10-K 1 stj20140103201510-k.htm 10-K STJ 2014 01.03.2015 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2015
Commission File Number: 1-12441

ST. JUDE MEDICAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Minnesota
 
41-1276891
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
 
 
One St. Jude Medical Drive
 
(651) 756-2000
St. Paul, Minnesota 55117
 
(Registrant’s telephone number,
(Address of principal executive
 
including area code)
offices, including zip code)
 
 
 
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Common Stock ($.10 par value)
 
New York Stock Exchange
(Title of class)
 
(Name of exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý           No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o           No ý
 
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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý           No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý           No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o           No ý
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was $19.8 billion at June 27, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), when the closing sale price of such stock, as reported on the New York Stock Exchange, was $69.54 per share.
The registrant had 281,281,678 shares of its $0.10 par value Common Stock outstanding as of February 20, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders are incorporated by reference into Part III.




TABLE OF CONTENTS
ITEM
DESCRIPTION
PAGE
 
 
 
 
PART I
 
 
 
 
1.
1A.
1B.
2.
3.
4.
 
 
 
 
PART II
 
 
 
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
 
 
 
PART III
 
 
 
 
10.
11.
12.
13.
14.
 
 
 
 
PART IV
 
 
 
 
15.
 
 
 
 


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PART I

Item 1.
BUSINESS

General
St. Jude Medical, Inc., together with its subsidiaries develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiovascular and atrial fibrillation therapy areas, and interventional pain therapy and neurostimulation devices for the management of chronic pain and movement disorders.
On January 28, 2014, we announced organizational changes to combine our Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division, resulting in an integrated research and development (R&D) organization and a consolidation of manufacturing and supply chain operations worldwide. The integration was conducted in a phased approach during 2014. Our continuing global realignment efforts are focused on streamlining our organization to improve productivity, reduce costs and leverage its scale to drive additional growth. During 2014, we changed our internal reporting structure such that we now operate as a single operating segment and derive our revenues from six principal product categories.
Our six principal product categories are as follows: tachycardia implantable cardioverter defibrillator (ICD) systems, bradycardia pacemaker (pacemaker) systems, atrial fibrillation (AF) products (electrophysiology (EP) introducers and catheters, advanced cardiac mapping, navigation and recording systems and ablation systems), vascular products (vascular closure products, pressure measurement guidewires, optical coherence tomography (OCT) imaging products, vascular plugs, heart failure monitoring device and other vascular accessories), structural heart products (heart valve replacement and repair products and structural heart defect devices) and neuromodulation products (spinal cord stimulation and radiofrequency ablation to treat chronic pain and deep brain stimulation to treat movement disorders). References to “St. Jude Medical,” “St. Jude,” “the Company,” “we,” “us” and “our” are to St. Jude Medical, Inc. and its subsidiaries.
In May 2014, we exercised our exclusive fixed purchase option to acquire the remaining 81% ownership interest in CardioMEMS, Inc. (CardioMEMS). CardioMEMS is focused on the development of a wireless monitoring technology that can be placed directly into the pulmonary artery to assess cardiac performance via measurement of pulmonary artery pressure. In August 2014, we acquired all the outstanding shares of NT Holding Company (NeuroTherm). NeuroTherm is involved in the business of marketing, designing, manufacturing and distributing radio frequency ablation medical devices and the related consumable items for pain management and interventional radiology markets world-wide. In August 2013, we acquired Endosense S.A. (Endosense). Endosense manufactures and markets the TactiCath® irrigated ablation catheter to provide physicians a real-time, objective measure of the force to apply to the heart wall during a catheter ablation procedure. This force-sensing technology had CE Mark approval for AF and supra ventricular tachycardia ablation prior to our acquisition, and received U.S. Food and Drug Administration (FDA) approval in October 2014. In October 2013, we acquired Nanostim, Inc. (Nanostim). Nanostim has developed the first leadless, miniaturized cardiac pacemaker system, which received CE Mark approval in August 2013. Refer to the Business Combinations and Investments section for a more detailed discussion.

In 2010, significant U.S. healthcare reform legislation, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively PPACA), was enacted into law. As a U.S.-headquartered company with significant sales in the United States, this healthcare reform law has had, and is expected to continue to have, a material impact on us and on the U.S. healthcare system, more generally. Beginning in 2013, the law levies an annual 2.3% excise tax on the majority of our U.S. medical device sales. Additionally, the law reduced the annual rate of inflation for Medicare payments to hospitals and called for the establishment of the Independent Payment Advisory Board to recommend strategies for reducing growth in Medicare spending. The law also focused on a number of Medicare provisions aimed at improving quality and decreasing costs, such as 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). It is uncertain at this point what consequences these provisions may have on potentially limiting patient access to new technologies. We cannot predict what future healthcare legislation will be implemented at the federal or state level, nor 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.

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St. Jude Medical was incorporated in Minnesota in 1976. We market and sell our products world-wide through both a direct sales force and independent distributors. The principal geographic markets for our products are the United States, Europe, Japan and Asia Pacific.
We utilize a 52/53-week fiscal year ending on the Saturday nearest December 31st. Fiscal year 2014 consisted of 53 weeks and ended on January 3, 2015, with the additional week reflected in our fourth quarter 2014 results. Fiscal years 2013 and 2012 consisted of 52 weeks and ended on December 28, 2013 and December 29, 2012, respectively.
Principal Products
The following table presents net sales from external customers for our six principal product categories (in millions):
Net Sales
2014
 
2013
 
2012
ICD Systems
$
1,746

 
$
1,741

 
$
1,743

Pacemaker Systems
1,047

 
1,042

 
1,111

Atrial Fibrillation Products
1,044

 
957

 
898

Vascular Products
709

 
704

 
716

Structural Heart Products
639

 
631

 
612

Neuromodulation Products
437

 
426

 
423

   Net sales
$
5,622

 
$
5,501

 
$
5,503


ICD Systems: Our tachycardia implantable cardioverter defibrillator ICD systems and cardiac resynchronization therapy defibrillator (CRT-D) devices treat patients with hearts that beat inappropriately fast - a condition known as tachycardia. If left untreated, patients suffering from tachycardia are at risk of lethal heart conditions such as sudden cardiac arrest or heart failure.

An ICD monitors the heartbeat and delivers high-energy electrical impulses, or “shocks,” to treat potentially lethal, abnormally fast heart rhythms -- ventricular tachycardia (VT) and ventricular fibrillation (VF) -- which often lead to sudden cardiac death (SCD). In VT, the lower chambers of the heart (ventricles) contract at an abnormally rapid rate and typically deliver less blood to the body's tissues and organs. VT can progress to VF, in which the heart beats so rapidly and erratically that it can no longer pump blood.
A CRT-D device resynchronizes the beating of the ventricles, which often beat out of sync in heart failure patients, and provides backup treatment for SCD, which is a risk factor associated with certain types of heart failure. Cardiac resynchronization therapy can improve the quality of life for many patients with heart failure, a progressive condition in which the heart weakens and loses its ability to pump an adequate supply of blood.

ICDs and CRT-Ds are typically implanted underneath the collarbone and connected to the heart by leads (wires) that carry electrical impulses to the heart, regulating its rhythm. Physicians and healthcare professionals are also able to use programmers and remote monitoring equipment to analyze device data from our cardiac rhythm management devices, reducing office visits and improving patient management.

We received FDA approval in June 2013 and European CE Mark approval in May 2013 for our next generation Ellipse™ ICD and SJM Assura™ family of ICD and CRT-D devices. The SJM Assura™ family of high-voltage devices features both ICD models (Fortify Assura™) and CRT-D models (Unify Assura™ for bi-polar CRT-D and Quadra Assura™ for quadripolar CRT-D). The Ellipse™ ICD is a high-energy ICD denoted for its small size, while the Assura™ family has a high-energy output, with a maximum output of 40 Joules. The next generation Ellipse™ and Assura™ family of devices feature DynamicTx™ Over-Current Detection Algorithm, which automatically adjusts shock configurations, and utilize a new low friction coating on the device to reduce the risk for lead-to-can abrasion, the most common type of lead insulation failure in the industry.

The Assura™ family also includes our Unify Quadra™ CRT-D device (FDA approval in November 2011 and European CE Mark approval in March 2011) and our Quartet™ LV (left ventricular) lead (FDA approval in November 2011 and European CE Mark approval in September 2009). St. Jude Medical's Unify Quadra™, Quadra Assura™ and Promote Quadra™ represent quadripolar pacing systems that are available worldwide. These quadripolar pacing systems allow physicians more options to address pacing complications without the need to reposition a lead surgically. In June 2013, we announced European CE Mark approval of our next-generation quadripolar

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device, the Quadra Assura MP CRT-D device, which features MultiPoint Pacing (MPP) technology that enables physicians to pace multiple locations on the left side of the heart with a single lead, thereby providing more options to best optimize CRT pacing to meet individual patient needs.

The Assura™ family replaces our Unify™ CRT-D and Fortify™ ICD devices (FDA approval in May 2010 and European CE Mark approval in January 2010). The Unify and Fortify devices were smaller in size than previous devices, offered improved longevity and provided high-energy electrical impulse capability for life saving therapy when needed. All of our high-voltage device families are available with the DF4 connector that allows a single defibrillation lead connection between an ICD or CRT-D device and the heart, reducing the procedure time and volume of leads implanted in the chest cavity.

With the introduction of the Unify™ and Fortify™ families of devices, we discontinued legacy offerings such as Current Accel™ and Promote Accel™ devices (FDA approval in February 2010 and European CE Mark approval in March 2009) as options for new implants in most countries; however, we continue to offer Current Plus™ and Promote Plus™ in some markets worldwide. In addition, the Fortify™ (European CE Mark approval in January 2010) and Ellipse™ ICDs (models commercialized outside the U.S. only) are capable of continuously monitoring the electrical changes between heartbeats, providing physicians insight into clinical events to help improve patient management.

Our ICDs are used with the single and dual-shock electrode transvenous defibrillation leads. Our ICD lead offerings include the Optisure™ (FDA approval in April 2014), Durata™ SJ4 (FDA approval in April 2009) and Durata™ high-voltage leads (FDA approval in September 2007. All our ICD leads feature our exclusive Optim™ insulation material that combines the durability of polyurethane and the softness of silicone. Optim™ insulation has demonstrated a statistically significant reduction in the incidence of insulation abrasion when compared to our previous silicone insulated leads. We now have Optim™ insulation available in all of our lead segments and have phased out our older silicone insulated leads.

Our current portfolio of CRT leads includes the Quartet™ low voltage (LV) lead (FDA approval in November 2011 and European CE Mark approval in September 2009), as well as the smaller diameter lead, QuickFlex™ µ (micro) LV lead (FDA approval in May 2010 and European CE Mark approval in September 2008). Both the Quartet™ and QuickFlex™ µ are Optim™ insulated leads. The Quartet lead features four electrodes spaced over 4.7 centimeters, enabling up to 10 pacing configurations. Multiple pacing configurations allow the physician to implant the lead in the most stable position without sacrificing electrical performance. It also provides the physician more alternatives to pace closer to the base of the left ventricle. The quadripolar pacing electrodes also provide physicians more options to optimize CRT performance, such as pacing around scar tissue in the heart. For LV lead implantation, we received FDA and European CE Mark approval in 2013 for improved versions of our CPS Aim™ SL and CPS Direct™ SL II slittable LV lead delivery tools designed to offer safe and efficient implantation procedures and improved compatibility with our Quartet™ LV lead. We also provide additional tools for the placement of LV leads, including the CPS Luminary™, CPS Duo™, CPS Courier™ guidewires and the CPS Venture™ wire control catheter.

Pacemaker Systems: Our pacemakers treat patients with hearts that beat too slowly, a condition known as bradycardia. Similar to ICDs and CRT-Ds, pacemakers are typically implanted underneath the collarbone, monitor heart rate and, when necessary, deliver low-voltage electrical impulses to stimulate an appropriate heartbeat. Single-chamber pacemakers sense and stimulate only one chamber of the heart (atrium or ventricle), while dual-chamber devices can sense and pace both the upper atrium and lower ventricle chambers. Biventricular pacemakers can sense and pace in three chambers (atrium and both ventricle chambers) of the heart.

In October 2013, we received European CE Mark approval for the first leadless pacemaker system that we acquired through our acquisition of Nanostim. Unlike conventional pacemakers that require a more invasive surgery, the Nanostim™ leadless pacemaker is designed to be implanted directly into the heart via a less invasive procedure. The device is delivered using a steerable catheter through the femoral vein, eliminating the need to surgically create a pocket for the pacemaker and also eliminating the need for insulated wires (leads) that have historically been recognized as the most vulnerable component of pacing systems. The Nanostim™ leadless pacemaker was designed to be fully retrievable so the device can be repositioned during the implant procedure and later retrieved if necessary, such as at the time of normal battery replacement. Patient enrollment in our U.S. pivotal IDE trial continues to move forward in our effort to obtain FDA approval.

Our current pacemaker portfolio also includes the Assurity™ and Endurity™ traditional pacemakers and Allure™ CRT pacemakers (FDA approval in April 2014 and European CE Mark approval in March 2013). Allure™ Quadra

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brings the quadripolar lead technology to the pacemaker market (FDA approval in March 2014 and European CE Mark approval in April 2013). Quadripolar leads allow for increased implant efficiencies, which clinical data indicates can result in fewer surgical revisions. The Allure™ family of devices also offers enhanced heart failure diagnostics, including CorVue Impedance Monitoring, for improved patient management. In December 2014, we announced European CE Mark approval of our next-generation quadripolar CRT pacemaker, the Quadra Allure MP (cardiac resynchronization therapy pacemaker) CRT-P device, which features MultiPoint Pacing technology. The Assurity™ and Endurity™ family of pacemakers further enhances our pacemaker portfolio with smaller size and improved battery longevity.

These new devices complement our existing Accent MRI™ pacemaker family (introduced in Europe in 2011 and Japan in 2013). The Accent MRI™ system features the Accent MRI™ pacemaker devices and the Tendril MRI™ lead with added filtering capabilities for safety during an MRI scan. In combination, the Accent MRI™ pacemaker and the Tendril MRI™ lead allow for a full-body MRI scan without zone restrictions. Additionally, the system includes the MRI activator to minimize changes in workflow prior to and immediately after an MRI scan. We have initiated an Investigational Device Exemption (IDE) trial in the U.S. to further study the safety of the Accent MRI™ system in order to gain U.S. approval.

In 2009, we received approval (FDA approval in July 2009 and European CE Mark approval in April 2009) of our Accent™ radio frequency (RF) pacemaker and Anthem™ RF CRT-P. The Accent™ and Anthem™ product families feature RF telemetry that enables secure, wireless communication between the implanted device and the programmer used by the clinician, allowing for more efficient and convenient care and device management.

Our current pacing leads include the Optisense™ Optim, Tendril™ ST Optim, Tendril™ STS Optim lead families and the IsoFlex™ Optim, passive-fixation lead families, all available worldwide. All of these lead families feature steroid elution (to suppress the body's inflammatory response to a foreign object, such as a pacing lead) as well as our Optim™ insulation. Our Optisense™ leads offer an electrode spacing technology that has been clinically proven to reduce far-field over-sensing and inappropriate mode switching.

Our cardiac rhythm management devices interact with an external device referred to as a programmer. A programmer has two general functions. At the time of implant, the programmer is used to establish the initial therapeutic settings of these devices as determined by the physician. Later, the programmer is used for patient follow-up visits (which usually occur every three to 12 months based on patient need) to download stored diagnostic information from the implanted device for physicians to verify appropriate therapeutic settings. Since the introduction of programmable pacemakers, all cardiac rhythm management device manufacturers, including St. Jude Medical, have retained title to their programmers, which are used by their field sales force or by physicians, nurses or technicians.

In April 2006, we received FDA approval for the first software module of our Merlin™ Patient Care System, a universal programmer for St. Jude Medical ICDs and pacemakers. The Merlin Patient Care System features a large display, built-in full-size printer, touch screen and user interface designed for efficient and effective in-clinic patient follow-up. This programmer has had several software updates since release to extend capabilities and support new products and markets. In 2008, the programmer was updated to include Japanese and Mandarin Chinese language support. In 2010, we introduced a new Pacing Systems Analyzer (PSA) that integrates into the Merlin programmer to allow for quick and easy testing of the leads during device implant.

In addition to the programmer, physicians can monitor implanted devices and patient status using the Merlin.netTM Patient Care Network. This system allows daily device and patient monitoring and scheduled remote follow-ups to occur in the patient's home rather than in the physician's office. The Merlin@home™ line of RF transmitters (FDA approval in July 2008 and European CE Mark approval in September 2008) uses standard analog or DSL telephone lines, cellular networks or Wi-Fi to send device and therapy data stored in devices to an internet site for retrieval and review by the patient's physician. With the Merlin.netTM Patient Care Network, physicians can manage their volume of ICD and pacemaker patients by conducting remote follow-up sessions and using alerts of clinically significant events. Additionally, patient flexibility is provided by the reduction in the number of office visits required and the ability to have a physician interrogate device data when symptoms warrant. The latest version of this system received European CE Mark approval in 2013. This current version will offer support for our next generation Ellipse™ and Assura™ family of ICDs and CRT-Ds.

Atrial fibrillation products: AF and VT are irregular rhythms of the heart that can be treated with device-based ablation therapies. AF is a condition in which the upper chambers of the heart (atria) beat rapidly and erratically,

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affecting the heart's ability to adequately pump blood to its ventricles and subsequently to the rest of the body. Some of the complications caused by AF are increased risk of death or stroke, increased severity of stroke, increased hospitalizations and reduced quality of life due to palpitations and other AF-related symptoms. AF can have an impact on the heart as early as a few weeks after onset, causing cycles of remodeling, dysfunction and additional triggers that can advance the disease. These cycles both maintain and perpetuate AF from the state of initial induction, to paroxysmal AF (AF that begins suddenly and ends spontaneously) to persistent (recurring episodes lasting more than seven days) to long-standing persistent (ongoing and long-term). Our atrial fibrillation products provide a complete system of access, diagnostic, visualization and ablation products that assist physicians in diagnosing and treating various irregular heart rhythms. Our ablation technologies are primarily designed to be used in the EP lab to guide and facilitate the percutaneous delivery of catheters to areas of the heart where arrhythmias occur. We are committed to developing device-based ablation therapies for irregular heart rhythms that offer the potential for a cure.

Our access products enable clinicians to facilitate the percutaneous delivery of diagnostic and ablation catheters to areas of the heart where arrhythmias occur. Our products include our Epicardial (EPI) Ablation System (FDA approval in April 2009) with AgilisTM EPI to facilitate catheter delivery epicardially (outside the chambers of the heart) and our Swartz™ and Swartz™ Braided Transseptal fixed-curve introducers to guide catheters to precise locations in the right and left atria.

Our ultrasound product line consists of the ViewMate™ Z Intracardiac Ultrasound System and ViewFlex™ family of catheters. In June 2012, we introduced the ViewFlex™ Xtra 4-way Intracardiac Echocardiography (ICE) catheter in the U.S. that features 4-way steering capabilities, and we received European CE Mark approval in December 2012.
For diagnosing arrhythmias percutaneously, we offer a portfolio of fixed-curve and steerable catheters. Our SupremeTM, Response™ and Inquiry™ fixed-curve catheters gather electrical information from the heart to help determine the cause of an arrhythmia and/or the location of its source. Our steerable product lines include Livewire™ and Inquiry™ catheters which allow clinicians to move the catheter tip in precise movements to diagnose the more anatomically challenging areas within the heart. Our Reflexion Spiral™ (FDA approval in October 2006) and Inquiry™ Optima™ PLUS (FDA approval in March 2006) circular mapping catheters enable the physician to check for electrical isolation of the pulmonary vein openings during an AF ablation procedure. The Reflexion HD™ (FDA approval in January 2009) and Inquiry AFocus II™ Double Loop (FDA approval in August 2010) catheters are high-density, circular mapping catheters that are designed to leverage the mapping capabilities of the EnSite Velocity™ System to create accurate high-density heart chamber models and detailed electrical maps.

Our EnSite Velocity™ System, introduced in 2009, is a mapping and navigation system that, when used in conjunction with the EnSite Array™ non-contact mapping catheter or EnSite NavX™ navigation and visualization technology, creates three-dimensional cardiac models, allows for intracardiac diagnostic and ablation catheters to be located and navigated without the use of fluoroscopy within those models and provides electrical activity to be displayed in a color-coded fashion. The EnSite Velocity™ System also includes various modules and tools to assist the physician with their EP procedure. Our OneModel™ tool facilitates the creation of detailed chamber models; our OneMap™ tool allows simultaneous creation of chamber models and the associated electrical data in one step; and our RealReview™ function allows the user to view live and pre-recorded cardiac models and electrical maps simultaneously. Our EnSite Derexi™ module facilitates the exchange of information between the EnSite Velocity™ System and the EP-WorkMate™ recording system, to help improve efficiency and procedural workflow. Our EnSite Courier™ module can import and export data sets to and from a hospital's Picture Archiving and Storage (PACS) network.

We offer multiple ablation catheter configurations which focus on disabling abnormal tissue that causes or perpetuates arrhythmias. Our standard non-irrigated tip ablation catheters include our Livewire TC Ablation Catheters uni- and bi-directional models that offer stability and excellent contact with cardiac tissue. Our Safire™ and Safire TX™ bi-directional ablation catheter product line offers a comprehensive range of catheter tip sizes (Safire™ 4mm and 5mm FDA approved in August 2006 and Safire TX™ 8mm FDA approved in October 2007) and curve configurations, and is built on our ComfortGrip™ handle platform that is designed for physician comfort and control during EP procedures. Our Therapy™ 4mm and 8mm tip standard catheter lines provide a range of curve options and temperature control. When used with our 1500 T-series Cardiac Ablation Generators, power can be effectively managed for the creation of ablation lines. In addition to the 1500 T-series Cardiac Ablation Generations, in March 2014 the AmpereTM RF Generator was approved by the FDA. This generator is compatible with our currently approved ablation catheters. It was designed to enhance procedural efficiency, minimize noise interference and provide more control for the physician as they create ablation lines in arrhythmia management procedures.

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In addition to the standard non-irrigated tip ablation catheters, we also offer various open-irrigated ablation catheters which feature holes at the tip of the catheter to allow infused saline to circulate around the tip during therapy delivery. This irrigation allows the tip to be cooled and reduces the potential for char or thrombus (blood clot) to form during ablation. The Therapy™ Cool Path™ Duo (European CE Mark approval in October 2007) and the Safire BLU™ Duo™ (FDA approval in January 2012) are both irrigated tip ablation catheters that feature 12 infusion ports that allow for more uniform cooling of the ablation tip. The Therapy Cool Flex™ irrigated ablation catheter (European CE Mark approval in June 2010) is a fully irrigated, flexible tip ablation catheter that features a laser-cut tip, allowing it to bend and conform to the cardiac anatomy and providing for fluid to be infused around the entire catheter tip electrode. The FlexAbilityTM ablation catheter (FDA approval in January 2015) was designed using physician input from concept to completion and has the same irrigated catheter tip as the Cool Flex™ ablation catheter. This tip is now integrated onto a next generation shaft and handle platform to provide better performance and maneuverability.

Through our acquisition of Endosense in 2013, we deepened our presence in the ablation catheter segment. The TactiCath™ Quartz ablation catheter with its force-sensing technology provides physicians a real-time measure of contact force being applied between the catheter tip and the endocardial tissue surface during cardiac electrophysiological mapping and catheter ablation procedures (FDA approval in October 2014 and European CE Mark approval in June 2012). We now have the potential to integrate the force-sensing technology to offer a MediGuide™-enabled force-sensing ablation catheter and incorporate force-sensing data into our Ensite Velocity™ Mapping System.

Interventional EP procedures, including catheter ablations and CRT procedures, expose operators, staff and patients to the risks of fluoroscopy. Our MediGuide™ technology is a platform to facilitate the reduction of fluoroscopy exposure while also increasing procedural efficiencies. The MediGuide™ technology consists of a hardware system which is integrated with the EP lab fluoroscopy system. Other products offered by our Company will also integrate with the MediGuide™ technology, including MediGuide™ sensor-enabled diagnostic and irrigated ablation catheters, the EnSite Velocity™ system and certain CRT delivery tools. We continue to expand our MediGuide™ technology platform as additional integrated products are developed and approved. Early clinical work has demonstrated that the MediGuide™ technology can reduce radiation exposure during EP lab procedures for physicians, patients and staff.

