UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 (IRS 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)
Securities registered pursuant to Section 12(b) of the Act: Common Stock $.10
par value
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [X]
Based on the closing sales price of February 27, 1998, the aggregate
market value of the voting stock held by nonaffiliates of the registrant was
approximately $2,703,117,330.
The number of shares outstanding of the registrant's common stock, $.10
par value, was 96,115,065 at February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December
31, 1997 (the "1997 Annual Report") are incorporated by reference into Parts
II and IV.
Portions of the proxy statement filed with the Securities and Exchange
Commission relating to the 1998 Annual Meeting of Stockholders (the "1998
proxy statement") are incorporated by reference into Part III.
PART I
ITEM I. BUSINESS
General
- -------
Stryker Corporation and its subsidiaries (the "Company" or "Stryker")
develop, manufacture and market specialty surgical and medical products,
including orthopaedic implants, powered surgical instruments, endoscopic
systems and patient care and handling equipment for the global market and
provide physical therapy services in the United States. Stryker was
incorporated in Michigan in 1946 as the successor company to a business
founded in 1941 by Dr. Homer H. Stryker, a leading orthopaedic surgeon and
the inventor of several orthopaedic products.
In August 1993, the Company purchased 20% of the outstanding common
stock of Matsumoto Medical Instruments, Inc. ("Matsumoto"), Osaka, Japan.
Matsumoto is one of the largest distributors of medical devices in Japan and
is the exclusive distributor of Stryker products in that country. In August
1994, the Company purchased an additional 31% of Matsumoto's outstanding
common stock, thereby increasing its direct ownership in Matsumoto to 51%.
The results of operations for Matsumoto were consolidated with Stryker
beginning in August 1994. Subsequently, Stryker has purchased additional
shares of outstanding common stock of Matsumoto, thereby increasing its
direct ownership interest to 75%.
In June 1994, the Company purchased the Steri-Shield product line, which
is a personal protection system for operating room personnel, from a private
company.
In September 1996, the Company purchased 100% of the outstanding common
stock of Osteo Holding AG and subsidiaries ("Osteo"), Selzach, Switzerland.
Osteo designs and manufacturers trauma products and reconstructive
orthopaedic devices.
The Company's subsidiary, Physiotherapy Associates, Inc., has also
purchased a number of physical therapy clinic operations during each of the
last five years.
Product Sales
- -------------
The Company's products can be divided into three classes: Stryker
Surgical Products, Stryker Medical Products and Matsumoto Distributed
Products. Stryker Surgical Products are designed, manufactured and marketed
under the Osteonics, Dimso, Osteo, Stryker Instruments and Stryker Endoscopy
names and principally serve the orthopaedic market. Stryker Medical Products
consist of specialty beds and stretchers and general patient room beds
designed, manufactured and marketed under the Stryker Medical name and
rehabilitation services provided through Physiotherapy Associates, Inc.
Matsumoto Distributed Products represent products sourced by Matsumoto
Medical Instruments, Inc., the Company's 75% owned subsidiary, from other
companies for sale in Japan. The following amounts ($000's) and percentages
are the sales during each of the three years ended December 31:
1997 1996 1995
______________ _____________ _____________
$ % $ % $ %
_______ ___ _______ ___ _______ ___
Stryker Surgical Products $740,369 76% $669,898 74% $608,646 70%
Stryker Medical Products 207,481 21 196,083 21 158,516 18
Matsumoto Distributed
Products 32,285 3 44,079 5 104,790 12
________ ___ ________ ___ ________ ___
$980,135 100% $910,060 100% $871,952 100%
======== === ======== === ======== ===
Approximately two-thirds of the Company's sales in 1997, 1996 and 1995
consisted of products with short lives and service revenues, such as implants
(while implants have a long useful life to the patient, they have a one-time
use to the hospital), disposables, expendable tools and parts, service and
repair charges and physical therapy revenues. The balance of sales in each
of the years was of products that could be considered capital equipment,
having useful lives in excess of one year.
The Company's backlog of firm orders is not considered material to an
understanding of its business.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This standard is effective for periods beginning after
December 15, 1997. The Company is currently evaluating the disclosure
requirements of the new standard and its effect on reported product lines.
Stryker Surgical Products
- -------------------------
Stryker Surgical products are designed and manufactured by Osteonics,
Allendale, New Jersey; Dimso, Bordeaux, France; Osteo AG, Selzach,
Switzerland; Stryker Instruments, Kalamazoo, Michigan; and Stryker Endoscopy,
Santa Clara, California. The principal specialty served by Stryker Surgical
products is orthopaedics. Orthopaedic reconstructive products, such as hip,
knee, shoulder and spinal implants, compression hip screws and interlocking
compression nails, heavy-duty powered instruments, micro-powered instruments,
pulsating irrigation systems, cement injection systems, medical video cameras
and arthroscopes are manufactured and marketed for use by the orthopaedic
surgeon.
Osteonics designs and manufactures innovative total and partial hip,
knee and shoulder replacements and associated instruments for sale around the
world. These artificial implants are made of cobalt chrome or titanium
alloys and are implanted in patients whose natural joints have been damaged
by arthritis, osteoporosis, other diseases or injury. In late 1990,
Osteonics became the first company to receive clearance from the U.S. Food &
Drug Administration (FDA) to commercially release for sale in the U.S. a hip
implant with hydroxylapatite (HA) surface treatment. HA is a naturally
occurring calcium phosphate material that demonstrates a high level of
biocompatibility due to its resemblance to human bone. Osteonics' clinical
experience with HA-coated hip stems now extends over ten years and their
reported clinical performance continues to equal or exceed that of any
comparable stem reported in the scientific literature.
Osteonics offers a wide array of high performance cemented and
cementless stems and cups, with which physicians may treat the spectrum of
their primary and revision total hip requirements. For example, on the
primary side, the Secur-Fit HA Stems and Acetabular Shells combine Osteonics
evolutionary design concepts with its high quality HA coating on an abrasion
resistant, titanium surface, to enhance bone loading and implant stability
from the time of implantation onward. For revision indications, Osteonics
offers its Restoration Hip System, a versatile array of implants which is
designed to address the variety of complex surgical needs and patient
anomalies that are presented in revision surgery and where extensive
fixation, both distally and proximally, is required to support the
prosthesis.
Osteonics Knee Systems, the Insight Knee Positioning and Alignment
System and Passport Knee instrumentation provide the surgeon with a
simplified, cost effective approach to total knee arthroplasty. Osteonics
Knee Systems and Passport Knee instrumentation provide surgeons with the
interoperative flexibility to address a wide range of patient needs, while
the Insight Knee Positioning and Alignment System provide surgeons the
ability to realize precise, customized knee alignment and superior leg
position in knee surgery, which helps reduce the risk of post-operative
complications. In 1997, Osteonics released the Scorpio Posterior Stabilized
Knee System (Scorpio). Scorpio revolutionizes the way knee motion is viewed
clinically and scientifically, resulting in a more anatomical design, which
closely approximates the motion of the natural knee.
The Osteonics Total Shoulder system was launched in 1996. The unique
design of the Osteonics Shoulder system provides the surgeon with an
innovative glenoid component, as well as a wide variety of component sizing
options enabling restoration of the normal biomechanical function of the
shoulder joint. The system includes a user-friendly instrument set, which
enables the surgeon to accurately prepare the implant site with a high degree
of efficiency.
Dimso designs and manufactures spinal implant systems for use by spinal
surgeons in the treatment of degenerative spinal diseases and deformities and
the stabilization of the spine in trauma cases. During 1995, Osteonics began
to market a version of the Dimso spinal implant system in the United States
following the receipt of U.S. FDA clearance for limited surgical indications
and, in 1997, launched the Top Loading Connector and the Cross Connector.
The Ogival Intersomatic Cage, which was launched in 1996 for international
markets only, is designed to restore disk height space and allow lumbar
vertebrae to be fused to stabilize the spine.
Osteo designs and manufactures high quality orthopaedic and trauma
products, including compression hip screws and interlocking compression nails
for bone fixation in fracture cases. Sold in more than 50 countries, the
largest markets for Osteo products have been in Europe and the Far East.
Stryker Instruments' products include a broad line of powered surgical
drills, saws, fixation and reaming equipment and other surgical instruments
that are used by surgeons for drilling, burring, rasping or cutting bone,
wiring or pinning bone fractures and preparing hip or knee surfaces for the
placement of artificial hip or knee joints. Stryker Instruments provides
hundreds of different sized and shaped drill bits, burrs, blades, chisels and
other attachments for use by the orthopaedic surgeon.
Stryker Instruments System 2000 Heavy-Duty Battery-Powered Instruments
provide surgeons with a complete line of heavy-duty instruments that are
powerful, precise and maneuverable. In conjunction with joint replacement
surgery, Stryker Instruments Advanced Cement Mixing System greatly reduces
the risk that air bubbles will weaken the long-term bond between the implant
and surrounding bone. SurgiLav Plus is a disposable, self-contained pulsed
lavage system that is used to cleanse the surgical site during total joint
arthroplasty. Stryker Instruments CBC II System is a post-operative wound
drainage and blood reinfusion device that enables joint replacement patients
to receive their own blood rather than donor blood. For operating room
personnel, Stryker Instruments Steri-Shield Personal Protection System uses
an enclosed hood and toga to provide protection against contact with
infectious bodily fluids and harmful microorganisms during surgery.
Stryker Endoscopy products include medical video cameras, lightsources,
arthroscopes, laparoscopes, powered instruments and a disposable
suction/irrigation device. These systems allow the surgeon to perform
numerous surgical procedures through small incisions usually less than one
centimeter in length versus incisions that could be as long as ten inches.
The advantage to the patient is reduced trauma and a shorter rehabilitation
period.
Stryker Endoscopy offers two types of video cameras. A low cost single
chip camera with procedure specific head configurations as well as a
broadcast quality 3-Chip Camera, which has a programmable three function
button allowing the surgeon to control documentation equipment and picture
quality from the surgical site. Both can be used in virtually every surgical
specialty. They have extremely high resolution, which is typically two to
three times that of a standard television set as well as true color
reproduction allowing the surgeon to see the anatomy as if he or she was
looking at it with the naked eye. Stryker Endoscopy's rigid scopes range in
diameter from 2.3mm to 10mm. These scopes contain a series of precision
lenses as well as fiberoptics, which allow the surgeon to see into the body.
The video camera is attached to the scope transmitting the image onto a
monitor.
Stryker Endoscopy also produces a totally disposable suction irrigation
device that allows the surgeon to irrigate tissue where necessary as well as
remove the fluid, all out of a 5mm or 10mm portal. This device is also
capable of cauterizing tissue when necessary. This product is self
contained, and totally disposable, eliminating the need for any additional
equipment in the crowded operating room.
Stryker Instruments and Endoscopy both produce small, light micro-
powered tools and instruments that are used in orthopaedics, maxillofacial
surgery, functional endoscopic sinus surgery, neurosurgery, spinal surgery
and plastic surgery. Stryker Instruments Total Performance System (TPS),
which was released in 1996, provides a universal surgical system that can be
used by several specialties. Spine and neuro surgeons use the TPS Universal
Drill and TPS burs, while sports medicine and plastic surgeons use the TPS
MicroDriver and TPS Sagittal Saw. The TPS System is also compatible with
Stryker Endoscopy's SE5 Shaver System. Stryker Endoscopy's Hummer 2 Micro
Debrider System is a powered instrument used in sinus surgery which
incorporates new irrigation capabilities and specialized cutters for sinus
surgery. This device eliminates the need for over 50% of the instrumentation
otherwise required for sinuscopy surgery.
Stryker Medical Products
- ------------------------
Stryker Medical's product portfolio includes stretchers,
medical/surgical beds, intensive care unit beds, maternity beds and related
furnishings and ambulance cots. These products are manufactured or assembled
at the Company's Medical Division in Kalamazoo, Michigan. Stryker Medical
product sales also include revenue of the Company's Physiotherapy Associates,
Inc. subsidiary headquartered in Memphis, Tennessee.
Medical Division product designs are clinician-driven, developed through
extensive clinical research and life cycle tested before designs are
finalized. In 1997, the Medical Division introduced the FirstCare maternity
bed. This product is a full-featured bed that addresses maternity procedures
from labor and delivery through recovery and post-partum. Stryker Medical
also introduced the Rugged MX-PRO Ambulance Cot in 1997, continuing a
tradition of durability, high quality, ease of use and low maintenance set by
the original Rugged. The MX-PRO is lighter and has a more ergonomically
designed lift and grip mechanism.
Stryker Medical is a market leader in specialty stretcher products,
offering some 30 different types of stretchers customized to fit the needs of
acute care and specialty surgical care facilities. Stryker beds are also
designed to fit the unique needs of specialty departments within the acute
care environment. The Secure med/surg bed addresses the changing needs of an
aging population. They are lower to the ground and have siderails that help
patients in and out of bed. And, the Complete Care ICU bed features in-bed
scale systems to help clinicians avoid time consuming, awkward and risky
patient transfers.
Physiotherapy Associates provides physical, occupational and speech
therapy services to patients recovering from orthopaedic or neurological
illness and injury in 207 outpatient physical therapy centers in 22 states
and the District of Columbia. Physiotherapy Associates works closely with
referring physicians to design and execute rehabilitation protocols resulting
in quick recoveries for professional and amateur athletes, injured workers
and others.
Matsumoto Distributed Products
- ------------------------------
Matsumoto Medical Instruments, Inc. is a majority-owned subsidiary of
the Company located in Osaka, Japan. Matsumoto is one of the largest
distributors of medical devices in Japan and is the exclusive distributor of
Stryker products in that country. A majority of Matsumoto's sales are
comprised of Stryker Surgical Products. Approximately 20% of Matsumoto's
sales are sourced from other companies for sale in Japan. These products are
used in the areas of ophthalmology, general surgery and emergency care and
are classified as Matsumoto Distributed Products.
Product Development
- -------------------
Most of the Company's products and product improvements have been
developed internally. In addition, the Company maintains close working
relationships with physicians and medical personnel in hospitals and
universities who assist in product research and development. New and
improved products play a critical role in the Company's sales growth. The
Company has placed increased emphasis on the development of proprietary
products and product improvements to complement and expand its existing
product lines.
Total expenditures for product research, development and engineering
were $56,895,000 in 1997, $56,870,000 in 1996 and $43,771,000 in 1995. The
Company's research, development and engineering expenses represent the
continued development of the Company's OP-1 Bone Growth Device discussed
below and the Company-wide focus on new product developments. Recent new
product introductions include the development of implant, spinal and trauma
designs (the Scorpio Posterior Stabilized Knee System, BOS Trauma System and
the Osteo Hip Screw System, which were introduced in 1997, the Ogival
Intersomatic Cage for spinal surgery introduced in 1996 and the Secur-Fit HA
total hip implant system and Restoration HA Hip System for revision surgery
developed in 1995) and further enhancements to instrumentation related to
knee replacement procedures, including development of the Passport knee
instruments in 1996 and the Insight Positioning and Alignment System in 1995.
New products at Stryker Endoscopy and Stryker Instruments include the
development of advanced powered instruments and video technology (the SE
Sagittal Saw, the 882TE 3-Chip Camera System and the Tempest Arthroscopy Pump
introduced in 1997, the TPS advanced micro-powered instrument set, the 882 3-
Chip Camera System, the Hummer 2 Micro Debrider System and several new
arthroscopy instruments introduced in 1996, and the 4100 Cordless Driver, the
first battery-powered wire driver, the next generation 810 3-Chip Camera
System and the StrykeFlow suction/irrigator for laparoscopic surgery
introduced in 1995) and the development of new specialized operating room
equipment (the Steri-Shield Turbo 3 Helmet introduced in 1997 and the
Advanced Cement Mixing System, introduced in 1996). The Medical Division has
developed new patient handling equipment (the FirstCare maternity bed and the
6080 MX-PRO Rugged Ambulance Cot introduced in 1997, the Complete Care 2025
ICU Bed introduced in 1996 and the Stryker Stretcher Chair introduced in
1995).
In 1991, the Company received FDA approval to begin human clinical
trials of its OP-1 Bone Growth Device, which is being developed in
collaboration with Creative BioMolecules, Inc. ("Creative") as part of a long-
term research program funded by Stryker since 1985. This device is composed
of recombinant human osteogenic protein-1 (OP-1) and a bioresorbable collagen
matrix. OP-1 is naturally present in the human body and directs a cascade of
cellular events that result in bone growth. In preclinical studies, OP-1
induced the formation of new bone when implanted into bony defect sites. In
addition, results from early-stage animal trials of OP-1 in cartilage repair
have been encouraging. The initial human clinical study, which began in
1992, compares the efficacy of the OP-1 Bone Growth Device to autografts (the
current standard bone graft procedure for the treatment of tibial non-union
fractures, which uses bone chips removed from a patient's hip in a second
operation) in the repair of non-union fractures of the tibia. The patients
involved in the trial all suffered tibial fractures that showed no evidence
of healing at least nine months from the initial injury and at least three
months after any prior surgical intervention. Patients received either the
OP-1 Bone Growth Device or autograft bone on a random basis. In 1995, the
FDA allowed the Company to enlarge the scope of the clinical trials for
expanded indications of non-union fractures in all long bones. During 1996,
the surgical procedures on the 122 patients in the Company's tibial non-union
clinical trial were completed and, in 1997, the Company completed the
collection and analysis of the data from the clinical trial. The results of
the clinical trial were presented by Dr. George Muschler, Cleveland Clinic,
at the American Academy of Orthopaedic Surgeons on March 20, 1998. The study
demonstrated that the OP-1 Device patients had comparable clinical success to
the autograft patients without the need for a second invasive procedure to
harvest autograft from the hip. There were three prospectively determined
clinical trial outcomes defined in the study: weight-bearing; level of pain
with weight-bearing; and radiographic assessment of cortical bridging. The
study design predicted 80% success at nine months post-surgery. Both the OP-
1 and autograft groups met this prediction for the clinical outcomes of
weight-bearing and pain and both groups had comparable results. The blinded
radiographic assessment by an independent panel of radiologists showed that
neither group achieved the predicted level of cortical bridging. The
postoperative x-rays immediately following surgery showed a bias toward the
autograft group because the transplanted autograft bone is radiodense, in
contrast to the OP-1 Bone Growth Device which is transparent to x-rays. The
radiographs improved for both groups at comparable rates throughout the 24-
month follow-up period, however, radiographic assessment of the number of
patients with cortical bridging remained approximately 10% higher for the
autograft group. Dr. Muschler noted that there is no evidence in the data to
suggest that the radiographic differences observed resulted in a difference
in return to function or increase in re-operation. The Company anticipates
filing a Pre-Market Application (PMA) with the FDA in 1998; however, the
Company can give no assurance that the filing will not be delayed.
The surgical procedures for several pilot human clinical trials in
Europe in cases involving trauma, spine, and oral/maxillofacial indications
were completed in 1996 and a fresh fracture trial was initiated in Canada in
1997.
Stryker owns the patents on its osteogenic protein technology and has
exclusive worldwide rights under those patents to develop, market and sell OP-
1 for treatment, repair or replacement of bone and joint tissue. Creative
has an exclusive license to the technology for use in other applications.
Stryker and Creative are obligated to pay royalties to the other on its sales
of OP-l based products.
The Company has a royalty-free cross license agreement with Genetics
Institute, Inc., which holds patents covering a molecule different from OP-1
that may produce similar effects. The agreement will enable Stryker to
commercialize OP-1 unencumbered by patent litigation with this competitor.
Others are also attempting to develop osteogenic proteins and bioresorbable
carriers for the treatment, repair or replacement of bone and joint tissue.
These other companies have filed and obtained patents in the U.S. and
elsewhere claiming such compounds and methods of making them and using them
and may in the future file and obtain other such patents. The Company can
provide no assurance that it will not need a license under one or more of
those patents to further expand the OP-1 program or whether such licenses
will be available.
Marketing
- ---------
Most of the Company's products are marketed in the United States
directly to more than 5,000 hospitals, and to doctors and other health care
facilities, by the Company's sales force consisting of approximately 580
salespersons. Stryker maintains separate and dedicated sales forces for each
of its principal product lines to provide focus and a high level of expertise
to each medical specialty served. Certain products, primarily orthopaedic
implants, are sold to hospitals in the United States through both direct
sales forces and independent dealer organizations.
Approximately 26% of the Company's domestic revenues in 1997 were
accounted for by sales to hospital cooperative buying groups and other large
national accounts and 1% by sales to the Veterans Administration and other
hospitals operated by the Federal government.
International sales accounted for 35% of total revenues in 1997.
Stryker products are sold in over 100 foreign countries, through more than
540 local dealers, whose efforts are coordinated by approximately 680 sales
and marketing personnel and through direct sales efforts. Stryker
distributes its products through sales subsidiaries and branches with offices
located in The Netherlands, Belgium, Finland, France, Germany, Italy, Spain,
Switzerland, the United Kingdom, Australia, Hong Kong, Japan, Canada, Chile,
Poland and Mexico. Stryker exports products to dealers and to customers in
Latin America, the Middle East, Singapore, Korea, India, Taiwan, Malaysia,
the CIS (former Soviet Union) and China. Additional information regarding
the Company's foreign and domestic operations and export sales appearing in
"Note 12 - Geographic Data" on page 43 of the 1997 Annual Report is
incorporated herein by reference.
The Company's business is generally not seasonal in nature; however, the
number of orthopaedic surgeries is lower during the summer months.
Competition
- -----------
The Company is one of six leading competitors in the U.S. market for
orthopaedic reconstructive products, the others being Zimmer, USA Inc. (a
subsidiary of Bristol-Myers, Squibb, Inc.), Howmedica, Inc. (a subsidiary of
Pfizer, Inc.), DePuy Orthopedics, Inc., Biomet, Inc., and J&J Professional,
Inc. (a subsidiary of Johnson & Johnson). While competition abroad varies
from area to area, the Company believes it is also a leading factor in the
international markets, with these same companies being its principal
competitors.
In the international market for spinal implants, the Company is one of
the four market leaders through its Dimso S.A. subsidiary, with the principal
competitors being Sofamor Danek Group, Inc., AcroMed Corporation and the
Synthes companies. The Company entered the U.S. market for spinal implants
during 1995 and faces competition from these and other companies.
In the powered surgical instruments market, Stryker is one of the three
market leaders, with the principal domestic competitors being Linvatec, Inc.
(a subsidiary of Conmed Corporation) and Midas-Rex, Inc. These companies are
also competitors in the international markets, along with Aesculap-Werke AG,
a large European manufacturer.
In the arthroscopy market, the Company considers itself to be one of the
three market leaders, with the principal competitors being Smith & Nephew
Endoscopy (a division of Smith & Nephew PLC) and Linvatec, Inc. (a subsidiary
of Conmed Corporation). In the laparoscopic imaging products market, the
Company considers itself to be one of the four market leaders, with the
principal competitors being Karl Storz GmbH & Co. (a German company), Circon
Corporation and Olympus Optical Co. Ltd. (a Japanese company).
The Company's primary competitor in the hospital bed market is Hill-Rom
(a division of Hillenbrand Industries). In the specialty stretcher market,
the primary competitors are Hausted, Inc., Hill-Rom and Midmark Corporation;
in the ambulance cot market, Ferno-Washington is the primary competitor.
In the outpatient physical therapy market, the Company's primary
competitors are physician-owned independent practices and hospital-based
services, in addition to other national rehabilitation companies, including
HealthSouth Corporation and NovaCare, Inc.
The Company believes that several companies are engaged in the research
and development of morphogenic proteins for the repair of hard and soft
tissues that would compete with the Company's OP-1 Bone Growth Device,
including Genetics Institute, Inc. (a subsidiary of American Home Products
Corporation), which has begun human clinical trials of a recombinant bone
morphogenetic protein for repair of orthopaedic and other skeletal defects.
A number of other companies currently provide various other therapies,
including allografts, bone fillers and electrical stimulation devices for the
treatment, repair or replacement of bone and joint tissue. The Company
believes that its OP-1 Bone Growth Device, which is currently in clinical
trials, would ultimately compete with these products and traditional
therapies, such as autografts.
The principal factors that the Company believes differentiate its
products in these highly competitive markets and enable it to compete
effectively, are innovative products, reliability, service and reputation.
The Company is not able to predict the effect that continuing efforts to
reduce health care expenses generally and hospital costs in particular will
have on the future sales of its products or its competitive position. (See
"Regulation and Product Quality.") The Company believes that its competitive
position in the future will depend to a large degree upon the new products
and improvements in existing products it is able to develop. While the
Company does not consider patents a major factor in its overall competitive
success, patents and trademarks are significant to the extent that a product
or attribute of a product represents a unique design or process. Patent or
trademark protection of such products restricts competitors from duplicating
these unique product designs and features. Stryker seeks to obtain patent
protection whenever possible on its products. The Company currently has
approximately 148 U.S. patents and 133 foreign patents, which generally
expire in the next 10-15 years.
Manufacturing and Sources of Supply
- -----------------------------------
The Company's manufacturing processes consist primarily of precision
machining, metal fabrication and assembly operations and the investment
casting of cobalt chrome and finishing of cobalt chrome and titanium.
