Stryker Corporation (NYSE: SYK) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also reports fourth-quarter results. Unless otherwise noted, dollar amounts are in millions; per-share amounts are in dollars.
Business context
Stryker is a global medical technology company selling products in more than 75 countries. Its reportable segments are MedSurg and Neurotechnology, and Orthopaedics and Spine. The company’s stated goal is to achieve sales growth at the high end of the MedTech industry; its capital allocation priorities are acquisitions, dividends and share repurchases.
Financial performance
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $18,449 (+7.8% reported; +11.0% constant currency) | $17,108 |
| Gross profit / margin | $11,578 / 62.8% | $10,968 / 64.1% |
| Operating income / margin | $2,841 / 15.4% | $2,584 / 15.1% |
| Net earnings | $2,358 | $1,994 |
| Diluted EPS | $6.17 | $5.21 |
| Operating cash flow | $2,624 | $3,263 |
| Capital expenditures | $588 | $525 |
| Cash, cash equivalents and marketable securities | $1,928 | $3,019 |
| Total debt | $13,048 | $12,479 |
| Current assets less current liabilities | $3,972 | $5,468 |
Basic operating cash flow less capital expenditures was $2,036 in 2022, down from $2,738 in 2021; this is a simple calculation, not the company’s adjusted free-cash-flow measure. The company attributed lower operating cash flow mainly to higher component costs, inventory purchases to manage supply delays and higher year-end receivables. No borrowings were outstanding under its credit facility or commercial paper program at year-end; available borrowing capacity was $2,162.
MedSurg and Neurotechnology sales rose 11.2% reported to $10,611; Orthopaedics and Spine rose 3.5% to $7,838. Constant-currency growth was 14.1% and 7.0%, respectively. Reported segment operating income was $2,737 for MedSurg and Neurotechnology and $2,296 for Orthopaedics and Spine.
In the fourth quarter, sales were $5,202 versus $4,701 in 2021. Net earnings were $563 versus $662, and diluted EPS was $1.47 versus $1.73.
Material changes versus the prior comparable period
- Annual sales grew, but growth was substantially faster in MedSurg and Neurotechnology than in Orthopaedics and Spine. Currency reduced reported 2022 sales growth by 3.2 percentage points.
- Gross margin fell 1.3 percentage points, reflecting inflation in labor, steel and transportation, premium-priced electronic components, supply-chain inefficiencies and unfavorable mix. Adjusted gross margin, a non-GAAP measure, declined to 63.1% from 65.9%.
- Reported net earnings rose 18.3%; adjusted diluted EPS rose 2.8% to $9.34. Adjusted measures exclude items such as amortization, acquisition and restructuring costs, impairment, recalls and legal or regulatory matters, and are not substitutes for GAAP results.
- Operating cash flow declined by $639. Cash and marketable securities fell by $1,091, while year-end debt increased by $569.
- The February 2022 Vocera acquisition cost $2,563 net of cash acquired and was funded in part with a $1,500 term loan. Stryker repaid $650 of that loan during 2022.
Outlook, commentary, risks and unusual items
- No specific 2023 revenue or earnings guidance is provided in the supplied filing text. Management expects inflationary pressures to continue and noted higher interest, shipping and labor costs, foreign-exchange headwinds, and possible customer delays in capital-product orders. Supply constraints eased somewhat in the fourth quarter but continued to constrain some sales.
- China’s volume-based procurement programs have pressured prices and affected joint replacement, trauma and certain neurovascular products. After losing the 2022 spine procurement bid, Stryker is exiting its spine business in China. China accounted for approximately 2.4% of 2022 revenue.
- A $216 goodwill impairment was recorded for Spine, attributed principally to slower-than-expected surgery recovery, competition and rising interest rates. Management disclosed that a hypothetical 1% increase in the discount rate used in its valuation would have produced an additional $220 impairment.
- Recall matters include Rejuvenate/ABG II, LFIT femoral heads and Wright legacy hip products. The estimated remaining probable-loss range was $213–$347, with reserves recorded at the minimum of the range; ultimate costs and payment timing remain uncertain.
- In a PureWick patent case, a jury verdict was followed by a judgment; a pending request for enhanced damages could bring the judgment to approximately $100 and include an injunction. Stryker intends to appeal and disclosed additional patent claims related to PrimaFit.
- Other principal risks include supply-chain and sole-source supplier disruption, inflation and pricing pressure, regulation and product liability, cybersecurity, acquisition integration, foreign exchange, and geopolitical disruption. The company reported 2022 Russia sales of about 0.3% of revenue and stated it intended to continue operations there if it could do so safely.
- The effective tax rate was 12.1%, including benefits from settlement of a U.S. federal tax audit. Uncertain tax positions totaled $286 at year-end. Stryker reported an underfunded defined-benefit pension position of $253.
Important facts for investors to verify
- Whether sales growth, margin recovery and cash conversion can withstand persistent inflation, foreign-exchange effects and supply constraints.
- The performance and integration of Vocera, including whether expected strategic benefits materialize after the acquisition.
- Further developments in Spine, including the goodwill valuation assumptions and business performance, and the effects of China procurement policies.
- The ultimate costs and timing of product recall matters, the PureWick litigation and other legal or regulatory contingencies.
- Debt maturities, refinancing needs and liquidity: contractual debt repayments total $1,208 in 2023, while reported total debt is $13,048.
- Reported versus adjusted results: assess the recurring nature of excluded expenses and the company’s non-GAAP reconciliations.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The internal-control audit excluded Vocera, which represented approximately 8.2% of year-end assets and 1.1% of 2022 sales.