SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of
Registrant as specified in its charter)
| INDIANA | 35-1931722 | ||
| (State or other jurisdiction of | (I.R.S. Employer | ||
| incorporation or organization) | Identification No.) |
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
(Address of principal executive offices)
Registrant’s telephone number, including area code: (317) 971-2000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ____Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No ____The number of shares of common stock outstanding as of August 6, 2003:
| Class | Number of Shares Outstanding | ||
| Common | 311,116,943 |
GUIDANT CORPORATION
Consolidated
Statements of Operation
(In millions, except
per share data)
(unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Net sales | $ 944.9 | $ 787.8 | $ 1,820.6 | $ 1,481.9 | |||||
| Cost of products sold | 232.7 | 199.9 | 445.8 | 363.1 | |||||
| Gross profit | 712.2 | 587.9 | 1,374.8 | 1,118.8 | |||||
| Research and development | 130.3 | 99.6 | 243.9 | 196.8 | |||||
| Purchased in-process research and development | 12.0 | -- | 48.5 | 6.5 | |||||
| Sales, marketing and administrative | 301.2 | 239.8 | 574.1 | 453.1 | |||||
| Interest, net | (2.0) | 1.7 | (3.1) | 5.8 | |||||
| Royalties, net | 16.8 | 13.7 | 31.2 | 24.9 | |||||
| Amortization | 3.4 | 3.1 | 6.7 | 6.2 | |||||
| Other, net | 0.6 | 5.0 | 5.8 | 7.1 | |||||
| Litigation, net | 422.8 | (137.1) | 422.8 | (137.1) | |||||
| Foundation contribution | -- | 40.0 | -- | 40.0 | |||||
| Restructuring charge | -- | 14.0 | -- | 14.0 | |||||
| Income (loss) from continuing operations before income taxes | (172.9) | 308.1 | 44.9 | 501.5 | |||||
| Income taxes | (93.2) | 90.8 | (34.1) | 142.2 | |||||
| Income (loss) from continuing operations | (79.7) | 217.3 | 79.0 | 359.3 | |||||
| Loss from discontinued operations, net of income taxes | (17.4) | (12.5) | (82.7) | (15.0) | |||||
| Net income (loss) | ($ 97.1) | $ 204.8 | ($ 3.7) | $ 344.3 | |||||
| Earnings (loss) per share-basic | |||||||||
| Income (loss) from continuing operations | ($ 0.26) | $ 0.72 | $ 0.26 | $ 1.19 | |||||
| Loss from discontinued operations, net of income taxes | (0.06) | (0.04) | (0.27) | (0.05) | |||||
| Net income (loss) | ($ 0.32) | $ 0.68 | ($ 0.01) | $ 1.14 | |||||
| Earnings (loss) per share-diluted | |||||||||
| Income (loss) from continuing operations | ($ 0.26) | $ 0.71 | $ 0.26 | $ 1.17 | |||||
| Loss from discontinued operations, net of income taxes | (0.06) | (0.04) | (0.27) | (0.05) | |||||
| Net income (loss) | ($ 0.32) | $ 0.67 | ($ 0.01) | $ 1.12 | |||||
| Dividends declared per common share | -- | -- | $ 0.08 | -- | |||||
See notes to consolidated financial statements
GUIDANT CORPORATION
Consolidated Balance
Sheets
(In millions, except
share data)
| June 30, 2003 (unaudited) |
December 31, 2002 | ||||
|---|---|---|---|---|---|
| Assets | |||||
| Current Assets | |||||
| Cash and cash equivalents | $1,190.4 | $1,014.8 | |||
| Short-term investments | 10.3 | 10.3 | |||
| Accounts receivable, net of allowances of $31.8 (2003) and $30.9 (2002) | 757.8 | 693.9 | |||
| Inventories | 339.9 | 297.5 | |||
| Deferred income taxes | 242.0 | 210.0 | |||
| Prepaid expenses and other current assets | 57.3 | 63.9 | |||
| Current assets of discontinued operations | 2.1 | 12.8 | |||
| Total Current Assets | 2,599.8 | 2,303.2 | |||
| Other Assets | |||||
| Goodwill, net of allowances of $159.5 (2003) and $159.4 (2002) | 516.5 | 516.2 | |||
| Other intangible assets, net of allowances of $67.2 (2003) and $60.3 (2002) | 143.3 | 93.2 | |||
| Deferred income taxes | 49.8 | 53.9 | |||
| Investments | 44.6 | 46.8 | |||
| Sundry | 47.0 | 50.4 | |||
| Other assets of discontinued operations | 0.4 | 8.3 | |||
| 801.6 | 768.8 | ||||
| Property and equipment, net of accumulated depreciation of $607.0 (2003) and $550.6 (2002) | 707.1 | 644.1 | |||
| $4,108.5 | $3,716.1 | ||||
See notes to consolidated financial statements
GUIDANT CORPORATION
Consolidated Balance
Sheets
(In millions, except
share data)
| June 30, 2003 |
December 31, 2002 | ||||
|---|---|---|---|---|---|
| (unaudited) | |||||
| Liabilities and Shareholders' Equity | |||||
| Current Liabilities | |||||
