Stryker Corporation — Q2 2020 Form 10-Q
Business context and period: Stryker is a medical technology company with Orthopaedics, MedSurg, and Neurotechnology and Spine segments. This unaudited filing covers the quarter and six months ended June 30, 2020. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2,764 | $3,650 | $6,352 | $7,166 |
| Gross margin | 56.0% | 65.2% | 61.1% | 65.1% |
| Operating income (loss) | $(20) | $613 | $615 | $1,141 |
| Net earnings (loss) | $(83) | $480 | $410 | $892 |
| Diluted EPS | $(0.22) | $1.26 | $1.08 | $2.35 |
| Operating cash flow | Not separately stated | Not separately stated | $1,211 | $827 |
Q2 reported sales fell 24.3% year over year (23.5% in constant currency); six-month sales fell 11.4% (10.6% in constant currency). Management reported Q2 adjusted operating margin of 12.5% and adjusted diluted EPS of $0.64, versus 25.9% and $1.98 a year earlier. For the six months, adjusted operating margin was 19.0% versus 25.5%, and adjusted diluted EPS was $2.48 versus $3.86. These are non-GAAP measures; the filing provides reconciliations.
Cash, debt and liquidity: At June 30, cash and cash equivalents were $6,539 and marketable securities were $80, compared with $4,337 and $88 at year-end 2019. Current assets were $12,801 and current liabilities $4,405. Total debt was $12,921, including $1,110 of current maturities; long-term debt was $11,811. Six-month cash provided by operations was $1,211, investing cash use was $280, and financing cash provided was $1,288. The operating cash-flow increase primarily reflected improved receivables collections and lower inventory spending, partly offset by lower earnings.
Material changes and drivers
- COVID-19-related postponements of deferrable procedures and lower unit volumes materially reduced sales and earnings. Management said most businesses showed gradual recovery in June, but results remained substantially below the prior year.
- Q2 sales declined in all segments: Orthopaedics 29.9%, MedSurg 17.3%, and Neurotechnology and Spine 29.6%. Higher Medical product sales partly offset declines elsewhere.
- Lower sales and manufacturing volumes, lower prices, and unfavorable product mix reduced gross margin. Operating expenses also rose as a percentage of sales despite cost-saving actions.
- The company recorded $189 of impairment and product-line/other exit charges tied to suspending certain in-process investments, primarily work on a global ERP system. Management’s Q2 non-GAAP reconciliation reflects $209 of restructuring-related and other charges at operating-income level and $170 of related net-earnings adjustments.
- Q2 other expense was $67, with management attributing the increase mainly to higher interest expense following debt issuance. In June, Stryker issued $2.3 billion of notes; total debt increased from $11,090 at December 31, 2019.
Outlook, risks and contingencies
The filing gives no quantified sales or earnings guidance. Management said the pandemic’s effects were difficult to predict and could continue to materially affect procedures, operations, cash flows, and results. Risks include renewed delays in elective procedures, supplier or manufacturing disruption, demand surges that exceed capacity, and potential restrictions on operations. The company said it expected to meet near-term liquidity and operating needs through operating cash, borrowing capacity, and expense and capital-spending reductions.
Stryker amended its primary credit-facility leverage covenant from 3.5:1 to 4.5:1 for quarters through June 30, 2021, and added a $1.5 billion revolving facility maturing April 29, 2021. The 2025 and 2030 notes issued in June are subject to mandatory redemption at 101% plus accrued interest if the Wright Medical tender offer is not consummated by February 4, 2021. The Wright acquisition, announced at an approximate $5.4 billion purchase price, was expected to close in the second half of 2020, subject to approvals and other conditions.
Product-liability matters include the Rejuvenate/ABG II and LFIT V40 recalls. The estimated remaining probable loss range was approximately $290–$520, with charges recorded at the minimum; actual outcomes could differ materially. The share-repurchase program remained suspended through 2021. Stryker declared dividends of $0.575 per share in Q2, compared with $0.52 in Q2 2019.
Important facts for investors to verify
- Whether procedure volumes recovered after June and how renewed pandemic disruption affected demand, production, and guidance.
- The composition and recurrence of impairment, restructuring, and other adjustments underlying the large gap between GAAP and adjusted results.
- Progress, regulatory approvals, financing conditions, and any mandatory-redemption implications for the Wright Medical transaction.
- Developments in recall litigation and whether ultimate losses exceed the recorded estimates.
- Debt maturities, covenant compliance, and liquidity as cash needs and pandemic conditions evolve.