Stryker Corporation — Q1 2011 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2011. Stryker sells medical technologies in reconstructive, MedSurg, and neurotechnology and spine markets. It completed the $1.45 billion cash acquisition of Boston Scientific’s Neurovascular division on January 3, 2011; acquired operations are included from that date. The company also sold its OP-1 product family and a manufacturing facility for $60.0 million.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $2,015.2 million | $1,799.1 million; up 12% reported, 10% constant currency |
| Gross profit and margin | $1,326.3 million; 65.8% | $1,217.7 million; 67.7% |
| Operating income and margin | $423.5 million; 21.0% | $446.4 million; 24.8% |
| Net earnings | $307.4 million | $321.7 million; down 4% |
| Diluted EPS | $0.78 | $0.80; down 3% |
| Operating cash flow | $204.5 million | $274.8 million |
- Reported sales growth reflected 6% from unit volume and mix, 6% from acquisitions, and 2% from foreign exchange; pricing reduced growth by 2%.
- Segment sales: Reconstructive $911.1 million, up 2%; MedSurg $763.8 million, up 13%; Neurotechnology and Spine $340.3 million, up 48%. Neurotechnology and Spine growth included a substantial acquisition contribution.
- Acquisition and integration charges were $67.0 million pretax ($46.0 million after tax), including $54.2 million of inventory fair-value step-up cost of sales. Excluding these charges, adjusted net earnings were $353.4 million, up 10%, and adjusted diluted EPS was $0.90, up 13%; these are non-GAAP measures.
- Cost of sales rose to 34.2% of sales from 32.3%, chiefly reflecting acquired inventory step-up charges. Excluding that effect, management said the cost ratio declined, citing lower excess and obsolete inventory costs and improved mix. R&D increased to 5.5% of sales from 5.0%; SG&A increased to 38.0% from 37.1%.
- Cash and cash equivalents were $735.1 million and current marketable securities $2,150.8 million at March 31. Total debt was $1,024.8 million, including $996.6 million long-term debt. Additional borrowing capacity under existing facilities was $1,021.6 million; the company reported compliance with credit-facility covenants.
- Working capital was $4,914.4 million, down $1,112.0 million from year-end, primarily due to the acquisition payment. Operating cash flow declined year over year, with working-capital increases among the stated drivers. Acquisition cash outflows were $1,455.4 million and capital expenditures were $54.7 million.
Material changes, outlook, and risks
- International sales rose 18% reported and 12% at constant currency; U.S. sales rose 9%. Foreign exchange added $32.3 million to international sales.
- Management said cash and marketable securities, expected operating cash flow, and available borrowing capacity should cover operating needs, capital expenditures, debt service, and dividends. The filing provides no quantified full-year earnings or sales guidance; results for the quarter are not necessarily indicative of the year.
- Management cited planned product launches as a reason for higher R&D spending and said inventory days increased partly to support anticipated launches and second-quarter sales. Days sales in inventory rose to 161 from 154 at year-end; receivable days rose to 59 from 56.
- Significant uncertainties include tax assessments concerning European profit allocation and ongoing tax disputes involving Irish cost-sharing arrangements; the company says adverse outcomes could materially affect future tax expense, results, and cash flows. It is also responding to government subpoenas concerning PainPump and OtisKnee, and investigations involving physician compensation and possible Foreign Corrupt Practices Act issues remain disclosed.
- A federal indictment involving Stryker Biotech and certain former and current employees remains unresolved; the company says the outcome is not reasonably estimable and a conviction could result in significant fines. Other disclosed matters include shareholder litigation and product-related claims.
- Forward-looking risks include pricing and demand pressures, foreign exchange, regulatory and product-approval developments, reimbursement changes, product liability, tax-audit outcomes, competition, financial-market conditions, and integration of acquisitions.
Key facts for investors to verify
- Whether Neurovascular integration delivers expected revenue, profit, and cost synergies, and how much of segment growth reflects the acquisition rather than organic performance.
- Whether acquisition-related inventory step-up and integration charges are truly nonrecurring, and how reported margins develop after those charges.
- Working-capital trends, particularly inventory and receivables, and the sustainability of operating cash flow following the acquisition.
- Developments and potential financial exposure from tax disputes, government investigations, and the Stryker Biotech indictment; the filing does not provide a clear aggregate estimate of possible losses.
- Whether product launches, pricing, and foreign-exchange movements support management’s expectations; no quantified full-year guidance is provided in this filing.