Stryker Corporation (NYSE: SYK) — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; dollar amounts are in millions except per-share data. Quarterly figures below are unaudited. Stryker is a global medical technology company spanning Reconstructive, MedSurg, and Neurotechnology and Spine. Approximately 63% of FY2011 revenue came from the United States.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $8,307 | $7,320 | +13.5% |
| Gross profit / gross margin | $5,496 / 66.2% | $5,034 / 68.8% | +9.2% gross profit |
| Operating income / operating margin | $1,686 / 20.3% | $1,751 / 23.9% | -3.7% operating income |
| Net earnings / net margin | $1,345 / 16.2% | $1,273 / 17.4% | +5.7% net earnings |
| Diluted EPS | $3.45 | $3.19 | +8.2% |
| Operating cash flow | $1,434 | $1,547 | -7.3% |
| Cash and current marketable securities | $3,418 | $4,380 | Down $962 |
| Total debt | $1,768 | $1,021 | Up $747 |
Capital expenditures were $226, leaving operating cash flow less capital expenditures of approximately $1,208. The company reported current assets exceeding current liabilities by $5,383 and $1,098 of additional borrowing capacity under existing credit facilities. Total assets were $12,405 and shareholders’ equity was $7,683.
Fourth-quarter 2011 sales were $2,215 versus $1,995 in Q4 2010; net earnings were $401 versus $295, and diluted EPS was $1.05 versus $0.74.
Segments and material changes
- Reconstructive: Sales of $3,710, up 4.5% reported (1.5% constant currency); growth was modest, with price pressure and weak knee performance noted.
- MedSurg: Sales of $3,160, up 12.7% reported (11.2% constant currency), led by Medical and supported by acquisitions and volume/mix.
- Neurotechnology and Spine: Sales of $1,437, up 48.5% reported (46.4% constant currency); acquisitions accounted for 42.6% of segment growth, principally the Neurovascular business.
- Overall sales growth reflected volume/mix (+6.1%), favorable currency (+2.4%) and acquisitions (+6.8%), partly offset by pricing (-1.8%). International sales rose 20.2% reported and 13.4% constant currency; U.S. sales increased 9.9%.
- Operating results included higher acquisition-related costs, amortization and restructuring. Cost of sales rose to 33.8% of sales from 31.2%, including $143 of acquired-inventory fair-value step-up expense. R&D spending increased to $462 (5.6% of sales).
Cash, capital allocation and unusual items
- Acquisitions used $2,066 of cash in 2011, primarily for Neurovascular ($1,450), Orthovita ($316), Memometal and Concentric. The acquisitions increased goodwill and intangibles; purchase-price allocations were preliminary.
- Share repurchases totaled $622 (11.8 million shares); dividends paid were $279. The company issued $750 of 2.00% senior notes due 2016. Debt included notes due 2015, 2016 and 2020.
- FY2011 included $76 of restructuring charges, including workforce reductions planned to reduce global headcount by approximately 5% by end-2012. Expected total restructuring cost was $150–$175, with actions intended to be substantially complete by end-2012.
- A favorable IRS settlement and other uncertain-tax adjustments produced a net $99 benefit in the company’s adjusted-earnings reconciliation; the effective tax rate fell to 20.2% from 26.4%. Adjusted net earnings, a non-GAAP measure, were $1,448 versus $1,329; adjusted diluted EPS was $3.72 versus $3.33.
- The January 2012 Stryker Biotech resolution was recorded in Q4 2011: the company pled to one misdemeanor and paid a $15 non-tax-deductible fine; 13 felony charges and charges against employees were dismissed.
Outlook, risks and contingencies
The filing provides no quantified 2012 revenue or earnings guidance. Management cited continued investment in strategic areas and growth, while preparing for the U.S. medical-device excise tax of 2.3% on covered sales scheduled to begin in 2013. Risks include reimbursement and pricing pressure, product regulation and recalls, competition and intellectual-property disputes, foreign-exchange and international-market exposure, acquisition integration, and tax uncertainties. The company disclosed ongoing government investigations involving PainPump and OtisKnee, HHS inquiries concerning physician relationships, and SEC/DOJ matters relating to possible Foreign Corrupt Practices Act issues, among other litigation. It reported an underfunded defined-benefit pension position of $106 and a $249 liability for uncertain tax positions.
CEO Stephen MacMillan resigned on February 8, 2012; CFO Curt Hartman was named Interim CEO. Management and the auditor reported effective internal controls, but the assessment excluded the acquired Neurovascular business, which represented 4% of 2011 revenue and 13% of year-end assets.
Most important facts for investors to verify
- How much of subsequent growth and profitability is organic versus acquisition-driven, and whether the acquired businesses meet integration and return expectations.
- Whether margin pressure from pricing, acquired-inventory step-ups, restructuring and the 2013 device tax persists after 2011.
- The repeatability of earnings excluding the $99 uncertain-tax benefit and other adjusted-earnings items.
- Cash conversion and working-capital trends: operating cash flow declined while inventory and receivables increased; confirm subsequent inventory levels and collections.
- Developments in unresolved regulatory, tax, product-liability and intellectual-property matters, and the integration of Neurovascular controls and systems.
- Leadership transition and subsequent formal guidance; the filing does not provide quantified 2012 guidance.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, subject to the stated exclusion of Neurovascular controls.