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 September 30, 2000
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 Identification No.) | |
incorporation or organization) | ||
P.O. Box 4085, Kalamazoo, Michigan | 49003-4085 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:(616) 385-2600
___________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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:
195,589,235 shares of Common Stock, $.10 par value, as of October 27, 2000.
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
(Amounts in millions, except per share amounts) | |||||
(Unaudited) | |||||
September 30 | December 31 | ||||
2000 | 1999 | ||||
ASSETS | |||||
Current assets | |||||
Cash and cash equivalents | $63.7 | $80.0 | |||
Marketable debt securities | 3.5 | ||||
Accounts receivable, less allowance of $27.0 (1999 - $28.3) | 340.6 | 377.7 | |||
Inventories | 412.7 | 386.1 | |||
Deferred income taxes | 260.7 | 227.0 | |||
Prepaid expenses and other current assets | 37.4 | 36.1 | |||
Total current assets | 1,115.1 | 1,110.4 | |||
Property, plant and equipment, less allowance for depreciation of $263.7 (1999 - $221.6) | 369.4 | 391.5 | |||
Other assets | |||||
Goodwill, less accumulated amortization of $37.5 (1999 - $26.4) | 495.6 | 516.9 | |||
Other intangibles, less accumulated amortization of $46.2 (1999 - $31.6) | 357.3 | 382.0 | |||
Deferred charges, less accumulated amortization of $146.9 (1999 - $112.8) | 97.6 | 92.6 | |||
Other | 103.4 | 87.1 | |||
TOTAL ASSETS | $2,538.4 | $2,580.5 | |||
======= | ======= | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
Current liabilities | |||||
Accounts payable | $89.7 | $110.4 | |||
Accrued compensation | 104.0 | 102.0 | |||
Acquisition-related reorganization reserves and liabilities | 94.0 | 138.0 | |||
Income taxes | 85.1 | 47.1 | |||
Accrued expenses and other liabilities | 177.9 | 165.8 | |||
Current maturities of long-term debt | 122.3 | 106.3 | |||
Total current liabilities | 673.0 | 669.6 | |||
Long-term debt, excluding current maturities | 992.4 | 1,181.1 | |||
Other liabilities | 81.0 | 58.3 | |||
Stockholders' equity | |||||
Common stock, $.10 par value: | |||||
Authorized - 500.0 shares | |||||
Outstanding - 195.5 shares (1999 - 194.4) | 19.6 | 19.4 | |||
Additional paid-in capital | 58.1 | 27.1 | |||
Retained earnings | 822.6 | 668.1 | |||
Accumulated other comprehensive loss | (108.3) | (43.1) | |||
Total stockholders' equity | 792.0 | 671.5 | |||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $2,538.4 | $2,580.5 | |||
======= | ======= |
See accompanying Notes to Condensed Consolidated Financial Statements.
STRYKER CORPORATION AND SUBSIDIARIES | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS | |||||||
(Amounts in millions, except per share amounts) | |||||||
(Unaudited) | |||||||
Three Months Ended | Nine Months Ended | ||||||
September 30 | September 30 | ||||||
2000 | 1999 | 2000 | 1999 | ||||
Net sales | $548.4 | $498.9 | $1,677.0 | $1,544.6 | |||
Cost of sales (A) | 194.7 | 243.0 | 599.3 | 772.7 | |||
Gross profit | 353.7 | 255.9 | 1,077.7 | 771.9 | |||
Research, development and engineering expenses | 29.4 | 26.9 | 88.8 | 78.4 | |||
Selling, general and administrative expenses | 214.8 | 191.1 | 653.4 | 595.0 | |||
Restructuring charge |
|
|
| 19.7 | |||
244.2 | 218.0 | 742.2 | 693.1 | ||||
Other expense (income): | |||||||
Interest expense | 23.7 | 29.4 | 75.9 | 93.3 | |||
Intangibles amortization | 8.6 | 8.4 | 26.3 | 25.4 | |||
Other | 1.4 | (0.1) | (0.8) | (2.4) | |||
33.7 | 37.7 | 101.4 | 116.3 | ||||
Earnings (loss) before income taxes | 75.8 | 0.2 | 234.1 | (37.5) | |||
Income taxes (credit) | 25.8 | 0.1 | 79.6 | (13.1) | |||
Net earnings (loss) | $50.0 | $0.1 | $154.5 | ($24.4) | |||
===== | ===== | ===== | ====== | ||||
Net earnings (loss) per share of | |||||||
common stock (B): | |||||||
Basic | $0.26 | $0.00 | $0.79 | ($0.13) | |||
Diluted | $0.25 | $0.00 | $0.77 | ($0.13) | |||
Average shares outstanding for the period (B): | |||||||
Basic | 195.3 | 193.9 | 194.9 | 193.7 | |||
Diluted (C) | 201.9 | 198.9 | 200.7 | 193.7 |
- Includes $57.3 million for the three months ended September 30, 1999 and $185.2 million for the nine months ended September 30, 1999 of additional cost of sales for inventory stepped-up to fair value in connection with the Howmedica acquisition.
