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 March 31, 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. 96,651,638 shares of Common Stock*, $.10 par value, as of April 30, 1996 *Note: These shares have been adjusted to reflect the two-for-one stock split effective for shareholders of record on May 10, 1996. PART I - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) March 31 December 31 1996 1995 ________ ___________ ASSETS (in thousands, except CURRENT ASSETS per share amounts) Cash and cash equivalents $ 63,927 $ 69,049 Marketable securities 206,559 195,599 Accounts receivable, less allowance of $7,500 (1995 -- $7,800) 164,800 163,593 Inventories 138,920 133,619 Deferred income taxes 46,629 47,058 Prepaid expenses and other current assets 19,484 14,335 ________ ________ TOTAL CURRENT ASSETS 640,319 623,253 PROPERTY, PLANT AND EQUIPMENT, less allowance for depreciation 182,725 182,592 OTHER ASSETS 48,914 49,046 ________ ________ $871,958 $854,891 LIABILITIES AND STOCKHOLDERS' EQUITY ======== ======== CURRENT LIABILITIES Accounts payable $ 50,426 $ 49,029 Accrued compensation 23,473 32,447 Income taxes 38,123 25,633 Accrued expenses and other liabilities 62,172 64,277 Current maturities of long-term debt 2,599 3,052 ________ ________ TOTAL CURRENT LIABILITIES 176,793 174,438 LONG-TERM DEBT, excluding current maturities 93,511 96,967 OTHER LIABILITIES 22,894 24,214 MINORITY INTEREST 102,026 104,993 STOCKHOLDERS' EQUITY Common stock, $.10 par value: Authorized--150,000 shares Outstanding--97,132 shares (1995--97,107) 9,713 9,711 Additional paid-in capital 14,556 14,736 Retained earnings 444,557 419,537 Unrealized gains on securities 1,494 2,314 Foreign translation adjustments 6,414 7,981 ________ ________ TOTAL STOCKHOLDERS' EQUITY 476,734 454,279 ________ ________ $871,958 $854,891 ======== ======== See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) Three Months Ended March 31 __________________ 1996 1995 ________ ________ (in thousands, except per share amounts) Net Sales $217,623 $214,013 Costs and expenses: Cost of sales 89,336 87,584 Research, development and engineering 12,264 10,843 Selling, general and administrative 76,155 73,511 ________ ________ 177,755 171,938 ________ ________ OPERATING INCOME 39,868 42,075 Other income 1,897 804 ________ ________ EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 41,765 42,879 Income taxes 15,870 18,010 ________ ________ EARNINGS BEFORE MINORITY INTEREST 25,895 24,869 Minority interest (875) (4,069) ________ ________ NET EARNINGS $ 25,020 $ 20,800 ======== ======== Net earnings per share of common stock $.26 $.22 ==== ==== Average outstanding shares for the period 97,146 96,780 ====== ====== See accompanying notes to condensed consolidated financial statements. 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.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS STRYKER CORPORATION AND SUBSIDIARIES (UNAUDITED) Three Months Ended March 31 __________________ 1996 1995 _______ _______ (in thousands) OPERATING ACTIVITIES Net earnings $25,020 $20,800 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 5,925 5,828 Amortization 1,038 728 Minority interest 875 4,069 Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable (3,913) (1,462) Inventories (8,759) (6,540) Accounts payable 1,874 (7,876) Accrued expenses (6,762) (7,295) Income taxes 12,729 (1,347) Other (4,845) (2,142) _______ _______ NET CASH PROVIDED BY OPERATING ACTIVITIES 23,182 4,763 INVESTING AND FINANCING ACTIVITIES Purchases of property, plant and equipment (7,803) (7,707) Purchases of marketable securities (10,960) (46,564) Business acquisitions (3,399) (11,350) Proceeds from (payments on) borrowings (359) 7,982 Dividends paid (4,370) (3,870) Proceeds from exercise of stock options 2,259 1,259 Repurchases of common stock (2,436) Other (1,267) 754 _______ _______ NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (28,335) (59,496) Effect of exchange rate changes on cash and cash equivalents 31 288 _______ _______ DECREASE IN CASH AND CASH EQUIVALENTS ($ 5,122)($54,445) ======= ======= 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, 1995. 