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Stryker Corporation (NYSE:SYK)

Q2 2013 Earnings Call

July 18, 2013 4:30 pm ET

Executives

Kevin A. Lobo - Chief Executive Officer, President and Director

Katherine A. Owen - Vice President of Strategy & Investor Relations

William R. Jellison - Chief Financial Officer and Vice President

Analysts

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Richard Newitter - Leerink Swann LLC, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Matthew Taylor - Barclays Capital, Research Division

Matt Blackman - Stifel

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Chris Hammond - Goldman Sachs Group Inc., Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

David R. Lewis - Morgan Stanley, Research Division

William J. Plovanic - Canaccord Genuity, Research Division

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Operator

Welcome to Stryker's Second Quarter 2013 Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] This conference call is being recorded for replay purposes.

Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.

I will now turn the call over to Mr. Kevin Lobo, President and Chief Executive Officer. You may proceed, sir.

Kevin A. Lobo

Good afternoon, everyone, and welcome to Stryker's Second Quarter 2013 Earnings Call. Joining me is Bill Jellison, who as many of you know, joined Stryker as our CFO in April; and Katherine Owen, Vice President of Strategy & Investor Relations. With respect to today's call, I will provide opening comments and then turn it over to Katherine for additional details. And then Bill will cover the financials. We will then open the call to your questions.

Our second quarter results were driven by solid and balanced growth, both geographically and across our 3 segments: Reconstructive, MedSurg, and Neurotechnology and Spine. With Q2 sales of $2.2 billion, we delivered 5% reported growth and a 5.9% gain, excluding foreign currency and acquisitions. We benefited from 1 extra selling day in the quarter, which after adjusting for this, resulted in sales growth of 4.4%, excluding foreign exchange and acquisitions. Based on our first half results, we remain confident in our ability to achieve our full year sales target and are shifting our range of sales growth, excluding acquisition and foreign exchange, from 3% to 5.5% to 4% to 5.5%.

The strong top line, along with operational efficiencies, is helping drive solid performance, highlighted by continued gross margin improvement, after adjusting for the impact of the medical device excise tax. While we are pleased with our operational performance, as discussed previously, our results have been adversely impacted by a substantial foreign exchange headwind.

For Q2, foreign currency negatively impacted our per share earnings by roughly $0.04. However, with the sales momentum and effective cost control, we were able to partially absorb the foreign exchange impact and still deliver EPS of $1 a share.

With respect to our geographic growth, the U.S. had another strong showing with sales up approximately 5%. Encouragingly, we saw improved momentum in our international business, which posted nearly 9% growth, excluding foreign exchange, and included 1.6% growth from the Trauson acquisition. We believe that the globalization initiatives put in place are having a positive impact across our international businesses.

The European turnaround remains on track, as Europe registered positive growth in the quarter versus the prior year. We look forward to continuing this momentum in the back half of the year.

Our emerging markets businesses continue to perform well, posting strong double-digit growth.

Looking at our 3 franchises in more detail. On a global basis, Reconstructive sales were up roughly 6% on a reported basis, with 8% underlying growth, excluding foreign exchange. Growth was balanced geographically with a 6.3% gain in the U.S. and a 6.9% increase in international, after adjusting for foreign exchange and acquisitions. Hips continued to roll and U.S. knee growth of 2% appears to be in line with the market.

Turning to trauma and extremities. We continued to see great momentum with double-digit gains in both the U.S. and international, led by our foot and ankle business, which posted 34% growth in the U.S. and 28% worldwide. Based on the first half performance for our foot and ankle business, we are now even with the market leader, which is a considerable achievement, given that this dedicated business unit was only created at the beginning of 2012.

Worldwide MedSurg sales increased 4% on a reported basis, with year-over-year gains for all of its business segments, including strong double-digit growth from the 1488 Camera and System 7 power tools.

Finally, Neurotechnology and Spine posted roughly 7% underlying growth, excluding foreign exchange and acquisitions, led by double-digit gains for Neurovascular and Interventional Spine.

Turning to some other P&L highlights. Gross margin, excluding acquisitions and restructuring charges, declined 50 basis points year-over-year to 67.7%. However, this included approximately 80 basis point impact from the medical device excise tax. With R&D representing 6% of sales and up 14% from the prior year, we continue to make important investments in innovation for the future.

Looking ahead to the remainder of 2013, as mentioned, we feel highly encouraged by the continued strong sales momentum, which supports growth at the upper end of our original range. We are pleased with our overall operational performance, but foreign currency has proven to be a major challenge in 2013 and has worsened further, since we announced our Q1 results, at which time we guided EPS to the lower end of our range.

If exchange rates remain at current levels, we anticipate full year EPS to now be negatively impacted by approximately $0.20 per share versus the prior year. As a result of this increased foreign exchange impact, we are adjusting our EPS range to $4.20 to $4.26 versus our original target of $4.25 to $4.40. This revised range assumes we will offset approximately half of the full year foreign exchange headwind.

Importantly, going forward, we will be implementing a currency hedging program to enable us to mitigate the earnings volatility associated with foreign exchange swings, which Bill will comment on shortly.

With that, I will turn the call over to Katherine.

Katherine A. Owen

Thanks, Kevin. My comments on today's call will focus on an update of our Q1 acquisition of Trauson, as well as a preview of our upcoming analyst meeting, which will be held on September 4 and 5 at the Homer Stryker Center in New Jersey.

With respect to Trauson, we closed on the deal on March 1 and we have been pleased with the performance to date, recognizing the relatively short period of time since the acquisition. With Trauson, we are now a leading player in the lower priced segment of the trauma market, as well as spine in China, which we believe will be an increasingly important market with robust growth potential. The deal complements our existing presence in the premium segment, but provides us access to a different customer base and dealer network.

As it relates to the integration, we continue to make solid progress and are on track with expectations as it relates to all key activities. In order to ensure our organization remains focused on building our competitive presence in both the lower priced and premium segments of the Chinese market, we have separate leaders who are running their organizations independently. We remain excited about the prospects for this acquisition, both to expand our presence in China and longer term, to provide a platform that can be leveraged more broadly into the lower priced segments in other emerging markets.

Turning to the analyst meeting. We will once again be holding this event at the Homer Stryker Center. For those of you who are able to join us on the 4th, we will be hosting a product fair focused on our neurotechnology businesses. Specifically, we will be highlighting our 6 key business units that address the neurotechnology market, including Neurovascular, Interventional Spine, neuro Powered Instruments, Navigation, Spine and CNS.

