FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1994
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 number 0-9165
STRYKER CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-1239739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 4085, Kalamazoo, Michigan 49003-4085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 616/385-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
48,351,069 shares of Common Stock, $.10 par value, as of October 26, 1994
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PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
September 30 December 31
1994 1993
ASSETS (in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 105,248 $ 49,712
Marketable securities 78,830 102,925
Accounts receivable, less allowance of $5,400
(1993 -- $3,800) 139,720 87,896
Inventories 145,851 76,582
Deferred income taxes 27,379 15,829
Other current assets 14,555 10,907
TOTAL CURRENT ASSETS 511,583 343,851
PROPERTY, PLANT AND EQUIPMENT, less allowance for
depreciation 173,993 67,707
OTHER ASSETS
Intangibles, less accumulated amortization 17,005 7,795
Investment in affiliate 32,569
Miscellaneous 28,974 2,282
45,979 42,646
$731,555 $454,204
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 168 $ 777
Accounts payable 34,013 43,172
Accrued compensation 37,585 28,270
Income taxes 20,858 21,107
Accrued expenses and other liabilities 55,388 35,678
Current maturities of long-term debt 8,429 882
TOTAL CURRENT LIABILITIES 156,441 129,886
LONG-TERM DEBT, excluding current maturities 99,250 31,282
OTHER LIABILITIES 35,788 4,602
MINORITY INTEREST 98,306
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized--150,000 shares
Outstanding--48,351 shares (1993--48,395) 4,835 4,840
Additional paid-in capital 15,473 17,111
Retained earnings 319,447 268,367
Unrealized losses on securities (663)
Foreign translation adjustments 2,678 (1,884)
TOTAL STOCKHOLDERS' EQUITY 341,770 288,434
$731,555 $454,204
See accompanying notes to consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(in thousands, except per share amounts)
Net Sales $174,316 $136,932 $477,301 $412,146
Costs and expenses:
Cost of sales 77,821 63,876 215,886 190,202
Research, development and engineering 10,156 8,668 29,186 26,971
Selling, general and administrative 57,093 42,987 152,315 129,477
145,070 115,531 397,387 346,650
OPERATING INCOME 29,246 21,401 79,914 65,496
Other income 468 1,164 5,205 2,919
EARNINGS BEFORE INCOME TAXES
AND MINORITY INTEREST 29,714 22,565 85,119 68,415
Income taxes 11,885 8,575 32,940 25,975
EARNINGS BEFORE MINORITY INTEREST 17,829 13,990 52,179 42,440
Minority interest (1,099) (1,099)
NET EARNINGS $16,730 $13,990 $51,080 $42,440
Net earnings per share of common stock $.35 $.29 $1.06 $.88
Average outstanding shares for the
period 48,343 48,373 48,371 48,349
See accompanying notes to consolidated financial statements.
In 1993 the Company declared a cash dividend of seven cents per share to
shareholders of record on December 31, 1993, payable on January 31, 1994. No
cash dividends have been declared during 1994.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
Nine Months Ended
September 30
1994 1993
(in thousands)
OPERATING ACTIVITIES
Net earnings $51,080 $42,440
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 12,431 9,895
Amortization 1,677 1,356
Minority interest 1,099
Changes in operating assets and liabilities:
Accounts receivable 20,670 (11,346)
Inventories 880 (6,264)
Accounts payable (23,083) (7,965)
Accrued expenses 12,954 6,346
Income taxes (18,578) 6,858
Other 3,243 (3,542)
NET CASH PROVIDED BY OPERATING ACTIVITIES 62,373 37,778
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (19,931) (15,725)
Sales and maturities (purchases) of marketable
securities 24,095 (16,813)
Business acquisitions (40,645) (32,733)
Proceeds from borrowings 34,478 32,952
Proceeds from exercise of stock options 1,466 1,142
Repurchase of common stock (3,109)
Dividends paid (3,388) (2,898)
Other (702) (1,703)
NET CASH USED IN INVESTING AND FINANCING
ACTIVITIES (7,736) (35,778)
Effect of exchange rate changes on cash and cash
equivalents 899 (669)
INCREASE IN CASH AND CASH EQUIVALENTS $55,536 $ 1,331
See accompanying notes to consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the results of operations for
the periods shown. The financial statements have been prepared in accordance
with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of consolidated
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles.
The results of operations for any interim period are not necessarily indicative
of the results to be expected for the full year.
2. INVENTORIES
Inventories are as follows:
September 30 December 31
1994 1993
(in thousands)
Finished goods $114,896 $ 45,338
Work-in-process 8,335 10,586
Raw material 30,047 28,455
FIFO Cost 153,278 84,379
Less LIFO reserve 7,427 7,797
$145,851 $ 76,582
FIFO cost approximates replacement cost.