Our EP-WorkMate™ recording system is used to monitor electrical activity of the heart via intracardiac catheters and features our new ClearWave™ technology for high-fidelity signals and an integrated stimulator, our EP 4™ Cardiac Stimulator.

We also offer the VantageView™ System which is a high resolution 56” monitor that allows the display of eight video inputs. The VantageView™ System will accommodate a variety of video input signals and then display images that can be resized and relocated with high resolution. The VantageView™ System is programmed with a touch screen and can be customized to meet the needs of the physician and/or procedure. We also offer our Confirm™ implantable cardiac monitor device (FDA approval and European CE Mark approval in September 2008). This small implantable device is designed to help physicians monitor abnormal cardiac rhythms.

Vascular Products: Our vascular products include active vascular closure devices, compression assist devices, pressure measurement guidewires, diagnostic coronary imaging technology, percutaneous catheter introducers, diagnostic guidewires, a heart failure monitoring device (CardioMEMS), renal denervation technology and vascular plugs.

Our vascular closure devices are used to close femoral and radial artery puncture sites following percutaneous coronary interventions (PCIs), diagnostic procedures and certain peripheral procedures. Active or passive (manual) compression is utilized to assist in closing artery puncture sites. Our active closure devices include our Angio-Seal™ product offering. The latest version is the Angio-Seal Evolution™, which features automated collagen compaction, making it easier for the clinician to deploy the device and obtain arterial hemostasis (cessation of bleeding). Prior versions of Angio-Seal™, Angio-Seal™ VIP and Angio-Seal™ STS Plus continue to generate revenue in our active closure product offering. Since its introduction to the market approximately 18 years ago, more than 22 million Angio-Seal vascular closure devices have been utilized around the world.


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Our compression assist device offerings include both the RadiStop® and FemoStop™ compression assist devices to close puncture sites of the radial and femoral arteries, respectively. Compression assist devices are often used to maintain pressure on the arteriotomy in order to facilitate hemostasis.

Percutaneous catheter introducers are used to create passageways for cardiovascular catheters from outside the human body through the skin into a vein, artery or other location inside the body. Our percutaneous catheter introducer portfolio consists primarily of peel-away and non peel-away sheaths, sheaths with and without hemostasis valves, dilators, guidewires, repositioning sleeves and needles. These products are offered in a variety of sizes and packaging configurations. Diagnostic guidewires, such as the GuideRight™ and HydroSteer™ guidewires, are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. Our diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lubricity.

In coronary artery disease diagnosis and intervention, the current treatment model typically relies on angiography. Our PCI Optimization platform provides interventional cardiologists with supplemental information on the physiologic and anatomical characteristics of a target vessel. Fractional Flow Reserve (FFR) measures blood flow through a stenotic coronary lesion (tiny scars) with a special purpose coronary guidewire containing a pressure sensor. The resulting physiologic index is used to determine the functional severity of narrowings in the coronary arteries and specifically identifies which coronary narrowings are responsible for significantly obstructing the flow of blood (ischemia) to a patient's heart muscle. This information is used by the interventional cardiologist to direct coronary interventions (such as a stent procedure) and to assess the results of stent placement for improved treatment outcomes. FFR has been on the market for approximately 20 years and continues to be supported by a portfolio of products and clinical data. Optical Coherence Tomography (OCT) provides comprehensive lesion assessment (anatomical) information - including plaque types, previous stent placement, and key landmarks such as side branches, which are important considerations during stent selection, deployment and assessment. OCT has 10 times higher image resolution and 20 times faster image capture over other imaging modalities such as intravascular ultrasound (IVUS); this resolution has helped us develop automated software tools that provide information to the physician almost instantaneously.

Our PressureWire™ Aeris and Certus™ pressure guidewires provide precise measurements of intravascular pressure during a cardiovascular procedure and aid physicians in determining which lesions need treatment. PressureWire™ Aeris is a proprietary device that transmits the pressure signal wirelessly and requires no cabling in the cardiac catheterization laboratory. Physicians can remove the device's handle and insert a stent delivery system directly over the PressureWire™ Aeris, eliminating the time and cost of using an additional, traditional guidewire.

The landmark trial FAME (FFR vs. Angiography in Multivessel Evaluation), which exclusively used our PressureWire™ guidewires, was published in the January 15, 2009 issue of The New England Journal of Medicine. It demonstrated a statistically significant improvement of 28 percent in Major Adverse Cardiac Events (MACE) such as death, myocardial infarction (heart attack) and repeat revascularization. The randomized, prospective, multi-center trial looked at 1,005 patients with multi-vessel coronary artery disease 12 months after receiving a stent, and compared outcomes for patients whose treatment was guided by FFR, measured by PressureWire™, to those whose treatment was guided only by angiography. At the October 2009 Transcatheter Cardiovascular Therapeutics (TCT) conference, two-year results from the FAME study were presented which demonstrated continued reductions in mortality, morbidity, stent utilization and procedural cost when PressureWire™ was employed to guide the physician decision-making process.

The FAME 2 (FFR-Guided Percutaneous Coronary Intervention plus Optimal Medical Treatment vs. Optimal Medical Treatment Alone in Patients with Stable Coronary Artery Disease) trial was published in The New England Journal of Medicine in September 2012. The objective of the FAME 2 trial was to study the role of FFR in the treatment of stable coronary artery disease by comparing the clinical outcomes, safety and cost-effectiveness of PCI guided by FFR plus medical therapy to medical therapy alone. In patients with stable coronary artery disease undergoing PressureWire™-guided intervention, PCI plus medical therapy was found to improve outcomes compared to medical therapy alone. Patients with one or more significant lesions who received FFR-guided PCI had an 86% relative reduction in the risk for developing acute coronary syndrome requiring unplanned hospital readmission with urgent revascularization. Patients also experienced greater relief of angina (chest pain due to obstruction or spasm of the coronary arteries) and improved quality of life. Additional analysis of FAME 2 data showed that FFR-guided PCI was also cost effective when compared to best-available medical therapy in patients with stable coronary disease.


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Although OCT has been available on the market since 2004, in 2011 we launched our ILUMIEN™ PCI Optimization System, which integrated the functional modality of FFR and the anatomical modality of OCT into one platform for enhanced diagnostics and catheter lab efficiency. The ILUMIEN™ system includes wireless radio technology with the PressureWire™ Aeris guidewire for efficient integration into the clinical environment.

We have launched several PCI Optimization products in the past year. The QUANTIEN™ system provides wireless FFR in any room within the catheterization laboratory. The interface system is designed to be integrated into any lab set up with a variety of installation options. The PressureWire™ receiver integrates directly into the installed hemodynamic system, providing information during the PCI procedure.

The ILUMIEN™ OPTIS PCI Optimization System builds upon the technology of the ILUMIEN™ platform. The ILUMIEN™ OPTIS system offers a faster, high-powered laser with enhanced resolution for microscopic examination of disease inside the artery to assist with stent placement. The system also offers real-time, three-dimensional (3D) reconstruction, which provides a 360-degree panoramic view of the vessel, providing physicians the ability to visualize the area they are treating. Finally, stent planning tools provide the physician with specific measurements, which facilitate the stent selection and placement based on detailed anatomical information. Our Company has these tools available for physicians to use with intravascular imaging. The Dragonfly™ Duo and the Dragonfly™ JP Imaging Catheter were also launched with ILUMIEN™ OPTIS and offer fast, long pull-backs and allow the physician to assess more of the patient’s artery in less time.

The OPTIS™ Integrated System, a recent OCT advancement, offers full cath lab integration and angiography co-registration (FDA clearance and European CE Mark approval in September 2014). This system is installed in the cath lab, eliminating setup time and provides physicians tableside control of OCT and FFR. The on-site availability of the OPTIS™ integrated system optimizes PCI workflow for procedural efficiency.

Co-registration of angiography and OCT is an advancement in intravascular imaging. Co-registration allows physicians to map the exact location and vessel characteristics of an OCT image with the physician’s current view via angiogram. Co-registration allows for improved PCI planning and procedural decision making.

Directly measuring pulmonary artery (PA) pressure via a procedure called a right-heart catheterization is the standard-of-care for acute management of worsening heart failure (HF). The CardioMEMS HF System transmits this same PA hemodynamic data for improved monitoring and management of New York Heart Association (NYHA) Class III HF patients who have been hospitalized for HF in the previous year. The CardioMEMS HF system measures changes in PA pressure, which physicians use to initiate or modify HF treatment prior to symptoms. The CardioMEMS HF System is comprised of three components including an implantable wireless sensor, a patient electronics system and a patient database known as the CardioMEMS HF website.

The wireless sensor is designed for permanent implantation into the distal pulmonary artery via a right heart catheterization procedure. Once implanted, the CardioMEMS PA Sensor provides non-invasive hemodynamic data that is collected in the physician’s office, clinic, hospital or most often, in the patient’s home. The data provided by the HF system includes PA pressure waveform, systolic, diastolic, mean PA pressure and heart rate. This hemodynamic data is transmitted to a secure website that serves as the patient database so that PA monitoring information is available at all times through the Internet. Changes in PA pressure can be used in conjunction with heart failure signs and symptoms to guide adjustments to medications thereby avoiding hospitalization.

The CardioMEMS HF System is an FDA-approved monitor proven to significantly reduce HF hospital admissions and improve quality of life in NYHA class III patients. Data from the CHAMPION trial studying over 550 patients demonstrated that when the CardioMEMS HF System was used by clinicians to manage HF, 98.6% of patients were free from device or system complications and HF admissions were reduced by 37%.

We announced European CE Mark approval for the EnligHTN™ Renal Denervation System in May 2012 and launched EnligHTN™ outside of the United States in May 2012, focused on select countries in Europe and in Australia. This renal denervation technology includes an ablation catheter, ablation generator and guiding catheter. The EnligHTN™ system is a multi-electrode ablation technology that features a non-occlusive basket design that delivers a predictable pattern of four evenly spaced transmural lesions with each catheter placement. This approach allows for continuous blood flow to the kidney during the procedure. Compared to single-electrode ablation systems, the multi-electrode EnligHTN™ system has the potential to improve consistency and minimize procedure time, which may result in improved workflow and cost efficiencies.


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Our AMPLATZER™ Vascular Plugs are expandable, cylindrical devices made from nitinol wire that reduce, redirect or eliminate blood flow to unwanted blood vessels. The AMPLATZER™ Vascular Plug AVP 4 (FDA clearance in June 2012 and European CE Mark approval in July 2009) has a lower profile and extends the reach of the AMPLATZER™ vascular plug family to smaller and often more distal blood vessels. Our AMPLATZER™ Vascular Plugs are designed for use in abnormal blood vessels outside the heart, below the neck and above the knee and utilize standard delivery systems commonly used by interventional radiologists and vascular surgeons in these procedures.

Structural Heart Products: Heart valve replacement or repair may be necessary because the native heart valve has deteriorated due to congenital defects or disease. Our structural heart valve products facilitate blood flow from the chambers of the heart throughout the entire body. Our structural heart products include transcatheter aortic heart valves (TAVR), a line of surgical heart valve repair and replacement products and transcatheter structural heart defect devices.

Mechanical Valves: Our Regent™ mechanical heart valve received European CE Mark approval in December 1999 and FDA approval in March 2002. Over the last 35 years more than two million St. Jude Medical mechanical heart valves have been implanted.
Tissue Valves: With the acquisition of Biocor Industries, Inc. in 1996, St. Jude Medical strengthened our position in the tissue heart valve market. We currently market both the Epic™ and Biocor™ porcine stented tissue heart valves. In March 2010, we received European CE Mark approval for our Trifecta™ tissue heart valve, marking our expansion into the pericardial aortic stented tissue valve market. FDA approval for the Trifecta™ tissue valve followed in April 2011 and the product was launched in Japan in April 2012. The Trifecta™ tissue valve has a tri-leaflet stented pericardial design which offers hemodynamic performance (the optimization of blood flow through the valve) that mimics as closely as possible the flow of a natural, healthy heart valve. The Trifecta™ valve also features our patented Linx™ AC, an anti-calcification treatment designed to increase the valve's durability by reducing tissue mineralization (hardening) which is one of the primary causes of valve deterioration.
Valve Repair: We also offer a complement of heart valve repair products, including two fully flexible and two semi-rigid rings: the Tailor™ flexible ring and the Attune™ flexible adjustable annuloplasty ring, and the SJM™ Séguin Semi-Rigid Ring and the SJM™ Rigid Saddle Ring. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral and tricuspid heart valves.
Transcatheter Aortic Valve Replacement (TAVR): Building upon our experience in the surgical heart valve market, St. Jude Medical developed the Portico™ transcatheter aortic valve for a minimally invasive alternative to open heart surgery. The Portico™ transcatheter 23 mm aortic valve and the transfemoral delivery system received European CE Mark approval in November 2012, and the 25 mm valve received European CE Mark approval in December 2013. In addition, in 2014 we initiated the U.S. IDE trial to evaluate the safety and efficacy of the Portico™ transcatheter aortic valve and delivery systems for patients with symptomatic severe aortic stenosis who are considered at high or extreme risk for open heart surgery. In September 2014, we paused global implants of the Portico™ valve to ensure patient safety while further investigating reports of reduced leaflet mobility seen in the 4D CT imaging and transesophageal echo imaging. Our evaluation has not suggested the need for device redesign or modification. St. Jude Medical has now begun to resume implants of the Portico™ valve in some geographies, and remains in discussions with global regulatory authorities to complete the global resumption of clinical and commercial implants. Those discussions include communication with the FDA to resume implants within our U.S. IDE.
Closure Devices: Through the acquisition of AGA Medical in 2010, we extended our portfolio to the transcatheter treatment of structural heart defects. Transcatheter closure offers pediatric and adult patients a minimally invasive alternative to surgery. The majority of this portfolio includes a line of occluder devices to treat congenital heart defects, including atrial septal defects, the most common congenital heart defect. Our portfolio includes the AMPLATZER™ Septal Occluder for closure of atrial septal defects (FDA approval in 2001 and European CE Mark approval in 1998), the AMPLATZER™ Muscular VSD Occluder for closure of muscular ventricular septal defects (FDA approval in 2007 and European CE Mark approval in 1998) and the AMPLATZER™ Duct Occluder for closure of patent ductus arteriosus (FDA approval in 2003 and European CE Mark approval in 1998). In 2013, we received FDA approval for the AMPLATZER™ Duct Occluder II (European CE Mark approval in 2008) for closure of patent ductus arteriosus, expanding the percutaneous treatment indication for patent ductus arteriosus. In addition to our portfolio of treatment options for congenital heart disease, the AMPLATZER portfolio also includes devices for patent foramen ovale (PFO) closure, sealing a hole in the septum between the right and left sides of the heart, and left atrial appendage (LAA) closure to reduce the risk of ischemic stroke in patients with AF.

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According to the World Health Organization, an estimated 15 million strokes occur worldwide each year. In 2010, strokes cost the U.S. an estimated $34 billion in health care services, medications and missed days of work. Approximately 83 percent of all strokes are ischemic, which occur when blood clots block the blood vessels to the brain. Approximately 30 percent of ischemic strokes are classified as cryptogenic (a stroke of unknown cause) and a PFO is present in approximately 45% of this population. The AMPLATZER™ PFO Occluder received European CE Mark approval in 1998 for PFO closure in patients with a PFO and history of cryptogenic stroke or transient ischemic attacks (TIAs).

The AMPLATZER™ Cardiac Plug (European CE Mark clearance in 2008) provides an alternative therapy for reducing the risk of stroke in patients with AF. AF is responsible for 15 to 20 percent of all ischemic strokes and studies report that up to 90 percent of the clots that form in patients with AF originate in the left atrial appendage. In 2014, the next generation AMPLATZER™ Cardiac Plug, AMPLATZER™ Amulet, received CE mark. This device expands the percutaneous treatment indication for LAA closure to a larger size range and is intended to streamline the procedure.

Neuromodulation Products: Our neuromodulation product offerings provide neurostimulation therapy in which an implantable device delivers electrical current to targeted anatomical structures. Our commercialized neurostimulation therapies include spinal cord stimulation (SCS), targeted SCS through our Spinal Modulation investment and distribution agreement and radiofrequency ablation for the treatment of chronic pain and deep brain stimulation (DBS) for treating the symptoms of Parkinson's disease, tremor and primary and secondary dystonia. A neurostimulation system typically consists of four components: an implantable pulse generator (IPG) that produces the electrical current and is implanted under the patient's skin; leads which carry electrical impulses to the intended anatomical structure; an external patient remote control that enables the patient to control his or her therapy within prescribed ranges; and an external clinician programmer that is used to access all programming options of the implant to tailor therapy for the patient.

The largest application for neurostimulation therapy is for the management of chronic pain. This involves delivering electrical impulses via an implanted device (sometimes referred to as a “pacemaker for pain”) to the spinal cord. This stimulation is theorized to interfere with the transmission of pain signals to the brain and inhibits or blocks the sensation of pain felt by the patient. Neurostimulation for chronic pain is generally used to manage intense and constant pain arising from nerve damage or nervous system disorders referred to as neuropathic pain. Clinical results demonstrate that many patients who are implanted with a neurostimulation system for chronic pain experience a substantial reduction in pain, an increase in activity level, a reduction in use of narcotics and other pain medication and a reduction in hospital visits.

We offer a wide array of neurostimulation systems for chronic pain including rechargeable and primary cell IPGs and a full complement of both percutaneous and surgical leads. We currently market several SCS neurostimulation product platforms worldwide including the new flagship IPG systems: Prodigy™ IPG with Burst Technology and Protégé™ with Upgradeable Technology.

The Prodigy™ IPG (European CE Mark approval in 2014) features a Burst-enabled IPG. Traditional stimulation, also known as tonic stimulation, uses equally spaced electrical pulses to replace pain with a tingling sensation called paresthesia. For some patients, however, tonic stimulation does not effectively relieve their pain. St. Jude Medical’s proprietary Burst Technology offers intermittent “bursts” of stimulation designed to mimick the natural firing patterns of the brain. Burst has been shown to provide clinical superior results for many patients. In addition, Burst stimulation results in a reduction or complete elimination of the paresthesia sensation which can often result in undesirable changes in stimulation intensity with posture and body position changes.

In combination with our wide array of IPGs, we market a broad variety of leads which are intended to enable clinicians to tailor the system to each patient’s unique needs. Our leads can be divided into three categories: percutaneous leads, paddle leads and perc-paddle leads. Our percutaneous leads consist of the 8-contact Octrode™ and 4-contact Quattrode™ lead designs. Our paddle lead offering consists of the Lamitrode™ family of leads. This family includes single and dual column paddle leads that provide up to two vertebral segments as well as broad, lateral coverage; Tripole™ leads, which feature a three-column electrode array and are designed to focus stimulation to target low back pain; C-Series™ leads, shaped to mimic the curve of the epidural space of the spine and designed to facilitate lead placement and reduce lead migration; and the flagship Penta™ lead, a 5-column lead designed to provide stimulation control and specificity for focused stimulation therapy. Perc-paddle leads are a category of leads pioneered by St. Jude Medical with the advent of the Epiducer™ lead delivery system (European launch in 2010 and FDA approval in 2011). The Epiducer™ system is primarily designed to allow the percutaneous

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introduction of our small profile S-Series™ paddle leads. S-Series leads are designed to have the focused stimulation and stability of a paddle lead yet, with the Epiducer™ lead delivery system, can now be introduced via a minimally invasive percutaneous procedure.

Our SCS systems are programmed with our Rapid Programmer™ platform. This system enables clinicians to efficiently test patients intra-operatively and program patients post-operatively. The Rapid Programmer™ platform consists of a palm-sized programmer that features a touch screen interface enabling clinicians to create multiple programs tailored for each patient's pain pattern. Using the foundation of our Dynamic MultiStim™ technology for real time adjustments of multiple pain areas simultaneously, we simplified the programming of multi-focal pain by introducing MultiSteering™ technology.

In addition to SCS, we acquired NeuroTherm in 2014 adding radiofrequency ablation (RFA) to our chronic pain therapy portfolio of products. RFA can also be utilized to treat chronic spinal pain along with several peripheral areas that are not well treated with neurostimulation therapy. Radiofrequency (RF) nerve ablation (also known as RF neurotomy) is an interventional therapy that employs heat to disable pain-transmitting nerves. The procedure, which has been performed for over 25 years, is used for the treatment of a variety of chronic pain syndromes.

Facet joint pain in the cervical/lumbar spine is the most widely treated pain syndrome with RF ablation due to the discrete and well-defined innervation of these particular joints. With RFA, St. Jude Medical can now access chronic pain patients earlier in their treatment continuum.

Neuromodulation can also be used to treat other neurological conditions. DBS involves the placement of a lead or leads in targeted areas of the brain. In 2009, we entered the DBS market in Europe to treat the symptoms of Parkinson's disease, a neurological disorder that progressively diminishes a person's control over movement. We also gained European CE Mark in 2013 for dystonia. This regulatory approval provided us the use of deep brain stimulation therapy to manage the symptoms of both primary and secondary dystonia. Dystonia is a neurological movement disorder, in which sustained muscle contractions cause twisting and repetitive movements or abnormal postures. Our DBS systems are also marketed in Australia and certain Latin American countries.

Competition

The medical device market is intensely competitive and characterized by extensive (R&D) and rapid technological change. Our competitors range from small start-up companies to larger companies that have significantly greater resources and broader product offerings. We anticipate that in the coming years, other large companies will enter certain markets in which we currently hold a strong position. Furthermore, our industry has experienced significant consolidation in recent years. Certain of our competitors, such as Medtronic, Inc. (Medtronic), through its recent acquisition of Covidien plc, have been able to expand their portfolio of products and services through this consolidation process, and they are able to offer customers a broader array of products and services than we can. We expect competition will continue to intensify with the opportunity to improve therapy effectiveness and durability, reduce adverse events, and capture increasing reimbursement.

Our cardiac rhythm management customers consider many factors when choosing suppliers, including product reliability, clinical outcomes, product labeling (i.e. MRI-conditional systems), price and product services provided by the manufacturer. As a result, market share can shift due to technological innovation, innovations in service models and offerings, product field actions and safety alerts as well as from other business factors. Our primarily cardiac rhythm management competitors include Medtronic, Boston Scientific, Inc. (Boston Scientific), Biotronik International and Sorin Group (Sorin).

The AF therapy area is broadening to include multiple therapy methods and treatments which include drugs, percutaneous delivery of diagnostic and ablation catheters, external electrical cardioversion and defibrillation, implantable defibrillators and open-heart surgery. As a result, we have numerous competitors in the emerging AF market. Larger competitors, such as Medtronic and Boston Scientific, have started to extend their presence in the AF market through acquisitions or by leveraging their cardiac rhythm management capabilities. Our primary competitors include Biosense Webster, a division of Johnson & Johnson, Inc (J&J), Medtronic, Boston Scientific and Abbott Laboratories.

The cardiovascular market is also highly competitive with numerous competitors. The majority of our sales are generated from our cardiac surgery products and our vascular products which include vascular closure devices, PCI optimization devices and peripheral embolization devices. We continue to hold the number one market position in

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the vascular closure device market; however, the market for vascular closure devices is highly competitive and there are several companies that manufacture and market these products worldwide. Our primary vascular closure device competitors are Abbott Laboratories, Cordis, a division of J&J, and AccessClosure, Inc. Additionally, we anticipate other companies will enter this market in the coming years, which will increase competition. The key competitors in the PCI optimization market (FFR and intravascular imaging) include Volcano Corporation, Boston Scientific and Terumo Cardiovascular Systems Corporation. Our primary competitors in the peripheral embolization market include Boston Scientific and Cook Medical, Inc. Our structural heart products include heart valve replacement and repair products and other structural heart defect devices. We are the world’s leading manufacturer and supplier in the mechanical heart valve market. Our principal competitors in the mechanical heart valve market are Sorin, Medtronic and several smaller manufacturers. In the tissue heart valve market, we compete against two principal tissue heart valve manufacturers - Edwards Lifesciences Corporation (Edwards Lifesciences) and Medtronic - as well as other smaller manufacturers. Cardiac surgery therapies continue to shift from mechanical heart valves to tissue heart valves and repair products. Other competitors such as Edwards Lifesciences and Medtronic manufacture transcatheter heart valves that are marketed to patients who may be too frail for traditional heart valve surgery. The structural heart defect market has relatively few large competitors and high barriers to entry due to the intellectual property and clinical and regulatory processes required for product approval. Our primary competitors in the structural heart defect market include W.L. Gore & Associates and Boston Scientific.

