) third quarter 2012 adjusted earnings of 97 cents per share
missed the Zacks Consensus Estimate by a penny but surpassed the
year-ago earnings of 91 cents per share (up 6.6%).
STRYKER CORP (SYK): Free Stock Analysis
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Adjusted earnings exclude restructuring expenses of $11 million
associated with workforce reduction and other restructuring
activities undertaken by the company in 2011 as well as
integration and acquisition-related expenses of $6 million.
In the reported quarter, profits increased 8% year over year to
$353 million (or 92 cents a share), primarily led by higher
domestic sales and cost containment.
Revenues inched up 1% (up 2.9% in terms of constant currency)
year over year to $2,052 million, but fell short of the Zacks
Consensus Estimate of $2,070 million. Revenues increased on the
back of healthy sales across all U.S. franchises (except Medical)
but were largely offset by weak international and capital
Acquisitions contributed only 0.4% while higher volumes along
with improved product mix contributed 3.4% to total sales growth.
However, currency rates and fluctuating prices negatively
impacted revenues by 1.4% and 0.9%, respectively. Excluding the
impact of acquisitions, revenues increased 2.5% year over year in
On a geographic basis, revenues in the U.S. grew 4.7% to $1,360
million but sales in international markets dropped 5.6% (down
0.4% in constant currency) to $692 million.
Revenues from the core Reconstructive business (43% of total
sales) inched down 1.1% (up 1.1% in constant currency) to $891
million. Except the impact of acquisitions, revenues from this
segment increased 1% year over year in constant currency. The
quarter witnessed strong U.S. Trauma sales and mid-single digit
growth in the U.S. Knees business. This was, however, offset by
pricing pressure and soft international sales in Europe and
Within Reconstructive, sales (as reported) from Hips dropped 3.9%
(down 2.1% in constant currency) to $288 million, reflecting
tough year-over-year comparables and negative impact from the
Rejuvenate recall. Trauma and Extremities business dipped 0.7%
(up 2.7% in constant currency) to $235 million. However, revenues
from Knees business increased 1.4% (up 3% in constant currency)
to $315 million, driven by the Get Around Knee Direct-to-Consumer
MedSurg sales (38% of total sales) grew 1.7% (up 3.1% in constant
currency) to $781 million in the quarter, supported by gains from
Sustainability Solutions and Instruments sales.
Within MedSurg, the 3% growth in Instruments sales to $303
million was partially dampened by the Neptune recall. Endoscopy
sales inched up 1.1% to $259 million. However, Medical segment
revenues fell 1.3% to $169 million due to soft capital equipment
sales. Stryker expects continued growth in Instruments and
Sustainability Solutions along with new products from the
Endoscopy segment to boost future growth.
Stryker's Neurotechnology and Spine business (19% of total sales)
grew 4.7% (up 6.9% in constant currency) to $380 million. Barring
acquisitions, sales from this segment increased 4.7% in constant
currency. Sales were primarily driven by the Orthovita and
Concentric acquisitions and new product launches, which offset
the weak results of the core Spine business.
Sales from the Neurotechnology sub-segment jumped 10.8% to $205
million, partially offset by Spine sales, which fell 1.6% year
over year to $175. However, soft spinal implant sales continue to
Gross margin climbed up to 68.1% in the reported quarter from
67.1% a year ago. Operating margin remained flat at 21.9%.
Selling, general and administrative expenses were 38.5% of sales,
compared with 37.7% a year ago. Research and development
expenses, as a percentage of sales, dropped to 5.6% from 6% in
the year-ago quarter.
Balance Sheet and Others
Stryker exited the quarter with cash and cash equivalents and
marketable securities of $3,863 million, up 20.2%. Long-term debt
roughly remained flat at $1,751 million.
In the quarter, Stryker repurchased roughly 0.4 million shares
for $19 million.
Stryker lowered its sales guidance for 2012 and 2013 due to the
austerity measures in Europe and tough hospital capital budgets.
In terms of constant currency, the company narrowed its revenues
forecast, and expects revenues to increase in the range of 4% to
5.5% (earlier 3.5% to 6.5%). Excluding the impact of
acquisitions, the company expects revenue to increase in a band
of 2.5% and 4% (earlier 2% to 5%).
Stryker expects adjusted earnings for 2012 to be in the range of
$4.04-$4.07 (up 9%). Earlier the company had expected adjusted
earnings to grow at double-digit levels for 2012. For 2013,
Stryker expects adjusted earnings in to be the band of $4.25 and
Stryker also revised its forecast regarding the negative impact
of foreign currency (assuming current exchange rates) on net
sales for the full year and expects it to unfavorably impact
sales by roughly 0.5% to 1.5% (earlier it was 1%-2%). For the
fourth-quarter of 2012, the company expects an adverse impact of
0% to 1%.
Our 'Neutral' recommendation on Stryker carries a short-term
Zacks #3 Rank (Hold). With a market-cap of $20.10 billion,
Stryker is one of the world's largest medical device companies
operating in the global orthopedic market. Despite a soft
orthopedic market and Medsurg end-market pressure, the company's
well-diversified product portfolio along with solid business
fundamentals is expected to drive future growth.
Further, expansion into fast-growing international markets via
strategic acquisitions and new product launches represent
attractive growth opportunities. Moreover, the company remains
committed to delivering incremental returns to investors
leveraging its solid balance sheet, healthy free cash flow and
However, Stryker faces several challenges, which include still
soft international sales, tough hospital capital budgets and the
upcoming Med-tech tax. Moreover, despite recent stability in the
domestic market, it remains challenged by currency fluctuations
and pricing pressure.
Weakness in the reconstructive and Medical businesses as well as
soft spine sales continue to be a drag on Stryker. Additionally,
Stryker operates in the highly competitive orthopedic industry
and faces strong competition from players like
Zimmer Holdings Inc.