Approximately 18% of the Company's cost of sales in 1997 represented finished
products that were purchased complete from outside suppliers. The Company
also purchases parts and components, such as forgings, castings, gears,
bearings, casters and electrical components, and uses outside sources for
certain finishing operations, such as plating, hardening and coating of
machined components and sterilization of certain products. The principal raw
materials used by the Company are stainless steel, aluminum, cobalt chrome
and titanium alloys. In all, purchases from outside sources were
approximately 45% of the total cost of sales in 1997.
While the Company relies on single sources for certain purchased
materials and services, it believes alternate sources are available if
needed. The Company has not experienced any significant difficulty in the
past in obtaining the materials necessary to meet its production schedules.
Products manufactured by the Company's Medical Division are generally
assembled to order, while other products are stocked in inventory.
Pursuant to the Company's agreement with Creative, Creative has the
exclusive right and obligation to supply the Company's worldwide commercial
requirements of OP-1 Bone Growth Devices as long as certain conditions
relating to quality, quantity and pricing are satisfied. There can be no
assurance that Creative will supply OP-1 in sufficient quantities at a
commercially acceptable price.
Regulation and Product Quality
- ------------------------------
The Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, the Safe Medical Devices Act of 1990, and regulations issued or
proposed thereunder, provide for regulation by the FDA of the design and
manufacture of medical devices, including most of the Company's products.
The FDA's "Good Manufacturing Practices" and "Quality System"
regulations set forth standards for the Company's product design and
manufacturing processes, require the maintenance of certain records and
provide for inspections of the Company's facilities by the FDA. There are
also certain requirements of state, local and foreign governments, which must
be complied with in the manufacturing and marketing of the Company's
products. The Company believes that the manufacturing and quality control
procedures it employs meet the requirements of these regulations.
Most of the Company's new products fall into FDA classifications that
require notification of and review by the FDA before marketing (submitted as
a 510(k)). The Company's OP-1 Bone Growth Device requires extensive clinical
testing, consisting of safety and efficacy studies, followed by a PMA
application (see "Product Development"). A panel of industry and medical
experts will review the PMA application and make their recommendations to the
FDA. If there is a positive recommendation by the panel, the FDA may grant a
PMA allowing the product to be marketed for certain approved uses. Further
clinical testing and PMA filings are expected to be necessary to expand the
approved uses of the product.
Stryker also is subject to the laws that govern the manufacture and
distribution of medical devices of each country in which the Company
manufactures or sells products. The member states of the European Union
("EU") have adopted the European Medical Device Directives, which create a
single set of medical device regulations for all EU member countries. These
regulations require companies that wish to manufacture and distribute medical
devices in EU member countries to obtain Community European ("CE") marks for
their products by June 14, 1998. Stryker has authorization to apply the CE
mark to its hip, knee, upper extremity, spinal implant and trauma products,
and its Endoscopy, Instruments and Medical Division products.
Government agencies and legislative bodies in the United States and
other countries are considering various proposals designed to hold down
increases in health care costs. It is impossible to predict at this time the
long-term impact of such cost containment measures on the Company's future
business.
Employees
- ---------
At December 31, 1997, the Company had 5,691 employees worldwide,
including 1,659 involved in manufacturing, warehousing and distribution
operations, 1,406 in marketing and sales, 295 in research, development and
engineering, 784 providing physical, occupational and speech therapy and the
balance in general management and administration. No employees are covered
by collective bargaining agreements. The Company believes that its employee
relations are satisfactory.
ITEM 2. PROPERTIES
The Company has the following properties:
Square Owned/
Facility Location Feet Leased
_____________________________________________________________________________
Manufacturing, warehousing and distribution facility for surgical instruments
products and administrative offices for Stryker Instruments division:
Portage, Michigan 212,000 Owned
Manufacturing, warehousing and distribution facilities for beds, stretchers
and furniture and administrative offices for Stryker Medical division:
Portage, Michigan 154,000 Owned
Kalamazoo, Michigan 86,000 Owned
Manufacturing and warehousing facility for orthopaedic implant business and
administrative offices for Osteonics division:
Allendale, New Jersey 146,000 Leased
Manufacturing, warehousing and distribution facility for endoscopy business
and administrative offices of Stryker Endoscopy division:
Santa Clara, California 110,000 Leased
Manufacturing facility for surgical instruments and endoscopy business:
Arroyo, Puerto Rico 98,000 Leased
Administrative offices for Physiotherapy Associates located in Memphis,
Tennessee:
Memphis, Tennessee 16,000 Owned
207 physical therapy clinics located throughout the United States:
United States 679,000 Leased
Warehousing and administrative offices for Matsumoto Medical Instruments,
Inc. in Osaka, Japan:
Japan 147,000 Owned
Sales branches including warehousing and sales facilities in eight other
cities in Japan:
Japan 55,000 Leased
Manufacturing, warehousing and distribution facilities for trauma and
orthopaedic products and administrative offices for Osteo AG:
Selzach, Switzerland 34,000 Owned
Administrative offices for Stryker Biotech:
Natick, Massachusetts 7,000 Leased
Manufacturing and warehousing facilities for spinal implant products and
administrative offices for Dimso SA:
Bordeaux, France 28,000 Owned
Bordeaux, France 5,000 Leased
Administrative offices for Stryker Corporation:
Kalamazoo, Michigan 14,000 Leased
Domestic sales and administrative offices throughout the United States:
United States 77,000 Leased
Foreign sales and administrative offices throughout the world:
Worldwide 263,000 Leased
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant and plaintiff in various legal actions
arising in the normal course of business. The Company does not anticipate
material losses as a result of these actions beyond amounts already provided
for.
In September 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 damages, attorney fees and
interest for infringement of the Company's U.S. patent on its Omniflex Hip
System. A petition for rehearing or rehearing en banc was denied by the
Federal Circuit in December 1996 and the Company was paid $77,600,000. The
Company recognized a pre-tax gain, net of related legal fees and other
expenses of $61,094,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS
Certain information with respect to the executive officers of the
Company is set forth in Item 10 of this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Effective July 24, 1997, the Company's common stock began trading on the
New York Stock Exchange under the symbol SYK. Previous to that date, the
Company's common stock was traded in the over-the-counter market on The
Nasdaq Stock Market. Quarterly stock prices appearing under the caption
"Summary of Quarterly Data" on page 45 of the 1997 Annual Report and dividend
information for the years ended December 31, 1997 and 1996 under the caption
"Ten Year Review" on page 24 of the 1997 Annual Report are incorporated
herein by reference. The Company's Board of Directors intends to consider a
year-end cash dividend annually at its December meeting.
On April 30, 1997, the Company's Board of Directors authorized the
repurchase in the open market from time to time, depending upon prevailing
market conditions, of up to 1,000,000 shares of its common stock. At
February 27, 1998, no shares had been repurchased under this plan. During
the period from April 24, 1996 to April 3, 1997, 1,000,000 shares of common
stock were repurchased under a prior authorization.
On December 31, 1997, there were 3,127 stockholders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The financial information for each of the five years in the period ended
December 31, 1997 under the caption "Ten Year Review" on pages 24 and 25 of
the 1997 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 26 through 30 of
the 1997 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DESCLOSURES ABOUT MARKET RISK
The information under the sub-caption "Other" under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 30 of the 1997 Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its
subsidiaries and report of independent auditors included on pages 31 through
46 of the 1997 Annual Report are incorporated herein by reference.
Quarterly results of operations appearing under the caption "Summary of
Quarterly Data" on page 45 of the 1997 Annual Report are incorporated herein
by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding the directors of the Company appearing under the
caption "Election of Directors" in the 1998 proxy statement is incorporated
herein by reference.
Information regarding the executive officers of the Company appears
below. All officers are elected annually. Reported ages are as of January
31, 1998.
John W. Brown, age 63, has been Chairman of the Board since January
1981, and President and Chief Executive Officer of the Company since February
1977. He is also a director of Lunar Corporation, a medical products
company, First of America Bank Corporation, a bank, Arthur D. Little, Inc.,
an international management consulting Company, the Health Industry
Manufacturers Association and The American Business Conference.
Ronald A. Elenbaas, age 44, was appointed President of the Surgical
Group in 1985 and has been a Vice President of the Company since August 1983.
Previously he was the Director of Surgical Sales since May 1982. Since
joining the Company in September 1975 he has held various other positions,
including Sales Representative, Marketing Product Manager, Plant Manager,
Canadian Sales Director, Assistant to the President and Director of Customer
Relations.
Christopher F. Homrich, age 38, was appointed Treasurer upon joining the
Company in April 1996. He had previously been Assistant Treasurer at Ingram
Industries Inc., a privately held corporation with business activities
including wholesale distribution of microcomputer products, books and video
cassettes, inland marine transportation, oil and gas wellhead manufacturing
and insurance, since June 1991.
William T. Laube, III, age 58, was appointed President of Stryker
Pacific Group in 1985 and has been a Vice President of the Company since
March 1979. Since joining the Company in July 1975, he has held various
international sales management positions.
Edward B. Lipes, age 45, was appointed a Vice President of the Company
in May 1994 and has been President of Osteonics Corp. since August 1989. He
held the position of President, Physiotherapy Associates, Inc. upon joining
the Company in April 1988.
Michael R. Mainelli, Jr., age 36, was appointed Representative Director
and President of Matsumoto Medical Instruments, Inc. in November 1997 and has
been a Vice President of the Company since joining the Company in April 1996.
He had previously spent twelve years with General Electric Company in
manufacturing, marketing, and product line management positions. Most
recently he was responsible for worldwide planning, development and marketing
of magnetic resonance imaging products at GE Medical Systems.
David J. Simpson, age 51, was appointed Vice President, Chief Financial
Officer and Secretary upon joining the Company in June 1987. He had
previously been Vice President and Treasurer of Rexnord Inc., a manufacturer
of industrial and aerospace products, since July 1985.
Thomas R. Winkel, age 45, was appointed President of Stryker
Americas/Middle East in March 1992 and has been a Vice President of the
Company since December 1984. He had previously been Vice President,
Administration since June 1987. Since joining the Company in October 1978,
he has held various other positions, including Assistant Controller,
Secretary and Corporate Controller.
Jeffrey R. Winter, age 39, was appointed Controller upon joining the
Company in October 1996. He had previously been a Senior Manager at Ernst &
Young LLP, independent public accountants, since October 1991.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of the management of the Company
appearing under the captions "Director Compensation" and "Executive
Compensation" in the 1998 proxy statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Beneficial Ownership of More than 5%
of the Outstanding Common Stock" and "Beneficial Ownership of Management" in
the 1998 proxy statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2)- The response to this portion of Item 14 is submitted as a
separate section of this report following the signature
page.
(a)(3)- Exhibits
Exhibit 3 - Articles of Incorporation and By-Laws
(i) Restated Articles of Incorporation and amendment
thereto dated December 28, 1993 - Incorporated by
reference to Exhibit 3(i) to the Company's Form 10-K
for the year ended December 31, 1993 (Commission
File No. 0-9165).
(ii) By-Laws - Incorporated by reference to Exhibit 3(ii)
to the Company's Form 10-Q for the quarter ended
June 30, 1988 (Commission File No. 0-9165).
Exhibit 4 - Instruments defining the rights of security
holders, including indentures--The Company agrees to
furnish to the Commission upon request a copy of
each instrument pursuant to which long-term debt of
the Company and its subsidiaries not exceeding 10%
of the total assets of the Company and its
consolidated subsidiaries is authorized.
Exhibit 10 - Material contracts
(i)* 1988 Stock Option Plan - Incorporated by
reference to Exhibit 10(i) to the Company's Form
10-K for the year ended December 31, 1992
(Commission File No. (0-9165).
(ii)* Supplemental Savings and Retirement Plan (as Amended
Effective January 1, 1996) - Incorporated by
Reference to Exhibit 10(iii) to the Company's Form
10-K for the year ended December 31, 1994
(Commission File No.0-9165).
(iii)* Amendment to the 1988 Stock Option Plan -
Incorporated by reference to Exhibit 10(i)
to the Form 10-Q for the period ending
March 31, 1997.
(iv)* Description of bonus arrangements between the
Company and certain officers, including Messrs.
Brown, Elenbaas, Laube, Lipes, Mainelli, Simpson
and Winkel.
Exhibit 11 - Statement re: computation of per share earnings
(i) Statement Re: Computation of earnings per
share of common stock.
Exhibit 13 - Annual report to security holders
(i) Portions of the 1997 Annual Report that
are incorporated herein by reference.
Exhibit 21 - Subsidiaries of the registrant
(i) List of Subsidiaries.
Exhibit 23 - Consents of experts and counsel
(i) Consent of Independent Auditors.
Exhibit 27 - Financial data schedule
(i) Financial data schedule (included in EDGAR
filing only).
