<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 MARCH 31, 1997
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 March 31, 1997 65,839,561 Shares
<PAGE> 2
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION PAGE
----
<S> <C>
Financial Statements:
Consolidated Balance Sheets at March 31, 1997 (Unaudited) and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . 7
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Independent Accountants' Report and Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management's Discussion and Analysis of Interim Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 - 12
PART II-OTHER INFORMATION
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
-2-
<PAGE> 3
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
In thousands, except share data 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 108,900 $ 106,700
Receivables, less allowance ($11,300 March 31, 1997 and
$11,700 December 31, 1996) . . . . . . . . . . . . . . . . . . . . 294,100 287,600
Inventories:
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,500 128,300
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . 34,400 32,300
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,800 30,000
---------- ----------
192,700 190,600
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 95,800 106,700
---------- ----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . 691,500 691,600
---------- ----------
Property, plant, and equipment at cost . . . . . . . . . . . . . . . . . 712,500 723,300
Less: Allowance for depreciation and amortization . . . . . . . . . . . (277,700) (275,600)
-------- ---------
434,800 447,700
Other assets (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,800 375,500
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,522,100 $1,514,800
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,000 $ 29,400
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 137,200 177,300
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 84,100 83,800
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 4,900 4,700
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . 264,200 295,200
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,300 142,400
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 21,900 23,400
Stockholders' equity:
Preferred stock $5.00 par value, authorized 2,000,000 shares;
9.76% Series A cumulative convertible, 154,200 shares at
March 31, 1997 and 177,400 shares at December 31, 1996
(liquidation value - $174 million at March 31, 1997 and
$200 million at December 31, 1996) . . . . . . . . . . . . . . . . 800 900
Additional paid-in capital - preferred stock . . . . . . . . . . . . . 165,700 190,600
Common stock $.10 par value, authorized 250,000,000 shares;
issued, 73,176,257 at March 31, 1997 and 71,367,780 at
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 7,300 7,100
Additional paid-in capital - common stock . . . . . . . . . . . . . . 689,400 623,900
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 340,500 318,000
Treasury stock at cost; 7,336,696 shares at March 31, 1997
and 8,080,983 shares at December 31, 1996 . . . . . . . . . . . . . (97,300) (86,400)
Accumulated translation adjustments . . . . . . . . . . . . . . . . . (20,100) (3,100)
Unrealized gain on marketable securities . . . . . . . . . . . . . . . 2,400 2,800
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 1,088,700 1,053,800
---------- ----------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . $1,522,100 $1,514,800
========== -=========
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 4
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
In thousands, except per share data 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $284,600 $266,000
-------- --------
Costs and expenses:
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . 113,900 112,200
Research and development . . . . . . . . . . . . . . . . . . . . . . . 16,600 12,400
Selling, general and administrative . . . . . . . . . . . . . . . . . 112,700 110,300
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 4,000
-------- --------
243,300 238,900
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 41,300 27,100
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,600 6,200
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,700 20,900
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . 4,700 4,900
-------- --------
Net income applicable to common shares . . . . . . . . . . . . . . . . . $ 25,000 $ 16,000
======== ========
Average number of common shares outstanding . . . . . . . . . . . . . . . 64,700 57,300
======== ========
Net income per common share
(primary and fully diluted) . . . . . . . . . . . . . . . . . . . . . $ .39 $ .28
======== ========
Dividends declared per common share . . . . . . . . . . . . . . . . . . . $ .04 $ .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 Stockholders' Equity March 31, 1997
(Unaudited)
For the three months ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in Accumulated
Preferred Capital - Common Capital - Retained Treasury Translation
Dollars In thousands, except share data Stock Preferred Stock Common earnings Stock Adjustments
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 . . . . . . . . . . . . . $900 $190,600 $6,500 $394,200 $233,200 $(86,600) $ 2,300
Common stock issued to employees -
net (210,298 shares) . . . . . . . . . . . . . . 100 4,300 200
Income tax benefit from stock options exercised 2,600
Aggregate adjustment resulting from the
translation of foreign financial statements 400
Preferred stock dividends . . . . . . . . . . . . (4,900)
Common stock dividends declared
($.02 per share) . . . . . . . . . . . . . . . . (1,100)
Net income . . . . . . . . . . . . . . . . . . . . 20,900
----- ---------- -------- -------- -------- --------- --------
