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Stryker Misses Rev Est, EPS In Line

Zacks Equity Research

Stryker Corp. (SYK) reported its second quarter 2012 adjusted earnings of 98 cents per share, in line with the Zacks Consensus Estimate and surpassing the year-ago earnings of 90 cents per share (up 8.9%).

Adjusted earnings exclude restructuring expense of $12 million; integration and acquisition-related expense of $5 million and legal expenses of $33 million associated with sales and marketing of OtisKnee.

In the reported quarter, profits increased 4.8% year over year to $325 million (or 85 cents a share), led by higher domestic sales and margin expansion.


Revenues rose 2.9% (up 5% in terms of constant currency) year over year to $2,106 million, but fell short of the Zacks Consensus Estimate of $2,129 million. Revenues were driven by healthy sales across its three segments in the U.S., partially offset by a weak European economy and currency fluctuations.

Acquisitions contributed 2.2% while higher volumes along with improved product mix contributed 4.4% to total sales growth. However, currency rates and fluctuating prices negatively impacted revenues by 2% and 1.6%, respectively. Excluding the impact of acquisitions, revenues increased 2.7% year over year in constant currency.

On a geographic basis, revenues in the U.S. rose 7.7% to $1,384 million but sales in international markets dropped 5.1% (up 0.3% in constant currency) to $722 million, respectively.

Segments Analysis

Revenues from the core Reconstructive business (44% of total sales) inched up 1.2% (up 3.5% in constant currency basis) to $927 million. Barring the impact of acquisitions, revenues from this segment increased 1.6% year over year in constant currency. The quarter witnessed strong U.S. Reconstructive sales, which largely offset pricing pressure and soft international sales in Europe and Japan.

Within Reconstructive, sales (as reported) from Trauma and Extremities business rose 6.4% to $233 million led by acquisitions. However, Hips sales dipped 1.3% to $308 million and revenues from Knee remained flat year over year on a reported basis. The company expects weak European sales to adversely affect global reconstructive sales for the full year.

MedSurg sales (37% of total sales) grew 1.7% (up 3.3% in constant currency) to $786 million in the quarter, supported by gains from Sustainability Solutions and Instruments sales. Excluding the impact of acquisitions, revenue from MedSurg segment increased 3% year over year in constant currency.

Within MedSurg, the Instruments division reported a healthy sales growth of 8.7% to $314 million, driven by System 7 power tools. However, Endoscopy sales were flat year over year at $264 million and Medical segment revenues plunged 12.2% to $158 million. Stryker expects continued growth in Instruments and Sustainability Solutions along with new products from the Endoscopy segment to boost sales in the second half of 2012.
Stryker’s Neurotechnology and Spine business (19% of total sales) soared 10.1% (up 12.4% in constant currency) to $393 million. Barring acquisitions, sales from this segment increased 5.2% in constant currency. Sales were primarily driven by the Orthovita and Concentric acquisitions, which offset the weak results of the core Spine business.

Sales from the Spine and Neurotechnology sub-segments rose 6.5% and 13.4% to $181 million and $212 million, respectively. However, soft spinal implant sales continue to dampen profits.


Gross margin rose to 68.1% in the reported quarter from 65.2% a year ago. One-time expenses reduced gross margin by 0.1%. Operating margin increased to 21.1% from 19.6% a year ago. Selling, general and administrative expenses were 39.1% of sales, compared with 38.4% a year ago. Research and development expenses, as a percentage of sales, were 5.5%, roughly flat year over year.

Balance Sheet

Stryker exited the quarter with cash and cash equivalents and marketable securities of $3,460 million, up 29.3%. Long-term debt increased 75.6% year over year to $1,750 million.

In the quarter, Stryker repurchased roughly 0.7 million shares for $39 million. The company generated $457 million in cash from operations, resulting in a marked sequential increase.


Stryker reiterated its revenue and earnings guidance for 2012. It forecasts revenues to increase in a range of 3.5% to 6.5% in terms of constant currency. Excluding the impact of acquisitions, the company expects revenue to increase in a band of 2% and 5%. Stryker expects adjusted earnings to grow at double-digit levels for 2012.

Stryker, however, raised its forecast regarding the negative impact of foreign currency (assuming current exchange rates) on net sales for the full year and expects it to unfavorably impact sales by roughly 1% to 2% for the full year (earlier it was 0.5% –1.5%). For the third-quarter 2012, the company expects an adverse impact of 2% to 3%.

We believe that Stryker is poised for growth on the back of new products, ongoing cost control measures and increasing operating efficiency. The company is expanding its product portfolio by acquiring complementary businesses and leveraging a solid balance sheet.

However, turmoil in international markets especially in Europe and Japan coupled with declining U.S. medical results remain a challenge for the company. Stryker was also involved in a series of acquisitions in the recent past, pressed by sustained pricing and procedure volume pressure and hence needs to optimally integrate them in its results.

Stryker operates in a highly competitive orthopedic industry and faces strong competition from players like Zimmer (ZMH). Moreover, despite recent stability in the domestic market, it remains challenged by currency fluctuations and pricing pressure. Our Neutral recommendation on Stryker carries a short-term Zacks #3 Rank (Hold).

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