With the acquisition of our Neurovascular franchise in early 2011, combined with the 2 additional acquisitions of Concentric and Surpass, Stryker is the leader in complete stroke care. But beyond these important businesses, we have additional product offerings that touch the key physician community, including neurosurgeons, interventional neuroradiologists and neurologists, with these products to be included as part of the neuro product fair. The format will allow for informal interaction with the key leaders of these businesses and an opportunity to better understand the key product offerings and how they relate to our broad neurotechnology portfolio.

Following the product fair, on September 5, we will have our formal analyst meeting, which will include presentations from our key leaders with opportunity for extensive Q&A. We look forward to seeing many of you at the meeting in early September and hope you find the format and content helpful to better understanding not only Stryker's neurotechnology leadership, but our broader product portfolio.

With that, I'll turn the call over to Bill.

William R. Jellison

Thanks, Katherine. Sales growth was positive by 5% in the quarter, including a negative 1.5% impact from FX translation. Constant currency sales growth was a positive 6.5% and 5.9%, excluding acquisitions. We had a positive impact from an additional selling day in the quarter. And on a days adjusted basis, core growth was a positive 4.4%.

EPS on a GAAP basis for the quarter ended at $0.56 per share versus $0.85 per share last year in the second quarter, while adjusted earnings per share was $1 per share for the quarter versus $0.98 per share in the second quarter last year. This quarter's EPS includes negative impacts of approximately $0.04 per share from FX and $0.03 per share from the med tech tax.

The income statement is exposed to both transactional and translational FX risks, while the balance sheet is just exposed to translational FX risk. We currently hedge transactions once they occur, but we don't hedge future transactions at this time, nor do we hedge any translation exposure. We are planning to implement a predefined layered transactional hedging program, beginning sometime in the third quarter, which will be fully implemented over the next year. This will help us mitigate the volatility of FX movements in the future.

The most significant non-GAAP adjustments in the quarter, primarily related to a $170 million increase in the charge associated with the voluntary recall of the Rejuvenate and ABG II modular hip stems. The adjustments also included an increase of $19 million for estimated settlement expectations for previously disclosed regulatory issues. We believe these are reasonable estimations of our exposure. However, no potential insurance offset that may be available to help cover some portion of the Rejuvenate recall has been included. We do expect to recover some benefit from insurance in the future and we'll also book that as a non-GAAP adjustment, when known.

Looking at sales in the second quarter. Volume and mix contributed 7.8% to our top line sales growth and acquisitions added 0.6%. Price changes reduced sales by 1.9%. The price decline is in line with the decreases experienced in 2012, though. Currency, driven primarily by a significant weakening of the Japanese yen versus the U.S. dollar, negatively impacted our top line by 1.5%. We also had an additional selling day in the quarter, increasing sales by approximately 1.5% on average in the quarter.

Looking at our reporting segments. Reconstructive products represented 44% of our sales in the quarter. And sales in this segment were up 5.6% as reported and grew 7.6% on a constant currency basis. On an average daily sales basis, after adjusting for the impacts of acquisitions and currency, Reconstructive sales were up 5% in the quarter.

U.S. Reconstructive sales grew 6.3% in the quarter. Trauma and extremities had another excellent quarter in the U.S., posting 19% growth, led by new products, sales execution and strong growth in both foot and ankle. Domestic hips and knees were stronger sequentially, growing 6% and 2% in the quarter, respectively. Knees are still feeling the impact from the absence of our ShapeMatch Cutting Guides, but the growth in this category still appears to be in line with the market.

Our international Reconstructive business was up 9.4% in constant currency and 5.7%, adjusting for selling days and acquisitions. All regions posted positive growth with performance the strongest in the emerging markets.

Next, our MedSurg product segment represented approximately 37% of sales in the quarter. Total MedSurg sales increased 4.2% as reported and 4.8% on a constant currency basis. These results were led by growth from our Medical and Sustainability Solutions business. Medical increased by high-single digits and Sustainability returned to solid double-digit growth. Endoscopy posted mid-single-digit growth in constant currency. Instrument sales in the U.S. were hindered by the impact of the Neptune Waste Management System recall, which reduced sales by approximately $20 million in the quarter. And this impact, we believe, will anniversary itself mid-third quarter, which will reduce the year-over-year comparison issue to around $6 million to $7 million in the third quarter and eliminate that comparison negative drag by the fourth quarter. We look forward to getting this product back on the market once we obtain our regulatory clearance of the Neptune -- or on Neptune's 510(k).

Our final segment, the Neurotechnology and Spine, represented 19% of the company's sales and delivered another good quarter. Sales increased 5.4% as reported and 7.5% on a constant currency basis. Growth in this segment was led by our IVS and Neurovascular business, which both posted solid double digit constant currency growth. Core spinal implant sales were up 1% in the U.S. and up double digit internationally on a constant currency basis. Excluding the impact of the Trauson acquisition, international core spine still posted growth in the mid-single digits.

In looking at our operational performance, gross margins on an adjusted basis in the second quarter of 2013 were 67.7%, compared to 68.2% for the second quarter of 2012. The med tech tax negatively impacted gross margins by approximately 80 basis points in the quarter. When compared to the same period last year, the rate was also negatively impacted by foreign exchange rates.

Research and development expenses increased by 0.5 percentage points to 6% versus 5.5% last year in the quarter. And the 14% increase in R&D spending over last year reinforces our commitment in this area and our expectations for above-market sales growth.

Selling and general administrative expenses, costs were -- represented probably about 45.9% of sales. However, included approximately $200 million of non-GAAP adjustments, including both the Rejuvenate and regulatory costs that were mentioned earlier. On an adjusted basis, SG&A expenses were $813 million or 36.7% of sales in the second quarter of 2013 versus 37.1% in the prior year's second quarter.

Operating margins on an adjusted basis were 23.3% in the second quarter compared to 24.1% last year in the same period. And again, that rate was primarily impacted by the 80 basis point negative impact from the med tech tax, FX movements and R&D expenditures, partially offset by operational efficiencies.

Other income and expense in the second quarter were $21.3 million and that compares to $10.1 million last year in the second quarter. This represents a negative $0.02 per share impact on EPS this quarter. This increase in expense resulted primarily from lower interest income due to some lower interest rates and some higher -- or slightly higher transactional FX expense in this category.

Our reported tax rate for the second quarter was 20.8%, while the adjusted effective tax rate was 23.3% for the second quarter of this year.

Looking at the balance sheet, we ended the quarter with $4.7 billion of cash and marketable securities, an increase of approximately $450 million compared to year end 2012. We also have $2.8 billion of long-term debt on the balance sheet.

And from an asset management standpoint, accounts receivable days ended flat with last year in June at 58 days. And days in inventory finished the quarter at 166. That's actually down 1 day sequentially, but it's down 8 days when it's measured against the prior year quarter, as we're really driving a number of initiatives in this area as part of the operational improvement plan.

