e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JULY 4, 2009
OR
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o |
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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)
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Minnesota
(State or other jurisdiction
of incorporation or organization)
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41-1276891
(I.R.S. Employer
Identification No.) |
One St. Jude Medical Drive, St. Paul, Minnesota 55117
(Address of principal executive offices, including zip code)
(651) 756-2000
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of common stock, par value $.10 per share, outstanding on July 30, 2009 was
347,981,258.
PART I FINANCIAL INFORMATION
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Item 1. |
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FINANCIAL STATEMENTS |
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 28, 2008 |
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June 28, 2008 |
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July 4, 2009 |
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(As adjusted) |
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July 4, 2009 |
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(As adjusted) |
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Net sales |
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$ |
1,184,412 |
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$ |
1,135,760 |
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$ |
2,318,205 |
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$ |
2,146,498 |
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Cost of sales |
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305,544 |
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287,691 |
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600,039 |
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548,178 |
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Gross profit |
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878,868 |
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848,069 |
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1,718,166 |
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1,598,320 |
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Selling, general and administrative
expense |
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431,169 |
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416,261 |
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848,844 |
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783,377 |
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Research and development expense |
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143,052 |
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138,455 |
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282,403 |
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262,090 |
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Operating profit |
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304,647 |
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293,353 |
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586,919 |
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552,853 |
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Other income (expense), net |
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(4,961 |
) |
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(18,020 |
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(12,273 |
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(28,447 |
) |
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Earnings before income taxes |
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299,686 |
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275,333 |
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574,646 |
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524,406 |
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Income tax expense |
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80,316 |
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82,421 |
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154,005 |
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154,925 |
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Net earnings |
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$ |
219,370 |
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$ |
192,912 |
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$ |
420,641 |
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$ |
369,481 |
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Net earnings per share: |
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Basic |
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$ |
0.63 |
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$ |
0.57 |
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$ |
1.21 |
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$ |
1.08 |
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Diluted |
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$ |
0.63 |
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$ |
0.55 |
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$ |
1.20 |
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$ |
1.06 |
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Weighted average shares outstanding: |
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Basic |
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346,767 |
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340,699 |
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346,308 |
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342,178 |
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Diluted |
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350,620 |
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348,269 |
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350,213 |
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350,112 |
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See notes to the condensed consolidated financial statements.
1
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
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July 4, 2009 |
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(Unaudited) |
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January 3, 2009 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
486,569 |
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$ |
136,443 |
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Accounts receivable, less allowance for doubtful accounts of
$30,942 at July 4, 2009 and $28,971 at January 3, 2009 |
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1,177,067 |
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1,101,258 |
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Inventories |
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620,117 |
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546,499 |
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Deferred income taxes, net |
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135,454 |
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137,042 |
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Other |
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204,606 |
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158,821 |
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Total current assets |
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2,623,813 |
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2,080,063 |
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Property, plant and equipment, at cost |
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1,833,448 |
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1,675,979 |
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Less: accumulated depreciation |
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(762,109 |
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(695,803 |
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Net property, plant and equipment |
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1,071,339 |
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980,176 |
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Other Assets |
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Goodwill |
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1,985,966 |
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1,984,566 |
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Other intangible assets, net |
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474,256 |
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493,535 |
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Other |
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208,449 |
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184,164 |
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Total other assets |
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2,668,671 |
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2,662,265 |
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TOTAL ASSETS |
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$ |
6,363,823 |
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$ |
5,722,504 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities |
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Current portion of long-term debt |
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$ |
324,525 |
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$ |
75,518 |
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Accounts payable |
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229,243 |
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238,310 |
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Income taxes payable |
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18,357 |
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17,608 |
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Accrued expenses |
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Employee compensation and related benefits |
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284,375 |
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297,287 |
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Other |
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386,818 |
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399,801 |
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Total current liabilities |
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1,243,318 |
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1,028,524 |
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Long-term debt |
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961,022 |
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1,126,084 |
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Deferred income taxes, net |
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126,738 |
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112,231 |
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Other liabilities |
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254,387 |
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219,759 |
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Total liabilities |
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2,585,465 |
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2,486,598 |
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Commitments and Contingencies (Note 7) |
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Shareholders Equity |
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Preferred stock ($1.00 par value; 25,000,000 shares authorized; none outstanding) |
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Common stock ($0.10 par value; 500,000,000 shares authorized; 347,640,007 and
345,332,272 shares issued and outstanding at July 4, 2009 and
January 3, 2009, respectively) |
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34,764 |
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34,533 |
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Additional paid-in capital |
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302,675 |
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219,041 |
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Retained earnings |
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3,398,271 |
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2,977,630 |
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Accumulated other comprehensive income (loss): |
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Cumulative translation adjustment |
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35,958 |
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(1,023 |
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Unrealized gain on available-for-sale securities |
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6,690 |
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6,136 |
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Unrealized loss on derivative financial instruments |
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(411 |
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Total shareholders equity |
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3,778,358 |
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3,235,906 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
6,363,823 |
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$ |
5,722,504 |
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See notes to the condensed consolidated financial statements.
2
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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June 28, 2008 |
Six Months Ended |
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July 4, 2009 |
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(As adjusted) |
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OPERATING ACTIVITIES |
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Net earnings |
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$ |
420,641 |
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$ |
369,481 |
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Adjustments to reconcile net earnings to net cash from operating activities: |
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Depreciation |
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71,413 |
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62,708 |
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Amortization |
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29,531 |
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37,408 |
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Amortization of discount on convertible debentures |
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26,008 |
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Stock-based compensation |
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27,980 |
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24,800 |
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Excess tax benefits from stock-based compensation |
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(12,866 |
) |
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(18,543 |
) |
Deferred income taxes |
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13,415 |
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|
4,862 |
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Changes in operating assets and liabilities, net of business
acquisitions: |
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Accounts receivable |
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(68,780 |
) |
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(106,533 |
) |
Inventories |
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(64,864 |
) |
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(16,125 |
) |
Other current assets |
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(41,360 |
) |
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(14,507 |
) |
Accounts payable and accrued expenses |
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(34,076 |
) |
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20,406 |
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Income taxes payable |
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17,427 |
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(9,666 |
) |
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Net cash provided by operating activities |
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358,461 |
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380,299 |
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INVESTING ACTIVITIES |
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Purchases of property, plant and equipment |
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(158,476 |
) |
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(136,650 |
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Business acquisition payments, net of cash acquired |
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(9,065 |
) |
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(6,359 |
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Other, net |
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1,330 |
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(22,011 |
) |
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Net cash used in investing activities |
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(166,211 |
) |
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(165,020 |
) |
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FINANCING ACTIVITIES |
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Proceeds from exercise of stock options and stock issued |
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39,588 |
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63,263 |
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Excess tax benefits from stock-based compensation |
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12,866 |
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18,543 |
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Common stock repurchased, including related costs |
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(300,000 |
) |
Borrowings under debt facilities |
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6,687,000 |
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Payments under debt facilities |
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(6,583,775 |
) |
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Net cash provided by (used in) financing activities |
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155,679 |
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(218,194 |
) |
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Effect of currency exchange rate changes on cash and cash equivalents |
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2,197 |
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11,302 |
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Net increase in cash and cash equivalents |
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350,126 |
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8,387 |
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Cash and cash equivalents at beginning of period |
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136,443 |
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389,094 |
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Cash and cash equivalents at end of period |
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$ |
486,569 |
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$ |
397,481 |
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See notes to the condensed consolidated financial statements.
3
ST. JUDE MEDICAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of St. Jude Medical, Inc.
(St. Jude Medical or the Company) 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, these statements include all
adjustments (consisting of normal recurring adjustments) considered necessary to present a fair
statement of the Companys consolidated results of operations, financial position and cash flows.
Operating results for any interim period are not necessarily indicative of the results that may be
expected for the full year. Preparation of the Companys 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 footnotes. Actual
results could differ from those estimates.
This Quarterly Report on Form 10-Q should be read in conjunction with the Companys consolidated
financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year
ended January 3, 2009 (2008 Annual Report on Form 10-K), as revised by its Current Report on Form
8-K filed with the Securities and Exchange Commission on July 22, 2009 to reflect the retrospective
impact of the adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP)
Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1).
All prior periods presented in this Quarterly Report on Form 10-Q have been retrospectively
adjusted for the impact of the adoption of FSP APB No. 14-1 (see Note 3).
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued two related FSPs: (i) FSP SFAS No. 115-2 and SFAS No. 124-2,
Recognition of Presentation of Other-Than-Temporary Impairments (FSP SFAS No. 115-2/SFAS No. 124-2)
and (ii) FSP SFAS No. 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP SFAS No. 107-1/APB No. 28-1), which are effective for interim and annual
reporting periods ending after June 15, 2009. FSP SFAS No. 115-2/SFAS No. 124-2 modifies the
requirement for recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. FSP SFAS No. 107-1/APB
No. 28-1 requires fair value disclosures at interim reporting periods for financial instruments not
reflected in the Condensed Consolidated Balance Sheets at fair value, which are similar to the fair
value disclosures required in annual financial statements for those same assets and liabilities.
In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent
Events (SFAS No. 165), which establishes general standards of accounting for and disclosures of
events that occur after the balance sheet date but before the financial statements are issued or
available to be issued. It requires the disclosure of the date through which the Company has
evaluated its subsequent events and the basis for that date. The Company has evaluated its
subsequent events through August 12, 2009, the date of issuance of this Quarterly Report on Form 10-Q
(see Note 15).
NOTE 3 RETROSPECTIVE ADOPTION OF ACCOUNTING PRONOUNCEMENT
In May 2008, the FASB issued FSP APB No. 14-1, which requires the proceeds from the issuance of
certain convertible debt instruments to be allocated between a liability and an equity component in
a manner that reflects the entitys nonconvertible debt borrowing rate when interest expense is
recognized in subsequent periods. The resulting debt discount is amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest expense. The
Companys 2009 adoption of FSP APB No. 14-1 did not impact 2009 financial statements; however, it
required retrospective application to all prior periods presented. As a result, the Companys
historical financial statements presented in this Quarterly Report on Form 10-Q have been adjusted
to conform to the new accounting treatment.
4
The application of this new accounting treatment results in the following adjustments to the
Companys condensed consolidated statement of earnings for the second quarter of 2008 and the first
six months of 2008 (in thousands):
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Three Months Ended |
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Six Months Ended |
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June 28, 2008 |
|
June 28, 2008 |
|
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As Originally |
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As |
|
Effect of |
|
As Originally |
|
As |
|
Effect of |
|
|
Reported |
|
Adjusted |
|
Change |
|
Reported |
|
Adjusted |
|
Change |
|
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|
Operating profit |
|
$ |
293,353 |
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|
$ |
293,353 |
|
|
$ |
|
|
|
$ |
552,853 |
|
|
$ |
552,853 |
|
|
$ |
|
|
Other income (expense), net |
|
|
(5,040 |
) |
|
|
(18,020 |
) |
|
|
(12,980 |
) |
|
|
(2,439 |
) |
|
|
(28,447 |
) |
|
|
(26,008 |
) |
|
|
|
Earnings before income taxes |
|
|
288,313 |
|
|
|
275,333 |
|
|
|
(12,980 |
) |
|
|
550,414 |
|
|
|
524,406 |
|
|
|
(26,008 |
) |
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|
|
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|
|
|
Income tax expense |
|
|
87,254 |
|
|
|
82,421 |
|
|
|
(4,833 |
) |
|
|
164,574 |
|
|
|
154,925 |
|
|
|
(9,649 |
) |
|
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Net earnings |
|
$ |
201,059 |
|
|
$ |
192,912 |
|
|
$ |
(8,147 |
) |
|
$ |
385,840 |
|
|
$ |
369,481 |
|
|
$ |
(16,359 |
) |
|
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|
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Net earnings per share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.59 |
|
|
$ |
0.57 |
|
|
$ |
(0.02 |
) |
|
$ |
1.13 |
|
|
$ |
1.08 |
|
|
$ |
(0.05 |
) |
Diluted |
|
$ |
0.58 |
|
|
$ |
0.55 |
|
|
$ |
(0.03 |
) |
|
$ |
1.10 |
|
|
$ |
1.06 |
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
340,699 |
|
|
|
340,699 |
|
|
|
|
|
|
|
342,178 |
|
|
|
342,178 |
|
|
|
|
|
Diluted |
|
|
348,269 |
|
|
|
348,269 |
|
|
|
|
|
|
|
350,112 |
|
|
|
350,112 |
|
|
|
|
|
|
|
|
Additionally, the application of this new accounting treatment results in increases of $13,164 and
$10,801 to the Companys third and fourth quarter 2008 interest expense, respectively, and
decreases of $4,917 and $4,098 to the Companys third and fourth quarter 2008 income tax expense,
respectively.
