史賽克 (SYK) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Stryker Corporation third-quarter operating results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, October 16th, 2002.

Certain statements made in today's presentation may constitute forward-looking statements. They are based upon management's current expectations and are subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. In addition to factors that may be discussed in this presentation, such factors include, but are not limited to, regulatory actions including cost containment measures that could adversely affect the price of or demand for the company's products, changes in reimbursement levels from third-party payers, a significant increase in product liability claims, changes in economic conditions that adversely affect the level of demand for the company's products, changes in foreign exchange markets, changes in financial markets, and changes in the competitive environment.

Additional information concerning these factors can contained in the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K, and quarterly reports on Form 10-Q.

I would now like to turn the conference over to Mr. John Brown, Chairman, president, and CEO of Stryker Corporation. Please go ahead, sir.

Thank you, Sonia, and good afternoon and welcome to Stryker's third-quarter earnings report for the year 2002.

With me here today are Dave Simpson, Vice President, Chief Financial Officer and Secretary, along with Dean Bergy, Vice President of Finance. And we're pleased to report that Stryker had a very strong third quarter and first nine months.

For the third quarter sales, they were 746 million, for an increase of 20% over the prior year. Excluding the impact of foreign currency, net sales were 19% higher than last year. Net earnings increased 20% to 73 million, and diluted earnings per share increased 20% to 36 cents.

Excluding the nonrecurring items, net earnings increased 30% to 84 million, and diluted earnings per share increased 28% to 41 cents.

For the first nine months, sales were 2 million - 2.182 billion, for an increase of 15% over the prior year. The impact of foreign currency on net sales for the first nine months was negligible. Net earnings increased 26% to 240 million, and diluted earnings per share increased 26% to $1.18.

Excluding nonrecurring items, net earnings increased 26% to 251 million, and diluted earnings per share increased 26% to $1.23.

Cash flow continues to be very strong. In fact, we were able to retire the 135 million borrowed this quartererly, earlier in the quarter, for the Surgical Dynamics acquisition. Domestic sales were 494 million for the quarter, and 1.437 billion for the first nine months, representing increases of 20% and 17% over the prior year. Divisions are, we think, very well positioned for a great year. Halmedica Osteonics was up 20% in the quarter and 19% for the first nine months with strong growth in spine, trauma, reconstructive implants, and the July acquisition of the spinal implant business, Surgical Dynamics accounted for about 6 points of this growth.

Instrument sales increased 15% in the quarter and 10% year-to-date, with solid growth in powered instruments, [Steri-Shield], pain management, and new offerings in the Neptune operating room waste management systems and percutaneous cement delivery. Endoscopy sales increased 14% in the quarter, and 21% year-to-date, with strong growth in arthroscopy, general surgery, and video sales.

[Lydinger] sales increased 14% in the quarter and 5% year-to-date.

Medical, our bed and stretcher business was up 24% in the quarter, and 21% year-to-date, with strong growth in hospital beds, stretchers, and ambulance cots.

Physical therapy was up 13% in the quarter and the first nine months on new start-ups, good same-store sales growth, and a few - few small acquisitions.

International sales were at 252 million for the quarter, and 745 million for the first nine months, representing increases of 21% and 13%, respectively.

Foreign currency comparisons added 10 million to the top line in the third quarter and reduced the top line by a little less than a million dollars for the first nine months.

Excluding the impact of foreign currency, international sales increased 16% for the quarter and 13% for the first nine months.

On a local currency basis, most of the international divisions are really having a great year. Europe was our growth leader in the quarter at 20%, and 14% year-to-date, with strong performances in the U.K., Benelux, Spain, Scandinavia, Italy, and - which has helped by last - which was helped by last year's acquisition of a distributor.

Overall, though, Europe is doing better than it's done in years for us.

The Pacific was up 19% for the quarter and 22% for the first nine months, with the strongest performances in China and Australia.

Canada and Latin America were up 11% for the quarter and 10% year-to-date, with the strongest performance in Latin America.

Japan grew 9% in the quarter, and 8% year-to-date with the strongest performance in orthopedic implants.

Orthopedic implant sales were 420 million for the quarter and 1.23 billion for the first nine months, representing increases of 24% and 17%, respectively. Based on strong shipments of reconstructive products, trauma, and spinal implants, and the third-quarter acquisition of the spinal implant business of surgical dynamics.

Excluding the impact of foreign currency, sales of orthopedic implants increased 22% in the quarter and 17% for the first nine months.

Excluding the impact of the spinal implant acquisition, sales of orthopedic implants increased 21% in the quarter and 16% for the first nine months.

Overall, the med/surg sales were 275 million in the quarter and 802 million for the first nine months, for increases of 16% and 14% respectively, based on higher shipments of endoscopic systems, hospital beds and stretchers, powered surgical instruments and lied in engineer craniomaxillofacial implants and the image guided surgical systems. Excluding the impact of furnish see sales of med/surg equipment increased 13% in the quarter and 14% for the first nine months.

In the new product area, in September we began rolling out the next generation of [Zia] spinal implant system, the new [Zia] screws are lower in profile, easier to insert, and provide more placement options. And the new [Zia] instruments have been improved, making the system easier for the surgeon to use.

The [Eos] needle invasive knee system launched in the first quarter continues to show strong quarter to quarter growth. Scorpio mobile bearing knee is doing very well in Europe and Australia and we're launching this product in Japan, and have an ID underway in the U.S.

The Scorpio super flex knee was launched midyear in the U.S. and is doing well in the premium placed flex knee market. The T2 somewhat medullar [inaudible] provides a wide range of fracture repair options for the tibia, femur and humerus using a common set of instruments and from what we can see right now, this is one of the best new products we've had in the trauma area in some time. The Trident acetabular system for polyethylenes is our fastest growing cup system. The Trident on ceramic system is selling very well in Australia and Europe and we recently obtained approval in Canada.

We're still on hold in the U.S. as our supplier completes their FDA inspection, and that will start in November, I believe. The system 5 heavy duty powered instrument system was introduced in the third quarter, and this is the fifth generation of battery powered instruments that we've had in the market, and we think it's the best ever.