Turning to cash flow. We had an excellent first half of this year, generating cash from operations of $592 million. That compares to $492 million in the prior year, which is an increase of 20.3% over the first half of last year.

Finally, regarding share repurchases. In the first half of 2013, we repurchased approximately $250 million of our stock or approximately 3.8 million shares at an average price of $65.12. And we still have about $750 million available for repurchase under our current authorization program.

Based on our solid sales achievement in the first half and the current economic and market conditions, we are projecting constant currency sales growth, excluding acquisitions, in a range of 4% to 5.5% for the year. And if foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 1.5% to 2.5% in both the third quarter and in the full year for 2013.

As Kevin indicated previously, we are adjusting our guidance for our 2013 adjusted diluted net earnings per share to a range of $4.20 to $2 -- or to $4.26. This includes a negative impact from foreign exchange movements of approximately $0.20 per share compared to last year's average rates.

Thanks for your support. And we'd be glad to answer any questions that you may have at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first call comes from the line of Bob Hopkins from Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So Bill, just to start off with a financial question. My first question is, can you just highlight how the -- how FX impacted the gross margin this quarter? And then give us a little bit more detail on the hedging program and how that might impact the P&L going forward?

William R. Jellison

Sure. As far as how it affects the rate, it's probably about 10 to 20 points negative impact in this period. And obviously, that's only one area that the rates actually has an impact on the overall performance. In general, as I talked about from an FX perspective, we're exposed obviously on both the transactional and the translational side of the equation. So we generate a significant amount of money and profits both in Japan and Australia and a number of other countries. But we also have transactional-related exposure, where we're selling products into a number of these countries that don't have natural offsets. Currently, the company only hedges those activities once the transaction already occurs. And on the layered hedging program that we're at least looking at and implementing on an ongoing basis, we'd be in essence looking out forward as far as 12 or 18 months and actually putting in different layers of purchases at different points in time throughout kind of that 12- or 18-month period of time. So that we're buying the currencies that we need to have in those periods consistently through that period. And what that does is it just mitigates or buffers some of the highs and lows associated with those exchange rate movements in any one period. So hopefully, that helps kind of explain that. And I'd be glad to get into it more if you've got further follow-up questions.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

No. Just for my other follow-up, I wanted to ask Kevin a question, but thank you for that. And Kevin, I just wanted to get your quick update on the competitive knee landscape. Obviously, as everyone's been talking about for a while now, there's a couple of new knees in the marketplace. And one of the other competitors that have reported so far have mentioned that there was some trialing going on. Your numbers seem pretty solid here. So just -- has your opinion changed now that we're another quarter into the competitive launches on the potential impact from those competitive launches? Just an update would be great.

Kevin A. Lobo

Yes, sure, Bob. Thanks. What I would say is basically consistent with what I said last quarter, that it's going to take a while before we really see if there'll be an impact. I would say, not before the end of the third quarter will we have a good sense. We feel pretty good about our knee performance. It's in line with the market, despite the fact that we have our ShapeMatch Cutting Guides off the market. So we feel we're doing well. We hear noise a little bit here and there about trialing, but it's very minor at this stage. And like I say, we're not going to have a good understanding probably until the end of the third quarter.

Operator

Our next question comes from Richard Newitter from Leerink Swann.

Richard Newitter - Leerink Swann LLC, Research Division

Just a kind of housekeeping. I think you had given the impact of selling days on the overall Recon business, just can you parse that out by hips and knees?

Katherine A. Owen

There isn't -- Rich, it's Katherine. There really isn't any real variability between hips and knees. So the math that we quoted on the call would hold. And it's 1.5% overall. There is -- if there's any variability, it would be more related to our capital business that tend to be less impacted. But for consistency's sake, we apply the same math each quarter and don't try and adjust because the swings aren't that meaningful. So I wouldn't expect any variability.

Richard Newitter - Leerink Swann LLC, Research Division

Okay. And on the knee side, can you maybe give us a sense of where you are with getting ShapeMatch back on the market? When might we expect that? And also, your direct-to-consumer initiative in knees for the GetAroundKnee, can you describe what updates you might have on the impact that's having on the business and what your plans are going forward with that?

Katherine A. Owen

Yes, no problem. We filed the Otis 510(k) during the second quarter. And it's difficult, as you know, to predict when the 510(k) clearance may materialize. We're hopeful sometime this year. But obviously, that's going to depend on a number of variables. We have been continuing with the DTC campaign, although the mix of media varies just depending on some of the analysis we've done, which is very consistent with what we said on prior updates. That's not a departure of any type. And we continue to believe that the Triathlon Knee, as the only single-radius knee on the market, has some unique benefits, as well as some extensive clinical history that we believe will help us remain very competitive. And we're pleased with the growth that we saw, recognizing there's always some impact. Not massive, but some impact, given the ShapeMatch is not available in the market right now.

Operator

Our next question comes from Larry Biegelsen from Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

So Kevin, it would be great to hear from you what you think drove the strong improvement in your international hip and knee growth and the sustainability of that?

Kevin A. Lobo

Yes, so sure. As you know, Europe, the turnaround story has really -- really began last fall. We put a lot of new leaders in place. We've really focused the company on turning that around. We've had great exchanges with our U.S. counterparts, the head offices in U.S., to help drive that growth. We've also sent over one of our top leaders, who is leading the knee campaign in the U.S. He's now living in Europe and helping to run the orthopaedic group in Europe. So I would say, it's a number of factors leading to sustained performance. And we've seen the improvement gradually coming. It came through, obviously, very clearly in this quarter. But it's only 1 quarter. So I don't want to get ahead of ourselves. I think we need to see that sustained. But I really can't point to one thing. It's a real focus commitment, really starting with leadership and alignment. And driving what we have, our great products. And we just have a disproportionately lower share in Europe than we do in the U.S. and to other markets like Australia, Japan, Canada. And so that's really the key point -- part of the turnaround, Europe being a negative sales over the last few quarters finally turning to positive sales this quarter.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

And then for my follow-up, I wanted to ask about pricing because it did deteriorate in recon. And that was a little bit surprising to me given that you lapped the Japan cuts on April 1. So could you talk a little about where you saw pricing deteriorate? Was it the U.S., Europe; hips, knees? And how confident are you that it doesn't get worse, at least in the near term, from that negative 3.4% we saw this quarter?

Katherine A. Owen

Yes. It did worsen, I think by about 80 bps or so versus the first quarter. Remember, we did anniversary the Accolade launch in the second quarter last year. So there were some benefit that we saw. There was nothing significant I would call out or some change in trend. We've been saying that hip and knee pricing is likely to remain under pressure somewhere in the low-single digits, partly offset by mix, which is going to vary quarter-to-quarter. But there was no significant departure from that.

