史賽克 (SYK) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Stryker Corporation fourth 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 number one and then 4 on your telephone. As a reminder this conference is being recorded Monday, January 27, 2003.

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 action, including cost containment measures that could adversely affect the price of or demand for the company's products, change in reimbursement levels from third-party payors, a significant increase in product liability claims, changes in economic conditions that adversely affect the level of demand for the company's products, change in foreign exchange markets, change in financial markets and changes in the competitive environment. Additional information concerning these factors is 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 John Brown, CEO. Please go ahead, sir.

Good afternoon to all of you. We appreciate your dialing in to hear our update on Stryker. We will be reporting on our fourth quarter earnings and also then the full year. With me today is Dave Simpson, Executive Vice President and although many of you have been introduced to him, unfortunately Dean Bergy, our Vice President, Chief Financial Officer and Secretary, couldn't be here today because of a death in his family.

We are pleased to report that Stryker closed the year on a strong note for the fourth quarter sales were 829 million for an increase of 17% over the prior year. Excluding the impact of foreign currency, net sales were 15% higher than last year. Net earnings increased 39% to 106 million and diluted earnings per share increased 37% to 52 cents per share. Excluding nonrecurring items in the prior year, net earnings increased 25% and diluted earnings per share increased 24%.

For the year, sales were 3.012 billion for an increase of 16% over the prior year. Excluding the impact of foreign currency, net sales for the year were 15% higher than last year. Net earnings increased 29% to 346 million and diluted earnings per share increased 29% to $1.70. Excluding the nonrecurring items, net earnings increased 26% to 357 million and diluted earnings per share increased 25% to $1.75.

Cash flow and asset management were particularly strong allowing to us reduce debt by 115 million in the fourth quarter and 221 million for the year. In addition, we funded over 170 million in acquisitions from internally generated cash this year. Domestic sales were 537 million for the quarter and 1.974 billion for the year representing increases of 17% over the prior year.

U.S. Divisions had a great quarter and a great year. Our [Medicon Accountings] was up 19% for the year with strong growth in spine, trauma and reconstructive implants. Instrument sales increased 12% in the quarter and 11% for the year with solid growth in powered instruments. Our Steri-Shield product, pain management and strong growth in Neptune, the operating waste management systems and percutaneous cement delivery systems. Endoscopy increased 14% in the quarter, and 19% for the year with strong growth across the bored in general surgery, arthroscopy and video sales.

Leibinger sales increased 1% in the quarter and 4% for the year. Medical was up 36% in the quarter, medical being our bed and stretcher business, and 25% for the year with strong growth in all three product lines, beds, stretcher and ambulance cots. Physical therapy was up 7% in the quarter, but 11% for the year.

International sales were 293 million for the quarter and 1.038 billion for the year, representing increases of 16% and 14% representatively. Foreign currency comparisons added 15 million to the top line in the fourth quarter and 14 million for the full year. Excluding the impact of foreign currency, international sales increased 10% for the quarter and 12% for the year. On the local currency basis, most of our international divisions had an excellent year. The numbers I'll quote to you in the next three or four comments are all in local currency. Europe grew 13% in the quarter and 14% for the year with strong performances in the U.K., Benelux, Spain, Scandinavia and Italy. Pacific was up 20% for the quarter and 21% for the year with the strongest performances in China and Australia.

Canada and Latin America were up 3% for the quarter and 8% for the year with the strongest performance in Latin America. Japan grew 4% in the quarter and 6% for the year with the strongest performance in orthopedic implants. Orthopedic implant sales were 475 million for the quarter and 1.705 billion for the year representing increases of 20% and 18% respectively based on strong shipments of reconstructive products, trauma, spinal implants and the third quarter acquisitions, spinal implant business of Surgical Dynamics.

Excluding the impact of foreign currency, sales of orthopedic implants increased 18% in the quarter and 17% for the year. Excluding the impact of spinal implant acquisition, sales of orthopedic implants increased 17% in the quarter and 16% for the year. So, just overall implants were really strong. Med-Surg sales were 304 million in the quarter and 1.105 billion for the year for increases of 13% in both the periods. That was based on higher shipments of endoscopic systems, hospital beds and stretchers, power surgical instruments and Leibinger cranio-maxillofacial implants along with navigational systems. excluding the impact of foreign currency, sales of Med-Surg equipment increased 12% in the quarter and 13% for the year. The July 1 acquisition of spinal implant business and Surgical Dynamics added 12 million to sales in the fourth quarter and 25 million for the year.

In the new product area, the new generation Zia spinal implant system introduced in the fourth quarter is off to a very strong start. The new Zia screws are lower profile, easier to insert and provide more placement options and a new Zia instruments are considerably easier to use. The ESEI U.S. metal invasive unit knee launched in the first quarter is our fastest growing reconstructive implant. Scorpio mobile bearing knee is doing well in Europe and Australia and it's also been launched in Japan.

We have an IVE under way here in the U.S. Scorpio super flex knee was launched mid year in the U.S. and it's doing well in the premium price flex knee market. The T2 intramedullar nail system had a big impact on trauma sales in 2002. It might very well go down as our best new product for the year in 2002. The T2 system provides a wide range of fracture repair options for the tibia, femur, humerus using a common set of instruments. As I mentioned, this is one of our most successful new products. The Trident acetabular system for polyethyline is or faster growing cup system. The ceramic on ceramic hip system is selling well in Australia and Europe. We recently obtained approval to sell it in Canada. We are still on hold in the U.S. as our supplier completes their F.D.A. inspection and we are waiting on a day-to-day basis for that.

The system 5 heavy duty powered instrument system was introduced in the third quarter. This fifth generation battery powered instrument system is the best Stryker has ever made and it's generating a lot of interest in the marketplace. For OP 1, we are pleased with our initial sales activity in the U.S. and Australia by dedicated specialized sales organizations. Europe is doing better as they develop dedicated OP 1 product managers in the key countries and Canada's off to a good start.

We are also recruiting patients to the instrument posterior lateral spine fusion trial and are making plans for a clinical trial with the raid cage. In Japan we began a clinical trial for OP 1 in instrumented posterior lateral spine fusions. We acquired the decompressor product line during the fourth quarter for 10 million, plus an earn out based on sales growth.

Decompressor is a trademark for a percutaneous probe for aspiration of herniated disc material. This unique device will be sold by instruments division for lumbar discectomy.

In the sports medicine area, we recently entered into an agreement with Regeneration Technologies to distribute human tissue for sports medicine surgery. Stryker endoscopy will provide distribution services in U.S. for the tissue processed by RTI for use in reconstruction and repair of the knee, hip, shoulder, wrist, elbow, foot and ankle. Sports medicine products include the [Meniski] pre-shipped tendons, precision tooled anchors, screws and pins and fresh [INAUDIBLE] allographs. With that I'll turn it over to my old friend Dave for the fourth quarter financial results and the full year. Dave?

Thank you, John. Well, foreign currency trends continue to be favorable for the company. This is the third quarter this year that it's -- foreign currency has added to sales. As John noted, it was almost 15 million in the fourth quarter which put us at almost 14 million positive year to date. If currency rates hold, we'll see a significant positive impact in the first quarter, could be as much as 30 million.

On the price volume front, the trends continue, U.S. implant prices are up about 5% in the fourth quarter and at about the same rate for the year. Prices were down slightly in Japan while prices elsewhere generally improved modestly. Overall, the price volume analysis is price added 3 percentage points to sales growth in the quarter, foreign currency added two points. Acquisitions added 2 points leaving volume and mix at 10 points of growth for the 17% increase for the quarter. And those trends are pretty much on track for the whole year. Volume and mix is up about 11% in the United States and about 10% overseas.

On SDI, the sales for the fourth quarter were 12 million, which put us at 25 million year to date. Sales of SDI products should pick up in '03 now that the Stryker sales force has unrestricted access to the line and training on interbody cages is completed.

Orthopedic implants, this represents 56% of our sales and I'll walk through the five lines that we talk about, the four lines we talk about here. Hips in the quarter, domestic sales were up 9%, international was up 18% for a worldwide growth of 13%. Knees, 15% in the U.S., 22 overseas and 18% worldwide. Trauma was up 22% in the U.S., 21% OUS, 21% worldwide. Spine was up 133% in the U.S., international was up 40 and the total was up 88. If you strip SDI out of those spine numbers, they are 51% growth in the U.S., 32 OUS and 42 worldwide. And then the total orthopedic implants were up 21% in the U.S., 20% OUS and 20% worldwide. And again if you strip SDI out, those numbers are 16, 19 and 17.

Foreign currency did have a positive impact on the fourth quarter. So, let me just give you those international numbers in totals without foreign currency. Hips would have been up 12%, international, 10% worldwide; knees would have been up 16, international 16% worldwide. Trauma 14% international, 17% worldwide, and spinal 34% international, 85% worldwide and the totals would have been 14% international and 18% worldwide.

So, hips were up 13% in the quarter and year to date. Cementless stems continue to lead the growth in hips driven by HA stems. The Accolade TMZF Citation, TMZF and Secure Fit HA. Revision stems continue to do very well, led by the T3 modular hip system. BL Sales of acetabular cups are strong, driven by the tri-dent acetabular system for polyethylene in the U.S. and ceramics overseas. The Trident acetabular system utilizes the same cup and shell locking mechanism as the polyethylene and ceramic liners. And this will position us for well for the ultimate launch of ceramic components in the U.S.

In Europe. Trident, Exeter and ABG2 are doing very well. In Japan, Supersecure Fit, Superior and ABC Ceramic on ceramic hips are doing very well. Our supplier of aluminum ceramic components is working towards the U.S. approval of their manufacturing processes. The inspection of their plant went well and they are working through the final paperwork with the F.D.A.. We are hopeful of U.S. approval early this year.

In the meantime, the Trident ceramic hip system is doing very well in the international markets. Knees, up 18% in the quarter and year to date, another great quarter with both Scorpio and Duricon showing solid increases in the U.S. The Scorpio TS and Duricon TS revision systems are also doing very well. The new modular rotating knee hinge has been well accepted in the U.S.

The new Scorpio flex knee for patients requiring an extended range of motion is showing encouraging results so far. EIUS, our new minimally invasive uni-knee is our fastest growing recon product. In Europe the mobile bearing Scorpio knee was introduced in Q1. We recently got approval in Japan and have a U.S. IDE under way.

Our modular sequential system which we call MRS for complex revision and oncology procedures continues to show double digit growth. Trauma, up 21% in the quarter and 15% year to date continues on a steady growth trend in the U.S. and overseas.

The Gamma hip fracture devices continue to show strong growth. The new T2 intramedullary nail system launched in the U.S., Europe and Japan in '01 is doing extremely well. The T2 system was completed in '02 with the introduction of the T2 humoral nail. And, as John said, this may be Stryker's best performing new product.

The MATA pelvic reconstruction system launched earlier this year is growing rapidly in the small segment of the trauma market. Spine up 42% in the quarter and 41% year to date without SDI. The Zia thoracolumbar systems are growing nicely with the introduction of Zia II in September which offers lower profile screws and improved implementation. The Reflux anterior cervical plate launched late last year is doing very well.

The Q3 addition of spinal implant products from Surgical Dynamics completed the Stryker spine lineup by adding interbody cages in the U.S. markets as well as other cervical and thoracolumbar systems. As to how the sales organization, we ended the year with about 700 reps and managers and we are looking to expand this sales organization by about 10% in 2003.

Moving on to the Med-Surg group, the size of the group is about the same or the relative size. Instruments about 39% of the group endoscopy 31%, medical 20 and Leibinger, about 10% of sales. So walking through each of those lines. Instruments had a very steady quarter. Powered instruments were up 10%, 7% in the U.S. and 18% OUS. Other OR equipment was up 20% with 18% U.S. growth and 25% OUS. So the total was 14% growth with 12% in the U.S. and 20% OUS. This division had a solid quarter based on steady growth and powered instrument systems and strong shipments of other OR equipment. Steri-Shield, irrigation, pain management, percutaneous cement delivery and the Neptune operating room waste management system were especially strong in the quarter. Also an important driver in the second half was the launch of system 5, our next generation heavy duty powered instrument system. The decompressor discectomy probe will be sold by the instrument's reps that are focused on pain management, along with the nuculatome acquired from SDI and the instrument sales force in the U.S. is going to go to about 190 reps and managers up from 172 last year.

Endoscopy had another solid double digit quarter. The total growth rates are; domestic up 14%, international up 16 for 14% worldwide. Breaking it down by the three lines, arthroscopy was up 13% worldwide, general surgery up 16 and video was up 12. We continue to have a lot of activity in the endo suite and communications area, which is driving the entire line. The RTI contract kicks off in February. The allographs will be sold by the endoscopy sales force primarily for sports medicine. In the U.S., the endoscopy division is going to 210 or more sales executives and managers compared to 182 last year.

The Leibinger line was up 2% in Q4 and 6% year to date. Breaking that down by U.S. and international they were up 1% in the U.S. and 2% international. Leibinger is splitting its sales organization this year to bring more focus to the CMF and navigation businesses. In the U.S., Leibinger is going to 85 reps and managers with 70 focused on cranial maxo-facial products and 15 focused on image guide surgical systems. Medical had a great quarter and a great year. They were up 25% for the year in the U.S. with 36% growth in the U.S. in Q4.

International was off 15 for the year and off 23 in the fourth quarter. They had some very difficult comps from some big shipments last year. So the worldwide numbers are; fourth quarter up 18% and the year to date up 13%. This business has thrived on great new products and a much stronger sales organization. The medical division in the U.S. is going to 140 reps and managers next year compared to 130 this year.

Physiotherapy revenue growth was up 7% in the quarter and 11% for the year. Same store sales were up 5% in the quarter and 4% for the year with the startups and acquisitions providing the rest of the growth. The number of PT centers at the end of the fourth quarter was 331 compared to 302 at the end of '01. The clarification in Medicare guidance effective July 1, 2002, certainly had an impact on near-term sales growth for this business. Physiotherapy is adjusting to the new pricing environment and expects sales growth to pick up in 2003.

Operating results, the gross margins were up slightly in the quarter and slightly for the year. We ended the year at 63.1%, the big impact on margins is ahead of us as we complete the Rutherford move in '03 and see the full benefit of that in '04. R&D trends continue to be on about the same course. We are 4.7% for the year of sales compared to 5.5% last year and a good deal of that decline relates to the reclassification of biotech costs from R&D to SG&A and cost of sales. That also has an impact on the increase in the SG&A ratios which are up almost a full point for the year. Certainly insurance costs also had an impact there in the SG&A ratios.

All operating margins are holding in there very well. We were at 19.7 for the year compared to 19.6 a year ago. Interest expense continues to fall as does the AR securitization discount. I'll remind you that that discount is classified as an SG&A expense. It was 600,000 in '04 and 2.7 year to date. So when you add those two interests, the numbers are still declining quite nicely to 43 million this year versus 70 -- almost 74 million last year.

In tangibles, amortization increased about 2.5 million in Q4 and almost 5 million year to date as a result of the SDI acquisition. After you remove this from the intangibles amortization numbers, we have a decline of about 14.4 million to date. Most of which relates to the adoption of FASB statement No. 142 which is reflected under the nonrecurring items in our P&L.

There's really nothing remarkable in other income, interest income was 400,000 for the quarter, FX gain and loss. I think, for the first time I can remember, actually turned out to be neutral and minority interest was 100,000 negative. So it's -- that was a pretty small number. The income tax rate for the year, though, declined nicely from 33% last year down to 31.8% this year, primarily as a result of tax benefits from manufacturing in Ireland and Puerto Rico.

Moving over to the balance sheet, it really looks good. Most of the ratios have improved significantly this year. I would remind everybody that the AR securitization program remains at 130 million which is consistent with where it was at the end of last year. You need to add that back to receivables to compute in receivable days which dropped again in 2002. We ended the year at 58 days versus 59 at the end of last year and I'm just very pleased with that performance by the company.

Inventory days also declined to record lows. We ended the year at 126 days, almost three turns compared to 138 days at the end of last year. Total debt and AR securitization declined 115 million in the quarter and 221 million for the year based on strong operating cash flow. We also funded 174 million in acquisitions last year all from internally generated funds.

Total debt including the AR securitization stands at 631 -- actually 632 million compared to 850 -- almost 853 a year ago. And the debt ratios continue to improve. Our interest coverage ratio is up to 17 times, and that's almost a double -- actually it's just about a double from where it was a year ago. And the debt to EBITDA ratio is under one, it's now at .86. We have really made a lot of progress in this area and it's been recognized by Standard and Poor's who recently raised our rating to A minus. And we are all very proud of that.

We are also very proud of the cash flow statement. This year, cash provided by operating activities topped the half a billion mark at almost 504 million driven by strong earnings growth and solid asset management. And on that positive note, I'll turn it back over to John.

Thank you, Dave. Well, we are optimistic about the markets that we are in, and our future. The orthopedic surgery market obviously just continues to grow very nicely at a very steady rate, and we believe that that will continue to do so in the next two or three years. We are planning on about a 15% top line growth for 2003. Mind you, these are goals or targets and one would expect the 2003 sales for Stryker to be about 3 1/2 billion. Next year's bottom line goal would be the usual 20% net earnings increase before any nonrecurring items, and that would bring you to $2.10 a share. So, top line, 3.5 billion and in earnings, per diluted share of $2.10. I don't think it's necessary to run through the individual quarters, but it's just say that you folks can sort that out, I think.

The earnings for 2002, that we are going against is $1.70 as reported and going to $2.10 with the year or $1.75 before the nonrecurring items and going to $2.10. So. a 24% increase on a reported basis and 20% increase before the nonrecurring items.

We will be hosting an analysts' meeting on Thursday, February 6 at the American Academy of Orthopedic Surgeons in New Orleans at 8 a.m. That meeting will also be accessible by phone and on the company's web site. The conference call for the first quarter will be at 5 p.m. Eastern time on Wednesday, April 16. So April 16 on a Wednesday 5 p.m., first quarter results. We are bullish. And with that, Michelle, we'll take questions.

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1 then the 4 on your touch tone phone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your question, press 1 then the 3 on your touch tone phone. If you are using a speaker phone, lift your hand set before entering your request. One moment, please, for the first question. Our first question comes from the line of Avi Horev with JP Morgan.

Good afternoon guys. Couple of questions here. First on OP 1 and thinking about what the strategy is going forward, given why recent success at a second panel, are you rethinking your strategy for a trauma indication, perhaps maybe trying to go back with the same data you used the first time? And second question is just looking really throughout the P&L here. I was hoping you could probably give us some of your thoughts on a couple of line items. Number one, looking at the SG&A, you've been adding a lot over the past couple of quarters. SG&A has been growing 20%. Assuming you'll continue to add in 2003, can you talk about kind of what you expect SG&A to grow next year?

And the second just looking at gross margins, over the last two quarters, gross margins have ticked down a little bit, despite the fact or though orthopedic implants are growing as a percentage total of sales. Can you maybe give us your thoughts on that. Finally just the tax rate, how sustainable is that given the last two quarters were 28, 29%? Thanks guys.

Sounded more like comments than questions. We'll see if we can tackle them for you. On OP 1, we are in discussions with the F.D.A. and it would be inappropriate for me to say anything more than that. On the financial questions, Dave, you can probably tackle those.

Avi, you know we don't provide very much in the way of line by line guidance so I'm going to stick to past trends here. SG&A, there's some opportunity here and we would hope long term that we would be able to leverage these numbers down. This year we had the biotech costs coming in there and we are still dealing in there the reactionary activities in the insurance markets. That's not going to change. They insurance business won't change over night.

As far as operating results go, I'm sorry -- gross margins go, frankly, we have been very aggressive about making sure that we got our obsolete inventories fully reserved and taken care of. We pay a lot of attention to that and as we introduce new products, we are very aggressive about writing off the stuff that we don't think we'll be able to sell in the future. And I would say that that's certainly been a factor this year.

Dave, I know you probably don't want to comment. If you look at the last two quarters, if you look at gross margin last two quarters, would it be safe to say we're probably not going to see a significant uptick until you start to realize the benefits of the restructuring plan?

You're right. I really don't want to comment. I don't want to create a lot of line by line expectations out there.

Just real quick on the tax rate, I'm assuming that's sustainable now for 2003?

I think very sustainable, yeah. The downward bias in the tax rate remains intact as we continue to shift products to Ireland, I think the tax rate has more room to get better.

Okay. Thank you.

Our next question comes from the line of Frederick Wise with Bear Stearns. Please proceed with your question.

Good afternoon, gentlemen.

Hi, Rick.

Couple questions. First can you just expand on the excellent performance in Europe? Seems like you continue to accelerate there. Can you help us understand under a little bit more where it's coming from and the likely drivers of that continued excellent growth going forward?

Sure. Just to back up a minute. Europe was kind of headed in the wrong direction first year after the Halmedica integration and Ron Lawson came in and stabilized that, started to head it in the upward and then brought in a very capable general manager for all of Europe, Luciano Katani I would say in the last year and a half, Luciano has done a wonderful job for us to get Europe clicking.

The countries that really stand out right now are the U.K. had a fantastic year this last year, Italy had a great year, Spain and Portugal had a great year. What we call our export business, which is Africa and a lot of the old iron curtain countries had a good year, France turned around a little bit for us this last year, it didn't do great, but turned around a little bit. Same thing with Germany. But clearly the management team in Europe right now is really doing a good job and we think they'll have a very good run here. Certainly the currency is helping them, that's giving us added confidence. Overall in local evening and local currency there, they're on a roll.

It's Milton Chu with Rick. Actually just a follow-up on that. Is it the sort of surgeons working through the backlog of cases in the U.K. and Italy that have kind of contributed to this growth and can you give it a the more color on the breakdown of maybe procedural volume growth, price and mix that -- or components of that 14% growth in Europe?

My sense is that it's market share. Dave, you have --

I think it's clearly some market share in there. I don't have any procedure volume.

I don't know. But the guys are not -- they are more inclined to tell you how they're picking up business as opposed to added volume in a given account.

One last question, if you are gaining market share, who do you think you're taking market share from? Thanks.

That's probably an appropriate question for other people. But I -- probably across the board.

Okay. Thank you.

Thank you.

Our next question comes from the line of Bruce Jacobs with Deutsche Bank Alex Brown. Please proceed with your question.

Thanks very much. Guys, I just want to ask two quick spine questions, if I could. I'm assuming from the numbers the sales force integration is going well. Could you give us any color on any synergies you're realizing in terms of either account ads or cross-selling? Somewhat related to that, I'm wondering if you could comment on what impact if any Danics infused product is having, if any, on your overall business?

My sense is the sales integration process is pretty well complete. And to be honest, Bruce, I don't think the infused is particularly slowing down hardware sales for us. What you're hearing too, Dave?

I'm not hearing that as an issue. I think for us, the biggest thing was training the -- our own reps in the cage. We worked really hard in that here in January at the national sales meeting.

Okay. Fair enough. Then on the 2003 guidance for the top line, which I think you said, Dave, was around 15%. Is it fair to say there's a couple points of foreign currency and a couple points of pricing, is that a fair way to look at it?

I think so, Bruce. I don't see anything in the volume mix story that that's changing here. You know, every time we do the numbers, we get different form currency answers. That's kind of a wild number. I think that's fair.

