Stryker Corporation — Q1 2022 Form 10-Q
Business context and reporting period. Results cover the three months ended March 31, 2022; dollar amounts are in millions except per-share data. Stryker reports MedSurg and Neurotechnology and Orthopaedics and Spine. The quarter included the February acquisition of Vocera Communications for $2.6 billion net of cash acquired ($3.0 billion including convertible notes).
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $4,275 | $3,953 |
| Gross profit / margin | $2,734 / 64.0% | $2,509 / 63.5% |
| Operating income / margin | $447 / 10.5% | $459 / 11.6% |
| Net earnings | $323 | $302 |
| Diluted EPS | $0.84 | $0.79 |
| Operating cash flow | $203 | $452 |
- Reported sales rose 8.1%; constant-currency sales increased 9.9%. Excluding acquisitions and divestitures, constant-currency growth was 10.2%, driven by volume and partly offset by lower prices.
- MedSurg and Neurotechnology sales increased 10.6% reported (12.1% constant currency); Orthopaedics and Spine sales increased 5.1% (7.2% constant currency).
- GAAP operating margin fell 110 basis points. Management’s adjusted operating margin was 21.8%, down 170 basis points; adjusted diluted EPS was $1.97, up 2.1%. These are non-GAAP measures and exclude specified items.
- Management cited inflation in labor, electronic components, steel and transportation as pressure on adjusted gross margin, which declined to 64.1% from 65.4%.
- Operating cash flow declined primarily due to working-capital changes, including a $229 increase in inventory cash use. Investing cash outflow was $2,682, mainly reflecting the Vocera acquisition.
- Cash and marketable securities totaled $1,530 at quarter-end, versus $3,019 at December 31, 2021. Current assets exceeded current liabilities by $4,317. Total debt was $14,099, including a new $1,500 term loan; borrowing capacity on existing facilities was $2,162. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Vocera contributed less than 1% of quarterly sales and approximately 8.5% of total assets. The acquisition added $2,332 of goodwill and $746 of identified intangible assets in preliminary purchase accounting. A $132 charge for accelerated vesting of Vocera employee awards was recorded in SG&A.
- Reported GAAP results included substantial acquisition/integration, restructuring, amortization, regulatory, recall and legal items. Adjusted results exclude these items; investors should consider the reconciliations and the company’s stated limitations on comparability.
- No specific full-year earnings or sales guidance is provided in the filing. Management reported a partial recovery in elective procedures and faster sales momentum as pandemic effects eased in the U.S. and Europe, while continuing supply-chain constraints and electronic-component shortages limited some capital-product sales.
- Russia sales were approximately 0.1% of revenue; the company warned that escalation, sanctions, market disruption, inflation, supply chains, currencies and cyber threats could adversely affect results. China’s volume-based procurement and import-purchase policies were affecting joint replacement, trauma and MedSurg activity; China represented approximately 2.5% of revenue.
- A Delaware court judgment following a jury verdict in the PureWick patent case led to a $28 charge recorded in Q1. If enhanced, damages could reach approximately $100 and include an injunction; Stryker intends to appeal.
- Estimated remaining probable losses for recall matters were approximately $385 to $520, with reserves recorded at the minimum of the range. The company also executed a confidential settlement agreement in April 2022 concerning LFIT V40 claims. Actual outcomes could materially differ from estimates.
- Management stated that uncertain tax positions, excluding interest, could decrease by as much as $175 within 12 months through resolution of tax matters. Turkey operations became subject to highly inflationary accounting effective April 1; no material impact was expected.
Investor verification priorities
- Track whether sales growth and elective-procedure recovery continue, particularly given component shortages, inflation and lower pricing.
- Assess operating cash conversion, inventory levels and the effect of acquisition-related spending on liquidity and debt.
- Review the GAAP-to-adjusted reconciliations and the persistence of excluded costs; adjusted operating margin contracted despite adjusted EPS growth.
- Monitor Vocera integration, realized strategic benefits, final purchase-price allocations and debt servicing.
- Follow the PureWick appeal and potential injunction, recall settlements and the adequacy of the $385–$520 recall-loss estimate.