) adjusted earnings of $1.14 a share for the fourth quarter of
2012 beat the Zacks Consensus Estimate by a penny and exceeded
the year-ago earnings of $1.02 a share. Adjusted net income
increased 11.8% year over year to $436 million.
The adjusted earnings for the quarter exclude charges of $133
million, net of taxes (or 35 cents per share) related to the
Rejuvenate and ABG II hip products recall in Jun 2012, charges of
$24 million related to the previously communicated headcount
reduction and other restructuring moves and $2 million in charges
associated with the company's takeover of Surpass Medical,
Orthovita, Memometal Technologies, Concentric Medical and
) Neurovascular business.
The Michigan-based orthopedic devices major's profit (as
reported) declined 32.7% to $270 million (or 71 cents a
For the full year, profit (as reported) dropped 3.5% year over
year to $1,298 million (or $3.39 a share). However, adjusted
earnings per share of $4.07 surpassed the Zacks Consensus
Estimate by a penny and exceeded the year-ago earnings of $3.72 a
In an effort to expand its foothold in emerging markets, Stryker
also announced the acquisition of a leading China-based trauma
manufacturing company, Trauson Holdings for $685 million. The
deal, expected to close in the second quarter of 2013, will not
affect the adjusted earnings guidance for 2013 (excluding
acquisition-and integration-related expenses).
Stryker's fourth-quarter sales grew 5.5% (6.1% in constant
currency) year over year to $2,337 billion, marginally beating
the Zacks Consensus Estimate of $2,277. The growth was triggered
by healthy domestic sales but was partially offset by sluggish
international markets, particularly in Europe, and stagnant
hospital capital equipment sales.
Volume and mix contributed 7.5% to sales growth, partly
neutralized by unfavorable pricing impact and foreign currency
exchange translation of 1.4% and 0.6%, respectively. Sales in the
U.S. improved 8.7% but international sales remained roughly flat
due to the ongoing austerity measures in Europe.
For the full year, sales increased 4.2% (5.4% in constant
currency) to $8,657 million, which exceeded the Zacks Consensus
Estimate of $8,598. In 2012, revenue growth, on a constant
currency basis, surpassed the company's guidance of 2.5%-4.0%.
U.S. revenues grew 7.4%, while international revenues dipped 1.3%
(up 1.9% in constant currency).
Revenues from Stryker's core Reconstructive unit (offering
replacement hip, knees and extremities products) increased 6.7%
(or 7.4% in constant currency) to $1,046 million in the fourth
quarter. This reflects a marked acceleration from the 1.1% growth
achieved in the previous quarter, which implies improving
reconstructive market fundamentals.
Domestic hip sales jumped 7.4%, while international revenues
edged down 0.4% (up 0.7% in constant currency) in the quarter.
The U.S. trauma and extremities business witnessed a 26.4% rise
in sales in the reported quarter. However, sales in the
international markets dipped 3.3% (down 0.4% in constant
currency). Growth in the trauma and extremities franchise in the
U.S. was led by robust improvement in Foot and Ankle, market
share gain due to product recall by a competitor along with
contributions from new offerings and sales force expansion.
Stryker's knee business has started showing signs of improvement
with the U.S. sales growing 9.2% in the quarter. However,
international knee sales fell 1.5% (down 0.6% in constant
currency). The business is benefiting from the Get Around Knee
Revenues from Stryker's MedSurg segment grew 2.4% (up 2.7% in
constant currency) year over year to $877 million, boosted by the
Endoscopy and Sustainability Solutions franchises. Volume and
mix, and favorable pricing impact contributed 2.2% and 0.5%,
respectively, to growth, partly neutralized by an unfavorable
foreign currency exchange translation of 0.3%.
Within MedSurg, the 3.5% increase in Instruments sales to $330
million (gains in the Power Tools segment) was partially dampened
by the Neptune recall. Endoscopy sales surged 6% to $309 million,
driven by the launch of a new camera. However, Medical segment
revenues fell 7.4% to $185 million due to soft capital equipment
sales and tough year-over-year comparables in the U.S. business.
The Neptune recall will continue to adversely affect sales by
roughly $17million-$20 million every quarter, until regulatory
clearance is obtained, which is unlikely in the first half of
Stryker's Neurotechnology and Spine segment continues its solid
growth streak with revenues increasing 9.7% (up 10.8% in constant
currency) year over year to $414 million. Sales from the
Neurotechnology sub-segment climbed 12.7% to $224 million. The
company expects favorable traction for its Target Coil and Trevo
stent retriever. Quite surprisingly, the spine business too
posted sales growth of 6.4% to $190 million, reflecting
significant contribution from the Biologics products obtained
from the Orthovita acquisition.
Adjusted gross margin increased by 100 basis points (bps) year
over year to 68.3% in the fourth quarter. Growth was driven by
favorable mix, currency impact, and cost curtailment efforts by
the company's global quality and operations group. Focused
management efforts and controlled operating expenses led to a 120
bps improvement in adjusted operating margin, which came in at
Research, development and engineering expenses, as a percentage
of sales, increased to 5.5% from 5.2% a year ago. Selling,
general and administrative expenses (as a percentage of sales)
rose to 44.2% from 37.7%, primarily due to the aforementioned
Stryker ended the quarter with cash and cash equivalents and
marketable securities of $4,285 million, up roughly 25.4% year
over year. Long-term debt remained roughly flat at $1,746
Stryker generated $596 million of cash from operations during the
fourth quarter, down 5% year over year. The company did not
repurchase any shares in the fourth quarter, thus total
repurchases for 2012 remained at 2.1 million (worth $108
Stryker has divulged its outlook for 2013. Revenues are expected
to grow 3.0%-5.5% in constant currency. The company expects
foreign currency (assuming current exchange rates) to unfavorably
impact sales by roughly flat to 1% in the first quarter as well
as full year 2013.
After accounting for the $100 million pre-tax annualized impact
from the Med-Tech excise tax, Stryker expects adjusted earnings
in the range of $4.25-$4.40 a share for 2013. The current Zacks
Consensus Estimate of $4.32 for 2013 is within the provided
Further, the company highlighted certain factors, which are
expected to affect both top as well as bottom-line growth in
2013. Fewer selling days in the first quarter compared with the
year-ago quarter, price reductions in Japan in Apr 2012, the
Neptune product recall and the income tax adjustments in 2012 are
expected to impact results in 2013. Based on the above mentioned
factors, adjusted earnings are expected to grow 23%, 24%, 24% and
29% in each of the four quarters of 2013.
About the Company
Stryker, with a market-cap of $23.46 billion, is one of the
world's largest medical device manufacturers operating in the
global orthopedic market. The company's well-diversified product
portfolio, expanding foothold in emerging markets along with
acquisitions are expected to drive future growth.
Moreover, the company remains committed to delivering incremental
returns to investors, as reflected in the recent 25% hike in
dividends and the $1 billion share repurchase program.
However, Stryker faces several challenges, which include
continued soft international sales and tough hospital capital
budgets. Moreover, despite the recent stability in the domestic
market, it remains challenged by the prevailing austerity
measures in Europe.
Stryker carries a Zacks Rank #3 (Hold). Medical products
companies, such as
Edwards Lifesciences Corp.
), which carry a Zacks Rank #2 (Buy), are expected to do well.
Hanger will be reporting its results on Feb 13.
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