Table of Contents
|
Item 2.
|
MANAGEMENT’S 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, cardiology, cardiac surgery and atrial fibrillation
therapy areas and implantable neurostimulation medical devices for the management of chronic pain. 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). Our principal products in each operating segment are as follows: CRM – tachycardia implantable cardioverter defibrillator
systems (ICDs) and bradycardia pacemaker systems (pacemakers); CV – vascular products, which include vascular closure products,
pressure measurement guidewires, optical coherence tomography (OCT) imaging products, vascular plugs and other vascular accessories,
and structural heart products, which include heart valve replacement and repair products and structural heart defect devices; AF
– atrial fibrillation products which include electrophysiology (EP) introducers and catheters, advanced cardiac mapping,
navigation and recording systems and ablation systems; and NMD – neurostimulation products, which include spinal cord stimulation
and deep brain stimulation 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 competitive pressures in the industry, cost containment pressure on healthcare systems
and the implementation of U.S. healthcare reform legislation to continue to place downward pressure on prices for our products,
impact reimbursement for our products and potentially reduce medical procedure volumes.
In March 2010, significant U.S. healthcare reform legislation was
enacted into law. As a U.S. headquartered company with significant sales in the United States, this health care reform legislation
will materially impact us. Certain provisions of the legislation are not effective for a number of years and there are many programs
and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear
what the full impacts will be from the legislation. The legislation does levy a 2.3% excise tax on all U.S. medical device sales
beginning in 2013. This is a significant new tax that will materially and adversely affect our business and results of operations.
The legislation also focuses on a number of Medicare provisions aimed at improving quality and decreasing costs. It is uncertain
at this point what impacts these provisions will have on patient access to new technologies. The Medicare provisions also include
value-based payment programs, increased funding of comparative effectiveness
research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate
alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally,
the provisions include a reduction in the annual rate of inflation for hospitals starting in 2011 and the establishment of an independent
payment advisory board to recommend ways of reducing the rate of growth in Medicare spending. We cannot predict what healthcare
programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation
or regulation. However, any changes that lower reimbursements for our products or reduce medical procedure volumes could adversely
affect our business and results of operations.
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.
During the last three weeks in March 2010, a competitor in the CRM market, Boston Scientific Inc. (Boston Scientific), suspended
sales of its ICD products in the United States. Although Boston Scientific resumed sales on April 16, 2010, we experienced an incremental
ICD net sales benefit of approximately $40 million the first nine months of 2010 ICD net sales. 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. We are also
investing in our other three major growth platforms – cardiovascular, atrial fibrillation and neuromodulation – to
increase our market share in these markets.
Net sales in the third quarter and first nine months of 2011 were
$1,382.6 million and $4,204.8 million, respectively, increases of 12% and 10%, respectively, over the same prior year periods.
During the third quarter and first nine months of 2011, our net sales increases were led by incremental net sales from our 2010
acquisitions of AGA Medical Inc. (AGA Medical) and LightLab Imaging, Inc. (LightLab Imaging). Our products to treat atrial fibrillation
also contributed to the increase. Our AF net sales increased 20% and 17% during the third quarter and first nine months of 2011,
respectively, over the same periods in 2010. Compared to the same prior year period, our foreign currency translation comparisons
increased our third quarter and first nine month net sales during 2011 by $73.2 million and $164.9 million, respectively. Refer
to the
Segment Performance
section for a more detailed discussion of the results for the respective segments.
Table of Contents
Our third quarter 2011 net earnings of $226.5 million and diluted
net earnings per share of $0.69 increased 12% and 10%, respectively, compared to our third quarter 2010 net earnings of $208.4
million and diluted net earnings per share of $0.63. Third quarter 2011 net earnings were negatively impacted by $20.9 million
of after-tax charges related to realigning certain activities in our CRM operating segment and costs associated with improving
our international sales and sales support organization, and $8.5 million related to an account receivable write-down associated
with one customer in Europe. Net earnings and diluted net earnings per share for the first nine months of 2011 were $700.8 million,
an increase of 10% in net earnings over the first nine months of 2010. Diluted net earnings per share for the first nine months
of 2011 of $2.13 per diluted share remained flat compared to the same prior year period. During the first nine months of 2011,
net earnings were negatively impacted by $49.8 million of restructuring charges discussed previously, $19.3 million of AGA Medical
inventory step up costs of sale expenses, $18.8 million of AGA Medical-related post-acquisition expenses, $8.5 million of accounts
receivable allowance charges discussed previously and $2.8 million of in-process research and development (IPR&D) charges.
We generated $941.2 million of operating cash flows during the first
nine months of 2011, compared to $791.6 million of operating cash flows during the first nine months of 2010, an 18.9% increase.
We ended the third quarter with $959.5 million of cash and cash equivalents and $3,002.1 million of total debt. We also repurchased
11.7 million shares of our common stock for $500.0 million at an average repurchase price of $42.79 per share. Additionally, our
Board of Directors authorized three quarterly cash dividends of $0.21 per share paid on April 29, 2011, July 29, 2011 and October
31, 2011.
NEW ACCOUNTING PRONOUNCEMENTS
Certain new accounting standards became effective for us in the
first quarter of fiscal year 2011. Information regarding the new accounting pronouncement that impacted our 2011 disclosures is
included in Note 2 to the Condensed Consolidated Financial Statements. Information regarding new accounting pronouncements that
will impact future periods are included below.