- All share and per share data have been adjusted to reflect the 2-for-1 stock split effective May 12, 2000, as though it had occurred at the beginning of the periods presented.
- Diluted average outstanding shares for the nine months ended September 30, 1999 are the same as basic average shares outstanding as the effect of incremental shares would be anti-dilutive.
See accompanying Notes to Condensed Consolidated Financial Statements.
STRYKER CORPORATION AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY | |||||
(Amounts in millions, except per share amounts) | |||||
(Unaudited) | |||||
Accumulated | |||||
Additional | Other | ||||
Common | Paid-In | Retained | Comprehensive | ||
Stock | Capital | Earnings | Gain (Loss) | Total | |
Balances at January 1, 2000 | $19.4 | $27.1 | $668.1 | ($43.1) | $671.5 |
Comprehensive gain (loss): | |||||
Net earnings | 154.5 | 154.5 | |||
Net unrealized gains on securities | 0.1 | 0.1 | |||
Foreign currency translation adjustments | (65.3) | (65.3) | |||
Comprehensive gain for the nine | |||||
months ended September 30, 2000 | 89.3 | ||||
Issuance of 0.7 shares of common stock under | |||||
stock option and benefit plans, | |||||
including $6.9 income tax benefit | 0.1 | 11.3 |
|
| 11.4 |
Common stock issued in business acquisitions | 0.1 | 19.7 |
|
| 19.8 |
Balances at September 30, 2000 | $19.6 | $58.1 | $822.6 | ($108.3) | $792.0 |
===== | ===== | ===== | ===== | ===== |
See accompanying Notes to Condensed Consolidated Financial Statements.
In 1999 the Company declared a cash dividend of six and one-half cents per share to shareholders of record on December 31, 1999, payable on January 30, 2000. No cash dividends have been declared during 2000.
STRYKER CORPORATION AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
(Amounts in millions) | |||||
(Unaudited) | |||||
Nine Months Ended | |||||
September 30 | |||||
2000 | 1999 | ||||
OPERATING ACTIVITIES | |||||
Net earnings (loss) | $154.5 | ($24.4) | |||
Adjustments to reconcile net earnings (loss) to net cash provided by | |||||
operating activities: | |||||
Depreciation | 56.0 | 49.8 | |||
Amortization | 68.6 | 68.6 | |||
Sales of inventory stepped-up to fair value at acquisition | 185.2 | ||||
Restructuring charge | 19.7 | ||||
Payments of restructuring and acquisition-related liabilities | (6.6) | (20.6) | |||
Other | 6.1 | 3.9 | |||
Changes in operating assets and liabilities, net of effects of business acquisitions: | |||||
Accounts receivable | 14.7 | (36.1) | |||
Inventories | (44.4) | (11.7) | |||
Deferred charges | (49.7) | (45.4) | |||
Accounts payable | (18.4) | (21.2) | |||
Payments of acquisition purchase liabilities | (25.5) | (67.8) | |||
Accrued expenses | 39.7 | 12.8 | |||
Income taxes | 21.0 | (41.0) | |||
Other | (2.7) | 31.7 | |||
Net cash provided by operating activities | 213.3 | 103.5 | |||
INVESTING ACTIVITIES | |||||
Proceeds from sales of property, plant and equipment | 4.6 | ||||
Purchases of property, plant and equipment | (58.5) | (44.2) | |||
Purchases of marketable securities | (2.5) | ||||
Sales and maturities of marketable securities | 7.1 | 8.4 | |||
Business acquisitions, net of cash acquired | (14.1) | (12.6) | |||
Net cash used in investing activities | (60.9) | (50.9) | |||
FINANCING ACTIVITIES | |||||
Proceeds from borrowings | 167.8 | 72.0 | |||
Payments on borrowings | (319.0) | (144.8) | |||
Dividends paid | (12.6) | (11.6) | |||
Proceeds from exercise of stock options | 8.1 | 5.5 | |||
Other | (11.3) | (3.8) | |||
Net cash used in financing activities | (167.0) | (82.7) | |||
Effect of exchange rate changes on cash and cash equivalents | (1.7) | (3.7) | |||
Decrease in cash and cash equivalents | ($16.3) | ($33.8) | |||
===== | ===== |
See accompanying Notes to Condensed Consolidated Financial Statements.
