Business Context and Reporting Period
Company: Stryker Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Stryker is a leading medical technology company with two primary reportable segments: Orthopaedic Implants (joint replacement, trauma, spine) and MedSurg Equipment (surgical equipment, navigation, imaging). The company operates globally, with domestic sales accounting for approximately 65% of revenue in the first half of 2009.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $1,634.3 | $3,235.6 |
| Gross Profit | $1,098.0 | $2,183.8 |
| Operating Income | $389.8 | $769.0 |
| Net Earnings | $291.3 | $572.4 |
| Diluted EPS | $0.73 | $1.44 |
| Cash from Operations | $182.4 | $454.8 |
| Cash & Equivalents | $666.3 | $666.3 |
| Marketable Securities | $1,761.6 | $1,761.6 |
| Debt (Current Maturities) | $19.4 | $19.4 |
Margins (Six Months 2009): Gross Margin was 67.5%; Operating Margin was 23.8%; Net Margin was 17.7%.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 5% in Q2 2009 and 3% in the first half of 2009 compared to 2008. This was primarily driven by unfavorable foreign currency exchange rates (approx. 5% negative impact in Q2) and weaker demand for MedSurg Equipment due to the economic slowdown.
- Segment Performance:
- Orthopaedic Implants: Sales were flat on a reported basis but grew 5-6% on a constant currency basis, driven by growth in hips, knees, trauma, and spine products.
- MedSurg Equipment: Sales declined 11% in Q2 and 8% in the first half. Significant declines were noted in patient handling and emergency medical equipment (-28% in Q2).
- Profitability: Net earnings decreased 5% in Q2 and 4% in the first half. Gross margin percentage declined slightly due to higher compliance costs, excess inventory costs, and unabsorbed costs from lower production levels.
- Investment Income: Interest and marketable securities income dropped significantly (down 56% in the first half) due to lower average yields on investments.
Guidance, Outlook, and Risks
Guidance and Outlook
- 2009 EPS Forecast: Management projects diluted net earnings per share for 2009 in the range of $2.90 to $3.10 (a 2% to 10% increase over adjusted 2008 EPS of $2.83).
- Sales Outlook: Anticipates constant currency net sales growth of 1% to 3% for the full year. However, currency exchange rates are expected to have an unfavorable impact of 2% to 3% on full-year net sales.
- Product Specifics: The FDA Orthopaedic and Rehabilitation Devices Advisory Panel voted not to recommend marketing approval for OP-1 Putty. The company is reviewing its strategic plan for this product.
Risks and Contingencies
- Legal and Regulatory Investigations:
- IRS Audit: The IRS proposed adjustments to 2003-2005 tax returns regarding cost-sharing arrangements in Ireland. If the IRS prevails, it could materially impact future tax expense.
- Federal Grand Jury: Stryker Biotech is a target of a federal grand jury investigation regarding illegal promotion of OP-1, sale of misbranded devices, and false FDA reports. Former employees have pled guilty.
- Subpoenas: Received subpoenas from the New Jersey Attorney General regarding physician financial interests and from HHS regarding consulting fees to surgeons.
- Foreign Corrupt Practices Act: Ongoing cooperation with the DOJ and SEC regarding an inquiry into sales in foreign countries.
- FDA Warning Letters: Received warning letters in 2009 and prior years regarding compliance and quality systems at various manufacturing facilities (Portage, MI; Hopkinton, MA; Cork, Ireland; Mahwah, NJ).
- Market Risks: Exposure to foreign currency fluctuations and potential further weakening of economic conditions affecting elective procedures.
Investor Verification Checklist
- IRS Tax Dispute: Monitor the status of the IRS proposed adjustments for 2003-2005 returns and potential financial impact.
- OP-1 Product Status: Verify the outcome of discussions with the FDA regarding the OP-1 Putty marketing approval and the impact on the Biotech segment.
- Legal Investigations: Track developments in the federal grand jury investigation into Stryker Biotech and the HHS subpoena regarding surgeon consulting fees.
- MedSurg Demand: Assess whether the decline in MedSurg Equipment sales (particularly patient handling) is a temporary economic effect or a structural shift.
- Currency Hedging: Review the company's hedging strategy given the significant negative impact of foreign currency on reported sales.