<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NO. 1-9776
UNITED STATES SURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2518270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 GLOVER AVENUE, NORWALK, CONNECTICUT 06856
(Address of principal executive offices) (Zip Code)
(203) 845-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock,
par value $.10 per share,
outstanding at September 30, 1995 57,079,445 Shares
<PAGE> 2
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION Page
----
<S> <C>
Financial Statements:
Consolidated Balance Sheets at September 30, 1995 (Unaudited) and
December 31, 1994 ................................................................... 3
Consolidated Statements of Operations (Unaudited) for the Nine Months and
Three Months Ended September 30, 1995 and 1994 ...................................... 4
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine Months Ended September 30, 1995 and 1994 ............................... 5
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 1995 and 1994 ................................................... 6
Notes to Consolidated Financial Statements (Unaudited) .............................. 7
Review by Independent Accountants ................................................... 9
Independent Accountants' Report and Letter........................................... 10
Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations ................................................ 11 - 16
PART II--OTHER INFORMATION
Legal Proceedings ................................................................... 17
Exhibits and Reports on Form 8-K .................................................... 18
Signature ........................................................................... 18
</TABLE>
-2-
<PAGE> 3
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share data 1995 1994
- ---------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ....................................... $ 10,300 $ 11,300
Receivables, less allowance
($7,700 - September 30, 1995 and
$7,300 - December 31, 1994) .............................. 219,100 211,500
Inventories:
Finished goods .............................................. 98,500 95,500
Work in process ............................................. 25,600 27,100
Raw materials ............................................... 41,200 44,600
----------- -----------
165,300 167,200
Other current assets ............................................ 97,900 49,500
----------- -----------
Total Current Assets ........................................ 492,600 439,500
----------- -----------
Property, Plant, and Equipment at cost: ............................. 757,600 751,100
Less: Allowance for depreciation and amortization .................. (245,500) (211,100)
----------- -----------
512,100 540,000
Other Assets (net) .................................................. 180,300 124,000
----------- -----------
Total Assets ................................................ $ 1,185,000 $ 1,103,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................ $ 30,900 $ 29,500
Accrued liabilities ............................................. 136,500 125,200
Income taxes payable ............................................ 76,800 29,400
----------- -----------
Total Current Liabilities ................................... 244,200 184,100
Long-Term Debt ...................................................... 211,200 248,500
Deferred Income Taxes ............................................... 3,800 8,900
Stockholders' Equity:
Preferred Stock $5.00 par value, authorized 2 million shares;
9.76% Series A cumulative convertible, 177,400 shares
issued and outstanding (liquidation value - $200 million) 900 900
Additional paid-in capital - preferred stock .................... 190,600 190,600
Common stock $.10 par value, authorized 250 million shares;
issued, 65,211,373 at September 30, 1995 and
64,973,192 at December 31, 1994 ............................. 6,500 6,500
Additional paid-in capital - common stock ....................... 392,700 380,700
Retained earnings ............................................... 219,500 178,100
Treasury stock at cost; 8,131,928 shares at September 30,
1995 and 8,137,053 shares at December 31, 1994 ...................... (86,700) (86,700)
Accumulated translation adjustments ............................. 2,300 (8,100)
----------- -----------
725,800 662,000
----------- -----------
Total Liabilities and Stockholders' Equity .................. $ 1,185,000 $ 1,103,500
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 4
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------------------------------------
In thousands, except per share data 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $759,000 $692,200 $254,800 $234,200
------- ------- -------- -------
Costs and expenses:
Cost of products sold 337,200 350,000 106,500 115,200
Research and development 33,000 28,000 13,400 8,000
Selling, general and administrative 308,900 275,800 109,200 89,300
Interest 15,800 14,600 5,100 4,300
-------- -------- -------- --------
694,900 668,400 234,200 216,800
------- ------- -------- --------
Income before income taxes 64,100 23,800 20,600 17,400
Income taxes (benefit) 4,700 10,500 (5,300) 4,200