We are one of three principal manufacturers of neurostimulation devices. Competitive pressures will increase in the future as our primary competitors, Medtronic and Boston Scientific, continue to grow their positions. Although we also compete against smaller competitors such as Nevro Corporation, barriers to entry for new competitors are high in the U.S. market due to a long and expensive product development and regulatory approval process as well as the intellectual property and patent positions existing in the market. However, other larger medical device companies may be able to enter the neuromodulation market by leveraging their existing medical device capabilities, thereby decreasing the time and resources required to enter the market.
Patents, Licenses and Trademarks
Our policy is to protect our intellectual property rights related to our medical devices. Where appropriate, we apply for U.S. and foreign patents. We own or hold licenses to numerous U.S. and foreign patents. U.S. patents are typically granted for a term of twenty years from the date a patent application is filed. The actual protection afforded by a foreign patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. In those instances where we have acquired technology from third parties, we have sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses.
We also have obtained certain trademarks and tradenames for our products to distinguish our products from our competitors’ products. U.S. trademark registrations are for a term of ten years and are renewable every ten years as long as the trademarks are used in the regular course of trade. We register our trademarks in the U.S. and in a number of countries where we do business.
While we believe design, development, clinical, regulatory and marketing aspects of the medical device business represent the principal barriers to entry, we also rely on our patents, trade secrets, exclusive and non-exclusive license rights and non-disclosure and non-competition agreements to make it more difficult for competitors to market products similar to those we produce. We can give no assurance that any of our patent rights, whether issued, subject to license or in process, will not be circumvented or invalidated. Furthermore, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that our existing or planned products do not or will not infringe such rights or that others will not claim such infringement. Our industry has extensive ongoing patent litigation which can lead to significant legal costs for indeterminate periods of time, injunctions against the manufacture or sale of infringing products and significant royalty payments. At any given time, we may be a plaintiff or defendant in such an action. No assurance can be given that we will be able to prevent competitors from challenging our patents or entering markets we currently serve.
Research and Development
Our investment in R&D reflects our commitment to fund long-term growth opportunities while balancing short-term results. The markets in which we participate are dynamic and competitive. Our ongoing commitment to R&D investments are intended to provide patients with positive outcomes and innovation that will shape the markets in which we participate. Our R&D activities primarily include research, development, clinical and regulatory efforts. These efforts are primarily focused on product innovation that we anticipate will ultimately improve patient outcomes, reduce overall healthcare costs and provide economic value to our customers while providing the best

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possible technology available. Our R&D expenses were $692 million (12.3% of net sales) in 2014, $691 million (12.6% of net sales) in 2013 and $676 million (12.3% of net sales) in 2012. Our R&D expense as a percent of net sales remained relatively consistent over the last few years, reflecting our commitment to fund growth through cost effective innovation. We will continue to assess our R&D programs in future periods as we focus on the development of new products and the improvement to existing products.
Business Combinations and Investments
In addition to generating growth internally through our own R&D activities, we also make strategic acquisitions and investments to access new technologies and therapy areas. We expect to continue to make acquisitions and investments in future periods to strengthen our business.
In May 2014, we exercised our exclusive purchase option to acquire the remaining 81% ownership interest in CardioMEMS and paid $344 million to shareholders and $18 million for pre-existing fee and compensation arrangements. Previously in 2010, we made an equity investment of $60 million in CardioMEMS, a privately-held company based in Atlanta, Georgia that is focused on the development of a wireless monitoring technology that can be placed directly into the pulmonary artery to assess cardiac performance via measurement of pulmonary artery pressure. The investment agreement resulted in a 19% voting equity interest and provided us the exclusive right, but not the obligation, to acquire CardioMEMS for an additional payment of $375 million less any net debt payable to St. Jude Medical under a separate loan agreement entered into between CardioMEMS and the Company. In the first quarter of 2013, we obtained significant decision-making rights over CardioMEMS' operations and provided debt financing of $28 million to CardioMEMS which was collateralized by substantially all the assets of CardioMEMS, including its intellectual property. In July 2013, we provided $9 million of additional debt financing to CardioMEMS. In accordance with Accounting Standards Codification (ASC) Topic 810, Consolidations (ASC Topic 810), we reconsidered our arrangements with CardioMEMS and determined that effective February 27, 2013 CardioMEMS was a variable interest entity (VIE) for which St. Jude Medical was the primary beneficiary. As a result, as of February 27, 2013, the financial condition and results of operations of CardioMEMS were included in our Consolidated Financial Statements. Upon exercise of our exclusive purchase option in May 2014, we retained our controlling interest and the payment resulted in a decrease in our shareholders' equity before noncontrolling interest of $297 million and a decrease in noncontrolling interest of $47 million. The results of operations continue to be included in our Consolidated Financial Statements. The acquisition provides strategic opportunities for growing our cardiac rhythm management and heart failure therapy product portfolio.

In August 2014, we acquired all the outstanding shares of NeuroTherm for $147 million in net cash consideration and assumed $50 million of debt, which has been repaid. NeuroTherm is based in Wilmington, Massachusetts and is involved in the business of marketing, designing, manufacturing and distributing radio frequency ablation medical devices and the related consumable items for pain management and interventional radiology markets. The acquisition provides strategic opportunities for growing our neuromodulation product portfolio.

In August 2013, we acquired all the outstanding shares of Endosense for the equivalent of $171 million (160 million Swiss Francs) in net cash consideration. Endosense is based in Geneva, Switzerland and develops, manufactures and markets the TactiCath® irrigated ablation catheter to provide physicians a real-time, objective measure of the force to apply to the heart wall during a catheter ablation procedure. At the time of acquisition, the Endosense force-sensing technology was CE Mark-approved for atrial fibrillation and supra ventricular tachycardia ablation. Under the terms of the acquisition agreement, we were obligated to make an additional cash payment of up to 150 million Swiss Francs, contingent upon both the achievement and timing of FDA approval. In October 2014, we received FDA approval of the TactiCath® irrigated ablation catheter and settled the contingent consideration liability. See Note 11 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data" for additional information on settlement of the contingent consideration liability. The business combination expanded our atrial fibrillation product portfolio and future product pipeline, including the potential to integrate the force-sensing technology to offer a MediGuide™-enabled force-sensing ablation catheter and incorporate force-sensing data into our EnSite Velocity™ Mapping System.


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In October 2013, we exercised our exclusive purchase option and acquired all the outstanding shares of Nanostim for $121 million in net cash consideration. We previously held an investment in Nanostim, which provided us an 18% voting equity interest. Nanostim is based in Sunnyvale, California and has the first leadless, miniaturized cardiac pacemaker system, which received CE mark approval in August 2013. The Nanostim™ leadless pacemaker also received FDA conditional approval for its Investigational Device Exemption application and pivotal clinical trial protocol to begin evaluating the technology in the U.S. Under the terms of the acquisition agreement, we are obligated to make additional cash payments of up to $65 million, contingent upon the achievement and timing of certain revenue-based milestones. See Note 11 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data" for additional information. The Nanostim acquisition expanded our cardiac rhythm management product portfolio and provides the potential for future product indications.

In June 2013, we made an equity investment of $40 million in Spinal Modulation, a privately-held company that is focused on the development of an intraspinal neuromodulation therapy that delivers spinal cord stimulation targeting the dorsal root ganglion to manage chronic pain. The investment agreement resulted in a 19% voting equity interest and provided us the exclusive right, but not the obligation, to acquire Spinal Modulation for payments of up to $300 million during the period that extends through the completion of certain regulatory milestones. If we acquire Spinal Modulation, the contingent acquisition agreement also provides for additional consideration payments contingent upon the achievement of certain revenue-based milestones. In connection with the investment and contingent acquisition agreement, we also entered into an exclusive international distribution agreement and obtained significant decision-making rights over Spinal Modulation's operations and economic performance. We also committed to providing additional debt financing to Spinal Modulation of up to $15 million at the time of the initial agreement. Accordingly, effective June 7, 2013, in accordance with ASC Topic 810, we determined that Spinal Modulation was a VIE for which St. Jude Medical was the primary beneficiary. Therefore, as of June 7, 2013, the financial condition and results of operations of Spinal Modulation were included in St. Jude Medical's Consolidated Financial Statements. Additionally, during the fourth quarter of 2014, we increased the available financing to Spinal Modulation to be up to $25 million. As of January 3, 2015, Spinal Modulation has utilized $15 million of the total available financing. The investment and exclusive international distribution agreement provide strategic opportunities for growing our neuromodulation chronic pain portfolio.
Marketing and Distribution
Our products are sold in more than 100 countries throughout the world. No distributor organization or single customer accounted for more than 10% of our 2014, 2013 or 2012 consolidated net sales.
In the United States and Canada, we sell directly to healthcare providers primarily through a direct sales force. In Europe, we have direct sales organizations in 20 different countries, selling throughout Europe, the Middle East and Africa. In Japan, we sell directly to healthcare providers through a direct sales force, and we continue to use longstanding independent distributor relationships. In Asia Pacific, we have direct sales organizations in 10 different countries, selling throughout the Asia Pacific region. In Latin America, we have direct sales organizations in 5 different countries, selling throughout Latin America. Some of our direct sales in Asia Pacific and Latin America also include sales to independent distributors. Throughout the rest of the world, we use a combination of independent distributors and direct sales forces.
Group purchasing organizations (GPO), independent delivery networks (IDN) and large single accounts such as the Veterans Administration in the United States continue to consolidate purchasing decisions for some of our healthcare provider customers. We have contracts in place with many of these organizations. In some circumstances, our inability to obtain a contract with a GPO or IDN could adversely affect our efforts to sell products to a particular healthcare provider.
International Operations
Our net sales and long-lived assets by significant geographic areas are presented in Note 13 of the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Our international business is subject to special risks such as: foreign currency exchange controls and fluctuations; the imposition of or increase in import or export duties, surtaxes, tariffs or customs duties; the imposition of import or export quotas or other trade restrictions; foreign tax laws and increased costs associated with overlapping tax structures; longer accounts receivable cycles; and other international regulatory, economic, legal and political problems. Such risks are further described in Item 1A, "Risk Factors." Currency exchange rate fluctuations relative to the U.S. Dollar can affect our reported consolidated results of operations and financial position. See the Market Risk section in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

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Seasonality
Our quarterly net sales are influenced by many factors, including new product introductions, acquisitions, regulatory approvals, patient and physician holiday schedules and other factors. Net sales in the third quarter are typically lower than other quarters of the year as a result of patient tendencies to defer, if possible, procedures during the summer months and from the seasonality of the U.S. and European markets, where summer vacation schedules normally result in fewer procedures.
Suppliers
We purchase raw materials and other products from numerous suppliers. Our manufacturing requirements comply with the rules and regulations of the FDA and comparable agencies in foreign countries, which mandate validation of materials prior to use in our products. We purchase certain supplies used in our manufacturing processes from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Agreements with certain suppliers are terminable by either party upon short notice, and we have been advised periodically by some suppliers that, in an effort to reduce their potential product liability exposure, they may terminate sales of products to customers that manufacture implantable medical devices. While some of these suppliers have modified their positions and have indicated a willingness to continue to provide a product temporarily until an alternative vendor or product can be qualified (or even to reconsider the supply relationship), where a particular single-source supply relationship is terminated, we may not be able to establish additional or replacement suppliers for certain components or materials quickly. A reduction or interruption by a sole-source supplier of the supply of materials or key components used in the manufacturing of our products or an increase in the price of those materials or components could adversely affect our business, financial condition and results of operations.
Government Regulation
The development, manufacturing and marketing of our products is subject to extensive and rigorous regulation by government agencies, both within and outside the United States, including but not limited to the FDA and the relevant authorities in the member states of the European Union (EU Member States). In the United States, the Federal Food, Drug and Cosmetic Act (FDCA) and FDA regulations govern the composition, labeling, testing, clinical study, manufacturing, packaging, marketing and distribution of medical devices.

Unless exempt, all medical devices must receive FDA clearance or approval before they can be commercially marketed in the United States. Class III devices, such as life-sustaining, life-supporting or implantable devices, require the submission and approval of a pre-market approval (PMA) application demonstrating that the new medical device is safe and effective for its intended use. For certain class I and class II devices that pose less risk, manufacturers must submit a pre-market notification to the FDA. The notification process, which is generally known as 510(k) clearance, requires manufacturers to demonstrate that the medical device is substantially equivalent to a legally marketed medical device. Premarket notification is also required if a manufacturer makes certain modifications to an already marketed 510(k) device. Human clinical data submitted to the FDA in a 510(k) or PMA must be gathered in compliance with the FDA Good Clinical Practice regulations. Our vascular closure devices, mechanical and tissue heart valves, ICDs, pacemakers and certain leads, neurostimulation devices and EP catheter applications require a PMA application or supplement to a PMA. Other leads and lead delivery tools, annuloplasty ring products, other neurostimulation devices and other EP and cardiology products are currently marketed under the less rigorous 510(k) pre-market notification procedure.

Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations. These include, but are not limited to:

Establishment registration and product listing requirements;
Quality System Regulation (QSR) requires manufacturers, including third-party manufacturers, to follow stringent design, testing, documentation and other quality assurance procedures during product design and throughout the manufacturing process;
Labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses and against making false and misleading claims; and
Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur.


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The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

Fines, injunctions, consent decrees and civil penalties;
Recall or seizure of our products;
Operating restrictions, partial suspension or total shutdown of production;
Refusing our requests for 510(k) clearance or PMA of new products or new intended uses;
Refusing to provide documents needed to export products;
Withdrawing 510(k) clearance or PMAs that are already granted; and
Criminal prosecution.

The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed.

Our international business is subject to foreign medical device laws. Most major markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The applicable laws range from extensive device approval requirements in some countries for all or some of our products, to requests for data or certifications in other countries. In the European Union, all medical devices must be “CE-marked”. The CE-mark represents a declaration by the manufacturer of the product that the product conforms to all relevant European regulatory requirements, including those relating to safety and performance. For devices categorized as medium- or high-risk devices, European legislation requires the use of a notified body to carry out a compliance assessment before manufacturers can place their products on the market. A “notified body” is an independent certification body that uses a series of independent criteria to evaluate a manufacturer’s compliance with the technical requirements of the relevant legislation. Each notified body is appointed and supervised by a national governmental authority in the European Union (a “competent authority”). The regulatory systems of the EU Member States have been harmonized so that a medical device that is CE-marked can be sold anywhere within the European Union. However, any national health authority can raise public health concerns and take appropriate measures to protect public health. Increasingly, notified bodies and competent authorities in EU Member States coordinate supervision and enforcement of medical device regulations. In the European Union, we are also required to maintain certain International Organization for Standardization (ISO) certifications in order to sell products, and we undergo periodic inspections by notified bodies to obtain and maintain these certifications.

In the United States, Medicare payment to providers is based on prospective rates set by the Centers for Medicare and Medicaid Services (CMS). CMS uses separate Prospective Payment Systems for reimbursement to acute inpatient hospitals, hospital outpatient departments, and ambulatory surgery centers (ASCs). Diagnosis-related group (DRG) and Ambulatory Payment Classification (APC) reimbursement schedules dictate the amount that CMS will reimburse hospitals for care of persons covered by Medicare. In response to rising Medicare and Medicaid costs, from time to time Congress and state legislatures consider legislation to restrict funding for these programs and reduce federal payments to hospitals and other providers. For example, federal healthcare reform legislation enacted in 2010 mandated reductions in reimbursement to hospitals and ASCs, including a cut in the annual inflation increase in reimbursement rates. Reduced funding to Medicare and other federal healthcare programs could have an adverse effect on market demand and our domestic pricing flexibility.

More generally, major third-party payors for hospital services in the United States and abroad continue to work to contain healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to hospital charges for services performed and in the shifting of services from the inpatient to the outpatient setting. From time to time, initiatives to limit the growth of healthcare costs, including price regulation, are implemented in countries in which we do business. Implementation of healthcare reform in the United States and in significant overseas markets may limit the reimbursement for our products.

As a medical device company, St. Jude Medical’s operations and interactions with providers such as hospitals and healthcare professionals are subject to extensive regulation by various federal, state, and local government entities. For example, the federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person or entity that it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment to the government, or has made or used, or caused to be made or used, a false statement or

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false record material to a false claim. A violation of the False Claims Act could result in fines up to $11,000 (as adjusted for inflation) for each false claim, plus up to three times the amount of damages sustained by the government. A False Claims Act violation may also provide the basis for the imposition of administrative penalties and exclusion from participation in federal healthcare programs. Most states have enacted false claims acts that are similar to the federal False Claims Act.

The federal Anti-Kickback Statute (AKS) prohibits an entity such as St. Jude Medical from knowingly and willfully offering or paying remuneration, directly or indirectly, to induce any other person or entity (such as a hospital, physician, or other purchasers of medical products) to purchase, prescribe, arrange for or recommend products such as ours that are covered by federal healthcare programs. A violation of the AKS constitutes a felony offense punishable by imprisonment and civil and criminal fines. A violation also can result in exclusion from federal healthcare programs. Many states and foreign countries have enacted similar anti-kickback laws, some of which may apply regardless of the patient’s payor source.

As a manufacturer of FDA-approved devices reimbursable by federal healthcare programs, we are subject to the Physician Payments Sunshine Act, which requires us to report annually to CMS certain payments and other transfers of value we make to U.S.-licensed physicians or U.S. teaching hospitals. Failure to comply with the Physician Payments Sunshine Act can result in a maximum annual penalty up to $150,000, or $1 million for knowing failures to report.

In addition, federal and state laws have also been enacted to protect the confidentiality of certain patient health information, including patient records, and restrict the unauthorized use and disclosure of such information. In particular, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their implementing regulations (collectively, HIPAA Standards), govern the use and disclosure of protected health information by “covered entities,” which are healthcare providers that submit electronic claims, health plans and healthcare clearinghouses, as well as their "business associates" and their subcontractors. Our employee health benefit plans are considered “covered entities” and, therefore, are subject to the HIPAA Standards.

Additionally, we may function as a “business associate” in our commercial arrangements with healthcare providers using our Merlin.net™ Patient Care Network System or using the CardioMEMS™ product and, in this capacity, may be subject to the HIPAA Standards. Violations of the HIPAA Standards are punishable by civil penalties up to an annual limit of $1.5 million for all identical violations and criminal penalties up to an annual limit of $250,000 and ten years’ imprisonment for certain knowing violations. Failure to comply with any state or foreign laws regarding personal data protection may also result in significant fines or penalties, lawsuits, costs associated with mitigating any privacy or security breach, and/or negative publicity.

In some jurisdictions, there are laws, regulations and guidance that regulate the use of certain animal material in medical devices because of concerns about Transmissible Spongiform Encephalopathy (TSE), such as Bovine Spongiform Encephalopathy, which is sometimes referred to as “mad cow disease”, a disease which has sometimes been transmitted to humans through the consumption of beef. We are not aware of any reported cases of transmission of TSE through medical products. Nonetheless, some medical device regulatory agencies have considered and are considering whether to continue to permit the sale of medical devices that incorporate certain animal material. Some of our products such as Angio-Seal™ use bovine collagen. In addition, some of the tissue heart valves we market incorporate bovine and porcine pericardial material.
Product Liability
The design, manufacture and marketing of our medical devices entail an inherent risk of product liability claims. Our products are often used in intensive care settings with seriously ill patients, and many of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time or indefinitely. There are a number of factors that could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products which we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. Product liability claims may be brought by individuals or by groups seeking to represent a class. We are currently the subject of product liability litigation proceedings and other proceedings described in more detail in Note 5 of the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data."

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Insurance
Consistent with industry practice, we do not currently maintain or intend to maintain any insurance policies with respect to product liability in the future. We believe that our self-insurance program, which is based on historical loss trends, will be adequate to cover future losses, although we can provide no assurances that this will remain true as historical trends may not be indicative of future losses. These losses could have a material adverse impact on our consolidated earnings, financial condition or cash flows.
Our facilities could be materially damaged by earthquakes, hurricanes and other natural disasters or catastrophic circumstances. Earthquake insurance is currently difficult to obtain, extremely costly, and restrictive with respect to scope of coverage. We do not currently maintain or intend to maintain earthquake insurance. Consequently, we could incur uninsured losses and liabilities arising from an earthquake near our California, Puerto Rico or Costa Rica facilities as a result of various factors, including the severity and location of the earthquake, the extent of any damage to our facilities, the impact of an earthquake on our workforce and on the infrastructure of the surrounding communities and the extent of damage to our inventory and work in process. These losses could have a material adverse effect on our business for an indeterminate period. Furthermore, our manufacturing facilities in Puerto Rico and Malaysia may suffer damage as a result of hurricanes and could result in lost production and additional expenses to us to the extent any such damage is not fully covered by our hurricane and business interruption insurance.
Employees
As of January 3, 2015, we had approximately 16,000 employees worldwide. Our employees are not represented by any labor organizations, with the exception of a limited number of employees in Europe and Brazil. We have never experienced a work stoppage as a result of labor disputes. We believe that our relationship with our employees is generally good.
Executive Officers of the Registrant
The following is a list of our executive officers as of February 20, 2015. For each position, the date in parentheses indicates the year during which each executive officer began serving in such capacity.
Name
 
Age
 
Position
Daniel J. Starks
 
60
 
Chairman (2004), President (2001) and Chief Executive Officer (2004)
John C. Heinmiller
 
60
 
Executive Vice President (2004)
Michael T. Rousseau
 
59
 
Chief Operating Officer (2014)
Lisa M. Andrade
 
43
 
Vice President, Chief Marketing Officer (2014)
I. Paul Bae
 
50
 
Vice President, Global Human Resources (2015) and Chief Compliance Officer (2012)
Joel D. Becker
 
47
 
President, Americas Division (2014)
Mark D. Carlson, M.D.
 
59
 
Vice President, Global Clinical Affairs and Chief Medical Officer (2013)
Jeffrey A. Dallager
 
40
 
Vice President and Corporate Controller (2014)
Rachel H. Ellingson
 
45
 
Vice President, Global Communications (2014)
Eric S. Fain, M.D.
 
54
 
Group President (2014)
Jeff A. Fecho
 
54
 
Vice President, Global Quality (2012)
Denis M. Gestin
 
51
 
President, International Division (2008)
Mark W. Murphy
 
46
 
Vice President, Information Technology and Chief Information Officer (2013)
Scott P. Thome
 
52
 
Vice President, Global Operations and Supply Chain (2014)
Jason A. Zellers
 
49
 
Vice President, General Counsel and Corporate Secretary (2011)
Donald J. Zurbay
 
47
 
Vice President, Finance (2006) and Chief Financial Officer (2012)

Mr. Starks has served on St. Jude Medical’s Board of Directors since 1996 and has been Chairman, President and Chief Executive Officer of St. Jude Medical since May 2004. Previously, Mr. Starks was President and Chief Operating Officer of St. Jude Medical from February 2001 to May 2004. From April 1998 to February 2001, he was President and Chief Executive Officer of our Cardiac Rhythm Management Division, and prior to that, Mr. Starks was Chief Executive Officer and President of Daig Corporation, a wholly-owned subsidiary of St. Jude Medical.


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Mr. Heinmiller joined St. Jude Medical in May 1996 as a part of our acquisition of Daig Corporation, where Mr. Heinmiller had served as Vice President of Finance and Administration since 1995. In May 1998, he was named Vice President of Corporate Business Development. In September 1998, he was appointed Vice President, Finance and Chief Financial Officer and in May 2004 was promoted to Executive Vice President. Mr. Heinmiller served as St. Jude Medical’s Chief Financial Officer from September 1998 through August 2012 and continues to serve as Executive Vice President, responsible for the global support and service functions including finance, human resources, information technology, corporate relations, legal, security and business development.

