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:
Percentage
Percentage of Net Sales Increase
_______________________ ________________
1995 1994 1993 1995/94 1994/93
______ ______ ______ _______ _______
Net Sales 100.0% 100.0% 100.0% 28% 22%
Cost of sales 42.4 44.0 46.1 23 17
Research, development and
engineering expense 5.0 5.8 6.5 10 9
Selling, general and
administrative expense 34.6 32.5 30.9 36 28
______ ______ ______
Operating Income 18.0 17.7 16.5 31 31
Other income 0.7 1.0 0.7
______ ______ ______
Earnings Before Income Taxes
and Minority Interest 18.7 18.7 17.2 28 33
Income taxes 7.7 7.4 6.4 32 42
______ ______ ______
Earnings Before Minority Interest 11.0 11.3 10.8 25 28
Minority interest (1.0) (.7)
______ ______ ______
Net Earnings 10.0% 10.6% 10.8% 20 20
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The table below sets forth domestic/international and product line sales
information:
Percentage
Net Sales (in thousands) Increase
____________________________ ________________
1995 1994 1993 1995/94 1994/93
________ ________ ________ _______ _______
Domestic/International Sales
Domestic $477,207 $405,549 $378,255 18% 7%
International 394,745 276,371 179,080 43 54
Total Net Sales $871,952 $681,920 $557,335 28 22
Product Line Sales
Stryker Surgical $608,646 $502,961 $447,042 21 13
Stryker Medical 158,516 135,520 110,293 17 23
Matsumoto Distributed
Products 104,790 43,439 141 --
________ ________ ________
Total Net Sales $871,952 $681,920 $557,335 28 22
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1995 COMPARED TO 1994
Stryker Corporation's net sales increased 28% in 1995 to $872.0 million from
$681.9 million in 1994. The 1994 purchase by Stryker of an additional 31%
interest in its Japanese distributor, Matsumoto Medical Instruments, Inc.
(Matsumoto), and Matsumoto's resulting consolidation with Stryker beginning in
August 1994, accounted for a 15% sales increase through incremental sales of
Matsumoto Distributed Products, which are sourced by Matsumoto from other
companies for sale in Japan, and incremental margins and increased unit volume
of Stryker products in Japan for the first seven months of 1995. Increased
unit volume generated a 6% sales increase, other business acquisitions
accounted for a 3% increase and a 1% increase arose from changes in foreign
currency exchange rates. Net sales increased 3% as a result of the Company's
conversion of certain portions of the Osteonics domestic distribution network
to direct sales, which began in 1994 and resulted in higher selling prices
offset by the repurchase of inventory from distributors converted in 1995.
The Company's domestic sales increased 18% in 1995 compared to 1994. The
leading domestic sales gains came from strong shipments of Stryker Surgical
products and increased physical therapy revenue. International sales
increased 43% in 1995 and were led by incremental Japanese sales from the
consolidation of Matsumoto along with increased shipments of Stryker Surgical
and Medical products. International sales grew to 45% of total sales in 1995
compared to 41% in 1994.
Stryker Surgical product sales (principally orthopaedic products) increased
21% for the year. The increase in domestic sales of Stryker Surgical products
was led by Osteonics hip and knee implants, the Steri-Shield Personal
Protection System product line acquired in June 1994 and Stryker Instruments'
heavy duty powered surgical instruments and High Vacuum Cement Injection
System. The increase in international sales of Stryker Surgical products was
led by incremental sales from the consolidation of Matsumoto along with sales
of Osteonics orthopaedic implants, endoscopic equipment and powered surgical
instruments. Stryker Medical product sales (principally specialty
stretchers/beds and physical therapy services) increased 17% for the year, led
by increased revenues from physical therapy services,primarily as a result of
business acquisitions during the year. Sales of Matsumoto Distributed
Products increased by 141% for the year as a result of the consolidation of
Matsumoto for twelve months in 1995 and only five months in 1994. Sales of
Matsumoto Distributed Products declined 29% in the fourth quarter of 1995
compared to the fourth quarter of 1994 as a result of the termination of
several distribution agreements. These terminations are expected to lead to a
further decrease in sales of Matsumoto Distributed Products in 1996.
Cost of sales represented 42.4% of sales compared to 44.0% in 1994. The lower
cost of sales percentage in 1995 resulted from additional margins on Stryker
products sold by Matsumoto since its consolidation and 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 10% as the Company spent $43.8 million on
product development in 1995 compared to $39.6 million in 1994. The decrease
in research, development and engineering 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
continued commitment to product development 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 4100 Cordless
Driver and the Stryker Stretcher Chair. Selling, general and administrative
expenses increased 36% in 1995 as a result of consolidating Matsumoto which,
as a distributor, has a higher percentage of these expenses, along with
increased selling expenses resulting from the changes in the Osteonics
distribution network. These costs increased to 34.6% of sales in 1995
compared to 32.5% in 1994.
