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, 1996
--------------------
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 and 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.
96,748,533 shares of Common Stock, $.10 par value, as of October 25, 1996.
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
September 30 December 31
1996 1995
-------- --------
ASSETS (in thousands)
CURRENTS ASSETS
<S> <C> <C>
Cash and cash equivalents $114,258 $ 69,049
Marketable securities 135,925 195,599
Accounts receivable, less allowance of
$7,600 (1995 - $7,800) 168,842 163,593
Inventories 152,078 133,619
Deferred income taxes 51,000 47,058
Prepaid expenses and other current assets 13,678 14,335
-------- --------
TOTAL CURRENT ASSETS 635,781 623,253
PROPERTY, PLANT AND EQUIPMENT, less
allowance for depreciation 188,478 182,592
OTHER ASSETS 86,192 49,046
-------- --------
$910,451 $854,891
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 45,283 $ 49,029
Accrued compensation 35,447 32,447
Income taxes 28,623 25,633
Accrued expenses and other liabilities 72,083 64,277
Current maturities of long-term debt 1,315 3,052
-------- --------
TOTAL CURRENT LIABILITIES 182,751 174,438
LONG-TERM DEBT, excluding current maturities 96,641 96,967
OTHER LIABILITIES 22,306 24,214
MINORITY INTEREST 98,547 104,993
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized - 150,000 shares
Outstanding - 96,742 shares (1995-97,107) 9,674 9,711
Additional paid-in capital 4,497 14,736
Retained earnings 493,197 419,537
Unrealized gains on securities 435 2,314
Foreign translation adjustments 2,403 7,981
-------- --------
TOTAL STOCKHOLDERS' EQUITY 510,206 454,279
-------- --------
$910,451 $854,891
======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Sales $223,587 $205,363 $666,623 $647,885
Costs and expenses:
Cost of sales 94,360 88,753 276,055 273,985
Research, development and engineering 14,288 9,718 40,378 32,256
Selling, general and administrative 78,178 72,308 234,979 226,342
-------- -------- -------- --------
186,826 170,779 551,412 532,583
-------- -------- -------- --------
OPERATING INCOME 36,761 34,584 115,211 115,302
Other income 2,234 1,365 6,607 3,742
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST 38,995 35,949 121,818 119,044
Income taxes 14,820 14,380 46,290 49,280
-------- -------- -------- --------
EARNINGS BEFORE MINORITY INTEREST 24,175 21,569 75,528 69,764
Minority interest (25) (1,439) (1,868) (8,424)
-------- -------- -------- --------
NET EARNINGS $ 24,150 $ 20,130 $ 73,660 $ 61,340
======== ======== ======== ========
Net earnings per share of common stock $.25 $.21 $.76 $.64
Average outstanding shares
for the period 96,700 96,998 96,862 96,894
See accompanying notes to condensed consolidated financial statements.
</TABLE>
In 1995 the Company declared a cash dividend of four and one-half cents per
share (after the two-for-one stock split described in Note 4 to the condensed
consolidated financial statements) to shareholders of record on December 29,
1995, payable on January 31, 1996. No cash dividends have been declared
during 1996.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
Nine Months Ended
September 30
1996 1995
-------- --------
(in thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 73,660 $ 61,340
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 18,595 17,018
Amortization 3,047 2,285
Minority interest 1,868 8,424
Changes in operating assets and
liabilities, net of effects of
business acquisitions:
Accounts receivable (6,284) (4,860)
Inventories (17,615) (8,193)
Accounts payable (5,462) (4,250)
Accrued expenses 9,595 3,503
Income taxes (1,356) (9,963)
Other 2,427 (838)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 78,475 64,466
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (20,301) (21,192)
Sales and maturities (purchases) of
marketable securities 59,674 (76,451)
Business acquisitions, net of cash acquired (48,047) (12,815)
Proceeds from (payments on) borrowings (3,262) 4,257
Dividends paid (4,370) (3,870)
Proceeds from exercise of stock options 3,442 2,737
Repurchases of common stock (14,862)
Other (5,008) 235
-------- --------
NET CASH USED IN INVESTING AND FINANCING
ACTIVITIES (32,734) (107,099)
Effect of exchange rate changes on cash and
cash equivalents (532) 167
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 45,209 $ (42,466)
======== =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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, 1995.
