SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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: 001-12229
DePuy, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 35-1989795
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
788 Orthopaedic Drive, Warsaw, Indiana 46581
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (219) 267-8143
Indicate by check [x] 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 No X
----- -----
The number of shares of Common Stock, par value $.01 per share, outstanding
as of November 11, 1996 was 97,780,000.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DEPUY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
Unaudited
---------
December 31, September 30,
------------ -------------
ASSETS 1995 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 46,909 $ 57,785
Accounts receivable, net of allowances
of $6,628 (1995) and $6,177 (1996) 115,452 122,617
Receivable from affiliates, net 24,265 2,758
Inventories at lower of cost or market 116,566 141,443
Deferred income taxes 25,275 24,432
Prepaid expenses and other current assets 18,023 32,339
-------- --------
Total Current Assets 346,490 381,374
-------- --------
NONCURRENT ASSETS
Goodwill, net of accumulated amortization
of $60,312 (1995) and $69,455 (1996) 181,208 220,411
Other intangible assets, net of accumulated
amortization of $245 (1995) and $621 (1996) 1,278 1,954
Deferred income taxes 4,876 2,437
Investment in affiliates 2,081 3,090
Other assets 10,634 9,954
-------- --------
200,077 237,846
-------- --------
Property, plant and equipment, net 76,683 83,851
-------- --------
TOTAL ASSETS $623,250 $703,071
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term debt payable to affiliates $ 31,717 $ 41,961
Short-term debt 21,048 7,621
Accounts payable 26,090 26,743
Income taxes payable 23,088 34,104
Income taxes payable to affiliates 10,738 -
Accrued royalties 16,596 18,727
Accrued employee compensation 16,121 14,359
Other accrued expenses 24,282 30,005
-------- --------
Total Current Liabilities 169,680 173,520
-------- --------
NONCURRENT LIABILITIES
Long-term debt payable to affiliates 42,591 17,982
Long-term debt 5,342 4,218
Long-term employee benefits 17,756 16,904
Noncurrent deferred income tax liability 5,585 6,314
Other noncurrent liabilities 2,236 499
-------- --------
Total Noncurrent Liabilities 73,510 45,917
-------- --------
CONTINGENCIES (Note 7)
MINORITY INTEREST 1,961 3,248
-------- --------
SHAREHOLDER'S EQUITY
Shareholder's Net Investment 378,099 480,386
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $623,250 $703,071
======== ========
See accompanying notes to these Consolidated Financial Statements.
DEPUY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except share data)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------------ ------------ ------------ -------------
Net sales $ 148,442 $ 167,275 $ 471,692 $ 516,289
Cost of sales 46,967 48,754 151,774 155,270
--------- --------- --------- ---------
Gross Profit 101,475 118,521 319,918 361,019
--------- --------- --------- ---------
Selling, general and administrative expenses 55,828 66,145 167,347 194,373
Research and development expenses 5,388 5,735 15,896 15,739
Goodwill amortization 3,596 2,655 10,798 9,247
--------- --------- --------- ---------
Operating Income 36,663 43,986 125,877 141,660
--------- --------- --------- ---------
Interest expense, affiliate 1,067 1,224 3,070 3,697
Interest expense, other 482 941 1,099 1,917
Other income, net (1,021) (441) (2,486) (2,768)
--------- --------- --------- ---------
Income before taxes, minority interest and
equity in earnings of unconsolidated
affiliate 36,135 42,262 124,194 138,814
--------- --------- --------- ---------
Provisions for income taxes 16,119 18,197 54,070 59,556
Minority interest 286 465 530 1,287
Equity in earnings of unconsolidated affiliate 590 409 2,178 1,639
--------- --------- --------- ---------
Net Income $ 20,320 $ 24,009 $ 71,772 $ 79,610
========= ========= ========= =========
Pro forma net income per share $ 0.23 $ 0.27 $ 0.80 $ 0.88
========= ========= ========= =========
Pro forma weighted average number
of shares outstanding 90,000,000 90,000,000 90,000,000 90,000,000
=========== =========== =========== ===========
See accompanying notes to these Consolidated Financial Statements.
