Stryker Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Dollar amounts are in millions, except per-share data. Stryker operates in MedSurg and Neurotechnology and Orthopaedics and Spine.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $5,243 | $4,778 | +9.7% reported; +10.2% constant currency |
| Gross profit / margin | $3,333 / 63.6% | $3,016 / 63.1% | Margin +0.5 percentage points |
| Operating income / margin | $972 / 18.5% | $735 / 15.4% | Margin +3.1 percentage points |
| Net earnings | $788 | $592 | +33.1% |
| Diluted EPS | $2.05 | $1.54 | +33.1% |
| Operating cash flow | $204 | $445 | Down $241 |
Adjusted diluted EPS, a non-GAAP measure, was $2.50 versus $2.14, up 16.8%; adjusted operating margin was 21.9% versus 21.1%. Adjustments include purchased-intangible amortization and other specified acquisition, restructuring, regulatory, recall, legal and tax items. These measures are not substitutes for GAAP results.
Sales growth excluding acquisitions and divestitures was 9.3% in constant currency, driven by 9.3% unit-volume growth and 0.7% higher prices. MedSurg and Neurotechnology sales increased 11.5% reported (12.0% constant currency); Orthopaedics and Spine increased 7.5% (8.0% constant currency). U.S. sales rose 11.4%; international sales rose 4.9% reported and 6.8% constant currency.
Gross margin improvement primarily reflected favorable volume and pricing, partly offset by manufacturing and supply-chain costs. SG&A was 35.1% of sales versus 37.3%, helped by lower prior-year structural optimization and legal charges and continued spending discipline. MedSurg and Neurotechnology segment operating margin improved to 26.8% from 23.3%; Orthopaedics and Spine declined to 27.0% from 28.8%, principally reflecting higher SG&A and R&D investment.
Cash, liquidity and debt
- Cash and cash equivalents were $2,330 at March 31, 2024, down from $2,971 at year-end; cash, cash equivalents and marketable securities totaled $2,407, versus $3,053.
- Current assets exceeded current liabilities by $4,937. Total current assets were $11,892 and current liabilities $6,955.
- Total debt was $12,865, including $2,058 current maturities and $10,807 long-term debt. No borrowings were outstanding under the revolving credit facility or commercial paper program; the company reported compliance with debt covenants.
- Operating cash flow was $204, versus $445, primarily due to timing of working-capital payments and collections. Investing cash outflow was $408, including $246 for the SERF acquisition and $167 of capital expenditures. Financing cash outflow was $418, mainly dividends of $304 and taxes on withheld shares of $113.
- Cash dividends declared were $0.80 per share, compared with $0.75 in Q1 2023. No shares were repurchased during the quarter.
Changes, outlook and risks
- On March 20, 2024, Stryker acquired SERF SAS for $246; its joint-replacement implants expand the Orthopaedics and Spine portfolio. Purchase accounting remains preliminary.
- Management cited inflation, supply-chain disruption, labor and shipping costs, higher interest rates, foreign-exchange movements, and conflicts in Russia and Ukraine and the Middle East as continuing uncertainties that could affect costs, customer orders and capital-product deal mix. No numerical full-year guidance is provided in the supplied filing text.
- Management expects segment mix to weigh on gross margin for the foreseeable future, as it anticipates faster growth in the lower-gross-margin MedSurg and Neurotechnology segment.
- The company is investigating whether certain foreign business activities violated the Foreign Corrupt Practices Act and is cooperating with the SEC, Department of Justice and other authorities. The outcome and potential financial impact cannot currently be predicted.
- Product recall and legacy hip-product litigation matters remain ongoing. Accruals for these matters were $277; actual costs could differ materially and adversely affect results or cash flows. A February 2024 settlement of PrimaFit and PrimoFit patent claims had no significant impact on recorded reserves or financial statements.
- New tax laws, including implementation of the OECD global minimum tax framework in some jurisdictions, could increase future tax expense. The Q1 effective tax rate was 14.6%, versus 12.8%.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2023 Form 10-K.
Important facts for investors to verify
- Whether sales momentum and margin improvements persist, particularly the divergence between the two segments’ operating margins.
- Whether working-capital timing reverses and operating cash flow improves after the unusually lower Q1 result.
- Upcoming debt maturities, including $2,058 of current maturities, and the company’s refinancing and cash-use plans.
- Developments in the FCPA investigation, product-liability and recall matters, and whether the $277 accrual remains adequate.
- The final SERF purchase-price allocation and any subsequent acquisition-related costs or contributions.
- Effects of foreign exchange, macroeconomic pressures, segment mix and new tax rules on future results; the filing provides no numerical full-year guidance.