE 7 - SHAREHOLDERS' EQUITY The Company's authorized capital consists of 25,000 shares of $1.00 per share par value preferred stock and 250,000 shares of $0.10 per share par value common stock. There were no shares of preferred stock issued or outstanding during 2002 or the first quarter of 2003. There were 179,558 and 178,028 shares of common stock outstanding at March 31, 2003 and December 31, 2002. NOTE 8 - NET EARNINGS PER SHARE The table below sets forth the computation of basic and diluted net earnings per share: THREE MONTHS ENDED MARCH 31, 2003 2002 ============================================================================== Numerator: Net earnings $ 79,987 $ 62,076 Denominator: Basic-weighted average shares outstanding 178,888 175,223 Effect of dilutive securities: Employee stock options 7,428 7,140 Restricted shares 10 22 - ------------------------------------------------------------------------------ Diluted-weighted average shares outstanding 186,326 182,385 ============================================================================== Basic net earnings per share $ 0.45 $ 0.35 ============================================================================== Diluted net earnings per share $ 0.43 $ 0.34 ============================================================================== 8 Diluted-weighted average shares outstanding have not been adjusted for certain employee stock options and awards where the effect of those securities would have been anti-dilutive. NOTE 9 - COMPREHENSIVE INCOME Other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale marketable securities and foreign currency translation adjustments, net of taxes. Other comprehensive income (loss) was $15,969 and $(4,559) for the three months ended March 31, 2003 and 2002. Total comprehensive income combines reported net earnings and other comprehensive income (loss). Total comprehensive income was $95,956 and $57,517 for the three months ended March 31, 2003 and 2002. NOTE 10 - OTHER INCOME (EXPENSE) Other income (expense) consists of the following: THREE MONTHS ENDED MARCH 31, 2003 2002 ================================================================================ Interest income $ 2,003 $ 1,063 Interest expense (197) (923) Other (609) (625) - -------------------------------------------------------------------------------- $ 1,197 $ (485) ================================================================================ NOTE 11 - SEGMENT AND GEOGRAPHICAL INFORMATION SEGMENT INFORMATION: The Company manages its business on the basis of one reportable segment - the development, manufacture and distribution of cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and vascular access (C/VA) markets. The Company's principal products in each of these markets are: bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator (ICD) systems, and electrophysiology catheters in CRM; mechanical and tissue heart valves, valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses in CS; and vascular closure devices, catheters, guidewires and introducers in C/VA. Net sales by class of similar products were as follows: THREE MONTHS ENDED MARCH 31, NET SALES 2003 2002 ================================================================================ Cardiac rhythm management $ 318,423 $ 267,798 Cardiac surgery 66,153 62,882 Cardiology and vascular access 56,808 40,513 - -------------------------------------------------------------------------------- $ 441,384 $ 371,193 ================================================================================ 9 GEOGRAPHICAL INFORMATION: The following tables present certain geographical financial information: THREE MONTHS ENDED MARCH 31, NET SALES* 2003 2002 ================================================================================ United States $ 277,015 $ 245,830 International 164,369 125,363 - -------------------------------------------------------------------------------- $ 441,384 $ 371,193 ================================================================================ MARCH 31, DECEMBER 31, LONG-LIVED ASSETS** 2003 2002 ================================================================================ United States $ 682,807 $ 674,119 International 150,335 150,674 - -------------------------------------------------------------------------------- $ 833,142 $ 824,793 ================================================================================ * NET SALES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF THE CUSTOMERS. ** LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES. NOTE 12 - SUBSEQUENT EVENTS ACQUISITIONS: On April 1, 2003, the Company completed its acquisition of Getz Bros. Co., Ltd. (Getz Japan), a distributor of medical technology products in Japan and the Company's largest volume distributor in Japan. The Company paid 26.9 billion Japanese yen in cash, or approximately $230,000, to acquire 100% of the outstanding common stock of Getz Japan. The purchase price was financed by a portion of the Company's existing cash balances and 24.6 billion yen of borrowings under a short-term, bank credit agreement. On April 1, 2003, the Company also acquired the net assets of Getz Bros. & Co. (Aust.) Pty. Limited and Medtel Pty. Limited related to the distribution of the Company's products in Australia for approximately $6,500 in cash. The results of operations of the above-mentioned business acquisitions will be included in the Company's consolidated results of operations beginning in the second quarter of 2003. INVESTMENTS: On May 1, 2003, the Company made a $15,000 minority investment in a development stage company that is focused on developing technologies to treat patients with atrial fibrillation. In conjunction with this investment, the Company also agreed to acquire the remaining ownership of the business in 2004 for an additional $185,000 in cash, provided a number of specific clinical and regulatory milestones are achieved. The Company will account for the initial $15,000 investment using the cost method of accounting. DEBT: On April 1, 2003, the Company borrowed 24.6 billion Japanese yen, or approximately $210,000, under a short-term, unsecured bank credit agreement to partially finance the Getz Japan acquisition. Borrowings under this agreement bore interest at an average rate of .58% per annum and were repaid in May 2003. 