2. INVENTORIES Inventories are as follows (in thousands): March 31 December 31 1996 1995 ________ ___________ Finished goods $106,919 $105,209 Work-in-process 10,680 7,552 Raw material 29,065 28,602 ________ ________ FIFO Cost 146,664 141,363 Less LIFO reserve 7,744 7,744 ________ ________ $138,920 $133,619 ======== ======== FIFO cost approximates replacement cost. 3. BUSINESS ACQUISITIONS During the first quarter of 1996, the Company's subsidiary, Physiotherapy Associates, Inc., purchased certain physical therapy clinic operations at an aggregate cost of $3.0 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTATED PRODUCT LINE SALES AND EARNINGS PER SHARE DATA Comparative product line sales information originally reported in 1995 has been restated below to conform with the presentation adopted in the fourth quarter of 1995: Quarter Ended March 31 June 30 _______________________ _______________________ % % 1995 1994 Chg 1995 1994 Chg ________ ________ ___ ________ ________ ___ Product Line Sales Stryker Surgical $145,415 $118,912 22% $155,292 $124,310 25% Stryker Medical 36,675 29,847 23 40,158 29,916 34 Matsumoto Distributed products 31,923 -0- -- 33,059 -0- -- ________ ________ ________ ________ $214,013 $148,759 44% $228,509 $154,226 48% ======== ======== === ======== ======== === September 30 December 31 _______________________ ________________________ % % 1995 1994 Chg 1995 1994 Chg ________ ________ ___ ________ ________ ____ Product Line Sales Stryker Surgical $146,612 $123,202 19% $161,327 $136,537 18% Stryker Medical 38,301 34,883 10 43,382 40,874 6 Matsumoto Distributed products 20,450 16,231 26 19,358 27,208 (29) ________ ________ ________ ________ $205,363 $174,316 18% $224,067 $204,619 10% ======== ======== === ======== ======== ===
Earnings per share information originally reported in 1995 has been restated below to reflect the two-for-one stock split as though it had occurred as of January 1, 1995: Year Ended 1995 Quarter Ended Dec 31, _____________________________________ Mar 31 Jun 30 Sept 30 Dec 31 1995 _______ _______ _______ _______ _________ Net Earnings $20,800 $20,410 $20,130 $25,670 $87,010 Net Earnings per share of common stock $.22 $.21 $.21 $.26 $.90 Average outstanding shares for the period 96,780 96,903 96,998 97,057 96,936 RESULTS OF OPERATIONS The table below sets forth domestic/international and product line sales information for the first quarter: Three Months Ended March 31 % 1996 1995 Change ________ ________ ______ Domestic/International Sales Domestic $133,687 $112,215 19% International 83,936 101,798 (18) ________ ________ Total Net Sales $217,623 $214,013 2% ======== ======== Product Line Sales Stryker Surgical $161,475 $145,415 11% Stryker Medical 43,562 36,675 19 Matsumoto Distributed Products 12,586 31,923 (61) ________ ________ Total Net Sales $217,623 $214,013 2% ======== ======== For the first quarter of 1996, net sales increased 2% 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 1% 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 partially offset by a 2% decrease arising from changes in foreign currency exchange rates. The Company's domestic sales increased 19% in the first quarter of 1996 compared to 1995. The increase was led by orthopaedic implants, powered surgical instruments and endoscopic equipment, increased revenue from physical therapy services and higher shipments of hospital beds and stretchers. International sales declined 18% in the first quarter of 1996 compared to the same period 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 35% 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 19%. International sales represented 39% of total sales in the first quarter of 1996 compared to 48% in the same period of 1995. Stryker Surgical product sales (principally orthopaedic products) increased 11%, led by increased shipments of orthopaedic implants, powered surgical instruments and endoscopic equipment. Stryker Medical product sales (principally stretchers/beds and physical therapy services) increased 19% in the first quarter resulting from higher physical therapy revenues and increased shipments of hospital beds and stretchers. Sales of Matsumoto distributed products declined 61% in the first quarter. The decline results from the termination of several distribution arrangements and unfavorable currency comparisons. Matsumoto has lost three suppliers who have chosen other distribution channels. Matsumoto has introduced new products to replace two of the lost lines and is seeking replacements for the third. However, 1996 sales of Matsumoto distributed products are expected to be significantly lower than 1995 levels. Cost of sales in the first quarter of 1996 represented 41.1% of sales compared to 40.9% in the same period of 1995. Research, development and engineering (R,D&E) expense increased 13% in the first quarter, and represented 5.6% of sales in 1996 compared to 5.1% in the same period last year. 