Mr. Rousseau joined St. Jude Medical in 1999 as Senior Vice President, Cardiac Rhythm Management Global Marketing. In August 1999, Cardiac Rhythm Management Marketing and Sales were combined under his leadership. In January 2001, he was named President, U.S. Cardiac Rhythm Management Sales, and in July 2001, he was named President, U.S. Division, a position Mr. Rousseau held until January 2008, when he was promoted to Group President, initially responsible for the Company’s four product divisions. In November 2009, Mr. Rousseau’s Group President responsibilities were realigned, with the Company’s Cardiac Rhythm Management Division and U.S. Division reporting directly to him. Mr. Rousseau served as President, U.S. Division from November 2009 to October 2011. Mr. Rousseau continued to serve as Group President over the Cardiac Rhythm Management and Neuromodulation product divisions as well as the U.S. Division until August 2012 when his Group President responsibilities were expanded and broadened to include the Cardiovascular and Ablation Technologies Division (the former Cardiovascular and Atrial Fibrillation divisions), the Implantable Electronic Systems Division (the former Cardiac Rhythm Management and Neuromodulation divisions) and the U.S. Division. Mr. Rousseau also oversaw Global Regulatory and the Center for Innovation and Strategic Collaboration and served as the (Acting) Chief Marketing Officer. In January 2014, Mr. Rousseau was promoted to Chief Operating Officer of St. Jude Medical, expanding his responsibilities to include global sales, global marketing, technology development, operations and supply chain and quality.
Ms. Andrade joined St. Jude Medical in 1997 as a part of our acquisition of Ventritex, Inc. She held multiple leadership positions in engineering for the Company's cardiac rhythm management business. She left the Company in 1999 to pursue other interests and rejoined us in 2006. In March 2006, Ms. Andrade was named Senior Director, Systems Engineering, Cardiac Rhythm Management and in March 2009, she became the Divisional Director, Clinical and Systems Engineering. In March 2010, Ms. Andrade was promoted to Vice President, Connectivity for the U.S. Division and in February 2011 she was named Vice President, Education and Market Development, U.S. Division. Later, in October 2011, she was named the Senior Vice President, Marketing, U.S. Division. In July 2013, Ms. Andrade was promoted to Senior Vice President, Global Strategy and Market Development, and in January 2014, she was named the Chief Marketing Officer for St. Jude Medical.
Mr. Bae joined St. Jude Medical in January 2003 as Associate General Counsel for the United States Division and served in the legal and human resources capacity for that division until being named Vice President, Corporate Human Resources in September 2006. Mr. Bae was named Senior Vice President, Administration and General Counsel, Americas Division in December 2009. In August 2012, Mr. Bae was promoted to Deputy General Counsel, Labor and Employment and Chief Compliance Officer for St. Jude Medical, and in February 2015, Mr. Bae was named Vice President, Global Human Resources and Chief Compliance Officer for St. Jude Medical.
Mr. Becker joined St. Jude Medical in 1993 as Senior Associate in Corporate Development. In 1999, he left the Company to join Myocor, Inc., a venture-backed heart failure company, as Senior Vice President. Mr. Becker returned to St. Jude Medical in 2002 where he held numerous leadership positions in both the Cardiovascular and Atrial Fibrillation divisions. He began serving as Vice President Program Management & Business Development for the Atrial Fibrillation Division from 2004 to February 2011. He then served as Senior Vice President, Marketing for the U.S. Division from February 2011 to October 2011. Mr. Becker was promoted in October 2011 to President, U.S. Division, which was expanded in January 2014 to become the Americas Division.
Dr. Carlson joined St. Jude Medical in November 2006 as Chief Medical Officer and Sr. Vice President, Clinical Affairs, Cardiac Rhythm Management. In June 2007, he was promoted to Chief Medical Officer and Senior Vice President Research and Clinical affairs, Cardiac Rhythm Management and the later expanded Implantable Electronics Systems Division (the former Cardiac Rhythm Management and Neuromodulation divisions). In September 2013, Dr. Carlson was named Vice President Global Clinical Affairs and Chief Medical Officer for St. Jude Medical.
Mr. Dallager joined St. Jude Medical in October 2004 as Manager, Financial Reporting and was named Director, Financial Reporting in August 2005. In December 2006, Mr. Dallager was appointed to Vice President, Finance, Information Technology and Supply Chain for our Cardiovascular Division. In September 2009, Mr. Dallager was

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appointed to Senior Vice President, Finance for our U.S. Division and in January 2012, Mr. Dallager was named Senior Vice President, Finance and Supply Chain for our International Division. In January 2014, Mr. Dallager was promoted to Vice President and Corporate Controller.
Ms. Ellingson joined St. Jude Medical in November 2010 through the acquisition of AGA Medical where she served as Vice President, Business Development and Investor Relations. Prior to joining St. Jude Medical, she spent 15 years in investment banking, most recently as a Managing Director with the medical device team at Banc of America Securities (now Bank of America Merrill Lynch). In February 2011, Ms. Ellingson was named Senior Director, Corporate Strategy and Planning. In October 2011, Ms. Ellingson was promoted to Vice President, Corporate Communications and Investor Relations for St. Jude Medical, and in August 2012, she was promoted to Vice President, Corporate Relations. In July 2014, Ms. Ellingson's role was expanded and she was named Vice President, Global Communications where she now oversees internal and external marketing communications, investor relations, U.S. government affairs and corporate giving programs.
Dr. Fain joined St. Jude Medical in 1997 as a part of our acquisition of Ventritex, Inc., where he had served since 1987. In 1998, he was named Senior Vice President, Clinical Engineering and Regulatory Affairs, Cardiac Rhythm Management. In 2002, he was appointed Senior Vice President for Development and Clinical/Regulatory Affairs for Cardiac Rhythm Management and was promoted to Executive Vice President over those functions in 2005. In July 2007, Dr. Fain became President, Cardiac Rhythm Management Division and in August 2012, he became President, Implantable Electronic Systems Division (the former Cardiac Rhythm Management and Neuromodulation divisions). Dr. Fain's responsibilities expanded in January 2014 after being promoted to Group President of St. Jude Medical where he oversees all global research and development activities, including clinical and regulatory affairs.
Mr. Fecho joined St. Jude Medical in 2005 as Director of Quality for the Cardiovascular Division, served as Vice President of Quality for the Cardiovascular Division from 2008 to 2012 and became Vice President, Global Quality in January 2012. Prior to joining St. Jude Medical, he worked in research and development and quality operations for Boston Scientific, Inc.
Mr. Gestin joined St. Jude Medical in 1997 as the manager of cardiac rhythm management and catheter product sales in France. He was named Managing Director of St. Jude Medical France in 1999 and was promoted to Vice President, Northern Europe & Africa in 2002. He was named President of SJM Europe, Middle East, Africa and Canada in August 2004, and in January 2008, Mr. Gestin was promoted to President, International Division.
Mr. Murphy joined St. Jude Medical in January 2003 as Director, Corporate Information Technology. In September 2009, Mr. Murphy was named Senior Director of Enterprise Applications where he was responsible for business applications, including the global SAP program. In April 2013, Mr. Murphy was promoted to Vice President, Information Technology and Chief Information Officer.
Mr. Thome joined St. Jude Medical in 2000 as part of our acquisition of Vascular Science, Inc. Beginning in October 2000, Mr. Thome served as Director of Program Management and Process Development, Cardiac Surgery until October 2004 when he was promoted to Senior Director Program Management, Cardiology. In June 2005, Mr. Thome was named Vice President Operations, Cardiovascular and was subsequently promoted to Senior Vice President Operations, Cardiovascular in February 2010. In August 2012, his scope expanded to the Cardiovascular and Ablation Technologies Division (combining our legacy Cardiovascular and Atrial Fibrillation divisions). In January 2014, Mr. Thome was promoted to Vice President Global Operations and Supply Chain.
Mr. Zellers joined St. Jude Medical in 2006 as Vice President and General Counsel for the International Division. In October 2011, he was appointed St. Jude Medical’s Vice President, General Counsel and Corporate Secretary. Before joining St. Jude Medical, he was a partner at Armstrong Teasdale LLP and Schiff Hardin LLP and served as Senior Counsel at GE Healthcare.
Mr. Zurbay joined St. Jude Medical in 2003 as Director of Corporate Finance. In 2004, Mr. Zurbay was named Corporate Controller, and in January 2006 he was named Vice President, Finance and Corporate Controller. In August 2012, Mr. Zurbay was promoted to Chief Financial Officer.
Availability of SEC Reports
We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practical after they are filed or furnished to the U.S. Securities and Exchange Commission (SEC). Such reports are available on our website (http://www.sjm.com) under Investor Relations – SEC Filings. Information included on our website is not deemed to be incorporated into

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this Form 10-K. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov.


Item 1A.
RISK FACTORS
Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other SEC filings, could have a material impact on our business, financial condition or results of operations.
We face intense competition and may not be able to keep pace with the rapid technological changes in the medical devices industry.
The medical device market is intensely competitive and is characterized by extensive research and development and rapid technological change. Our customers consider many factors when choosing suppliers, including product reliability, clinical outcomes, product availability, breadth of product portfolio, inventory consignment, price and product services provided by the manufacturer, and market share can shift as a result of technological innovation and other business factors. Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, reflecting the importance of product quality in the medical device industry, and any quality problems with our processes, goods and services could harm our reputation for producing high-quality products and erode our competitive advantage, sales and market share. Our competitors range from small start-up companies to larger companies which have significantly greater resources and broader product offerings than us, and we anticipate that in the coming years, other large companies will enter certain markets in which we currently hold a strong position. Furthermore, our industry has experienced significant consolidation in recent years. Certain of our competitors have been able to expand their portfolio of products and services through this consolidation process, and they are able to offer customers a broader array of products and services than we can, thereby, in some instances, providing them a competitive advantage in the market. In addition, we expect that competition will continue to intensify with the increased use of strategies such as consigned inventory, and we have seen increasing price competition as a result of managed care, consolidation among healthcare providers, increased competition and declining reimbursement rates. Product introductions or enhancements by competitors which have advanced technology, better features or lower pricing may make our products or proposed products obsolete or less competitive. As a result, we will be required to devote continued efforts and financial resources to bring our products under development to market, enhance our existing products and develop new products for the medical marketplace. If we fail to develop new products, enhance existing products or compete effectively, our business, financial condition and results of operations will be adversely affected.

We are subject to stringent domestic and foreign medical device regulation and any adverse regulatory action may materially adversely affect our financial condition and business operations.

We are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. To varying degrees, each of these authorities monitors and enforces our compliance with laws and regulations governing the development, testing, clinical study, manufacturing, labeling, packaging, marketing and distribution of our medical devices. These laws and regulations are subject to change and to evolving interpretations which could increase costs, prevent or delay future device clearance or approvals, or otherwise adversely affect our ability to market currently cleared or approved devices. The process of obtaining marketing approval or clearance from the FDA and comparable foreign bodies for new products, or for enhancements or modifications to existing products, could:

take a significant amount of time,
require the expenditure of substantial resources,
involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance,
involve modifications, repairs or replacements of our products, and
result in limitations on the indicated uses of our products.

We cannot be certain that new medical devices or new uses for existing medical devices will be cleared or approved by the FDA or foreign regulatory agencies in a timely or cost-effective manner, if cleared or approved at all. In addition, the FDA may require post-market testing and surveillance and may, depending on the results, prevent or limit further marketing of products. The failure to receive approval or clearance for significant new

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products or modifications to existing products or the receipt of an approval of limited or reduced scope could have a material adverse effect on our financial condition and results of operations.

Both before and after a product is commercially released, we have ongoing responsibilities under the FDCA and FDA regulations, which govern virtually all aspects of a medical device’s design, development, testing, manufacturing, labeling, storage, record keeping, adverse event reporting, sale, promotion, distribution and shipping. Compliance with applicable statutory and regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA, which may result in observations on Form 483, and in some cases warning letters, that require corrective action. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could:

require us to notify health professionals and others that the devices present unreasonable risk of substantial harm to public health;
order us to recall, repair, replace or refund the cost of any medical device that we manufactured or distributed;
detain, seize or ban adulterated or misbranded medical devices;
refuse to provide us with documents necessary to export our products;
refuse requests for 510(k) clearance or PMA of new products or new intended uses;
withdraw 510(k) clearances or PMAs that are already granted;
impose operating restrictions, including requiring a partial or total shutdown of production;
enjoin or restrain conduct resulting in violations of applicable law pertaining to medical devices; and/or
assess criminal or civil penalties against us or our officers and employees.

Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products. In addition, negative publicity and product liability claims resulting from any adverse regulatory action could have a material adverse effect on our financial condition and results of operations.

In addition, the FDCA permits device manufacturers to promote products solely for the uses and indications set forth in the approved product labeling. The U.S. Department of Justice has initiated a number of enforcement actions against manufacturers that promote products for “off-label” uses, alleging, among other things, that “off-label” promotion caused the submission of false and fraudulent claims for reimbursement to federal health care programs in violation of the Federal False Claims Act. Government enforcement action can result in substantial fines, penalties, and/or administrative remedies, including exclusion from government reimbursement programs and entry into Corporate Integrity Agreements (CIAs) with governmental agencies entailing significant additional obligations and costs.

Foreign governmental regulations have become increasingly stringent and more common, and we may become subject to even more rigorous regulation by foreign governmental authorities in the future. Changes in clearance, approvals or standards that must be complied with prior to commercial marketing or the enactment of additional laws or regulations may cause delays in or prevent the marketing of a product. Penalties for a company's noncompliance with foreign governmental regulation could be severe, including revocation or suspension of a company's business license and criminal sanctions. Any domestic or foreign governmental medical device law or regulation imposed in the future may have a material adverse effect on our financial condition and business operations.

Our products are continually the subject of clinical trials conducted by us, our competitors or other third parties, the results of which may be unfavorable, or perceived as unfavorable by the market, and could have a material adverse effect on our business, financial condition and results of operations.

As a part of the regulatory process of obtaining marketing clearance for new products and new indications for existing products, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, by our competitors or by third parties, or the market's or FDA's perception of this clinical data, may adversely impact our ability to obtain product approvals, the size of the markets in which we participate, our position in, and share of, the markets in which we participate and our business, financial condition and results of operations.


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Our business, financial condition, results of operations and cash flows could be significantly and adversely affected by recent healthcare reform legislation and other administration and legislative proposals.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively PPACA), was enacted into law in 2010. As a U.S.-headquartered company with significant sales in the United States, this healthcare reform law has had, and is expected to continue to have, a material impact on us and on the U.S. healthcare system, more generally. Beginning in 2013, the law levied a 2.3% excise tax on the majority of our U.S. medical device sales, which has materially impacted our cash flows and results of operations. Additionally, the law reduced the annual rate of inflation for Medicare payments to hospitals and called for the establishment of the Independent Payment Advisory Board to recommend strategies for reducing growth in Medicare spending. The law also focused on a number of Medicare provisions aimed at improving quality and decreasing costs, such as 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). It is uncertain at this point what consequences these provisions may have on potentially limiting patient access to new technologies. We cannot predict what future healthcare legislation will be implemented at the federal or state level, nor 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.

Cost containment pressures and domestic and foreign legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors or preferences for alternate therapies could decrease the demand for products purchased by our customers, the prices which they are willing to pay for those products and the number of procedures using our devices.

Our products are purchased principally by healthcare providers that typically bill various third-party payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of customers to obtain appropriate reimbursement for their services and the products they provide from government and third-party payors is critical to the success of medical technology companies. The availability of reimbursement affects which products customers purchase and the prices they are willing to pay. Reimbursement varies from country to country and can significantly impact the acceptance of new technology. After we develop a promising new product, we may find limited demand for the product unless reimbursement approval is obtained from governmental and private third-party payors.

Major third-party payors for healthcare provider services in the United States and abroad continue to work to contain healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to healthcare provider charges for services performed and in the shifting of services from the inpatient to the outpatient setting. Initiatives to limit the growth of healthcare costs, including price regulation, are also underway in several countries in which we do business. Implementation of healthcare reforms in the United States and in significant overseas markets such as Germany, Japan and other countries may limit the price or the level at which reimbursement is provided for our products and adversely affect both our pricing flexibility and the demand for our products.

For example, in 2010, PPACA was enacted into law in the United States and included a number of provisions aimed at improving the quality and decreasing the costs of healthcare. The healthcare reform statutes have already resulted in significant reimbursement cuts in Medicare payments to hospitals and other healthcare providers, although it is uncertain what consequences these provisions may have on new technologies. Additionally, the Budget Control Act of 2011 (BCA) called for the establishment of a Joint Select Committee on Deficit Reduction, tasked with reducing the federal debt level. However, because the Committee did not draft a proposal by the BCA’s deadline, automatic cuts (sequestration) in various federal programs began on March 1, 2013. Under the Bipartisan Budget Act of 2013 and a bill signed by the President on February 15, 2014, sequestration has been extended through fiscal year 2024. Medicare payments to providers are subject to such cuts, although the BCA generally limited the Medicare cuts to two percent. For fiscal year 2024, however, Medicare sequestration amounts will be realigned such that there will be a four percent sequester for the first six months and no sequester for the second six months.

Legislative or administrative reforms to the U.S. or international reimbursement systems that significantly reduce reimbursement for procedures using our medical devices or deny coverage for such procedures, or adverse

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decisions relating to our products by administrators of such systems on coverage or reimbursement issues, would have an adverse impact on the products purchased by our customers and the prices our customers are willing to pay for them. Healthcare providers may respond to such cost-containment pressures by substituting lower cost products or other therapies for our products. This, in turn, would have an adverse effect on our financial condition and results of operations.

Our failure to comply with requirements and/or restrictions relating to reimbursement and regulation of healthcare goods and services may subject us to penalties and adversely affect our financial condition and results of operations.

As a medical device company, our operations and interactions with healthcare providers such as hospitals and healthcare professionals are subject to extensive regulation by various federal, state and local government entities. Failure to comply with such laws and regulations could result in substantial penalties and adversely affect our financial condition and results of operations. For example, in the United States, federal laws and regulations prohibit the filing of false or improper claims for payment by federal healthcare programs (the federal False Claims Act) and unlawful inducements for the referral of business reimbursable by federal healthcare programs (the federal AKS), require disclosure of payments or other transfers of value made to U.S.-licensed physicians and teaching hospitals (the federal Physician Payments Sunshine Act), and regulate the use and disclosure of protected health information (the federal HIPAA Standards). Additionally, many states have enacted similar laws that may impose more stringent requirements. Foreign governments also impose regulations in connection with their healthcare reimbursement programs and the delivery of healthcare goods and services. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties, including, for example, exclusion from participation in federal healthcare programs, including Medicare and Medicaid. Such fines and potential exclusion could adversely affect our financial condition and results of operations.

If we are unable to protect our intellectual property effectively, our financial condition and results of operations could be adversely affected.
Patents and other proprietary rights are essential to our business and our ability to compete effectively with other companies is dependent upon the proprietary nature of our technologies. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop, maintain and strengthen our competitive position. We seek to protect these, in part, through confidentiality agreements with certain employees, consultants and other parties. We pursue a policy of generally obtaining patent protection in both the United States and in key foreign countries for patentable subject matter in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We currently own numerous United States and foreign patents and have numerous patent applications pending. We are also a party to various license agreements pursuant to which patent rights have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments. We cannot be certain that any pending or future patent applications will result in issued patents, that any current or future patents issued to or licensed by us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide a competitive advantage to us or prevent competitors from entering markets which we currently serve. Any required license may not be available to us on acceptable terms, if at all. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technologies as us. In addition, we may have to take legal action in the future to protect our trade secrets or know-how or to defend them against claimed infringement of the rights of others. Any legal action of that type could be costly and time consuming to us and we cannot be certain of the outcome. The invalidation of key patents or proprietary rights which we own or an unsuccessful outcome in lawsuits to protect our intellectual property could have a material adverse effect on our financial condition and results of operations.
Our intellectual property, other proprietary technology and other sensitive Company data are also potentially vulnerable to loss, damage or misappropriation from information technology system malfunction, computer viruses, unauthorized access or misappropriation or misuse thereof by those with permitted access, as well as other events. While we have taken and will continue to take steps to protect our intellectual property, other proprietary technology and other sensitive Company data from these risks, there can be no assurance our precautionary measures will prevent breakdowns, breaches, cyber-attacks or other events. Such events could have a material adverse effect on our reputation, financial condition or results of operations.

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Pending and future patent litigation could be costly and disruptive to us and may have an adverse effect on our financial condition and results of operations.

We operate in an industry that is susceptible to significant patent litigation and, in recent years, it has been common for companies in the medical device field to aggressively challenge the rights of other companies to prevent the marketing of new devices. Companies that obtain patents for products or processes that are necessary for or useful to the development of our products may bring legal actions against us claiming infringement and at any given time, we generally are involved as both a plaintiff and a defendant in a number of patent infringement and other intellectual property-related actions. Defending intellectual property litigation is expensive and complex and outcomes are difficult to predict. Any pending or future patent litigation may result in significant royalty or other payments or injunctions that can prevent the sale of products and may cause a significant diversion of the efforts of our technical and management personnel. While we intend to defend any such lawsuits vigorously, we cannot be certain that we will be successful. In the event that our right to market any of our products is successfully challenged or if we fail to obtain a required license or are unable to design around a patent, our financial condition and results of operations could be materially adversely affected.

Pending and future product liability claims and other litigation, including private securities litigation, shareholder derivative suits and contract litigation, may adversely affect our financial condition and results of operations.

The design, manufacture and marketing of the medical devices we produce entail an inherent risk of product liability claims. Our products are often used in intensive care settings with seriously ill patients, and many of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time or indefinitely. There are a number of factors that could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products which we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. Product liability claims may be brought by individuals or by groups seeking to represent a class.
We are currently the subject of product liability litigation proceedings and other proceedings described in more detail in Note 5 of the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data." The outcome of product liability litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate monetary amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The final resolution of these types of litigation matters may take a number of years and we cannot reasonably estimate the time frame in which any potential settlements or judgments would be paid out or the amounts of any such settlements or judgments. In addition, the cost to defend any future product liability claims may be significant. Product liability claims, securities and commercial litigation and other current or future litigation, including any costs (the material components of which are settlements, judgments, legal fees and other related defense costs) not covered under our previously-issued product liability insurance policies and existing litigation reserves, could have a material adverse effect on our results of operations, financial position and cash flows.

Our product liability self-insurance program may not be adequate to cover future losses.
Consistent with the predominant practice in our industry, we do not currently maintain or intend to maintain in the future any insurance policies with respect to product liability. We will continue to monitor the insurance marketplace to evaluate the value to us of obtaining insurance coverage in the future. We believe that our self-insurance program, which is based on historical loss trends, will be adequate to cover future losses, although we can provide no assurances that this will remain true as historical trends may not be indicative of future losses. These losses could have a material adverse impact on our results of operations, financial condition and cash flows.

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The loss of any of our sole-source or single source suppliers or an increase in the price of inventory supplied to us could have an adverse effect on our business, financial condition and results of operations.
We purchase certain supplies used in our manufacturing processes from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Agreements with certain suppliers are terminable by either party upon short notice, and we have been advised periodically by some suppliers that in an effort to reduce their potential product liability exposure, they may terminate sales of products to customers that manufacture implantable medical devices. While some of these suppliers have modified their positions and have indicated a willingness to continue to provide a product temporarily until an alternative vendor or product can be qualified (or even to reconsider the supply relationship), where a particular single-source supply relationship is terminated, we may not be able to establish additional or replacement suppliers for certain components or materials quickly. This is largely due to the FDA approval system, which mandates validation of materials prior to use in our products, and the complex nature of manufacturing processes employed by many suppliers. In addition, we may lose a sole-source supplier due to, among other things, the acquisition of such a supplier by a competitor (which may cause the supplier to stop selling its products to us) or the bankruptcy of such a supplier, which may cause the supplier to cease operations. A reduction or interruption by a sole-source supplier of the supply of materials or key components used in the manufacturing of our products or an increase in the price of those materials or components could adversely affect our business, financial condition and results of operations.
Consolidation in the healthcare industry could lead to demands for price concessions or limit or eliminate our ability to sell to certain of our significant market segments.
The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the medical device industry, as well as among our customers, including healthcare providers. This, in turn, has resulted in greater pricing pressures and limitations on our ability to sell to important market segments, as group purchasing organizations, independent delivery networks and large single accounts, such as the Veterans Administration in the United States, continue to consolidate purchasing decisions for some of our healthcare provider customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances that may exert further downward pressure on our product prices and adversely impact our business, financial condition and results of operations.
Failure to integrate acquired businesses into our operations successfully could adversely affect our business.
As part of our strategy to develop and identify new products and technologies, we have made several acquisitions in recent years and may make additional acquisitions in the future. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. These efforts result in additional expenses and involve significant amounts of management's time that cannot then be dedicated to other projects. Our failure to manage successfully and coordinate the growth of the combined company could also have an adverse impact on our business. In addition, we cannot be certain that the businesses we acquire will become profitable or remain so. If our acquisitions are not successful, we may record unexpected impairment charges. Factors that will affect the success of our acquisitions include:

the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;
adverse developments arising out of investigations by governmental entities of the business practices of acquired companies;
any decrease in customer loyalty and product orders caused by dissatisfaction with the combined companies' product lines and sales and marketing practices, including price increases;
our ability to retain key employees; and
the ability of the combined company to achieve synergies among its constituent companies, such as increasing sales of the combined company's products, achieving cost savings and effectively combining technologies to develop new products.


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We may not realize the expected benefits from our restructuring initiatives and continuous improvement efforts, and they may result in unintended adverse impacts to our business.

Since 2011, we have made changes to our organizational structure to better position us for the evolving competitive, regulatory and economic environments in which we operate. These changes have included, among others, combining our several operating divisions into a single division, resulting in an integrated research and development organization and a consolidation of manufacturing and supply chain operations worldwide; centralization of certain support functions, including information technology, human resources, legal, business development and certain marketing functions; streamlining distribution methods; rationalizing plant utilization levels; and consolidating vendor relationships. These restructuring initiatives and continuous improvement efforts have been conducted in a phased approach and will continue over the coming years.

While these changes are part of a comprehensive plan to, among other things, accelerate our growth, leverage economies of scale, streamline distribution methods, drive process improvements through global synergies, balance plant utilization levels, centralize certain vendor relationships and reduce overall costs, we may not realize the expected benefits of our restructuring initiatives and continuous improvement efforts. In addition, these actions and potential future restructuring actions could yield unintended consequences, such as distraction of management and employees, business disruption, reduced employee morale and productivity and unexpected additional employee attrition, including the inability to attract or retain key personnel. These consequences could negatively affect our business, financial condition and results of operations. We cannot guarantee that these restructuring measures, or other restructuring actions and expense reduction measures we take in the future, will result in the expected cost savings and additional operating efficiency we hope to achieve.
 
The success of many of our products depends upon strong relationships with physicians and other healthcare professionals.
 
If we fail to maintain our working relationships with physicians and other healthcare professionals, many of our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products. The research, development, marketing and sales of many of our new and improved products is dependent upon our maintaining working relationships with physicians as well as other healthcare professionals, including hospital purchasing agents, who are becoming increasingly instrumental in making purchasing decisions for our products. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing and sale of our products. Physicians also assist us as researchers, consultants, advisory board members, inventors and as public speakers. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, the development and marketing and sales of our products could suffer, which could have a material adverse effect on our financial condition and results of operations. Our relationships with physicians and other healthcare professionals and other providers that use our products are regulated under the U.S. federal AKS and similar state and foreign laws. Failure to comply with the federal AKS or similar state or foreign law could result in criminal or civil penalties, exclusion from federal healthcare programs, or the imposition of corporate integrity agreements that result in significant administrative obligations and costs.

In addition, in February 2013, CMS finalized regulations to implement the Physician Payments Sunshine Act, enacted as part of the U.S. healthcare reform legislation in 2010. This rule requires us to report annually to CMS certain payments and other transfers of value we make to U.S.-licensed physicians and teaching hospitals. These annual reports are publicly available, which could impact the number of physicians and other healthcare providers who are willing to work with us on the research and development of our products. In addition, several states have implemented, and a number of foreign regulatory bodies are in the process of developing, similar transparency and disclosure laws applicable to medical device manufacturers, some of which require reporting of transfers of value made not only to physicians, but to a wider variety of healthcare professionals and institutions as well.

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Instability in international markets or foreign currency fluctuations could adversely affect our results of operations.
We generate a significant amount of revenue from outside the United States with approximately 53% of our revenue in 2014 coming from our international markets. Our products are currently marketed in more than 100 countries around the world, with our largest geographic markets outside of the United States being Europe, Japan and Asia Pacific. As a result, we face currency and other risks associated with our international sales. We are exposed to foreign currency exchange rate fluctuations due to transactions denominated primarily in Euros, Japanese Yen, Canadian Dollars, Australian Dollars, Brazilian Reals, British Pounds, Malaysian Ringgit and Costa Rican Colon which may potentially reduce the U.S. Dollars we receive for sales denominated in any of these foreign currencies and/or increase the U.S. Dollars we report as expenses in these currencies, thereby affecting our reported consolidated revenues, profit margins and results of operations. Fluctuations between the currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses. We cannot predict the effects of currency exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the volatility of currency exchange rates. While we have initiated a hedging strategy in 2015 in an effort to mitigate the effects of currency exchange rate volatility, there can be no assurance that such hedging strategy will be effective.
In addition to foreign currency exchange rate fluctuations, there are a number of additional risks associated with our international operations, including those related to:
the imposition of or increase in import or export duties, surtaxes, tariffs or customs duties;
the imposition of import or export quotas or other trade restrictions;
foreign tax laws and potential increased costs associated with overlapping tax structures;
compliance with various U.S. and foreign laws, including the Foreign Corrupt Practices Act, the UK Anti-Bribery Act and import/export laws;
longer accounts receivable cycles in certain foreign countries, whether due to cultural, economic or other factors;
changes in medical reimbursement programs and regulatory requirements in international markets in which we operate; and
economic and political instability in international markets, including concerns over excessive levels of sovereign debt and budget deficits in countries where we market our products that could result in an inability to pay or timely pay outstanding payables.

Economic conditions could adversely affect our results of operations.

In recent years, the global economic downturn and credit and sovereign debt issues have caused disruptions in financial markets and deterioration in economic conditions in the United States, Europe and throughout the world. Continued global economic uncertainty and other factors beyond our control may adversely affect our ability to borrow money in the credit markets and to obtain financing for acquisitions or other general corporate and commercial purposes.

Instability in the global economy and financial markets can also affect our business through its effects on general levels of economic activity, employment and customer behavior. The rate of recovery from the recent recession in the United States and other markets has been slower than historical economic recovery periods. Central Banks around the world may move to tighten monetary conditions in an attempt to control inflation. Reductions in federal spending in the United States over the next decade (e.g. sequestration) could result in cuts to, and restructuring of, entitlement programs such as Medicare and aid to states for Medicaid programs. Our hospital customers rely heavily on Medicare and Medicaid programs to fund their operations. Any cuts to these programs could negatively affect the business of our customers and our business. As a result of poor economic conditions, our customers may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact their ability or decision to purchase our products or to pay for products they purchase on a timely basis, if at all. While the economic environment has begun to show signs of improvement, the strength and timing of any economic recovery remains uncertain, and we cannot predict to what extent the global economic slowdown may negatively impact our net sales, average selling prices, profit margins, procedural volumes and reimbursement rates from third party payors. In addition, adverse economic conditions may affect our suppliers, leading them to experience financial difficulties or to be unable to borrow money to fund their operations, which could cause disruptions in our ability to produce our products.


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We continue to experience longer collection cycles for trade receivables in certain European member states, particularly in Southern Europe. There can be no assurances that additional negative economic disruptions and slowdowns in Europe may result in us not fully collecting these receivables, adversely affecting our cash flows, financial position and results of operations. Additional prolongation of the economic disruptions in Europe may negatively impact reimbursement rates and procedural volumes and adversely affect our business and results of operations.
The medical device industry and its customers are often the subject of governmental investigations into marketing and other business practices. Investigations against us could result in the commencement of civil and/or criminal proceedings, substantial fines, penalties and/or administrative remedies, divert the attention of our management and have an adverse effect on our financial condition and results of operations. Investigations of our customers may adversely affect the size of our markets.
We are subject to extensive and stringent regulation by the FDA and numerous other federal, state and foreign governmental authorities, who have been increasing their scrutiny of the medical device industry. We have received subpoenas and other requests for information from governmental agencies, including the Civil Division of the Department of Justice and the Office of Inspector General for the Department of Health and Human Services. These investigations have related primarily to financial arrangements with healthcare providers and product promotional practices. Similar requests were made of our major competitors. We are cooperating fully with these investigations and are responding to the government agencies’ requests. However, we cannot predict when these investigations will be resolved, the outcome of these investigations or their impact on us.
An adverse outcome in one or more of these investigations could include the commencement of civil and/or criminal proceedings, substantial fines, penalties and/or administrative remedies, including exclusion from federal healthcare programs. In addition, resolution of any of these matters could involve the imposition of additional and costly compliance obligations. Finally, if these investigations continue over a long period of time, they could divert the attention of management from the day-to-day operations of our business and impose significant administrative burdens on us. These potential consequences, as well as any adverse outcome from these investigations or other investigations initiated by the government at any time, could have a material adverse effect on our financial condition and results of operations.
Further, governmental investigations involving our customers, such as the DOJ investigation of hospitals related to ICD utilization, may have a negative impact on the size of the cardiac rhythm management market. Our U.S. ICD net sales represented approximately 19% of our worldwide consolidated net sales in both 2014 and 2013, and any further changes in this market could have a material adverse effect on our financial condition and results of operations.
Regulatory actions arising from the concern over Bovine Spongiform Encephalopathy may limit our ability to market products containing bovine material.
Our Angio-Seal™ vascular closure device, as well as our vascular graft products, contain bovine collagen. In addition, some of the tissue heart valves we market, such as our Biocor®, Epic™, Trifecta™ and Portico™ tissue heart valves, incorporate bovine pericardial material. In some jurisdictions, there are laws, regulations and guidance that regulate the use of certain animal material in medical devices because of concerns about Transmissible Spongiform Encephalopathy (TSE), such as Bovine Spongiform Encephalopathy, which is sometimes referred to as “mad cow disease,” a disease which has sometimes been transmitted to humans through the consumption of beef. Some medical device regulatory agencies have considered and are considering whether to continue to permit the sale of medical devices that incorporate certain animal material. While we are not aware of any reported cases of transmission of TSE through medical products and are cooperating with regulatory agencies considering these issues, the suspension or revocation of authority to manufacture, market or distribute products containing bovine material, or the imposition of a regulatory requirement that we procure material for these products from alternate sources, could result in lost market opportunities, harm the continued commercialization and distribution of such products and impose additional costs on us. Any of these consequences could in turn have a material adverse effect on our financial condition and results of operations.

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We are not insured against all potential losses. Natural disasters or other catastrophes could adversely affect our business, financial condition and results of operations.
The occurrence of one or more natural disasters, such as hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, severe changes in climate and geo-political events, such as acts of war, civil unrest or terrorist attacks, or the occurrence of epidemic diseases in a country in which we operate or in which our suppliers are located could adversely affect our operations and financial performance. For example, we have significant facilities located in Sylmar and Sunnyvale, California, Puerto Rico and Costa Rica. Earthquake insurance is currently difficult to obtain, extremely costly and restrictive with respect to scope of coverage. We do not currently maintain or intend to maintain earthquake insurance. Consequently, we could incur uninsured losses and liabilities arising from an earthquake near our California, Puerto Rico or Costa Rica facilities as a result of various factors, including the severity and location of the earthquake, the extent of any damage to our facilities, the impact of an earthquake on our workforce and on the infrastructure of the surrounding communities and the extent of damage to our inventory and work in process. These losses could have a material adverse effect on our business for an indeterminate period. Furthermore, our manufacturing facilities in Puerto Rico or Malaysia may suffer damage as a result of hurricanes and could result in lost production and additional expenses to us to the extent any such damage is not fully covered by our hurricane and business interruption insurance. Even with insurance coverage, natural disasters or other catastrophic events, including acts of war or terrorism, could cause us to suffer substantial losses in our operational capacity and could also lead to a loss of opportunity and to a potential adverse impact on our relationships with our existing customers resulting from our inability to produce products for them, for which we would not be compensated by existing insurance. This in turn could have a material adverse effect on our financial condition and results of operations.
Further, when natural disasters result in wide-spread destruction, or certain regions experience acts of war or terrorism, the adverse impact on the operations of our customers in those affected locations could result in a material adverse effect on our results of operations in that region or on the consolidated operations of our business.
Our operations are subject to environmental, health and safety laws and regulations that could require us to incur material costs.
Our operations are subject to environmental, health and safety laws and regulations concerning, among other things, the generation, handling, transportation and disposal of hazardous substances or wastes, particularly ethylene oxide, the cleanup of hazardous substance releases, and emissions or discharges into the air or water. We have incurred and expect to incur expenditures in the future in connection with compliance with environmental, health and safety laws and regulations. New laws and regulations, violations of these laws or regulations, stricter enforcement of existing requirements, or the discovery of previously unknown contamination could require us to incur costs or become the basis for new or increased liabilities that could be material.

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We are increasingly dependent on sophisticated information technology and, if we fail to properly maintain the integrity of our data systems or if our products do not operate as intended, our business could be materially affected.
We are increasingly dependent on sophisticated information technology for our products and infrastructure. We have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities, including the conversion to a new enterprise resource planning system. Our information and manufacturing systems, as well as our products that incorporate information technology, require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and products and develop new systems and products to keep pace with continuing changes in information processing technology, mobile device technology, evolving systems and regulatory standards and the need to protect patient and customer information. In addition, third parties may attempt to hack into our systems or products in order to, among other things, compromise the integrity of those systems or products. If we fail to maintain or protect the integrity of our information and manufacturing systems and our products that incorporate information technology, we could lose existing customers, have difficulty attracting new customers, have difficulty manufacturing product, have problems with product functionality that could pose a risk to patients, have difficulty preventing, detecting and controlling fraud, become subject to product recalls, regulatory sanctions or penalties, experience increases in operating expenses, incur expenses or lose revenues as a result of a breach or suffer other adverse consequences. There can be no assurance that our process of consolidating the number of systems we operate, upgrading and expanding the information capabilities of our systems and products, protecting and enhancing the integrity of our systems and products and developing new systems and products to keep pace with continuing changes in information processing technology will be successful or that additional systems or product issues will not arise in the future. Any significant breakdown, intrusion, interruption, corruption or destruction of our systems or products could have a material adverse effect on our business.

If our efforts to maintain the privacy and security of our customer, patient, third-party payor, employee, supplier or Company information are not successful, we could incur substantial additional costs and become subject to litigation, enforcement actions and reputational damage.

Our business, like that of most medical device manufacturers, involves the receipt, storage and transmission of patient information and payment and reimbursement information, as well as confidential information about third-party payors, our employees, our suppliers and our Company. Our information systems are vulnerable to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deceiving our employees or third-party service providers. Hardware, software or applications we develop or obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We have implemented and regularly review and update processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and there is no guarantee that our efforts will be adequate to safeguard against all data security breaches, misuse of data or sabotage of our systems. Any future significant compromise or breach of our data security, whether external or internal, or misuse of customer, third-party payor, employee, supplier or Company data, could result in additional significant costs, lost sales, fines, lawsuits and damage to our reputation. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.


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Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition and results of operations.

We are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our results of operations and financial condition. Our operations in Puerto Rico, Costa Rica and Malaysia presently benefit from various tax incentive grants. Unless these grants are extended, they will expire between 2018 and 2026. Our historical practice has been to renew, extend or obtain new tax incentive grants upon expiration of existing tax incentive grants. If we are unable to renew, extend, or obtain new tax incentive grants, the expiration of existing tax incentive grants could have a material impact on our financial results in future periods. Additionally, changes in tax laws or tax rulings could materially impact our effective tax rate. For example, proposals for fundamental U.S. international tax reform, such as past or current proposals by the Obama administration, if enacted, could have a significant adverse impact on our future results of operations. In addition, the enactment of the PPACA levied a 2.3% excise tax on the majority of our U.S. medical device sales.

 
 
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
 
 
Item 2.
PROPERTIES
We own our principal executive offices, which are located in St. Paul, Minnesota. Our manufacturing facilities currently operating are located in California, Minnesota, Arizona, South Carolina, Texas, New Jersey, Oregon, Massachusetts, Georgia, Brazil, Puerto Rico, Costa Rica, Sweden and Malaysia. We own approximately 75% (800,000 square feet) of our total manufacturing space. We also maintain over 100 sales and administrative offices world-wide. With the exception of 17 locations, all of our sales and administrative offices are leased. We believe that all buildings, machinery and equipment are in good condition, suitable for their purposes and are maintained on a basis consistent with sound operations. Additionally, we believe that we have sufficient space for our current operations and for foreseeable expansion in the next few years.

 
 
Item 3.
LEGAL PROCEEDINGS
We are the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of our business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. We record a liability in our Consolidated Financial Statements for costs related to claims, including future legal costs, settlements and judgments, where we have assessed that a loss is probable and an amount can be reasonably estimated. Our significant legal proceedings are discussed in Note 5 of the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." While it is not possible to predict the outcome for most of the legal proceedings discussed in Note 5, the costs associated with such proceedings could have a material adverse effect on our consolidated results of operations, financial position and cash flows of a future period.

 
 
Item 4.
MINE SAFETY DISCLOSURES
No matters require disclosure.


34


PART II
 
 
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There were no sales of unregistered securities during the 2014 fiscal year. As of February 20, 2015, St. Jude Medical, Inc. had 1,826 shareholders of record. St. Jude Medical, Inc.'s stock is listed on the New York Stock Exchange, Inc. (NYSE) as "STJ."

Cash dividends totaled $0.27 per share for each quarter in fiscal year 2014 and $0.25 per share for each quarter in fiscal year 2013. The following prices are the high and low market sales quotations per share of the Company’s common stock for the quarters indicated:

 
 
Fiscal Year
 
 
2014
 
2013
Quarter
 
High
 
Low
 
High
 
Low
First
 
$
68.79

 
$
59.16

 
$
43.23

 
$
35.32

Second
 
$
70.59

 
$
59.85

 
$
47.45

 
$
39.79

Third
 
$
71.90

 
$
61.00

 
$
54.36

 
$
45.38

Fourth
 
$
70.24

 
$
54.80

 
$
63.15

 
$
51.79


Stock Performance Graph
The following graph compares the cumulative total shareholder returns for St. Jude Medical common stock for the last five fiscal years with the Standard & Poor’s 500 Health Care Equipment Index and the Standard & Poor’s 500 Index weighted by market value at each measurement point. The comparison assumes that $100 was invested on December 31, 2009, in St. Jude Medical common stock and in each of these Standard & Poor’s indexes and assumes the reinvestment of any dividends.

35


 
 
Item 6.
SELECTED FINANCIAL DATA

Five-Year Summary Financial Data
(in millions, except per share amounts)
 
 
2014
 
2013
 
2012
 
2011
 
2010
Summary of Operations for the Fiscal Year:
Net sales
 
$
5,622

 
$
5,501

 
$
5,503

 
$
5,612

 
$
5,164

Gross profit
 
3,969

 
3,927

 
3,965

 
4,079

 
3,754

Percent of net sales
 
70.6
%
 
71.4
%
 
72.1
%
 
72.7
%
 
72.7
%
Net earnings attributable to St. Jude Medical, Inc.
 
$
1,002

 
$
723

 
$
752

 
$
826

 
$
907

Percent of net sales
 
17.8
%
 
13.1
%
 
13.7
%
 
14.7
%
 
17.6
%
Diluted net earnings per share attributable to St. Jude Medical, Inc.
 
$
3.46

(a)
$
2.49

(b)
$
2.39

(c)
$
2.52

 
$
2.75

Cash dividends declared per share (d)
 
$
1.08

 
$
1.00

 
$
0.92

 
$
0.84

 
$

Financial Position at Year End:
Cash and cash equivalents
 
$
1,442

 
$
1,373

 
$
1,194

 
$
986

 
$
500

Total assets
 
10,207

 
10,248

 
9,271

 
9,118

 
8,566

Total debt (e)
 
$
3,866

 
$
3,580

 
$
3,080

 
$
2,796

 
$
2,512


Fiscal year 2014 consisted of 53 weeks. All other fiscal years noted above consisted of 52 weeks.

(a)
2014 diluted net earnings per share attributable to St. Jude Medical, Inc. included after-tax charges of $150 million, or $0.52 per diluted net earnings per share attributable to St. Jude Medical, Inc., related to restructuring activities associated with our 2012 Business Realignment Plan and Manufacturing and Supply Chain Optimization Plan, acquisition-related charges, intangible asset impairment charges, product field action and litigation charges, and legal settlement expenses, partially offset by a favorable legal settlement and an income tax benefit for discrete income tax adjustments. See the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further detail.
(b)
2013 diluted net earnings per share attributable to St. Jude Medical, Inc. included after-tax charges of $371 million, or $1.27 per diluted net earnings per share attributable to St. Jude Medical, Inc., related to restructuring activities associated with our 2012 Business Realignment Plan and 2011 Restructuring Plan, debt retirement costs primarily associated with make-whole redemption payments and the write-off of unamortized debt issuance costs, acquisition-related charges, intangible asset impairment charges, product field action and litigation charges, and a legal settlement charge, partially offset by an income tax benefit from the enactment of a tax law and the settlement of domestic tax audits. See the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further detail.
(c)
2012 diluted net earnings per share attributable to St. Jude Medical, Inc. included after-tax charges of $321 million, or $1.02 per diluted net earnings per share attributable to St. Jude Medical, Inc., related to restructuring activities associated with our 2012 Business Realignment Plan and 2011 Restructuring Plan, product field action and litigation charges, a legal settlement charge, intangible asset impairment charges, inventory write-offs and an additional income tax charge related to a settlement reserve for certain prior year tax positions. See the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further detail.
(d)
Beginning in fiscal year 2011, the Company began declaring and paying cash dividends. The Company did not declare or pay any cash dividends during 2010.
(e)
Total debt consists of current debt obligations and long-term debt.


36


 
 
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
Our business is focused on the development, manufacture and distribution of cardiovascular medical devices for the global cardiac rhythm management, cardiovascular and atrial fibrillation therapy areas, and interventional pain therapy and neurostimulation devices for the management of chronic pain and movement disorders. On January 28, 2014, we announced organizational changes to combine our Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division, resulting in an integrated research and development (R&D) organization and a consolidation of manufacturing and supply chain operations worldwide. The integration was conducted in a phased approach during 2014. Our continuing global realignment efforts are focused on streamlining our organization to improve productivity, reduce costs and leverage our scale to drive additional growth. During 2014, we changed our internal reporting structure such that we now operate as a single operating segment and derive our revenues from six principal product categories.
Our six principal product categories are as follows: tachycardia implantable cardioverter defibrillator (ICD) systems, bradycardia pacemaker (pacemaker) systems, atrial fibrillation (AF) products (electrophysiology (EP) introducers and catheters, advanced cardiac mapping, navigation and recording systems and ablation systems), vascular products (vascular closure products, pressure measurement guidewires, optical coherence tomography (OCT) imaging products, vascular plugs, heart failure monitoring device and other vascular accessories), structural heart products (heart valve replacement and repair products and structural heart defect devices) and neuromodulation products (spinal cord stimulation and radiofrequency ablation to treat chronic pain and deep brain stimulation to treat movement disorders). We market and sell our products world-wide primarily through a direct sales force.
Our industry has undergone significant consolidation in the last decade and is highly competitive. Our strategy requires significant investment in research and development (R&D) 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 2010, significant U.S. healthcare reform legislation, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively PPACA), was enacted into law. As a U.S.-headquartered company with significant sales in the United States, this healthcare reform law has had, and is expected to continue to have, a material impact on us and on the U.S. healthcare system, more generally. Beginning in 2013, the law levies an annual 2.3% excise tax on the majority of our U.S. medical device sales. Additionally, the law reduced the annual rate of inflation for Medicare payments to hospitals and called for the establishment of the Independent Payment Advisory Board to recommend strategies for reducing growth in Medicare spending. The law also focused on a number of Medicare provisions aimed at improving quality and decreasing costs, such as 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). It is uncertain at this point what consequences these provisions may have on potentially limiting patient access to new technologies. We cannot predict what future healthcare legislation will be implemented at the federal or state level, nor 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.