In September 2011, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2011-08,
Intangibles – Goodwill and Other (ASC Topic 350): Testing Goodwill for
Impairment
, which allows an entity to first assess qualitative factors to determine whether the existence of events or circumstances
lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If after the assessment the entity determines it is unlikely that the fair value of a reporting unit is less than its carrying
amount, then the two-step impairment test is unnecessary. If however, an entity concludes otherwise, then the first step of the
two-step impairment test is required. ASU 2011-08 is effective for interim and annual reporting periods beginning after December
15, 2011, with early adoption permitted. We expect to adopt this new accounting pronouncement during our fourth quarter 2011 annual
goodwill impairment assessment and do not expect a material impact.
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income
(ASC Topic 220): Presentation of Comprehensive Income
, which eliminates the current option to report other comprehensive income
and its components in the consolidated statements of shareholders’ equity. The update to ASU 2011-05 requires an entity to
present items of net income and other comprehensive income in one continuous statement – referred to as the statement of
comprehensive income – or in two separate, but consecutive, statements. Each component of net income and each component of
other comprehensive income is required to be presented with subtotals for each and a grand total for total comprehensive income.
The updated guidance does not change the calculation of earnings per share. ASU 2011-05 is effective for interim and annual reporting
periods beginning after December 15, 2011. We expect to adopt this new account pronouncement beginning in fiscal year 2012.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies in preparing the consolidated
financial statements in accordance with U.S. generally accepted accounting principles. 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 1, 2011 (2010 Annual Report on Form 10-K).
Table of Contents
Preparation of our consolidated financial statements in conformity
with U.S. generally accepted accounting principles 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; inventory reserves; valuation
of IPR&D, other intangible assets and goodwill; income taxes; litigation 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,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
included in our 2010 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 products, which include vascular closure products, pressure measurement
guidewires, optical coherence tomography (OCT) imaging products, vascular plugs and other vascular accessories, and structural
heart products, which include heart valve replacement and repair products and structural heart defect devices; AF – atrial
fibrillation products which include EP introducers and catheters, advanced cardiac mapping, navigation and recording systems and
ablation systems; and NMD – neurostimulation products, which include spinal cord stimulation and deep brain stimulation 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 Company’s
reportable segments include end-customer revenues 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 customers
and operating expenses managed by each of the reportable segments. Certain operating expenses managed by our selling and corporate
functions, including all stock-based compensation expense, impairment charges, IPR&D charges and special charges have not been
recorded in the individual reportable segments. As a result, reportable segment operating profit is not representative of the operating
profit of the products in these reportable segments.
The following table presents net sales and operating profit by reportable
segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/NMD
|
|
CV/AF
|
|
Other
|
|
Total
|
|
|
Three Months ended October 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
852,774
|
|
$
|
529,784
|
|
$
|
—
|
|
$
|
1,382,558
|
|
|
Operating profit
|
|
|
522,465
|
|
|
281,041
|
|
|
(493,839
|
)
|
|
309,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended October 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
830,902
|
|
$
|
409,003
|
|
$
|
—
|
|
$
|
1,239,905
|
|
|
Operating profit
|
|
|
514,788
|
|
|
225,637
|
|
|
(441,441
|
)
|
|
298,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended October 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,602,835
|
|
$
|
1,601,987
|
|
$
|
—
|
|
$
|
4,204,822
|
|
|
Operating profit
|
|
|
1,623,378
|
|
|
834,341
|
|
|
(1,500,950
|
)
|
|
956,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended October 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,549,768
|
|
$
|
1,264,602
|
|
$
|
—
|
|
$
|
3,814,370
|
|
|
Operating profit
|
|
|
1,595,378
|
|
|
713,748
|
|
|
(1,299,382
|
)
|
|
1,009,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Effective
January 2, 2011, we realigned our significant cardiovascular product categories and reclassified prior period amounts to conform
to the current period presentation.
Table of Contents
Cardiac Rhythm Management
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
|
ICD systems
|
|
$
|
444,889
|
|
$
|
439,333
|
|
|
1.3
|
%
|
$
|
1,387,479
|
|
$
|
1,362,042
|
|
|
1.9
|
%
|
|
Pacemaker systems
|
|
|
305,700
|
|
|
298,669
|
|
|
2.4
|
%
|
|
917,845
|
|
|
915,574
|
|
|
0.2
|
%
|
|
|
|
$
|
750,589
|
|
$
|
738,002
|
|
|
1.7
|
%
|
$
|
2,305,324
|
|
$
|
2,277,616
|
|
|
1.2
|
%
|
Cardiac Rhythm Management’s net sales increased 2% and 1%
during the third quarter and first nine months of 2011, respectively, compared to the same periods in 2010. During the third quarter
and first nine months of 2011, foreign currency translation had a $38.5 million and $84.4 million favorable impact on net sales,
respectively, compared to the same prior year periods. ICD net sales increased 1% and 2% in the third quarter and first nine months
of 2011, respectively, compared to the same prior year periods, as a result of favorable foreign currency translation and sales
of recently launched products, partially offset by the incremental benefit on 2010 U.S. ICD net sales resulting from a suspension
of a competitor’s product sales. In the United States, third quarter 2011 ICD net sales of $257.2 million decreased 9% over
the prior year’s third quarter and ICD net sales in the first nine months of 2011 of $809.9 million decreased 6% over the
same period last year. The nine month decrease included the incremental benefit of approximately $40 million during the first nine
months of 2010, resulting from the suspension of U.S. ICD sales by one of our competitors in the CRM market. Internationally, third
quarter 2011 ICD net sales of $187.7 million increased 21% compared to the third quarter of 2010. During the first nine months
of 2011 ICD net sales of $577.6 million increased 16% compared to the first nine months of 2010. These increases are primarily
a result of favorable foreign currency translation and the second quarter 2011 launch of our Unify
TM
cardiac resynchronization
therapy defibrillator (CRT-D) and Fortify
TM
ICD in Japan. The Unify
TM
CRT-D and Fortify
TM
ICD
are smaller, deliver more energy and have a longer battery life than comparable conventional devices. Foreign currency translation
had a $19.9 million and $43.3 million favorable impact on international ICD net sales in the third quarter and first nine months
of 2011, respectively, compared to the same periods in 2010.