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 2% sales increase in the quarter attributable to lower sales 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 4% in the first quarter of 1996 compared to the same period of 1995. The increase in S,G&A costs is principally a result of increased sales expenses resulting from the changes in the Osteonics distribution network. S,G&A costs increased to 35.0% of sales in the first quarter of 1996 compared to 34.3% in the same period of 1995. Other income increased $1.1 million in the first quarter of 1996 compared to the first quarter of 1995 principally as a result of increased interest income attributable to higher levels of invested cash. The effective tax rate decreased to 38% in the first quarter of 1996 compared to 42% in the first quarter of 1995 due to a 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 the minority interest charge in the first quarter of 1996 as compared to the same period of 1995. In the first quarter of 1996, earnings before income taxes and minority interest decreased 3%, primarily as a result of Matsumoto's lower profits, and net earnings increased 20% compared to the first quarter of 1995. LIQUIDITY AND CAPITAL RESOURCES Stryker's financial position at March 31, 1996 remained strong with cash and marketable securities of $270.5 million and working capital of $463.5 million. Accounts receivable at March 31, 1996 increased 1% from December 31, 1995 while days sales outstanding increased slightly to 65 days from 64 days at December 31, 1995. Inventories at March 31, 1996 increased 4% from December 31, 1995 and days in inventory increased to 148 days from 133 days at December 31, 1995. The Company generated $23.2 million of cash from operations in the first quarter of 1996 compared to $4.8 million of cash used in the same period of 1995. During the first quarter of 1996, the Company repurchased 50,000 shares of common stock (100,000 shares 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 $2.4 million. Subsequent to the first quarter, in April 1996 the Company repurchased an additional 550,000 split-adjusted shares of common stock at a cost of $12.4 million, bringing the total split-adjusted 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 $270.5 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 March 31, 1996.
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (c) At the Annual Meeting of Stockholders held on April 24, 1996, the stockholders elected seven directors to serve until the next Annual Meeting of Stockholders. The voting results for each nominee were as follows: Shares* _____________________ Name For Withheld ____ __________ _________ John W. Brown 41,047,634 277,725 Howard E. Cox, Jr. 41,047,621 277,738 Donald M. Engelman, Ph.D. 41,038,866 286,493 Jerome H. Grossman, M.D. 40,082,825 1,242,534 John S. Lillard 41,035,508 289,851 William U. Parfet 40,994,751 330,608 Ronda E. Stryker 41,038,946 286,413 * Note: Shares have not been adjusted for the two-for-one stock split declared on April 24, 1996. 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) May 10, 1996 JOHN W. BROWN ____________ __________________________________ Date John W. Brown, Chairman, President and Chief Executive Officer (Principal Executive Officer) May 10, 1996 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 March 31 1996 1995 ___________ ___________ Average number of shares outstanding 97,146,000 96,780,000 ___________ ___________ Net earnings $25,020,000 $20,800,000 =========== =========== Net earnings per share of common stock $.26 $.22 ==== ==== Primary: Average shares outstanding 97,146,000 96,780,000 Net effect of dilutive stock options, based on the treasury stock method using average market price 1,638,000 1,674,000 ___________ ___________ Total Primary Shares 98,784,000 98,454,000 =========== =========== Fully Diluted: Average shares outstanding 97,146,000 96,780,000 Net effect of dilutive stock options, using the period-end market price, if higher than average market price 1,638,000 1,790,000 ___________ ___________ Total Fully Diluted Shares 98,784,000 98,570,000 =========== =========== 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.