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SYK > SEC Filings for SYK > Form 10-Q on 23-Oct-2013All Recent SEC Filings

Show all filings for STRYKER CORP

Form 10-Q for STRYKER CORP


23-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures, including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; cost of sales excluding specified items; adjusted selling, general and administrative expenses; adjusted operating income; adjusted effective income tax rate; adjusted net earnings; and adjusted diluted net earnings per share (EPS). We believe that these non-GAAP measures provide meaningful information to assist shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, cost of sales, selling, general and administrative expenses, operating income, effective income tax rate, net earnings and diluted net earnings per share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Results of Operations below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
ABOUT STRYKER
Stryker is one of the world's leading medical technology companies, with 2012 revenues of $8,657 and net earnings of $1,298. We are dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. We offer a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products, to help people lead more active and more satisfying lives. In the United States, most of our products are marketed directly to doctors, hospitals and other healthcare facilities. For the most part, we maintain separate and dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Internationally, our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors. Our business is generally not seasonal in nature; however, the number of reconstructive surgeries is generally lower during the summer months. Revenues in the United States accounted for 66.4% and 65.3% of total revenues in the first nine months of 2013 and 2012, respectively, and international revenues accounted for 33.6% and 34.7% of total revenues in the first nine months of 2013 and 2012, respectively.

RESULTS OF OPERATIONS
Consolidated results of operations for the three- and nine-month periods ended
September 30, 2013 and 2012 were:
                                                   Three Months                     Nine Months
                                             2013      2012    % Change      2013      2012    % Change
Net Sales                                  $ 2,151   $ 2,052       4.8     $ 6,553   $ 6,319       3.7
Gross profit                                   1,469     1,397     5.2         4,428     4,283     3.4
Research, development and engineering
expenses                                       136         114    19.3           397       342    16.1
Selling, general and administrative
expenses                                       1,136       791    43.6         3,067     2,433    26.1
Intangible asset amortization                     34        30    13.3           102        92    10.9
Restructuring charges                             13      12       8.3            36      45     (20.0 )
Other income (expense)                          (13)       (6)   116.7          (45)      (24)    87.5
Income taxes                                      34        91   (62.6 )         161       319   (49.5 )
Net earnings                               $   103   $   353     (70.8 )   $   620   $ 1,028     (39.7 )
Diluted net earnings per share             $  0.27   $  0.92     (70.7 )   $  1.62   $  2.68     (39.6 )

Dollar amounts in millions except per share
12 amounts or as otherwise specified


Geographic and segment net sales for the three- and nine-month periods ended September 30, 2013 and 2012 were:

                                                       Percentage Change                             Percentage Change
                                                           2013/2012                                     2013/2012
                                 Three Months                    Constant        Nine Months                   Constant
                               2013         2012      Reported   Currency     2013        2012      Reported   Currency
Geographic sales:
United States               $  1,449     $  1,360          6.5        6.5   $ 4,348     $ 4,128          5.3        5.3
International                    702          692          1.5        7.5     2,205       2,191          0.7        5.2
Total net sales             $  2,151     $  2,052          4.8        6.8   $ 6,553     $ 6,319          3.7        5.3
Segment sales:
Reconstructive              $    949     $    891          6.5        9.2   $ 2,897     $ 2,776          4.3        6.5
MedSurg                          792          781          1.5        2.6     2,435       2,388          2.0        2.8
Neurotechnology and Spine        410          380          7.7       10.0     1,221       1,155          5.7        7.7
Total net sales             $  2,151     $  2,052          4.8        6.8   $ 6,553     $ 6,319          3.7        5.3

Net sales increased 4.8% for the three-month period ended September 30, 2013 from 2012. Net sales grew 7.1% as a result of increased unit volume and changes in product mix and 0.7% due to acquisitions. Net sales were unfavorably impacted by 0.9% due to changes in price and 2.0% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales increased by 6.8%. The increase was primarily due to higher shipments of trauma and extremities products, neurotechnology products, hips and endoscopy products. Net sales increased 3.7% for the nine-month period ended September 30, 2013 from 2012. Net sales grew 6.2% as a result of increased unit volume and changes in product mix and 0.5% due to acquisitions. Net sales were unfavorably impacted by 1.4% due to changes in price and 1.6% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales increased by 5.3%. The increase was primarily due to higher shipments of trauma and extremities products, neurotechnology products, hips and endoscopy products; these gains were partially offset by the unfavorable effects of pricing and foreign currency exchange rates in the Japanese markets and pricing impacts for Spine products.
Supplemental sales growth information for the three- and nine-month periods ended September 30, 2013 and 2012:

                                                        Three Months                                                                           Nine Months
                                                                  % Change                                                                                % Change
                                                                     U.S.           International                                                           U.S.            International
                                                      Constant                               Constant                                        Constant                                Constant
                       2013    2012    As Reported    Currency    As Reported  As Reported   Currency       2013      2012    As Reported    Currency    As Reported  As Reported    Currency
Reconstructive
Knees                 $ 315   $ 315           -         2.1            3.8           (7.7 )    (1.3 )     $ 1,000   $  996         0.4         1.8            1.7          (2.1 )      2.2
Hips                    304     288         5.5         9.3            9.3            1.0       9.4           931      908         2.5         5.3            6.3          (1.7 )      4.1
Trauma and
Extremities             277     235        18.1        20.4           22.7           13.1      17.8           809      711        13.9        16.3           22.6           5.4       10.1
TOTAL RECONSTRUCTIVE    949     891         6.5         9.2            9.9            1.6       8.2         2,897    2,776         4.3         6.5            7.5             -        5.0
MedSurg
Instruments             292     303        (3.5 )      (1.9 )         (5.5 )          2.0       8.3           919      931        (1.2 )      (0.1 )         (1.9 )         0.4        4.8
Endoscopy               279     259         7.3         8.4           10.5           (0.6 )     3.2           831      802         3.6         4.4            4.7           1.0        3.8
Medical                 168     169        (0.1 )       0.2            3.9          (15.0 )   (13.7 )         522      506         3.3         3.5            4.8          (2.3 )     (1.4 )
TOTAL MEDSURG           792     781         1.5         2.6            2.8           (2.3 )     2.0         2,435    2,388         2.0         2.8            2.6           0.1        3.2
Neurotechnology and
Spine
Neurotechnology         227     205        10.9        13.9           14.0            6.1      13.7           675      618         9.3        12.0           12.6           4.5       11.0
Spine                   183     175         4.1         5.5            2.6            7.9      12.9           546      537         1.6         2.9            1.8           1.2        5.6
TOTAL NEUROTECHNOLOGY
AND SPINE               410     380         7.7        10.0            8.2            6.8      13.4         1,221    1,155         5.7         7.7            7.0           3.3        9.0

Reconstructive net sales in the three-month period increased 6.5%, due to a 9.6% increase in unit volume and changes in product mix and 1.2% due to acquisitions. Net sales were unfavorably impacted by 1.6% due to changes in price and 2.7% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales increased 9.2%, primarily due to increases in trauma and extremities products and hips worldwide. For the nine-month period, net sales increased 4.3%, due to a 8.2% increase in unit volume and changes in product mix and 0.8% due to acquisitions. Net sales were unfavorably impacted by 2.6% due to changes in price and 2.1% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales in the nine-month period increased 6.5%, primarily due to sales growth in trauma and extremities products and hips.

Dollar amounts in millions except per share
13 amounts or as otherwise specified


MedSurg net sales in the three-month period increased 1.5% due to a 2.1% increase in unit volume and changes in product mix and a 0.5% increase due to changes in price. Net sales were unfavorably impacted by 1.1% due to the impact of foreign currency exchange rates. In constant currency, net sales in the three-month period increased 2.6%, primarily due to sales growth in endoscopy products. Net sales in the nine-month period increased 2.0% due to a 2.5% increase in unit volume and changes in product mix and a favorable impact of 0.3% due to changes in price. Net sales were unfavorably impacted by 0.8% due to the impact of foreign currency exchange rates. In constant currency, net sales in the nine-month period increased 2.8%, led by higher endoscopy product shipments.
Neurotechnology and Spine net sales in the three-month period increased 7.7%, primarily due to an 11.3% increase in unit volume and changes in product mix and 0.9% due to acquisitions. Net sales were unfavorably impacted by 2.1% due to changes in price and 2.3% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales in the three-month period increased 10.0%, led by higher shipments of neurotechnology products. Net sales in the nine-month period increased 5.7%, primarily due to a 9.2% increase in unit volume and changes in product mix and 0.6% due to acquisitions. Net sales were unfavorably impacted by 2.1% due to changes in price and 2.0% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales in the nine-month period increased 7.7%, primarily due to higher shipments of neurotechnology products. Cost of Sales
Cost of sales increased 4.1% for the three-month period to 31.7% of sales, compared to 31.9% of sales for three-month period in 2012. The increase in cost of sales of 2.8% in the three-month period due to the impact of the Medical Device Excise Tax (MDET) was offset by favorable manufacturing productivity and increased absorption associated with higher inventory levels. Product mix was also favorable, as sales of Reconstructive products were very strong while sales of MedSurg products experienced more modest growth. Cost of sales also includes $8 for the three-month period of 2013 related to inventory that was stepped up to fair value following acquisitions. Restructuring and restructuring-related costs of $2 were recorded in each of the three-month periods of 2013 and 2012, respectively. Excluding the impact of the acquisition and restructuring costs described above, cost of sales in the three-month period was 31.2% of sales compared to 31.8% in 2012.
Cost of sales increased 4.4% for the nine-month period to 32.4% of sales compared to 32.2% of sales in 2012. Cost of sales increased 2.9% in the nine-month period due to the impact of MDET. Cost of sales also includes $16 and $15 in 2013 and 2012, respectively, related to inventory that was stepped up to fair value following acquisitions. Restructuring and restructuring-related costs of $9 and $4 were recorded in 2013 and 2012, respectively. Excluding the impact of the acquisition and restructuring costs described above, cost of sales in the nine-month period was 32.0% of sales in 2013 compared to 31.9% in 2012. Research, Development and Engineering Expenses Research, development and engineering expenses increased 19.3% to $136, representing 6.3% of sales in the three-month period, compared to 5.6% in 2012 and increased 16.1% to $397 in the nine-month period, representing 6.1% of sales, compared to 5.4% in 2012. The timing of projects for anticipated future products and continued investment in new technologies causes the spending level to vary by period as a percentage of sales. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by 43.6% to $1,136, representing 52.8% of sales in the three-month period, compared to 38.5% in 2012. The three-month periods included $6 and $7 in 2013 and 2012, respectively, in acquisition and integration related charges and $313 in 2013 related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System. Excluding the impact of these charges, selling, general and administrative expenses were 38.0% of sales in 2013 compared to 38.2% in 2012, reflecting favorable trends in spending, partially offset by the effect of charges associated with the transition of distributors serving some of our smaller Asian markets. Selling, general and administrative expenses increased by 26.1% to $3,067, representing 46.8% of sales in the nine-month period, compared to 38.5% in 2012. The nine-month periods included $38 and $24 in 2013 and 2012, respectively, in acquisition and integration related charges; $523 in 2013 related to the Rejuvenate and ABG II and Neptune recalls; and $58 and $33 in 2013 and 2012, respectively, related to two previously disclosed United States regulatory matters. Excluding the impact of these charges, selling, general and administrative expenses were 37.3% of sales in 2013 compared to 37.6% in 2012. Restructuring Charges
Restructuring charges totaling $14 and $12 in the three-month periods and $38 and $45 in the nine-month periods in 2013 and 2012, respectively, were related to the continuation of focused reductions of our global workforce and other restructuring activities. The actions were initiated in 2011 to provide efficiencies and realign resources in advance of the MDET, which began on January 1, 2013, as well as to allow for continued investment in strategic areas and drive growth.

Dollar amounts in millions except per share
14 amounts or as otherwise specified


Other Income (Expense)
Other expense in the three- and nine-month periods increased $7 and $21, respectively, from 2012, primarily as a result of reduced interest income on marketable securities in the current year as well as increased interest expense associated with our public offering of Notes in March 2013. Income Taxes
Our effective income tax rate on earnings in the three-month period was 24.8 % compared to 20.5% in 2012; for the nine-month period, our effective income tax rate was 20.6% compared to 23.7% in 2012. In January 2013 we recorded tax benefits of $13 pursuant to the American Taxpayer Relief Act of 2012 that was signed into law on January 2, 2013. These tax benefits related to the retroactive extension of numerous tax provisions, including an extension of the research tax credit and other provisions for companies with significant international operations.
Net Earnings
Net earnings in the three-month period decreased to $103 or $0.27 per diluted share compared to $353 or $0.92 per diluted share in 2012. Reported net earnings includes restructuring and restructuring-related charges of $15 and $11 in 2013 and 2012, respectively, and acquisition and integration related charges of $9 and $6 in 2013 and 2012, respectively. In addition, 2013 also includes $246 related to the Rejuvenate and ABG II and Neptune recalls and other matters. Excluding the impact of these items, adjusted net earnings in the three-month period increased 0.8% to $373 or $0.98 per diluted share. The impact of foreign currency exchange rates on net earnings reduced diluted net earnings per share by approximately $0.05.
Net earnings in the nine-month period decreased to $620 or $1.62 per diluted share compared to $1,028 or $2.68 per diluted share in 2012. Reported net earnings includes restructuring and restructuring-related charges of $36 and $35 in 2013 and 2012, respectively, and acquisition and integration related charges of $41 and $28 in 2013 and 2012, respectively. In addition 2013 includes $397 related to the Rejuvenate and ABG II and Neptune recalls as well as $53 and $33 in 2013 and 2012, respectively, related to two previously disclosed United States regulatory matters. Excluding the impact of these items, adjusted net earnings in the nine-month period increased 2.0% to $1,147 or $3.00 per diluted share. The impact of foreign currency exchange rates on net earnings reduced diluted net earnings per share by approximately $0.08.
The following reconciles the non-GAAP financial measures of adjusted gross profit; adjusted selling, general and administrative expense; adjusted operating income; adjusted net earnings; adjusted effective tax rate; and adjusted diluted net earnings per share with the most directly comparable GAAP financial measures:

Three Months Ended                             Selling, General and
September 30           Gross Profit          Administrative Expenses           Operating Income           Net Earnings         Effective Tax Rate        Diluted EPS
                      2013      2012            2013           2012            2013        2012           2013       2012        2013       2012        2013      2012
AS REPORTED         $ 1,469   $ 1,397     $     1,136      $    791        $     150    $     450     $    103      $ 353       24.8  %    20.5  %    $  0.27   $ 0.92
 Acquisition and
integration related
charges
  Inventory stepped
up to fair value          8         -               -             -                8            -            6          -        0.2          -          0.02        -
  Other acquisition
and integration
related                   -         -              (6 )          (7 )              6            7            3          6        1.4       (0.1 )        0.01     0.02
 Restructuring and
related charges           2         2               -             -               15           14           15         11       (1.4 )     (0.2 )        0.04     0.03
 Rejuvenate/ABG II
and Neptune recall
charges                   -         -            (313 )           -              313            -          245          -       (0.9 )        -          0.64        -
 Regulatory matters       -         -               1             -               (1 )          -            1          -       (2.1 )        -             -        -
ADJUSTED            $ 1,479   $ 1,399     $       818      $    784        $     491    $     471     $    373      $ 370       22.0  %    20.2  %    $  0.98   $ 0.97