--------- -------- -------- ---------
Net income 59,400 13,300 25,900 13,200
Preferred stock dividends 14,600 10,000 4,900 4,900
-------- -------- -------- ---------
Net income applicable to common shares $ 44,800 $ 3,300 $ 21,000 $ 8,300
======== ======== ======== =========
Average number of common shares outstanding 56,900 56,500 57,000 56,700
======== ======== ======== =========
Net income per common share
(primary and fully diluted) $.79 $.06 $.37 $.15
=== === === ===
Dividends declared per common share $.06 $.06 $.02 $.02
=== === === ===
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 5
United States Surgical Corporation and Subsidiaries Form 10-Q
Consolidated Statements of Changes in September 30, 1995
Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in
Dollars in thousands, Preferred Capital - Common Capital - Retained
except share data Stock Preferred Stock Common Earnings
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994, $6,400 $371,700 $178,300
Issuance of preferred stock (177,400
shares) $900 $190,700
Common stock issued to employees -
net (511,475 shares) 100 6,900
Payment received on installment
receivables
Aggregate adjustment resulting from the
translation of foreign financial
statements
Preferred stock dividends declared (10,000)
Common stock dividends declared ($.06
per share) (3,400)
Net income 13,300
--- ------- ----- ------- -------
BALANCE AT SEPTEMBER 30, 1994 $900 $190,700 $6,500 $378,600 $178,200
=== ======= ===== ======= =======
BALANCE AT JANUARY 1, 1995, $900 $190,600 $6,500 $380,700 $178,100
Common stock issued to employees -
net (246,132 shares) 3,700
Income tax benefit from stock options
exercised 8,300
Aggregate adjustment resulting from the
translation of foreign financial
statements
Preferred stock dividends declared (14,600)
Common stock dividends declared ($.06
per share) (3,400)
Net income 59,400
--- ------- ----- ------- -------
BALANCE AT SEPTEMBER 30, 1995 $900 $190,600 $6,500 $392,700 $219,500
=== ======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Installment
Accumulated Receivables
Dollars in thousands, Translation from Sale of Treasury
except share data Adjustments Common Stock Stock Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994, $(20,400) $(5,400) $(86,700) $443,900
Issuance of preferred stock (177,400
shares) 191,600
Common stock issued to employees -
net (511,475 shares) 7,000
Payment received on installment
receivables 5,400 5,400
Aggregate adjustment resulting from the
translation of foreign financial 13,900 13,900
statements
Preferred stock dividends declared (10,000)
Common stock dividends declared ($.06
per share) (3,400)
Net income 13,300
---------- ------------ ------- -------
BALANCE AT SEPTEMBER 30, 1994 $ (6,500) $(86,700) $661,700
=========== ============ ======= =======
BALANCE AT JANUARY 1, 1995, $ (8,100) $(86,700) $662,000
Common stock issued to employees -
net (246,132 shares) 3,700
Income tax benefit from stock options
exercised 8,300
Aggregate adjustment resulting from the
translation of foreign financial 10,400 10,400
statements
Preferred stock dividends declared (14,600)
Common stock dividends declared ($.06
per share) (3,400)
Net income 59,400
--------- ------------ ------- -------
BALANCE AT SEPTEMBER 30, 1995 $ 2,300 $(86,700) $725,800
========= ============ ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 6
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
In thousands 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ............................... $ 762,700 $ 694,900
Cash paid to vendors, suppliers and employees .............. (617,500) (571,500)
Interest paid .............................................. (14,500) (20,100)
Income taxes paid .......................................... (7,300) (10,300)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 123,400 93,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ................. (24,800) (40,800)
Acquisitions ............................................... (23,900)
Other assets ............................................... 6,700 15,100
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .................... (42,000) (25,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings .................................. 1,560,800 3,030,700
Long-term debt repayments .................................. (1,633,700) (3,286,200)
Issuance of preferred stock, net ........................... 191,600
Common stock issued from stock plans ....................... 3,600 12,400
Dividends paid ............................................. (18,000) (8,500)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES .................... (87,300) (60,000)
----------- -----------
Effect of exchange rate changes .............................. 4,900 2,300
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,000) 9,600
Cash and cash equivalents, beginning of period ............... 11,300 900
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................... $ 10,300 $ 10,500
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
NET INCOME ................................................... $ 59,400 $ 13,300
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 69,000 66,900
Adjustment of property, plant and
equipment reserves ..................................... 12,500 15,200