STRYKER CORPORATION AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2000 |
(Amounts in millions, except share and per share amounts) |
(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, 1999.
The Company follows Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income" in accounting for comprehensive income and its components. Other comprehensive loss for the nine months ended September 30, 1999 was $41.7 million.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". Portions of Statement No. 133 have been amended by the issuance of Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", in June 2000. Statement No. 133 requires 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 Statement No. 133 are to be included in earnings. For derivatives that do meet the hedge criteria, changes in the fair value are to offset changes in the fair value of the items being hedged. The Company is required to adopt Statement No. 133 beginning in the first quarter of 2001. The Company has not determined what effect Statement No. 133 will have on the Company's future consolidated results of operations or financial position when adopted.
Note 2. INVENTORIES
Inventories are as follows:
September 30 | December 31 | |
2000 | 1999 | |
Finished goods | $312.8 | $276.7 |
Work-in-process | 49.3 | 58.9 |
Raw material | 57.9 | 57.8 |
FIFO Cost | 420.0 | 393.4 |
Less LIFO reserve | 7.3 | 7.3 |
$412.7 | $386.1 | |
===== | ===== |
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, craniomaxillofacial 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 allocation of the purchase price and certain other information regarding the acquisition see Note 4 in the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Immediately after the acquisition was consummated, management of the Company began to implement an integration plan to combine Stryker and Howmedica. In conjunction with the integration plan, the Company recorded additional purchase liabilities of $126.5 million ($80.5 million net of related tax benefits), which were included in the final acquisition cost allocation. The Company also incurred $37.7 million in costs and charges related to the acquisition that were charged to operations during 1999 and 1998 (see Note 5 in the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
The additional purchase liabilities include $84.2 million for severance and related costs for Howmedica employees, $26.3 million for the cost to convert Howmedica's distribution network to direct sales and $16.0 million for the cost associated with Howmedica facility closures and contractual obligations. The severance and related costs are provided for workforce reductions covering approximately 1,250 Howmedica employees in the areas of general management, marketing, research and development, general administration and product manufacturing. The cost of the distributor conversions is based on negotiated contracts. The Howmedica facility closures include two facilities in Europe--a leased facility used for centralized administrative functions such as finance, accounting and information systems and a leased facility used for centralized warehousing and distribution in Europe and certain other regions. The facility closures also include certain facilities in the United States--a leased facility supporting administration, warehousing and distribution for Howmedica's craniomaxillofacial business in the United States and leased facilities supporting administration, marketing, research and development and a portion of the U.S. warehousing and distribution for Howmedica's orthopaedic implant business. The contractual obligations represent noncancelable commitments for third-party research and development related to projects that were not continued after the acquisition and purchase commitments for inventory related to discontinued Howmedica products.
Many of the activities for which additional purchase liabilities are recorded were completed during 1999. These activities include the conversion of Howmedica's distribution network to direct sales and many of the planned workforce reductions. Planned workforce reductions covering approximately 1,200 Howmedica employees have been completed with the remaining workforce reductions expected to occur in the fourth quarter of 2000. Payments of distributor conversion obligations and severance and related costs are expected to be completed by the third quarter of 2001. The two Howmedica facilities in Europe and Howmedica's U.S. craniomaxillofacial facility were closed during 1999. The remaining leased facilities in the United States are expected to be closed during 2000, with the exception of one facility that is expected to be closed during 2001. Facility closure and contractual obligations include lease obligation payments that extend to 2008.
