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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

        For the quarterly period ended September 30, 2004

Commission File Number 1-13388

GUIDANT CORPORATION
(Exact name of Registrant as specified in its charter)

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 November 3, 2004:

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

GUIDANT CORPORATION
Consolidated Statements of Income
(In millions, except per share data)
(unaudited)

See notes to consolidated financial statements

GUIDANT CORPORATION
Consolidated Balance Sheets
(In millions, except share data)

GUIDANT CORPORATION
Consolidated Balance Sheets
(In millions, except share data)

See notes to consolidated financial statements

GUIDANT CORPORATION
Consolidated Statements of Cash Flows
(In millions)
(unaudited)

See notes to consolidated financial statements

GUIDANT CORPORATION
Notes to Consolidated Financial Statements
(In millions, except per share data)
(unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. 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 accounting principles generally accepted in the United States 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).

Note 2 – Stock-Based Compensation

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.

(1)     Reported amounts include expense associated with restricted stock awards and accelerated vesting of stock compensation associated with the restructuring (Note 10).

GUIDANT CORPORATION
Notes to Consolidated Financial Statements

Note 2 – Stock-Based Compensation (continued)

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:

(1)     Decreased due to the lean manufacturing initiative across the cardiac rhythm management product lines aimed at improving inventory management.

Note 4 – Product Warranties

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:

GUIDANT CORPORATION
Notes to Consolidated Financial Statements

Note 5 – Earnings Per Share

The following table sets forth the computation of earnings per share:

Total options outstanding at September 30, 2004 and 2003 were 38.2 million and 46.8 million. Earnings per share-diluted includes 34.1 million and 35.4 million stock options for the three- and nine-month periods ended September 30, 2004 and includes 32.5 million and 24.7 million stock options for the three- and nine-month periods ended September 30, 2003. Stock options with an exercise price greater than the average market value stock price for the period were excluded from the calculation of earnings per share-diluted because including them would have had an anti-dilutive impact.

Note 6 – Comprehensive Income

Comprehensive income is comprised of net income adjusted for changes in foreign currency translation and unrealized gains or losses on foreign currency derivative contracts designated and qualifying as cash flow hedges. For the third quarters of 2004 and 2003, comprehensive income was $166.1 million and $143.4 million. Comprehensive income for the nine months ended September 30, 2004 and 2003 was $425.4 million and $187.0 million. The increase in comprehensive income was primarily due to higher net income in 2004 compared to 2003.

Note 7 – Segment Information

Geographic Information:

(1) Revenues are attributed to countries based on location of the customer.

GUIDANT CORPORATION
Notes to Consolidated Financial Statements

Note 7 - Segment Information (continued)

Note 8 – Acquisitions

AFx, inc.: On February 9, 2004, Guidant acquired AFx, inc., a manufacturer of microwave surgical cardiac ablation medical devices. Guidant paid $48.4 million (including transaction expenses) in cash and forgave a $5.8 million extension of credit. The purchase price was allocated to the acquired assets and liabilities based upon fair market values (using the income approach), including a $22.8 million in process research and development (IPRD) charge for technology that had not reached technological feasibility and had no alternative use and $31.6 million for intangible assets related to proven technology. In addition, a deferred tax liability of $11.7 million was recorded for the tax effect of the intangible assets and deferred tax assets of $11.7 million were recorded for the net operating loss carryovers. In order to value the IPRD, a risk-adjusted discount rate of 22.5% was applied to the cash flows. In August 2004, Guidant obtained FDA approval for the minimally invasive cardiac ablation indication, resulting in an additional payment of $3.0 million. This payment increased intangible assets and deferred tax liabilities by $4.8 million and $1.8 million. Guidant may make additional milestone payments upon future satisfaction of regulatory, clinical and sales performance criteria.

Biosensors International (Biosensors): In March 2003, Guidant recorded a $20.5 million IPRD charge in connection with the acquisition of certain assets of Biosensors’ everolimus eluting stent program, including an exclusive worldwide license to Biosensors’ polymer formulation technology in the field of everolimus eluting stents and a nonexclusive license to use this technology with other drugs in drug eluting stents. Additionally, as part of this consideration, Guidant acquired the option of manufacturing and commercializing Biosensors’ everolimus eluting stent platform that has been used in Biosensors’ FUTURE I and II Clinical Trials. In June 2003, Guidant recorded a $10.1 million IPRD charge as a result of the achievement of a performance milestone related to six-month clinical data of the everolimus eluting stent trial, FUTURE I. An additional IPRD charge of $50.0 million was recorded in the second quarter of 2004 for clinical results related to Biosensors’ everolimus eluting stent trial, FUTURE II. Payments were recorded as IPRD since technological feasibility of the project had not been attained and the research had no alternative future uses. Over the course of clinical development, Biosensors may receive additional milestone payments. In addition, Biosensors will receive royalties on future sales of products utilizing Biosensors’ technology.

GUIDANT CORPORATION
Notes to Consolidated Financial Statements

Note 8 – Acquisitions (continued)

Bioabsorbable Vascular Solutions (BVS): In March 2003, Guidant acquired the majority interest in BVS for $10.0 million and accrued an additional $6.0 million for a future clinical milestone. In addition, Guidant purchased the remaining 49% interest for $6.0 million in April 2004. All these amounts are accounted for as IPRD, since technological feasibility of the project has not been attained and the research has no alternative future uses. BVS is developing vascular stent platforms designed to be absorbed by tissue following the restoration of blood flow in patients with coronary artery disease. Guidant may pay milestone payments over the course of clinical development.

X Technologies, Inc. (X Technologies): In June 2003, Guidant acquired X Technologies, the manufacturer of the FDA-approved FX miniRAIL™ Balloon Dilatation Catheter, a device for the treatment of coronary artery disease. Guidant paid $60.0 million in cash and forgave a $4.5 million extension of credit. The purchase price was allocated to the acquired assets and liabilities based upon fair market values, including $88.7 million to intangible assets related to developed technology and the related deferred tax liability of $32.8 million.

MediVas LLC (MediVas): In September 2003, Guidant acquired a subsidiary of MediVas, including rights to certain bioabsorbable polymer technologies. The agreement provided Guidant with an exclusive worldwide license to these bioabsorbable polymer products, related pre-clinical and clinical data, and intellectual property for use with drugs in the “rolimus” family, as well as a non-exclusive license for use with other drugs. Guidant recorded a $35.2 million IPRD charge in connection with the purchase, since technological feasibility of the project had not been attained and the research had no alternative future uses. MediVas may receive additional milestone payments over the course of clinical development and receive royalties on future sales of licensed products utilizing MediVas’ technology.

Novartis Pharma AG and Novartis AG (Novartis): In 2002, Guidant entered into an agreement with Novartis that provided Guidant an exclusive worldwide license to use everolimus in drug eluting stents. In the second quarter of 2004, a payment of $15.0 million was made to Novartis for completion of SPIRIT FIRST clinical trial enrollment. This amount was recorded as IPRD, since technological feasibility of the project has not been attained and the research has no alternative future uses. Novartis may receive additional milestone payments over the course of clinical development and receive royalties on future sales of licensed products utilizing everolimus.

Contingent Consideration
Certain of Guidant’s acquisitions involve contingent consideration. Contingent consideration will be recorded when the amount is determinable and will be allocated to the fair value of the intangibles or IPRD, with any amounts paid above fair value of identifiable assets recorded as goodwill. In addition to contingent consideration, certain equity investments made by Guidant in other entities may involve contingent payments, which would provide additional ownership to Guidant (both collectively referred to as “milestone payments”). These milestone payments are generally contingent upon reaching performance-related milestones, including specified revenue levels, product development targets or regulatory approvals or filings. At September 30, 2004, Guidant’s accrual for milestone payments totaled $33.3 million, which is expected to be paid during the next two years. In addition, future undiscounted performance-related milestone payments of up to $258.0 million could be paid through 2010, depending on when and if milestones are attained. Potential milestone payments under existing agreements during the next 12 months range from $2.0 to $71.0 million, of which management currently estimates $30.0 million could result in IPRD charges if paid. The Company continues to evaluate business development opportunities, which may generate additional payments.

The operating results of all acquisitions are included in the Company’s consolidated financial statements from the date of each acquisition.

Note 9 – Discontinued Operations

In March 2004, Guidant’s Board of Directors approved a plan to discontinue the GALILEO^® Intravascular Radiotherapy System (GALILEO System) product line for the treatment of in-stent restenosis due to the significant competitive impact of drug eluting stents. On April 21, 2004, Guidant signed a definitive agreement with Novoste Corporation (Novoste) to cooperate in assisting existing US and Canadian customers of the GALILEO System who wish to transition to Novoste products. Guidant received $2.5 million upon signing and will receive earn-out payments up to a maximum of $4.0 million based on Novoste sales in the US and Canada. The disposal plan consists primarily of the termination of normal activity, abandonment of property and equipment, product returns, collection of accounts receivable and settlement of liabilities. Net loss from discontinued operations for the nine months ended September 30, 2004 includes a charge of $11.2 million, primarily related to the write down of long-lived assets to fair value, severance related charges and recording inventory and accounts receivable at net realizable value. Guidant expects this discontinuation to be substantially complete by December 31, 2004. In December 2003, Guidant’s Board of Directors ratified a plan to discontinue Guidant’s operations in Brazil due to unfavorable business conditions and poor operating performance.

In June 2003, Guidant’s Board of Directors approved a plan to dispose of the ANCURE® ENDOGRAFT® System (ANCURE) product line to treat abdominal aortic aneurysms (AAA) due to continuing financial losses, limited prospects for the Company’s AAA product line and the impact of the US Department of Justice investigation.

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these disposals represent discontinued operations. Accordingly, the accompanying consolidated financial statements and notes reflect the results of operations and financial position of the GALILEO and AAA product lines and the Brazil operations as discontinued operations for all periods presented.

At September 30, 2004, and December 31, 2003, there were $2.1 million and $36.5 million in assets and $17.9 million and $23.9 million in liabilities related to discontinued operations. Assets are primarily comprised of accounts receivable, inventory and property, plant and equipment. Liabilities primarily include accruals for severance, product returns, ANCURE-related settlements and lease commitments. Net loss from discontinued operations includes charges related to the impairment of certain long-lived assets, inventory write-downs, customer returns, ANCURE-related settlements, employee severance and facility costs. Loss from discontinued operations before income taxes, for the nine months ended September 30, 2003, includes a $62.4 million charge for the previously disclosed agreement with the US Department of Justice surrounding the ANCURE product line for the treatment of AAA.

