FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-9165 ----- STRYKER CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-1239739 - ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 4085, Kalamazoo, Michigan 49003-4085 - -------------------------------------- ------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 616/385-2600 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 96,675,354 shares of Common Stock, $.10 par value, as of July 31, 1996. <TABLE> PART I - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) <CAPTION> June 30 December 31 1996 1995 -------- --------- (in thousands) ASSETS CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 83,136 $ 69,049 Marketable securities 182,877 195,599 Accounts receivable, less allowance of $7,600 (1995 -- $7,800) 169,697 163,593 Inventories 140,354 133,619 Deferred income taxes 47,216 47,058 Prepaid expenses and other current assets 13,889 14,335 -------- -------- TOTAL CURRENT ASSETS 637,169 623,253 PROPERTY, PLANT AND EQUIPMENT, less allowance for depreciation 181,299 182,592 OTHER ASSETS 47,903 49,046 -------- -------- $866,371 $854,891 LIABILITIES AND STOCKHOLDERS' EQUITY ======== ======== CURRENT LIABILITIES Accounts payable $ 45,934 $ 49,029 Accrued compensation 28,215 32,447 Income taxes 30,793 25,633 Accrued expenses and other liabilities 61,923 64,277 Current maturities of long-term debt 1,356 3,052 -------- -------- TOTAL CURRENT LIABILITIES 168,221 174,438 LONG-TERM DEBT, excluding current maturities 91,394 96,967 OTHER LIABILITIES 21,294 24,214 MINORITY INTEREST 99,928 104,993 STOCKHOLDERS' EQUITY Common stock, $.10 par value: Authorized--150,000 shares Outstanding--96,672 shares (1995--97,107) 9,667 9,711 Additional paid-in capital 3,162 14,736 Retained earnings 469,047 419,537 Unrealized gains on securities 765 2,314 Foreign translation adjustments 2,893 7,981 -------- -------- TOTAL STOCKHOLDERS' EQUITY 485,534 454,279 -------- -------- $866,371 $854,891 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. <TABLE> CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) <CAPTION> Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 --------- -------- -------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> Net Sales $225,413 $228,509 $443,036 $442,522 Costs and expenses: Cost of sales 92,359 97,648 181,695 185,232 Research, development $ engineering 13,826 11,695 26,090 22,538 Selling, general and administrative 80,646 80,523 156,801 154,034 -------- -------- -------- ------- 186,831 189,866 364,586 361,804 -------- -------- -------- ------- OPERATING INCOME 38,582 38,643 78,450 80,718 Other income 2,476 1,573 4,373 2,377 -------- ------- -------- ------ EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 41,058 40,216 82,823 83,095 Income taxes 15,600 16,890 31,470 34,900 -------- -------- ------- ------- EARNINGS BEFORE MINORITY INTEREST 25,458 23,326 51,353 48,195 Minority interest (968) (2,916) (1,843 (6,985) -------- -------- ------- ------- NET EARNINGS $ 24,490 $ 20,410 $ 49,510 $ 41,210 ======== ======== ======== ======= Net earnings per share of common stock $.25 $.21 $.51 $.43 Average outstanding shares for the period 96,743 96,903 96,945 96,842 See accompanying notes to condensed consolidated financial statements. </TABLE> In 1995 the Company declared a cash dividend of four and one-half cents per share (after the two-for-one stock split described in Note 4 to the condensed consolidated financial statements) to shareholders of record on December 29, 1995, payable on January 31, 1996. No cash dividends have been declared during 1996. <TABLE> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) <CAPTION> Six Months Ended June 30 1996 1995 -------- -------- (in thousands) OPERATING ACTIVITIES <S> <C> <C> Net earnings $49,510 $41,210 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 12,120 11,383 Amortization 1,948 1,466 Minority interest 1,843 6,985 Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable (10,755) (19,268) Inventories (14,348) (5,676) Accounts payable (2,340) (3,501) Accrued expenses (1,729) (3,352) Income taxes 4,736 (3,785) Other (145) 867 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 40,840 26,329 INVESTING AND FINANCING ACTIVITIES Purchases of property, plant and equipment (14,337) (15,357) Sales and maturities (purchases) of marketable securities 12,722 (54,537) Business acquisitions (5,159) (12,728) Proceeds from (payments on) borrowings (1,554) 6,121 Dividends paid (4,370) (3,870) Proceeds from exercise of stock options 3,245 1,707 Repurchases of common stock (14,862) Other (2,119) 969 ------- -------- NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (26,434) (77,695) Effect of exchange rate changes on cash and cash equivalents (319) 571 ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $14,087 ($50,795) ======= ======== See accompanying notes to condensed consolidated financial statements. </TABLE> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1995. 2. INVENTORIES <TABLE> Inventories are as follows (in thousands): <CAPTION> June 30 December 31 1996 1995 -------- --------- <S> <C> <C> Finished goods $106,279 $105,209 Work-in-process 10,052 7,552 Raw material 31,767 28,602 -------- -------- FIFO Cost 148,098 141,363 Less LIFO reserve 7,744 7,744 -------- -------- $140,354 $133,619 ======== ======== FIFO cost approximates replacement cost. </TABLE> 3. BUSINESS ACQUISITIONS During the first six months of 1996, the Company's subsidiary, Physiotherapy Associates, Inc., purchased certain physical therapy clinic operations at an aggregate cost of $4.7 million. Intangible assets acquired, principally goodwill, are being amortized over periods ranging from five to fifteen years. Pro forma consolidated results including the purchased businesses would not differ significantly from reported results. 