) reported adjusted earnings per share of 98 cents in the third
quarter of 2013, up 1.0% year over year. However, it missed the
Zacks Consensus Estimate by a penny. Adjusted EPS included costs
associated with the Medical Device Excise Tax amounting to 3
cents per share. Adjusted net income increased 0.8% to $373
million in the quarter.
However, the Mich.-based orthopedic device major's reported net
income plunged more than 70% to $103 million or 27 cents a share
from $353 million or 92 cents per share. This is mainly due to
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.
Stryker's third-quarter revenues grew 4.8% to $2,151 million,
slightly missing the Zacks Consensus Estimate of $2,158 million.
Volume and product mix contributed 7.1% to sales growth while
acquisitions contributed 0.7%. This was partly neutralized by
unfavorable pricing impact and foreign currency exchange
translation of 0.9% and 2.0%, respectively.
On an organic basis (excluding the impact of acquisitions), net
revenues grew 6.1% at constant exchange rate (CER), reflecting
solid growth across all the business segments. Revenues in the
U.S. climbed 6.5% to $1,449 million, while international revenues
inched up 1.5% to $702 million and improved 7.5% at CER.
Adjusted gross margin in the third quarter was 68.8% versus 68.2%
in the prior-year quarter. Management asserts that the company's
5-year plan to drive greater operational efficiencies has led to
the improvement in margin.
Selling, general and administrative (SG&A) expenses spiked
43.6% to $1,136 million, mainly due to product recalls. On an
adjusted basis, SG&A was 38.0% of sales compared with 38.2%
in the year-ago quarter. This decline was on account of a
distributor transition in Asia. Research, development and
engineering expenses also grew 19.3% to $136 million due to
increased investment in additional R&D projects and
Adjusted operating margin of 22.8% declined 20 basis points (bps)
from the prior-year quarter. This was mainly due to the medical
device tax, pricing pressure and higher R&D spending,
partially offset by operational efficiency and favorable product
Revenues from Stryker's core Reconstructive unit grew 6.5% (9.2%
at CER) to $949 million in the third quarter. In terms of
constant currency, hip sales climbed 9.3%, while the knee
business inched up 2.1%. The trauma and extremities business
continues to post strong results, with revenues soaring 20.4% 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 1.5% (2.6% at
CER) to $792 million, boosted by the Endoscopy and Sustainability
Solutions franchises. Within MedSurg, Instrument sales dropped
5.5% in the U.S. due to the Neptune recall and difficult
year-over-year comparisons, while the same grew 8.3% overseas.
Endoscopy sales were up 8.4% at CER whereas Medical revenues
inched up only 0.2% in the quarter under review.
Stryker's Neurotechnology and Spine segment continued its solid
growth streak with revenues increasing 7.7% (up 10.0% at CER) to
$410 million. Growth was led by Stryker's IVS and Neurotechnology
businesses. Revenues from the Neurotechnology sub-segment climbed
13.9% at CER, while spinal implant sales improved 5.5% in the
Stryker ended the third quarter with cash and cash equivalents
and marketable securities of $5,138 million, up roughly 19.9%
from $4,285 million at the end of 2012. Long-term debt jumped
57.1% to $2,743 million as of Sep 30, 2013, from $1,746 million
at the end of 2012.
For the first nine months of 2013, SYK generated solid cash from
operations of $1,214 million, 14.4% higher than $1,061 million
generated in the first nine months of 2012. The company
repurchased shares worth $252 million in the first nine months of
2013 under the company's share repurchase program. Shares worth
approximately $750 million are still available for repurchase.
Stryker raised its revenue guidance for 2013 driven by solid
sales in the first nine months of the year as well as the
prevailing market conditions. Constant currency sales growth
guidance, excluding acquisitions, has been raised to the range of
4.5% to 5.5% from the earlier band of 4.0% to 5.5%. The company
expects foreign currency to hurt sales by roughly 1.5% to 2.0% in
the fourth quarter as well as full year 2013.
However, SYK reiterated its projection for adjusted earnings in
the range of $4.20 to $4.26 a share for 2013. The current Zacks
Consensus Estimate of $4.23 for 2013 lies within the guided
Stryker's share price increased 1.4% to $72.55 on Oct 17,
following the announcement of the third quarter results. We are
encouraged by the recent stability in SYK's businesses,
especially the core reconstructive business. Moreover, the
company's raised revenue guidance for 2013 reflects management
confidence to drive top line growth on the back of a
well-diversified product portfolio, increasing footprint in
emerging markets and strategic acquisitions.
The company continues to expand its base through acquisitions
such as the recently announced decision to takeover
MAKO Surgical Corp.
). Although expensive, the acquisition of MAKO's advanced robotic
arm technology is expected to benefit Stryker over the long term.
Despite solid top-line growth reported in the third quarter, 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, medical products
companies such as
Bio-Rad Laboratories, Inc.
) are expected to do well. Both these stocks carry a Zacks Rank
#1 (Strong Buy).
BIO-RAD LABS -A (BIO): Free Stock Analysis
MAKO SURGICAL (MAKO): Free Stock Analysis
RESMED INC (RMD): Free Stock Analysis Report
STRYKER CORP (SYK): Free Stock Analysis
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