10-QPeriod: Q2 FY2013

STRYKER CORP Quarterly Report for Q2 Ended Jun 30, 2013

Filed July 23, 2013For Securities:SYK

Summary

Stryker Corporation (SYK) reported its second-quarter and year-to-date results for the period ending June 30, 2013. For the three months ended June 30, 2013, net sales increased 5.0% to $2.21 billion, driven by higher unit volumes and acquisitions, although this was partially offset by unfavorable pricing and foreign currency impacts. Net earnings for the quarter decreased significantly by 34.5% to $213 million, or $0.56 per diluted share, compared to $325 million, or $0.85 per diluted share, in the prior year. This decline was largely attributed to substantial charges related to the voluntary recall of Rejuvenate and ABG II hip stems ($120 million) and regulatory matters ($19 million in Q2 2013 vs. $33 million in Q2 2012). For the six months ended June 30, 2013, net sales grew 3.2% to $4.40 billion. However, net earnings saw a notable decrease of 23.4% to $517 million, or $1.35 per diluted share, from $675 million, or $1.76 per diluted share, in the same period last year. Similar to the quarterly results, the year-to-date decline in net earnings was impacted by significant charges including $152 million for the hip stem recall and $52 million for regulatory matters. Excluding these and other charges, adjusted net earnings showed a modest increase of 2.7% for the six-month period, indicating underlying operational strength despite significant one-time expenses.

Financial Highlights

51 data points
Beta

Revenue

$2.21B

67.0% Gross Margin

Net Income

$213.00M

9.6% Net Margin

EPS (Diluted)

$0.56

Total Assets

$14.38B

Cash & Equivalents

$971.00M

Free Cash Flow

$309.00M

Financial Statements
Beta
Revenue$2.21B
Cost of Revenue$730.00M
Gross Profit$1.48B
R&D Expenses$132.00M
SG&A Expenses$1.01B
Operating Expenses$1.19B
Operating Income$290.00M
Net Income$213.00M
EPS (Basic)$0.56
EPS (Diluted)$0.56
Shares Outstanding (Basic)378.00M
Shares Outstanding (Diluted)381.00M

Key Highlights

  • 1Net sales for Q2 2013 increased 5.0% to $2.21 billion, and 3.2% to $4.40 billion for the six months ended June 30, 2013, compared to the prior year periods.
  • 2Reported net earnings declined significantly in Q2 2013 to $213 million ($0.56/share) from $325 million ($0.85/share) in Q2 2012, primarily due to a $120 million charge for the Rejuvenate and ABG II hip stem recall.
  • 3For the first six months of 2013, reported net earnings were $517 million ($1.35/share), down from $675 million ($1.76/share) in the prior year, impacted by $152 million in hip stem recall charges and $52 million in regulatory matters.
  • 4Excluding significant charges, adjusted net earnings for Q2 2013 increased 1.3% to $380 million ($1.00/share), and for the first six months of 2013 increased 2.7% to $774 million ($2.03/share), indicating underlying operational performance.
  • 5The company acquired Trauson Holdings Company Limited for $751 million in March 2013, primarily to enhance its Reconstructive segment and expand its presence in China.
  • 6Long-term debt increased significantly from $1.75 billion at year-end 2012 to $2.74 billion at June 30, 2013, largely due to the issuance of $1 billion in new notes in March 2013.
  • 7Operating cash flow decreased in Q2 2013 to $356 million from $457 million in Q2 2012, influenced by changes in working capital, but remained strong at $592 million for the six-month period compared to $492 million in the prior year.

Frequently Asked Questions

The substantial decrease in net earnings for Q2 2013 was primarily driven by significant charges related to the voluntary recall of Stryker's Rejuvenate and ABG II modular-neck hip stems, which amounted to $120 million. Additionally, regulatory matters also contributed to the decline, although to a lesser extent, with charges of $19 million in Q2 2013 compared to $33 million in Q2 2012.

Stryker acquired Trauson Holdings Company Limited in March 2013 for $751 million in cash. This acquisition is expected to enhance Stryker's Reconstructive segment and broaden its presence in China and emerging markets. The financial impact includes an increase in goodwill and identifiable intangible assets on the balance sheet, and its results are included prospectively from the acquisition date. For the current period, revisions to preliminary purchase price allocation led to adjustments in intangible assets, liabilities, and goodwill.

Stryker is actively managing several significant legal and regulatory matters. For the Rejuvenate and ABG II hip stem recall, the company has estimated a probable loss in the range of $400 million to $660 million before insurance recoveries and has recorded charges of $210 million in the first six months of 2013. The company is also engaged in discussions with the DOJ regarding the OtisKnee device and is cooperating with the SEC on a Foreign Corrupt Practices Act investigation. While the company accrues for probable losses where estimable, the ultimate costs for these matters are difficult to predict and could materially affect future financial results.

Stryker significantly increased its long-term debt by issuing $1 billion in new notes in March 2013. Consequently, total long-term debt rose from $1.75 billion at the end of 2012 to $2.74 billion at June 30, 2013. Despite this increase in debt, the company maintains a strong liquidity position, with cash, cash equivalents, and marketable securities totaling $4.65 billion, and current assets substantially exceeding current liabilities. The company anticipates supporting its liquidity needs through cash generated from operations and has available borrowing capacity under its credit facilities.