-----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, E+6MBXOltv9r8/zExo4ZYFT12OdD56tiGaKUF9t1jMtZ2DIQuAGqFrsBFAnx6NOv Xu4JA6PyWaQ2a5prALaN9w== 0000897101-98-000917.txt : 19980915 0000897101-98-000917.hdr.sgml : 19980915 ACCESSION NUMBER: 0000897101-98-000917 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTRONIC INC CENTRAL INDEX KEY: 0000064670 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 410793183 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07707 FILM NUMBER: 98708669 BUSINESS ADDRESS: STREET 1: 7000 CENTRAL AVE NE STREET 2: MS 316 CITY: MINNEAPOLIS STATE: MN ZIP: 55432 BUSINESS PHONE: 6125744000 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998 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 1-7707 MEDTRONIC, INC. (Exact name of registrant as specified in its charter) Minnesota 41-0793183 (State of incorporation) (I.R.S. Employer Identification No.) 7000 Central Avenue N.E. Minneapolis, Minnesota 55432 (Address of principal executive offices) Telephone number: (612) 514-4000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ Shares of common stock, $.10 par value, outstanding on August 28, 1998: 467,955,830 PART I--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS MEDTRONIC, INC. CONSOLIDATED STATEMENT OF EARNINGS (Unaudited)
Three months ended ------------------------ July 31, August 1, 1998 1997 --------- --------- (in thousands, except per share data) Net sales $ 653,235 $ 646,279 Costs and expenses: Cost of products sold 169,689 160,161 Research and development expense 74,634 70,687 Selling, general, and administrative expense 187,927 194,903 Interest expense 1,882 1,950 Interest income (6,996) (5,068) --------- --------- Total costs and expenses 427,136 422,633 --------- --------- Earnings before income taxes 226,099 223,646 Provision for income taxes 75,743 77,158 --------- --------- Net earnings $ 150,356 $ 146,488 ========= ========= Weighted average shares outstanding 469,061 468,402 Basic earnings per share $ 0.32 $ 0.31 ========= ========= Earnings per share assuming dilution $ 0.32 $ 0.31 ========= ========= Weighted average shares outstanding assuming dilution 476,236 476,245
See accompanying Notes to Condensed Consolidated Financial Statements. MEDTRONIC, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
July 31, April 30, 1998 1998 ----------- ----------- ASSETS (in thousands) ------ Current assets: Cash and cash equivalents $ 259,188 $ 382,734 Short-term investments 180,317 43,148 Accounts receivable, less allowance for doubtful accounts of $15,590 and $14,469 574,936 566,056 Inventories: Finished goods 160,152 147,689 Work in process 76,030 73,350 Raw materials 106,185 110,094 ----------- ----------- Total inventories 342,367 331,133 Prepaid expenses and other current assets 237,920 228,539 ----------- ----------- Total current assets 1,594,728 1,551,610 Property, plant, and equipment 1,053,022 1,023,403 Accumulated depreciation (534,817) (514,616) ----------- ----------- Net property, plant, and equipment 518,205 508,787 Goodwill and other intangible assets, net 456,411 466,559 Long-term investments 114,505 137,706 Other assets 108,893 110,065 ----------- ----------- Total assets $ 2,792,742 $ 2,774,727 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Short-term borrowings $ 99,226 $ 93,346 Accounts payable 74,241 89,149 Accrued liabilities 403,946 389,547 ----------- ----------- Total current liabilities 577,413 572,042 Long-term debt 16,434 16,227 Deferred tax liabilities 650 13,409 Other long-term liabilities 125,354 128,859 ----------- ----------- Total liabilities 719,851 730,537 Shareholders' equity: Common stock--par value $.10 46,864 46,905 Retained earnings 2,127,874 2,072,383 Accumulated other non-owner changes in equity (75,697) (47,198) ----------- ----------- 2,099,041 2,072,090 Receivable from Employee Stock Ownership Plan (26,150) (27,900) ----------- ----------- Total shareholders' equity 2,072,891 2,044,190 ----------- ----------- Total liabilities and shareholders' equity $ 2,792,742 $ 2,774,727 =========== ===========
See accompanying notes to condensed consolidated financial statements. MEDTRONIC, INC. CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