3. BUSINESS ACQUISITION
On August 2, 1994, the Company purchased 528,860 shares (31%) of the outstanding
common stock of Matsumoto Medical Instruments, Inc. ("Matsumoto"), Osaka,
Japan, thereby increasing its direct ownership interest in Matsumoto to 51%.
Results of operations for Matsumoto are included in the Company's consolidated
financial statements beginning in August 1994. Prior to that date, the
Company's 20% equity in Matsumoto's net earnings was reflected in other
income in the Consolidated Statement of Earnings.
The purchase price of approximately 6 billion yen, or approximately
$61 million, was based on book value at December 31, 1993. Payment of
approximately 847 million yen, or approximately $8 million, of the purchase
price has been deferred to April 3, 1995. The acquisition of the shares
has been funded with an unsecured yen-denominated four-year floating rate loan
from the Chicago branches of The Bank of Tokyo, Ltd., The Mitsubishi Bank,
Limited and The Sanwa Bank, Limited. The effective annual interest rate has
been fixed at 4.17%.
The incremental Matsumoto sales for August and September 1994 were $25 million
and the incremental net earnings did not have a material impact on the
Company's earnings in the third quarter of 1994. Pro forma net sales for the
nine months ended September 30, 1994 and 1993 were $553 million and $504
million, respectively. Pro forma net earnings for the nine months ended
September 30, 1994 and 1993 were not materially different than the amounts
reported.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the nine months ended September 30, 1994, net sales increased 16% compared
to the same period of 1993. Increased unit volume generated a 10% sales
increase and a 6% increase was due to the incremental Matsumoto sales which
were included in the consolidated results beginning in August. Surgical
product sales (principally orthopaedic products) increased 13%, led by the
incremental sales from the consolidation of Matsumoto along with increased
shipments of orthopaedic implants and powered surgical instruments. Medical
product sales (principally stretchers/beds and physical therapy services)
increased 26%. The Medical sales gain resulted from increased shipments of
hospital beds and stretchers and increased revenues from physical therapy
services. For the third quarter, net sales increased 27% compared to the third
quarter of 1993. Surgical and medical product sales increased 27% and 28%,
respectively.
Uncertainty over the impact of U.S. health care reform programs has generally
slowed domestic sales of medical devices. The Company's domestic sales
increased 11% in the third quarter and 8% in the first nine months of 1994
compared to 1993. International sales increased 63% in the third quarter and
31% in the first nine months of 1994 compared to 1993, led by incremental sales
from the consolidation of Matsumoto along with increased shipments of Osteonics
orthopaedic implants, Dimso spinal implants, powered surgical instruments and
hospital beds and stretchers. International sales represented 38% of total
sales in the first nine months
Cost of sales for the first nine months of 1994 represented 45.2% of sales
compared to 46.1% in the same period of 1993. In the third quarter, the cost
of sales percentage decreased to 44.6% from 46.6% in the third quarter of
1993. The lower cost of sales percentage in 1994 resulted from additional
margins on Stryker products sold by Matsumoto since their consolidation, an
increased mix of international sales and ongoing cost reduction programs.
Research, development and engineering (R,D&E) expense increased 8% for the
first nine months of 1994 and represented 6.1% of sales in 1994 compared to
6.5% in the same period last year. In the third quarter, these expenses
increased 17% and were 5.8% of sales in 1994 compared to 6.3% in the third
quarter of 1993. The decrease in R,D&E expenses as a percentage of sales in
1994 is principally a result of consolidating Matsumoto. The Company's
continued commitment to product development resulted in several new product
introductions in 1994, including the Omnifit-Plus forged cobalt chrome hip
stem, the new Sapphire View arthroscope system, a new low cost high resolution
1-chip camera, a second generation ConstaVac CBCII Blood Conservation System,
and a new line of powered micro instruments for oral/maxillofacial procedures.
Selling, general and administrative (S,G&A) expense increased 18% in the first
nine months and 33% in the third quarter of 1994 compared to the same
periods of 1993. The increase in S,G&A costs are principally a result of
consolidating Matsumoto which, as a distributor, has a higher percentage of
S,G&A expenses. These costs represented 31.9% of sales in the first nine
months of 1994 compared to 31.4% in the same period of 1993. In the third
quarter of 1994, these costs represented 32.8% of sales compared to 31.4% in the
same period of 1993.
