UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 Or 15(D) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1997
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)
(616) 385-2600
(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 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:
96,122,551 shares of Common Stock, $.10 par value, as of October 31, 1997.
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
For the nine months ended September 30, 1997
(Unaudited)
<TABLE>
(Amounts in thousands, except per share amounts)
September 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 153,731 $ 175,673
Marketable debt securities 178,945 191,900
Accounts receivable, less allowance
of $10,000 (1996 - $9,500) 173,726 166,052
Inventories 132,032 127,387
Deferred income taxes 72,770 78,034
Prepaid expenses and other current assets 13,413 14,491
--------- ---------
Total Current Assets 724,617 753,537
Property, Plant and Equipment, less allowance
for depreciation of $132,089 (1996 - $117,882) 167,657 172,303
Other Assets 71,520 67,666
--------- ---------
TOTAL ASSETS $ 963,794 $ 993,506
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 51,178 $ 62,433
Accrued compensation 40,702 37,693
Income taxes 34,407 56,723
Accrued expenses and other liabilities 81,921 90,489
Current maturities of long-term debt 2,582 4,403
--------- ---------
Total Current Liabilities 210,790 251,741
Long Term Debt, excluding current maturities 82,086 89,502
Other Liabilities 30,484 36,034
Minority Interest 51,049 85,868
Stockholders' Equity
Common stock, $.10 par value:
Authorized - 150,000 shares
Outstanding - 96,054 shares (1996 - 96,787) 9,605 9,679
Additional paid-in capital 593 5,922
Retained earnings 586,569 514,318
Unrealized gains on securities 2,178 1,196
Foreign translation adjustments (9,560) (754)
--------- ---------
Total Stockholders' Equity 589,385 530,361
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 963,794 $ 993,506
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the nine months ended September 30, 1997
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $238,143 $223,587 $725,715 $666,623
Costs and Expenses:
Cost of sales 97,805 94,360 296,022 276,055
Research, development and 14,253 14,288 42,312 40,378
engineering
Selling, general and administrative 82,590 78,178 254,691 234,979
-------- -------- -------- --------
194,648 186,826 593,025 551,412
-------- -------- -------- --------
Operating Income 43,495 36,761 132,690 115,211
Other Income 1,949 2,234 7,722 6,607
-------- -------- -------- --------
Earnings Before Income Taxes
and Minority Interest 45,444 38,995 140,412 121,818
Income Taxes 16,815 14,820 51,953 46,290
-------- -------- -------- --------
Earnings Before Minority Interest 28,629 24,175 88,459 75,528
Minority Interest 341 (25) (89) (1,868)
-------- -------- -------- --------
Net Earnings $ 28,970 $ 24,150 $ 88,370 $ 73,660
======== ======== ======== ========
Net Earnings Per Share of Common
Stock $.30 $.25 $.92 $.76
==== ==== ==== ====
Average Outstanding Shares
for the Period 96,038 96,700 96,298 96,862
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1997
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
Additional Unrealized Foreign
Common Paid-In Retained Gains on Translation
Stock Capital Earnings Securities Adjustments
------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $9,679 $5,922 $514,318 $1,196 ($754)
Net earnings for
nine months ended
September 30, 1997 88,370
Sales of 254
shares of common
stock under stock
option and benefit
plans, including
$2,155 income tax
benefit 25 4,029
Repurchases of 993
shares of common
stock (99) (9,358) (16,119)
Unrealized gains,
net of $923 income
tax benefit 982
Translation
adjustment (8,806)
------- ---------- -------- ---------- -----------
Balance at
September 30, 1997 $9,605 $593 $586,569 $2,178 ($9,560)
======= ========== ======== ========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
In 1996 the Company declared a cash dividend of ten cents per share to
shareholders of record on December 31, 1996, payable on January 31, 1997. No
cash dividends have been declared during 1997.
