UNITED STATES
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, 2004
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of
Registrant as specified in its charter)
|
INDIANA (State or other jurisdiction of incorporation or organization) |
35-1931722 (I.R.S. Employer 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 4, 2004:
| Class | Number of Shares Outstanding | ||
| Common | 314,576,547 | ||
GUIDANT CORPORATION
Consolidated
Statements of Operation
(In millions, except
per share data)
(unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Net sales | $ 938.8 | $ 926.6 | $ 1,872.9 | $ 1,784.5 | |||||
| Cost of products sold | 234.6 | 224.5 | 460.9 | 429.6 | |||||
| Gross profit | 704.2 | 702.1 | 1,412.0 | 1,354.9 | |||||
| Research and development | 136.8 | 129.4 | 274.4 | 242.2 | |||||
| Purchased in-process research and development | 73.0 | 12.0 | 99.8 | 48.5 | |||||
| Sales, marketing and administrative | 298.1 | 297.2 | 612.8 | 566.2 | |||||
| Interest, net | (0.2) | (2.5) | (1.2) | (3.9) | |||||
| Royalties, net | 12.5 | 15.7 | 24.6 | 29.0 | |||||
| Amortization | 7.7 | 3.3 | 15.0 | 6.5 | |||||
| Other, net | 6.4 | 0.4 | 8.9 | 5.7 | |||||
| Litigation, net | -- | 422.8 | -- | 422.8 | |||||
| Income (loss) from continuing operations before income taxes | 169.9 | (176.2) | 377.7 | 37.9 | |||||
| Income taxes | 34.3 | (94.4) | 89.1 | (36.7) | |||||
| Income (loss) from continuing operations | 135.6 | (81.8) | 288.6 | 74.6 | |||||
| Loss from discontinued operations, net of income taxes | (9.1) | (15.3) | (22.7) | (78.3) | |||||
| Net income (loss) | $ 126.5 | ($ 97.1) | $ 265.9 | ($ 3.7) | |||||
| Earnings (loss) per share-basic | |||||||||
| Income (loss) from continuing operations | $ 0.44 | ($ 0.27) | $ 0.93 | $ 0.25 | |||||
| Loss from discontinued operations, net of income taxes | (0.03) | (0.05) | (0.07) | (0.26) | |||||
| Net income (loss) | $ 0.41 | ($ 0.32) | $ 0.86 | ($ 0.01) | |||||
| Earnings (loss) per share-diluted | |||||||||
| Income (loss) from continuing operations | $ 0.42 | ($ 0.27) | $ 0.90 | $ 0.24 | |||||
| Loss from discontinued operations, net of income taxes | (0.03) | (0.05) | (0.07) | (0.25) | |||||
| Net income (loss) | $ 0.39 | ($ 0.32) | $ 0.83 | ($ 0.01) | |||||
| Dividends declared per common share | $ 0.10 | -- | $ 0.20 | $ 0.08 | |||||
See notes to consolidated financial statements
GUIDANT CORPORATION
Consolidated Balance
Sheets
(In millions, except
share data)
| June 30, 2004 (unaudited) |
December 31, 2003 | ||||
|---|---|---|---|---|---|
| Assets | |||||
| Current Assets | |||||
| Cash and cash equivalents | $1,690.4 | $1,468.2 | |||
| Short-term investments | 100.6 | -- | |||
| Accounts receivable, net of allowances | |||||
| of $23.5 (2004) and $24.0 (2003) | 826.9 | 822.9 | |||
| Inventories | 398.0 | 401.9 | |||
| Deferred income taxes | 289.0 | 313.2 | |||
| Prepaid expenses and other current assets | 57.8 | 57.7 | |||
| Current assets of discontinued operations | 3.6 | 16.0 | |||
| Total Current Assets | 3,366.3 | 3,079.9 | |||
| Other Assets | |||||
| Goodwill, net of allowances of $157.9 (2004) and $157.9 (2003) | 513.3 | 512.9 | |||
| Other intangible assets, net of allowances of $91.1 (2004) and | |||||
| $81.7 (2003) | 179.7 | 160.8 | |||
| Deferred income taxes | 9.9 | 0.9 | |||
| Investments | 69.6 | 55.1 | |||
| Sundry | 65.7 | 60.9 | |||
| Other assets of discontinued operations | 0.3 | 20.5 | |||
| Total Other Assets | 838.5 | 811.1 | |||
| Property and equipment, net of accumulated depreciation of | |||||
| $715.9 (2004) and $657.0 (2003) | 791.8 | 749.1 | |||
| Total Assets | $4,996.6 | $4,640.1 | |||
See notes to consolidated financial statements
GUIDANT CORPORATION
Consolidated Balance
Sheets
(In millions, except
share data)
| Liabilities and Shareholders' Equity | June 30, 2004 |
