Stryker Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Dollar amounts are in millions except per-share data. Stryker develops and sells medical technology through Reconstructive, MedSurg, and Neurotechnology and Spine businesses.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $2,161 | $2,015 | +7.2% reported; +7.4% constant currency |
| Gross profit | $1,452 | $1,326 | +9.5% |
| Operating income | $476 | $423 | +12.5% |
| Net earnings | $350 | $307 | +14.0% |
| Diluted EPS | $0.91 | $0.78 | +16.7% |
| Operating cash flow | $35 | $204 | −82.8% |
Gross margin was 67.2% versus 65.8%; operating margin was 22.0% versus 21.0%; net margin was 16.2% versus 15.2%. Cost of sales was 32.8% of revenue versus 34.2%; excluding acquisition inventory step-up and restructuring-related costs, it was 32.2% versus 31.5%. Reported adjusted net earnings were $379, up 7.4%, and adjusted diluted EPS was $0.99 versus $0.90; these non-GAAP measures exclude specified acquisition, integration, inventory step-up, and restructuring charges.
Sales growth reflected 6.9% from volume and mix and 2.3% from acquisitions, offset by 1.7% from pricing and 0.2% from foreign exchange. U.S. sales rose 8.2% to $1,384; international sales rose 5.6% to $777, or 6.1% in constant currency. By segment, Reconstructive sales were $958 (+5.2%), MedSurg $821 (+7.5%), and Neurotechnology and Spine $382 (+12.4%).
Cash flow, liquidity, and debt
- Operating cash flow was $35; capital expenditures were $52, implying approximately $17 of negative cash flow after capital spending. Working capital and cash tax payments were significant uses: tax payments consumed $153, and the net of receivables, inventory, loaner instrumentation, and payables used $166.
- Cash and cash equivalents were $690 at March 31, down from $905 at year-end. Current marketable securities were $2,607; the company reported combined cash and marketable securities of $3,297, down from $3,418.
- Current assets of $7,229 exceeded current liabilities of $1,549 by $5,680. Total debt was $1,774, including $23 current maturities; long-term debt was $1,751. The filing reports $1,106 of available borrowing capacity and compliance with credit-facility covenants.
- Financing activities used $128, including $81 of dividends and $50 of share repurchases. The quarterly dividend was $0.2125 per share. The company repurchased 1.0 million shares under its 2010 program; $153 remained authorized under that program.
- Approximately 66% of cash and marketable securities were held outside the U.S. and considered indefinitely reinvested. Management said it did not intend to repatriate significant amounts in the foreseeable future.
Material changes and unusual items
- Restructuring charges were $14 in the quarter. The workforce reduction and related actions are expected to reduce global headcount by approximately 5%, cost a total of approximately $150–$175, and be substantially complete by year-end 2012; related cash payments were expected by the end of Q1 2013.
- Q1 SG&A included $8 of separation costs related to the former CEO. Acquisition and integration charges and inventory fair-value step-up costs also affected reported results.
- In January 2012, Stryker Biotech settled a federal matter by pleading to one misdemeanor and paying a $15 non-tax-deductible fine; the 13 felony charges against the company and charges against the named employees were dismissed.
- Foreign-currency translation increased other comprehensive income by $85. Comprehensive income was $441 versus $570 a year earlier, when the translation adjustment was $271.
- No material acquisitions were completed in Q1 2012. The filing says the final measurement-period valuation for the 2011 Neurovascular acquisition caused no material adjustment.
Outlook, risks, and contingencies
The filing provides no specific full-year revenue or earnings guidance. Management said operating cash generation is expected to support short-term liquidity and operating needs. It highlighted the U.S. medical-device excise tax of 2.3% on most U.S. device sales, scheduled to begin in 2013; the company was assessing its impact. Management cited restructuring as a means to improve efficiency and realign resources ahead of the tax while continuing investment in strategic areas.
Key uncertainties include pending product, patent, labor, and regulatory matters. The company reported ongoing DOJ investigations concerning PainPump and OtisKnee, SEC/DOJ inquiries relating to potential FCPA matters, and an HHS inquiry into physician and institutional payments. It said material losses or ranges could not be estimated for certain matters and no liability was accrued for those matters; ultimate resolution could materially affect financial position, results, or cash flows. A shareholder derivative case remained stayed; a securities class action was dismissed on March 30, 2012, subject to possible appeal. The company also noted exchange-rate exposure and continuing monitoring of European credit conditions.
Important facts for investors to verify
- Whether the sharp decline in operating cash flow reverses, given working-capital use, tax payments, and legal-settlement payments.
- Actual cost, timing, and cash impact of the restructuring program, and the effect of the 2013 medical-device excise tax.
- Developments and potential financial exposure in the pending product, intellectual-property, and government investigations; the filing does not provide clear estimated loss ranges for certain matters.
- Portfolio credit quality and the liquidity and accessibility of funds held outside the U.S.; management states it does not expect significant repatriation.
- Progress in sales and margins by segment, especially the contribution from acquisitions, pricing pressure, and inventory-related costs.