Stryker Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Dollar amounts are in millions except per-share data. Stryker reports MedSurg and Neurotechnology, and Orthopaedics and Spine.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4,996 | $4,493 | $9,774 | $8,768 |
| Gross profit / margin | $3,181 / 63.7% | $2,826 / 62.9% | $6,197 / 63.4% | $5,560 / 63.4% |
| Operating income / margin | $965 / 19.3% | $772 / 17.2% | $1,700 / 17.4% | $1,219 / 13.9% |
| Net earnings | $738 | $656 | $1,330 | $979 |
| Diluted EPS | $1.93 | $1.72 | $3.47 | $2.56 |
- Reported sales increased 11.2% in Q2 and 11.5% for the half. Constant-currency growth was 11.9% and 12.9%, respectively; six-month growth excluding acquisitions and divestitures was 12.7% in constant currency.
- Q2 adjusted diluted EPS was $2.54, up 12.9%; six-month adjusted diluted EPS was $4.68, up 10.9%. Adjusted operating margin was 24.3% in Q2, up 60 basis points, and 22.7% for the half, down 10 basis points. These are non-GAAP measures; see filing reconciliations.
- Q2 sales rose across both segments: MedSurg and Neurotechnology increased 12.2% and Orthopaedics and Spine 9.9%. For the half, increases were 11.6% and 11.3%, respectively. Medical grew 26.3% in Q2; Neurovascular declined 2.0% for the half.
- For the six months, operating cash flow was $1,133 versus $732; investing cash outflow was $665 versus $2,834, largely reflecting lower acquisition spending than in 2022; financing cash outflow was $886 versus $240 inflow. Capital expenditures were $282, and dividends paid were $569.
- At June 30, cash and cash equivalents were $1,401; cash, cash equivalents and marketable securities totaled $1,478. Working capital was $3,567. Total debt was $12,947, including $1,798 classified as current; no revolving-credit or commercial-paper borrowings were outstanding. The company reported $2,160 of borrowing capacity and covenant compliance.
Changes, outlook and risks
- Q2 gross margin improved 80 basis points year over year, primarily from favorable volume and mix, partly offset by higher manufacturing and supply-chain costs. Six-month gross margin was unchanged as pricing and volume/mix were offset by higher costs.
- Management cited inflation, labor shortages, supply-chain disruptions, higher interest and shipping costs, currency movements, and the Russia-Ukraine conflict as economic uncertainties that could affect costs and customer orders. The filing gives no specific earnings or sales guidance.
- China represented approximately 1.8% of six-month revenue. Volume-based procurement has pressured prices for some joint replacement, trauma and neurovascular products; Stryker is exiting its China spine business after an unsuccessful bid. Local-sourcing policies are also affecting MedSurg in China.
- On May 2, Stryker acquired Cerus Endovascular for $289 net cash consideration, with up to $225 in milestone payments; $192 was recorded as contingent consideration. Its purchase-price allocation remains preliminary.
- Legal and regulatory matters include ongoing company investigations into possible Foreign Corrupt Practices Act violations in certain foreign countries; Stryker is cooperating with the SEC, DOJ and other authorities and says outcomes cannot currently be predicted. A separate PureWick patent case involving PrimaFit products was scheduled for trial in December 2023. The company recorded a $194 reserve for global recall matters and cautioned that ultimate costs could differ materially.
- Unusual items affected comparability, including acquisition and integration costs, intangible amortization, restructuring and special charges, EU medical-device regulatory costs, recall and legal items, and discrete tax effects. GAAP earnings also reflected higher tax rates than the prior-year comparable periods; the 2022 rates benefited from a deferred-tax reversal.
Important facts for investors to verify
- Whether sales growth and margin trends persist, particularly given supply-chain costs, inflation and the anticipated unfavorable effect of segment mix.
- The composition and timing of current debt maturities, and refinancing plans; debt totaled $12,947, with $1,798 current at quarter-end.
- Inventory increased to $4,593 from $3,995 at year-end, while six-month operating cash flow was $1,133; monitor inventory conversion and cash generation.
- Progress, potential financial impact and related disclosures for the FCPA investigations, PureWick litigation, recall claims and other contingencies.
- Cerus integration, milestone-payment outcomes and final purchase-price allocation; also monitor the effects of China procurement and sourcing policies.