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, 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 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.
96,675,354 shares of Common Stock, $.10 par value, as of July 31, 1996.
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
<CAPTION>
June 30 December 31
1996 1995
-------- ---------
(in thousands)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 83,136 $ 69,049
Marketable securities 182,877 195,599
Accounts receivable, less allowance of $7,600
(1995 -- $7,800) 169,697 163,593
Inventories 140,354 133,619
Deferred income taxes 47,216 47,058
Prepaid expenses and other current assets 13,889 14,335
-------- --------
TOTAL CURRENT ASSETS 637,169 623,253
PROPERTY, PLANT AND EQUIPMENT,
less allowance for depreciation 181,299 182,592
OTHER ASSETS 47,903 49,046
-------- --------
$866,371 $854,891
LIABILITIES AND STOCKHOLDERS' EQUITY ======== ========
CURRENT LIABILITIES
Accounts payable $ 45,934 $ 49,029
Accrued compensation 28,215 32,447
Income taxes 30,793 25,633
Accrued expenses and other liabilities 61,923 64,277
Current maturities of long-term debt 1,356 3,052
-------- --------
TOTAL CURRENT LIABILITIES 168,221 174,438
LONG-TERM DEBT, excluding current maturities 91,394 96,967
OTHER LIABILITIES 21,294 24,214
MINORITY INTEREST 99,928 104,993
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized--150,000 shares
Outstanding--96,672 shares (1995--97,107) 9,667 9,711
Additional paid-in capital 3,162 14,736
Retained earnings 469,047 419,537
Unrealized gains on securities 765 2,314
Foreign translation adjustments 2,893 7,981
-------- --------
TOTAL STOCKHOLDERS' EQUITY 485,534 454,279
-------- --------
$866,371 $854,891
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
--------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Sales $225,413 $228,509 $443,036 $442,522
Costs and expenses:
Cost of sales 92,359 97,648 181,695 185,232
Research, development $ engineering 13,826 11,695 26,090 22,538
Selling, general and administrative 80,646 80,523 156,801 154,034
-------- -------- -------- -------
186,831 189,866 364,586 361,804
-------- -------- -------- -------
OPERATING INCOME 38,582 38,643 78,450 80,718
Other income 2,476 1,573 4,373 2,377
-------- ------- -------- ------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST 41,058 40,216 82,823 83,095
Income taxes 15,600 16,890 31,470 34,900
-------- -------- ------- -------
EARNINGS BEFORE MINORITY INTEREST 25,458 23,326 51,353 48,195
Minority interest (968) (2,916) (1,843 (6,985)
-------- -------- ------- -------
NET EARNINGS $ 24,490 $ 20,410 $ 49,510 $ 41,210
======== ======== ======== =======
Net earnings per share of common stock $.25 $.21 $.51 $.43
Average outstanding shares for the period 96,743 96,903 96,945 96,842
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.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
(UNAUDITED)
<CAPTION> Six Months Ended
June 30
1996 1995
-------- --------
(in thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $49,510 $41,210
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 12,120 11,383
Amortization 1,948 1,466
Minority interest 1,843 6,985
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable (10,755) (19,268)
Inventories (14,348) (5,676)
Accounts payable (2,340) (3,501)
Accrued expenses (1,729) (3,352)
Income taxes 4,736 (3,785)
Other (145) 867
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,840 26,329
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (14,337) (15,357)
Sales and maturities (purchases) of
marketable securities 12,722 (54,537)
Business acquisitions (5,159) (12,728)
Proceeds from (payments on) borrowings (1,554) 6,121
Dividends paid (4,370) (3,870)
Proceeds from exercise of stock options 3,245 1,707
Repurchases of common stock (14,862)
Other (2,119) 969
------- --------
NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (26,434) (77,695)
Effect of exchange rate changes on cash and cash
equivalents (319) 571
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $14,087 ($50,795)
======= ========
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):
<CAPTION>
June 30 December 31
1996 1995
-------- ---------
<S> <C> <C>
Finished goods $106,279 $105,209
Work-in-process 10,052 7,552
Raw material 31,767 28,602
-------- --------
FIFO Cost 148,098 141,363
Less LIFO reserve 7,744 7,744
-------- --------
$140,354 $133,619
======== ========
FIFO cost approximates replacement cost.