In May 2014, we exercised our exclusive fixed purchase option to acquire the remaining 81% ownership interest in CardioMEMS, Inc. (CardioMEMS). CardioMEMS is focused on the development of a wireless monitoring technology that can be placed directly into the pulmonary artery to assess cardiac performance via measurement of pulmonary artery pressure. In August 2014, we acquired all the outstanding shares of NT Holding Company (NeuroTherm). NeuroTherm is involved in the business of marketing, designing, manufacturing and distributing radio frequency ablation medical devices and the related consumable items for pain management and interventional radiology markets world-wide. In August 2013, we acquired Endosense S.A. (Endosense). Endosense manufactures and markets the TactiCath® irrigated ablation catheter to provide physicians a real-time,

37


objective measure of the force to apply to the heart wall during a catheter ablation procedure. This force-sensing technology had CE Mark approval for AF and supra ventricular tachycardia ablation prior to our acquisition, and received U.S. Food and Drug Administration (FDA) approval in October 2014. In October 2013, we acquired Nanostim, Inc. (Nanostim). Nanostim has developed the first leadless, miniaturized cardiac pacemaker system, which received CE Mark approval in August 2013.
We utilize a 52/53-week fiscal year ending on the Saturday nearest December 31st. Fiscal year 2014 consisted of 53 weeks and ended on January 3, 2015, with the additional week reflected in our fourth quarter 2014 results. Fiscal years 2013 and 2012 consisted of 52 weeks and ended on December 28, 2013 and December 29, 2012, respectively.
Net sales of $5,622 million in 2014 increased 2% compared to 2013. Foreign currency translation unfavorably decreased our 2014 net sales by $74 million, or 1%, compared to 2013. The increase in our 2014 net sales was primarily driven by our AF Products, which benefited from increased EP catheter ablation procedures and increased sales volumes associated with our intracardiac echocardiography imaging product offerings. During 2014, we also benefited from incremental net sales associated with our NeuroTherm acquisition and our FDA approval of the CardioMEMS™ (Heart Failure) HF System. Additionally, compared to 2013, we have continued to experience incremental net sales benefits from our 2013 acquisitions of Endosense and Nanostim, and sales volume increases associated with Spinal Modulation, Inc.'s (Spinal Modulation) Axium™ Neurostimulator System, a targeted therapy for chronic pain, for which we are the exclusive distributor. Our increased sales volumes associated with our Fractional Flow Reserve (FFR) technology products and OCT imaging products, Trifecta™ pericardial stented tissue valve, transcatheter aortic heart valves and AMPLATZER™ occluder products have also continued to benefit 2014 net sales compared to 2013. Partially offsetting these net sales increases, we have experienced a 2014 net sales decline in our other neuromodulation chronic pain products, our third party vascular products we distribute in Japan and our mechanical heart valves, due to a market preference for tissue valves, compared to 2013. Refer to the Results of Operations section for a more detailed discussion of our net sales.

Net sales of $5,501 million in 2013 were flat compared to 2012. Foreign currency translation unfavorably impacted our 2013 net sales by $101 million, or 2%, partially offset by net sales benefits primarily in our AF Products due to the increase in EP catheter ablation procedures, further market penetration of our EnSite® Velocity System and related connectivity tools as well as our intracardiac echocardiography imaging product offerings. Additionally, although the ICD market contracted during 2013, we began to benefit from our 2013 product launches including our next-generation Ellipse™ and Assura™ devices (FDA approved in June 2013 and CE Mark-approved in May 2013), our Accent MRI™ Pacemaker and the Tendril MRI™ lead (Japan regulatory approved in June 2013) and our Allure Quadra™ Cardiac Resynchronization Therapy Pacemaker (CRT-P) (CE Mark-approved in April 2013). We also experienced incremental net sales from our exclusive distribution of the Spinal Modulation Axium™ Neurostimulator System and we experienced net sales increases from our FFR technology products and OCT imaging products, Trifecta™ pericardial stented tissue valve and our AMPLATZER™ occluder products compared to net sales in 2012. Refer to the Results of Operations section for a more detailed discussion of our net sales.

Net earnings attributable to St. Jude Medical, Inc. in 2014 of $1,002 million and diluted net earnings per share attributable to St. Jude Medical, Inc. of $3.46 both increased 39% compared to 2013 net earnings attributable to St. Jude Medical, Inc. of $723 million and diluted net earnings per share attributable to St. Jude Medical, Inc. of $2.49. Our 2014 net earnings attributable to St. Jude Medical, Inc. and diluted net earnings per share attributable to St. Jude Medical, Inc. were negatively impacted by after-tax charges of $198 million, or $0.69 per diluted share attributable to St. Jude Medical, Inc., due to charges related to our restructuring activities, acquisition-related charges, intangible asset impairment charges, product field action and litigation charges and legal settlement expenses, partially offset by a legal settlement gain related to a favorable judgment and resolution in a patent infringement case. These charges were also partially offset by an income tax benefit of $48 million, or $0.17 per diluted share attributable to St. Jude Medical, Inc., related to discrete income tax adjustments. In 2013, our net earnings attributable to St. Jude Medical, Inc. were impacted by after-tax charges of $392 million, or $1.34 per diluted share attributable to St. Jude Medical, Inc., related to our ongoing restructuring activities, debt retirement costs, intangible asset impairment charges, product field action and litigation charges, a legal settlement charge and acquisition-related charges. These charges were partially offset by a $21 million, or $0.07 per diluted share attributable to St. Jude Medical, Inc., income tax benefit related to the 2012 federal R&D 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. In addition to the impact of these after-tax charges, 2014 diluted net earnings per share attributable to St. Jude Medical, Inc. also increased compared to 2013 as a result of share repurchases in 2014 resulting in lower outstanding shares compared to 2013.

38


Net earnings attributable to St. Jude Medical, Inc. in 2013 of $723 million decreased 4% and diluted net earnings per share attributable to St. Jude Medical, Inc. of $2.49 increased 4% compared to 2012 net earnings attributable to St. Jude Medical, Inc. of $752 million and diluted net earnings per share attributable to St. Jude Medical, Inc. of $2.39, respectively. Our 2013 net earnings attributable to St. Jude Medical, Inc. and diluted net earnings per share attributable to St. Jude Medical, Inc. were negatively impacted by after-tax charges of $392 million, or $1.34 per diluted share attributable to St. Jude Medical, Inc., related to our restructuring activities, debt retirement costs, intangible asset impairment charges, product field action and litigation charges, a legal settlement charge and acquisition-related charges. These charges were partially offset by a $21 million, or $0.07 per diluted share attributable to St. Jude Medical, Inc., income tax benefit related to the 2012 federal R&D tax credit extended in the first quarter of 2013, retroactive to the beginning of our 2012 tax year. In 2012, our net earnings attributable to St. Jude Medical, Inc. were impacted by after-tax charges of $275 million, or $0.87 per diluted share attributable to St. Jude Medical, Inc., related to our restructuring activities, product field action and litigation charges, a legal settlement charge, intangible asset impairment charges and inventory write-offs. Additionally, we recognized $46 million, or $0.15 per diluted share attributable to St. Jude Medical, Inc., of additional income tax expense related to a settlement reserve for certain prior year tax positions. Refer to the Results of Operations section for a more detailed discussion of these charges. The impact of these after-tax charges to our 2013 diluted net earnings per share attributable to St. Jude Medical, Inc. was partially offset by additional share repurchases in 2013 resulting in lower outstanding shares compared to 2012.
We generated $1,304 million of operating cash flows during 2014, compared to $961 million of operating cash flows during 2013 and $1,335 million of operating cash flows during 2012. Refer to the Liquidity section for a more detailed discussion. We ended the year with $1,442 million of cash and cash equivalents and $3,866 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 and our Board of Directors authorized 2014 quarterly cash dividends of $0.27 per share, representing an 8% per share increase over the 2013 quarterly cash dividends. During 2013, we repurchased 18.3 million shares of our common stock for $808 million at an average repurchase price of $43.97 per share.

NEW ACCOUNTING PRONOUNCEMENTS
Certain new accounting standards may become effective for us in fiscal year 2015 and future periods upon finalization. Information regarding new accounting pronouncements that impacted 2014 or our historical Consolidated Financial Statements and related disclosures is included in Note 1 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP) 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. Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data."
On an ongoing basis, we evaluate our estimates and assumptions, including those related to our accounts receivable allowance for doubtful accounts; inventory reserves; acquisition-related measurements; income taxes; and legal proceedings. 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 and expenses. Actual results may differ from these estimates. Senior management has discussed the development, selection and disclosure of its critical accounting policies and estimates with the Audit Committee and the Board of Directors. We believe that the following represent our most critical accounting estimates because (1) they are most important to the portrayal of our financial conditions and results and (2) they require our most difficult, subjective or complex judgments:
Accounts Receivable Allowance for Doubtful Accounts
We grant credit to customers in the normal course of business, and generally do not require collateral or any other security to support our accounts receivable. We maintain an allowance for doubtful accounts for potential credit losses, which primarily consists of reserves for specific customer balances that we believe may not be collectible. We determine the adequacy of this allowance by regularly reviewing the age of accounts receivable, customer financial conditions and credit histories, and current economic conditions. In some developed markets and in many emerging markets, payment of certain accounts receivable balances are made by the individual countries' healthcare systems for which payment is dependent, to some extent, upon the political and economic environment

39


within those countries. For example, we recognized a $9 million accounts receivable allowance charge during 2013 in connection with a distributor termination in Europe. No significant accounts receivable allowance charges were recognized during fiscal year 2014 or 2012. We also reserve for probable and reasonably estimable losses from uncollectible receivables based on historical experience and other factors since specific customer receivable balances may be uncollectible and not identifiable. As of January 3, 2015 and December 28, 2013, the allowance for doubtful accounts was $53 million and $45 million, respectively. Although we consider our allowance for doubtful accounts to be adequate, if the financial condition of our customers or the individual countries' healthcare systems were to deteriorate and impair their ability to make payments to us, additional allowances may be required in future periods.
Inventory Reserves

We value inventory at the lower of cost or market, with cost determined using the first-in, first-out method and market determined by current replacement cost. In calculating current replacement cost, we estimate expected selling prices in the ordinary course of business, reasonably predictable costs of completion and disposal, and appropriately normal profit margins. We maintain reserves for excess and obsolete inventory based on forecasted product sales, new product introductions by us or our competitors, product expirations and historical experience. The inventory reserves we recognize are based on our estimates of how these factors are expected to impact the amount and value of inventory we expect to sell. The markets in which we operate are highly competitive and characterized by rapid product development and technological change putting our products at risk of losing market share and/or becoming obsolete. We monitor our inventory reserves on an ongoing basis, and although we consider our inventory reserves to be adequate, we may be required to recognize additional inventory reserves if future demand or market conditions are less favorable than we have estimated.

Acquisition-related Measurements
We make significant estimates in performing the initial measurements required by the acquisition method of accounting. Certain related items, such as intangible assets, contingent consideration and goodwill are subsequently measured as described below. The inputs and assumptions for the various estimates are often interrelated. As a result, a change to an assumption for a single acquired technology, for example, may affect several of the measurements and may simultaneously have favorable and unfavorable impacts on our Consolidated Statements of Earnings.
Business Combinations: We applied the acquisition method of accounting to one transaction in 2014 and four transactions in 2013. We did not apply the acquisition method of accounting to any transactions in 2012. When we apply the acquisition method of accounting, the total purchase consideration is allocated to identifiable assets acquired, liabilities assumed and noncontrolling interests (“net assets”). Any residual purchase consideration is recorded as goodwill. Identifying net assets requires significant judgment, especially with respect to intangible assets, including in-process research and development (IPR&D) activities, of the acquired entity. Specific acquired IPR&D projects that are to be used in our R&D activities are separately identified as one or more units of account (generally based on jurisdiction) in purchase accounting when the projects have substance and are incomplete at the business combination date.
Determining the total purchase consideration utilizes significant estimates when we previously hold an equity interest in the acquired entity and/or when the terms of the agreements contain contingent consideration payments. The allocation of the purchase price among the net assets utilizes significant estimates in determining the fair values of the respective net assets, especially with respect to intangible assets (including IPR&D assets). We typically engage independent third-party appraisal firms to assist in the estimation process. Examples of the significant estimates and assumptions inherent in the initial measurements include, but are not limited to:
timing and amount of revenue and future cash flows, which often depend on estimates of relevant market sizes, expected market growth rates, trends in technology (including the impacts of anticipated product introductions by competitors, legal agreements and patent litigation), the expected useful lives of acquired technologies and the expected introduction date of IPR&D projects;
expected costs to develop the IPR&D projects into commercially viable products, which include the stage of completion, the complexity of the work to complete and the contribution of core technologies and other acquired assets;
the discount rate reflecting the risk inherent in future cash flows; and
perpetual growth rate used to calculate the terminal value, where applicable.


40


While we use our best estimates and assumptions to accurately value the net assets at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the net assets with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the net assets, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Earnings.
Intangible Assets: We make estimates and assumptions in accounting for intangible assets subsequent to acquisition for which results will emerge over long periods of time. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant.
The carrying values of our definite-lived intangible assets were $708 million and $614 million at January 3, 2015 and December 28, 2013, respectively, and consisted primarily of purchased technology and patents. We establish the estimated useful lives of these intangible assets at the acquisition date by considering our expected uses of the assets, provisions that may limit the useful lives, the effects of obsolescence and other factors. If reliably determinable, we amortize these assets in a pattern reflecting consumption of their economic benefits; otherwise we utilize the straight-line amortization method. We test these assets for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Examples of indicators we monitor include, but are not limited to, significant adverse changes in the manner in which the asset is being used, legal factors, business climate (including impacts of competing technologies) and forecasted cash flows. If we determine that the carrying amounts for the assets are not recoverable, we impair the carrying amounts to the assets’ fair values using the income approach and updated estimates and assumptions. During 2013 and 2012 we recognized impairment charges of $13 million and $33 million, respectively. There were no impairments of definite-lived intangible assets in 2014.
The carrying values of our indefinite-lived intangible assets were $143 million and $297 million at January 3, 2015 and December 28, 2013, respectively, and consisted primarily of IPR&D projects. We test these assets for impairment annually or more frequently if events or changes in circumstances (including completion or abandonment of the IPR&D projects) indicate that the fair value of the asset is more likely than not below its carrying amount. In evaluating whether a quantitative test is necessary, we consider the totality of all relevant events or circumstances that could affect the significant inputs used to determine the fair values of these assets. This assessment includes consideration of qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity-specific events and regulatory or other factors. If we determine that an indefinite-lived intangible asset is more likely than not impaired, we impair the carrying amount to the asset’s fair value using the income approach and updated estimates and assumptions. When an IPR&D project is completed (generally upon receipt of regulatory approval), the asset is then accounted for as a definite-lived intangible asset. During 2014, we reclassified $96 million of IPR&D to definite-lived intangible assets. During 2014 and 2013, we recognized impairment charges of $58 million and $29 million, respectively. There were no impairments of indefinite-lived intangible assets in 2012.
Contingent Consideration: The fair value of our contingent consideration was $50 million and $195 million at January 3, 2015 and December 28, 2013, respectively. The fair value of contingent consideration is remeasured to the estimated fair value each reporting period with the change in fair value recognized in selling, general and administrative expense in our Consolidated Statements of Earnings. Changes in the fair value of the contingent consideration liability can result from changes in discount rates and period as well as changes in the timing and amounts of revenue estimates or in the timing or likelihood of achieving the milestones that trigger payment. These changes resulted in charges of $22 million and $1 million during 2014 and 2013, respectively. There were no charges related to contingent consideration in 2012.
Goodwill: The carrying values of our goodwill were $3,532 million and $3,524 million at January 3, 2015 and December 28, 2013, respectively. The change in our structure during the third quarter of 2014 resulted in the combination of our reporting units. As a result, tests of goodwill are performed at the consolidated entity level. Estimates associated with the goodwill impairment tests in 2014 are not considered to be critical because of the low likelihood of impairment and reliance on the market approach, which makes use of more observable inputs in the fair value estimate. In 2013 and 2012, goodwill was tested for impairment in the context of the reporting unit structure that existed at those times. Those assessments required us to make several judgments about fair values, which included the consideration of qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity specific events, changes in net assets and sustained decrease in share price. Additional judgments were also required, including the consideration of projected future

41


cash flows and the use of appropriate risk-adjusted discount rates. There were no impairments of goodwill in 2014, 2013 or 2012.
Income Taxes
As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense as well as assessing temporary differences in the treatment of items for tax and financial accounting purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We assess the likelihood that our deferred tax assets will be realized from future taxable income after consideration of all positive and negative evidence. Evidence we consider varies for different tax jurisdictions. In situations in which we have been able to conclude that our deferred tax assets will be realized, we have generally relied on future reversals of taxable temporary differences, expected future taxable income where such estimates have historically been reliable and other factors. Certain of our subsidiaries in international tax jurisdictions, however, are in cumulative loss positions and have experienced cumulative losses in recent periods. A cumulative loss position is considered significant negative evidence that is difficult to overcome with other positive evidence. In these situations, we reduced the carrying value of deferred tax assets that arose primarily from net operating losses and tax credit carryforwards by recording valuation allowances because we did not believe it was more-likely-than-not that these assets would be realized. Gross deferred tax assets were $1,066 million and $1,025 million as of January 3, 2015 and December 28, 2013, respectively. We have established valuation allowances of $400 million and $368 million as of January 3, 2015 and December 28, 2013, respectively.
We have not provided U.S. income taxes on certain of our non-U.S. subsidiaries' undistributed earnings, as such amounts are intended to be reinvested outside the United States indefinitely based on our specific business plans and tax strategies. Our business plans and tax strategies consider: (i) short-term and long-term forecasts and budgets of the U.S. parent and non-U.S. subsidiaries; (ii) working capital and other needs in locations where earnings are generated; (iii) our past practices regarding non-U.S. subsidiary dividends; (iv) sources of financing by the U.S. parent, such as issuing debt; and (v) uses of cash by the U.S. parent that are more discretionary in nature, such as business combinations and share repurchase programs. However, should we change our business plans and tax strategies in the future and decide to repatriate a portion of these earnings to one of our U.S. subsidiaries, including cash maintained by these non-U.S. subsidiaries, additional U.S. tax liabilities would be recognized. It is not practicable to estimate the amount of additional U.S. tax liabilities we would incur.

We record our income tax provisions based on our knowledge of all relevant facts and circumstances, including the existing tax laws, our experience with previous settlement agreements, the status of current tax audits and examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters. We recognize liabilities for anticipated income tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate of whether additional taxes will be due is based on analyses of whether we believe that it is more-likely-than-not that our tax position is sustainable based solely on its technical merits and consideration of the taxing authorities’ widely understood administrative practices and precedents. Our estimate of the extent to which additional taxes will be due is based on analyses of the portion that is greater than 50 percent likely to be realized upon settlement with taxing authorities that have full knowledge of all relevant information.

Although we recognize income tax liabilities regarding uncertainty in income taxes, our accruals represent accounting estimates that are subject to the inherent uncertainties associated with the tax audit process, and therefore include certain contingencies. The finalization of the tax audit process across the various tax authorities, including federal, state and foreign, often takes many years. We adjust our income tax liabilities in light of changing facts and circumstances as new information becomes available; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional income tax expense would result. Specifically in 2012, we recognized $46 million of additional income tax expense related to a settlement reserve for certain prior year tax positions related to the 2002 through 2009 tax years. As of January 3, 2015, our liability for uncertain tax positions was $328 million and our accrual for gross interest and penalties was $44 million. As of December 28, 2013, our liability for uncertain tax positions was $315 million and our accrual for gross interest and penalties was $37 million.

42


Legal Proceedings 
We operate in an industry that is susceptible to significant product liability and intellectual property claims. As a result, we are involved in a number of legal proceedings, the outcomes of which are not in our complete control and may not be known for extended periods of time. We record a liability in our Consolidated Financial Statements for costs related to claims, including future legal costs, settlements and judgments where we have assessed that a loss is probable and an amount can be reasonably estimated. Product liability claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, claims may be asserted against us in the future related to events that are not known to us at the present time. In situations in which we believe that a loss is at least reasonably possible, we are often not able to estimate an amount or range of potential loss often because the amounts claimed typically bear no relation to the extent of the plaintiff’s injury. Our significant legal proceedings are discussed in detail in Note 5 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data." While it is not possible to predict the outcome for most of the legal proceedings discussed in Note 5, the costs associated with such proceedings could have a material adverse effect on our consolidated earnings, financial position or cash flows of a future period.

RESULTS OF OPERATIONS
Net sales
While we manage our operations globally and believe our product category sales are the most relevant measure of revenue performance, we also utilize geographic area revenue data as a secondary performance measure.
The following table presents net sales from external customers for our six principal product categories (in millions):
 
 
 
 
 
 
 
% Change
 
% Change
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
ICD Systems
$
1,746

 
$
1,741

 
$
1,743

 
0.3
%
 
(0.1
)%
Pacemaker Systems
1,047

 
1,042

 
1,111

 
0.5

 
(6.2
)
Atrial Fibrillation Products
1,044

 
957

 
898

 
9.1

 
6.6

Vascular Products
709

 
704

 
716

 
0.7

 
(1.7
)
Structural Heart Products
639

 
631

 
612

 
1.3

 
3.1

Neuromodulation Products
437

 
426

 
423

 
2.6

 
0.7

    Net sales
$
5,622

 
$
5,501

 
$
5,503

 
2.2
%
 
 %
The following table presents net sales by significant country based on customer location (in millions):
 
 
 
 
 
 
 
% Change
 
% Change
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
United States
$
2,657

 
$
2,596

 
$
2,594

 
2.3
 %
 
0.1
 %
Japan
526

 
567

 
665

 
(7.2
)
 
(14.7
)
Other foreign countries
2,439

 
2,338

 
2,244

 
4.3

 
4.2

     Net sales
$
5,622

 
$
5,501

 
$
5,503

 
2.2
 %
 
 %
We analyze changes in revenue based on constant currency growth (which includes organic volume and selling price impacts and the impacts of acquisitions) and foreign currency translation impacts. These impacts for 2014 and 2013 were as follows:
 
2014
 
2013
Constant currency
3.5
 %
 
1.8
 %
Translation
(1.3
)
 
(1.8
)
     Net sales change
2.2
 %
 
 %
Overall, net sales increased during 2014 compared to 2013 primarily as a result of our AF Products, incremental net sales from our NeuroTherm, Endosense and CardioMEMS business combinations, sales volume increases related

43


to our Structural Heart Products and distribution of Spinal Modulation's Axium™ Neurostimulator System and incremental net sales from our Quadra Assura™ and Unify Assura™ CRT-Ds launched in 2013. Foreign currency translation unfavorably decreased our 2014 net sales by $74 million compared to 2013 primarily due to the U.S. Dollar strengthening against the Japanese Yen and Latin America and Asia Pacific currencies, partially offset by the U.S. Dollar weakening against the Euro.

Our 2014 net sales increase over 2013 was primarily driven by our AF Products due to the continued increase in EP catheter ablation procedures and our intracardiac echocardiography imaging product offerings. We have also continued to experience a net sales benefit from our European launch of our TactiCath® irrigated ablation catheter, acquired through our Endosense acquisition in August 2013, including incremental net sales from our recent U.S. TactiCath® irrigated ablation catheter product launch after receiving FDA approval in October 2014. Foreign currency translation had a $17 million (2 percentage point) unfavorable impact on 2014 AF Products net sales compared to 2013.

Our August 2014 acquisition of NeuroTherm resulted in incremental net sales in our Neuromodulation product category and we continued to benefit from increased sales volumes associated with the Spinal Modulation Axium™ Neurostimulator System, for which we are the exclusive distributor. Partially offsetting these net sales increases, we experienced a 2014 net sales decline in our other neuromodulation chronic pain products and unfavorable foreign currency translation impacts of $2 million (1 percentage point) on 2014 Neuromodulation net sales compared to the prior year.

Structural Heart Product 2014 net sales increased over 2013 net sales primarily due to increased sales volumes associated with our Trifecta™ pericardial stented tissue valve, our transcatheter aortic heart valves and our AMPLATZER™ occluder products. Net sales volumes of our Trifecta™ pericardial stented tissue valve were partially offset by a net sales volume decrease in our mechanical heart valves due to a market preference for tissue valves. Additionally, foreign currency translation had an $11 million (2 percentage point) unfavorable impact on 2014 Structural Heart Products net sales compared to 2013.

