Stryker’s Q3 Earnings Take Hit From Recall Costs

Stryker Corp.’s posted solid third-quarter results—that is if you don’t include the cost of recalls. The cost of metal hip implant recalls continued to drag down the Kalamazoo, Mich.-based orthopedic giant’s earnings for the period ended Sept. 30.

The company recorded $103 million in net earnings, but that number was down 70.8 percent from $353 million for the same period last year—in large part because of costs relating to the company’s Rejuvenate and ABG II modular-neck hip stem recalls.

To date, Stryker officials say the company has recorded $700 million in charges relating to its all-metal hip recall effort.

A charge of $313 million during the quarter mostly involved hip recall expenses, as well as costs relating to the recall of the company’s Neptune Waste Management System. Acquisition-related expenses also took a chuck out of the results—relating to Stryker’s $1.7 billion buyout of robot assisted surgery outfit Mako.

Without the metal hip recall and other one-time expenses, Stryker results for Q3 generally were good.
The company reported $2.15 billion in net sales during the quarter, a 4.8 percent increase compared with the $2 billion generated during 2012. The company generated strong sales gains in its reconstructive, neurotechnology and spine divisions. Even Stryker’s MedSurg division grew sales 1.5 percent compared to the 2012 third quarter.

Stryker President and CEO Kevin Lobo said the results “not only represent gradual improvement in our key markets but also underscore our commitment to delivering above market growth.” Lobo added that the company remains on track with its full-year adjusted earnings per share guidance of $4.20 to $4.26. Overall, Stryker predicts full-year organic sales growth of between 4.5 and 5.5 percent.

In the U.S., the firm’s reconstruction sales growth was powered by hip gains of 9.3 percent and Trauma and Extremities of 22.7 percent.

“Trauma and Extremities continues to roll, having now reported 7 quarters in a row of double-digit growth, including a 39 percent increase in foot and ankle this quarter,” Lobo said on a conference call with reporters and analysts.

Sales for MedSurg in the United States saw a pickup in endoscopy at 10.5 percent, Lobo said, as operating room integration sales improved, but was offset by a decline in instruments due to the Neptune recall. MedSurg Equipment products include surgical equipment; surgical navigation systems; endoscopic, communications and digital imaging systems; and patient handling and emergency medical equipment.

“We expect Instruments to return to positive sales growth in the U.S. in Q4,” he noted.
The firm’s U.S. neurotechnology and spine was driven by 14 percent sales growth in neurotechnology as each of its businesses registered double-digit gains, the CEO said. Lobo also noted that emerging markets “continue to do well,” with China, Brazil and India delivering very strong double-digit growth.

By the Numbers

Reconstructive net sales of $949 million increased 6.5 percent in the quarter compared to the prior year, as reported, and 9.2 percent in constant currency. Net sales in the quarter grew by 9.6 percent due to increased unit volume and changes in product mix and 1.2 percent as a result of acquisitions.
Net sales in the quarter were unfavorably impacted by 1.6 percent due to changes in price and 2.7 percent due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, Reconstructive net sales increased 8.0 percent in constant currency over the prior year.

MedSurg net sales of $792 million increased 1.5 percent in the quarter compared to the prior year, as reported, and 2.6 percent in constant currency. Net sales in the quarter grew by 2.1 percent due to increased unit volume and changes in product mix and 0.5 percent due to changes in price. Net sales in the quarter were unfavorably impacted by 1.1 percent due to the unfavorable impact of foreign currency exchange rates on net sales.

Neurotechnology and spine net sales of $410 million increased 7.7 percent in the quarter compared to the prior year, as reported, and 10.0 percent in constant currency. Net sales in the quarter grew by 11.3 percent due to increased unit volume and changes in product mix and 0.9 percent as a result of acquisitions. Net sales in the quarter were unfavorably impacted by 2.1 percent due to changes in price and 2.3 percent due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, neurotechnology and spine net sales increased 9.1 percent in constant currency over the prior year.