10-QPeriod: Q3 FY2015

STRYKER CORP Quarterly Report for Q3 Ended Sep 30, 2015

Filed October 23, 2015For Securities:SYK

Summary

Stryker Corporation reported solid revenue growth in the third quarter of 2015, with net sales increasing by 1.3% year-over-year to $2.42 billion, or 5.9% in constant currency. For the nine-month period, net sales grew 2.5% to $7.23 billion, or 7.0% in constant currency. The company's performance was driven by increased shipments across its key segments, particularly Neurotechnology and Spine, Trauma and Extremities, and Instruments. Net earnings for the quarter saw a significant increase to $301 million, or $0.79 per diluted share, compared to $57 million, or $0.16 per diluted share, in the prior year, reflecting improved operational performance and a decrease in recall charges. The company also made progress on managing its significant recall charges related to the Rejuvenate and ABG II hip stems. While recall charges remained substantial in the nine-month period ($316 million), they were significantly lower than the prior year's $649 million. Stryker's balance sheet remains strong, with substantial cash and cash equivalents of $3.16 billion, providing flexibility for future investments and shareholder returns. The company also announced a new $2 billion share repurchase program, underscoring its confidence in its financial health and commitment to returning value to shareholders.

Financial Highlights

50 data points
Beta

Revenue

$2.42B

67.1% Gross Margin

Net Income

$301.00M

12.4% Net Margin

EPS (Diluted)

$0.79

Total Assets

$15.92B

Cash & Equivalents

$3.16B

Free Cash Flow

-$586.00M

Financial Statements
Beta
Revenue$2.42B
Cost of Revenue$796.00M
Gross Profit$1.62B
R&D Expenses$155.00M
SG&A Expenses$887.00M
Operating Expenses$1.25B
Operating Income$378.00M
Net Income$301.00M
EPS (Basic)$0.80
EPS (Diluted)$0.79
Shares Outstanding (Basic)376.30M
Shares Outstanding (Diluted)380.70M

Key Highlights

  • 1Net sales increased 1.3% to $2.42 billion for Q3 2015 and 2.5% to $7.23 billion for the nine months ended September 29, 2015. Constant currency sales grew by 5.9% and 7.0% respectively, indicating strong underlying performance.
  • 2Net earnings surged to $301 million ($0.79 per diluted share) for Q3 2015, a substantial increase from $57 million ($0.16 per diluted share) in Q3 2014.
  • 3Recall charges decreased significantly to $150 million for the quarter and $316 million for the nine months, down from $649 million in the prior year's nine-month period, easing a major drag on profitability.
  • 4The Neurotechnology and Spine segment showed robust growth, with net sales increasing by 5.0% in the quarter and 4.5% for the nine months, driven by higher shipments of neurotechnology products.
  • 5The company ended the period with a strong liquidity position, holding $3.16 billion in cash and cash equivalents.
  • 6Stryker initiated a new $2 billion share repurchase program, demonstrating management's confidence and commitment to shareholder returns.
  • 7Adjusted diluted EPS showed a more modest but consistent improvement, increasing by 8.7% for the quarter to $1.25 and 8.2% for the nine months to $3.56.

Frequently Asked Questions

The substantial increase in net earnings from $57 million to $301 million was primarily driven by a combination of factors including a general increase in sales, improved gross profit margins, and a significant reduction in recall charges. Recall charges decreased from $29 million in Q3 2014 to $150 million in Q3 2015, although the nine-month recall charges were still substantial at $316 million, they were down from $649 million in the prior year. The income tax provision also decreased significantly, impacting the bottom line positively.

Stryker has entered into a settlement agreement to compensate eligible patients for revision surgeries related to the recalled hip stems. The company has recorded significant charges and made substantial payments, with an estimated range of probable loss between $2,027 million and $2,554 million. While recall charges remain a factor, the company is working to resolve these liabilities, and the charges in the current period were lower than the prior year.

Stryker maintains a strong liquidity position with $3.16 billion in cash and cash equivalents as of September 30, 2015. The company expects to fund its operating needs and recall-related settlements through cash from operations, commercial paper, and existing credit lines. It also has a substantial $1,250 million in available borrowing capacity. In addition to dividends, the company announced a new $2 billion share repurchase program, indicating financial strength and a commitment to shareholder value.

The Neurotechnology and Spine segment demonstrated strong growth, with net sales up 5.0% in the quarter and 4.5% for the nine months, largely due to higher shipments of neurotechnology products. The MedSurg segment also saw positive growth (0.6% in the quarter, 3.0% for nine months), driven by instruments and medical products. Orthopaedics showed modest reported growth (0.3% in the quarter, 1.1% for nine months) but solid growth in constant currency, primarily from trauma and extremities products. Constant currency analysis reveals stronger underlying growth across all segments, with Neurotechnology and Spine leading at 9.9% and 9.4% for the respective periods.