Stryker Corp.’s Third-Quarter Net Sales Swell 6 Percent

Stryker Corporation had a profitable summer.

Third-quarter net sales grew 6.1 percent to $3 billion (5.8 percent in constant currency), and gross profit jumped 5.8 percent to $1.98 billion, according to the company’s latest earnings report.
 
“We delivered strong growth despite headwinds related to Sage products and hurricanes, which is reflected in our revised sales and earnings outlook,” said Kevin A. Lobo, chairman and CEO. “Our teams continue to execute well, and we are also pleased to have closed on the NOVADAQ acquisition in the quarter.”
 
Sales Analysis
Foreign currency exchange rates positively impacted net sales by 0.3 percent. Excluding the 0.3 percent impact of acquisitions, net sales in the quarter increased 5.5 percent in constant currency including 6.5 percent from increased unit volume (including negative impacts of 1.8 percent related to Sage product recalls and temporary ship holds and 0.6 percent related to hurricanes) partially offset by 1 percent due to lower prices.
 
Orthopaedics net sales of $1.1 billion increased 5.1 percent in the quarter as reported and 4.8 percent in constant currency, as foreign currency exchange rates positively impacted net sales by 0.3 percent. Excluding the 0.3 percent impact of acquisitions, net sales in the quarter increased 4.5 percent in constant currency, including 6.5 percent from increased unit volume (including negative impacts of 0.4 percent related to hurricanes) partially offset by 2 percent due to lower prices.
 
MedSurg net sales of $1.3 billion increased 6.7 percent in the quarter as reported and 6.2 percent in constant currency, as foreign currency exchange rates positively impacted net sales by 0.5 percent. Excluding the 0.6 percent impact of acquisitions, net sales in the quarter increased 5.6 percent in constant currency, including 5.6 percent increased unit volume (including negative impacts of 4.6 percent related to Sage product recalls and ship holds and 0.8 percent related to hurricanes). The impact of acquisitions is primarily attributed to NOVADAQ Technologies Inc., the previously announced acquisition that was completed during the quarter. NOVADAQ is now part of Endoscopy.
 
Neurotechnology and Spine net sales of $538 million increased 6.9 percent in the quarter as reported and 7 percent in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.1 percent. Net sales in the quarter increased 8.1 percent from increased unit volume (including negative impacts of 0.5 percent related to hurricanes) partially offset by 1.1 percent due to lower prices.
 
Earnings Analysis
Reported net earnings of $434 million increased 22.3 percent in the quarter. Reported net earnings per diluted share of $1.14 increased 21.3 percent in the quarter. Reported net earnings includes certain charges for the amortization of purchased intangible assets, product recalls, restructuring-related activities, and acquisition and integration related activities. Excluding the impact of these items increases gross profit margin in the quarter from 65.9 percent to 66 percent and increases operating income margin from 17.4 percent to 24.2 percent. Excluding the impact of these items, adjusted net earnings of $578 million increased 9.9 percent in the quarter. Adjusted net earnings per diluted share of $1.52 increased 9.4 percent in the quarter.
 
During the quarter, Stryker initiated a voluntary product recall involving specific lots of Sage Products Oral Care products. The company took this action in response to a Warning Letter received from the U.S. Food and Drug Administration (FDA) dated July 17, which set forth concerns regarding the potential for cross-contamination of Oral Care solutions manufactured by a third party supplier on equipment also used to manufacture non-pharmaceutical products. Stryker discontinued business with the third-party supplier and the Oral Care solutions are now being manufactured in-house by Sage. The company resumed shipping Oral Care products in October and continue to anticipate a return to full supply capacity by year-end.
 
Stryker also placed Sage cloth-based products on a temporary ship hold during the quarter in response to concerns set forth in the FDA Warning Letter regarding testing methods used for all Sage products containing solutions. The company resumed shipping products manufactured by Sage and tested under the testing method required by FDA in September and continue to anticipate a return to full supply capacity by year-end.
 
These matters, along with recent hurricanes and the NOVADAQ acquisition, had a negative impact on adjusted net earnings per diluted share in the quarter of approximately five cents.
 
2017 Outlook
Based on its year-to-date performance, Stryker now expects 2017 organic net sales growth to be in the range of 6.5 percent to 7 percent and expects adjusted net earnings per diluted share to be in the range of $6.45 to $6.50. For the fourth quarter the company expects adjusted net earnings per diluted share to be in the range of $1.92 to $1.97. If foreign currency exchange rates hold near current levels, net sales in the fourth quarter will be impacted positively by approximately 1 percent, the full year to be nominally impacted and adjusted net earnings per diluted share to be negatively impacted by approximately two cents in the fourth quarter and 10 cents in the full year.