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| SYK > SEC Filings for SYK > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
Throughout this discussion, references are made to the following financial measures: "constant currency," "adjusted net earnings from continuing operations," "adjusted basic net earnings per share from continuing operations" and "adjusted diluted net earnings per share from continuing operations." These financial measures are an alternative representation of Stryker Corporation's (the Company or Stryker) past and potential future operational performance and do not replace the presentation of the Company's reported financial results under U.S. generally accepted accounting principles (GAAP). The Company has provided these supplemental non-GAAP financial measures because they provide meaningful information regarding the Company's results on a consistent and comparable basis for the periods presented. Management uses these non-GAAP financial measures for reviewing the operating results of its business segments, for analyzing potential future business trends in connection with its budget process and bases certain annual bonus plans on these non-GAAP financial measures. In order to measure the Company's sales performance on a constant currency basis, it is necessary to remove the impact of changes in foreign currency exchange rates which affects the comparability and trend of sales. Constant currency results are calculated by translating current year results at prior year average foreign currency exchange rates. In order to measure the Company's earnings performance on a consistent and comparable basis, the Company excludes the intangible asset impairment charge recorded in the second quarter of 2007 which affects the comparability of operating results and the trend of earnings. Additional details regarding the nature, determination and financial statement impact of the intangible asset impairment charge are included in Results of Operations. In addition, the Company believes investors will utilize this information to evaluate period-to-period results on a comparable basis and to better understand potential future operating results. The Company encourages investors and other users of these financial statements to review its Condensed Consolidated Financial Statements and other publicly filed reports in their entirety and not to rely solely on any single financial measure.
Executive Level Overview
Stryker is one of the world's leading medical technology companies with the most broadly based range of products in orthopaedics and a significant presence in other medical specialties. Stryker works with respected medical professionals to help people lead more active and more satisfying lives. The Company's products include implants used in joint replacement, trauma, craniomaxillofacial and spinal surgeries; biologics; surgical, neurologic, ear, nose & throat and interventional pain equipment; endoscopic, surgical navigation, communications and digital imaging systems; as well as patient handling and emergency medical equipment.
Domestic sales accounted for 63% and 64% of total revenues in the first nine months of 2008 and 2007, respectively, and 65% in the third quarter of 2008 and 2007. Most of the Company's products are marketed directly to doctors, hospitals and other health-care facilities. Stryker primarily maintains separate and dedicated sales forces for each of its principal product lines to provide focus and a high level of expertise to each medical specialty served.
International sales accounted for 37% and 36% of total revenues in the first nine months of 2008 and 2007, respectively, and 35% in the third quarter of 2008 and 2007. The Company's products are sold in more than 100 countries through both Company-owned sales subsidiaries and branches as well as third-party dealers and distributors.
The Company's business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is lower during the summer months.
During the third quarter of 2008, the Company repurchased 9.1 million shares of common stock in the open market at a cost of $596.0 million pursuant to the previously announced repurchase program of up to $750.0 million of common stock as authorized by the Company's Board of Directors. In October 2008, the Company completed the share repurchase program with an additional repurchase of 2.5 million shares of common stock in the open market at a cost of $154.0 million. Shares repurchased under the share repurchase program will be available for general corporate purchases, including offsetting dilution associated with stock option and other equity-based employee benefit plans. In addition, during October 2008, the Company's Board of Directors authorized the Company to purchase up to an additional $250 million of the Company's common stock in the open market or in privately negotiated transactions.
In 2007 the Company sold its outpatient physical therapy business, Physiotherapy Associates, to Water Street Healthcare Partners for $150.0 million in cash less certain indebtedness. Physiotherapy Associates' operating results are reported as discontinued operations for the first nine months of 2007.
Outlook
The Company's outlook for 2008 continues to be optimistic regarding underlying growth rates in orthopaedic procedures and sales growth in the Company's broadly based range of products in orthopaedics and other medical specialties, despite the potential for an unfavorable impact on demand for the Company's products as a result of current worldwide economic conditions and continued pricing pressure in certain markets. The Company projects that diluted net earnings per share for 2008 will approximate $2.88, representing a 22% increase over diluted net earnings per share from continuing operations of $2.37 for the year ended December 31, 2007. Excluding the impact of the charge to reflect the intangible asset impairment in 2007, the Company projects that diluted net earnings per share for 2008 will increase 20% over adjusted diluted net earnings per share from continuing operations of $2.40 for the year ended December 31, 2007.
