<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 June 30, 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:
96,924,776 shares of Common Stock, $.10 par value, as of July 23, 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>
June 30 December 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 68.2 $ 124.9
Marketable debt securities 11.4 17.3
Accounts receivable, less allowance
of $19.0 (1998 - $21.6) 455.8 425.6
Inventories (A) 473.5 591.0
Deferred income taxes 148.1 139.1
Prepaid expenses and other current assets 41.7 51.0
--------- ---------
Total current assets 1,198.7 1,348.9
Property, plant and equipment, less allowance
for depreciation of $194.5 (1998 - $167.7) 386.8 429.5
Other assets
Goodwill, less accumulated amortization of
$17.7 (1998 - $8.7) 462.1 475.5
Other intangibles, less accumulated amortization
of $22.2 (1998 - $15.6) 400.3 422.5
Deferred charges, less accumulated amortization
of $78.1 (1998 - $52.2) 110.1 131.8
Other 97.7 77.7
--------- ---------
TOTAL ASSETS $2,655.7 $2,885.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 98.7 $ 162.4
Accrued compensation 85.7 89.7
Acquisition-related reorganization reserves
and liabilities 188.2 206.9
Income taxes 37.1 49.1
Accrued expenses and other liabilities 159.2 176.4
Current maturities of long-term debt 50.2 15.0
--------- ---------
Total current liabilities 619.1 699.5
Long term debt, excluding current maturities 1,400.3 1,488.0
Other liabilities 53.5 46.3
Stockholders' equity
Common stock, $.10 par value:
Authorized - 150.0 shares
Outstanding - 96.9 shares (1998 - 96.5) 9.7 9.7
Additional paid-in capital 25.2 10.5
Retained earnings 616.4 640.9
Accumulated other comprehensive loss (68.5) (9.0)
--------- ---------
Total stockholders' equity 582.8 652.1
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,655.7 $2,885.9
========= =========
</TABLE>
(A) Inventories include a step-up of $83.0 million as of June 30, 1999 and
$213.1 million as of December 31, 1998 to fair value in connection with the
acquisition of Howmedica.
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 Six Months Ended
June 30 June 30
1999 1998 1999 1998
------- ------- -------- ------
<S> <C> <C> <C> <C>
Net sales $523.3 $ 267.3 $1,045.7 $520.9
Cost of sales (A) 263.1 110.8 529.7 211.6
------ ------- -------- ------
Gross profit 260.2 156.5 516.0 309.3
Research, development and engineering 26.3 15.5 51.5 28.5
Selling, general and administrative 201.6 88.7 403.9 175.0
Restructuring charge 19.7
------ ------- -------- ------
227.9 104.2 475.1 203.5
Other expense (income)
Interest expense 32.0 .9 63.9 1.8
Intangibles amortization 8.5 1.3 17.0 2.6
Other income (2.0) (4.1) (2.3) (8.2)
------ ------- -------- ------
38.5 (1.9) 78.6 3.8
------ ------- -------- ------
Earnings (loss) before income taxes (6.2) 54.2 (37.7) 109.6
Income taxes (credit) (2.5) 18.9 (13.2) 38.3
------ ------- -------- ------
Net earnings (loss) $ (3.7) $ 35.3 $ (24.5) $ 71.3
====== ======= ======== ======
Net earnings (loss) per share of common stock:
Basic $ (.04) $ .37 $ (.25) $ .74
====== ======= ======== ======
Diluted $ (.04) $ .36 $ (.25) $ .73
====== ======= ======== ======
Average outstanding shares for the period:
Basic 96.9 96.3 96.8 96.2
Diluted 99.3 98.2 99.1 98.1
</TABLE>
(A) Includes $65.4 million for the three months ended June 30, 1999 and
$127.9 million for the six months ended June 30, 1999, of additional
cost of sales 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 (24.5) (24.5)
Net unrealized losses
on securities (0.2) (0.2)
Foreign currency
translation
adjustments (59.3) (59.3)
--------
Comprehensive loss for
the six months
ended June 30, 1999 (84.0)
--------
Common stock issued in
business acquisition 9.7 9.7
Sales of 0.2 shares of
common stock under
stock option and
benefit plans,
including $1.4
income tax benefit 5.0 5.0
------- ---------- -------- ---------- --------
Balance at
June 30, 1999 $9.7 $25.2 $616.4 ($68.5) $582.8
======= ========== ======== ========== ========
</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)
Six Months Ended
June 30
1999 1998