Three months ended ------------------------ July 31, Aug. 1, 1998 1997 --------- --------- (in thousands) OPERATING ACTIVITIES: Net earnings $ 150,356 $ 146,488 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 35,900 33,962 Change in assets and liabilities: Increase in accounts receivable (10,185) (3,381) Increase in inventories (12,821) (25,755) Increase (decrease) in accounts payable and accrued liabilities (2,874) 19,315 Changes in other operating assets and liabilities (20,471) (18,502) --------- --------- Net cash provided by operating activities 139,905 152,127 INVESTING ACTIVITIES: Additions to property, plant, and equipment (29,232) (21,450) Purchases of marketable securities (162,000) 0 Sales and maturities of marketable securities 47,643 32,760 Other investing activities (net) (34,127) (24,489) --------- --------- Net cash used in investing activities (177,716) (13,179) FINANCING ACTIVITIES: Increase (decrease) in short-term borrowings (net) 4,672 (11,433) Increase in long-term debt (net) 207 4,959 Dividends to shareholders (30,423) (25,729) Repurchases of common stock (59,028) (40,066) Issuance of common stock 1,094 18,310 --------- --------- Net cash used in financing activities (83,478) (53,959) Effect of exchange rate changes on cash and cash equivalents (2,257) (2,150) --------- --------- Net change in cash and cash equivalents (123,546) 82,839 Cash and cash equivalents at beginning of period 382,734 197,388 --------- --------- Cash and cash equivalents at end of period $ 259,188 $ 280,227 ========= =========
See accompanying notes to condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation - ------------------------------ The unaudited condensed consolidated financial statements include the accounts of Medtronic, Inc. and all of its subsidiaries, after elimination of all significant intercompany transactions and accounts. In the opinion of management, all adjustments necessary for a fair presentation of operating results have been made. All such adjustments are of a normal recurring nature. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. Note 2 - Acquisitions - --------------------- On June 29, 1998, Medtronic, Inc. and Physio-Control International Corporation announced the signing of a definitive merger agreement. The agreement calls for each Physio-Control shareholder to receive $27.50 in the form of Medtronic common stock for each share of Physio-Control they now hold. Physio-Control has approximately 21 million shares outstanding on a diluted basis. It is anticipated that the transaction will close in the second quarter of fiscal 1999 and be accounted for as a pooling of interests. In order to be eligible for pooling of interests, Medtronic intends to issue at least 12.5 million shares of common stock to the public prior to the closing of the transaction. Physio-Control designs, manufactures, markets, and services an integrated line of noninvasive emergency cardiac defibrillator and vital sign assessment devices, disposable electrodes, and data management software. On July 13, 1998, Medtronic, Inc. and AVECOR Cardiovascular Inc. announced the signing of an agreement under which Medtronic will acquire AVECOR in a transaction valued at approximately $91 million. The transaction calls for AVECOR shareholders to receive $11.125 in Medtronic common stock for each share of AVECOR they now hold. It is anticipated that the transaction will close in late 1998 and be accounted for as a purchase. AVECOR develops, manufacturers and markets specialty medical devices for heart/lung bypass surgery and long-term respiratory support. Note 3 - Other Non-Owner Changes in Equity - ------------------------------------------ During the first quarter of fiscal 1999, the company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" (SFAS No. 130). In addition to net earnings, other non-owner changes in equity include, as applicable, unrealized gains and losses on available for sale securities, foreign currency translation adjustments, and minimum pension liability. For the quarters ended July 31, 1998 and August 1, 1997, the company's other non-owner changes in equity was $121.9 million and $142.0 million, respectively. The company's adoption of SFAS No. 130 had no effect on the company's reported results of operations, cash flows or financial position. Note 4 - Non-Recurring Charges and Foundation Commitment Update - --------------------------------------------------------------- The company recorded pre-tax charges totaling $205.3 million during the third quarter of fiscal 1998. Applications during the first quarter of fiscal 1999 against the remaining accruals related to these charges were as follows: (amounts in thousands) Balance at Charges Balance at April 30, 1998 Utilized July 31, 1998 - -------------------------------------------------------------------------------- Facility Reductions $4,038 $(976) $3,062 Severance and Related Costs 44,756 (5,698) 39,058 Noncancelable Contractual Obligations and Other 39,977 (31,393) 8,584 - -------------------------------------------------------------------------------- Total $88,771 $(38,067) $50,704 The company is in the process of implementing the