The OP 1 area, we're pleased with our initial sales activity in the U.S. and Australia by small specialized sales organizations. Europe is doing better as they develop dedicated OP 1 product managers in key markets there. We're recruiting patients to the un-instrumented posterolateral spine fusion trial and making plans for a clinical trial for the rate cage. In Japan, we have approval for a clinical trial for OP 1 in an instrumented posterolateral spine fusion and hope to kick it off late this year.

Our royalty obligation on OP 1 sales was settled on October the 1st, with a $14 million pay-out to [Carus], Incorporated.

Concerning the Rutherford plant, we entered into a shutdown agreement which will facilitate the orderly phaseout of production at the Rutherford, New Jersey manufacturing facility over the next 12 months. The after-tax employment-related costs of the shutdown are 14 million, which we recorded as a nonrecurring charge in the third quarter.

Surgical Dynamics is going well. Acquisition of spinal implant business Surgical Dynamics was completed on July the 1st, with a cash payment to Tyco of 135 million. Integration process is proceeding as planned. Third-quarter sales of acquired products were 13.3 million, which was about even with last year, but down from the previous quarter, the second quarter, because of the integration process.

Almost half of the distribution reps selling in the SD line - SDI line have joined Stryker. Most of the distributors who won't be coming with us are now terminated, and the business has been transferred to our sales force. We're looking for a stronger sales with the SDI product line here in the next quarter.

And with that's correct I'll turn the mic over to Dave, who will cover the financial results in more detail. Dave?

Thanks, John. The currency comparisons were quite favorable Q3. We picked up 10.3 million, which almost eliminated the unfavorable impact from the - from the first half. If currency rates hold at this - at current levels, we'll see a positive impact on sales of about 10 million in the fourth quarter.

The price volume analysis, we are looking at U.S. implant prices up about 5% in the third quarter and the first nine months. Prices were down slightly in Japan and the Pacific, while prices elsewhere generally improved modestly.

The overall price volume analysis, as a percent of sales, follows. Price - in the third quarter, price accounted for about 2% of our worldwide sales - sales growth. Freight was negligible. Foreign currency is up 1-and-a-half to 2%. Acquisition was about 3%, principally SDI. Leaving volume and mix accounting for 13% of our growth in the third quarter.

For the year, price will be about 2%, FX will be flat, acquisitions 2%, and volume and mix will account for 11% of our 15% growth year-to-date.

Volume and mix is up about 11% year-to-date in both the U.S. and overseas markets.

Surgical Dynamics, as John indicated, we had 13.3 million in sales this quarter, which are flat with - with last year. We expected some fallout in the integration process, and as not all the SDI distributors wanted to join forces with Stryker, and vice versa. Sales of SDI products will improve, now that the Stryker sales force has unrestricted access to the line.

Pro forma numbers for the Stryker and Surgical Dynamics product lines would be 43 million this quarter versus 36.2 million last year, which would be up 19%.

Now, moving over to orthopedic implants, they account for 56% of our sales. Orthopedic implants were up 24% in Q3 and 17% year-to-date. Now, I'll walk through the growth rates by the main product lines.

Hips were up 18% in the quarter, 13 in the U.S., 26 OUS. Knees were up 23% worldwide, 20% in the U.S., 28% OUS.

Trauma was up 22%, 34% in the U.S., 16% OUS.

Spine was up 88%, 155 in the U.S. and 25 OUS. If you strip out the SDI products, spine was up 32%, 50 in the U.S., 15 OUS.

Totals are 24% growth world wide, 26 U.S., 22 OUS, and again, if you strip out the SDI products, orthopedic implants were up 21%, 20 in the U.S., and 22 OUS.

So that puts our year-to-date growth in hips at 12%, knees 19, trauma 13, spine 61, and the total, 17.

And again, if you strip out SDI, the spine growth would be 42% and the total's 16%. I'll give you the constant currency numbers for the quarter. It won't make a difference on the year-to-date numbers. The international - and I'll just give you the international. Hips were up 20, and that would put worldwide at 16. Knees were up 22 and that puts the world at 21. Trauma was up 9, and that puts the world at 17. Spine up 21, and 87 for the overall, and the total would be 17 international and 22 overall.

In the hip line, cementless stems continue to lead the growth, driven by pri- - primarily by HA stems. The Accolade TMZF, Citation TMZF, and Secure Fit HA. Revision stems continue to do very well led by Restoration T3 and Restoration HA. Cup growth is strong, driven by the Trident acetabular system for polyethylene in the U.S. and continued penetration by crossfire. The Trident acetabular system has a better locking mechanism and is positioned - positioning us for the launch of ceramic inserts next year.

In Europe, Trident Exeter and ABG 2 are doing well and the hip star system was introduced in midyear.

In Japan, super secure fit, super eon, and ABC ceramic on ceramic hips are doing well. Our supplier of aluminum ceramic components is working towards the U.S. approval of their manufacturing process, and we're hopeful of U.S. approval early in 2003.

In the meantime, the Trident ceramic/ceramic hip system is doing well in the international markets.

We had another great quarter in knees, with both Scorpio and [Duricon] showing solid increases in the dues. The [Duricon] TS and Scorpio TS revision systems are doing very well. The new modular rotating knee hinge has been well accepted in the U.S. The new Scorpio super flex knee for patients requiring an extended range of motion is showing encouraging results.

The [Zeos], our minimally invasive uniknee is off to a strong start in the U.S. In Europe, the mobile bearing Scorpio knee was introduced in the first quarter and we recently got approval in Japan, and have an U.S. I.D.E. study under way. Our MRS modular sequential system for complex revision and oncology procedures continues its strong performance.

Trauma continues on a very steady growth trend in the U.S. and overseas. The gamma hip fracture devices continue to show strong growth. The new T2 intermedullary nail system, which was launched in the U.S., Europe, and Japan in late last year is doing extremely well. The T2 system was completed this year with the introduction of the T2 humeral nail.

The Malta pelvic reconstruction system, launched earlier this year, is growing rapidly in a small but important segment of the trauma market.

