Stryker Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Amounts are in millions of dollars except per-share data. Stryker is a global medical technology company reporting Orthopaedics, MedSurg, and Neurotechnology and Spine segments.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $9,946 | $9,675 | +2.8% reported; +7.0% constant currency |
| Gross profit / margin | $6,602 / 66.4% | $6,356 / 65.7% | Margin +0.7 percentage points |
| Operating income | $1,861 | $1,246 | +49.3% |
| Net earnings | $1,439 | $515 | +179.4% |
| Diluted EPS | $3.78 | $1.34 | +182.1% |
| Adjusted diluted EPS | $5.12 | $4.73 | +8.2% |
| Operating cash flow | $899 | $1,782 | Down $883 |
- GAAP net margin was 14.5%, versus 5.3% in 2014. The comparison was affected by unusually high 2014 tax expense and recall-related charges; the 2014 effective tax rate was 55.6%, versus 17.1% in 2015.
- 2015 sales growth included 6.1% constant-currency growth excluding acquisitions; foreign exchange reduced reported sales growth by 4.2 percentage points. Increased volume and product mix were partly offset by lower prices.
- Segment sales: Orthopaedics $4,223 (+1.7% reported), MedSurg $3,895 (+3.0%), and Neurotechnology and Spine $1,828 (+5.0%). Each segment grew faster in constant currency; Neurotechnology was a leading contributor.
- Fourth-quarter sales were $2,715, net earnings $522, and diluted EPS $1.38, compared with $2,618, $260, and $0.67, respectively, in fourth-quarter 2014.
Cash, debt, and capital allocation
- Cash, cash equivalents, and marketable securities totaled $4,079 at year-end, down from $5,000. Current assets exceeded current liabilities by $4,441. Total debt was $4,022, including $769 due within one year; available credit-facility borrowing capacity was $1,236.
- Operating cash flow fell primarily because of $1,206 in recall-related payments and the timing of income-tax payments. The company reported $1,956 of cash provided by investing activities, principally reflecting marketable-security sales used to fund recall payments.
- Capital expenditures were $270. Stryker paid $521 in dividends and repurchased $700 of shares; it said share repurchases would be suspended through 2016. Dividends declared were $1.42 per share.
- The company repatriated approximately $1.8 billion to the United States during 2015. Approximately 46% of year-end cash and marketable securities remained outside the United States.
Material changes, outlook, and key risks
- Management’s stated goal was sales growth at the high end of the medical technology industry. Its capital-allocation priorities were acquisitions, dividends, then share repurchases. The filing provides no specific 2016 revenue or earnings guidance.
- In February 2016, after year-end, Stryker agreed to acquire Sage Products for $2,775 in cash, with closing expected in the second quarter of 2016. The filing also announced that CFO William Jellison would retire effective April 1, 2016, with Glenn Boehnlein named as successor.
- The principal unusual exposure was the Rejuvenate and ABG II hip-stem recall. The estimated global probable-loss range was $1,824 to $2,416, including $232 of third-party insurance recoveries at the low end; $1,202 was paid under the U.S. settlement in 2015. The ultimate cost and payment timing remain uncertain and could materially affect results and cash flows.
- Other disclosed risks include medical-device regulation and product liability, healthcare cost containment and pricing pressure, foreign-exchange exposure, acquisition integration, intellectual-property disputes, cybersecurity and the ongoing global ERP implementation. The medical-device excise tax was suspended for 2016 and 2017.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. The assessment excluded certain 2015 acquisitions, including CHG, under the permitted one-year transition.
Important facts for investors to verify
- Progress and ultimate settlement costs for the hip-stem recall, including how the remaining accrual compares with claims and payments.
- Whether underlying sales and adjusted EPS growth persist after accounting for currency movements, acquisitions, and pricing pressure.
- Cash-flow recovery after recall payments and tax-payment timing, and the funding and integration impact of the Sage acquisition.
- Debt maturities, refinancing needs, and the implications of suspending share repurchases while maintaining dividends and pursuing acquisitions.
- Developments in regulatory, litigation, foreign-exchange, cybersecurity, and ERP risks.