Stryker Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Dollar amounts are in millions, except per-share data. Stryker is a medical technology company reporting in Reconstructive, MedSurg, and Neurotechnology and Spine.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,363 | $2,212 | $4,668 | $4,402 |
| Operating income | $197 | $290 | $328 | $676 |
| Net earnings | $128 | $213 | $198 | $517 |
| Diluted EPS | $0.33 | $0.56 | $0.51 | $1.35 |
| Cash from operations | $366 | $356 | $572 | $592 |
Q2 sales rose 6.8% (6.9% in constant currency); six-month sales increased 6.1% (6.7% in constant currency). Q2 growth reflected volume/product mix and acquisitions, partly offset by pricing and currency. Q2 gross profit was $1,555, or approximately 65.8% of sales, versus $1,482, or 67.0%, a year earlier. Reported Q2 operating income fell about 32% and net earnings about 40%; management’s adjusted diluted EPS was $1.08 versus $1.07. Six-month adjusted diluted EPS was $2.14 versus $2.16.
Q2 segment sales were Reconstructive $1,028 (+6.5%), MedSurg $905 (+8.8%), and Neurotechnology and Spine $430 (+3.8%). MedSurg growth was led by instruments and endoscopy; spine sales faced continued pricing pressure.
Liquidity, debt, and capital allocation
At June 30, cash and cash equivalents were $1,319 and current marketable securities were $3,426. Current assets exceeded current liabilities by $5,668. Total debt was $3,867, including $630 of current maturities, compared with $2,764 at year-end 2013. Stryker issued $1,000 of senior notes in May and had $100 of commercial paper outstanding. It reported $949 of available borrowing capacity and compliance with debt covenants.
Six-month investing cash use was $1,366, including $457 for acquisitions and $124 for capital expenditures. Financing provided $774, including borrowing proceeds; dividends paid were $231, and share repurchases were $60. Management stated it expected to meet operating, liquidity, and recall-settlement needs through operating cash flow, commercial paper, credit lines, and potentially capital markets.
Material changes, outlook, and risks
- Rejuvenate and ABG II recall: After announcing Q2 results, Stryker updated its estimated probable loss range to $1,400–$2,090 before third-party recoveries, a $110 increase to the range. Q2 results include a $270 charge to bring the accrual to the new range’s $1,400 minimum. No insurance recovery was recognized. Management cautioned the ultimate cost could differ materially and adversely affect results, financial position, and cash flows.
- The filing also cites recall-related charges for the Neptune Waste Management System. Reported earnings were substantially affected by recall costs and other items; adjusted measures exclude specified charges and are not substitutes for GAAP results.
- Other legal and regulatory exposures include DOJ investigations involving OtisKnee and PainPump, and patent litigation with Hill-Rom. Outcomes and potential losses for certain matters could not be estimated. Stryker is self-insured for product liability claims.
- Stryker reported a favorable patent-infringement ruling against Zimmer, including an order for at least $228, but Zimmer appealed; no contingent gain was recorded.
- Acquisitions completed in 2014 included Berchtold for approximately $172 and Patient Safety Technologies for $120, as well as smaller acquisitions. The planned Small Bone Innovations asset acquisition, up to $375 gross and up to $285 net of estimated tax benefits, was expected to close in Q3, subject to conditions.
- No specific earnings or sales guidance was provided in the filing. Management described ongoing investment in new products and restructuring/cost-saving efforts. Risks include recall estimates and recoveries, litigation, pricing pressure, foreign exchange, and acquisition integration.
Important facts for investors to verify
- How the Rejuvenate/ABG II loss estimate, patient claims, revision-surgery costs, and potential insurance recoveries evolve.
- Whether recall accruals translate into cash outflows on the expected timetable and how they affect liquidity.
- Underlying operating trends against the reported results, including the basis and comparability of non-GAAP adjustments.
- Debt maturities and refinancing needs, and the performance and integration of recent and planned acquisitions.
- Developments in DOJ inquiries and other material litigation or regulatory matters.