Cash Flow and Balance Sheet

Stryker generated $428.3 million in cash from operations in 3Q10 versus $465.8 million in 3Q09. Free cash flow came in at $424 million. Stryker exited 3Q10 with $4.5 billion in cash and marketable securities. The company did not repurchase any shares in 3Q10. The company had $750 million remaining under the buyback authorization, which it can use to partially offset share-based compensation-related dilution.

Others

FDA Warning Letters: In March 2010, Stryker announced resolution of its 2007 warning letter relating to the Mahwah, NJ facility. The FDA deemed that the actions taken to address the issues raised in the 2007 warning letter at the facility were sufficient and that no other steps were needed. The warning letter had to do with quality system specifications in implant manufacturing. This settlement was in addition to the settlement of the warning letter issued to the Biotech, Massachusetts facility.

The analysts believe the lifting of the warning letter at Mahwah significantly removes the risk of a corporate-wide warning letter for the company. Of all the warning letters, the resolution of the Mahwah issue is considered to be the most important one as Mahwah is Stryker’s second largest manufacturing facility. Management noted that the resolutions demonstrate Stryker’s continued commitment to investment in quality control systems and compliance with the FDA requirements. Stryker is spending $200 million over three years to improve quality and compliance programs.

At the Analyst Day, on May 19, 2010, management announced the resolution of the remaining two warning letters relating to the Cork, Ireland and Portage, Michigan facilities.
 

Acquisitions

On October 28, 2010, Stryker inked a definitive agreement to acquire Boston Scientific’s Neurovascular unit for $1.5 billion in cash. Under the agreement terms, Stryker will pay $1.4 billion to Boston Scientific on the closure of the transaction. Moreover, it will pay an additional milestone amount of $100 million. Subject to regulatory clearances and customary closing conditions, the acquisition is expected to close in fourth-quarter 2010.

Boston Scientific’s Neurovascular division is a leader in the roughly $900 million global neurovascular market with annual sales of $348 million. The unit offers devices such as detachable coils, stents and microcatheters to treat cerebrovascular diseases including aneurysms. Stryker expects the acquisition to be earnings neutral to modestly accretive to its FY11 earnings excluding acquisition and integration-related charges.

On August 25, 2010, Stryker struck a definitive agreement to acquire privately held medical product maker Gaymar Industries for $150 million in cash. Orchard Park, New York based Gaymar specializes in design, manufacture and marketing pressure ulcer and temperature management solutions. It had revenue of $77 million in 2009.
Gaymar boasts of a comprehensive portfolio of high-performance surface and pressure ulcer management products that addresses a roughly $1.8 billion market globally. The acquisition, which was closed in October 2010, has broadened Stryker’s acute-care product offerings targeted at this lucrative market.
 

The industry’s pricing environment is expected to deteriorate going forward.

Stryker’s Orthopedic division continues to struggle with sluggish growth. The replacement hips and knees markets remain affected by the lingering economic softness.

The company's new products are subject to the FDA's regulation and timely response. In the past, Stryker has received several FDA warning letters regarding product quality.