</TABLE>
3. BUSINESS ACQUISITIONS
During the first six months of 1996, the Company's subsidiary, Physiotherapy
Associates, Inc., purchased certain physical therapy clinic operations at an
aggregate cost of $4.7 million. Intangible assets acquired, principally
goodwill, are being amortized over periods ranging from five to fifteen years.
Pro forma consolidated results including the purchased businesses would not
differ significantly from reported results.
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. SUBSEQUENT EVENT
On July 8, 1996 the Company entered into a definitive agreement to acquire
Osteo Holdings AG and its subsidiary companies. Osteo, which is based in
Selzach, Switzerland, designs and manufactures trauma products and
reconstructive orthopaedic devices and had 1995 consolidated sales of Sfr 28.7
million ($23.0 million). The acquisition will be accounted for by the
purchase method and is expected to close by September 9, 1996. The purchase
price is subject to completion of Stryker's due diligence investigation and is
expected to approximate two times Osteo's consolidated sales.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
The table below sets forth domestic/international and product line sales
information:
Three Months Ended Six Months Ended
June 30 % June 30 %
1996 1995 Change 1996 1995 Change
-------- -------- ------ ------- -------- ------
(in thousands, except per share amounts)
Domestic/International Sales
<S> <C> <C> <C> <C> <C> <C>
Domestic $139,284 $118,163 18 $272,971 $230,378 18
International 86,129 110,346 (22) 170,065 212,144 (20)
-------- -------- ------- --------
Total Net Sales $225,413 $228,509 (1) $443,036 $442,522 --
======== ======== ======== ========
Product Line Sales
Stryker Surgical $166,372 $155,292 7 $327,847 $300,707 9
Stryker Medical 48,015 40,158 20 91,577 76,833 19
Matsumoto Distributed
Products 11,026 33,059 (67) 23,612 64,982 (64)
-------- -------- ------- -------
Total Net Sales $225,413 $228,509 (1) $443,036 $442,522 --
======== ======== ======== ========
</TABLE>
For the six months ended June 30, 1996, net sales were flat 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 2%
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 second quarter, net sales declined 1%
compared to the second quarter of 1995 as a result of the same factors.
The Company's domestic sales increased 18% for the first six months and in the
second quarter of 1996 compared to 1995. The increase was led by strong
shipments of orthopaedic implants, endoscopic equipment and powered surgical
instruments, increased revenues from physical therapy services and higher
shipments of hospital beds and stretchers. International sales declined 20%
for the first six months and 22% in the second 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 37% in the first six months and 39% in the second
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 17% in the
first six months and 14% in the second quarter. International sales
represented 38% of total sales in the first six months of 1996 compared to 48%
in the same period of 1995.
Stryker Surgical product sales (principally orthopaedic products) increased 9%
for the first six months and 7% in the second quarter of 1996 compared to 1995
as a result of higher shipments of orthopaedic implants, powered surgical
instruments and endoscopic equipment and despite lower dollar translation of
foreign currency sales. Stryker Medical product sales (principally
stretchers/beds and physical therapy services) increased 19% for the first six
months and 20% in the second quarter resulting from higher physical therapy
revenues and increased shipments of hospital beds and stretchers.
Sales of Matsumoto distributed products declined 64% in the first six months
and 67% in the second 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. Sales of Matsumoto distributed products in the
third and fourth quarter of 1996 are expected to be significantly lower than
1995 levels for the comparable periods.
