Stryker Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited. Stryker sells orthopaedic implants and medical/surgical equipment. Domestic sales were 65% of revenue and international sales 35%, unchanged from Q1 2009.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $1,799.1 million | $1,601.3 million | +12% reported; +9% constant currency |
| Gross profit / margin | $1,217.7 million / 67.7% | $1,085.8 million / 67.8% | Profit +12%; margin down 0.1 percentage point |
| Operating income / margin | $446.4 million / 24.8% | $379.2 million / 23.7% | Income +18%; margin up 1.1 points |
| Net earnings / margin | $321.7 million / 17.9% | $281.1 million / 17.6% | Earnings +14%; margin up 0.3 point |
| Diluted EPS | $0.80 | $0.71 | +13% |
| Cash from operations | $274.8 million | $272.4 million | +$2.4 million |
Revenue growth reflected 8% growth from volume and mix, a 4% favorable currency effect, and a 2% contribution from acquisitions, partly offset by a 1% unfavorable price effect. Orthopaedic Implants sales rose 11% reported (6% constant currency) to $1,076.9 million; MedSurg Equipment rose 15% (12% constant currency) to $722.2 million. MedSurg growth included a 6% acquisition contribution and a 3% one-time patient-handling equipment shipment.
Research and development expense rose 12% to $90.0 million, remaining 5.0% of sales. SG&A increased 8% in dollars but declined to 37.1% of sales from 38.5%, reflecting higher volume and controlled discretionary spending. The effective tax rate was 27.8%, versus 27.3% a year earlier.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $1,202.5 million and current marketable securities were $2,735.1 million. Working capital was $5,470.6 million, up $1,060.4 million from year-end, principally due to new debt proceeds.
- Total borrowings were $1,023.8 million, including $996.2 million of long-term debt. In January, Stryker issued $500 million of 3.00% notes due 2015 and $500 million of 4.375% notes due 2020, receiving $996.1 million net proceeds. Weighted average borrowing cost was 3.7%.
- Management said cash, expected operating cash flow, available credit and potential capital-market access should be sufficient for operating needs, capital expenditures, acquisitions, instrumentation and debt service. Available borrowing capacity was $1,034.1 million, including a $1 billion revolver expiring in November 2010.
- Investing activities used $605.4 million, including net marketable-security purchases and $57.4 million for acquisitions. Financing activities provided $898.0 million, principally from the note issuance; the company also repurchased $111.1 million of shares and paid $59.7 million in dividends.
Material changes, outlook and risks
- Sales growth was broad-based, but international constant-currency growth was only 2%, versus 13% domestic growth. Management cited stronger implant shipments and MedSurg equipment demand, while surgical equipment and navigation sales were weaker on a constant-currency basis.
- Management increased R&D spending to support planned product launches later in 2010 and in future years. The filing provides no specific full-year earnings or revenue guidance.
- First-quarter acquisitions of Sonopet-related assets were not material to consolidated sales or operating income. The company also continued development of SpineCore artificial-disc products; commercialization remains subject to regulatory approval and development risks.
- Investments included $139.9 million of auction-rate securities at par, with failed auctions since 2008. The company valued these securities and related rights using Level 3 estimates; it recorded a $1.9 million loss on ARS rights, offset by a gain on related securities. The UBS right to sell the ARS at par is exercisable from June 2010 through July 2012.
- Risks include an IRS dispute over 2003–2005 Irish cost-sharing arrangements that could materially affect future taxes and earnings; ongoing Stryker Biotech criminal proceedings, which could lead to fines and exclusion from government healthcare programs; and other shareholder, physician-compensation, foreign-corruption, product and FDA matters. The FDA resolved its Mahwah-facility warning letter in March 2010; observations at the Cork facility remained under review.
- Other uncertainties identified by management include economic weakness, pricing and reimbursement pressures, foreign exchange, product liability, regulatory approvals, tax audits, financial-market changes and competition. Foreign-currency translation increased shareholders’ equity by $110.3 million in the quarter.
Important facts for investors to verify
- Whether reported revenue growth persists when currency effects, acquisitions and the one-time patient-handling shipment are excluded.
- Progress on product launches and SpineCore regulatory approval, and whether higher R&D spending translates into sales growth.
- Resolution and potential financial exposure from the IRS dispute, Biotech criminal case, government investigations and other litigation or FDA matters.
- Liquidity and refinancing capacity, particularly the November 2010 revolver expiration, alongside the new long-term debt and ongoing repurchases.
- Valuation, liquidity and eventual recovery of auction-rate securities and related rights, which rely partly on unobservable inputs.