Our Vascular Products category continues to benefit from incremental net sales related to our FDA approval of the CardioMEMS™ HF System in May 2014 as well as sales volume increases related to our FFR technology and OCT imaging products. Partially offsetting these net sales increases, we experienced a 2014 net sales decline in our third party vascular products we distribute in Japan compared to 2013. As a result of the economic pressures and average selling price declines in the Japan market, many third party manufacturers have migrated to a direct selling model with end customers, which resulted in revenue decreases over the last two years. Foreign currency translation also unfavorably decreased our Vascular Products 2014 net sales by $12 million (2 percentage point) compared to 2013. Additionally, although Angio-Seal™ sales volumes increased during 2014, we experienced an overall net sales decrease as a result of average selling price declines due to competitive pressures compared to 2013. We also continued to experience lower 2014 net sales of our EnligHTN™ Renal Denervation System compared to 2013 driven by expected overall market declines in the treatment of drug-resistant, uncontrolled hypertension.

Our 2014 ICD Systems net sales increased compared to 2013 ICD Systems net sales driven by our Quadra Assura™ for quadripolar CRT-D and our Unify Assura™ CRT-D, launched in 2013. These increases were partially offset by declines in our other ICD categories as well as ICD and CRT-D sales declines in Japan. Foreign currency translation unfavorably decreased our 2014 ICD Systems net sales by $15 million (1 percentage point) compared to the prior year.

Pacemaker Systems 2014 net sales increased compared to 2013 primarily due to continued net sales benefits from our July 2013 Accent MRI™ Pacemaker and the Tendril MRI™ lead launch in Japan and our Allure Quadra™ CRT-P launch in Europe (CE Mark approval in April 2013). Foreign currency translation unfavorably impacted our Pacemaker Systems 2014 net sales by $17 million (2 percentage point) compared to 2013. Additionally, our U.S. Pacemaker Systems 2014 net sales decreased by $5 million compared to 2013 primarily due to overall market declines in average selling prices.


Overall, 2013 net sales were flat compared to 2012. Foreign currency translation had an unfavorable impact of $101 million on 2013 net sales compared to 2012 due primarily to the strengthening of the U.S. Dollar against the Japanese Yen. Partially offsetting the unfavorable foreign currency translation impact, we experienced 2013 net sales benefits primarily in our AF Products and Structural Heart Products compared to 2012.

44



AF Products 2013 net sales increased over 2012 as a result of the continued increase in EP catheter ablation procedures, further market penetration of our EnSite® Velocity System and related connectivity tools (EnSite Connect™, EnSite Courier™ and EnSite Derexi™ modules) as well as our intracardiac echocardiography imaging product offerings. Additionally, we experienced an incremental net sales benefit from our European launch of our TactiCath® irrigated ablation catheter, acquired through our Endosense acquisition in August 2013. Foreign currency translation had a $25 million (3 percentage point) unfavorable impact on 2013 AF Products net sales compared to 2012.

Structural Heart Products 2013 net sales increased compared to 2012 primarily driven by our Trifecta™ pericardial stented tissue valve and our AMPLATZER™ occluder products. These increases were partially offset by a net sales decrease in our mechanical heart valves due to a market preference for tissue heart valves. Additionally, foreign currency translation had a $13 million (2 percentage point) unfavorable impact on 2013 Structural Heart Products net sales compared to the prior year.

Although our 2013 ICD systems net sales were flat compared to 2012, driven by a $16 million (1 percentage point) unfavorable foreign currency translation impact, we experienced sales volume benefits from our next-generation Ellipse™ and Assura™ devices that received FDA approval in June 2013 and CE Mark approval in May 2013.

Additionally, our 2013 Vascular Products net sales declined over 2012 primarily as a result of a $25 million unfavorable foreign currency translation impact to 2013 net sales and sales declines related to our third party products we distribute in Japan (discussed previously). These decreases were partially offset by increased revenues in our FFR technology products and OCT imaging products during 2013 compared to 2012.

Our 2013 Pacemaker Systems net sales decreased compared to 2012 primarily due to overall market declines in average selling prices and a $22 million (2 percentage point) unfavorable foreign currency translation impact on 2013 net sales compared to 2012. These decreases were partially offset by benefits we experienced from our July 2013 Accent MRI™ Pacemaker and the Tendril MRI™ lead launch in Japan and our Allure Quadra™ CRT-P launch in Europe (CE Mark approval in April 2013).

Foreign currency translation relating to our international operations can have a significant impact on our operating results from year to year. The two main currencies influencing our operating results are typically the Euro and the Japanese Yen. As discussed previously, foreign currency translation had a $74 million unfavorable impact on 2014 net sales compared to 2013 and a $101 million unfavorable impact on 2013 net sales compared to 2012. These impacts to net sales are not indicative of the net earnings impact of foreign currency translation due to partially offsetting foreign currency translation impacts on cost of sales and operating expenses.
Gross profit
 

 
 

 
 
 
2014 vs. 2013 Change
 
2013 vs. 2012 Change
 
(in millions)
2014
 
2013
 
2012
 
 
 
Gross profit
$
3,969

 
$
3,927

 
$
3,965

 
1.1
 %
 
(1.0
)%
 
Percentage of net sales
70.6
%
 
71.4
%
 
72.1
%
 
(0.8
)
pts.
(0.7
)
pts.

Our 2014 and 2013 gross profit percentage (or gross margin) was negatively impacted by 1.4 percentage points and 0.9 percentage points, respectively, as a result of the U.S. medical device and Puerto Rico excise taxes assessed on the sale of our products. Additionally, our 2014 gross margin was negatively impacted by special charges of $56 million, or 1.0 percentage point, related to our restructuring activities associated with our 2012 Business Realignment Plan and Manufacturing and Supply Chain Optimization Plan and product field action costs. Our 2013 gross margin was negatively impacted by special charges of $45 million, or 0.8 percentage points, related to charges associated with our 2012 Business Realignment Plan and product field action costs. Refer to “Special Charges” section that follows for a more detailed discussion of these charges.

Special charges in 2012 negatively impacted our gross margin by $93 million, or 1.6 percentage points, due to restructuring activities related to our 2012 Business Realignment Plan and 2011 Restructuring Plan, product field action and litigation costs and inventory write-offs. Our 2012 gross margin did not include any impact from excise taxes.
 

45


Selling, general and administrative (SG&A) expense
 

 
 

 
 
 
2014 vs. 2013 Change
 
2013 vs. 2012 Change
 
(in millions)
2014
 
2013
 
2012
 
 
 
Selling, general and administrative expense
$
1,856

 
$
1,805

 
$
1,803

 
2.8
%
 
0.1
%
 
Percentage of net sales
33.0
%
 
32.8
%
 
32.8
%
 
0.2

pts.

pts.

The increase in our 2014 SG&A expense as a percent of net sales compared to 2013 was primarily driven by $62 million (1.1 percentage points) of acquisition-related costs, including contingent consideration fair value adjustments, partially offset by cost savings initiatives, including benefits associated with our restructuring activities.
 
Although our 2013 SG&A expense as a percent of net sales compared to 2012 was flat, our 2013 SG&A expense included $21 million (0.4 percentage points) of acquisition-related costs, including contingent consideration fair value adjustments, and a $9 million accounts receivable allowance charge (0.1 percentage points) for the increased collection risk associated with a certain distributor account receivable in Europe. These 2013 charges were offset by cost savings initiatives resulting from the 2012 Business Realignment Plan initiated in August 2012.

Research and development (R&D) expense
 

 
 

 
 
 
2014 vs. 2013 Change
 
2013 vs. 2012 Change
 
(in millions)
2014
 
2013
 
2012
 
 
 
Research and development expense
$
692

 
$
691

 
$
676

 
0.1
 %
 
2.2
%
 
Percentage of net sales
12.3
%
 
12.6
%
 
12.3
%
 
(0.3
)
pts.
0.3

pts.

Our R&D expense as a percent of net sales has remained relatively consistent over the last few years, reflecting our commitment to fund growth through cost effective innovation. Our investment in R&D reflects our commitment to fund long-term growth opportunities while balancing short-term results. Our global R&D activities primarily include research, development, clinical and regulatory efforts. These efforts are primarily focused on product innovation that we anticipate will ultimately improve patient outcomes, reduce overall healthcare costs and provide economic value to our customers while providing the best possible technology available. We will continue to assess our R&D programs in future periods as we focus on the development of new products and the improvement to existing products.

Amortization of intangible assets
 
 
 
 
 
 
2014 vs. 2013 Change
 
2013 vs. 2012 Change
(in millions)
2014
 
2013
 
2012
 
Amortization of intangible assets
$
89

 
$
79

 
$
88

 
12.7
%
 
(10.2
)%

The increase in our 2014 intangible asset amortization expense compared to 2013 was driven by an increase in our definite-lived intangible assets as a result of our business combinations during 2014 and 2013. During the second half of 2013, we acquired Nanostim and Endosense and recognized a total of $54 million in developed technology assets with estimated useful lives ranging between seven and 10 years. In 2013, we also recognized $7 million of purchased technology intangible assets with an estimated useful life of 12 years as part of our Spinal Modulation business combination. Our 2014 intangible asset amortization expense reflects a full year of amortization of these assets compared to a partial year in 2013. During 2014, we also acquired NeuroTherm and recognized $87 million of developed technology intangible assets that have estimated useful lives ranging from 11 to 12 years and a $2 million other intangible asset that has an estimated useful life of five years. Additionally, after receiving FDA approval of our CardioMEMS™ HF System in May 2014, we reclassified $63 million of acquired IPR&D from an indefinite-lived intangible asset to a purchased technology definite-lived intangible asset, and began amortizing the asset over its estimated useful life of 11 years. In October 2014, we also received FDA approval of our TactiCath® irrigated ablation catheter and reclassified $33 million of acquired IPR&D from an indefinite-lived intangible asset to a purchased technology definite-lived intangible asset, and began amortizing the asset over its estimated useful life of seven years.

The decrease in our 2013 intangible asset amortization expense compared to 2012 was the result of recognizing $31 million of developed technology intangible assets impairments primarily during the second half of 2012.

46


Additionally, we recognized $13 million and $2 million of intangible asset impairments primarily associated with customer relationship intangible assets acquired in connection with certain legacy acquisitions during 2013 and 2012, respectively.
 
Special charges
 

 
 

 
 
(in millions)
2014
 
2013
 
2012
Cost of sales special charges
$
56

 
$
45

 
$
93

Special charges
181

 
301

 
298

    Total special charges
$
237

 
$
346

 
$
391

We recognize certain transactions and events as special charges in our Consolidated Financial Statements. These charges (such as restructuring charges, impairment charges and certain legal settlements or product field action costs and litigation costs) result from facts and circumstances that vary in frequency and impact on our results of operations.
Restructuring Activities
During 2014, we announced additional organizational changes including the combination of our Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division, resulting in an integrated R&D organization and a consolidation of manufacturing and supply chain operations worldwide. The integration has been conducted in a phased approach during 2014. In connection with these actions, we incurred special charges totaling $108 million during 2014 as part of our 2012 Business Realignment Plan (refer to the subsequent paragraph for further details). Of the $108 million incurred, we recognized $44 million of severance costs and other termination benefits after management determined that such severance and benefit costs were probable and estimable, $20 million of fixed asset write-offs and $8 million of inventory write-offs primarily associated with a discontinued clinical trial and $36 million of other restructuring costs, including $22 million of distributor and other contract termination costs, $10 million associated with the discontinuation of a clinical trial and $4 million related to a planned exit of a facility in Europe. The Company currently expects to incur approximately $6 million to complete the plan during 2015. Additionally, we incurred special charges totaling $32 million during 2014 related to our Manufacturing and Supply Chain Optimization Plan initiated during the third quarter of 2014. We expect the Manufacturing and Supply Chain Optimization Plan to leverage economies of scale, streamline distribution methods, drive process improvements through global synergies, balance plant utilization levels, centralize certain vendor relationships and reduce overall costs. The Company currently expects to incur approximately $45 million to complete the plan during 2015, but may incur additional charges in future periods. Of the total $140 million of restructuring charges incurred, $37 million was recorded to cost of sales. The cost of sales special charges primarily related to fixed assets and inventory write-offs associated with a discontinued clinical trial and employee severance and other termination benefits related to the planned exit of a facility in Europe.
During 2013, we incurred special charges totaling $220 million related to the 2012 Business Realignment Plan, initiated in August of 2012. The 2012 Business Realignment Plan was initiated to realign our product divisions into two new operating divisions: Implantable Electronic Systems Division (combining our legacy Cardiac Rhythm Management and Neuromodulation product divisions) and Cardiovascular and Ablation Technologies Division (combining our legacy Cardiovascular and Atrial Fibrillation product divisions) and to centralize certain support functions, including information technology, human resources, legal, business development and certain marketing functions. The organizational changes have been part of a comprehensive plan to accelerate growth, reduce costs, leverage economies of scale and increase investment in product development. The 2012 Business Realignment Plan reduced our workforce by approximately 5%. Of the $220 million recorded as special charges, $35 million was recorded in cost of sales. We recognized severance costs and other termination benefits of $75 million after management determined that such severance and benefit costs were probable and estimable. Additionally, we recorded $30 million of inventory write-offs primarily associated with discontinued cardiovascular product lines, $13 million of fixed asset write-offs primarily related to information technology assets no longer expected to be utilized and $102 million of other restructuring costs. Of the $102 million in other restructuring costs, $64 million was associated with distributor and other contract termination costs and office consolidation costs, including a $23 million charge related to the termination of a research agreement, and $38 million was associated with other costs, all as part of our continued integration efforts. During 2013, we also recognized additional special charges totaling $24 million related to the 2011 Restructuring Plan initiated during 2011. These actions included phasing out our cardiac rhythm management manufacturing and R&D operations in Sweden, reductions in our workforce and rationalizing product lines. Of the $24 million recorded as special charges, we recognized severance costs and

47


other termination benefits of $5 million after management determined that such severance and benefit costs were probable and estimable. We also recognized $1 million of fixed write-offs and $18 million of other restructuring costs, primarily associated with idle facility costs in Sweden.
During 2012, we incurred charges of $185 million related to the 2012 Business Realignment Plan, of which $24 million was recognized in cost of sales. In connection with the realignment, we recognized $109 million of severance costs and other termination benefits after management determined that such severance and benefit costs were probable and estimable. We also recognized $17 million of inventory write-offs associated with discontinued cardiovascular product lines and $41 million of incremental depreciation charges and fixed asset write-offs primarily related to information technology assets no longer expected to be utilized or with a limited remaining useful life. Additionally, we recognized $18 million of other restructuring costs which included $7 million of contract termination costs and $11 million of other costs. During 2012, we also incurred additional charges totaling $102 million related to the 2011 Restructuring Plan. Of the $102 million recorded as special charges, $44 million was recorded in cost of sales. We recognized severance costs and other termination benefits of $38 million for an additional 100 employees after management determined that such severance and benefit costs were probable and estimable. We also recognized $13 million of inventory obsolescence charges primarily related to the rationalization of product lines in our Cardiac Rhythm Management and Neuromodulation businesses. Additionally, we recognized $51 million of other restructuring charges which included $37 million of restructuring related charges associated with our Cardiac Rhythm Management business and selling support organizations (of which $13 million related to idle facility costs in Sweden). The remaining charges included $8 million of contract termination costs and $6 million of other costs.
Other Special Charges
Intangible asset impairment charges: During 2014, we recognized $58 million of intangible asset impairment charges to write-down certain cardiovascular indefinite-lived IPR&D assets and an indefinite-lived tradename asset that were less than their carrying values. The impairments were due primarily to our revised expectations, including an increase in the cost and length of time to bring the related products to market through U.S. regulatory approval as well as termination of an IPR&D program and clinical trial. During 2013, we recognized impairment charges of $29 million to write-down certain cardiovascular indefinite-lived tradename and IPR&D assets to fair value. The impairments were due primarily to our revised expectations, including an increase in the cost and length of time to bring the related products to market through U.S. regulatory approval. During 2012, we recognized a $23 million impairment charge for certain developed technology intangible assets, as our updated expectations for the future cash flows of the related neuromodulation product lines decreased, ultimately resulting in the related assets' fair value falling below carrying value. We also discontinued certain cardiovascular product lines and recognized $8 million of impairment charges to fully impair the related developed technology intangible assets. During both 2013 and 2012, we recognized $13 million and $2 million, respectively, of intangible asset impairments primarily related to our customer relationship intangible assets acquired in connection with certain legacy acquisitions of businesses involved in the distribution of our products. Due to the changing dynamics of the U.S. healthcare market, specifically as it relates to hospital purchasing practices, we determined that these intangible assets had no future discrete cash flows and were fully impaired.
Legal settlements: During 2014, we recognized a $48 million gain associated with a favorable judgment and resolution in a patent infringement case. Partially offsetting this gain, we recognized $37 million of legal settlement expense for three unrelated legal settlements. During 2013, we agreed to settle a dispute on licensed technology associated with certain cardiovascular products lines. In connection with the settlement, which resolved all disputed claims, we recognized a $22 million charge. During 2012, we agreed to settle a dispute on licensed technology for our Angio-Seal™ vascular closure devices. In connection with this legal settlement, which resolved all disputed claims and included a fully-paid perpetual license, we recognized a $28 million settlement expense.
Product field action costs and litigation costs: During 2014, we initiated an advisory letter to physicians for patients implanted with certain ICDs that were identified as having a potential battery anomaly. As a result, we recognized charges of $23 million in cost of sales special charges primarily for scrapped inventory as well as additional warranty and patient monitoring costs. During 2014, we also recognized a $4 million benefit in cost of sales special charges due to lower than expected direct recall costs related to the voluntary product field action initiated in late 2012 associated with certain neuromodulation implantable pulse generator charging systems. During 2013, we recognized charges of $10 million in cost of sales special charges for costs related to the 2012 neuromodulation voluntary product field action. During 2012, we recognized charges of $27 million, of which $25 million was recorded to cost of sales special charges, for costs primarily related to the 2012 neuromodulation voluntary product field action.

48


During 2014, 2013 and 2012, we recognized $31 million, $28 million and $16 million, respectively, of litigation charges for expected future probable and estimable legal costs associated with outstanding legal matters related to our product field actions. Charges in excess of the amounts accrued are reasonably possible and depend on a number of factors, such as the type of claims received and the cost to defend.
Other expense, net
 
 
 
 
 
(in millions)
2014
 
2013
 
2012
Interest income
$
(5
)
 
$
(5
)
 
$
(5
)
Interest expense
85

 
81

 
73

Other (income) expense
3

 
191

 
27

Other expense, net
$
83

 
$
267

 
$
95


Interest income: Our interest income is dependent on our outstanding cash balances and applicable interest rates.

Interest expense: Our interest expense has increased over the last two years as a result of higher average debt balances, specifically term loans that we entered into in June 2013 and August 2014, as well as maintaining a higher average commercial paper balance. Additionally, we have been subject to higher average interest rates on our term loans.

Other (income) expense: During 2013, we redeemed the full $700 million principal amount of 5-year, 3.75% unsecured senior notes originally due in 2014 (2014 Senior Notes) and the full $500 million principal amount of 10-year, 4.875% unsecured senior notes originally due in 2019 (2019 Senior Notes). In connection with the redemption of these notes prior to their scheduled maturities, we recognized a $161 million debt retirement charge to other (income) expense associated primarily with make-whole redemption payments and the write-off of unamortized debt issuance costs. Additionally, in connection with the initial February 2013 consolidation of CardioMEMS, we recognized a $29 million loss to other (income) expense related to a fair value remeasurement adjustment during 2013 to adjust the carrying value of our CardioMEMS equity investment and fixed price purchase option. During 2014, 2013 and 2012, we also recognized $3 million, $13 million and $14 million, respectively, of realized gains in other (income) expense associated with the sale of available-for-sale securities.
Income taxes
(as a percent of earnings before income taxes and noncontrolling interest)
2014
 
2013
 
2012
Effective tax rate
10.6
%
 
11.7
%
 
25.2
%
Our effective tax rate differs from our U.S. federal statutory 35% tax rate due to our international operations that are subject to foreign tax rates that are lower than the U.S. federal statutory rate, state and local taxes and domestic tax incentives. Our effective tax rate is also impacted by discrete factors or events such as special charges, non-deductible charges, tax law changes or the resolution of audits by tax authorities.
Special charges and discrete items recognized during 2014 favorably impacted the effective tax rate by 7.4 percentage points. Debt redemption charges and special charges favorably impacted our 2013 effective tax rate by 7.7 percentage points. Additionally, our 2013 effective tax rate includes the full year 2012 benefit of the R&D tax credit, which was extended for 2012 in January 2013. As a result of the late extension, our effective tax rate for 2013 was favorably impacted by 1.6 percentage points and our 2012 effective tax rate was negatively impacted by 1.6 percentage points. Additionally, during 2012 we resolved certain prior year tax positions with the IRS and recognized a $46 million settlement reserve to income tax expense, negatively impacting our 2012 effective tax rate by 4.6 percentage points. Special charges and discrete items, however, favorably impacted our 2012 effective tax rate by 2.6 percentage points. Refer to the Special charges section for further details regarding these charges.


49


Net loss attributable to noncontrolling interest
(in millions)
2014
 
2013
 
2012
Net loss attributable to noncontrolling interest
$
(47
)
 
$
(31
)
 
$


Net loss attributable to noncontrolling interest represents the elimination of the losses attributable to non-St. Jude Medical, Inc. ownership interests in St. Jude Medical, Inc. consolidated entities. The changes in the net loss attributable to noncontrolling interest are largely related to the differing periods during which there were non-St. Jude Medical, Inc. ownership interests in CardioMEMS and Spinal Modulation. Refer to Note 2 of the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data" for additional information.

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 our commercial paper program will be sufficient to fund our operating needs, working capital requirements, R&D opportunities, capital expenditures, debt service requirements, share repurchases and shareholder dividends (see Dividends and Share Repurchases section) 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.
As of January 3, 2015, substantially all of our cash and cash equivalents were 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 practicable 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.
A summary of our cash flows from operating, investing and financing activities is provided in the following table (in millions):
 
2014
 
2013
 
2012
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
1,304

 
$
961

 
$
1,335

Investing activities
(339
)
 
(522
)
 
(313
)
Financing activities
(827
)
 
(257
)
 
(813
)
Effect of currency exchange rate changes on cash and cash equivalents
(69
)
 
(3
)
 
(1
)
Net increase in cash and cash equivalents
$
69

 
$
179

 
$
208

Operating Cash Flows
Operating cash flows can fluctuate significantly from period to period due to payment timing differences of working capital accounts such as accounts receivable, inventories, accounts payable, accrued liabilities and income taxes payable. During 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.
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) was 77 days at January 3, 2015 compared to 91 days at December 28, 2013 and 89 days at December 29, 2012. The overall decrease in our DSO at January 3, 2015 is primarily a result of our

50


increased receivable collection efforts during the fourth quarter of 2014 as well as foreign currency translation impacts reducing our accounts receivable balance compared to the same prior two year periods. Our DIOH (ending net inventory divided by average daily cost of sales for the most recently completed six months) was 170 days at January 3, 2015 compared to 158 days at December 28, 2013 and 143 days at December 29, 2012. Special charges recognized in cost of sales in the last half of 2014 reduced our January 3, 2015 DIOH by 7 days. Special charges recognized in cost of sales in the second half of 2013 reduced our December 28, 2013 DIOH by 5 days, and special charges recognized in cost of sales in the second half of 2012 reduced our December 29, 2012 DIOH by 11 days. The overall increase in our DIOH is the result of more inventory on hand as a result of our business combinations and inventory on hand to support our new product approvals.
Investing Cash Flows
Our purchases of property, plant and equipment totaled $190 million, $222 million and $280 million in 2014, 2013 and 2012, respectively, primarily reflecting our continued investment in our product growth platforms currently in place. Additionally, during 2014, we acquired NeuroTherm for $147 million in net cash consideration. During 2013, we also acquired Endosense and Nanostim for $171 million and $121 million in net cash consideration, respectively.
Financing Cash Flows
During 2014, we exercised our exclusive option and paid $344 million to shareholders to obtain the remaining 81% ownership interest in CardioMEMS. Additionally, during 2014, we received FDA approval of the TactiCath® irrigated ablation catheter and settled the contingent consideration liability. See Note 6 and 11 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data" for further information regarding both of these transactions. Additionally, during 2014, the Company entered into a 364-day, $250 million unsecured term loan and used the proceeds for general corporate purposes, including the acquisition of NeuroTherm. During 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). We used the majority of the proceeds to redeem both our $700 million principal amount 2014 Senior Notes and our $500 million principal amount 2019 Senior Notes. We used the remaining proceeds from the issuance of our 2023 Senior Notes and 2043 Senior Notes for general corporate purposes. We also entered into a 2-year, $500 million unsecured term loan and used the proceeds for general corporate purposes. 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 were 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):
 
2014
 
2013
 
2012
Stock issued under employee stock plans, including tax benefit
$
156

 
$
458

 
$
120

Common stock repurchases
(476
)
 
(833
)
 
(992
)
Dividends paid
(303
)
 
(282
)
 
(284
)
Debt borrowings, net
275

 
554

 
321

Purchase of shares from noncontrolling ownership interest
(344
)
 

 

Payment of contingent consideration
(128
)
 

 

Other, net
(7
)
 
(154
)
 
22

Net cash used in financing activities
$
(827
)
 
$
(257
)
 
$
(813
)

DEBT AND CREDIT FACILITIES
Total debt increased to $3,866 million as of January 3, 2015 from $3,580 million as of December 28, 2013. Our weighted average effective interest rate on our outstanding long-term debt, inclusive of interest rate swaps, was 2.1% and 2.2% at January 3, 2015 and December 28, 2013, respectively.

