Stryker Corporation (SYK) posted nearly 10.6% rise in adjusted earnings per share to $1.15 in the third quarter of 2014 from $1.04 in the prior-year quarter and surpassed the Zacks Consensus Estimate by a penny. Earnings per share lie within the projected range of $1.12 and $1.16. Adjusted net earnings rose 10.3% to $439 million from $398 million in the third quarter of 2013.
The adjustments include Rejuvenate, ABG II and Neptune recalls, tax impacts related to the establishment of the European regional headquarters and planned cash repatriation, acquisition and integration related charges, additional cost of sales for inventory sold that was “stepped up” to fair value related to acquisitions, restructuring and related charges, and other charges related to regulatory and legal matters.
Stryker’s reported net earnings for the quarter ebbed 44.7% to $57 million from $103 million in the year-ago quarter. Reported net earnings per share slashed 40.7% to 16 cents from 27 cents in the 2013-third quarter.
Revenues
Stryker’s third-quarter revenues escalated 11.1% year over year to $2,389 million and edged past the Zacks Consensus Estimate of $2,326 million. Volume and mix contributed 10.2% to revenue growth and acquisition contributed 3.4%. These were partly offset by unfavorable pricing impact of 2.3% and foreign currency impact of 0.2%.
On an organic basis (excluding the impact of acquisitions), net revenues grew 8.0% in the quarter. Revenues from the U.S. improved 12.4% to $1,628 million while that from the international market grew 8.3% to $761 million.
Segments Analysis
Revenues from Stryker’s core Reconstructive segment increased 8.5% (8.6% in constant currency) to $1,016 million in the reported quarter. Volume and product mix contributed 8.2%, while acquisition contributed 3.7%. These were partially offset by 3.2% due to prices and 0.1% due to unfavorable foreign currency exchange rates. Excluding the impacts of acquisitions and currency, revenues grew 4.9%.
Revenues from Stryker’s MedSurg segment increased 16.3% (16.6% in constant currency) to $936 million. Volume and product mix contributed 12.7% to revenue growth, while acquisition contributed 4.7%. Pricing and foreign currency had adverse impacts of 0.8% and 0.3%, respectively on revenue growth. Excluding the impacts of acquisitions and currency, revenues grew 11.9%.
Revenues from Stryker’s Neurotechnology and Spine segment rose 6.5% (6.9% in constant currency) to $437 million. Volume and product mix contributed 9.9% and acquisition contributed 0.4% to revenue growth. However, pricing and foreign currency had unfavorable impacts of 3.4% and 0.4% on revenues. Excluding the impacts of acquisitions and currency, revenues grew 6.5%.
Margins
Adjusted gross profit in the third quarter grew 6.7% to $1,567 million. However, adjusted gross margin contracted 270 basis points (bps) to 65.6% from 68.3% in the prior-year quarter. Adjusted operating income increased threefold to $450 million while adjusted operating margin jumped 1,180 bps to 18.8% from 7.0% in the third quarter of 2013.
Financial Position
Stryker ended the quarter with cash and cash equivalents of $1,356 million, up 1.3% from $1,339 million as of Dec 31, 2013. Long-term debt (excluding current portion) increased 18.0% to $3,231 million as of Sep 30, 2014 from $2,739 million as of Dec 31, 2013.
Stryker generated cash flow of $1,107 million from operations during the first nine months of the year, down 8.8% from $1,214 million in the same period of 2013 due to a fall in net earnings. Capital expenditures in the quarter rose 23.7% to $172 million from $139 million in the first nine months of 2013.
Outlook Reiterated
Stryker reiterated its guidance for full year 2014. The company expects organic revenue growth in the range of 5.0 to 6.0%.
Stryker continue to expect adjusted earnings per share in the range of $4.75 to $4.80 for the full year. The current Zacks Consensus Estimate of $4.76 lies within the guided range.
Our Take
Stryker continues to grow through acquisitions. In Dec last year, Stryker completed its acquisition of MAKO Surgical to get hold of the latter’s advanced robotic arm technology known as Robotic Arm Interactive Orthopedic System (“RIO”). The acquisition helped Stryker gain competitive edge in the hip-and-knee replacement market.
In March this year, Stryker completed acquisitions of Irvine, CA-based Patient Safety Technologies and Sunnyvale, CA-based developer of hip arthroscopy products, Pivot Medical, Inc.
Thereafter, in April, Stryker closed the Berchtold acquisition, which is expected to boost Stryker’s fast growing endoscopy division and operating room equipment product portfolio by adding complementary solutions.
However, Stryker faces strong competition from Johnson & Johnson (JNJ). It also faces obstacles for becoming a major medtech company from a couple of recent M&A activities. They include the merger announcements between Medtronic, Inc. (MDT) and Covidien plc (COV).
Currently, Stryker carries a Zacks Rank #3 (Hold).
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