Pacemaker net sales were flat in both the third quarter and first
nine months of 2011 compared to the same prior year periods. In the United States, our third quarter 2011 pacemaker net sales of
$126.2 million decreased 6% compared to the third quarter of 2010. Additionally, during the first nine months of 2011, U.S. pacemaker
net sales of $385.6 million decreased 4% over the same period last year. Internationally, our 2011 net sales during the third quarter
of $179.5 million and first nine months of $532.2 million increased 9% and 4%, respectively, compared to the same prior year periods.
Foreign currency translation had an $18.5 million and $41.1 million favorable impact during the third quarter and first nine months
of 2011, respectively, compared to the same prior year periods.
Cardiovascular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vascular products
|
|
$
|
177,156
|
|
$
|
161,063
|
|
|
10.0
|
%
|
$
|
549,941
|
|
$
|
496,128
|
|
|
10.8
|
%
|
|
Structural heart products
|
|
|
150,828
|
|
|
79,122
|
|
|
90.6
|
%
|
|
447,640
|
|
|
253,791
|
|
|
76.4
|
%
|
|
|
|
$
|
327,984
|
|
$
|
240,185
|
|
|
36.6
|
%
|
$
|
997,581
|
|
$
|
749,919
|
|
|
33.0
|
%
|
Cardiovascular net sales increased 37% and 33% during the third
quarter and first nine months of 2011, respectively, compared to the same periods one year ago driven by incremental net sales
from our 2010 acquisitions of AGA Medical and LightLab Imaging. CV net sales were also favorably impacted by foreign currency translation
of $20.7 million and $47.7 million during the third quarter and first nine months of 2011, respectively, compared to the same prior
year periods. Vascular products’ net sales increased 10% and 11% during the third quarter and first nine months of 2011,
respectively, compared to the same periods in 2010 primarily due to incremental AGA Medical net sales of vascular plugs, and LightLab
Imaging net sales of Optical Coherence Tomography (OCT) products and favorable foreign currency translation, partially offset by
decreased sales volumes associated with our Angio-Seal™ active closure devices. Vascular products include vascular closure
products, fractional flow reserve (FFR) Pressure Wire™, OCT products, vascular plugs and other vascular accessories. Foreign
currency translation favorably impacted the third quarter and first nine months of 2011 by $12.0 million and $29.5 million, respectively.
Structural heart products’ net sales increased 91% and 76% during the third quarter and first nine months of 2011, respectively,
due to the incremental AGA Medical net sales of Amplatzer® occluder products and international net sales growth associated
with our Trifecta™ tissue valve, which was recently launched in the United States after receiving U.S. FDA approval in April
2011. Structural heart products include heart valve replacement and repair products and Amplatzer® occluder products. Foreign
currency translation favorably impacted structural heart products’ net sales by $8.6 million and $18.2 million during the
third quarter and first nine months of 2011, respectively, compared to the same prior year period.
Table of Contents
Atrial Fibrillation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atrial fibrillation products
|
|
$
|
201,800
|
|
$
|
168,818
|
|
|
19.5
|
%
|
$
|
604,406
|
|
$
|
514,683
|
|
|
17.4
|
%
|
In our Atrial Fibrillation division, our access, diagnosis, visualization,
recording and ablation products assist physicians in diagnosing and treating atrial fibrillation and other irregular heart rhythms.
AF net sales increased 20% and 17% during the third quarter and first nine months of 2011, respectively, compared to the same prior
year periods due to the continued increase in EP catheter ablation procedures, the continued market penetration of our EnSite®
Velocity System and related connectivity tools (EnSite Connect™, EnSite Courier™ and EnSite Derexi™ modules)
and the on-going rollout of recently approved EP irrigated ablation catheters in the U.S. (Safire BLU™) and internationally
(Therapy™ Cool Flex™, Safire Blu™ Duo and Therapy™ Cool Path™ Duo bi-directional). Foreign currency
translation had a favorable impact on AF net sales of $11.5 million and $26.4 million in the third quarter and first nine months
of 2011, respectively, compared to the same periods in 2010.