10 In May 2003, the Company issued 7-year, unsecured term notes totaling 20.9 billion yen, or approximately $178,000. The Company also obtained a short-term, unsecured bank credit agreement which provides for borrowings of up to 3.8 billion yen, or approximately $32,000. Proceeds from the issuance of the term notes and from borrowings under the short-term, bank credit agreement were used to repay the 24.6 billion yen of short-term bank borrowings. The term notes bear interest at a fixed rate of 1.02% per annum and mature in May 2010. The short-term, unsecured bank credit agreement bears interest at the floating yen LIBOR rate plus 0.50% per annum and is due in November 2003. The term notes and the short-term, bank credit agreement contain various restrictive covenants such as minimum financial ratios, limitations on additional liens or indebtedness and limitations on certain acquisitions, investments and dispositions of assets. However, these agreements do not include provisions for the termination of the agreements or acceleration of repayment due to changes in the Company's credit ratings. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable allowance for doubtful accounts, estimated useful lives of property, plant and equipment, income taxes, Silzone(R) special charges and legal proceedings. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Our most critical accounting estimates are discussed in the Management's Discussion and Analysis section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. RESULTS OF OPERATIONS NET SALES: Net sales for the first quarter ended March 31, 2003 and 2002 by class of similar products were as follows: Three months ended March 31, 2003 2002 ================================================================================ Cardiac rhythm management $ 318,423 $ 267,798 Cardiac surgery 66,153 62,882 Cardiology and vascular access 56,808 40,513 - -------------------------------------------------------------------------------- $ 441,384 $ 371,193 ================================================================================ Overall, net sales increased 18.9% in the first quarter of 2003 over the first quarter of 2002. Foreign currency translation had a net favorable impact on first quarter 2003 net sales as compared with 2002 of $15,700 due primarily to the strengthening of the Euro against the U.S. dollar. This amount is not indicative of the impact of foreign currency on net earnings for the first quarter of 2003 due to partially offsetting unfavorable foreign currency translation impacts on operating costs. Net sales of cardiac rhythm management (CRM) products increased 18.9% in the first quarter of 2003 over 2002 due primarily to increased implantable cardioverter defibrillator (ICD) and electrophysiology catheter unit sales. ICD net sales for the first quarter of 2003 benefited from the full quarter availability of the Epic(TM) family of ICDs released into the U.S. market in the 12 fourth quarter of 2002 and from continued market expansion. Foreign currency translation also had a $10,900 favorable impact on first quarter 2003 CRM net sales as compared with 2002. Cardiac surgery (CS) net sales increased 5.2% in the first quarter of 2003 over 2002 due to the favorable impact of foreign currency translation of $2,600 and to increased heart valve unit sales in international markets. Cardiology and vascular access (C/VA) net sales increased 40.2% in the first quarter of 2003 over 2002 due primarily to increased Angio-Seal(TM) vascular closure unit sales. Foreign currency translation also had a $2,200 favorable impact on first quarter 2003 C/VA net sales as compared with 2002. GROSS PROFIT: Gross profit for the first quarter of 2003 totaled $301,920, or 68.4% of net sales, as compared with $252,405, or 68.0% of net sales, for the first quarter of 2002. The improvement in the gross profit percentage is due primarily to higher manufacturing volumes and improved manufacturing efficiencies. We anticipate additional improvements in our gross profit percentage in the future due to increasing sales volumes and to the use of total quality management techniques and further investments in technology. Offsetting these improvements for 2003 will be inventory acquisition accounting adjustments related to the acquisition of Getz Bros. Co., Ltd. (Getz Japan) in the second quarter of 2003 and the addition of non-St. Jude Medical manufactured products sold by Getz Japan, which generally have a lower gross profit margin. For the full year 2003, we expect our gross profit percentage to be approximately 68.5% to 69.0% of net sales. