Stryker Corporation — Q1 2019 Form 10-Q
Business context and period: Medical technology company operating in Orthopaedics, MedSurg, and Neurotechnology and Spine. This unaudited report covers the three months ended March 31, 2019; dollar amounts are in millions except per-share data.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $3,516 | $3,241 |
| Gross profit / margin | $2,283 / 64.9% | $2,137 / 65.9% |
| Operating income / margin | $528 / 15.0% | $591 / 18.2% |
| Net earnings | $412 | $443 |
| Diluted EPS | $1.09 | $1.16 |
| Operating cash flow | $313 | $297 |
- Reported sales rose 8.5%; growth was 10.6% in constant currency. Management reported 7.3% constant-currency sales growth excluding acquisitions; unit volume growth was partly offset by lower prices.
- Adjusted operating margin was 25.1%, versus 25.0%; adjusted net earnings were $714 and adjusted diluted EPS was $1.88, up 11.9%. These are non-GAAP measures and exclude specified items.
- Cash and cash equivalents were $1,674 at quarter-end; cash, cash equivalents and marketable securities totaled $1,758. Current assets exceeded current liabilities by $4,175.
- Total debt was $8,471, including $521 of current maturities. The company repaid $1,341 of debt during the quarter; no commercial paper was outstanding. Available borrowing capacity was $1,562.
- Investing cash outflow was $303, including $180 for acquisitions and $122 for property and equipment. Financing cash outflow was $1,947, mainly reflecting debt repayment, $307 of share repurchases, and $195 of dividends.
Material changes and management commentary
- Neurotechnology and Spine sales increased 20.7% reported (23.2% constant currency), MedSurg increased 8.2% (10.0%), and Orthopaedics increased 2.8% (5.1%). Acquisition contribution was substantial in Neurotechnology and Spine.
- GAAP gross and operating margins declined year over year. Management attributed adjusted gross-margin pressure mainly to lower selling prices and product mix, partly offset by higher-volume leverage. Adjusted operating margin edged higher through volume leverage and expense initiatives, partly offset by pricing.
- GAAP earnings fell while adjusted EPS grew; the reported results included significant acquisition and integration costs, purchased-intangible amortization, restructuring, recall, and regulatory/legal items. Effective tax rate declined to 14.2% from 18.3%, primarily due to excess tax benefits from stock-option exercises.
- Management said short-term liquidity and operating needs were expected to be supported by operating cash flow, commercial paper, and existing credit lines. No quantified earnings or sales guidance is provided in the filing text.
Acquisitions, contingencies and risks
- In March, Stryker acquired OrthoSpace for $110 cash, with up to $110 in future milestone payments. Acquisition and integration-related charges, including inventory fair-value step-up, totaled $138 in Q1.
- For LFIT V40 and other recall matters, the estimated remaining probable loss was approximately $250–$470; the company had accrued the minimum of the range. Management cautioned that ultimate costs could differ materially and adversely affect results and cash flows.
- Zimmer conditionally paid Stryker $167 related to an intellectual-property judgment while considering further appeals; the filing stated its opportunity for further appeals expired June 17, 2019.
- Management identified foreign-exchange exposure as its greatest potential market-risk area. The filing also describes ongoing product-liability, legal, regulatory, and other proceedings; adverse outcomes could lead to additional expense. The company is self-insured for product-liability claims.
Important facts for investors to verify
- Reconcile GAAP results with management’s non-GAAP adjustments and assess the recurring nature of acquisition, integration, and other excluded costs.
- Track developments and accrual adequacy for the hip-product recalls, including the disclosed $250–$470 probable-loss range.
- Confirm the final status and collectability of the conditional $167 Zimmer payment and any subsequent appeals.
- Monitor acquisition milestone obligations, integration costs, debt maturities, and the effect of foreign exchange and pricing on organic growth and margins.
- Review subsequent filings for formal guidance or changes in liquidity, legal contingencies, and the company’s outlook.