In the second quarter of 2013, Stryker Corporation (SYK) reported adjusted earnings per share (EPS) of $1.00, up 2.0% year over year. However, it missed the Zacks Consensus Estimate by 3 cents due to foreign exchange headwinds. Adjusted EPS included the recently implemented Medical Device Excise Tax amounting to 3 cents per share. Adjusted net income increased 1.3% year over year to $380 million.
The adjusted earnings for the quarter exclude charges of $120 million, net of taxes (or 31 cents per share) related to the Rejuvenate and ABG II hip products recall in Jun 2012, resulting in a total charge of $400 million. It also excluded charges of $10 million (or 3 cents per share), net of tax, related to restructuring moves and $15 million (or 4 cents per share), net of tax, in charges associated with the company’s takeover and integration of Trauson, Surpass Medical and Boston Scientific’s (BSX) Neurovascular business. Additionally, a one-time expense of $22 million (or 6 cents per share), net of tax, related to regulatory matters in the U.S. was also excluded.
The Mich.-based orthopedic devices major’s net income (as reported) declined 34.5% to $213 million (or 79 cents a share).
Stryker’s second-quarter revenues grew 5.0% year over year to $2,212 billion, beating the Zacks Consensus Estimate of $2,192. Volume and mix contributed 7.8% to sales growth and acquisition contributed 0.6%. This was partly neutralized by unfavorable pricing impact and foreign currency exchange translation of 1.9% and 1.5%, respectively. On an organic basis (excluding the impact of acquisitions), net revenue grew 5.9% at constant exchange rate (:CER).
Sales in the U.S. increased 5.4% to $1,458 million and international sales improved 4.2% (up 8.6% at CER). The sequential turnaround in Stryker’s international business reflects positive impact of the company’s globalization efforts. The company experienced double-digit growth in emerging markets. Europe too delivered encouraging results this quarter.
Revenues from Stryker’s core Reconstructive unit grew 5.6% (or 7.6% at CER) to $979 million in the second quarter. Domestic hip sales climbed 6% and international revenues improved 5.9% at CER. Stryker’s knee business inched up 1.8% in the U.S. and climbed 10.4% at CER. The U.S. trauma and extremities business witnessed an 18.9% rise in sales, led by robust sales of foot and ankle offerings along with contributions from new products and sales force expansion. Sales in the global markets jumped 15.0% at CER.
Revenues from Stryker’s MedSurg segment increased 4.2% (up 4.8% at CER) year over year to $819 million, boosted by the Medical and Sustainability Solutions franchises. New offerings like the 1488 camera and the System 7 power tools also contributed to sales growth. Within MedSurg, Instrument sales inched up 1.1% in the U.S., while it grew 2.2% overseas. However, the Neptune recall adversely affected sales in the U.S.
Endoscopy sales were up 4.8% and 3.9% in the U.S. and international markets, respectively. Medical segment revenues increased 6.3% in the U.S. and surged 22.5% at CER in the overseas market.
Stryker’s Neurotechnology and Spine segment continues its solid growth streak with revenues increasing 5.4% (up 7.5% at CER) year over year to $414 million. Growth was led by Stryker’s IVS and Neurovascular business. Sales from the Neurotechnology sub-segment climbed 9.6% and 3.5% (at CER) in the U.S. and global markets, respectively. Core spinal implant sales improved 2.7% in the U.S. and climbed 11% at CER, globally. Global sales included contribution from the newly acquired Trauson business.
Adjusted gross margin in the second quarter was 67.7% versus 68.3% in the previous-year quarter. It included the negative impact of the medical device excise tax in 2013, which reduced gross margin by 80 basis points (bps), and the adverse impact of foreign exchange rates.
Selling, general and administrative (SG&A) expenses rose 23.3% to $1,015 million, mainly due to product recalls and regulatory costs. On an adjusted basis, SG&A was 36.7% of sales compared with 37.1% of sales in the prior year. Research, development and engineering expenses increased 13.8% to $132 million due to increased investment in additional R&D projects and innovation activities.
Adjusted operating margin was 23.3%, an 80 bps decline from the year-ago quarter. This was mainly due to the medical device tax, foreign currency fluctuations and higher R&D spending, partially offset by operational efficiency.
Stryker ended the quarter with cash and cash equivalents and marketable securities of $4,652 million, up roughly 34.5% year over year. Long-term debt jumped 56.8% to $2,742 million.
The company repurchased 3.8 million shares in the first half of 2013 under the company’s share repurchase program. Shares worth approximately $750 million are still available for repurchase.
Stryker raised its sales guidance for 2013 driven by solid sales performance in the first half of the year as well as the prevailing market conditions. Revenues are expected to grow 5.0%–6.5% at CER (earlier 4.0%–6.5%) in 2013. The company expects foreign currency (assuming current exchange rates) to hurt sales by roughly 1.5%–2.5% in the third quarter as well as full year 2013. Constant currency sales growth, excluding acquisitions, is projected in the range of 4.0%–5.5% (earlier 3.0%–5.5%).
However, Stryker lowered its projection for adjusted earnings in the range of $4.20—$4.26 (earlier $4.25—$4.40) a share for 2013, primarily due to negative foreign exchange impact of 20 cents. The current Zacks Consensus Estimate of $4.29 for 2013 is above the provided guidance.
We are encouraged by the recent stability in Stryker’s businesses, especially the core recon business but the company remains challenged by adverse foreign exchange swings, which are dampening bottom-line growth. In addition, Stryker faces several challenges including a tough hospital capital budget environment.
The company’s well-diversified product portfolio, increasing footprint in emerging markets along with acquisitions are expected to drive future growth. Moreover, the company remains committed to delivering incremental returns to investors via share repurchase and dividends.
Stryker carries a Zacks Rank #3 (Hold). Medical products companies, such as Resmed (RMD), carrying a Zacks Rank #1 (Strong Buy) and Hanger (HGR), which carries a Zacks Rank #2 (Buy), are expected to do well.
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