Great. Just the last quick question and obviously you will talk about this at the analyst meeting. Can you give you any preview you'll focus people's attention on at AAOS?

Well, we certainly -- we hope from talking about ceramic on ceramic. You've heard us talking about that for years. And I know everyone's hoping that we can talk more about that.

Got it. Fair enough, thanks, guys. Very nice quarter.

Our next question comes from the line of Scott Davidson with U.S. Bancorp Piper Jaffray. Please proceed with your question.

Hi, good afternoon.

Hi, Scott.

Just maybe one first question related to Bruce's question on ceramic on ceramic. Can you give us your latest thinking based on what you've seen in some of the international markets. How big could that be in the U.S. if you look out over maybe a one-year time horizon and how big ultimately as a percentage of total hip units?

I won't quantify it, Scott, but our thinking is that it will put ceramic on ceramic squarely in the face of metal on metal. So then the market will decide which one of these bearing surfaces it likes best and may decide to split it. We think it will make us very competitive with the metal on metal products that are out there now.

We think it's big. How big? I am reluctant to give you a number on that. I do think it will be significant.

Okay. Thanks and then Dave, you spoke about plans for adding additional sales reps to most of your businesses in 2003. Can you help us understand where those reps are going to be targeted? Will they be targeted towards gaining share and picking up accounts in which you don't do business currently or towards kind of reinforcing service in your existing accounts as volume scale. Can you just talk about maybe how big the Halmedica Osdionics sales force can get over time. When does the opportunity to grow that sales force begin to tap out?

Well, of course we are going to target market share as the main goal of adding sales reps. Caught up in the day to day activity of life we'll be helping to service our existing accounts. How big can this sales organization get? We are already segmenting that organization into recon, trauma and spine, and if you look at it that way, you know, the marketplace will be able to -- there's plenty of market out there to have a lot bigger certainly trauma and spine sales organizations than we have now.

So I think there's a lot of growth ahead in the sales organization. But Bruce, I want to make a comment. About -- Scott, sorry. About John's answer because I was chuckling as John answered to that. I remember when we launched hydroxy appetite back a dozen years ago and that's been just a revolutionary product in hip implants, but it took a long time to get there. But it's today one of our fastest-growing technologies. But it took a long time to get there. So sometimes the new products don't explode off the page quite the way you think they will.

Okay. Thanks and can you give us a quick update. You mentioned the clinical progress with the mobile bearing in the U.S., can you give us an update on when we might see your first mobile bearing knee domestically.

That's a PMA product, so we are looking at quite a long time. I don't have a time line in front of me, Scott, that I think it's -- we are looking at many years, I think.

Thanks very much.

Thank you.

Our next question comes from the line of Katherine Martinelli with Merrill Lynch. Please proceed with your question.

Great, thanks. One just a clarification or a little bit more on the recon side. Any sense for what extremities grew in the quarter?

Yeah. It was up double digit. Bear with me here. -- I take that back. It was up about 5% worldwide.

Okay. And then I'm not sure -- I apologize if I missed it. Did you say what the penetration rates were for crossfire on hips and is through a thought process on introducing it in the knees?

I think the penetration rate is above 80%, but I don't actually have that number. As far as using it on knees, I don't think that we had any plans at this point to do that. And it has to do with the engineering principles on -- how crossfire affects the poly from what I understand.

Okay. Then just lastly, looking ahead for this year, obviously the August time frame with the decision from CMF on the Medicare reimbursement will get a lot of focus since it was a big increase this past year. Do you have any sense for how that process goes?

Do they get feedback from the various companies or is it kind of just an envelope that gets opened up in August and I guess as an adjunct to that, how much of a decision or impact does the pricing reimbursement have on your decision to implement the price increase?

I would say it didn't have any impact on implementing the price increase. And to be frank, I don't think that CMS pays a whole lot of attention to what the industry has to say about pricing. That's made pretty much unilaterally.

It's pretty much in a vacuum, the whole decision-making process?

I wouldn't accuse of making it in a vacuum, but they don't consult the industry on that.

Great, thank you.

Our next question comes from the line of Wade King with Wells Fargo Securities. Please proceed with your question.

Good afternoon, gentlemen. Very nice quarter.

Hi, Wade.

Two questions, please. First for Dave, and it's nice to have you on the call, Dave. First from a tax rate standpoint, I assume based on your comments that in '03 your guidance assumes something of the order of 32% tax rate for the year, is that right?

I don't think it will be any higher than it is for the year this year.

Which was 31?

31.8. Won't be any higher than that.

So something -- 31.8% or less?

Right.

And also per the guidance of 3.5 being in the top line would it be fair to say that the FX contribution of that is about $100 million?

Could be.

That might be a little high because, you know, it's more dramatic, I think, in the earlier quarters.

