Stryker Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Dollar amounts are in millions except per-share data. Stryker is a global medical technology company reporting in Orthopaedics, MedSurg, and Neurotechnology and Spine.
Financial performance
- Q3 revenue: $3,006, up 6.1% reported and 5.8% in constant currency year over year. Nine-month revenue was $8,973, up 9.9% reported and 10.2% in constant currency.
- Growth drivers and mix: Q3 organic sales growth in constant currency was 5.5%, excluding acquisitions. Unit-volume gains were partly offset by lower prices; Q3 sales were also affected by Sage product recalls and ship holds (1.8 percentage points) and hurricanes (0.6 points).
- Segments, Q3 sales growth reported: Orthopaedics $1,132, up 5.1%; MedSurg $1,336, up 6.7%; Neurotechnology and Spine $538, up 6.9%. Spine sales declined 3.7%.
- Profitability: Q3 gross profit was $1,982 (65.9% margin, versus 66.1%); operating income was $523, up from $486; net earnings were $434, up from $355. Diluted EPS was $1.14 versus $0.94. Nine-month net earnings were $1,269 versus $1,137, and diluted EPS was $3.34 versus $3.01.
- Adjusted results (non-GAAP): Adjusted diluted EPS was $1.52 in Q3, up 9.4%, and $4.53 for nine months, up 12.7%. These measures exclude specified items and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow was $880, down from $1,257. Recall-related payments were $492 versus $128 in the prior-year period. Investing cash outflow was $1,153, including $712 for acquisitions and $412 of capital expenditures. Financing cash outflow was $522. Cash and cash equivalents declined $724 to $2,592.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $2,689; working capital was $4,452. Total debt was $7,225, including $632 current maturities. Available borrowing capacity was approximately $1,542; the company reported compliance with debt covenants.
Changes, outlook, and material items
- In September, Stryker completed its approximately $716 acquisition of NOVADAQ, adding fluorescence-imaging technology to MedSurg. Goodwill rose to $7,026 from $6,356 at year-end 2016, partly reflecting acquisitions.
- In October, after quarter-end, Stryker acquired a majority stake in VEXIM and began a tender offer for the remaining shares, for approximately $215 in total cash consideration; closing was expected in Q4 2017.
- Management said organic growth was in line with its goal to grow at the high end of the medical technology industry. The filing provides no specific full-year revenue or earnings guidance.
- Gross margin was pressured by lower selling prices and product mix; nine-month margin also reflected acquisitions and foreign currency, partly offset by productivity. R&D spending increased with acquisitions and investment in projects and technologies.
- Recall charges were $66 in Q3 and $164 for nine months, primarily related to Rejuvenate/ABG II hip stems and Sage Oral Care products. The estimated probable loss for the hip-stem matter was $2,072–$2,327, net of $232 in expected insurance recoveries; the ultimate cost could differ materially.
- Sage recalled certain Oral Care lots following an FDA Warning Letter concerning potential supplier cross-contamination and temporarily held certain cloth-based products. Shipments resumed, with full supply capacity anticipated by year-end; the filing notes these disruptions affected sales.
- The effective tax rate fell to 7.9% in Q3 and 10.3% for nine months, primarily due to the tax effect of adopting share-based compensation accounting guidance.
Important facts for investors to verify
- Progress and ultimate costs of the Rejuvenate/ABG II settlement, related claims, and adequacy of reserves and insurance recoveries.
- Whether Sage products return to full supply capacity as anticipated, and any further FDA or product-quality developments.
- Contribution of acquisitions versus organic growth, including NOVADAQ integration and the post-quarter VEXIM transaction.
- Drivers of lower operating cash flow, particularly recall payments and working-capital needs, and the company’s capacity to meet debt maturities and acquisition commitments.
- Durability of margins and earnings growth given pricing pressure, product mix, restructuring, and acquisition-related amortization.