(b) No reports on Form 8-K were filed in 1997.
(c) Exhibits - Exhibit Index appears on page 24 of this report.
(d) Financial statement schedules - The response to this portion
of Item 14 is submitted as a separate section of this report
following the signature page.
*compensation arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: 3/23/98 DAVID J. SIMPSON
_____________________________________
David J. Simpson, Vice President,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
JOHN W. BROWN 3/23/98 DAVID J. SIMPSON 3/23/98
___________________________________ ______________________________________
John W. Brown, Chairman, President David J. Simpson, Vice President,
and Chief Executive Officer Chief Financial Officer and Secretary
(Principal Executive Officer) (Principal Financial Officer)
HOWARD E. COX, JR. 3/23/98 JEFFREY R. WINTER 3/23/98
____________________________________ ______________________________________
Howard E. Cox, Jr. - Director Jeffrey R. Winter, Controller
(Principal Accounting Officer)
DONALD M. ENGELMAN 3/23/98 RONDA E. STRYKER 3/23/98
____________________________________ ______________________________________
Donald M. Engelman, Ph.D. - Director Ronda E. Stryker - Director
JEROME H. GROSSMAN 3/23/98 WILLIAM U. PARFET 3/23/98
____________________________________ ______________________________________
Jerome H. Grossman, M.D. - Director William U. Parfet - Director
JOHN S. LILLARD 3/23/98
____________________________________
John S. Lillard - Director
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
STRYKER CORPORATION
KALAMAZOO, MICHIGAN
FORM 10-K - ITEM 14(a)(1), (2) AND (d)
STRYKER CORPORATION AND SUBSIDIARIES
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Stryker Corporation
and subsidiaries and report of independent auditors, included in the 1997
Annual Report, are incorporated by reference in Item 8:
Report of independent auditors
Consolidated balance sheets - December 31, 1997 and 1996.
Consolidated statements of earnings - years ended
December 31, 1997, 1996 and 1995.
Consolidated statements of stockholders' equity -
years ended December 31, 1997, 1996 and 1995.
Consolidated statements of cash flows - years ended
December 31, 1997, 1996 and 1995.
Notes to consolidated financial statements - December 31, 1997.
The following consolidated financial statement schedule of Stryker
Corporation and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STRYKER CORPORATION AND SUBSIDIARIES
Column A Column B Column C Column D Column E
___________________________ ___________ __________ ___________ __________
Additions Deductions
__________ ___________
Balance at Charged to Balance
Beginning Costs & at End
Description of Period Expenses Describe(a) of Period
___________________________ ___________ __________ ___________ ___________
DEDUCTED FROM ASSET ACCOUNTS
Allowance for Doubtful Accounts
Year ended December 31, 1997 $9,500,000 $4,565,000 $2,365,000 $11,700,000
========== ========== ========== ==========
Year ended December 31, 1996 $7,800,000 $3,865,000 $2,165,000 $9,500,000
========== ========== ========== ==========
Year ended December 31, 1995 $6,400,000 $1,934,000 $534,000 $7,800,000
========== ========== ========== ==========
(a) Uncollectible amounts written off, net of recoveries
FORM 10-K - ITEM 14(c)
STRYKER CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page*
________________________________________________________________ ______
(3) Articles of incorporation and by-laws.
(i) Restated Articles of Incorporation and amendment
thereto dated December 28, 1993. 16**
(ii) By Laws. 16**
(10) Material contracts.
(i) 1988 Stock Option Plan. 16**
(ii) Supplemental Savings and Retirement Plan
(as Amended Effective January 1, 1996). 16**
(iii) Amendment to the 1988 Stock Option Plan. 17**
(iv) Description of bonus arrangements between the Company
and certain officers, including Messrs. Brown,
Elenbaas, Laube, Lipes, Mainelli, Simpson and Winkel. 23
(11) Statement re: computation of per share earnings.
(i) Statement Re: Computation of earnings per share of
common stock. 23
(13) Annual report to security holders.
(i) Portions of the 1997 Annual Report that are
incorporated herein by reference. 17**
(21) Subsidiaries of the registrant.
(i) List of Subsidiaries. 24
(23) Consents of experts and counsel.
(i) Consent of Independent Auditors. 26
(27) Financial data schedule.
(i) Financial data schedule (included in EDGAR filing only).
* Page number in sequential numbering system where such exhibit can be
found, or it is stated that such exhibit is incorporated by reference.
** Incorporated by reference in this Annual Report on Form 10-K
EXHIBIT (10)(iv)
DESCRIPTION OF BONUS ARRANGEMENTS
The Company has entered into bonus arrangements with certain executive
officers for 1998, including Mr. Brown, Mr. Elenbaas, Mr. Laube, Mr. Lipes,
Mr. Mainelli, Mr. Simpson and Mr. Winkel, based on specific performance
criteria including sales, profits and asset management. The aggregate amount
of such bonuses is not expected to exceed $2,000,000.
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
Year Ended December 31
______________________________________
1997 1996 1995
___________ ___________ __________
Basic:
Average number
of shares outstanding 96,254,000 96,838,000 96,936,000
___________ ___________ __________
Net earnings $125,320,000 $104,460,000 $87,010,000
=========== =========== ==========
Basic net earnings per
share of common stock $1.30 $1.08 $0.90
==== ==== ====
Diluted:
Average number
of shares outstanding 96,254,000 96,838,000 96,936,000
Net effect of dilutive stock
options, based on the
treasury stock method using
average market price 1,878,000 1,589,000 1,609,000
___________ ___________ __________
Total diluted shares 98,132,000 98,427,000 98,545,000
=========== =========== ==========
Diluted net earnings per
share of common stock $1.28 $1.06 $0.88
===== ===== =====
EXHIBIT (21)
LIST OF SUBSIDIARIES
State or Country
Name of Subsidiary of Incorporation
____________________________________________________________________
Comptoir Hospitalier Orthopedique et Chirurgical France
Diagnostic Treatment Rehabilitation Clinic Limited United Kingdom
Dimso Iberica SA Spain
Dimso SA France
Favro B.V. The Netherlands
N.V. Stryker S.A. Belgium
Osteo AG Switzerland
Osteo Australia Pty. Limited Australia
Osteo France SARL France
Osteo Holding AG Switzerland
Osteonics Corp. New Jersey
Physiotherapy Associates, Inc. Michigan
Physiotherapy Associates UK Limited United Kingdom
Stryker AB Sweden
Stryker Arroyo, Inc. Delaware
Stryker A/S Denmark
Stryker Australia Pty. Ltd. New South Wales
Stryker (Barbados) Foreign Sales Corporation Barbados
Stryker Biotech B.V. The Netherlands
Stryker Biotech France SARL France
Stryker B.V. The Netherlands
Stryker Canada Inc. Canada
Stryker China Limited Hong Kong
Stryker Corporation (Chile) Compania Limitada Chile
Stryker Corporation (Malaysia) Sdn. Bhd. Malaysia
Stryker Far East, Inc. Delaware
Stryker France SA France
Stryker IFSC Limited Ireland
Stryker Ireland Limited Ireland
Stryker Korea Ltd. Korea
Stryker Medical B.V. The Netherlands
Stryker Mexico, S.A. de C.V. Mexico
Stryker Osteonics (PTY) LTD. South Africa
Stryker Osterreich GmbH Austria
Stryker Pacific Limited Hong Kong
Stryker Polska Sp.zo.o Poland
Stryker Puerto Rico Inc. Delaware
Stryker SA Switzerland
Stryker Sales Corporation Michigan
Stryker Singapore Private Limited Singapore
Stryker-Osteo GmbH Germany
Stryker-Osteonics SA Switzerland
Stryker Corporation directly or indirectly owns 100% of the outstanding
voting securities of each of the above-named subsidiaries.
Stryker is a 75% investor in:
Matsumoto Medical Instruments, Inc. Japan
Stryker effectively controls:
Stryker India Medical Equipment Private Limited India
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Stryker Corporation of our report dated January 31, 1998, included
in the 1997 Annual Report to Stockholders of Stryker Corporation.
Our audits also included the financial statement schedule of Stryker
Corporation and subsidiaries listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement Number 33-55662 on Form S-8 dated December 11, 1992, Registration
Statement Number 2-96467 on Form S-8 dated April 4, 1985, Registration
Statement Number 33-32240 on Form S-8 dated November 20, 1989 and to the
related prospectus for each of the registration statements of our report
dated January 31, 1998, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Stryker Corporation.
ERNST & YOUNG LLP
Kalamazoo, Michigan
March 25, 1998
TEN-YEAR REVIEW
(dollars in thousands, except per share amounts)
<TABLE>
SUMMARY OF OPERATIONS
1997 1996 1995 1994 1993
________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
Net sales $980,135 $910,060 $871,952 $681,920 $557,335
Cost of sales 397,766 392,358 369,444 300,381 256,748
________ ________ ________ ________ ________
Gross profit 582,369 517,702 502,508 381,539 300,587
Operating expenses:
Research, development,
and engineering 56,895 56,870 43,771 39,630 36,199
Selling, general, and
administrative 341,500 326,641 301,426 221,433 172,446
Special charges -- 41,778 -- -- --
Gain on patent judgment -- (61,094) -- -- --
________ ________ ________ ________ ________
398,395 364,195 345,197 261,063 208,645
________ ________ ________ ________ ________
Operating income 183,974 153,507 157,311 120,476 91,942
Other income (expense) 10,476 6,939 5,782 7,099 4,123
________ ________ ________ ________ ________
Earnings before income
taxes, minority interest,
and extraordinary item 194,450 160,446 163,093 127,575 96,065
Income taxes 70,000 61,650 66,900 50,770 35,860
________ ________ ________ ________ ________
Earnings before minority
interest 124,450 98,796 96,193 76,805 60,205
Minority interest 870 5,664 (9,183) (4,405) --
________ ________ ________ ________ ________
Earnings before
extraordinary item 125,320 104,460 87,010 72,400 60,205
Extraordinary gain (net) -- -- -- -- --
________ ________ ________ ________ ________
Net earnings $125,320 $104,460 $87,010 $72,400 $60,205
======== ======== ======== ======== ========
Basic net earnings per
share of common stock (a) $1.30 $1.08 $.90 $.75 $.62
Diluted net earnings per
share of common stock (a) $1.28 $1.06 $.88 $.74 $.62
Dividend per share of
common stock $.11 $.10 $.045 $.04 $.035
Basic average number of
shares outstanding-in
thousands (a) 96,254 96,838 96,936 96,734 96,712
Diluted average number of
shares outstanding-in
thousands (a) 98,132 98,427 98,545 98,053 97,847
(a) Adjusted for the three-for-two stock split effective May 19,1989, and
the two-for-one stock splits effective May 13, 1991 and May 10, 1996.
</TABLE>
<TABLE>
1992 1991 1990 1989 1988
________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
Net sales $477,054 $364,825 $280,634 $225,860 $178,636
Cost of sales 221,650 172,477 132,882 106,899 85,037
________ ________ ________ ________ ________
Gross profit 255,404 192,348 147,752 118,961 93,599
Operating expenses:
Research, development,
and engineering 32,313 23,703 19,663 15,572 12,193
Selling, general, and
administrative 149,390 117,089 92,384 71,761 55,046
Special charges -- -- -- -- --
Gain on patent judgment -- -- -- -- --
________ ________ ________ ________ ________
181,703 140,792 112,047 87,333 67,239
________ ________ ________ ________ ________
Operating income 73,701 51,556 35,705 31,628 26,360
Other income (expense) 3,239 1,789 2,395 (598) (360)
________ ________ ________ ________ ________
Earnings before income
taxes, minority interest,
and extraordinary item 76,940 53,345 38,100 31,030 26,000
Income taxes 29,240 20,270 14,475 11,800 10,140
________ ________ ________ ________ ________
Earnings before minority
interest 47,700 33,075 23,625 19,230 15,860
Minority interest -- -- -- -- --
________ ________ ________ ________ ________
Earnings before
extraordinary item 47,700 33,075 23,625 19,230 15,860
Extraordinary gain (net) -- -- 9,910 -- --
________ ________ ________ ________ ________
Net earnings $47,700 $33,075 $33,535 $19,230 $15,860
======== ======== ======== ======== ========
Basic net earnings per
share of common stock (a) $.50 $.35 $.25(b) $.20 $.17
Diluted net earnings per
share of common stock (a) $.49 $.34 $.25(b) $.20 $.17
Dividend per share of
common stock $.03 $.025 -- -- --
Basic average number of
shares outstanding-in
thousands (a) 95,432 95,052 94,792 94,356 93,728
Diluted average number of
shares outstanding-in
thousands (a) 97,783 97,444 96,444 95,857 95,081
(a) Adjusted for the three-for-two stock split effective May 19, 1989, and
the two-for-one stock splits effective May 13, 1991 and May 10, 1996.