The following summarizes financial information for discontinued operations:

⁽¹⁾     Represents net product returns from customers.

Note 10 – Restructuring

On July 21, 2004 Guidant’s Board of Directors approved a corporate-wide restructuring and realignment that included work force reductions, cessation of certain capital projects and contract terminations, resulting primarily from the weakness in the metallic coronary stent market. The pre-tax expense associated with this plan was $66.0 million and includes severance and benefits packages for affected employees of $42.7 million, expense associated with the accelerated vesting of stock-based compensation (stock options and restricted stock) for affected employees of $7.1 million, impairment of property, plant and equipment of $6.5 million, relocation expenses of $4.4 million, contract termination costs of $3.9 million and other related costs of $1.4 million. At September 30, 2004 the Company had a liability of $37.8 million remaining related to this restructuring (primarily recorded in other current liabilities), the majority of which will be paid by December 31, 2004. This liability primarily relates to severance and benefit packages that have yet to be paid.

Note 11 – Dividend

On October 18, 2004, Guidant’s Board of Directors declared a fourth quarter 2004 dividend of $0.10 per common share outstanding. The dividend will be paid on December 15, 2004 to shareholders of record on December 1, 2004.

Note 12 – Contingencies

The description of legal proceedings in Part II, Item 1 (“Legal Proceedings”) to this filing is incorporated herein by reference.

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
(unaudited)

Guidant Corporation provides innovative, therapeutic medical solutions of distinctive value for customers, patients and healthcare systems around the world. Guidant’s lifesaving medical technologies are designed to extend the lives and improve the quality of life of millions of patients suffering from life-threatening cardiac and vascular disease. Approximately 12,000 employees develop, manufacture and market the Company’s medical devices in nearly 100 countries, with key operations in the US, Europe and Asia. As used herein, the terms “the Company” and “Guidant” mean Guidant Corporation and its consolidated subsidiaries.

Cardiovascular disease is the leading cause of death for both men and women in the US today and claims more lives each year than the next five leading causes of death combined. Within cardiovascular disease, Guidant develops, manufactures and markets products that focus on the treatment of cardiac arrhythmias, heart failure and coronary and peripheral disease including:

Operating Results — Three and Nine Months Ended September 30, 2004 and 2003

Sales

Guidant reported $924.5 million in worldwide sales for the quarter ended September 30, 2004, representing sales growth of $4.4 million, or 0.5%, over the same period in 2003. The impact of fluctuations in foreign currency exchange rates increased sales by $16.4 million, or 2%, offset by price and volume declines. US sales of $638.1 million increased 1% compared to the prior year and international sales of $286.4 million decreased 1%. Sales of products other than worldwide coronary stent systems represented 87% of total revenues and increased 11% in the third quarter 2004 compared to the third quarter 2003.

Sales for the nine months ended September 30, 2004 were $2,797.4 million, an increase of $92.8 million, or 3% over the same period in 2003. The impact of fluctuations in foreign currency exchange rates increased sales by $66.3 million, or 2%, volume increased sales 2% and price declines decreased sales 1%. US sales of $1,886.2 million grew 2% over the prior year primarily due to an increase in volume, while international sales of $911.2 million increased 7% primarily due to fluctuations in foreign currency exchange rates.

Sales Summary—Three Months Ended

Sales Summary—Nine Months Ended

Implantable Defibrillator (ICD) Systems

Worldwide sales of implantable defibrillator systems in the third quarter of 2004 were $444.6 million, an increase of 16% over the same period in 2003. Growth was driven primarily by increased volume and a shift toward higher-value CRT-D systems. US implantable defibrillator system sales increased 13% to $356.9 million and international sales increased 30% to $87.7 million in the third quarter of 2004 compared to the same period in the prior year. For the first nine months of 2004, worldwide ICD system sales increased 19% to $1,305.3 million, compared to $1,092.8 million for the same period in the prior year. International sales were $261.0 million in the first nine months of 2004 compared to $196.5 million in the first nine months of 2003. Sales of ICD systems increased due to the following:

In July 2004, Guidant received Conformité Européenne (CE) Mark approval of its CONTAK RENEWAL® 4 AVT cardiac resynchronization therapy defibrillator, designed to treat heart failure patients who are at risk for sudden cardiac death and also suffer from atrial arrhythmias. In May 2004 Guidant launched the VITALITY 2 implantable defibrillator system in the US. This device incorporates Guidant’s RHYTHM ID® feature, which utilizes rhythm discrimination technology to distinguish between lethal and non-lethal heart rhythms to deliver the appropriate care.

