) adjusted earnings per share (EPS) of $1.03 increased 4.0% year
over year in the first quarter of 2013. It beat the Zacks
Consensus Estimate by 2 cents. Adjusted EPS included the recently
implemented Medical Device Excise Tax amounting to $14 million
net of tax as well as an income tax benefit of $17 million
associated with the American Taxpayer Relief Act of 2012.
Adjusted net income increased 4.0% year over year to $394
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The adjusted earnings for the quarter exclude charges of $32
million, net of taxes, related to the Rejuvenate and ABG II hip
products recall in Jun 2012, resulting in a total charge of $230
million. It also excluded charges of $11 million, net of tax,
related to the previously communicated headcount reduction and
other restructuring moves and $17 million, net of tax, in charges
associated with the company's takeover and integration of
Trauson, Surpass Medical and
) Neurovascular business. Additionally, a one-time expense of $30
million net of tax related to regulatory matters in the U.S. was
The Michigan-based orthopedic devices major's profit (as
reported) declined 13.1% to $304 million (or 79 cents a
Stryker completed the acquisition of a leading China-based trauma
manufacturing company, Trauson Holdings in Mar 2013. Stryker
acquired this entity in an effort to expand its foothold in the
Chinese orthopedic market.
Stryker's first-quarter sales inched up 1.3% year over year (2.6%
in constant currency) to $2,190 million but were below the Zacks
Consensus Estimate of $2,207. Volume and mix contributed 3.8% to
sales growth and acquisition contributed 0.2%. This was partly
neutralized by unfavorable pricing impact and foreign currency
exchange translation of 1.3% each. On an organic basis (excluding
the impact of acquisitions) net revenues grew 2.6% in constant
Sales in the U.S. improved 4.0% to $1,441 million but
international sales dipped 3.4% (up 0.2% in constant currency)
mainly due to the ongoing austerity measures in Europe.
Revenues from Stryker's core Reconstructive unit increased 1.2%
(or 2.8% in constant currency) to $969 million in the first
quarter. Solid sales in the U.S., up 6.5% year over year, led to
the growth. Management asserts the U.S. recon market is stable,
which is likely to sustain through 2013.
Domestic hip sales grew 3.7%, while international revenues
dropped 2.4% in constant currency. Stryker's knee business failed
to maintain the growth momentum displayed in the prior quarter as
it declined 0.4% in the U.S. and 5% in constant currency
overseas, mainly due to the recall of the ShapeMatch Cutting
Guides. The U.S. trauma and extremities business witnessed a
26.2% rise in sales, led by robust improvement in foot and ankle
along with contributions from new offerings and sales force
expansion. However, sales in the global markets dipped 0.8% in
Revenues from Stryker's MedSurg segment inched up 0.3% (up 1.0%
in constant currency) year over year to $824 million, boosted by
the Medical and Sustainability Solutions franchises. Volume and
mix, and favorable pricing impact contributed 0.5% each to
growth, partly neutralized by an unfavorable foreign currency
exchange translation of 0.7%.
Within MedSurg, Instrument sales dropped 1.3% in the U.S. due to
the Neptune recall but increased 4.1% in constant currency
internationally. Endoscopy sales were also down 0.9% in the U.S.
but grew 4.3% outside the U.S. We note that the Medical segment
revenues were up 4.3% in the U.S. due to soft year-over-year
comparables but down 6.6%, in constant currency, overseas.
Stryker's Neurotechnology and Spine segment continues its solid
growth streak with revenues increasing 4.0% (up 5.7% in constant
currency) year over year to $397 million. Growth was led by
Stryker's neuro Powered Instruments platform, NSE, which posted a
growth of about 20%.
Sales from the Neurotechnology sub-segment climbed 14.5% and
10.0% (constant currency) in the U.S. and global markets. Core
spinal implant sales were flat in the U.S. and down 6.2% in
constant currency, globally.
Adjusted gross margin in the first quarter was 67.5% versus 67.8%
in the previous year quarter. It included the impact of the
medical device excise tax in 2013, which reduced gross margin by
100 basis points. Gross margin benefited from favorable mix,
lower inventory charges, and cost curtailment efforts by the
company's global quality and operations group.
Selling, general and administrative (SG&A) expenses (as a
percentage of sales) rose to 41.8% from 37.9%, mainly due to
one-time expenses. On an adjusted basis, SG&A was 37.2% of
sales compared with 37.5% of sales in the prior year. Research,
development and engineering expenses, as a percentage of sales,
increased to 5.9% from 5.2% a year ago, and up 5.5% sequentially
due to increased investment in additional R&D projects and
Adjusted operating margin was 22.9%, an 80 basis points decline
from the year-ago quarter. This was mainly due to the medical
device tax and higher R&D spending, partially offset by
factors that benefited gross margin.
Stryker ended the quarter with cash and cash equivalents and
marketable securities of $4,487 million, up roughly 36.1% year
over year. Long-term debt increased 56.4% to $2,738 million.
Stryker generated a solid $236 million of cash from operations
during the first quarter, compared to $35 million in the prior
year. The company repurchased 3.6 million shares in the quarter
under the company's $250 million Accelerated Share Repurchase
(ASR) program. The program was completed in Apr 2013 and
resulted in the receipt of 0.2 million additional shares.
Revenues are expected to grow 4.0%-6.5% in terms of constant
currency in 2013. Constant currency sales growth, excluding
acquisitions, is projected in the range of 3.0%-5.5%. The company
expects foreign currency (assuming current exchange rates) to
unfavorably impact sales by roughly 1%-2% in the second quarter
as well as full year 2013.
However, Stryker continues to expect 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
Stryker, with a market-cap of $24.63 billion, is one of the
world's largest medical device manufacturers operating in the
global orthopedic market. The company's well-diversified product
portfolio and 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 via share repurchase and dividends.
We are encouraged by the recent stability in the domestic recon
market, but the company remains challenged by the prevailing
austerity measures in Europe, which is dampening sales growth in
some segments. However, Stryker faces several challenges, which
include a tough hospital capital budget environment.
Stryker carries a short-term Zacks Rank #3 (Hold). Medical
products companies, such as
), carrying a Zacks Rank #1 (Strong Buy) and
), which carry a Zacks Rank #2 (Buy), are expected to do