<PAGE> 1
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 March 31, 1999
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:
96,845,924 shares of Common Stock, $.10 par value, as of April 30, 1999.
<PAGE> 2
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 102.6 $ 124.9
Marketable debt securities 11.4 17.3
Accounts receivable, less allowance
of $19.0 (1998 - $21.6) 435.6 425.6
Inventories 534.7 591.0
Deferred income taxes 155.4 139.1
Prepaid expenses and other current assets 50.3 50.9
-------- --------
Total current assets 1,290.0 1,348.8
Property, plant and equipment, less allowance
for depreciation of $167.0 (1998 - $167.7) 391.3 429.5
Other assets
Goodwill, less accumulated amortization of
$13.0 (1998 - $8.7) 496.7 475.5
Other intangibles, less accumulated amortization
of $19.9 (1998 - $15.6) 407.7 422.5
Deferred charges, less accumulated amortization
of $66.2 (1998 - $52.2) 110.7 131.8
Other 77.9 77.8
-------- --------
TOTAL ASSETS $2,774.3 $2,885.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 128.7 $ 162.4
Accrued compensation 76.1 89.7
Acquisition-related reorganization reserves
and liabilities 217.7 206.9
Income taxes 56.5 49.1
Accrued expenses and other liabilities 137.3 176.4
Current maturities of long-term debt 32.8 15.0
-------- --------
Total current liabilities 649.1 699.5
Long term debt, excluding current maturities 1,478.8 1,488.0
Other liabilities 45.5 46.3
Stockholders' equity
Common stock, $.10 par value:
Authorized - 150.0 shares
Outstanding - 96.8 shares (1998 - 96.5) 9.7 9.7
Additional paid-in capital 24.0 10.5
Retained earnings 620.1 640.9
Accumulated other comprehensive loss (52.9) (9.0)
-------- --------
Total stockholders' equity 600.9 652.1
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,774.3 $2,885.9
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
-------- --------
<S> <C> <C>
Net sales $522.4 $253.6
Cost of sales (A) 266.6 100.8
-------- --------
Gross profit 255.8 152.8
Research, development and engineering 25.2 13.0
Selling, general and administrative 202.3 86.3
Restructuring charge 19.7
-------- --------
247.2 99.3
-------- --------
Other expense (income)
Interest expense 31.9 0.9
Intangibles amortization 8.5 1.3
Other income (0.3) (4.1)
-------- --------
40.1 (1.9)
-------- --------
Earnings (loss) before income taxes (31.5) 55.4
Income taxes (credit) (10.7) 19.4
-------- --------
Net earnings (loss) $(20.8) $ 36.0
======== ========
Net earnings (loss) per share of common stock:
Basic ($.21) $.37
==== ====
Diluted ($.21) $.37
==== ====
Average outstanding shares for the period:
Basic 96.8 96.1
Diluted 98.8 98.1
</TABLE>
(A) Includes $62.5 million of additional cost of sales in 1999 for inventory
stepped-up to fair value in connection with the Howmedica acquisition.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(Amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Gain (Loss) Total
------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1999 $9.7 $10.5 $640.9 ($9.0) $652.1
Comprehensive
gain (loss):
Net loss (20.8) (20.8)
Net unrealized gains
on securities 0.1 0.1
Foreign currency
translation
adjustments (44.0) (44.0)
--------
Comprehensive loss for
the three months
ended March 31, 1999 (64.7)
--------
Common stock issued in
business acquisition 9.7 9.7
Sales of 0.1 shares of
common stock under
stock option and
benefit plans,
including $1.1
income tax benefit 3.8 3.8
------- ---------- -------- ---------- --------
Balance at
March 31, 1999 $9.7 $24.0 $620.1 ($52.9) $600.9
======= ========== ======== ========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
In 1998 the Company declared a cash dividend of twelve cents per share to
shareholders of record on December 31, 1998, payable on January 30, 1999. No
cash dividends have been declared during 1999.