The following may impact the implantable defibrillator market and/or Guidant’s sales in the future:

Pacemaker Systems

Worldwide pacemaker system sales were $181.2 million for the quarter ended September 30, 2004, virtually flat compared to the same period in the prior year. US pacemaker system sales fell 4% to $112.1 million due to decreases in price and volume. International sales grew 7% to $69.1 million, primarily due to fluctuations in foreign currency exchange rates. Worldwide sales of these products for the first nine months of 2004 were $543.8 million, an increase of $30.9 million or 6% over the same period in 2003. International sales were $216.3 million in the first nine months of 2004 compared to $186.2 million in the first nine months of 2003. Pacemaker system sales primarily include:

Coronary Stent Systems

Worldwide coronary stent system sales for the third quarter of 2004 were $122.1 million, a decline of 38% compared to the third quarter of 2003 and slightly ahead of the second quarter of 2004 sales of $120.4 million. Coronary stent system sales comprise 13% of sales in both the second and third quarter of 2004, compared to 22% of sales in the third quarter of 2003. In February 2004, Guidant entered into an agreement with Johnson & Johnson (J&J) to co-promote Cordis’ CYPHER™ Sirolimus-eluting Coronary Stent (CYPHER). This agreement also allows for co-promotion of future drug eluting stents sold by J&J. Co-promotion commissions earned by Guidant under this agreement, along with sales of stent delivery systems (dilatation catheters) to J&J, are included in US coronary stent system sales. Revenues from J&J were $29.0 million for the third quarter of 2004 compared to $11.5 million for the same period in the prior year. Coronary stent system sales in the US were $60.0 million for the third quarter of 2004 compared to $104.3 million for the third quarter of 2003 and $51.2 million for the second quarter of 2004. Increasing penetration of competitive drug eluting stents in the US primarily drove the decline compared to 2003; however, the sales increase from the second quarter of 2004 was due to increases in co-promotion commissions and sales of stent delivery systems to J&J in the third quarter of 2004. International sales for the third quarter of 2004 and 2003 were $62.1 million and $93.7 million. This decrease was primarily due to declining stent sales in Japan as a result of competitive metallic stent launches since late 2003 and the launch of CYPHER in the third quarter of 2004. Worldwide coronary stent system sales for the first nine months of 2004 were $413.9 million compared to $642.0 million for the same period in the prior year. International sales were $216.5 million in the first nine months of 2004 compared to $279.8 million in the first nine months of 2003. Modest sequential declines in coronary stent system sales are expected until Guidant directly participates in the drug eluting stent market. Coronary stent system sales in 2004 primarily include:

Angioplasty Systems

Angioplasty system sales totaled $104.8 million in the third quarter of 2004 and 2003. The absence of growth was due to declining balloon utilization in angioplasty procedures, as physicians become more comfortable with implanting drug eluting stents without pre-dilating the vessel. Sales of these products for the nine months ended September 30, 2004, were $332.6 million compared to $307.8 million for the same period in the prior year, an increase of 8%. During the second and third quarter of 2004, Guidant announced FDA approval and launched the over-the-wire VOYAGER™ (OTW) and the rapid exchange VOYAGER (RX) Coronary Dilatation Catheters.

Cardiac Surgery, Biliary, Peripheral and Carotid Systems

Worldwide sales of cardiac surgery, biliary, peripheral and carotid systems totaled $71.8 million in the third quarter of 2004, representing 41% growth over the same period in 2003. Sales for these systems during the first nine months of 2004 were $201.8 million compared to $149.1 million for the same period in 2003, representing a 35% increase. Sales growth was driven by:

In September 2004, Guidant announced FDA approval of the VASOVIEW 6 Endoscopic Vessel Harvesting System, a sixth-generation product expected to be easier for physicians to use.

Cost of Products Sold

Cost of products sold was $228.7 million and $689.6 million in the third quarter of 2004 and nine months ended September 30, 2004, compared to $216.4 million and $646.0 million for the same respective periods in 2003. Gross profit percentage was 75.3% for both the third quarter of 2004 and the nine months ended September 30, 2004, compared to 76.5% for the third quarter of 2003 and 76.1% for the nine months ended September 30, 2003. The decrease in gross profit percentages was primarily driven by the decrease in sales of stents in the US and Japan, partially offset by continued sales mix shift toward higher value implantable defibrillator systems, including CRT-D systems. Guidant has implemented a lean manufacturing initiative across the cardiac rhythm management product lines. Over the long term this is expected to improve responsiveness of the supply chain and help offset the Company’s decreasing gross profit percentage due to decreasing stent sales.

Research and Development

Research and development expense was $124.4 million for the third quarter of 2004, or 13.5% of sales, compared to $140.7 million in the third quarter of 2003, or 15.3% of sales. The decrease is primarily related to the restructuring, specifically the reduced employee and management bonuses in the third quarter of 2004 compared to the same period in the prior year. Research and development expense for the first nine months of 2004 totaled $398.8 million (14.3% of sales) compared to $382.9 million (14.2% of sales) in the same period in 2003. Significant investments in research and development in the first nine months of 2004 included:

      Important research and development events in 2004 included:

In-Process Research and Development (IPRD)

Guidant incurred no IPRD charges for the three months ended September 30, 2004, compared to $35.2 million for the three months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, Guidant recorded IPRD charges of $99.8 million and $83.7 million. Key components of these charges include:

2004

The remaining charges in 2004 were primarily for the purchase of technology to be utilized in conjunction with Guidant’s carotid embolic protection systems.

