News Column

ST JUDE MEDICAL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 6, 2014

OVERVIEW

Our business is focused on the development, manufacture and distribution of cardiovascular medical devices for the global cardiac rhythm management, cardiovascular and atrial fibrillation therapy areas and implantable neurostimulation 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. On January 28, 2014, we announced organizational changes to combine our Implantable Electronic Systems Division (IESD) and Cardiovascular and Ablation Technologies Division (CATD) operating divisions, resulting in an integrated research and development organization and a consolidation of manufacturing and supply chain operations worldwide. The integration will be conducted in a phased approach throughout 2014. Our continuing global restructuring efforts are focused on streamlining our organization to improve productivity, reduce costs and leverage its scale to drive additional growth. We will continue to report under the existing reportable segment structure for internal management financial forecasting and reporting purposes into fiscal year 2014 until the organizational changes and the related financial reporting structure are finalized. The financial reporting structure has not changed as of and for the period ended March 29, 2014 and continues to be consistent with the 2013 comparable periods. See Note 14 to the Condensed Consolidated Financial Statements for further information on our reportable segments. Our principal products are as follows: IESD - tachycardia implantable cardioverter defibrillator systems (ICDs), bradycardia pacemaker systems (pacemakers) and neurostimulation products (spinal cord and deep brain stimulation devices); and CATD - vascular products (vascular closure products, pressure measurement guidewires, optical coherence tomography (OCT) imaging products, vascular plugs and other vascular accessories), structural heart products (heart valve replacement and repair products and structural heart defect devices) and atrial fibrillation (AF) products (electrophysiology (EP) introducers and catheters, advanced cardiac mapping, navigation and recording systems and ablation systems). 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, global economic conditions, 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, the Patient Protection and Affordable Care Act (PPACA) along with the Health Care and Education Reconciliation Act of 2010, was enacted into law. As a U.S. headquartered company with significant sales in the United States, this health care reform law will materially impact us. Certain provisions of this health care reform law are not yet effective 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 impact will be from the legislation. The law levies a 2.3% excise tax on all U.S. medical device sales, which we began paying effective January 1, 2013. The law also focuses on a number of Medicare provisions aimed at improving quality and decreasing costs. It is uncertain at this point what impact 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 law includes a reduction in the annual rate of inflation for hospitals that began in 2011 and the establishment of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending beginning in 2014. 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 reimbursement 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 consolidated net sales are comprised of cardiac rhythm management devices - ICDs and pacemakers. During both 2011 and 2012, the ICD market in the United States was negatively impacted by a decline in implant volumes and pricing as well as changing business dynamics related to a significant increase in hospital ownership of physician practices. Based on the negative impacts of these circumstances we estimate that in 2011 and 2012 the U.S. ICD market contracted at a mid single-digit percentage rate each year. Recently, however, the U.S. ICD market appears to be stabilizing, as 2013 was relatively flat compared to 2012. Management remains focused on increasing our worldwide market share, as we are one of three principal 25



--------------------------------------------------------------------------------

Table of Contents

manufacturers and suppliers in the global cardiac rhythm management market. We are also investing in our other therapy areas - cardiovascular, atrial fibrillation and neuromodulation - with the goal to increase our market share and grow sales through continued market penetration.

Net sales in the first quarter of 2014 increased 2% to $1,363 million compared to the first quarter of 2013. Foreign currency translation comparisons unfavorably decreased our first quarter 2014 net sales by $25 million (2 percentage points) compared to the same prior year period. Sales of our AF products benefited from an increase in EP catheter ablation procedures and increased sales volumes associated with our intracardiac echocardiography imaging product offerings. We have also experienced a net sales benefit from our 2013 product launches, most notably from our next-generation Ellipse™ and Assura™ devices (FDA approved in June 2013 and CE Mark approved in May 2013) which include our cardiac resynchronization therapy defibrillator (CRT-D) models, Quadra Assura™ for quadripolar CRT-D and Unify Assura™ for bi-polar CRT-D. Additionally, we continue to benefit from incremental net sales associated with our exclusive distribution of Spinal Modulation Inc.'s (Spinal Modulation) Axium™ Neurostimulator System as well as sales volume increases associated with our Fractional Flow Reserve (FFR) technology products and OCT imaging products as well as our Trifecta™ pericardial stented tissue valve. Partially offsetting these net sales increases, we have experienced a net sales decline in our other neuromodulation chronic pain products, mechanical valves, due to a market preference for tissue valves, and our third party vascular products we distribute in Japan. Refer to the Segment Performance section for a more detailed discussion of the results of our reportable segments.

