Stryker’s First-Quarter Sales Rise 3.2 Percent

Stryker Corp. is off to a strong start this year.

The Kalamazoo, Mich.-based orthopedic device behemoth posted a 4.7 percent jump in adjusted earnings per share (EPS) during the first quarter, driven by 3.2 percent growth in net sales. At constant currency, net sales swelled 7.4 percent from the year-ago quarter.

Organic growth was nearly 6 percent in the period ending March 31, driven by improving volume and product mix, but partially offset by pricing headwinds. Acquisitions added 1.9 percent, while a strong U.S. dollar negatively impacted overall sales by 4.2 percent in the quarter. The year-over-year growth in net sales primarily was led by a solid performance from the MedSurg segment.

Adjusted gross margin contracted 100 bps to 65.6 percent, on the back of pricing pressure and unfavorable mix caused by acquisitions.
Adjusted operating margin contracted 80 basis points (bps) to 23.3 percent on a year-over-year basis. The contraction primarily was caused by negative impacts from unfavorable foreign exchange rate, pricing headwinds and unfavorable mix caused by recent acquisitions. However, the downsides were partially offset by operating improvements in the first quarter. Research and development expenses, as a percentage of sales, contracted 10 bps. On the other hand, selling, general and administrative expenses also fell 10 bps despite the company’s targeted reinvestments to strengthen its European selling and regional headquarter activities.

“We are pleased with our first quarter results, with another quarter of nearly 6 percent organic sales growth and disciplined expense management,” Chairman/CEO Kevin A. Lobo said. “We expect this momentum, which is balanced across segments and regions, to continue and are raising the low end of full year sales and earnings guidance.”

Segment Details

U.S. sales surged 8.5 percent year over year to $1.67 billion, driven by higher demand for orthopedic products (up 9.7 percent from Q1 2014), and strong MedSurg (up 8.1 percent) and Neurotechnology (up 10.4 percent) growth. International sales slipped 7.4 percent compared with the first quarter of last year (up 5.4 percent at constant currency) to $706 million, primarily due to an unfavorable foreign exchange rate.

Orthopedic sales increased 2.4 percent (7.5 percent at constant currency) to $1.02 billion, thanks primarily to an 8.7 percent spike in Trauma & Extremities sales and a whopping 17.8 percent jump in other sales. The gains fully offset a 1.9 percent and 0.9 percent decline in hips and knees sales, respectively.

Trauma & Extremities sales in the United States surged 18.4 percent. The segment reported a 3.5 percent decline (up 10.9 percent at constant currency) in the international market. Hips delivered a strong performance in the United States, with sales growth of 7.5 percent in the quarter.

MAKO faced some challenges in the first quarter, namely U.S. supply disruptions, which affected revenues for its implants. Notably, Stryker sold nine robots in the quarter. In late 2014, the company filed a 510-K application with the U.S. Food and Drug Administration (FDA) for the MAKO total Knee. The company expects to gain FDA approval for the product this year and gain meaningful sales from it in 2016.

MedSurg sales increased 4.6 percent (up 7.7 percent at constant currency) to $927 million compared with Q1 2014. Executives attributed the increase to solid growth in the medical business. Endoscopy, Medical and Sustainability sales reportedly grew 2.8 percent, 13.5 percent and 9.2 percent, respectively.

Finally, the Neurotechnology and Spine segment grew almost 2.1 percent (6.6 percent at constant currency) to $429 million, primarily owing to 9.2 percent growth in Neurotechnology sales. Spine sales declined 3 percent on a year-over-year basis in the quarter.
Cash & cash equivalents (including marketable securities), as of March 2015 amounted to $4.26 billion, compared with $5 billion as of Dec 2014. At the end of the first quarter of 2015, Stryker had $2.3 billion available for share repurchase under its recently expanded authorization.

Management raised the lower end of both its earnings and sales guidance for 2015. The new sales projection considers constant currency growth of 6 percent to 7 percent (previously 5.5 percent to 7 percent), with organic sales growth in the range of 5 percent to 6 percent (previously 4.5 percent to 6 percent). Bigwigs expect unfavorable foreign exchange rate to negatively impact net sales by 3.5 percent to 4.5 percent. Pricing pressure is expected to act as a headwind, going forward.

Adjusted EPS for 2015 is now expected to lie in the range of $4.95–$5.10 (previously $4.90–$5.10). For the second quarter of 2015, adjusted EPS is expected to be in the band of $1.15–$1.20.