Orthopedic devices major Stryker Corporation (SYK) reported first-quarter fiscal 2011 adjusted earnings per share of 90 cents, beating the Zacks Consensus Estimate by a penny while exceeding the year-ago earnings of 80 cents.
Adjusted net income climbed 9.9% year over year to $353 million. The adjusted earnings exclude charges (of $46 million) associated with the company’s acquisition of Boston Scientific’s (BSX) Neurovascular business.
However, on a reported basis, profit slipped 4.4% to $307 million (or 78 cents a share) on account of the hefty acquisition-related charges. The Michigan-based company’s shares fell $1.10 (or 1.80%) to $60 in after-hours trading on April 19, reflecting the lower reported profit. Stryker backed its full-year fiscal 2011 sales and adjusted earnings guidance.
Beyond the Bottom-line
Revenues soared 12% year over year to $2.02 billion, ahead of the Zacks Consensus Estimate of $2 billion. Sales were boosted by sustained double-digit growth at the company’s surgical equipment unit coupled with the acquisition of Boston Scientific’s Neurovascular business, which offset the lingering softness in its reconstructive business.
Acquisitions (including the Neurovascular business), volume and mix, and favorable foreign currency exchange swings contributed 6.2%, 5.9% and 1.8%, respectively, to the top-line growth. Domestic and international sales leaped 9% and 17.6%, respectively, in the quarter.
Segment Analysis
Revenues from Stryker’s Reconstructive business, offering replacement hip, knees and extremities products, edged up 1.9% (down 0.2% on constant currency basis) to $911 million. Stryker’s hips and trauma businesses posted growth in the quarter, partly offset by lower knee sales.
Hips sales improved across the domestic (up 5%) and international markets (up 9%), thanks to the favorable traction of new hip systems, Restoration ADM and MDM X3. Domestic knee sales (down 1%) were impacted by a soft market.
Stryker’s major competitors DePuy, a division of Johnson & Johnson (JNJ), and privately held Biomet also recently reported weak knee sales, which points to a general softness in the market. Another big rival Zimmer Holdings (ZMH) is due to report earnings on April 28.
However, according to Stryker, the Reconstructive result does not indicate a major turnaround as implant pricing and elective procedure volume still remains headwinds. Stryker stated that company-wide selling prices dipped 2% globally in the quarter. The joint replacement market has been hit by patient deferral of elective procedures, impacted by a host of macro issues including high unemployment rate and expiry of health insurance.
Revenues from the MedSurg division, Stryker’s growth business, surged 13.1% (up 11.9% on constant currency basis) year over year to $764 million. Growth was led by higher sales of surgical equipment and surgical navigation systems, endoscopic and communications systems, and patient handling and emergency medical equipment. Acquisitions contributed 2.3% to the growth.
Neurotechnology and Spine products sales rocketed 48.3% (up 45.9% on constant currency basis) year over year to $340 million, buoyed by higher shipments of neurotechnology products and the acquisition of the Neurovascular asset. Pricing and volume pressure, however, continue to hurt the spine implant business.
Margin Trends
Gross margin declined to 65.8% from 67.7% on account of higher cost of sales (up 18.5% year over year). Research, development and engineering expenses as a percentage of sales increased to 5.5% from 5% a year ago. Selling, general and administrative expenses (as a percentage of sales) rose to 38% from 37%. Operating margins fell to 21% from 24.8% a year ago due to the Neurovascular acquisition-related charges.
Financial Health
Stryker exited the quarter with cash and cash equivalents and marketable securities of $2,886 million, down 27% year over year, along with a long-term debt of $996.6 million (flat year over year). The company generated $204.5 million of cash from operations during the quarter, down 26% year over year. Stryker repurchased 4 million shares worth $250 million in the quarter.
Guidance and Recommendation
Stryker continues to envision revenues for fiscal 2011 to grow 11%-13% in constant currency driven by higher shipments of Reconstructive, MedSurg, and Neurotechnology and Spine products coupled with the contribution from acquisitions. The company expects foreign currency (assuming current exchange rates) to favorably impact sales by roughly 3%-4% in second-quarter 2011 and 1.5%-2.5% in full-year 2011.
Adjusted earnings forecast for fiscal 2011 remains in the range of $3.65 to $3.73 per share, representing a 10%-12% annualized growth. The company expects charges associated with the acquisition of the Neurovascular business would trim its 2011 earnings per share by roughly 28-30 cents versus its prior forecast of 21-25 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 an improving hospital capital spending backdrop. However, it faces stiff challenges from Zimmer Holdings, Smith & Nephew (SNN), CONMED Corp (CNMD) and Biomet, in a highly competitive orthopedic industry.
Moreover, the company still remains exposed to pricing and procedure volume pressure on its hip, knee and spine products. We are currently Neutral on Stryker, backed by a short-term Zacks #3 Rank (Hold).
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