Stryker Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Results are unaudited; dollar amounts are in millions except per-share figures.
Business context and financial performance
Stryker develops and sells medical technology across MedSurg and Neurotechnology, and Orthopaedics and Spine. The company completed its acquisition of Vocera Communications in February 2022.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $4,493 | $4,294 | $8,768 | $8,247 |
| Gross margin | 62.9% | 64.6% | 63.4% | 64.0% |
| Operating income | $772 | $732 | $1,219 | $1,191 |
| Operating margin | 17.2% | 17.0% | 13.9% | 14.4% |
| Net earnings | $656 | $592 | $979 | $894 |
| Diluted EPS | $1.72 | $1.55 | $2.56 | $2.34 |
Q2 reported sales grew 4.6%; growth was 7.6% in constant currency and 7.5% on an organic, constant-currency basis. For the six months, reported growth was 6.3%, constant-currency growth 8.7%, and organic constant-currency growth 8.8%. Foreign exchange reduced reported sales growth. Q2 MedSurg and Neurotechnology sales rose 8.0% reported, while Orthopaedics and Spine rose 0.5%.
Management-reported adjusted Q2 operating margin was 23.7%, down 220 basis points, and adjusted diluted EPS was $2.25, unchanged year over year. For the six months, adjusted operating margin was 22.8%, down 190 basis points; adjusted diluted EPS was $4.22, up 1.0%. These are non-GAAP measures and exclude specified items.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $732, down from $1,330, primarily reflecting higher inventory and receivables. Investing cash outflow was $2,834, including $2,563 for acquisitions; financing cash inflow was $240.
- Cash and cash equivalents were $1,044 at June 30, versus $2,944 at year-end 2021; cash, equivalents, and marketable securities totaled $1,127. Current assets exceeded current liabilities by $4,421.
- Total debt was $13,381, including $1,250 remaining on the Vocera-related term loan. Long-term debt was $13,374. No commercial paper or credit-facility borrowings were outstanding; the company reported $2,162 of borrowing capacity and compliance with debt covenants.
- Inventory increased to $3,749 from $3,314 at year-end. Dividends paid in the first half were $525; the company reported no share repurchases.
Material changes, outlook, and risks
- Gross margin and adjusted operating margin declined amid premium-priced electronic components and inflation in labor, steel, and transportation. Higher volume and cost discipline provided partial offsets. Supply-chain constraints and electronic-component shortages continued to limit some product sales.
- Vocera was acquired for $2.6 billion net of cash (approximately $3.0 billion including convertible notes). The acquisition added $2,328 of goodwill; a $132 charge for vested Vocera employee awards was recorded in SG&A.
- The filing provides no specific numerical sales or earnings guidance. Management said elective procedures had recovered in many geographies, with Asia-Pacific exceptions; supply constraints remained. Management expects to reduce uncertain-tax-position accruals and related interest by approximately $220 in Q3 2022 following settlement of a U.S. federal tax audit for 2014–2018.
- China’s volume-based procurement programs pressured pricing for joint-replacement and trauma products; a national spine program began in July 2022. China represented approximately 2.6% of first-half revenue. Russia represented approximately 0.2%; the company said it planned to continue operating there if it could do so safely.
- In a patent case brought by PureWick, the court entered judgment after a jury verdict; Stryker recorded $28 of charges. A pending motion could raise damages to approximately $100 and include an injunction against future sales; Stryker intends to appeal.
- Estimated remaining probable losses for global recall matters were approximately $380–$515, with reserves recorded at the minimum of the range. Actual outcomes could be materially different. The company also cited COVID-related disruption, inflation, supplier concentration, and foreign-exchange effects as risks.
Important facts for investors to verify
- Whether component availability and inflation ease, and the resulting effect on gross and adjusted operating margins.
- Vocera integration, purchase-price allocation, and contribution to sales and earnings.
- Developments in the PureWick appeal and recall matters, including possible payments or sales restrictions.
- China procurement-program effects and the extent of continuing foreign-exchange pressure.
- Cash conversion and inventory levels, given the first-half decline in operating cash flow and increase in inventory.
- The expected Q3 tax-accrual reduction and how it affects reported results.