Okay. Very good. On a macro basis, for both of you, coming off a year when industry saw health plan costs rising rather dramatically, we got Dr. Frisk as majority leader, some comments about a potential drug bill looking ahead, and we have seen companies like Tenant come under fire as it relates to billing practices and ways they can reach profitability.

Do you think on a macro basis that we are further along in this cycle whereby the capacity to pass along price increases on a regular basis is restrained? I know obviously your are questioned about this almost on every conference call, but certainly we see it in terms of the cycle that we see every 3 or 5 years are further along in the cycle given the backdrop of what we have come off in 2002. Do you have any perspective on that?

I think the mixed change will probably have as much to do with it as just out and out price increases because just the demand on the -- for the implant today is much longer life because of the average age that they're being put into much younger. So the below 65 age group is probably one of the fastest growing there is right now. As a result, you are going to have more and more of that high-end product put in those patients.

Price increases, how long will they last, frankly we -- with all of our budgeting work and strategic work, we look at price increases for one year and that is it, so we don't make any comments or plans for that after that. They don't go in our strategic plans.

All right. Very good. Listen, thank you very much.

Thanks, Wade.

Our next question comes from Kurt Kruger with Banc of America. Please proceed with your question.

Hi, John, hi Dave. Very pleased to see the agreement with RTI. Could you talk to us a little bit more about that, is it an exclusive agreement for those particular anatomys, if you could help us understand the terms in terms of how you share the revenues with RTI and then what particular products do you see as having the biggest potential for you within the RTI mix of products?

First of all, I don't believe that we are at liberty to disclose the terms of the process split with -- that we have with RTI. So I don't think it's Stryker's place to talk about that. And I think the biggest selling product or the most exciting product will be bone tendon bone or knee reconstruction.

All right. Then you said that percutaneous bone cement was strong in the quarter for the full quarter. Can you help us understand what that is. Is that vertebral plasty, other applications, do you know?

I'm not supposed to call it that. It's very similar. It is injecting bone cement in the spine under -- I think it's under floroscopy, it's been a very fast growing although small product line, by the instrument divisions. I think it's up 100 or 200% this year. worldwide.

That's great. Just on the unicompartmental knee. You said the growth was phenomenal there. I understand that's a fairly small base. Would you hazard a comment about the magnitudes there? Are you doing 20, 30 million in that this last quarter, was it 50, 60 million?

Not yet.

Okay. Then one final question if I could. As you look at the contours of sales growth over the -- this last year we just finished out. Very strong overseas toward the back half of the year. Can you talk about how we might expect the comparisons to be as we go into the '03. Will you necessarily show or on account of that show somewhat lower growth in the overseas comps for third and fourth quarter of the new year?

Certainly if currency holds where it is right now the comparisons -- first quarter and second quarter are going to look very good. But I think in particularly Europe and the Pacific are going to have very good trends going. Japan will probably continue about the same track it's on right now, but all in all I think the international business will be strong first quarter and second quarter would be my prediction today.

They certainly enter the first quarter on a strong note.

Okay, thanks guys.

Thank you, Curt.

Our next question comes from the line of William Plovanic with First Albany.

Thank you. Good quarter, gentlemen. My question is, as we look at the hips and knee business, it looks like on a constant currency rate that those growth rates came down a bit. I was wondering if you could give us a little color? I know the last couple of quarters you said you thought the general market growth has accelerated. Do you think that's now just the opposite where we are starting to see a deceleration in that growth?

I don't think so.

No. I think it's the comps. If you recall a year ago, we had a boomer of a fourth quarter in '01.

Okay. All right, great, thank you very much.

Our next question comes from the line of Katherine Sharadin with Gerard Klauer Madison. Please proceed with your question. Pardon me one moment. Our next question comes from the line of Steve Miller with RBC Capital Markets, please proceed with your question.

Good afternoon. Steve Hamill. In terms of the Leibinger business, we saw a bit of a rebound here in the third quarter and in the fourth quarter as you're going through this transition, slowed back down a little bit. Can you give us a better understanding how that transition will occur over 2003?

The thing that we did with Leibinger in the fourth quarter was we finally recognized that we had put all the strategy decisions in the hands of our sales people. So what Cy Johnson and Eric Torches, President for Leibinger did, split in the U.S. into two groups, one in navigation and one for the craniomaxillofacial product line.

I think most of us here are convinced that as we get dedicated sales forces lined up behind those two product lines that we will see that business start growing again. I think it will get better every quarter would be my prediction.

In terms of the various modules you've rolled out for the image guided system. Can you gives a sense as to which ones have received the most enthusiastic response so far?

Across the board from what I know.

You know, it depends on which country and what -- they've all been well accepted. We are excited about the knee navigation system.

That's very hot.

A lot of interest and we aren't selling a ton of them yet, but there's a tremendous amount of interest out there. We have high expectations for that product line.

