SYK
#My comments today will be focused on our second quarter financial results and the related performance drivers
The detailed financial data and results have been included in today' press release
Organic sales growth for the quarter was 6.7%
As a reminder, this quarter included one less selling day, which has the impact of reducing growth by roughly 1%
As previously stated, selling days generally do not have an impact on the performance of our capital businesses
Pricing in the quarter was unfavorable 1.5% from the prior year, while foreign currency had an unfavorable impact of 0.8% on sales
, we continue to see good momentum with organic sales growth of 7.2%
This strong growth was evident throughout several of our key divisions within our Orthopaedics, MedSurg and Neurotechnology segment
International organic sales growth of 5.5% was highlighted by solid performances in Europe and Australia
Our growth in emerging markets continues to recover, but also benefited from favorable year-over-year comparable
Both geographies were impacted by one less selling day
Our adjusted quarterly earnings per diluted share of $1.53 increased 10.1% from the prior year, reflecting strong sales growth, accretive acquisitions, operating expense control and the previously discussed benefit from the change in accounting guidance for tax benefits from certain stock compensation expenses now included in our tax provision
Our second-quarter EPS, as anticipated, was negatively impacted $0.04 by unfavorable foreign currency exchange rates
Now, I will provide some highlights around our segment performance
Orthopaedics delivered constant currency growth of 6.5% and organic growth of 6.2%, including organic growth of 8.4% in the U.S
performance was highlighted by growth in knees of 7% and trauma and extremities at 10%, reflecting strong demand for our 3D-printed products, our foot and ankle portfolio and our Triathlon knee
Orthopaedics international delivered organic growth of 1.8% and included steady performances across all developed markets
MedSurg continued to have strong results in the quarter with constant currency growth of 6.8% and organic gains of 6.7%, which included a 6.9% increase in the U.S
instruments had U.S
organic sales growth of 4.2%
During the quarter, instruments executed its sampling plan for its newly launched System 8 drill and began several customer trials
We expect System 8 shipments will gain momentum into the third and fourth quarters as we have now shifted to full commercial launch
Endoscopy had another strong quarter with U.S
organic sales of 15.2%
This reflects continued strong demand for our 1588 video platform, booms and lights and sports medicine products
Medical had U.S
organic growth of 2.3%
This growth primarily reflects the impact related to the timing of shipments of our core bed, stretcher and power cot products
As you are aware, our core medical business is all capital and can be impacted by the timing of customer orders and the related shipment
We continue to see strong order growth in the core medical business
Our Sage business momentum improved during the quarter, following the previously discussed product recall
We are actively regaining customers that had switched during the recall and we are seeing solid performances in the other key products in the Sage portfolio
Subsequent to quarter-end, Sage received an FDA warning letter, which relates to an inspection last September shortly after we closed on the acquisition
We have already taken many steps to address the items outlined in the warning letter and will continue to work with the FDA toward resolution
This year's (11:04) results were impacted by continued supplier issues took earlier in the quarter in a tough quarterly comparable
Internationally, MedSurg had organic sales growth of 6%, which reflects strong Canadian, Australian sales and an easing of the metrics comparables in China
Neurotechnology and Spine had constant currency and organic growth of 7.9%
We continue to see strong global demand for our Neurotech products, which is somewhat offset by softness in our Spine business
Neurotech business posted growth of 10.3% for the quarter, highlighted by continued strong demand for our hemorrhagic and ischemic stroke products, CMF products and our neuro-powered instruments
Spine business continued to see softness as it recovers from supply issues early in the year, partly offset by high demand for our 3D-printed titanium products
Internationally, Neurotechnology and Spine had organic growth of 13.1%
This performance was driven by continued strong demand for our Neurotech products in Europe and Asia
Now, I'll focus on operating highlights in the second quarter
Our adjusted gross margin of 66.3% was up 10 basis points from the prior-year quarter, reflecting a favorable mix, offset primarily by price and foreign exchange related to certain businesses
R&D spending was 6.4% of sales
Our adjusted SG&A was 35% of sales, which was up 10 basis points from the prior-year quarter
