October 17, 2014 | By Stacy Lawrence
Stryker ($SYK) took an earnings hit during the third quarter, in part to repatriate $2 billion in cash for acquisitions and to establish an EU regional headquarters in Amsterdam, where it has moved some intellectual property. The IP transfer is expected to reduce its effective tax rate from an expected 22% in 2014 to 20% next year.
The orthopedics giant reported net earnings per share of $0.16, a 41% decline from the same quarter a year prior. It attributed the decline not only to a tax rate of about 5% on the $2 billion to be repatriated and the EU headquarters, but also to currency exchange, charges related to product recalls as well as to acquisition and restructuring-related charges.
It had $4.7 billion in cash and $4 billion in debt at the end of the third quarter.
The company is actively working on a U.S. acquisition strategy, which it won’t be able to execute until the repatriated cash becomes available in late 2015.
“We are absolutely first and foremost focused on acquisitions, but dividends and stock buybacks are also a key part of our overall cash structure strategy,” Stryker VP and CFO William Jellison said on the third-quarter conference call. “But also on the cash repatriation side, also keep in mind that as I mentioned, most of that cash won’t occur actually until the back half of 2015.”
In the first 9 months of 2014, Stryker paid $346 million in dividends and $100 million for share repurchases.
Jellison also expects that the tax savings from the IP transfer to the Netherlands will provide a long-term benefit to the business. “The transfer of the intellectual property provides us more flexibility in managing our operations in the future and aligns the ownership with where our primary European leadership team will be located,” he said.
“This project will also generate some ongoing tax benefits, which as we mentioned previously, are expected to further reduce our overall adjusted operating tax rate in 2015 by approximately two full percentage points. Currently, we are expecting to reinvest approximately half of these savings directly into our business,” concluded Jellison.
The tax rate Stryker is anticipating depend on the so-called tax extenders provision being renewed in the U.S.; otherwise it will take a $0.05 hit to 2014 EPS.
The company also guided to the low end of its previously announced 2014 EPS range of $4.75 to $4.80, due to recent currency exchange pressures. But that doesn’t include a failure to renew tax extenders legislation, which is by no means certain. In early October, IRS Commissioner John Koskinen sent a letter to Congress warning that if debate on the legislation goes into December or later, it would force the IRS to postpone tax filing deadlines.
Stryker maintained its organic sales growth guidance for 2014 of 5% to 6%.
In the third quarter, net sales grew 11% to $2.4 billion, with the strongest performer being its Medical & Surgical business that includes surgical equipment, bone-cutting tools, minimally invasive surgical solutions, and other products. It gained 16% to $936 million driven by improved hospital capital expenditures and strong acceleration in sales of its Neptune Surgical Waste System.