2003

Sales, Marketing and Administrative

Sales, marketing and administrative expenses were $282.1 million for the three months ended September 30, 2004, compared to $300.1 million for the same period in 2003 representing a decrease of 6%. The decrease is primarily related to the restructuring, which included a reduction in certain discretionary expenses such as travel and advertising expenses and reduced employee and management bonuses. Sales, marketing and administrative expenses for the nine months ended September 30, 2004, totaled $894.9 million compared to $866.3 million for the same period in 2003, an increase of 3%. The increase for the nine-month period was driven primarily by compensation associated with sales growth and the increase in the cardiac rhythm management sales force, partially reduced by the reduction in expenses associated with the restructuring.

Interest

The components of interest, net are as follows:

Royalties

Royalty expense is incurred for sales of certain implantable defibrillator systems, pacemaker systems, coronary stent systems and angioplasty systems. Net royalty expense totaled $12.6 million in the third quarter of 2004 compared to $15.9 million for the same period in 2003. These expenses for the nine months ended September 30, 2004, totaled $37.2 million compared to $44.9 million in the same period in the prior year. Net royalty expense included royalty income of less than $1.0 million in all periods presented. The decrease in royalty expense was primarily due to the December 2003 expiration of a Mirowski patent covering certain implantable defibrillator products. At the end of the third quarter, the Company had accrued $59.4 million, which represents all royalties and interest potentially payable under the license agreement pertaining to that patent. The ultimate payment by Guidant will depend on a final ruling regarding the patent. (See Part II, Item 1, Legal Proceedings.)

Amortization

Amortization for other intangible assets was $7.7 million in the third quarter of 2004 compared to $5.2 million in the third quarter of 2003. These expenses for the nine months ended September 30, 2004, totaled $22.7 million compared to $11.7 million for the same period in 2003. The increases are attributable to the intangibles recorded in conjunction with the June 2003 acquisition of X Technologies, Inc. and the February 2004 acquisition of AFx, inc.

Other, net

Other, net expense was $5.3 million in the third quarter of 2004 compared to $0.3 million of net other income in the third quarter of 2003. Other, net expense for the nine months ended September 30, 2004 and 2003 was $14.2 million and $5.4 million. The additional expense in 2004 compared to 2003 is primarily due to equity investments that were considered permanently impaired in 2004 and an increase in losses on the disposal of fixed assets.

Income Tax

The effective income tax rates for the quarters ended September 30, 2004 and 2003 were 19.7% and 30.2%. The effective tax rate is higher for the three-month period ended September 30, 2003, primarily due to nondeductible IPRD charges in 2003 and the restructuring charge recorded in 2004 that was primarily deductible at the US statutory rate. The income tax rates for the nine-month periods ending September 30, 2004 and 2003 were 22.3% and 10.7%. The effective tax rate change in 2004 was primarily due to the litigation settlement in 2003 that was deductible at the US statutory tax rates. Guidant’s ongoing operations are impacted by overseas operations having statutory tax rates that are lower than the US statutory tax rates. Guidant is evaluating the provisions of The American Jobs Creation Act of 2004, which was signed into law on October 22, 2004. The Act creates a temporary incentive to repatriate foreign subsidiary earnings by providing an 85% dividends received deduction. The deduction is subject to a number of limitations including a requirement that the company’s senior management and board of directors approve a domestic reinvestment plan. Additional income tax expense may be recorded if Guidant’s Board of Directors approves a plan to repatriate foreign earnings.

Litigation

The Company recorded a $422.8 million net litigation charge in the second quarter of 2003. The Company accrued $425.0 million in that quarter based on the decision of an arbitration panel in a matter involving Cordis Corporation. That decision became final in the third quarter of 2003, with payment made in the fourth quarter of 2003.

Restructuring

On July 21, 2004 Guidant’s Board of Directors approved a corporate-wide restructuring and realignment that included work force reductions, cessation of certain capital projects and contract terminations, resulting primarily from the weakness in the metallic coronary stent market. The pre-tax expense associated with this plan was $66.0 million and includes severance and benefits packages for affected employees of $42.7 million, expense associated with the accelerated vesting of stock-based compensation (stock options and restricted stock) for affected employees of $7.1 million, impairment of property, plant and equipment of $6.5 million, relocation expenses of $4.4 million, contract termination costs of $3.9 million and other related costs of $1.4 million. This initiative, along with other structural spending controls, is expected to decrease total sales, marketing, administrative and research and development expenses in the second half of 2004 compared to the first half of 2004. In connection with this restructuring, the Company changed its bonus programs in a manner expected to reduce bonus compensation expense in the second half of 2004, including the elimination of the management committee bonuses for all of 2004.

Discontinued Operations

In March 2004, Guidant’s Board of Directors approved a plan to discontinue the GALILEO Intravascular Radiotherapy System (GALILEO System) product line for the treatment of in-stent restenosis due to the significant competitive impact of drug eluting stents. On April 21, 2004, Guidant signed a definitive agreement with Novoste Corporation (Novoste) to cooperate in assisting existing US and Canadian customers of the GALILEO System who wish to transition to Novoste products. Guidant received $2.5 million upon signing and will receive earn-out payments up to a maximum of $4.0 million based on Novoste sales in the US and Canada. The disposal plan consists primarily of the termination of normal activity, abandonment of property and equipment, product returns, collection of accounts receivable and settlement of liabilities. Net loss from discontinued operations for the nine months ended September 30, 2004 includes a charge of $11.2 million, primarily related to the write down of long-lived assets to fair value, severance-related charges and recording inventory and accounts receivable at net realizable value. Guidant expects this discontinuation to be substantially complete by December 31, 2004.