| Accounts payable | $ 88.1 | $ 69.0 | |||
| Employee compensation | 139.8 | 189.1 | |||
| Cordis accrual | 425.0 | -- | |||
| Other liabilities | 267.2 | 309.8 | |||
| Income taxes payable | 117.5 | 248.3 | |||
| Short-term debt | 72.8 | 6.8 | |||
| Current liabilities of discontinued operations | 31.3 | 42.8 | |||
| Total Current Liabilities | 1,141.7 | 865.8 | |||
| Noncurrent Liabilities | |||||
| Long-term debt | 357.8 | 361.7 | |||
| Other | 172.3 | 166.8 | |||
| 530.1 | 528.5 | ||||
| Commitments and contingencies | -- | -- | |||
| Shareholders' Equity | |||||
| Preferred stock: | |||||
| Authorized shares: 50,000,000 | |||||
| Issued shares: none | -- | -- | |||
| Common stock, no par value: | |||||
| Authorized shares: 1,000,000,000 | |||||
| Issued shares: 310,201,000 | 256.2 | 226.1 | |||
| Additional paid-in capital | 229.0 | 200.7 | |||
| Retained earnings | 1,974.0 | 2,002.3 | |||
| Deferred cost, ESOP | (19.6) | (24.2) | |||
| Unearned compensation | (59.1) | -- | |||
| Treasury stock, at cost: | |||||
| Shares: 2,388,000 (2002) | -- | (92.0) | |||
| Accumulated other comprehensive income | 56.2 | 8.9 | |||
| 2,436.7 | 2,321.8 | ||||
| $4,108.5 | $ 3,716.1 | ||||
See notes to consolidated financial statements
GUIDANT CORPORATION
Consolidated
Statements of Cash Flows
(In millions)
(unaudited)
| Six Months Ended June 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | ||||||
| Cash Provided by Operating Activities | |||||||
| Net income (loss) | ($ 3.7) | $ 344.3 | |||||
| Adjustments to Reconcile Net Income (Loss) to Cash | |||||||
| Provided by Operating Activities | |||||||
| Depreciation | 63.0 | 55.1 | |||||
| Amortization of other intangible assets | 6.7 | 6.4 | |||||
| Provision for inventory and other losses | 29.6 | 42.8 | |||||
| Purchased in-process research and development | 48.5 | 6.8 | |||||
| Other noncash, net | (16.1) | (28.4) | |||||
| 128.0 | 427.0 | ||||||
| Changes in Operating Assets and Liabilities | |||||||
| Receivables | (37.8) | (54.8) | |||||
| Inventories | (46.9) | (31.5) | |||||
| Prepaid expenses and other current assets | 7.7 | -- | |||||
| Accounts payable and accrued liabilities | (18.0) | 43.3 | |||||
| Income taxes payable | (124.5) | 91.8 | |||||
| Other liabilities | 335.0 | 69.1 | |||||
| Net Cash Provided by Operating Activities | 243.5 | 544.9 | |||||
| Investing Activities | |||||||
| Investment purchases | (1.9) | (12.1) | |||||
| Sale/maturity of investments | 1.4 | 0.1 | |||||
| Additions of property and equipment, net | (125.4) | (68.3) | |||||
| Additions of other assets, net | (1.5) | (6.4) | |||||
| Purchase of in-process research and development | (39.7) | (6.8) | |||||
| Acquisition of business, net of cash acquired | (63.6) | -- | |||||
| Net Cash Used for Investing Activities | (230.7) | (93.5) | |||||
| Financing Activities | |||||||
| Increase (decrease) in borrowings, net | 62.2 | (287.3) | |||||
| Issuance of common stock under stock plans and other capital | |||||||
| transactions | 42.9 | 26.6 | |||||
| Dividends paid | (24.6) | -- | |||||
| Repurchase of common stock | (0.3) | -- | |||||
| Net Cash Provided by (Used for) Financing Activities | 80.2 | (260.7) | |||||
| Effect of Exchange Rate Changes on Cash | 82.6 | 59.6 | |||||
| Net Increase in Cash and Cash Equivalents | 175.6 | 250.3 | |||||
| Cash and Cash Equivalents at Beginning of Period | 1,014.8 | 437.8 | |||||
| Cash and Cash Equivalents at End of Period | $1,190.4 | $688.1 | |||||
See notes to consolidated financial statements
GUIDANT CORPORATION
Notes to Consolidated
Financial Statements
(In millions, except
per share data)
(unaudited)
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial position and cash flows in conformity with generally accepted accounting principles. Operating results from interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s results for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. A discussion of the Company’s significant accounting policies is described in the “Significant Accounting Policies” section of “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. As used herein, the terms “the Company” and “Guidant” mean Guidant Corporation and its consolidated subsidiaries.
