STRYKER CORP quarterly report, Q3 FY2010

全文

Stryker Corporation — Q3 2010 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Stryker sells orthopaedic implants and medical/surgical equipment in the United States and internationally.

Financial performance

  • Q3 revenue: $1,767.6, up 7% from $1,653.3. Domestic sales grew 10%; international sales grew 2%. MedSurg Equipment sales rose 16%, while Orthopaedic Implants sales rose 1%.
  • Nine-month revenue: $5,324.9, up 9% from $4,888.9. Reported growth reflected volume and product mix (+7%), acquisitions (+2%), and currency (+1%), partly offset by pricing (-2%). MedSurg Equipment grew 16%; Orthopaedic Implants grew 5%.
  • Profit: Q3 operating income was $470.5 versus $311.4; net earnings were $337.7 versus $229.0. Diluted EPS was $0.85 versus $0.57. Nine-month operating income was $1,365.0 versus $1,080.4; net earnings were $978.4 versus $801.4, and diluted EPS was $2.45 versus $2.01.
  • Margins: Q3 gross margin was 69.4% versus 67.4%, and operating margin was 26.6% versus 18.8%. Nine-month gross margin was 68.8% versus 67.5%, and operating margin was 25.6% versus 22.1%. Lower cost of sales and the absence of 2009 restructuring charges supported the improvement.
  • Adjusted results: Excluding the Caen facility gain and favorable tax adjustment in 2010, and restructuring charges in 2009, adjusted Q3 net earnings increased 14% to $316.9; adjusted diluted EPS increased 16% to $0.80. For nine months, adjusted net earnings increased 13% to $957.6 and adjusted diluted EPS increased 13% to $2.40. These are company-defined non-GAAP measures.
  • Cash flow: Nine-month operating cash flow was $1,029.8 versus $920.6. Q3 operating cash flow was $428.3 versus $465.8, with the decline attributed primarily to higher inventory. Nine-month capital expenditures were $127.0; dividends paid were $178.7; acquisitions used $62.2; and share repurchases used $111.1.
  • Liquidity and debt: At September 30, cash and cash equivalents were $925.6 and current marketable securities were $3,589.0. Working capital was $6,137.7, up from $4,410.2 at year-end 2009, primarily reflecting the January debt issuance. Total debt was $1,015.5, including $996.4 of long-term debt. The company reported $1,057.7 of additional borrowing capacity under existing facilities.
  • Balance-sheet trends: Inventories rose to $1,035.3 from $943.0 at year-end; inventory days increased to 174 from 145. Receivable days increased to 59 from 56.

Material changes and unusual items

  • In January, Stryker issued $500 million of 3.00% notes due 2015 and $500 million of 4.375% notes due 2020, receiving net proceeds of $996.1. In August, it replaced its $1 billion revolving credit facility due November 2010 with a $1 billion facility due August 2013, expandable by up to $500 million.
  • The Q3 sale of the Caen, France, orthopaedics manufacturing facility generated $52.9 in cash consideration and a $24.3 pretax gain (reported as $13.4 net of tax). The sale includes a five-year supply agreement.
  • Reported 2010 earnings also benefited from a $7.4 favorable tax adjustment related to repatriation of foreign earnings. In 2009, reported earnings included restructuring charges. Q3 2010 adjusted comparisons exclude these items as described in the filing.
  • Q3 R&D expense rose 18% year over year as the company increased investment for anticipated product launches. Management cited lower inventory charges, higher production absorption, and favorable currency effects on euro-based manufacturing costs as contributors to lower cost-of-sales percentages.
  • In June, Stryker redeemed its remaining auction-rate securities investment of $139.9 million at par under its UBS rights agreement. The company recorded a $17.0 loss on the rights’ fair-value estimate, offset by a corresponding gain on the related investment.

Outlook, risks and contingencies

  • The filing provides no specific forward revenue or earnings guidance. Management said available cash, marketable securities, operating cash flows, borrowing capacity, and potential capital-market access should be sufficient for operating needs, investment, acquisitions, and debt service.
  • Management noted that inventory was built in support of anticipated Q4 sales and that R&D spending supports launches later in 2010 and in future years. Orthopaedic implant surgeries are generally lower during summer months, although the business is not otherwise considered seasonal.
  • Significant disclosed risks include an income-tax assessment concerning European profit allocation and IRS proposed adjustments to older Irish cost-sharing tax positions; adverse outcomes could materially affect tax expense, results, and cash flows.
  • Legal and regulatory matters include DOJ subpoenas concerning PainPump sales and marketing and OtisKnee matters; an ongoing Stryker Biotech criminal proceeding; an HHS investigation concerning physician compensation; and SEC/DOJ inquiries concerning possible Foreign Corrupt Practices Act issues. The company said the Biotech matter’s ultimate resolution was not reasonably estimable; a conviction could lead to significant fines and exclusion from government healthcare programs. Several prior FDA warning letters were reported resolved after inspections and corrective actions.
  • In October, Stryker acquired Gaymar for $150.6 cash and agreed to acquire Boston Scientific’s Neurovascular division for $1.4 billion at closing plus up to $100 million in milestone payments, subject to approvals and other closing conditions. The filing also reports that Stryker decided to withdraw its FDA application for the FlexiCore artificial disc; CerviCore remained under development.
  • Other forward-looking risks identified include pricing and cost-containment pressure, demand and economic conditions, reimbursement changes, foreign exchange, product liability, regulatory approvals, tax audits, and competition.

Most important facts for investors to verify

  • Whether revenue growth and margin gains persist, particularly given Q3 Orthopaedic Implants growth of only 1%, pricing pressure, and the contribution from acquisitions and the one-time equipment shipment.
  • Whether inventory levels and working-capital demands normalize; nine-month inventory days reached 174 and inventory growth reduced Q3 operating cash flow.
  • The recurring earnings impact of the Caen gain and tax adjustment versus the company’s adjusted, non-GAAP results.
  • The eventual cost and resolution of the disclosed tax disputes, investigations, subpoenas, and litigation, including the Stryker Biotech proceeding.
  • Funding, integration, regulatory approval, and milestone terms for the post-quarter acquisitions, especially the proposed Neurovascular transaction.