Stryker Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. Amounts are in millions of U.S. dollars unless noted.
Business context
Stryker develops and sells medical technology, including joint replacement and trauma implants, surgical and patient-care equipment, and neurotechnology and spine products. It reports three segments: Reconstructive, MedSurg, and Neurotechnology and Spine. The United States generated 65.4% of 2012 revenue; products were sold in more than 100 countries.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $8,657 | $8,307 |
| Gross profit / gross margin | $5,876 / 67.9% | $5,496 / 66.2% |
| Operating income / operating margin | $1,741 / 20.1% | $1,686 / 20.3% |
| Net earnings | $1,298 | $1,345 |
| Diluted earnings per share | $3.39 | $3.45 |
| Operating cash flow | $1,657 | $1,434 |
| Capital expenditures | $210 | $226 |
| Cash, cash equivalents and current marketable securities | $4,285 | $3,418 |
| Total debt | $1,762 | $1,768 |
| Current assets less current liabilities | $6,272 | $5,367 |
Operating cash flow less capital expenditures was approximately $1,447. The effective tax rate was 23.9%, compared with 20.2% in 2011. The company declared dividends of $0.9025 per share in 2012. Approximately 60% of cash, cash equivalents and marketable securities were held outside the United States.
Changes versus 2011
- Sales increased 4.2% reported and 5.4% in constant currency, slowing from 13.5% reported growth in 2011. Growth reflected volume and product mix; acquisitions contributed 1.2%, while price and foreign exchange each reduced reported growth by 1.4% and 1.2%, respectively.
- U.S. sales rose 7.4%; international sales declined 1.3% reported but grew 1.9% in constant currency. Management cited weakness in European markets.
- Neurotechnology and Spine grew 9.2% to $1,569; MedSurg grew 3.3% to $3,265; Reconstructive grew 3.1% to $3,823.
- Gross margin improved, with management citing manufacturing and distribution efficiencies, favorable mix, and currency effects on euro-based costs. SG&A rose 10.0% and increased to 40.0% of sales from 37.9%.
- Net earnings fell 3.5%, despite higher sales and operating income. Reported results included significant recall and legal charges; adjusted net earnings, a non-GAAP measure, increased 7.7% to $1,560, and adjusted diluted EPS increased 9.4% to $4.07.
- Operating cash flow increased 15.6%. Investing cash use fell to $736, largely reflecting lower acquisition spending than in 2011. Share repurchases declined to $108 from $622.
Fourth-quarter sales were $2,337 and net earnings were $270, versus $2,215 and $401 in fourth-quarter 2011. Quarterly diluted EPS was $0.71 versus $1.05.
Outlook, management commentary and material risks
- The filing does not provide a clear quantified 2013 revenue or earnings guidance figure. Management expected to fund short-term operating and liquidity needs largely from operating cash flow.
- A 2.3% U.S. medical-device excise tax took effect in January 2013. Restructuring actions intended partly to prepare for the tax were expected to reduce the global workforce by about 5%, cost approximately $225 in total, and be completed by the end of 2013; $75 was recorded in 2012.
- In February 2013, Stryker offered $764 in cash for Trauson Holdings, a Chinese orthopaedic company; closing was expected before the end of second-quarter 2013. The offer restricted $800 of available borrowing capacity pending completion.
- The Rejuvenate and ABG II modular-neck hip stem recall resulted in a $174 charge in 2012 ($133 after tax). Stryker estimated probable total losses of approximately $190–$390 before insurance recoveries; final costs could differ materially.
- Stryker recorded a $33 non-tax-deductible charge related to the DOJ investigation of OtisKnee sales and marketing. The company said the ultimate resolution could cost approximately twice the accrued amount if its defense is unsuccessful.
- Other legal and regulatory matters include an ongoing DOJ investigation concerning the PainPump, SEC/DOJ inquiries into possible Foreign Corrupt Practices Act issues, an HHS inquiry regarding physician-related payments, and patent litigation. Outcomes or potential losses for several matters could not be estimated clearly.
- Other exposures include pricing and reimbursement pressure, healthcare regulation, foreign exchange, international economic weakness, product liability, intellectual property disputes, acquisition integration, and goodwill impairment. Defined-benefit pension plans were underfunded by $193; uncertain income tax positions were recorded at $227.
- The company refinanced its $1,000 revolving credit facility to maturity in August 2017 and reported compliance with its covenants. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Track the number and cost of patient treatments, revisions, insurance recoveries, and litigation arising from the hip-stem recall against the $190–$390 estimated loss range.
- Check the resolution and total cost of the OtisKnee matter and the other ongoing government investigations and litigation.
- Assess whether sales growth, particularly outside the United States and in Reconstructive, improves despite European weakness and pricing pressure.
- Evaluate the effect of the medical-device excise tax and restructuring program on costs, margins, and workforce execution.
- Confirm the Trauson offer’s completion, funding, and integration outcomes, alongside acquisition-related performance in Neurotechnology and Spine.
- Monitor cash generation, debt maturities, the $193 pension shortfall, and resolution of uncertain tax positions.