10-Q/APeriod: Q1 FY1999

STRYKER CORP Quarterly Report (Amendment) for Q1 Ended Mar 31, 1999

Filed February 22, 2000For Securities:SYK

Summary

Stryker Corporation's first quarter 1999 report reveals a significant transformation driven by the acquisition of Howmedica, which more than doubled net sales to $522.4 million compared to $253.6 million in the prior year period. While this acquisition substantially boosted revenue, it also led to a net loss of $20.8 million for the quarter, a reversal from the $36.0 million net earnings in Q1 1998. This loss is primarily attributable to substantial non-recurring charges, including a $62.5 million increase in cost of sales due to the inventory step-up from the Howmedica acquisition and a $19.7 million restructuring charge related to Japanese operations. Excluding these charges, the company would have reported a pro forma net profit. Despite the reported net loss, the underlying operational performance shows resilience with pro forma net sales up 13%. The integration of Howmedica is progressing, with significant progress made on severance costs and distribution network conversions. The company's liquidity remains stable, supported by cash on hand, marketable securities, and available credit facilities, positioning it to manage upcoming working capital adjustments and debt repayments. Investors should focus on the pro forma performance and the successful integration of Howmedica as key indicators of future growth and profitability, while noting the significant impact of acquisition-related costs on the current quarter's reported earnings.

Key Highlights

  • 1Net sales surged by 106% to $522.4 million in Q1 1999, primarily due to the Howmedica acquisition, compared to $253.6 million in Q1 1998.
  • 2The company reported a net loss of $20.8 million ($0.21 per share) in Q1 1999, a significant shift from a net earning of $36.0 million ($0.37 per share) in Q1 1998.
  • 3Q1 1999 results were impacted by $62.5 million in additional cost of sales from the Howmedica inventory step-up and a $19.7 million restructuring charge related to Japanese operations.
  • 4Excluding these non-recurring charges, pro forma net earnings would have been $33.5 million, representing a 7% decrease from the prior year's pro forma earnings.
  • 5Pro forma net sales increased by 13% in Q1 1999 compared to Q1 1998, indicating underlying organic growth.
  • 6The company made substantial progress in integrating Howmedica, completing distribution network conversions and significant workforce reductions.
  • 7Liquidity remains stable with $114.0 million in cash and marketable securities, and $174.8 million in additional borrowing capacity available.
  • 8Long-term debt increased significantly due to the Howmedica acquisition, standing at $1,511.6 million at the end of Q1 1999.

Frequently Asked Questions

The primary driver behind the 106% increase in net sales to $522.4 million in the first quarter of 1999 was the acquisition of Howmedica on December 4, 1998. This acquisition nearly doubled the company's sales.

Stryker reported a net loss of $20.8 million primarily due to significant non-recurring charges associated with the Howmedica acquisition. These included a $62.5 million increase in cost of sales related to the inventory step-up from the acquisition and a $19.7 million restructuring charge for Japanese operations. These acquisition-related costs masked the underlying operational performance.

The integration of Howmedica is progressing well, with key milestones achieved, including the conversion of its distribution network to direct sales and significant workforce reductions. The costs associated with this integration, such as severance pay and distributor termination, are being managed. The company recorded a $19.7 million restructuring charge related to Japanese operations and has adjusted acquisition-related reserves.

Despite the reported net loss, the company's pro forma performance indicates underlying growth. Liquidity remains stable, with $114.0 million in cash and marketable securities and available credit facilities of $174.8 million. The company anticipates these resources will be sufficient to fund ongoing operations, working capital adjustments, and debt repayments.