The application of this new accounting treatment results in the following adjustments to the
Companys condensed consolidated statement of cash flows for the first six months of 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
|
|
|
|
|
As Originally |
|
As |
|
Effect of |
Six Months Ended |
|
Reported |
|
Adjusted |
|
Change |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
385,840 |
|
|
$ |
369,481 |
|
|
$ |
(16,359 |
) |
Adjustments to reconcile net earnings to net cash
from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount on convertible debentures |
|
|
|
|
|
|
26,008 |
|
|
|
26,008 |
|
Deferred income taxes |
|
|
14,511 |
|
|
|
4,862 |
|
|
|
(9,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
380,299 |
|
|
$ |
380,299 |
|
|
$ |
|
|
|
The application of this new accounting treatment does not change the Companys operating cash flow
for any 2008 period.
5
NOTE 4 GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for each of the Companys reportable segments (see
Note 14) for the six months ended July 4, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/NMD |
|
CV/AF |
|
Total |
|
Balance at January 3, 2009 |
|
$ |
1,211,538 |
|
|
$ |
773,028 |
|
|
$ |
1,984,566 |
|
Foreign currency translation |
|
|
1,981 |
|
|
|
(89 |
) |
|
|
1,892 |
|
Other |
|
|
2,756 |
|
|
|
(3,248 |
) |
|
|
(492 |
) |
|
Balance at July 4, 2009 |
|
$ |
1,216,275 |
|
|
$ |
769,691 |
|
|
$ |
1,985,966 |
|
|
During the second quarter of 2009, the Company finalized the purchase price allocation relating to
the acquisition of EP MedSystems, Inc. The impacts of finalizing the purchase price allocation,
individually and in the aggregate, were not material. Overall, the Company recorded a $3.3 million
net decrease to goodwill upon finalization of the purchase accounting.
The following table provides the gross carrying amount of other intangible assets and related
accumulated amortization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 4, 2009 |
|
January 3, 2009 |
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
carrying |
|
Accumulated |
|
carrying |
|
Accumulated |
|
|
amount |
|
amortization |
|
amount |
|
amortization |
|
Purchased technology and patents |
|
$ |
503,281 |
|
|
$ |
151,528 |
|
|
$ |
494,796 |
|
|
$ |
124,749 |
|
Customer lists and relationships |
|
|
173,370 |
|
|
|
71,692 |
|
|
|
166,637 |
|
|
|
63,385 |
|
Trademarks and tradenames |
|
|
24,263 |
|
|
|
5,562 |
|
|
|
22,651 |
|
|
|
4,789 |
|
Licenses, distribution agreements and other |
|
|
5,486 |
|
|
|
3,362 |
|
|
|
5,529 |
|
|
|
3,155 |
|
|
|
|
$ |
706,400 |
|
|
$ |
232,144 |
|
|
$ |
689,613 |
|
|
$ |
196,078 |
|
|
NOTE 5 INVENTORIES
The Companys inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 4, 2009 |
|
January 3, 2009 |
|
Finished goods |
|
$ |
448,366 |
|
|
$ |
398,452 |
|
Work in process |
|
|
62,704 |
|
|
|
39,143 |
|
Raw materials |
|
|
109,047 |
|
|
|
108,904 |
|
|
|
|
$ |
620,117 |
|
|
$ |
546,499 |
|
|
NOTE 6 DEBT
The Companys total long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 4, 2009 |
|
January 3, 2009 |
|
Credit facility borrowings |
|
$ |
500,000 |
|
|
$ |
500,000 |
|
Commercial paper borrowings |
|
|
|
|
|
|
19,400 |
|
Term loan due 2011 |
|
|
486,000 |
|
|
|
360,000 |
|
1.02% Yen-denominated notes due 2010 |
|
|
216,525 |
|
|
|
230,088 |
|
Yen-denominated term loan due 2011 |
|
|
83,022 |
|
|
|
88,222 |
|
Other |
|
|
|
|
|
|
3,892 |
|
|
Total long-term debt |
|
|
1,285,547 |
|
|
|
1,201,602 |
|
Less: current portion of long-term debt |
|
|
324,525 |
|
|
|
75,518 |
|
|
Long-term debt |
|
$ |
961,022 |
|
|
$ |
1,126,084 |
|
|
6
Credit facility borrowings: In December 2006, the Company entered into a 5-year, $1.0 billion
committed credit facility (Credit Facility) that it may draw on for general corporate purposes and
to support its commercial paper program. Borrowings under the Credit Facility bear interest at the
United States Prime Rate (Prime Rate) or United States Dollar London InterBank Offered Rate (LIBOR)
plus 0.235%, at the election of the Company. In the event that over half of the Credit Facility is
drawn upon, an additional five basis points is added to the elected Prime Rate or LIBOR rate. The
interest rates are subject to adjustment in the event of a change in the Companys credit ratings.
In October 2008, the Company borrowed $500.0 million under the Credit Facility to partially fund
the retirement of the Companys 1.22% Convertible Debentures in December 2008.
In November 2008, the Company entered into an interest rate swap contract to convert $400.0 million
of variable-rate borrowings under the Credit Facility into fixed-rate borrowings. The Company
designated this interest rate swap as a cash flow hedge under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS No. 133). This contract terminated
in February 2009 and payments made or received under this interest rate swap contract were recorded
to interest expense. Inclusive of the interest rate swap, borrowings under the Credit Facility
incurred interest at a weighted average interest rate of 0.7% and 1.1% during the second quarter
and first six months of 2009, respectively.
Commercial paper borrowings: The Companys commercial paper program provides for the issuance of
short-term, unsecured commercial paper with maturities up to 270 days. The Company had no
commercial paper borrowings outstanding as of July 4, 2009. Any future commercial paper borrowings
would bear interest at the applicable then-current market rates. The Company classifies all of its
commercial paper borrowings as long-term debt, as the Company has the ability to repay any
short-term maturity with available cash from its existing long-term, committed Credit Facility.
Term loan due 2011: In December 2008, the Company entered into a 3-year, unsecured term loan (2011
Term Loan). The Company initially borrowed $360.0 million in December 2008 and borrowed an
additional $180.0 million in January 2009, resulting in total original borrowings of $540.0 million
under the 2011 Term Loan. As of July 4, 2009, the Company had total borrowings of $486.0 million
under the 2011 Term Loan. The Company is required to make quarterly principal payments in the
amount of 5% of the total original borrowings. Accordingly, the Company made quarterly principal
payments of $27.0 million in both March and June 2009. These borrowings bear interest at LIBOR plus
2.0%, although the Company may elect the Prime Rate plus 1.0%. The interest rates are subject to
adjustment in the event of a change in the Companys credit ratings. Borrowings under the 2011 Term
Loan incurred interest at weighted average interest rates of 2.3% and 2.4% during the second
quarter and first six months of 2009, respectively.
1.02% Yen-denominated notes due 2010: In May 2003, the Company issued 7-year, 1.02% unsecured
notes in Japan (Yen Notes) totaling 20.9 billion Yen (the equivalent of $216.5 million at July 4,
2009 and $230.1 million at January 3, 2009). Interest payments are required on a semi-annual basis
and the entire principal balance is due in May 2010. The principal amount recorded on the balance
sheet fluctuates based on the effects of foreign currency translation. As of July 4, 2009, the
fair value of the Yen Notes approximate the carrying value.
Yen-denominated term loan due 2011: In December 2008, the Company entered into a 3-year,
Yen-denominated unsecured term loan in Japan (Yen Term Loan) totaling 8.0 billion Japanese Yen (the
equivalent of $83.0 million at July 4, 2009 and $88.2 million at January 3, 2009). The borrowings
bear interest at the Yen LIBOR plus 2.0%. Interest payments are required on a semi-annual basis
and the entire principal balance is due in December 2011. The principal amount recorded on the
balance sheet fluctuates based on the effects of foreign currency translation.
NOTE 7 COMMITMENTS AND CONTINGENCIES
Litigation
The Company accrues a liability for costs related to claims, including future legal costs,
settlements and judgments, where it has assessed that a loss is probable and an amount can be
reasonably estimated. The Company also records a receivable from its product liability insurance
carriers for amounts expected to be recovered.
Silzone® Litigation and Insurance Receivables: The Company has been sued in various jurisdictions
beginning in March 2000 by some patients who received a product with Silzone® coating, and such
cases are pending in the United States and Canada. Some of these claimants allege bodily injuries
as a result of an explant or other complications, which they attribute to Silzone®-coated products.
Others, who have not had their Silzone®-coated heart valve explanted, seek compensation for past
and future costs of special monitoring they allege they need over and above the medical monitoring
all other replacement heart valve patients receive. Some of the lawsuits seeking the cost of
monitoring have been initiated by patients who are asymptomatic and who have no apparent clinical
injury to date. The Company has vigorously defended against the claims that have been asserted and
expects to continue to do so with respect to any remaining claims.
In 2001, the U.S. Judicial Panel on Multi-District Litigation (MDL) ruled that certain lawsuits
filed in U.S. federal district court involving products with Silzone® coating should be part of MDL
proceedings in the U.S. District Court in Minnesota (the
7
District Court). As a result, actions in
federal court involving products with Silzone® coating have been and will likely continue to be
transferred to the District Court for coordinated or consolidated pretrial proceedings.
In October 2001, various class-action complaints were consolidated into one class action case by
the District Court. The Company requested the Eighth Circuit Court of Appeals (the Eighth Circuit)
to review the District Courts initial class certification orders and, in October 2005, the Eighth
Circuit issued a decision reversing the District Courts class certification rulings and directed
the District Court to undertake further proceedings. In October 2006, the District Court granted
plaintiffs renewed motion to certify a nationwide consumer protection class under Minnesotas
consumer protection statutes and Private Attorney General Act. The Company again requested the
Eighth Circuit to review the District Courts class certification orders and, in April 2008, the
Eighth Circuit again issued a decision reversing the District Courts October 2006 class
certification rulings. The order by the Eighth Circuit returned the case to the District Court for
continued proceedings. The plaintiffs requested the District Court to certify a new class, but on
June 23, 2009, the District Court issued an order striking any remaining claims seeking class
action status. As a result, the former class representative has only an individual claim at the
present time. The Company will continue to vigorously defend against this and other Silzone claims.
There are five individual Silzone® cases pending in federal court. The plaintiffs in these cases
are requesting damages in excess of $75 thousand. The complaint in the case that was most recently
transferred to the MDL court was served upon the Company in December 2008.
There are seven individual state court suits concerning Silzone®-coated products pending, involving
seven patients. These cases are venued in Minnesota and Texas. The complaints in these state court
cases are requesting damages ranging from $10 thousand to $100 thousand and, in some cases, seek an
unspecified amount. The most recent individual state court complaint was served upon the Company in
February 2008. These state court cases are proceeding in accordance with the orders issued by the
judges in those matters.
In Canada, there are also four class-action cases and one individual case pending against the
Company. In one such case in Ontario, the court certified that a class action involving Silzone®
patients may proceed, and the trial of the initial phase of this matter is expected to occur as
early as September 2009. A second case seeking class action status in Ontario has been stayed
pending resolution of the other Ontario class action. A case filed as a class action in British
Columbia remains pending. A court in Quebec has certified a class action, and that matter is
proceeding in accordance with that courts orders. Additionally, the Company has been served with
lawsuits by the British Columbia Provincial health insurer and the Quebec Provincial health insurer
to recover the cost of insured services furnished or to be furnished to class members in the class
actions pending in British Columbia and Quebec, respectively. The complaints in the Canadian cases
request damages ranging from 1.5 million to 2.0 billion Canadian Dollars (the equivalent to $1.3
million to $1.7 billion at July 4, 2009).
The Company is not aware of any unasserted claims related to Silzone®-coated products. Company
management believes that the final resolution of the Silzone® cases will take a number of years.
The Company has recorded an accrual for probable legal costs that it will incur to defend the
various cases involving Silzone®-coated products, and the Company has recorded a receivable from
its product liability insurance carriers for amounts expected to be recovered. The Company has not
accrued for any amounts associated with settlements or judgments because potential losses cannot be
reasonably estimated. Based on the Companys experience in these types of individual cases, the
amount ultimately paid, if any, often does not bear any relationship to the amount claimed by the
plaintiffs and is often significantly less than the amount claimed. Any costs (the material
components of which are settlements, judgments, legal fees and other related defense costs) not
covered by the Companys product liability insurance policies or existing reserves could be
material to the Companys consolidated earnings, financial position and cash flows. As of July 4,
2009, the Companys Silzone® litigation reserve was $23.1 million and the related receivable from
insurance carriers was $21.6 million.
The Companys remaining product liability insurance for Silzone® claims consists of two $50.0
million layers, each of which is covered by one or more insurance companies. The first $50.0
million layer of insurance is covered by American Insurance Company (AIC). In December 2007, AIC
initiated a lawsuit in Minnesota Federal District Court seeking a court order declaring that it is
not required to provide coverage for a portion of the Silzone® litigation defense and indemnity
expenses that the Company may incur in the future. The Company believes the claims of AIC are
without merit and plans to vigorously defend against the claims AIC has asserted. The insurance
broker that assisted the Company in procuring the insurance with AIC has been added as a party to
the case. For all Silzone® legal costs incurred, the Company records insurance receivables for the
amounts that it expects to recover.