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for the first quarter of 2003 totaled $139,084, or 31.5% of net sales, as compared with $122,687, or 33.1% of net sales, for the first quarter of 2002. The decrease in SG&A expense as a percentage of net sales for the first quarter of 2003 was primarily due to the leveraging effect of higher sales volumes. We expect our SG&A expense as a percentage of net sales to increase in the remaining quarters of 2003 due to the addition of the Getz direct sales organization of approximately 400 sales and support personnel and to an increase of approximately 200 U.S. sales and support personnel in anticipation of our 2004 entry into the cardiac resynchronization segment of the U.S. CRM market. RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expenses in the first quarter of 2003 totaled $55,942, or 12.7% of net sales, compared with $46,465, or 12.5% of net sales, for the first quarter of 2002. The increase in R&D expenses as a percentage of net sales is primarily attributable to increased CRM activities relating primarily to ICDs and products treating emerging indications in atrial fibrillation and heart failure. SPECIAL CHARGES: On January 21, 2000, we initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating Silzone(R) coating on the sewing cuff fabric. We concluded that it would no longer utilize Silzone(R) coating. We recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636), including monitoring expenses, associated with this recall and product discontinuance. In the second quarter of 2002, we determined that the Silzone(R) reserves for other costs should be increased by $11,000 due primarily to difficulties in obtaining certain reimbursements from our insurance carriers under the product liability insurance policies. This additional accrual was included in selling, general and administrative 13 expenses for the second quarter ended June 30, 2002. We have utilized $23,360 of these special charge accruals through March 31, 2003, consisting of $9,465 of asset write-downs and $13,895 of other costs. We estimate that the remaining accruals will be utilized primarily during 2003 and 2004. We have approximately $200,000 remaining in product liability insurance currently available for the Silzone(R)-related matters. There can be no assurance that the final costs associated with this recall that are not covered by insurance, including litigation-related costs, will not exceed management's estimates. OTHER INCOME (EXPENSE): The change in other income (expense) during the first quarter of 2003 as compared with 2002 is due primarily to higher levels of interest income resulting from the increase in cash and equivalents and reduced interest expense as a result of the repayment of our debt in the first quarter of 2002. INCOME TAXES: Our effective income tax rate was 26% for the first quarter of 2003 and 25% for the first quarter of 2002. The increase in our effective income tax rate in 2003 is due to a larger percentage of our taxable income being generated in higher taxing jurisdictions. We anticipate that our effective income tax rate will increase in the years following 2003 as a larger percentage of our forecasted taxable income is generated in higher taxing jurisdictions. From time to time, we face challenges from tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Our U.S. Federal tax filings prior to 1998 have been examined by the Internal Revenue Service (IRS), and we have settled all differences arising out of those examinations. Consistent with our status with the U.S. Federal tax authorities as a "coordinated industry case," the IRS is currently in the process of examining our U.S. Federal tax returns for the calendar years 1998, 1999 and 2000. Although we believe we have recorded an appropriate income tax provision, there can be no assurance that the IRS or other tax authorities will not take positions contrary to those taken by us. We further believe that any taxes not covered by our income tax provision will not have a material adverse impact on our consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. OUTLOOK: We expect that market demand, government regulation and reimbursement policies, and societal pressures will continue to change the worldwide healthcare industry resulting in further business consolidations and alliances. We participate with industry groups to promote the use of advanced medical device technology in a cost-conscious environment. The global medical technology industry is highly competitive and is characterized by rapid product development and technological change. Our products must continually improve technologically and provide improved clinical outcomes due to the competitive nature of the industry. In addition, competitors have historically employed litigation to gain a competitive advantage. The cardiac rhythm management market is highly competitive. There are currently three principal suppliers in this market, including us, and our two principal competitors each have substantially more assets and sales than the Company. Rapid technological change in the CRM market is expected to continue, requiring us to invest heavily in R&D and to effectively market our products. Two trends began to emerge in the CRM market during 2002 and have continued into 2003. The first involved a possible shift of some traditional pacemaker patients to ICD 14 devices and the second involved the increasing use of resynchronization devices in both the ICD and pacemaker markets. Our competitors in the CRM market have U.S. regulatory approval to market CRM devices with resynchronization features. We currently have both a cardiac resynchronization ICD and pacemaker product in U.S. clinical studies. If the approvals of these products are delayed or not received, our CRM sales could be adversely affected if the CRM market continues to shift towards products with cardiac resynchronization capabilities. The cardiac surgery market, which includes mechanical heart valves, tissue heart valves and valve repair products, is also highly competitive. In the past few years, the market has shifted to tissue valves and repair products from mechanical heart valves, resulting in an overall market share loss for