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| SYK > SEC Filings for SYK > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Throughout this discussion, references are made to the following financial measures: "constant currency," "adjusted net earnings," "adjusted basic net earnings per share" 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 2009 and 2008, each of which affects the comparability of operating results and the trend of earnings. Additional details regarding the nature, determination and financial statement impact of these items 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 65% and 63% of total revenues in the first nine months of 2009 and 2008, respectively, and 65% in both the third 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.
The Company's business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is lower during the summer months.
In the third quarter of 2009, the Company recorded restructuring charges of $67.0 million related to decisions to terminate certain third-party agreements at the Company's EMEA Division, to simplify the organization structure at its Biotech, EMEA, Japan and Canada divisions and to discontinue selling certain products within its Orthopaedic Implants and MedSurg business segments. Additional details, including the financial statement impact resulting from these restructurings are included in Results of Operations.
In October 2009 a federal grand jury in the District of Massachusetts returned an indictment charging Stryker Biotech LLC and certain current and former employees of Stryker Biotech with wire fraud, conspiracy to defraud the U.S. Food and Drug Administration (FDA), distribution of a misbranded device and false statements to the FDA. The Company still hopes to be able to reach a fair and just resolution of this matter. Conviction of these charges could result in significant monetary fines, beyond those currently recorded by management, and Stryker Biotech's exclusion from participating in federal and state health care programs, which could have a material affect on Stryker Biotech's business, however, the ultimate resolution of these matters is not reasonably estimatable at this time. The Company understands that certain former Stryker Biotech employees have pled guilty to charges in connection with this matter. In 2009 the 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 reviewing its strategic alternatives for OP-1 which could be impacted by the ultimate resolution of the indictment.
Outlook
The Company projects that adjusted diluted net earnings per share for 2009 will be in the range of $2.90 to $3.00, an increase of 2% to 6% 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 1.0% to 2.0%. If currency exchange rates hold near September 30, 2009 levels, the Company anticipates a favorable impact on net sales of approximately 3.2% to 4.2% in the fourth quarter of 2009 and an unfavorable impact on net sales of approximately 1.6% to 2.0% for the full year of 2009.
The reconciliation of projected reported diluted net earnings per share to adjusted diluted net earnings per share before the restructuring charge for 2009 is as follows:
Range
Projected results:
Reported diluted net earnings per share $2.78 to $2.88
Restructuring charges $0.12 $0.12
Adjusted diluted net earnings per share $2.90 to $3.00
Weighted-average diluted shares outstanding (in millions) 399.3 399.3
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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
Weighted-average diluted shares outstanding (in millions) 413.6
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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
Nine Months Ended Percentage
September 30 Change
2009 2008 2009/2008
Net sales 100.0 100.0 (2 )
Cost of sales 32.5 31.5 1
Gross profit 67.5 68.5 (4 )
Research, development and engineering expenses 5.0 5.4 (8 )
Selling, general and administrative expenses 38.4 39.6 (5 )
Intangibles amortization 0.5 0.6 (12 )
Restructuring charges 1.4 - -
Operating income 22.1 23.0 (6 )
Other income (expense) 0.4 1.0 (60 )
Earnings before income taxes 22.5 24.0 (8 )
Income taxes 6.1 6.6 (9 )
Net earnings 16.4 17.4 (8 )
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Percentage of Net Sales
Three Months Ended Percentage
September 30 Change
2009 2008 2009/2008
Net sales 100.0 100.0 0
Cost of sales 32.6 32.8 (1 )
Gross profit 67.4 67.2 0
Research, development and engineering expenses 5.1 5.6 (10 )
Selling, general and administrative expenses 38.9 39.0 0
Intangibles amortization 0.5 0.6 (12 )
Restructuring charges 4.1 - -
Operating income 18.8 22.0 (14 )
Other income (expense) 0.2 0.7 (75 )
Earnings before income taxes 19.0 22.7 (16 )
Income taxes 5.2 6.2 (16 )
Net earnings 13.9 16.6 (16 )
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The tables below set forth domestic/international and product line sales information (in millions):
Percentage Change
2009/2008
Nine Months Ended
September 30 Constant
2009 2008 Reported Currency
Domestic/international sales:
Domestic $3,158.8 $3,153.5 0 0
International 1,730.1 1,846.5 (6 ) 4
Total net sales $4,888.9 $5,000.0 (2 ) 1
Product line sales:
Orthopaedic Implants $3,004.1 $2,950.6 2 6
MedSurg Equipment 1,884.8 2,049.4 (8 ) (5 )
Total net sales $4,888.9 $5,000.0 (2 ) 1
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Percentage Change
2009/2008
Three Months Ended
September 30 Constant
2009 2008 Reported Currency
Domestic/international sales:
Domestic $1,069.6 $1,067.8 0 0
International 583.7 585.2 0 3
Total net sales $1,653.3 $1,653.0 0 1
Product line sales:
Orthopaedic Implants $1,016.7 $963.3 6 7
MedSurg Equipment 636.6 689.7 (8 ) (7 )
Total net sales $1,653.3 $1,653.0 0 1
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The tables below set forth additional geographical sales information for significant products within the Company's Orthopaedic Implants and MedSurg Equipment segments on both a reported basis and a constant currency basis:
Nine Months Ended September 30 2009/2008
Percentage Change
Domestic International Total
Constant Constant
Reported Reported Currency Reported Currency
Orthopaedic Implants sales:
Hips 6 (6 ) 5 0 6
Knees 10 (10 ) 1 2 6
Trauma 9 (2 ) 4 2 6
Spine 13 4 12 10 13
Craniomaxillofacial 12 (9 ) 1 5 8
Total Orthopaedic Implants 8 (6 ) 4 2 6
MedSurg Equipment sales:
Surgical equipment and surgical
navigation systems 3 (8 ) 2 0 3
Endoscopic, communications and
digital imaging systems (8 ) 1 13 (6 ) (3 )
Patient handling and emergency
medical equipment (27 ) (24 ) (14 ) (26 ) (24 )
Total MedSurg Equipment (8 ) (8 ) 3 (8 ) (5 )
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Three Months Ended September 30 2009/2008
Percentage Change
Domestic International Total
Constant Constant
Reported Reported Currency Reported Currency
Orthopaedic Implants sales:
Hips 7 1 5 4 6
Knees 10 (3 ) 1 5 7
Trauma 6 5 6 5 6
Spine 13 14 16 14 14
Craniomaxillofacial 12 9 12 11 12
Total Orthopaedic Implants 8 2 5 6 7
MedSurg Equipment sales:
Surgical equipment and surgical
navigation systems 3 1 5 2 3
Endoscopic, communications and
digital imaging systems (10 ) 11 16 (5 ) (4 )
Patient handling and emergency
medical equipment (23 ) (45 ) (43 ) (28 ) (27 )
Total MedSurg Equipment (8 ) (6 ) (2 ) (8 ) (7 )
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The Company's net sales decreased 2% in the first nine months of 2009 to $4,888.9 million from $5,000.0 million in 2008. For the third quarter of 2009 net sales were $1,653.3 million, representing an increase of less than 1% from net sales of $1,653.0 million in the third quarter of 2008. Net sales in the first nine months of 2009 grew by 2% as a result of increased unit volume and changes in product mix and decreased by 4% due to the unfavorable impact from changes in foreign currency exchange rates had on net sales. Net sales in the third quarter grew by 2% as a result of increased unit volume and changes in product mix and decreased by 1% due to the unfavorable impact from 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 $3,158.8 million for the first nine months of 2009, representing an increase of less than 1%, as a result of an 8% increase in shipments of Orthopaedic Implants partially offset by an 8% decrease in shipments of MedSurg Equipment. Domestic sales were $1,069.6 million for the third quarter of 2009, representing an increase of less than 1%, as a result of an 8% increase in shipments of Orthopaedic Implants was offset by an 8% decrease in shipments of MedSurg Equipment. International sales were $1,730.1 million for the first nine months of 2009, representing a decrease of 6%. The impact of foreign currency comparisons to the dollar value of international sales was unfavorable by $183.5 million in the first nine months of 2009. On a constant currency basis, international sales increased 4% in the first nine months of 2009 as a result of a 4% increase in shipments of Orthopaedic Implants and a 3% increase in shipments of MedSurg Equipment. International sales were $583.7 million for the third quarter of 2009, representing a decrease of less than 1%. The impact of foreign currency comparisons to the dollar value of international sales was unfavorable by $19.7 million in the third quarter of 2009. On a constant currency basis, international sales increased 3% in the third quarter of 2009 as a result of a 5% increase in shipments of Orthopaedic Implants partially offset by a 2% decrease in shipments of MedSurg Equipment.
Worldwide sales of Orthopaedic Implants were $3,004.1 million for the first nine months of 2009 and $1,016.7 million for the third quarter of 2009. On a constant currency basis, sales of Orthopaedic Implants increased 6% and 7% for the first nine months and third 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 were flat in the first nine months of 2009 and increased 4% for the third quarter of 2009 (increased 6% in both periods on a constant currency basis). In the United States, sales growth was driven by Trident hip products, X3 Polyethylene hip products, Accolade cementless hip products and Restoration Modular Hip System revision hip products. Sales growth in several hip systems, including X3 Polyethylene and Accolade cementless hip products in Europe, Canada, Latin America and the Pacific region and Trident in Japan, also led to the Company's constant currency sales growth for the first nine months and third quarter of 2009.