BALANCE AT MARCH 31, 1996 . . . . . . . . . . . . $900 $190,600 $6,600 $401,100 $248,100 $(86,400) $ 2,700
==== ======== ====== ======== ======== ======== ========
BALANCE AT JANUARY 1, 1997 . . . . . . . . . . . . . $900 $190,600 $7,100 $623,900 $318,000 $(86,400) $ (3,100)
Conversion of Series A convertible preferred
stock . . . . . . . . . . . . . . . . . . . . . (100) (24,900) 19,100 5,900
Common stock issued for purchase of CeDaR
Surgical (293,048 shares) . . . . . . . . . . . 11,400
Common stock issued to employees -
net (1,519,261 shares) . . . . . . . . . . . . . 200 35,000 (16,800)
Aggregate adjustment resulting from the
translation of foreign financial statements (17,000)
Preferred stock dividends . . . . . . . . . . . . (4,700)
Common stock dividends declared
($.04 per share) . . . . . . . . . . . . . . . . (2,500)
Unrealized gain (loss) on marketable securities
Net income . . . . . . . . . . . . . . . . . . . . 29,700
----- ---------- -------- -------- -------- -------- --------
BALANCE AT MARCH 31, 1997 . . . . . . . . . . . . $800 $165,700 $7,300 $689,400 $340,500 $(97,300) $(20,100)
==== ======== ====== ======== ======== ======== ========
<CAPTION>
Unrealized
Gain On
Marketable
Dollars In thousands, except share data Securities Total
- ------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1, 1996 . . . . . . . . . . . . . $ 741,100
Common stock issued to employees -
net (210,298 shares) . . . . . . . . . . . . . . 4,600
Income tax benefit from stock options exercised 2,600
Aggregate adjustment resulting from the
translation of foreign financial statements 400
Preferred stock dividends . . . . . . . . . . . . (4,900)
Common stock dividends declared
($.02 per share) . . . . . . . . . . . . . . . . (1,100)
Net income . . . . . . . . . . . . . . . . . . . . 20,900
------ -----------
BALANCE AT MARCH 31, 1996 . . . . . . . . . . . . $ 763,600
===========
BALANCE AT JANUARY 1, 1997 . . . . . . . . . . . . . $2,800 $ 1,053,800
Conversion of Series A convertible preferred
stock . . . . . . . . . . . . . . . . . . . . . 0
Common stock issued for purchase of CeDaR
Surgical (293,048 shares) . . . . . . . . . . . 11,400
Common stock issued to employees -
net (1,519,261 shares) . . . . . . . . . . . . . 18,400
Aggregate adjustment resulting from the
translation of foreign financial statements (17,000)
Preferred stock dividends . . . . . . . . . . . . (4,700)
Common stock dividends declared
($.04 per share) . . . . . . . . . . . . . . . . (2,500)
Unrealized gain (loss) on marketable securities (400) (400)
Net income . . . . . . . . . . . . . . . . . . . . 29,700
------ -----------
BALANCE AT MARCH 31, 1997 . . . . . . . . . . . . $2,400 $ 1,088,700
====== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 6
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
In thousands 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . $263,500 $ 249,600
Cash paid to vendors, suppliers and employees . . . . . . . . (239,000) (229,900)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . (800) (3,800)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . (3,200) (2,700)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . 20,500 13,200
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment . . . . . . . . . . (15,100) (12,700)
Advance - Progressive Angioplasty Systems . . . . . . . . . . (15,000)
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . (1,700)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . (14,300) (3,400)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . (44,400) (17,800)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings . . . . . . . . . . . . . . . . . . 44,100 686,900
Long-term debt repayments . . . . . . . . . . . . . . . . . . (28,200) (680,900)
Acquisition of common stock for treasury . . . . . . . . . . . (4,100)
Common stock issued from stock plans . . . . . . . . . . . . . 22,100 4,600
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (7,400) (6,000)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . 26,500 4,600
-------- ---------
Effect of exchange rate changes . . . . . . . . . . . . . . . . . (400) 1,200
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . 2,200 1,200
Cash and cash equivalents, beginning of period . . . . . . . . 106,700 10,500
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . $108,900 $ 11,700
======== =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,700 $ 20,900
-------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 16,100 16,500
Amortization . . . . . . . . . . . . . . . . . . . . . . . . 6,100 5,200
Adjustment of property, plant and equipment reserves . . . . 800 4,100
Receivables -- (increase) . . . . . . . . . . . . . . . . . (21,200) (15,700)
Inventories -- (increase) . . . . . . . . . . . . . . . . . (11,900) (8,800)
Adjustment of inventory reserves . . . . . . . . . . . . . . 4,900 3,900
Other current assets (increase) . . . . . . . . . . . . . . (4,700) (800)
Accounts payable/accrued liabilities -- (decrease) . . . . . (9,400) (14,900)
Income tax assets, payable and deferred -- decrease . . . . 10,100 200
Income tax benefit from stock options exercised . . . . . . 0 2,600
-------- ---------
Total adjustments . . . . . . . . . . . . . . . . . . . . (9,200) (7,700)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . $ 20,500 $ 13,200
======== =========
</TABLE>
See Notes to Consolidated Financial Statements
-6-
<PAGE> 7
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements for the
three-month periods ended March 31, 1997 and 1996 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 three-month periods ended March
31, 1997 and 1996 have been reflected. All such adjustments are of a
normal recurring nature. It is suggested that the March 31, 1997
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,
1996.