<PAGE>
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997
(UNAUDITED)
(Amounts in thousands)
<TABLE>
Nine Months Ended
September 30
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $88,370 $73,660
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 19,480 18,595
Amortization 5,765 3,047
Minority interest 89 1,868
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable (14,127) (6,284)
Inventories (15,123) (17,615)
Accounts payable (10,456) (5,462)
Accrued expenses 3,688 9,595
Income taxes (21,045) (1,356)
Other (5,839) 2,427
-------- --------
Net Cash Provided by Operating Activities 50,802 78,475
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (25,995) (20,301)
Sales and maturities of marketable securities 12,955 59,674
Business acquisitions (28,338) (48,047)
Payments on borrowings (5,413) (3,262)
Dividends paid (9,679) (4,370)
Proceeds from exercise of stock options 4,054 3,442
Repurchases of common stock (25,576) (14,862)
Other 6,441 (5,008)
-------- --------
Net Cash Used in Investing
and Financing Activities (71,551) (32,734)
Effect of exchange rate changes on
cash and cash equivalents (1,193) (532)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents ($21,942) $45,209
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
STRYKER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 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, 1996.
Note 2. INVENTORIES
Inventories are as follows (in thousands):
<TABLE>
September 30 December 31
1997 1996
--------- ---------
<S> <C> <C>
Finished goods $ 98,628 $ 94,424
Work-in-process 12,167 8,328
Raw material 28,591 31,989
--------- ---------
FIFO Cost 139,386 134,741
Less LIFO reserve 7,354 7,354
--------- ---------
$ 132,032 $ 127,387
========= =========
</TABLE>
FIFO cost approximates replacement cost.
Note 3. BUSINESS ACQUISITIONS
During the first nine months of 1997, the Company's subsidiary,
Physiotherapy Associates, Inc., purchased certain physical therapy clinic
operations at an aggregate cost of $2.9 million. In addition, the Company
purchased an additional 17% of the outstanding common stock of Matsumoto
Medical Instruments, Inc. at a cost of $20.9 million, thereby increasing its
direct ownership interest in Matsumoto to 68%. The Company also purchased two
product lines at a cost of $4.5 million. All of the above acquisitions were
accounted for by the purchase method. Any intangible assets acquired in the
above acquisitions are being amortized over periods ranging from five to
fifteen years. Pro forma consolidated operating results including the
acquisitions would not differ significantly from reported results.
<PAGE>
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 %
1997 1996 Chg 1997 1996 Chg
-------- -------- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Domestic/
International Sales
Domestic $157,965 $143,303 10 $464,632 $416,274 12
International 80,178 80,284 -- 261,083 250,349 4
-------- -------- -------- --------
Total Net Sales $238,143 $223,587 7 $725,715 $666,623 9
======== ======== ======== ========
Product Line Sales
Stryker Surgical $178,845 $162,270 10 $545,806 $490,117 11
Stryker Medical 51,487 50,795 1 155,013 142,372 9
Matsumoto Dist.
Products 7,811 10,522 (26) 24,896 34,134 (27)
-------- -------- -------- --------
Total Net Sales $238,143 $223,587 7 $725,715 $666,623 9
======== ======== ======== ========
</TABLE>
For the nine months ended September 30, 1997, Stryker Corporation's net
sales increased 9% compared to the same period in 1996. Increased unit volume
generated a 11% sales increase. Net sales also increased 3% from business
acquisitions and 1% from the conversion of certain portions of the Osteonics'
domestic distribution network to direct sales. These increases were partially
offset by a 4% decrease in sales from unfavorable foreign currency comparisons,
a 1% decline from a divested business and a 1% decline in average selling
prices. For the third quarter, net sales increased 7% when compared to the
third quarter of 1996. Increased unit volume generated a 9% sales increase and
acquisitions accounted for a 3% sales increase. These increases were partially
offset by a 3% decrease arising from changes in foreign currency exchange
rates, a 1% decline from a divested business and a 1% decline in average
selling prices.