DEPUY, INC.
-----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited, in thousands)
Nine Months Ended
-----------------
September 30,
-------------
1995 1996
---- ----
Cash Flows from Operating Activities
Net income $ 71,772 $ 79,610
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,603 20,352
Deferred income taxes (220) 3,975
Other, net 1,030 221
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (10,441) (5,372)
Inventories (5,234) (23,783)
Amounts payable to or receivable
from affiliates 3,404 21,384
Prepaid expenses and other current assets (2,768) (14,298)
Other noncurrent assets (2,969) (531)
Accounts payable (7,199) (275)
Accrued employee compensation & other 6,436 4,876
Other current and noncurrent liabilities 9,662 (3,498)
Income taxes payable 11,934 702
-------- --------
Net Cash Provided by Operating Activities 96,010 83,363
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (10,245) (16,683)
Business acquisitions, net of cash acquired (17,500) (51,851)
-------- --------
Net Cash Used for Investing Activities (27,745) (68,534)
-------- --------
Cash Flows from Financing Activities:
Payments of short-term debt (4,712) (14,347)
Proceeds from issuance of short-term debt --- 9,418
Payments of long-term debt (4,140) (23,722)
Advances (to) from affiliate (51,921) 29,682
Dividends paid to affiliate --- (4,973)
-------- --------
Net Cash (Used For) Financing Activities (60,773) (3,942)
-------- --------
Effect of exchange rate changes on cash 1,999 (11)
-------- --------
Increase in Cash and Cash Equivalents 9,481 10,676
-------- --------
Cash and Cash Equivalents at Beginning of Period 32,131 46,909
-------- --------
Cash and Cash Equivalents at End of Period $ 41,622 $ 57,785
======== ========
See accompanying notes to these Consolidated Financial Statements
DEPUY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of DePuy,
Inc. (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore,
do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Registration Statement on Form S-1 (Registration Statement No. 333-09345)
filed with the Securities and Exchange Commission. In the opinion of
management, all adjustments necessary for a fair presentation of the
results of operations for the periods reported have been included. The
results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - ORGANIZATION / ACQUISITIONS
The consolidated financial statements of the Company are comprised of
DePuy Orthopaedics, Inc. (formerly DePuy Inc., renamed DePuy Orthopaedics,
Inc. on September 5, 1996) and other U.S. and international orthopedic
subsidiaries, branches and divisions of Corange Limited. These
consolidated financial statements have been prepared from the historical
accounting records of the consolidated affiliates. Unless otherwise
referred to herein or the context otherwise requires, references to the
"Company" or "DePuy" shall mean DePuy, Inc. and its majority owned
subsidiaries, after giving effect to the reorganization described below.
A worldwide reorganization of the Company's operations has occurred in
anticipation of DePuy becoming a public company. Various actions have
been taken to (i) consolidate the worldwide operations of DePuy under
Corange U.S. Holdings, Inc., an Indiana corporation ("CUSHI"), (ii)
transfer out of the CUSHI consolidated group Boehringer Mannheim
Corporation ("BMC"), and (iii) merge CUSHI downstream into DePuy, Inc.
(which was created on July 26, 1996 for purposes of becoming the holding
company for the DePuy worldwide operations), with DePuy, Inc. as the
surviving company in the merger, the effect of which was to reincorporate
CUSHI in Delaware under the name "DePuy, Inc."
On March 11, 1996, the Company acquired all of the outstanding shares of
common stock of Orthopedic Technology, Inc. ("DePuy OrthoTech"), a
manufacturer of orthopedic products primarily for the sports medicine
market, in consideration of $46,300 in cash. For the year ended September
30, 1995, DePuy OrthoTech reported sales of $18,400 and net income of
$600. The purchase method of accounting was applied to this acquisition
and a total of $41,600 was allocated to goodwill. The acquisition was
funded by available internal resources.