The financial forecast for 2008 includes a constant currency net sales increase in the range of 11% to 12% as a result of growth in shipments of Orthopaedic Implants and MedSurg Equipment. If foreign currency exchange rates hold near October 31, 2008 levels, the Company anticipates an unfavorable impact on net sales of approximately 4.5% to 5.5% in the fourth quarter of 2008 and a favorable impact on net sales of approximately 1.0% to 1.5% for the full year of 2008.
The reconciliation of reported diluted net earnings per share from continuing operations to adjusted diluted net earnings per share from continuing operations for the year ended December 31, 2007 is as follows:
Reported diluted net earnings per share from continuing operations $2.37 Intangible asset impairment $.03 Adjusted diluted net earnings per share from continuing operations $2.40 Weighted-average diluted shares outstanding (in millions) 417.2
The weighted-average diluted shares outstanding used in the calculation of this non-GAAP financial measure are the same as the weighted-average diluted shares outstanding used in the calculation of the reported per share amounts.
Results of Operations
The table below outlines the components of net earnings from continuing
operations from the condensed consolidated statements of earnings as a
percentage of net sales and the period-to-period percentage change in dollar
amounts:
Percentage of Net Sales
Nine Months Ended Percentage
September 30 Change
2008 2007 2008/2007
Net sales 100.0 100.0 15
Cost of sales 31.5 30.9 18
Gross profit 68.5 69.1 14
Research, development and engineering expenses 5.4 6.3 (2)
Selling, general and administrative expenses 39.6 39.9 14
Intangibles amortization 0.6 0.7 (3)
Intangible asset impairment -- 0.5 (100)
Operating income 23.0 21.7 22
Other income (expense) 1.0 1.0 23
Earnings from continuing operations before
income taxes 24.0 22.7 22
Income taxes 6.6 6.3 20
Net earnings from continuing operations 17.4 16.4 22
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Percentage of Net Sales
Three Months Ended Percentage
September 30 Change
2008 2007 2008/2007
Net sales 100.0 100.0 14
Cost of sales 32.8 31.4 19
Gross profit 67.2 68.6 12
Research, development and engineering expenses 5.6 6.7 (4)
Selling, general and administrative expenses 39.0 40.1 11
Intangibles amortization 0.6 0.6 7
Operating income 22.0 21.1 18
Other income (expense) 0.7 0.7 12
Earnings from continuing operations before
income taxes 22.7 21.9 18
Income taxes 6.2 6.1 15
Net earnings from continuing operations 16.6 15.7 20
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Percentage Change
Nine Months Ended 2008/2007
September 30 Constant
2008 2007 Reported Currency
Domestic/international sales:
Domestic $3,153.5 $2,795.7 13 13
International 1,846.5 1,546.7 19 9
Total net sales $5,000.0 $4,342.4 15 12
Product line sales:
Orthopaedic Implants $2,950.6 $2,611.2 13 9
MedSurg Equipment 2,049.4 1,731.2 18 16
Total net sales $5,000.0 $4,342.4 15 12
Percentage Change
Three Months Ended 2008/2007
September 30 Constant
2008 2007 Reported Currency
Domestic/international sales:
Domestic $1,067.8 $946.0 13 13
International 585.2 507.2 15 10
Total net sales $1,653.0 $1,453.2 14 12
Product line sales:
Orthopaedic Implants $963.3 $859.8 12 10
MedSurg Equipment 689.7 593.4 16 15
Total net sales $1,653.0 $1,453.2 14 12
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Nine Months Ended September 30 2008/2007
Percentage Change
Domestic International Total
Constant Constant
Reported Reported Currency Reported Currency
Orthopaedic Implants sales:
Hips 3 8 0 6 2
Knees 14 18 9 16 12
Trauma 20 23 11 22 15
Spine 23 18 7 21 18
Craniomaxillofacial 24 9 1 19 16
Total Orthopaedic Implants 11 15 5 13 9
MedSurg Equipment sales:
Surgical equipment and surgical
navigation systems 15 29 18 19 16
Endoscopic, communications and
digital
imaging systems 11 26 16 14 12
Patient handling and emergency
medical equipment 18 46 36 23 21
Total MedSurg Equipment 15 30 20 18 16
Three Months Ended September 30 2008/2007
Percentage Change
Domestic International Total
Constant Constant
Reported Reported Currency Reported Currency
Orthopaedic Implants sales:
Hips 4 7 3 6 4
Knees 18 12 8 16 14
Trauma 25 17 9 20 16
Spine 21 21 13 21 19
Craniomaxillofacial 21 (9) (12) 10 9
Total Orthopaedic Implants 13 10 5 12 10
MedSurg Equipment sales:
Surgical equipment and surgical
navigation systems 10 23 18 13 12
Endoscopic, communications and
digital
imaging systems 10 13 8 11 10
Patient handling and emergency
medical equipment 21 81 77 31 30
Total MedSurg Equipment 12 29 24 16 15
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The Company's domestic sales were $3,153.5 million for the first nine months of 2008 and $1,067.8 million for the third quarter of 2008, representing increases of 13% for both periods as a result of higher shipments of Orthopaedic Implants and MedSurg Equipment. International sales were $1,846.5 million for the first nine months of 2008 and $585.2 million for the third quarter of 2008, representing increases of 19% and 15%, respectively. The impact of foreign currency comparisons to the dollar value of international sales was favorable by $153.0 million in the first nine months of 2008 and by $26.0 million in the third quarter of 2008. On a constant currency basis, international sales increased 9% in the first nine months of 2008 and 10% in the third quarter of 2008 as a result of higher shipments of Orthopaedic Implants and MedSurg Equipment.
