Stryker Corporation — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; amounts in millions of dollars except per-share data. The filing also reports fourth-quarter results.
Business context and reporting period
Stryker is a global medical technology company operating in Orthopaedics, MedSurg, and Neurotechnology and Spine. It reported sales in more than 100 countries; approximately 73% of 2016 sales came from the United States. The year’s results included major acquisitions of Sage Products and Physio-Control, completed in April, and the Synergetics neuro portfolio.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $11,325 | $9,946 |
| Gross profit / margin | $7,495 / 66.2% | $6,602 / 66.4% |
| Operating income | $2,166 | $1,861 |
| Net earnings | $1,647 | $1,439 |
| Diluted EPS | $4.35 | $3.78 |
| Adjusted diluted EPS (non-GAAP) | $5.80 | $5.12 |
| Cash provided by operations | $1,812 | $899 |
| Cash, cash equivalents and current marketable securities | $3,384 | $4,079 |
| Total debt | $6,914 | $3,998 |
Sales rose 13.9% as reported and 14.3% in constant currency; management attributed 7.9% of growth to acquisitions. The overview cites 6.4% constant-currency growth excluding acquisitions. Net earnings increased 14.5%, while adjusted net earnings were $2,194 versus $1,949. The effective tax rate was 14.3%, compared with 17.1%. Operating cash flow improved mainly because recall-related payments were lower than in 2015; higher inventory partly offset that benefit. Capital expenditures were $490, and acquisitions used $4,332 of cash.
Current assets exceeded current liabilities by $4,713 at year-end. The company reported $1,551 of available borrowing capacity under existing facilities. Approximately 84% of consolidated cash and marketable securities was held outside the United States. Dividends paid were $568 ($1.52 per share); share repurchases were $13.
By segment, sales were $4,422 in Orthopaedics (+4.7%), $4,894 in MedSurg (+25.6%, substantially reflecting acquisitions), and $2,009 in Neurotechnology and Spine (+9.9%). In fourth-quarter 2016, sales were $3,157 versus $2,715; net earnings were $510 versus $522, and diluted EPS was $1.34 versus $1.38.
Material changes versus the prior comparable period
- Total debt increased by $2,916, reflecting acquisition funding and the March 2016 issuance of $3,500 in senior unsecured notes; the company also repaid $750 of notes due in September.
- Acquisition spending rose to $4,332 from $153. Sage and Physio contributed to significant growth in MedSurg sales, goodwill, and intangible assets.
- Operating cash flow increased to $1,812 from $899, while capital expenditures rose to $490 from $270.
- Gross margin edged down 0.2 percentage points. Management cited unfavorable mix, including acquisitions, and foreign exchange, partly offset by productivity and suspension of the medical-device excise tax.
- Reported recall charges fell to $158 from $296; amortization of intangible assets increased to $319 from $210, primarily due to acquisitions. Other expense increased to $245 from $126, mainly from higher interest expense.
Outlook, commentary, risks, and unusual items
- Management’s stated objective is sales growth at the high end of the MedTech industry; the filing provides no quantified 2017 sales or earnings guidance. It anticipated full commercial launch of the Mako total-knee application in 2017.
- The Rejuvenate and ABG II hip-stem recall remains a material contingency. The estimated probable loss was $1,968–$2,224 net of $232 in third-party insurance recoveries. The company recorded $158 in 2016 recall charges and stated the ultimate cost could differ materially; it could not reasonably estimate the timing of future payments.
- Other risks include medical-device regulation and product liability, pricing and healthcare-cost pressures, foreign-exchange exposure, tax uncertainty, acquisition integration, cybersecurity and implementation of a new global ERP system, and dependence on certain single-source suppliers.
- After the March 2016 debt issuance, Moody’s lowered its unsecured-note rating to Baa1 from A3 and S&P lowered its corporate and long-term issue ratings to A from A+. The company said ratings remained investment grade and it expected continued capital-market access.
- Management reported no goodwill impairment in 2016. Auditors issued unqualified opinions on the financial statements and internal control; the assessment excluded the acquired Sage, Physio, and other 2016 businesses.
Important facts for investors to verify
- Track recall enrollment, settlement payments, reserve adequacy, and any changes to the estimated loss range.
- Assess whether acquired businesses deliver expected growth and integration benefits, particularly in MedSurg, and review the effect on margins and amortization.
- Monitor debt repayment, interest expense, ratings, and liquidity following the acquisition-led increase in leverage.
- Compare reported results with non-GAAP adjusted measures and review the company’s exclusions and reconciliations.
- Check subsequent filings for quantified guidance, the Mako launch, ERP implementation progress, and updates on tax, regulatory, and litigation matters.