The results of DePuy OrthoTech operations, since the date of acquisition,
are included in the unaudited consolidated statement of income for the
nine month period ended September 30, 1996 and are not material to
consolidated net sales or consolidated net income.
In addition the Company made contingent payments relating to previous
acquisitions totaling $6 million which were recorded as goodwill.
NOTE 3 - CAPITALIZATION AND UNAUDITED PRO FORMA NET INCOME PER SHARE
Prior to the reorganization, the Company was not a legal entity and did
not have a separately identifiable pool of capital. Accordingly,
historical per share data has been omitted from the consolidated financial
statements. Pro forma net income per share is based on historical net
income and the number of shares of common stock which are outstanding
after the reorganization, but prior to the Company's Initial Public
Offering which was effective October 31, 1996 (Note 8).
DEPUY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - INVENTORIES
Inventories consisted of the following:
December 31, September 30,
------------ -------------
1995 1996
---- ----
Finished products $ 98,887 $120,102
Work in process 7,656 7,697
Raw materials 10,023 13,644
-------- --------
$116,566 $141,443
======== ========
NOTE 5 - INCOME TAXES
The difference between the Company's effective and statutory tax rates for
both the quarter and nine months ended September 30, 1996 is primarily
attributable to state income taxes, nondeductible goodwill and the effect
of international operations.
NOTE 6 - SHAREHOLDER'S NET INVESTMENT
Prior to becoming a public company pursuant to a registration statement
filed with the Securities and Exchange Commission which became effective
on October 30, 1996, the Company participated in a centralized cash
management system for all of its U.S. operations through an affiliate,
Corange U.S. Holdings, Inc. ("CUSHI"). Substantially all cash receipts
and disbursements were processed through CUSHI and the Company was charged
or credited for the net of cash receipts, cash disbursements, and other
CUSHI allocated charges each month. The net effect of this monthly
activity was charged or credited to shareholder's net investment.
NOTE 7 - CONTINGENCIES
The Company is subject to a number of investigations, lawsuits and claims
during the normal course of business. Management does not expect that
resulting liabilities beyond provisions already recorded will have a
materially adverse effect on the Company's consolidated financial
position, results of operations and cash flows. The loss provisions
recorded have not been reduced for any material amounts of anticipated
insurance recoveries.
NOTE 8 - SUBSEQUENT EVENTS
Pursuant to a registration statement filed with the Securities and
Exchange Commission which became effective on October 30, 1996, the
Company issued, through an Initial Public Offering, 7,780,000 shares of
its Common Stock at $17.50 per share which generated net proceeds after
expenses, discounts and commissions of approximately $127 million. The
Company plans to use the net proceeds from the sale of shares of its
Common Stock primarily to finance the expansion of the Company's business,
provided suitable acquisitions can be identified and negotiated.
The following table sets forth the capitalization of the Company at
September 30, 1996 on an actual and as adjusted basis to give effect to
the reorganization (Note 1) and the issuance of 7,780,000 shares of Common
Stock offered by the Company:
At September 30, 1996
--------------------------
Actual As Adjusted
---------- --------------
Shareholder's equity:
Shareholder's net investment $480,386 $ ---
Common stock $.01 par value; 130,000,000
shares authorized, no shares issued and --- ---
outstanding; 97,780,000 shares issued and
outstanding, as adjusted --- 978
Additional paid-in capital --- 637,909
Cumulative translation adjustment --- (31,613)
---------- --------
Total Shareholder's net investment $480,386 $607,274
========== ========
DEPUY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective with the Initial Public Offering, the Company has granted stock
options under stock-based compensation plans totaling 1,274,250 shares at
the initial public offering price of $17.50 per share.
The Company will account for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations.