Part of the Companys final layer of insurance ($20.0 million of the final $50.0 million layer) is
covered by Lumbermans Mutual Casualty Insurance, a unit of the Kemper Insurance Companies
(collectively referred to as Kemper). Prior to being no
8
longer rated by A.M. Best, Kempers
financial strength rating was downgraded to a D (poor). Kemper is currently in run off, which
means it is no longer issuing new policies, and therefore, is not generating any new revenue that
could be used to cover claims made under previously-issued policies. In the event Kemper is unable
to pay claims directed to it, the Company believes the other insurance carriers in the final layer
of insurance will take the position that the Company will be directly liable for any claims and
costs that Kemper is unable to pay. It is possible that Silzone® costs and expenses will reach the
limit of the final Kemper layer of insurance coverage, and it is possible that Kemper will be
unable to meet its full obligations to the Company. Therefore, the Company could incur an expense
up to $20.0 million for which it would have otherwise been covered. While potential losses are
possible, the Company has not accrued for any such losses as they are not reasonably estimable at
this time.
Guidant 1996 Patent Litigation: In November 1996, Guidant Corporation (Guidant), which became a
subsidiary of Boston Scientific Corporation in 2006, sued the Company in federal district court for
the Southern District of Indiana alleging that the Company did not have a license to certain
patents controlled by Guidant covering tachycardia implantable cardioverter defibrillator systems
(ICDs) and alleging that the Company was infringing those patents.
Guidants original suit alleged infringement of four patents by the Company. Guidant later
dismissed its claim on the first patent and the district court ruled that the second patent was
invalid, and this ruling was later upheld by the Court of Appeals for the Federal Circuit (CAFC).
The third patent was found to be invalid by the district court. The fourth patent (the 288 patent)
was initially found to be invalid by the district court judge, but the CAFC reversed this decision
in August 2004. The case was returned to the district court in November 2004. The district court
issued rulings on claims construction and a response to motions for summary judgment in March 2006.
Guidants special request to appeal certain aspects of these rulings was rejected by the CAFC. In
March 2007, the district court judge responsible for the case granted summary judgment in favor of
the Company, ruling that the only remaining patent claim (the 288 patent) asserted against the
Company in the case was invalid. In April 2007, Guidant appealed the district courts March 2007
and March 2006 rulings. In December 2008, the CAFC upheld the March 2006 rulings of the district
court but also reversed the district courts March 2007 ruling that the 288 patent was invalid. As
such, based on that ruling, although the invalidity of the 288 patent was overturned, the damages
in the case going forward are limited to those relatively few instances prior to the expiration of
the patent in 2003 when the cardioversion therapy method described in the only remaining claim of
the 288 patent is actually practiced.
The parties filed requests with the CAFC requesting that the entire CAFC re-hear some of the issues
addressed in the December 2008 decision, and the CAFC issued a ruling in March 2009 vacating its
December 2008 decision, denying Guidants request for re-hearing and granting part of the Companys
request for re-hearing. Oral arguments occurred in May 2009 on the one issue the CACF asked the
parties to brief, and the parties are presently awaiting a decision from the CAFC.
The 288 patent expired in December 2003. Accordingly, the final outcome of the litigation
involving the 288 patent cannot result in an injunction precluding the Company from selling ICD
products in the future. Sales of the Companys ICD products in which Guidant asserts infringement
of the 288 patent were approximately 18% and 16% of the Companys consolidated net sales during
fiscal years 2003 and 2002, respectively. Additionally, based on a July 2006 agreement, in exchange
for the Companys agreement not to pursue the recovery of attorneys fees or assert certain claims
and defenses, Guidant agreed it would not seek recovery of lost profits, prejudgment interest or a
royalty rate in excess of 3% of net sales for any patents found to be infringed upon by the
Company. This agreement had the effect of limiting the Companys financial exposure. Based on this
and the recent rulings in this case, the Company does not believe that any potential losses arising
from any legal settlements or judgments in this case could be material to the Companys
consolidated earnings, financial position and cash flows. The Company has not accrued any amounts
for legal settlements or judgments related to the Guidant 1996 patent litigation. Although the
Company believes that the assertions and claims in the Guidant 1996 patent litigation are without
merit, potential losses arising from any legal settlements or judgments are possible, but not
reasonably estimable at this time.
Ohio OIG Investigation: In July 2007, the Company received a civil subpoena from the U.S.
Department of Health and Human Services, Office of the Inspector General (OIG), requesting
documents regarding the Companys relationships with ten Ohio hospitals during the period from 2003
through 2006. The Company has received follow-up requests from the U.S. Department of Justice and
the U.S. Attorneys Office in Cleveland regarding this matter. The Company is cooperating with the
investigation and is continuing to work with the OIG in responding to the subpoena.
Boston U.S. Attorney Investigation: In October 2005, the U.S. Department of Justice, acting
through the U.S. Attorneys office in Boston, commenced an industry-wide investigation into whether
the provision of payments and/or services by makers of ICDs and bradycardia pacemaker systems
(pacemakers) to doctors or other persons constitutes improper inducements under the federal health
care program anti-kickback law. As part of this investigation, the Company received a civil
subpoena from the
U.S. Attorneys office in Boston requesting documents created since January 2000 regarding the
Companys practices related to ICDs, pacemakers, lead systems and related products marketed by the
Companys Cardiac Rhythm Management segment. The
9
Company understands that its principal competitors
in the cardiac rhythm management therapy areas received similar civil subpoenas. The Company
received an additional subpoena from the U.S. Attorneys office in Boston in September 2006,
requesting documents created since January 2002 related to certain employee expense reports and
certain ICD and pacemaker purchasing arrangements. The Company is cooperating with the
investigation and has been producing documents and witnesses as requested. In December 2008, the
U.S. Attorneys Office in Boston delivered a third subpoena issued by the Department of Health &
Human Services Office of Inspector General requesting the production of documents relating to
implantable cardiac rhythm device and pacemaker warranty claims. The Company is cooperating with
these investigations.
U.S. Department of Justice Investigation: In October 2008, the Company received a letter from the
Civil Division of the U.S. Department of Justice stating that it was investigating the Company for
potential False Claims Act and common law violations relating to the sale of the Companys
EpicorTM surgical ablation devices. The Department of Justice is investigating whether
companies marketed surgical ablation devices for off-label treatment of atrial fibrillation. Other
manufacturers of medical devices used in the treatment of atrial fibrillation have reported
receiving similar letters. The letter requests that we provide documents from January 1, 2005 to
present relating to U.S. Food and Drug Administration (FDA) approval and marketing of
EpicorTM ablation devices. The Company is cooperating with the investigation. In July
2009, the U.S. District Court in Houston, Texas unsealed a false claims suit against the
Company. Similar suits were unsealed at the same time against other manufacturers of surgical
ablation devices. The Department of Justice has not decided whether to intervene in the suit
against the Company.
Securities Class Action Litigation: In April and May 2006, five shareholders, each purporting to
act on behalf of a class of purchasers during the period January 25 through April 4, 2006 (the
Class Period), separately sued the Company and certain of its officers in federal district court in
Minnesota alleging that the Company made materially false and misleading statements during the
Class Period relating to financial performance, projected earnings guidance and projected sales of
ICDs. The complaints, all of which seek unspecified damages and other relief, as well as attorneys
fees, have been consolidated. The Company filed a motion to dismiss, which was denied by the
district court in March 2007. The discovery process concluded in September, and the Company filed a
motion for summary judgment which was argued before the Court in January 2009. In June 2009, the
Court issued its ruling granting summary judgment in favor of the Company on all claims. The
plaintiffs have agreed not to appeal this matter, to pay the Company certain costs and fees and to
provide a full release of all claims asserted in the action or that could have been asserted
against the Company and the individual defendants.
Derivative Action: In February 2007, a derivative action was filed in state court in Minnesota
which purported to bring claims belonging to the Company against the Companys Board of Directors
and various officers and former officers for alleged malfeasance in the management of the Company.
The claims were based on substantially the same allegations as those underlying the securities
class action litigation described above. The defendants (consisting of the Companys Board of
Directors and various officers and former officers) filed a motion to dismiss, and in June 2007 the
state court granted the motion, thus dismissing the derivative case for failure of the complainant
to make a demand on the Board. In September 2007, the plaintiff sent a shareholder demand letter to
the Board. The Board considered the letter at its October 25, 2007 Board meeting and requested that
the complainant provide it with details to substantiate the allegations. In June 2008, the
complainant filed a derivative action against the defendants again. The court denied the
defendants motion to dismiss concerning that complaint. To date, the complainant has not provided
any material facts to support the allegations. The plaintiff filed an amended complaint on July 13,
2009 which contains many deficiencies and which is also in substantial conflict with the District
Courts ruling in the Securities Class Action Litigation above. The defendants intend to continue
to vigorously defend against the claims raised in this action. The Companys directors and officers
liability insurance provides $75 million of insurance coverage for the Company, the officers and
the directors, after a $15 million self-insured retention level has been reached.
The Company is also involved in various other product liability lawsuits, claims and proceedings
that arise in the ordinary course of business.
Regulatory Matters
The FDA inspected the Companys manufacturing facility in Minnetonka, Minnesota at various times
between December 8 and December 19, 2008. On December 19, 2008, the FDA issued a Form 483
identifying certain observed non-conformity with current Good Manufacturing Practice (cGMP)
primarily related to the manufacture and assembly of the SafireTM ablation catheter with
a 4 mm or 5 mm non-irrigated tip. Following the receipt of the Form 483, the Companys Atrial
Fibrillation division provided written responses to the FDA detailing proposed corrective actions
and immediately initiated efforts to
address FDAs observations of non-conformity. The Company subsequently received a warning letter
dated April 17, 2009 from the FDA relating to these non-conformities with respect to this facility.
10
The FDA inspected the Companys Plano, Texas manufacturing facility at various times between March
5 and April 6, 2009. On April 6, 2009, the FDA issued a Form 483 identifying certain observed
non-conformities with cGMP. Following the receipt of the Form 483, the Companys Neuromodulation
division provided written responses to the FDA detailing proposed corrective actions and
immediately initiated efforts to address FDAs observations of non-conformity. The Company
subsequently received a warning letter dated June 26, 2009 from the FDA relating to these
non-conformities with respect to its Neuromodulation divisions Plano, Texas and Hackettstown, New
Jersey facilities.
With respect to each of these warning letters, the FDA notes that it will not grant requests for
exportation certificates to foreign governments or approve pre-market approval applications for
Class III devices to which the quality system regulation deviations are reasonably related until
the violations have been corrected.
Customer orders are not expected to be impacted while the Company works to resolve the FDAs
concerns. The Company takes these matters seriously and is working diligently to respond timely and
fully to the FDAs requests. While the Company believes the FDAs concerns can be resolved without
a material impact on the Companys financial results, the FDA has recently been increasing its
scrutiny of the medical device industry and the government should be expected to continue to
scrutinize the industry closely with inspections, and possibly enforcement actions, by the FDA or
other agencies. The Company is regularly monitoring, assessing and improving its internal
compliance systems and procedures so that its activities will be consistent with applicable laws,
regulations and requirements, including those of the FDA.
Product Warranties
The Company offers a warranty on various products, the most significant of which relates to its
ICDs and pacemakers. 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 Companys 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 Companys product warranty liability during the three and six months ended July 4,
2009 and June 28, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Balance at beginning of period |
|
$ |
16,335 |
|
|
$ |
17,238 |
|
|
$ |
15,724 |
|
|
$ |
16,691 |
|
Warranty expense recognized |
|
|
1,679 |
|
|
|
598 |
|
|
|
3,028 |
|
|
|
1,573 |
|
Warranty credits issued |
|
|
(509 |
) |
|
|
(560 |
) |
|
|
(1,247 |
) |
|
|
(988 |
) |
|
Balance at end of period |
|
$ |
17,505 |
|
|
$ |
17,276 |
|
|
$ |
17,505 |
|
|
$ |
17,276 |
|
|
Other Commitments
The Company has certain contingent commitments to acquire various businesses involved in the
distribution of the Companys products and to pay other contingent acquisition consideration
payments. While it is not certain if and/or when these payments will be made, as of July 4, 2009,
the Company estimates it could be required to pay approximately $307 million in future periods to
satisfy such commitments. Refer to Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations Off-Balance Sheet Arrangements and Contractual
Obligations of the Companys 2008 Annual Report on Form 10-K for additional information.