2. INCOME TAXES
The effective tax rate in 1997 is 28%, compared to an effective tax rate
of 23% for 1996. The effective tax rate for 1997 reflects the
expectation that for 1997 the Company will recognize tax benefits arising
from tax credits as well as certain U.S. tax benefits arising from the
utilization of the Company's Foreign Sales Corporation. As in 1996, the
Company's effective tax rate for 1997 continues to be beneficially
impacted by the availability of tax credits under Section 936 of the
Internal Revenue Code related to operations in Puerto Rico.
3. REDEMPTION OF PREFERRED STOCK
During the first quarter of 1997 the Company has called for redemption on
April 1, 1997 all the issued and outstanding shares of its Series A
Convertible Preferred Stock in accordance with the original terms of the
offering memorandum. The redemption of the convertible preferred stock
will eliminate the preferred dividend payment subsequent to April 1, 1997
and will have a positive effect on the Company's cash position. Common
shares outstanding as a result of the called redemption will increase by
approximately 8.5 million shares. At March 31, 1997 certain holders of
preferred stock had chosen to convert prior to the redemption and 1.1
million common shares of the aforementioned 8.5 million common shares
have already been issued. Assuming the Company had the ability to
convert and converted the preferred stock on January 1, 1997, net income
for the three months ended March 31, 1997 would have been $.41 per common
share.
4. TENDER OFFER
The Company's $17 per share tender offer for Circon Corporation, which
previously expired on February 13, 1997 has been extended through June
16, 1997. As of February 13, 1997, 7,809,304 common shares had been
tendered. These shares plus the 1,000,100 shares previously purchased by
the Company represented 67% of Circon Corporation's common stock as
reported by Circon in its public reports for the fiscal year ended
December 31, 1996. The Circon Corporation common stock, along with other
securities are included in other assets. These available-for-sale
securities have a fair value of approximately $20 million at March 31,
1997 and a cost of approximately $17 million.
5. ADOPTION OF FAS 128
The Company will adopt the Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (FAS 128) in the fourth quarter of 1997, as
required. The Company will continue to apply APB Opinion No. 15,
"Earnings Per Share" until the adoption of FAS 128. The standard
specifies the computation, presentation and disclosure requirements for
earnings per share. The pro forma earnings per common share computed
under the provisions of FAS 128 for the quarter ended March 31, 1997 are
$.39 basic earnings per common share and $.38 diluted earnings per common
share. Basic and diluted pro forma earnings per common share are the
same as previously reported for the quarter ended March 31, 1996.
-7-
<PAGE> 8
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT ACCOUNTANTS
The March 31, 1997 and 1996 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, 1996 consolidated balance sheet was
audited by Deloitte & Touche LLP, in accordance with generally accepted
auditing standards.
-8-
<PAGE> 9
Form 10-Q
March 31, 1997
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 March 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the three month periods ended March 31, 1997 and 1996. 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, 1996, 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 21,
1997 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, 1996 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
APRIL 15, 1997
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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 March 31, 1997 and 1996, as indicated in our
report dated April 15, 1997; 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 March 31, 1997 is
incorporated by reference in Registration Statement No. 33-53297 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
APRIL 15, 1997
-9-
<PAGE> 10
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the first quarter of 1997 the Company attained sales of $285 million
compared with sales of $266 million in the first quarter of 1996. Sales
increased 7% in the first quarter of 1997 in comparison to the corresponding
period in 1996.