Under APB 25, because the exercise price of the employees' stock options
will equal or exceed the market price of the underlying stock on the date
of grant, no compensation expense will be recognized. In October 1995 the
Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock-Based Compensation" (FAS 123) which became effective for fiscal
years beginning after December 15, 1995. The Company will adopt the
additional disclosure requirements of FAS 123 in its yearend reporting in
1996.
DEPUY INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table summarizes the selected financial information expressed as a
percentage of net sales and the change from period to period.
Percentage of Net Sales Percentage of Net Sales
------------------------ ------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1995 1996 1995 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 31.7 29.2 32.2 30.1
------ ------ ------ ------
Gross profit 68.3 70.8 67.8 69.9
------ ------ ------ ------
Selling, general &
administrative expense 37.6 39.5 35.4 37.6
Research and development 3.6 3.4 3.4 3.1
Goodwill amortization 2.4 1.6 2.3 1.8
------ ------ ------ ------
Operating income 24.7 26.3 26.7 27.4
------ ------ ------ ------
Other expense .4 1.0 .4 .5
------ ------ ------ ------
Income before taxes,
minority interest and
equity in earnings of
unconsolidated affiliate 24.3 25.3 26.3 26.9
------ ------ ------ ------
Minority interest .2 .3 .1 .3
Equity in earnings of
unconsolidated affiliate .4 .2 .5 .3
Income taxes 10.8 10.8 11.5 11.5
------ ------ ------ ------
Net Income 13.7% 14.4% 15.2% 15.4%
====== ====== ====== ======
The following table summarizes sales by product line and geographical location:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------ ------ ------ ------
Reconstructive products $103.5 $110.2 $334.1 $352.4
Spinal implants 8.4 12.5 21.2 32.0
Trauma products 11.2 14.1 35.3 40.7
Sports medicine 6.9 13.2 22.1 35.0
Other products 18.4 17.3 59.0 56.2
------ ------ ------ ------
Total Sales $148.4 $167.3 $471.7 $516.3
====== ====== ====== ======
Domestic sales $ 87.0 $103.1 $279.6 $302.4
International sales 61.4 64.2 192.1 213.9
------ ------ ------ ------
Total Sales $148.4 $167.3 $471.7 $516.3
====== ====== ====== ======
Sales to customers located
in the United States $ 81.5 $ 93.7 $262.4 $279.9
Sales to customers located
outside the United States 66.9 73.6 209.3 236.4
------ ------ ------ ------
Total Sales $148.4 $167.3 $471.7 $516.3
====== ====== ====== ======
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net Sales were $516.3 million for the nine months ended September 30,
1996, representing an increase of $44.6 million, or 9% over the same
period in the prior year. Continued penetration of the spinal implant
market caused total sales to increase by 2%. The acquisition of DePuy
OrthoTech in March 1996 resulted in additional sales growth of 3%. The
effects of foreign exchange rates in 1996 compared with 1995 resulted in
an unfavorable impact on sales of 1%. The remaining 5% increase
primarily related to sales growth in international markets, partially
offset by the negative impact of lower average prices in the U.S.
predominantly resulting from managed care contracts.
The components of the worldwide sales improvement were as follows:
Acquisitions 3 %
Volume and product mix 8 %
Net pricing changes - 1 %
Effect of foreign exchange rates - 1 %
Domestic sales to unaffiliated customers rose $22.8 million, or
approximately 8%. This growth was primarily attributable to the
acquisition of DePuy OrthoTech in March 1996 and to increased sales of
spinal and shoulder implants.
International sales to unaffiliated customers rose $21.8 million, or 11%.
This increase in sales was related to continued expansion in the European,
Asia/Pacific and South American regions. Expansion in these areas caused
sales to grow by 9%, 5% and 1%, respectively, during the nine months ended
September 30, 1996, exclusive of the effects of foreign exchange. The
negative effect of foreign exchange rates caused the increase in
international sales to be 4% less than it otherwise would have been during
such nine-month period.