The following table provides a rollforward from December 31, 1999 to September 30, 2000 of the additional purchase liabilities recorded in connection with the acquisition of Howmedica (in millions):
Facility | ||||
Severance | Closures & | |||
& Related | Distributor | Contractual | ||
Costs | Conversions | Obligations | ||
Balances at December 31, 1999 | $23.1 | $7.8 | $13.3 | |
Payments | (17.3) | (3.1) | (5.1) | |
Foreign currency translation effects | (1.2) | 0.2 | (0.5) | |
Balances at September 30, 2000 | $4.6 | $4.9 | $7.7 | |
===== | ===== | ===== |
Note 4. BUSINESS ACQUISITIONS
In August 2000, the Company completed the acquisition of Image Guided Technologies, Inc. (IGT) by merger for 271,467 shares of Stryker common stock with a value of $12.0 million. Under the terms of the merger agreement, each outstanding share of IGT common stock was converted into 0.49470 of a share of Stryker common stock. IGT manufactures 3D optical measurement devices ("optical localizers") for anatomical image display workstations used by physicians to perform image guided surgery. The use of shares of Stryker common stock represents a noncash investing activity that is not reflected in the condensed consolidated statements of Cash Flows. The acquisition was accounted for using the purchase method of accounting. Intangible assets acquired, principally patents and goodwill, are being amortized over periods ranging from ten to fifteen years.
In June 2000, the Company acquired all of the outstanding common stock of Colorado Biomedical, Inc. by merger for 211,860 shares of Stryker common stock with a value of $7.8 million. Colorado Biomedical, Inc. manufactures the Colorado Dissection Needle that is used for precision electrosurgery in various surgical specialties. The use of shares of Stryker common stock represents a noncash investing activity that is not reflected in the Condensed Consolidated Statements of Cash Flows. The acquisition was accounted for using the purchase method of accounting. Intangible assets acquired, principally patents and goodwill, are being amortized over periods ranging from seven to fifteen years.
In February 2000, the Company purchased the Neptune System product line, which is a medical waste management system used in hospital operating rooms. The acquisition was accounted for using the purchase method of accounting at a total cost of $10.0 million, of which $7.0 million in royalties will be paid over the following three years. Intangible assets acquired, principally patents, are being amortized over fifteen years. The Company has the right to terminate the purchase agreement within a three-year period if the sales of the Neptune System do not meet certain levels. If the agreement is terminated, the Company will relinquish all of its rights to the patents. If the Company does not exercise its right to terminate the agreement at the end of three years, the Company will be required to pay additional royalties totaling a minimum amount of $30.4 million over the following four years.
Pro forma consolidated results including the purchased businesses would not differ significantly from reported results.
In February 2000, the Company acquired the remaining 50% interest in the patent rights for its Diapason spinal product line for cash of FFr 50.2 million ($7.6 million). The acquired patents are being amortized over approximately nine years.
Note 5. RESTRUCTURING AND ACQUISITION-RELATED CHARGES
In the first quarter of 1999, the Company recognized a $19.7 million restructuring charge. 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. The charge was reduced to $14.2 million in the fourth quarter of 1999 and includes $11.6 million to cover severance-related costs for approximately 110 employees and $2.6 million for costs associated with the discontinuance of the ophthalmology product line. Planned workforce reductions covering approximately 80 employees have been completed. The remaining headcount reductions are expected to be completed in 2000. The $2.6 million in costs for the discontinuance of the ophthalmology product line was provided to cover obsolescence of remaining ophthalmology inventories, including loss reserves on certain remaining inventory sold on a contingent basis to a Japanese distribution company in 1999. The Company exited the ophthalmology business at the end of 1999. Net sales of ophthalmology products were $1.4 million in the third quarter of 1999 and $6.5 million in the first nine months of 1999.
The Company recognized acquisition-related charges totaling $26.5 million ($4.7 million in 1999 and $21.8 million in 1998) for the reorganization of Stryker's distribution channels to accommodate the integration of the Howmedica sales force.
