Stryker Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparative periods ended June 30, 2011. Dollar amounts are in millions except per-share data. Stryker sells medical technology across Reconstructive, MedSurg, and Neurotechnology and Spine.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $2,106 | $2,046 | $4,267 | $4,061 |
| Gross profit | $1,434 | $1,333 | $2,886 | $2,659 |
| Operating income | $445 | $401 | $921 | $824 |
| Net earnings | $325 | $310 | $675 | $617 |
| Diluted EPS | $0.85 | $0.79 | $1.76 | $1.57 |
| Operating cash flow | $457 | $157 | $492 | $361 |
- Q2 reported sales rose 2.9% (5.0% in constant currency); first-half sales rose 5.1% (6.2% in constant currency). Growth reflected volume and mix and acquisitions, partly offset by price declines and foreign exchange.
- Gross margin was approximately 68.1% in Q2 versus 65.2% a year earlier, and 67.7% for the first half versus 65.5%. Operating margin was approximately 21.1% and 21.6%, respectively, compared with 19.6% and 20.3% in 2011.
- Adjusted net earnings, a company-defined non-GAAP measure, were $375 million in Q2 and $754 million for the first half; adjusted diluted EPS was $0.98 and $1.97. The company reported adjusted earnings growth of 6.2% and 6.8%, respectively. Adjustments include acquisition and integration costs, inventory step-up costs, restructuring, and the OtisKnee charge.
- Six-month investing activities provided $261 million, versus using $1,258 million in 2011, when acquisitions were significant. Financing activities used $276 million, mainly for dividends and share repurchases.
Liquidity, debt, and capital
- At June 30, cash and cash equivalents were $1,393 million and marketable securities were $2,067 million. Combined cash and marketable securities totaled $3,460 million. Current assets exceeded current liabilities by $5,709 million.
- Total debt was $1,766 million, including $16 million current maturities; long-term debt was $1,750 million. The company reported $1,058 million of borrowing capacity under existing credit facilities and compliance with facility covenants.
- Approximately 65% of cash and marketable securities were held outside the United States and considered indefinitely reinvested. The company said it expected operating cash flow to support short-term needs.
- First-half dividends declared were $0.425 per share. The company repurchased 1.7 million shares for $89 million in the first half; $114 million remained available under the 2010 program at quarter-end.
Business changes and management commentary
- U.S. sales grew 7.7% in Q2 and 8.0% in the first half. International sales declined 5.1% in Q2 as reported, but grew 0.3% in constant currency; first-half international sales increased 0.1% as reported and 3.1% in constant currency. Management cited weakness in Europe.
- Q2 segment sales growth was 1.2% in Reconstructive, 1.7% in MedSurg, and 10.1% in Neurotechnology and Spine. First-half growth was 3.2%, 4.6%, and 11.2%, respectively.
- The company continued a workforce reduction and other restructuring actions intended to reduce its global workforce by approximately 5%. It expected the actions to be substantially complete by year-end 2012, at a total estimated cost of $150–$175 million; related cash payments were expected by the end of Q1 2013.
- The 2.3% U.S. medical-device excise tax was scheduled to begin in 2013. Stryker said it was assessing the effect of healthcare reform and noted uncertainty about impacts on technology access and Medicare reimbursement.
- The stronger U.S. dollar reduced the value of foreign net investments, contributing to a $208 million first-half foreign currency translation loss in shareholders’ equity and a $204 million total other comprehensive loss.
Unusual items, risks, and contingencies
- Stryker recorded a $33 million non-tax-deductible charge after offering that amount to the Department of Justice to settle the OtisKnee matter. The company cautioned that settlement was not assured and final terms were uncertain.
- Other disclosed legal and regulatory matters include Hill-Rom patent litigation, a DOJ investigation relating to PainPump, shareholder litigation, and SEC/DOJ and HHS inquiries concerning foreign sales and physician consulting or other benefits. The company said it could not estimate a material loss or range for these matters; an adverse resolution could materially affect results, financial position, or cash flows.
- Management reported no material change in market-risk disclosures and stated that disclosure controls were effective. It was implementing ERP systems in certain divisions and did not expect those implementations to adversely affect internal controls.
- The filing provides no specific full-year sales or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether reported sales momentum persists, especially in international markets and Reconstructive, and how much growth depends on acquisitions, volume, price, and currency.
- Whether the $150–$175 million restructuring estimate and expected completion schedule remain valid, and what recurring savings result.
- The outcome and final cost of the OtisKnee settlement discussions and other unresolved legal and government matters.
- The effect of the medical-device excise tax beginning in 2013 and any changes in reimbursement or patient access.
- Cash generation, working-capital needs, foreign-held liquidity, and the company’s ability to maintain margins while funding investment, dividends, and repurchases.