Stryker Corp. (SYK), a global medical technology company, reported its first quarter fiscal 2012 adjusted earnings of 99 cents per share, in line with the Zacks Consensus Estimate and surpassing the year ago earnings of 90 cents per share. Adjusted earnings exclude restructuring expense of $12 million and integration and acquisition-related expense of $17 million, associated with the takeover of Neurovascular, Memometal, Concentric and Orthovita.
In the reported quarter, profits climbed 14% year over year to $350 million (or 91 cents a share).
Revenue
Revenues rose 7.2% (up 7.4% in terms of constant currency) year over year to $2,161 million beating the Zacks Consensus Estimate of $2,115 million. Growth was backed by balanced upticks across all segments, acquisitions and a diverse portfolio of products.
Acquisitions and higher volumes along with better product mix contributed 2.3% and 6.9%, respectively, to the sales growth. However, currency rates and fluctuating prices negatively impacted revenues by 0.2% and 1.7%, respectively.
On a geographic basis, revenues in the U.S. and international markets rose 8.2% and 5.6% (6.1% in constant currency) to $1,384 million and $777 million, respectively.
Segments Analysis
Revenues from the core Reconstructive business grew 5.2% (both on reported and constant currency basis) to $958 million. Barring the impact of acquisitions, revenue from this segment was higher by 3.4% year over year in constant currency.
Within Reconstructive, sales (as reported) from Hips, Knees along with Trauma and Extremities sub-segments moved up 3.3%, 5.1% and 9% to $312 million, $352 million and $243 million, respectively. Hips and Knees sales showed signs of improvement in the quarter but the company expects continued pricing pressure in this segment.
MedSurg sales increased 7.5% (up 7.9% in constant currency) to $821 million in the quarter, supported by solid gains from Sustainability Solutions and the launch of System 7 power tools. Excluding the impact of acquisitions, revenue from MedSurg segment grew 7.6% year over year in constant currency.
Within MedSurg, Instruments, Endoscopy and Medical sub-divisions reported a healthy sales growth of 10.2%, 4.1% and 4.7% to $314 million, $279 million and $179 million, respectively. Although the Medical business posted strong double-digit sales growth in the international markets, reported sales in the U.S. declined by 1.8% from the year-ago quarter.
Stryker’s Neurotechnology and Spine business soared 12.4% (up 12.3% in constant currency) to $382 million. Barring acquisitions, sales from this segment increased 4.3% in constant currency.
Sales from the Spine and Neurotechnology sub-segments surged 12.4% and 12.3%, to $181 million and $201 million, respectively. However, the soft spinal hardware division still continues to dampen profits generated from the growing Neurovascular, and Neuro, Interventional Spine, Spine and ENT businesses.
Gross margin rose to 67.2% in the reported quarter from 65.8% a year ago. Operating margin increased to 22% from 21% a year ago. Selling, general and administrative expenses were 37.9% of sales, roughly flat year over year. Research and Development expenses, as a percentage of sales, fell slightly to 5.2% from 5.5% in the year-ago period.
Balance Sheet
Stryker exited the quarter with cash and cash equivalents and marketable securities of $3,297 million, 14.2% higher than the previous year. Long-term debt increased 75.7% year over year to $1,751 million.
The company produced $35 million cash from operations, down 82.8% year over year. In the first quarter, Stryker repurchased roughly 1 million shares for $50 million.
Guidance
For fiscal 2012, Stryker forecasts revenue to increase in the range of 3.5% to 6.5% in terms of constant currency. Excluding the impact of exchange rates and acquisitions, the company expects revenue to grow in the band of 2% and 5%.
Stryker expects foreign currency (assuming current exchange rates) to unfavorably impact sales by roughly 1% to 2% in second-quarter 2012 and full year sales by roughly 0.5% -1.5%.
The company expects adjusted earnings to grow at double-digit levels for fiscal 2012. It is also expected that acquisitions and restructuring related charges will dampen reported earnings per share by roughly 22 cents.
We believe that Stryker is poised for growth powered by new products, acquisitions and recovery in capital spending by hospitals. The company is expanding its product portfolio by acquiring complementary businesses leveraging a solid balance sheet.
However, Stryker operates in a highly competitive orthopedic industry and faces strong competition from players like Zimmer (ZMH), Johnson & Johnson‘s (JNJ) DePuy and Smith & Nephew (SNN). Moreover, despite recent stability, it remains challenged by the lumpiness in the reconstructive implant market and pricing and elective procedure volume still remain headwinds. Our long-term Neutral recommendation on Stryker is in agreement with the short-term Zacks #2 Rank (Buy).
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