-------- --------
OPERATING ACTIVITIES
Net earnings (loss) ($24.5) $71.3
Adjustments to reconcile net earnings (loss) to
net cash provided by operating
activities:
Depreciation 34.2 13.2
Amortization 45.4 9.0
Sale of inventory stepped-up to fair value
at acquisition 127.9
Acquisition related and special charges,
net of cash paid (12.7)
Other 2.4 (0.8)
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable (50.6) (17.9)
Inventories (10.9) (16.3)
Deferred charges (30.1) (11.6)
Accounts payable (37.5) (0.1)
Accrued expenses (16.0) (13.0)
Income taxes (26.9) 0.7
Other 19.2 (7.0)
------- -------
Net cash provided by operating
activities 19.9 27.5
INVESTING AND FINANCING ACTIVITIES
Purchases of property, plant and equipment (29.5) (19.4)
Sales (purchases) of marketable securities 5.9 (74.4)
Business acquisitions (7.7) (25.4)
Proceeds from borrowings 65.0
Payments on borrowings (93.8) (0.5)
Dividends paid (11.6) (10.6)
Proceeds from exercise of stock options 5.0 5.2
Other (8.3) (0.4)
------- -------
Net cash used in investing
and financing activities (75.0) (125.5)
Effect of exchange rate changes on
cash and cash equivalents (1.6) (0.7)
------- -------
Decrease in cash and cash equivalents ($56.7) ($98.7)
======= =======
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
STRYKER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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
six months ended June 30, 1998 was $58.8 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 2001. 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:
June 30 December 31
1999 1998
--------- -----------
Finished goods $ 374.2 $ 488.9
Work-in-process 56.5 49.8
Raw material 50.3 59.8
--------- ---------
FIFO Cost 481.0 598.5
Less LIFO reserve 7.5 7.5
--------- ---------
$ 473.5 $ 591.0
========= =========
Inventories reflect a step-up of $83.0 million as of June 30, 1999 and
$213.1 million as of December 31, 1998 to fair value in connection with the
acquisition of Howmedica. This step-up is charged off as additional nonrecurring
cost of sales as the acquired inventory is sold. Cost of sales for the periods
ended June 30, 1999 were increased as a result of the step-up, reducing pre-tax
earnings by $65.4 million ($41.7 million net of tax) for the three months ended
June 30, 1999 and $127.9 million ($83.1 million net of tax) for the six months
ended June 30, 1999.
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.
The Company recorded additional purchase liabilities of approximately
$111.0 million in conjunction with the above acquisition, all of which were
outstanding at December 31, 1998. As of June 30, 1999, approximately $60.0
million of the related purchase liabilities remained outstanding and none of the
liabilities established have been reversed and taken into income.
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).
In April 1999, the Company acquired the Japanese distributor of Leibinger
products for approximately $2.7 million. The entire purchase price was allocated
to tangible assets acquired.
During the first six months of 1999, the Company's subsidiary,
7
<PAGE> 8
Physiotherapy Associates, Inc., purchased certain physical therapy clinic
operations at an aggregate cost of $1.2 million.
All of the above acquisitions were 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
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 $5.3 million for the six months ended June
30, 1999 and $11.8 million for all of 1998. As of June 30, 1999, $10.8 million
of the Japan restructuring charge remained and was included in
acquisition-related reorganization reserves and liabilities.
The Company had outstanding approximately $46.0 million of acquisition
related liabilities at December 31, 1998. As of June 30, 1999 approximately
$32.0 million of the acquisition related liabilities remained outstanding and
none of the liabilities established have been reversed and taken into income.
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, interest
expense and interest income. 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.