11
NOTE 8 NET EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted net earnings per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
|
June 28, |
|
|
|
|
|
June 28, |
|
|
July 4, |
|
2008 |
|
July 4, |
|
2008 |
|
|
2009 |
|
(As adjusted) |
|
2009 |
|
(As adjusted) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
219,370 |
|
|
$ |
192,912 |
|
|
$ |
420,641 |
|
|
$ |
369,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
346,767 |
|
|
|
340,699 |
|
|
|
346,308 |
|
|
|
342,178 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
3,837 |
|
|
|
7,507 |
|
|
|
3,868 |
|
|
|
7,854 |
|
Restricted shares |
|
|
16 |
|
|
|
63 |
|
|
|
37 |
|
|
|
80 |
|
|
Diluted weighted average shares outstanding |
|
|
350,620 |
|
|
|
348,269 |
|
|
|
350,213 |
|
|
|
350,112 |
|
|
Basic net earnings per share |
|
$ |
0.63 |
|
|
$ |
0.57 |
|
|
$ |
1.21 |
|
|
$ |
1.08 |
|
|
Diluted net earnings per share |
|
$ |
0.63 |
|
|
$ |
0.55 |
|
|
$ |
1.20 |
|
|
$ |
1.06 |
|
|
The Companys 2009 adoption of FSP APB No. 14-1 required retrospective application to all
prior periods presented (see Note 3). As a result, basic net earnings per share and diluted net
earnings per share for the second quarter of 2008 have been adjusted by $0.02 and $0.03,
respectively, decreasing 2008 basic and diluted net earnings per share to conform to the new
accounting treatment. Additionally, basic net earnings per share and diluted net earnings per
share for the first six months of 2008 have been adjusted by $0.05 and $0.04, respectively,
decreasing 2008 basic and diluted net earnings per share to conform to the new accounting
treatment.
Approximately 24.1 million and 13.3 million shares of common stock subject to stock options and
restricted stock were excluded from the diluted net earnings per share computation for the three
months ended July 4, 2009 and June 28, 2008, respectively, because they were not dilutive.
Additionally, approximately 24.3 million and 13.4 million shares of common stock subject to stock
options and restricted stock were excluded from the diluted net earnings per share computation for
the six months ended July 4, 2009 and June 28, 2008, respectively, because they were not dilutive.
In connection with the issuance of its 1.22% Convertible Senior Debentures in April 2007, the
Company sold warrants for 23.1 million shares. Over a two-month period beginning in April 2009, the
Company was required to issue shares of its common stock if the average price of the Companys
common stock during a defined period exceeded the warrants exercise price of approximately $60.73
per share. The last warrant expired in June 2009, and no shares were issued by the Company related
to the exercise of these warrants. Because the Companys average stock price during the defined
period was never greater than the warrants exercise price of $60.73, these warrants did not result
in a dilutive impact to the Companys dilutive net earnings per share computation.
NOTE 9 COMPREHENSIVE INCOME
The table below sets forth the amounts in other comprehensive income, net of the related income tax
impact (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
|
June 28, |
|
|
|
|
|
June 28, |
|
|
July 4, |
|
2008 |
|
July 4, |
|
2008 |
|
|
2009 |
|
(As adjusted) |
|
2009 |
|
(As adjusted) |
|
Net earnings |
|
$ |
219,370 |
|
|
$ |
192,912 |
|
|
$ |
420,641 |
|
|
$ |
369,481 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment |
|
|
75,122 |
|
|
|
(9,697 |
) |
|
|
36,981 |
|
|
|
52,378 |
|
Unrealized gain (loss) on available-for-sale securities |
|
|
3,208 |
|
|
|
3,296 |
|
|
|
554 |
|
|
|
(4,305 |
) |
Unrealized gain on derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
411 |
|
|
|
|
|
Reclassification of realized loss to net earnings |
|
|
|
|
|
|
|
|
|
|
(411 |
) |
|
|
|
|
|
Total comprehensive income |
|
$ |
297,700 |
|
|
$ |
186,511 |
|
|
$ |
458,176 |
|
|
$ |
417,554 |
|
|
12
Reclassification adjustments are reflected to avoid double counting items in other comprehensive
income that are also recorded in net earnings. In November 2008, the Company entered into an
interest rate swap contract to convert $400.0 million of variable-rate borrowings under the
Companys long-term committed Credit Facility into fixed-rate borrowings (see Note 6). This
contract terminated in February 2009, and the Company recognized a realized after-tax loss of $0.4
million. The total pre-tax loss of $0.7 million was recognized as interest expense.
NOTE 10 OTHER INCOME (EXPENSE), NET
The Companys other income (expense) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
|
June 28, |
|
|
|
|
|
June 28, |
|
|
July 4, |
|
2008 |
|
July 4, |
|
2008 |
|
|
2009 |
|
(As adjusted) |
|
2009 |
|
(As adjusted) |
|
Interest income |
|
$ |
518 |
|
|
$ |
3,091 |
|
|
$ |
1,077 |
|
|
$ |
7,347 |
|
Interest expense |
|
|
(5,619 |
) |
|
|
(18,101 |
) |
|
|
(12,570 |
) |
|
|
(36,126 |
) |
Other |
|
|
140 |
|
|
|
(3,010 |
) |
|
|
(780 |
) |
|
|
332 |
|
|
Total other income (expense), net |
|
$ |
(4,961 |
) |
|
$ |
(18,020 |
) |
|
$ |
(12,273 |
) |
|
$ |
(28,447 |
) |
|
The Companys 2009 adoption of FSP APB No. 14-1 required retrospective application to all prior
periods presented (see Note 3). As a result, interest expense for the second quarter and first six
months of 2008 were adjusted by $13.0 million and $26.0 million, respectively, increasing 2008
interest expense to conform to the new accounting treatment.
NOTE 11 INCOME TAXES
As of July 4, 2009, the Company had approximately $88.1 million of unrecognized tax benefits, all
of which would affect the Companys effective tax rate if recognized. The Company had $24.9 million
accrued for interest and penalties as of July 4, 2009. The Company recognizes interest and
penalties related to income tax matters in income tax expense. The Company does not expect its
unrecognized tax benefits to change significantly over the next 12 months.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters
for all tax years through 2001. Additionally, substantially all material foreign, state, and local
income tax matters have been concluded for all tax years through 1999. The U.S. Internal Revenue
Service (IRS) completed an audit of the Companys 2002-2005 tax returns and proposed adjustments in
its audit report issued in November 2008. The Company intends to vigorously defend its positions
and initiated defense of these adjustments at the IRS appellate level in January 2009. An
unfavorable outcome could have a material negative impact on the Companys effective income tax
rate in future periods.
NOTE 12 FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
SFAS No. 157, Fair Value Measurements (SFAS No. 157) establishes a framework for measuring fair
value, clarifies the definition of fair value and expands disclosures about fair-value
measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability. Fair value is a market-based measurement that should be determined
using assumptions that market participants would use in pricing an asset or liability. SFAS No. 157
establishes a valuation hierarchy for disclosure of fair value measurements. The categorization
within the valuation hierarchy is based on the lowest level of input that is significant to the
fair value measurement. The categories within the valuation hierarchy are described as follows:
|
|
|
Level 1 Financial instruments with quoted prices in active markets for identical
assets or liabilities. The Companys Level 1 financial instruments consist of
publicly-traded equity securities that are classified as available-for-sale securities and
investments in mutual funds that are classified as trading securities. The Companys
investments in mutual funds are specifically designated as available to the Company solely
for the purpose of paying benefits under the Companys non-qualified deferred compensation
plan. The Company holds these investments in a rabbi trust which is not available for
general corporate purposes and is subject to creditor claims in the event of insolvency.
Available-for-sale securities and trading securities are classified as other current assets
and other assets, respectively. |
13
|
|
|
Level 2 Financial instruments with quoted prices in active markets for similar assets
or liabilities. Level 2 fair value measurements are determined using either prices for
similar instruments or inputs that are either directly or indirectly observable, such as
forward foreign currency rates. The Companys Level 2 financial instruments include foreign
currency exchange contracts. |
|
|
|
|
Level 3 Inputs to the fair value measurement are unobservable inputs or valuation
techniques. The Company does not have any financial assets or liabilities being measured at
fair value that are classified as Level 3 financial instruments. |
A summary of financial assets and liabilities measured at fair value on a recurring basis at July
4, 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
Quoted Prices |
|
Other |
|
Significant |
|
|
|
|
|
|
In Active |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Markets |
|
Inputs |
|
Inputs |
|
|
July 4, 2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading marketable securities |
|
$ |
133,271 |
|
|
$ |
133,271 |
|
|
$ |
|
|
|
$ |
|
|
Available-for-sale marketable securities |
|
|
22,809 |
|
|
|
22,809 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,080 |
|
|
$ |
156,080 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts |
|
$ |
19 |
|
|
$ |
|
|
|
$ |
19 |
|
|
$ |
|
|
|
The following table summarizes the components of the balance of the Companys available-for-sale
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 4, 2009 |
|
January 3, 2009 |
|
Adjusted cost |
|
$ |
11,935 |
|
|
$ |
12,187 |
|
Gross unrealized gains |
|
|
11,205 |
|
|
|
9,944 |
|
Gross unrealized losses |
|
|
(331 |
) |
|
|
(66 |
) |
|
Fair value |
|
$ |
22,809 |
|
|
$ |
22,065 |
|
|
Realized gains (losses) from the sale of available-for-sale securities are recorded to other
income (expense) and are computed using the specific identification method. Upon the sale of an
available-for-sale security, the unrealized gain (loss) is reclassified out of other accumulated
comprehensive income and reflected as a realized gain (loss) in net earnings. There were no
realized gains (losses) from the sale of available-for-sale securities recorded during the first
six months of 2009 or 2008. Additionally, when the fair value of an available-for-sale security
falls below its original cost and the Company determines that the corresponding unrealized loss is
other-than-temporary, the Company recognizes an impairment loss to net earnings in the period the
determination is made. No available-for-sale security impairment losses were recognized during the
first six months of 2009 or 2008.
The Company also holds investments in equity securities that are designated as cost method
investments, which are classified as other current assets. The carrying value of these investments
was approximately $50 million at both July 4, 2009 and January 3, 2009. The fair value of the
Companys cost method investments is not estimated if there are no identified events or changes in
circumstance that may have a significant adverse effect on the fair value of these investments.
NOTE 13 DERIVATIVE FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133 and SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS No. 161) in accounting for and disclosing derivative
instruments and hedging activities. SFAS No. 133 requires all derivative financial instruments to
be recognized on the balance sheet at fair value. Changes in the fair value of derivatives are
recognized in net earnings or other comprehensive income depending on whether the derivative is
designated as part of a qualifying SFAS No. 133 hedging transaction. Derivative assets and
derivative liabilities are classified as other current assets and other current liabilities,
respectively. SFAS No. 161 requires certain disclosures for derivative instruments and hedging
activities to explain their use and impact on the financial statements.
14
In November 2008, the Company entered into an interest rate swap contract to convert $400.0
million of variable-rate borrowings under the Credit Facility into fixed-rate borrowings (see Note
6). The Company designated this interest rate swap as a cash flow hedge under SFAS No. 133. This
contract terminated in February 2009. The ineffective portion of the amount of gains (losses)
recognized in net earnings was immaterial. The Company recorded the $0.4 million after-tax loss on
the settlement of the interest rate swap contract to interest expense.
The Company hedges a portion of its foreign currency exchange rate risk through the use of
forward exchange contracts. The Company uses forward exchange contracts to manage foreign currency
exposures related to intercompany receivables and payables arising from intercompany purchases of
manufactured products. These forward contracts are not designated as qualifying hedging
relationships under SFAS No. 133. For the three and six months ended July 4, 2009, the net amount
of gains (losses) the Company recorded to other income (expense) for forward currency exchange
contracts not designated as hedging instruments under SFAS No. 133 was a net loss of $5.3 million
and a net loss of $3.4 million, respectively. These net losses were almost entirely offset by
corresponding net gains on the foreign currency exposures being managed. The Company had
outstanding foreign currency forward contracts of approximately 25 million Euros, 1.5 billion
Japanese Yen and 12 million Australian Dollars at July 4, 2009.
The Company does not enter into contracts for trading or speculative purposes. The Companys policy
is to enter into hedging contracts with major financial institutions that have at least an A (or
equivalent) credit rating.
NOTE 14 SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information
The Company develops, manufactures and distributes cardiovascular medical devices for the global
cardiac rhythm management, cardiovascular and atrial fibrillation therapy areas and implantable
neurostimulation devices for the management of chronic pain and neurological disorders. The
Companys four operating segments are Cardiac Rhythm Management (CRM), Cardiovascular (CV), Atrial
Fibrillation (AF) and Neuromodulation (NMD). Each operating segment focuses on developing and
manufacturing products for its respective therapy area. The primary products produced by each
operating segment are: CRM ICDs and pacemakers; CV vascular closure devices, heart valve
replacement and repair products and pressure measurement guidewires; AF electrophysiology
introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems;
and NMD neurostimulation devices.