Worldwide sales of Orthopaedic Implants were $2,950.6 million for the first nine months of 2008 and $963.3 million for the third quarter of 2008, representing increases of 13% and 12%, respectively. On a constant currency basis, sales of Orthopaedic Implants increased 9% and 10% for the first nine months of 2008 and third quarter of 2008, respectively, as a result of higher shipments of reconstructive, trauma, spinal and craniomaxillofacial implant systems.
Hip Implant Systems: Sales of hip implant systems increased 6% in both the first nine months of 2008 and in the third quarter of 2008 (2% and 4%, respectively, on a constant currency basis). In the United States, sales growth was driven by sales of Cormet Hip Resurfacing and sales growth in Accolade cementless hip products, X3 Polyethylene and Restoration Modular Hip System revision hip products partially offset by declines in other hip systems sales including the Trident hip system. Sales growth in several hip systems, including ABG II, Exeter, Accolade and X3 Polyethylene in Europe, Omnifit in Pacific and Exeter in Japan, led to the Company's constant currency sales growth for the first nine months and third quarter of 2008.
Knee Implant Systems: Sales of knee implant systems increased 16% in both the first nine months of 2008 and the third quarter of 2008 (12% and 14%, respectively, on a constant currency basis) due to strong worldwide sales growth of the Triathlon knee system as well as strong sales growth of the Scorpio knee system in Japan.
Trauma Implant Systems: Sales of trauma implant systems increased 22% in the first nine months of 2008 and 20% in the third quarter of 2008 (15% and 16%, respectively, on a constant currency basis) as a result of strong worldwide sales growth in the Gamma 3 Hip Fracture System, the SPS Calcaneal foot plating system as well as strong sales growth of the VariAx distal radius products in the United States, Europe, Canada and the Pacific region.
Spinal Implant Systems: Sales of spinal implant systems increased 21% in both the first nine months of 2008 and third quarter of 2008 (18% and 19%, respectively, on a constant currency basis) primarily due to strong worldwide sales growth of thoracolumbar implant systems, interbody devices and cervical implants.
Craniomaxillofacial Implant Systems: Sales of craniomaxillofacial implant systems increased 19% in the first nine months of 2008 and 10% in the third quarter of 2008 (16% and 9%, respectively, on a constant currency basis) primarily due to strong domestic sales growth led by products for neurological indications and the HydroSet injectible bone substitute product.
Worldwide sales of MedSurg Equipment were $2,049.4 million for the first nine months of 2008 and $689.7 million for the third quarter of 2008, representing increases of 18% and 16%, respectively. On a constant currency basis, sales of MedSurg Equipment increased 16% and 15% for the first nine months of 2008 and third quarter of 2008, respectively, as a result of higher shipments of surgical equipment; surgical navigation systems; endoscopic, communications and digital imaging systems; as well as patient handling and emergency medical equipment.
Surgical Equipment and Surgical Navigation Systems: Sales of surgical equipment and surgical navigation systems increased 19% in the first nine months of 2008 and 13% in the third quarter of 2008 (16% and 12%, respectively, on a constant currency basis) due to strong worldwide sales growth in powered surgical and operating room equipment and interventional pain products.