4
<PAGE> 5
STRYKER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) ($20.8) $36.0
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Depreciation 18.3 6.6
Amortization 22.7 5.6
Sale of inventory stepped-up to fair value
at acquisition 62.5
Acquisition related and special charges,
net of cash paid (5.7)
Other 1.2 (0.5)
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable (25.2) (9.9)
Inventories 5.4 (14.2)
Deferred charges (13.5) (5.9)
Accounts payable (25.0) 3.8
Accrued expenses (30.2) (21.1)
Income taxes (5.9) 16.5
Other (2.7) (4.6)
------ ------
Net cash provided by (used in) operating
activities (18.9) 12.3
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (9.2) (8.0)
Sales (purchases) of marketable securities 5.9 (67.7)
Business acquisitions (2.0) (12.7)
Proceeds from borrowings 51.9
Payments on borrowings (24.6) (0.4)
Dividends paid (11.6) (10.6)
Proceeds from exercise of stock options 3.8 3.6
Other (7.9) (0.2)
------ ------
Net cash provided by (used in) investing
and financing activities 6.3 (96.0)
Effect of exchange rate changes on
cash and cash equivalents (9.7) 0.4
------ ------
Decrease in cash and cash equivalents ($22.3) ($83.3)
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
STRYKER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Amounts in millions)
(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 notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
Certain prior period amounts have been reclassified to conform with the
presentation used in the first quarter of 1999.
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 130, "Reporting Comprehensive Income". Statement No.
130 establishes rules for the reporting of comprehensive income and its
components; however, the adoption of this statement had no impact on the
Company's net earnings or shareholders' equity. Other comprehensive gain for the
three months ended March 31, 1998 was $30.9 million.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement will require the Company to
record all derivatives on the balance sheet at fair value. Changes in the fair
value of derivatives that do not meet the criteria to be treated as a hedge
under the Statement will be included in earnings. If derivatives meet the hedge
criteria, changes in the fair value of the derivatives will offset changes in
the fair value of the items being hedged. The Statement is required to be
adopted by the Company beginning in the first quarter of 2000. The Company has
not determined what effect the Statement will have on the Company's future
consolidated results of operations or financial position when adopted.
6
<PAGE> 7
Note 2. INVENTORIES
Inventories are as follows:
March 31 December 31
1999 1998
--------- ---------
Finished goods $ 428.2 $ 488.9
Work-in-process 56.7 49.8
Raw material 57.3 59.8
--------- ---------
FIFO Cost 542.2 598.5
Less LIFO reserve 7.5 7.5
--------- ---------
$ 534.7 $ 591.0
========= =========
Inventories reflect a step-up of $148.1 million as of March 31, 1999 and
$213.2 million as of December 31, 1998 to fair value in connection with the
acquisition of Howmedica. This step-up will be charged off as additional
nonrecurring cost of sales as the acquired inventory is sold. First quarter cost
of sales for 1999 was increased as a result of the step-up, reducing pre-tax
earnings in the quarter by $62.5 million ($41.4 million net of tax).
Note 3. HOWMEDICA ACQUISITION
On December 4, 1998, the Company acquired Howmedica, the orthopaedic
division of Pfizer Inc., for $1,650.0 million in cash. Howmedica develops,
manufactures and markets a wide range of specialty medical products utilized in
the treatment of musculoskeletal disorders. Howmedica products include hip and
knee implants for primary and revision surgery, bone cement, trauma systems used
in bone repair, craniomaxillo-facial fixation devices and specialty surgical
equipment used in neurosurgery. The acquisition was funded with cash and cash
equivalents and approximately $1,500.0 million borrowed under $1,650.0 million
of credit facilities established in December 1998. The acquisition of Howmedica
was accounted for using the purchase method of accounting. For further
discussion of the preliminary allocation of the purchase price and other
information regarding the acquisition see Note 4 in the Company's 1998 Annual
Report on Form 10-K.
Note 4. BUSINESS ACQUISITION
In January 1999, the Company acquired the remaining outstanding common
stock of Matsumoto Medical Instruments, Inc., its Japanese distributor, thereby
increasing its direct ownership to 100% (83% at December 31, 1998) for cash of
$1.0 million and 180,605 shares of Stryker Common stock ($9.7 million value).
The acquisition was accounted for by the purchase method and pro forma
consolidated results would not differ significantly from reported results.
Note 5. RESTRUCTURING CHARGE
In the first quarter of 1999, the Company recognized a $19.7 million
nonrecurring restructuring charge in operations. The charge relates to the
7
<PAGE> 8
reorganization of Stryker's Japanese distribution operation to accommodate the
integration with Howmedica and to discontinue the distribution of ophthalmology
products in Japan. Approximately $17.6 million of the charge is to cover
severance-related costs for terminated employees and $2.1 million relates to
costs associated with the discontinuance of the ophthalmology product line. Net
sales of ophthalmology products were $2.8 million in the first quarter of 1999
and $11.8 million for all of 1998. As of March 31, 1999, all of the Japan
restructuring charge was included in acquisition-related reorganization reserves
and liabilities.