2. INVENTORIES
<TABLE>
Inventories are as follows (in thousands):
September 30 December 31
1996 1995
-------- ---------
<S> <C> <C>
Finished goods $114,286 $105,209
Work-in-process 9,722 7,552
Raw material 35,814 28,602
-------- --------
FIFO Cost 159,822 141,363
Less LIFO reserve 7,744 7,744
-------- --------
$152,078 $133,619
======== ========
FIFO cost approximates replacement cost.
</TABLE>
3. BUSINESS ACQUISITIONS
In September 1996, the Company purchased 100% of the outstanding stock of
Osteo Holdings AG and its subsidiaries ("Osteo"), based in Selzach,
Switzerland. Osteo designs and manufactures trauma products and
reconstructive orthopaedic devices. The purchase price of Sfr 55 million
($45.5 million) was paid Sfr 50 million ($41.5 million) in cash with the
remaining amount being paid ratably over a five year period. The acquisition
was accounted for using the purchase method. The results of operations for
Osteo are included in the Company's consolidated financial statements
beginning September 1996. The incremental Osteo sales and net earnings in
September 1996 did not have a material impact on the Company's sales and net
earnings in the third quarter of 1996.
During the first nine months of 1996, the Company's subsidiary, Physiotherapy
Associates, Inc., purchased certain physical therapy clinic operations at an
aggregate cost of $7.1 million.
Intangible assets acquired in the above acquisitions, principally goodwill,
are being amortized over periods ranging from five to fifteen years. Pro
forma consolidated results for the nine months ended September 30, 1996 and
1995 were not materially different than the amounts reported.
4. STOCK SPLIT
On April 24, 1996, the Company's Board of Directors approved a two-for-one
stock split effective for shareholders of record on May 10, 1996. All share
and per share data have been adjusted to reflect the stock split as though it
had occurred at the beginning of the periods presented.
5. CONTINGENCY
On September 25, 1996 the United States Court of Appeals for the Federal
Circuit affirmed the 1995 decision of the Federal District Court for the
Eastern District of New York awarding the Company $72.7 million in damages,
attorney fees and interest from Intermedics Orthopedics, Inc. and its
distributor for infringement of the Company's U.S. patent on its OmniFlex Hip
System. Intermedics has filed a petition for rehearing or rehearing in banc,
which is pending before the Federal Circuit. Until the resolution of the
appeal process, management is unable to determine the financial impact of this
litigation. Accordingly, the financial statements do not give recognition
to any gain which might ultimately be realized as a result of this decision.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The table below sets forth domestic/international and product line sales
information:
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
% %
1996 1995 Change 1996 1995 Change
-------- -------- ------ --------- -------- ------
(in thousands)
Domestic/International Sales
<S> <C> <C> <C> <C> <C> <C>
Domestic $143,303 $117,794 22 $416,274 $348,172 20
International 80,284 87,569 (8) 250,349 299,713 (16)
-------- -------- -------- --------
Total Net Sales $223,587 $205,363 9 $666,623 $647,885 3
======== ======== ======== ========
Product Line Sales
Stryker Surgical $162,270 $146,612 11 $490,117 $447,319 10
Stryker Medical 50,795 38,301 33 142,372 115,134 24
Matsumoto Distributed
Products 10,522 20,450 (49) 34,134 85,432 (60)
-------- -------- -------- --------
Total Net Sales $223,587 $205,363 9 $666,623 $647,885 3
======== ======== ======== ========
</TABLE>
For the nine months ended September 30, 1996, net sales increased 3% when
compared to the same period in 1995. Additional sales attributable to
acquired businesses accounted for a 2% sales increase and increased unit
volume generated a 5% increase. Net sales also increased 1% as a result of
the Company's conversion of certain portions of the Osteonics domestic
distribution network to direct sales, which resulted in higher selling
prices. These increases were offset by a 4% decrease arising from changes
in foreign currency exchange rates and a 1% decline in selling prices. For the
third quarter, net sales increased 9% when compared to the third quarter of
1995. Increased unit volume generated a 10% sales increase and additional
sales attributable to acquisitions accounted for a 3% sales increase. Net
sales also increased 1% due to the conversion of certain portions of the
Osteonics distribution network to direct sales. These increases were offset
by a 4% decrease arising from changes in foreign currency exchange rates and
a 1% decline in selling prices.