The [Zia] thoracolumbar systems are growing nicely with the introduction of [Zia] II in September, which offers lower profile screws and improved instrumentation. The Reflex anterior cervical plate launched last year is doing great. [Zia] sustainless steel for scoliosis is our first offering for deformity surgery and it's doing - it's doing great.

The Q3 edition of spinal implant products from Surgical Dynamics completed the Stryker Spine lineup by adding inter-body cages in the U.S. market as well as other cervical and thoracolumbar systems.

The Halmedica Osteonics sales force ended the first nine months at about 700 reps and managers, which was their goal for the year. About two-thirds of the sales force are branch employees and about a third are agent reps and managers. And in addition, we've got about 150 tech reps.

Moving on to the med/surg group, that group comprises 37% of our sales and is made up of 4 divisions. Instruments is about 39% of the group, endoscopy 30%, medical 21, and [Lydinger] is about 10% of the group.

Instruments, that line increased 19% in Q3 and 12% year-to-date. They had a very strong quarter in powered instruments. They're up 21% worldwide, 15% in the U.S., and 40% OUS. Other OR equipment was up 18%, 14 in the U.S. and 36 OUS, putting the growth overall at 15% in the U.S., 38 OUS, for 19 overall. Year-to-date, the powered instruments are up 11 and other OR is up 14, and 12% overall.

The instruments division had a great quarter, based on strong shipments of powered instrument systems and other OR equipment, such as [Steri-Shield], irrigation, pain management, percutaneous cement delivery and the Neptune operating room waste management system. A really big driver in the quarter was the launch of system 5, our next-generation heavy-duty powered instrument system.

Endoscopy was up 13% in Q3 and 20% year-to-date. The arthroscopy line was up 15%, with 13% growth in the U.S. and 20% growth OUS. General surgery was up 16, 11 in the U.S. and 57 overseas. Video was up 10%, 16% in the U.S., down 12 overseas. So the totals are up 13%, with 14% growth in the U.S. and 6% growth overseas.

Year-to-date, arthroscopy is up 18%, general surgery up 21, video up 21. Then the endoscopy division had another strong solid quarter, based on strong growth in arthroscopy, general surgery, and solid growth in video. And there continues to be a lot of activity in the endo suite and communication area.

The [Lydinger] line increased 20% in Q3 and 8% year-to-date. They had a very strong quarter, up 20% worldwide, with 14% growth in the U.S. and 27% international. [Lydinger] showed really nice growth in their image-guided surgical systems and the Colorado electrocautery needle. They're also completing the wind-down of their OEM business and that should just about be behind us now.

The medical division was up 14% in Q3 and 11% year-to-date. Domestic sales of medical products were up 24%. International was off 9 for the total of 14.

In the U.S., hospital bed, stretcher, and ambulance cot sales were strong, based on new products and a stronger sales force. The international markets face difficult comparables this year. This business, though, is very well positioned for mid-teens growth based on good incoming order trends.

Physical therapy is our last segment. It comprises 7% of our sales and its growth has been very steady at 13% each quarter this year. Same-store sales were up 4% for the quarter and the 9 months, with start-ups and acquisitions providing the rest of the growth. We're up to 319 physical therapy centers in the U.S. Physical therapy reacted quickly to the clarification in Medicare guidance effective July 1, 2002. The impact on revenue was less than 1 million in Q3 and should be even less going forward. Medicare, just as a point of reference, is only about 15% of the revenue in this segment.

Now moving on to the operating results, overall margins declined slightly in the quarter and are on par with last - with last year for the nine months. The consolidation of our implant manufacturing facilities will play a big role in our long-term goal of increasing gross margins and reducing inventory levels. R and D ratio is about 4.8% of sales, and that's declined somewhat from last year, principally because biotech costs - some biotech costs have been shifted over to cost of sales and SG and A, as they go into a commercial phase.

The SG and A ratios declined slightly in Q3 on strong sales growth, but increased slightly on a year-to-date basis. Again, because of the bio - primarily because of the bio tech.

Operating income before nonrecurring items increased 24.4% in Q3 and 17.3% year-to-date. And operating margins were up nicely. 19.5% versus 18.9 in the third quarter of last year.

Interest expense plus A/R securitization discount increased sequentially as a result of the SDI acquisition in Q3, and is up to 11.6 million compared to 18.1 last year.

Intangibles amortization increased about 2.4 million in Q3 as a result of the SDI acquisition. After removing the increase attributable to SDI, intangibles amortization declined about 10.7 million year-to-date, most of which relates to the adoption of FASB statement No. 142.

Other income, the details I'll give you real quickly. Interest income was 300,000. FX gain actually was a loss of 800,000. Minority interest was 200,000 reduction so overall, other expense was 700,000.

And the income tax rate held steady at 33%. We would expect to see the tax rate improve as production moves to Ireland and other favorable tax jurisdictions.

The balance sheet is in great shape. I'll remind everybody that we've got $130 million A/R securitization program, which is not reflected on our balance sheet, and you need to add that back to receivables to compute DSO and you need to add that back to debt to see the complete debt picture for the company.

We made really good progress in accounts receivable management over the last year, and I think we're going to be able to hold that. We're at 62 days, which is the same as last quarter, but that compares very favorably to 67 days last year.

Inventory days came in at 142, which is a nice improvement over last quarter, where we were 149, and a great improvement over last year, where we were 173 days. So we're clearly benefitting from stronger shipment levels here.

Cash flow was very strong in the quarter. It allowed us to almost pay for the July acquisition of SDI. And we were able to hold debt flat for the year. I'm sorry, for the quarter. So debt for the quarter was up less than a million dollars, and debt year-to-date is up almost $106 million. And the debt ratios just get better and better. Our interest coverage ratio has popped up close to over 14 times now, and debt to EBITDA is just a little over 1. 1.06, to be precise.

So you've all seen the cash flow statement. The operating cash flow is up 11% in Q3, and 13% for the nine months, and reflects the - the strong increase in shipments that we're experiencing here in the fourth quarter. But given that, we're real pleased with where - with where cash flow stands.

And I'll turn it back over to John.

Okay. Thank you, Dave. One of the other things that we did was send out with the earnings press release, we also sent out a press release announcing a new role for Dave and then also the promotion of Dean Bergy, and I just - I'd like to make some comments before we go into the wrap-up and the questions.