Neuromodulation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurostimulation devices
|
|
$
|
102,185
|
|
$
|
92,900
|
|
|
10.0
|
%
|
$
|
297,511
|
|
$
|
272,152
|
|
|
9.3
|
%
|
Neuromodulation net sales increased 10% and 9% during the third
quarter and first nine months of 2011, respectively, compared to the same periods in 2010. The increase in NMD net sales was driven
by continued market acceptance of our products and sales growth in our neurostimulation devices that help manage chronic pain.
Specifically, international net sales in the third quarter and first nine months of 2011 increased 41% and 42%, respectively, driven
by sales growth in the Eon Mini platform and growing market acceptance of the Epiducer Lead Delivery system which gives physicians
the ability to place multiple neurostimulation leads through a single entry point. Foreign currency translation had a $2.6 million
and $6.4 million favorable impact on NMD net sales during the third quarter and first nine months of 2011, respectively, compared
to the same prior year periods.
RESULTS OF OPERATIONS
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
October 1,
2011
|
|
October 2,
2010
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,382,558
|
|
$
|
1,239,905
|
|
|
11.5
|
%
|
$
|
4,204,822
|
|
$
|
3,814,370
|
|
|
10.2
|
%
|
Overall, net sales increased 12% and 10% during the third quarter
and first nine months of 2011 compared to the same prior year periods led by incremental net sales from our 2010 acquisitions of
AGA Medical and LightLab Imaging and sales growth from our products to treat atrial fibrillation. Our first nine months of 2010
net sales also benefited by approximately $40 million from suspended Boston Scientific U.S. ICD sales. Foreign currency translation
had a favorable impact on the third quarter and first nine months of 2011 net sales of $73.2 million and $164.9 million, respectively,
due primarily to the weakening of the U.S. Dollar against the Euro and Japanese Yen. This amount is not indicative of the net earnings
impact of foreign currency translation for the third quarter and first nine months of 2011 due to partially offsetting foreign
currency translation impacts on cost of sales and operating expenses.
Table of Contents
Net sales by geographic location of the customer were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Net Sales
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
United States
|
|
$
|
657,227
|
|
$
|
657,627
|
|
$
|
2,011,629
|
|
$
|
1,996,655
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
359,132
|
|
|
281,017
|
|
|
1,139,202
|
|
|
949,540
|
|
|
Japan
|
|
|
162,049
|
|
|
141,089
|
|
|
466,256
|
|
|
399,344
|
|
|
Asia Pacific
|
|
|
111,406
|
|
|
83,773
|
|
|
310,061
|
|
|
233,080
|
|
|
Other (a)
|
|
|
92,744
|
|
|
76,399
|
|
|
277,674
|
|
|
235,751
|
|
|
|
|
|
725,331
|
|
|
582,278
|
|
|
2,193,193
|
|
|
1,817,715
|
|
|
|
|
$
|
1,382,558
|
|
$
|
1,239,905
|
|
$
|
4,204,822
|
|
$
|
3,814,370
|
|
(a) No one geographic market is greater than 5% of consolidated
net sales.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Gross profit
|
|
$
|
1,012,443
|
|
$
|
900,086
|
|
$
|
3,075,342
|
|
$
|
2,808,080
|
|
|
Percentage of net sales
|
|
|
73.2
|
%
|
|
72.6
|
%
|
|
73.1
|
%
|
|
73.6
|
%
|
Gross profit for the third quarter of 2011 totaled $1,012.4 million,
or 73.2% of net sales, compared to $900.1 million, or 72.6% of net sales for the third quarter of 2010. Gross profit for the first
nine months of 2011 totaled $3,075.3 million, or 73.1% of net sales, compared to $2,808.1 million, or 73.6% of net sales for the
first nine months of 2010. The positive impact from our gross profit percentage during the third quarter of 2011 compared to the
same period in 2010 was primarily a result of favorable foreign currency translation impacts as well as favorable product mix from
our AGA Medical sales. Our gross profit percentage for the first nine months of 2011 was negatively impacted by $29.4 million (or
0.7 percentage points) due to inventory step-up amortization costs associated with our AGA Medical acquisition.
Selling, general and administrative (SG&A) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Selling, general and administrative
|
|
$
|
505,080
|
|
$
|
438,723
|
|
$
|
1,532,241
|
|
$
|
1,329,623
|
|
|
Percentage of net sales
|
|
|
36.5
|
%
|
|
35.4
|
%
|
|
36.4
|
%
|
|
34.9
|
%
|
SG&A expense for the third quarter of 2011 totaled $505.1 million,
or 36.5% of net sales, compared to $438.7 million, or 35.4% of net sales, for the third quarter of 2010. SG&A expense for the
first nine months of 2011 totaled $1,532.2 million, or 36.4% of net sales, compared to $1,329.6 million, or 34.9% of net sales,
for the first nine months of 2010. The increase in SG&A expense as a percent of net sales is primarily the result of $24.9
million of contract termination and international integration charges related to our AGA Medical acquisition, which negatively
impacted our first nine months SG&A expense as a percent of net sales by 0.6 percentage points. Incremental intangible asset
amortization expense from the AGA Medical acquisition also negatively impacted both our 2011 third quarter and first nine months
of SG&A expense as a percent of net sales by 0.5 percentage points. The remaining increase in SG&A expense as a percent
of net sales is primarily associated with our increased investment in sales and marketing activities to support the growth and
launch of our new technologies, particularly outside of the United States.