8
<PAGE> 9
Sales and net profit (loss) by business segment follows:
<TABLE>
<CAPTION>
Medical and
Orthopaedic Surgical
Implants Equipment Other Total
----------- ----------- ----- -----
Three Months Ended June 30, 1999
- ---------------------------------
<S> <C> <C> <C> <C>
Net sales $308.0 $182.5 $ 32.8 $ 523.3
Segment net profit (loss) before special charges 35.4 22.6 (20.0) 38.0
Segment net profit (loss) after special charges (1.3) 17.6 (20.0) (3.7)
Three Months Ended June 30, 1998
- ---------------------------------
Net sales $ 97.9 $140.8 $ 28.6 $ 267.3
Segment net profit 19.1 15.0 1.2 35.3
Six Months Ended June 30, 1999
- ---------------------------------
Net sales $623.1 $359.1 $ 63.5 $1,045.7
Segment net profit (loss) before special charges 70.0 40.8 (39.4) 71.4
Segment net profit (loss) after special charges (9.3) 24.2 (39.4) (24.5)
Six Months Ended June 30, 1998
- ---------------------------------
Net sales $192.5 $273.5 $ 54.9 $ 520.9
Segment net profit 36.2 33.0 2.1 71.3
</TABLE>
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 (in millions):
<TABLE>
<CAPTION>
Three Months Ended
June 30
Pro % Change
Forma 99/Pro
1999 1998 1998 (1) 99/98 Forma 98
------- ------- ------- ----- --------
<S> <C> <C> <C> <C> <C>
Domestic/international sales
Domestic $300.9 $179.6 $277.0 68 9
International 222.4 87.7 198.4 154 12
------- ------- -------
Total net sales $523.3 $267.3 $475.4 96 10
======= ======= =======
Product line sales
Orthopaedic Implants $308.0 $ 97.9 $279.6 215 10
MedSurg Equipment 182.5 140.8 167.2 30 9
Physical Therapy Services 32.8 28.6 28.6 15 15
------- ------- -------
Total net sales $523.3 $267.3 $475.4 96 10
======= ======= =======
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Six Months Ended
June 30
Pro % Change
Forma 99/Pro
1999 1998 1998 (1) 99/98 Forma 98
-------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C>
Domestic/international sales
Domestic $ 603.4 $350.8 $546.4 72 10
International 442.3 170.1 391.7 160 13
-------- ------- -------
Total net sales $1,045.7 $520.9 $938.1 101 11
======== ======= =======
Product line sales
Orthopaedic Implants $623.1 $192.5 $560.7 224 11
MedSurg Equipment 359.1 273.5 322.5 31 11
Physical Therapy Services 63.5 54.9 54.9 16 16
-------- ------- -------
Total net sales $1,045.7 $520.9 $938.1 101 11
======== ======= =======
</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 101% in the first six months of
1999 to $1,045.7 million from $520.9 million in 1998. Net sales increased $449.8
million, or 86%, as a result of the Howmedica acquisition. Net sales also grew
by 10% 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 distributors to direct sales.
For the second quarter, net sales increased 96% when compared to the second
quarter of 1998. Net sales increased $222.8 million, or 83%, as a result of the
Howmedica acquisition; 8% due to increased unit volume; 3% due to other acquired
businesses; 1% due to changes in foreign currency exchange rates, and 1% due to
higher selling prices from the conversion of distributors to direct sales.
Net sales on a pro forma basis increased 11% in the first six months of 1999
compared to 1998. Increased unit volume generated an 8% sales increase. Net
sales also increased 1% from business acquisitions; 1% from the conversion of
certain portions of the Company's distribution network to direct sales, and 1%
from favorable foreign currency comparisons. In the second quarter of 1999
10
<PAGE> 11
pro forma net sales increased 10% when compared to the second quarter of 1998.
Increased unit volume generated a 7% sales increase. Net sales also increased 2%
from business acquisitions and 1% from the conversion of certain portions of the
Company's distribution network to direct sales.
The Company's domestic sales increased 68% (9% on a pro forma basis) in
the second quarter and 72% (10% on a pro forma basis) in the first half of 1999
compared to 1998. The domestic sales increase is a result of the Howmedica
acquisition and from higher 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 second
quarter and the first half of 1999 were $99.1 million and $203.2 million,
respectively, representing increases of 2% and 4% over the same periods as last
year. International sales increased 154% (12% on a pro forma basis) in the
second quarter and 160% (13% on a pro forma basis) in the first half of 1999 as
a result of the Howmedica acquisition and higher shipments of Stryker products.
Howmedica's international sales were $123.7 million for the second quarter and
$246.6 million for the first half of 1999, representing increases of 12% and
11%, respectively, over its sales for the same periods last year. Foreign
currency comparisons were favorable in the second quarter adding $2.6 million
($2.5 million on a pro forma basis), or 3% (1% on a pro forma basis), to the
dollar value of international sales. For the first half of 1999, foreign
currency was also favorable adding $6.3 million ($9.5 million on a pro forma
basis), or 4% (2% on a pro forma basis), to the dollar value of international
sales.
Worldwide sales of Orthopaedic Implants were $308.0 million for the
second quarter and $623.1 million for the first half of 1999 representing
increases of 215% and 224%, respectively, (10% and 11%, respectively, on a pro
forma basis) as a result of the Howmedica acquisition and higher shipments of
reconstructive, trauma and spinal implants. Stryker's Osteonics and Dimso
implants increased 13% in the second quarter and 15% in the first half of 1999,
while Howmedica's implant lines increased 8% in the second quarter and 9% in the
first half of 1999. Worldwide sales of MedSurg Equipment were $182.5 million for
the second quarter and $359.1 million for the first half of 1999 representing
increases of 30% and 31%, respectively, (9% and 11% on a pro forma basis) based
on higher 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
11% in the second quarter and 14% in the first half of 1999 and the Howmedica
lines were down 3% compared to the prior year for both periods. Physical Therapy
Services revenue increased 15% in the second quarter and 16% in the first half
of 1999 as a result of new physical therapy centers and acquisitions.