Note 6. SEGMENT INFORMATION
Effective in the fourth quarter of 1998, the Company adopted FASB Statement
No. 131 "Disclosures About Segments of an Enterprise and Related Information".
Statement No. 131 establishes standards for the way that public business
enterprises report information about operating segments in interim and annual
financial reports.
The Company segregates its operations into two reportable segments:
Orthopaedic Implants and Medical and Surgical Equipment. The Orthopaedic
Implants segment sells orthopaedic reconstructive products such as hip, knee,
shoulder and spinal implants, and trauma related products. The Medical and
Surgical Equipment segment sells powered surgical instruments, endoscopic
systems, medical video imaging equipment, patient care, and handling systems.
Other includes Physical Therapy Services and corporate administration. Physical
Therapy Services, which was reported as a separate segment in 1998, no longer
meets the separate disclosure requirements of FASB Statement No. 131.
The Company's reportable segments are business units that offer different
products and services and are managed separately because each business requires
different manufacturing, technology and marketing strategies.
Sales and net profit (loss) by business segment follows:
<TABLE>
<CAPTION>
Medical and
Orthopaedic Surgical
Implants Equipment Other Total
----------- ----------- ----- -----
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1999
- ---------------------------------
Net sales $315.1 $176.6 $ 30.7 $522.4
Segment net profit (loss)
before restructuring charge 34.6 18.1 (19.2) 33.5
Segment net profit (loss)
after restructuring charge (8.9) 6.6 (18.5) (20.8)
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1998
- ---------------------------------
Net sales $ 94.6 $132.7 $ 26.3 $253.6
Segment net profit 16.8 17.8 1.4 36.0
</TABLE>
Sales and pro forma sales by segment for 1998 follows:
<TABLE>
<CAPTION>
1998 Actual Sales
------------------------
<S> <C> <C> <C> <C> <C>
Q1 Q2 Q3 Q4 Total
Product line sales ------- ------- ------- ------- --------
Orthopaedic Implants $ 94.6 $ 97.9 $ 89.6 $ 89.8 $ 371.9
MedSurg Equipment 132.7 140.8 141.1 158.1 572.7
Physical Therapy Services 26.3 28.6 30.3 30.6 115.8
------- ------- ------- ------- --------
Total net sales $253.6 $267.3 $261.0 $278.5 $1,060.4
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1998 Pro Forma Sales (1)
----------------------------------
<S> <C> <C> <C> <C> <C>
Q1 Q2 Q3 Q4 Total
Domestic/international sales ------- ------- ------- ------- --------
Domestic $269.4 $277.0 $274.7 $277.5 $1,098.6
International 193.3 198.4 179.2 236.1 807.0
------- ------- ------- ------- --------
Total net pro forma sales $462.7 $475.4 $453.9 $513.6 $1,905.6
======= ======= ======= ======= ========
Product line sales
Orthopaedic Implants $281.1 $279.6 $255.4 $295.4 $1,111.5
MedSurg Equipment 155.3 167.2 168.2 187.6 678.3
Physical Therapy Services 26.3 28.6 30.3 30.6 115.8
------- ------- ------- ------- --------
Total net pro forma sales $462.7 $475.4 $453.9 $513.6 $1,905.6
======= ======= ======= ======= ========
</TABLE>
(1) The pro forma sales information includes Howmedica's sales for a comparable
period but does not necessarily reflect the consolidated sales that would
have occurred had Stryker and Howmedica operated as a combined entity
during that period.
9
<PAGE> 10
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 for the three months ended March 31 (in millions):
<TABLE>
<CAPTION>
Pro % Change
Forma 99/Pro
1999 1998 1998 (1) 99/98 Forma 98
------- ------- ------- ----- --------
<S> <C> <C> <C> <C> <C>
Domestic/international sales
Domestic $302.5 $171.2 $269.4 77 12
International 219.9 82.4 193.3 167 14
------- ------- -------
Total net sales $522.4 $253.6 $462.7 106 13
======= ======= =======
Product line sales
Orthopaedic Implants $315.1 $ 94.6 $281.1 233 12
MedSurg Equipment 176.6 132.7 155.3 33 14
Physical Therapy Services 30.7 26.3 26.3 17 17
------- ------- -------
Total net sales $522.4 $253.6 $462.7 106 13
======= ======= =======
</TABLE>
(1) The pro forma sales information includes Howmedica's sales for a comparable
period but does not necessarily reflect the consolidated sales that would
have occurred had Stryker and Howmedica operated as a combined entity
during that period.