December 31, 2003 | |||
|---|---|---|---|---|---|
| (unaudited) | |||||
| Current Liabilities | |||||
| Accounts payable | $ 57.0 | $ 85.7 | |||
| Employee compensation | 140.4 | 198.7 | |||
| Other liabilities | 308.2 | 306.9 | |||
| Income taxes payable | 203.9 | 197.2 | |||
| Short-term debt | 250.0 | 250.0 | |||
| Current liabilities of discontinued operations | 25.4 | 23.9 | |||
| Total Current Liabilities | 984.9 | 1,062.4 | |||
| Noncurrent Liabilities | |||||
| Long-term debt | 704.1 | 698.3 | |||
| Other | 156.6 | 166.1 | |||
| Total Noncurrent Liabilities | 860.7 | 864.4 | |||
| 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: 314,844,000 (2004) | |||||
| 312,129,000 (2003) | 384.3 | 301.5 | |||
| Additional paid-in capital | 252.3 | 242.4 | |||
| Retained earnings | 2,462.5 | 2,258.9 | |||
| Deferred cost, ESOP | (14.7 | ) | (17.1 | ) | |
| Unearned compensation | (50.8 | ) | (25.2 | ) | |
| Treasury stock, at cost: | |||||
| Shares: 3,158,000 (2003) | -- | (171.2 | ) | ||
| Accumulated other comprehensive income | 117.4 | 124.0 | |||
| Total Shareholders' Equity | 3,151.0 | 2,713.3 | |||
| Total Liabilities and Shareholders' Equity | $ 4,996.6 | $ 4,640.1 | |||
See notes to consolidated financial statements
GUIDANT CORPORATION
Consolidated
Statements of Cash Flows
(In millions)
(unaudited)
| Six Months Ended June 30, | |||||
|---|---|---|---|---|---|
| 2004 | 2003 | ||||
| Operating Activities | |||||
| Net income (loss) | $ 265.9 | ($ 3.7 | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Cash | |||||
| Provided by Operating Activities | |||||
| Depreciation | 69.0 | 63.0 | |||
| Amortization of other intangible assets | 15.0 | 6.7 | |||
| Provision for inventory and accounts receivable | 13.2 | 29.6 | |||
| Purchased in-process research and development | 99.8 | 48.5 | |||
| Deferred income taxes | 2.9 | (16.4 | ) | ||
| Compensation earned under restricted stock and ESOP | 44.0 | 46.9 | |||
| Other noncash, net | 27.8 | (46.6 | ) | ||
| 537.6 | 128.0 | ||||
| Changes in Operating Assets and Liabilities | |||||
| Receivables | (15.9 | ) | (37.8 | ) | |
| Inventories | (12.9 | ) | (46.9 | ) | |
| Prepaid expenses and other current assets | (9.9 | ) | 7.7 | ||
| Accounts payable and accrued liabilities | (80.6 | ) | (18.0 | ) | |
| Income taxes payable | 80.5 | (124.5 | ) | ||
| Other liabilities | (3.3 | ) | 335.0 | ||
| Net Cash Provided by Operating Activities | 495.5 | 243.5 | |||
| Investing Activities | |||||
| Additions of property and equipment, net | (114.6 | ) | (125.4 | ) | |
| Acquisitions, net of cash acquired | (99.7 | ) | (104.8 | ) | |
| Purchases of equity and short-term investments | (122.8 | ) | (0.5 | ) | |
| Net Cash Used for Investing Activities | (337.1 | ) | (230.7 | ) | |
| Financing Activities | |||||
| Increase in borrowings, net | 6.1 | 62.2 | |||
| Issuance of common stock under stock plans and other capital | |||||
| transactions | 251.1 | 42.9 | |||
| Dividends paid | (62.2 | ) | (24.6 | ) | |
| Repurchase of common stock | (127.5 | ) | (0.3 | ) | |
| Net Cash Provided by Financing Activities | 67.5 | 80.2 | |||
| Effect of Exchange Rate Changes on Cash | (3.7 | ) | 82.6 | ||
| Net Increase in Cash and Cash Equivalents | 222.2 | 175.6 | |||
| Cash and Cash Equivalents at Beginning of Period | 1,468.2 | 1,014.8 | |||
| Cash and Cash Equivalents at End of Period | $ 1,690.4 | $ 1,190.4 | |||
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 and footnotes required by generally accepted accounting principles for complete financial statements. 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.
For further information, including the Company’s significant accounting policies, 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, 2003. 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 9).
