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 June 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 number 0-9165
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 616/385-2600
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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.
48,496,625 shares of Common Stock, $.10 par value, as of July 31, 1995.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
June 30 December 31
1995 1994
--------- -----------
ASSETS (in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 65,986 $116,781
Marketable securities 139,801 85,264
Accounts receivable, less allowance of $7,500
(1994 -- $6,400) 185,071 154,590
Inventories 130,251 115,757
Deferred income taxes 54,512 54,333
Other current assets 13,298 13,804
-------- --------
TOTAL CURRENT ASSETS 588,919 540,529
PROPERTY, PLANT AND EQUIPMENT, less allowance for
depreciation 201,795 180,719
OTHER ASSETS 51,508 46,723
-------- --------
$842,222 $767,971
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 208
Accounts payable $ 48,299 50,433
Accrued compensation 25,865 28,834
Income taxes 33,856 38,811
Accrued expenses and other liabilities 55,940 55,556
Current maturities of long-term debt 2,593 5,369
-------- --------
TOTAL CURRENT LIABILITIES 166,553 179,211
LONG-TERM DEBT, excluding current maturities 121,944 95,276
OTHER LIABILITIES 28,005 35,245
MINORITY INTEREST 126,142 99,973
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized--150,000 shares
Outstanding--48,465 shares (1994--48,369) 4,847 4,837
Additional paid-in capital 17,493 15,796
Retained earnings 378,107 336,897
Unrealized losses on securities (1,292) (1,315)
Foreign translation adjustments 423 2,051
-------- --------
TOTAL STOCKHOLDERS' EQUITY 399,578 358,266
-------- --------
$842,222 $767,971
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
-------------------- -------------------
(in thousands, except per share amounts)
Net Sales $228,509 $154,226 $442,522 $302,985
Costs and expenses:
Cost of sales 97,648 70,521 185,232 138,065
Research, development and
engineering 11,695 9,812 22,538 19,030
Selling, general and
administrative 80,523 48,645 154,034 95,222
-------- -------- -------- --------
189,866 128,978 361,804 252,317
-------- -------- -------- --------
OPERATING INCOME 38,643 25,248 80,718 50,668
Other income 1,573 2,187 2,377 4,737
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES
AND MINORITY INTEREST 40,216 27,435 83,095 55,405
Income taxes 16,890 10,425 34,900 21,055
-------- -------- -------- --------
EARNINGS BEFORE MINORITY INTEREST 23,326 17,010 48,195 34,350
Minority interest (2,916) (6,985)
-------- -------- -------- --------
NET EARNINGS $ 20,410 $ 17,010 $ 41,210 $ 34,350
======== ======== ======== ========
Net earnings per share of common
stock $.42 $.35 $.85 $.71
Average outstanding shares for
the period 48,452 48,358 48,421 48,386
See accompanying notes to condensed consolidated financial statements.
In 1994 the Company declared a cash dividend of eight cents per share to
shareholders of record on December 30, 1994, payable on January 31, 1995. No
cash dividends have been declared during 1995.
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
Six Months Ended
June 30
1995 1994
---------------------
(in thousands)
OPERATING ACTIVITIES
Net earnings $41,210 $34,350
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 11,383 7,514
Amortization 1,466 1,049
Minority interest 6,985
Changes in operating assets and liabilities:
Accounts receivable (19,268) (9,594)
Inventories (5,676) (2,283)
Accounts payable (3,501) (12,484)
Accrued expenses (3,352) 9,874
Income taxes (3,785) (4,582)
Other 867 (5,880)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 26,329 17,964
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (15,357) (12,300)
Sales and maturities (purchases) of marketable
securities (54,537) 18,686
Business acquisitions (12,728) (6,112)
Proceeds from (payments on) borrowings 6,121 (109)
Dividends paid (3,870) (3,388)
Proceeds from exercise of stock options 1,707 1,129
Repurchases of common stock (3,109)
Other 969 (1,942)
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NET CASH USED IN INVESTING AND
FINANCING ACTIVITIES (77,695) (7,145)
Effect of exchange rate changes on cash and
cash equivalents 571 411
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ($50,795) $11,230
======== =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1994.
2. INVENTORIES
Inventories are as follows (in thousands):
June 30 December 31
1995 1994
-------- -----------
(in thousands)
Finished goods $ 99,107 $ 86,719
Work-in-process 9,333 7,552
Raw material 29,109 28,784
-------- --------
FIFO Cost 137,549 123,055
Less LIFO reserve 7,298 7,298
-------- --------
$130,251 $115,757
======== ========
FIFO cost approximates replacement cost.