Great. And then Dave, can you give us an update in terms of how progress will go throughout 2003 with Rutherford and do you have a sense how rapidly you would move manufacturing to Ireland or to other facilities?

Well, it is happening now. We have already moved some manufacturing, and that's part of the reason we were able to lower our tax rate in the back half of the year here. And we are going to be completely out of that facility in '03. So, it's going to be loaded more towards the next six months, but I think when the dust settles, come Fall, and Fall of this year, we should be pretty much relocated all those lines to either Ireland or MAWA.

Longer term, given the trend you've got in terms of significant inventory turn improvement, can you give us an idea of what kind of target you think is about right for the business?

You know, for years and years I said three turns. We'll have to change that. I think there's certainly room for improvement, and certainly the inventory turns in our implant businesses are slower than that. And there's significant room for improvement down the road.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Katherine Sharadin with Gerard Klauer and Madison. Please proceed with your question.

Hi, I'll try that again. Just had a question going back to your guidance, John on the $2.10 for this year. I believe last quarter, the third quarter, it was about 2.08. Just on some preliminary calculations if I -- if we would just assume a lower tax rate we would get higher than $2.10. I'm wondering if there's -- you're tempering that a little bit versus where we were in the third quarter?

Not really. But $2.10's our number. That's what we're going for.

Okay. Thanks very much.

Our next question comes from the line of Lawrence Keusch with Goldman Sachs. Please proceed with your question.

Yeah. John, if my memory serves me right, the first quarter of 2002 was a little bit slower than '01 in growth in the implant business and as I recall there is some element to seasonality that typically crops up in the first quarter. Could you just help us understand how we should be thinking about any seasonality effects?

I don't think we're going to have any problem this year. Obviously we got the academy coming up, and that will be a lost week. Other than that, I don't know of anything that will really affect the numbers this year.

Okay. And then secondly, just with the -- the reduction in tax rate you're able to achieve in the fourth quarter, were you guys able to pick any particular buckets to sort of spend against that, in other words, did that wind up -- did that wind up somewhere in either SG&A primarily or writing down some of the obsolete products, et cetera?

I think Dave signaled you that they scrubbed the balance sheet in accordance with the latest accounting rules, so we didn't violate any rules. On the other hand, we scrubbed it as clean as we could, to be blunt.

If you look at the gross margin rates, you'll see that.

Okay. And then just the last question, Dave, is the operating margin in the fourth quarter was certainly versus the other quarters in the year, the first time that that operating margin was down on a year year-over-year comparison. What is the best way to think about that observation?

We had an unusually strong operating margin in the fourth quarter of '01. We had Q3 of '01, it was 18.9, it jumped significantly to 20.7. This year we went from 19.5 in Q3 to 20.1 in Q4. I don't see anything out of the ordinary there. These numbers -- we have a lot of moving pieces, and I think you got to look at a little broader time frame than just one quarter.

Okay, so we should think about sort of the way things are running now as more normalized than perhaps the jump last year?

I think so.

Terrific. Thanks very much.

Thanks, Larry.

Our next question from Greg Halter with Lynch Jones and Ryan Incorporated. Please proceed with your question.

Good results again.

Thank you, sir.

Wondered if you could provide the outlook for capital spending plans for 2003?

Well, completion of MAWA and everybody has to have at least two turning lathes and that sort of thing. It's a lot of routine upgrades, capacity expansion, that sort of thing, but nothing -- no single item that I know of that's big.

And dollar amount estimate?

Well, this year we spent 139 million, and I think we'll spend -- we'll probably spend every bit of that this year. I think our budget's higher than that. As I've said before, we don't normally spend our whole budget.

Right.

It will probably be at least as much as this year.

And your plan for debt reduction in 2003?

As much as possible.

Okay. That sounds good. Given this rate you're going, debt will be paid off in about two years. At that point, what would your plans be for uses of cash, possible acquisitions?

I think that's where we would go. We would be looking to plow money back in the business with acquisitions.

Okay, great. Thanks.

Thank you, sir.

Ladies and gentlemen, as a reminder to register for a question, press 1 then 4 on your telephone at this time. There are no further questions at this time. Please proceed with your closing comments.

Okay. Thanks, Michelle. We are grateful for everybody being on the line, appreciated all your questions, some of them pointed, some of them comments. We appreciate that. We repeat, we are looking for a good year. We think the trends in the industry are good and we think the trends for Stryker are good.

Nothing is perfect. there are no guarantees in this world, nor are we going to guarantee you everything except we will give you everything we've got and our expectations are we'll meet the goals we have in mind: 3 1/2 billion on the top line and $2.10 a share in earnings. And with that, we will look forward to seeing many of you in New Orleans and for the rest of you, we'll look forward to talking to you in about 90 days from now. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your line.