The Company has not utilized $2.7 million of reserves related to distributor reorganizations that were charged to operations in 1996. The delay in the use of these reserves occurred because the distributor is located in a country where Howmedica had a direct sales operation. The purchase of the Howmedica assets in this country was delayed because of the lengthy regulatory approval process there and was completed in the second quarter of 2000. The Company is currently evaluating its business in this country and anticipates that the distributor conversion will take place during 2001.
The following table provides a rollforward from December 31, 1999 to September 30, 2000 of remaining liabilities associated with acquisition-related, restructuring and special pre-tax charges recorded by the Company in prior years (in millions):
Distributor | Severance & | Discontinuance | ||
Conversions | Related Costs | of Product Line | ||
Balances at December 31, 1999 | $13.4 | $4.3 | $1.0 | |
Payments | (6.5) | (0.1) | ||
Foreign currency translation effects | (0.1) | (0.2) |
| |
Balances at September 30, 2000 | $6.8 | $4.0 | $1.0 | |
===== | ===== | ===== |
Note 6. SEGMENT INFORMATION
The Company segregates its operations into two reportable segments: Orthopaedic Implants and MedSurg Equipment. The Orthopaedic Implants segment sells orthopaedic reconstructive products such as hip, knee, shoulder and spinal implants and trauma-related products. The MedSurg 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.
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.
The 1999 segment data reflects segment net earnings (loss) before and after nonrecurring charges. Nonrecurring charges include the Japan restructuring charge (see Note 5) and the additional cost of sales for inventory stepped-up to fair value in connection with the Howmedica acquisition for the three- and nine-month periods ended September 30, 1999. The Japan restructuring charge was first allocated to the Company's business segments on a specific identification basis with any remaining amounts being allocated by business segment sales in Japan. The additional cost of sales for inventory stepped-up to fair value in connection with the Howmedica acquisition was allocated to the Company's business segments on a specific identification basis.
Sales and net earnings (loss) by business segment follows:
Orthopaedic | MedSurg | |||
Implants | Equipment | Other | Total | |
Three Months Ended September 30, 2000 | ||||
Net sales | $307.0 | $203.9 | $37.5 | $548.4 |
Segment net earnings (loss) | 38.5 | 23.8 | (12.3) | 50.0 |
Three Months Ended September 30, 1999 | ||||
Net sales | $288.9 | $178.6 | $31.4 | $498.9 |
Segment net earnings (loss) before | ||||
nonrecurring charges | 33.6 | 20.9 | (17.1) | 37.4 |
Segment net earnings (loss) after | ||||
nonrecurring charges | 1.1 | 16.1 | (17.1) | 0.1 |
Nine Months Ended September 30, 2000 | ||||
Net sales | $972.0 | $598.4 | $106.6 | $1,677.0 |
Segment net earnings (loss) | 125.6 | 72.8 | (43.9) | 154.5 |
Nine Months Ended September 30, 1999 | ||||
Net sales | $912.0 | $537.7 | $94.9 | $1,544.6 |
Segment net earnings (loss) before | ||||
nonrecurring charges | 103.7 | 61.6 | (56.5) | 108.8 |
Segment net earnings (loss) after | ||||
nonrecurring charges | (8.2) | 40.3 | (56.5) | (24.4) |
Note 7. CAPITAL STOCK
On April 19, 2000, the Company's stockholders approved an amendment to the Company's Restated Articles of Incorporation to increase its authorized shares of common stock to 500 million from 150 million.
On April 19, 2000, the Company's Board of Directors approved a two-for-one stock split effective May 12, 2000 for stockholders of record on May 1, 2000.
All share and per share data have been adjusted to reflect the increase in authorized shares of common stock and the stock split as though they had occurred at the beginning of the periods presented.