Our first quarter 2014 net earnings of $249 million and diluted net earnings per share of $0.86 increased 12% and 10%, respectively, compared to our first quarter 2013 net earnings of $223 million and diluted net earnings per share of $0.78. First quarter 2014 net earnings were negatively impacted by after-tax charges of $23 million, or $0.08 per diluted share, associated with additional charges related to our 2012 business realignment plan. First quarter 2013 net earnings were negatively impacted by after-tax special charges of $32 million, or $0.11 per diluted share, associated with both our 2012 business realignment plan and 2011 restructuring plan. Additionally, we recognized after-tax charges of $29 million to adjust the carrying value of our pre-existing CardioMEMS, Inc. (CardioMEMS) equity investment and fixed price purchase option to fair value during the first quarter of 2013. These charges were partially offset by a $21 million income tax benefit related to the 2012 federal research and development tax credit extended in the first quarter of 2013, retroactive to the beginning of our 2012 tax year. Refer to the Results of Operations section for a more detailed discussion of these charges.

We generated $273 million of operating cash flows during the first three months of 2014, compared to $183 million of operating cash flows during the first three months of 2013. During the first quarter of 2013, our operating cash flows were negatively impacted due to higher tax payments made as a result of a tax audit settlement associated with certain tax audits. We ended the first quarter of 2014 with $1,446 million of cash and cash equivalents and $3,910 million of total debt.

We also repurchased 6.7 million shares of our common stock for $434 million at an average repurchase price of $65.00 per share during the first quarter of 2014. Additionally, on February 22, 2014 and April 30, 2014, our Board of Directors authorized quarterly cash dividends of $0.27 per share payable on April 30, 2014 and July 31, 2014 to shareholders of record as of March 31, 2014 and June 30, 2014, respectively. Our quarterly 2014 dividend declarations represent an 8% per share increase over the same periods in 2013.

NEW ACCOUNTING PRONOUNCEMENTS Information regarding new accounting pronouncements that impacted our current 2014 period or our historical consolidated financial statements and related disclosures is included in Note 1 to the Condensed Consolidated Financial Statements. In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its Internal Control - Integrated Framework (2013 Framework), an updated version of its 1992, Internal Control - Integrated Framework (1992 Framework). The 2013 Framework is expected to 1) help organizations design and implement internal control in light of many changes in business and operating environments, including continued market globalization, 2) broaden the application of internal control in addressing operations and reporting objectives and 3) clarify the requirements for determining what 26



--------------------------------------------------------------------------------

Table of Contents

constitutes effective internal control. The 2013 Framework will supersede the 1992 Framework beginning December 15, 2014, and the Securities and Exchange Commission expects public companies to transition to the new framework as soon as feasible. We are evaluating the impact transitioning to the 2013 Framework will have on our annual assessment of internal control over financial reporting. Our transition to the 2013 Framework is not expected to impact our financial statements.

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 December 28, 2013 (2013 Annual Report on Form 10-K). 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; goodwill and intangible assets; 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 2013 Annual Report on Form 10-K.

SEGMENT PERFORMANCE Our reportable segments consist of our Implantable Electronic Systems Division (IESD) and our Cardiovascular and Ablation Technologies Division (CATD). Our principal products in each segment are as follows: IESD - tachycardia implantable cardioverter defibrillator systems (ICDs), bradycardia pacemaker systems (pacemakers) and neurostimulation products (spinal cord and deep brain stimulation devices); and CATD - vascular products (vascular closure products, pressure measurement guidewires, optical coherence tomography (OCT) imaging products, vascular plugs and other vascular accessories), structural heart products (heart valve replacement and repair products and structural heart defect devices) and AF products (EP introducers and catheters, advanced cardiac mapping, navigation and recording systems and ablation systems). Net sales of our 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 expenses managed by our selling and corporate functions, including all stock-based compensation expense, impairment charges, certain acquisition-related expenses, in-process research and development (IPR&D) charges, excise tax expense, special charges and centralized support groups' operating expenses are not recorded in the IESD and CATD 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 millions):