The Company's domestic sales increased 10% in the third quarter and 12% in
the first nine months of 1997 compared to 1996. The domestic sales increase
results from higher shipments of orthopaedic implants, powered surgical
instruments and endoscopic equipment and increased revenue from physical
therapy services. International sales were flat in the third quarter of 1997
when compared to 1996 as unfavorable foreign currency comparisons and lower
shipments of Matsumoto distributed products offset the growth of Stryker
Surgical products overseas. For the first nine months of 1997 international
sales were 4% higher as higher shipments of Stryker Surgical products more than
offset unfavorable foreign currency comparisons and lower shipments of
Matsumoto distributed products. Unfavorable foreign currency comparisons
lowered the dollar value of international sales by $6.9 million, or 9%, for the
third quarter and $23.7 million, or 9%, for the first nine months.
<PAGE>
Stryker Surgical product sales (principally orthopaedic products)
increased 10% in the third quarter and 11% in the first nine months, led by
higher shipments of orthopaedic implants, powered surgical instruments and
endoscopic equipment, partially offset by lower dollar translation of foreign
currency sales. Stryker Medical product sales (principally stretchers/beds and
physical therapy services) increased 1% in the third quarter and 9% in the
first nine months resulting primarily from increased physical therapy revenues.
Higher shipments of hospital beds and stretchers during the first nine months
were substantially offset by the January 1997 sale of the Sterilizer Service
Division and the lower dollar translation of foreign currency sales. Sales of
Matsumoto distributed products, which are sourced from other companies for sale
in Japan, declined 26% in the third quarter and 27% in the first nine months.
The decline in sales of distributed products results from unfavorable foreign
currency comparisons and lower sales volumes.
Cost of sales for the first nine months of 1997 represented 40.8% of sales
compared to 41.4% in the same period of 1996. In the third quarter, the cost
of sales percentage decreased to 41.0% from 42.2% in the third quarter of 1996.
The decrease in cost of sales is due to product mix and the Company's continued
efforts in cost reductions. Research, development and engineering (R,D&E)
expense increased 5% for the first nine months of 1997, and represented 5.8% of
sales in 1997 compared to 6.1% in the same period last year. In the third
quarter, these expenses were flat and were 6.0% of sales in 1997 compared to
6.4% in the third quarter of 1996. The decrease in R,D&E expense as a
percentage of sales in 1997 is principally a result of increased product
development spending measured against higher sales in 1997 compared to 1996.
R,D&E spending has increased as a result of the continued development of the OP-
1 bone growth device at Stryker Biotech and the Company-wide focus on new
product development. The Company's commitment to product development has
resulted in several new product introductions in the first nine months of 1997
including the Scorpio Knee system, TPS advanced micro-powered instruments, the
Advanced Cement Mixing System, the Sterishield Turbo3 Helmet, the Tempest
Arthroscopy Pump and the 6080 MX-Pro Ambulance Cot. Selling, general and
administrative (S,G&A) expenses increased 8.4% in the first nine months and
5.6% in the third quarter of 1997 compared to the same periods of 1996. These
costs decreased to 35.1% of sales in the first nine months of 1997 compared to
35.2% of sales in the same period of 1996. In the third quarter, S,G&A costs
represented 34.7% of sales compared to 35.0% in the same period of 1996. The
increase in S,G,&A costs is principally a result of increased selling expenses
resulting from higher shipments. Other income increased $1.1 million for the
first nine months and decreased $0.3 million in the third quarter of 1997
compared to the same periods of 1996. The increase in the first nine months of
1997 is due to increased interest income attributable to higher levels of
invested cash and lower interest expense on the Company's yen denominated debt.
The decrease in other income in the third quarter is due to the effect of
foreign currency translations.
The effective tax rate decreased to 37% for the first nine months of 1997
compared to 38% in the same period of 1996 as a result of the decline in
earnings reported by Matsumoto, which are taxed at the higher Japanese tax
rate. The earnings decline and the Company's increased ownership percentage of
Matsumoto also led to a reduction in the minority interest charge for the first
nine months as compared to the same period of 1996. For the first nine months
of 1997, earnings before income taxes and minority interest increased 15.3% and
net earnings increased 20.0% compared to the first nine months of 1996.