4. STOCK SPLIT On April 24, 1996, the Company's Board of Directors approved a two-for-one stock split effective for shareholders of record on May 10, 1996. All share and per share data have been adjusted to reflect the stock split as though it had occurred at the beginning of the periods presented. 5. SUBSEQUENT EVENT On July 8, 1996 the Company entered into a definitive agreement to acquire Osteo Holdings AG and its subsidiary companies. Osteo, which is based in Selzach, Switzerland, designs and manufactures trauma products and reconstructive orthopaedic devices and had 1995 consolidated sales of Sfr 28.7 million ($23.0 million). The acquisition will be accounted for by the purchase method and is expected to close by September 9, 1996. The purchase price is subject to completion of Stryker's due diligence investigation and is expected to approximate two times Osteo's consolidated sales. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS <TABLE> The table below sets forth domestic/international and product line sales information: Three Months Ended Six Months Ended June 30 % June 30 % 1996 1995 Change 1996 1995 Change -------- -------- ------ ------- -------- ------ (in thousands, except per share amounts) Domestic/International Sales <S> <C> <C> <C> <C> <C> <C> Domestic $139,284 $118,163 18 $272,971 $230,378 18 International 86,129 110,346 (22) 170,065 212,144 (20) -------- -------- ------- -------- Total Net Sales $225,413 $228,509 (1) $443,036 $442,522 -- ======== ======== ======== ======== Product Line Sales Stryker Surgical $166,372 $155,292 7 $327,847 $300,707 9 Stryker Medical 48,015 40,158 20 91,577 76,833 19 Matsumoto Distributed Products 11,026 33,059 (67) 23,612 64,982 (64) -------- -------- ------- ------- Total Net Sales $225,413 $228,509 (1) $443,036 $442,522 -- ======== ======== ======== ======== </TABLE> For the six months ended June 30, 1996, net sales were flat when compared to the same period in 1995. Additional sales attributable to acquired businesses accounted for a 2% sales increase and increased unit volume generated a 2% increase. Net sales also increased 1% as a result of the Company's conversion of certain portions of the Osteonics domestic distribution network to direct sales, which resulted in higher selling prices. These increases were offset by a 4% decrease arising from changes in foreign currency exchange rates and a 1% decline in selling prices. For the second quarter, net sales declined 1% compared to the second quarter of 1995 as a result of the same factors. The Company's domestic sales increased 18% for the first six months and in the second quarter of 1996 compared to 1995. The increase was led by strong shipments of orthopaedic implants, endoscopic equipment and powered surgical instruments, increased revenues from physical therapy services and higher shipments of hospital beds and stretchers. International sales declined 20% for the first six months and 22% in the second quarter compared to the same periods of 1995. The decrease in sales is the result of lower sales in Japan which more than offset strong shipments in the other international markets. Sales in Japan declined 37% in the first six months and 39% in the second quarter because of lower shipments of Matsumoto distributed products, which are sourced from other companies for sale in Japan, and unfavorable currency comparisons. Sales in the other international markets increased 17% in the first six months and 14% in the second quarter. International sales represented 38% of total sales in the first six months of 1996 compared to 48% in the same period of 1995. Stryker Surgical product sales (principally orthopaedic products) increased 9% for the first six months and 7% in the second quarter of 1996 compared to 1995 as a result of higher shipments of orthopaedic implants, powered surgical instruments and endoscopic equipment and despite lower dollar translation of foreign currency sales. Stryker Medical product sales (principally stretchers/beds and physical therapy services) increased 19% for the first six months and 20% in the second quarter resulting from higher physical therapy revenues and increased shipments of hospital beds and stretchers. Sales of Matsumoto distributed products declined 64% in the first six months and 67% in the second quarter of 1996 compared to the same periods of 1995. These declines result from the termination of several distribution arrangements commencing in the third quarter of 1995 and unfavorable foreign currency comparisons in Japan. Sales of Matsumoto distributed products in the third and fourth quarter of 1996 are expected to be significantly lower than 1995 levels for the comparable periods. Cost of sales for the first six months of 1996 represented 41.0% of sales compared to 41.9% in the same period of 1995. In the second quarter, the cost of sales percentage decreased to 41.0% from 42.7% in the second quarter of 1995. Research, development and engineering (R,D&E) expense increased 16% for the first six months of 1996, and represented 5.9% of sales in 1996 compared to 5.1% in the same period last year. In the second quarter, these expenses increased 18% and were 6.1% of sales in 1996 compared to 5.1% in the second quarter of 1995. The increase in R,D&E expense as a percentage of sales in 1996 is principally a result of increased product development spending measured against the flat sales in 1996 compared to 1995 attributable primarily to lower sales of Matsumoto distributed products in Japan. The Company's commitment to product development has resulted in several new products in late 1995 and early 1996, including the Restoration HA revision hip system, Passport knee instruments, the Insight Knee positioning and alignment system, the battery powered 4100 Cordless driver and several new arthroscopy