(b) Excludes net earnings before extraordinary gain of $.11 basic and $.10
diluted.
</TABLE>
<TABLE>
FINANCIAL AND STATISTICAL DATA
1997 1996 1995 1994 1993
________ ________ ________ ________ ________
Cash and marketable
<S> <C> <C> <C> <C> <C>
securities 351,068 367,573 264,648 202,045 152,637
Working capital 453,597 501,796 448,815 361,318 213,965
Current ratio 2.5 3.0 3.6 3.0 2.6
Property, plant and
equipment-net 163,867 172,303 182,592 180,719 67,707
Capital expenditures 35,213 26,724 36,299 29,239 20,160
Depreciation and
amortization 33,264 34,650 28,654 20,944 16,183
Total assets 985,075 993,506 854,891 767,971 454,204
Long-term debt 4,449 89,502 96,967 95,276 31,282
Stockholders' equity 612,775 530,361 454,279 358,266 288,434
Return on average equity 21.9% 21.2% 21.4% 22.4% 23.1%
Net cash provided by
operating activities 91,867 204,342 111,536 97,693 86,102
Number of stockholders
of record 3,127 3,306 3,260 3,684 3,951
Number of employees 5,691 5,274 4,629 4,221 3,228
</TABLE>
<TABLE>
1992 1991 1990 1989 1988
________ ________ ________ ________ ________
Cash and marketable
<S> <C> <C> <C> <C> <C>
securities 91,752 80,029 54,052 19,282 4,602
Working capital 168,197 140,296 117,877 89,594 70,071
Current ratio 2.7 2.6 3.0 3.5 3.4
Property, plant and
equipment-net 59,649 36,056 28,700 22,918 20,703
Capital expenditures 31,618 16,570 11,935 7,106 7,987
Depreciation and
amortization 11,382 11,796 7,109 6,312 5,999
Total assets 340,272 270,316 209,521 152,333 124,830
Long-term debt 1,433 1,400 1,900 2,655 3,121
Stockholders' equity 232,261 179,875 147,875 112,029 91,019
Return on average equity 23.1% 20.2% 18.2% 18.9% 19.1%
Net cash provided by
operating activities 50,728 37,644 48,328 21,500 3,365
Number of stockholders
of record 3,512 2,914 2,400 2,294 2,049
Number of employees 2,906 2,448 1,913 1,599 1,408
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The table below outlines the components of the consolidated statements
of earnings as a percentage of net sales:
<TABLE>
Percentage of Net Sales Percentage Change
_________________________ ________________
1997 1996 1995 1997/96 1996/95
_____ _____ _____ _______ _______
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 8% 4%
Cost of sales 40.6 43.1 42.4 1 6
_____ _____ _____
Gross profit 59.4 56.9 57.6 13 3
Research, development and
engineering expense 5.8 6.2 5.0 -- 30
Selling, general and
administrative expense 34.8 35.9 34.6 5 8
Special charges -- 4.6 -- -- --
Gain on patent judgment -- (6.7) -- -- --
____ ____ ____
Operating income 18.8 16.9 18.0 20 (2)
Other income 1.0 0.7 0.7 51 20
____ ____ ____
Earnings before income
taxes and minority
interest 19.8 17.6 18.7 21 (2)
Income taxes 7.1 6.7 7.7 14 (8)
____ ____ ____
Earnings before minority
interest 12.7 10.9 11.0 26 3
Minority interest 0.1 0.6 (1.0) (85) --
____ ____ ____
Net earnings 20 20
12.8% 11.5% 10.0%
==== ==== ====
</TABLE>
The table below sets forth domestic/international and product line sales
information:
<TABLE>
Net Sales Percentage
(in thousands) Change
____________________________ _______________
1997 1996 1995 1997/96 1996/95
________ ________ _______ _______ _______
Domestic/international sales
<S> <C> <C> <C> <C> <C>
Domestic $633,252 $564,534 $477,207 12% 18%
International 346,883 345,526 394,745 -- (12)
________ ________ ________
Total net sales $980,135 $910,060 $871,952 8 4
======== ======== ========
Product line sales
Stryker Surgical $740,369 $669,898 $608,646 11 10
Stryker Medical 207,481 196,083 158,516 6 24
Matsumoto Distributed
Products 32,285 44,079 104,790 (27) (58)
________ ________ ________
Total net sales $980,135 $910,060 $871,952 8 4
======== ======== ========
</TABLE>
1997 COMPARED TO 1996
Stryker Corporation's net sales increased 8% in 1997 to $980.1 million
from $910.1 million in 1996. Increased unit volume of Stryker Surgical and
Medical products generated an 11% sales increase. Net sales also increased
3% as a result of acquired businesses. These increases were partially offset
by a 3% decrease arising from changes in foreign currency exchange rates, a
2% decline in selling prices, and a 1% decline from a divested business.
The Company's domestic sales increased 12% in 1997 compared to 1996.
The leading domestic sales gains came from strong shipments of powered
surgical instruments, endoscopic equipment, and orthopaedic implants and
increased revenue from physical therapy services. International sales
increased less than 1% for the year as unfavorable foreign currency
comparisons and flat sales in Japan offset a 20% increase in shipments in the
other international markets.
Sales of Stryker Surgical products (principally orthopaedic products)
increased 11% for the year. The sales gains for the year resulted from
higher shipments of orthopaedic implants, primarily hips, knees and trauma
products, powered surgical instruments, especially the TPS advanced micro-
powered instruments, and endoscopic equipment, partially offset by the lower
dollar translation of foreign currency sales. Stryker Medical sales
increased 6% for the year resulting from increased revenues from physical
therapy services, primarily as a result of business acquisitions and start-
ups during the year, which were substantially offset by lower shipments of
hospital beds and stretchers and the January 1997 sale of the Sterilizer
Service Division. Sales of Matsumoto distributed products (principally
general surgery and ophthalmic products sourced from other companies for sale
in Japan) declined 27% for the year due to unfavorable foreign currency
comparisons and lower sales volume.
Cost of sales represented 40.6% of sales compared to 43.1% in 1996. The
lower cost of sales percentage in 1997 resulted from product mix and the
Company's continued efforts in product cost reductions and from inventory
adjustments of $13.8 million recorded in 1996 that did not occur in 1997.
The 1996 inventory adjustments were for excess inventory and product
deletions, principally in Japan, and obsolete inventory resulting from new
product introductions. Research, development, and engineering expenses were
$56.9 million in both 1997 and 1996. The Company's research, development,
and engineering expenses represent continued development of the OP-1 Bone
Growth Device at Stryker Biotech and the Company-wide focus on new product
development. New products in 1997 include the Scorpio Knee System, the Steri-
Shield Turbo3 Helmet, the SE Sagittal Saw, the Tempest Arthroscopy Pump and
the 6080 MX-Pro Ambulance Cot. Selling, general, and administrative expenses
increased 5% in 1997 as a result of an increase in marketing expenses due to
additional marketing campaigns, and an increase in selling expense resulting
from increases in sales volume, larger sales forces and the incremental
expenses incurred as a result of the Osteo Holding AG ("Osteo") acquisition.
However, selling, general, and administrative expenses declined to 34.8% of
sales in 1997 compared to 35.9% in 1996. In 1996, $8.9 million of
adjustments were made for additional legal reserves, depreciation charges due
to a change in estimate, and other matters. The effect of these adjustments
and the Company's ongoing effort to control operating expenses reduced
selling, general, and administrative expenses as a percentage of sales.
There were several significant unusual items reflected in continuing
operations in 1996 that did not occur in 1997. Special charges of $41.8
million were recorded in 1996 which consisted of $15.0 million for the
reorganization of the Company's distribution channels, $14.6 million relating
to asset impairments, $7.5 million for purchased in-process research and
development and $4.7 million for patent claims. In addition, the Company was
awarded and paid $77.6 million in damages, attorney fees and interest for
infringement of the Company's U.S. patent on its Omniflex Hip System. The
Company recognized a pre-tax gain, net of related legal fees and other
expenses, of $61.1 million.
During the fourth quarter of 1997, the Company reduced the effective tax
rate for the year to 36% from 37%, thereby reducing income tax expense by
$1.9 million. The reduction in the effective tax rate in the fourth quarter
of 1997 and from the 38.4% rate used in 1996 was the result of higher U.S.
exports, tax-free interest on short-term investments, and a more favorable
mix of operating results among tax jurisdictions. Minority interest,
reflected as an income item in both 1997 and 1996, decreased 85% due to lower
Matsumoto losses in 1997 and increased ownership by the Company. Net
earnings increased 20% to $125.3 million in 1997 compared to $104.5 million
in 1996.
1996 COMPARED TO 1995
Stryker Corporation's net sales increased 4% in 1996 to $910.1 million
from $872.0 million in 1995. Increased unit volume of Stryker Surgical and
Medical products generated an 11% sales increase. Net sales also increased
3% as a result of acquired businesses and 1% as a result of the 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 6% decrease arising from lower unit volume of Matsumoto distributed
products, a 4% decrease arising from changes in foreign currency exchange
rates, and a 1% decline in selling prices.
The Company's domestic sales increased 18% in 1996 compared to 1995.
The leading domestic sales gains came from strong shipments of endoscopic
equipment, powered surgical instruments and orthopaedic implants, increased
revenue from physical therapy services, and higher shipments of hospital beds
and stretchers. International sales declined 12% for the year as unfavorable
foreign currency comparisons and lower sales in Japan more than offset strong
shipments in the other international markets. Sales in Japan declined 31%
for the year because of lower shipments of Matsumoto distributed products and
unfavorable currency comparisons. Sales in the other international markets
increased 20% for the year.
Sales of Stryker Surgical products (principally orthopaedic products)
increased 10% for the year. The sales gains for the year resulted from
higher shipments of orthopaedic implants, especially the Osteonics Series
7000 knee implants, powered surgical instruments and endoscopic equipment,
but were reduced by the lower dollar translation of foreign currency sales.
Stryker Medical product sales increased 24% for the year resulting from
increased revenues from physical therapy services, primarily as a result of
business acquisitions during the year and higher shipments of hospital beds
and stretchers. Sales of Matsumoto distributed products declined 58% for the
year. The decline is a result of the termination of several distribution
arrangements commencing in the third quarter of 1995 and unfavorable foreign
currency comparisons in Japan. Matsumoto lost three major suppliers who
chose other distribution channels.
Cost of sales represented 43.1% of sales compared to 42.4% in 1995. The
higher cost of sales percentage in 1996 resulted from additional inventory
adjustments of $13.8 million recorded in the fourth quarter of 1996 for
excess inventory and product deletions, principally in Japan, and obsolete
inventory resulting from new product introductions. The effect of these
adjustments was partially offset by the conversion of certain portions of the
Osteonics domestic distribution network, which resulted in increased direct
sales to hospitals. Research, development, and engineering expense increased
30% as the Company spent $56.9 million on product development in 1996
compared to $43.8 million in 1995. The increase in research, development,
and engineering expense as a percentage of sales in 1996 is principally 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. New products
in 1996 include the TPS advanced micro-powered instruments, the Osteonics
Total Shoulder System, the 882TE 3-Chip Camera System, the Advanced Cement
Mixing System, Passport knee instruments, several new arthroscopy instruments
and the 2025 ICU Bed. Selling, general, and administrative expenses
increased 8% in 1996 as a result of increased selling expense resulting from
the changes in the Osteonics distribution network, larger sales forces and
the incremental expenses incurred as a result of the Osteo acquisition.
Also, $8.9 million of adjustments were made in the fourth quarter for
additional legal reserves, depreciation charges due to a change in estimate,
and other matters. Selling, general, and administrative expenses increased
to 35.9% of sales in 1996 compared to 34.6% in 1995.
There were several significant unusual items reflected in continuing
operations in 1996. Special charges of $41.8 million were recorded in the
fourth quarter consisting of $15.0 million for the reorganization of the
Company's distribution channels, $14.6 million relating to asset impairments,
$7.5 million for purchased in-process research and development and $4.7
million for patent claims. The reorganization of the Company's distribution
channels relates to the implementation of a plan to convert a portion of the
Company's distributors to direct sales. The cost of the conversions are
based on contractual terms. During the fourth quarter of 1996, certain
assets in Tokyo, Japan were designated as assets to be disposed of and were
written down $9.7 million to their fair value. In addition, an estimated
undiscounted cash flow analysis confirmed the impairment of certain goodwill,
which was written down by $3.9 million to its fair value. Seven and a half
million dollars of the Osteo purchase price was allocated to purchased in-
process research and development and charged to operations based upon a
valuation completed in the fourth quarter. Patent claims represent amounts
that the Company has agreed to pay for patent disputes related to certain of
its products. In addition, the Company was awarded and paid $77.6 million in
damages, attorney fees and interest for infringement of the Company's U.S.
patent on its Omniflex Hip System. The Company recognized a pre-tax gain,
net of related legal fees and other expenses, of $61.1 million.