IESD CATD Other Total Three Months ended March 29, 2014: Net sales $ 786$ 577 $ - $ 1,363 Operating profit 545 352 (585 ) 312 Three Months ended March 30, 2013: Net sales $ 777$ 561 $ - $ 1,338 Operating profit 531 333 (556 ) 308 27



--------------------------------------------------------------------------------

Table of Contents

The following discussion of the changes in our net sales is provided by class of similar products within our reportable segments. Implantable Electronic Systems Division

Three Months Ended % (in millions) March 29, 2014 March 30, 2013 Change ICD systems $ 436 $ 427 2.1 % Pacemaker systems 251 251 - % Neuromodulation products 99 99 - % $ 786 $ 777 1.2 %



IESD's net sales increased 1% during the first quarter of 2014 compared to the same prior year period. During the first quarter of 2014, foreign currency translation had a $10 million (1 percentage point) unfavorable impact on net sales compared to the first quarter of 2013. ICD net sales increased 2% during the first quarter of 2014 compared to the first quarter of 2013. Our U.S. 2014 first quarter ICD net sales of $267 million increased 5% compared to the same prior year period as a result of our sales volume benefit from the June 2013FDA approval of our next-generation Assura™ and Ellipse™ devices. Our Assura™ family of high-voltage devices feature Quadra Assura™ for quadripolar CRT-D, Unify Assura™ for bi-polar CRT-D and our Fortify Assura™ ICD. The Assura™ family has a high energy output, with a maximum output of 40 Joules while the Ellipse™ ICD is a high energy small-sized ICD. Internationally, our first quarter 2014 ICD net sales of $169 million decreased 2% compared to the same prior year period. Foreign currency translation had a $4 million (2 percentage point) unfavorable impact on international ICD net sales in the first quarter of 2014 compared to the same period in 2013 primarily as a result of the strengthening U.S. Dollar against the Japanese Yen.

Pacemaker systems net sales were flat during the first quarter of 2014 compared to the first quarter of 2013. In the United States, our first quarter 2014 pacemaker systems net sales of $100 million decreased 6% compared to the same prior year period primarily driven by overall market declines in average selling prices. Internationally, our first quarter 2014 pacemaker systems net sales of $151 million increased 5% compared to the first quarter of 2013. Foreign currency translation had a $6 million (4 percentage points) unfavorable impact on international pacemaker systems net sales during the first quarter of 2014 compared to the same prior year period. International pacemaker sales have experienced a benefit from our July 2013 Japan launch of our Accent MRI™ Pacemaker and the Tendril MRI™ lead, which received regulatory approval from the Japanese Ministry of Health, Labor and Welfare in June 2013. We also benefited from sales of our Allure Quadra™ CRT-P, which received CE Mark approval in April 2013.

Neuromodulation products net sales were flat during the first quarter of 2014 compared to the first quarter of 2013. Although our international net sales increased driven by sales of Spinal Modulation's Axium™ Neurostimulator System, for which we are the exclusive distributor, we also experienced partially offsetting net sales declines in our U.S. chronic pain products. Foreign currency translation did not have a significant impact during the first quarter of 2014 compared to the same prior year period. Cardiovascular and Ablation Technologies Division

Three Months Ended % (in millions) March 29, 2014 March 30, 2013 Change AF products $ 251 $ 233 7.7 % Vascular products 172 175 (1.7 )% Structural heart products 154 153 0.7 % $ 577 $ 561 2.9 %



CATD net sales increased 3% during the first quarter of 2014 compared to the first quarter of 2013. Foreign currency translation unfavorably impacted CATD net sales by $15 million (3 percentage points) during the first quarter of 2014 compared to the same period in 2013.