3. BUSINESS ACQUISITIONS
During the first six months of 1995, the Company's subsidiary, Physiotherapy
Associates, Inc., purchased several physical therapy clinic operations at an
aggregate cost of $3.1 million. Intangible assets acquired, principally
goodwill, are being amortized over periods ranging from one to fifteen years.
Pro forma consolidated results including the purchased businesses would not
differ significantly from reported results.
<PAGE>
4. SUBSEQUENT EVENT
In July 1995, a decision was issued by the Federal District Court for the
Eastern District of New York in a patent suit brought by the Company and its
wholly owned subsidiary Osteonics Corp. against Intermedics Orthopedics, Inc.,
and its distributor Marli Medical Supply, Inc., for infringement of Stryker's
U.S. patent on its Omniflex Hip System. The Court held that the Company's
patent is valid and enforceable and that the Company is entitled to damages
totaling $52.7 million and attorney fees. Intermedics has indicated that it
will appeal the Court's decision and the patent is under re-examination by the
U.S. Patent and Trademark Office as a result of a petition filed by
Intermedics. Until these issues are resolved, management is unable to
determine the financial impact of the Court's decision on the Company.
Accordingly, the Company's financial statements do not give recognition to any
gain which might ultimately be realized as a result of this decision.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the six months ended June 30, 1995, net sales increased 46% compared to
the same period in 1994. Increased sales in Japan, attributable to the
consolidation with Matsumoto, resulted in a sales increase of 31%. Increased
unit volume generated a 9% sales increase, other business acquisitions
accounted for a 5% increase and a 2% increase arose from changes in foreign
currency exchange rates. The Company also converted certain portions of the
Osteonics domestic distribution network to direct sales, resulting in the
repurchase of inventory from distributors, which reduced net sales by 1%.
Surgical product sales (principally orthopaedic products) increased 49%, led
by increased Japanese sales from the consolidation of Matsumoto along with
increased shipments of powered surgical instruments, orthopaedic implants and
endoscopic equipment. Medical product sales (principally stretchers/beds and
physical therapy services) increased 35%. The leading Medical sales gains
resulted from higher physical therapy revenues and increased shipments of
hospital beds and stretchers. For the second quarter, net sales increased 48%
compared to the second quarter of 1994. This increase was attributable to the
same factors which generated the sales increase for the first six months.
Surgical product sales increased 50% and Medical product sales increased 41%
during the second quarter.
The Company's domestic sales increased 19% for the first six months and 20% in
the second quarter of 1995 compared to 1994. The increase was led by physical
therapy services, powered surgical instruments, orthopaedic implants,
endoscopic equipment and hospital beds and stretchers. International sales
increased 93% for the first six months of 1995 and 98% in the second quarter.
The growth in international sales was led by increased Japanese sales from the
consolidation of Matsumoto along with increased shipments of Surgical and
Medical products by all international divisions. International sales
represented 48% of total sales in the first six months of 1995 compared to 36%
in the same period of 1994.
Cost of sales for the first six months of 1995 represented 41.9% of sales
compared to 45.6% in the same period of 1994. In the second quarter, the cost
of sales percentage decreased to 42.7% from 45.7% in the second quarter of
1994. The lower cost of sales percentages in the 1995 periods are the result
of additional margins on Stryker products sold by Matsumoto since its
consolidation and the conversion of certain portions of Osteonics' domestic
distribution network, which resulted in increased direct sales to hospitals.
Research, development and engineering (R,D&E) expense increased 18% for the
first six months of 1995, and represented 5.1% of sales in 1995 compared to
6.3% in the same period last year. In the second quarter, these expenses
increased 19% and were 5.1% of sales in 1995 compared to 6.4% in the second
quarter of 1994. The decrease in R,D&E expense as a percentage of sales in
1995 is principally a result of consolidating Matsumoto which, as a
distributor, incurs minimal research and development costs. The Company's
commitment to product development has resulted in several new products in
1995, including the Secur-Fit(TM) HA acetabular shell and hip stem, the 810
3-Chip Camera System and the StrykeFlow suction/irrigator for laparoscopic
surgery.
Selling, general and administrative (S,G&A) expenses increased 62% in the
first six months and 66% in the second quarter of 1995 compared to the same
periods of 1994. The increase in S,G&A costs is principally a result of
consolidating Matsumoto which, as a distributor, has a higher percentage of
S,G&A expenses. Other factors causing the increase were higher sales expenses
resulting from the changes in Osteonics' distribution network and slightly
larger sales forces throughout the Company. These costs increased to 34.8% of
sales in the first six months of 1995 compared to 31.4% in the same period of
1994. In the second quarter these costs represented 35.2% of sales in 1995
compared to 31.5% in 1994.