Endoscopic, Communications and Digital Imaging Systems: Sales of endoscopic, communications and digital imaging systems increased 14% in the first nine months of 2008 and 11% in the third quarter of 2008 (12% and 10%, respectively, on a constant currency basis) as a result of strong worldwide sales growth of arthroscopy products as well as general surgery and medical video imaging equipment, led by the 1188 HD Camera and complementary products such as the X8000 Lightsource and the Vision Elect Monitor. Solid growth in communications products in the United States also drove sales growth, led by the Infinity II Communications Platform.
Patient Handling and Emergency Medical Equipment: Sales of patient handling and emergency medical equipment increased 23% in the first nine months of 2008 and 31% in the third quarter of 2008 (21% and 30%, respectively, on a constant currency basis) due to strong sales growth of stretchers and EMS products in the United States, Europe and Latin America and hospital bed products in the United States and Latin America.
Cost of sales in the first nine months of 2008 increased to 31.5% of sales from to 30.9% in the same period of 2007. In the third quarter of 2008, the cost of sales percentages increased to 32.8% from 31.4% in the third quarter of 2007. The increase in the cost of sales percentage is primarily due to increased quality initiative costs, higher commodity and freight costs and higher prices for foreign sourced products.
Research, development and engineering expenses represented 5.4% of sales in the first nine months of 2008 compared to 6.3% in the same period of 2007 and decreased 2% to $268.0 million. These costs decreased 4% in the third quarter and represented 5.6% of sales in the third quarter of 2008 compared to 6.7% in 2007. As anticipated, the spending level in the first nine months and third quarter of 2008 decreased as the Company implemented a more normalized level of spending for these costs compared to prior periods as well as the Company's focus of research and development resources on quality initiatives, which has slowed down some research and development projects and reduced outside contractor spending on certain projects. Given the timing of projects, the spending level will likely vary from quarter to quarter as a percent of sales on a prospective basis.
Selling, general and administrative expenses increased 14% in the first nine months of 2008 and represented 39.6% of sales in the first nine months of 2008 compared to 39.9% in the first nine months of 2007. In the third quarter, these expenses increased 11% and represented 39.0% of sales in the third quarter of 2008 compared to 40.1% in the third quarter of 2007. The decrease in selling, general and administrative expenses as a percent of sales in the third quarter of 2008 is primarily due to tight control on discretionary spending, partially offset by increases in costs associated with compliance activities.
In the second quarter of 2007, the Company recorded a $19.8 million charge ($12.7 million net of income taxes) within its Orthopaedic Implants segment to write off patents associated with intervertebral body fusion cage products. The impairment followed a U.S. Food and Drug Administration (FDA) decision to downgrade certain intervertebral body fusion products to class II devices, along with a weak market for sales of these specific products. As a result, the Company performed a discounted cash flow analysis over the remaining life of the patented technologies and determined the charge to recognize an intangible asset impairment was required.
Interest and marketable securities income, which is included in other income (expense), increased to $77.8 million in the first nine months of 2008 from $59.3 million in the first nine months of 2007 and increased to $23.5 million in the third quarter of 2008 from $23.2 million in the third quarter of 2007 as a result of increased cash and cash equivalents and marketable securities balances compared to the prior year period.
The Company's effective income tax rates on earnings from continuing operations for the first nine months and third quarter of 2008 were 27.5% and 27.2%, respectively, as compared to effective income tax rates for the year ended December 31, 2007 and the first nine months and third quarter of 2007 of 28.0%, 27.9% and 28.1%, respectively. The effective income tax rates for the year ended December 31, 2007 and the first nine months of 2007 reflect the impact of the intangible asset impairment charge of $12.7 million (net of $7.1 million income tax benefit).
Excluding the impact of the charge to reflect the intangible asset impairment in the second quarter of 2007, net earnings from continuing operations for the first nine months of 2008 of $870.1 million increased by 20% over adjusted net earnings from continuing operations of $723.3 million for the first nine months of 2007. Basic net earnings per share from continuing operations for the first nine months of 2008 of $2.12 increased by 20% over adjusted basic net earnings per share from continuing operations of $1.77 for the first nine months of 2007, and diluted net earnings per share from continuing operations for the first nine months of 2008 of $2.09 increased by 20% over adjusted diluted net earnings per share from continuing operations of $1.74 for the first nine months of 2007.
The reconciliations of these non-GAAP financial measures are as follows (in millions, except per share amounts):
Nine Months Ended
September 30
Percentage
2008 2007 Change
Reported net earnings from continuing operations $870.1 $710.6 22
Intangible asset impairment -- 12.7 (100)
Adjusted net earnings from continuing operations $870.1 $723.3 20
Basic net earnings per share:
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