Receivables -- decrease .................................. 2,100 4,100
Inventories -- (increase)decrease ........................ (17,800) 6,400
Adjustment of inventory reserves ......................... 22,600 30,800
Other current assets -- (increase) ....................... (21,000) (6,400)
Accounts payable/accrued liabilities -- (decrease) (5,100) (43,100)
Income taxes payable and deferred -- (decrease) .......... (8,100) (2,000)
Other adjustments -- net ................................. 9,800 7,800
----------- -----------
Total adjustments ...................................... 64,000 79,700
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... $ 123,400 $ 93,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-6-
<PAGE> 7
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements for the
nine-month and three-month periods ended September 30, 1995 and 1994 have
been prepared in accordance with the instructions to Form 10-Q. All
adjustments which, in the opinion of management, are necessary for a fair
presentation of the consolidated financial statements for the nine-month
and three-month periods ended September 30, 1995 and 1994 have been
reflected. All such adjustments are of a normal recurring nature. It is
suggested that the September 30, 1995 consolidated financial statements be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
2. INCOME TAXES
In August 1995, the Company reached agreement with respect to settlement
of all issues raised by the Internal Revenue Service (IRS) in its
examination of the Company's income tax returns for the years 1984 through
1990. Prior to this resolution, a significant portion of deferred tax
assets related to available net operating loss and tax credit
carryforwards had been fully reserved by the Company because of
uncertainty over the future utilization of the tax benefits. Based upon
current circumstances relative to the IRS audit and the Company's estimate
of future domestic taxable income, it now appears more likely than not
that a significant portion of such fully reserved assets will be realized
in the future. As a result, in the third quarter of 1995 the Company
reduced the valuation allowances related to a significant portion of these
deferred tax assets by $54.3 million (change in valuation allowances in
1995 was a reduction of $62.4 million), increased its current tax
liabilities by $28.6 million for the remaining estimated tax liabilities
relating to years subsequent to 1990, decreased tax assets by $7.4
million, recognized a net credit to the tax provision of $10.0 million
($.18 per common share) and recorded a credit to Additional Paid-in
Capital (for windfall tax benefits related to net operating losses
generated from stock compensation deductions in prior years) of $8.3
million.
The 1994 tax provision for the nine months ended September 30, 1994
relates primarily to foreign taxes and taxes in Puerto Rico, and was a
result of the Company incurring net operating losses in certain tax
jurisdictions for which it is not able to recognize the corresponding tax
benefits.
3. ADOPTION OF FAS 116
In 1995, the Company adopted "Statement of Financial Accounting
Standards No. 116 Accounting for Contributions Received and
Contributions Made" (FAS 116). The effect of the adoption of FAS
116 was not material.
4. ACQUISITIONS
The Company completed on September 29, 1995 its 6.1 billion Yen
(approximately $62 million or a present value of $55 million) purchase
acquisition of certain assets and liabilities from the Company's former
distributor in Japan. The Company has made a preliminary allocation of
the purchase price based on the estimated fair values of assets and
liabilities acquired. As additional information is gained, adjustments to
the allocation of the purchase price may occur. The Company and the
former distributor had agreed that all of the conditions to closing the
purchase had either been met or could be met as of April 1, 1995 and,
accordingly, had entered into an agency agreement effective April 1, 1995
under which the Company assumed the risks and rewards of selling the
Company's products to third parties in Japan and recognized, since April
1, 1995, the former distributor's revenue and selling expenses in the
Company's consolidated financial statements relative to the sale of the
Company's products in Japan. Approximately $20 million was recorded as
goodwill and such goodwill will be amortized over 25 years on a
straight line basis.
-7-
<PAGE> 8
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The unaudited consolidated results of operations on a pro-forma basis as
though these certain assets had been acquired by the Company as of the
beginning of 1995 and 1994 are as follows (dollars in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1995 1994
-------- --------
<S> <C> <C>
Net sales $777,500 $724,400
Net income $61,000 $10,800
Net income per common share $.82 $.01
</TABLE>
The pro-forma financial information excludes adjustments which are not
expected to have a continuing impact on the Company and is presented for
informational purposes only and is not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated as of the above dates, nor are they necessarily indicative of
future operating results.