The increase in other income in the first nine months of 1994 is due to the
equity in net earnings of an affiliate, resulting from the initial 20%
investment in Matsumoto Medical Instruments, Inc. in the third quarter of
1993. However, other income declined in the third quarter of 1994 compared
to 1993, due to the consolidation of Matsumoto beginning in August 1994, when
the Company's direct ownership interest reached 51%, and the interest expense
from the debt used to finance the additional 31% investment. The effective tax
rate increased to 40% in the third quarter of 1994 compared to 38% in the
third quarter of 1993 as a result of the higher Japanese tax rate on the
earnings of Matsumoto.
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For the first nine months of 1994, earnings before income taxes and minority
interest increased 24%, while net earnings and net earnings per share increased
20% compared to the first nine months of 1993. Earnings before income taxes
and minority interest increased 32% in the third quarter of 1994, while net
earnings increased 20% and net earnings per share increased 21% compared to
the third quarter of 1993.
Liquidity and Capital Resources
Stryker's financial position at September 30, 1994 remained strong with cash and
marketable securities of $184.1 million and working capital of $355.1
million. Accounts receivable at September 30, 1994 increased 59% from
December 31, 1993 and days sales outstanding increased to 67 days from 47 days
at December 31, 1993. This increase reflects the consolidation of Matsumoto's
accounts receivable which generally have longer collection terms. Inventories
at September 30, 1994 increased 90% from December 31, 1993 and days in
inventory increased to 177 days from 114 days at December 31, 1993. This
likewise reflects the consolidation of Matsumoto's inventory which, as a
distributor, carries higher inventory levels.
On August 2, 1994, the Company completed the purchase of 31% of the outstanding
common stock of Matsumoto, thereby increasing its direct ownership interest in
Matsumoto to 51%. The purchase price of approximately 6 billion yen, or
approximately $61 million, was based on book value at December 31, 1993.
Payment of approximately 847 million yen, or approximately $8 million, of the
purchase price has been deferred to April 3, 1995. The acquisition of the
shares has been funded with an unsecured yen denominated four-year floating
rate loan. The effective annual interest rate has been fixed at 4.17%.
The Company generated $62.4 million of cash from operations in the first nine
months of 1994 compared to $37.8 million in the same period of 1993. Cash and
marketable securities on hand of $184.1 million and anticipated future cash
flows from operations are expected to be sufficient to fund future operating
and capital requirements. Should additional funds be required, the Company
has unsecured lines of credit with banks totaling $39.0 million, of which only
$.2 million was utilized at September 30, 1994.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- The exhibits listed below are submitted as a separate
section of this report following the signature page:
Exhibit (11) Statement Re: Computation of Earnings per Share of
Common Stock
Exhibit (27) Financial Data Schedule (included in EDGAR filing only)
(b) Reports on Form 8-K -- No reports on Form 8-K were filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRYKER CORPORATION
(Registrant)
November 4, 1994 JOHN W. BROWN
Date John W. Brown, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
November 4, 1994 DAVID J. SIMPSON
Date David J. Simpson, Vice President, Chief
Financial Officer and Secretary
(Principal Financial Officer)
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EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Average number of
shares outstanding 48,343,000 48,373,000 48,371,000 48,349,000
Net earnings $16,730,000 $13,990,000 $51,080,000 $42,440,000
Net earnings per share of
common stock $.35 $.29 $1.06 $.88
Primary:
Average shares outstanding 48,343,000 48,373,000 48,371,000 48,349,000
Net effect of dilutive
stock options, based on the
treasury stock method using
average market price 692,000 534,000 692,000 534,000
Total Primary Shares 49,035,000 48,907,000 49,063,000 48,883,000
Fully Diluted:
Average shares outstanding 48,343,000 48,373,000 48,371,000 48,349,000
Net effect of dilutive
stock options using the
period-end market price, if
higher than average market
price 735,000 553,000 735,000 553,000
Total Fully Diluted Shares 49,078,000 48,926,000 49,106,000 48,902,000
Note: Shares subject to stock options are not included in the earnings per
share computation because the present effect thereof is not materially
dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1993
<CASH> 105,248
<SECURITIES> 78,830
<RECEIVABLES> 139,720
<ALLOWANCES> 5,400
<INVENTORY> 145,851
<CURRENT-ASSETS> 511,583
<PP&E> 173,993
<DEPRECIATION> 0
<TOTAL-ASSETS> 731,555
<CURRENT-LIABILITIES> 156,441
<BONDS> 0
0
0
<COMMON> 4,835
<OTHER-SE> 336,935
<TOTAL-LIABILITY-AND-EQUITY> 731,555
<SALES> 477,301
<TOTAL-REVENUES> 477,301
<CGS> 215,886
<TOTAL-COSTS> 397,387
<OTHER-EXPENSES> (5,205)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 85,119
<INCOME-TAX> 32,940
<INCOME-CONTINUING> 52,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,080
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