Kevin A. Lobo

Yes. I would not characterize the market as deteriorating in terms of price. I would say it's very stable. Stable in the low-single digit. From quarter-to-quarter, we do tend to see a little bit of variation, but it's nothing that concerns us.

Operator

Our next question comes from Joanne Wuensch from BMO Capital Markets.

Joanne K. Wuensch - BMO Capital Markets U.S.

Just for clarification, the 4.5% constant currency growth you're guiding to for the year, how much of that is acquisition revenue? Or is that organic?

Kevin A. Lobo

That's organic growth. 4% to 5.5%, excludes foreign currency and acquisitions.

Joanne K. Wuensch - BMO Capital Markets U.S.

Terrific. Second up, can you please comment on the capital purchasing environment at the hospitals?

Katherine A. Owen

Joanne, there's been no real change since our prior update. The market remains somewhat cautious ahead of unknown changes under the ACA for next year. So there hasn't been any significant improvement nor deterioration in what we're seeing as it relates to hospital capital spending. Recognizing our capital businesses tend to have more variability, even when there is no overall market concern. It's just the nature of that type of business. But there's been really no change in the environment since the start of the year.

Operator

Our next question comes from Matthew Taylor from Barclays.

Matthew Taylor - Barclays Capital, Research Division

I guess, first, I just wanted to follow-up. It sounded like you started to answer the FX question that Bob asked. But given that hedging program that you talked about looking out 12 to 18 months, I guess my question is, you lowered the guidance for the year, but when will we start to see that have more of a stabilizing impact on FX as it rolls through the P&L? And can you comment on where those hedges would be located?

William R. Jellison

Sure. So -- and that's a great question because, obviously, we've got exchange rates that are already moved, which is why as we look at the full year and look at what the expected impact for us is, it's still obviously a significant drag on this year. We believe that we're going to be implementing a layered hedge program, but that's built up over time. And that's really to protect us against kind of future rate movements. And again, a hedging program is only set up to mitigate that risk. It doesn't eliminate the risk. So as currencies change, you're ultimately getting the impact of whatever those currencies are changing to, unless you, one, either have some good natural hedges established for long term; and also to just mitigate at least or minimize what the volatility of that high or low on those rates are. So if you think of us begin putting in a layered hedging program, we would think we'd have it pretty much in place or largely in place by the time we get into kind of the first quarter or so of next year. And by that point in time, you're going to have multiple layers that are already being established in each one of those quarters. But for this specific year, we're still going to have fairly significant negative impacts based on where the rates are at today.

Matthew Taylor - Barclays Capital, Research Division

Great. And then just on spine, your spine numbers have improved a little bit. And a lot of people have been talking about improvements in the spine market. Have you seen any change in volumes or the behavior of payors or anything that's really changed dynamically?

Katherine A. Owen

No. And keep in mind that spine business includes both our traditional core spine business, as well as our Interventional Spine business, which is faster growing. It had another solid quarter of double-digit gains on the Interventional Spine side. We see no really -- no significant change in trends, in terms of whether it's payor pushback or just the underlying overall market trends. It seems to be moving towards greater stability, but it's still an overall challenging spine market.

Operator

Our next question comes from Rick Wise from Stifel. Please go ahead.

Matt Blackman - Stifel

This is actually Matt Blackman here for Rick. Just a couple of questions. Are you able to comment at all about the incremental cost of implementing this hedging program?

William R. Jellison

So there's really not a lot of additional incremental cost associated with the hedging program. All the hedges that we would be layering into are really forward contracts. And those are done at kind of a very, very minimal related cost aspect of that. So there should be nothing associated, at least materially associated with anything with the hedging program itself.

Matt Blackman - Stifel

Okay. That's helpful. And then the next question. You mentioned you'd fully anniversary Neptune in the fourth quarter. But just any commentary on getting it back to market?

Katherine A. Owen

Well, we have filed the 510(k), so we're awaiting FDA clearance. And similar to OtisMed, obviously, we have to respond to any questions from the FDA. And we're continuing to target sometime this year for the clearance, but this isn't a perfect science, as you know. So we're trying to give visibility around both the quarterly impact and the expected impact until we get the clearance. Which again, hopefully it's sometime before year end.

Operator

Our next question comes from Derrick Sung from Sanford Bernstein.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

I wanted to follow up on the pricing question that was asked earlier, the 80 bps we're seeing in pricing. I guess I just wanted to go back to the kind of o U.S.-U.S. split because as Larry mentioned, there is that benefit from the Japan reimbursement cuts anniversarying. So I was wondering, does that imply that we saw a greater than 3.5% impact in the U.S.? Or if you can just maybe give a little color there, that would be helpful.

William R. Jellison

I mean, so first off, just a clarification of that impact. The impact on the pricing side is about a 60 basis point impact on the overall margin levels. The rates that are out there and what's being put together, as Kevin mentioned and as Katherine mentioned, the ranges of those price impacts actually are different quarter-to-quarter. And it's really based on some of the programs that people are putting into place. But nobody is really seeing any difference in the trends associated with that.

Katherine A. Owen

And also, keep in mind when we're talking about Reconstructive, as we show that category, that's not just hips and knees. So the pricing you're seeing is inclusive of some of our other businesses, as well, such as trauma and extremities.

William R. Jellison

That's right.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then as a follow-up, you're making a clearer effort here to step up your R&D spend this year. Can you talk a little bit about where that R&D spend is going and kind of when you expect to get the return on that?

Katherine A. Owen

No, our comments have been that we expect in any given quarter our R&D as a percent of sales to be somewhere in the 5.5% to 6% range. And it's going to vary quarter-to-quarter. Obviously, it was at the high end of the range that quarter as we continue to make investments that we believe are helping to drive the top line growth. So we don't expect any real change. That continues to be the expectation.

Operator

Our next question comes from Mike Weinstein from JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

I have a few questions, but I'll try to -- to narrow it to 2. One is, the cash flow performance this quarter. You kind of buried the lead a bit on that one when you put it into the text. So it's up 20% year-over-year. Can you just describe what drove that? Is there something in last year's comparison I should be aware of, because obviously that's a very strong performance relative to the underlying earnings.

