) reported its second quarter 2012 adjusted earnings of 98 cents
per share, in line with the Zacks Consensus Estimate and surpassing
the year-ago earnings of 90 cents per share (up 8.9%).
Adjusted earnings exclude restructuring expense of $12 million;
integration and acquisition-related expense of $5 million and legal
expenses of $33 million associated with sales and marketing of
In the reported quarter, profits increased 4.8% year over year to
$325 million (or 85 cents a share), led by higher domestic sales
and margin expansion.
Revenues rose 2.9% (up 5% in terms of constant currency) year over
year to $2,106 million, but fell short of the Zacks Consensus
Estimate of $2,129 million. Revenues were driven by healthy sales
across its three segments in the U.S., partially offset by a weak
European economy and currency fluctuations.
Acquisitions contributed 2.2% while higher volumes along with
improved product mix contributed 4.4% to total sales growth.
However, currency rates and fluctuating prices negatively impacted
revenues by 2% and 1.6%, respectively. Excluding the impact of
acquisitions, revenues increased 2.7% year over year in constant
On a geographic basis, revenues in the U.S. rose 7.7% to $1,384
million but sales in international markets dropped 5.1% (up 0.3% in
constant currency) to $722 million, respectively.
Revenues from the core Reconstructive business (44% of total sales)
inched up 1.2% (up 3.5% in constant currency basis) to $927
million. Barring the impact of acquisitions, revenues from this
segment increased 1.6% year over year in constant currency. The
quarter witnessed strong U.S. Reconstructive sales, which largely
offset pricing pressure and soft international sales in Europe and
Within Reconstructive, sales (as reported) from Trauma and
Extremities business rose 6.4% to $233 million led by acquisitions.
However, Hips sales dipped 1.3% to $308 million and revenues from
Knee remained flat year over year on a reported basis. The company
expects weak European sales to adversely affect global
reconstructive sales for the full year.
MedSurg sales (37% of total sales) grew 1.7% (up 3.3% in constant
currency) to $786 million in the quarter, supported by gains from
Sustainability Solutions and Instruments sales. Excluding the
impact of acquisitions, revenue from MedSurg segment increased 3%
year over year in constant currency.
Within MedSurg, the Instruments division reported a healthy sales
growth of 8.7% to $314 million, driven by System 7 power tools.
However, Endoscopy sales were flat year over year at $264 million
and Medical segment revenues plunged 12.2% to $158 million. Stryker
expects continued growth in Instruments and Sustainability
Solutions along with new products from the Endoscopy segment to
boost sales in the second half of 2012.
Stryker's Neurotechnology and Spine business (19% of total sales)
soared 10.1% (up 12.4% in constant currency) to $393 million.
Barring acquisitions, sales from this segment increased 5.2% in
constant currency. Sales were primarily driven by the Orthovita and
Concentric acquisitions, which offset the weak results of the core
Sales from the Spine and Neurotechnology sub-segments rose 6.5% and
13.4% to $181 million and $212 million, respectively. However, soft
spinal implant sales continue to dampen profits.
Gross margin rose to 68.1% in the reported quarter from 65.2% a
year ago. One-time expenses reduced gross margin by 0.1%. Operating
margin increased to 21.1% from 19.6% a year ago. Selling, general
and administrative expenses were 39.1% of sales, compared with
38.4% a year ago. Research and development expenses, as a
percentage of sales, were 5.5%, roughly flat year over year.
Stryker exited the quarter with cash and cash equivalents and
marketable securities of $3,460 million, up 29.3%. Long-term debt
increased 75.6% year over year to $1,750 million.
In the quarter, Stryker repurchased roughly 0.7 million shares for
$39 million. The company generated $457 million in cash from
operations, resulting in a marked sequential increase.
Stryker reiterated its revenue and earnings guidance for 2012. It
forecasts revenues to increase in a range of 3.5% to 6.5% in terms
of constant currency. Excluding the impact of acquisitions, the
company expects revenue to increase in a band of 2% and 5%. Stryker
expects adjusted earnings to grow at double-digit levels for 2012.
Stryker, however, raised 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 1% to 2% for the full year (earlier it was 0.5% -1.5%). For
the third-quarter 2012, the company expects an adverse impact of 2%
We believe that Stryker is poised for growth on the back of new
products, ongoing cost control measures and increasing operating
efficiency. The company is expanding its product portfolio by
acquiring complementary businesses and leveraging a solid balance
However, turmoil in international markets especially in Europe and
Japan coupled with declining U.S. medical results remain a
challenge for the company. Stryker was also involved in a series of
acquisitions in the recent past, pressed by sustained pricing and
procedure volume pressure and hence needs to optimally integrate
them in its results.
Stryker operates in a highly competitive orthopedic industry and
faces strong competition from players like
). Moreover, despite recent stability in the domestic market, it
remains challenged by currency fluctuations and pricing pressure.
Our Neutral recommendation on Stryker carries a short-term Zacks #3
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