Diluted average shares outstanding used to calculate the net loss per share of common stock for the nine month period ended September 30, 1999 are the same as basic average shares outstanding for that period as the effect of incremental shares would be anti-dilutive. For purposes of computing diluted net earnings per share before nonrecurring charges discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations", diluted average shares outstanding of 198.4 million were used for the nine month period ended September 30, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The table below outlines the components of the condensed consolidated statements of earnings as a percentage of net sales:
Nine months ended | Three months ended | ||||||
September 30 | September 30 | ||||||
% | % | ||||||
2000 | 1999 | Change | 2000 | 1999 | Change | ||
Net sales | 100.0 | 100.0 | 9 | 100.0 | 100.0 | 10 | |
Cost of sales: | |||||||
Before inventory step-up | 35.7 | 38.0 | 2 | 35.5 | 37.2 | 5 | |
Inventory step-up | -- | 12.0 | (100) | -- | 11.5 | (100) | |
Total cost of sales | 35.7 | 50.0 | (22) | 35.5 | 48.7 | (20) | |
Gross profit | 64.3 | 50.0 | 40 | 64.5 | 51.3 | 38 | |
Research, development | |||||||
and engineering expenses | 5.3 | 5.1 | 13 | 5.4 | 5.4 | 9 | |
Selling, general and | |||||||
administrative expenses | 39.0 | 38.5 | 10 | 39.2 | 38.3 | 12 | |
Restructuring charge | -- | 1.3 | (100) | -- | -- | -- | |
Other expense (income) | 6.0 | 7.5 | (13) | 6.1 | 7.6 | (11) | |
Earnings (loss) before income | |||||||
taxes | 14.0 | (2.4) | -- | 13.8 | 0.0 | -- | |
Income taxes (credit) | 4.7 | (0.8) | -- | 4.7 | 0.0 | -- | |
Net earnings (loss) | 9.2 | (1.6) | -- | 9.1 | 0.0 | -- | |
=== | === | === | === | ||||
The table below sets forth domestic/international and product line sales information (in millions):
Nine Months Ended | ||||
September 30 | ||||
% Change | ||||
2000 | 1999 | 2000/1999 | ||
Domestic/international sales | ||||
Domestic | $1,027.3 | $906.1 | 13 | |
International | 649.7 | 638.5 | 2 | |
Total net sales | $1,677.0 | $1,544.6 | 9 | |
===== | ===== | |||
Product line sales | ||||
Orthopaedic Implants | $972.0 | $912.0 | 7 | |
MedSurg Equipment | 598.4 | 537.7 | 11 | |
Physical Therapy Services | 106.6 | 94.9 | 12 | |
Total net sales | $1,677.0 | $1,544.6 | 9 | |
====== | ====== |
Three Months Ended | ||||
September 30 | ||||
% Change | ||||
2000 | 1999 | 2000/1999 | ||
Domestic/international sales | ||||
Domestic | $348.0 | $302.7 | 15 | |
International | 200.4 | 196.2 | 2 | |
Total net sales | $548.4 | $498.9 | 10 | |
===== | ===== | |||
Product line sales | ||||
Orthopaedic Implants | $307.0 | $288.9 | 6 | |
MedSurg Equipment | 203.9 | 178.6 | 14 | |
Physical Therapy Services | 37.5 | 31.4 | 19 | |
Total net sales | $548.4 | $498.9 | 10 | |
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Stryker Corporation's net sales for the first nine months of 2000 were $1,677.0 million representing a 9% increase over sales of $1,544.6 million for the first nine months of 1999. Net sales grew by 8% as a result of increased unit volume; 1% as a result of higher selling prices; and 1% due to acquired businesses. These increases were partially offset by a 1% decline due to changes in foreign currency exchange rates. For the third quarter, net sales were $548.4 million representing a 10% increase over sales of $498.9 million in the third quarter of 1999. Net sales grew by 10% as a result of increased unit volume; 1% as a result of higher selling prices; and 1% due to acquired businesses. These increases were partially offset by a 2% decline due to changes in foreign currency exchange rates.
The Company's domestic sales were $1,027.3 million for the first nine months and $348.0 million for the third quarter of 2000 representing increases of 13% and 15%, respectively, primarily as a result of strong shipments of orthopaedic implants, powered surgical instruments, endoscopic equipment, hospital beds and stretchers and increased revenue from physical therapy services. International sales were $649.7 million for the first nine months and $200.4 million for the third quarter of 2000 representing increases of 2% in both periods as a result of higher shipments of Orthopaedic Implants and MedSurg Equipment. The impact of foreign currency comparisons to the dollar value of international sales was unfavorable by $18.4 million in the first nine months and $9.8 million in the third quarter of 2000. Excluding the impact of foreign currency and discontinued products, international sales increased 6% in the first nine months and 8% in the third quarter.