Research and development (R&D) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Research and development expense
|
|
$
|
176,320
|
|
$
|
150,135
|
|
$
|
528,387
|
|
$
|
456,469
|
|
|
Percentage of net sales
|
|
|
12.8
|
%
|
|
12.1
|
%
|
|
12.7
|
%
|
|
12.0
|
%
|
Table of Contents
R&D expense in the third quarter of 2011 totaled $176.3 million,
or 12.8% of net sales, compared to $150.1 million, or 12.1% of net sales, for the third quarter of 2010. R&D expense in the
first nine months of 2011 totaled $528.4 million, or 12.7% of net sales, compared to $456.5 million, or 12.0% of net sales, for
the first nine months of 2010. R&D expense as a percent of net sales increased during the third quarter and first nine months
of 2011 compared to the same prior year periods, reflecting our continuing commitment to fund future long-term growth opportunities.
We will continue to balance delivering short-term results with our investments in long-term growth drivers.
Purchased in-process research and development charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(in thousands)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Purchased in-process research and development charges
|
|
$
|
—
|
|
$
|
12,244
|
|
$
|
4,400
|
|
$
|
12,244
|
|
During the second quarter of 2011, we recorded IPR&D charges
of $4.4 million in conjunction with the purchase of intellectual property in our CRM segment since the related technological feasibility
had not yet been reached and such technology had no future alternative use. During the third quarter of 2010, we recorded IPR&D
charges of $12.2 million in conjunction with the purchase of cardiovascular-related intellectual property since the related technological
feasibility had not yet been reached and such technology had no future alternative use.
Special charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Cost of sales special charges
|
|
$
|
7,173
|
|
$
|
—
|
|
$
|
18,219
|
|
$
|
—
|
|
|
Special charges
|
|
|
21,376
|
|
|
—
|
|
|
53,545
|
|
|
—
|
|
|
|
|
$
|
28,549
|
|
$
|
—
|
|
$
|
71,764
|
|
$
|
—
|
|
During the first nine months of 2011, we incurred charges totaling
$71.8 million primarily related to ongoing restructuring actions that began in the second quarter of 2011 to realign certain activities
in our CRM business as well as costs primarily associated with our continuing efforts to improve the our international sales and
sales support organization. A key component of these restructuring activities related to our decision to transition CRM manufacturing
out of Sweden to more cost-advantaged locations. As part of these actions as well as the efforts to enhance the efficiency and
effectiveness of our international sales and sales support organization, we recorded $33.9 million related to severance and benefit
costs for approximately 380 employees.
We also recorded a $6.5 million charge in cost of sales related
to inventory obsolescence charges and $19.4 million of other long-lived asset charges, of which $12.0 million was recorded as an
impairment charge to write-down our CRM manufacturing facility in Sweden to its fair value. We also recorded charges of $11.9 million
related to contract terminations and other costs.
As part of our decision to transition CRM manufacturing out of Sweden,
we expect to incur additional pre-tax costs of approximately $50 - $70 million ($35 - $50 million after-tax costs) over the next
several quarters related to additional employee termination costs, accelerated depreciation and other restructuring related costs.
We expect to fully transition our manufacturing operations out of Sweden by the end of fiscal year 2012.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Interest income
|
|
$
|
1,256
|
|
$
|
785
|
|
$
|
3,201
|
|
$
|
1,507
|
|
|
Interest expense
|
|
|
(16,986
|
)
|
|
(14,714
|
)
|
|
(51,747
|
)
|
|
(50,299
|
)
|
|
Other
|
|
|
(3,783
|
)
|
|
2,818
|
|
|
(22,432
|
)
|
|
(2,865
|
)
|
|
Total other income (expense), net
|
|
$
|
(19,513
|
)
|
$
|
(11,111
|
)
|
$
|
(70,978
|
)
|
$
|
(51,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
The unfavorable change in other income (expense) during the third
quarter and first nine months of 2011 compared to the same periods in 2010 was due to $6.6 million and $21.8 million, respectively,
of Puerto Rico excise tax expense recognized in other expense. The 4% Puerto Rico excise tax became effective in 2011, and we incur
this tax on most purchases made from our Puerto Rico subsidiary. This excise tax is almost entirely offset by the resulting foreign
tax credits or income tax deductions which are recognized as a benefit to income tax expense.
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(as a percent of pre-tax income)
|
|
October 1,
2011
|
|
October 2,
2010
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Effective tax rate
|
|
21.9%
|
|
27.6%
|
|
20.9%
|
|
26.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective income tax rate was 21.9% and 27.6% for the third
quarter of 2011 and 2010, respectively, and 20.9% and 26.8% for the first nine months of 2011 and 2010, respectively. As discussed
previously, the 4% Puerto Rico excise tax, which is levied on most purchases from Puerto Rico, became effective beginning in 2011.
Because the excise tax is not levied on income, U.S. generally accepted accounting principles do not allow for the excise tax to
be recognized as part of income tax expense. However, the resulting foreign tax credit or income tax deduction is recognized as
a benefit to income tax expense, thus favorably impacting our effective income tax rate. As a result, our effective tax rate was
favorably impacted by 1.3 percentage points and 1.4 percentage points in the third quarter and first nine months of 2011, respectively,
compared to the same periods in 2010. As discussed previously, this favorable impact on our effective tax rate is more than offset
by the excise tax expense recognized in other expense.