One is that I've worked for Dave - worked with Dave now for 15 years, and over the last 30-something years, I've worked with a lot of financial people. He's - he is the best I've worked with. He's really good. He's been a tremendous asset to the company, and he's been a leader in the executive group. He's been my business partner as we go forward - as we've gone forward here, and played an instrumental part in basically the way we run the company.

He was very much involved in the Halmedica acquisition and the negotiations with Pfizer, and just some comments about the financial results during the 15-year period that Dave has been our CFO. Sales have gone from 148 million, and I think this year we'll do 3 billion, so that's a growth factor of - cumulative average growth rate of about 22%. Earnings have been a little bit better, from 13 million in '87 to something over 330 million this year, and that's a growth rate of 24%. And our market cap has gone from 275 million to about 12-and-a-half billion today. Unless you guys do something terrible to us in your reports. And the stock price has gone from $1.46 to $61, or about $62, I guess, today. 20% - 28% cumulative average growth rate.

But not only has he been very much involved in running the business, but he's also built a very strong organization under him, and our accounting, finance, treasury, and tax organization is really, very, very strong.

Now, why is Dave stepping down? Well, this was Dave's idea, it wasn't mine. But I would say that he's earned it. He's got personal plans to spend a little less time working and a little more time having some fun. For those of us that think work is fun, I don't understand why he wants to do that, but nevertheless, that's what he's told me.

He's worked awfully hard, and we're very much indebted to him, and he's earned the right to relax a little bit. So we're not begrudging that. He's got a home in Florida and so he loves to play golf and he loves to fish and he'll get to do some of both of that. But Dave Simpson is still going to be involved with this company.

We're planning a - what I would call a slow transition with Dave, and for the next year or two, Dave is going to be involved in investor relations. Many of you are good friends with Dave, and we don't want to lose that relationship. We want that to continue. He's - we're expecting him to play a big part in our business development and strategic planning as we go forward, and he's one of our best strategic thinkers there, so I still want to take advantage of that.

And he's a great negotiator and I'll obviously take advantage of that.

And as stated in the press release, Dean Bergy, who is being promoted to replace Dave, is a strong individual in his own right. Dave has been with Stryker - Dean has been with Stryker now for eight years. He joined us as corporate controller after 12 years with Ernst and Young in public accounting, and was promoted to vice president of finance of our medical division and then helped turn that division around and moved back to corporate as V.P. of finance in '98, four years ago. And he came back right - just at the right time to get - fall into the Halmedica acquisition activities, so he played a big part in that.

In many ways, Dean is an unsung hero at Stryker. He's, I think, our best accountant. He's the guy that tells Dave and me what we can swear to and what we cannot swear to. As you well know under the new rules. And he's the guy that we go to to make sure that all of our external financial reporting, including the SEC and New York Stock Exchange reporting and compliance is all in place. And really does a wonderful job at it.

He's also very smart, as you might suspect. He's an U. of M. business school graduate, Harvard PMD program graduate last year. A few years ago, we sent Dean to training class at Halmedica Osteonics and these are people that have been selling and pedalling orthopedic devices for years and the number one student in that class with the highest score at the end of the class was Dean Bergy, so just to give you some idea of his ability.

He's been participating now for several years now with our weekly staff meeting calls. He's been visiting all of our major sites. And he's the guy - inside guy that puts our budgets together and makes sure that our reports come out on a timely basis and they're accurate. He works very closely with our division heads, and so we're looking for a - really a very smooth transition here. Just on a personal basis, Dean is a very strong individual as far as character is concerned, and I think that he, too, will be a very good business partner, and we're looking forward to working with him.

Overall, we're really expecting a nice smooth transition. The cut here is this: The results for 2002 are Dave's responsibility, and the budget for 2003 is Dean's responsibility, so Dean is already working on his - in effect, his budget for the upcoming year.

And with that, Sonia, we will be delighted to take - oh, you want me to do that now? Okay.

Dave is very concerned here I don't skip the 2002 outlook. I must do that.

Just some general comments about 2002.

We're very optimistic about the markets that we're in. The - the orthopedic surgery market continues to be very robust. It's growing very steadily. And we're expecting very positive results as we go forward here. If we can get a little help from the dollar and the SDI acquisition in Q4 goes as we plan, we should hit the $3 billion in sales, and it's something that I - personally, I am really putting a lot of heat on, because I just think it would be a nice goal for us to achieve. And it would be a nice way for Dave to end the year, to say that he delivered 3 billion.

The trends are good. We - we - as I said earlier, we're expecting a strong fourth quarter. Our guidance for the fourth quarter as far as earnings is concerned, we're looking for 50 cents, and that will bring the year in at $1.68. As reported, and then a nickel higher if we exclude the nonrecurring items. So it would be $1.68 reported and $1.73 before the nonrecurring items.

And next year's goal with Dean's budget will be not less than a 20% increase in net earnings before any nonrecurring items, and at this point, that would be $2.08 per diluted share. Now, keep in mind we have not completed our budget, it's not had exhaustive reviews, which it will all go through in November and early December, but - but I think you can - as you put your models together, you can be looking at 20% earnings growth for next year, or $2.08, without any nonrecurring items.

And with that, we'll open it up. I want to talk about that at the end.

Okay.

And with that, we'll open it up for questions.

Thank you, gentlemen. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the 1, followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question.

Our first question will come from the line of Rick Weiss with Bear Stearns. Please go ahead.

Good afternoon. First, congratulations, truly, on a wonderful quarter, John.

Thanks, Rick.

Can you help us maybe sort through just your thoughts on market growth at this point? I mean, clearly you've had a wonderful quarter. To what degree is that market specific and Stryker, where do you think you're gaining share, number one.

And maybe talk about pricing as well, since October 1st is when you usually implement your - I believe historically your price increases.

And my second question is, now that you've closed the Rutherford plant, you talked about improving the potential for improving inventory and gross margins. Can you talk about those implications directionally and the goals and how fast and what we might see and when? Thank you.