In the third quarter of 1995, the Company acquired through purchase
transactions certain assets of an internal stapling business and a 9.5%
equity interest in a private biopharmaceutical company which will be
accounted for under the cost method. In addition, the Company acquired
the exclusive worldwide rights to market transgenic pig organs from the
private biopharmaceutical company. These two acquisitions did not
currently have a material impact on the Company's consolidated results of
operations or financial position.
5. RESTRUCTURING
The Company recorded restructuring charges of approximately $2.4 million
during the third quarter of 1995. These restructuring charges related
primarily to lease termination and employee severance costs associated
with the relocation of one of the Company's largest international
subsidiaries as part of the plan to centralize the distribution of the
Company's products to its European customers. In addition, severance
payments were incurred in the third quarter of 1995 in relation to the
restructuring of the Company's manufacturing plants. The majority of the
cash outlays relative to these restructuring charges were made in the
third quarter of 1995 with the remainder of the cash outlays to be made in
the subsequent two quarters. The 1995 restructuring charges were
substantially offset by the reversal of overaccrued restructuring charges
which were originally recognized in the Company's fourth quarter 1993
consolidated statements of operations.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The Company has purchased certain assets from its former Japanese
distributor for approximately 6.1 billion Yen ($62 million or a present
value of $55 million). In conjunction with this purchase a long-term
payable was recorded as follows:
<TABLE>
<S> <C>
Fair value of net assets acquired $54.8
Cash paid through September 30, 1995 11.2
----
Present value of non-interest bearing notes payable
to former distributor over six years $43.6
====
</TABLE>
-8-
<PAGE> 9
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT ACCOUNTANTS
The September 30, 1995 and 1994 consolidated financial statements included in
this Quarterly Report on Form 10-Q have been reviewed by Deloitte & Touche LLP,
in accordance with established professional standards and procedures for such a
review. In addition, the December 31, 1994 consolidated balance sheet was
audited by Deloitte & Touche LLP in accordance with generally accepted auditing
standards.
-9-
<PAGE> 10
Form 10-Q
September 30, 1995
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
UNITED STATES SURGICAL CORPORATION
We have reviewed the accompanying consolidated balance sheet of United States
Surgical Corporation and subsidiaries as of September 30, 1995, and the related
consolidated statements of operations for the nine-month and three-month periods
ended September 30, 1995 and 1994 and the consolidated statements of changes in
stockholders' equity and cash flows for the nine-month periods ended September
30, 1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United States Surgical Corporation
and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 24,
1995, except for Note C, as to which the date was February 1, 1995, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1994 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
STAMFORD, CONNECTICUT
OCTOBER 19, 1995
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
United States Surgical Corporation
150 Glover Avenue
Norwalk, CT 06856
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim consolidated
financial information of United States Surgical Corporation and subsidiaries for
the periods ended September 30, 1995 and 1994, as indicated in our report dated
October 19, 1995; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 is
incorporated by reference in Registration Statement No. 33-59729 on Form
S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that
Act.
DELOITTE & TOUCHE LLP
STAMFORD, CONNECTICUT
OCTOBER 19, 1995
-10-
<PAGE> 11
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the third quarter of 1995 the Company attained sales of $255 million compared
with sales of $234 million in the third quarter of 1994. In the first nine
months of 1995, the Company achieved sales of $759 million compared with sales
of $692 million in the first nine months of 1994. Sales increased 9% in the
third quarter and increased 10% in the first nine months of 1995 in comparison
to the corresponding periods in 1994.
In the third quarter of 1995, the Company reported net income of $26 million and
$.37 per common share (after preferred dividends of $5 million) compared with
net income of $13 million and $.15 per common share (after preferred dividends
of $5 million) in the third quarter of 1994. The effect of changes in foreign
currency exchange rates on results of operations was to increase net income by
$2.7 million in the third quarter of 1995 in comparison to the corresponding
period in 1994.
In the first nine months of 1995, the Company reported net income of $59 million
and $.79 per common share (after preferred dividends of $15 million) compared
with net income of $13 million and $.06 per common share (after preferred
dividends of $10 million) in the first nine months of 1994. The effect of
changes in foreign currency exchange rates on results of operations was to
increase net income by $11.6 million in the first nine months of 1995 in
comparison to the corresponding period in 1994.
