Stryker's Q1 Earnings and Revs Lag Ests

Stryker Corporation (SYK) 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.

Revenues

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).

Segments Analysis

Revenues from Stryker’s core Reconstructive unit 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 market.

Revenues from Stryker’s MedSurg segment 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%.

Stryker’s 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.

Margin Trends

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 and price.

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 innovation activities.

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.

Financial Health

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 period.

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.

Outlook

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 million.

Our Take

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 implants.

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 Enzymotec Ltd. (ENZY), Edwards Lifesciences Corp. (EW) and St. Jude Medical Inc. (STJ). Enzymotec sports a Zacks Rank #1 (Strong Buy), while both Edward Lifesciences and St. Jude Medical retain a Zacks Rank #2 (Buy)

Read the Full Research Report on SYK
Read the Full Research Report on STJ
Read the Full Research Report on EW
Read the Full Research Report on ENZY


Zacks Investment Research