Stryker Reports Second Quarter 2013 Results

Kalamazoo, Michigan - July 18, 2013 - Stryker Corporation (NYSE:SYK) reported operating results for the second quarter of 2013:

Second Quarter Highlights

• Net sales growth of 5.0% to $2.2 billion 

• Reconstructive increased 5.6% as reported, 7.6% constant currency 

• MedSurg increased 4.2% as reported, 4.8% constant currency 

• Neurotechnology and Spine increased 5.4% as reported, 7.5% constant currency 

• Adjusted diluted net earnings per share⁽¹⁾ increased 2.0% to $1.00  

• Reported diluted net earnings per share decreased 34.1% to $0.56 

• Cash flow from operations increased 20.3% in the first half 

"We delivered another solid quarter of operational results with balanced sales growth across all segments and geographies, as well as strong cash flow performance," said Kevin A. Lobo, President and Chief Executive Officer. "Our earnings per share was impacted by foreign exchange headwinds which we expect to continue throughout the year."

Sales Analysis

Consolidated net sales of $2.2 billion increased 5.0% in the quarter compared to the prior year.  Net sales in the quarter grew by 7.8% due to increased unit volume and changes in product mix and 0.6% as a result of acquisitions. Net sales in the quarter were unfavorably impacted by 1.9% due to changes in price and 1.5% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased 5.9% in constant currency over the prior year.

Reconstructive net sales of $979 million increased 5.6% in the quarter compared to the prior year, as reported, and 7.6% in constant currency.  Net sales in the quarter grew by 9.9% due to increased unit volume and changes in product mix and 1.1% as a result of acquisitions.  Net sales in the quarter were unfavorably impacted by 3.4% due to changes in price and 2.0% due to the unfavorable impact of foreign currency exchange rates on net sales.  Excluding the impact of acquisitions, Reconstructive net sales increased 6.5% in constant currency over the prior year.

MedSurg net sales of $819 million increased 4.2% in the quarter compared to the prior year, as reported, and 4.8% in constant currency.  Net sales in the quarter grew by 4.8% due to increased unit volume and changes in product mix but were unfavorably impacted by 0.1% due to changes in price and 0.6% due to the impact of foreign currency exchange rates on net sales.  

Neurotechnology and Spine net sales of $414 million increased 5.4% in the quarter compared to the prior year, as reported, and 7.5% in constant currency.  Net sales in the quarter grew by 8.8% due to increased unit volume and changes in product mix and 0.8% as a result of acquisitions.  Net sales in the quarter 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.  Excluding the impact of acquisitions, Neurotechnology and Spine net sales increased 6.7% in constant currency over the prior year.

Earnings Analysis

Reported net earnings of $213 million decreased 34.5% in the quarter compared to the prior year.  Diluted net earnings per share of $0.56 decreased 34.1% in the quarter over the prior year.  Reported net earnings in the quarter includes an additional charge of $170 million ($120 million net of tax or $0.31 per diluted share) related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems, bringing total charges recorded for this recall to $400 million.  In addition, a charge of $19 million ($22 million net of tax or $0.06 per diluted share) was recorded in the quarter related to two previously disclosed United States regulatory matters.  Reported net earnings in the quarter also includes acquisition and integration related charges of $18 million ($15 million net of taxes or $0.04 per diluted share) related to the Neurovascular, Surpass and Trauson acquisitions and restructuring and related charges of $19 million ($10 million net of taxes or $0.03 per diluted share). These charges reduced the reported gross profit margin from 67.7% to 67.0% and the reported operating income margin from 23.3% to 13.1%.

Excluding the charges described above, adjusted net earnings⁽²⁾ of $380 million increased 1.3% in the quarter over the prior year and adjusted diluted net earnings per share⁽¹⁾ of $1.00 increased 2.0% in the quarter over the prior year.  Adjusted diluted net earnings per share⁽¹⁾ in the second quarter of 2013 includes approximately $0.03 per diluted share of costs associated with the new Medical Device Excise Tax.

2013 Outlook

For the full year 2013, Stryker is projecting constant currency sales growth in a range of 5.0% to 6.5%. If foreign currency exchange rates hold near current levels, the Company anticipates net sales will be negatively impacted by approximately 1.5% to 2.5% in both the third quarter and full year of 2013.  Excluding the expected impact of foreign currency and acquisitions, projected 2013 sales growth is 4.0% to 5.5% for the full year.

The Company now projects 2013 adjusted diluted net earnings per share⁽¹⁾ to be in a range of $4.20 to $4.26.  

1. A reconciliation of reported diluted net earnings per share to adjusted diluted net earnings per share, a non-GAAP financial measure, and other important information, appears below. 

2. A reconciliation of reported net earnings to adjusted net earnings, a non-GAAP financial measure, and other important information, appears below. 

SUPPLEMENTAL INFORMATION - RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

We supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures, including percentage sales growth in constant currency; adjusted gross profit; adjusted selling, general and administrative expenses; adjusted operating income; adjusted effective income tax rate; adjusted net earnings; and adjusted diluted net earnings per share. We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance and 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 for analyzing potential future business trends in connection with our budget process and bases certain annual bonus plans 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 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, selling, general and administrative expenses, operating income, effective 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 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.

The following reconciles the non-GAAP financial measures discussed above with the most directly comparable GAAP financial measures: