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| SYK > SEC Filings for SYK > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Throughout this discussion, references are made to the following financial measures: "constant currency" and "adjusted diluted net earnings per share." 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 earnings performance on a consistent and comparable basis, the Company excludes the restructuring charges recorded in 2008 which affects the comparability of operating results and the trend of earnings. 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 65% and 62% of total revenues in the first half of 2009 and 2008, respectively, and 64% and 61% in the second quarter of 2009 and 2008, respectively. 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 35% and 38% of total revenues in the first half of 2009 and 2008, respectively, and 36% and 39% in the second quarter of 2009 and 2008, respectively. 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.
In 2009 the U.S. Food and Drug Administration (FDA) Orthopaedic and Rehabilitation Devices Advisory Panel voted not to recommend that the Company receive marketing approval for its OP-1 Putty. The Company is in discussions with the FDA to determine potential paths forward for approval and is reviewing its strategic plan for OP-1.
Outlook
The Company projects that diluted net earnings per share for 2009 will be in the range of $2.90 to $3.10, an increase of 2% to 10% over adjusted diluted net earnings per share of $2.83 in 2008. The financial forecast for 2009 anticipates a constant currency net sales increase in the range of 1% to 3% reflecting the continued weaker demand for certain MedSurg Equipment products as well as consideration of slower elective procedural growth for certain Orthopaedic Implants products. If currency exchange rates hold near June 30, 2009 levels, the Company anticipates an unfavorable impact on net sales of approximately 1.5% to 2.5% in the third quarter of 2009 and an unfavorable impact on net sales of approximately 2% to 3% for the full year of 2009.
The reconciliation of reported diluted net earnings per share to adjusted diluted net earnings per share for the year ended December 31, 2008 is as follows:
Reported diluted net earnings per share $2.78 Restructuring charges $0.05 Adjusted diluted net earnings per share $2.83 |
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 tables below outline the components of net earnings 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
Six Months Ended Percentage
June 30 Change
2009 2008 2009/2008
Net sales 100.0 100.0 (3)
Cost of sales 32.5 30.9 2
Gross profit 67.5 69.1 (6)
Research, development and engineering expenses 5.0 5.2 (7)
Selling, general and administrative expenses 38.1 39.8 (7)
Intangibles amortization 0.6 0.6 (12)
Operating income 23.8 23.4 (2)
Other income (expense) 0.5 1.2 (56)
Earnings before income taxes 24.3 24.6 (5)
Income taxes 6.6 6.8 (6)
Net earnings 17.7 17.8 (4)
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Percentage of Net Sales
Three Months Ended Percentage
June 30 Change
2009 2008 2009/2008
Net sales 100.0 100.0 (5)
Cost of sales 32.8 31.1 1
Gross profit 67.2 68.9 (7)
Research, development and engineering expenses 5.1 5.3 (9)
Selling, general and administrative expenses 37.8 39.6 (9)
Intangibles amortization 0.5 0.6 (15)
Operating income 23.9 23.4 (3)
Other income (expense) 0.6 1.1 (47)
Earnings before income taxes 24.5 24.5 (5)
Income taxes 6.7 6.7 (5)
Net earnings 17.8 17.9 (5)
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The tables below set forth domestic/international and product line sales information (in millions):
Percentage Change
Six Months Ended 2009/2008
June 30 Constant
Domestic/international sales: 2009 2008 Reported Currency
Domestic $2,089.2 $2,085.7 0 0
International 1,146.4 1,261.3 (9) 4
Total net sales $3,235.6 $3,347.0 (3) 2
Product line sales:
Orthopaedic Implants $1,987.4 $1,987.3 0 6
MedSurg Equipment 1,248.2 1,359.7 (8) (4)
Total net sales $3,235.6 $3,347.0 (3) 2
Percentage Change
Three Months Ended 2009/2008
June 30 Constant
Domestic/international sales: 2009 2008 Reported Currency
Domestic $1,047.2 $1,052.8 (1) (1)
International 587.1 659.8 (11) 1
Total net sales $1,634.3 $1,712.6 (5) 0
Product line sales:
Orthopaedic Implants $1,014.2 $1,016.2 0 5
MedSurg Equipment 620.1 696.4 (11) (8)
Total net sales $1,634.3 $1,712.6 (5) 0
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The tables below set forth additional geographical sales growth information for significant products within the Company's Orthopaedic Implants and MedSurg Equipment segments on both a reported basis and a constant currency basis:
