Stryker Q4 Profits Dip, Sales Up

Stryker Corp. reported that profit for the fourth quarter (ended Dec. 31, 2014) fell 33 percent due to the higher costs of recalls of its metal-on-metal hip products and the opening of the Kalamazoo, Mich.-based firm’s new European headquarters in the Netherlands.

For the quarter, Stryker reported a profit of $260 million, or 67 cents a share, down from $386 million, or $1.01 a share, compared to the same quarter last year. Excluding recall charges and other items, profit rose 11.6 percent to $1.44. Revenue rose 6 percent to $2.62 billion.

Domestic sales rose 11.1 percent to $1.82 billion, while sales abroad fell 3.8 percent to $800 million, in line with the company’s preliminary figures. Excluding the impact of foreign currency, international sales improved by 3.8 percent.

Excluding currency fluctuations, Stryker’s overall sales for the company’s orthopedics segment rose 1.7 percent. The sales gains were due to 9.1 percent growth in trauma and extremities sales and 12.5 percent jump in “other” sales, which offset a 2.9 percent and 2.2 percent dip in hips and knees sales, respectively.

Trauma and extremities sales in the United States grew 18.7 percent. The segment reported mid-single-digit growth in the international market. Hips delivered strong performance in the United States as well, with sales growth of 4.5 percent in the quarter. However, international sales in both segments dropped due to pricing headwinds and operational problems in Japan, according to company officials.

Neurotechnology and spine segment sales, also adjusting for currency fluctuations, improved 3.9 percent to $262 million owing to 9.2 percent growth in neurotechnology sales. Spine sales declined 2.5 percent on a year-over-year basis. Medical instruments’ sales rose 12.1 percent.

For the year, the company reported net earnings of $515 million, down 48.8 percent. On a per-share basis, it was $1.34 per diluted share, down 49 percent from a year ago. Net sales for the full year were $9.65 billion, up 7.3 percent from the $9 billion generated in 2013.

Stryker’s reported net earnings include charges for the Rejuvenate, ABG II and Neptune recalls, tax impacts related to the establishment of the European regional headquarters and a planned cash repatriation, acquisition and integration related charges, the additional cost of sales for inventory sold that was “stepped up” to fair value related to acquisitions, restructuring and related charges, and certain charges related to regulatory and legal matters.

An Eye on the Next Buy
Kevin Lobo, CEO of Stryker said his company is making acquisitions a “first priority” for the company’s cash—followed close behind by a stock repurchase.

Rumors have swirled on and off for a year that the company has been eyeing a takeover of its United Kingdom-based orthopedic rival Smith & Nephew plc.

During a conference call about the company’s fourth-quarter earnings, Stryker’s CEO said, “Obviously the timing of acquisitions is unpredictable in that if those acquisitions don’t materialize in a reasonable period of time, then we would be open to larger share buybacks. So right now, we’re pursuing the acquisition deal flow, and we’ll see what happens.”

The orthopedic industry has seen large consolidations via mergers in recent years, with Johnson & Johnson buying Synthes for about $21 billion in 2012, and Zimmer Holdings Inc. in the process of acquiring privately held Biomet for $13.4 billion. Wright Medical also recently announced merger plans with Tornier for $3.3 billion. Stryker has been active in acquiring smaller companies, including its $1.65 billion deal for Mako Surgical Corp., maker of robotic surgery technology, in 2013. It also recently purchased Small Bone Innovations in August last year.

Bullish on the Pipeline
During the same investor call, Katherine Owen, Stryker’s vice president of strategy and investor relations was bullish on new-product prospects for 2015.

“Turning to MAKO… we are excited about the increasing momentum we are experiencing. In late 2014, we submitted the 510(k) application for our total knee on the MAKO robot, and continue to target 2015 for FDA (U.S. Food and Drug Administration) clearance,” Owen said. “Beyond the total knee, we are targeting Q2 for a limited release of our cementless Uni knee on the robot, and we are also preparing to launch Stryker’s hip power brand, including our highly successful Accolade hip, on the robot this year, as well as our X3 poly bearings.”

She said the company has made “tremendous progress” on the product pipeline over the past 12 months.

“Going forward, we are well-positioned to drive adoption and leverage the considerable breadth of Stryker’s reconstructive sales and marketing presence,” she said.