Okay. I guess two questions. One would be how much of this growth is market and how much of it is because we're working a little harder. And I'm a little hesitant to give you specific numbers that we've gained this amount of market share or that amount of market share, but I would say in general, my sense is, Rick, that we gained market share in knees, we gained market share in trauma, and we gained market share in spine. Part that have is acquisition but I think we also gained market share on the base business there.

In hips, we may have gained a little bit. I'm not - I'm not real sure there. But just, I think, if you look at the overall implant product line on a worldwide basis, we're - we're pretty sure we picked up some market share in the third quarter.

Now, there's no question the market is strong, the trends at this point are still - still look very favorable. Pricing, I think Dave kind of went into that. Pricing looks good, and the guys have already put in their price increases for - or U.S. have.

Yeah. September 1.

Yeah, September the 1st. And I don't think we have any reason to think that they're not going to stick. I think they'll probably stick.

Right.

On the Rutherford plant, you know, the - our big concern, first, was getting an agreement with the union, and that was tough negotiations. They - they made us work for the agreement, but we think we've got a fair agreement with them and we hope they feel the same way.

That shutdown will - is in process now, and will continue for the next couple of quarters, but I would say toward the middle of the summer next year, we'll basically have the manufacturing operations all moved, either to [Mawa] or to Ireland, and a number of people will be relocated, too. In fact, a few I think have already been moved, so we think that's proceeding along pretty much according to plan.

Okay. Just a quick follow-up. Maybe I missed it, John. I apologize if I did. What was the, in fact, price increase or sort of overall price increase, however you want to share it, that you all put in place?

It's - Rick, it's right in line with last year.

So 7% or so?

It's in that zone. Maybe it's not quite that high. It's a - you know, we have a complicated product line, so it's - it depends a lot on what we sell, but it's going to be right in line with what last year. We didn't see any deviation from the price impacts when we ran the numbers for September.

Okay. Thank you very much. And congratulations, Dave. Fishing sounds good to me right about now. (Laughter)

Thanks, Rick.

Our next question will come from the line of Ozzie Horab with J. P. Morgan. Please go ahead.

Hey, guys. Congratulations also on a good quarter and to Dave and Dean on your new roles quick question on the just kind of fleshing out the international business a little bit more. Your growth, particularly in Europe, was exceptionally strong again this quarter, and you're seeing similar trends from some of your competitors as well. Could you talk a little bit more about maybe price versus mix in Europe and really any kind of macro trends that you're seeing overseas right now? In the hip and knee business?

The price is very modest in Europe. I think it's - if I recall, it's around 1% or so.

I think that's right.

Isn't that about right.

Yeah.

Yeah. It's very modest. It's mostly - it's mostly volume mix.

And is this just an increase in procedure growth in Europe right now?

I hope so, because it's the hospitals and surgeons that are buying the product. We're not stocking any - we're not stocking anybody. Almost all over the world, what we sell is what got consumed.

Okay. And then just a quick question on the gross margin again. It was a little bit lower this quarter. Do you have a sense of - I know it's going to take a while for the Rutherford closing to go through and to see a real benefit there. A sense of where the gross margin is going to go over the next couple of quarters? Is that - is that a function of international versus U.S. recon growth?

I don't know that it's all that. I mean there's - there certainly is some of that. The margins in some of the international business is not quite as high as the U.S. But it's - as far as - as far as the impact on Rutherford, you know, we're - we really haven't been very specific about what that will be, and I'm - I'm a little reluctant to put - to put specific numbers out there. But it will definitely nudge margins forward. You'll see that more in '04, I think, than you will in '03, because remember, '03 will be a transition year.

Okay. Thanks, guys.

Talking about the year, not the quarter.

Yeah. Sorry.

Yeah.

Our next question will come from the line of Scott Davidson with U.S. Bankcorp Piper Jaffray. Please go ahead.

Hi. Good afternoon, and congratulations.

Dean, I wondered if, first, maybe you could talk a little bit about your, you know, key agenda items, top priorities, those sorts of things, as you move into the role.

And then related to that, maybe how you would envision the - the earnings growth drivers maybe changing a little bit going forward. Obviously there's been a lot of benefit historically from debt pay-down in recent years. Can you talk maybe about the type of tax upside that we might expect to see.

And then also just in general terms, about some of the margin drivers that you would see kicking in?

Okay, Scott. I'm interested in this answer too, so we'll see. Go, Dick.

Well, Scott, I've been well schooled during my eight years here and I guess the one thing I know for sure is our objective will be 20% growth, and, you know, clearly right now we're looking at working on wrapping up this year but as we go into 2003, you've heard the guidance that John offered today. I think as we move forward in a tax area, clearly we've been moving products overseas - or some of our production overseas, and I think we will see the tax - we will see some tax benefit - or benefit in the tax rate reduction as we go forward there.

In terms of debt, you know, obviously we - we continue to pay that down and we'll continue to look for opportunities to deploy our cash as we get our debt paid down.

Great. And then just related to the tax issue, could we expect to see a tax benefit next year, or is that more of a '04 item, and then just also the issue of margin drivers going forward.

Well, I - you know, I think - I think that's possible but I wouldn't want to comment on the tax rate at this point in time.

And, you know, margin drivers, you know, obviously the Rutherford initiative is - is the key one that we have right now and as Dave said, I think, you know, 2004 is the time frame to really look for the impact, the positive impact that we're going to get from that.

Okay. Thanks. And just one follow-up. Dave, you referenced the system 5 that was just launched. Can you maybe just talk about the key attributes of that product and how it's doing in the early going?

Well, it's doing great. It - it - you saw, if you're - I know you're tracking these growth rates every quarter, and it really accelerated the - our powered instrument business in the U.S. in the - in the third quarter. This is a - this is a system that is more powerful and more versatile than anything we've - we've produced in the past.

It has some unique features that we haven't offered in the past. For example, the drill has a dual trigger mechanism for a very easy forward and reverse controls for the surgeon. The sagittal saw has a couple of speed options that really does some remarkable cutting of bone. And then this system also has the ability to have the OR use a non-sterile battery, if they - if they wish. We don't know that that will be a very popular option in the U.S., but it's one that is available if - if a hospital wants to use that.

