) reported adjusted earnings per share of $1.06 in the first
quarter of 2014, down 2.8% from $1.09 reported in the prior-year
quarter. Earnings also missed the Zacks Consensus Estimate by 3
cents. Adjusted net earnings decreased 3.1% to $404 million from
$417 million in the first quarter of 2013.
Stryker's reported net earnings for the quarter slumped nearly
77.0% to $70 million from $304 million in the year-ago quarter.
Reported net earnings per share also fell 77.2% to 18 cents from
79 cents in the same quarter last year.
Stryker's first-quarter revenues went up 5.3% year over year to
$2,305 million but fell short of the Zacks Consensus Estimate of
$2,325 million. Volume and mix contributed 6.9% to revenue growth
and acquisition contributed 1.4%. These were partly neutralized
by unfavorable pricing impact and foreign currency exchange
translation of 1.8% and 1.1%, respectively.
On an organic basis (excluding the impact of acquisitions), net
revenue grew 5.0% in constant currency. Sales in the U.S.
improved 7.0% to $1,542 million whereas international sales grew
1.9% (5.2% in constant exchange rate or CER).
Revenues from Stryker's core
increased 4.5% (5.9% at CER) to $999 million in the reported
quarter. Solid 8.0% rise in sales in the U.S. led to revenue
growth in the segment. Revenues from the global markets were down
0.5% (but up 2.9% at CER).
Domestic hip sales climbed 5.9%, while sales from the knee
business increased 4.4%. The trauma and extremities business
continued to post strong results, with domestic revenues soaring
11.6%, led by continued expansion into the Foot & Ankle
Revenues from Stryker's
increased 5.8% (6.8% at CER) to $886 million, boosted by strong
growth in Instruments and Endoscopy businesses. Sales in the U.S.
shot up 6.7% year over year while international sales grew 3.4%
(7.1% at CER).
Within MedSurg, domestic Instrument sales climbed 12.8% with its
Neptune product back in the market after receiving the U.S. Food
and Drug Administration (FDA) approval. Endoscopy sales grew 5.9%
and medical sales inched up 1.9%.
Neurotechnology and Spine segment
delivered another strong quarter with revenues increasing 5.9%
(7.0% at CER) year over year to $420 million. Growth was led by
strong results in the Stryker's IVS and Neurotechnology
businesses. U.S. sales increased 5.9% year over year with
international revenues growing 5.8% (9.1% at CER).
Within this segment, domestic revenues from Neurotechnology were
up 11.3%. Spinal implant sales, however, reported low organic
growth of 0.4% in the quarter.
First-quarter adjusted gross profit grew 4.4% year over year to
$1,542 million. However, adjusted gross margin contracted 60
basis points (bps) from the prior-year quarter to reach 66.9%.The
quarterly margin was adversely impacted by foreign exchange rates
Selling, general and administrative (SG&A) expenses scaled up
31.6% to $1,205 million from the prior-year quarter. As a
percentage of sales, SG&A expenses expanded 1050 bps to
52.3%. On an adjusted basis, SG&A expenses went up 2.7% to
$836 million or 36.3% of sales, compared with $814 million or
37.2% of sales a year ago.
Research, development (R&D) and engineering expenses rose
16.3% to $150 million in the first quarter. As a percentage of
sales, it increased 60 bps to 6.5% from 5.9% a year ago, due to
increased investment in additional R&D projects and
Adjusted operating income increased 4.1% to $556 million but
adjusted operating margin decreased 30 bps to 24.1% in the first
quarter as it was negatively impacted by pricing and foreign
exchange rates in the quarter, partially offset by operational
improvement and lower SG&A expenses as a percent of sales.
Stryker ended the quarter with cash and cash equivalents and
marketable securities of $4,047 million, down roughly 9.8% year
over year. Long-term debt (excluding current portion) decreased
18.0% year over year to $2,244 million as of Mar 31, 2014.
Stryker generated $206 million of cash from operations during the
first quarter, down 12.7% from $236 million in the prior year.
First-quarter cash flow was lower due to a fall in net earnings,
higher inventory and expenditures incurred in order to support an
ERP implementation in Japan. Capital expenditures in the quarter
rose 42.9% to $70 million from $49 million last year in the same
No shares were repurchased during the first quarter as the
company continued to focus on new acquisitions. Shares worth
approximately $700 million are still available for repurchase
under the current authorization.
Stryker reiterated its 2014 guidance. The company expects to
report adjusted EPS in the range of $4.75 to $4.90. The current
Zacks Consensus Estimate of $4.83 lies within the guided range.
Organic revenues growth in 2014 is expected to be in the range of
4.5 to 6.0%. Unfavorable foreign exchange is expected to impact
the full year and second-quarter net sales by less than 1%. The
current Zacks Consensus Estimate for revenues is pegged at $9,582
Management reiterated its revenues guidance for 2014 reflecting
confidence to drive top-line growth on the back of a
well-diversified product portfolio, increasing footprint in
emerging markets and strategic acquisitions. We are encouraged by
the guidance, recent stability in Stryker's businesses and
balanced segmental growth.
The company continues to expand through acquisitions. Last year,
Stryker acquired MAKO Surgical Corp. With MAKO, the company
expects to renovate orthopedic surgery through procedural
advancements and improved patient experience with advanced
More recently, in March, Stryker closed its acquisition deal of
U.S.-based developer of hip arthroscopy products, Pivot Medical,
Inc. Pivot's offerings are expected to complement Stryker's
existing Sports Medicine portfolio. Thereafter, earlier this
month, the company also completed the acquisition of German
surgical tools firm, Berchtold Holding which is expected to boost
Stryker's fast growing endoscopy division and operating room
equipment product portfolio by adding complementary solutions.
However, we are concerned about Stryker's increasing expenses,
largely related to product recalls, which are hampering the
company's margins. Moreover, the company remains challenged by
adverse foreign exchange swings, pricing pressure and a stringent
hospital capital budget environment.
Currently, Stryker carries a Zacks Rank #3 (Hold). Some
better-ranked stocks in the medical products industry are
Edwards Lifesciences Corp.
St. Jude Medical Inc.
). Enzymotec sports a Zacks Rank #1 (Strong Buy), while both
Edward Lifesciences and St. Jude Medical retain a Zacks Rank #2
ENZYMOTEC LTD (ENZY): Free Stock Analysis
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STRYKER CORP (SYK): Free Stock Analysis
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