SYK

Business Context and Reporting Period

Company: Stryker Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: Stryker operates in two primary segments: Orthopaedic Implants (reconstructive, trauma, spinal) and MedSurg Equipment (surgical instruments, imaging, hospital beds). The company also reports Physical Therapy Services and corporate items under "Other."

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 19% in the quarter and 20% for the nine-month period compared to 2002. Growth was driven by a 12-13% increase in unit volume/mix, favorable foreign currency exchange rates (4% impact for nine months), and price increases.
• Profitability: Net earnings surged 49% in the quarter and 33% for the nine-month period. This outpaced revenue growth due to the absence of a $17.2 million restructuring charge recorded in Q3 2002 and improved gross margins.
• Segment Performance: Orthopaedic Implants sales grew 20% (quarter) and 23% (nine months). MedSurg Equipment sales grew 17% in both periods.
• Debt Reduction: Total borrowings declined by $329.4 million during the first nine months of 2003, reducing interest expense significantly ($19.2M for nine months vs. $31.5M in 2002).
• Working Capital: Increased by $70.7 million to $514.5 million, aided by the expansion of the accounts receivable securitization facility.

Outlook, Risks, and Unusual Items

• Restructuring (Prior Year Impact): The 2002 results included a $21.0 million charge to close the Rutherford, NJ facility. The 2003 period had no such charges, though payments on prior liabilities continued ($10.5M paid in nine months).
• Acquisitions: The company acquired Surgical Dynamics Inc. (SDI) in July 2002. Final purchase price allocation was completed in 2003, including a $6.6 million working capital adjustment received in Q3 2003.
• Insurance Costs: Selling, general, and administrative expenses increased due to higher insurance premiums and the establishment of a wholly-owned captive insurance company ($10.4M increase in nine months).
• Foreign Currency: Strengthening foreign currencies relative to the U.S. dollar provided a favorable impact of $98.9 million on international sales for the nine-month period. Conversely, translation gains of $92.0 million eliminated prior cumulative losses in equity.
• Liquidity: The company maintains $907.6 million in additional borrowing capacity. Management believes cash on hand and operating cash flows are sufficient for future needs.
• Risks: Forward-looking statements highlight risks including regulatory cost-containment measures, changes in third-party reimbursement levels, product liability claims, and foreign exchange volatility.

Investor Verification Checklist

• Non-GAAP Adjustments: Verify the reconciliation of "Adjusted Net Earnings" which excludes the 2002 restructuring charge to ensure accurate year-over-year operational comparison.
• Accounts Receivable Aging: Review the increase in days sales outstanding (64 days vs. 58 days) and the specific mention of aging receivables in Europe, Japan, and Canada.
• Debt Covenants and Maturities: Confirm the status of the $250.0 million 364-day revolving credit agreement expiring in December 2003 and renewal terms.
• Stock-Based Compensation: Note the pro forma impact of FASB 123 on earnings ($13.6M deduction for nine months) and the issuance of restricted stock to the new President/COO.
• Product Liability Reserves: Assess the adequacy of reserves held by the new captive insurance company for product liability claims.