William R. Jellison

Sure. I'd say that if you look at kind of last year's performance, I'd say that we had a weaker or softer cash flow on level in the first half of last year. But I think that, as you saw our inventory days in comparison, especially in comparison to 1 year ago, are down about 8 days. I think in general, we feel very good about kind of the cash flow level that we're looking at. And we should continue to be able to drive that at a solid layout -- or a solid rate.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay. I'm going to sneak in 2 follow-ups here. First, just to understand the -- you're basically describing a current FX impact on your bottom line of basically 100 basis points as $0.10. Is it that high just because of what's going on right now is the yen and you have less hedges on your yen exposure than you do on your euro? Because I always thought that historical relationships, Katherine, the top line impact to bottom-line impact was less severe. So that's first. And the second, maybe -- I just wanted to go back to the cost of the hedging program. You described that the cost of the impact on the C&L of implementing a hedging program is relatively de minimis. I just want to make sure I understood that.

William R. Jellison

Sure. Absolutely. So a couple of questions there. The first question really deals with some of rate-related impacts and it really depends on which currencies are moving. So in some currencies, we have better natural impacts or offsets associated with it. But when you look at the Japanese yen, for example, and say the Australian dollar, the Australian dollar just in the last -- since the last call, in the last 3 months, has changed about 13% downward. So when we're selling in Australian dollars, but we're buying those products that are sold into that market in either dollars or euros, that's obviously a negative impact associated with it. Same with Japan. So Japan, we had very little, virtually no natural offsets there. Everything we're selling there is really being purchased outside of that region. So because we've had such a significant move in the yen and also in the Aussie dollar, and in fact in most commodity-based countries, that's actually having a more negative impact on us in this specific year than what we'd generally see, even with some higher volatility and rates. And as far as the cost of the program goes, again, there's obviously some additional ramp-up within kind of the treasury group to make sure that we can support that. But relative to the overall cost of both the organization and the cost of that program, it's relatively de minimis. As far as buying that, all we're really doing is we're purchasing the amount that we need in advance. So we're buying amounts, let's say for the second quarter of next year. And we're buying that at different periods between now and then. So that we don't just get exposed to whatever the rate is in that specific quarter, but it's layered in through a number of purchases up until that date.

Operator

Our next question comes from Matthew Dodds from Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

Quick one first, for Kevin. Now that we've had more than half of companies reporting in the second quarter and you look at the first and second quarter combined, the hip market continues to outperform the knee market, whereas you could argue demographics might be better for the knee market, there's more GTC spending there, you got the new product launches. I mean, is the difference, in your view, all elective? Or knees are just that much more elective than hips? Or is there something else out there?

Kevin A. Lobo

Yes. Matt, I -- thanks for the question. I would say that, that's a trend we've been seeing for a little while now and I would attribute it to the more elective nature of knee procedures. If you have hip pain and you're lying in your bed, you feel the pain; versus a knee, it can be deferrable and you could get HA shots or other things that can delay your procedure. So I would 100% attribute it to the more elective nature. Just on hips, I would have to say I'm extremely pleased with our performance in hips, given that we obviously had to undergo a recall starting last year. You have not seen our business go negative in hips, certainly in the United States, where the recall was most intense. In the third quarter of last year, we had a slight dip in our growth rate, but it was still positive growth. And what you've seen since then it's -- can sustain positive market-leading growth, in spite of having to manage our way through a recall. So I think that's a tribute to the leadership that we have in our recon group in the United States.

Matthew J. Dodds - Citigroup Inc, Research Division

I figured you were just looking forward to signs on the hips. One quick one on trauma. Was there any benefit left from the mail recall of the competitor, or was that largely gone in Q1?

Kevin A. Lobo

At the end of Q1, they were largely back on the market. So what I would say is, we had a pretty pure quarter in the second quarter. And as you know, we've been growing above market in trauma for a number of quarters, frankly a number of years, certainly in the United States. It was nice to see our International Trauma business pick up as well. But feel very bullish and very confident with our Trauma business, our great leadership that we have in place. And very, very strong performance in the second quarter, again.

Operator

Our next question comes from David Roman from Goldman Sachs.

Chris Hammond - Goldman Sachs Group Inc., Research Division

It's actually Chris Hammond in for David Roman. First question is related to the P&L. I think for the last 2 quarters now, I think you guys have come in with SG&A spend a little bit higher than what we were forecasting. And I'm wondering, A, kind of how that -- how we should be thinking about that for the rest of the year? And then additionally, how that plays in the context for EPS for the full year, when we strip out all the noise, whether it's FX or device tax. It looks like the total EPS growth rate is fairly robust and I'm wondering about the sustainability of that. And what are the various levers, up or down, either way?

William R. Jellison

Yes. So I guess, first off, just on the SG&A-related expenses. I think that we're doing a very good job on the covering of that side. We've got our expenses this quarter on an adjusted basis or about 36.7% of sales versus 37.1% last year in the second quarter. I think we had some pretty good first half related improvement. And I think, overall, that we're expecting to continue to -- especially if we can realize this level of top line sales growth, it does allow us to get some leverage associated with our overall business. And I think that that's our expectation moving forward.

Chris Hammond - Goldman Sachs Group Inc., Research Division

Okay. Wonderful. If I could just squeeze in just 1 follow-up here. I curious a little bit about what's going on in Europe. Obviously, a turnaround seems to be well underway there. But then, there's some other numbers from the Trauson that's getting baked in there, too. But just outside of just the sales changes that you guys have made, what are you seeing in terms of a macro landscape there? Has anything changed since you were -- you've last updated at this, whether it's regard to austerity or competitive trends?

Kevin A. Lobo

So first thing, I would start with the market. I would say that the market in Europe is -- had the same challenging market that it has been, frankly, over the last couple of years. Trauson sales are only in China. There's virtually no sales outside of China. So they're -- the impact in Europe is -- has nothing to do with Trauson. It's really our own operational performance. And what I would say is our actions, that we had lost market share for a number of quarters and we started to address that with vigor, starting in the fall of last year. I'm very pleased with our performance in the U.K., in France. Spain has really turned the corner and we had a very strong quarter in Spain. And a number of the other smaller countries, we've really -- with better leadership in place and more focused, we've been driving improvements. Italy and Germany actually improved versus the first quarter, but those are 2 countries were we still have work to do. And I -- we'd be looking for more improvement from those 2 countries later on. But this is really an operational improvement story. But we have to be honest that this is following a period of a number of quarters where we were underperforming the market. Our goal that we stated last year was to get back to market growth by the end of the year. We're obviously on that trajectory, based on a very strong performance this quarter.

Operator

Our next question comes from Kristen Stewart from Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I just wanted to ask a question on the neurovascular business. I think you guys had mentioned there was double-digit growth in the quarter. Can you maybe just further expand upon that? And are all of the activities or shifts between you and Boston Scientific now complete from a manufacturing standpoint?