us. Competition is anticipated to continue to place pressure on pricing and terms, including a trend toward vendor-owned (consignment) inventory at the hospitals. Healthcare reform is expected to result in further hospital consolidations over time, which could lead to increased demands for price concessions. The cardiology and vascular access market is a growing market with numerous competitors. More than 80% of our sales in this market are for vascular closure devices. The market for vascular closure devices is highly competitive, and there are several companies, in addition to us, that manufacture and market these products worldwide. We operate in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against us in the future relative to events that are not known to management at the present time. While it is not possible to predict the outcome of every claim, we believe that we have adequate product liability insurance to cover the costs associated with them. The product liability insurance market has changed dramatically since September 2001. Our self-insured retentions and insurance premiums have increased and are expected to increase further in the future. Our insurance program, as a result, is designed to prevent a catastrophic loss. We further believe that any costs not covered by product liability insurance, including our self-insured deductible, will not have a material adverse impact on our consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. Group purchasing organizations (GPOs) and independent delivery networks (IDNs) in the United States continue to consolidate purchasing decisions for some of our hospital customers. We have contracts in place with many of these organizations. One large GPO has executed contracts with our CRM market competitors that exclude us. The enforcement of these contracts may adversely affect our sales of CRM products to members of this GPO. FINANCIAL CONDITION Our liquidity and cash flows remained strong during the first quarter of 2003. Cash provided by operating activities was $85,335 for the three months ended March 31, 2003, a $49,333 increase over the same period one year ago reflecting increased earnings and improved working capital management. Our current assets to current liabilities ratio (computed as current assets divided by current liabilities) was 3.4 to 1 at March 31, 2003, as compared with 3.0 to 1 at December 31, 2002. 15 At March 31, 2003 and December 31, 2002, approximately one-half of our cash and equivalents were held by our non-U.S. subsidiaries. These funds are available for use by our U.S. operations; however, they would be subject to additional U.S. tax upon repatriation to the United States. During the first quarter of 2003, our $350,000 unsecured revolving credit facility expired. We elected not to renew the facility due to our existing cash balances, anticipated future cash flows from operations and the expenses associated with maintaining such a facility. On April 1, 2003, we completed our acquisition of Getz Japan. We paid 26.9 billion Japanese yen in cash, or approximately $230,000, to acquire 100% of the outstanding common stock of Getz Japan. The purchase price was financed by a portion of our existing cash balances and 24.6 billion yen of borrowings under a short-term, bank credit agreement. On April 1, 2003, we also acquired the net assets of Getz Bros. & Co. (Aust.) Pty. Limited and Medtel Pty. Limited for approximately $6,500 in cash. The results of operations of the above-mentioned business acquisitions will be included in our consolidated results of operations beginning in the second quarter of 2003. We estimate that these acquisitions will be neutral to earnings per share in 2003 and accretive in 2004 and thereafter. On April 1, 2003, we borrowed 24.6 billion Japanese yen, or approximately $210,000, under a short-term, unsecured bank credit agreement to partially finance the Getz Japan acquisition. These borrowings were repaid in May 2003. In May 2003, we issued fixed-rate, 7-year, unsecured term notes totaling 20.9 billion yen, or approximately $178,000. We also obtained a short-term, unsecured bank credit agreement which provides for borrowings of up to 3.8 billion yen, or approximately $32,000. Proceeds from the issuance of the term notes and from borrowings under the short-term, bank credit agreement were used to repay the 24.6 billion yen of short-term bank borrowings. On May 1, 2003, we made a $15,000 minority investment in a development stage company that is focused on developing technologies to treat patients with atrial fibrillation. In conjunction with this investment, we also agreed to acquire the remaining ownership of the business in 2004 for an additional $185,000 in cash, provided a number of specific clinical and regulatory milestones are achieved. We believe that our cash balances will be sufficient to fund the 2004 cash payment if we complete the acquisition. We have no off-balance sheet financing arrangements other than certain operating leases previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. With the acquisition of Getz Japan on April 1, 2003, we assumed numerous noncancelable operating lease arrangements for various facilities in Japan. The future minimum lease payments related to these lease agreements are approximately $3,000 each year for years 2003 through 2007 and an aggregate of $15,000 for all years thereafter. There have been no other significant changes in our operating lease obligations since December 31, 2002. We believe that our existing cash balances and future cash generated from operations will be sufficient to meet our working capital and capital investment needs in the near term. Should 16 suitable investment opportunities arise, we believe that our earnings, cash flows and balance sheet will permit us to obtain additional debt financing or equity capital, if necessary. CAUTIONARY STATEMENTS In this discussion and in other written or oral statements made from time to time, we have included and may include statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Litigation Securities Reform Act of 1995. These forward-looking statements are not historical facts but instead represent our belief regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. These statements relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the results indicated by these forward-looking statements. We undertake no obligation to update any forward-looking statements. Various factors contained in the previous discussion and those described below may affect the Company's operations and results. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. Risk factors include the following: 1. Legislative or administrative reforms to the U.S. Medicare and Medicaid systems or similar reforms of international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for such procedures. Adverse decisions relating to our products by administrators of such systems in coverage or reimbursement issues. 2. Acquisition of key patents by others that have the effect of excluding us from market segments or require us to pay royalties. 3. Economic factors, including inflation, changes in interest rates and changes in foreign currency exchange rates. 4. Product introductions by competitors which have advanced technology, better features or lower pricing. 5. Price increases by suppliers of key components, some of which are sole-sourced. 6. A reduction in the number of procedures using our devices caused by cost-containment pressures or preferences for alternate therapies. 7. Safety, performance or efficacy concerns about our marketed products, many of which are expected to be implanted for many years, leading to recalls and/or advisories with the attendant expenses and declining sales. 8. Changes in laws, regulations or administrative practices affecting government regulation of our products, such as FDA laws and regulations that increase pre-approval testing requirements for products or impose additional burdens on the manufacture and sale of medical devices. 17 9. Difficulties obtaining, or the inability to obtain, appropriate levels of product liability insurance. 10. A serious earthquake affecting our facilities in Sunnyvale or Sylmar, California. 11. Health care industry consolidation leading to demands for price concessions or the exclusion of some suppliers from significant market segments. 12. Adverse developments in litigation including product liability litigation and patent litigation or other intellectual property litigation including those arising from the Telectronics and Ventritex acquisitions. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK On April 1, 2003, we completed our acquisition of Getz Japan. In May 2003, we issued fixed-rate, 7-year, unsecured term notes totaling 20.9 billion yen, or approximately $178,000, to partially finance the acquisition purchase price. We also obtained a short-term, unsecured bank credit agreement which provides for borrowings of up to 3.8 billion yen, or approximately $32,000. We are exposed to foreign currency exchange rate fluctuations due to transactions associated with the acquired Getz business that are denominated in Japanese yen, including borrowings under the short-term, bank credit agreement and the long-term, unsecured term notes issued in May 2003. We are also exposed to interest rate risk on the short-term, bank credit agreement which has a variable interest rate tied to the floating yen LIBOR rate. A hypothetical 10% change in short-term interest rates as compared to the current interest rate under the bank credit agreement would not have a material impact on our consolidated results of operations. There have been no other material changes from December 31, 2002 in our market risk. For further information on market risk, refer to Item 7A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures ------------------------------------------------ Disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934) refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days prior to the filing of this quarterly report, and they have concluded that such controls and procedures are effective at ensuring that required information will be disclosed on a timely basis in the Company's reports filed under the Exchange Act. (b) Changes in Internal Controls ---------------------------- There have been no significant changes to the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation. 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in the Company's mechanical heart valves and valve repair products with Silzone(R) coating. Some of these cases are seeking monitoring of patients implanted with Silzone(R)-coated valves and repair products who allege no injury to date. Some of these cases have been settled, some have been dismissed, and others are on-going. Some of these cases, both in the United States and Canada, are seeking class action status. The Company voluntarily recalled products with Silzone(R) coating on January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to physicians and others. In 2001, the U.S. Judicial Panel on Multi-District Litigation ruled that certain lawsuits filed in U.S. federal district court involving products with Silzone(R) coating should be part of Multi-District Litigation proceedings under the supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result, actions in federal court involving products with