The Company recorded restructuring charges of approximately $2.4 million during
the third quarter of 1995. These restructuring charges related primarily to
lease termination and employee severance costs associated with the relocation of
one of the Company's largest international subsidiaries as part of the plan to
centralize the distribution of the Company's products to its European customers.
In addition, severance payments were incurred in the third quarter of 1995 in
relation to the restructuring of the Company's manufacturing plants. The
majority of the cash outlays relative to these restructuring charges were made
in the third quarter of 1995 with the remainder of the cash outlays to be made
in the subsequent two quarters. The 1995 restructuring charges were
substantially offset by the reversal of overaccrued restructuring charges which
were originally recognized in the Company's fourth quarter 1993 consolidated
statements of operations.
The following table analyzes the increase in sales in the third quarter and
first nine months of 1995 compared with the corresponding periods in 1994:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
In thousands September 30, 1995 September 30, 1995
------------ ------------------- ------------------
<S> <C> <C>
Composition of Sales Increase:
Sales volume increases $ 1,600 $31,900
Net price changes * 12,700 11,100
Effects of changes in foreign
currency exchange rates 6,300 23,800
------- ------
Sales Increase $20,600 $66,800
====== ======
</TABLE>
* Approximately $14 million of the sales increase for the third quarter of
1995 and $27 million for the first nine months of 1995, accounted for in net
price changes above, is the result of the initiation on April 1, 1995 of the
agency agreement with the Company's distributor in Japan.
-11-
<PAGE> 12
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company continues to be affected by intense competition, and by ongoing
changes in the health care industry which impact hospital purchasing decisions.
The rate of acceptance of additional procedures utilizing the Company's products
also continues to be affected by uncertainty surrounding health care reform and
by the increased educational requirements for more complex procedures.
USSC and the former Japanese distributor had voluntarily postponed the official
closing of the transaction until Japan's Ministry of Health and Welfare
completed its investigation into the former distributor's operations unrelated
to the business being acquired by the Company. The investigation has been
completed and the Company closed the purchase on September 29, 1995. The
Company and the former distributor had agreed that all of the conditions to
closing the purchase had either been met or could be met and, accordingly,
entered into an agency agreement effective April 1, 1995 under which the
Company assumed the risks and rewards of selling its products to third parties
in Japan and recognized the former distributor's revenues and selling expenses
relative to the sale of the Company's products in Japan in the Company's
consolidated results of operations for the three months and nine months ended
September 30, 1995. The effect of operations under the agency agreement on the
Company's third quarter and the first nine months of 1995 results of operations
was to significantly increase the sales revenues recognized by the Company in
the Japanese marketplace to $23 million (1994-$13 million) and $58 million
(1994-$37 million), respectively, and, correspondingly, increased selling,
general and administrative expenses by $11.8 million and $21.3 million in the
third quarter and first nine months of 1995, respectively, in comparison to the
corresponding periods in 1994.
Cost of products sold expressed as a percentage of sales decreased to 42% in the
third quarter and 44% in the first nine months of 1995, compared with 49% and
51% for the corresponding periods in 1994. Gross margin from operations (sales
less cost of products sold divided by sales) was 58% in the third quarter of
1995 and 56% in the first nine months of 1995 in comparison to 51% and 49% in
the corresponding periods in 1994. Although the Company implemented the
majority of its restructuring plans in the first quarter of 1994, the benefits
of many of the cost reduction measures adopted by the Company started being
realized in the third quarter of 1994 resulting in improved gross margins for
succeeding quarters of 1994 and 1995. Changes in foreign currency exchange
rates had an immaterial effect on cost of products sold in the third quarter and
the first nine months of 1995, respectively.
The Company's expenditures for research and development in the third quarter and
first nine months of 1995 were $13 million and $33 million, respectively,
compared to $8 million and $28 million for the corresponding periods in 1994.
The increase in research and development for the third quarter and first nine
months of 1995 results from approximately $4.6 million of charges relating
primarily to the Company's termination during the third quarter of 1995 of its
development efforts related to certain technologies which the Company decided
not to pursue. The Company is continuing its commitment to develop and acquire
unique new products for use in new surgical procedures and specialty areas. The
Company presently plans to maintain its investment in research and development
activities at levels approximating 3% - 5% of annual sales in the future.