The effective tax rate decreased to 38.4% in 1996 compared to 41% in
1995 as a result of losses reported by Matsumoto, which provided a tax
benefit at the higher Japanese tax rate. The net losses reported at
Matsumoto reduced Stryker's operating income below the prior year level;
however, 49% of those losses were reversed by the minority interest benefit.
As a result, earnings before income taxes and minority interest declined 2%,
and minority interest was reflected as an income item in 1996. Net earnings
increased 20% to $104.5 million in 1996 compared to $87.0 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Stryker's financial position remained strong in 1997, with operating
activities providing $91.9 million in cash, compared to $204.3 million
provided in 1996. The large decrease of cash provided in 1997 is the result
of first quarter 1997 payments of attorney fees and taxes totaling $37.9
million and the receipt of $77.6 million in the fourth quarter of 1996, both
of which relate to the 1996 gain on patent judgment. Excluding those items,
cash flow from operations in 1997 would be $129.8 million compared to $126.7
million in 1996. Working capital at December 31, 1997 decreased by $48.2
million to $453.6 million from $501.8 million in 1996. The decrease in
working capital is due to the reclass from long-term to current in 1997 of
$72.6 million of debt related to the acquisition of Matsumoto, which matures
in August 1998. Accounts receivable increased 6% and days sales outstanding
at the end of 1997 remained at 62 days, consistent with the end of 1996.
Inventories increased 7% in 1997 and days sales in inventory finished 1997 at
127 days compared to 104 days at the end of 1996.
During 1997, the Company purchased additional shares of the outstanding
common stock of Matsumoto Medical Instruments, Inc., thereby increasing its
direct ownership interest in Matsumoto to 75%, at a cost of $28.6 million.
Also during 1997, the Company repurchased 992,800 shares of Stryker common
stock in the open market at a cost of $25.6 million. These purchases brought
the total shares repurchased under an April 24, 1996 repurchase authorization
by the Company's Board of Directors up to the 1,000,000 shares authorized.
This repurchase authorization was replaced by a new authorization approved by
the Board of Directors on April 30, 1997, for repurchases of up to 1,000,000
shares of common stock. No shares have been repurchased under the new share
repurchase program. Shares repurchased under the share repurchase program
will be used for employee stock option plans and other corporate purposes.
The Company's cash and marketable securities of $351.1 million at
December 31, 1997, as well as anticipated cash flows from operations, are
expected to be sufficient to fund planned future operating capital
requirements and to finance future acquisitions. Should additional funds be
required, the Company has unsecured lines of credit with banks totaling $53.3
million, none of which were utilized at December 31, 1997.
OTHER MATTERS
The Company manufactures its products in the United States, France and
Switzerland and distributes its product throughout the world. As a result,
the Company's financial results could be significantly affected by factors
such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. The Company's operating results are exposed
to changes in exchange rates between the U.S. dollar and the Japanese yen and
European currencies, in particular the French franc, Swiss franc and German
mark. When the U.S. dollar strengthens against foreign currencies, the
dollar value of foreign currency sales declines and the relative cost of U.S.-
sourced product increases, thereby decreasing gross margins. When the U.S.
dollar weakens, the opposite occurs.
The Company does not engage in any hedge activity related to the
translation of its net sales or net profits overseas and its use of
derivative financial instruments to hedge transaction exposure is not
significant.
The Company's exposure to market risk for changes in interest rates
relates primarily to its investment portfolio. The Company places its
investments with high quality issuers and, by policy, is averse to principal
loss of its invested funds by limiting default risk, market risk and
reinvestment risk.
The Company manages default risks by investing in only high credit,
quality securities and by responding appropriately to a significant reduction
in a credit rating of any investment issuer or guarantor. The portfolio
includes only marketable securities with active secondary or resale markets
to ensure portfolio liquidity.
At December 31, 1997 36% of the Company's marketable debt securities
mature within one year and substantially all of the remainder mature within
three years. A 1% rise or decline in U.S. market interest rates would cause
the fair value of the Company's marketable debt securities to decline or rise
in fair value by approximately $2.6 million. This was determined by
considering the impact of a hypothetical move in interest rates on the
Company's marketable debt securities portfolio and does not consider any
actions by management to mitigate its exposure to such a change.
The Company plans to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The total incremental cost for the Year 2000 project is
estimated at approximately $2 million, the majority of which will be for the
purchase of new software that will be capitalized. The project is
anticipated to be complete by December 31, 1998. With conversions to new
software and modifications to existing software, the Year 2000 issue should
not pose significant operational problems for the Company. However, if such
conversions and modifications are not made or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the
Company.
The Company will begin formal communications with large suppliers and
customers during 1998 to determine the extent to which interface systems are
vulnerable to Year 2000 issues. There is no guarantee that the computer
systems of suppliers and customers would not have an adverse effect on the
Company's operations.
The costs and timing of the Year 2000 project modifications are based on
management's best estimates, which were derived utilizing assumptions of
future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
Stryker common stock 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.
- -----------------------------------------------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS
STRYKER CORPORATION AND SUBSIDIARIES
(dollars in thousands, except per share amounts)
December 31
____________________
1997 1996
<S> <C> <C>
ASSETS ________ ________
Current Assets
Cash and cash equivalents $154,027 $175,673
Marketable debt securities 197,041 191,900
Accounts receivable, less allowance of $11,700
($9,500 in 1996) 176,214 166,052
Inventories 136,246 127,387
Deferred income taxes 78,896 78,034
Prepaid expenses and other current assets 14,184 14,491
________ ________
Total current assets 756,608 753,537
Property, Plant, and Equipment
Land, buildings, and improvements 116,830 130,240
Machinery and equipment 183,619 159,945
________ ________
300,449 290,185
Less allowance for depreciation 136,582 117,882
________ ________
163,867 172,303
Other Assets
Intangibles, less accumulated amortization of
$23,400 ($17,510 in 1996) 46,110 45,375
Other 18,490 22,291
________ ________
64,600 67,666
________ ________
$985,075 $993,506
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 55,034 $ 62,433
Accrued compensation 43,927 37,693
Income taxes 36,971 56,723
Accrued expenses and other liabilities 93,452 90,489
Current maturities of long-term debt 73,627 4,403
________ ________
Total current liabilities 303,011 251,741
Long-Term Debt, Excluding Current Maturities 4,449 89,502
Other Liabilities 29,168 36,034
Minority Interest 35,672 85,868
Stockholders' Equity
Common stock, $.10 par value:
Authorized--150,000 shares
Outstanding--96,059 shares (96,787 in 1996) 9,606 9,679
Additional paid-in capital 18 5,922
Retained earnings 612,939 514,318
Unrealized (losses) gains on securities (376) 1,196
Foreign translation adjustments (9,412) (754)
________ ________
Total stockholders' equity 612,775 530,361
________ ________
$985,075 $993,506
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
- -----------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
(dollars in thousands, except per share amounts)
Years Ended December 31
_______________________________
1997 1996 1995
________ ________ ________
<S> <C> <C> <C>
Net sales $980,135 $910,060 $871,952
Cost of sales 397,766 392,358 369,444
________ ________ ________
Gross profit 582,369 517,702 502,508
Operating expenses:
Research, development, and engineering 56,895 56,870 43,771
Selling, general, and administrative 341,500 326,641 301,426
Special charges -- 41,778 --
Gain on patent judgment -- (61,094) --
________ ________ ________
398,395 364,195 345,197
________ ________ ________
Operating income 183,974 153,507 157,311
Other income 10,476 6,939 5,782
________ ________ ________
Earnings before income taxes and
minority interest 194,450 160,446 163,093
Income taxes 70,000 61,650 66,900
________ ________ ________
Earnings before minority interest 124,450 98,796 96,193
Minority interest 870 5,664 (9,183)
________ ________ ________
Net earnings $125,320 $104,460 $87,010
======== ======== ========
Net earnings per share of common stock:
Basic $1.30 $1.08 $.90
Diluted $1.28 $1.06 $.88
See accompanying notes to consolidated financial statements.
</TABLE>
- -----------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STRYKER CORPORATION AND SUBSIDIARIES
(in thousands, except per share amounts)
Unrealized
Additional (Losses) Foreign
Common Paid-In Retained Gains on Translation
Stock Capital Earnings Securities Adjustments
______ _________ ________ _________ __________
Balance at
<S> <C> <C> <C> <C> <C>
January 1, 1995 $9,675 $10,958 $336,897 ($1,315) $2,051
Net earnings for 1995 87,010
Sales of 370 shares
of common stock
under stock option
and benefit plans,
including $1,615
income tax benefit 36 3,778
Cash dividend
declared of $.045
per share of common
stock (4,370)
Unrealized gains, net
of income taxes of
$2,535 3,629
Translation
adjustment 5,930
______ _________ ________ __________ __________
Balance at
December 31, 1995 9,711 14,736 419,537 2,314 7,981
Net earnings for 1996 104,460
Sales of 257
shares of common
stock under stock
option and benefit
plans, including
$1,152 income tax
benefit 26 4,095
Common stock issued
in business
acquisitions 8 2,089
Repurchase of 657
shares of common
stock (66) (14,998)
Cash dividend
declared of $.10 per
share of common
stock (9,679)
Unrealized losses,
net of $825 income
tax benefit (1,118)
Translation
adjustment (8,735)
______ _________ ________ __________ __________
Balance at
December 31, 1996 9,679 5,922 514,318 1,196 (754)
Net earnings for 1997 125,320
Sales of 386 shares
of common stock
under stock option
and benefit plans,
including $3,878
income tax benefit 38 5,317
Repurchase of 993
shares of common
stock (99) (9,358) (16,119)
Elimination of 120
shares of common
stock held by a
subsidiary (12) (1,863)
Cash dividend
declared of $.11 per
share of common (10,580)
stock
Unrealized losses,
net of $1,483 income
tax benefit (1,572)
Translation
adjustment (8,658)
______ __________ ________ __________ __________
Balance at
December 31, 1997 $9,606 $18 $612,939 ($376) ($9,412)
====== ========== ======== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
- -----------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended December 31
_______________________________
1997 1996 1995
________ ________ ________
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings $125,320 $104,460 $ 87,010
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 26,113 28,397 25,542
Amortization 7,151 6,253 3,112
Special charges -- 41,178 --
Minority interest (870) (5,664) 9,183
Provision for losses on accounts
receivable 2,200 1,700 1,400
Deferred income taxes (credit) 1,960 (30,693) 2,484
Changes in operating assets and
liabilities, net of effects of
business acquisitions:
Increase in accounts receivable (20,968) (7,312) (13,560)
Decrease (increase) in inventories (18,170) 3,466 (1,599)
(Decrease) increase in accounts
payable (8,192) 12,041 (703)
(Decrease) increase in income taxes (25,728) 27,431 (5,909)
Other 3,051 23,085 4,576
________ ________ ________
Net cash provided by operating activities 91,867 204,342 111,536
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (35,213) (26,724) (36,299)
Sales (purchases) of marketable securities (5,141) 3,699 (110,335)
Business acquisitions, net of cash acquired (39,385) (51,295) (17,743)
________ ________ ________
Net cash used in investing activities (79,739) (74,320) (164,377)
FINANCING ACTIVITIES
Proceeds from borrowings -- -- 9,795
Payments on borrowings (6,734) (3,278) (5,913)
Dividends paid (9,679) (4,370) (3,870)
Proceeds from exercise of stock options 5,355 4,121 3,814
Repurchases of common stock (25,576) (15,064) --
Other 6,203 (2,804) 1,131
________ ________ ________
Net cash provided by (used in) financing
activities (30,431) (21,395) 4,957
Effect of exchange rate changes on cash and
cash equivalents (3,343) (2,003) 152
________ ________ ________
Increase (decrease) in cash and cash
equivalents (21,646) 106,624 (47,732)
Cash and cash equivalents at beginning
of year 175,673 69,049 116,781
________ ________ ________
Cash and cash equivalents at end of year $154,027 $175,673 $ 69,049
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
- ----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
December 31, 1997
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Stryker Corporation develops, manufactures and markets specialty
surgical and medical products which are sold primarily to hospitals
throughout the world and provides outpatient physical therapy services in
the United States.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries and its
majority-owned subsidiary, Matsumoto Medical Instruments, Inc., after
elimination of all significant intercompany accounts and transactions.
Minority interest represents the minority stockholders' equity in
Matsumoto's net earnings (loss) and their equity in Matsumoto's net assets.
REVENUE RECOGNITION: Revenue is recognized on the sale of products and
services when the related goods have been shipped or services have been
rendered.