Great. And any impact competitively? I know that one of your key powered instrument competitors just teamed up with one of your big orthopedic competitors. Has that changed the landscape at all?

I don't - I don't think so. Frankly, it's a little early to tell, but we haven't seen a whole heck of a lot and, you know, our experience in the - in the past is that, you know, we've dealt with big companies selling bone saws before. It's not - it's not been a problem for us.

But you should think of this product line as kind of the BMW of powered instruments. It's going to be hot.

Thanks very much.

Thank you.

Our next question will come from the line of Katherine Martinelli with Merrill Lynch. Please go ahead.

Great. Thank you. And let me offer my congrats as well.

Just a couple of quick questions. Any color you could give with respect to your assumptions for the spinal market going forward? Particularly when we look at the launch of infuse and what may be an ability for Medtronic to pull through some spinal hardware business. Are you seeing any of that right now, and maybe just in terms of what your expectations are for that business in light of that?

Well, it's a little early to tell. I did read your - your report this morning on First Call, and I thought you - you did a great job on your analysis of infuse and the market potential, Katherine.

But it's just a little hard to tell from our chair exactly - exactly what that's doing for Medtronic. Our spine business continues to grow quite nicely.

Okay. Fair enough. And then just on [Lydinger], which had a big turnaround in the quarter, is it fair to say that that business is now back where it needs to be in terms of the sales force and the product offering, and that we could kind of extrapolate the run rate we're seeing now?

Absolutely not. I have - (Laughter)

It's not growing fast enough. And we all know that. But on the other hand, we've got some very bright young people here that we know that want to enhance their careers and a good way to do that is to grow that line faster.

The navigation part of the business is really picking up momentum, Katherine, and I think what we've got to do is also get the craniomaxillofacial product line moving a little bit faster but they're making some changes overall in the sales side there that I think are really going to help that. So I think quarter to quarter, I think you're going to see improvement. But are we declaring that we've turned it around? No.

So maybe still a bit lumpy but heading in the right direction?

Exactly.

And then just one last question. Any comments with respect to extremity growth in the quarter as well as bone cement?

I - I'm - I think extremities were up worldwide high single digits and bone cement was about 5% worldwide.

Great. Thanks a lot.

Okay. Thanks, Katherine.

Our next question will come from the line of Bruce Jacobs with Deutsche Banc Alex Brown. Please go ahead.

Thanks very much and my congratulations as well.

If I could ask, you've talked a little bit about some of the important drivers in the recon side, crosslink, poly, you mentioned cementless and revisions. Can you talk at all about - for any of those areas, where you are in terms of either penetration, I guess when it comes to crosslink, and then in terms of mix of your business for cementless and revisions.

Crosslink is now what 80%.

A little shy of that.

79?

I think maybe 75, 76.

75, 76.

Yeah.

And cementless - cementless products in dollar terms are - I think are now higher than cemented.

Yeah.

We're - I don't think we're there yet on units.

Okay, okay. And separate topic. Has OP 1 gotten to the point yet where you'd be willing to quantify the sales level or talk about what your expectations might be for next year?

No.

Okay. Then also related to OP 1, the - you mentioned the enrollment in the spine trial. Can you just give us a sense for where that is and timing on that wrapping up?

It's going to be next year. We're - we're still got a ways to go there. I think we're looking at - at sometime in the second half of next year before we'll complete enrollment.

Second half of next year? Okay. And I guess just the last question, John, really for you, sort of a big-picture question. It obviously seems that all is well for - at Stryker and also in the industry broadly. Has there been a time where you have as many things going well for the company as you do right now? It just seems - seems like you're exceptionally well positioned. I'm just wondering if - if, you know, it's been as good as it is right now.

I'd say back in '91/'92, when minimally invasive surgery, you know, came on the scene, we had huge growth in top line and bottom line. But I don't think we've seen just overall the company do this well financially in about 10 years. We got a big bump back in the mid-'90s when we did the - the [Motsimoto] acquisition, when we picked up all the revenue and half the profits in that - that acquisition. But right now, it's very robust, but, you know, these things, they don't last forever, so we're not here telling you that we don't have to be vigilant. We do. We've got to keep fighting for every order and doing everything we can to keep our growth going. And you guys are getting good stories, we know, from competition, but we're going to do well.

Great. Thanks so much. And congrats again.

Thanks, Bruce.

Our next question will come from the line of Bob Hawkins - I'm sorry, Hopkins, with Lehman Brothers. Please go ahead.

Thanks very much. A quick question on unit growth on - in the hip and knee area. You've seen tremendous growth in Europe this quarter. I was wondering if you could perhaps give a deeper level of granularity on what's behind those trends and, therefore, give us some understanding as to their sustainability.

Obviously, the numbers are - are great and I'm just wondering exactly, you know, is it specific to certain countries within Europe, and, again, talk about sustainability. That would be very helpful.

Well, John talked about the countries that are - that are doing really well, and I think that that would apply to the -

U.K., Italy.

Yeah, U.K., Italy, Benelux, Spain -

But has something changed lately that's causing the uptick in either reimbursement or attitudes or - or specific product lines?

We've got a great president that's picking up where Ron Lawson left off. Ron stabilized the organization and Luciano is really turning it on.

They've added a lot of salespeople, and the - the organization's performing at a pretty high level.

Yeah, we - if we talk to the individual country managers in general, we think we're picking up market share in Europe right now.

And then just a question, I guess, a little bit more broad in the longer term outlook, and obviously from the hip and knee perspective, the babyboomers coming on-line at some point is very exciting for this industry as far as long-term growth is concerned. But could you give us a sense as to, you know, when you think that bolus of patients is coming on-line here and when that might really start to impact your business?

I thought we'd said it already had.

Well, the older babyboomers are in their - they've passed over 55 and, you know, I think there's some of those -

A few of them getting implants.

- starting to come into that can you say base now.

Yeah.

But clearly the - the big - the big bolus isn't here yet. It's still coming.

Do you - do you have a sense as to what the average age is of a patient getting a hip or knee implant at this point?

You know, we've seen the government statistics, which are about three years old -

Yeah.