-12-
<PAGE> 13
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses expressed as a percentage of sales
were 43% in the third quarter and 41% for the first nine months of 1995,
compared with 38% and 40%, respectively, in the comparable 1994 periods. The
increase in selling, general and administrative expenses in the third quarter
and first nine months of 1995 is primarily due to the effects of the agency
agreement entered into with the Company's Japanese distributor which was
effective as of April 1, 1995. Changes in foreign currency exchange rates from
those existing in 1994 had the effect of increasing reported selling, general
and administrative expenses by $3.3 million and $11.1 million in the third
quarter and first nine months of 1995, respectively.
In August 1995, the Company reached agreement with respect to settlement of all
issues raised by the Internal Revenue Service (IRS) in its examination of the
Company's income tax returns for the years 1984 through 1990. Prior to this
resolution, a significant portion of deferred tax assets related to available
net operating loss and tax credit carryforwards had been fully reserved by the
Company because of uncertainty over the future utilization of the tax benefits.
Based upon current circumstances relative to the IRS audit and the Company's
estimate of future domestic taxable income, it now appears more likely than not
that a significant portion of such fully reserved assets will be realized in
the future. As a result, in the third quarter of 1995 the Company reduced the
valuation allowances related to a significant portion of these deferred tax
assets by $54.3 million (change in valuation allowances in 1995 was a reduction
of $62.4 million), increased its current tax liabilities by $28.6 million for
the remaining estimated tax liabilities relating to years subsequent to 1990,
decreased tax assets by $7.4 million, recognized a net credit to the tax
provision of $10.0 million ($.18 per common share) and recorded a credit to
Additional Paid-in Capital (for windfall tax benefits related to net operating
losses generated from stock compensation deductions in prior years) of $8.3
million.
The 1994 tax provision for the nine months ended September 30, 1994 relates
primarily to foreign taxes and taxes in Puerto Rico, and was a result of the
Company incurring net operating losses in certain tax jurisdictions for which
it is not able to recognize the corresponding tax benefits.
-13-
<PAGE> 14
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
The Company's current cash and cash equivalent balances, existing borrowing
capacity and projected operating cash flows are currently in excess of its
foreseeable cash flow requirements. Following the issuance of $200 million of
convertible preferred stock in March 1994, the proceeds from which were used to
reduce bank debt, the Company entered into a new $400 million syndicated credit
agreement in June 1994, later reduced to $350 million in the first quarter of
1995 as a result of the strong cash flows currently being generated by the
Company. Outstanding domestic bank borrowings decreased $87 million during the
first nine months of 1995 to $74 million at September 30, 1995. In the third
quarter of 1995, the Company increased by 1 billion Yen its initial 1 billion
Yen Japanese credit agreement which was entered into during the second quarter
of 1995. The Company entered into an additional credit agreement with another
Japanese bank for 1 billion Yen in the third quarter of 1995. Outstanding debt
under the Company's new Japanese credit agreements at September 30, 1995 was
approximately 510 million Yen (approximately $5 million) resulting in total
bank debt of $79 million at September 30, 1995. The syndicated credit
agreement and the Company's lease agreement for its North Haven, Connecticut
manufacturing complex provide for certain restrictions concerning sales and
purchases of assets, dividends and subsidiary debt and require the maintenance
of certain minimum levels of tangible net worth, fixed charge coverage ratio and
a maximum ratio of total debt to total capitalization, as defined. The Company
is in compliance with all of the covenants associated with its bank and lease
agreements.
Cash acquisitions of property, plant, and equipment totaled $25 million in the
first nine months of 1995 compared with $41 million in the corresponding period
in 1994, and consist primarily of additions to machinery and equipment ($17
million) and molds and dies ($8 million). As part of the acquisition of certain
assets from the Company's former Japanese distributor, property, plant and
equipment was increased $13 million to reflect the acquisition of the training
center and certain other assets of the former distributor. The training center
is used to train surgeons and salespeople.