In December 2003, Guidant’s Board of Directors ratified a plan to discontinue Guidant’s operations in Brazil due to unfavorable business conditions and poor operating performance.

In June 2003, Guidant’s Board of Directors approved a plan to dispose of the ANCURE ENDOGRAFT System (ANCURE) product line to treat abdominal aortic aneurysms (AAA) due to continuing financial losses, limited prospects for the Company’s AAA product line and the impact of the US Department of Justice investigation.

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these disposals represent discontinued operations. Accordingly, the accompanying consolidated financial statements and notes reflect the results of operations and financial position of the GALILEO and AAA product lines and the Brazil operations as discontinued operations for all periods presented.

Net loss from discontinued operations includes charges related to the impairment of certain long-lived assets, inventory write-downs, customer returns, ANCURE-related settlements, employee severance and facility costs. Loss from discontinued operations before income taxes, for the nine months ended September 30, 2003, includes a $62.4 million charge for the previously disclosed agreement with the US Department of Justice surrounding the ANCURE product line for the treatment of AAA. The Company expects to incur pre-tax losses of up to $10.0 million associated with the exit of these three businesses for the remainder of 2004, excluding potential litigation charges (see Part II, Item 1, Legal Proceedings).

The following summarizes financial information for discontinued operations (in millions):

⁽¹⁾     Represents net product returns from customers.

LIQUIDITY AND FINANCIAL CONDITION

Certain of Guidant’s acquisitions involve contingent consideration. In addition, certain equity investments made by Guidant in other entities may involve contingent payments, which would provide additional ownership to Guidant (both collectively referred to as “milestone payments”). These milestone payments are generally contingent upon reaching performance-related milestones, including specified revenue levels, product development targets or regulatory approvals or filings. At September 30, 2004, Guidant’s accrual for milestone payments totaled $33.3 million and will be paid during the next two years. In addition, future undiscounted performance-related milestone payments of up to $258.0 million could be paid through 2010, depending on when and if milestones are attained. Potential milestone payments under existing agreements during the next 12 months range from $2.0 to $71.0 million, of which management currently estimates $30 million could result in IPRD charges if paid. The Company continues to evaluate business development opportunities, which may generate additional payments.

Summary of Cash Flows

Net cash provided by operating activities was $776.8 million for the first nine months of 2004, an increase of $241.1 million, primarily due to increased net income and decreases in raw material purchases and tax payments for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Net cash used for investing activities was $763.3 million for the first nine months of 2004, an increase of $435.1 million from the prior year primarily due to an increase of $490.0 million for purchases of equity and short-term investments. The majority of these short-term investments are interest-bearing investments with maturities between three and six months.

Net cash used for financing activities was $32.0 million for the first nine months of 2004, a change of $140.8 million from the prior year due to the following:

partially offset by:

Exchange rate fluctuations decreased cash by $8.7 million for the nine months ended September 30, 2004 compared to an increase to cash of $22.3 million for the same period in the prior year. This decrease of $31.0 million is primarily due to the Euro weakening compared to the US dollar during the nine months ended September 30, 2004 and strengthening during the same period in the prior year.

At September 30, 2004, the Company had outstanding borrowings of $776.9 million at a weighted average interest rate of 2.94%, comprised primarily of commercial paper, $350.0 million principal balance in long-term notes due in 2006 and interest rate swap agreements valued at $5.3 million. The commercial paper borrowings are supported by two credit facilities: a $400.0 million facility that expires August 2007 and a $500.0 million facility that expires August 2009. There are currently no outstanding borrowings under these facilities. The Company classified $250.0 million as short-term debt at September 30, 2004. The Company believes that cash and cash equivalent balances will be adequate to fund maturities of short-term borrowings, obligations to make interest payments on its debt and other anticipated operating cash requirements, including planned capital expenditures of approximately $60.0 million for the remainder of 2004 and approximately $370.0 million for 2005. The expected increase in capital expenditures in 2005 compared to 2004 is primarily related to investments in manufacturing equipment and facilities to support Guidant’s drug eluting stent initiatives.

The Company has recognized net deferred tax assets aggregating $325.1 million at September 30, 2004, compared to $314.1 million at December 31, 2003. In view of the consistent profitability of its past operations, the Company believes that these assets will be substantially recovered and that no significant additional valuation allowances are necessary.

Field Actions

As further described in the Company’s Annual Report on Form 10-K and Exhibit 99 to this filing, the medical device industry is subject to substantial regulation, including by the FDA and comparable international agencies. In addition to requiring clearance or approval to market new or improved devices, the Company is subject to regulation as a device manufacturer. Regulations cover many aspects of the Company’s operations, including quality systems, marketing and device reporting.

The Company continually collects information about field observations and analyzes the observations to determine if a field action is necessary. Following this process, from time to time, the Company initiates field actions with respect to market-released products. These actions may include product recalls or communications with a significant number of physicians about a product or labeling issue. The scope of such actions can range from very minor issues affecting a small number of units to more significant actions. Since the Company’s last filing on Form 10-Q, the Company has not had any such field actions.

Cautionary Factors

Certain statements made in this report are forward-looking, including accounting estimates, statements concerning sales and expense trends (including cost reductions), anticipated tax rates, capital expenditures, cash flows, costs of research programs, the timing of discontinued operations and the timing of product developments. The statements are based on assumptions about many important factors, including assumptions concerning:

Actual results may differ materially. The Company does not undertake to update its forward-looking statements.

Item 4. Controls and Procedures

An evaluation was carried out, under the supervision of and with the participation of the Company’s management, including the Company’s chief executive officer (CEO) and chief financial officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.

There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Section 404 of the Sarbanes-Oxley Act requires company management to assess and report on the company’s internal controls. It also requires a company’s independent, outside auditors to issue an “attestation” to management’s assessment, as well as assess the proper design and function of internal controls. Guidant is required to comply with this requirement for the first time as of December 31, 2004. Guidant has completed the documentation to comply with this standard and continues to work on management testing and the external auditor attestation on Guidant’s internal controls.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in patent, product liability, shareholder and other legal proceedings that arise in the course of the Company’s business. The Company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the lower end of the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.

Patent and other proprietary rights are essential to the Company’s business. Significant litigation concerning patents and products is pervasive in the Company’s industry. Patent claims include challenges to the coverage and validity of the Company’s patents on products or processes as well as allegations that the Company’s products infringe patents held by competitors or other third parties. Although the Company believes that it has valid defenses to these challenges with respect to material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

Losses in the matters below are not considered probable or cannot be reasonably estimated. Accordingly, the Company has not recorded reserves for these matters. While the liability of the Company in connection with the claims cannot be estimated with any certainty, the outcome of these legal proceedings, except as specifically identified below, is not expected to have a material adverse effect on the Company’s consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on the Company’s results of operations for that period. While the Company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the Company may in the future incur material judgments or enter into material settlements of claims. Further, notwithstanding that product liability insurance remains available to the Company on terms consistent with terms available in prior periods, like many of its industry peers, the Company elected to increase substantially the degree to which it self-insures for product liability exposures. The decision does not affect coverage with respect to claims made under previous policies.

On February 18, 1998, Arterial Vascular Engineering, Inc. (now known as Medtronic Vascular) filed suit against the Company’s subsidiary, Advanced Cardiovascular Systems, Inc. (ACS), in the District Court for Delaware alleging that the sale of its balloon-expandable coronary and peripheral stents infringe the Boneau patents owned by Medtronic Vascular. The suit is consolidated with a suit by ACS alleging infringement by Medtronic Vascular of the Company’s Lau stent patents. The Medtronic Vascular complaint also alleges misappropriation of trade secrets and breach of a confidentiality agreement by ACS. In the lawsuit, Medtronic Vascular is seeking injunctive relief, co-ownership of the Lau patents, monetary damages and a ruling that the ACS stent patents asserted against Medtronic Vascular are invalid. Pretrial matters are scheduled through 2004, with trial set in the first quarter of 2005. This suit is one of a number of suits brought by Medtronic Vascular under the Boneau patents against all substantial participants in the stent market. The allegations made by Medtronic Vascular are wide-ranging and cover the Company’s stent products broadly. Accordingly, while potential liability cannot be estimated with any certainty, an adverse outcome could have a material impact on results of operations or consolidated financial position.

On June 15, 2000, Medtronic, Inc. (Medtronic) filed a declaratory judgment action against the Company and its Cardiac Pacemakers, Inc. (CPI) subsidiary in the District Court for Minnesota requesting that the court rule that Medtronic does not infringe certain of CPI’s patents for atrial fibrillation technology or that the patents are not valid. Subsequently, the Company asserted additional patents related to atrial fibrillation technology against Medtronic in the same court. Currently, eight patents are being asserted against Medtronic in this consolidated litigation.

On March 6, 2002, Pacesetter, Inc. (Pacesetter), a subsidiary of St. Jude Medical, Inc. (St. Jude), filed suit against the Company’s subsidiaries, CPI and Guidant Sales Corporation (GSC), in the Central District of California alleging that CPI and GSC have infringed a number of Pacesetter patents covering various features of pacemakers and implantable defibrillators. On the Company’s motion, the case was transferred to the District Court for Minnesota and stayed in October 2004 pending reexamination of two of the patents. The parties stipulated to lift the stay in October 2005. Currently four patents are at issue. Pacesetter is seeking injunctive relief, monetary damages and attorney fees. A new pretrial scheduling order has yet to be set.

On April 14, 2003, Medinol Ltd. (Medinol) filed suit against the Company and its ACS subsidiary in the Southern District of New York alleging that the sale of the Company’s MULTI-LINK ZETA, MULTI-LINK PENTA and MULTI-LINK VISION Coronary Stent Systems infringe five Medinol patents related to stent design. The complaint seeks injunctive relief and monetary damages. Pretrial matters are scheduled through 2004.

