Stryker Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Dollar amounts are in millions except per-share data. Stryker reports Orthopaedics, MedSurg, and Neurotechnology and Spine.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $2,379 | $2,305 |
| Gross profit / margin | $1,553 / 65.3% | $1,529 / 66.3% |
| Operating income | $406 | $131 |
| Net earnings | $224 | $70 |
| Diluted EPS | $0.58 | $0.18 |
| Adjusted diluted EPS (non-GAAP) | $1.11 | $1.06 |
| Operating cash flow | $380 | $209 |
- Reported sales grew 3.2%; growth was 7.4% at constant currency and 5.6% in constant currency excluding acquisitions. Foreign exchange reduced reported growth by 4.2%; acquisitions added 1.9%.
- Segment sales: Orthopaedics $1,023 (+2.4% reported; +7.5% constant currency); MedSurg $927 (+4.6%; +7.7%); Neurotechnology and Spine $429 (+2.1%; +6.6%). U.S. sales rose 8.5%; international sales fell 7.4% reported but rose 5.4% at constant currency.
- Gross margin declined to 65.3% from 66.3%, reflecting pricing and foreign-exchange effects. SG&A was 37.5% of sales versus 37.3%; excluding specified acquisition and restructuring charges, it was 35.9% versus 36.0%.
- Reported net earnings and EPS benefited from substantially lower recall charges than in Q1 2014, but included $84 of tax matters and $54 of recall charges. Adjusted net earnings were $424 versus $404, up 5.0%; adjusted measures are non-GAAP.
Cash, liquidity, and debt
- Cash and cash equivalents were $1,674 at March 31, versus $1,795 at year-end. Marketable securities were $2,589 on the current-asset balance sheet; cash, cash equivalents, and marketable securities totaled $4,263, down from $5,000 at year-end.
- Current assets were $8,727 and current liabilities $3,695; working capital was $5,032. The filing reports $3,482 of total debt ($225 current and $3,257 long-term), versus $3,973 at December 31.
- Cash provided by operations was $380. Investing activities provided $326, including $456 net proceeds from marketable securities; financing activities used $734, including $500 net debt repayments, $131 dividends, and $130 share repurchases. Cash declined $121, including a $93 adverse foreign-exchange effect.
- At quarter-end, commercial paper outstanding was $200, borrowing capacity under credit facilities was $1,279, and the weighted-average interest rate on borrowings was 2.9%. The company reported compliance with debt covenants.
Changes, outlook, and risks
- In January, Stryker acquired certain assets of CHG Hospital Beds for $70 in cash. Management said the acquisition expands MedSurg offerings. The company also repaid $500 of notes due January 15, 2015.
- No specific earnings or sales guidance for future periods is provided in the filing. Management said it expects to meet short-term liquidity and operating needs through operating cash flow, commercial paper, and credit lines. It reported repatriating approximately $650 of foreign-held cash in 2015 and expected additional repatriation in the second half.
- The Rejuvenate and ABG II hip-stem recall remains the principal disclosed contingency. Stryker recorded a $54 pretax charge in Q1; estimated probable global resolution costs were $1,587 to $2,510, including $179 of third-party insurance recoveries in the stated pre-recovery estimate. The ultimate cost and payment timing remain uncertain and could materially affect results, financial position, and cash flows.
- Other risks include product-liability claims, ongoing patent litigation (including Hill-Rom claims whose resolution could not be estimated), currency exposure, and a supplier product-supply issue that affected certain Instruments products. The company said foreign exchange reduced diluted EPS by approximately $0.06 in Q1.
- The effective tax rate increased to 40.6% from 34.5%, primarily due to discrete items related to establishing a European regional headquarters and other tax matters. Financial-statement translation produced a $282 loss in other comprehensive income, contributing to a $43 comprehensive loss despite positive net earnings.
Important facts for investors to verify
- Subsequent disclosures on the recall settlement, claimant participation, accrual adequacy, insurance recoveries, and cash payments.
- Whether constant-currency sales momentum persists, particularly internationally, and the duration or effects of the Instruments supplier issue.
- The composition and timing of discrete tax items, planned cash repatriations, and the impact of foreign exchange on earnings and liquidity.
- Debt maturities, borrowing costs, and the pace of repurchases under the $2.0 billion 2015 authorization; $130 was repurchased in Q1 under an earlier program.
- Final purchase-price allocations for acquisitions and developments in the unresolved patent proceedings.