Katherine A. Owen

I think, Kristen, yes. The final employees transferred over in April. So we are now essentially done with all of the major integration-related aspects of that deal, which is in line with what was expected when we did the deal a couple of years ago. And they continue to see very solid momentum. There's really no acquisition benefit in those numbers, just given how small the Surpass deal was. And so it's really a nice -- nice product flow and continuing to have good momentum across both the hemorrhagic and ischemic segments for the Neuro business.

Kevin A. Lobo

Yes. I'd say, Kristen, just to add one comment. The product launches have been terrific in coils. So in coils, we're clearly the leader and we're gaining market share pretty significantly with nanocoils, long coils, just a whole series of launches over the last few quarters that are really boosting that business. And as you know, we -- that management team stayed in place, as we acquired the business from Boston Scientific. And the R&D engine is really humming very, very well.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. Perfect. And so overall, it sounds like you would say you're gaining share and where do you think the market is generally growing at these days?

Katherine A. Owen

I don't think there's any real change to our overall market growth expectations. It's somewhere in the 6% to 8% range. It's hard to get total visibility, given that a lot of the companies are -- the sales are a part of much bigger companies that it doesn't necessarily get broken out. But we think the overall market growth is probably somewhere in that 6% to 8% vicinity.

Kevin A. Lobo

And related to the comment on gaining share, we're gaining share in coils. Certainly, when you look at the ischemic market, as well as the history of the flow-diverter, the stent, we're still enrolling patients in the trials. We don't have that product on the market in the U.S. So our share gains are really in the plumbing segment.

Operator

Our next question comes from Glenn Navarro from RBC Capital Markets.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Two quick questions. One on the hip side, your hip numbers came in better than expected, particularly on the U.S. side. So I'm assuming you're taking market share. Can you confirm that? And then, what do you think that the U.S. hip market is growing? And a follow-up then, after that, on extremities.

Kevin A. Lobo

Well, first on the hip market, obviously, not everybody has reported yet. I would guess that it's probably growing in the low single digit. We have been at the high ends of market growth for a number of quarters now. As I mentioned earlier, very excited about our hip leadership. We launched the Secur-Fit Advanced product recently, which was a fit-and-fill stem on the heels of Accolade II being launched a year ago. So we've had very good products flow, including our RMDM and ADM cups that we launched not so long ago. So it's been a very, very good product flow. And great execution in the field that's been driving above-market growth in hips for quite some time now.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

And then, let me just follow up on the foot and ankle side. You said the U.S. business was up 34%. We assume the U.S. foot and ankle market's kind of going in that 10% range. So 2 questions. One, has the market accelerated? And then 2, obviously you've taken share, do you know who you've taken share from?

Kevin A. Lobo

Well, first of all, we love being in this market. It's a high-growth market. Until I read the reports, it will be hard to say exactly what the market growth is. But I would say the 10% to 15% range is probably about right for market growth. I think we are taking share from a number of players. It's a fairly fragmented market. I wouldn't say it's from 1 particular player. The bigger issue is that it's a market expansion story. So we're frankly more concerned with growing the market than we are with individual competitors, because there are so many implants that are not used today to treat hammertoe procedures or bunions. And then that's really where the bulk of our growth is really coming from, the electric procedure area, which makes up the vast majority of our foot and ankle business.

Operator

Our next question comes from Matthew O'Brien from William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

I was just hoping you could talk a bit about your capital equipment performance in the quarter. It was quite good, compared to what we've seen so far from a couple of other companies in this space. And I just wonder if Stryker is a little bit unique in the fact that it can bundle quite a few products across recon, neuro and then in MedSurg as well. Is that a dynamic that's benefiting you in this type of environment? Is it something that's been accelerating recently? Or can you just talk a bit about that?

Katherine A. Owen

We've been, as we've talked about in the past, increasingly looking to drive better cross-divisional coordination, but that is still very much in the early stages and I wouldn't want to characterize the performance of any of our businesses as being driven by that at this time. There's been no real change in the overall market backdrop, as it relates to our capital businesses and that we've seen year-to-date. Obviously, we saw very good momentum with the 1488 and System 7, which are capital. And both growing in the double digits. Medical's our most capital-intensive business. Over 90% of that business is capital. Again, hospitals seem somewhat cautious on some of their more deferrable capital purchases, but that's a very consistent trend we've seen throughout the year.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. And then just a quick follow-up to Derrick's earlier question on the R&D side. Three quarters in a row now of double-digit growth in that metric. Is the spend more related towards -- maybe a bit more allocation towards some newer areas that Stryker's not currently in, where you may have a call point? Or is it more just allocated in areas where you're currently at, i.e. spending on the neuro side?

Kevin A. Lobo

So clearly as neuro takes on a larger portion of Stryker's overall business, you would expect a slight tick up in our overall R&D rate. So that's a business mix issue and as neuro does demand a slightly higher rate of R&D spending. But it really is an across-the-board commitment to really invigorating our pipelines. I've had the chance to travel to all of our businesses and do business reviews, including the pipeline. I'm very excited about what I'm seeing. At that stage, we tend not to want to talk too much about a lot of the new products, but you can see with our success with the 1488 and System 7, that new products are the lifeblood of the company. And we're committed and focused on continuing to drive above-market growth through strong investments in research and development.

Operator

Our next question comes from Bruce Nudell from Credit Suisse.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Medical is clearly a lumpy business. It did well quite -- it did quite well this quarter. What's the kind of trend line that you envisioned for that business, now that you've have some more experience with it?

Katherine A. Owen

Bruce, I don't think we'd expect any major departure from what we've seen. Clearly, prior to 2008, we saw very strong growth in capital, but it was a different market environment. We feel there is some hesitancy, as we've said, around the ACA and just general uncertainty. You are right, this is a business that is -- it can vary considerably from quarter-to-quarter. Even where there isn't market uncertainty, that's just the nature of capital, more so for our medical than any of our other businesses. But there's been no real change in the outlook for that business than what we've thought at the start of the year.

Bruce M. Nudell - Crédit Suisse AG, Research Division

And just last quarter, you noted that in endoscopy, cameras are strong, communications was below par. Where do you think the -- where are you right now in that business?

Katherine A. Owen

Yes. We obviously continue to see good momentum as we're going into year 2 with the camera, which was up double-digits, as Kevin referenced. Comm was down. Again, that is one of the most capital-intensive components, certainly of endoscopy, although the rate was considerably better than the declines that we saw in the first quarter, which was expected when we were on our last call. We would, based on trends, we'd expect a little bit, continued improving trends that relates to comm in the back half of this year.

