10-QPeriod: Q1 FY2006

STRYKER CORP Quarterly Report for Q1 Ended Mar 31, 2006

Filed May 3, 2006For Securities:SYK

Summary

Stryker Corporation (SYK) reported its first-quarter 2006 financial results, showing a 10% increase in net sales to $1.32 billion, driven by growth in both its Orthopaedic Implants and MedSurg Equipment segments. While reported net earnings decreased by 12% to $147.5 million, or $0.36 per diluted share, this was primarily due to a significant $52.7 million charge related to purchased in-process research and development from the acquisition of Sightline Technologies Ltd. Excluding this charge, adjusted net earnings increased by 20.1% to $200.2 million, with adjusted diluted EPS growing by 20% to $0.49. The company adopted new accounting standards for share-based payments (SFAS 123R) effective January 1, 2006, which reduced reported net earnings but provided a more consistent basis for comparison with prior periods. Acquisitions in Sightline Technologies and eTrauma.com contributed to the MedSurg Equipment segment's growth. Stryker maintains a strong financial position with ample liquidity and anticipates continued growth in 2006, projecting adjusted diluted EPS of $2.02.

Key Highlights

  • 1Net sales increased 10% to $1.32 billion for Q1 2006 compared to $1.20 billion in Q1 2005.
  • 2Reported net earnings decreased 12% to $147.5 million ($0.36/share) due to a $52.7 million charge for acquired in-process R&D.
  • 3Adjusted net earnings (excluding the R&D charge) increased 20.1% to $200.2 million ($0.49/share).
  • 4The company adopted SFAS 123R (Share-Based Payment) in Q1 2006, impacting reported earnings but aligning reporting with prior pro forma disclosures.
  • 5Acquisitions of Sightline Technologies and eTrauma.com contributed to growth in the MedSurg Equipment segment.
  • 6Orthopaedic Implants segment sales grew 7% (11% constant currency), while MedSurg Equipment sales grew 16% (17% constant currency).
  • 7Stryker projects full-year 2006 adjusted diluted EPS of $2.02, representing a 21.0% increase.

Frequently Asked Questions

The acquisition of Sightline Technologies in the first quarter of 2006 resulted in a $52.7 million charge for purchased in-process research and development. This charge significantly reduced reported net earnings for the quarter. However, when excluding this one-time charge, adjusted net earnings show robust growth.

Effective January 1, 2006, Stryker adopted SFAS 123R, which requires companies to recognize the fair value of stock options as compensation expense. This adoption reduced reported operating income and net earnings by $14.8 million and $9.6 million, respectively, in Q1 2006, and by $9.8 million and $6.4 million in Q1 2005. The company adopted this using a modified-retrospective method, restating prior periods and reclassifying certain cash flows.

Stryker is optimistic about 2006, projecting adjusted diluted net earnings per share of $2.02, a 21.0% increase over 2005. They anticipate net sales growth in the range of 11% to 14%, driven by both segments, though foreign currency exchange rates are expected to have an unfavorable impact of 1% to 2% on net sales.

The company is cooperating with investigations by the United States Attorney's Office and the Department of Justice concerning billing and coding practices of its subsidiary Physiotherapy Associates, Inc., and consulting agreements with orthopedic surgeons, respectively. While these matters are ongoing, the company does not anticipate material losses beyond amounts already provided for in its financial statements.