Stryker Corporation — 2017 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2017; the filing reports annual results, with quarterly data including fourth-quarter 2017. Stryker is a global medical technology company operating in Orthopaedics, MedSurg, and Neurotechnology and Spine, selling products in more than 85 countries.
Financial performance and liquidity
- Revenue: $12.444 billion, up 9.9% reported year over year. United States sales rose 10.1%; international sales rose 9.4%.
- Segments: Orthopaedics revenue was $4.713 billion (+6.6%); MedSurg $5.557 billion (+13.6%); Neurotechnology and Spine $2.174 billion (+8.2%). MedSurg was the largest segment and grew fastest.
- Profit and margins: Gross profit was $8.173 billion, or 65.7% of sales, down from 66.2%. Operating income was $2.290 billion, up from $2.166 billion. GAAP net earnings fell to $1.020 billion from $1.647 billion; diluted EPS fell to $2.68 from $4.35. Adjusted diluted EPS, a non-GAAP measure, was $6.49 versus $5.80.
- Taxes: The effective tax rate was 50.6%, versus 14.3% in 2016, primarily reflecting the Tax Cuts and Jobs Act, including a transition-tax charge on foreign earnings and deferred-tax adjustments.
- Cash flow: Operating cash flow was $1.559 billion, down from $1.915 billion. Capital expenditures were $598 million; cash used for acquisitions was $831 million. Cash and cash equivalents ended the year at $2.542 billion; marketable securities were $251 million.
- Debt and liquidity: Total debt was $7.222 billion, versus $6.914 billion in 2016. Current assets exceeded current liabilities by $4.508 billion. The company reported $1.547 billion borrowing capacity under existing facilities and no commercial paper outstanding at year-end.
- Fourth quarter: Sales were $3.471 billion; net loss was $249 million, or $0.66 per diluted share, compared with net earnings of $510 million and diluted EPS of $1.34 in fourth-quarter 2016.
Material changes versus 2016
- Sales growth slowed to 9.9% from 13.9%; 2016 growth included a larger acquisition contribution. Stryker attributed 2017 sales growth mainly to higher unit volumes, partly offset by lower prices.
- Gross margin declined 0.5 percentage point, reflecting restructuring-related charges, hurricane effects, unfavorable mix, and inflation, partly offset by volume, productivity, and currency benefits.
- GAAP earnings declined sharply despite higher operating income, chiefly because income-tax expense increased to $1.043 billion from $274 million following U.S. tax reform.
- Operating cash flow declined, primarily due to higher recall-related payments and foreign-currency remeasurement. Cash used for recall-related payments was $526 million, versus $190 million in 2016.
- Acquisitions included NOVADAQ, acquired for approximately $716 million. Stryker also announced an approximately $662 million agreement to acquire Entellus Medical, expected to close in February 2018.
Outlook, commentary, risks, and unusual items
- Management’s stated goal is to grow sales at the high end of the MedTech industry; it did not provide specific forward-year sales or earnings guidance in the supplied filing text. It prioritizes acquisitions, dividends, and share repurchases in capital allocation.
- The filing gives two different 2017 sales-growth descriptions excluding acquisitions: 7.1% constant-currency growth in the overview and 8.2% in the detailed sales discussion. The text does not clearly reconcile these measures.
- The Rejuvenate and ABG II hip-stem recall remains a significant contingency. The estimated probable loss was $2.072–$2.307 billion after $232 million of expected insurance recoveries; management cautioned that the final cost and timing of payments could differ materially. The company recorded $104 million of additional charges in 2017 and is self-insured for product-liability claims.
- A voluntary recall and temporary shipping holds affected certain Sage products after an FDA Warning Letter concerning testing and potential cross-contamination. Stryker reported resuming shipments and reaching full supply capacity by year-end.
- Other material risks include medical-device regulation and compliance, pricing pressure, competition, foreign exchange, acquisitions and integration, cybersecurity and implementation of a new global ERP system, and reliance on certain sole-source suppliers.
- The company reported an uncertain-tax-position reserve of $540 million and underfunded defined-benefit pension plans of $338 million. It also disclosed a $696 million retained-earnings reduction from adopting an accounting standard on intra-entity asset transfers and a $55 million reduction from adopting the new revenue standard, both effective January 1, 2018.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls; its internal-control audit excluded NOVADAQ and VEXIM, acquired in 2017.
Important facts for investors to verify
- Reconcile the 7.1% and 8.2% constant-currency sales-growth figures and confirm the company’s definition of each measure.
- Review the assumptions, insurance recoveries, payment timing, and potential range of outcomes for the Rejuvenate and ABG II recall liability.
- Assess the underlying tax impact of the Tax Cuts and Jobs Act, including the provisional transition-tax and deferred-tax estimates and the $540 million uncertain-tax-position reserve.
- Track MedSurg growth and acquisition integration, including NOVADAQ and the pending Entellus transaction, alongside acquisition-related amortization and debt.
- Monitor fourth-quarter results and the drivers of the $249 million quarterly net loss, as well as future margins, cash conversion, and recall payments.