Net income and net income per common share in the first quarter of 1997 were
$30 million and $.39 per common share (after preferred dividends of $5
million), respectively, as compared to 1996 first quarter net income and net
income per common share of $21 million and $.28 per common share, (after
preferred dividends of $5 million), respectively. The effects of changes in
foreign currency exchange rates on Results of Operations was to decrease net
income by $3 million in the first quarter of 1997 in comparison to the
corresponding period in 1996.
The following table analyzes the increase in sales in the first quarter of 1997
compared with the corresponding period in 1996:
<TABLE>
<CAPTION>
Three Months Ended
In thousands March 31, 1997
------------ ------------------
<S> <C>
Composition of Sales Increase:
Sales volume increases $ 39,300
Net price changes (11,700)
Effects of changes in foreign
currency exchange rates (9,000)
--------
Sales Increase $ 18,600
========
</TABLE>
Changes in the health care industry continue to significantly affect the
Company's marketplace. Industry consolidations, intense competition, and
pricing pressures due to ongoing reform of the health care system continue in
1997.
-10-
<PAGE> 11
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cost of products sold expressed as a percentage of sales decreased in the first
quarter of 1997 to 40% compared to 42% in the corresponding period of 1996 as a
result of higher sales volumes and ongoing cost savings initiatives. Gross
margin from operations (sales less cost of products sold divided by sales) was
60% in the first quarter of 1997 in comparison to 58% in the corresponding
period in 1996. Changes in foreign currency exchange rates from those existing
in the first quarter of 1996 had the effect of decreasing cost of products sold
by $2 million from the corresponding period in 1996.
The Company's expenditures for research and development increased to $17
million in the first quarter of 1997 from $12 million in the corresponding
period in 1996. The Company is continuing its commitment to develop and
acquire unique new products and technologies for use in new surgical procedures
and specialty areas and, accordingly, is incurring significant clinical and
development related costs.
Selling, general and administrative expenses expressed as a percentage of sales
decreased to 40% in the first quarter of 1997, compared with 41% in the
corresponding 1996 period. The Company continues its commitment to evaluate
and implement, as necessary, cost savings opportunities. Changes in foreign
currency exchange rates from those existing in the first quarter of 1996 had
the effect of decreasing selling, general, and administrative expenses by $4
million from the corresponding period in 1996.
The decrease in net interest in the first quarter of 1997, compared to the
first quarter of 1996, is attributable to the reduction of bank borrowings with
the proceeds from the Company's public common stock offering in June 1996 and
the interest income generated by the Company's substantial cash and cash
equivalents which are invested in high quality short-term liquid money market
instruments.
The effective tax rate in 1997 is 28%, compared to an effective tax rate of 23%
for 1996. The effective tax rate for 1997 reflects the expectation that for
1997 the Company will recognize tax benefits arising from tax credits as well
as certain U.S. tax benefits arising from the utilization of the Company's
Foreign Sales Corporation. As in 1996, the Company's effective tax rate for
1997 continues to be beneficially impacted by the availability of tax credits
under Section 936 of the Internal Revenue Code related to operations in Puerto
Rico.
The Company will adopt the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128) in the fourth quarter of 1997, as required. The
Company will continue to apply APB Opinion No. 15, "Earnings Per Share" until
the adoption of FAS 128. The standard specifies the computation, presentation
and disclosure requirements for earnings per share. The pro forma earnings per
common share computed under the provisions of FAS 128 for the quarter ended
March 31, 1997 are $.39 basic earnings per common share and $.38 diluted
earnings per common share. Basic and diluted pro forma earnings per common
share are the same as previously reported for the quarter ended March 31, 1996.
-11-
<PAGE> 12
Form 10-Q
March 31, 1997
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 substantial cash and cash equivalent balances, existing
borrowing capacity and projected operating cash flows are currently in excess
of its foreseeable operating cash flow requirements. The redemption of the
Company's Series A Convertible Preferred Stock into common stock on April 1,
1997 will improve the Company's liquidity by approximately $18 million on an
annual basis through the elimination of the preferred stock dividend. The
Company's existing borrowing capacity consists of a $325 million syndicated
credit facility and a conditional committed term loan facility of $175 million
with similar terms to the present syndicated facility. The Company's
uncommitted facilities have been increased slightly since December 31, 1996,
and presently consist of 6 billion Japanese Yen and $125 million. Borrowings
have been categorized as long-term debt as such borrowings can be refinanced
under the Company's five-year syndicated bank credit agreement.