The effective tax rate increased to 41.0% in 1995 compared to 39.8% in 1994 as
a result of the higher Japanese tax rate on the earnings of Matsumoto.
Earnings before minority interest increased 25% in 1995 compared to 1994. Net
earnings in 1995 were $87.0 million, a 20% increase over the Company's 1994
net earnings of $72.4 million. The consolidation with Matsumoto increased net
earnings for 1995 by $3.0 million ($.06 per share) from 1994.
1994 COMPARED TO 1993
Stryker Corporation's net sales increased 22% in 1994 to $681.9 million
compared to $557.3 million in 1993. The consolidation of Matsumoto beginning
in August 1994, accounted for a 12% sales increase through incremental sales
at end customer selling prices of Stryker products and added sales of
Matsumoto Distributed Products. Increased unit volume generated an 8%
increase in sales, other business acquisitions accounted for 3% of the overall
gain and higher selling prices provided an additional 2% increase. The
Company also converted certain portions of the Osteonics domestic distribution
network to direct sales, resulting in the repurchase of inventory from
distributors, which reduced net sales by 3%.
Uncertainty over the impact of U.S. health care reform programs generally
slowed domestic sales of medical devices during 1994. The Company's domestic
sales increased 7% in 1994 compared to 1993. International sales increased
54% in 1994. The international sales gains were led by incremental Japanese
sales from the consolidation of Matsumoto along with increased shipments of
Osteonics orthopaedic implants, Dimso spinal implants, powered surgical
instruments and hospital beds and stretchers. International sales grew to 41%
of total sales in 1994 compared to 32% in 1993.
Stryker Surgical product sales increased 13% for the year. The increase in
domestic sales of Stryker Surgical products was led by Stryker Instruments'
SurgiLav Plus pulsed irrigation system and High Vacuum Cement Injection System
and Stryker Endoscopy's line of powered arthroscopic instruments. The
increase in international sales of Surgical products was led by sales of
Osteonics orthopaedic implants, Dimso spinal implants, powered surgical
instruments and incremental margins on Stryker products resulting from the
consolidation of Matsumoto. Sales of Stryker Medical products increased 23%,
led by increased revenues from physical therapy services as a result of
business acquisitions during the year, increased sales of the MPS Primary
Acute Care Bed, which was introduced in the third quarter of 1993, and
increased sales of patient handling equipment. Sales of Matsumoto Distributed
Products were added beginning with the consolidation of Matsumoto in August
1994.
Cost of sales represented 44.0% of sales compared to 46.1% in 1993. The lower
cost of sales percentage in 1994 resulted from additional margins on Stryker
products sold by Matsumoto since its consolidation and improved margins from
ongoing cost reduction programs and 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
9% as the Company spent $39.6 million on product development in 1994 compared
to $36.2 million in 1993. The decrease in research, development and
engineering expense as a percentage of sales in 1994 is principally a result
of consolidating Matsumoto which, as a distributor, incurs minimal research
and development costs. The Company's continued commitment to product
development resulted in several new products in 1994, including the Omnifit-
Plus forged cobalt chrome hip stem, the Sapphire View arthroscope system, a
new low cost high resolution 1-chip camera, a second generation ConstaVac
CBCII Blood Conservation System and a new line of powered micro instruments
for oral/maxillofacial procedures. Selling, general and administrative
expenses increased 28% in 1994, principally as a result of consolidating
Matsumoto which, as a distributor, has a higher percentage of these expenses,
along with increased selling expenses resulting from the changes in the
Osteonics distribution network. These costs increased to 32.5% of sales in
1994 compared to 30.9% in 1993.
The effective tax rate increased to 39.8% in 1994 compared to 37.3% in 1993 as
a result of the higher Japanese tax rate on the earnings of Matsumoto.
Earnings before minority interest increased 28% in 1994 compared to 1993. Net
earnings in 1994 were $72.4 million, a 20% increase over the Company's 1993
net earnings of $60.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Stryker's financial position continued to strengthen in 1995, with operating
activities providing $111.5 million in cash. Working capital increased to
$448.8 million from $361.3 million in the prior year. Accounts receivable
increased 6% and days sales outstanding at the end of 1995 decreased to 64
days from 67 days at the end of 1994. Inventories increased 15% in 1995 and
days sales in inventory finished 1995 at 133 days compared to 131 days at the
end of 1994.
The Company's cash and marketable securities of $264.6 million at December 31,
1995, 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 $55.4 million, of which none
was utilized at December 31, 1995.