The Company's gross profit for the nine months ended September 30, 1996
was $361.0 million, or 69.9% of sales, as compared to 67.8% of sales for
the prior nine-month period. This margin improvement resulted from
increased sales of spinal products and manufacturing efficiencies obtained
through cost controls and higher unit sales, the consolidated impact of
which more than offset the negative impact of lower average prices
realized in the U.S.
Selling, general and administrative expense totaled $194.4 million for the
first nine months of 1996, or 37.6% of sales, as compared to 35.4% in the
first nine months of the prior year. The primary reason for this increase
as a percent of sales was the cost associated with converting 75% of the
Company's U.S. distribution structure from independent sales agents to
Company-managed territories under the responsibility of territory sales
managers. As part of this conversion, the Company incurred additional (in
certain cases, one time) costs totaling $11.7 million, primarily related
to new surgical instrumentation and additional administration expenses
incurred to set up the new territory offices. In addition to these costs,
the Company continued to invest in the development of the U.S. sales
infrastructure and in the expansion of its business in the spinal and
international markets.
Research and development expense decreased $.2 million during the first
nine months of 1996 as compared to the same period in 1995.
Goodwill amortization totaled $9.2 million for the first nine months of
the year, representing a $1.6 million decrease compared to the same period
in the prior year. This decrease primarily related to certain goodwill
assets becoming fully amortized during the third quarter of 1995.
The Company reported a 13% increase in operating income to $141.7 million
for the nine months ended September 30, 1996, or 27.4% of sales, as
compared to $125.9 million for the same period in 1995, or 26.7% of sales.
The increase was primarily attributable to improved gross margins, offset
by additional expenses incurred in selling, general and administrative
expense.
Interest expense was $5.6 million, representing a $1.4 million increase
over the same period in the prior year. This higher expense primarily
resulted from higher interest expense related to
additional indebtedness incurred to fund the expansion of international
operations in existing and new subsidiaries.
Net income for the nine months ended September 30, 1996 was $79.6 million,
or 15.4% of sales, representing an 11% increase over the same period in
the prior year. This increase was the result of a 13% increase in
operating profit offset by higher interest expense and lower equity in
earnings of unconsolidated affiliate.
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30,
1995
Net sales were $167.3 million for the quarter ended September 30, 1996,
representing an increase of $18.8 million, or 13% over the same period in
the prior year. Continued penetration of the spinal implant market caused
total sales to increase by 3%. The acquisition of DePuy OrthoTech in
March 1996 resulted in additional sales growth of 3%. The effects of
foreign exchange rates in the third quarter of 1996 compared with the same
quarter in 1995 resulted in no material impact on sales. The remaining 7%
increase related primarily to sales growth in international markets,
partially offset by the negative impact of lower average prices in the
U.S. predominantly resulting from managed care contracts.
The components of the worldwide sales improvement were as follows:
Acquisitions 3 %
Volume and product mix 12 %
Net pricing changes -2 %
Effect of foreign exchange rates -- %
Domestic sales to unaffiliated customers rose $16.0 million, or
approximately 18%. This growth was primarily attributable to the
acquisition of DePuy OrthoTech in March 1996 and to increased sales of
spinal and shoulder implants.
International sales to unaffiliated customers rose $2.8 million, or 5%.
This increase in sales was related to continued expansion in the European,
Asia/Pacific and South American regions. Expansion in these areas caused
sales to grow by 5%, 3% and 1%, respectively, during the three months
ended September 30, 1996, exclusive of the effects of foreign exchange.
The negative effect of foreign exchange rates caused the increase in
international sales to be 4% less than it otherwise would have been during
such three-month period.
