FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 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. 48,519,452 shares of Common Stock, $.10 par value, as of October 31, 1995.
PART I - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEET STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) September 30 December 31 1995 1994 ____________ ___________ ASSETS (in thousands) CURRENT ASSETS Cash and cash equivalents $ 74,315 $116,781 Marketable securities 161,715 85,264 Accounts receivable, less allowance of $7,400 (1994 -- $6,400) 158,070 154,590 Inventories 128,706 115,757 Deferred income taxes 54,651 54,333 Prepaid expenses and other current assets 12,707 13,804 ________ ________ TOTAL CURRENT ASSETS 590,164 540,529 PROPERTY, PLANT AND EQUIPMENT, less allowance for depreciation 187,839 180,719 OTHER ASSETS 47,029 46,723 ________ ________ $825,032 $767,971 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 208 Accounts payable $ 45,976 50,433 Accrued compensation 31,121 28,834 Income taxes 25,678 38,811 Accrued expenses and other liabilities 56,432 55,556 Current maturities of long-term debt 424 5,369 ________ ________ TOTAL CURRENT LIABILITIES 159,631 179,211 LONG-TERM DEBT, excluding current maturities 103,693 95,276 OTHER LIABILITIES 24,462 35,245 MINORITY INTEREST 108,449 99,973 STOCKHOLDERS' EQUITY Common stock, $.10 par value: Authorized--150,000 shares Outstanding--48,511 shares (1994--48,369) 4,851 4,837 Additional paid-in capital 18,519 15,796 Retained earnings 398,237 336,897 Unrealized gains (losses) on securities 530 (1,315) Foreign translation adjustments 6,660 2,051 ________ ________ TOTAL STOCKHOLDERS' EQUITY 428,797 358,266 ________ ________ $825,032 $767,971 ======== ======== See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 ________ ________ ________ ________ (in thousands, except per share amounts) Net Sales $205,363 $174,316 $647,885 $477,301 Costs and expenses: Cost of sales 88,753 77,821 273,985 215,886 Research, development and engineering 9,718 10,156 32,256 29,186 Selling, general and administrative 72,308 57,093 226,342 152,315 ________ ________ ________ ________ 170,779 145,070 532,583 397,387 ________ ________ ________ ________ OPERATING INCOME 34,584 29,246 115,302 79,914 Other income - net 1,365 468 3,742 5,205 ________ ________ ________ ________ EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 35,949 29,714 119,044 85,119 Income taxes 14,380 11,885 49,280 32,940 ________ ________ ________ ________ EARNINGS BEFORE MINORITY INTEREST 21,569 17,829 69,764 52,179 Minority interest (1,439) (1,099) (8,424) (1,099) ________ ________ ________ ________ NET EARNINGS $ 20,130 $ 16,730 $ 61,340 $ 51,080 ======== ======== ======== ======== Net earnings per share of common stock $.42 $.35 $1.27 $1.06 Average outstanding shares for the period 48,499 48,343 48,447 48,371 See accompanying notes to condensed consolidated financial statements. In 1994 the Company declared a cash dividend of eight cents per share to shareholders of record on December 30, 1994, payable on January 31, 1995. No cash dividends have been declared during 1995.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) Nine Months Ended September 30 1995 1994 ___________________ (in thousands) OPERATING ACTIVITIES Net earnings $ 61,340 $ 51,080 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 17,018 12,431 Amortization 2,285 1,677 Minority interest 8,424 1,099 Changes in operating assets and liabilities: Accounts receivable (4,860) 20,670 Inventories (8,193) 880 Accounts payable (4,250) (23,083) Accrued expenses 3,503 12,954 Income taxes (9,963) (18,578) Other (838) 3,243 ________ ________ NET CASH PROVIDED BY OPERATING ACTIVITIES 64,466 62,373 INVESTING AND FINANCING ACTIVITIES Purchases of property, plant and equipment (21,192) (19,931) Sales (purchases) of marketable securities (76,451) 24,095 Business acquisitions (12,815) (40,645) Proceeds from borrowings 4,257 34,478 Dividends paid (3,870) (3,388) Proceeds from exercise of stock options 2,737 1,466 Repurchases of common stock (3,109) Other 235 (702) _________ ________ NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (107,099) (7,736) Effect of exchange rate changes on cash and cash equivalents 167 899 _________ ________ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (42,466) $ 55,536 ========= ======== See accompanying notes to condensed consolidated financial statements.