The increase in Other Current Assets results primarily from the recognition of
certain tax assets ($20.5 million) as it now appears more likely than not that a
significant portion of previously fully reserved tax assets will be realized in
the future based upon the substantial resolution of an IRS tax audit and the
Company's estimate of future domestic taxable income (see the second paragraph
on Page 13 for further details) and the recognition of a receivable ($5.9
million) from the Company's former Japanese distributor which arose from the
Company's closing of the acquisition of certain assets (see second paragraph on
Page 12 for further details).
The increase in Other Assets results primarily from the removal of the
uncertainty over the future utilization of the tax benefits of certain deferred
tax assets ($22.3 million) which resulted from the recent settlement of the IRS
audit (see the second paragraph on Page 13 for further details) and the increase
in Goodwill ($20 million) related to the closing of the purchase transaction
with the Company's former Japanese distributor for the acquisition by the
Company of certain assets utilized in the sale of the Company's products in
Japan (see the second paragraph on Page 12 for further details).
-14-
<PAGE> 15
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The increase in Income Taxes Payable results primarily from the recognition of
estimated tax liabilities ($28.6 million) relating to years subsequent to 1990
as a result of the substantial resolution of the IRS examination of the
Company's income tax returns for the years 1984 through 1990 (see the second
paragraph on Page 13 for further details).
The net decrease in long term debt resulted from the reduction of domestic bank
borrowings through the utilization of operating cash flows ($87 million), the
increase ($6 million) in the capitalized lease obligation on the Company's
European headquarters building in France as a result of movements in the French
franc/U.S. dollar exchange rate and the increase ($44 million) resulting from
the acquisition of certain assets of its former Japanese distributor which
closed on September 29, 1995.
The increase in Additional Paid-In Capital at September 30, 1995 results
primarily from the substantial resolution of issues reached in an Internal
Revenue Service audit ($8.3 million) (See Note 2 of Notes to the Company's
Consolidated Financial Statements).
The movement in Accumulated Translation Adjustments balance results from changes
in exchange rates between the U.S. dollar and the local currencies of the
countries of the company's international subsidiaries.
In the third quarter of 1995, the Company acquired through purchase transactions
certain assets of an internal stapling business and a 9.5% equity interest in a
private biopharmaceutical company which will be accounted for under the cost
method. In addition, the Company acquired the exclusive worldwide rights to
market transgenic pig organs from the private biopharmaceutical company. These
two acquisitions did not currently have a material impact on the Company's
consolidated results of operations or financial position.
In 1995 the Company adopted "Statement of Financial Accounting Standards No.
116 - Accounting for Contributions Received and Contributions Made" (FAS 116).
The effect of the adoption was not material.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage
well-defined interest rate and foreign exchange rate risks.
The Company enters into contracts to reduce its exposure to and risk from
foreign currency exchange rate changes and interest rate fluctuations in the
regular course of the Company's global business. As of September 30, 1995, the
Company had approximately $16 million of foreign currency exchange contracts
outstanding that will mature at various dates through November 1995. Realized
and unrealized foreign currency gains and losses with respect to such contracts
are recognized when incurred and amounted to gains of $.9 million and $.8
million in the three months and nine months ended September 30, 1995,
respectively. The losses recognized in the three months and nine months ended
September 30, 1994 were $1.5 million and $2.7 million, respectively.
-15-
<PAGE> 16
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company has swapped with certain banks its exposure to floating interest
rates of $50 million of its variable rate U.S. dollar debt and $40 million (200
million French francs) of variable rate French franc debt. These swap
agreements expire in August 1996 and December 1997 for the U.S. dollar debt and
French franc debt, respectively. The Company makes fixed interest payments at
rates of approximately 7.8% for the U.S. dollar swap and 8.1% for the French
franc swap and receives payments based on the floating six-month LIBOR and
three-month LIBOR, respectively. The net gain or loss from the exchange of
interest rate payments, which is immaterial, is included in interest expense.
Based upon the fair value of the Company's interest rate swap agreements at
September 30, 1995, termination of such agreements would require a payment by
the Company of approximately $2.1 million. The Company does not currently
intend to terminate its interest rate swap agreements prior to their
expiration dates.
-16-
<PAGE> 17
Form 10-Q
September 30, 1995
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PART. II. OTHER INFORMATION
Item 1. Legal Proceedings.