28



--------------------------------------------------------------------------------

Table of Contents

AF products net sales increased 8% during the first quarter of 2014 compared to the first quarter of 2013 primarily due to the continued increase in EP catheter ablation procedures and our intracardiac echocardiography imaging product offerings, which provide physicians a clear picture of the inner workings of the heart through an ultrasound probe. Foreign currency translation had a $6 million (2 percentage points) unfavorable impact on AF products net sales during the first quarter of 2014 compared to the same period in 2013. Additionally, we experienced a net sales benefit from our European launch of our TactiCath® irrigated ablation catheter, acquired through our Endosense acquisition in August 2013. The TactiCath® irrigated ablation catheter provides physicians a real-time, objective measure of the force to apply to the heart wall during a catheter ablation procedure.

Vascular products net sales decreased 2% during the first quarter of 2014 compared to the same prior year period primarily due to unfavorable foreign currency translation of $5 million (3 percentage points) and lower sales of third party products we distribute in Japan. As a result of the economic pressures and average selling price declines in the Japan market, many third party manufacturers began migrating in 2013 to a direct selling model with end-customers, which continues to unfavorably impact our third party product sales in Japan. The decrease was partially offset by increased revenues in our FFR technology products and OCT imaging products during the first quarter of 2014 compared to the same prior year period. Additionally, we expect lower 2014 sales of our EnligHTN™ Renal Denervation System compared to 2013 driven by expected overall market declines in the treatment of drug-resistant, uncontrolled hypertension.

Structural heart products net sales increased 1% during the first quarter of 2014 compared to the same period in 2013. The increase was primarily driven by sales of our Trifecta™ pericardial stented tissue valve and our AMPLATZER™ occluder products, partially offset by a net sales decrease in our mechanical valves due to market preference for tissue valves. Additionally, foreign currency translation had a $4 million (2 percentage points) unfavorable impact on structural heart products net sales during the first quarter of 2014 compared to the first quarter of 2013.

RESULTS OF OPERATIONS Net sales Three Months Ended % (in millions) March 29, 2014 March 30, 2013 Change Net sales $ 1,363 $ 1,338 1.9 %



Overall, net sales increased 2% during the first quarter of 2014 compared to the same prior year period. Foreign currency translation had an unfavorable impact of $25 million (2 percentage points) on the first quarter of 2014 net sales compared to the same period in 2013 due primarily to the strengthening of the U.S. Dollar against the Japanese Yen. Net sales by geographic location of the customer were as follows (in millions):

Three Months Ended Net Sales March 29, 2014 March 30, 2013 United States $ 644 $ 640 International Europe 387 357 Japan 130 139 Asia Pacific 115 112 Other 87 90 719 698 $ 1,363 $ 1,338 Gross profit Three Months Ended (in millions) March 29, 2014 March 30, 2013 Gross profit $ 980 $ 961 Percentage of net sales 71.9 % 71.8 %



Gross profit for the first quarter of 2014 totaled $980 million, or 71.9% of net sales, compared to $961 million, or 71.8% of net sales for the first quarter of 2013. Our gross profit percentage (or gross margin) for both the first quarter of 2014 and 2013 was negatively impacted by 1.5 percentage points and 0.3 percentage points, respectively, related to excise tax costs assessed on the sales of our products. Additionally, our gross margin for the first quarter of 2013 was negatively impacted by 1.4 percentage points related to special charges associated with our previously announced 2012 business realignment plan and 2011 restructuring plan. Refer to "Special Charges" within the Results of Operations section for a more detailed discussion of these charges.

29



--------------------------------------------------------------------------------

Table of Contents

Selling, general and administrative (SG&A) expense

Three Months Ended (in millions) March 29, 2014 March 30, 2013 Selling, general and administrative $ 465 $ 468 Percentage of net sales 34.1 % 35.0 %



SG&A expense for the first quarter of 2014 totaled $465 million, or 34.1% of net sales, compared to $468 million, or 35.0% of net sales for the first quarter of 2013. The decrease in our SG&A expense during the first quarter 2014 was primarily driven by cost savings initiatives, including the realignment plan initiated in August 2012 and expanded in the first quarter of 2014.