Earnings before income taxes and minority interest increased 16.5% and net
earnings increased 20.0% in the third quarter of 1997 when compared to 1996.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Stryker's financial position at September 30, 1997 remained strong with
cash and marketable securities of $332.7 million and working capital of
$513.8 million. Accounts receivable at September 30, 1997 increased 5% from
December 31, 1996 as a result of increased sales and days sales outstanding
increased 4 days from a record low of 62 days at December 31, 1996 to 66 days
at September 30, 1997. Inventories at September 30, 1997 increased 4% from
December 31, 1996 and days in inventory increased to 128 days from 104 days at
December 31, 1996.
The Company provided $50.8 million of cash from operations in the first
nine months of 1997, compared to $78.5 million of cash generated in the same
period of 1996. The large decrease of cash provided in the first nine months
is the result of first quarter payments of attorney fees and taxes totaling
$37.9 million relating to the patent judgment received in the fourth quarter of
1996. Excluding those payments, cash flow from operations would be $88.7
million, an increase of $10.2 million over 1996. During the first nine months
of 1997, the Company repurchased 992,800 shares of common stock at a cost of
$25.6 million. On April 30, 1997 the Company's Board of Directors authorized
the repurchase of an additional 1,000,000 shares of common stock. Shares
repurchased will be used for employee stock option plans and other corporate
purposes. In the first nine months, $20.9 million of cash was used to purchase
an additional 17% of the outstanding common stock of Matsumoto Medical
Instruments, Inc. Cash and marketable securities of $332.7 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 $52.4 million, none of which was utilized
at September 30, 1997.
Stryker began trading on the New York Stock Exchange on July 24, 1997
under the symbol SYK. The Company's shares were previously traded on The
Nasdaq Stock Market.
<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
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 10, 1997 /s/ JOHN W. BROWN
- ----------------- -----------------------------------
Date John W. Brown, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
November 10, 1997 /s/ DAVID J. SIMPSON
- ----------------- --------------------------------
Date David J. Simpson, Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
<PAGE>
Exhibit 11
STRYKER CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
September 30, 1997
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Average number of shares
outstanding 96,308,000 96,700,000 96,299,000 96,862,000
----------- ----------- ----------- -----------
Net earnings $28,970,000 $24,150,000 $88,370,000 $73,660,000
=========== =========== =========== ===========
Net earnings per share
of common stock $.30 $.25 $.92 $.76
==== ==== ==== ====
Primary:
Average shares outstanding 96,308,000 96,700,000 96,299,000 96,862,000
Net effect of dilutive
stock options, based on
the treasury stock
method using average
market price 2,194,000 1,485,000 1,869,000 1,490,000
----------- ----------- ----------- -----------
Total Primary Shares 98,502,000 98,185,000 98,168,000 98,352,000
=========== =========== =========== ===========
Fully Diluted:
Average shares outstanding 96,308,000 96,700,000 96,299,000 96,862,000
Net effect of dilutive
stock options, using the
period-end market price,
if higher than average
market price 2,259,000 1,814,000 2,067,000 1,772,000
----------- ----------- ----------- -----------
Total Fully Diluted Shares 98,567,000 98,514,000 98,366,000 98,634,000
=========== =========== =========== ===========
</TABLE>
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 153731
<SECURITIES> 178945
<RECEIVABLES> 173726
<ALLOWANCES> 10000
<INVENTORY> 132032
<CURRENT-ASSETS> 724617
<PP&E> 167657
<DEPRECIATION> 132089
<TOTAL-ASSETS> 963794
<CURRENT-LIABILITIES> 210790
<BONDS> 0
0
0
<COMMON> 9605
<OTHER-SE> 579780
<TOTAL-LIABILITY-AND-EQUITY> 963794
<SALES> 238143
<TOTAL-REVENUES> 238143
<CGS> 97805
<TOTAL-COSTS> 194648
<OTHER-EXPENSES> (1949)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1105
<INCOME-PRETAX> 45444
<INCOME-TAX> 16815
<INCOME-CONTINUING> 28970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28970
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