Knee Implant Systems: Sales of knee implant systems increased 2% in the first nine months of 2009 and 5% in the third quarter of 2009 (6% and 7%, respectively, on a constant currency basis) due to strong sales growth in the Triathlon knee system in the United States, Europe, Canada, Japan and the Pacific region. Sales growth in Global Modular Replacement System (GMRS) knee products in the United States, Europe 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.
Spinal Implant Systems: Sales of spinal implant systems increased 10% in the first nine months of 2009 and 14% in the third quarter of 2009 (13% and 14%, respectively, on a constant currency basis) primarily due to strong sales growth of thoracolumbar implant systems in the United States, Europe, Canada, Latin America and Pacific region as well as solid sales growth in interbody devices products in the United States, Europe, Japan and the Pacific region.
Craniomaxillofacial Implant Systems: Sales of craniomaxillofacial (CMF) implant systems increased 5% in the first nine months of 2009 and 11% in the third quarter of 2009 (8% and 12%, respectively, on a constant currency basis) primarily due to strong sales growth of products for neurological indications in the United States, Japan, Canada and the Pacific region. Sales growth of the HydroSet injectable bone substitute products in the United States, Europe and the Pacific region also contributed to the Company's constant currency sales growth.
Worldwide sales of MedSurg Equipment were $1,884.8 million for the first nine months of 2009 and $636.6 million for the third quarter of 2009. On a constant currency basis, sales of MedSurg Equipment decreased 5% and 7% for the first nine months of 2009 and third quarter of 2009, respectively as higher shipments of surgical equipment and surgical navigation systems were offset by lower shipments of endoscopic, communication 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 less than 1% in the first nine months of 2009 and increased 2% in the third quarter (increased 3% in both periods on a constant currency basis). Sales growth of interventional pain products in the United States, Japan and the Pacific region; powered surgical products in Europe, Japan, and Latin America region and operating room equipment products in the United States, Europe, Japan, Canada and the Latin America region led to the Company's constant currency sales growth in the first nine months of 2009. Sales growth of interventional pain products in the United States, Europe, Japan and the Pacific region; powered surgical products in the United States and Latin America region and operating room equipment products in the United States, Europe, Japan, Canada; and the Latin America and Pacific regions led to the Company's constant currency sales growth in the third quarter of 2009.
Endoscopic, Communications and Digital Imaging Systems: Sales of endoscopic, communications and digital imaging systems decreased 6% in the first nine months of 2009 and 5% in the third quarter of 2009 (decreased 3% and 4%, 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 worldwide sales growth in general surgery products as well as sales growth in communications products in the Canada, Japan and the Latin America and Pacific regions and medical video imaging equipment in Europe, Latin America and the Pacific regions.
Patient Handling and Emergency Medical Equipment: Sales of patient handling and emergency medical equipment decreased 26% in the first nine months of 2009 and 28% in the third quarter (decreased 24% and 27%, 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, Canada and the Pacific and Latin America regions, partially offset by sales growth in hospital bed products in Europe.
Cost of sales in the first nine months of 2009 represented 32.5% of sales compared to 31.5% in the same period of 2008. In the third quarter of 2009, the cost of sales percentage decreased to 32.6% from 32.8% in the third quarter of 2008. The increase in the cost of sales percentage in the first nine months of 2009 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.
Selling, general and administrative expenses decreased 5% in the first nine months of 2009 and represented 38.4% of sales compared to 39.6% in the same period of 2008. In the third quarter of 2009, these expenses decreased by less than 1% and represented 38.9% of sales compared to 39.0% in the third quarter of 2008. The decrease in selling, general and administrative expenses as a percent of sales in the first nine months 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.
In the third quarter of 2009, the Company recorded $67.0 million ($48.4 million net of income taxes) in restructuring charges related to decisions to terminate certain third-party agent agreements at the Company's EMEA Division, to simplify the organization structure at its Biotech, EMEA, Japan and Canada divisions and to discontinue selling certain products within its Orthopaedic Implants and MedSurg Equipment segments.
Interest and marketable securities income, which is included in other income (expense), decreased to $38.8 million in the first nine months of 2009 from $77.8 million in 2008 and decreased to $8.7 million in the third quarter of 2009 from $23.5 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 nine months and third quarter of 2009 was 27.2%, as compared to effective income tax rates for the year ended December 31, 2008 and the first nine months and third quarter of 2008 of 27.4%, 27.5% and 27.2%, respectively. The effective income tax rates for the first nine months and third quarter of 2009 reflect the impact of the restructuring charges of $48.4 million (net of $18.6 million income tax benefits). In addition to this factor the Company's reported 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.
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