Stryker Corporation — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. Stryker is a medical technology company reporting three segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. The quarter was materially affected by the COVID-19 pandemic, particularly the suspension or deferral of elective procedures in many markets.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $3,588 million | $3,516 million |
| Gross profit / margin | $2,331 million / 65.0% | $2,283 million / 64.9% |
| Operating income / margin | $635 million / 17.7% | $528 million / 15.0% |
| Net earnings | $493 million | $412 million |
| Diluted EPS | $1.30 | $1.09 |
| Operating cash flow | $591 million | $313 million |
- Sales grew 2.0% as reported and 2.9% in constant currency. Excluding acquisitions, constant-currency sales growth was 2.8%; foreign exchange reduced reported sales growth by 0.9 percentage points.
- GAAP operating income and net earnings rose year over year. On an adjusted, non-GAAP basis, operating margin fell to 24.0% from 25.1%, and diluted EPS declined 2.1% to $1.84 from $1.88. Management attributed adjusted margin pressure principally to procedure deferrals, unfavorable mix, and lower prices.
- Segment sales: Orthopaedics $1,222 million, down 2.1%; MedSurg $1,622 million, up 6.2%; Neurotechnology and Spine $744 million, up 0.7%.
- Cash and cash equivalents were $3,964 million; marketable securities were $84 million. Current assets exceeded current liabilities by $6,574 million.
- Total debt was $10,507 million, including $1,103 million of current maturities; total debt was $11,090 million at December 31, 2019. Stryker reported compliance with debt covenants at quarter-end and no commercial paper outstanding.
- Cash used for capital expenditures was $144 million. Dividends paid were $215 million; no shares were repurchased during the quarter.
Material changes and management commentary
- COVID-19 reduced sales growth and significantly affected gross profit, operating income, and earnings. Although overall unit volumes increased for the quarter, most businesses experienced significant declines in March. Preliminary estimates put April 2020 sales down 35% to 40% versus April 2019.
- Orthopaedics was pressured by postponed elective procedures; MedSurg benefited from higher shipments of medical and instruments products, among others. Management noted increased demand for some products used in pandemic response, alongside risks of capacity constraints.
- Management reported $699 million of adjusted net earnings and $1.84 adjusted diluted EPS. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
- Management said it expected to meet short-term liquidity and operating needs through operating cash flow, available credit, commercial paper capacity, and expense and capital-spending reductions, and described liquidity as adequate for the foreseeable future. It did not provide a quantified full-year earnings or sales outlook.
- Stryker expected its approximately $5.4 billion acquisition of Wright Medical to close in the second half of 2020, subject to regulatory and other conditions. It stated that additional debt financing would be needed to fund the pending acquisition, operations, and debt refinancing.
- After quarter-end, on April 30, Stryker amended its primary credit facility to temporarily raise the maximum leverage covenant to 4.5:1 and entered into a separate $1.5 billion, 364-day revolving facility maturing April 29, 2021.
Risks, contingencies, and unusual items
- The company said the pandemic could disrupt suppliers, manufacturing, distribution, staffing, product development, and access to capital. Delays in elective procedures could continue to hurt demand; unexpectedly high demand for certain products could exceed production capacity. The duration and financial impact were uncertain and not quantifiable by the company.
- Management said pandemic-related effects could contribute to future goodwill impairment, but whether an impairment charge would be required remained uncertain.
- Product-liability matters include recalls of Rejuvenate and ABG II hip stems and LFIT V40 femoral heads. The estimated remaining global probable-loss range for these matters was approximately $290 million to $535 million; the company had recorded charges at the minimum of the range. Ultimate costs could differ materially.
- Reported recall charges were a $6 million credit in Q1 2020 versus a $13 million charge in Q1 2019. Other notable Q1 2020 operating items included $54 million of restructuring-related charges, $37 million of acquisition and integration-related charges, and $24 million of medical-device-regulation costs.
- The effective tax rate increased to 16.4% from 14.2%, mainly because of a lower tax benefit from share-based compensation. Stryker did not expect the CARES Act to materially affect its 2020 annual tax rate or financial statements.
Important facts for investors to verify
- How quickly elective procedures resume and whether the preliminary estimate of a 35%–40% April sales decline translates into sustained demand pressure.
- Whether pandemic-related supply, distribution, staffing, and production constraints affect sales, margins, or customer relationships.
- Wright Medical acquisition timing, required financing, and the effect of added debt and leverage on covenant headroom and liquidity.
- Potential changes in the estimated $290 million–$535 million recall-loss range and related cash payments.
- Whether COVID-19 developments trigger goodwill impairment, and how management’s expense and capital-spending actions affect operating performance.