Silzone(R) coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings. Certain plaintiffs requested Judge Tunheim to allow some cases to proceed as class actions. Judge Tunheim issued a ruling on plaintiffs' motions for class certification on March 27, 2003. In his ruling, Judge Tunheim conditionally certified one class of plaintiffs (U.S. persons who have a Silzone heart valve which is still implanted) and conditionally certified a second class of plaintiffs (U.S. persons who received a Silzone heart valve and who have sustained physical injuries due to the valve). The Company believes that the ruling is inconsistent with the applicable laws and precedents, and is pursuing its appellate remedies. In the meantime, cases involving Silzone(R) products not seeking class action status which are consolidated before Judge Tunheim are proceeding in accordance with the scheduling orders he has rendered. There are other actions involving products with Silzone(R) coating in various state courts that may or may not be coordinated with the matters presently before Judge Tunheim. The lawsuits in Canada are proceeding in accordance with separate schedules issued by the applicable provincial courts. A hearing concerning the certification of a class action in Ontario, Canada, is currently scheduled for June 2003. While it is not possible to predict the outcome of the various cases involving Silzone(R) products, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The Company further believes that any costs not covered by product liability insurance will not have a material adverse impact on the Company's consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. GUIDANT LITIGATION: In November 1996, Guidant Corporation ("Guidant") sued St. Jude Medical alleging that the Company did not have a license to certain patents controlled by Guidant covering ICD products and alleging that the Company was infringing those patents. St. Jude Medical's contention was that it had obtained a license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude Medical's position, and in May 2001, a federal district court judge also ruled that the Guidant patent license with Telectronics had not transferred to St. Jude Medical. 20 Guidant's suit originally alleged infringement of four patents by St. Jude Medical. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant and the Court of Appeals upheld the lower court's invalidity determination. In a jury trial involving the two remaining patents (the '288 and '472 patents), the jury found that these patents were valid and that St. Jude Medical did not infringe the '288 patent. The jury found that the Company did infringe the '472 patent, though such infringement was not willful. The jury awarded damages of $140,000 to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the '472 patent was invalid and also was not infringed by St. Jude Medical, thereby eliminating the $140,000 verdict against the Company. The trial court also made other rulings as part of the post-trial order, including a ruling that the '288 patent was invalid on several grounds. In August 2002, Guidant commenced an appeal of certain of the trial judge's post-trial decisions pertaining to the '288 patent. Guidant did not appeal the trial court's finding of invalidity and non-infringement of the '472 patent. The parties are currently in the briefing phase of this appeal. While it is not possible to predict the outcome of the appeal process, the Company believes that it has meritorious defenses against the claims asserted by Guidant and Guidant's continued pursuit of this case. OTHER LITIGATION MATTERS: The Company is involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K A Form 8-K was filed on March 21, 2003, to disclose under Item 5 an Amendment, dated as of December 20, 2002, to the Rights Agreement dated as of June 16, 1997, between St. Jude Medical, Inc. and American Stock Transfer and Trust Company, as Rights Agent. A Form 8-K was also filed on March 31, 2003, to disclose under Item 9 that the U.S. District Court for the District of Minnesota issued a ruling on plaintiffs' requests to allow claims against the Company involving Silzone(R) coating to proceed as class actions. 21 SIGNATURE 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. ST. JUDE MEDICAL, INC. May 12, 2003 /s/ JOHN C. HEINMILLER - ------------ ---------------------- DATE JOHN C. HEINMILLER Vice President - Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 22 CERTIFICATION I, Terry L. Shepherd, certify that: 1. I have reviewed this quarterly report on Form 10-Q of St. Jude Medical, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ TERRY L. SHEPHERD - --------------------- Terry L. Shepherd Chairman and Chief Executive Officer 23 CERTIFICATION I, John C. Heinmiller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of St. Jude Medical, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ JOHN C. HEINMILLER - ---------------------- John C. Heinmiller Chief Financial Officer 24 EX-99.1 3 stjude032225_ex99-1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of St. Jude Medical, Inc., (the "Company") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Terry L. Shepherd, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ TERRY L. SHEPHERD - --------------------- Terry L. Shepherd Chairman and Chief Executive Officer May 12, 2003 EX-99.2 4 stjude032225_ex99-2.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of St. Jude Medical, Inc., (the "Company") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John C. Heinmiller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JOHN C. HEINMILLER - ---------------------- John C. Heinmiller Chief Financial Officer May 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----