Medical technology giant Stryker Corporation (SYK) reported strong third-quarter fiscal 2010 results with adjusted earnings per share of 80 cents beating the Zacks Consensus Estimate of 77 cents and surpassing the year-ago earnings of 69 cents. Adjusted earnings exclude one-time items such as gain on sale of the company’s orthopaedic implants manufacturing facility in France and tax adjustments.
Healthy sales from the MedSurg Equipment business boosted net income, which catapulted 47.5% year-over-year to $338 million (or 85 cents a share). Adjusted net income rose 14.2% year-over-year to $317 million. The better-than-expected results coupled with the company’s upward guidance revision pushed up Stryker’s shares $2.68 (or 5.4%) to $52.75 in after-hours trading on October 19.
Highlights from the Quarter
Revenues grew 6.9% year-over-year to $1,768 million, ahead of the Zacks Consensus Estimate of $1,749 million. Excluding the foreign currency translation impact, net sales increased 7% year-over-year. Strong growth at the MedSurg division was partly offset by yet another sluggish performance by the Orthopedic business.
Segment Analysis
The Orthopedic Implants unit continues to struggle with sales increasing by a mere 1.2% year-over-year (1.3% on constant currency basis) to $1,029 million. Higher revenues (on a global basis) from hips and trauma products were marred by weak spine and knees sales. The division remains affected by pricing pressure (especially on spine products) and soft procedure volume.
Stryker faces stiff challenges from Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and DePuy, a division of Johnson & Johnson (JNJ) in a highly competitive orthopedic industry. DePuy and Biomet recently reported weak orthopedic sales, which underscore a general sluggishness in the industry. The replacement hips and knees markets continue to be hit by the lingering economic weakness.
The MedSurg division, meanwhile, continued its double-digit growth momentum with revenues cruising 16.1% year-over-year (16.3% on constant currency basis) to $739 million. Growth was led by higher sales of surgical equipment and surgical navigation systems (up 13%), endoscopic and communications systems (up 7%), and patient handling and emergency medical equipment (up 8%). Ascent Healthcare acquisition contributed 6% to the growth.
Geographically, U.S. revenues (up 9.7%) contributed 66% of the total sales while International sales (up 1.7%) accounted for the balance. Domestic sales benefited from higher shipments of orthopedic implants and surgical equipment while international revenue growth was muted on account of an unfavorable foreign exchange translation effect.
Margin Trends
Gross margin improved to 69.4% from 67.4% a year-ago on the back of revenue growth, favorable currency impact on costs and lower inventory charges. Research, development and engineering expenses as a percentage of sales increased to 5.6% from 5.1% a year-ago. Selling, general and administrative expenses (as a percentage of sales) decreased to 36.4% from 38.9%. Stryker’s cost-management initiatives helped increase operating margins to 26.6% from 18.8% a year-ago.
Financial Health
Stryker exited the quarter with cash and cash equivalents of $925.6 million, down 3.6% year-over-year, along with a long-term debt of $996.4 million. The company generated $428.3 million of cash from operations in the quarter, down 8% year-over-year.
Guidance Tweaked
Stryker has raised the bottom-end of its sales and earnings guidance for fiscal 2010. The device maker now expects net sales to grow between 7% and 8% (up from 5% and 8%) on a constant-currency basis. Stryker expects foreign exchange (assuming exchange rates near September 30 level) to drag net sales by 0% to 1% in the fourth quarter and to favorably impact by 0.5% to 1% in fiscal 2010.
Based on the changes in the sales forecast, the company has lifted its earnings per share guidance for fiscal 2010 to between $3.27 and $3.30 from the earlier projection of $3.20 and $3.30. The current Zacks Consensus Estimate for 2010 is $3.26.
Our Take on Stryker
Stryker is one of the world’s largest medical devices companies operating in the global orthopedic market and is armed with a well diversified product portfolio. Moving forward, we feel that Stryker should benefit from new product launches and the improving hospital capital spending backdrop, which has rebounded from a slowdown at the height of the recession.
However, we point out some areas of concerns such as pricing/procedure volume pressure in the orthopedic business, sluggish European markets and a still soft reconstructive implant market, 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).
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