On June 12, 2003, the Company announced that its subsidiary, EndoVascular Technologies, Inc. (EVT), had entered into a plea agreement with the US Department of Justice relating to a previously disclosed investigation regarding the ANCURE ENDOGRAFT System for the treatment of abdominal aortic aneurysms. At the time of the EVT plea, the Company had outstanding fourteen suits alleging product liability related causes of action relating to the ANCURE System. Subsequent to the EVT plea, the Company has been notified of additional claims and served with additional complaints. From time to time, the Company has settled certain of the claims and suits for amounts that were not material to the Company. Currently, the Company has outstanding approximately forty suits, and more suits are likely to be filed. The cases generally allege the plaintiff suffered injuries, and in certain cases died, as a result of purported defects in the device or the accompanying warnings and labeling. The complaints seek damages, including punitive damages, and equitable relief. During the quarter, a California court granted summary judgment in the Company's favor with respect to all claims in a case against the Company that formerly alleged violations of California unfair trade and business practice laws relating to sales of the product, which judgment the plaintiffs have not appealed. While insurance may reduce the Company’s exposure with respect to ANCURE claims, one of the Company’s carriers, Allianz Insurance Company (Allianz), filed suit in the Circuit Court, State of Illinois, County of DuPage, seeking to rescind or otherwise deny coverage, and additional carriers have intervened in the case. The Company also has initiated suit against certain of its carriers, including Allianz, in the Superior Court, State of Indiana, County of Marion, in order to preserve the Company’s rights to coverage.

Also following the EVT plea, the Company has been served with securities class action and shareholder derivative complaints relating to the ANCURE System. A consolidated securities class action, which names as defendants the Company, EVT and certain of their current and former officers, is pending in the Southern District of Indiana. Generally, it is alleged that during all or a portion of the period from June 23, 1999, through June 12, 2003, public statements by the Company relating to the ANCURE System were false and misleading. Damages are sought on behalf of persons who purchased or otherwise acquired Company shares during that period. The Company has filed a motion to dismiss the case, which motion is fully briefed.

The derivative suits relating to the ANCURE System currently are pending in the Southern District of Indiana and in the Superior Court of the State of Indiana, County of Marion. The suits, purportedly filed on behalf of the Company, generally allege that the Company’s directors breached their fiduciary duties by taking improper steps or failing to take steps to prevent the ANCURE and EVT related matters described above. The complaints seek damages and other equitable relief. The state court suits have been stayed in favor of the federal action. The Company has filed a motion to dismiss the federal action, which motion is fully briefed. In connection with the briefing, the court recently certified an issue to the Indiana Supreme Court, which certified issue was accepted, relating to the plaintiff’s obligation to make a demand on the Company’s board of directors before filing a lawsuit.

On August 29, 2003, Medtronic filed a declaratory judgment action in the District Court for Delaware against the Company, GSC, Eli Lilly and Company (Lilly), and Mirowski Family Ventures L.L.C. (Mirowski), challenging its obligation to pay royalties to Mirowski on certain devices by alleging the invalidity of certain claims of US patent RE 38,119 (‘119), which patent relates to cardiac resynchronization therapy and bi-ventricular pacing therapy. The ‘119 patent is exclusively licensed to the Company as part of a broader license covering Mirowski patents and is sublicensed to Medtronic. The parties agreed to an expedited proceeding with limited scope and a bench trial was held the week of November 1, 2004.

On February 2, 2004, the Company, GSC, CPI and Mirowski filed a declaratory judgment action in the District Court for Delaware against St. Jude and Pacesetter alleging that their Epic HF, Atlas HF, and Frontier 3x2 devices infringe the ‘119 patent, described in the prior paragraph.

On February 24, 2004, the Company’s subsidiary, CPI, filed a patent infringement action in the District Court of Minnesota against St. Jude and Pacesetter alleging that their Quicksite over-the-wire pacing lead has infringed US Patent No. 5,755,766/Reexamination Certificate No. 5,755,766 C1. Pretrial matters are scheduled through 2006.

On February 24, 2004, the Company entered into an agreement with Johnson & Johnson (J&J) to co-promote the CYPHER Sirolimus-eluting Coronary Stent in the US. Previously, Boston Scientific Corporation (BSC) sued J&J in the US District Court for the District of Delaware alleging that the CYPHER stent infringes certain patents owned or licensed by BSC. On March 16, 2004, BSC filed an amended complaint adding the Company as a defendant. Under the terms of the agreement with J&J, J&J is required to indemnify the Company.

Anna Mirowski, Lilly and two Company subsidiaries, GSC and CPI, are plaintiffs in a patent infringement suit originally filed against St. Jude and its affiliates in November 1996 in the District Court in Indianapolis. In July 2001, a jury found that US Patent No. 4,407,288 (‘288 Patent), which was licensed to CPI and expired in December 2003, was valid and infringed by St. Jude’s defibrillator products. In February 2002, the District Court reversed the jury’s findings. In August 2004, the Federal Circuit Court of Appeals, among other things, reinstated the jury verdict of validity, and remanded the matter for a new trial on infringement and damages. St. Jude's request for additional Federal Circuit review was denied.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

Item 6. Exhibits

The Exhibit Index is incorporated herein by reference.

SIGNATURES

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.

EXHIBIT INDEX

Exhibit 31.1:  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of Ronald W. Dollens

Exhibit 31.2:  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of Keith E. Brauer

Exhibit 32.1:  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of Ronald W. Dollens

Exhibit 32.2:  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of Keith E. Brauer

Exhibit 99:     Factors Possibly Affecting Future Operating Results