UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 Or 15(D) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 Commission file number 0-9165 STRYKER CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-1239739 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 4085, Kalamazoo, Michigan 49003-4085 (Address of principal executive offices) (Zip Code) (616) 385-2600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 96,122,551 shares of Common Stock, $.10 par value, as of October 31, 1997.
PART I. - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS STRYKER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS For the nine months ended September 30, 1997 (Unaudited) <TABLE> (Amounts in thousands, except per share amounts) September 30 December 31 1997 1996 ----------- ----------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 153,731 $ 175,673 Marketable debt securities 178,945 191,900 Accounts receivable, less allowance of $10,000 (1996 - $9,500) 173,726 166,052 Inventories 132,032 127,387 Deferred income taxes 72,770 78,034 Prepaid expenses and other current assets 13,413 14,491 --------- --------- Total Current Assets 724,617 753,537 Property, Plant and Equipment, less allowance for depreciation of $132,089 (1996 - $117,882) 167,657 172,303 Other Assets 71,520 67,666 --------- --------- TOTAL ASSETS $ 963,794 $ 993,506 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 51,178 $ 62,433 Accrued compensation 40,702 37,693 Income taxes 34,407 56,723 Accrued expenses and other liabilities 81,921 90,489 Current maturities of long-term debt 2,582 4,403 --------- --------- Total Current Liabilities 210,790 251,741 Long Term Debt, excluding current maturities 82,086 89,502 Other Liabilities 30,484 36,034 Minority Interest 51,049 85,868 Stockholders' Equity Common stock, $.10 par value: Authorized - 150,000 shares Outstanding - 96,054 shares (1996 - 96,787) 9,605 9,679 Additional paid-in capital 593 5,922 Retained earnings 586,569 514,318 Unrealized gains on securities 2,178 1,196 Foreign translation adjustments (9,560) (754) --------- --------- Total Stockholders' Equity 589,385 530,361 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 963,794 $ 993,506 ========= ========= </TABLE> See accompanying notes to condensed consolidated financial statements.
STRYKER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the nine months ended September 30, 1997 (Unaudited) (Amounts in thousands, except per share amounts) <TABLE> Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Sales $238,143 $223,587 $725,715 $666,623 Costs and Expenses: Cost of sales 97,805 94,360 296,022 276,055 Research, development and 14,253 14,288 42,312 40,378 engineering Selling, general and administrative 82,590 78,178 254,691 234,979 -------- -------- -------- -------- 194,648 186,826 593,025 551,412 -------- -------- -------- -------- Operating Income 43,495 36,761 132,690 115,211 Other Income 1,949 2,234 7,722 6,607 -------- -------- -------- -------- Earnings Before Income Taxes and Minority Interest 45,444 38,995 140,412 121,818 Income Taxes 16,815 14,820 51,953 46,290 -------- -------- -------- -------- Earnings Before Minority Interest 28,629 24,175 88,459 75,528 Minority Interest 341 (25) (89) (1,868) -------- -------- -------- -------- Net Earnings $ 28,970 $ 24,150 $ 88,370 $ 73,660 ======== ======== ======== ======== Net Earnings Per Share of Common Stock $.30 $.25 $.92 $.76 ==== ==== ==== ==== Average Outstanding Shares for the Period 96,038 96,700 96,298 96,862 </TABLE> See accompanying notes to condensed consolidated financial statements.
STRYKER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the nine months ended September 30, 1997 (Unaudited) (Amounts in thousands, except per share amounts) <TABLE> Additional Unrealized Foreign Common Paid-In Retained Gains on Translation Stock Capital Earnings Securities Adjustments ------- ---------- -------- ---------- ----------- <S> <C> <C> <C> <C> <C> Balance at January 1, 1997 $9,679 $5,922 $514,318 $1,196 ($754) Net earnings for nine months ended September 30, 1997 88,370 Sales of 254 shares of common stock under stock option and benefit plans, including $2,155 income tax benefit 25 4,029 Repurchases of 993 shares of common stock (99) (9,358) (16,119) Unrealized gains, net of $923 income tax benefit 982 Translation adjustment (8,806) ------- ---------- -------- ---------- ----------- Balance at September 30, 1997 $9,605 $593 $586,569 $2,178 ($9,560) ======= ========== ======== ========== =========== </TABLE> See accompanying notes to condensed consolidated financial statements. In 1996 the Company declared a cash dividend of ten cents per share to shareholders of record on December 31, 1996, payable on January 31, 1997. No cash dividends have been declared during 1997.
STRYKER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 1997 (UNAUDITED) (Amounts in thousands) <TABLE> Nine Months Ended September 30 1997 1996 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net Earnings $88,370 $73,660 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 19,480 18,595 Amortization 5,765 3,047 Minority interest 89 1,868 Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable (14,127) (6,284) Inventories (15,123) (17,615) Accounts payable (10,456) (5,462) Accrued expenses 3,688 9,595 Income taxes (21,045) (1,356) Other (5,839) 2,427 -------- -------- Net Cash Provided by Operating Activities 50,802 78,475 INVESTING AND FINANCING ACTIVITIES Purchases of property, plant and equipment (25,995) (20,301) Sales and maturities of marketable securities 12,955 59,674 Business acquisitions (28,338) (48,047) Payments on borrowings (5,413) (3,262) Dividends paid (9,679) (4,370) Proceeds from exercise of stock options 4,054 3,442 Repurchases of common stock (25,576) (14,862) Other 6,441 (5,008) -------- -------- Net Cash Used in Investing and Financing Activities (71,551) (32,734) Effect of exchange rate changes on cash and cash equivalents (1,193) (532) -------- -------- Increase (Decrease) in Cash and Cash Equivalents ($21,942) $45,209 ========= ======== </TABLE> See accompanying notes to condensed consolidated financial statements.
STRYKER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 (Unaudited) Note 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. Note 2. INVENTORIES Inventories are as follows (in thousands): <TABLE> September 30 December 31 1997 1996 --------- --------- <S> <C> <C> Finished goods $ 98,628 $ 94,424 Work-in-process 12,167 8,328 Raw material 28,591 31,989 --------- --------- FIFO Cost 139,386 134,741 Less LIFO reserve 7,354 7,354 --------- --------- $ 132,032 $ 127,387 ========= ========= </TABLE> FIFO cost approximates replacement cost. Note 3. BUSINESS ACQUISITIONS During the first nine months of 1997, the Company's subsidiary, Physiotherapy Associates, Inc., purchased certain physical therapy clinic operations at an aggregate cost of $2.9 million. In addition, the Company purchased an additional 17% of the outstanding common stock of Matsumoto Medical Instruments, Inc. at a cost of $20.9 million, thereby increasing its direct ownership interest in Matsumoto to 68%. The Company also purchased two product lines at a cost of $4.5 million. All of the above acquisitions were accounted for by the purchase method. Any intangible assets acquired in the above acquisitions are being amortized over periods ranging from five to fifteen years. Pro forma consolidated operating results including the acquisitions would not differ significantly from reported results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results Of Operations - --------------------- The table below sets forth domestic/international and product line sales information: <TABLE> Three Months Ended Nine Months Ended September 30 % September 30 % 1997 1996 Chg 1997 1996 Chg -------- -------- ---- -------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Domestic/ International Sales Domestic $157,965 $143,303 10 $464,632 $416,274 12 International 80,178 80,284 -- 261,083 250,349 4 -------- -------- -------- -------- Total Net Sales $238,143 $223,587 7 $725,715 $666,623 9 ======== ======== ======== ======== Product Line Sales Stryker Surgical $178,845 $162,270 10 $545,806 $490,117 11 Stryker Medical 51,487 50,795 1 155,013 142,372 9 Matsumoto Dist. Products 7,811 10,522 (26) 24,896 34,134 (27) -------- -------- -------- -------- Total Net Sales $238,143 $223,587 7 $725,715 $666,623 9 ======== ======== ======== ======== </TABLE> For the nine months ended September 30, 1997, Stryker Corporation's net sales increased 9% compared to the same period in 1996. Increased unit volume generated a 11% sales increase. Net sales also increased 3% from business acquisitions and 1% from the conversion of certain portions of the Osteonics' domestic distribution network to direct sales. These increases were partially offset by a 4% decrease in sales from unfavorable foreign currency comparisons, a 1% decline from a divested business and a 1% decline in average selling prices. For the third quarter, net sales increased 7% when compared to the third quarter of 1996. Increased unit volume generated a 9% sales increase and acquisitions accounted for a 3% sales increase. These increases were partially offset by a 3% decrease arising from changes in foreign currency exchange rates, a 1% decline from a divested business and a 1% decline in average selling prices. The Company's domestic sales increased 10% in the third quarter and 12% in the first nine months of 1997 compared to 1996. The domestic sales increase results from higher shipments of orthopaedic implants, powered surgical instruments and endoscopic equipment and increased revenue from physical therapy services. International sales were flat in the third quarter of 1997 when compared to 1996 as unfavorable foreign currency comparisons and lower shipments of Matsumoto distributed products offset the growth of Stryker Surgical products overseas. For the first nine months of 1997 international sales were 4% higher as higher shipments of Stryker Surgical products more than offset unfavorable foreign currency comparisons and lower shipments of Matsumoto distributed products. Unfavorable foreign currency comparisons lowered the dollar value of international sales by $6.9 million, or 9%, for the third quarter and $23.7 million, or 9%, for the first nine months.
Stryker Surgical product sales (principally orthopaedic products) increased 10% in the third quarter and 11% in the first nine months, led by higher shipments of orthopaedic implants, powered surgical instruments and endoscopic equipment, partially offset by lower dollar translation of foreign currency sales. Stryker Medical product sales (principally stretchers/beds and physical therapy services) increased 1% in the third quarter and 9% in the first nine months resulting primarily from increased physical therapy revenues. Higher shipments of hospital beds and stretchers during the first nine months were substantially offset by the January 1997 sale of the Sterilizer Service Division and the lower dollar translation of foreign currency sales. Sales of Matsumoto distributed products, which are sourced from other companies for sale in Japan, declined 26% in the third quarter and 27% in the first nine months. The decline in sales of distributed products results from unfavorable foreign currency comparisons and lower sales volumes. Cost of sales for the first nine months of 1997 represented 40.8% of sales compared to 41.4% in the same period of 1996. In the third quarter, the cost of sales percentage decreased to 41.0% from 42.2% in the third quarter of 1996. The decrease in cost of sales is due to product mix and the Company's continued efforts in cost reductions. Research, development and engineering (R,D&E) expense increased 5% for the first nine months of 1997, and represented 5.8% of sales in 1997 compared to 6.1% in the same period last year. In the third quarter, these expenses were flat and were 6.0% of sales in 1997 compared to 6.4% in the third quarter of 1996. The decrease in R,D&E expense as a percentage of sales in 1997 is principally a result of increased product development spending measured against higher sales in 1997 compared to 1996. R,D&E spending has increased as a result of the continued development of the OP- 1 bone growth device at Stryker Biotech and the Company-wide focus on new product development. The Company's commitment to product development has resulted in several new product introductions in the first nine months of 1997 including the Scorpio Knee system, TPS advanced micro-powered instruments, the Advanced Cement Mixing System, the Sterishield Turbo3 Helmet, the Tempest Arthroscopy Pump and the 6080 MX-Pro Ambulance Cot. Selling, general and administrative (S,G&A) expenses increased 8.4% in the first nine months and 5.6% in the third quarter of 1997 compared to the same periods of 1996. These costs decreased to 35.1% of sales in the first nine months of 1997 compared to 35.2% of sales in the same period of 1996. In the third quarter, S,G&A costs represented 34.7% of sales compared to 35.0% in the same period of 1996. The increase in S,G,&A costs is principally a result of increased selling expenses resulting from higher shipments. Other income increased $1.1 million for the first nine months and decreased $0.3 million in the third quarter of 1997 compared to the same periods of 1996. The increase in the first nine months of 1997 is due to increased interest income attributable to higher levels of invested cash and lower interest expense on the Company's yen denominated debt. The decrease in other income in the third quarter is due to the effect of foreign currency translations. The effective tax rate decreased to 37% for the first nine months of 1997 compared to 38% in the same period of 1996 as a result of the decline in earnings reported by Matsumoto, which are taxed at the higher Japanese tax rate. The earnings decline and the Company's increased ownership percentage of Matsumoto also led to a reduction in the minority interest charge for the first nine months as compared to the same period of 1996. For the first nine months of 1997, earnings before income taxes and minority interest increased 15.3% and net earnings increased 20.0% compared to the first nine months of 1996. Earnings before income taxes and minority interest increased 16.5% and net earnings increased 20.0% in the third quarter of 1997 when compared to 1996.