Operator

Our next question comes from Matt Miksic from Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Just a couple of follow-ups on some of the areas that folks have been asking after, one was on Extremities. And I have a follow-up on Capital and MedSurg. So on Extremities, would love to hear, understanding that your growth so far has been coming from some of the sort of discretionary procedures, hammertoe, bunions. Love to hear about maybe some of the investments that you're making in that business, in terms of distribution, maybe in terms of what -- where we can look forward to in expanding the product line, either in Foot and Ankle or Upper Extremities, it'd be very helpful.

Katherine A. Owen

Yes, you are correct. The vast majority of the revenue in our Foot and Ankle business is associated with elective procedures, that we're very excited about the opportunity there. We've put in place a dedicated sales force for Foot and Ankle, which is largely a different call point than the Upper Extremities piece of the business. And we put that in place in the first quarter of last year. Very pleased with the focus. It's a formula that is tried and true within Stryker, bring a lot of focus and leverage what was a terrific portfolio of products with the Memometal acquisition. And continue to -- invest and expand in the market, which as Kevin mentioned, this is really about a market expansion story more than anything else. What we do longer term, whether it's in upper extremities or other areas, I think we'll just determine that, as we look at the opportunities. But right now, the bulk of our focus is really in that Foot and Ankle area.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Nothing immediately on the docket for back half next year, upper or further lower, that you can talk about?

Kevin A. Lobo

What I said in the upper extremities is we -- in the Shoulder business, in particular, we launched our new primary shoulder a year ago. And we have a reverse shoulder that's in our pipeline, which we hope to launch by the end of the year, or let's say around the end of the year. Once we have the reverse shoulder launch, that will really give us a complete portfolio. We would love to drive pretty significant growth. But we're not going to see much of that this year. That will be really more of a next year's growth opportunity.

Operator

Our next question comes from David Lewis from Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Maybe a couple of questions for Bill and then for Kevin. Bill, just one quick one on currency and then a more strategic question. I guess on currency, can you just walk us through the decision to begin to hedge transactional, I guess? Is it a response to volatility in this particular quarter? Or is it really a response to the multiple disparities around FX over the last, kind of 6 to 8 quarters?

William R. Jellison

I really don't think it's actually either of those two. I think that maybe the highlight of that volatility, maybe, has caused us to look at it a little bit harder. But I think that it's just one of the areas that, as an organization, we need to look at to manage risk in general. And we obviously have exposures in a number of different currencies, both on the translation side as well as on the transaction side, as well as really on our balance sheet side. So I mean, we're just looking at it relative to the activities and the practices that we currently have in place and seeing whether we think we should have some additional programs in place to help mitigate any other risk in the organization. So I think it highlights it for us maybe this year a little bit more, just because it's having an impact. But even if the impact hadn't occurred, the risk level still existed. And we -- that's a program that we should have in place as an organization.

Kevin A. Lobo

Yes. I'd just like to jump in, just to make a quick comment. That obviously, Bill has years of experience with layered hedging programs. And I think bringing him on as the new CFO with a fresh set of eyes, there's a risk we had known about at Stryker and Stryker's has lived with this risk for many, many, many years. Rates have never moved with this kind of dramatic -- just in terms of intensity, as well as the shortness of the timeframe. So it's a risk we've known about, but it's a risk that never materialized in such a dramatic action. But Bill has that experience and, obviously, the two of us spent a lot of time talking about it. We really believe this is the right step to move forward with that will smooth out those variations. And then our true operational performance can shine through.

David R. Lewis - Morgan Stanley, Research Division

Just going to be 2 more quick ones. The first is, maybe going back to Bill's significant experience. And Bill, one of the areas that I think investors are pretty enthusiastic where you can bring some of your leadership is on shared services. And I imagine, as you've been there -- have you been there long enough to kind of get a sense of where Stryker sits on shared services. And relative to some of the cost numbers that Stryker has proposed, how do you feel about those numbers and your ability to implement shared services with the broader team? And over what time frame do you think that's appropriate? Then one quick follow-up for Kevin.

William R. Jellison

Well, I mean, a couple of things here. One, we -- I think the organization is already in a -- it's in a good position. I think it's starting from a strong foot on a number of different activities, as well as just with the strength of its overall business performance. And yes, I think that we can definitely make some continued improvements here, looking forward, especially as we see kind of the areas that we're going to be growing sales and focus. But specifically as it relates to shared services, while I've had a chance to look at really each one of the 3 different regions right now and, yes, we've been talking through a number of different opportunities on -- and activities. I think that, one, that's going to migrate over probably many different years. Again, that's not something that just happens overnight. But I think that we've got some good opportunities in a number of areas to just make sure that we're looking at even best practices within Stryker, let alone kind of broadly external to Stryker, because I think we're doing a lot of really good things already within the organization. We just need to maximize on that.

Operator

Our next question comes from Bill Plovanic from Canaccord.

William J. Plovanic - Canaccord Genuity, Research Division

Just 2 questions here. One is, for the hip recall, I think it adds up cumulatively to about $384 million, if my math is correct. And correct me if I'm wrong. And I think the original range was between $190 million to $390 million. Should we expect an increase in that range?

William R. Jellison

I think, one, you should expect us to reevaluate that at the end of every quarter. And I think that we did have some run-off on some expectations. And I think that mostly that's because of, kind of a communications and how we're looking to see and get a good assessment of all the activity out there. I don't think you should expect -- you shouldn't expect it and we shouldn't expect it. I think the numbers that we've got out there are the range that we're currently expecting, based on the kind of the current trends and low levels of expectations moving forward. If it does change within this quarter or within the next quarter or anytime in the future, we'll be reassessing that and trying to give us at least our best estimate of what that new range may be. And it could actually move in either direction. And as I mentioned, the range that we do have out there today does not include any potential offset from any insurance recovery on the backside. And we don't want to book anything associated with that until, obviously, we get closer to understanding exactly what that may be. And if we do book some, that will be, as well, a non-GAAP related adjustment that we'll highlight for you.

William J. Plovanic - Canaccord Genuity, Research Division

Okay. And then just on the hip. And it's been kind of beat up a little here. It was a great quarter, 6% on a 5% comp. The comps are getting tougher. You did announce or talk about some new products that have rolled out. I mean, how much longer do you think you can keep, kind of staying at the high end of the market in terms of hip and really taking share? Is this -- should we expect a reversion to the mean, now that new product cycles are starting to slow, or can you maintain at the high end?