The Company has aggregated the four operating segments into two reportable segments based upon
their similar operational and economic characteristics: CRM/NMD and CV/AF. Net sales of the
Companys reportable segments include end-customer revenue from the sale of products they each
develop and manufacture or distribute. The costs included in each of the reportable segments
operating results include the direct costs of the products sold to end-customers and operating
expenses managed by each reportable segment. Certain operating expenses managed by the Companys
selling and corporate functions, including all stock-based compensation expense, are not included
in the reportable segments operating profit. As a result, reportable segment operating profit is
not representative of the operating profit of the products in these reportable segments.
Additionally, certain assets are managed by the Companys selling and corporate functions,
principally including end-customer receivables, inventory, corporate cash and cash equivalents and
deferred income taxes. For management reporting purposes, the Company does not compile capital
expenditures by reportable segment and, therefore, this information has not been presented as it is
impracticable to do so.
15
The following table presents net sales and operating profit by reportable segment (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/NMD |
|
CV/AF |
|
Other |
|
Total |
|
Three Months ended July 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
784,913 |
|
|
$ |
399,499 |
|
|
$ |
|
|
|
$ |
1,184,412 |
|
Operating profit |
|
|
486,024 |
|
|
|
211,987 |
|
|
|
(393,364 |
) |
|
|
304,647 |
|
|
Three Months ended June 28, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
772,404 |
|
|
$ |
363,356 |
|
|
$ |
|
|
|
$ |
1,135,760 |
|
Operating profit |
|
|
479,399 |
|
|
|
194,379 |
|
|
|
(380,425 |
) |
|
|
293,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended July 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,533,681 |
|
|
$ |
784,524 |
|
|
$ |
|
|
|
$ |
2,318,205 |
|
Operating profit |
|
|
947,054 |
|
|
|
402,872 |
|
|
|
(763,007 |
) |
|
|
586,919 |
|
|
Six Months ended June 28, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,455,716 |
|
|
$ |
690,782 |
|
|
$ |
|
|
|
$ |
2,146,498 |
|
Operating profit |
|
|
899,673 |
|
|
|
368,297 |
|
|
|
(715,117 |
) |
|
|
552,853 |
|
|
The following table presents the Companys total assets by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
Total Assets |
|
July 4, 2009 |
|
January 3, 2009 |
|
CRM/NMD |
|
$ |
2,071,308 |
|
|
$ |
2,018,478 |
|
CV/AF |
|
|
1,318,204 |
|
|
|
1,267,290 |
|
Other |
|
|
2,974,311 |
|
|
|
2,436,736 |
|
|
|
|
$ |
6,363,823 |
|
|
$ |
5,722,504 |
|
|
Geographic Information
The following table presents net sales by geographic location of the customer (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
Net Sales |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
United States |
|
$ |
630,658 |
|
|
$ |
582,548 |
|
|
$ |
1,250,999 |
|
|
$ |
1,120,010 |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
299,552 |
|
|
|
316,733 |
|
|
|
584,320 |
|
|
|
586,878 |
|
Japan |
|
|
118,756 |
|
|
|
99,485 |
|
|
|
230,908 |
|
|
|
185,289 |
|
Asia Pacific |
|
|
65,027 |
|
|
|
63,153 |
|
|
|
118,601 |
|
|
|
116,193 |
|
Other (a) |
|
|
70,419 |
|
|
|
73,841 |
|
|
|
133,377 |
|
|
|
138,128 |
|
|
|
|
|
553,754 |
|
|
|
553,212 |
|
|
|
1,067,206 |
|
|
|
1,026,488 |
|
|
|
|
$ |
1,184,412 |
|
|
$ |
1,135,760 |
|
|
$ |
2,318,205 |
|
|
$ |
2,146,498 |
|
|
(a) |
|
No one geographic market is greater than 5% of consolidated net sales. |
The amounts for long-lived assets by significant geographic market include net property, plant and
equipment by physical location of the asset. The prior period has been reclassified to conform to
the current year presentation. The following table presents long-lived assets by geographic
location (in thousands):
16
|
|
|
|
|
|
|
|
|
Long-Lived Assets |
|
July 4, 2009 |
|
January 3, 2009 |
|
United States |
|
$ |
856,053 |
|
|
$ |
775,205 |
|
International |
|
|
|
|
|
|
|
|
Europe |
|
|
87,991 |
|
|
|
84,266 |
|
Japan |
|
|
14,563 |
|
|
|
16,001 |
|
Asia Pacific |
|
|
19,760 |
|
|
|
17,087 |
|
Other |
|
|
92,972 |
|
|
|
87,617 |
|
|
|
|
|
215,286 |
|
|
|
204,971 |
|
|
|
|
$ |
1,071,339 |
|
|
$ |
980,176 |
|
|
NOTE 15 SUBSEQUENT EVENTS
Share repurchases: On July 21, 2009, the Companys Board of Directors authorized a share repurchase
program of up to $500.0 million of the Companys outstanding common stock. As of August 11, 2009,
the Company had repurchased 9.1 million shares for $347.6 million at an average repurchase price of
$38.40 per share.
Issuance and retirement of long-term debt: On July 28, 2009, the Company issued $700.0 million
aggregate principal amount of 5-year, 3.75% Senior Notes that mature on July 15, 2014 and $500.0
million aggregate principal amount of 10-year, 4.875% Senior Notes that mature on July 15, 2019
(collectively, the Senior Notes). Interest payments are required on a semi-annual basis. The
Company may redeem the Senior Notes at any time at the applicable redemption price.
On August 10, 2009, the Company repaid $500.0 million of borrowings under its Credit Facility with
proceeds from the issuance of the Senior Notes.
17
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
OVERVIEW
Our business is focused on the development, manufacture and distribution of cardiovascular medical
devices for the global cardiac rhythm management, cardiovascular and atrial fibrillation therapy
areas and implantable neurostimulation devices for the management of chronic pain and neurological
disorders. We sell our products in more than 100 countries around the world. Our largest geographic
markets are the United States, Europe, Japan and Asia Pacific. Our four operating segments are
Cardiac Rhythm Management (CRM), Cardiovascular (CV), Atrial Fibrillation (AF) and Neuromodulation
(NMD). Each operating segment focuses on developing and manufacturing products for its respective
therapy area. Our principal products in each operating segment are as follows: CRM tachycardia
implantable cardioverter defibrillator systems (ICDs) and bradycardia pacemaker systems
(pacemakers); CV vascular closure devices, heart valve replacement and repair products and
pressure measurement guidewires; AF electrophysiology introducers and catheters, advanced
cardiac mapping and navigation systems and ablation systems; and NMD neurostimulation devices.
References to St. Jude Medical, St. Jude, the Company, we, us and our are to St. Jude
Medical, Inc. and its subsidiaries.
Our industry has undergone significant consolidation in the last decade and is highly competitive.
Our strategy requires significant investment in research and development in order to introduce new
products. We are focused on improving our operating margins through a variety of techniques,
including the production of high quality products, the development of leading edge technology, the
enhancement of our existing products and continuous improvement of our manufacturing processes. We
expect cost containment pressure on healthcare systems as well as competitive pressures in the
industry will continue to place downward pressure on prices for our products.
We participate in several different medical device markets, each of which has its own expected
growth rate. A significant portion of our net sales relate to CRM devices ICDs and pacemakers.
Management remains focused on increasing our worldwide CRM market share, as we are one of three
principal manufacturers and suppliers in the global CRM market. In order to help accomplish this
objective, we have continued to expand our selling organizations and introduce new CRM products. We
are also investing in our other three major growth platforms atrial fibrillation,
neuromodulation and cardiovascular to increase our market share.
Net sales in the second quarter and first six months of 2009 were $1,184.4 million and $2,318.2
million, respectively, an increase of 4% and 8% over the second quarter and first six months of
2008, respectively, led by sales volume growth of our ICDs and pacemakers as well as products to
treat atrial fibrillation. Unfavorable foreign currency translation comparisons decreased our 2009
net sales in the second quarter and first six months by $68.9 million and $119.8 million,
respectively. Our ICD and pacemaker net sales both declined approximately 1% in the second quarter
of 2009, and grew nearly 4% and 2%, respectively, during the first six months of 2009. Foreign
currency translation unfavorably impacted ICD and pacemaker net sales by $22.4 million and $19.2
million, respectively, in the second quarter of 2009, and $40.0 million and $32.4 million,
respectively, during the first six months of 2009. AF net sales increased approximately 16% and 19%
during the second quarter and first six months of 2009, respectively, to $156.4 million and $301.6
million, respectively. Unfavorable foreign currency translation comparisons decreased our 2009 AF
net sales during the second quarter and first six months by $10.2 million and $16.4 million,
respectively. Refer to the Segment Performance section below for a more detailed discussion of the
results for the respective segments.
Net earnings and diluted net earnings per share for the second quarter of 2009 were $219.4 million
and $0.63 per diluted share, increases of 14% and 15%, respectively, compared to the same prior
year period. Net earnings and diluted net earnings per share for the first six months of 2009 were
$420.6 million and $1.20 per diluted share, increases of 14% and 13%, respectively, over the first
six months of 2008. These increases for both the second quarter and first six months of 2009
compared to the same prior year periods were primarily driven by incremental profits resulting from
higher sales volumes, led by our CRM and AF operating segments. During the first quarter of 2009,
we adopted a new accounting standard, which required us to retrospectively adjust our historical
2008 financial statements. The adoption of this new accounting standard decreased our 2008 net
income and diluted earnings per share for the three and six months ended June 28, 2008 by $8.1
million and $0.03 per share, and $16.4 million and $0.04 per share, respectively. Refer to Note 3
of the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for
further discussion of the new accounting standard.
We generated $358.5 million of operating cash flows during the first six months of 2009, compared
to $380.3 million of operating cash flows during the first six months of 2008. We ended the second
quarter with $486.6 million of cash and cash
18
equivalents and $1,285.5 million of total debt. As of August 12, 2009, we had strong short-term
credit ratings of A1 from Standard & Poors, P2 from Moodys and F1 from Fitch; additionally, our
long-term credit rating included an A rating from Standard & Poors, a Baa1 rating from Moodys
and an A rating from Fitch.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2 to the Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies in preparing 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 January 3, 2009 (2008 Annual Report on
Form 10-K).
Preparation of our consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to adopt various accounting policies and 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
diagnostic equipment; valuation of purchased in-process research and development, other intangible
assets and goodwill; income taxes; legal reserves and insurance receivables; and stock-based
compensation. 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. There have been no material changes to our critical accounting
policies and estimates from the information provided in Part II, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations included in our 2008 Annual Report on
Form 10-K.
SEGMENT PERFORMANCE
Our four operating segments are Cardiac Rhythm Management (CRM), Cardiovascular (CV), Atrial
Fibrillation (AF) and Neuromodulation (NMD). The primary products produced by each operating
segment are: CRM ICDs and pacemakers; CV vascular closure devices, heart valve replacement
and repair products and pressure measurement guidewires; AF electrophysiology introducers and
catheters, advanced cardiac mapping and navigation systems and ablation systems; and NMD
neurostimulation devices.
We aggregate our four operating segments into two reportable segments based upon their similar
operational and economic characteristics: CRM/NMD and CV/AF. Net sales of our reportable segments
include end-customer revenues from the sale of products they each develop and manufacture. The
costs included in each of the reportable segments operating results include the direct costs of
the products sold to end-customers and operating expenses managed by each reportable segment.
Certain operating expenses managed by our selling and corporate functions, including all
stock-based compensation expense, are not included in our reportable segments operating profit. As
a result, reportable segment operating profit is not representative of the operating profit of the
products in these reportable segments.
19
The following table presents net sales and operating profit by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/NMD |
|
CV/AF |
|
Other |
|
Total |
|
Three Months ended July 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
784,913 |
|
|
$ |
399,499 |
|
|
$ |
|
|
|
$ |
1,184,412 |
|
Operating profit |
|
|
486,024 |
|
|
|
211,987 |
|
|
|
(393,364 |
) |
|
|
304,647 |
|
|
Three Months ended June 28, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
772,404 |
|
|
$ |
363,356 |
|
|
$ |
|
|
|
$ |
1,135,760 |
|
Operating profit |
|
|
479,399 |
|
|
|
194,379 |
|
|
|
(380,425 |
) |
|
|
293,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended July 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,533,681 |
|
|
$ |
784,524 |
|
|
$ |
|
|
|
$ |
2,318,205 |
|
Operating profit |
|
|
947,054 |
|
|
|
402,872 |
|
|
|
(763,007 |
) |
|
|
586,919 |
|
|
Six Months ended June 28, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,455,716 |
|
|
$ |
690,782 |
|
|
$ |
|
|
|
$ |
2,146,498 |
|
Operating profit |
|
|
899,673 |
|
|
|
368,297 |
|
|
|
(715,117 |
) |
|
|
552,853 |
|
|
The following discussion of the changes in our net sales is provided by class of similar products
within our four operating segments, which is the primary focus of our sales activities.