Six Months Ended June 30 2009/2008
Percentage Change
Domestic International Total
Constant Constant
Reported Reported Currency Reported Currency
Orthopaedic Implants sales:
Hips 6 (9) 5 (2) 5
Knees 10 (13) 0 0 6
Trauma 11 (6) 4 1 6
Spine 13 (1) 9 9 12
Craniomaxillofacial 12 (16) (4) 2 6
Total Orthopaedic Implants 8 (9) 3 0 6
MedSurg Equipment sales:
Surgical equipment and surgical navigation
systems 3 (12) 1 (2) 3
Endoscopic, communications and digital
imaging systems (7) (3) 11 (6) (2)
Patient handling and emergency medical
equipment (29) (9) 6 (25) (22)
Total MedSurg Equipment (8) (9) 5 (8) (4)
Three Months Ended June 30 2009/2008
Percentage Change
Domestic International Total
Constant Constant
Reported Reported Currency Reported Currency
Orthopaedic Implants sales:
Hips 9 (12) 1 (2) 5
Knees 11 (15) (3) 0 5
Trauma 11 (8) 1 (1) 5
Spine 14 (1) 10 9 13
Craniomaxillofacial 12 (18) (8) 1 5
Total Orthopaedic Implants 9 (11) 0 0 5
MedSurg Equipment sales:
Surgical equipment and surgical navigation
systems (4) (12) (1) (7) (3)
Endoscopic, communications and digital
imaging systems (6) (6) 7 (6) (3)
Patient handling and emergency medical
equipment (30) (17) (6) (28) (26)
Total MedSurg Equipment (11) (11) 1 (11) (8)
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The Company's net sales decreased 3% in the first half of 2009 to $3,235.6 million from $3,347.0 million in 2008. For the second quarter of 2009 net sales were $1,634.3 million, representing a 5% decrease from net sales of $1,712.6 million in the second quarter of 2008. Net sales in the first half grew by 2% as a result of increased unit volume and changes in product mix and decreased by 5% due to the unfavorable impact changes in foreign currency exchange rates had on net sales. Net sales in the second quarter decreased by 5% due to the unfavorable impact changes in foreign currency exchange rates. The continued weaker demand for certain MedSurg Equipment products as a result of the ongoing economic slowdown continues to unfavorably impact net sales.
The Company's domestic sales were $2,089.2 million for the first half of 2009, representing an increase of less than 1%, as result of a 8% increase in shipments of Orthopaedic Implants partially offset by an 8% decrease in shipments of MedSurg Equipment. Domestic sales were $1,047.2 million for the second quarter of 2009, representing a decrease of 1%, as a 9% increase in shipments of Orthopaedic Implants was offset by an 11% decrease in shipments of MedSurg
Equipment. International sales were $1,146.4 million for the first half of 2009,
representing a decrease of 9%. The impact of foreign currency comparisons to the
dollar value of international sales was unfavorable by $163.8 million in the
first half of 2009. On a constant currency basis, international sales increased
4% in the first half of 2009 as a result of a 3% increase in shipments of
Orthopaedic Implants and a 5% increase in shipments of MedSurg Equipment.
International sales were $587.1 million for the second quarter of 2009,
representing a decrease of 11%. The impact of foreign currency comparisons to
the dollar value of international sales was unfavorable by $76.7 million in the
second quarter of 2009. On a constant currency basis, international sales
increased 1% in the second quarter of 2009 as a result of a less than 1%
increase in shipments of Orthopaedic Implants and a 1% increase in shipments of
MedSurg Equipment.
Worldwide sales of Orthopaedic Implants were $1,987.4 million for the first half of 2009 and $1,014.2 million for the second quarter of 2009. On a constant currency basis, sales of Orthopaedic Implants increased 6% and 5% for the first half and second quarter of 2009, respectively, as a result of higher shipments of reconstructive, trauma, spinal and craniomaxillofacial implant systems.
Hip Implant Systems: Sales of hip implant systems decreased 2% in both the first half and second quarter of 2009 (increased 5% in both periods on a constant currency basis). In the United States, sales growth was driven by hip resurfacing products, Accolade cementless hip products, X3 Polyethylene, Trident hip products and Restoration Modular Hip System revision hip products partially offset by declines in other hip systems. Sales growth in several hip systems, including X3 Polyethylene and Accolade cementless hip products in Europe, Canada and Latin America, X3 Polyethylene in the Pacific region and Trident in Japan, led to the Company's constant currency sales growth for the first half and second quarter of 2009.
Knee Implant Systems: Sales of knee implant systems were flat in the first half of 2009 and in the second quarter (increased 6% and 5%, respectively, on a constant currency basis) due to strong sales growth in the Triathlon knee system in the United States, Europe, Canada, Japan, Canada and the Pacific region. Sales growth in Global Modular Replacement System (GMRS) knee products in the United States and Canada as well as sales growth of Scorpio knee systems in the Latin America and the Pacific regions led to the Company's constant currency sales growth.
Trauma Implant Systems: Sales of trauma implant systems increased 1% in the first half of 2009 and decreased 1% in the second quarter (increased 6% and 5%, respectively, on a constant currency basis) as a result of sales growth in the Gamma 3 Hip Fracture System, VariAx Distal Radius System and the SPS Calcaneal Foot Plating System in the United States, Europe and Canada as well as sales growth in the Company's T2 Nailing System in the United States and Europe.
Spinal Implant Systems: Sales of spinal implant systems increased 9% in both the first half and second quarter of 2009 (12% and 13%, respectively, on a constant currency basis) primarily due to strong sales growth of thoracolumbar implant systems in the United States, Canada and Japan as well as solid sales growth in interbody devices products in the United States, Japan and the Pacific region. Sales growth of bone substitutes products in the United States, Japan, Canada and the Latin America region also contributed to the Company's constant currency sales growth.
Craniomaxillofacial Implant Systems: Sales of craniomaxillofacial implant systems increased 2% in the first half of 2009 and 1% in the second quarter (6% and 5%, respectively, on a constant currency basis) primarily due to strong sales growth of products for neurological indications in the United States, Japan and the Latin America region.
Worldwide sales of MedSurg Equipment were $1,248.2 million for the first half of 2009, representing a decrease of 8% as reported and 4% on a constant currency basis, as higher shipments of surgical equipment and surgical navigation systems were offset by lower sales of endoscopic, communications and digital imaging systems and patient handling and emergency medical equipment. Worldwide sales of MedSurg Equipment were $620.1 million for the second quarter of 2009, representing a decrease of 11% as reported and 8% on a constant currency basis based on lower shipments of surgical equipment and surgical navigation systems; endoscopic, communications and digital imaging systems; and patient handling and emergency medical equipment.
Surgical Equipment and Surgical Navigation Systems: Sales of surgical equipment and surgical navigation systems decreased 2% in the first half of 2009 and 7% in the second quarter (increased 3% and decreased 3%, respectively, on a constant currency basis). Sales growth of interventional pain products in the United States, powered
surgical products in Japan, Canada and the Pacific region and operating room equipment products in Europe and the Latin America region led to the Company's constant currency sales growth in the first half of 2009. Lower sales of operating room equipment products in Canada and the Latin America region; powered surgical products in Europe, Canada, the Pacific and Latin American regions as well as lower sales of interventional pain products in Europe, Canada and the Latin America region led to the Company's constant currency sales decrease in the second quarter of 2009.
Endoscopic, Communications and Digital Imaging Systems: Sales of endoscopic, communications and digital imaging systems decreased 6% in both the first half and second quarter of 2009 (2% and 3% respectively, on a constant currency basis) due to lower sales of medical video imaging equipment products and image portal products in the United States partially offset by solid sales growth in general surgery products in the United States, Japan and the Latin America and Pacific regions as well as sales growth in communications products in the Europe, Japan and the Latin America and Pacific regions and medical video imaging equipment in Europe.
Patient Handling and Emergency Medical Equipment: Sales of patient handling and emergency medical equipment decreased 25% in the first half of 2009 and 28% in the second quarter (22% and 26%, respectively, on a constant currency basis) due to lower sales of hospital bed products in the United States, Canada, Japan and the Pacific and Latin America regions and stretchers in the United States, Europe and Canada, partially offset by sales growth in hospital bed products in Europe and stretchers in Japan and the Latin America region.
Cost of sales in the first half of 2009 represented 32.5% of sales compared to 30.9% in the same period of 2008. In the second quarter of 2009, the cost of sales percentage increased to 32.8% from 31.1% in the second quarter of 2008. The increase in the cost of sales percentage is primarily due to increased compliance initiative costs, higher excess and obsolete inventory costs associated with the Orthopaedic Implants businesses as well as higher unabsorbed costs due to lower production levels.
Research, development and engineering expenses represented 5.0% of sales in the first half of 2009 compared to 5.2% in the same period of 2008 and decreased 7% to $163.0 million. These costs decreased 9% in the second quarter and represented 5.1% of sales in 2009 compared to 5.3% in 2008. The spending level in the first half and second quarter of 2009 decreased due to tight control on discretionary spending as well as the Company's continued focus of research and development resources on compliance initiatives. The timing of projects also causes the spending level to vary from quarter to quarter as a percent of sales.