instruments. Selling, general and administrative (S,G&A) expenses increased 2% in the first six months and were flat in the second quarter of 1996 compared to the same periods of 1995. These costs increased to 35.4% of sales in the first six months of 1996 compared to 34.8% in the same period of 1995. In the second quarter these costs represented 35.8% of sales in 1996 compared to 35.2% in 1995. The increase in S,G&A costs as a percentage of sales is principally a result of higher sales expenses resulting from the changes in Osteonics' distribution network and slightly larger sales forces measured against flat sales in 1996. Other income increased $2.0 million for the first six months and $0.9 million in the second quarter of 1996 compared to the same periods of 1995 principally as a result of increased interest income attributable to higher levels of invested cash and lower interest expense on the Company's yen denominated debt. The effective tax rate decreased to 38% for the first six months of 1996 compared to 42% in the same period of 1995 as a result of the significant decline in earnings reported by Matsumoto, which are taxed at the higher Japanese tax rate. The earnings decline at Matsumoto also led to a significant reduction in minority interest charges for the first six months as compared to the same period of 1995. For the first six months of 1996, earnings before income taxes and minority interest was flat, primarily as a result of Matsumoto's lower profits, and net earnings increased 20% compared to the first six months of 1995. Earnings before income taxes and minority interest increased 2% and net earnings increased 20% in the second quarter of 1996 when compared to 1995. LIQUIDITY AND CAPITAL RESOURCES Stryker's financial position at June 30, 1996 remained strong with cash and marketable securities of $266.0 million and working capital of $468.9 million. Accounts receivable at June 30, 1996 increased 4% from December 31, 1995 while days sales outstanding increased slightly to 65 days from 64 days at December 31, 1995. Inventories at June 30, 1996 increased 5% from December 31, 1995 and days in inventory increased to 144 days from 133 days at December 31, 1995. The Company generated $40.8 million of cash from operations in the first six months of 1996 compared to $26.3 million of cash in the same period of 1995. During the first six months of 1996, the Company repurchased 650,000 shares of common stock (after adjustment for the two-for-one stock split described in Note 4 to the Condensed Consolidated Financial Statements) in the open market at a cost of $14.9 million. These purchases brought the total shares repurchased under a December 9, 1993 repurchase authorization by the Company's Board of Directors to 895,000 of the 1,200,000 shares authorized. This repurchase authorization was replaced by a new authorization approved by the Board of Directors on April 24, 1996 for repurchases of up to 1,000,000 split- adjusted shares of common stock. Shares repurchased under the share repurchase programs will be used for employee stock option plans and other corporate purposes. Cash and marketable securities of $266.0 million and anticipated future cash flows from operations are expected to be sufficient to fund future operating and capital requirements. The Company also has unsecured lines of credit with banks totaling $55.4 million, none of which was utilized at June 30, 1996. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -- The exhibit listed below is submitted as a separate section of this report following the signature page: Exhibit (11) Statement Re: Computation of Earnings per Share of Common Stock (b) Reports on Form 8-K -- No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRYKER CORPORATION ------------------------------------- (Registrant) August 6, 1996 JOHN W. BROWN - --------------------------- ------------------------------------- Date John W. Brown, Chairman, President and Chief Executive Officer (Principal Executive Officer) August 6, 1996 DAVID J. SIMPSON - --------------------------- -------------------------------------- Date David J. Simpson, Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) <TABLE> EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK <CAPTION> Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 ------------ ---------- ----------- ---------- Average number of shares <S> <C> <C> <C> <C> outstanding 96,743,000 96,903,000 96,945,000 96,842,000 ---------- ---------- ---------- ---------- Net earnings $24,490,000 $20,410,000 $49,510,000 $41,210,000 =========== =========== =========== =========== Net earnings per share of common stock $.25 $.21 $.51 $.43 ==== ==== ==== ==== Primary: Average shares outstanding 96,743,000 96,903,000 96,945,000 96,842,000 Net effect of dilutive stock options, based on the treasury stock method using average market price 1,315,000 1,596,000 1,476,000 1,634,000 ------------ ---------- ----------- --------- Total Primary Shares 98,058,000 98,499,000 98,421,000 98,476,000 ============ ========== =========== ========== Fully Diluted: Average shares outstanding 96,743,000 96,903,000 96,945,000 96,842,000 Net effect of dilutive stock options, using the period- end market price, if higher than average market price 1,315,000 1,596,000 1,476,000 1,692,000 ------------ --------- ---------- ----------- Total Fully Diluted Shares 98,058,000 98,499,000 98,421,000 98,534,000 =========== ========== =========== =========== </TABLE> Note: All share and per share data have been adjusted to reflect the two-for- one stock split effective for shareholders of record on May 10, 1996 as though it had occurred at the beginning of the periods presented. Shares subject to stock options are not included in the earnings per share computation because the present effect thereof is not materially dilutive.