Cost of sales in the first six months of 1999 represented 50.7% of
sales compared to 40.6% in the same period of 1998. In the second quarter, the
cost of sales percentage increased to 50.3% from 41.5% in the second quarter of
1998. The higher cost of sales percentages in 1999 resulted from $127.9 million
in the first half of 1999 and $65.4 million in the second quarter of additional
nonrecurring cost of sales for inventory sold in 1999 that was stepped-up to
fair value in connection with the acquisition of Howmedica. Excluding the
nonrecurring cost of sales charges of $127.9 million and $65.4 million, cost of
sales as a percent of sales would have declined to 38.4% in the first half of
1999 and 37.8% in the second quarter from 40.6% in the first half of 1998 and
41.5% in the second quarter of 1998. The decline for both periods is primarily
the result of a higher mix of orthopaedic implant sales as a result of the
acquisition of Howmedica. Research, development and engineering expense
increased 81% for the first six months of 1999, and represented 4.9% of sales in
1999 compared to 5.5% in the same period of 1998.
11
<PAGE> 12
In the second quarter, these expenses increased 70%, and were 5.0% of sales in
1999 compared to 5.8% in 1998. The increase in research, development and
engineering spending in 1999 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. New product introductions in the first half of
1999 include Crossfire Highly Crosslinked Polyethylene for implants, the
SecureFit Plus hip restoration system, Stryker Instrument's Pain Pump, 12K
Shaver system, 888 3-Chip digital camera and the "Big Wheel" stretcher. Selling,
general, and administrative expenses increased 131% in the first six months and
127% in the second quarter of 1999 compared to the same periods of 1998. These
costs increased to 38.6% of sales in the first six months of 1999 compared to
33.6% of sales in the same period of 1998. In the second quarter, selling,
general and administrative costs represented 38.5% of sales compared to 33.2% in
the same period of 1998. The increase in selling, general and administrative
expenses for both periods 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 was to cover
severance-related costs and $2.1 million relates to costs associated with the
discontinuation of the ophthalmology product line.
Interest expense increased to $63.9 million in the first half of 1999
from $1.8 million in 1998 and increased to $32.0 million in the second quarter
of 1999 from $0.9 million in the prior year due to the borrowing of
approximately $1,500.0 million to fund the Howmedica acquisition. The increase
in intangibles amortization to $17.0 million from $2.6 million in the first six
months of 1999 and to $8.5 million in the second quarter of 1999 from $1.3
million in 1998 relates to the Howmedica acquisition. Other income declined to
$2.3 million in the first half of 1999 from $8.2 million in 1998 and declined to
$2.0 million in the second quarter of 1999 from $4.1 million in 1998 due to
lower interest income.
The effective tax rate for the first six months of 1999 and 1998 was
35%. The effective rate in the second quarter increased to 40.3% from 34.9% in
1998 in order to adjust the 1999 first half effective rate to 35% from the 34%
used in the first quarter of 1999. The increase in the rate from the first
quarter of 1999 to the second quarter is due to the mix of operating results
among tax jurisdictions. The net loss for the first half of 1999 was $24.5
million (basic and diluted earnings per share of $0.25) compared to net earnings
of $71.3 million in 1998. The net loss for the second quarter of 1999 was $3.7
million (basic and diluted earnings per share of $.04) compared to net earnings
of $35.3 million in 1998. Excluding the non recurring charges, net earnings for
the first six months increased to $71.4 million from $71.3 million in 1998,
basic earnings per share of $.74 was the same as the prior year and diluted
earnings per share decreased 1% to $.72. For the second quarter net earnings
excluding non recurring charges increased 8% to $38.0 million from $35.3 million
in 1998, basic earnings per share increased 5% to $.39 and diluted earnings per
share increased 6% to $.38, respectively.
The completion dates of the two significant acquired in-process
research projects, which were in development by Howmedica at the time of the
acquisition are progressing according to plan. The estimated future revenues
associated
12
<PAGE> 13
with the spinal project have not changed, however, the estimated future revenues
of the polyethylene project will be delayed from what was originally estimated.
The delay has been caused by the expected leveraging of the technology acquired
from Howmedica with the technology existing in the Company. The integration of
the two technologies is expected to be complete in the second half of 2000.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity and financial position has remained stable
since December 31, 1998. Working capital at June 30, 1999 decreased $69.7
million to $579.6 million from $649.4 million at December 31, 1998. The working
capital decrease is due to the use of cash to reduce total outstanding debt by
$52.5 million. Accounts receivable days sales outstanding at the end of the
second quarter of 1999 increased eight days to 78 days from 70 days at December
31, 1998. The higher days sales outstanding at June 30, 1999 is the result of
the higher mix of international sales, which typically have longer accounts
receivable terms. Days sales in inventory, net of purchase accounting step-up,
increased to 181 days at June 30, 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 generated cash of $19.9 million in operations in the first
six months of 1999, compared to $27.5 million in 1998. The generation of cash in
the first six months of 1999 is the result of strong cash earnings (net loss
plus non-cash adjustments) partially offset by the increase in accounts
receivable and the decrease in accounts payable, income taxes and other accrued
expenses. In 1999 the Company used cash of $29.5 million for capital
expenditures, $11.6 million to pay dividends and $7.7 million for business
acquisitions. In addition, the Company borrowed an additional $65.0 million
under the existing credit facilities to fund cash flow needs in the first six
months and made repayments against the credit facilities of $93.8 million during
the first half.
On June 4, 1999 the Company's $1,650.0 million credit facility was
amended to lower the net borrowing cost by an average of 50 basis points, or
approximately $7.0 million per year on current borrowings.
The Company had $79.6 million in cash and marketable securities at June
30, 1999. The Company also had outstanding long-term debt totaling $1,450.5
million at the end of the first half of 1999. Current maturities of long-term
debt at June 30, 1999 are $50.2 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 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
$204.9 million of additional borrowing capacity available under the $1,650.0
million credit facilities at June 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
13
<PAGE> 14
due to changes in foreign currencies. In the first half of 1999, the weakening
of foreign currencies reduced the value of these investments in net assets by
$59.3 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 international manufacturing and
distribution locations. 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 most of its subsidiaries and divisions will
have completed necessary upgrades to be Y2K compliant by September 30, 1999,
with two smaller international locations expecting to be Y2K compliant by
October 31, 1999. 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 Y2K
project is approximately $6.2 million, of which $4.0 million had been spent
through June 30, 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
14
<PAGE> 15
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.
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
Reports on Form 8-K filed during the second quarter of
1999 through the date of this report.
Form 8-K dated June 14, 1999
Item 7. Financial Statements and Exhibits-
Amendment to Credit and Guaranty
Agreement related to the Howmedica
acquisition.
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)
July 27, 1999 /s/ JOHN W. BROWN
- ----------------- -----------------------------------------
Date John W. Brown, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
July 27, 1999 /s/ DAVID J. SIMPSON
- ----------------- -----------------------------------------
Date David J. Simpson, Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
15
<PAGE> 1
Exhibit 11
STRYKER CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(amounts in millions except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Basic:
Average number of shares outstanding 96.9 96.3 96.8 96.2
----- ----- ------ -----
Net earnings (loss) $(3.7) $35.3 $(24.5) $71.3
===== ===== ====== =====
Basic net earnings (loss) per share of
common stock $(.04) $ .37 $ (.25) $ .74
===== ===== ====== =====
Diluted:
Average number of shares outstanding 96.9 96.3 96.8 96.2
Net effect of dilutive stock options,
based on the treasury stock method
using average market price 2.4 1.9 2.3 1.9
----- ----- ------ -----
Total diluted shares 99.3 98.2 99.1 98.1
===== ===== ====== =====
Diluted net earnings (loss) per share
of common stock $(.04) $ .36 $ (.25) $ .73
===== ===== ====== =====
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 68,200
<SECURITIES> 11,400
<RECEIVABLES> 474,800
<ALLOWANCES> 19,000
<INVENTORY> 473,500
<CURRENT-ASSETS> 1,198,700
<PP&E> 386,800
<DEPRECIATION> 194,500
<TOTAL-ASSETS> 2,655,700
<CURRENT-LIABILITIES> 619,100
<BONDS> 0
0
0
<COMMON> 9,700
<OTHER-SE> 573,100
<TOTAL-LIABILITY-AND-EQUITY> 2,655,700
<SALES> 1,045,700
<TOTAL-REVENUES> 1,045,700
<CGS> 529,700
<TOTAL-COSTS> 1,004,800
<OTHER-EXPENSES> 14,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,900
<INCOME-PRETAX> (37,700)
<INCOME-TAX> (13,200)
<INCOME-CONTINUING> (24,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,500)
<EPS-BASIC> (.25)
<EPS-DILUTED> (.25)
</TABLE>