Our effective tax rate for the first nine months of 2010 does not
include the impact of the federal research and development tax credit (R&D tax credit), as the R&D tax credit was not enacted
into law until the fourth quarter of 2010. As a result, our effective tax rates for both the third quarter and first nine months
of 2010 were negatively impacted by 2.0 percentage points.
LIQUIDITY
We believe that our existing cash balances, future cash generated
from operations and available borrowing capacity under our $1.5 billion long-term committed credit facility (Credit Facility) and
related commercial paper program will be sufficient to fund our operating needs, working capital requirements, R&D opportunities,
capital expenditures, debt service requirements and shareholder dividends over the next 12 months and in the foreseeable future
thereafter. We do not have any significant debt maturities until 2013. The majority of our outstanding October 1, 2011 debt portfolio
matures after December 2015.
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 and growth opportunities arise.
Our credit ratings are investment grade. We monitor capital markets regularly and may raise additional capital when market conditions
or interest rate environments are favorable.
At October 1, 2011, substantially all of our cash and cash equivalents
was held by our non-U.S. subsidiaries. A portion of these foreign cash balances are associated with earnings that we have asserted
are permanently reinvested and which we plan to use to support our continued growth plans outside the U.S. through funding of operating
expenses, capital expenditures and other investment and growth opportunities. The majority of 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 currently have no plans to repatriate funds held by our non-U.S. subsidiaries.
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 most recently completed quarter) increased from 90 days
at January 1, 2011 to 92 days at October 1, 2011. Our DIOH (ending net inventory divided by average daily cost of sales for the
most recently completed six months) decreased from 163 days at January 1, 2011 to 157 days at October 1, 2011. Special charges
recognized in cost of sales as well as acquisition impacts to cost of sales and inventory during the last six months reduced our
October 1, 2011 DIOH by 7 days. Special charges recognized in cost of sales in the second half of 2010 reduced our January 1, 2011
DIOH by 7 days; however, the impact of our acquisitions in the second half of 2010 offset the special charge impact, increasing
our DIOH by 7 days.
Table of Contents
A summary of our cash flows from operating, investing and financing
activities is provided in the following table (in thousands):
|
|
|
Nine Months Ended
|
|
|
|
|
October 1,
2011
|
|
October 2,
2010
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
941,153
|
|
$
|
791,561
|
|
|
Investing activities
|
|
|
(268,369
|
)
|
|
(468,775
|
)
|
|
Financing activities
|
|
|
(207,894
|
)
|
|
133,677
|
|
|
Effect of currency exchange rate changes on cash and cash equivalents
|
|
|
(5,700
|
)
|
|
2,224
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
459,190
|
|
$
|
458,687
|
|
Operating Cash Flows
Cash provided by operating activities was $941.2 million during
the first nine months of 2011, an 18.9% increase compared to $791.6 million during the first nine months of 2010. 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 $268.4 million during the
first nine months of 2011 compared to $468.8 million during the same period last year. Our purchases of property, plant and equipment,
which totaled $236.0 million and $226.3 million in the first nine months of 2011 and 2010, respectively, primarily reflect our
continued investment in our product growth platforms currently in place. During the first nine months of 2010, we made certain
acquisitions and strategic investments by acquiring LightLab Imaging for $92.2 million in net cash consideration, investing $60
million in CardioMEMS, Inc. (CardioMEMS) and making our final scheduled acquisition payment of $31.3 million for MediGuide, Inc.
CardioMEMS is a privately-held company focused on the development of a wireless monitoring technology that can be placed directly
into the pulmonary artery to assess cardiac performance via measurement of pulmonary artery pressure.
Financing Cash Flows
Cash used in financing activities was $207.9 million during the
first nine months of 2011 compared to $133.7 million of cash provided by financing activities in the first nine months of 2010.
Our financing cash flows can fluctuate significantly depending upon our liquidity needs, stock repurchase plans and the amount
of stock option exercises. During the first nine months of 2011, we repurchased $809.2 million of our common stock, which was financed
primarily with cash generated from operations and net commercial paper issuances of $444.6 million. During the first nine months
of 2010, we received net proceeds of $671.1 million from debt borrowings consisting of $450.0 million principal amount of 2013
Senior Notes, 2.04% Yen Notes (12.8 billion Yen) and 1.58% Yen Notes (8.1 billion Yen). The proceeds from these debt issuances
were used to repay $655.7 million of outstanding debt borrowings consisting of a 3-year unsecured 2011 Term Loan ($432.0 million)
and 1.02% Yen Notes (20.9 billion Yen). Proceeds from the exercise of stock options and stock issued provided cash inflows of $285.8
million and $107.3 million during the first nine months of 2011 and 2010, respectively. We also paid $137.8 million of cash dividends
to shareholders in the first nine months of 2011.
DEBT AND CREDIT FACILITIES
We have a long-term $1.5 billion committed Credit Facility used
to support our commercial paper program and for general corporate purposes. The Credit Facility expires in February 2015. Borrowings
under this facility bear interest initially at LIBOR plus 0.875%, subject to adjustment in the event of a change in our credit
ratings. Commitment fees under this Credit Facility are not material. There were no outstanding borrowings under the Credit Facility
as of October 1, 2011 or January 1, 2011.