Cardiac Rhythm Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
|
July 4, |
|
June 28, |
|
% |
|
July 4, |
|
June 28, |
|
% |
(in thousands) |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
ICD systems |
|
$ |
400,477 |
|
|
$ |
405,777 |
|
|
|
(1.3 |
)% |
|
$ |
794,430 |
|
|
$ |
766,729 |
|
|
|
3.6 |
% |
Pacemaker systems |
|
|
303,759 |
|
|
|
306,008 |
|
|
|
(0.7 |
)% |
|
|
586,127 |
|
|
|
576,845 |
|
|
|
1.6 |
% |
|
|
|
$ |
704,236 |
|
|
$ |
711,785 |
|
|
|
(1.1 |
)% |
|
$ |
1,380,557 |
|
|
$ |
1,343,574 |
|
|
|
2.8 |
% |
|
Cardiac Rhythm Management net sales were flat in the second quarter of 2009 compared to the second
quarter of 2008 and increased 3% in the first six months of 2009 over the same period one year ago.
CRM net sales for both the second quarter and first six months of 2009 were driven by sales volume
growth; however, unfavorable foreign currency translation comparisons decreased net sales by $41.6
million and $72.4 million during the second quarter and first six months of 2009, respectively,
compared to the same periods in 2008.
ICD net sales were flat in the second quarter of 2009 compared to the second quarter of 2008 and
increased 4% in the first six months of 2009 compared to the same period in 2008. Net sales growth
was driven by volume growth across both U.S. and international markets during the first six months
of 2009, and our international markets during the second quarter of 2009. In the United States,
second quarter 2009 ICD net sales of $255.2 million were flat over last years second quarter.
Internationally, second quarter 2009 ICD net sales of $145.3 million decreased 5% compared to the
second quarter of 2008, due to the impact of unfavorable foreign currency translation of $22.4
million. In the United States, the first six months of 2009 ICD net sales of $512.8 million
increased 5% over the same period last year. Internationally, the first six months of 2009 ICD net
sales of $281.6 million remained relatively flat compared to the first six months of 2008. Foreign
currency translation had a $40.0 million unfavorable impact on international ICD net sales during
the first six months of 2009 compared to the same period in 2008.
Pacemaker net sales remained flat in the second quarter of 2009 compared to the second quarter of
2008 and increased approximately 2% in the first six months of 2009 compared to the same period in
2008, due to volume growth. In the second
quarter of 2009, pacemaker net sales in both the United States ($132.0 million) and internationally
($171.8 million) were flat compared to the same prior year period. Foreign currency translation had
a $19.2 million unfavorable impact on international pacemaker net sales in the second quarter of
2009 compared to the same period last year. In the United States, the first six months of 2009
pacemaker net sales of $261.0 million increased 2% compared to the same period last year.
Internationally, the first six months of 2009 pacemaker net sales of $325.1 million were flat
compared to the first half of 2008.
20
Foreign currency translation had a $32.4 million unfavorable
impact on international pacemaker net sales during the first six months of 2009 compared to the
same period last year.
Cardiovascular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
|
July 4, |
|
June 28, |
|
% |
|
July 4, |
|
June 28, |
|
% |
(in thousands) |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
Vascular closure devices |
|
$ |
98,884 |
|
|
$ |
96,956 |
|
|
|
2.0 |
% |
|
$ |
196,461 |
|
|
$ |
187,043 |
|
|
|
5.0 |
% |
Heart valve products |
|
|
83,782 |
|
|
|
87,205 |
|
|
|
(3.9 |
)% |
|
|
164,406 |
|
|
|
164,843 |
|
|
|
(0.3 |
)% |
Other cardiovascular
products |
|
|
60,463 |
|
|
|
43,814 |
|
|
|
38.0 |
% |
|
|
122,049 |
|
|
|
84,622 |
|
|
|
44.2 |
% |
|
|
|
$ |
243,129 |
|
|
$ |
227,975 |
|
|
|
6.6 |
% |
|
$ |
482,916 |
|
|
$ |
436,508 |
|
|
|
10.6 |
% |
|
Cardiovascular net sales increased approximately 7% and 11% during the second quarter and first six
months of 2009, respectively, compared to the same periods in 2008. CV net sales were driven by
volume growth but were unfavorably impacted by foreign currency translation impacts of $14.8
million and $26.7 million during the second quarter and first six months of 2009, respectively,
compared to the same periods last year.
Vascular closure device net sales increased 2% and 5% during the second quarter and first six
months of 2009, respectively, compared to the same periods last year primarily driven by
Angio-Seal volume growth and incremental sales resulting from our acquisition of Radi Medical
Systems AB in December 2008. Our Angio-Seal device continues to be the market share leader in the
vascular closure device market. Heart valve net sales decreased 4% during the second quarter of
2009 and were flat during the first six months of 2009 compared to the same periods last year due
to unfavorable foreign currency translation fully offsetting increased sales volumes. Net sales of
other cardiovascular products increased $16.6 million and $37.4 million during the second quarter
and first six months of 2009, respectively, compared to the same periods last year due to
incremental sales of pressure measurement guidewires, a product line acquired from Radi Medical
System AB in December 2008, and increased sales volumes of other cardiovascular products.
Atrial Fibrillation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
|
July 4, |
|
June 28, |
|
% |
|
July 4, |
|
June 28, |
|
% |
(in thousands) |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
Atrial fibrillation products |
|
$ |
156,370 |
|
|
$ |
135,381 |
|
|
|
15.5 |
% |
|
$ |
301,608 |
|
|
$ |
254,274 |
|
|
|
18.6 |
% |
|
Atrial Fibrillation net sales increased approximately 16% and 19% during the second quarter and
first six months of 2009, respectively, compared to the same periods last year. The increases in AF
net sales were driven by volume growth from continued market acceptance of device-based ablation
procedures to treat the symptoms of atrial fibrillation and our expanded product offerings. Our
access, diagnosis, visualization and ablation products assist physicians in diagnosing and treating
atrial fibrillation and other irregular heart rhythms. Foreign currency translation had an
unfavorable impact on AF net sales of $10.2 million and $16.4 million during the second quarter and
first six months of 2009, respectively, compared to the same periods in 2008.
Neuromodulation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
July 4, |
|
|
June 28, |
|
|
% |
|
|
July 4, |
|
|
June 28, |
|
|
% |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Neurostimulation devices |
|
$ |
80,677 |
|
|
$ |
60,619 |
|
|
|
33.1 |
% |
|
$ |
153,124 |
|
|
$ |
112,142 |
|
|
|
36.5 |
% |
|
Neuromodulation net sales increased 33% and 37% during the second quarter and first six months of
2009, respectively, compared to the same prior year periods. The increases in NMD net sales were
driven by strong volume growth and continued growth in the neuromodulation market. Foreign
currency translation had an unfavorable impact on NMD net sales of $2.3 million and $4.3 million
during the second quarter and first six months of 2009, respectively, compared to the same periods
in 2008.
21
RESULTS OF OPERATIONS
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
|
July 4, |
|
June 28, |
|
% |
|
July 4, |
|
June 28, |
|
% |
(in thousands) |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
Net sales |
|
$ |
1,184,412 |
|
|
$ |
1,135,760 |
|
|
|
4.3 |
% |
|
$ |
2,318,205 |
|
|
$ |
2,146,498 |
|
|
|
8.0 |
% |
|
Overall, net sales increased 4% and 8% in the second quarter and first six months of 2009,
respectively, compared to the same prior year periods. Net sales growth was favorably impacted by
strong volume growth, driven primarily by our CRM and AF product sales. Foreign currency
translation had an unfavorable impact on net sales for the second quarter and first six months of
2009 of $68.9 million and $119.8 million, respectively, due primarily to the strengthening of the
U.S. Dollar against the Euro. These amounts are not indicative of the net earnings impact of
foreign currency translation for the second quarter and first six months of 2009 due to partially
offsetting foreign currency translation impacts on cost of sales and operating expenses.
Net sales by geographic location of the customer were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
Net Sales |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
United States |
|
$ |
630,658 |
|
|
$ |
582,548 |
|
|
$ |
1,250,999 |
|
|
$ |
1,120,010 |
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
299,552 |
|
|
|
316,733 |
|
|
|
584,320 |
|
|
|
586,878 |
|
Japan |
|
|
118,756 |
|
|
|
99,485 |
|
|
|
230,908 |
|
|
|
185,289 |
|
Asia Pacific |
|
|
65,027 |
|
|
|
63,153 |
|
|
|
118,601 |
|
|
|
116,193 |
|
Other (a) |
|
|
70,419 |
|
|
|
73,841 |
|
|
|
133,377 |
|
|
|
138,128 |
|
|
|
|
|
553,754 |
|
|
|
553,212 |
|
|
|
1,067,206 |
|
|
|
1,026,488 |
|
|
|
|
$ |
1,184,412 |
|
|
$ |
1,135,760 |
|
|
$ |
2,318,205 |
|
|
$ |
2,146,498 |
|
|
(a) |
|
No one geographic market is greater than 5% of consolidated net sales. |
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
(in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Gross profit |
|
$ |
878,868 |
|
|
$ |
848,069 |
|
|
$ |
1,718,166 |
|
|
$ |
1,598,320 |
|
Percentage of net sales |
|
|
74.2 |
% |
|
|
74.7 |
% |
|
|
74.1 |
% |
|
|
74.5 |
% |
|
Gross profit for the second quarter of 2009 totaled $878.9 million, or 74.2% of net sales, compared
to $848.1 million, or 74.7% of net sales, for the second quarter of 2008. Gross profit for the
first six months of 2009 totaled $1,718.2 million, or 74.1% of net sales, compared to $1,598.3
million, or 74.5% of net sales, for the first six months of 2008. The decrease in our gross profit
percentage for both the second quarter and first six months of 2009 compared to the same periods in
2008 resulted from unfavorable foreign currency translation impacts partially offset by sales mix
and productivity improvements.
Selling, General and Administrative (SG&A) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
(in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Selling, general and administrative |
|
$ |
431,169 |
|
|
$ |
416,261 |
|
|
$ |
848,844 |
|
|
$ |
783,377 |
|
Percentage of net sales |
|
|
36.4 |
% |
|
|
36.7 |
% |
|
|
36.6 |
% |
|
|
36.5 |
% |
|
22
SG&A expense for the second quarter of 2009 totaled $431.2 million, or 36.4% of net sales, compared
to $416.3 million, or 36.7% of net sales, for the second quarter of 2008. SG&A expense for the
first six months of 2009 totaled $848.8 million, or 36.6% of net sales, compared to $783.4 million,
or 36.5% of net sales, for the first six months of 2008. Overall, SG&A expense as a percentage of
net sales has remained relatively flat year over year.
Research and Development (R&D) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
(in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Research and development expense |
|
$ |
143,052 |
|
|
$ |
138,455 |
|
|
$ |
282,403 |
|
|
$ |
262,090 |
|
Percentage of net sales |
|
|
12.1 |
% |
|
|
12.2 |
% |
|
|
12.2 |
% |
|
|
12.2 |
% |
|
R&D expense in the second quarter of 2009 totaled $143.1 million, or 12.1% of net sales, compared
to $138.5 million, or 12.2% of net sales, for the second quarter of 2008. R&D expense in the first
six months of 2009 totaled $282.4 million, or 12.2% of net sales, compared to $262.1 million, or
12.2% of net sales, for the first six months of 2008. While 2009 R&D expense as a percent of net
sales was flat compared to 2008, total R&D expense increased 3% and 8% for the second quarter and
first six months of 2009, respectively, compared to the same periods in 2008. These increases
reflect our continuing commitment to fund future long-term growth opportunities. We continue to
balance delivering short-term results with our investments in long-term growth drivers.