Anecdotally, we think it's getting a little bit younger, but, you know, I don't think anybody has any definitive statistics that are current.

Okay. Thanks very much. And congratulations. Great quarter.

Thank you, sir.

Our next question will come from the line of Kurt Kruger with Bank of America. Please go ahead.

Hi, guys. Great quarter.

Hi, Kurt.

If I could just ask, you know, your competitors have made a lot of noise about the move towards less invasive, I guess hips mainly. Could you tell was you're doing and is it - do you envision that will be a significant market that you'll need to address, and maybe you've done things already that - and you haven't been as vocal about it.

Yeah we're doing - we're doing a fair amount there. An awful lot of this is surgical technique. And I'd just point you to an article in orthopedics, the October 2002 issue, which I think just came out. There's a paper in there by - by Dr. James Wentz at Johns Hopkins who is talking about a mini incision total hip arthroplasty technique that he's been working on for the last few years, and he was using - using Halmedica products.

He is - so we've got several things like this that we're working on, but don't really have anything too specific to talk about at this point.

So would you say, David, if that trend develops here and we see some of the competitors launch products, you won't be far behind with your own version?

I don't think so. We'll be - we'll be right there.

We'll be in the fray.

We'll be right there. It's clearly, from what the article by Dr. Wentz indicated, that his experience was pretty positive with a mini incision, and if that turns out to be a long-term trend, we'll - we are going to be right there.

That's great. thanks. Could I just follow up with another. The mobile-bearing knee that you do have an I.D.E. outstanding, I believe. Could you bring us up-to-date to what's going on there. Have you finished that trial and can you tell us where you might enter the U.S. market?

Well, I don't have that information. I - I don't - I don't know exactly where that trial stands.

Okay. And then just if I could, I'd ask a broad question. John, I know you've been around a long time. I, too, and if you - if I could ask, you know, you as a sage - your sage advice her. You saw the - the whole orthopedic market turndown in, what the late '80s with pricing pressures, DRGs, et cetera. What can we look for? What would you say? I mean what should we look for? When will this all end? It's just so robust right now. I know you alluded to that a couple questions ago but maybe I could ask you: What should we look for? Are there signs that are possible to gauge when this might start to slow down?

You know, nobody knows for sure, Kurt, but I - I would say in general, if you look at the - the statistics and look at the - the financial data that the - all the companies are giving you, it's a good market right now. And I think if you look at the trends as far as the market population that we're talking about, the - the babyboomers that are just now moving into the late 50s and the graying of America but really of the people all around the world, demand here is just going to continue to grow. The pharmaceutical companies are obviously working very, very hard to find therapeutic remedies for osteoporosis and osteoarthritis, but the truth of the matter is, that's decades not a generation away. Even if they find something today. So I think you're going to see a very good market for the next few years. And I think the thing that's - that the industry has got to be careful of is that they don't - they don't get greedy, they don't get foolish, and that would be my sage - quote, sage advice.

The other trend to watch, too, is the weight of people around the world. There's - people are getting heavier, certainly in America but all over the world, and that adds a lot of -

That's adding to the population.

- adding to the - adding to the problem.

That's well said. Thanks.

Thanks, Kurt.

Our next question will come from the line of Bill [inaudible] with First Albany. Please go ahead.

Great. Thank you. Fantastic quarter, gentlemen.

My questions are - most of them have been answered but with the crossfire poly, do you look to phase out your standard poly over time?

Well, you know, there's a - there's a - there's a population of patients that are very low demand patients and it may not be that - necessary that they receive - that they pay the premium for crossfire.

Okay. And then if I looked at your hip revenues, what percentage of the overall hip revenues would be liner sales, roughly?

Oh, it's fairly small. I don't know the answer to that. It's got to be in the 20 range maybe?

Yeah. Not any more than that.

Yeah. Just liners? Yeah, I - it's not a huge portion of it. The biggest part of hip sales are stems and cups.

Okay. Great. Thanks a lot. I appreciate it. Again, great quarter, guys.

Our next question will come from the line of Steve Hamel with RBC capital markets. Please go ahead.

Good afternoon, and congratulations from me as well.

Two questions for you. First up, in terms of the inventory days, Dave you obviously talked about how strong they improved here this quarter, particularly year-over-year, and is this something that could continue even before you get the impact of Rutherford that you've got strategies in place to continue to bring down inventory days in the near term?

Oh, yeah. We - we've been working on this for years, and we've made some just great progress. I - I can't remember exactly how high inventories were when we acquired Halmedica, but it was significantly higher than this, and we've made a lot of progress. We will continue to work on bringing inventories down. We're going to try to do it every quarter.

And then my second question has to do with - again, with pricing, but from a different perspective.

We - since the last conference call, we had reimbursement rates come out for Medicare for 2003 and it looked like DRG 209 got quite a boost. Do you think that that offers a good omen in terms of the ability to continue to pass through at least some kind of a CPI or maybe a little better than CPI type of price increase for the longer term?

I think it's a little early to start talking about the longer term. I mean, we just put our price increases in for the next 12 months. But as long as the hospitals are healthy and they want to do more orthopedic surgery, that would be very positive.

Okay. And if - one last question for you, Dave. In terms of allograft opportunities, I know last quarter you said that you had been looking at the possibilities of adding allograft to your spinal product line. Is there any update there.

We've got a few small relationships that are just - just starting, and we're seeing some very modest allograft sales in our implant numbers now, but they're very, very small. Even less than OP 1.

Do you - do you think that there's more supply out there to be had that you could go after?

Sure.

Okay. Thank you.

Thanks, Steve.

Our next question will come from the line of Larry [Koosh] with Goldman Sachs. Please go ahead.

Yeah, hi. Good afternoon, and Dave and Dean, I obviously look forward to working with you guys in your new roles when those take place.

Just two quick questions. First, on - I think, Dave, you had mentioned - or it may have been John - the November, I believe, inspection for the ceramic manufacture, and I just wanted to make sure that I heard that correctly and sort of get a sense of is that sort of in line with what you were thinking about when you guys were talking about somewhere - about an early kind of '03 approval or should we think about that time line slightly differently for the ceramic on ceramic. And then the second question is gross margin. I just want to make sure that I understand, again, sort of the sequential drop, just given obviously the tremendous orthopedic implant sales and the margins that those carry.