Worldwide sales of Orthopaedic Implants were $972.0 million for the first nine months and $307.0 million for the third quarter of 2000 representing increases of 7% and 6%, respectively, as a result of higher shipments of reconstructive (hip, knee and shoulder), trauma and spinal implants. Worldwide sales of MedSurg Equipment were $598.4 million for the first nine months and $203.9 million for the third quarter of 2000 representing increases of 11% and 14%, respectively, based primarily on higher shipments of powered surgical instruments, endoscopic systems and hospital beds and stretchers. Physical Therapy Services revenues were $106.6 million for the first nine months and $37.5 million for the third quarter of 2000 representing increases of 12% and 19%, respectively, as a result of new physical therapy centers and higher revenues from existing centers.
Cost of sales in the first nine months of 2000 represented 35.7% of sales compared to 50.0% in the same period of 1999. In the third quarter of 2000, the cost of sales percentage decreased to 35.5% from 48.7% in the third quarter of 1999. The higher cost of sales percentage in 1999 resulted from $185.2 million for the first nine months and $57.3 million for the third 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, cost of sales as a percent of sales would have been 38.0% in the first nine months of 1999 and 37.2% in the third quarter of 1999. The decline in cost of sales as a percent of sales in 2000 is primarily the result of the realization of cost savings from cost reduction plans implemented at former Howmedica manufacturing plants in 1999 and due to slightly higher selling prices in 2000.
Research, development and engineering expense increased 13.3% for the first nine months of 2000, and represented 5.3% of sales in 2000 compared to 5.1% in the same period of 1999. In the third quarter, these expenses increased 9.3%, and represented 5.4% of sales in 2000 and in 1999. New product introductions in the first nine months of 2000 include Crossfire Highly Crosslinked Polyethylene for Howmedica implants, Scorpio TS Revision Knee System, Stryker Instruments' TPS U2 drill, the Steri-Shield T4 Personal Protection System, the Stryker Navigation System, the Antigrade/Retrograde intermedulory nail, the OPUS spinal system, resorbable craniomaxillofacial plates and screws, and, in certain international markets, Simplex P bone cement with Tobramycin.
Selling, general and administrative expenses increased 9.8% in the first nine months and 12.4% in the third quarter of 2000 compared to the same periods of 1999. These costs increased to 39.0% of sales in the first nine months of 2000 compared to 38.5% of sales in the same period of 1999. In the third quarter, selling, general and administrative costs represented 39.2% of sales compared to 38.3% in the same period of 1999. Selling, general and administrative expenses include $5.1 million in the first nine months and $1.8 million in the third quarter of 2000 of discount expense related to the accounts receivable securitization program established in November 1999.
Interest expense declined to $75.9 million in the first nine months of 2000 from $93.3 million in 1999 and declined to $23.7 million in the third quarter from $29.4 million in 1999 primarily as a result of lower outstanding debt balances. The increase in intangibles amortization to $26.3 million in the first nine months of 2000 from $25.4 million of 1999 and to $8.6 million in the third quarter of 2000 from $8.4 million in 1999 is primarily the result of business acquisitions completed in the first nine months of 2000. Other income declined to $0.8 million in the first nine months of 2000 from $2.4 million in 1999 and was a loss of $1.4 million in the third quarter of 2000 compared to $0.1 million of income in 1999 due primarily to realized foreign currency exchange losses in 2000.
The effective tax rate was 34.0% for the first nine months of 2000 and for the third quarter of 2000 compared to a rate of 34.9% for the first nine months of 1999 and 50.0% for the third quarter of 1999. The tax rate of 50.0% for the third quarter of 1999 is not indicative of any trend in the rate and is solely a function of the modest level of earnings on which it was computed. Net earnings for the first nine months of 2000 were $154.5 million representing a 42% increase over net earnings before nonrecurring charges of $108.8 million in 1999. Diluted net earnings per share increased 40% to $.77 compared to diluted net earnings per share before nonrecurring charges of $.55 in the first nine months of 1999. Net earnings for the third quarter of 2000 were $50.0 million representing a 34% increase over net earnings before nonrecurring charges of $37.4 million in the third quarter of 1999. Diluted net earnings per share increased 32% to $.25 compared to diluted net earnings per share before nonrecurring charges of $.19 in the third quarter of 1999.