Outstanding bank borrowings increased since December 31, 1996 to approximately
$39 million at March 31, 1997. The increase in bank borrowings during the
first quarter of 1997 is primarily attributable to the Company's ability to
borrow under its Yen denominated committed and uncommitted credit facilities at
interest rates of approximately 1% for enhanced working capital management.
The credit agreements and the Company's operating lease for its primary
domestic manufacturing, distribution and warehousing complex in North Haven,
Connecticut, provide for certain restrictions including sales of assets,
capital expenditures, dividends and subsidiary debt. The most restrictive
covenants of the Company's financing agreements require the maintenance of
certain minimum levels of tangible net worth, fixed charges coverage and a
maximum ratio of total debt to total capitalization, as defined. The Company
is generally limited to declaring dividends on its common stock up to 20% of
net income, subject to changes in the number of common shares outstanding,
until it meets certain financial objectives, as defined. The Company is in
full compliance with all of the covenants associated with its various financing
agreements.
The increase in accounts receivable ($6 million) since December 31, 1996
results primarily from the sales of capital equipment which have extended
payment terms and sales of spine cages which accelerated significantly in the
first quarter of 1997.
Additions to property, plant, and equipment totaled $15 million in the first
quarter of 1997 compared with $13 million in the corresponding quarter in 1996,
and consist primarily of additions to machinery and equipment ($11 million) and
molds and dies ($3 million).
The decrease in accrued liabilities since December 31, 1996 ($40 million)
resulted primarily from the semi-annual payment in January 1997 of $29 million
on the Company's North Haven lease. There were no material changes in accrued
restructuring charges in the first quarter of 1997.
The Company routinely enters into foreign currency exchange contracts and
foreign currency option contracts to reduce its exposure to foreign currency
exchange rate changes on the results of operations of its international
subsidiaries. As of March 31, 1997 the Company's foreign currency exchange
contracts have all matured and the outstanding foreign currency option
contracts will mature throughout 1997. Realized and unrealized foreign
currency gains and losses are recognized when incurred. As a result of the
Company's hedging program the changes in foreign currency exchange rates had an
immaterial effect on its results of operations during the first quarter of
1997.
-12-
<PAGE> 13
Form 10-Q
March 31, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A. In the action by Ethicon, Inc. ("Ethicon") against the Company in
the United States District Court for the District of Connecticut alleging
infringement 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, 1996), the Court, on February 19, 1997, dismissed Ethicon's claim
based on the Court's previous decision correcting the inventorship of the
patent in favor of the Company's licensor. The Company's counterclaims against
Ethicon remain pending, and a trial date is expected on the counterclaims
during late 1997. In the opinion of management, based upon the advice of
counsel, the Company has valid claims against Ethicon.
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, 1996), a hearing has been scheduled for May 7, 1997, before the
United States District Court for the District of Connecticut, for consideration
of approval of the settlement of the case entered into in November, 1996
between the Company and counsel for the plaintiffs. Notice has been
distributed to prospective class members as to the proposed settlement. The
Company believes that the settlement of this action should not have a
materially adverse effect on the Company's consolidated financial statements.
C. In the action by Applied Medical Resources Corporation ("Applied
Medical") against the Company in the United States District Court for the
Eastern District of Virginia, alleging infringement by the Company of patents
related to trocar seal systems (see Item 3 of Part I of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996), trial of the case
began on April 14, 1997, with respect to the plaintiff's claims and the
Company's counterclaims against Applied Medical. In the opinion of management,
based upon the advice of counsel, the Company has valid claims against Applied
Medical and meritorious defenses against the claims by Applied Medical. The
Company believes that the ultimate outcome of this action should not have a
materially adverse effect on the Company's consolidated financial statements.
D. 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 referred to above. 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.
-13-
<PAGE> 14
Item 2. Changes in Securities
c. On February 21, 1997, the Company issued 293,048 shares of its
$.10 par value Common Stock in the acquisition by means of a
share exchange of the outstanding common stock of CeDaR
Surgical, Inc., a privately held company, at an offering price
equal to $38.98 per share. The transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933,
as amended.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K - The Company filed a report on Form 8-K on
March 13, 1997 relative to the call for redemption on April 1,
1997 of all issued and outstanding shares of its Series A
Convertible Preferred Stock.
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/ Richard A. Douville
------------------------------------
Richard A. Douville
(Senior Vice President and
Chief Financial Officer)
Dated: April 17, 1997
-14-
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