The Company's domestic sales increased 20% for the first nine months and 22%
in the third quarter of 1996 compared to 1995. The increase was led by
strong shipments of orthopaedic implants, endoscopic equipment and powered
surgical instruments, increased revenue from physical therapy services and
higher shipments of hospital beds and stretchers. International sales
declined 16% for the first nine months and 8% in the third quarter compared
to the same periods of 1995. The decrease in sales is the result of lower
sales in Japan which more than offset strong shipments in the other
international markets. Sales in Japan declined 34% in the first nine months
and 26% in the third quarter because of lower shipments of Matsumoto
distributed products, which are sourced from other companies for sale in
Japan, and unfavorable currency comparisons. Sales in the other
international markets increased 18% in the first nine months and 22% in the
third quarter. International sales represented 38% of total sales in the
first nine months of 1996 compared to 46% in the same period of 1995.
Stryker Surgical product sales (principally orthopaedic products) increased
10% for the first nine months and 11% in the third quarter of 1996 compared
to 1995 as a result of higher shipments of orthopaedic implants, endoscopic
equipment and powered surgical instruments, offset by lower dollar
translation of foreign currency sales. Stryker Medical product sales
(principally stretchers/beds and physical therapy services) increased 24%
for the first nine months and 33% in the third quarter resulting from higher
physical therapy revenues and increased shipments of hospital beds and
stretchers.
Sales of Matsumoto distributed products, which are products sourced from
other companies for sale in Japan, declined 60% in the first nine months and
49% in the third quarter of 1996 compared to the same periods of 1995. These
declines result from the termination of several distribution arrangements
commencing in the third quarter of 1995 and unfavorable foreign currency
comparisons in Japan. Matsumoto has lost three major suppliers who have
chosen other distribution channels. Matsumoto has introduced new products
to replace two of the lost lines. However, sales of Matsumoto distributed
products in the fourth quarter of 1996 are expected to be significantly lower
than 1995 levels for the comparable period. The significant decline in sales
of Matsumoto Distributed Products does not have as a significant effect on
the Company's net earnings because (i) distributed products generally have
lower margins, (ii) income taxes are higher in Japan and (iii) the Company's
net earnings are reduced by the minority interest in Matsumoto's net earnings.
Cost of sales for the first nine months of 1996 represented 41.4% of sales
compared to 42.3% in the same period of 1995. In the third quarter, the cost
of sales percentage decreased to 42.2% from 43.2% in the third quarter of
1995. Research, development and engineering (R,D&E) expense increased 25%
for the first nine months of 1996, and represented 6.1% of sales in 1996
compared to 5.0% in the same period last year. In the third quarter, these
expenses increased 47% and were 6.4% of sales in 1996 compared to 4.7% in the
third quarter of 1995. The increase in R,D&E expense as a percentage of
sales in 1996 is principally a result of increased product development spending
measured against the relatively flat sales in 1996 compared to 1995
attributable primarily to lower sales of Matsumoto distributed products in
Japan. The Company's commitment to product development has resulted in
several new products in late 1995 and early 1996, including the Restoration
HA revision hip system, Passport knee instruments, the Insight Knee
positioning and alignment system, the battery powered 4100 Cordless driver
and several new arthroscopy instruments.
Selling, general and administrative (S,G&A) expenses increased 4% in the
first nine months and increased 8% in the third quarter of 1996 compared to
the same periods of 1995. These costs increased to 35.2% of sales in the
first nine months of 1996 compared to 34.9% in the same period of 1995. In
the third quarter these costs represented 35.0% of sales in 1996 compared to
35.2% in 1995. The increase in S,G&A costs as a percentage of sales in the
first nine months of 1996 is principally a result of higher sales expenses
resulting from the changes in Osteonics' distribution network and slightly
larger sales forces measured against modest sales increases in 1996. Other
income increased $2.9 million for the first nine months and $0.9 million in
the third quarter of 1996 compared to the same periods of 1995 principally as
a result of increased interest income attributable to higher levels of
invested cash and lower interest expense due to favorable currency
fluctuations on the Company's yen denominated debt.
The effective tax rate decreased to 38% for the first nine months of 1996
compared to 41.4% in the same period of 1995 as a result of the significant
decline in earnings reported by Matsumoto, which are taxed at the higher
Japanese tax rate. The earnings decline at Matsumoto also led to a
significant reduction in minority interest charges for the first nine months
as compared to the same period of 1995. As a result of Matsumoto's lower
profits, earnings before income taxes and minority interest increased only
2.3%, and net earnings increased 20% for the first nine months of 1996 when
compared to the first nine months of 1995. Earnings before income taxes and
minority interest increased 8.5% and net earnings increased 20% in the third
quarter of 1996 when compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
Stryker's financial position at September 30, 1996 remained strong with cash
and marketable securities of $250.2 million and working capital of $453.0
million. The Company generated $78.5 million of cash from operations in the
first nine months of 1996 compared to $64.5 million of cash in the same
period of 1995.
Accounts receivable at September 30, 1996 increased 3% from December 31, 1995
while days sales outstanding increased slightly to 67 days from 64 days at
December 31, 1995. Inventories at September 30, 1996 increased 14% from
December 31, 1995 and days in inventory increased to 152 days from 133 days
at December 31, 1995. The Company's inventories grew by 14% due to higher
unit volume, the conversion of certain portions of the Osteonics domestic
distribution network to direct sales and the additional inventories acquired
as a result of the Osteo Holdings AG ("Osteo") acquisition.
In September 1996, the Company made a cash payment of $41.5 million to
purchase 100% of the outstanding stock of Osteo. During the first nine
months of 1996, the Company repurchased 650,000 shares of common stock (after
adjustment for the two-for-one stock split) in the open market at a cost of
$14.9 million. These purchases brought the total shares repurchased under a
December 9, 1993 repurchase authorization by the Company's Board of Directors
to 895,000 of the 1,200,000 shares authorized. This repurchase authorization
was replaced by a new authorization approved by the Board of Directors on
April 24, 1996 for repurchases of up to 1,000,000 split-adjusted shares of
common stock. Shares repurchased under the share repurchase programs will be
used for employee stock option plans and other corporate purposes.
Cash and marketable securities of $250.2 million and anticipated future cash
flows from operations are expected to be sufficient to fund future operating
and capital requirements. The Company also has unsecured lines of credit
with banks totaling $55.4 million, none of which was utilized at September
30, 1996.
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)
October 25, 1996 JOHN W. BROWN
- ---------------------------- --------------------------------
Date John W. Brown, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
October 25, 1996 DAVID J. SIMPSON
- ---------------------------- --------------------------------
Date David J. Simpson, Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF
COMMON STOCK
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
----------- ---------- ----------- ----------
Average number of shares
[S] [C] [C] [C] [C]
outstanding 96,700,000 96,998,000 96,862,000 96,894,000
----------- ----------- ----------- ----------
Net earnings $24,150,000 $20,130,000 $73,660,000 $61,340,000
=========== =========== =========== ===========
Net earnings per share of
common stock $.25 $.21 $.76 $.64
==== ==== ==== ====
Primary:
Average shares outstanding 96,700,000 96,998,000 96,862,000 96,894,000
Net effect of dilutive stock
options, based on the
treasury stock method using
average market price 1,485,000 1,530,000 1,490,000 1,600,000
----------- ---------- ---------- ----------
Total Primary Shares 98,185,000 98,528,000 98,352,000 98,494,000
=========== =========== =========== ===========
Fully Diluted:
Average shares outstanding 96,700,000 96,998,000 96,862,000 96,894,000
Net effect of dilutive stock
options, using the period-
end market price, if
higher than average
market price 1,814,000 1,618,000 1,772,000 1,668,000
----------- ---------- ---------- ----------
Total Fully Diluted Shares 98,514,000 98,616,000 98,634,000 98,562,000
=========== =========== =========== ===========
Note:All share and per share data have been adjusted to reflect the
two-for-one stock split effective for shareholders of record on
May 10, 1996 as though it had occurred at the beginning of the
periods presented. 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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 114,258
<SECURITIES> 135,925
<RECEIVABLES> 168,842
<ALLOWANCES> 7,600
<INVENTORY> 152,078
<CURRENT-ASSETS> 635,781
<PP&E> 298,702
<DEPRECIATION> 110,224
<TOTAL-ASSETS> 910,451
<CURRENT-LIABILITIES> 182,751
<BONDS> 0
0
0
<COMMON> 9,674
<OTHER-SE> 500,532
<TOTAL-LIABILITY-AND-EQUITY> 910,451
<SALES> 223,587
<TOTAL-REVENUES> 223,587
<CGS> 94,360
<TOTAL-COSTS> 186,826
<OTHER-EXPENSES> (2,234)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,148
<INCOME-PRETAX> 38,995
<INCOME-TAX> 14,820
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,150
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