Is this really primarily associated with the plant closure and if so, should we sort of be thinking about these somewhat compressed margins here for a little while?

Okay. As far as the inspection is concerned, Larry, we've been promised by the FDA that they will inspect our vendor in November, and our hope is that we get - we can then get - get the plant approved and then get back - get on the market then sometime early next year. And then you guys ought to address the other question, margins.

Yeah. I don't - there's not a long-term trend here, Larry. We had to build an awful lot of safety stock, as we went into the union negotiations, and that put a lot of pressure on margins. We - we take a pretty hard-nosed attitude about excess inventories around here, so I - I think that that will - that will - that's not a - there's not a trend here. You'll see margins pop back up in the fourth quarter.

Okay. Super. Thanks very much.

Thanks, Larry.

Our next question will come from the line of Greg halter with Lynch, Jones, and Ryan, Incorporated. Please go ahead.

Hello. Not many super laitives left on the quarter but a very good quarter and Dave it's been very nice -

We enjoyed it.

Dave, it's been very nice working with you and Elliot says the same since your '87 time frame of joining the company.

Well, you're not rid of me yet.

Well, we know that and we're glad of that as well.

And Dave and/or Dean, can you elaborate on your capital spending plans for this year and if you have anything set for next year, and what percentage of that would be either new investment versus maintenance?

Greg, we are working on some plants. As now, we're - in conjunction with our Rutherford move, we're moving some production into a couple of plants, one in New Jersey, which we're still doing some work on, and also a plant in Ireland that we've - we're also doing some expansion work on. So, you know, a fair amount of the capital spending this year is for plant increases and we also - we also went into a new facility in California in endoscopy this year as well.

In terms of next year, we'll - we're still - we're still firming that up. We will still have some continued spending in New Jersey, but beyond that, you know, I - I would think that capital spending will - spending will be, you know, on par with this year, if not up just a little bit.

Okay.

And just for the record, we expense maintenance. We don't put it in our capital accounts.

Okay. Great. Regarding your debt, any - any goal for reduction in '03? And also, was there any short-term debt in your current liabilities as of September 30th?

I think there's about 22 million of - of current maturities and -

Yeah. 22.

Yeah.

Okay. And a goal for debt reduction for '03?

Go ahead. It's your budget.

Yeah. John actually asked me that right before the call. I think we'll - you know, we'll probably be - I would say the range is probably in the 250 range. It depends on, you know, what we do. I mean, obviously, if acquisitions opportunities come up, such as Surgical Dynamics this year, that will obviously alter what we end up with there.

Okay. And finally, one quick one on the medical in Europe. You mentioned the tough comps and so forth, but just wondered what - what kind of information you could provide on your level of comfort going forward in terms of order trends and so forth, if there's anything more you can add.

Well, I think -

Oh, go ahead, John.

For one thing, we basically declared that this is a North American product line. We don't want the people in the Far East or in Europe spending a lot of time and money trying to - trying to sell our beds and stretchers, but just because of the terribly expensive costs for transporting this stuff across the ocean. And on the other hand, Canada doesly well with this, and I think that's where the comparisons have - unfavorable comparisons have occurred. That doesn't mean that Canada is doing poorly today, but it just means that in 2001, we had one boomer of a year.

Okay. Great. Thanks.

Thanks, Greg.

Our next question will come from the line of Matthew Butin with Argus partners. Please go ahead.

Hi, and also congratulations.

Larry, more or less scooped me on the gross margin question, but I'm wondering if geographic mix or product mix also had an impact on gross margin. And then could you also repeat what you had said about the Wyeth royalty and when did that get resolved?

That was [Carus] not Wyeth.

Okay.

We don't have a royalty to Wyeth. That's our competitor.

But we have cross-license.

We have a cross-license where we've agreed not to - not to go after each other on patents.

The -

And when was that payment made?

It was made October 1.

Okay.

14 million. We put out a press release a couple weeks ago on this, and that was a onetime payment to take all of our future royalties off the table with [Carus], so we're - we're royalty-free on OP 1.

Congrats.

And the answer to your first question is yes.

Can you be a little more specific about the - - the product and geographic mix and its impact on the gross margin?

I could be, but we don't really want to go into all those details.

Matthew, I think they're getting tired of answering margin questions. They're getting kind of grumpy with me here.

Well, thank you, again, for a great quarter.

Okay. Thanks again, Matthew.

Your next question will be a follow-up question from the line of Bob Hopkins. Please go ahead.

Thanks, just a very quick one for Dave. I'm wondering, in the guidance that you gave for 2003 and understanding it's early on, can you give us a sense as to what the revenue growth assumptions are in that - in that guidance?

We didn't give you any.

And we're not.

And we're - we really don't have - don't really have anything specific that we're prepared to talk about there.

We've - we've always been very precise on our earnings guidance and very vague on our revenue guidance, and I don't - I don't see that changing.

Okay. Can't blame me for trying. Thanks, guys.

Okay.

Gentlemen, I'm showing no additional questions at this time. Please continue with your closing remarks.

All right. Well, thank you, Sonia, and thank you, everybody, for participating. Just a couple of one-liners. A reminder that we'll be reporting our fourth-quarter operating results at 4:00 p.m. eastern time on Monday, January 27th, and that will be followed up with a phone call as we did today at 5:00 p.m. 5:00 p.m. on Monday, January the 27th, 2003.

And then secondly, we'll host our annual analysts' meeting at the AOS. That's going to be in New Orleans this year. And that's at 8:00 a.m. on Thursday, February the 6th. 8:00 a.m. on Thursday, February the 6th, in New Orleans. And that will be a very good chance for all of you to get to meet Dean Bergy in person and I believe Dave will be there with us too, so -

Yep.

- you'll get to see both of them.

Again, thank you so much for your patience in listening to us and we look forward to talking to you about 90 days from now. A little more. Thank you and have a nice evening.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Thank you, Sonia.

You're welcome, gentlemen. Have a nice evening.