For the first nine months and third quarter of 1999, the Company reported net losses of $24.4 million ($.13 per diluted share) and net earnings of $0.1 million ($.00 per diluted share), respectively, which included nonrecurring charges of $204.9 million ($133.2 million net of tax) and $57.3 million ($37.3 million net of tax), respectively, as follows:
- Additional cost of sales for inventory stepped-up to fair value in connection with the Howmedica acquisition of $185.2 million in the first nine months of 1999 and $57.3 million in the third quarter of 1999.
- $19.7 million in the first quarter of 1999 for reorganizing Stryker's Japanese distribution operation to accommodate the integration with Howmedica and to discontinue the distribution of ophthalmology products in Japan. Net sales of discontinued products were $1.4 million in the third quarter and $6.5 million in the first nine months of 1999.
There were no nonrecurring charges for the first nine months or third quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 2000 increased $1.3 million to $442.1 million from $440.8 million at December 31, 1999. The increase in working capital is due primarily to strong cash earnings, which were used to fund increases in inventory and pay certain current liabilities due in the first nine months of 2000, primarily for accounts payable and acquisition-related reorganization reserves and liabilities. The Company reduced cash and cash equivalents and marketable debt securities by $19.8 million in the first nine months of 2000 in order to repay debt owed under its credit facilities. Accounts receivable days sales outstanding, excluding the effect of the accounts receivable securitization program, decreased four days to 72 days at September 30, 2000 from 76 days at December 31, 1999. Days sales in inventory declined to 194 days at September 30, 2000 from 200 days at September 30, 1999. Inventory days are higher than the 174 days at December 31, 1999 primarily as a result of seasonally lower sales volume in the third quarter.
The Company generated cash of $213.3 million from operations in the first nine months of 2000, compared to $103.5 million in 1999. The cash provided by operating activities in the first nine months of 2000 is primarily the result of strong cash earnings and increases in accrued expenses and income tax liabilities and reductions in accounts receivable. These changes were partially offset by increases in inventories and deferred charges and payments of acquisition purchase liabilities.
In the first nine months of 2000 the Company used cash of $58.5 million for capital expenditures, $14.1 million for business acquisitions and $12.6 million for the payment of dividends. The Company also borrowed an additional $167.8 million under its existing credit facilities to fund cash flow needs during the first nine months of 2000 and made repayments of $319.0 million against the credit facilities. Total debt declined by $172.7 million during the first nine months of 2000.
In June 2000, the Company acquired all of the outstanding common stock of Colorado Biomedical, Inc. by merger for 211,860 shares of Stryker common stock with a value of $7.8 million. In August 2000, the Company acquired Image Guided Technologies, Inc. by merger for 271,467 shares of Stryker common stock with a value of $12.0 million.
The Company had $63.7 million in cash at September 30, 2000. The Company also had outstanding long-term debt totaling $1,114.7 million at the end of the first nine months of 2000. Current maturities of long-term debt at September 30, 2000 are $122.3 million and will increase to $148.1 million in 2002 and $186.5 million in 2003. The Company believes its cash on-hand as well as anticipated cash flows from operations will be sufficient to fund future operating and 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 $250.7 million of additional borrowing capacity available under the $1,650.0 million credit facilities at September 30, 2000.
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 nine months of 2000, the weakening of foreign currencies reduced the value of these investments in net assets by $65.3 million. The loss is deferred and is recorded as a separate component of stockholders' equity.
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 and changes in the competitive environment. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes from the information provided in the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
PART II. - OTHER INFORMATION
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 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. |
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) | |
October 31, 2000 | /S/ JOHN W. BROWN |
Date | John W. Brown, Chairman, President |
and Chief Executive Officer | |
(Principal Executive Officer) | |
October 31, 2000 | /S/ DAVID J. SIMPSON |
Date | David J. Simpson, Vice President, |
Chief Financial Officer and Secretary | |
(Principal Financial Officer) |