Stryker Corporation — Q1 2013 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Stryker sells medical technology across Reconstructive, MedSurg, and Neurotechnology and Spine. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $2,190 | $2,161 | +1.3% reported; +2.6% constant currency |
| Gross profit / margin | $1,477 / 67.4% | $1,452 / 67.2% | Margin +0.2 percentage points |
| Operating income / margin | $386 / 17.6% | $476 / 22.0% | −18.9% |
| Net earnings | $304 | $350 | −13.1% |
| Diluted EPS | $0.79 | $0.91 | −13.2% |
| Adjusted net earnings / diluted EPS (company non-GAAP) | $394 / $1.03 | $379 / $0.99 | +4.0% net earnings |
| Operating cash flow | $236 | $35 | +$201 |
| Capital expenditures | $49 | $52 | −$3 |
Sales growth reflected 3.8% from unit volume and mix and 0.2% from acquisitions, partly offset by 1.3% price impact and 1.3% foreign-exchange impact. U.S. sales increased 4.0%; international sales declined 3.4% reported but rose 0.2% in constant currency. By segment, reported sales rose 1.2% in Reconstructive, 0.3% in MedSurg, and 4.0% in Neurotechnology and Spine.
Reported earnings included after-tax charges for the hip recall ($32), regulatory matters ($30), restructuring ($11), and acquisition/integration costs ($17). The company’s adjusted results exclude specified items and are non-GAAP measures; they should be considered alongside reported results.
Liquidity, debt, and capital
- Cash and cash equivalents were $1,913 and marketable securities were $2,574 at March 31. Together they totaled $4,487, versus $4,285 at year-end 2012.
- Current assets exceeded current liabilities by $6,613. Cash from operations was $236; investing activities used $360 and financing activities provided $651. Cash increased $518 during the quarter.
- Total debt was $2,772, up from $1,762 at December 31, 2012; long-term debt was $2,738. The increase included a March offering of $600 in 1.30% notes due 2018 and $400 in 4.10% notes due 2043. The company reported $1,042 of available credit capacity and compliance with debt covenants.
- Q1 share repurchases totaled $250 for 3.6 million shares. Dividends paid totaled $101; the declared quarterly dividend was $0.265 per share.
Material changes, outlook, and risks
- Operating income and reported net earnings fell despite modest sales growth, primarily reflecting higher SG&A and R&D expenses and Q1 charges. SG&A included $40 for the hip recall and $40 for regulatory matters before tax. R&D expense increased 15.2% to $129.
- The Medical Device Excise Tax contributed $23 to Q1 cost of sales. Restructuring charges were $14; the workforce program is expected to reduce global headcount by about 5%, cost approximately $225 in total, and be substantially complete by year-end 2013.
- Stryker acquired Trauson, a China-based orthopedics business, on March 1 for $742 in cash consideration, with the stated aim of strengthening offerings and expanding in China and value-segment markets. The purchase-price allocation was preliminary.
- The Rejuvenate and ABG II hip-stem recall loss estimate was approximately $230–$430 before insurance recoveries. A $40 Q1 charge brought the recorded estimate to the range minimum; no insurance recovery was recognized. Actual costs may differ materially.
- The company had recorded $75 in charges for DOJ and SEC regulatory matters, including $40 in Q1. The matters remain unresolved; management cautioned that final costs could differ materially and adversely affect results, financial position, or cash flows. Other ongoing matters include DOJ inquiries, an HHS subpoena, and patent litigation; some potential losses could not be estimated.
- Management cited slower European markets, weak Japanese pricing, and softness in Spine. The filing provides no specific full-year sales or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- Foreign-currency translation reduced other comprehensive income by $114 in Q1. The company identified exchange rates as its principal market-risk exposure. It reported no sovereign investments in Southern European debt, and considered related non-sovereign investment exposure immaterial.
Important facts for investors to verify
- Progress and financial impact of the hip recall, including patient treatment costs, litigation, and potential insurance recoveries.
- Developments in DOJ, SEC, HHS, and patent matters, and whether additional accruals or payments are required.
- Trauson’s integration, final purchase-price allocation, and contribution to growth and cash generation.
- Whether constant-currency growth and adjusted earnings remain supported by underlying volume, pricing, and margins.
- Debt, liquidity, restructuring costs, and the effects of foreign exchange and the Medical Device Excise Tax.