Other Income (Expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
|
June 28, |
|
|
|
|
|
June 28, |
|
|
July 4, |
|
2008 |
|
July 4, |
|
2008 |
|
|
2009 |
|
(As adjusted) |
|
2009 |
|
(As adjusted) |
|
Interest income |
|
$ |
518 |
|
|
$ |
3,091 |
|
|
$ |
1,077 |
|
|
$ |
7,347 |
|
Interest expense |
|
|
(5,619 |
) |
|
|
(18,101 |
) |
|
|
(12,570 |
) |
|
|
(36,126 |
) |
Other |
|
|
140 |
|
|
|
(3,010 |
) |
|
|
(780 |
) |
|
|
332 |
|
|
Total other income (expense), net |
|
$ |
(4,961 |
) |
|
$ |
(18,020 |
) |
|
$ |
(12,273 |
) |
|
$ |
(28,447 |
) |
|
The Companys 2009 adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP)
Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1)
required retrospective application to all prior periods presented (see Note 3 to the Condensed
Consolidated Financial Statements). As a result, non-cash interest expense adjustments of $13.0
million and $26.0 million were recorded in the second quarter and first six months of 2008,
respectively, increasing 2008 interest expense to conform to the new accounting treatment.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
|
June 28, |
|
|
|
|
|
June 28, |
|
|
July 4, |
|
2008 |
|
July 4, |
|
2008 |
(as a percent of pre-tax income) |
|
2009 |
|
(As adjusted) |
|
2009 |
|
(As adjusted) |
|
Effective tax rate |
|
|
26.8 |
% |
|
|
29.9 |
% |
|
|
26.8 |
% |
|
|
29.5 |
% |
|
Our effective income tax rate was 26.8% and 29.9% for the second quarter of 2009 and 2008,
respectively, and 26.8% and 29.5% for the first six months of 2009 and 2008, respectively. The
effective tax rate for the first six months of 2008 was unfavorably impacted by 2.1 percentage
points due to the expiration of the Federal Research and Development tax credit (R&D tax credit) at
the end of 2007, which was not signed into law until October 2008. The R&D tax credit was made
retroactively effective for all of 2008 through 2009. Accordingly, no 2008 benefit from the R&D tax
credit was recognized until October 2008.
The impact of retrospectively applying the change in accounting for our convertible debentures (see
Note 3 to the Condensed Consolidated Financial Statements) decreased the previously reported second
quarter 2008 effective tax rate from 30.3% to 29.9% and first six months of 2008 effective tax rate
from 29.9% to 29.5%.
23
LIQUIDITY
We believe that our existing cash balances, available borrowing capacity under our commercial paper
program and long-term committed credit facility and future cash generated from operations will be
sufficient to meet our working capital, capital investment and debt service requirements over the
next twelve months and in the foreseeable future thereafter. Although we believe that our earnings,
cash flows and balance sheet position will permit us to obtain additional debt financing or equity
capital, should suitable investment opportunities arise, recent disruptions in the global financial
markets may adversely impact the availability and cost of capital.
On July 28, 2009, we issued $700.0 million aggregate principal amount of 5-year, 3.75% Senior Notes
that mature on July 15, 2014 and $500.0 million aggregate principal amount of 10-year, 4.875%
Senior Notes that mature on July 15, 2019 (collectively, the Senior Notes). We used $500.0 million
of the proceeds from the issuance of these Senior Notes to repay our outstanding borrowings under
our $1.0 billion long-term committed credit facility. Accordingly, at August 12, 2009, we have $1.0
billion of available borrowing capacity under our commercial paper program and long-term committed
credit facility.
As of August 12, 2009, our short-term credit ratings were A1 from Standard & Poors, P2 from
Moodys and F1 from Fitch; additionally, our long-term credit ratings were an A from Standard &
Poors, a Baa1 from Moodys and an A from Fitch. The ratings are not a recommendation to buy, sell
or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated
independently of any other rating.
At July 4, 2009, a large portion of our cash and cash equivalents was held by our non-U.S.
subsidiaries. These funds are only available for use by our U.S. operations if they are repatriated
into the United States. The funds repatriated would be subject to additional U.S. taxes upon
repatriation; however, it is not practical to estimate the amount of additional U.S. tax
liabilities we would incur.
We use two primary measures that focus on accounts receivable and inventory days sales
outstanding (DSO) and days inventory on hand (DIOH). We use DSO as a measure that places emphasis
on how quickly we collect our accounts receivable balances from customers. We use DIOH, which can
also be expressed as a measure of the estimated number of days of cost of sales on hand, as a
measure that places emphasis on how efficiently we are managing our inventory levels. These
measures may not be computed the same as similarly titled measures used by other companies. Our DSO
(ending net accounts receivable divided by average daily sales for the quarter) increased from 88
days at January 3, 2009 to 90 days at July 4, 2009. Our DIOH (ending net inventory divided by
average daily cost of sales for the most recent six months) increased from 160 days at January 3,
2009 to 188 days at July 4, 2009. Special charges to cost of sales in the fourth quarter of 2008
reduced our January 3, 2009 DIOH by 19 days. The remaining increase in DIOH is the result of our
inventory levels increasing to support our increased sales growth and product launches.
A summary of our cash flows from operating, investing and financing activities is provided in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
July 4, |
|
June 28, |
|
|
2009 |
|
2008 |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
358,461 |
|
|
$ |
380,299 |
|
Investing activities |
|
|
(166,211 |
) |
|
|
(165,020 |
) |
Financing activities |
|
|
155,679 |
|
|
|
(218,194 |
) |
Effect of currency exchange rate changes on cash and cash equivalents |
|
|
2,197 |
|
|
|
11,302 |
|
|
Net increase in cash and cash equivalents |
|
$ |
350,126 |
|
|
$ |
8,387 |
|
|
Operating Cash Flows
Cash provided by operating activities was $358.5 million during the first six months of 2009
compared to $380.3 million during the first six months of 2008. Operating cash flows can fluctuate
significantly from period to period due to payment timing differences of working capital accounts
such as accounts receivable, accounts payable, accrued liabilities, and income taxes payable.
Investing Cash Flows
Cash used in investing activities was $166.2 million during the first six months of 2009 compared
to $165.0 million during the same period last year. Our purchases of property, plant and equipment,
which totaled $158.5 million and $136.7 million in the
24
first six months of 2009 and 2008,
respectively, primarily reflect our continued investment in our product growth platforms currently
in place.
Financing Cash Flows
Cash provided by financing activities was $155.7 million during the first six months of 2009
compared to $218.2 million of cash used in financing activities during the first six months of
2008. Our financing cash flows can fluctuate significantly depending upon our liquidity needs and
the amount of stock option exercises. During the first six months of 2009, we made borrowings
under a 3-year unsecured term loan and also repaid all outstanding commercial paper borrowings.
Total net proceeds provided by borrowings made in the first six months of 2009 were $103.2 million.
Comparatively, during the first six months of 2008, we used our outstanding cash balances to
repurchase $300.0 million of our common stock.
DEBT AND CREDIT FACILITIES
We have a long-term $1.0 billion committed credit facility (Credit Facility) used to support our
commercial paper program and for general corporate purposes. Borrowings under this facility bear
interest at the United States Prime Rate (Prime Rate) or the United States Dollar London InterBank
Offered Rate (LIBOR) plus 0.235%, at our election. In the event over half of the Credit Facility is
drawn upon, an additional five basis points is added to the elected Prime or LIBOR rate. The
interest rates are subject to adjustment in the event of a change in our credit ratings.
Outstanding borrowings under the Credit Facility at July 4, 2009 and January 3, 2009 were $500.0
million. On August 10, 2009, we repaid $500.0 million of borrowings under our Credit Facility,
which was funded primarily by proceeds from the issuance of other long-term debt.
Our commercial paper program provides for the issuance of short-term, unsecured commercial paper
with maturities up to 270 days. During the first quarter of 2009, we repaid a net $19.4 million of
our commercial paper borrowings. As of July 4, 2009, we have no outstanding commercial paper
borrowings. Any future commercial paper borrowings would bear interest at the applicable
then-current market rates.
In December 2008, we entered into a 3-year, unsecured term loan (2011 Term Loan), which can be used
for general corporate purposes or to refinance certain other outstanding borrowings of the Company.
The 2011 Term Loan bears interest at LIBOR plus 2.0%, although we may also elect the Prime Rate
plus 1.0%, which is subject to adjustment in the event of a change in our credit ratings. We are
required to make quarterly principal payments in the amount of 5% of the total borrowings.
We made quarterly principal payments of $27.0 million in both March and June 2009.
As of July 4, 2009, we had
total borrowings of $486.0 million under the 2011 Term Loan.
In December 2008, we entered into a 3-year, Yen-denominated unsecured term loan in Japan (Yen Term
Loan) totaling 8.0 billion Japanese Yen (the equivalent of $83.0 million at July 4, 2009 and $88.2
million at January 3, 2009). The borrowings bear interest at the Yen LIBOR plus 2.0%. Interest
payments are required on a semi-annual basis and the entire principal balance is due in December
2011. The principal amount recorded on the balance sheet fluctuates based on the effects of foreign
currency translation.
In May 2003, we issued 7-year, 1.02% Yen-denominated notes in Japan (Yen Notes) totaling 20.9
billion Yen (the equivalent of $216.5 million at July 4, 2009 and $230.1 million at January 3,
2009). Interest payments are required on a semi-annual basis and the entire principal balance is
due in May 2010. The principal amount recorded on our balance sheet fluctuates based on the
effects of foreign currency translation.
Our Credit Facility, 2011 Term Loan and Yen Notes contain certain operating and financial
covenants. Specifically, the Credit Facility and 2011 Term Loan require that we have a leverage
ratio (defined as the ratio of total debt to EBITDA (net earnings before interest, income taxes,
depreciation and amortization)) not exceeding 3.0 to 1.0. The Yen Notes require that we have a
ratio of total debt to total capitalization not exceeding 55% and a ratio of consolidated EBIT (net
earnings before interest and income taxes) to consolidated interest expense of at least 3.0 to 1.0.
Under the Credit Facility, 2011 Term Loan and Yen Notes we also have certain limitations on how we
conduct our business, including limitations on additional liens or indebtedness and
limitations on certain acquisitions, mergers, investments and dispositions of assets. We were in
compliance with all of our debt covenants as of July 4, 2009.
On July 28, 2009, we issued $700.0 million aggregate principal amount of 5-year, 3.75% Senior Notes
that mature on July 15, 2014 and $500.0 million aggregate principal amount of 10-year, 4.875%
Senior Notes that mature on July 15, 2019. Interest payments are
required on a semi-annual basis. We may redeem the Senior Notes at any time at the applicable
redemption price. We intend to use the net proceeds for general corporate purposes.
25
The Senior Notes are senior unsecured obligations and rank equally with all of our existing and
future senior unsecured indebtedness. Under the Senior Notes, we have certain limitations on how
we conduct our business, including limitations on additional liens or indebtedness and limitations
on certain acquisitions, mergers, investments and dispositions of assets.
SHARE REPURCHASES
On July 21, 2009, the Companys Board of Directors authorized a share repurchase program of up to
$500.0 million of the Companys outstanding common stock. As of August 11, 2009, the Company had
repurchased 9.1 million shares for $347.6 million at an average repurchase price of $38.40 per share.
On February 22, 2008, our Board of Directors authorized a share repurchase program of up to $250.0
million of our outstanding common stock. On April 8, 2008, our Board of Directors authorized an
additional $50.0 million of share repurchases as part of this share repurchase program. We
ultimately completed the repurchases under the program on May 1, 2008. In total, we repurchased
6.7 million shares for $300.0 million at an average repurchase price of $44.51 per share.
COMMITMENTS AND CONTINGENCIES
We have certain contingent commitments to acquire various businesses involved in the distribution
of our products and to pay other contingent acquisition consideration payments. While it is not
certain if and/or when these payments will be made, as of July 4, 2009, we could be required to pay
approximately $307 million in future periods to satisfy such commitments. A description of our
contractual obligations and other commitments is contained in Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations Off-Balance Sheet
Arrangements and Contractual Obligations, included in our 2008 Annual Report on Form 10-K. As of
July 4, 2009, there have been no significant changes in our contractual obligations and other
commitments as previously disclosed in our 2008 Annual Report on Form 10-K. We have no off-balance
sheet financing arrangements other than that previously disclosed in our 2008 Annual Report on Form
10-K. Our significant legal proceedings are discussed in Note 7 to the Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q.
CAUTIONARY STATEMENTS
In this Quarterly Report on Form 10-Q and in other written or oral statements made from time to
time, we have included and may include statements that constitute forward-looking statements with
respect to the financial condition, results of operations, plans, objectives, new products, future
performance and business of St. Jude Medical, Inc. and its subsidiaries. Statements preceded by,
followed by or that include words such as may, will, expect, anticipate, continue,
estimate, forecast, project, believe or similar expressions are intended to identify some
of the forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and are included, along with this statement, for purposes of complying with the safe
harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. By
identifying these statements for you in this manner, we are alerting you to the possibility that
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. Actual results may
differ materially from those contemplated by the forward-looking statements due to, among others,
the risks and uncertainties discussed in the sections entitled Off-Balance Sheet Arrangements and
Contractual Obligations, Market Risk and Competition and Other Considerations in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations of our 2008
Annual Report on Form 10-K and in Part II, Item 1A, Risk Factors of our Quarterly Report on Form
10-Q for the fiscal quarter ended April 4, 2009 as well as the various factors described below.
