Stryker Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Dollar amounts are in millions except per-share data. Stryker sells medical technology through three segments: Reconstructive, MedSurg, and Neurotechnology and Spine.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,212 | $2,106 | $4,402 | $4,267 |
| Operating income | $290 | $445 | $676 | $921 |
| Net earnings | $213 | $325 | $517 | $675 |
| Diluted EPS | $0.56 | $0.85 | $1.35 | $1.76 |
| Operating cash flow | $356 | $457 | $592 | $492 |
Q2 sales increased 5.0% reported and 6.5% in constant currency; six-month sales rose 3.2% and 4.5%, respectively. Sales growth reflected higher volume and product mix, partly offset by price reductions and unfavorable currency. Q2 and six-month gross margins were approximately 67.0% and 67.2%, versus 68.1% and 67.7%. Operating margins were approximately 13.1% and 15.4%, versus 21.1% and 21.6%; net margins were approximately 9.6% and 11.7%, versus 15.4% and 15.8%.
Management’s adjusted, non-GAAP results excluded specified acquisition, restructuring, hip-recall, and regulatory charges. Adjusted diluted EPS was $1.00 for Q2, up from $0.98, and $2.03 for six months, up from $1.97. These measures are not substitutes for GAAP results.
Segments and material changes
- Q2 segment sales: Reconstructive $979 million, up 5.6%; MedSurg $819 million, up 4.2%; Neurotechnology and Spine $414 million, up 5.4%. Trauma and extremities, medical products, knees, and hips contributed to growth; spine markets remained soft.
- GAAP earnings declined substantially despite sales growth, principally reflecting the Rejuvenate/ABG II hip recall charge and higher SG&A. Q2 SG&A included $170 million for the recall and $19 million for regulatory matters; six-month SG&A included $210 million and $59 million, respectively.
- R&D expense rose 13.8% in Q2 and 14.5% for six months. The Medical Device Excise Tax increased cost of sales by approximately 2.5% and 2.9% in the respective periods.
- The effective tax rate fell to 20.8% in Q2 and 19.7% for six months, from 25.3% and 25.2%; the 2013 six-month period included $13 million of tax benefits from retroactively extended tax provisions.
Cash, liquidity, and debt
At June 30, cash and cash equivalents were $971 million and current marketable securities were $3,681 million. Combined cash, cash equivalents, and marketable securities totaled $4,652 million, versus $4,285 million at year-end 2012. Working capital was $6,718 million. Total debt was $2,771 million, including $2,742 million long-term debt, compared with $1,762 million at December 31, 2012. The company issued $1 billion of notes in March: $600 million at 1.30% due 2018 and $400 million at 4.10% due 2043. It reported $1,047 million of available credit capacity and compliance with debt covenants.
Six-month investing cash use was $1,558 million, including $662 million net cash used for acquisitions, primarily Trauson, acquired for $751 million. The company repurchased $250 million of stock and paid $201 million of dividends during the six months. Operating cash flow was lower in Q2 year over year, partly because receivables, inventory, and payables consumed $64 million, versus generating $63 million in Q2 2012.
Outlook, risks, and unusual items
- The filing provides no numerical full-year sales or earnings guidance. Management expected current restructuring actions and related cash payments to be completed by year-end 2013; the broader program was expected to cost approximately $225 million and reduce the global workforce by about 5%.
- The Rejuvenate and ABG II modular-neck hip-stem recall remains a material contingency. The estimated probable loss was $400 million to $660 million before insurance recoveries; $210 million of additional charges was recorded in the first half. The ultimate cost depends on treatment and revision-surgery claims, litigation, and insurance recoveries, and could differ materially.
- DOJ and SEC regulatory matters remain unresolved. The company had recorded $94 million of charges related to the cited DOJ and SEC matters, including $59 million in the first half; the ultimate outcome and cost are uncertain. Other ongoing matters include DOJ inquiries concerning OtisKnee and PainPump, an HHS inquiry, and patent litigation.
- Currency exposure affected international results and reduced the value of foreign net investments; foreign-currency translation reduced shareholders’ equity by $94 million since December 2012. About half of cash, cash equivalents, and marketable securities were held outside the United States and considered indefinitely reinvested.
Important facts for investors to verify
- Updates to the hip-recall loss estimate, claims experience, insurance recoveries, and related cash payments.
- Progress and potential financial exposure from DOJ, SEC, HHS, and other unresolved legal matters.
- Whether sales growth, adjusted earnings, and margins can offset pricing pressure, the device excise tax, and currency effects.
- Cash generation and working-capital trends, particularly receivables and inventory, alongside the increased debt balance and acquisition spending.
- Completion and total cost of restructuring, and the final purchase accounting for the Trauson acquisition.