The Company's gross profit for the quarter ended September 30, 1996 was
$118.5 million, or 70.8% of sales, as compared to 68.3% of sales for the
same quarter in the prior year. This margin improvement resulted from
increased sales of spinal products and manufacturing efficiencies obtained
through cost controls and higher unit sales, the consolidated impact of
which more than offset the negative impact of lower average prices
realized in the U.S.
Selling, general and administrative expense totaled $66.1 million for the
first three months of 1996, or 39.5% of sales, as compared to 37.6% in the
third quarter of the prior year. The primary reason for this increase as
a percent of sales was the cost associated with converting 75% of the
Company's U.S. distribution structure from independent sales agents to
Company-managed territories under the responsibility of territory sales
managers. As part of this conversion, the Company incurred additional (in
certain cases, one time) costs totaling $4.2 million during the quarter,
primarily related to new surgical instrumentation and additional
administration expenses incurred to set up the new territory offices. In
addition to these costs, the Company continued to invest in the
development of the U.S. sales infrastructure and in the expansion of its
business in the spinal and international markets.
Research and development expense increased $.3 million during the third
quarter of 1996 as compared to the same period in 1995, but decreased as a
percentage of sales to 3.4% as compared to 3.6% for the prior year. The
Company continues to make investments in technological advancements in
order to remain competitive in the orthopedic market and to provide its
customers with the latest technology available.
Goodwill amortization totaled $2.7 million for the third quarter of the
year, representing a $.9 million decrease compared to the same period in
the prior year. This decrease primarily related to certain goodwill
assets becoming fully amortized during the third quarter of 1995.
The Company reported a 20% increase in operating income to $44.0 million
for the three months ended September 30, 1996, or 26.3% of sales, as
compared to $36.7 million for the same period in 1995, or 24.7% of sales.
The increase was primarily attributable to improved gross margins, offset
by additional expenses incurred in selling, general and administrative
expense.
Interest expense was $2.2 million for the quarter, representing a $.6
million increase over the prior year. This higher expense primarily
resulted from higher interest expense related to additional indebtedness
incurred to fund the expansion of international operations in existing and
new subsidiaries.
Net income for the three months ended September 30, 1996 was $24.0
million, or 14.4% of sales, representing an 18% increase over the same
period in the prior year. This increase was the result of a 20% increase
in operating profit offset by higher interest expense and lower earnings
of an unconsolidated affiliate.
Liquidity and Capital Resources
Cash generated from operations is the principal source of funding
available and provides adequate liquidity to meet the Company's
operational needs. Cash and cash equivalents totaled $57.8 million at
September 30, 1996, compared with $46.9 million at December 31, 1995.
Working capital at September 31, 1996, was $207.9 million, representing a
$31.1 million increase from December 31, 1995. The annualized inventory
turnover ratio for the nine months ended September 30, 1996 was 1.6,
decreasing slightly compared with the rate of 1.7 experienced during the
nine months ended September 30, 1995. The annualized accounts receivable
turnover rate was 5.8 for the first nine months of 1996, increasing
slightly from 5.7 in the same period in 1995.
Operating activities generated $83.4 million in the first nine months of
1996 as compared to $96.0 million of cash provided in the same period in
the prior year. The $12.6 million decrease resulted primarily from a
higher investment in inventories during the first nine months of 1996 in
support of changes in the Company's method of distribution and inventory
buildup to support the faster growing product lines such as trauma and
spinal. In addition, higher investments were made in surgical
instrumentation sets in the first nine months of the year as compared to
the same period in the prior year, offset by receipt of payment during the
first six months of 1996 of an affiliate receivable outstanding at
December 31, 1995.
Cash flows used for investing activities totaled $68.5 million in the
first nine months of 1996 including $45.9 million paid in consideration
for the acquisition of DePuy OrthoTech (net of cash received), capital
expenditures of $16.6 million and $6.0 million of deferred payments made
in 1996 related to the acquisitions of ACE Medical Company in March 1994
and of CMW Laboratories in November 1994. In the first nine months of
1995, cash flows used for investing activities of $27.7 million included
deferred payments on previous acquisitions of $17.5 million and $10.2
million for purchases of machinery and equipment. The increase in capital
expenditures in the two nine month periods resulted primarily from items
being deferred from the last quarter of 1995 to the first half of 1996.
