) reported adjusted earnings per share (EPS) of $1.23 in the
fourth quarter of 2013, up 7.9% year over year. The result also
exceeded the Zacks Consensus Estimate by a penny. Full year
adjusted EPS increased 3.9% to $4.23 but remained in line with
the Zacks Consensus Estimate.
The Mich.-based orthopedic device major's reported net income
for the quarter surged nearly 43% to $386 million or $1.01 a
share. However, 2013 reported net income was $1.0 billion (down
22.5%) or $2.63 per share (down 22.4%). The reported EPS included
costs associated with the Medical Device Excise Tax amounting to
4 cents and 13 cents per share for the quarter and the year
respectively. The reported figures were also affected by the
negative impact of the company's various product recalls such as
the Rejuvenate and ABG II modular-neck hip stems and the Neptune
Waste Management System, and certain other charges.
Stryker's fourth-quarter revenues grew 5.6% to $2,468 million,
marginally ahead of the Zacks Consensus Estimate of $2,444
million. Volume and product mix contributed 7.3% to sales growth
while acquisitions contributed 1.5%. This was partly neutralized
by unfavorable pricing impact and foreign currency exchange
translation of 1.4% and 1.8%, respectively. For 2014, revenues
were $9,021 million reflecting annualized growth of 4.2%. The
yearly revenues however, missed the Zacks Consensus Estimate by
On an organic basis (excluding the impact of acquisitions),
net revenue grew approximately 5.8% at constant exchange rate
(CER), exhibiting solid growth across all the business segments.
Revenues in the U.S. climbed 7.0% to $1,636 million, while
international revenues increased 2.9% to $832 million (up 8% at
Adjusted gross margin in the fourth quarter contracted 200
basis points (bps) from the prior-year quarter to reach 66.3%.
Reduced inventory in the quarter leading to lower overhead
absorption and negative impact from the med-tech tax adversely
impacted the quarterly margin.
Selling, general and administrative (SG&A) expenses
declined 3.3% to $999 million, mainly due to product recalls. On
an adjusted basis, SG&A was 34.0% of sales compared with
36.2% in the year-ago quarter. This improvement came primarily on
the back of improved general and administrative expenses and
lesser marketing expenses. On the other hand, research,
development and engineering expenses scaled up 7.8% to $139
million due to increased investment in additional R&D
projects and innovation activities.
Adjusted operating margin of 25.3% remained at par with the
prior-year quarter. This was mainly due to the impact of medical
device tax being fully offset by strong year-end sales,
operational efficiency and low general and administrative and
marketing expenses margins.
Revenues from Stryker's core Reconstructive unit grew 5.8% (8%
at CER) to $1,107 million in the fourth quarter. In terms of
constant currency, hip sales climbed 8.0%, while the knee
business increased 4.7%. The trauma and extremities business
continued to post strong results, with revenues soaring 12.3% at
CER, led by robust sales of Foot & Ankle offerings along with
contributions from new products and sales force expansion.
Revenues from Stryker's MedSurg segment increased 5.4% (6.6%
at CER) to $924 million, boosted by strong growth in Endoscopy
business. Within MedSurg, Instrument sales grew in upper-single
digit (7.4% at CER), Endoscopy sales climbed 10.1% and medical
sales inched up 2.2%.
Stryker's Neurotechnology and Spine segment continued its
solid growth streak with revenues increasing 5.4% (up 7.5% at
CER) to $431 million. Growth was led by Stryker's IVS and
Neurotechnology businesses. Revenues from the Neurotechnology
sub-segment were up 9.9% at CER, while spinal implant sales
improved 4.7% in the quarter.
Stryker ended the fiscal with cash and cash equivalents and
marketable securities of $3,980 million compared with $4,285
million at the end of 2012. Long-term debt jumped 56.9% to $2,739
million as of Dec 30, 2013 from $1,746 million at the end of
For full year 2013, SYK generated solid cash from operations
of $1,886 million, 13.8% higher than $1,657 million generated in
2012. The company repurchased shares worth $317 million in 2013
under the company's share repurchase program. Shares worth
approximately $700 million are still available for repurchase
under the current authorization.
Stryker initiated its 2014 guidance. In the year the company
expects to report adjusted EPS in the range of $4.75 to $4.90.
This includes acquisition and intangible amortization related
adjustment of 35 cents. The current Zacks Consensus estimate of
$4.58 remains far below the guided range. Management expects that
despite the possibility of first-quarter 2014 facing the most
severe headwinds, Stryker shouldearn 45% of the full year's
adjusted EPS by the first half of the year.
Organic revenues for the year are expected to remain within
4.5% to 6.0%. Unfavorable foreign exchange is expected to
impact the full year and first quarter net sales by 1%. The
current Zacks Consensus Estimate for revenues is pegged at $9,936
million reflecting annualized growth of more than 10%.
We are encouraged by the recent stability in SYK's businesses
with balanced segmental growth. Moreover, the company posted a
strong guidance for 2014 reflecting management's confidence to
drive top-line growth on the back of a well-diversified product
portfolio, increasing footprint in emerging markets and strategic
The company continues to expand through acquisitions. Last
month it completed the acquisition of MAKO Surgical Corp. and
also signed an agreement to acquire Patient Safety Technologies.
With MAKO, the company expects to renovate orthopedic surgery
through procedural advancements and improved patient experience
with advanced implants. According to the company, MAKO's robotic
technology has long-term potential for human joint
However, we are concerned about Stryker's increasing expenses,
largely related to product recalls, which are hampering the
company's margins. The company needs to address these internal
issues to avoid additional expenses. Moreover, the company
remains challenged by adverse foreign exchange swings, pricing
pressure and a stringent hospital capital budget environment.
Stryker currently carries a Zacks Rank #3 (Hold). While we
choose to remain on the sidelines regarding SYK at present,
medical products companies such as
Mead Johnson Nutrition Company
) are expected to do well. All these stocks carry a Zacks Rank #2
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