Research and development (R&D) expense

Three Months Ended (in millions) March 29, 2014 March 30, 2013



Research and development expense $ 170 $ 160 Percentage of net sales

12.5 % 12.0 %



R&D expense in the first quarter of 2014 totaled $170 million, or 12.5% of net sales, compared to $160 million, or 12.0% of net sales for the first quarter of 2013. We remain committed to funding future long-term growth opportunities. We will continue to balance delivering short-term results with our investments in long-term growth drivers.

Special charges Three Months Ended (in millions) March 29, 2014 March 30, 2013 Cost of sales special charges $ 1 $ 18 Special charges 33 25 $ 34 $ 43 We recognize certain transactions and events as special charges in our consolidated financial statements. These charges (such as restructuring charges, impairment charges and certain settlement or litigation charges) result from facts and circumstances that vary in frequency and impact on our results of operations. In order to enhance segment comparability and reflect management's focus on the ongoing operations, special charges are not reflected in the individual reportable segments operating results. During the first quarter of 2014, we announced additional organizational changes including the combination of our IESD and CATD operating divisions, resulting in an integrated research and development organization and a consolidation of manufacturing and supply chain operations worldwide. The integration will be conducted in a phased approach throughout 2014. In connection with these actions, we incurred special charges totaling $34 million related to our 2012 business realignment plan. Of the $34 million incurred, $1 million was recorded to cost of sales. During the first quarter of 2013, we incurred special charges totaling $43 million. Of the special charges incurred, $34 million related to the previously discussed 2012 business realignment plan. Of the $34 million incurred, $18 million was recorded to cost of sales, which primarily related to inventory write-offs associated with CATD product lines. The remaining $9 million of special charges incurred during the first quarter of 2013 was associated with our 2011 restructuring plan and primarily related to idle facility costs. The formalized plan for these actions was announced in the second quarter of 2011 and included phasing out our cardiac rhythm management manufacturing and R&D operations in Sweden, reducing our workforce and rationalizing product lines. Refer to Note 7 of the Condensed Consolidated Financial Statements for additional detail associated with these special charges. 30



--------------------------------------------------------------------------------

Table of Contents Other expense, net Three Months Ended (in millions) March 29, 2014 March 30, 2013 Interest income $ (1 ) $ (1 ) Interest expense 21 19 Other - 30 Other expense, net $ 20 $ 48



During the first three months of 2013, we recognized a $29 million charge in other expense, net to adjust the carrying value of our pre-existing CardioMEMS equity investment and fixed price purchase option to fair value. Income taxes

Three Months Ended



(as a percent of pre-tax income) March 29, 2014March 30, 2013 Effective tax rate

18.2 % 14.6 %



Our effective income tax rate was 18.2% and 14.6% for the first quarter of 2014 and 2013, respectively. Special charges recognized during the first quarter of 2014 were $34 million, favorably impacting the effective tax rate by 1.3 percentage points. Additionally, our effective tax rate for the first quarter of 2014 does not include the impact of the federal research and development tax credit (R&D tax credit), as the R&D tax credit has not yet been extended for 2014. As a result, our effective tax rate for the first quarter of 2014 was negatively impacted by 1.2 percentage points. Our effective tax rate for the first quarter of 2013 includes the full year 2012 benefit of the R&D tax credit, which was extended for 2012 in January 2013. As a result, our effective tax rate for the first quarter of 2013 was favorably impacted by 6.3 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 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 March 29, 2014, 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 are permanently reinvested and which we plan to use to support our continued growth plans outside the United States 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) remained flat at 91 days as of both December 28, 2013 and March 29, 2014. Our DIOH (ending net inventory divided by average daily cost of sales for the most recently completed six months) increased from 158 days at December 28, 2013 to 174 days at March 29, 2014 as a result of inventory increases to support our product launches. Special charges recognized in cost of sales in the six months ended March 29, 2014 reduced our 31



--------------------------------------------------------------------------------

Table of Contents

March 29, 2014 DIOH by 6 days. Special charges recognized in cost of sales in the last half of 2013 reduced our December 28, 2013 DIOH by 5 days. A summary of our cash flows from operating, investing and financing activities is provided in the following table (in millions):

