Stryker Corporation 2009 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009; fourth-quarter figures are also noted. Amounts are U.S. dollars in millions, except per-share data.
Business context
Stryker is a medical technology company operating through Orthopaedic Implants and MedSurg Equipment, selling in more than 100 countries. Domestic sales were 64% of 2009 revenue and international sales were 36%. On December 31, 2009, Stryker acquired Ascent Healthcare Solutions, a medical-device reprocessing and remanufacturing company, for $525 million in cash; the acquisition did not affect 2009 consolidated sales or operating income.
Financial results and liquidity
| Metric | 2009 | 2008 | Change or context |
|---|---|---|---|
| Net sales | $6,723.1 | $6,718.2 | Flat reported; up 2% at constant currency |
| Gross profit / margin | $4,539.4 / 67.5% | $4,586.8 / 68.3% | Margin declined 0.8 percentage points |
| Operating income / margin | $1,594.4 / 23.7% | $1,519.0 / 22.6% | Income increased 5% |
| Net earnings | $1,107.4 | $1,147.8 | Down 4% |
| Diluted EPS | $2.77 | $2.78 | Down slightly |
| Operating cash flow | $1,460.7 | $1,175.9 | Up $284.8 |
| Capital expenditures | $131.3 | $155.2 | Down $23.9 |
| Cash and marketable securities | $2,954.8 | $2,195.6 | At year-end |
| Working capital / current ratio | $4,410.2 / 4.1 | $3,517.2 / 3.4 | Liquidity measures improved |
| Debt | $18.0 | $20.5 | All 2009 debt was classified as current |
Orthopaedic Implants sales rose 4% to $4,119.7 million (6% at constant currency); MedSurg Equipment sales fell 5% to $2,603.4 million (4% at constant currency). Spine and craniomaxillofacial products were among the stronger implant categories. Patient handling and emergency medical equipment sales fell 22%, reflecting lower hospital capital spending.
Research, development and engineering expense fell 9% to $336.2 million, or 5.0% of sales, as Stryker controlled discretionary spending and redirected some resources to compliance. Selling, general and administrative expense declined 5%; 2009 included a $62.5 million patent-litigation settlement gain recorded as a reduction to that expense.
Fourth-quarter 2009 sales were $1,834.2 million versus $1,718.2 million in fourth-quarter 2008. Quarterly net earnings were $306.0 million versus $277.7 million, and diluted EPS was $0.76 versus $0.69.
Changes, unusual items, and outlook
- 2009 adjusted net earnings, excluding specified restructuring charges, the patent settlement gain and the tax charge on repatriated earnings, were $1,180.0 million, up 1%; adjusted diluted EPS was $2.95, up 4%. These are non-GAAP measures and do not replace reported GAAP results.
- Stryker recorded $67.0 million of restructuring charges in 2009, principally for terminating certain EMEA agent agreements, organizational changes and discontinued products. The 2008 restructuring charge was $34.9 million.
- The effective tax rate increased to 31.8% from 27.4%, including a $67.1 million tax charge associated with repatriating $787 million of foreign earnings.
- Management said the economic slowdown sharply constrained hospital capital budgets, particularly affecting MedSurg products. It cited pricing and reimbursement pressure, foreign exchange, regulation, competition and product-liability exposure as risks.
- No quantitative 2010 sales or earnings guidance is provided in the supplied filing text. Management stated that cash, marketable securities, expected operating cash flow and borrowing capacity were expected to fund operations, capital spending, acquisitions, debt repayment and dividends.
- After year-end, Stryker issued $500 million of 3.00% notes due 2015 and $500 million of 4.375% notes due 2020. The proceeds were intended for general corporate purposes, including acquisitions and repurchases.
Risks, contingencies, and controls
- A federal grand jury indicted Stryker Biotech and certain current and former employees on charges including wire fraud and alleged FDA-related offenses. Stryker said the outcome could not be reasonably estimated; a conviction could bring significant fines and exclusion from government healthcare programs.
- The company disclosed FDA warning letters concerning a CMF product and facilities; the FDA had resolved the warning letter relating to the OP-1 facility after reinspection. Stryker continued working with regulators on other observations.
- Other matters included government inquiries or subpoenas involving physician arrangements and foreign sales, plus a January 2010 securities class action. The filing states outcomes and potential losses are uncertain; it does not provide a clear estimate of the potential exposure for these matters.
- Auction-rate securities remained illiquid. Stryker held $156.3 million at par and reported UBS rights to sell them at par during a specified 2010–2012 period; valuation relied on significant unobservable inputs.
- Unresolved income-tax positions totaled $292.7 million. Stryker also reported an $85.1 million underfunded status for defined-benefit pension plans and expected to contribute $19.0 million in 2010.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2009.
Important facts for investors to verify
- Whether Ascent integration delivers the anticipated customer savings and growth, given the acquisition closed on the final day of 2009.
- Whether MedSurg sales recover from reduced hospital capital budgets, especially patient handling and emergency medical equipment.
- How much margin pressure persists from compliance costs, inventory charges and lower production levels.
- Developments and financial consequences, if any, from the Stryker Biotech indictment, FDA matters, physician-arrangement inquiries, FCPA investigation and securities litigation.
- The timing and recoverability of auction-rate securities, and resolution of the $292.7 million in uncertain tax positions.
- The effects of the $1 billion post-year-end note issuance, the credit facility scheduled to expire in November 2010, and the company’s planned repurchases and dividends.
- The filing reports both a $0.25 dividend per share in selected financial data and a $0.50 total for 2009 in the capital-stock note, which describes a transition dividend; investors should confirm the definitions and periods behind those figures.