Medical technology giant Stryker Corp. (SYK) reported second-quarter fiscal 2010 results after the closing bell on Tuesday, with earnings per share of 80 cents matching the Zacks Consensus Estimate and surpassing the year-ago earnings of 73 cents.
Higher sales from the MedSurg Equipment business catalyzed a 9.5% growth in net income which came in at $319 million. However, on the flipside, lower-than-expected sales due to discouraging Orthopedic results pushed down Stryker’s shares, which slid $1.79 (or 3.49%) to $49.50 in after-hours trading.
Revenues for the quarter grew 7.6% year-over-year to $1,758 million, but trailed behind the Zacks Consensus Estimate of $1,767 million. Excluding a favorable foreign currency translation, net sales increased 6.9% year over year. Healthy growth at MedSurg was marred by a sluggish Orthopedic business.
Segment Analysis
Orthopedic Implants business struggled in the quarter with sales increasing by a mere 2.2% (1.4% on constant currency basis) to $1,036 million, attributable to weak hips, knees and spinal devices sales. Pricing pressure on the company’s hip, knee and spine products are affecting the division’s results. The sunny side of this was the encouraging growth in trauma products.
Orthopedic industry is highly competitive and Stryker faces stiff challenges from its peers such as Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp. (CNMD), Biomet and DePuy, a division of Johnson & Johnson (JNJ). DePuy reported weak sales for its hips and knees on July 20, which underscores the macro concerns related to product pricing pressure. Stryker’s spinal implants products, in particular, are facing the heat in a market where rival offerings continue to make in-roads.
However, Stryker’s MedSurg Equipment division continues to post double-digit growth with revenues cruising 16.4% year-over-year to $722 million. Growth was led by the acquisition of Ascent Healthcare (with 6% contribution), higher sales of surgical equipment and surgical navigation systems (up 12%), endoscopic and communications systems (up 9%), and patient handling and emergency medical equipment (up 22%).
Geographically, U.S. revenues (up 10.8%) contributed 66% of the total sales while International sales (up 1.8%) accounted for the balance. Domestic sales benefited from higher demand across both segments while international revenue growth was muted on account of lower shipments of Orthopedic Implants, discontinued product lines, termination of certain distribution channels, and a soft hospital capital spending backdrop in Europe.
Margin Trends
Gross margin improved to 69.3% from 67.2% a year-ago on the back of top line growth, favorable currency impact on costs and lower inventory charges. Research, development and engineering expenses as a percentage of sales were essentially flat year-over-year at 5.4%. Selling, general and administrative expenses (as a percentage of sales) were also stable year-over-year at 37.6%. Stryker’s cost-management initiatives helped increase operating margins to 25.5% from 23.9% a year-ago.
Financial Health
Stryker exited first-half fiscal 2010 with cash and cash equivalents of $785.2 million, a 13.8% year-over-year improvement. The company had a long-term debt of $996.3 million at the end of the period. Stryker generated $326.7 million of cash from operations in the quarter, up 79% year over year.
Outlook & Recommendation
Stryker has reiterated its sales and earnings guidance for fiscal 2010. The device maker continues to expect net sales to grow between 5% and 8% on a constant-currency basis. Projected earnings per share for the year remains in the range of $3.20 to $3.30. The current Zacks Consensus Estimate for 2010 is $3.26, reflecting a 10.6% year-over-year growth.
Stryker expects foreign currency (at current exchange rates) to drag net sales by 1% to 2% in the third quarter and 0% to 1% in fiscal 2010. Despite concerns over its Orthopedic unit, Stryker remains confident about meeting its sales expectation for fiscal 2010.
Stryker is one of the world’s largest medical devices companies operating in the global orthopedic market. The company’s well diversified product portfolio is a natural hedge against the risk of revenue shortfall in a volatile economy. Moving forward, we feel that Stryker should benefit from the resurgent replacement hips and knees markets, which has rebounded from a slowdown in the height of the recession.
However, we point out some areas of concerns such as pricing pressure and stiff competition in the orthopedic space, sluggish European markets, and a challenging hospital capital spending environment, which could potentially dent future earnings. We currently have a long-term Neutral recommendation on Stryker, which is supported by the short-term Zacks #3 Rank (Hold).
Read the full analyst report on “SYK”
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