A. In the pending action by Ethicon, Inc. ("Ethicon") in the United
States District Court for the District of Connecticut, alleging infringement by
the Company of a single United States patent relating to trocars (see Item 3 of
Part I of the Company's Annual Report on Form 10-K for the year ended December
31, 1994, and Item 1 of Part II of the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995), the Court concluded
hearings during September 1995 as to the Company's motion concerning
inventorship and unenforceability of the patent asserted by Ethicon. The
Company's motion is under consideration by the Court.
B. In the pending consolidated action brought as class actions (see Item
3 of Part I of the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and Item 1 of Part II of the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995), a proposed
notice to members of the class as to their participation in the lawsuit has
been submitted by the plaintiffs' counsel to the Court.
C. In the pending action by Ethicon Endo-Surgery, a division of Ethicon,
against the Company in the United States District Court for the Southern
District of Ohio, alleging infringement by the Company's instruments of a single
patent for a safety lockout mechanism on a linear cutter/stapler (see Item 3 of
Part I of the Company's Annual Report on Form 10-K for the year ended December
31, 1994 and Item 1 of Part II of the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995), the court, on August
31, 1995, after a hearing as to the construction of Ethicon's patent claims,
ruled in favor of the Company and dismissed Ethicon's claims. Ethicon has filed
a notice of appeal from the decision.
D. On October 2, the United States Supreme Court, in selecting the
docket for its current session, left pending the Company's writ of certiorari in
its action against Johnson & Johnson, Inc. and its subsidiary, Ethicon, Inc.
("Ethicon") alleging infringement of the patent covering the Company's
endoscopic multiple clip applier (see Item 3 of Part I of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, and Item 1 of Part II
of the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1995 and June 30, 1995). The Company believes the Court has tied the outcome of
the Company's action to a case, raising similar issues, which is expected to be
heard during the first quarter of 1996. If the Company's position is sustained
on appeal, the lower Court would be expected to either enter a decision on the
Company's behalf or order the District Court to hold a new trial at which the
Company could reassert its claims for barring Ethicon's endoscopic clip applier
from the market and for monetary damages.
E. The Company is engaged in other litigation, primarily as the
defendant in cases involving product liability claims. The Company believes it
is adequately insured in all material respects against the product liability
claims. The Company is also involved in various other cases. In the opinion of
management, based on advice of counsel, the Company has meritorious defenses
and, as the case may be, valid cross-claims in these actions.
* * *
In the opinion of management, based on the advice of counsel, the
ultimate outcome of all of the aforementioned lawsuits should not have a
materially adverse effect on the Company's consolidated financial statements.
-17-
<PAGE> 18
Item 5. Other Information
The Company is engaged in negotiations with the federal government with
respect to a contract dispute relating to transactions which took place during
the period from 1989 through 1993. The Company has tentatively agreed to a
settlement of the dispute against which it is fully reserved.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K - Form 8-K's relative to the acquisition of
certain assets of the Company's former Japanese distributor were filed on July
10, 1995 and October 13, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES SURGICAL CORPORATION
----------------------------------
Registrant
By: /s/ Howard M. Rosenkrantz
------------------------------
Howard M. Rosenkrantz
Senior Vice President, Finance and
Chief Financial Officer
Dated: October 24, 1995
-18-
<PAGE> 19
EXHIBIT INDEX
-------------
Exhibit 27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 10,300
<SECURITIES> 0
<RECEIVABLES> 226,800
<ALLOWANCES> 7,700
<INVENTORY> 165,300
<CURRENT-ASSETS> 492,600
<PP&E> 757,600
<DEPRECIATION> 245,500
<TOTAL-ASSETS> 1,185,000
<CURRENT-LIABILITIES> 244,200
<BONDS> 0
<COMMON> 6,500
0
900
<OTHER-SE> 718,400
<TOTAL-LIABILITY-AND-EQUITY> 1,185,000
<SALES> 759,000
<TOTAL-REVENUES> 759,000
<CGS> 337,200
<TOTAL-COSTS> 337,200
<OTHER-EXPENSES> 341,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,800
<INCOME-PRETAX> 64,100
<INCOME-TAX> 4,700
<INCOME-CONTINUING> 59,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,400
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