major strategic actions, which are expected to be completed by the end of fiscal 1999. The remaining reserve balance at July 31, 1998 is included in current accrued liabilities. The above applications utilized during the quarter include company funding of the remaining commitment to Medtronic Foundation through the donation of equity securities with a fair value of $25.5 million. Note 5 - New Accounting Pronouncements - -------------------------------------- In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which is required to be adopted for fiscal years beginning after June 15, 1999, although earlier application is permitted as of the beginning of any fiscal quarter. This statement will require the company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The company is in the process of determining if earlier application would be feasible and what effect the adoption of SFAS No. 133 will have on the company's results of operations, cash flows or financial position. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- Net Earnings - ------------ Net earnings for the first quarter ended July 31, 1998 and August 1, 1997 were $150.4 million and $146.5 million, respectively. Diluted earnings per share was $0.32 compared to $0.31 per share for the same period last year. Sales - ----- Sales for the quarter ended July 31, 1998 increased 1.1 percent compared to the same period last year. The softer-than-expected first quarter revenues were largely due to the selling environment the company is currently facing in the U.S. as it awaits regulatory clearance of several major new products. Sales growth in the quarter was also negatively impacted by $15.6 million of unfavorable exchange rate movements caused primarily by the strengthening of the U.S. dollar versus major European currencies and the Japanese Yen. Exclusive of the effects of foreign currency translation, sales for the quarter increased 3.5 percent over the comparable period last year. Net sales of Cardiac Rhythm Management products, which consist primarily of products for bradycardia pacing and tachyarrhythmia management, increased 6.6 percent during the quarter after removing the impact of foreign exchange rate fluctuations, compared to the same period a year ago. Unit sales of bradycardia implantable pulse generators (IPG's) achieved 10% growth during the quarter. This growth was led by especially strong sales of the Medtronic.Kappa 700 series pacemakers in international locations. Strong sales growth was also achieved in the U.S. by sales of the Medtronic.Kappa 400 series pacemakers. Sales of tachyarrhythmia management products increased nearly 5% during the quarter as the highly competitive defibrillator market continued its shift from single chamber to dual chamber defibrillators. The Gem DR, which has been rapidly accepted since its June 1998 release in Europe and certain other markets outside the U.S. led international defibrillator sales growth during the quarter of approximately 30%. U.S. defibrillator sales declined slightly during the quarter as compared to the prior year. In addition, the Jewel AF device, which incorporates tiered therapy to the atrium as well as the ventricle for treatment of ventricular and atrial arrhythmias, was commercially released in Europe and other international markets at the end of the quarter. Revenues continue to be soft in the U.S. as the company awaits FDA regulatory clearance of the Gem DR, Gem SR, and Kappa.700 products, in contrast to Europe where strong revenue increases have resulted from the availability of these products. The company anticipates regulatory clearance of the Gem products in the second fiscal quarter and the Kappa.700 later in the year. The timing of the regulatory clearances is important to achievement of period to period financial comparisons and expectations. Net sales within Other Cardiovascular product lines, (consisting of heart valves, perfusion and blood management systems, cannulae, surgical accessories, balloon and guiding catheters, and stents), decreased 9.2 percent from the same period a year ago after excluding the effects of foreign currency translation. This decline was primarily attributable to continued significant declines in sales of stents and balloon catheters used in coronary angioplasty. The prior year comparative period also included the benefit of the prior year U.S. launch of the Wiktor(R) Prime coronary stent in the absence of the strong competitive stents which now dominate the U.S. market. Sales of heart valve products achieved high-single digit revenue growth during the quarter on continuing strong U.S. sales of the Freestyle stentless aortic tissue valve. Sales of cannulae