Three Months Ended March 29, 2014 March 30, 2013 Net cash provided by (used in): Operating activities $ 273 $ 183 Investing activities (42 ) (69 ) Financing activities (159 ) (333 )



Effect of currency exchange rate changes on cash and cash equivalents

1 (9 ) Net increase in cash and cash equivalents $ 73 $ (228 ) Operating Cash Flows Cash provided by operating activities was $273 million during the first three months of 2014, compared to $183 million during the first three months of 2013. 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. During the first quarter of 2013, our operating cash flows were negatively impacted due to higher tax payments made as a result of a tax audit settlement associated with certain tax audits related to our 2002 through 2009 tax years. Investing Cash Flows Cash used in investing activities was $42 million during the first three months of 2014 compared to $69 million during the same period last year. Our purchases of property, plant and equipment totaled $46 million and $65 million during the first three months of 2014 and 2013, respectively, primarily reflecting our continued investment in our product growth platforms currently in place. Financing Cash Flows Cash used in financing activities was $159 million during the first three months of 2014 compared to $333 million during the first three months of 2013 primarily driven by the amount of common stock repurchases. Our financing cash flows can fluctuate significantly depending upon our liquidity needs, the extent of our common stock repurchases and the amount of stock option exercises. Our repurchases of our common stock during the first quarter of 2014 was funded from cash generated from operations and issuances of commercial paper. A summary of our financing cashflows is provided in the following table (in millions): Three Months Ended March 29, 2014 March 30, 2013 Stock issued under employee stock plans, net of tax benefit $ 69 $ 51 Common stock repurchases (476 ) (609 ) Dividends paid (72 ) (68 ) Debt borrowings, net 326 307 Other, net (6 ) (14 ) Net cash used in financing activities $ (159 ) $ (333 ) 32



--------------------------------------------------------------------------------

Table of Contents

DEBT AND CREDIT FACILITIES In May 2013, we entered into 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 May 2018. Borrowings under this facility bear interest initially at LIBOR plus 0.8%, 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 March 29, 2014. Our commercial paper program provides for the issuance of unsecured commercial paper with maturities up to 270 days. At March 29, 2014 and December 28, 2013, we had outstanding commercial paper balances of $1,040 million and $714 million, respectively. Any future commercial paper borrowings would bear interest at the applicable then-current market rates. Our predominant historical practice has been to issue commercial paper (up to the amount backed by available borrowings capacity under the Credit Facility), as our commercial paper has historically been issued at lower interest rates. In June 2013, we entered into a 2-year, $500 million unsecured term loan, the proceeds of which were used for general corporate purposes, including the repayment of outstanding commercial paper borrowings. These borrowings bear interest at LIBOR plus 0.5%, subject to adjustment in the event of a change in our credit ratings. We may make principal payments on the outstanding borrowings any time after June 26, 2014. In December 2010, we issued our $500 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 was used for general corporate purposes. 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 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. In June 2012, we terminated the interest rate swap and received a cash payment of $24 million. The gain from terminating the interest rate swap agreement is reflected as an increase to the carrying value of the debt and is being amortized as a reduction of interest expense over the remaining life of the 2016 Senior Notes. In April 2013, we issued $900 million principal amount of 10-year, 3.25% unsecured senior notes (2023 Senior Notes) and $700 million principal amount of 30-year, 4.75% unsecured senior notes (2043 Senior Notes). The net proceeds from the issuance of the 2023 Senior Notes and 2043 Senior Notes was used for general corporate purposes including the repayment of outstanding borrowings. Interest payments are required on a semi-annual basis. We may redeem the 2023 Senior Notes or 2043 Senior Notes at any time at the applicable redemption price. The 2023 Senior Notes and the 2043 Senior Notes are senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness. In April 2010, we issued 10-year, 2.04% unsecured senior notes in Japan (2.04% Yen Notes) totaling 12.8 billion Japanese Yen (the equivalent of $125 million at March 29, 2014 and $122 million at December 28, 2013) and 7-year, 1.58% unsecured senior notes in Japan (1.58% Yen Notes) totaling 8.1 billion Japanese Yen (the equivalent of $80 million at March 29,2014 and $78 million at December 28, 2013). We used the proceeds from these issuances to retire outstanding debt obligations. 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 outstanding 6.5 billion Japanese Yen balance was the equivalent of $63 million at March 29, 2014 and $62 million at December 28, 2013. 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 mature in March 2015, and the other half of the borrowings bear interest at the Yen LIBOR plus 0.275% and mature in June 2014. The maturity dates of each credit facility automatically extend for a one-year period, unless we elect to terminate the credit facility. 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 3.5 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 March 29, 2014. 33



