10-QPeriod: Q2 FY2018

STRYKER CORP Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 25, 2018For Securities:SYK

Summary

Stryker Corporation's second quarter 2018 report shows robust top-line growth driven by strong performance across all segments, particularly Neurotechnology and Spine, which saw significant increases in net sales. Consolidated net sales rose 10.3% year-over-year, with a 9.1% increase in constant currency, reflecting solid unit volume growth across key product lines like neurotechnology, instruments, and knee implants. The company also reported improved operating income, demonstrating effective cost management and operational leverage, especially after adjusting for acquisition and integration-related charges. The company's strategic acquisitions, notably Entellus Medical, are contributing to growth in the Neurotechnology and Spine segment. While recall charges have significantly decreased compared to the prior year, the company still faces ongoing legal and regulatory matters, including a substantial potential liability related to hip stem recalls. Despite these challenges, Stryker maintains a strong financial position with healthy operating cash flow and ample liquidity to support ongoing operations and future growth initiatives.

Financial Highlights

52 data points
Beta

Revenue

$3.32B

65.9% Gross Margin

Net Income

$452.00M

13.6% Net Margin

EPS (Diluted)

$1.19

Total Assets

$21.57B

Cash & Equivalents

$1.64B

Free Cash Flow

$492.00M

Financial Statements
Beta
Revenue$3.32B
Cost of Revenue$1.13B
Gross Profit$2.19B
R&D Expenses$216.00M
SG&A Expenses$1.19B
Operating Expenses$1.52B
Operating Income$672.00M
Net Income$452.00M
EPS (Basic)$1.21
EPS (Diluted)$1.19
Shares Outstanding (Basic)373.90M
Shares Outstanding (Diluted)380.10M

Key Highlights

  • 1Consolidated net sales increased by 10.3% to $3,322 million in Q2 2018, with a 9.1% growth in constant currency, indicating strong underlying business performance.
  • 2All three segments – Orthopaedics, MedSurg, and Neurotechnology and Spine – showed positive sales growth, with Neurotechnology and Spine leading at 19.4% growth.
  • 3Operating income saw a substantial increase of 33.9% to $672 million, leading to a healthy operating margin of 20.2%, up from 16.7% in the prior year.
  • 4Diluted Earnings Per Share (EPS) grew by 15.5% to $1.19, demonstrating improved profitability on a per-share basis.
  • 5Recall charges significantly decreased by 97.2% to $2 million, largely due to fewer adjustments related to the Rejuvenate and ABG II hip stem recalls.
  • 6The company completed the acquisition of Entellus Medical for approximately $697 million, strengthening its Neurotechnology business.
  • 7Cash provided by operating activities increased to $946 million for the six months ended June 30, 2018, up from $801 million in the prior year, indicating robust cash generation.

Frequently Asked Questions

Stryker's sales growth was driven by strong unit volume increases across various product lines, particularly in neurotechnology, instruments, trauma and extremities, and knee implants. Acquisitions, such as Entellus Medical, also contributed to growth, especially in the Neurotechnology and Spine segment. Foreign currency exchange rates had a positive impact of 1.2% on net sales.

Stryker's profitability improved significantly. Gross profit as a percentage of sales was 65.9% compared to 66.1% in the prior year, with adjusted gross profit remaining strong. Operating income increased by 33.9% to $672 million, resulting in an expanded operating margin of 20.2%. Diluted Earnings Per Share (EPS) rose by 15.5% to $1.19, demonstrating enhanced profitability at the net income level.

Recall charges have decreased substantially in Q2 2018. While the company continues to offer support for recall-related care, the accrual for the Rejuvenate and ABG II hip stem recall matter remains significant, with an estimated range of probable loss between $2,073 million and $2,313 million. No additional charges to earnings were recognized in the six months of 2018 as the low end of the range met previously recorded reserves.

Stryker generated strong operating cash flow, with $946 million in the first six months of 2018, an increase from the prior year. However, cash used in investing activities rose significantly due to acquisitions, and cash used in financing activities also increased due to debt refinancing, stock repurchases, and dividends. The company's cash and cash equivalents stood at $1,641 million as of June 30, 2018. Despite the overall decrease in cash, Stryker maintains ample liquidity and strong credit ratings to support its operations and future needs.