Stryker Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; all financial amounts are in millions of U.S. dollars except per-share data. The filing also reports fourth-quarter results. Stryker is a medical technology company operating in Orthopaedics, MedSurg, and Neurotechnology and Spine.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $9,675 | $9,021 | +7.3% |
| Gross profit / gross margin | $6,384 / 66.0% | $6,044 / 67.0% | Margin down 1.0 percentage point |
| Operating income / margin | $1,246 / 12.9% | $1,256 / 13.9% | Income down 0.8% |
| Net earnings | $515 | $1,006 | Down 48.8% |
| Diluted GAAP EPS | $1.34 | $2.63 | Down 49.0% |
| Adjusted diluted EPS (non-GAAP) | $4.73 | $4.49 | Up 5.3% |
| Operating cash flow | $1,782 | $1,886 | Down 5.5% |
| Cash, cash equivalents and marketable securities | $5,000 | $3,980 | Up $1,020 |
| Total debt | $3,973 | $2,764 | Up $1,209 |
- Sales growth was driven by unit volume, product mix and acquisitions; pricing and foreign exchange were headwinds. Excluding acquisitions, sales grew 5.8% in constant currency. U.S. sales rose 9.6%; international sales rose 5.7% in constant currency.
- Segment sales: MedSurg $3,781, up 10.8%; Orthopaedics $4,153, up 5.2%; Neurotechnology and Spine $1,741, up 5.0%. MedSurg was the fastest-growing segment.
- Cost of sales increased to 34.0% of sales from 33.0%, reflecting pricing, product mix, foreign exchange and acquisition effects. R&D spending rose 14.6% to $614, or 6.3% of sales.
- The 2014 effective tax rate was 55.6%, versus 17.0% in 2013. Management attributed the increase principally to the European regional headquarters and planned U.S. repatriation of cash. Foreign currency reduced 2014 diluted EPS by approximately $0.14.
- Current assets exceeded current liabilities by $5,209, compared with $5,678 in 2013. Cash from operations remained substantial, while working capital absorbed $249, including higher inventory and receivables. Capital expenditures were $233.
- Cash uses included $916 for acquisitions, $462 in dividends paid, and $100 in share repurchases. The declared annual dividend was $1.26 per share, up from $1.10.
Material changes and unusual items
- GAAP earnings were heavily affected by recall charges and discrete tax items. The filing reports $761 of 2014 recall charges, net of insurance recoveries, and $645 of income tax expense. Adjusted net earnings were $1,810 and adjusted diluted EPS was $4.73; these are non-GAAP measures and exclude specified items.
- For the Rejuvenate and ABG II hip-stem matter, Stryker recorded an additional $748 charge in 2014. The estimated total global loss range was $1,534 to $2,453, after $179 of third-party insurance recoveries from gross charges of $1,713. The company had recorded $1,593 in accrued recall expenses at year-end; timing and ultimate settlement costs remained uncertain. Most U.S. settlement payments were expected by the end of 2015.
- Acquisitions included Small Bone Innovations for approximately $358, Berchtold for approximately $184, Patient Safety Technologies for approximately $120, and Pivot Medical. Stryker also issued $1,000 of senior unsecured notes in 2014. Total debt rose, including $727 of current maturities.
- Fourth-quarter sales were $2,618 versus $2,468 a year earlier; net earnings were $260 versus $386. Fourth-quarter diluted EPS was $0.67 versus $1.01.
- Comprehensive income was $29, substantially below net earnings, including a $440 foreign-currency translation loss in other comprehensive income. Defined-benefit pension plans were underfunded by $260 at year-end.
Outlook, risks and contingencies
- Management’s stated objective was sales growth at the high end of the MedTech industry; it did not provide a specific numerical earnings or sales forecast in the supplied filing text. Management described its capital allocation priorities as acquisitions, dividends, then share repurchases.
- Management planned to repatriate approximately $2,000 of foreign cash in 2015. Approximately 68% of consolidated cash, cash equivalents and marketable securities was held outside the United States at year-end.
- Key risks include product liability and recall costs, regulatory compliance and device approvals, healthcare cost containment and pricing pressure, competition and product innovation, foreign-exchange movements, acquisition integration, cybersecurity and information technology disruptions, and tax audits and uncertain tax positions.
- The company was self-insured for product liability claims. Other legal matters included Hill-Rom patent litigation, for which the ultimate outcome and any probable loss could not be estimated clearly. A $76 patent-damages award against Zimmer was affirmed, but enhanced damages were reversed; Stryker reported no contingent gain.
- Stryker reported that the FDA had advised in January 2014 that its actions addressing a 2013 warning letter were sufficient and no further corrective actions related to that letter were required. The 2014 financial statements received an unqualified audit opinion; management and the auditor also reported effective internal control over financial reporting, excluding certain 2014 acquisitions from the assessment.
Important facts for investors to verify
- Track the hip-stem settlement enrollment, claims, payments and whether the ultimate loss approaches or exceeds the recorded estimate.
- Assess whether organic and constant-currency sales growth can continue, particularly in MedSurg, and monitor pricing, foreign exchange and segment-level trends.
- Separate recurring operating performance from recall, acquisition, restructuring and tax adjustments when evaluating non-GAAP earnings.
- Review the cash-flow impact of the planned repatriation, debt maturities, acquisition spending, dividends and pension funding.
- Monitor resolution of tax audits and legal proceedings, as well as any future regulatory, product-quality or cybersecurity developments.