Liquidity and Capital Resources - ------------------------------- Stryker's financial position at September 30, 1997 remained strong with cash and marketable securities of $332.7 million and working capital of $513.8 million. Accounts receivable at September 30, 1997 increased 5% from December 31, 1996 as a result of increased sales and days sales outstanding increased 4 days from a record low of 62 days at December 31, 1996 to 66 days at September 30, 1997. Inventories at September 30, 1997 increased 4% from December 31, 1996 and days in inventory increased to 128 days from 104 days at December 31, 1996. The Company provided $50.8 million of cash from operations in the first nine months of 1997, compared to $78.5 million of cash generated in the same period of 1996. The large decrease of cash provided in the first nine months is the result of first quarter payments of attorney fees and taxes totaling $37.9 million relating to the patent judgment received in the fourth quarter of 1996. Excluding those payments, cash flow from operations would be $88.7 million, an increase of $10.2 million over 1996. During the first nine months of 1997, the Company repurchased 992,800 shares of common stock at a cost of $25.6 million. On April 30, 1997 the Company's Board of Directors authorized the repurchase of an additional 1,000,000 shares of common stock. Shares repurchased will be used for employee stock option plans and other corporate purposes. In the first nine months, $20.9 million of cash was used to purchase an additional 17% of the outstanding common stock of Matsumoto Medical Instruments, Inc. Cash and marketable securities of $332.7 million and anticipated future cash flows from operations are expected to be sufficient to fund future operating and capital requirements. The Company also has unsecured lines of credit with banks totaling $52.4 million, none of which was utilized at September 30, 1997. Stryker began trading on the New York Stock Exchange on July 24, 1997 under the symbol SYK. The Company's shares were previously traded on The Nasdaq Stock Market.
PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibit listed below is submitted as a separate section of this report following the signature page: Exhibit 11 - Statement Re: Computation of Earnings per Share of Common Stock Exhibit 27 - Financial Data Schedule (included in EDGAR filing only) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRYKER CORPORATION (Registrant) November 10, 1997 /s/ JOHN W. BROWN - ----------------- ----------------------------------- Date John W. Brown, Chairman, President and Chief Executive Officer (Principal Executive Officer) November 10, 1997 /s/ DAVID J. SIMPSON - ----------------- -------------------------------- Date David J. Simpson, Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)
Exhibit 11 STRYKER CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK September 30, 1997 <TABLE> Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Average number of shares outstanding 96,308,000 96,700,000 96,299,000 96,862,000 ----------- ----------- ----------- ----------- Net earnings $28,970,000 $24,150,000 $88,370,000 $73,660,000 =========== =========== =========== =========== Net earnings per share of common stock $.30 $.25 $.92 $.76 ==== ==== ==== ==== Primary: Average shares outstanding 96,308,000 96,700,000 96,299,000 96,862,000 Net effect of dilutive stock options, based on the treasury stock method using average market price 2,194,000 1,485,000 1,869,000 1,490,000 ----------- ----------- ----------- ----------- Total Primary Shares 98,502,000 98,185,000 98,168,000 98,352,000 =========== =========== =========== =========== Fully Diluted: Average shares outstanding 96,308,000 96,700,000 96,299,000 96,862,000 Net effect of dilutive stock options, using the period-end market price, if higher than average market price 2,259,000 1,814,000 2,067,000 1,772,000 ----------- ----------- ----------- ----------- Total Fully Diluted Shares 98,567,000 98,514,000 98,366,000 98,634,000 =========== =========== =========== =========== </TABLE> Note: Shares subject to stock options are not included in the earnings per share computation because the present effect thereof is not materially dilutive.