Selling, general and administrative expenses decreased 7% in the first half of 2009 and represented 38.1% of sales compared to 39.8% in the same period of 2008. In the second quarter, these expenses decreased 9% and represented 37.8% of sales in 2009 compared to 39.6% in 2008. The decrease in selling, general and administrative expenses as a percent of sales in the first half and second quarter of 2009 is primarily due to tight control on discretionary spending that more than offset increased legal settlement costs, net of insurance recoveries, recorded for certain product liability claims.
Interest and marketable securities income, which is included in other income (expense), decreased to $30.1 million in the first half of 2009 from $54.3 million in 2008 and decreased to $14.5 million in the second quarter of 2009 from $26.4 million in 2008 as a result of lower average yields on the Company's investments.
The Company's effective income tax rate on earnings for both the first half and second quarter of 2009 was 27.2%, as compared to effective income tax rates for the year ended December 31, 2008 and the first half and second quarter of 2008 of 27.4%, 27.6% and 27.2%, respectively. The effective income tax rates are lower than the U.S. statutory income tax rate primarily as a result of manufacturing in lower income tax international jurisdictions.
Net earnings for the first half of 2009 were $572.4 million, a decrease of 4% compared to net earnings of $596.3 million for the first half of 2008. Basic net earnings per share decreased 1% in the first half of 2009 to $1.44 from $1.45 in 2008, and diluted net earnings per share increased 1% in the first half of 2009 to $1.44 from $1.43 in 2008. Net earnings for the second quarter of 2009 were $291.3 million, representing a 5% decrease over net earnings of $305.8 million for the second quarter of 2008. Basic net earnings per share decreased 1% in the second quarter of 2009 to $.73 from $.74 in 2008, and diluted net earnings per share was flat in the second quarter of 2009 at $.73 compared to 2008.
Liquidity and Capital Resources
The Company's working capital at June 30, 2009, increased $648.0 million to $4,165.2 million from working capital of $3,517.2 million at December 31, 2008. The increase in working capital resulted from cash earnings partially offset by dividend payments as well as payments of certain current liabilities and accrued expenses. Accounts receivable days sales outstanding increased by one day to 60 days at June 30, 2009 from 59 days at December 31, 2008 and days sales in inventory increased 12 days to 167 days at June 30, 2009 from 155 days at December 31, 2008. Days sales outstanding increased one day and days sales in inventory increased five days compared to the June 30, 2008 levels. The days sales outstanding at June 30, 2009 is consistent with historical levels. Days sales in inventory at June 30, 2009 is higher than the prior year periods primarily due to higher levels of inventory resulting from the slowdown in sales levels and in support of the Company's ongoing compliance initiatives.
The Company generated cash of $454.8 million from operations in the first six months of 2009 compared to $431.1 million in 2008. In the second quarter, the Company generated cash from operations of $182.4 million compared to $240.3 million in 2008. The increase in cash provided by operating activities in the first six months of 2009 compared to 2008 is primarily due to the reduction in accounts receivable and slower growth in certain current assets, including inventories. The decrease in cash provided by operating activities in the second quarter of 2009 compared to 2008 is primarily due to decreases in certain current liabilities, including accounts payable and income taxes.
In the first half of 2009, the Company used cash of $158.6 million for the payment of dividends, $61.0 million for capital expenditures and $11.7 million for acquisitions. The Company also purchases and sells marketable securities, which are classified as available-for-sale investments in accordance with the provisions of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.
The Company had $666.3 million in cash and cash equivalents and $1,761.6 million in current marketable securities at June 30, 2009. The Company had outstanding borrowings totaling $19.4 million at June 30, 2009. The Company believes its cash on hand and marketable securities, as well as anticipated future cash flows from operations, will be sufficient to fund future operating capital requirements; future manufacturing facility construction and other capital expenditures; future business and product line acquisitions to supplement its current product offerings and loaner instrumentation for surgical implants in support of new product launches. Should additional funds be required, at June 30, 2009 the Company had $1,058.5 million of additional borrowing capacity available under all of its existing credit facilities, including the Company's $1,000.0 million 5-year nonamortizing, revolving Unsecured Credit Facility that expires in November 2010.
Other Matters
The Company has certain investments in net assets in international locations that are not hedged. These investments are subject to translation gains and losses due to changes in foreign currencies. For the first half of 2009, the strengthening of foreign currencies relative to the U.S. dollar . . .
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