Stryker Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing; it includes unaudited quarterly data. Stryker sells orthopaedic implants and MedSurg equipment, with operations reported in those two segments.
Financial performance and position
| Metric | FY2010 | FY2009 | Change or context |
|---|---|---|---|
| Net sales | $7,320.0 million | $6,723.1 million | Up 9% reported; up 8% on a constant-currency basis |
| Gross profit / margin | $5,034.3 million / 68.8% | $4,539.4 million / 67.5% | Margin increased 1.3 percentage points |
| Operating income / margin | $1,751.4 million / 23.9% | $1,594.4 million / 23.7% | Operating income up 10% |
| Net earnings | $1,273.4 million | $1,107.4 million | Up 15%; diluted EPS was $3.19 versus $2.77 |
| Adjusted net earnings (non-GAAP) | $1,329.2 million | $1,180.0 million | Up 13%; adjusted diluted EPS was $3.33 versus $2.95 |
| Operating cash flow | $1,547.4 million | $1,460.7 million | Up $86.7 million |
| Cash and current marketable securities | $4,380.1 million | $2,954.8 million | At year-end |
| Total debt | $1,021.8 million | $18.0 million | Includes $1.0 billion of notes issued in 2010 |
| Working capital / current ratio | $6,026.4 million / 4.8 | $4,410.2 million / 4.1 | Liquidity measures improved |
FY2010 sales growth reflected 7% from increased unit volume and product mix, 1% from currency, and 3% from acquisitions, partly offset by 2% from price changes. Domestic sales rose 11%; international sales rose 5% reported and 2% in constant currency. Orthopaedic Implants sales increased 5% reported (3% constant currency) to $4,308.4 million. MedSurg Equipment increased 16% reported (15% constant currency) to $3,011.6 million, including acquisition contributions and a one-time patient-handling shipment.
Fourth-quarter sales were $1,995.1 million versus $1,834.2 million a year earlier. Quarterly net earnings were $295.0 million versus $306.0 million; diluted EPS was $0.74 versus $0.76.
Material changes versus the prior year
- Sales returned to stronger growth after essentially flat reported sales in 2009; MedSurg Equipment rebounded from a 5% reported decline in 2009 to 16% growth in 2010.
- Cost of sales declined to 31.2% of sales from 32.5%, which management attributed primarily to lower excess and obsolete inventory charges, better production absorption, and favorable currency effects on costs.
- Research and development expense rose 17% to $393.9 million, or 5.4% of sales, reflecting increased product-development and technology investment.
- Reported results included a $123.5 million property, plant and equipment impairment expense. Separately, management identified a $76.6 million after-tax impairment related to the planned OP-1 sale in its non-GAAP reconciliation.
- Debt increased following the issuance of $500 million of 3.00% notes due 2015 and $500 million of 4.375% notes due 2020. Interest expense also increased.
Outlook, transactions, risks and unusual items
- Outlook: The filing provides no specific quantitative earnings or revenue guidance. Management said cash and securities, expected operating cash flows, and available credit were expected to meet operating needs, capital spending, debt service, and dividends.
- Major subsequent transactions: Stryker completed the $1.45 billion cash acquisition of Boston Scientific’s Neurovascular division on January 3, 2011, with another $50 million contingent on milestones. It completed the sale of its OP-1 product family and West Lebanon facility for $60 million on February 1, 2011.
- Capital allocation: FY2010 cash uses included $425.5 million for share repurchases, $238.3 million for dividends, $182.1 million for capital expenditures, and $265.4 million for acquisitions. The company also authorized a new $500 million repurchase program; no purchases were made under it in 2010.
- Unusual items: FY2010 results included a $24.3 million gain on sale of the Caen, France facility, a $76.6 million after-tax OP-1-related impairment, and a $7.4 million favorable tax adjustment related to the prior-year repatriation of foreign earnings. FY2009 included a patent-litigation gain and restructuring charges, among other comparability items.
- Legal and regulatory exposure: The company reported DOJ subpoenas concerning PainPump and OtisKnee, an ongoing HHS inquiry into physician compensation, an SEC/DOJ inquiry concerning possible Foreign Corrupt Practices Act violations, and an indictment involving Stryker Biotech and certain current and former employees. The Biotech matter’s ultimate resolution was not reasonably estimable; a conviction could result in significant fines. Some FDA warning letters were reported resolved in 2010.
- Tax and other risks: Uncertain income tax positions totaled $365.6 million; management cited potential material effects from ongoing tax disputes. The company also identified pricing and reimbursement pressure, product liability, regulatory compliance, foreign exchange, acquisition integration, and product-development risks. Defined-benefit pension plans were underfunded by $107.7 million.
- Assurance: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Reconcile the $123.5 million impairment expense in the income statement with the $76.6 million after-tax OP-1 impairment described in management’s discussion and the non-GAAP reconciliation.
- Assess the Neurovascular acquisition’s integration, contingent payment, financing impact, and contribution to results after closing.
- Track the outcomes and potential financial exposure from the DOJ, HHS, SEC, shareholder, and Stryker Biotech proceedings, as well as the material tax disputes.
- Monitor whether inventory growth and days in inventory (154 days, up from 145) convert into sales without additional write-downs.
- Evaluate the sustainability of growth and margins, especially MedSurg’s acquisition-related and one-time shipment contributions and continuing pricing and reimbursement pressures.