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. We believe the most significant factors that could
affect our future operations and results are set forth in the list below.
|
1. |
|
Any legislative or administrative reform to the U.S. Medicare or Medicaid systems or
international reimbursement systems that significantly reduces reimbursement for procedures using
our medical devices or denies coverage for such procedures, as well as adverse decisions relating
to our products by administrators of
such systems on coverage or reimbursement issues. |
|
|
2. |
|
Assertion, acquisition or grant of key patents by or to others that have the effect of
excluding us from market segments or requiring us to pay royalties. |
|
|
3. |
|
Economic factors, including inflation, contraction in capital markets, changes in interest
rates, changes in tax laws and changes in foreign currency exchange rates. |
|
|
4. |
|
Product introductions by competitors that 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 the development of or preferences for alternative therapies. |
26
|
7. |
|
Safety, performance or efficacy concerns about our 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. |
|
Declining industry-wide sales caused by product recalls or advisories by our competitors that
result in loss of physician and/or patient confidence in the safety, performance or efficacy of
sophisticated medical devices in general and/or the types of medical devices recalled in
particular. |
|
|
9. |
|
Changes in laws, regulations or administrative practices affecting government regulation of
our products, such as FDA laws and regulations that increase the time and/or expense of obtaining
approval for products or impose additional burdens on the manufacture and sale of medical devices. |
|
|
10. |
|
Regulatory actions arising from concern over Bovine Spongiform Encephalopathy, sometimes
referred to as mad cow disease, that have the effect of limiting our ability to market products
using bovine collagen, such as Angio-Seal, or products using bovine pericardial material, such as
our Bicor® and Epic tissue heart valves, or that impose added costs on the procurement of bovine
collagen or bovine pericardial material. |
|
|
11. |
|
The intent and ability of our product liability insurers to meet their obligations to us,
including losses related to our Silzone® litigation, and our ability to fund future product
liability losses related to claims made subsequent to becoming self-insured. |
|
|
12. |
|
Severe weather or other natural disasters that cause damage to the facilities of our critical
suppliers or one or more of our facilities, such as an earthquake affecting our facilities in
California or a hurricane affecting our facilities in Puerto Rico. |
|
|
13. |
|
Healthcare industry consolidation leading to demands for price concessions and/or limitations
on, or the elimination of, our ability to sell in significant market segments. |
|
|
14. |
|
Adverse developments in investigations and governmental proceedings, including the
investigation of business practices in the cardiac rhythm management industry by the U.S.
Attorneys Office in Boston. |
|
|
15. |
|
Adverse developments in litigation, including product liability litigation, patent or other
intellectual property litigation or shareholder litigation. |
|
|
16. |
|
Inability to successfully integrate the businesses that we have acquired in recent years and
that we plan to acquire. |
|
|
17. |
|
Failure to successfully complete clinical trials for new indications for our products and/or
failure to successfully develop markets for such new indications. |
|
|
18. |
|
Changes in accounting rules that adversely affect the characterization of our results of
operations, financial position or cash flows. |
|
|
19. |
|
The disruptions in the financial markets and the economic downturn that adversely impact the
availability and cost of credit and customer purchasing and payment patterns. |
|
|
20. |
|
Conditions imposed in resolving, or any inability to timely resolve, any regulatory issues
raised by the FDA, including 483 observations or warning letters, as well as risks generally
associated with our regulatory compliance and quality systems. |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since January 3, 2009 in our market risk. For further
information on market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk in our 2008 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
As of July 4, 2009, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective as of July 4, 2009.
During the fiscal quarter ended July 4, 2009, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
27
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are the subject of various pending or threatened legal actions and proceedings, including those
that arise in the ordinary course of our business. Such matters are subject to many uncertainties
and to outcomes that are not predictable with assurance and that may not be known for extended
periods of time. We record a liability in our consolidated financial statements for costs related
to claims, including future legal costs, settlements and judgments, where we have assessed that a
loss is probable and an amount can be reasonably estimated. Our significant legal proceedings are
discussed in Note 7 to the Condensed Consolidated Financial Statements in this Quarterly Report on
Form 10-Q and are incorporated herein by reference. While it is not possible to predict the outcome
for most of the legal proceedings discussed in Note 7, the costs associated with such proceedings
could have a material adverse effect on our consolidated earnings, financial position or cash flows
of a future period.
Item 1A. RISK FACTORS
The risks factors identified in Part II, Item 1A of our Quarterly Report on Form 10-Q for the
quarterly period ended April 4, 2009 have not changed in any material respect, except as follows:
(i) The risk factor titled Pending and future product liability claims and litigation may
adversely affect our financial condition and results of operations is amended and restated to read
in its entirety as follows:
The design, manufacture and marketing of the medical devices we produce entail an inherent risk
of product liability claims. Our products are often used in intensive care settings with
seriously ill patients, and many of the medical devices we manufacture and sell are designed to
be implanted in the human body for long periods of time or indefinitely. There are a number of
factors that could result in an unsafe condition or injury to, or death of, a patient with
respect to these or other products which we manufacture or sell, including component failures,
manufacturing flaws, design defects or inadequate disclosure of product-related risks or
product-related information. Product liability claims may be brought by individuals or by groups
seeking to represent a class.
We are currently the subject of various product liability claims, including several lawsuits in
the United States and lawsuits being allowed to proceed as class actions in Canada. The outcome
of litigation, particularly class action lawsuits, is difficult to assess or quantify.
Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate
amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown
for substantial periods of time. For example, in January 2000, we initiated a voluntary field
action to replace products incorporating Silzone® coating, which was used in certain of our
mechanical heart valves and heart valve repair products. After our voluntary field action, we
were sued in various jurisdictions and now have cases pending in the United States and Canada
which have been brought by some patients alleging complications and past or future costs arising
either from the surgical removal or, alternatively, from the continued implantation and
maintenance of products incorporating Silzone® coating over and above the medical monitoring all
replacement heart valve patients receive. Some of the cases involving Silzone®-coated products
have been settled, others have been dismissed and still others are ongoing. The complaints in
the ongoing individual cases in the United States request damages ranging from $10 thousand to
$100 thousand and in some cases, seek an unspecified amount, and the complaints in the Canadian
class actions request damages ranging from the equivalent of $1.3 million to $1.7 billion at
July 4, 2009. We believe that the final resolution of the Silzone®-coated product cases will
take a number of years and cannot reasonably estimate the time frame in which any potential
settlements or judgments would be paid out or the amounts of any such settlements or judgments.
In addition, the cost to defend any future litigation, whether Silzone®-related or not, may be
significant. We believe that many settlements and judgments relating to the Silzone® litigation
and our other litigation may be covered in whole or in part under our previously-issued product
liability insurance policies and existing reserves. Any costs (the material components of which
are settlements, judgments, legal fees and other related defense costs) not covered under our
previously-issued product liability insurance policies and existing reserves could have a
material adverse effect on our consolidated earnings, financial position and cash flows.
(ii) The risk factor titled We may be unable to obtain appropriate levels of product liability
insurance is deleted in its entirety.
(iii) The risk factor titled Our product liability insurers may refuse to cover certain losses on
the grounds that such losses are outside the scope of our product liability insurance policies or
may agree that such losses are covered losses, but may not be able to meet their current or future
payment obligations to us is amended and restated to read in its entirety as follows:
28
One of our prior product liability insurers has filed suits seeking court orders declaring that
they are not required to provide coverage for some of the costs we have incurred or may incur in
the future in the Silzone® litigation described above. This insurer, as well as other insurers
from whom we had purchased product liability insurance, may deny coverage of these and other
past and/or future losses relating to our products on the grounds that such losses are outside
the scope of coverage of those previously-issued insurance policies. To the extent that we
suffer losses that are outside of the scope of coverage of those previously-issued product
liability insurance policies, those losses may have a material adverse effect on our
consolidated earnings, financial position and cash flows.
Our remaining product liability insurance for Silzone® claims consists of a number of layers,
each of which is covered by one or more insurance companies. Part of our final layer of
insurance is covered by a unit of the Kemper Insurance Companies (Kemper), which is currently in
run off and not issuing new policies or generating any new revenue that could be used to cover
claims made under previously-issued policies such as ours. In the event that Kemper is unable to
pay part or all of the claims directed to it, we believe that the other insurance carriers in
Kempers layer will take the position that we will be directly liable for any claims and costs
that Kemper is unable to pay and that the other insurance carriers in that layer will not
provide coverage for Kempers portion. If Kemper or any other insurance companies are unable to
meet their respective obligations to us, we could incur losses which could have material adverse
effect on our consolidated earnings, financial position and cash flows.
(iv) An additional risk factor titled Our self-insurance program may not be adequate to cover
future losses is added at the end of the list of risk factors under Part II, Item 1A of our
Quarterly Report on Form 10-Q for the quarterly period ended April 4, 2009 to read in its entirety
as follows:
For the period from June 15, 2008 through June 15, 2009, we maintained product liability
policies which provided $350 million of insurance coverage, with a $50 million per occurrence
deductible or a $100 million deductible if the claims were deemed an integrated occurrence under
the policies. However, we decided to allow such product liability policies to lapse, and
consistent with industry practice, do not currently maintain or intend to maintain any insurance
policies with respect to product liability in the future. This decision was made based on
current conditions in the insurance marketplace that have led to increasingly higher levels of
self-insured retentions, increasing number of coverage limitations and high insurance premium
rates. We will continue to monitor the insurance marketplace to evaluate the value to us of
obtaining insurance coverage in the future. While based on historical loss trends, we believe
that our self-insurance program will be adequate to cover future losses; we can provide no
assurances that this will remain true. Historical trends may not be indicative of future losses.
These losses could have a material adverse impact on our consolidated earnings, financial
condition or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Companys 2009 Annual Meeting of Shareholders held on May 8, 2009, the shareholders voted on
and approved the following matters brought before the vote of shareholders:
|
a) |
|
A proposal to elect two directors to the Companys Board of Directors
to serve three-year terms ending at the Companys annual meeting in
2012, as follows: |
|
|
|
|
|
|
|
|
|
Director |
|
Votes For |
|
Votes Withheld |
John W. Brown |
|
|
300,860,700 |
|
|
|
5,477,963 |
|
Daniel J. Starks |
|
|
296,203,210 |
|
|
|
10,135,453 |
|
|
|
|
In addition, the terms of the following directors continued after the meeting:
directors with a term ending in 2010 Barbara B. Hill, Michael A. Rocca and
Stefan K. Widensohler; and directors with a term ending in 2011 Richard R.
Devenuti, Stuart M. Essig, Thomas H. Garrett III and Wendy L. Yarno. |
|
|
b) |
|
A proposal to approve the St. Jude Medical, Inc. Management Incentive
Compensation Plan. The proposal received 246,580,722 votes for and
22,269,579 votes against, with the holders of 417,352 shares
abstaining and 37,177,348 broker non-votes. |
|
|
c) |
|
A proposal to ratify the appointment of Ernst & Young LLP as the
Companys independent registered public accounting firm for 2009. The
proposal received 297,658,332 votes for and 8,296,020 votes against,
with the holders of 384,310 shares abstaining. |
29
Item 6. EXHIBITS
|
|
|
|
|
|
10.1 |
|
|
St. Jude Medical, Inc. Management Incentive Compensation Plan is incorporated by reference to
Exhibit 10.1 to St. Jude Medicals Current Report on Form 8-K filed on May 11, 2009. |
|
|
|
|
|
|
12 |
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
101 |
|
|
Financial statements from the quarterly report on Form 10-Q of St. Jude Medical, Inc. for the
quarter ended July 4, 2009, filed on August 12, 2009, formatted in XBRL: (i) the Condensed
Consolidated Statements of Earnings, (ii) the Condensed Consolidated Balance Sheets, (iii) the
Condensed Consolidated Statements of Cash Flows and (iv) the Notes to the Condensed Consolidated
Financial Statements tagged as blocks of text. |
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.
|
|
|
|
|
|
|
|
August 12, 2009
|
|
/s/ JOHN C. HEINMILLER |
|
|
|
|
|
|
|
DATE
|
|
JOHN C. HEINMILLER |
|
|
|
|
Executive Vice President
and Chief Financial Officer |
|
|
|
|
(Duly Authorized Officer and
Principal Financial and Accounting Officer) |
|
|
30
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
10.1 |
|
|
St. Jude Medical, Inc. Management Incentive Compensation Plan is incorporated by reference to Exhibit
10.1 to St. Jude Medicals Current Report on Form 8-K filed on May 11, 2009. |
|
|
|
|
|
|
12 |
|
|
Computation of Ratio of Earnings to Fixed Charges. # |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. # |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. # |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. # |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. # |
|
|
|
|
|
|
101 |
|
|
Financial statements from the quarterly report on Form 10-Q of St. Jude Medical, Inc. for the quarter
ended July 4, 2009, filed on August 12, 2009, formatted in XBRL: (i) the Condensed Consolidated
Statements of Earnings, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed
Consolidated Statements of Cash Flows and (iv) the Notes to the Condensed Consolidated Financial
Statements tagged as blocks of text. * |
|
|
|
# |
|
Filed as an exhibit to this Quarterly Report on Form 10-Q. |
|
* |
|
Furnished herewith. |
31