Stryker Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Amounts are in millions of dollars except per-share data.
Business context
Stryker is a global medical technology company selling products in Orthopaedics, MedSurg, and Neurotechnology and Spine. Products include implants, surgical equipment, patient-care products, and neurosurgical, neurovascular, and spinal devices. The company reported operations in more than 75 countries.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $14,884 | $13,601 |
| Gross profit / margin | $9,696 / 65.1% | $8,938 / 65.7% |
| Operating income | $2,713 | $2,537 |
| Net earnings | $2,083 | $3,553 |
| Diluted EPS | $5.48 | $9.34 |
| Operating cash flow | $2,191 | $2,610 |
| Capital expenditures | $649 | $572 |
| Total debt at year-end | $11,090 | $9,859 |
| Cash, cash equivalents and current marketable securities | $4,425 | $3,699 |
Reported sales increased 9.4%; growth was 10.7% in constant currency. Management cited 8.1% constant-currency growth excluding acquisitions in its overview. Sales by segment were Orthopaedics $5,252 (+5.2%), MedSurg $6,574 (+8.8%), and Neurotechnology and Spine $3,058 (+19.2%); acquisitions contributed significantly to the last segment’s growth. U.S. sales increased 11.3%, while international sales rose 4.6% as reported and 9.3% in constant currency.
Adjusted net earnings were $3,139 and adjusted diluted EPS was $8.26, up 13.0% from 2018. These are non-GAAP measures; the company excludes specified acquisition, amortization, restructuring, recall, regulatory/legal, and tax items. The reported 2018 net earnings comparison is especially affected by a $1,197 income tax benefit and a negative 50.8% effective tax rate; the 2019 effective tax rate was 18.7%.
Operating cash flow declined, primarily due to greater working-capital use, including accounts receivable and inventory. Working capital consumed $900 in 2019, versus $329 in 2018. Current assets exceeded current liabilities by $6,960 at year-end. Stryker had $1,500 of commercial-paper capacity and approximately $1,500 of borrowing capacity under its main credit facility; no commercial paper was outstanding at year-end.
Fourth-quarter 2019 sales were $4,131, net earnings were $725, and diluted EPS was $1.90, compared with $3,796, $2,068, and $5.44, respectively, in fourth-quarter 2018. The prior-year quarter’s earnings included the unusually large tax benefit noted above.
Material changes and unusual items
- Gross margin declined to 65.1% from 65.7%; management attributed the adjusted-margin decrease primarily to lower selling prices.
- Recall charges, net of insurance proceeds, increased to $192 from $23, principally relating to Rejuvenate and ABGII hip stems and LFIT V40 femoral heads.
- Stryker recorded a $100 net gain in 2019 from the concluded patent litigation with Zimmer Biomet.
- Acquisition spending was $802 on a net-cash basis; completed deals included Mobius Imaging/Cardan Robotics and OrthoSpace. A separate acquisition note reports total 2019 consideration, net of cash acquired, of $1,096.
- In November 2019, Stryker agreed to acquire Wright Medical for approximately $5.4 billion, subject to approvals and other conditions. The filing expected closing in the second half of 2020. S&P downgraded Stryker’s corporate and long-term issue ratings to A- from A following the announcement.
- Stryker issued €2.4 billion of senior unsecured notes in December 2019 and announced it intended to suspend share repurchases in 2020 and 2021. It paid $778 in dividends and repurchased $307 of shares during 2019.
Outlook, risks, and contingencies
Management stated its goal was to achieve sales growth at the high end of the MedTech industry and continue prioritizing acquisitions, dividends, and share repurchases. The filing provides no specific numeric revenue or earnings guidance for 2020.
Key risks include pricing and reimbursement pressure, intense competition and product innovation requirements, foreign-exchange exposure, regulatory changes including the EU Medical Device Regulation effective May 2020, supply-chain and sole-source supplier dependence, cybersecurity and ERP implementation risks, and integration and financing risks related to acquisitions.
Product-recall losses were estimated at $275–$520; the recorded liability was $275, and ultimate costs could be materially higher. Uncertain tax positions totaled $472. Defined-benefit pension plans were underfunded by $441. The Wright transaction remained conditional; certain euro notes issued in 2019 are subject to mandatory redemption provisions if the tender offer is not consummated by February 4, 2021. The company reported effective disclosure controls and received unqualified audit opinions on its financial statements and internal controls; the acquired OrthoSpace and Mobius businesses were excluded from management’s internal-control evaluation.
Important facts for investors to verify
- Whether Wright Medical closed as expected, the final purchase financing and leverage, and any regulatory or integration conditions.
- Progress and cash costs of the hip-product recalls, including whether claims exceed the recorded minimum liability.
- Underlying earnings and sales growth after distinguishing acquisition contributions, currency effects, lower pricing, and excluded non-GAAP items.
- Working-capital trends and operating cash flow, given the substantial 2019 cash use for receivables and inventory.
- Debt maturities, refinancing needs, rating outlook, and the effect of the share-repurchase suspension.
- Resolution of uncertain tax positions and the ongoing effects of tax changes and intellectual-property transfers between jurisdictions.