Our commercial paper program provides for the issuance of short-term,
unsecured commercial paper with maturities up to 270 days. We began issuing commercial paper during November 2010 and had an outstanding
commercial paper balance of $470.1 million and $25.5 million at October 1, 2011 and January 1, 2011, respectively. Any future commercial
paper borrowings would bear interest at the applicable then-current market rates. Our commercial paper has historically been issued
at lower interest rates than borrowings available under the Credit Facility.
Table of Contents
In March 2010, we issued $450.0 million principal amount of 2013
Senior Notes and used the proceeds to retire outstanding debt obligations. Interest payments on the 2013 Senior Notes are required
on a semi-annual basis. We may redeem the 2013 Senior Notes at any time at the applicable redemption price. The 2013 Senior Notes
are senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness.
Concurrent with the issuance of the 2013 Senior Notes, we entered
into a 3-year, $450.0 million notional amount interest rate swap designated as a fair value hedge of the changes in fair value
of our fixed-rate 2013 Senior Notes. On November 8, 2010, we terminated the interest rate swap and received a cash payment of $19.3
million. The gain from terminating the interest rate swap agreement is being amortized as a reduction of interest expense over
the remaining life of the 2013 Senior Notes.
In July 2009, we issued $700.0 million aggregate principal amount
of 5-year, 3.75% Senior Notes (2014 Senior Notes) and $500.0 million aggregate principal amount of 10-year, 4.875% Senior Notes
(2019 Senior Notes). In August 2009, we used $500.0 million of the net proceeds from the 2014 Senior Notes and 2019 Senior Notes
to repay all amounts outstanding under our credit facility. We may redeem the 2014 Senior Notes or 2019 Senior Notes at any time
at the applicable redemption prices. Both the 2014 Senior Notes and 2019 Senior Notes are senior unsecured obligations and rank
equally with all of our existing and future senior unsecured indebtedness.
In December 2010, we issued our $500.0 million principal amount
5-year, 2.50% unsecured senior notes (2016 Senior Notes). The majority of the net proceeds from the issuance of the 2016 Senior
Notes were used for general corporate purposes including the repurchase of our common stock. Interest payments are required on
a semi-annual basis. We may redeem the 2016 Senior Notes at any time at the applicable redemption price. The 2016 Senior Notes
are senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness.
Concurrent with the issuance of the 2016 Senior Notes, we entered
into a 5-year, $500.0 million notional amount interest rate swap designated as a fair value hedge of the changes in fair value
of our fixed-rate 2016 Senior Notes. As of October 1, 2011, the fair value of the swap was a $17.9 million asset which was classified
as other assets on the consolidated balance sheet, with a corresponding adjustment increasing the carrying value of the 2016 Senior
Notes. Refer to Note 13 of the Consolidated Financial Statements for additional information regarding the interest rate swap.
In April 2010, we issued 10-year, 2.04% unsecured senior notes in
Japan (2.04% Yen Notes) totaling 12.8 billion Yen (the equivalent of $166.5 million at October 1, 2011 and $156.3 million at January
1, 2011) and 7-year, 1.58% unsecured senior notes in Japan (1.58% Yen Notes) totaling 8.1 billion Yen (the equivalent of $106.3
million at October 1, 2011 and $99.7 million at January 1, 2011). We used the net proceeds from these issuances to repay our 1.02%
Yen-denominated notes that matured on May 7, 2010 totaling 20.9 billion Yen. Interest payments on the 2.04% Yen Notes and 1.58%
Yen Notes are required on a semi-annual basis and the principal amounts recorded on the balance sheet fluctuate based on the effects
of foreign currency translation.
In March 2011, we borrowed 6.5 billion Japanese Yen under uncommitted
credit facilities with two commercial Japanese banks that provide for borrowings up to a maximum of 11.25 billion Japanese Yen. The proceeds from the borrowings were used to repay the outstanding balance on the Yen-denominated term loan due December 2011.
The outstanding 6.5 billion Japanese Yen balance was the equivalent of $84.8 million at October 1, 2011. The principal amount reflected
on the balance sheet fluctuates based on the effects of foreign currency translation. Half of the borrowings bear interest at the
Yen LIBOR plus 0.25% and the other half of the borrowings bear interest at the Yen LIBOR plus 0.275%. The entire principal balance
is due in March 2012 with an option to renew with the lenders’ consent.
Our Credit Facility and Yen Notes contain certain operating and
financial covenants. Specifically, the Credit Facility requires 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 60% 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, our senior
notes 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 October 1, 2011.
Table of Contents
SHARE REPURCHASES
On August 2, 2011, our Board of Directors authorized a share repurchase
program of up to $500.0 million of our outstanding common stock. We completed the repurchases under the program on August 29, 2011,
repurchasing 11.7 million shares for $500.0 million at an average repurchase price of $42.79 per share.
