Stryker Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; compared with the corresponding 2010 periods. Amounts are in U.S. dollars. The filing is unaudited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $2,045.5 million | $1,758.2 million | $4,060.7 million | $3,557.3 million |
| Gross margin | 65.2% | 69.3% | 65.5% | 68.5% |
| Operating income | $400.3 million | $448.1 million | $823.8 million | $894.5 million |
| Net earnings | $309.1 million | $319.0 million | $616.5 million | $640.7 million |
| Diluted EPS | $0.79 | $0.80 | $1.57 | $1.60 |
| Operating cash flow | $156.2 million | $326.7 million | $360.7 million | $601.5 million |
- Reported sales grew 16% in Q2 and 14% year to date. Constant-currency growth was 12% and 11%, respectively. Management attributed growth to volume and mix (+7%), foreign exchange (+4%), and acquisitions (+6%), partly offset by pricing (-2%) in Q2; first-half drivers were similar.
- Reported net earnings declined 3% in Q2 and 4% year to date. Excluding specified acquisition and integration charges, adjusted net earnings rose 10% in both periods; adjusted diluted EPS increased 13% in Q2 and 13% year to date. These are non-GAAP measures.
- Gross margin fell year over year, primarily reflecting $54.7 million of Q2 and $108.9 million of first-half cost of sales from inventory stepped up to fair value in the Neurovascular acquisition, as well as pricing pressure and currency effects on international manufacturing purchases. SG&A and R&D also increased.
- Sales by segment for the first half: Reconstructive $1,827.4 million (+5% reported; +1% constant currency); MedSurg $1,536.6 million (+14%; +12%); Neurotechnology and Spine $696.7 million (+51%; +48%). The latter’s growth was principally acquisition-driven, especially Neurovascular.
Liquidity, balance sheet and capital allocation
- At June 30, cash and cash equivalents were $497.1 million and current marketable securities were $2,177.9 million, versus $1,757.6 million and $2,622.5 million at year-end 2010. Working capital was $4,899.2 million, down from $6,026.4 million.
- Total debt was $1,021.1 million, including $996.7 million long-term debt; cash and current marketable securities substantially exceeded debt. The company reported $1,024.6 million of additional borrowing capacity and compliance with credit-facility covenants.
- First-half operating cash flow was $360.7 million, down from $601.5 million, primarily due to working-capital outflows, including inventory and income taxes. Investing cash flow was negative $1,257.5 million, including $1,777.6 million for acquisitions. Financing cash flow was negative $410.0 million.
- Inventory increased to $1,284.4 million from $1,056.8 million at year-end. Days sales in inventory rose to 164 from 154; management cited inventory built for launches and expected third-quarter sales. Receivable days increased to 59 from 56.
- Cash uses included $250.1 million of first-half share repurchases and $140.2 million of dividends paid. The company declared a quarterly dividend of $0.18 per share. Management said cash, expected operating cash flows and available facilities should fund anticipated requirements.
Material developments, outlook and risks
- Acquisitions: Neurovascular was acquired in January for $1.45 billion, with a further $50 million contingent milestone payment; Orthovita was acquired in June for $316 million. Related acquisition and integration charges were $130.9 million pre-tax ($89.2 million after tax) for the first half. Purchase-price allocations remained preliminary.
- After quarter-end, Stryker acquired Memometal for $150 million, with a further $12 million contingent on milestones. The company also entered a commercial-paper program of up to $500 million on July 15, 2011.
- No formal earnings or sales guidance is provided in the supplied filing text. Management’s liquidity outlook was that resources and borrowing capacity should be sufficient for operations, capital needs, debt service and dividends. The filing cautions that first-half results are not necessarily indicative of full-year results.
- Tax matters remain uncertain. Stryker settled certain IRS matters, including Puerto Rico income allocation for 2006–2009, with $37.7 million of cash payments expected in Q3. Separate disputes over European income allocation and Irish cost-sharing arrangements could materially affect future tax expense, results and cash flows.
- Other significant legal and regulatory matters include Hill-Rom patent-infringement lawsuits seeking damages and injunctions; ongoing DOJ investigations concerning PainPump and OtisKnee; HHS and SEC/DOJ inquiries; shareholder litigation; and the Stryker Biotech criminal case, for which trial was scheduled for November 7, 2011. The Biotech matter’s ultimate resolution was not reasonably estimable; a conviction could result in significant fines.
- Forward-looking risks cited include demand weakness, pricing and cost-containment pressure, foreign-exchange movements, regulation and product approvals, reimbursement changes, product liability, tax-audit outcomes, financial-market changes, competition and acquisition integration. Management excluded Neurovascular from its internal-control effectiveness assessment because of the acquisition; it concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether acquired businesses deliver expected growth and synergies, and whether integration charges and Neurovascular inventory step-up costs subside.
- Whether sales growth persists on a constant-currency basis and margins recover despite pricing pressure and higher costs.
- Working-capital trends, especially elevated inventory and receivable days, and their effect on operating cash flow.
- Cash requirements and outcomes for tax disputes, contingent acquisition payments, and the disclosed legal and regulatory matters.
- The distinction between GAAP results and management’s adjusted, non-GAAP earnings and EPS measures.