--------------------------------------------------------------------------------

Table of Contents

DIVIDENDS AND SHARE REPURCHASES During the three months ended March 29, 2014, the Company declared a quarterly cash dividend of $0.27 per common share for a total of $77 million. On April 30, 2014, our Board of Directors authorized a quarterly cash dividend of $0.27 per share payable on July 31, 2014 to shareholders of record as of June 30, 2014. We expect to continue to pay quarterly cash dividends in the foreseeable future, subject to declaration by the Board of Directors.

On December 9, 2013, our Board of Directors authorized a share repurchase program of up to $700 million of our outstanding common stock. We began repurchasing shares on December 11, 2013 and completed the repurchases under the program on January 17, 2014, repurchasing 11.1 million shares for $700.0 million at an average repurchase price of $63.07 per share. From December 29, 2013 through January 17, 2014, we repurchased 6.7 million shares for $434 million at an average repurchase price of $65.00 per share.

COMMITMENTS AND CONTINGENCIES 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 2013 Annual Report on Form 10-K. We have no off-balance sheet financing arrangements other than that previously disclosed in our 2013 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. 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 other factors, 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 2013 Annual Report on Form 10-K and in the section entitled Risk Factors in Part I, Item 1A in our 2013 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 as follows. 34



--------------------------------------------------------------------------------

Table of Contents

1. Competition, including product introductions by competitors that have advanced technology, better features or lower pricing. 2. 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. 3. 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 technologies or therapies. 4. Declining industry-wide sales caused by product quality issues or recalls or advisories by us or 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. 5. Governmental legislation, including the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, and/or regulation that significantly impacts the healthcare system in the United States or in international markets and that results in lower reimbursement for procedures using our products or denies coverage for such procedures, reduces medical procedure volumes or otherwise adversely affects our business and results of operations, including the imposition of any medical device excise tax. 6. Any changes 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. 7. 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. 8. Consolidation and other 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. 9. 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. 10. 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 health, safety and environmental regulatory compliance and quality systems. 11. 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. 12. Adverse developments in litigation, including product liability litigation, patent or other intellectual property litigation, qui tam litigation or shareholder litigation. 13. Our ability to fund future product liability losses related to claims made subsequent to becoming self-insured. 14. Economic factors, including inflation, contraction in capital markets, changes in interest rates and changes in foreign currency exchange rates. 15. Disruptions in the financial markets or changes in economic conditions that adversely impact the availability and cost of credit and customer purchasing and payment patterns, including the collectability of customer accounts receivable. 16. The loss of, or price increases by, suppliers of key components, some of which are sole-sourced. 17. Inability to successfully integrate the businesses that we have acquired in recent years and that we plan to acquire. 18. Risks associated with our substantial international operations, including economic and political instability, currency fluctuations, changes in customs, tariffs and other trade restrictions and compliance with foreign laws. 19. Our inability to realize the expected benefits from our restructuring initiatives and continuous improvement efforts and the negative unintended consequences such activity could have. 20. Adverse developments in investigations and governmental proceedings. 21. 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™, or and Trifecta™ tissue heart valves, or that impose added costs on the procurement of bovine collagen or bovine pericardial material. 22. Severe weather or other natural disasters that can adversely impact customer 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 and Costa Rica or a hurricane affecting our facilities in Puerto Rico and Malaysia. 23. Our inability to maintain, protect and enhance our existing information and manufacturing systems and our products that incorporate information technology or to develop new systems and products. 24. Changes in accounting rules or tax laws that adversely affect our results of operations, financial position or cash flows. 35



--------------------------------------------------------------------------------

Table of Contents


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters