Financial

Stryker reports third quarter 2018 operating results

Kalamazoo, Michigan – October 25, 2018 – Stryker (NYSE:SYK) reported operating results for the third quarter of 2018:

Third Quarter Highlights

2018 Net Sales Growth Overview
Reported Excluding ASC 606 Adoption(2) Foreign Currency Exchange Constant Currency Acquisitions Organic
Orthopaedics 3.4 % 4.0 % (1.0 )% 5.0 % % 5.0 %
MedSurg 8.0 9.5 (0.9 ) 10.4 1.6 8.8
Neurotechnology and Spine 16.7 17.4 (0.9 ) 18.3 6.4 11.9
Total 7.9 % 8.8 % (1.0 )% 9.8 % 1.9 % 7.9 %

“We had another impressive quarter, as our talented teams continue to deliver strong results and execute on acquisitions,” said Kevin A. Lobo, Chairman and Chief Executive Officer. “The strength of our operating model and culture is evident in the consistency of our performance over time, and we remain optimistic about the future.”

Sales Analysis (percentages exclude ASC 606(2) adoption impact)

Consolidated net sales of $3.2 billion increased 8.8% in the quarter and 9.8% in constant currency. Organic net sales increased 7.9% in the quarter including 9.5% from increased unit volume partially offset by 1.6% from lower prices.

Orthopaedics net sales of $1.2 billion increased 4.0% in the quarter and 5.0% in constant currency. Organic net sales increased 5.0% in the quarter including 7.6% from increased unit volume partially offset by 2.6% from lower prices.

MedSurg net sales of $1.4 billion increased 9.5% in the quarter and 10.4% in constant currency. Organic net sales increased 8.8% in the quarter including 9.5% from increased unit volume partially offset by 0.7% from lower prices.

Neurotechnology and Spine net sales of $0.6 billion increased 17.4% in the quarter and 18.3% in constant currency. Organic net sales increased 11.9% in the quarter including 13.5% from increased unit volume partially offset by 1.6% from lower prices.

Earnings Analysis

Reported net earnings of $590 million increased 35.9% in the quarter. Reported net earnings per diluted share of $1.55 increased 36.0% in the quarter. Reported net earnings include certain items, such as charges for acquisition and integration-related activities, the amortization of purchased intangible assets, restructuring-related and other charges, costs to comply with European Medical Devices Regulation, Rejuvenate and other recall-related matters, regulatory and legal matters and tax matters. The effect of each of these matters on reported net earnings and net earnings per diluted share appear in the reconciliation of GAAP to non-GAAP financial measures. Excluding the aforementioned items decreases gross profit margin from 66.5% to 66.3% in the quarter and increases operating income margin from 17.8% to 24.9%(1), including a 20 basis point favorable impact related to the adoption of the new revenue recognition standard(2). Excluding the impact of the items described above, adjusted net earnings(4) of $643 million increased 11.2% in the quarter. Adjusted net earnings per diluted share(3) of $1.69 increased 11.2% in the quarter.

2018 Outlook

Based on our year-to-date performance we now expect 2018 organic net sales growth, which excludes the impact related to adoption of the new revenue recognition standard(2), to be at the high end of the range of 7.0% to 7.5% and expect adjusted net earnings per diluted share(5) to be in the range of $7.25to $7.30. In 2018 our calculation of organic net sales growth excludes the impact of adopting ASC 606(2), which includes primarily the reclassification of costs previously reported within selling expenses to a reduction of sales, which for 2017 was approximately $112 million ($28 million per quarter). For the fourth quarter we expect adjusted net earnings per diluted share(5) to be in the range of $2.13 to $2.18. If foreign currency exchange rates hold near current levels, we expect net sales in the fourth quarter will be negatively impacted by approximately 1.0% and full year will be positively impacted by approximately 0.5%, and net earnings per diluted share will be neutral in the fourth quarter and positively impacted by $0.05 in the full year.

(1) A reconciliation of operating income to adjusted operating income, a non-GAAP financial measure, and other important information accompanies this press release.