Stryker Corporation's net sales increased 106% in the first quarter of 1999
to $522.4 million from $253.6 million in 1998. Net sales increased $227.0
million, or 90%, as a result of the Howmedica acquisition. Net sales also grew
by 11% as a result of increased unit volume; 3% as a result of other acquired
businesses; 1% due to changes in foreign currency exchange rates, and 1% related
to higher selling prices from the conversion of Howmedica Osteonics distributors
to direct sales.
Net sales on a pro forma basis increased 13% in the first quarter of 1999
compared to 1998. Increased unit volume generated a 9% sales increase. Net sales
also increased 1% from other business acquisitions; 1% from the conversion of
certain portions of the Howmedica Osteonics domestic distribution network to
direct sales, and 2% from favorable foreign currency comparisons.
The Company's domestic sales increased 77% (12% on a pro forma basis) in
the first quarter of 1999 compared to 1998. The domestic sales increase is a
result of the Howmedica acquisition and from strong shipments of orthopaedic
implants, powered surgical instruments, endoscopic equipment, hospital beds and
stretchers and increased revenue from physical therapy services. Howmedica's
U.S. sales for the first quarter were $104.1 million, representing an increase
of 6% over its sales for the first quarter of last year. International sales
increased 167% (14% on a pro forma basis) in the first quarter of 1999 as a
10
<PAGE> 11
result of the Howmedica acquisition and strong shipments of Stryker products.
Howmedica's international sales for the first quarter were $122.9 million,
representing an increase of 11% over its sales for the first quarter of last
year. Foreign currency comparisons were favorable in the first quarter adding
$3.8 million($7.2 million on a pro forma basis), or 5% (4% on a pro forma
basis), to the dollar value of international sales.
Worldwide sales of Orthopaedic Implants of $315.1 million increased 233% in
the first quarter (12% on a pro forma basis) based on strong shipments of
reconstructive, trauma and spinal implants. Stryker's Osteonics and Dimso
implants increased 16% and Howmedica's implant lines increased 10%. Worldwide
sales of MedSurg Equipment of $176.6 million increased 33% in the first quarter
(14% on a pro forma basis) based on strong shipments of powered surgical
instruments, endoscopic systems and hospital beds and stretchers along with the
Leibinger craniomaxillofacial products and other lines acquired with Howmedica.
The Stryker lines increased 17% and the Howmedica lines were comparable to the
prior year. Physical Therapy Services revenue increased 17% in the first quarter
as a result of new physical therapy centers, acquisitions and internal growth.
Cost of sales in the first quarter of 1999 represented 51.0% of sales
compared to 39.7% in the same period of 1998. The higher cost of sales
percentage in 1999 resulted from $62.5 million in additional nonrecurring cost
of sales for inventory sold in the first quarter that was stepped-up to fair
value in connection with the acquisition of Howmedica. Excluding the
nonrecurring cost of sales charge of $62.5 million, cost of sales as a percent
of sales would have declined to 39.1% from 39.7% in 1998. The decline is
primarily the result of a higher mix of orthopaedic implant sales caused by the
acquisition of Howmedica, which cost less to manufacture than the Company's
other products. Research, development and engineering expense increased 93% as
the Company spent $25.2 million on product development in the first quarter of
1999 compared to $13.0 million in 1998. The increase in research, development
and engineering spending results from the acquisition of Howmedica and from the
November 1998 purchase of the manufacturing rights and facilities for OP-1 from
Creative BioMolecules, Inc. Research, development and engineering expense
represented 4.8% of sales in 1999 compared to 5.1% in 1998 and the decline as a
percent of sales is the result of the acquisition of Howmedica. New product
introductions in the first three months of 1999 include Crossfire Highly
Crosslinked Polyethylene for implants, the SecureFit Plus hip restoration
system, Stryker Instrument's Pain Pump, 12K Shaver system, and the "Big Wheel"
stretcher. Selling, general and administrative expenses increased 135% in the
first quarter of 1999 and represented 38.7% of sales compared to 34.0% in the
same period of 1998. The increase in selling, general and administrative
expenses is primarily the result of the acquisition of Howmedica and the
increase as a percent of sales reflects the higher mix of orthopaedic implant
sales, which cost more to sell than the Company's other products.