USE OF ESTIMATES: The preparation of these consolidated financial statements
in conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS: Cash equivalents are highly liquid
investments with a maturity of three months or less when purchased.
Investments include marketable debt securities classified as current assets
and marketable equity securities classified in other assets.
The Company's investments in marketable equity and debt securities are
classified as "available-for-sale" and are carried at fair value, with the
unrealized gains and losses, net of income taxes, reported as a separate
component of stockholders' equity. Interest, dividends and realized gains
and losses on the sale of such securities are included in other income.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost
for approximately 78% (75% in 1996) of inventories is determined using the
lower of first-in, first-out (FIFO) cost or market. Cost for certain
domestic inventories is determined using the last-in, first-out (LIFO) cost
method. The FIFO cost for all inventories approximates replacement cost.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at
cost. Depreciation is computed by the straight-line or declining balance
methods over the estimated useful lives of the assets.
INTANGIBLE ASSETS: Intangible assets represent the excess of purchase price
over fair value of tangible net assets of acquired businesses. Intangible
assets, which include patents and intangibles not specifically
identifiable, are principally being amortized using the straight-line
method over periods of up to fifteen years.
INCOME TAXES: The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates in
effect for the years in which the differences are expected to reverse.
Deferred tax expense represents the change in net deferred tax assets and
liabilities during the year.
STOCK OPTIONS: The Company follows Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" in accounting for its
employee stock options. Under APB 25, no compensation expense is
recognized because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant.
EARNINGS PER SHARE: Effective January 1, 1997, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 128, "Earnings Per Share".
Statement 128 replaces the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Previously
the Company had not included shares subject to option in calculating
earnings per share because the effect thereof was not materially dilutive.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED: In June 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income" and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Results of operations and financial position will be unaffected by
implementation of these new standards. Both of these standards are
effective for financial periods beginning after December 15, 1997 and
require comparative information for earlier years to be restated.
Management is currently evaluating disclosure requirements under the new
standards.
NOTE 2. INVESTMENTS
The following is a summary of the Company's investments in marketable
equity and debt securities (in thousands):
<TABLE>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
_________ __________ __________ __________
At December 31, 1997:
<S> <C> <C> <C> <C>
Debt securities $197,505 $147 ($611) $197,041
Equity securities 4,796 1,317 (1,887) 4,226
_________ __________ __________ __________
Total $202,301 $1,464 ($2,498) $201,267
========= ========== ========== ==========
At December 31, 1996:
Debt securities $192,334 $360 ($794) $191,900
Equity securities 7,117 3,654 (1,199) 9,572
_________ __________ __________ __________
Total $199,451 $4,014 ($1,993) $201,472
========= ========== ========== ==========
</TABLE>
Gross realized gains on sales of the Company's investments totaled
$118,000, $516,000 and $248,000 in 1997, 1996 and 1995, respectively, and
gross realized losses totaled $750,000, $589,000 and $768,000 in 1997, 1996
and 1995, respectively. At December 31, 1997, approximately 36% of the
Company's investments in debt securities mature within one year and
substantially all of the remainder mature within three years.
Interest income, which is included in other income, totaled $14,963,000
in 1997, $13,339,000 in 1996 and $11,197,000 in 1995.
NOTE 3. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
December 31
___________________
1997 1996
________ ________
<S> <C> <C>
Finished goods $103,744 $94,424
Work-in-process 10,661 8,328
Raw material 29,560 31,989
________ ________
FIFO cost 143,965 134,741
Less LIFO reserve 7,719 7,354
________ ________
$136,246 $127,387
======== ========
</TABLE>
NOTE 4. BUSINESS ACQUISITIONS
The Company's subsidiary, Physiotherapy Associates, Inc., purchased
several physical therapy clinic operations. The aggregate purchase price of
these clinics in 1997, 1996 and 1995 was approximately $5,601,000, $8,605,000
and $5,700,000, respectively. Intangible assets acquired, principally
employment contracts and goodwill, are being amortized over periods ranging
from one to fifteen years.
In 1997, the Company purchased two product lines at a cost of
$4,500,000. Intangible assets acquired, principally patents and goodwill,
are being amortized over a period of five years.
In September 1996, the Company purchased 100% of the outstanding stock
of Osteo Holding AG and its subsidiaries ("Osteo"), based in Selzach,
Switzerland. Osteo designs and manufactures trauma products and
reconstructive orthopaedic devices. The purchase price of Sfr 55,000,000
($45,500,000) was paid Sfr 50,000,000 ($41,500,000) 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 in September 1996. Of the excess purchase price over fair value of
the net tangible assets acquired, $7,500,000 was allocated to purchased in-
process research and development and was charged to operations (See Note 5)
upon the completion of the valuation. The remaining excess purchase price of
$27,600,000 was allocated to intangibles to be amortized over fifteen years.
During 1997, the Company purchased additional shares of outstanding
common stock of Matsumoto Medical Instruments, Inc., thereby increasing its
direct ownership interest in Matsumoto to 75%, at a cost of $28,600,000. The
acquisition of additional shares was accounted for under the purchase method.
Matsumoto is one of the largest distributors of medical devices in Japan and
is the exclusive distributor of most Stryker products in that country.
For all of the above acquisitions, pro forma consolidated results would
not differ significantly from reported results.
NOTE 5. SPECIAL CHARGES
In the fourth quarter of 1996, the Company recorded special pre-tax
charges consisting of the following items (in thousands):
<TABLE>
Special
Charges
_______
<S> <C>
Reorganization of distribution channels $15,000
Asset impairments 14,578
Purchased in-process research and development (See Note 4) 7,500
Patent claims 4,700
_______
$41,778
=======
</TABLE>
Reorganization of distribution channels relates to the implementation of
a plan to convert a portion of the Company's distributors to direct sales.
The cost of the conversions are based on contractual terms. Asset
impairments consist of $9,678,000 for land and a building in Japan and
goodwill impairments of $3,900,000. Matsumoto analyzed its branch operations
throughout Japan and determined that certain assets, which consist of land
and a parking garage in Tokyo, Japan, would no longer be utilized in its
normal operations. Based on this evaluation, the Company adopted a plan to
sell these assets and wrote them down to their fair value. Also, a cash flow
analysis indicated that certain goodwill was impaired. The goodwill was
written down to its fair value. Patent claims, which are included in accrued
expenses, relate to patent disputes on certain products.
NOTE 6. GAIN ON PATENT JUDGMENT
In September 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 damages, attorneys' fees
and interest for infringement of the Company's U.S. patent on its Omniflex
Hip System. A petition for rehearing or rehearing en banc was denied by the
Federal Circuit Court in December 1996 and the Company was paid $77,600,000.
The Company recognized a pre-tax gain, net of related legal fees and other
expenses, of $61,094,000, which is included in operating income.
NOTE 7. BORROWINGS
The Company and its subsidiaries have unsecured short-term line of
credit arrangements with banks aggregating $20,000,000 domestically and
$33,300,000 equivalent in foreign currencies. There were no borrowings under
these lines at December 31, 1997. These lines generally expire on
July 31, 1998.
Long-term debt is as follows (in thousands):
<TABLE>
December 31
________________
1997 1996
_______ _______
<S> <C> <C>
Bank loans $72,565 $81,785
Other 5,511 12,120
_______ _______
78,076 93,905
Less current maturities 73,627 4,403
_______ _______
$ 4,449 $89,502
======= =======
</TABLE>
The bank loans represent two separate borrowings made to finance the
acquisition of the Company's investment in Matsumoto Medical Instruments,
Inc. Both loans are Japanese yen denominated, are unsecured and mature in
August 1998. The first loan is from the Chicago branch of The Sanwa Bank,
Limited, has a principal balance of $26,273,000 ($29,611,000 at December 31,
1996) and bears interest at a fixed annual rate of 4.76%. The second loan is
a floating rate loan (Japanese Libor + 0.25%) from the Chicago branches of
The Bank of Tokyo-Mitsubishi, Ltd. and The Sanwa Bank, Limited and has a
principal balance of $46,292,000 ($52,174,000 at December 31, 1996). The
Company has fixed the effective annual interest rate of this debt at 4.10%
using an interest rate swap with a notional amount and term equal to that of
the related loan. The yen denominated loans act as hedges of the Company's
investment in Matsumoto. As a result, adjustments made to the loan balances
to reflect applicable currency exchange rates at December 31 are included in
the foreign translation adjustments component of stockholders' equity.
Maturities of debt for the four years succeeding 1998 are: 1999 -
$1,090,000; 2000 - $178,000; 2001 - $72,000; and 2002 - $78,000.
The carrying amounts of the Company's long-term debt and interest rate
swap approximate their fair values based on the Company's current borrowing
rates for similar types of borrowing agreements and quoted market rates,
respectively.
Interest expense on debt, which is included in other income and
approximates interest paid, was $4,117,000 in 1997, $4,349,000 in 1996, and
$6,319,000 in 1995.
NOTE 8. CAPITAL STOCK
On May 10, 1996, the Company effected a two-for-one stock split. All
share and per share data have been adjusted to reflect the stock split as
though it had occurred at the beginning of the earliest period presented.
The Company has key employee and director stock option plans under which
options are granted at a price not less than fair market value at the date of
grant. The options are granted for periods of up to ten years and become
exercisable in varying installments. A summary of stock option activity
follows:
<TABLE>
Weighted
Average
Exercise
Shares Price
__________ ________
<S> <C> <C>
Options Outstanding at January 1, 1995 3,095,970 $ 9.38
Granted 50,000 22.94
Canceled (133,400) 11.00
Exercised (369,170) 6.93
__________ ________
Options Outstanding at December 31, 1995 2,643,400 9.90
Granted 955,000 22.50
Canceled (185,200) 15.47
Exercised (218,600) 9.12
__________ ________
Options Outstanding at December 31, 1996 3,194,600 13.40
Granted 845,000 28.86
Canceled (103,800) 17.72
Exercised (405,100) 6.50
__________ ________
Options Outstanding at December 31, 1997 3,530,700 $17.77
========== ========
Price range $3.38 - $10.00 646,100 $ 6.30
Price range $10.01 - $20.00 1,157,600 12.52
Price range $20.01 - $31.125 1,727,000 25.56
__________ ________
Options Outstanding at December 31, 1997 3,530,700 $17.77
========== ========
</TABLE>
Shares reserved for future grants were 839,600 and 1,580,800 at December
31, 1997 and 1996, respectively. Exercise prices for options outstanding as
of December 31, 1997 ranged from $3.38 to $31.125. A summary of shares
exercisable follows:
<TABLE>
Weighted
Average
Exercise
Shares Price
_________ ________
<S> <C> <C>
Price range $3.38 - $10.00 646,100 $ 6.30
Price range $10.01 - $20.00 903,000 12.60
Price range $20.01 - $31.125 167,000 22.05
_________ ________
Shares Exercisable at December 31, 1997 1,716,100 $11.16
========= ========
</TABLE>
Net earnings and net earnings per share would not be materially
different if the Company accounted for its employee stock options under the
fair value method as provided for under FASB Statement No. 123, "Accounting
for Stock-Based Compensation."
The Company has 500,000 authorized shares of $1 par value preferred
stock, none of which are outstanding.
NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share amounts):
<TABLE>
1997 1996 1995
________ ________ ________
<S> <C> <C> <C>
Net income $125,320 $104,460 $ 87,010
======== ======== ========
Weighted-average shares outstanding for
basic earnings per share 96,254 96,838 96,936
Effect of dilutive employee stock options 1,878 1,589 1,609
________ ________ ________
Adjusted weighted-average shares
outstanding for diluted earnings per share 98,132 98,427 98,545
======== ======== ========
Basic earnings per share $1.30 $1.08 $.90
Diluted earnings per share $1.28 $1.06 $.88
</TABLE>
NOTE 10. RETIREMENT PLANS
Substantially all employees of the Company are covered by retirement
plans. The majority of employees are covered by profit sharing or defined
contribution retirement plans.
The Company's 75%-owned subsidiary, Matsumoto Medical Instruments, Inc.,
has a noncontributory-defined benefit plan covering all employees who are
generally entitled, upon termination, to lump-sum or annuity payments of
amounts determined by reference to the current level of salary, length of
service and the conditions under which the termination occurs.
Matsumoto's funding policy for the plan is to contribute actuarially
determined amounts on a monthly basis. During 1996, Matsumoto changed the
plan's benefit formula which caused the projected benefit obligation to
decrease by $4,550,000. In addition, certain officers of Matsumoto are
customarily entitled to lump-sum payments under an unfunded retirement plan.
An accrual has been provided for the expected cost of these benefits earned
to date, although such payments are subject to the approval of Matsumoto's
stockholders. The net periodic retirement costs for the Matsumoto retirement
plans totaled $952,000 in 1997, $1,290,000 in 1996 and $2,276,000 in 1995.