On October 15, 2010, our Board of Directors authorized a share repurchase
program of up to $600.0 million of our outstanding common stock. On October 21, 2010, our Board of Directors authorized an additional
$300.0 million of share repurchases as part of this share repurchase program. We continued repurchasing shares in 2011 and completed
the repurchases under the program on January 20, 2011, repurchasing a total of 22.0 million shares for $900.0 million at an average
repurchase price of $40.87 per share. From January 1 through January 20, 2011, we repurchased 6.6 million shares for $274.7 million
at an average repurchase price of $41.44 per share.
DIVIDENDS
The following table provides dividend authorization, shareholder
record and dividend payable dates as well as the cash dividends declared per share. We expect to continue to pay quarterly cash
dividends in the foreseeable future, subject to Board approval.
Board of Directors’
Dividend Authorization Date
|
|
Shareholders’
Record Date
|
|
Dividend
Payable Date
|
|
Cash Dividends
Declared
Per Share
|
|
|
|
|
|
|
|
|
|
|
February 26, 2011
|
|
March 31, 2011
|
|
April 29, 2011
|
|
$
|
0.21
|
|
May 11, 2011
|
|
June 30, 2011
|
|
July 29, 2011
|
|
$
|
0.21
|
|
August 2, 2011
|
|
Septemeber 30, 2011
|
|
October 31, 2011
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
Total dividends declared per share for the nine months ended October 1, 2011
|
|
$
|
0.63
|
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 October 1, 2011, we could be required to pay approximately $25.7 million in future
periods to satisfy such commitments. A description of our contractual obligations and other commitments is contained in Part II,
Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
– Off-Balance
Sheet Arrangements and Contractual Obligations
, included in our 2010 Annual Report on Form 10-K. We have no off-balance sheet
financing arrangements other than that previously disclosed in our 2010 Annual Report on Form 10-K. Our significant legal proceedings
are discussed in Note 6 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Table of Contents
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
and
Market Risk
in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of our 2010 Annual Report on Form 10-K and in Part II, Item 1A,
Risk Factors
of this Quarterly Reports on Form 10-Q for
the periods ended April 2, 2011 and July 2, 2011 and in Part I, Item 1A,
Risk Factors
of our 2010 Annual Report on Form
10-K, 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, publication of adverse study results, initiation of investigations of our customers related to our devices or the development of or preferences for alternative therapies.
|
|
|
7.
|
|
Safety, performance or efficacy concerns about our products, many of which are expected to be implanted for many years, some of which may lead to recalls and/or advisories with the attendant expenses and declining sales.
|
|
|
8.
|
|
Declining industry-wide sales caused by product quality issues or 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 regulations, including those that decrease the probability or 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 Biocor®, Epic™ and Trifecta™ 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 can adversely impact customers purchasing patterns and/or patient implant procedures or 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 changes 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.
|
|
|
15.
|
|
Adverse developments in litigation, including product liability litigation, patent or other intellectual property litigation, qui tam 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 or unfavorable data from clinical trials for our products or 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 Form 483 observations or warning letters, as well as risks generally associated with our regulatory compliance and quality systems.
|
|
|
21.
|
|
Governmental legislation, including the recently enacted Patient Protection and Affordable Care Act and the Health Care and Educational Reconciliation Act, and/or regulation that significantly impacts the healthcare system in the United States and that results in lower reimbursement for procedures using our products, reduces medical procedure volumes or otherwise adversely affects our business and results of operations, including the recently enacted medical device excise tax.
|
Table of Contents
|
Item 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There have been no material changes since January 1, 2011 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 2010 Annual Report on Form 10-K.
|
Item 4.
|
CONTROLS AND PROCEDURES
|
As of October 1, 2011, the Company carried out an evaluation, under
the supervision and with the participation of the Company’s 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 Company’s disclosure controls and procedures were effective as of October 1, 2011.
There were no changes in the Company’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the third quarter of 2011 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
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 6 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 6, 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
.
The risks factors identified in Part I, Item
1A of our Annual Report on Form 10-K for the year ended January 1, 2011, Part II, Item 1A of our Quarterly Report on Form 10-Q
for the period ended April 2, 2011 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended July 2, 2011
have not changed in any material respect.
|
Item 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Issuer Purchases of Equity Securities
On August 3, 2011, our Board of Directors announced a share repurchase
program of up to $500.0 million of our outstanding common stock with no expiration date. We completed the repurchases under the
program on August 29, 2011, repurchasing 11.7 million shares for $500.0 million at an average repurchase price of $42.79 per share.
Table of Contents
The following table provides information about the shares we repurchased
during the third quarter of
2011:
|
Period
|
|
Total Number
of Shares
Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/3/2011 - 7/30/2011
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
7/31/2011 - 9/3/2011
|
|
|
11,684,681
|
|
|
42.79
|
|
|
11,684,681
|
|
|
—
|
|
|
9/4/2011 - 10/1/2011
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,684,681
|
|
|
42.79
|
|
|
11,684,681
|
|
$
|
—
|
|
|
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 October 1, 2011, 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.
|
Table of Contents
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
November 9, 2011
|
|
/s/ JOHN C. HEINMILLER
|
|
|
DATE
|
|
JOHN C. HEINMILLER
Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
|
|
Table of Contents
INDEX TO EXHIBITS
Exhibit
No.
|
|
Description
|
|
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 October 1, 2011, 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.
|
_________________
# Filed as an exhibit to this Quarterly Report on
Form 10-Q.
* Furnished herewith.
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