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, 1994. 2. INVENTORIES Inventories are as follows (in thousands): September 30 December 31 1995 1994 ____________ ___________ (in thousands) Finished goods $ 94,927 $ 86,719 Work-in-process 8,824 7,552 Raw material 32,253 28,784 ________ ________ FIFO Cost 136,004 123,055 Less LIFO reserve 7,298 7,298 ________ ________ $128,706 $115,757 ======== ======== FIFO cost approximates replacement cost. 3. BUSINESS ACQUISITIONS During the first nine months of 1995, the Company's subsidiary, Physiotherapy Associates, Inc., purchased several physical therapy clinic operations at an aggregate cost of $3.1 million. Intangible assets acquired, principally goodwill, are being amortized over periods ranging from one to fifteen years. Pro forma consolidated results including the purchased businesses would not differ significantly from reported results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the nine months ended September 30, 1995, net sales increased 36% compared to the same period in 1994. All nine months of 1995 and the last two months of the third quarter of 1994 include the operations of Matsumoto Medical Instruments, Inc., which became a 51% owned subsidiary in August 1994. Increased sales in Japan arising from the consolidation of Matsumoto, which are attributable to incremental sales of distributed products and incremental margins and increased unit volume of Stryker products, resulted in a sales increase of 22%. Increased unit volume generated an 8% sales increase, other business acquisitions accounted for a 4% increase and a 1% increase arose from changes in foreign currency exchange rates. The Company also converted certain portions of the Osteonics domestic distribution network to direct sales, resulting in higher selling prices offset by the repurchase of inventory from distributors, which increased net sales by 1%. Surgical product sales (principally orthopaedic products) increased 38%, led by increased Japanese sales from the consolidation of Matsumoto along with increased shipments of orthopaedic implants, powered surgical instruments and endoscopic equipment. Medical product sales (principally stretchers/beds and physical therapy services) increased 26%. The leading Medical sales gains resulted from higher physical therapy revenues. For the third quarter, net sales increased 18% compared to the third quarter of 1994. Surgical product sales increased 20% and Medical product sales increased 11% during the third quarter. The Company's domestic sales increased 18% for the first nine months and 15% in the third quarter of 1995 compared to 1994. The increase was led by orthopaedic implants, physical therapy services, powered surgical instruments and endoscopic equipment. International sales increased 65% for the first nine months of 1995 and 22% in the third quarter. The growth in international sales was led by increased Japanese sales from the consolidation of Matsumoto along with increased shipments of Surgical and Medical products by substantially all international divisions. International sales represented 46% of total sales in the first nine months of 1995 compared to 38% in the same period of 1994. Cost of sales for the first nine months of 1995 represented 42.3% of sales compared to 45.2% in the same period of 1994. In the third quarter, the cost of sales percentage decreased to 43.2% from 44.6% in the third quarter of 1994. The lower cost of sales percentages in the 1995 periods are the result of additional margins on Stryker products sold by Matsumoto since its consolidation and the conversion of certain portions of Osteonics' domestic distribution network, which resulted in increased direct sales to hospitals. Research, development and engineering (R,D&E) expense increased 11% for the first nine months of 1995 and represented 5.0% of sales in 1995 compared to 6.1% in the same period last year. In the third quarter, these expenses decreased 4.3% and were 4.7% of sales in 1995 compared to 5.8% in the third quarter of 1994. The decrease in R,D&E expense as a percentage of sales in 1995 is principally a result of consolidating Matsumoto which, as a distributor, incurs minimal research and development costs. The Company's commitment to product development has resulted in several new products in 1995, including the Secur-Fit HA total hip implant system, the Restoration HA Hip System for revision surgery, the Insight Positioning and Alignment System for knee replacement surgery, the 810 3-Chip Camera System, the StrykeFlow suction/irrigator for laparoscopic surgery, the battery powered Trauma Driver addition to our Heavy Duty surgical instrument line and the Stryker Stretcher Chair. Selling, general and administrative (S,G&A) expenses increased 49% in the first nine months and 27% in the third quarter of 1995 compared to the same periods of 1994. The increase in S,G&A costs is principally a result of consolidating Matsumoto, which, as a distributor, has a higher percentage of S,G&A expenses. In addition, higher sales expenses resulted from the changes in Osteonics' distribution network. These costs increased to 34.9% of sales in the first nine