A summary of the significant actuarial assumptions used as of December
31 follows:
<TABLE>
1997 1996 1995
_____ _____ _____
<S> <C> <C> <C>
Discount rate 4.50% 4.50% 4.50%
Expected long-term rate of return on assets 3.00% 3.00% 3.00%
Rate of increase in compensation levels 2.33% 2.33% 6.00%
</TABLE>
The funded status of the plan is as follows (in thousands):
<TABLE>
December 31
__________________
1997 1996
_______ _______
<S> <C> <C>
Vested accumulated plan benefits $ 4,021 $ 4,620
======= =======
Accumulated benefit obligation 4,053 4,784
======= =======
Projected benefit obligation for service
rendered to date 5,492 6,909
Plan assets at fair value (stocks and bonds) (4,591) (5,151)
_______ _______
Net pension obligation 901 1,758
Unrecognized net pension obligation 3,398 3,283
_______ _______
Accrued pension obligation 4,299 5,041
Accrued retirement benefits for officers 408 6,520
_______ _______
Accrued retirement benefits (included in
other liabilities) $ 4,707 $11,561
======= =======
</TABLE>
Retirement plan expense under the Company's profit sharing and defined
contribution retirement plans totaled $11,248,000 in 1997, $10,147,000 in
1996, and $8,977,000 in 1995.
NOTE 11. INCOME TAXES
Earnings before income taxes and minority interest consist of the
following (in thousands):
<TABLE>
1997 1996 1995
________ ________ ________
<S> <C> <C> <C>
United States operations $180,407 $152,680 $103,813
Foreign operations 14,043 7,766 59,280
________ ________ ________
$194,450 $160,446 $163,093
======== ======== ========
</TABLE>
The components of the provision for income taxes follow (in thousands):
<TABLE>
1997 1996 1995
_______ _______ _______
Current:
<S> <C> <C> <C>
Federal $57,608 $74,808 $34,676
State, including Puerto Rico 8,648 8,981 2,300
Foreign 1,784 8,554 27,440
_______ _______ _______
68,040 92,343 64,416
Deferred tax expense (credit) 1,960 (30,693) 2,484
_______ _______ _______
$70,000 $61,650 $66,900
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the
Company's effective tax rate follows:
<TABLE>
1997 1996 1995
_____ _____ _____
<S> <C> <C> <C>
U.S. statutory income tax rate 35.0% 35.0% 35.0%
Add (deduct):
State taxes, less effect of federal deduction 2.4 1.3 0.3
Foreign income taxes at rates different from
the U.S. statutory rate (0.5) (1.5) 6.8
Tax benefit relating to operations in Puerto Rico (1.4) (1.5) (1.7)
Nondeductible purchased research and
development and permanent differences (0.2) 2.6 (0.1)
Other 0.7 2.5 0.7
_____ _____ _____
36.0% 38.4% 41.0%
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The tax effect of significant temporary differences, which comprise the
Company's deferred tax assets and liabilities, is as follows (in thousands):
<TABLE>
December 31
_________________
1997 1996
_______ _______
Deferred tax assets:
<S> <C> <C>
Inventories $41,041 $38,887
Accounts receivable and other assets 11,371 2,757
Other accrued expenses 25,546 33,643
State taxes 3,552 3,446
Other 3,295 2,126
_______ _______
Total deferred tax assets 84,805 80,859
Deferred tax liabilities:
Depreciation 370 (546)
Other (3,960) (1,861)
_______ _______
Total deferred tax liabilities (3,590) (2,407)
_______ _______
Total net deferred tax assets $81,215 $78,452
======= =======
</TABLE>
Deferred tax assets and liabilities are included in the consolidated
balance sheets as follows (in thousands):
<TABLE>
December 31
_________________
1997 1996
_______ _______
<S> <C> <C>
Current assets -- deferred income taxes $78,896 $78,034
Noncurrent assets -- other assets 5,909 2,825
Noncurrent liabilities -- other liabilities (3,590) (2,407)
_______ _______
Total net deferred tax assets $81,215 $78,452
======= =======
</TABLE>
No provision has been made for U.S. federal and state income taxes or
foreign taxes that may result from future remittances of the undistributed
earnings ($205,792,000 at December 31, 1997) of foreign subsidiaries because
it is expected that such earnings will be reinvested overseas indefinitely.
Determination of the amount of any unrecognized deferred income tax liability
on these unremitted earnings is not practicable.
Total income taxes paid were $87,462,000 in 1997, $62,330,000 in 1996, and
$70,009,000 in 1995.
NOTE 12. GEOGRAPHIC DATA
The Company's area of operations outside the United States, Europe, and
Pacific principally includes Canada, Latin America, and the Middle East.
Geographic area information follows (in thousands):
<TABLE>
1997 1996 1995
________ ________ ________
NET SALES
United States operations:
<S> <C> <C> <C>
Domestic $633,252 $564,534 $477,207
Export 179,008 156,242 137,355
Foreign operations:
Pacific 188,270 193,723 272,362
Europe 122,672 102,859 83,674
Other 16,988 15,764 13,521
Eliminations (160,055) (123,062) (112,167)
________ ________ ________
Total net sales $980,135 $910,060 $871,952
======== ======== ========
OPERATING INCOME
United States operations $189,713 $176,370 $121,411
Foreign operations:
Pacific (6,344) (19,824) 35,060
Europe 11,567 8,396 9,491
Other 2,510 2,561 1,954
________ ________ ________
Total foreign operations 7,733 (8,867) 46,505
Corporate expenses (13,472) (13,996) (10,605)
________ ________ ________
Total operating income $183,974 $153,507 $157,311
======== ======== ========
ASSETS
United States operations $302,855 $319,481 $283,471
Foreign operations:
Pacific 188,478 228,315 273,686
Europe 131,971 118,292 65,406
Other 15,788 12,500 9,304
Corporate 345,983 314,918 223,024
________ ________ ________
Total assets $985,075 $993,506 $854,891
======== ======== ========
</TABLE>
Intercompany sales between geographic areas are included in export and
foreign operations sales at agreed-upon prices, which include a profit
element.
Gains on foreign currency transactions, which are included in other
income, totaled $325,000, $1,949,000 and $904,000 in 1997, 1996 and 1995,
respectively.
Corporate assets consist primarily of domestic cash and cash equivalents
and marketable securities.
NOTE 13. LEASES
The Company leases various manufacturing and office facilities and
equipment under operating leases.
Future minimum lease commitments under these leases are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $15,803
1999 12,604
2000 9,458
2001 6,414
2002 4,331
Thereafter 2,335
_______
$50,945
=======
</TABLE>
Rent expense totaled $26,293,000 in 1997, $24,915,000 in 1996 and
$21,437,000 in 1995.
14. Contingencies
The Company is involved in various claims and legal actions arising in
the normal course of business. The Company does not anticipate material
losses as a result of these actions beyond amounts already provided in the
accompanying financial statements.
- -----------------------------------------------------------------------------
SALES ANALYSIS, QUARTERLY DATA
(dollars in thousands, except per share data)
<TABLE>
PRODUCT LINE SALES (Unaudited)
1997 1996 1995
_____________ _____________ ______________
Stryker Surgical
Orthopaedic implants,
endoscopic systems,
powered surgical
instruments, and other
<S> <C> <C> <C> <C> <C> <C>
operating room devices $740,369 76% $669,898 74% $608,646 70%
Stryker Medical
Hospital beds and
stretchers and physical
therapy services 207,481 21 196,083 21 158,516 18
Matsumoto Distributed
Products
Orthopaedic, ophthalmic,
and general surgery
products sourced from
other companies for
sale in Japan 32,285 3 44,079 5 104,790 12
________ ___ ________ ___ ________ ___
$980,135 100% $910,060 100% $871,952 100%
======== === ======== === ======== ===
</TABLE>
DOMESTIC/INTERNATIONAL SALES (Unaudited)
<TABLE>
1997 1996 1995
______________ ______________ ______________
<S> <C> <C> <C> <C> <C> <C>
Domestic $633,252 65% $564,534 62% $477,207 55%
International 346,883 35 345,526 38 394,745 45
________ ___ ________ ___ ________ ___
$980,135 100% $910,060 100% $871,952 100%
======== === ======== === ======== ===
</TABLE>
SUMMARY OF QUARTERLY DATA (Unaudited)
<TABLE>
1997 Quarter Ended
_____________________________________________
March 31 June 30 Sept. 30 Dec. 31(a)
________ ________ ________ __________
<S> <C> <C> <C> <C>
Net sales $239,536 $248,036 $238,143 $254,420
Gross profit 141,851 147,504 140,338 152,676
Earnings before income
taxes and minority
interest 48,159 46,809 45,444 54,038
Net earnings 30,020 29,380 28,970 36,950
Net earnings per share of
common stock:
Basic .31 .31 .30 .38
Diluted .30 .30 .30 .38
Market price of common
stock:
High 32-3/8 37-7/8 45-5/16 43-9/16
Low 24-3/4 24-1/4 35 35
</TABLE>
<TABLE>
1996 Quarter Ended
_____________________________________________
March 31 June 30 Sept. 30 Dec. 31(b)
________ ________ ________ __________
<S> <C> <C> <C> <C>
Net sales $217,623 $225,413 $223,587 $243,437
Gross profit 128,287 133,054 129,227 127,134
Earnings before income
taxes and minority
interest 41,765 41,058 38,995 38,628
Net earnings 25,020 24,490 24,150 30,800
Net earnings per share of
common stock:
Basic .26 .25 .25 .32
Diluted .25 .25 .25 .31
Market price of common
stock:
High 29-1/16 26-5/8 30-1/8 32-1/8
Low 23-3/8 19-7/8 20-1/4 27
</TABLE>
The price quotations reported above were supplied by The Nasdaq Stock Market
and, effective July 24, 1997, the New York Stock Exchange and have been
adjusted for the two-for-one-stock split effective May 10, 1996.
(a) In the fourth quarter of 1997, the Company reduced the effective tax rate
for the year to 36% from 37%, thereby decreasing income tax expense by
$1,900,000.
(b) In the fourth quarter of 1996, the Company recorded special charges of
$41,778,000 (see Note 5) and a $61,094,000 gain on patent judgement (see
Note 6). In addition, the company recorded inventory adjustments of
$13,800,000 for excess inventory and product deletions, principally in
Japan, and obsolete inventory resulting from new product introductions.
Also, adjustments totaling $8,900,000 were made to selling, general, and
administrative expenses for additional legal reserves and depreciation
charges due to a change in estimate and other matters.
- ----------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Stryker Corporation
We have audited the accompanying consolidated balance sheets of Stryker
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Stryker Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Kalamazoo, Michigan ERNST & YOUNG LLP
January 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 154,027
<SECURITIES> 197,041
<RECEIVABLES> 187,914
<ALLOWANCES> 11,700
<INVENTORY> 136,246
<CURRENT-ASSETS> 756,608
<PP&E> 163,867
<DEPRECIATION> 136,582
<TOTAL-ASSETS> 985,075
<CURRENT-LIABILITIES> 303,011
<BONDS> 0
0
0
<COMMON> 9,606
<OTHER-SE> 603,169
<TOTAL-LIABILITY-AND-EQUITY> 985,075
<SALES> 980,135
<TOTAL-REVENUES> 980,135
<CGS> 397,766
<TOTAL-COSTS> 796,161
<OTHER-EXPENSES> (10,476)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,117
<INCOME-PRETAX> 194,450
<INCOME-TAX> 70,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,320
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 175,673 69,049
<SECURITIES> 191,900 195,599
<RECEIVABLES> 175,552 171,393
<ALLOWANCES> 9,500 7,800
<INVENTORY> 127,387 133,619
<CURRENT-ASSETS> 753,537 623,253
<PP&E> 172,303 182,592
<DEPRECIATION> 117,882 102,909
<TOTAL-ASSETS> 993,506 854,891
<CURRENT-LIABILITIES> 251,741 174,438
<BONDS> 0 0
0 0
0 0
<COMMON> 9,679 9,711
<OTHER-SE> 520,682 444,568
<TOTAL-LIABILITY-AND-EQUITY> 993,506 854,891
<SALES> 910,060 871,952
<TOTAL-REVENUES> 910,060 871,952
<CGS> 392,358 369,444
<TOTAL-COSTS> 756,553 714,641
<OTHER-EXPENSES> (6,939) (5,782)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,349 6,319
<INCOME-PRETAX> 160,446 163,093
<INCOME-TAX> 61,650 66,900
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 104,460 87,010
<EPS-PRIMARY> 1.08 .90
<EPS-DILUTED> 1.06 .88
</TABLE>
