Stryker Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Dollar amounts are in millions except per-share data. Stryker manufactures medical technology across Orthopaedics, MedSurg, and Neurotechnology and Spine.
Financial performance
- Revenue: $3,953, up 10.2% year over year (8.0% in constant currency). Acquisitions contributed 6.2 percentage points to constant-currency growth; foreign exchange added 2.2 points to reported growth.
- Segment sales: Orthopaedics $1,484 (+21.4% reported); MedSurg $1,621 (flat); Neurotechnology and Spine $848 (+14.0%). U.S. sales rose 5.3%; international sales rose 23.7% reported and 15.2% in constant currency.
- Profit and margins: Gross profit was $2,509, with a 63.5% margin versus 65.0%. Operating income was $459, with an 11.6% margin versus 17.7%. Net earnings were $302 versus $493; diluted EPS was $0.79 versus $1.30. Adjusted diluted EPS, a non-GAAP measure, was $1.93 versus $1.84, up 4.9%; adjusted operating margin was 23.5% versus 24.0%.
- Cash flow: Operating cash flow was $452 versus $591; capital expenditures were $83 versus $144. Investing used $96 and financing used $1,053, including repayment of $750 of notes. Cash decreased $705 to $2,238.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $2,312 at quarter-end. Current assets exceeded current liabilities by $5,026. Total debt was $13,074, down from $13,991 at year-end; no borrowings were outstanding under credit facilities or commercial paper programs. The company reported covenant compliance.
- Other: The quarterly dividend declared was $0.63 per share, up from $0.575. The effective tax rate was 17.7% versus 16.4%.
Material changes and drivers
- Reported sales rebounded from the pandemic-affected prior-year quarter, but management said COVID-19 and procedure cancellations continued to weigh on sales, particularly in the U.S. and Europe. Momentum improved toward quarter-end, especially in the U.S. and Asia Pacific.
- Orthopaedics growth was substantially acquisition-driven, including Wright Medical, acquired in November 2020. Excluding acquisitions and currency, total sales increased 1.8% in the overview; detailed discussion attributes constant-currency growth to higher volumes partly offset by lower prices.
- Reported earnings and margins fell despite higher sales. Management cited acquisition-related expenses, acquired-inventory fair-value step-up, higher amortization, increased interest expense, and unfavorable business mix. The $79 inventory step-up charge was a notable contributor to the reported gross-margin decline.
- R&D expense rose 13.4% to $288; selling, general and administrative expense rose 18.4% to $1,575. Management said higher R&D reflected product development, technology investment, and acquisition integration.
Outlook, risks, and unusual items
- The filing gives no specific numerical revenue or earnings guidance. Management expects to meet short-term liquidity and operating needs through operating cash flow, credit facilities, commercial paper, and expense and capital-spending actions; it also noted improving sales momentum late in the quarter.
- COVID-19-related procedure cancellations, restrictions, and disruption to suppliers, distributors, and facilities remain significant uncertainties; the company said the financial impact could not be quantified.
- China’s volume-based procurement tenders could affect market share and pricing for joint replacement, spine, and trauma products. China represented approximately 2% of 2020 revenue; the company was monitoring potential impairment indicators.
- Product-recall and related liability matters include estimated remaining probable losses of approximately $480–$610; reserves reflect the minimum of the estimated range. Actual outcomes could be materially different and adversely affect results and cash flows.
- Wright acquisition accounting remained preliminary for certain valuations. Acquisition and integration-related charges, including inventory step-up and purchased-intangible amortization, materially affected GAAP results. Adjusted results exclude selected items and should be considered alongside GAAP results.
- The company repaid $750 of notes due in March and suspended share repurchases through 2021. A separate $1.5 billion revolving credit facility was scheduled to mature April 29, 2021; the primary $1.5 billion facility expires in August 2023.
Investor verification priorities
- Assess the extent to which sales growth reflects underlying procedure-volume recovery versus acquisitions and currency, particularly in Orthopaedics.
- Track the persistence of acquisition-related costs, acquired-inventory charges, amortization, and the gap between GAAP and adjusted margins and EPS.
- Review cash conversion and working-capital trends, and confirm refinancing or renewal developments for the April 2021 credit facility.
- Monitor the COVID-19 impact, China procurement tenders, and product-liability exposures, including changes to the estimated loss range and reserves.
- Compare management’s recovery commentary with subsequent reported results; this filing provides no numerical forward guidance.