The Company recognized a $19.7 million nonrecurring restructuring charge in
operations in the first quarter of 1999. The charge relates to the
reorganization of Stryker's Japanese distribution operation to accommodate the
integration with Howmedica and to discontinue the distribution of ophthalmology
products in Japan. Approximately $17.6 million of the charge is to cover
severance-related costs and $2.1 million relates to costs associated with the
11
<PAGE> 12
discontinuation of the ophthalmology product line.
Interest expense increased to $31.9 million in the first quarter from $0.9
million in 1998 due to the borrowing of approximately $1,500 million to fund the
Howmedica acquisition. The increase in intangibles amortization to $8.5 from
$1.3 million relates to the Howmedica acquisition. Other income declined to $0.3
million in the first quarter of 1999 from $4.1 million in 1998 due to lower
interest income and foreign currency transaction losses compared to foreign
currency gains in 1998.
The effective tax rate decreased to 34.0% in the first quarter of 1999
compared to 35.0% in the same period of 1998. The decrease in the income tax
rate is due to a more favorable mix of operating results among tax
jurisdictions. The net loss for the first quarter of 1999 was $20.8 million
compared to net earnings of $36.0 million in 1998. Excluding the impact of the
nonrecurring charges, net earnings for the quarter would have been $33.5
million, a decrease of 7% from net earnings of $36.0 million ($.37 per share) in
the first quarter of 1998 and basic and diluted net earnings per share declined
5% to $.35 and 8% to $.34, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity and financial position has remained stable since
December 31, 1998. Working capital at March 31, 1999 increased $28.5 million to
$640.9 million from $612.4 million at December 31, 1998. The working capital
increase is due to current liabilities decreasing faster, particularly accounts
payable and other accrued expenses, than current assets. Accounts receivable
days sales outstanding at the end of the first quarter increased four days to 74
days from 70 days at December 31, 1998. The higher days sales outstanding at
March 31, 1999 is the result of the higher mix of international sales, which
typically have longer accounts receivable terms. Days sales in inventory
increased to 174 days at March 31, 1999 from 157 days at December 31, 1998.
Inventory days are higher because of the greater mix of implant sales, which
have higher inventory requirements.
The Company used cash of $18.9 million in operations in the first three
months of 1999, compared to generating cash of $12.3 million in 1998. The use of
cash in the first quarter of 1999 is the result of the payment of certain
acquisition-related costs, such as severance costs, distributor termination
payments and transaction costs and due to the increase in accounts receivable
and decrease in accounts payables and other accrued expenses. In 1999 the
Company used cash of $11.6 million to pay 1998 dividends, $9.2 million for
capital expenditures and $2.0 million for business acquisitions. In addition,
the Company borrowed an additional $51.9 million under the existing credit
facilities to fund cash flow needs in the first quarter and made repayments of
$24.7 million during the quarter. The Company repaid an additional $25.0 million
of the outstanding credit facilities in April 1999.
The Company had $114.0 million in cash and marketable securities at March
31, 1999. The Company also had outstanding long-term debt totaling $1,511.6
million at the end of the first quarter of 1999. Current maturities of long-
12
<PAGE> 13
term debt at March 31, 1999 are $32.8 million and will increase to $89.0 million
in 2000 and $130.2 million in 2001. The Company believes its cash and marketable
securities on-hand as well as anticipated cash flows from operations will be
sufficient to fund future operating capital requirements, payment to Pfizer Inc.
of a working capital adjustment to the purchase price of the Howmedica
acquisition and required debt repayments. Should additional funds be required,
the Company has $174.8 million of additional borrowing capacity available under
the $1,650.0 million credit facilities at April 30, 1999.
Other Matters
- -------------
The Company has certain investments in net assets in international
locations that are not hedged that are subject to translation gains and losses
due to changes in foreign currencies. In the first quarter of 1999, the
weakening of foreign currencies reduced the value of these investments in net
assets by $44.0 million. The loss is deferred and is recorded as a separate
component of stockholder's equity.
Year 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The Company is preparing for the Year 2000 (Y2K) so that its computer and
other systems will function properly with respect to dates in the year 2000 and
beyond. The scope of the Company's Y2K response includes replacement or upgrades
of information technology, such as software or hardware, as well as
non-information-technology systems that may include embedded chips, such as
micro-controllers contained in manufacturing equipment and in Company products.