(2) Consistent with previous press releases and financial disclosures, we adopted Accounting Standards Update 2014-09, Revenue From Contracts with Customers, as well as related amendments (ASC 606), issued by the Financial Accounting Standards Board on a modified retrospective basis, effective January 1, 2018. The impact of the adoption of ASC 606 related primarily to the reclassification of certain costs previously presented as selling, general and administrative expenses to net sales.

(3) A reconciliation of reported net earnings per diluted share to adjusted net earnings per diluted share, a non-GAAP financial measure, and other important information accompanies this press release.

(4) A reconciliation of reported net earnings to adjusted net earnings, a non-GAAP financial measure, and other important information accompanies this press release.

(5) We are unable to present a quantitative reconciliation of our expected net earnings per diluted share to expected adjusted net earnings per diluted share as we are unable to predict with reasonable certainty and without unreasonable effort the impact and timing of restructuring-related and other charges, acquisition-related expenses and fair value adjustments to inventory and the outcome of certain regulatory, legal and tax matters. The financial impact of these items is uncertain and is dependent on various factors, including timing, and could be material to Stryker’s Consolidated Statements of Earnings.

Conference Call on Thursday, October 25, 2018

As previously announced, Stryker will host a conference call on Thursday, October 25, 2018 at 4:30 p.m., Eastern Time, to discuss the Company’s operating results for the quarter ended September 30, 2018 and provide an operational update.

To participate in the conference call dial (844) 826-0610 (domestic) or (973) 453-3249 (international) and be prepared to provide conference ID number 9086309 to the operator.

A simultaneous webcast of the call will be accessible via the Company’s website at www.stryker.com. The webcast will be archived on the Investor Relations page of this site.

A recording of the call will also be available from 8:00 p.m., Eastern Time, on Thursday, October 25, 2018, until 11:59 p.m., Eastern Time, on Thursday, November 1, 2018. To hear this recording, you may dial (855) 859-2056 (domestic) or (404) 537-3406 (international) and enter conference ID number 9086309.

Forward-Looking Statements

This press release contains information that includes or is based on forward-looking statements within the meaning of the federal securities laws that are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to: weakening of economic conditions that could adversely affect the level of demand for our products; pricing pressures, including cost-containment measures that could adversely affect the price of or demand for our products; changes in foreign exchange markets; legislative and regulatory actions; the failure to satisfy any of the closing conditions of the K2M Group Holdings, Inc. merger agreement, including the receipt of any required regulatory approvals or approval by K2M’s stockholders of the merger; unexpected charges or expenses in connection with the acquisition of K2M; unanticipated issues arising in connection with clinical studies and otherwise that affect U.S. Food and Drug Administration approval of new products; potential supply disruptions; changes in reimbursement levels from third-party payors; a significant increase in product liability claims; the ultimate total cost with respect to the Rejuvenate and ABG II matter; the impact of investigative and legal proceedings and compliance risks; resolution of tax audits; the impact of the federal legislation to reform the United States healthcare system; costs to comply with the European Medical Devices regulation; changes in financial markets; changes in the competitive environment; our ability to integrate acquisitions, including the acquisition of K2M; and our ability to realize anticipated cost savings. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Stryker is one of the world’s leading medical technology companies and, together with its customers, is driven to make healthcare better. The Company offers innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine that help improve patient and hospital outcomes. More information is available at www.stryker.com.

For investor inquiries please contact:

Katherine A. Owen, Stryker, 269-385-2600 or katherine.owen@stryker.com

For media inquiries please contact:

Yin Becker, Stryker, 269-385-2600 or yin.becker@stryker.com

 

STRYKER CORPORATION
For the Three and Nine Months September 30
(Unaudited – Millions of Dollars, Except Per Share Amounts)
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Nine Months
2018 2017 % Change 2018 2017 % Change
Net sales $ 3,242 $ 3,006 7.9 % $ 9,805 $ 8,973 9.3 %
Cost of sales 1,087 1,022 6.4 3,323 3,034 9.5
Gross profit $ 2,155 $ 1,984 8.6 % $ 6,482 $ 5,939 9.1 %
% of sales 66.5 % 66.0 % 66.1 % 66.2 %
Research, development and engineering expenses 221 198 11.6 641 582 10.1
Selling, general and administrative expenses 1,242 1,103 12.6 3,668 3,335 10.0
Recall charges 4 66 (93.9 ) 10 164 (93.9 )
Amortization of intangible assets 112 92 21.7 324 275 17.8
Total operating expenses $ 1,579 $ 1,459 8.2 % $ 4,643 $ 4,356 6.6 %
Operating income $ 576 $ 525 9.7 % $ 1,839 $ 1,583 16.2 %
% of sales 17.8 % 17.5 % 18.8 % 17.6 %
Other income (expense), net (42 ) (54 ) (22.2 ) (140 ) (169 ) (17.2 )
Earnings before income taxes $ 534 $ 471 13.4 % $ 1,699 $ 1,414 20.2 %
Income taxes (56 ) 37 (251.4 ) 214 145 47.6
Net earnings $ 590 $ 434 35.9 % $ 1,485 $ 1,269 17.0 %
Net earnings per share of common stock:
Basic net earnings per share of common stock $ 1.58 $ 1.16 36.2 % $ 3.97 $ 3.39 17.1 %
Diluted net earnings per share of common stock $ 1.55 $ 1.14 36.0 % $ 3.90 $ 3.34 16.8 %
Weighted-average shares outstanding (in millions):
Basic 374.1 374.2 374.0 373.8
Diluted 380.2 380.2 380.4 379.8

 

CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
2018 2017
Assets
Cash and cash equivalents $ 1,918 $ 2,542
Marketable securities 292 251
Accounts receivable, net 2,076 2,198
Inventories 2,893 2,465
Prepaid expenses and other current assets 739 537
Total current assets $ 7,918 $ 7,993
Property, plant and equipment, net 2,178 1,975
Goodwill and other intangibles, net 11,097 10,645
Other noncurrent assets 891 1,584
Total assets $ 22,084 $ 22,197
Liabilities and shareholders’ equity
Current liabilities $ 4,153 $ 3,485
Long-term debt, excluding current maturities 5,928 6,590
Income taxes 1,251 1,261
Other noncurrent liabilities 892 881
Shareholders’ equity 9,860 9,980
Total liabilities and shareholders’ equity $ 22,084 $ 22,197

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
2018 2017
Operating activities
Net earnings $ 1,485 $ 1,269
Depreciation 223 198
Amortization of intangible assets 324 275
Changes in operating assets and liabilities and other, net (468 ) (862 )
Net cash provided by operating activities $ 1,564 $ 880
Investing activities
Acquisitions, net of cash acquired $ (770 ) $ (712 )
Change in marketable securities, net (41 ) (29 )
Purchases of property, plant and equipment (418 ) (412 )
Net cash used in investing activities $ (1,229 ) $ (1,153 )
Financing activities
(Payments) borrowings of debt, net $ (13 ) $ 300
Dividends paid (528 ) (477 )
Repurchases of common stock (300 ) (230 )
Other financing, net (110 ) (115 )
Net cash used in financing activities $ (951 ) $ (522 )
Effect of exchange rate changes on cash and cash equivalents (8 ) 71
Change in cash and cash equivalents $ (624 ) $ (724 )

 

STRYKER CORPORATION
For the Three and Nine Months September 30
(Unaudited – Millions of Dollars)

 

CONDENSED SALES ANALYSIS
Three Months Nine Months
Percentage Change Percentage Change  
Ex-ASC 606(2)
Percentage Change Percentage Change  
Ex-ASC 606(2)
2018 2017 As Reported Ex-ASC 606(2) Constant
Currency
2018 2017 As Reported Ex-ASC 606(2) Constant
Currency
Geographic:
United States $ 2,381 $ 2,182 9.1 % 10.4 % 10.4 % $ 7,080 $ 6,546 8.2 % 9.4 % 9.4 %
International 861 824 4.5 4.6 8.1 2,725 2,427 12.3 12.5 9.1
Total $ 3,242 $ 3,006 7.9 % 8.8 % 9.8 % $ 9,805 $ 8,973 9.3 % 10.3 % 9.4 %
Segment:
Orthopaedics $ 1,171 $ 1,132 3.4 % 4.0 % 5.0 % $ 3,615 $ 3,408 6.1 % 6.6 % 5.4 %
MedSurg 1,443 1,336 8.0 9.5 10.4 4,325 3,977 8.8 10.4 9.8
Neurotechnology and Spine 628 538 16.7 17.4 18.3 1,865 1,588 17.4 18.1 16.8
Total $ 3,242 $ 3,006 7.9 % 8.8 % 9.8 % $ 9,805 $ 8,973 9.3 % 10.3 % 9.4 %

