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Stryker Corporation (SYK - Analyst Report) posted a nearly 1.0% rise in adjusted earnings per share to $1.08 in the second quarter of 2014 from $1.07 in the prior-year quarter but missed the Zacks Consensus Estimate by a penny. Adjusted net earnings rose modestly by 2.2% to $415 million from $406 million in the second quarter of 2013.

The adjustments include charges for the recall of Rejuvenate, ABG II and Neptune, acquisition and integration related charges, additional cost of sales for inventory sold that was “stepped up” to fair value related to acquisitions, restructuring and related charges, certain charges related to regulatory and legal matters, and amortization of intangible assets.

Stryker’s reported net earnings for the quarter went up roughly 1.0% to $215 million from $213 million in the year-ago quarter. However, reported net earnings per share were flat at 56 cents for the quarter on a year-over-year basis.
 

 

Revenues

Stryker’s second-quarter revenues escalated 6.8% year over year to $2,363 million and edged past the Zacks Consensus Estimate of $2,349 million. Volume and mix contributed 6.8% to revenue growth and acquisition contributed 2.1%. These were partly neutralized by unfavorable pricing impact of 2.0%.

On an organic basis (excluding the impact of acquisitions), net revenues grew 5.0% in the quarter. Revenues from the U.S. improved 7.6% to $1,569 million while that from the international market grew 5.4% to $794 million.

Segments Analysis

Revenues from Stryker’s core Reconstructive segment increased 6.5% (6.3% in constant currency) to $1,028 million in the reported quarter driven by solid growth in the Trauma and Extremities business. Volume and product mix contributed 6.5%, acquisition contributed 2.8%, and favorable foreign currency contributed 0.1% to revenue growth. Excluding the impacts of acquisitions and currency, revenues grew 3.6%.

Revenues from Stryker’s MedSurg segment increased 8.8% (9.0% in constant currency) to $905 million, boosted by strong growth in Endoscopy business. Volume and product mix contributed 7.8% to revenue growth. However, acquisition and foreign currency had adverse impacts of 1.1% and 0.2%, respectively on revenue growth. Excluding the impacts of acquisitions and currency, revenues grew 6.7%.

Revenues from Stryker’s Neurotechnology and Spine segment rose 3.8% (3.9% in constant currency) to $430 million, driven by Neurotechnology sales. Volume and product mix contributed 5.5% and acquisition contributed 0.2% to revenue growth. However, pricing and foreign currency had unfavorable impacts of 1.9% and 0.1% on revenues. Excluding the impacts of acquisitions and currency, revenues grew 3.7%.

Margins

Adjusted gross profit in the second quarter grew 4.5% to $1,564 million. However, adjusted gross margin contracted 150 basis points (bps) to 66.2% from 67.7% in the prior-year quarter. Adjusted operating income increased 2.4% to $565 million but adjusted operating margin decreased 110 bps to 23.9% from 25.0% in the second quarter of 2013.

Financial Position

Stryker ended the quarter with cash and cash equivalents of $1,319 million, down 1.5% from $1,339 million as of Dec 31, 2013. Long-term debt (excluding current portion) increased 18.2% to $3,237 million as of Jun 30, 2014 from $2,739 million as of Dec 31, 2013.

Stryker generated cash flow of $572 million from operations during the first half of the year, down 3.4% from $592 million in the same period of 2013 due to a fall in net earnings. Capital expenditures in the quarter rose 29.2% to $124 million from $96 million in the same period last year.

Outlook

Stryker updated its guidance for the full year 2014. The company expects organic revenue growth in the range of 5.0 to 6.0% compared with the earlier range of 4.5 to 6.0%.

Stryker now expects adjusted earnings per share in the range of $4.75 to $4.80 for the full year compared with the earlier band of $4.75 to $4.90. The current Zacks Consensus Estimate of $4.80 lies within the guided range.

For the third quarter of the year, Stryker projected adjusted earnings per share between $1.12 and $1.16 compared with the Zacks Consensus Estimate of $1.16.

Our Take

Stryker continues to grow through acquisitions. In Dec last year, Stryker completed its acquisition of MAKO Surgical to get hold of the latter’s advanced robotic arm technology known as Robotic Arm Interactive Orthopedic System ("RIO"). The acquisition helped Stryker gain competitive edge in the hip-and-knee replacement market.

In March this year, Stryker completed acquisitions of Irvine, CA-based Patient Safety Technologies and Sunnyvale, CA-based developer of hip arthroscopy products, Pivot Medical, Inc.

Pivot’s offerings are expected to complement Stryker's existing Sports Medicine portfolio and will provide Stryker's customers with more comprehensive solutions to address certain challenges faced during current Sports Medicine procedures.

Thereafter, in April, Stryker closed the Berchtold acquisition, which is expected to boost Stryker’s fast growing endoscopy division and operating room equipment product portfolio by adding complementary solutions.

However, Stryker faces strong competition from Johnson & Johnson (JNJ - Analyst Report). It also faces obstacles for becoming a major medtech company from a couple of recent M&A activities. They include the merger announcements between Medtronic, Inc. (MDT - Analyst Report) and Covidien plc (COV - Analyst Report), and between Zimmer Holdings, Inc. (ZMH - Analyst Report) and privately-owned Biomet, Inc.

Currently, Stryker carries a Zacks Rank #3 (Hold).

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