Stryker Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts are in millions except per-share data. Stryker reports MedSurg and Neurotechnology and Orthopaedics and Spine segments.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $4,479 | $4,160 | $13,247 | $12,407 |
| Gross margin | 62.1% | 63.5% | 63.0% | 63.9% |
| Operating income | $808 | $574 | $2,027 | $1,765 |
| Operating margin | 18.0% | 13.8% | 15.3% | 14.2% |
| Net earnings | $816 | $438 | $1,795 | $1,332 |
| Diluted EPS | $2.14 | $1.14 | $4.70 | $3.48 |
Q3 reported sales rose 7.7% (11.4% in constant currency); excluding acquisitions and divestitures, constant-currency growth was 10.6%. Nine-month sales rose 6.8% as reported and 9.6% in constant currency; excluding acquisitions and divestitures, constant-currency growth was 9.4%. Q3 segment sales grew 10.2% at MedSurg and Neurotechnology and 4.4% at Orthopaedics and Spine, as reported.
Reported earnings benefited from the settlement of the 2014–2018 U.S. federal tax audit: Q3 income tax expense decreased $162, and other income included a $50 benefit from releasing accrued interest. The Q3 effective tax rate was 0.0%. Adjusted diluted EPS was $2.12, down 3.6%; adjusted operating margin was 22.3%, down from 25.4%. For nine months, adjusted diluted EPS was $6.34, down 0.6%, and adjusted operating margin was 22.6%, versus 25.0%. These are non-GAAP measures.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1,621, versus $2,263 a year earlier. Stryker attributed the decline primarily to higher electronic-component costs and increased inventory to manage supply delays.
- Investing cash outflow was $2,762, including $2,563 for acquisitions, primarily Vocera, and $400 of capital expenditures. Financing cash outflow was $303. Cash and cash equivalents fell to $1,420 from $2,944 at year-end 2021.
- Cash, cash equivalents and marketable securities totaled $1,497; working capital was $4,747. Gross debt was $12,759, including a $1,000 term-loan balance. There were no borrowings outstanding under the credit facility or commercial-paper program; available borrowing capacity was $2,162. The company reported compliance with debt covenants.
- Dividends paid in the first nine months totaled $788; no shares were repurchased. The declared quarterly dividend was $0.695 per share.
Material changes, outlook and risks
- Vocera was acquired in February for $2.6 billion net of acquired cash ($3.0 billion including convertible notes). It contributed approximately 1% of nine-month sales and approximately 8.5% of total assets at quarter-end, including acquisition goodwill and intangibles.
- Management cited inflation in labor, steel and transportation, premium spot-market prices for electronic components, supply-chain disruption and foreign-exchange headwinds. These pressures reduced adjusted gross and operating margins. Management also warned that customer orders could be delayed or reduced, and higher rates could weigh on capital-product demand. No specific numeric full-year guidance is provided in the filing text.
- Stryker was unsuccessful in China’s national volume-based procurement program for spine products and is exiting that business there. It cited potential future procurement programs and local-purchase policies as risks; China represented about 2.5% of nine-month revenue.
- Recall-related probable losses were estimated at approximately $375–$510, with reserves recorded at the minimum of the range. A PureWick patent case resulted in a $28 charge; a request for enhanced damages could bring the judgment to approximately $100 and include an injunction. Stryker intends to appeal.
- The company recorded a $110 reduction in contingent consideration after certain Mobius Imaging and Cardan Robotics milestones were judged no longer probable. It also recorded a $132 charge for Vocera employee awards that vested upon acquisition.
- The Inflation Reduction Act includes a 15% corporate alternative minimum tax beginning in 2023 and a 1% excise tax on share repurchases after December 31, 2022. Stryker did not expect the tax provisions to have a material financial-statement impact; the excise-tax effect depends on future repurchases.
Important facts for investors to verify
- Whether sales growth and supply availability can offset persistent cost inflation and the resulting margin pressure.
- How much of reported earnings growth reflects the tax-audit settlement and other unusual items versus recurring operations.
- Vocera integration, purchase-accounting estimates and contribution to growth and cash generation.
- Developments in recall reserves and the PureWick appeal, including potential damages or injunctive relief.
- China procurement impacts, foreign-exchange exposure, inventory levels and operating cash-flow conversion.