10-QPeriod: Q1 FY2014

STRYKER CORP Quarterly Report for Q1 Ended Mar 31, 2014

Filed April 24, 2014For Securities:SYK

Summary

Stryker Corporation (SYK) reported its first-quarter financial results for the period ending March 30, 2014. The company experienced a net sales increase of 5.3% year-over-year, reaching $2.3 billion. However, net earnings significantly declined by 77.0% to $70 million, or $0.18 per diluted share, compared to $304 million, or $0.79 per diluted share, in the prior year. This substantial decrease in profitability was largely attributed to a significant charge of $340 million related to the Rejuvenate and ABG II modular-neck hip stem recalls, a substantial increase in Selling, General and Administrative (SG&A) expenses primarily driven by acquisition integration costs and recall-related expenses, and higher Research, Development, and Engineering (R&D) investments.

Financial Highlights

51 data points
Beta

Revenue

$2.31B

66.3% Gross Margin

Net Income

$70.00M

3.0% Net Margin

EPS (Diluted)

$0.18

Total Assets

$16.16B

Cash & Equivalents

$1.38B

Free Cash Flow

$139.00M

Financial Statements
Beta
Revenue$2.31B
Cost of Revenue$776.00M
Gross Profit$1.53B
R&D Expenses$150.00M
SG&A Expenses$859.00M
Operating Expenses$1.40B
Operating Income$131.00M
Net Income$70.00M
EPS (Basic)$0.19
EPS (Diluted)$0.18
Shares Outstanding (Basic)378.20M
Shares Outstanding (Diluted)382.60M

Key Highlights

  • 1Net sales grew by 5.3% to $2.31 billion, driven by increased unit volume and contributions from recent acquisitions.
  • 2Net earnings saw a sharp decrease of 77.0% to $70 million, primarily impacted by a $340 million charge related to hip implant recalls.
  • 3Diluted EPS fell to $0.18 from $0.79 in the prior year, largely due to the significant recall charge and increased operating expenses.
  • 4Selling, General, and Administrative (SG&A) expenses increased significantly by 31.6% due to acquisition integration costs, recall expenses, and regulatory matters.
  • 5Research, Development, and Engineering (R&D) expenses increased by 16.3% as the company continued to invest in new technologies and products.
  • 6The company completed the acquisition of Patient Safety Technologies, Inc. (PST) for $120 million and announced its intent to acquire Berchtold Holding, AG, which closed in April 2014 for approximately $172 million.
  • 7Cash flow from operations was $206 million, a decrease from $236 million in the prior year, impacted by the recall charges and changes in working capital.

Frequently Asked Questions

The substantial decrease in net earnings and EPS was primarily due to a significant charge of $340 million recorded in the first quarter of 2014 related to the voluntary recall of Stryker's Rejuvenate and ABG II modular-neck hip stems. This charge represents the excess of the minimum estimated probable loss over previously recorded reserves for this recall.

The company made strategic acquisitions, including Patient Safety Technologies, Inc. (PST) for $120 million in March 2014, and announced the intent to acquire Berchtold Holding, AG, which closed in April 2014 for $172 million. These acquisitions contributed to net sales growth but also increased Selling, General, and Administrative (SG&A) expenses due to integration costs.

SG&A expenses increased significantly by 31.6% primarily due to acquisition and integration-related charges, recall expenses ($344 million in 2014 vs. $40 million in 2013), and regulatory matters. Excluding these specific charges, SG&A as a percentage of sales decreased slightly from 37.2% in Q1 2013 to 36.3% in Q1 2014, indicating improved control over underlying G&A spending despite the higher overall reported figures.

Stryker maintained a strong liquidity position with $4.05 billion in cash, cash equivalents, and marketable securities as of March 31, 2014. The company's current assets significantly exceeded current liabilities. While debt levels increased, primarily due to the issuance of commercial paper and notes, the company had ample borrowing capacity available under its credit facilities and strong debt ratings, suggesting good access to capital.