Other income declined for the first six months and in the second quarter of
1995 compared to the same periods of 1994. Other income in 1994 included the
equity in net earnings of Matsumoto related to the Company's initial 20%
investment. In addition, interest expense, which is included in other income,
increased in the first half of 1995 as a result of the increased debt used to
finance the additional 31% investment in Matsumoto. However, the increase in
interest expense was more than offset by an increase in interest income
attributable to higher levels of invested cash.
The effective tax rate increased to 42% in the first six months of 1995
compared to 38% in the same period of 1994 as a result of the higher Japanese
tax rate on the earnings of Matsumoto.
For the first six months of 1995, earnings before income taxes and minority
interest increased 50% and net earnings and net earnings per share increased
20% compared to the first six months of 1994. Earnings before income taxes
and minority interest increased 47% and net earnings and net earnings per
share increased 20% in the second quarter compared to the second quarter of
1994. As a result of the consolidation with Matsumoto, net earnings for the
first six months of 1995 increased by $2.8 million ($.06 per share) from the
first six months of 1994 and net earnings for the second quarter of 1995
increased by $0.9 million ($.02 per share) from the second quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
Stryker's financial position at June 30, 1995 remained strong with cash and
marketable securities of $205.8 million and working capital of $422.4 million.
Accounts receivable at June 30, 1995 increased 20% from December 31, 1994
while days sales outstanding increased slightly to 71 days from 67 days at
December 31, 1994. These increases reflect the increase in sales in the
second quarter of 1995 compared to the fourth quarter of 1994 and the
increased level of international sales, which generally have longer collection
terms. Inventories at June 30, 1995 increased 13% from December 31, 1994 and
days in inventory decreased to 127 days from 131 days at December 31, 1994.
The Company generated $26.3 million of cash from operations in the first half
of 1995 compared to $18.0 million of cash in the same period of 1994. Cash
and marketable securities of $205.8 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 $45.7 million, of which none was
utilized at June 30, 1995.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- The exhibit listed below is submitted as a
separate section of this report following the signature
page:
Exhibit (11) Statement Re: Computation of Earnings per
Share of Common Stock
(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)
AUGUST 2, 1995 /s/ JOHN W. BROWN
-------------------------------- ----------------------------------
Date John W. Brown, Chairman,
President and Chief Executive
Officer
(Principal Executive Officer)
AUGUST 2, 1995 /s/ DAVID J. SIMPSON
-------------------------------- ----------------------------------
Date David J. Simpson, Vice
President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
<PAGE>
EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
----------- ----------- ----------- -----------
Average number of
shares outstanding 48,452,000 48,358,000 48,421,000 48,386,000
----------- ----------- ----------- -----------
Net earnings $20,410,000 $17,010,000 $41,210,000 $34,350,000
=========== =========== =========== ===========
Net earnings per share
of common stock $.42 $.35 $.85 $.71
==== ==== ==== ====
Primary:
Average shares
outstanding 48,452,000 48,358,000 48,421,000 48,386,000
Net effect of dilutive
stock options, based
on the treasury stock
method using average
market price 798,000 502,000 817,000 597,000
----------- ----------- ----------- -----------
Total Primary Shares 49,250,000 48,860,000 49,238,000 48,983,000
=========== =========== =========== ===========
Fully Diluted:
Average shares
outstanding 48,452,000 48,358,000 48,421,000 48,386,000
Net effect of dilutive
stock options, using
the period-end market
price, if higher than
average market price 798,000 502,000 846,000 597,000
----------- ----------- ----------- -----------
Total Fully Diluted
Shares 49,250,000 48,860,000 49,267,000 48,983,000
=========== =========== =========== ===========
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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 65,986
<SECURITIES> 139,801
<RECEIVABLES> 185,071
<ALLOWANCES> 7,500
<INVENTORY> 130,251
<CURRENT-ASSETS> 588,919
<PP&E> 201,795
<DEPRECIATION> 106,427
<TOTAL-ASSETS> 842,222
<CURRENT-LIABILITIES> 166,553
<BONDS> 0
<COMMON> 4,847
0
0
<OTHER-SE> 394,731
<TOTAL-LIABILITY-AND-EQUITY> 842,222
<SALES> 442,522
<TOTAL-REVENUES> 442,522
<CGS> 185,232
<TOTAL-COSTS> 361,804
<OTHER-EXPENSES> (2,377)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,172
<INCOME-PRETAX> 83,095
<INCOME-TAX> 34,900
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,210
<EPS-PRIMARY> .85
<EPS-DILUTED> .84
</TABLE>