Cash flows used from financing activities were $3.9 million in the first
nine months of 1996 and included $29.7 million of advances received from
CUSHI, an affiliate, as part of the centralized cash management system
described below, used for the DePuy OrthoTech acquisition offset by a net
decrease in debt of $28.6 million and dividends of $5.0 million paid to
another affiliate. During the first nine months of 1995, cash flows used
by financing activities totaled $60.8 million resulting from $51.9 million
of advances to CUSHI, representing advances under the cash management
system described below, and an $8.9 decrease in debt.
Prior to the Initial Public Offering pursuant to a registration statement
filed with the Securities and Exchange Commission which became effective
on October 30, 1996 (described in Note 8 to the interim Consolidated
Financial Statements), the U.S. subsidiaries of DePuy participated in a
centralized cash management system with CUSHI. Cash generated by the
Company in the U.S. was advanced to CUSHI and classified as a reduction in
shareholder's net investment on the balance sheet. Effective with the
Company becoming a public company, cash generated is now maintained in its
own accounts and is available for use by the Company. The Company does
not believe it has any present need for additional financing to fund
existing operations. If financing becomes necessary, the Company will
pursue credit facilities from commercial sources.
The Company anticipates that it will pay dividends on a quarterly basis,
provided that funds are legally available therefor and subject to the
discretion of the Board of Directors. Capital expenditures are expected
to be approximately $25 million in 1996, primarily consisting of purchases
of machinery and equipment. In addition to these funding requirements,
the Company expects to continue to evaluate potential acquisitions to
expand its business.
The Company has historically been able to fund its capital and operating
needs through its cash flow from operations and expects to be able to
continue to do so in the future. The Company believes that the net
proceeds from the Offering of approximately $127 million received in
November 1996 along with its ability to issue additional shares of Common
Stock and to obtain credit lines, together with its cash flow from
operations, will provide it with the ability to fund its acquisition
strategy.
Factors Affecting Future Performance
The orthopedic industry is experiencing a period of significant transition
as a result of health care reform. While cost containment issues have
existed for several years outside of the United States, these are
relatively recent phenomena in the U.S. orthopedic market. Trends in the
U.S. market, which have had an impact on the Company, include the
increased movement toward the provision of health care through managed
care, significant emphasis on cost control and related pressures.
The advent of managed care in the orthopedic products industry has meant
greater attention to tradeoffs of patient need and product cost, so-called
demand matching, where patients are evaluated as to their age, need for
mobility, and other parameters, and are then matched with a replacement
product that is cost effective in light of such evaluation. This has led
(particularly from mid-1995 onward) to an increase in unit sales of lower-
priced, cemented products, sales of which constitute an increasing share
of the Company's overall unit growth. Such shift in product mix has and
is expected to continue to have an impact on the Company's sales with
respect to hip replacement systems and, to a lesser extent, knee
replacement systems.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
During the three-month period ended September 30, 1996, the Company
submitted to its shareholders for approval the following matters:
the adoption of the DePuy, Inc. 1996 Equity Incentive Plan, the
adoption of the DePuy, Inc. Employee Stock Option/Purchase Plan, and
the merger of CUSHI into DePuy, Inc. pursuant to which CUSHI was
reincorporated in Delaware. Each matter was approved by all
90,000,000 shares then outstanding.
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
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.
Date: November __, 1996 DEPUY, INC.
By:
---------------------------------
James A. Lent
Chairman and Chief
Executive Officer
Date: November __, 1996 By:
---------------------------------
Thomas J. Oberhausen
Senior Vice President and
Chief Financial and
Accounting Officer
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27.1 Financial Data Schedule