Stryker’s Net Sales Grow 11 Percent in Q3

Stryker Corp. posted an 11 percent rise in net sales during the third quarter, but its net earnings per share fell dramatically, as the orthopedic device behemoth repatriated $2 billion in cash to fund acquisitions and establish a European 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 percent this year to 20 percent in 2015.

The company’s reported net earnings per share (EPS) plummeted 41 percent to 16 cents, according to the latest earnings statement. Stryker executives attributed the decline to a 5 percent tax rate on the $2 billion to be repatriated and the European Union headquarters as well as currency exchange, charges related to product recalls and acquisition/restructuring-related charges.

Stryker had $4.7 billion in cash and $4 billion in debt at the end of the third quarter.

The company’s U.S. acquisition strategy will be executed once 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 Vice President and Chief Financial Officer William Jellison said on the third-quarter conference call.

In the first 9 months of 2014, Stryker paid $346 million in dividends and $100 million for share repurchases.

Jellison expects that 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.”

The tax rate Stryker is anticipating depends on the tax extenders provision being renewed in the United States; otherwise it will take a five-cent hit to 2014 EPS.

The company 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 percent to 6 percent.

Stryker’s third-quarter revenues surged to $2.38 billion, edging past the Zacks Consensus Estimate of $2.32 billion. Volume and mix contributed 10.2 percent to revenue growth and acquisition contributed 3.4 percent. These partly were offset by unfavorable pricing impact of 2.3 percent and foreign currency impact of 0.2 percent.

On an organic basis (excluding the impact of acquisitions), net revenues grew 8 percent in the quarter. U.S. revenues improved 12.4 percent to $1.62 billion while proceeds from the international market grew 8.3 percent to $761 million.

Segments Analysis

Revenues from Stryker’s core Reconstructive segment increased 8.5 percent (8.6 percent in constant currency) to $1.01 billion in the third quarter (ended Sept. 30). Volume and product mix contributed 8.2 percent, while acquisition contributed 3.7 percent. The gains partially were offset by 3.2 percent due to prices and 0.1 percent due to unfavorable foreign currency exchange rates. Excluding the impacts of acquisitions and currency, revenues grew 4.9 percent.

Revenues from Stryker’s MedSurg segment increased 16.3 percent (16.6 percent in constant currency) to $936 million. Volume and product mix contributed 12.7 percent to revenue growth, while acquisition contributed 4.7 percent. Pricing and foreign currency had adverse impacts of 0.8 percent and 0.3 percent, respectively on revenue growth. Excluding the impacts of acquisitions and currency, revenues grew 11.9 percent.

Revenues from Stryker’s Neurotechnology and Spine segment rose 6.5 percent (6.9 percent in constant currency) to $437 million. Volume and product mix contributed 9.9 percent and acquisition contributed 0.4 percent to revenue growth. However, pricing and foreign currency had unfavorable impacts of 3.4 percent and 0.4 percent on revenues. Excluding the impacts of acquisitions and currency, revenues grew 6.5 percent.