Nine Months Ended                               Selling, General and
September 30             Gross Profit         Administrative Expenses          Operating Income           Net Earnings        Effective Tax Rate        Diluted EPS
                        2013      2012           2013           2012            2013         2012        2013      2012         2013       2012        2013      2012
AS REPORTED           $ 4,428   $ 4,283     $    3,067      $    2,433     $      826      $ 1,371     $   620   $ 1,028       20.6  %    23.7  %    $  1.62   $ 2.68
 Acquisition and
integration related
charges
  Inventory stepped
up to fair value           16        15              -               -             16           15          12        11          -        0.1          0.03     0.03
  Other acquisition
and integration
related                     -         -            (38 )           (24 )           38           24          29        17        0.2        0.1          0.08     0.04
 Restructuring and
related charges             9         4             (3 )             -             48           49          36        35        0.3        0.1          0.09     0.09
 Rejuvenate/ABG II
and Neptune recall
charges                     -         -           (523 )             -            523            -         397         -        1.6          -          1.04        -
 Regulatory matters         -         -            (58 )           (33 )           58           33          53        33       (1.0 )     (0.6 )        0.14     0.09
ADJUSTED              $ 4,453   $ 4,302     $    2,445      $    2,376     $    1,509      $ 1,492     $ 1,147   $ 1,124       21.7  %    23.4  %    $  3.00   $ 2.93

The weighted-average basic and diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as those used in the calculation of the reported per share amounts.

Dollar amounts in millions except per share
15 amounts or as otherwise specified


LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash from operations totaled $622 and $1,214 in the three- and nine-month periods ended September 30, 2013, compared to $569 and $1,061, respectively, in 2012. Operating cash flow resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, share-based compensation, deferred income taxes and charges for product recall and regulatory matters). The adjustments for non-cash items in the three months ended September 30, 2013 were due primarily to the charge to net earnings for additional amounts related to the Rejuvenate and ABG II and Neptune recalls of $245. The net of accounts receivable, inventory and accounts payable provided $13 of cash in 2013 compared to the consumption of $4 of cash in 2012, contributing a $17 increase in cash from operations as compared to 2012. In the nine months ended September 30, 2013, the adjustments for non-cash items were due primarily to the charge to net earnings for additional amounts related to the Rejuvenate and ABG II and Neptune recalls of $397. The net of accounts receivable, inventory and accounts payable consumed $91 in 2013 compared to a consumption of $53 in 2012, contributing a $38 reduction of cash from operations as compared to 2012.
The impact of the timing of sales in each period resulted in the generation of $46 of cash for nine months ended September 30, 2013 for accounts receivable compared to the generation of $52 in the same period in 2012. Accounts receivable days outstanding has improved from September 30, 2012 by 2 days but has increased by 2 days from December 2012. Inventory days on hand has increased by 2 days as compared to September 2012. Investing Activities
Net investing activities consumed $1,926 and $167 of cash in the nine-month periods in 2013 and 2012, respectively.
Acquisitions. Acquisitions used $686 and $47 of cash in the nine-month periods in 2013 and 2012, respectively. Cash used in 2013 was primarily for the acquisition of Trauson Holdings Company Limited.
Capital Spending. We manage capital spending to support our business growth. Capital expenditures, primarily to support integration of acquisitions, capacity expansion, new product introductions, innovation and cost savings, were $139 and $161 in the nine-month periods in 2013 and 2012, respectively.
Marketable Securities. Cash of $1,101 was used for the purchase of marketable securities in the nine-month period in 2013 compared to $41 of cash generated from the sale of marketable securities in 2012. Financing Activities
Dividend Payments. Dividends paid per common share increased 24.7% to $0.795 per share in the nine-month period in 2013 compared to $0.6375 in 2012. Total dividend payments to common shareholders were $301 and $243 in 2013 and 2012, respectively. . . .

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