Kevin A. Lobo

Well, I would say that moving back to the mean is never an objective, obviously. We've been above market for, I think 8 quarters in the United States. At least 8, if not more than 8. And in the middle of that, we had a recall. A pretty significant recall. So I feel really strongly about -- I just had a review this week -- earlier this week with our hip business in Mahwah and very excited about the cadence of new products over the next few years. They shared with me, the execution in the field has been fantastic, dealing with this recall and then continuing to sell and not making excuses for it. So I believe we can continue to sustain market leadership. That doesn't mean every single quarter we'll be #1, but we certainly have a terrific product portfolio that's existing. Accolade II still is continuing to grow at robust rates. So even though it was launched a year ago, it's certainly not reached its maxim. Same with our mobile bearing hip offerings and close cuts are still gaining traction. A lot of surgeons use those initially in revisions, but they're having great success and now they are thinking of using those cups in primary procedures. So we still have very good runway with the new products that were launched, let's say 1 year to 2 years ago, in addition to the Secur-Fit Advance that was just launched. And they -- we do have a pipeline looking ahead that excites me. So I don't -- would not expect us to suddenly fall off on hips. But from quarter-to-quarter, any one quarter, somebody might nudge a little bit ahead of us. But we're certainly playing for market leadership for the long term here.

Operator

Our next question comes from Steven Lichtman from Oppenheimer and Company.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Just a question on endoscopy. You mentioned that comps will even with Neptune in the back half. But you did just anniversary the 1488 launch. Where are we in that launch? Is this a multi-year type of launch, like we've seen in hips and knees? Or are you pretty well out there in terms of the rollout?

Katherine A. Owen

Yes. The 1488 launch got underway late in the second quarter of last year. If you recall, we had some initial glitches, which is not unusual when we start to get the products out, used broader in the field. And since that time, we've started to see, obviously, accelerating momentum. I'm really pleased. So they're now going into Year 2. And as we get certainly to the back half of Year 2, the comps get more difficult. It tends to be a roughly 3-year cycle, same with our power tools. So Year 1 to Year -- the first 18 months, the strongest growth. And then you'd start to see a greater moderation, as you start to get to the tail end of the cycle. And there'd be no difference with that with the 1488.

Kevin A. Lobo

Yes. But in this quarter, it was strong double-digit growth. So when -- I would not say we're at the anniversary stage. And we have good expectations in the second half for endoscopy. The camera should continue to grow well. And in addition, Katherine mentioned earlier the Communication business, the drag that we had in the first 2 quarters was certainly lessened in the second quarter and should start to turn modestly positive in the back half of the year.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

And then, Bill, never liked to ask a question on other expense, but did hit you guys by $0.02 this quarter. Is that a level that we should be thinking about on a quarterly basis the next couple?

William R. Jellison

No. I think that as we've kind of looked through the back end of the year, we're obviously still getting hit by some of the lower interest rate, especially on the investment incomes, and we're still obviously sitting with a fairly significant amount of cash. But I think that from a year-over-year comparison level, I think the back half is probably not going to have as negative of an impact as you saw in the second quarter of this period.

Operator

Our next question comes from Josh Jennings from Cowen.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Just first, with a competitor signing the Reconstructive joint business to MicroPort, is there any outlook here for Stryker to take advantage of any disruption, sales force attrition, et cetera, to see some benefit there in either hips or knees?

Kevin A. Lobo

Whenever you have any kind of transition, there's always opportunity. But they had a very, very small share of the overall market. So any gains that we would get, I would say look at all the players likely to be able to capitalize a little bit. But given how small their market share was, it wouldn't be something that would be meaningful to our overall results.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

And then just a follow-up question on Biologics. Can you just talk about the performance of Stryker's Biologics Unit, future investment, future interest in building out your Biologics franchise? And then any interpretation of the [indiscernible] analysis for Medtronics-infused product and whether or not that's a positive or negative for Stryker's Biologics going forward.

Kevin A. Lobo

Sure. We've acquired Orthovita, as you know, recently. And we were very pleased with the Vitoss product, which has been sold by our Spine business as well as our Trauma business. Last year, Spine took full advantage of that and really had terrific performance. I would say this year, Trauma has picked it up and Orthovita's starting to have a little bit more of this positive impact in Trauma than it did last year. But we really like that business. It has very good clinical data. And we continue to have runway for growth in Biologics. We have a dedicated business unit which focuses just on R&D and making the product. And then it's sold through our existing sales force. So that was the thesis of the acquisition. We're pleased with that acquisition. But frankly, the BMP issue on Medtronic, that -- their decline has really happened over the last number of quarters. It seems to be starting to level off and maybe there might be a little bit more decline. But whatever benefit has accrued, whether it's to us or other players in the market, it's pretty much behind us. We do also have some Biologics sold by our Sports Medicine and our Foot and Ankle business. We entered into a distribution agreement just recently on that. And that seems to be going very well as well. So whether Biologics will continue to be an area of focus for us in the future. But we have a pretty good portfolio right now that we're looking to maximize.

Operator

Our next question comes from Matt Miksic from Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

The follow-up that I had, sorry about that before, was around medical. And just to maybe probe a little further into that, I know you've gotten a couple of questions on it, the environment being what it is and here you have these pretty impressive numbers in the quarter. Can you maybe talk about the degree to which there was a product cycle involved there? I know you've launched some new things in sort of critical care or emergency and stretchers side, to the extent maybe that surfaces played a role here. Katherine, you referenced hospitals are being more cautious with some deferrable capital expenses. Maybe help us understand which parts of medical are performing so well for you.

Katherine A. Owen

Yes. I would just -- I think on the margin, yes, Surfaces helps, on the margin, some new product launches. Like Power-LOAD, which I believe we showed earlier in the year at the academy meeting. But I wouldn't say medical is in the midst of a major new product cycle that's driving the growth. And I probably don't want to get into a whole lot of granularity regarding the business segment growth rate because we don't break that out separately. But in general, as you look at our -- all of our capital businesses, which are around 22% to 23% of total company revenue, my comments earlier was that medical as a group is the most deferrable, in terms of beds and stretchers just having an inherently longer life cycle, versus something like the capital businesses of our endoscopy and instruments business, where cameras and power tools are technically capital, but they're less deferrable than other certain types of businesses, certainly than medical.

Kevin A. Lobo

Yes. The only thing I'd add is, we really like being in the medical business. It is volatile. So from quarter-to-quarter, we do have to deal with that volatility. But there are new products, whether it's the Power-LOAD -- there's a new wheelchair that they launched recently, which did not contribute in any meaningful way to sales in this quarter, but those types of investment, you'll start to see the benefit over time. So we are committed to innovation in medical. And over the cycle, with the ups and downs, we certainly -- we do expect to be growing at above-market rates and we really do enjoy that business.

Operator

There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for closing remarks.

Kevin A. Lobo

So thank you, all, for joining our call. Our conference call for the third quarter 2013 results will be held on October 17, 2013. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.

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