51


In May 2013, we entered into a long-term $1.5 billion committed Credit Facility that we may draw on for general corporate purposes and to pay outstanding commercial paper. 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 January 3, 2015.
Our commercial paper program provides for the issuance of short-term, unsecured notes with maturities up to 270 days. As of January 3, 2015 and December 28, 2013, we had outstanding commercial paper balances of $789 million and $714 million, respectively. During both 2014 and 2013, our weighted average effective interest rate on our outstanding commercial paper borrowings was 0.24%. Any future commercial paper borrowings would bear interest at the applicable then-current market 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 August 2014, we entered into a 364-day, $250 million unsecured term loan that matures in August 2015, the proceeds of which were used for general corporate purposes, including the acquisition of NeuroTherm. These borrowings bear interest at LIBOR plus 0.9% and we may repay the term loan at any time.
In December 2010, we issued $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 2043 Senior Notes are both 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 $107 million at January 3, 2015 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 $68 million at January 3, 2015 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. The outstanding 6.5 billion Japanese Yen balance was the equivalent of $54 million at January 3, 2015 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 2015. 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

52


and Yen Notes we also have certain limitations on how we conduct our business, including limitations on dividends, 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 January 3, 2015.
DIVIDENDS AND SHARE REPURCHASES
Cash dividends declared totaled $0.27 per share for each quarter in fiscal year 2014 for a total of $309 million, $0.25 per share for each quarter in fiscal year 2013 for a total of $286 million and $0.23 per share for each quarter in fiscal year 2012 for a total of $284 million. On February 20, 2015 our Board of Directors authorized a cash dividend of $0.29 per share payable on April 30, 2015 to shareholders of record as of March 31, 2015. We expect to continue to pay quarterly cash dividends in the foreseeable future, subject to Board approval.
On January 13, 2015, our Board of Directors authorized a share repurchase program of up to $500 million of our outstanding common stock. We began repurchasing shares on January 30, 2015. From January 30, 2015 through February 20, 2015, we repurchased 6.2 million shares for $413 million at an average repurchase price of $66.88 per share.
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 11, 2013 through December 28, 2013, we repurchased 4.4 million shares for $266 million at an average repurchase price of $60.18 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.
On November 29, 2012, our Board of Directors authorized a share repurchase program of up to $1.0 billion of our outstanding common stock. We began repurchasing shares on December 5, 2012 and completed the repurchases under the program on February 1, 2013, repurchasing 26.8 million shares for $1.0 billion at an average repurchase price of $37.27 per share. From December 5, 2012 through December 29, 2012, we repurchased 12.9 million shares for $458 million at an average repurchase price of $35.60 per share. From December 30, 2012 through February 1, 2013, we repurchased 13.9 million shares for $542 million at an average repurchase price of $38.83 per share.
On October 17, 2012, our Board of Directors authorized a share repurchase program of up to $300 million of our outstanding common stock. We began repurchasing shares on October 19, 2012 and completed the repurchases under the program on November 6, 2012, repurchasing 7.7 million shares for $300 million at an average repurchase price of $38.97 per share.
On December 12, 2011, our Board of Directors authorized a share repurchase program of up to $300 million of our outstanding common stock. We began repurchasing shares on January 27, 2012 and completed the repurchases under the program on February 8, 2012, repurchasing 7.1 million shares for $300 million at an average repurchase price of $42.14 per share.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We believe that our off-balance sheet arrangements do not have a material current or anticipated future effect on our consolidated earnings, financial position or cash flows. Our off-balance sheet arrangements principally consist of operating leases for various facilities and equipment and purchase commitments.
In the normal course of business, we periodically enter into agreements that require us to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising out of our products or the negligence of our personnel or claims alleging that our products infringe third-party patents or other intellectual property. In addition, under our bylaws and indemnification agreements we have entered into with our executive officers and directors, we may be required to indemnify our executive officers and directors for losses arising from their conduct in an official capacity on behalf of St. Jude Medical. We may also be required to indemnify officers and directors of certain companies that we have acquired for losses arising from their conduct on behalf of their companies prior to the closing of our acquisition. Our maximum exposure under these indemnification obligations cannot be estimated, and we have not accrued any liabilities within our Consolidated Financial Statements or included any indemnification provisions in our commitments table. Historically, we have not experienced significant losses on these types of indemnification obligations.

53


A summary of contractual obligations and other minimum commercial commitments as of January 3, 2015 is as follows (in millions):
 
Payments Due by Period
 
 
Less than
1-3
3-5
More than
 
Total
1 Year
Years
Years
5 Years
Contractual obligations related to
 
 
 
 
 
off-balance sheet arrangements:
 
 
 
 
 
 Operating lease obligations
$
122

$
35

$
51

$
29

$
7

 Purchase obligations (a)
285

268

16

1


   Total
$
407

$
303

$
67

$
30

$
7

 
 
 
 
 
 
Contractual obligations reflected
 
 
 
 
 
in the balance sheet:
 
 
 
 
 
 Debt obligations (b)
$
5,091

$
1,670

$
703

$
129

$
2,589

 Contingent consideration and other (c)
78

10

53

15


   Total
$
5,169

$
1,680

$
756

$
144

$
2,589

 
 
 
 
 
 
Grand Total (d)
$
5,576

$
1,973

$
770

$
159

$
2,596

 
(a)
 
These amounts include commitments for inventory purchases and capital expenditures that do not exceed our projected requirements and are in the normal course of business. The purchase commitment amounts do not represent the entire anticipated purchases and capital expenditures in the future, but only those for which we are contractually obligated.
 
(b)
 
Includes current debt obligations, scheduled maturities of long-term debt and scheduled interest payments. See Note 4 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data" for additional information on our debt obligations.
 
(c)
 
These amounts include contingent commitments to acquire various businesses involved in the distribution of our products and other contingent acquisition consideration payments. In connection with certain acquisitions, we may agree to provide additional consideration payments upon the achievement of certain product development milestones, which may include but are not limited to: successful levels of achievement in clinical trials and certain product regulatory approvals. We may also provide for additional consideration payments to be made upon the achievement of certain levels of future product sales. While it is not certain if and/or when these payments will be made, we have included the payments in the table based on our best estimates of the dates when we expect the milestones and/or contingencies will be met. Contingent consideration arrangements with variable interest entities have been excluded from the table, as we have the exclusive right, but not the obligation, to acquire these companies. See Note 2 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data" for further detail.
 
(d)
 
The table does not include our liability for uncertain tax positions of $328 million or our related accrual for gross interest and penalties of $44 million as of January 3, 2015, as we are uncertain as to if or when such amounts may be paid. Additionally, the table does not include other liabilities of $301 million pertaining to non-qualified deferred compensation because the timing of the future cash payments is uncertain.


54


MARKET RISK
Foreign Exchange Rate Risk

We are exposed to foreign currency exchange rate fluctuations due to transactions denominated primarily in Euros, Japanese Yen, Canadian Dollars, Australian Dollars, Brazilian Reals, Argentine Peso, British Pounds and Swedish Kronor. When the U.S. Dollar weakens against foreign currencies, the dollar value of sales denominated in foreign currencies increases. When the U.S. Dollar strengthens against foreign currencies, the dollar value of sales denominated in foreign currencies decreases. A hypothetical 10% change in the value of the U.S. Dollar in relation to our foreign currency denominated sales would have an impact of approximately $277 million on our 2014 net sales. This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on the related cost of sales and operating expenses in the applicable foreign currencies.

Derivative Financial Instrument Risk

During 2014, 2013 and 2012, we hedged a portion of our foreign currency transaction risk through the use of forward exchange contracts. We use forward exchange contracts to manage foreign currency exposures related to intercompany receivables and payables arising from intercompany purchases of manufactured products. These forward contracts are not designated as qualifying hedging relationships under ASC Topic 815, Derivatives and Hedging (ASC Topic 815). We measure our foreign currency exchange rate contracts at fair value on a recurring basis. The fair value of all outstanding contracts was immaterial as of January 3, 2015 and December 28, 2013. During 2014, 2013 and 2012, we recognized net gains of $9 million, $15 million and $7 million, respectively, to other (income) expense for our forward currency exchange contracts not designated as hedging instruments under ASC Topic 815. The net gains were almost entirely offset by corresponding net losses on the foreign currency exposures being managed. We do not enter into contracts for trading or speculative purposes. Our policy is to enter into hedging contracts with major financial institutions that have at least an “A” (or equivalent) credit rating. Although we are exposed to credit loss in the event of nonperformance by counterparties on our outstanding derivative contracts, we do not anticipate nonperformance by any of the counterparties. We continue to evaluate our foreign currency exchange rate risk and the different mechanisms for use in managing such risk, including using derivative financial instruments and operational hedges, such as international manufacturing operations. Our derivative financial instruments accounting policy is discussed in detail in Note 1 to the Consolidated Financial Statements within Item 8. "Financial Statements and Supplementary Data." Although we have not entered into any derivative hedging contracts to hedge the net asset exposure of our foreign subsidiaries, we have elected to use natural hedging strategies in certain geographies. We have naturally hedged a portion of our Yen-denominated net asset exposure by issuing long-term Yen-denominated debt.

In January 2015, we began to enter into foreign exchange forward contracts that are designated as cash flow hedges to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. We expect to de-designate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The maximum length of time over which the Company will hedge its exposure to the variability in future cash flows is expected to be 24 months.
Fair Value Risk
We are also exposed to fair value risk on our Senior Notes and Yen Notes. As of January 3, 2015, the aggregate fair value of our Senior Notes (measured using quoted prices in active markets) was $2,357 million compared to the aggregate carrying value of $2,273 million (inclusive of the terminated interest rate swaps). Our 2043 Senior Notes have a fixed interest rate of 4.75%, our 2023 Senior Notes have a fixed rate of interest of 3.25% and our 2016 Senior Notes have a fixed rate of interest of 2.50%. A hypothetical one-percentage point change in the interest rates would have an impact of approximately $175 million to $210 million on the fair value of our Senior Notes. As of January 3, 2015, the fair value of our yen-denominated notes (2.04% Yen Notes and 1.58% Yen Notes), both of which have a fixed interest rate, approximated their carrying value. A hypothetical one-percentage point change in the interest rates would have an aggregate impact of approximately $7 million on the fair value of the yen-denominated notes.
Our variable-rate debt consists of our commercial paper borrowings and term loans in the United States and our yen-denominated credit facilities in Japan. Assuming average outstanding borrowings of $1,593 million during 2014, a hypothetical one-percentage point change in the interest rates would have an impact of approximately $16 million on our 2014 interest expense.

55


We are also exposed to equity market risk on our marketable equity security investments. We hold certain marketable equity securities of publicly-traded companies. Our investments in these companies had a fair value of $30 million as of January 3, 2015, which are subject to the underlying price risk of the public equity markets.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, derivative financial instruments and accounts receivable. We invest our excess cash in bank deposits, commercial paper or money market funds and diversify the concentration of cash among different financial institutions. Counterparties to our derivative financial instruments are limited to major financial institutions. We perform periodic evaluations of the relative credit standings of these financial institutions and limit the amount of credit exposure with any one financial institution. While we do not require collateral or other security to be furnished by the counterparties to our derivative financial instruments, we minimize exposure to credit risk by dealing with a diversified group of major financial institutions and actively monitoring outstanding positions.
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to our large number of customers and their diversity across many geographic areas. A portion of our trade accounts receivable outside the United States, however, include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies. Deteriorating credit and economic conditions in parts of Southern Europe, particularly in Italy, Spain, Portugal and Greece may continue to increase the average length of time it takes us to collect our accounts receivable or also increase our risk of fully collecting our accounts receivable in these countries.
We continually evaluate all government receivables for potential collection risks associated with the availability of government funding, reimbursement practices and economic conditions. During 2013, we recognized $9 million of accounts receivable reserves for increased collection risk associated with a certain accounts receivable account in Europe. If the financial condition of customers or the countries' healthcare systems deteriorate such that their ability to make payments is uncertain, additional allowances may be required in future periods. Our aggregate accounts receivable balance, net of the allowance for doubtful accounts, as of January 3, 2015 and December 28, 2013 in Italy, Spain, Portugal and Greece was approximately $216 million and $317 million, respectively, which made up 18% and 22%, respectively, of our consolidated net accounts receivable balance. No significant accounts receivable allowance charges were recognized in 2014 or 2012.

CAUTIONARY STATEMENTS
In this discussion and in other written or oral statements made from time to time, we have included and may include statements that constitute “forward-looking statements” with respect to the financial condition, results of operations, plans, objectives, new products, future performance and business of St. Jude Medical, Inc. and its subsidiaries. Statements preceded by, followed by or that include words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “forecast,” “project,” “believe” or similar expressions are intended to identify some of the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. By identifying these statements for you in this manner, we are alerting you to the possibility that actual results may differ, possibly materially, from the results indicated by these forward-looking statements. We undertake no obligation to update any forward-looking statements. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties discussed in the previous section entitled Off-Balance Sheet Arrangements and Contractual Obligations, Market Risk and Competition and Other Considerations and in Part I, Item 1A, "Risk Factors" as well as the various factors described below. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. We believe the most significant factors that could affect our future operations and results are set forth in the following list.
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.

56


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™, Trifecta™ and Portico™ 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, Puerto Rico and Costa Rica or a hurricane affecting our facilities in Puerto Rico and Malaysia.

57


23.
 
Our inability to maintain, protect and enhance our information and manufacturing systems and our products that incorporate information technology or to develop new systems and products as well as risks to the privacy and security of customer, patient, third-party payor, employee, supplier or company information from continually evolving cybersecurity threats.
24.
 
Changes in accounting rules or tax laws that adversely affect our results of operations, financial position or cash flows.



 
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the context of Item 7A, market risk refers to the risk of loss arising from adverse changes in financial and derivative instrument market rates and prices, such as fluctuations in interest rates and foreign currency exchange rates. The Company discusses market risk in various places throughout this document, including discussions in Liquidity and Market Risk sections within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and within Item 8. "Financial Statements and Supplementary Data" in the Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies, Debt, Fair Value Measurements and Financial Instruments and Derivatives Financial Instruments).


58


 
 
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Management
Management's Report on the Financial Statements
We are responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include amounts which reflect management's best estimates based on its informed judgment and consideration given to materiality. We are also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements.
Audit Committee Oversight
The adequacy of our internal accounting controls, the accounting principles employed in our financial reporting and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of independent directors. The independent registered public accounting firm meets with, and has unrestricted access to, the Audit Committee to discuss the results of its audit work.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of the Company's management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on this evaluation, we concluded that our internal control over financial reporting was effective as of January 3, 2015. Ernst & Young LLP, our independent registered public accounting firm, has also audited the effectiveness of the Company's internal control over financial reporting as of January 3, 2015 as stated in its report which is included herein.

/s/   Daniel J. Starks
Daniel J. Starks
Chairman, President and Chief Executive Officer

/s/   Donald J. Zurbay
Donald J. Zurbay
Vice President, Finance and Chief Financial Officer


59


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of St. Jude Medical, Inc.

We have audited St. Jude Medical, Inc.’s internal control over financial reporting as of January 3, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). St. Jude Medical, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, St. Jude Medical, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 3, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of St. Jude Medical, Inc. as of January 3, 2015 and December 28, 2013, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended January 3, 2015, and our report dated February 26, 2015 expressed an unqualified opinion thereon.




/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 26, 2015


60


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of St. Jude Medical, Inc.
 
We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. as of January 3, 2015 and December 28, 2013, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended January 3, 2015. Our audit also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Jude Medical, Inc. at January 3, 2015 and December 28, 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 3, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), St. Jude Medical, Inc.’s internal control over financial reporting as of January 3, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP
 
Minneapolis, Minnesota
February 26, 2015


61



CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share amounts)

Fiscal Year Ended
January 3, 2015
 
December 28, 2013
 
December 29, 2012
Net sales
$
5,622

 
$
5,501

 
$
5,503

Cost of sales:
 

 
 

 
 
Cost of sales before special charges
1,597

 
1,529

 
1,445

Special charges
56

 
45

 
93

Total cost of sales
1,653

 
1,574

 
1,538

Gross profit
3,969

 
3,927

 
3,965

Selling, general and administrative expense
1,856

 
1,805

 
1,803

Research and development expense
692

 
691

 
676

Amortization of intangible assets
89

 
79

 
88

Special charges
181

 
301

 
298

Operating profit
1,151

 
1,051

 
1,100

Interest income
(5
)
 
(5
)
 
(5
)
Interest expense
85

 
81

 
73

Other (income) expense
3

 
191

 
27

     Other expense, net
83

 
267

 
95

Earnings before income taxes and noncontrolling interest
1,068

 
784

 
1,005

Income tax expense
113

 
92

 
253

Net earnings before noncontrolling interest
955

 
692

 
752

Less: Net loss attributable to noncontrolling interest
(47
)
 
(31
)
 

Net earnings attributable to St. Jude Medical, Inc.
$
1,002

 
$
723

 
$
752

Net earnings per share attributable to St. Jude Medical, Inc.:
 
 

 
 
Basic
$
3.52

 
$
2.52

 
$
2.40

Diluted
$
3.46

 
$
2.49

 
$
2.39

Cash dividends declared per share:
$
1.08

 
$
1.00

 
$
0.92

Weighted average shares outstanding:
 

 
 

 
 
Basic
285.0

 
287.0

 
313.3

Diluted
289.7

 
290.6

 
314.8

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.


62



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)

Fiscal Year Ended
January 3, 2015
 
December 28, 2013
 
December 29, 2012
Net earnings before noncontrolling interest
$
955

 
$
692

 
$
752

Other comprehensive income (loss), net of tax:
 

 
 

 
 
Unrealized gain on available-for-sale securities, net of taxes of $2 million and $1 million, respectively

 
5

 
10

Reclassification of realized gain on available-for-sale securities, net of taxes of $1 million, $5 million and $6 million, respectively
(2
)
 
(8
)
 
(8
)
Unrealized gain on derivative financial instruments, net of taxes

 
3

 

Foreign currency translation adjustment
(217
)
 

 
28

Other comprehensive income (loss)
(219
)
 

 
30

Total comprehensive income before noncontrolling interest
736

 
692

 
782

Total comprehensive loss attributable to noncontrolling interest
(47
)
 
(31
)
 

Total comprehensive income attributable to St. Jude Medical, Inc.
$
783

 
$
723

 
$
782

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.


63


CONSOLIDATED BALANCE SHEETS
(in millions, except par value and share amounts)
 
January 3, 2015
 
December 28, 2013
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
1,442

 
$
1,373

Accounts receivable, less allowance for doubtful accounts
1,215

 
1,422

Inventories
784

 
708

Deferred income taxes
291

 
229

Other current assets
182

 
178

Total current assets
3,914

 
3,910

Property, Plant and Equipment
 
 
 
Land, building and improvements
709

 
651

Machinery and equipment
1,616

 
1,674

Diagnostic equipment
450

 
474

Property, plant and equipment, at cost
2,775

 
2,799

Less: Accumulated depreciation
(1,432
)
 
(1,389
)
Net property, plant and equipment
1,343

 
1,410

Goodwill
3,532

 
3,524

Intangible assets, net
851

 
911

Deferred income taxes
113

 
116

Other assets
454

 
377

TOTAL ASSETS
$
10,207

 
$
10,248

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current debt obligations
$
1,593

 
$
62

Accounts payable
151

 
247

Dividends payable
77

 
72

Income taxes payable
60

 
32

Employee compensation and related benefits
292

 
312

Other current liabilities
493

 
655

Total current liabilities
2,666

 
1,380

Long-term debt
2,273

 
3,518

Deferred income taxes
240

 
240

Other liabilities
784

 
706

Total liabilities
5,963

 
5,844

Commitments and Contingencies (Note 5)

 

Shareholders’ Equity
 

 
 

Preferred stock ($1.00 par value; 25,000,000 shares authorized; none outstanding)

 

Common stock ($0.10 par value; 500,000,000 shares authorized; 286,659,901 and 289,117,352 shares issued and outstanding as of January 3, 2015 and December 28, 2013, respectively)
29

 
29

Additional paid-in capital
118

 
220

Retained earnings
4,225

 
3,936

Accumulated other comprehensive income (loss)
(173
)
 
46

Total shareholders' equity before noncontrolling interest
4,199

 
4,231

Noncontrolling interest
45

 
173

Total shareholders' equity
4,244

 
4,404

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
10,207

 
$
10,248

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

64


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions, except share amounts)
 
 
 
 
Accumulated
 
 
 
Common Stock
Additional
 
Other
 
Total
 
Number of
 
Paid-In
Retained
Comprehensive
Noncontrolling
Shareholders'
 
Shares
Amount
Capital
Earnings
Income (Loss)
Interest
Equity
Balance as of December 31, 2011
319,615,965

$
32

$
43

$
4,384

$
16

$

$
4,475

Net earnings
 
 
 
752

 

752

Other comprehensive income (loss)
 
 
 
 
30


30

Cash dividends declared
 
 
 
(284
)
 
 
(284
)
Repurchases of common stock
(27,670,874
)
(3
)
(221
)
(834
)
 
 
(1,058
)
Stock-based compensation
 
 
69

 
 
 
69

Common stock issued under employee stock plans and other, net
3,703,236

1

118

 
 
 
119

Tax shortfall from stock plans
 
 
(9
)
 
 
 
(9
)
Balance as of December 29, 2012
295,648,327

30


4,018

46


4,094

Net earnings
 
 
 
723

 
(31
)
692

Other comprehensive income (loss)
 
 
 
 



Cash dividends declared
 
 
 
(286
)
 
 
(286
)
Repurchases of common stock
(18,385,436
)
(2
)
(287
)
(519
)
 
 
(808
)
Stock-based compensation
 
 
65

 
 
 
65

Common stock issued under employee stock plans and other, net
11,854,461

1

442

 
 
 
443

Additions in noncontrolling ownership interests
 
 

 
 
204

204

Balance as of December 28, 2013
289,117,352

29

220

3,936

46

173

4,404

Net earnings
 
 
 
1,002

 
(47
)
955

Other comprehensive income (loss)
 
 
 
 
(219
)

(219
)
Cash dividends declared
 
 
 
(309
)
 
 
(309
)
Repurchases of common stock
(6,670,817
)
(1
)
(247
)
(186
)
 
 
(434
)
Stock-based compensation
 
 
69

 
 
2

71

Common stock issued under employee stock plans and other, net
4,213,366

1

134

 
 
 
135

Tax benefit from stock plans
 
 
21

 
 
 
21

Measurement period fair value adjustment to noncontrolling interest
 
 
 
 
 
(36
)
(36
)
Purchase of shares from noncontrolling ownership interest
 
 
(79
)
(218
)
 
(47
)
(344
)
Balance as of January 3, 2015
286,659,901

$
29