This reflects favorable leverage from business mix and continued focus on operating expense improvements through our cost transformation for growth program
This favorability was offset by planned investments in our selling organization, including samples and sales rep adds, our CTG program, including our ERP implementation, and continued investments in our Mako TKA platform
In total, adjusted operating expenses were 41.3% of sales, which was flat compared to prior-year quarter
In summary, our adjusted operating margin was 25% of sales and 20 basis points better than the prior-year quarter
Our operating margin reflects good leverage, offset by key investments related to drive future operational savings and product growth platforms
We continue to remain confident in our ability to deliver our full-year commitment of 30 basis point to 50 basis point improvement in our operating margin
Lastly, as it relates to our full-year operating margin improvement, NOVADAQ is anticipated to be approximately 20 basis point dilutive to our operating margin for 2017, which would partially offset the expected 30 basis points to 50 basis points of improvement
Now, I will provide some highlights on other income and expense
Other income/expense decreased from the prior-year quarter primarily due to increased interest income
Our second quarter adjusted effective tax rate of 16.3% reflects a larger-than-anticipated benefit related to the adoption of the changes in accounting for stock compensation expenses
In the second half of the year, our tax rate will benefit from certain other geographical and operational changes that, combined with the aforementioned change in accounting, will result in an anticipated effective tax rate ranging from 16% to 17%
Focusing on the balance sheet, we continue to maintain a strong position with $3.7 billion of cash and marketable securities; of which, approximately 89% was held outside the U.S
Total debt on the balance sheet at the end of the quarter was $7.4 billion
Turning to cash flow, our cash from operations was approximately $801 million
Also, we did not repurchase any shares during the quarter
And now, I will discuss our third quarter and full-year guidance
Based on our past performance on our outlook for the remainder for the year, we now anticipate annual organic sales growth to be in the range of 6.5% to 7% for 2017. As a reminder, the third quarter will have one less selling day as compared to 2016 and the fourth quarter will have the same number of selling days
The full year has one less selling day
If foreign currency exchange rates hold near current levels, we expect net sales in the third quarter and full year to be negatively impacted by approximately 0.5% and adjusted net earnings per diluted share to be negatively impacted by $0.02 in the third quarter and approximately $0.10 in the full year
For 2017, our adjusted net earnings per diluted share is now expected to be in the range of $6.45 to $6.55 per share, which excludes any anticipated dilution related to the planned acquisition of NOVADAQ technologies
Based on the third quarter-end close date for NOVADAQ, the dilution is estimated to be approximately $0.03 to $0.05 per share
For the third quarter, we anticipate that adjusted net earnings per diluted share will be in the range of $1.50 to $1.55, which includes the aforementioned investment, foreign currency impact and the impact of the accounting change for stock compensation
Our third quarter range does not assume any dilution related to NOVADAQ
However, if the deal closes earlier than September 30, there will be additional dilution during the quarter
And now, we'll open up the call for Q&A
Question-and-Answer Session
Yes
On the component of the raise, FX is moderating
So, it won't be as big as it was in the first half
I think in the first half, we probably had around $0.08 per share, if you look at what we had
I'm guessing that it will be about $0.05 or so in the back half
No, not $0.05, probably $0.02 in the back half
And then, in terms of the components of the tax, I think in addition to the stock comp, we also implemented some other changes geographically that will benefit us in the back half of the year and that's probably roughly a 0.5% point on our tax rate
And as we laid out with cost transformation, we did say 30 basis points to 50 basis points over the next few years
In the early years, it will be closer to 30 basis points
There are some elements like indirect procurement, shared services where we'll get savings earlier
The areas like the ERP systems and product life cycle management will drive much higher savings in the outer years, but it's a multi-year multi-facetted program
It's working so far and we're getting some early returns at least as it relates to indirect procurement
But the bigger prize will come with product lifecycle management and as you mentioned with ERP, which will begin sort of towards the end of 2018 and continue in the years after that