and perfusion systems grew in the low-single digits while sales of blood management systems were nearly flat compared to last year's comparable quarter. The endovascular stent-graft system, currently launched outside the United States, continues to gain medical acceptance for minimally-invasive treatment of abdominal aortic aneurysms. Net sales of Neurological and Other products, consisting primarily of implantable neurostimulation devices, drug administration systems, neurosurgery products, and diagnostic systems, increased 9.5 percent from the same period a year ago after excluding the effects of foreign currency translation. Sales of neurostimulation and drug delivery products grew by 22 and 20 percent respectively, compared to the same period last year. Continued strong sales growth was achieved in the drug delivery product line as a result of continued increased demand for the SynchroMed(R) drug infusion system for delivery of morphine for chronic pain and for delivery of Lioresal (baclofen, USP)Intrathecal for treatment of cerebral and spinal spasticity. Another strong growth factor was the continued rapid sales growth of Medtronic Activa(TM) neurostimulation therapy for control of essential tremor and tremor associated with Parkinson's disease. The company continues to train centers to develop the InterStim continence control therapy market. Sales of neurosurgery (PS Medical) products grew in the low-single digits during the quarter while sales of diagnostic systems (Synectics) declined modestly from a year ago. Costs of Products Sold - ---------------------- Cost of products sold as a percent of sales was 26.0 percent for the quarter compared to 24.8 percent for the same quarter a year ago. The slight increase in the cost of products sold as a percent of sales resulted primarily from the negative impact of foreign exchange rate fluctuations. In addition, certain changes in product and geographic mixes combined with modest pricing pressures on certain products and costs related to new product introductions contributed to the increase. Research and Development Expense - -------------------------------- The company remains committed to spending aggressively on research and development (R&D) to develop technological enhancements and new indications for existing products, as well as to develop less invasive and new technologies to address unmet patient needs and to help reduce procedural costs and length of hospital stay. R&D was $74.6 million or 11.4 percent of net sales for the quarter ended July 31, 1998 compared to $70.7 million, or 10.9 percent of net sales in the comparable period last year. Selling, General, and Administrative Expense (SG&A) - --------------------------------------------------- SG&A expense for the quarter ended July 31, 1998, was $187.9 million compared to $194.9 million for the comparable period last year. SG&A as a percent of sales decreased from 30.2 percent a year ago to 28.8 percent for the current quarter. The decrease in SG&A as a percent of sales is primarily attributable to continued overall cost efficiencies and benefits realized from management initiatives to restructure the vascular organization and reduce global infrastructure taken in the third quarter of fiscal 1998. The decrease is also attributable to gains recognized in the current quarter from the sale of certain available-for-sale equity securities partially offset by a decrease in the dollar amount of gains recognized in the current quarter from hedging activities as compared to the comparative period last year. Interest - -------- Interest expense of $1.9 million for the quarter was fairly consistent to $2.0 million of interest expense for the same period last year. Interest income during the quarter was $7.0 million compared to $5.1 million for the same period last year. The increase in interest income was primarily the result of increased average investment balances over the prior year. Income Taxes - ------------ The estimated effective tax rate for the company's current fiscal year is 33.5 percent compared to an effective tax rate of 34.8 percent for the fiscal year ended April 30, 1998. Despite tax legislation that reduces U.S. tax benefits derived from the company's operations in Puerto Rico, the reduction in the fiscal 1999 effective tax rate is primarily due to a greater proportion of income being derived from Switzerland and other tax planning initiatives. Liquidity and Capital Resources - ------------------------------- Operating activities provided $139.9 million of cash and cash equivalents for the quarter ended July 31, 1998 compared to $152.1 million for the same period a year ago. Working capital was $1,017.3 million