The Company has already upgraded the hardware and software at many divisions.
Major hardware and software upgrades are in process at Howmedica Osteonics,
Physiotherapy Associates and at several manufacturing and distribution locations
within Europe. The Company's largest ongoing project is at Howmedica Osteonics,
where separate noncompliant manufacturing and distribution systems are being
upgraded or replaced with integrated systems that are Y2K compliant. The Company
has or will contact key third parties, such as suppliers, customers and
financial institutions in an effort to assure no interruption of its business
relationships occur due to Y2K compliance issues. However, if the needed
conversions or modifications to computer or other systems are not made, or are
not completed timely, the Y2K issue could have a material impact on the
operations of the Company.
The Company expects that it will be Y2K compliant by September 1999.
Substantially all of the Company's products that contain embedded chips are now
believed to be Y2K compliant. The Company will continue testing and
documentation efforts throughout 1999 and will formulate and finalize any
contingency plans needed during that time. These contingency plans will address
worst-case scenarios if needed conversions or modifications are not made to
certain key systems as well as worst-case scenarios for key third party
relationships affected by Y2K. The total estimated incremental cost for the
13
<PAGE> 14
Y2K project is approximately $5.1 million, of which $3.1 million had been spent
through March 31, 1999. All costs will be expensed as incurred and will be
funded through operating cash flows.
The costs and timing of the Y2K project are based on management's best
estimates, which were derived utilizing assumptions regarding future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct relevant computer codes and similar uncertainties.
Forward-Looking Statements
The information contained in this report includes forward-looking
statements within the meaning of the federal securities laws that are subject to
risks and uncertainties. Factors that could cause the Company's actual results
and financial condition to differ from the Company's expectations include, but
are not limited to: changes in economic conditions that adversely affect the
level of demand for the Company's products, changes in foreign exchange markets,
changes in financial markets, changes in the competitive environment, and the
factors referred to above regarding Y2K issues. All forward-looking statements
contained in this report are qualified in their entirety by this cautionary
statement.
14
<PAGE> 15
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 28, 1999, 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 88,561,306 380,157
Howard E. Cox, Jr. 88,575,525 365,938
Donald M. Engelman, Ph.D. 88,571,480 369,983
Jerome H. Grossman, M.D. 88,573,930 367,533
John S. Lillard 88,553,382 388,081
William U. Parfet 88,519,770 421,693
Ronda E. Stryker 88,539,648 401,815
15
<PAGE> 16
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
No reports on Form 8-K were filed during the quarter for which this
report is filed.
16
<PAGE> 17
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 12, 1999 /s/ JOHN W. BROWN
- ----------------- -----------------------------------------
Date John W. Brown, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
May 12, 1999 /s/ DAVID J. SIMPSON
- ----------------- -----------------------------------------
Date David J. Simpson, Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
17
<PAGE> 1
Exhibit 11
STRYKER CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(amounts in millions except per share amounts)
March 31, 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
-------- --------
<S> <C> <C>
Basic:
Average number of shares outstanding 96.8 96.1
----- -----
Net earnings (loss) $(20.8) $36.0
===== =====
Basic net earnings (loss) per share of
common stock $(.21) $.37
===== =====
Diluted:
Average number of shares outstanding 96.8 96.1
Net effect of dilutive stock options,
based on the treasury stock method
using average market price 2.0 2.0
----- -----
Total diluted shares 98.8 98.1
===== =====
Diluted net earnings (loss) per share
of common stock $(.21) $.37
===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 102,600
<SECURITIES> 11,400
<RECEIVABLES> 454,600
<ALLOWANCES> 19,000
<INVENTORY> 534,700
<CURRENT-ASSETS> 1,290,000
<PP&E> 391,300
<DEPRECIATION> 167,000
<TOTAL-ASSETS> 2,774,300
<CURRENT-LIABILITIES> 649,100
<BONDS> 0
0
0
<COMMON> 9,700
<OTHER-SE> 591,200
<TOTAL-LIABILITY-AND-EQUITY> 2,774,300
<SALES> 522,400
<TOTAL-REVENUES> 522,400
<CGS> 266,600
<TOTAL-COSTS> 513,800
<OTHER-EXPENSES> 40,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,900
<INCOME-PRETAX> (31,500)
<INCOME-TAX> (10,700)
<INCOME-CONTINUING> (20,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,800)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
