Stryker Corporation's (SYK) earnings topped expectation in third-quarter 2011 but a sizable acquisition charge dragged down profits for the quarter masking a double-digit growth in the top line. The Michigan-based orthopedic devices major posted adjusted earnings per share of 91 cents, exceeding the Zacks Consensus Estimate of 89 cents and the year-ago earnings of 80 cents.
Adjusted net income climbed 11% year over year to $352 million. The adjusted earnings exclude $25 million in charges associated with the company’s takeover of Orthovita, Memometal Technologies and Boston Scientific’s (BSX) Neurovascular business.
However, profit (as reported) slid 3% to $327 million (or 84 cents a share), hurt by hefty acquisition charges. Pressed by sustained pricing and procedure volume issues in its core replacement hips and knees businesses, Stryker is actively pursuing acquisitions.
The company so far has completed four acquisitions in 2011 and is focusing on integrating those buyouts. More recently, it has gobbled up stroke intervention products maker Concentric Medical. However, costs associated with acquisitions continue to weigh on its bottom line.
Stryker’s shares fell 10 cents (or 0.20%) to $49.31 in after-hours trading on October 19. The company raised its adjusted earnings outlook for fiscal 2011 and dialed back some other forecasts.
Revenue
Revenues leapt 14.9% year over year to $2,031 million, essentially in line with the Zacks Consensus Estimate. The healthy growth was triggered by higher sales across the board, strongly backed by acquisitions.
Volume and mix, acquisitions, and favorable foreign currency exchange translation contributed 6.1%, 7.6% and 3.2%, respectively, to growth, partly neutralized by an unfavorable pricing impact of 2%. Geographically, U.S. and international sales soared 10.6% and 23.4%, respectively, in the quarter.
Segments: In-depth Analysis
The company’s Reconstructive unit, offering replacement hip, knees and extremities products, posted sales of $901 million, a surge of 8% year over year. However, barring a foreign exchange translation effect, reconstructive sales grew 3.9% in the quarter.
Growth across the hips, trauma and extremities segments coupled with contributions from acquisitions was, in part, masked by a still weak knee business. Stryker noted that it remains challenged by the sustained lumpiness in the reconstructive implant market. Companies in the orthopedic space continue to struggle as patients defer their elective procedures given the prevailing economic softness.
Domestic and international hip sales rose 4.5% and 16% (up 6.3% in constant currency), respectively, in the quarter. Favorable traction of Stryker’s new hip system, MDM X3, is driving hip revenues. International hip sales were driven by emerging markets. Trauma and extremities business had a solid quarter with sales spiking 19.7% and 15% (up 5% in constant currency) in the U.S. and international markets, respectively.
Revenues from Stryker’s knee business, which remains its Achilles heel, improved just 2.6% (down 0.5% in constant currency) impacted by a soft market. U.S. knee sales dipped 1.8% in the quarter while international knee sales climbed 2.3% in constant currency. The recently approved OtisMed pre-op surgical cutting guides represent a promising growth catalyst for the knee franchise and should help drive results moving ahead.
Revenues from Stryker’s MedSurg unit shot up 12% (up 9.8% in constant currency) year over year to $767 million, buoyed by higher sales of surgical, endoscopic, and emergency medical equipment. Demand for the company’s bed and stretcher offerings remained healthy, driven by favorable hospital replacement/upgrade cycle.
Excluding contributions from acquisitions, MedSurg sales climbed 7.7% in constant currency. Within MedSurg, patient handling and emergency medical equipment business was the bright spot with sales cruising at roughly 31%.
Neurotechnology and Spine products sales zoomed 45.8% (up 43% in constant currency) year over year to $363 million, boosted by the acquisition of Boston Scientific’s Neurovascular asset. Excluding acquisition, sales from this segment edged up 0.5% in constant currency. Sales of spinal implants, however, were sluggish in the quarter given volume and pricing pressure.
Margin Trends
Gross margin trimmed to 67.1% from 69.4% a year-ago. Operating margins declined to 21.9% from 26.6% in the year-ago quarter. Acquisition charges hurt margins in the quarter. Research, development and engineering expenses as a percentage of sales rose to 6% from 5.6% a year ago as Stryker ramped up spending on innovation. Selling, general and administrative expenses (as a percentage of sales) increased to 37.7% from 36.4%.
Financial Condition
Stryker ended the quarter with cash and cash equivalents and marketable securities of $3,213 million, a year-over-year decline of roughly 29%, partly due to cash spent on acquisitions and share repurchases. Long-term debt increased 76% year over year to $1,755 million. Stryker generated $446 million of cash from operations during the quarter, up 4% year over year, with free cash flows of $389 million. The company bought back 5.9 million shares in the quarter for $289 million.
Outlook and Recommendation
Stryker mildly adjusted its forecasted revenue growth for fiscal 2011. The company now expects growth of 11%-12% (in constant currency) versus its earlier forecast of 11%-13%. Excluding foreign exchange translation impact and acquisitions, sales are now expected to grow in the range of 4%-5%, down from the prior view of 5%-7%.
Growth is expected to be fueled by higher shipments of Reconstructive, MedSurg, and Neurotechnology and Spine products coupled with acquisitions. The company envisions foreign currency (assuming current exchange rates) to favorably impact sales by roughly 0%-1% in the fourth quarter and 2%-3% in fiscal 2011.
Stryker has raised its adjusted earnings target for fiscal 2011 to a higher range of $3.70-$3.74 (previously $3.65-$3.73), an 11%-12% year -over -year growth. The company still expects charges associated with acquisitions to trim its 2011 earnings per share by roughly 33-35 cents. The current Zacks Consensus Estimate for fiscal 2011 is $3.71.
We believe that Stryker remains well placed for growth driven by new products, acquisitions and a stable-to-improving hospital capital spending environment.
However, it faces stiff challenges from Zimmer Holdings (ZMH), Biomet, Johnson & Johnson’s (JNJ) DePuy and Smith & Nephew (SNN) in a soft orthopedic industry. Moreover, implant pricing and elective procedure volume still remain headwinds. Our long-term Neutral recommendation on Stryker is in agreement with the short-term Zacks #3 Rank (Hold).
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
SMITH & NEPHEW (SNN): Free Stock Analysis Report
STRYKER CORP (SYK): Free Stock Analysis Report
ZIMMER HOLDINGS (ZMH): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment