10-QPeriod: Q2 FY2015

STRYKER CORP Quarterly Report for Q2 Ended Jun 30, 2015

Filed July 29, 2015For Securities:SYK

Summary

Stryker Corporation's second quarter 2015 results showed a notable increase in net earnings compared to the prior year, driven significantly by a reduction in recall charges. For the three months ended June 29, 2015, net sales grew 2.9% year-over-year to $2.43 billion, while net earnings surged by 206.3% to $392 million, or $1.03 per diluted share. This substantial earnings improvement was primarily attributed to a nearly 60% decrease in recall charges, particularly related to the Rejuvenate and ABG II hip stems. Excluding these recall charges and other adjustments, adjusted diluted EPS rose 11.1% to $1.20, indicating solid underlying operational performance. The company's balance sheet reflects a strong cash position, with cash and cash equivalents increasing significantly to $3.63 billion from $1.80 billion at the end of 2014. This was bolstered by strong operating cash flow and significant proceeds from the sale of marketable securities, which helped fund recall-related payments and other cash management activities. Despite a challenging international sales environment impacted by foreign currency exchange rates, Stryker demonstrated resilience, with constant currency sales growth across its segments, particularly in Neurotechnology and Spine, and MedSurg. The company continues to manage its capital effectively through share repurchases and dividend payments, signaling confidence in its financial health and future prospects.

Financial Statements
Beta

Key Highlights

  • 1Net sales increased by 2.9% to $2.43 billion for the three months ended June 29, 2015, compared to $2.36 billion in the prior year.
  • 2Net earnings dramatically increased by 206.3% to $392 million ($1.03 per diluted share) in Q2 2015, up from $128 million ($0.33 per diluted share) in Q2 2014.
  • 3The substantial increase in net earnings was largely due to a significant reduction in recall charges, which decreased from $276 million in Q2 2014 to $112 million in Q2 2015.
  • 4Adjusted diluted earnings per share (a non-GAAP measure) grew 11.1% to $1.20 in Q2 2015, indicating strong operational performance excluding specific charges.
  • 5The company reported a strong cash position, with cash and cash equivalents increasing to $3.63 billion at June 30, 2015, up from $1.80 billion at December 31, 2014.
  • 6International sales decreased by 9.9% as reported but showed growth of 4.1% on a constant currency basis, highlighting the impact of foreign exchange rates.
  • 7The Orthopaedics segment saw modest reported sales growth of 0.6% ($1.03 billion), while MedSurg and Neurotechnology and Spine segments reported growth of 3.9% ($939 million) and 6.4% ($458 million) respectively.

Frequently Asked Questions

The primary driver behind the substantial increase in net earnings was a significant reduction in recall charges, particularly those related to the Rejuvenate and ABG II modular-neck hip stems. Recall charges decreased from $276 million in the second quarter of 2014 to $112 million in the second quarter of 2015.

Stryker's cash position significantly improved, with cash and cash equivalents rising to $3.63 billion as of June 30, 2015, from $1.80 billion at the end of 2014. This increase was supported by strong operating cash flow and substantial proceeds from the sale of marketable securities. The company anticipates it can support its liquidity needs, including recall-related payments, from operations, commercial paper, and credit lines.

All three business segments showed positive constant currency sales growth. Orthopaedics grew 6.2%, MedSurg grew 7.4%, and Neurotechnology and Spine grew 11.5% in constant currency for the quarter. However, reported international sales decreased by 9.9% due to unfavorable foreign currency exchange rates, while constant currency international sales grew by 4.1%.

The company is still addressing the Rejuvenate and ABG II hip stem recalls, with an estimated probable loss range of $1.7 billion to $2.5 billion. While a significant settlement was made in July 2015, the final outcome is still dependent on various factors and could materially impact future financial results. The company also recorded a gain from a legal settlement with Zimmer Holdings, Inc. in the current quarter.