at July 31, 1998, an increase of $37.7 million over the $979.6 million at April 30, 1998. The current ratio increased to 2.8:1 at July 31, 1998, compared to 2.7:1 at April 30, 1998. Cash and cash equivalents decreased $123.5 million during the quarter. Significant uses of cash during the quarter included purchases of property, plant, and equipment, purchases of marketable securities, repurchases of common stock under the company's systematic stock repurchase plan, and dividends paid to shareholders. Cautionary Factors That May Affect Future Results - ------------------------------------------------- Certain statements contained in this document and other written and oral statements made from time to time by the company do not relate strictly to historical or current facts. As such, they are considered "forward-looking statements" which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "estimate," "expect," "intend," "may," "could," "possible," "plan," "project," "will," "forecast" and similar words or expressions. The company's forward-looking statements generally relate to its growth strategies, financial results, product development and regulatory approval programs, and sales efforts. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions, including, among others, those discussed in the section entitled "Government Regulation and Other Matters" in the company's Annual Report and Form 10-K. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. The company undertakes no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by the company on this subject in its filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any), in which the company discusses in more detail various important factors that could cause actual results to differ from expected or historic results. The company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. PART II -- OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the company's 1998 Annual Meeting of Shareholders held on August 26, 1998, the shareholders approved the following: (a) A proposal to set the size of the Board of Directors at 14 and to elect five Class III directors of the company to serve for three- year terms ending in 2001, as follows: Director Votes For Votes Withheld - -------- --------- -------------- William R. Brody, M.D., Ph.D. 385,401,207 4,043,662 Paul W. Chellgren 385,196,316 4,248,553 Arthur D. Collins, Jr. 384,961,466 4,483,403 Antonio M. Gotto, Jr., M.D. 385,419,140 4,025,729 Thomas E. Holloran 385,203,704 4,241,165 There were no broker non-votes. In addition, the terms of the following directors continued after the meeting: Class I directors for a term ending in 1999-Glen D. Nelson, M.D., Jack W. Schuler, Gerald W. Simonson, and Richard A. Swalin, Ph.D.; and Class II directors for a term ending in 2000-William W. George, Bernadine P. Healy, M.D., Richard L. Schall, and Gordon M. Sprenger. (b) A proposal to ratify the appointment of PricewaterhouseCoopers LLP to serve as independent auditors of the company for the fiscal year ending April 30, 1999. The proposal received 388,129,389 votes for, and 767,429 against, ratification. There were 548,051 abstentions and no broker non-votes. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 - Financial Data Schedule (For SEC use only) (b) Reports on Form 8-K During the quarter ended July 31, 1998, the company filed (i) a Report on Form 8-K dated July 8, 1998 reporting under Item 5 the announced signing of an agreement to acquire Physio-Control International Corporation and (ii) a Report on Form 8-K dated July 16, 1998 reporting under Item 5 the announced signing of an agreement to acquire AVECOR Cardiovascular Inc. Subsequent to the quarter ended July 31, 1998, the company filed (i) a Report on Form 8-K dated August 20, 1998 reporting under Item 5 the announcement of financial results for the fiscal first quarter ended July 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Medtronic, Inc. (Registrant) Date: September 14, 1998 /S/ WILLIAM W. GEORGE ------------------------------------- William W. George Chairman and Chief Executive Officer Date: September 14, 1998 /S/ ROBERT L. RYAN ------------------------------------- Robert L. Ryan Senior Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEET FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998 FILED WITH THE SEC ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS APR-30-1999 MAY-1-1998 JUL-31-1998 259,188 180,317 590,526 (15,590) 342,367 1,594,728 1,053,022 (534,817) 2,792,742 577,413 0 46,864 0 0 2,026,027 2,792,742 653,235 653,235 169,689 169,689 255,565 0 1,882 226,099 75,743 150,356 0 0 0 150,356 .32 .32
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