Stryker Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in millions, except per-share figures. Stryker operates in Orthopaedics, MedSurg, and Neurotechnology and Spine.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3,737 (+4.2%) | $3,587 | $10,089 (-6.2%) | $10,753 |
| Gross margin | 65.9% | 65.0% | 62.8% | 65.0% |
| Operating income | $859 | $628 | $1,474 | $1,769 |
| Operating margin | 23.0% | 17.5% | 14.6% | 16.5% |
| Net earnings | $621 | $466 | $1,031 | $1,358 |
| Diluted EPS | $1.63 | $1.23 | $2.71 | $3.58 |
| Operating cash flow | Not reported separately | Not reported separately | $2,040 | $1,456 |
Q3 sales increased 3.8% in constant currency; international exchange rates contributed a 0.4% benefit. All three segments grew in the quarter: Orthopaedics 4.4%, MedSurg 3.2%, and Neurotechnology and Spine 6.0% as reported. Nine-month sales fell across Orthopaedics (-9.3%), MedSurg (-2.9%), and Neurotechnology and Spine (-7.8%).
Q3 adjusted operating margin, a non-GAAP measure, was 28.0% versus 25.4%; adjusted diluted EPS was $2.14 versus $1.91. For the nine months, adjusted operating margin was 22.3% versus 25.5%, and adjusted diluted EPS was $4.62 versus $5.77. These measures exclude items identified by the company and should be considered alongside GAAP results.
Financial position and liquidity
- Cash and cash equivalents were $7,083 at September 30, 2020, up from $4,337 at year-end 2019; cash, cash equivalents, and marketable securities totaled $7,161.
- Total debt was $13,127, including $1,119 current maturities; long-term debt was $12,008. Debt increased from $11,090 at December 31, 2019, including $2,300 of notes issued in June.
- Current assets exceeded current liabilities by $8,856. No commercial paper was outstanding, and the company reported compliance with debt covenants.
- Nine-month investing cash outflow was $349; financing cash inflow was $1,046. Dividends paid were $647. No shares were repurchased during the first nine months.
Material changes, outlook, and risks
Management attributed the first-half sales and earnings decline primarily to COVID-19-related postponement of deferrable medical procedures. Most businesses reported increased unit volume in Q3 as activity recovered. Management cautioned that renewed or continuing delays in procedures could again harm sales, cash flow, financial condition, and results. It said the pandemic’s financial impact could not be quantified. The filing provides no specific forward earnings or sales guidance.
Nine-month results included $170 of charges related to suspended investments and product-line and other exit costs; the filing describes $189 of total asset impairment and exit charges in Q2, primarily involving an in-process global ERP investment. Operating cash flow improved year over year, primarily due to higher receivable collections and lower inventory-related spending, partly offset by lower earnings.
The company expected the Wright Medical acquisition to close in Q4 2020, subject to regulatory approvals and other conditions. It issued notes with $2,300 principal in June to support funding needs; the 2025 and 2030 notes include a special mandatory redemption provision if the tender offer is not completed by February 4, 2021. The company expected to meet liquidity needs through operating cash flow, credit facilities, and spending reductions, and planned to keep share repurchases suspended through 2021.
Product-liability and recall matters remain significant contingencies. For LFIT V40 femoral-head recall matters, Stryker estimated a remaining probable-loss range of approximately $280 to $515 and recorded charges at the minimum of the range. The company said ultimate costs could differ materially. It also entered a September 2020 settlement agreement for eligible Rejuvenate and ABG II hip-stem patients; terms were not provided in the filing.
Key facts for investors to verify
- Whether elective-procedure volumes and hospital activity continued recovering after Q3, and the effect on segment sales and margins.
- Progress, approvals, funding, and closing conditions for the Wright Medical tender offer, including the notes’ mandatory redemption terms.
- Changes in estimated recall liabilities, settlement costs, and other product-liability exposures.
- Whether cash generation, debt levels, and the sizable cash balance changed materially after quarter-end.
- The composition and recurrence of excluded items underlying adjusted earnings and margins.