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 and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to all stock-based employee compensation. The fair value of stock options was estimated as of the grant date using the Black-Scholes option-pricing model, the attribution method and a forfeiture rate of 10%. These pro forma amounts may not be representative of the effects on reported net income 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, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Reported net income (loss) (1) | $ 126.5 | ($ 97.1 | ) | $ 265.9 | ($ 3.7 | ) | |||
| Deduct: Stock-based compensation not reflected in | |||||||||
| net income (loss), net of tax | 17.6 | 15.1 | 28.0 | 31.0 | |||||
| Pro forma net income (loss) | $ 108.9 | ($112.2 | ) | $ 237.9 | ($34.7 | ) | |||
| Earnings (loss) per share: | |||||||||
| Basic--as reported | $ 0.41 | ($ 0.32 | ) | $ 0.86 | ($0.01 | ) | |||
| Basic--pro forma | $ 0.35 | ($ 0.37 | ) | $ 0.77 | ($0.11 | ) | |||
| Diluted--as reported | $ 0.39 | ($ 0.32 | ) | $ 0.83 | ($0.01 | ) | |||
| Diluted--pro forma | $ 0.34 | ($ 0.37 | ) | $ 0.74 | ($0.11 | ) | |||
(1) Reported amounts include expense associated with restricted stock awards.
On April 1, 2004, Guidant granted options on approximately 3.1 million shares and 610,000 restricted stock awards to over 2,500 employees. Restricted stock awards are expensed ratably over the vesting period. Under this program, stock options will vest ratably over three years and the restricted stock awards will vest primarily on April 1, 2007. For certain executive officers, the restricted stock awards vest over six years, but may be accelerated to three-year vesting, in 1/3 increments, upon achievement of 25%, 50% and 75% appreciation of the 60-day moving average stock price from the date of grant ($63.11 on April 1, 2004). Grants may vest earlier upon a qualifying disability, death, retirement or change in control.
Note 3 – Inventories
Inventories consisted of the following:
| June 30, 2004 |
December 31, 2003 | ||||
|---|---|---|---|---|---|
| Finished products | $191.3 | $172.9 | |||
| Work in process | 69.9 | 81.5 | |||
| Raw materials and supplies | 136.8 | 147.5 | |||
| $398.0 | $401.9 | ||||
Provisions for estimated expenses related to product warranties are recorded at the time the products are sold. Estimates for warranty costs are calculated based primarily upon historical warranty experience, but may include assumptions related to anticipated changes in warranty costs and failure rates. Warranty cost accruals are adjusted from time to time when warranty claim experience differs from estimates. A summary of the changes in the product warranty activity is as follows:
| Six Months Ended June 30, | |||||
|---|---|---|---|---|---|
| 2004 | 2003 | ||||
| January 1 | $ 22.3 | $ 18.8 | |||
| Provisions for product warranties | 4.5 | 3.3 | |||
| Settlements during the period | (7.9) | (4.2) | |||
| June 30 | $ 18.9 | $ 17.9 | |||
GUIDANT CORPORATION
Notes to Consolidated
Financial Statements
The following table sets forth the computation of earnings (loss) per share:
| Three Months Ended June 30, |
Six Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Income (loss) from continuing operations | $ 135.6 | ($81.8) | $ 288.6 | $ 74.6 | |||||
| Loss from discontinued operations, net of income taxes | (9.1) | (15.3) | (22.7) | (78.3) | |||||
| Net income (loss) | $ 126.5 | ($97.1) | $ 265.9 | ($ 3.7) | |||||
| Earnings (loss) per share-basic | |||||||||
| Income (loss) from continuing operations | $ 0.44 | ($0.27) | $ 0.93 | $ 0.25 | |||||
| Loss from discontinued operations, net of income taxes | (0.03) | (0.05) | (0.07) | (0.26) | |||||
| Net income (loss) | $ 0.41 | ($0.32) | $ 0.86 | ($ 0.01) | |||||
| Earnings (loss) per share-diluted | |||||||||
| Income (loss) from continuing operations | $ 0.42 | ($0.27) | $ 0.90 | $ 0.24 | |||||
| Loss from discontinued operations, net of income taxes | (0.03) | (0.05) | (0.07) | (0.25) | |||||
| Net income (loss) | $ 0.39 | ($0.32) | $ 0.83 | ($ 0.01) | |||||
| Weighted average common shares outstanding | 310.91 | 304.52 | 309.70 | 303.86 | |||||
| Effect of dilutive stock options and unvested restricted | |||||||||
| stock awards | 9.24 | -- | 9.65 | 6.11 | |||||