Stryker Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Dollar amounts are in millions except per-share data. Stryker is a medical technology company reporting in MedSurg and Neurotechnology and Orthopaedics and Spine.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $4,778 | $4,275 |
| Gross profit / margin | $3,016 / 63.1% | $2,734 / 64.0% |
| Operating income / margin | $735 / 15.4% | $447 / 10.5% |
| Net earnings | $592 | $323 |
| Diluted EPS | $1.54 | $0.84 |
| Operating cash flow | $445 | $203 |
Sales rose 11.8% reported and 14.0% in constant currency; organic constant-currency growth was 13.6%. Growth reflected higher unit volume and pricing, partly offset by foreign exchange. U.S. sales grew 13.1% and international sales grew 8.2% reported (16.5% constant currency). MedSurg and Neurotechnology sales increased 11.0% reported; Orthopaedics and Spine increased 12.7%.
Adjusted diluted EPS, a non-GAAP measure, was $2.14, up 8.6% from $1.97; adjusted operating margin was 21.1%, down 70 basis points. These measures exclude specified items and should be considered alongside GAAP results.
Cash, debt and liquidity
Cash and cash equivalents were $1,671 at quarter-end, down from $1,844 at December 31, 2022. Cash, cash equivalents and marketable securities totaled $1,757. Current assets exceeded current liabilities by $4,289. Total debt was $13,061, including $1,204 due within one year; long-term debt was $11,857. No commercial paper or revolving-credit borrowings were outstanding, and Stryker reported compliance with debt covenants. Operating cash flow was $445; capital spending was $130. Dividends paid were $284, and the company repaid $100 of term-loan debt. No shares were repurchased.
Changes, outlook and material matters
- Gross margin fell 90 basis points, primarily due to higher manufacturing and supply-chain costs, especially raw materials; pricing and favorable volume/mix partly offset the pressure. Segment mix is expected to weigh on gross margin if MedSurg and Neurotechnology grows faster than Orthopaedics and Spine.
- GAAP earnings benefited from lower comparison-period charges, including $132 of Vocera employee share-award expense and $144 of other acquisition and integration-related costs in Q1 2022. Q1 2023 also had lower R&D expense, partly reflecting the prior-year write-off of certain intangible assets. Stryker completed no acquisitions during Q1 2023.
- Management did not provide specific forward earnings or sales guidance in the supplied filing text. It expects inflation, labor shortages and supply-chain challenges to continue. Constraints modestly improved, but electronic-component shortages continued to limit some capital-product sales.
- China’s volume-based procurement programs have pressured prices for certain joint replacement, trauma and neurovascular products. Stryker was unsuccessful in China’s spine-product bidding and is exiting that business. China represented approximately 1.6% of Q1 revenue.
- On May 2, 2023, after quarter-end, Stryker acquired Cerus Endovascular for $300 in cash plus up to $225 in milestone payments.
- Legal and regulatory exposures include an ongoing FCPA investigation into certain foreign-country business activities; Stryker is cooperating with the SEC and DOJ and cannot predict the outcome or financial impact. The company also reported a $202 reserve for recall-related matters and ongoing product-liability and patent litigation. It plans to appeal a PureWick patent judgment; a separate PureWick complaint is also pending.
- The 2022 annual impairment test resulted in a $216 goodwill impairment charge for the Spine reporting unit. Management cautioned that weaker cash-flow assumptions or a higher discount rate could cause further impairment.
- Other macroeconomic risks include foreign-exchange volatility, higher interest and shipping costs, and the Russia-Ukraine conflict. Management reported no material change to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether sales growth and procedure volumes remain strong, and whether supply constraints continue to ease.
- Whether pricing and productivity can offset inflation and preserve gross and segment operating margins.
- Progress and potential financial consequences of the FCPA investigation, recall reserves and outstanding litigation.
- Spine reporting-unit performance and assumptions underlying goodwill impairment testing.
- Cerus integration, milestone obligations and the effect of the acquisition on future results and cash needs.