Stryker Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Stryker is a medical technology company reporting Orthopaedics, MedSurg, and Neurotechnology and Spine segments. Dollar amounts are in millions except per-share data.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $3,241 | $2,955 |
| Gross profit / margin | $2,137 / 65.9% | $1,964 / 66.5% |
| Operating income / margin | $591 / 18.2% | $556 / 18.8% |
| Net earnings | $443 | $444 |
| Diluted EPS | $1.16 | $1.17 |
| Operating cash flow | $297 | $151 |
| Capital expenditures | $121 | $139 |
Reported sales increased 9.7%; constant-currency growth was 7.2%. Management reported adjusted operating margin of 25.0% versus 24.3%, and adjusted diluted EPS of $1.68 versus $1.48. These are non-GAAP measures; the company cautions they should be considered alongside, not instead of, GAAP results.
Segments and material changes
- Orthopaedics: Sales of $1,216, up 7.1% reported and 4.2% in constant currency.
- MedSurg: Sales of $1,427, up 9.3% reported and 7.5% in constant currency.
- Neurotechnology and Spine: Sales of $598, up 16.1% reported and 12.9% in constant currency; growth was led by Neurotechnology.
- Management attributed underlying sales growth primarily to higher unit volumes, partly offset by lower prices. Currency contributed 2.5 percentage points to reported consolidated growth; acquisitions and adoption of ASC 606 also affected comparability.
- Despite higher sales and operating income, GAAP net earnings were nearly unchanged. The effective tax rate rose to 18.3% from 11.1%, principally due to acquisition-integration restructuring and Tax Cuts and Jobs Act effects. Gross margin declined, with lower prices and product mix cited among the factors.
Cash, debt, liquidity, and notable transactions
- At March 31, cash and cash equivalents were $2,179 and marketable securities were $276. Current assets exceeded current liabilities by $3,051, down from $4,508 at year-end 2017.
- Total debt was $7,904, including $1,984 classified as current; long-term debt was $5,920. The increase in current maturities included $600 of notes repaid in April 2018. The company reported $1,547 of available borrowing capacity and compliance with debt covenants.
- Cash declined by $363 during the quarter. Investing used $849, including $704 for acquisitions; financing provided $145. Operating cash flow improved year over year, in part because recall-related payments were lower.
- Stryker acquired Entellus Medical in February for $697, net of cash acquired. It issued $600 of 3.650% senior notes due in 2028 during March.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said it expects to support short-term liquidity and operating needs through operating cash flow, commercial paper, and existing credit lines, and may access capital markets as needed.
- The Rejuvenate and ABG II hip-stem recall remains a material contingency. The estimated global probable-loss range was approximately $2,072–$2,307 before $232 of insurance recoveries; the ultimate cost could differ materially. No additional Q1 charge was recorded because the low end of the range matched existing reserves.
- Q1 included $32 of regulatory and legal matters, $63 of restructuring-related and other charges, and $4 of recall charges. These and other specified adjustments explain much of the gap between GAAP and adjusted operating results.
- Management identifies foreign exchange as its greatest market-risk exposure. It also notes that actual results may differ materially from forward-looking statements due to risks described in its 2017 Form 10-K.
- ASC 606 was adopted January 1, 2018; its impact on Q1 results was not material, but it affected reported sales presentation. Adoption reduced opening retained earnings by $64. A separate accounting-standard adoption for income taxes reduced opening retained earnings by $695.
Important facts for investors to verify
- How much reported and adjusted earnings growth depends on acquisition-related and other exclusions, and whether underlying volume growth persists amid pricing pressure.
- The progress and ultimate cost of the hip-stem recall claims, including the adequacy of recorded reserves and insurance recoveries.
- Debt refinancing and liquidity after the April repayment of $600 in notes, given the elevated current debt balance at quarter-end.
- The final acquisition purchase-price allocations and integration costs, and the effect of higher amortization on future GAAP earnings.
- How tax rates evolve as provisional Tax Act accounting is finalized and restructuring activities continue.