 

SUPPLEMENTAL SALES GROWTH ANALYSIS
Three Months
Percentage Change Ex-ASC 606(2)
Percentage Change International
2018 2017 As Reported Ex-ASC 606(2) Constant Currency United States Ex-ASC 606(2) Constant Currency
Orthopaedics:
Knees $ 395 $ 369 7.0 % 7.7 % 8.7 % 8.4 % 5.7 % 9.6 %
Hips 316 313 1.0 1.2 2.5 2.4 (0.6 ) 2.8
Trauma and Extremities 376 367 2.5 3.2 4.0 3.2 3.1 5.5
Other 84 83 1.2 1.6 2.7 (0.9 ) 13.1 19.3
$ 1,171 $ 1,132 3.4 % 4.0 % 5.0 % 4.4 % 3.0 % 6.3 %
MedSurg:
Instruments $ 442 $ 404 9.4 % 10.7 % 11.6 % 13.7 % 0.3 % 4.3 %
Endoscopy 443 404 9.7 10.8 11.9 11.0 10.4 15.2
Medical 492 464 6.0 7.5 8.5 12.4 (8.1 ) (4.2 )
Sustainability 66 64 3.1 7.0 7.0 7.0 10.9 15.0
$ 1,443 $ 1,336 8.0 % 9.5 % 10.4 % 12.0 % 0.2 % 4.5 %
Neurotechnology and Spine:
Neurotechnology $ 435 $ 353 23.2 % 23.8 % 24.8 % 28.7 % 15.4 % 18.2 %
Spine 193 185 4.3 5.2 5.9 2.4 13.4 16.5
$ 628 $ 538 16.7 % 17.4 % 18.3 % 18.6 % 14.9 % 17.8 %
Total $ 3,242 $ 3,006 7.9 % 8.8 % 9.8 % 10.4 % 4.6 % 8.1 %

 

Nine Months
Percentage Change Ex-ASC 606(2)
Percentage Change International
2018 2017 As Reported Ex-ASC 606(2) Constant Currency United States Ex-ASC 606(2) Constant Currency
Orthopaedics:
Knees $ 1,236 $ 1,149 7.6 % 8.0 % 7.1 % 7.3 % 9.8 % 6.6 %
Hips 983 955 2.9 3.3 2.2 1.9 5.5 2.6
Trauma and Extremities 1,152 1,070 7.7 8.5 6.9 6.3 12.5 8.0
Other 244 234 4.3 4.2 3.9 3.9 5.4 4.2
$ 3,615 $ 3,408 6.1 % 6.6 % 5.4 % 5.3 % 9.2 % 5.7 %
MedSurg:
Instruments $ 1,292 $ 1,190 8.6 % 10.2 % 9.5 % 10.8 % 8.0 % 5.0 %
Endoscopy 1,335 1,183 12.8 14.2 13.6 14.8 11.8 9.5
Medical 1,508 1,413 6.7 8.3 7.7 7.4 11.5 8.7
Sustainability 190 191 (0.5 ) 2.5 2.5 2.4 17.3 15.7
$ 4,325 $ 3,977 8.8 % 10.4 % 9.8 % 10.3 % 10.5 % 7.8 %
Neurotechnology and Spine:
Neurotechnology $ 1,282 $ 1,036 23.7 % 24.5 % 23.0 % 25.3 % 23.1 % 19.1 %
Spine 583 552 5.6 6.1 5.2 1.1 22.1 18.2
$ 1,865 $ 1,588 17.4 % 18.1 % 16.8 % 15.8 % 22.9 % 18.9 %
Total $ 9,805 $ 8,973 9.3 % 10.3 % 9.4 % 9.4 % 12.5 % 9.1 %

 

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Josh Sandberg

Josh Sandberg is the President of Ortho Spine Partners and Partner for The De Angelis Group. He also serves as Co-Founder and Editor of OrthoSpineNews.

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