Cost of sales for the first six months of 1996 represented 41.0% of sales
compared to 41.9% in the same period of 1995. In the second quarter, the cost
of sales percentage decreased to 41.0% from 42.7% in the second quarter of
1995. Research, development and engineering (R,D&E) expense increased 16% for
the first six months of 1996, and represented 5.9% of sales in 1996 compared
to 5.1% in the same period last year. In the second quarter, these expenses
increased 18% and were 6.1% of sales in 1996 compared to 5.1% in the second
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 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 2% in the first six months and were flat in the second quarter of
1996 compared to the same periods of 1995. These costs increased to 35.4% of
sales in the first six months of 1996 compared to 34.8% in the same period of
1995. In the second quarter these costs represented 35.8% of sales in 1996
compared to 35.2% in 1995. The increase in S,G&A costs as a percentage of
sales is principally a result of higher sales expenses resulting from the
changes in Osteonics' distribution network and slightly larger sales forces
measured against flat sales in 1996. Other income increased $2.0 million for
the first six months and $0.9 million in the second 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 on the Company's yen denominated debt.
The effective tax rate decreased to 38% for the first six months of 1996
compared to 42% 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 six months as
compared to the same period of 1995. For the first six months of 1996,
earnings before income taxes and minority interest was flat, primarily as a
result of Matsumoto's lower profits, and net earnings increased 20% compared
to the first six months of 1995. Earnings before income taxes and minority
interest increased 2% and net earnings increased 20% in the second quarter of
1996 when compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
Stryker's financial position at June 30, 1996 remained strong with cash and
marketable securities of $266.0 million and working capital of $468.9 million.
Accounts receivable at June 30, 1996 increased 4% from December 31, 1995 while
days sales outstanding increased slightly to 65 days from 64 days at
December 31, 1995. Inventories at June 30, 1996 increased 5% from December
31, 1995 and days in inventory increased to 144 days from 133 days at
December 31, 1995.
The Company generated $40.8 million of cash from operations in the first six
months of 1996 compared to $26.3 million of cash in the same period of 1995.
During the first six months of 1996, the Company repurchased 650,000 shares of
common stock (after adjustment for the two-for-one stock split described in
Note 4 to the Condensed Consolidated Financial Statements) 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 $266.0 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 June 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)
August 6, 1996 JOHN W. BROWN
- --------------------------- -------------------------------------
Date John W. Brown, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
August 6, 1996 DAVID J. SIMPSON
- --------------------------- --------------------------------------
Date David J. Simpson, Vice President, Chief
Financial Officer and Secretary
(Principal Financial Officer)
<TABLE>
EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
------------ ---------- ----------- ----------
Average number of shares
<S> <C> <C> <C> <C>
outstanding 96,743,000 96,903,000 96,945,000 96,842,000
---------- ---------- ---------- ----------
Net earnings $24,490,000 $20,410,000 $49,510,000 $41,210,000
=========== =========== =========== ===========
Net earnings per share of
common stock $.25 $.21 $.51 $.43
==== ==== ==== ====
Primary:
Average shares outstanding 96,743,000 96,903,000 96,945,000 96,842,000
Net effect of dilutive stock
options, based on the
treasury stock method using
average market price 1,315,000 1,596,000 1,476,000 1,634,000
------------ ---------- ----------- ---------
Total Primary Shares 98,058,000 98,499,000 98,421,000 98,476,000
============ ========== =========== ==========
Fully Diluted:
Average shares outstanding 96,743,000 96,903,000 96,945,000 96,842,000
Net effect of dilutive stock
options, using the period-
end market price, if higher
than average market price 1,315,000 1,596,000 1,476,000 1,692,000
------------ --------- ---------- -----------
Total Fully Diluted Shares 98,058,000 98,499,000 98,421,000 98,534,000
=========== ========== =========== ===========
</TABLE>
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 83,136
<SECURITIES> 182,877
<RECEIVABLES> 169,697
<ALLOWANCES> 7,600
<INVENTORY> 140,354
<CURRENT-ASSETS> 637,169
<PP&E> 181,299
<DEPRECIATION> 112,877
<TOTAL-ASSETS> 637,169
<CURRENT-LIABILITIES> 168,221
<BONDS> 0
0
0
<COMMON> 9,667
<OTHER-SE> 475,867
<TOTAL-LIABILITY-AND-EQUITY> 866,371
<SALES> 225,413
<TOTAL-REVENUES> 225,413
<CGS> 92,359
<TOTAL-COSTS> 186,831
<OTHER-EXPENSES> (2,467)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,145
<INCOME-PRETAX> 41,058
<INCOME-TAX> 15,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,490
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