months of 1995 compared to 31.9% in the same period of 1994. In the third quarter these costs represented 35.2% of sales in 1995 compared to 32.8% in 1994. Other income declined for the first nine months of 1995 compared to the same period of 1994. However, in the third quarter of 1995 other income increased compared to 1994 principally as a result of increased interest income. Other income for the first seven months of 1994 included the equity in net earnings of Matsumoto related to the Company's initial 20% investment. In addition, interest expense, which is included in other income, increased in the first nine months of 1995 as a result of the increased debt used to finance the additional 31% investment in Matsumoto. However, the increase in interest expense was more than offset by an increase in interest income attributable to higher levels of invested cash. The effective tax rate increased to 41.4% in the first nine months of 1995 compared to 38.7% in the same period of 1994 as a result of the higher Japanese tax rate on the earnings of Matsumoto. The effective tax rate of 40.0% for the third quarter is comparable to the prior year rate. For the first nine months of 1995, earnings before income taxes and minority interest increased 40% and net earnings and net earnings per share increased 20% compared to the first nine months of 1994. Earnings before income taxes and minority interest increased 21% and net earnings and net earnings per share increased 20% in the third quarter compared to the third quarter of 1994. As a result of the consolidation with Matsumoto, net earnings for the first nine months of 1995 increased by $3.0 million ($.06 per share) from the first nine months of 1994. Net earnings for the third quarter were not materially impacted by the consolidation. LIQUIDITY AND CAPITAL RESOURCES Stryker's financial position at September 30, 1995 remained strong with cash and marketable securities of $236.0 million and working capital of $430.5 million. Accounts receivable at September 30, 1995 increased 2% from December 31, 1994 while days sales outstanding increased slightly to 69 days from 67 days at December 31, 1994. Inventories at September 30, 1995 increased 11% from December 31, 1994 and days in inventory increased to 138 days from 131 days at December 31, 1994. The Company generated $64.5 million of cash from operations in the first nine months of 1995 compared to $62.4 million of cash in the same period of 1994. Cash and marketable securities of $236.0 million and anticipated future cash flows from operations are expected to be sufficient to fund future operating and capital requirements. Should additional funds be required, the Company has unsecured lines of credit with banks totaling $45.7 million, of which none was utilized at September 30, 1995.
PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -- The exhibits listed below are submitted as a separate section of this report following the signature page: Exhibit (11) Statement Re: Computation of Earnings per Share of Common Stock Exhibit (27) Financial Data Schedule (included in EDGAR filing only) (b) Reports on Form 8-K -- On July 13, 1995 a Form 8-K was filed relating to a press release issued by the Company reporting a decision in a patent suit brought by Stryker Corporation against Intermedics Orthopedics, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRYKER CORPORATION ------------------------------------- (Registrant) October 31, 1995 /S/JOHN W. BROWN - --------------------------------- ------------------------------------- Date John W. Brown, Chairman, President and Chief Executive Officer (Principal Executive Officer) October 31, 1995 /S/DAVID J. SIMPSON - --------------------------------- ------------------------------------- Date David J. Simpson, Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)
EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 ___________ ___________ ___________ ___________ Average number of shares outstanding 48,499,000 48,343,000 48,447,000 48,371,000 ___________ ___________ ___________ ___________ Net earnings $20,130,000 $16,730,000 $61,340,000 $51,080,000 =========== =========== =========== =========== Net earnings per share of common stock $.42 $.35 $1.27 $1.06 ==== ==== ===== ===== Primary: Average shares outstanding 48,499,000 48,343,000 48,447,000 48,371,000 Net effect of dilutive stock options, based on the treasury stock method using average market price 765,000 692,000 800,000 692,000 ___________ ___________ ___________ ___________ Total Primary Shares 49,264,000 49,035,000 49,247,000 49,063,000 =========== =========== =========== =========== Fully Diluted: Average shares outstanding 48,499,000 48,343,000 48,447,000 48,371,000 Net effect of dilutive stock options, using the period-end market price, if higher than average market price 809,000 735,000 834,000 735,000 ___________ ___________ ___________ ___________ Total Fully Diluted Shares 49,308,000 49,078,000 49,281,000 49,106,000 =========== =========== =========== =========== Note: Shares subject to stock options are not included in the earnings per share computation because the present effect thereof is not materially dilutive.