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Stryker Corporation (SYK - Analyst Report) saw a healthy double-digit growth in its profits in the fourth quarter, which bucked a declining trend witnessed in the first three quarters of 2011. The Michigan-based orthopedic devices major’s profit (as reported) shot up 35.9% to $401 million (or $1.05 a share) in the quarter on the heels of strong revenues.
The company’s adjusted earnings of $1.02 a share for the fourth quarter matched the Zacks Consensus Estimate and exceeded the year-ago earnings of 93 cents a share. Adjusted net income rose 5.1% year over year to $390 million.
The adjusted earnings for the quarter exclude a benefit of roughly $99 million (after tax) stemming from a favorable settlement with the U.S. Internal Revenue Service, charges of $60 million related to the previously communicated headcount reduction and other restructuring moves, and $28 million in charges associated with the company’s takeover of Orthovita, Memometal Technologies, Concentric Medical and Boston Scientific’s (BSX - Analyst Report) Neurovascular business.
Stryker was involved in a series of acquisitions last year pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses.
For the full year, profit (as reported) rose 5.7% year over year to $1,345 million (or $3.45 a share). Adjusted earnings per share of $3.72 missed the Zacks Consensus Estimate by a penny and surpassed the year-ago earnings of $3.33 a share.
Stryker’s fourth quarter sales climbed 11% year over year (10.7% on a constant currency basis) year over year to $2.2 billion, essentially in line with the Zacks Consensus Estimate. The growth was triggered by higher sales across the company’s surgical equipment (“MedSurg”) and Neurotechnology and Spine divisions.
Volume and mix, acquisitions, and favorable foreign currency exchange translation contributed 5.7%, 6.7% and 0.3%, respectively, to growth, partly neutralized by an unfavorable pricing impact of 1.7%. Geographically, U.S. and international sales jumped 9.4% and 14%, respectively, in the quarter.
For the full year, sales leapt 13.5% (11.1% in constant currency) to $8.3 billion, also matching the Zacks Consensus Estimate. The constant currency growth dovetailed the company’s guidance of 11%-12%. U.S. and international revenues climbed 9.9% and 20.2%, respectively.
Revenues from Stryker’s core Reconstructive unit, offering replacement hip, knees and extremities products, crept up 1.3% (or 0.7% in constant currency) to $981 million in the fourth quarter. The constant currency growth shows a marked deceleration from a 3.9% growth achieved in the previous quarter, which points to a weak reconstructive market fundamentals.
Growth in trauma and extremities franchise coupled with contributions from acquisitions was, in part, masked by weak hip and knee business. Stryker and its peers in the orthopedic space continue to struggle due to sustained patient deferral of elective procedures given a still unstable job market.
Domestic hip sales declined 0.7% while international revenues increased 3% (up 1.5% in constant currency) in the quarter. The company is seeing favorable traction for its new hip systems ADM and MDM X3. Trauma and extremities business had another healthy quarter with sales climbing 9.8% and 8.5% (up 7% in constant currency) in the U.S. and international markets, respectively.
Stryker’s knee business continues to struggle with sales declining 2% (down 2.4% in constant currency) impacted by a soft market. U.S. knee sales dipped 3.5% in the quarter while international knee sales fell 0.4% in constant currency. The new OtisMed pre-op surgical cutting guides represent a promising growth catalyst for the knee business and should help drive results in 2012.
Revenues from Stryker’s MedSurg segment soared 11.2% (up 11.1% in constant currency) year over year to $857 million, boosted by higher shipments of emergency medical equipment and surgical and endoscopic systems. Excluding contributions from acquisitions, MedSurg sales climbed 10.8% in constant currency.
Within MedSurg, patient handling and emergency medical equipment business posted strongest growth with sales leaping 17% (up 17.4% in constant currency). Healthy double-digit growth was witnessed across the U.S. and international medical businesses.
Stryker’s Neurotechnology and Spine segment continues its solid growth streak with revenues cruising 47.3% (up 46.8% in constant currency) year over year to $377 million, buoyed by acquisitions and higher neurotechnology products shipment. Barring acquisition, sales from this division inched up 1.7% in constant currency. The company continues to see pricing and volume pressure in the spinal implants market.
Gross margin clipped to 66.6% from 68.7% a year ago, hurt by acquisition and integration charges (including inventory step-up costs). Acquisition and restructuring related charges reduced operating margin to 18.9% from 19.4% in the year-ago quarter. Research, development and engineering expenses as a percentage of sales fell to 5.2% from 5.6% a year ago. Selling, general and administrative expenses (as a percentage of sales) rose to 37.7% from 36.8%.
Stryker ended the quarter with cash and cash equivalents and marketable securities of $3,418 million, a year-over-year decline of roughly 28%, partly due to cash spent on acquisitions. Long-term debt increased 76% year over year to $1,751 million.
Stryker generated $627 million of cash from operations during the fourth quarter, up 21% year over year, with free cash flows of $563 million. The company repurchased 1.8 million shares in the fourth quarter, bringing the total repurchases to 11.8 million (worth $622 million) for fiscal 2011.
Guidance and Recommendation
Moving ahead, Stryker envisions revenues for fiscal 2012 to grow 3.5%-6.5% in constant currency. The company expects foreign currency (assuming current exchange rates) to favorably or unfavorably impact sales by roughly 0.5% in first-quarter 2012 and negatively impact full year sales by roughly 0.5%-1.5%.
Barring the foreign currency and acquisition impact, sales have been forecast to grow by 2%-5%. The organic growth outlook appears to indicate sustained pressure in the core reconstructive business.
The company expects adjusted earnings to grow at a double-digit clip over the projected adjusted earnings for fiscal 2011. Stryker expects earnings of $3.88 a share and adjusted earnings of $4.10 a share for fiscal 2012. The current Zacks Consensus Estimate is $4.12. The company sees charges associated with acquisition/integration and restructuring to trim 2012 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 - Analyst Report), Johnson & Johnson’s (JNJ - Analyst Report) DePuy and Smith & Nephew (SNN - Snapshot Report). Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market and pricing and elective procedure volume still remains headwinds. Our long-term Neutral recommendation on Stryker is in agreement with the short-term Zacks #3 Rank (Hold).
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