Stryker Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts are in millions of dollars except per-share data. Stryker is a medical technology company operating in Reconstructive, MedSurg, and Neurotechnology and Spine. It reported that 65.3% of nine-month revenue came from the U.S.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $2,052 | $2,031 | $6,319 | $6,092 |
| Gross profit | $1,397 | $1,362 | $4,283 | $4,021 |
| Operating income | $450 | $444 | $1,371 | $1,268 |
| Net earnings | $353 | $327 | $1,028 | $944 |
| Diluted EPS | $0.92 | $0.84 | $2.68 | $2.41 |
| Operating cash flow | $569 | $446 | $1,061 | $807 |
- Reported sales increased 1.0% in Q3 and 3.7% year to date; constant-currency growth was 2.9% and 5.1%, respectively. Q3 sales growth reflected volume and mix gains and acquisitions, partly offset by pricing and foreign-exchange headwinds.
- Gross margin was approximately 68.1% in Q3 versus 67.0% a year earlier, and 67.8% year to date versus 66.0%. Operating margin was approximately 21.9% in Q3 and 21.7% year to date.
- Adjusted net earnings were $370 million, or $0.97 per diluted share, in Q3, up from $352 million, or $0.91, a year earlier. Nine-month adjusted earnings were $1,124 million, or $2.93 per diluted share, versus $1,058 million, or $2.70. These non-GAAP figures exclude specified acquisition, restructuring, inventory step-up, and OtisKnee charges.
- Nine-month capital expenditures were $161 million; operating cash flow less capital expenditures was approximately $900 million, compared with approximately $645 million in 2011.
Balance sheet, liquidity, and capital allocation
- At September 30, cash and cash equivalents were $1,423 million and marketable securities were $2,440 million. The filing reports combined cash and marketable securities of $3,863 million.
- Total debt was $1,769 million, including $18 million of current maturities; long-term debt was $1,751 million. The company reported $1,056 million of borrowing capacity and compliance with credit-facility covenants.
- Current assets were $7,640 million and current liabilities $1,576 million. Nine-month dividends paid were $243 million; share repurchases were $108 million. The quarterly dividend declared was $0.2125 per share.
- Approximately 67% of cash and marketable securities were held outside the U.S. and considered indefinitely reinvested.
Changes, outlook, and significant matters
- U.S. sales grew 4.7% in Q3, while international sales declined 5.6% reported, or 0.4% in constant currency. Neurotechnology and Spine led segment growth; Reconstructive sales declined 1.1% reported in Q3.
- Management described slower conditions in Europe and Japan and challenging global markets for capital equipment. It provided no specific full-year revenue or earnings guidance in the supplied filing text.
- Restructuring charges were $45 million for the first nine months. The program is expected to reduce the global workforce by about 5%, cost approximately $150–$175 million in total, and be substantially complete by the end of 2013. Management cited efficiency and resource realignment ahead of the U.S. medical-device excise tax, scheduled to begin in 2013 at 2.3% of covered U.S. sales.
- Q3’s effective tax rate was 20.5%, versus 24.1% a year earlier; management attributed favorable tax effects in part to German tax settlements and foreign-tax-credit estimate adjustments. The nine-month rate was 23.7%, versus 24.7%.
- Stryker recalled and stopped global distribution of Rejuvenate and ABGII modular neck-stem hip products in June 2012 because of potential fretting or corrosion risks. Related product-liability lawsuits had been filed; the company said it could not estimate a material loss or range of loss.
- The company recorded a $33 million non-tax-deductible charge after offering that amount to the DOJ to settle the OtisKnee matter; settlement was not assured. Other ongoing matters include a DOJ investigation concerning PainPump, SEC/DOJ foreign-corrupt-practices inquiries, and an HHS inquiry concerning payments to physicians and institutions. A Hill-Rom patent case was settled for $3.75 million; a separate patent case continued.
- Foreign-currency translation reduced the value of foreign net assets and related equity by $74 million since the start of 2012. Management said it had no sovereign investments in the Southern European Region and considered related non-sovereign portfolio exposure immaterial.
Investor verification priorities
- Track the scope, claims, and potential financial effects of the hip-product recall and related lawsuits; the filing does not provide a clear estimate of exposure.
- Follow the outcome and final terms of the OtisKnee DOJ matter and the other disclosed government investigations.
- Assess whether reported sales and earnings trends persist after foreign-exchange effects, acquisition-related items, restructuring costs, and the 2013 medical-device excise tax.
- Monitor restructuring spending and completion, working-capital needs—especially loaner instrumentation and inventory—and the use of offshore cash.