Certain reclassifications have been made to prior year amounts to conform to current year presentation (see Note 8).
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (“SFAS”) 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Accordingly, the Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, using the intrinsic value method. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to all stock-based employee compensation. The pro forma impact on net income (loss) assumes a forfeiture rate of approximately 10%. These pro forma amounts may not be representative of the effects on reported net income (loss) for future years due to the uncertainty of stock option grant volume and potential changes in assumptions driven by market factors.
| Three Months Ended June 30, |
Six Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Reported net income (loss) | ($97.1) | $ 204.8 | ($ 3 .7) | $ 344.3 | |||||
| Deduct: Total stock option employee compensation expense, net of tax | 15.1 | 24.3 | 31.0 | 49.1 | |||||
| Pro forma net income (loss) | ($112.2) | $ 180.5 | ($34.7) | $ 295.2 | |||||
| Earnings (loss) per share: | |||||||||
| Basic--as reported | ($ 0.32) | $ 0.68 | ($0.01) | $ 1.14 | |||||
| Basic--pro forma | ($ 0.37) | $ 0.60 | ($0.11) | $ 0.98 | |||||
| Diluted--as reported | ($ 0.32) | $ 0.67 | ($0.01) | $ 1.12 | |||||
| Diluted--pro forma | ($ 0.37) | $ 0.59 | ( $0.11) | $ 0.96 | |||||
In February 2003, Guidant’s Board of Directors authorized the issuance of approximately 2.3 million restricted shares of common stock (U.S.) and restricted stock units (outside the U.S.) to over 2,000 employees. Restricted stock awards granted to certain executive officers vest over six years. Awards granted to other employees vest over three years. Grants may vest earlier upon a qualifying disability, death, retirement or change in control. This grant includes a performance element that allows
vesting to accelerate if certain Guidant share price performance measures are met. Specifically, 1/3 of the general grant will vest immediately upon achievement of 25%, 50% and 75% appreciation of the 60-day moving average stock price from the date of grant ($34.37 on February 18, 2003). Portions of the executive officer grant may accelerate from six years to three years under this same performance measure. Guidant recorded $79.0 million of unearned compensation in conjunction with this grant, representing the fair value of restricted stock awards on the date of grant. Unearned compensation will be recognized as compensation expense ratably over the vesting period or earlier based on the performance element. The related compensation expense totaled $16.6 million and $19.4 million for the three- and six-month periods ended June 30, 2003. The first performance element was met in July 2003; therefore, additional compensation expense for the portion earned in the second quarter of 2003 was recorded. The Company will record approximately $17.0 million of compensation expense during the remainder of 2003 related to this award, absent the achievement of an additional performance measure.
Inventories consisted of the following:
| June 30, 2003 |
December 31, 2002 | ||||||
|---|---|---|---|---|---|---|---|
| Finished products | $131.2 | $135.4 | |||||
| Work in process | 65.1 | 58.0 | |||||
| Raw materials and supplies | 143.6 | 104.1 | |||||
| $339.9 | $297.5 | ||||||
GUIDANT CORPORATION
Notes to Consolidated
Financial Statements
The following table sets forth the computation of earnings per share:
| Three Months Ended June 30, |
Six Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Income (loss) from continuing operations | ($79.7) | $ 217.3 | $ 79.0 | $ 359.3 | |||||
| Loss from discontinued operations, net of income taxes | (17.4) | (12.5) | (82.7) | (15.0) | |||||
| Net income (loss) | ($97.1) | $ 204.8 | ($ 3.7) | $ 344.3 | |||||
| Earnings (loss) per share-basic | |||||||||
| Income (loss) from continuing operations | ($0.26) | $ 0.72 | $ 0.26 | $ 1.19 | |||||
| Loss from discontinued operations, net of income taxes | (0.06) | (0.04) | (0.27) | (0.05) | |||||
| Net income (loss) | ($0.32) | $ 0.68 | ($ 0.01) | $ 1.14 | |||||
| Earnings (loss) per share-diluted | |||||||||
| Income (loss) from continuing operations | ($0.26) | ||||||||