10-Q


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________

FORM 10-Q
(Mark one)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-09165
STRYKER CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
 
38-1239739
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
2825 Airview Boulevard, Kalamazoo, Michigan
 
49002
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(269) 385-2600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                          YES [X]          NO [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                 YES [X]         NO [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
[X]
 
Accelerated filer
[ ]
 
 
 
 
 
Non-accelerated filer
[ ]
 
Small reporting company
[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES [   ]        NO [X]

Number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 373,981,097 shares of Common Stock, $0.10 par value, on March 31, 2016.
 

STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

PART I. - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 
 
Three Months

 
2016
 
2015
Net sales
 
$
2,495

 
$
2,379

Cost of sales
 
801

 
826

Gross profit
 
$
1,694

 
$
1,553

Research, development and engineering expenses
 
159

 
152

Selling, general and administrative expenses
 
944

 
892

Recall charges
 
19

 
54

Intangible asset amortization
 
53

 
49

Total operating expenses
 
$
1,175

 
$
1,147

Operating income
 
519

 
406

Other income (expense), net
 
(38
)
 
(29
)
Earnings before income taxes
 
$
481

 
$
377

Income taxes
 
79

 
153

Net earnings
 
$
402

 
$
224

 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
Basic net earnings per share of common stock
 
$
1.08

 
$
0.59

Diluted net earnings per share of common stock
 
$
1.07

 
$
0.58

 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
Basic
 
373.2

 
378.9

Effect of dilutive employee stock options
 
4.2

 
4.6

Diluted
 
377.4

 
383.5

Anti-dilutive shares excluded from the calculation of net effect of dilutive employee stock options
 
—

 
—



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
 
Three Months
 
 
2016
 
2015
Net earnings
 
$
402

 
$
224

Other comprehensive income (loss), net of tax
 
 
 
 
Marketable securities
 
—

 
1

Pension plans
 
(1
)
 
13

Unrealized (losses) gains on designated hedges
 
(20
)
 
1

Financial statement translation
 
38

 
(282
)
Total other comprehensive income (loss), net of tax
 
$
17

 
$
(267
)
Comprehensive income (loss)
 
$
419

 
$
(43
)

See accompanying notes to consolidated financial statements.

1
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
March 31
 
December 31
 
2016
 
2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
6,976

 
$
3,379

Marketable securities
 
507

 
700

Accounts receivable, less allowance of $64 ($61 in 2015)
 
1,591

 
1,662

Inventories:
 
 
 
 
Materials and supplies
 
325

 
304

Work in process
 
119

 
103

Finished goods
 
1,324

 
1,232

Total inventories
 
$
1,768

 
$
1,639

Prepaid expenses and other current assets
 
483

 
563

Total current assets
 
$
11,325

 
$
7,943

Property, plant and equipment:
 
 
 
 
Land, buildings and improvements
 
695

 
687

Machinery and equipment
 
2,116

 
2,043

Total property, plant and equipment
 
2,811

 
2,730

Less allowance for depreciation
 
1,587

 
1,531

Net property, plant and equipment
 
$
1,224

 
$
1,199

Goodwill
 
4,165

 
4,136

Other intangibles, net
 
1,780

 
1,794

Other noncurrent assets
 
1,174

 
1,151

Total assets
 
$
19,668

 
$
16,223

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
394

 
410

Accrued compensation
 
406

 
637

Income taxes
 
151

 
141

Dividend payable
 
142

 
142

Accrued recall expenses
 
606

 
694

Accrued expenses and other liabilities
 
717

 
710

Current maturities of debt
 
770

 
768

Total current liabilities
 
$
3,186

 
$
3,502

Long-term debt, excluding current maturities
 
6,706

 
3,230

Other noncurrent liabilities
 
968

 
980

Shareholders' equity
 
 
 
 
Common stock, $0.10 par value:
 
 
 
 
Authorized: 1 billion shares, outstanding: 374 million shares (373 million shares in 2015)
 
37

 
37

Additional paid-in capital
 
1,353

 
1,321

Retained earnings
 
8,040

 
7,792

Accumulated other comprehensive income
 
(622
)
 
(639
)
Total shareholders' equity
 
$
8,808

 
$
8,511

Total liabilities & shareholders' equity
 
$
19,668

 
$
16,223


See accompanying notes to consolidated financial statements.


2
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
December 31, 2015
 
$
37

 
$
1,321

 
$
7,792

 
$
(639
)
 
$
8,511

Net earnings
 

 

 
402

 

 
402

Other comprehensive income
 

 

 

 
17

 
17

Issuance of 1.1 million shares of common stock under stock option and benefit plans, including $16 excess income tax benefit
 


 
5

 

 

 
5

Repurchase of 0.1 million shares of common stock
 

 
(1
)
 
(12
)
 

 
(13
)
Share-based compensation
 

 
28

 

 

 
28

Cash dividends declared of $0.38 per share of common stock
 

 

 
(142
)
 

 
(142
)
March 31, 2016
 
$
37

 
$
1,353

 
$
8,040

 
$
(622
)
 
$
8,808


CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months
 
2016
 
2015
Operating activities
 
 
 
Net earnings
$
402

 
$
224

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
49

 
45

Amortization of intangible assets
53

 
49

Share-based compensation
28

 
23

Gross recall charges
19

 
54

Sale of inventory stepped up to fair value at acquisition
—

 
7

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
86

 
12

Inventories
(109
)
 
(42
)
Accounts payable
17

 
8

Accrued expenses and other liabilities
(254
)
 
(142
)
Recall-related payments
(108
)
 
(19
)
Income taxes
(16
)
 
27

Other
36

 
134

Net cash provided by operating activities
$
203

 
$
380

Investing activities
 
 
 
Acquisitions, net of cash acquired
(23
)
 
(84
)
Purchases of marketable securities
(94
)
 
(631
)
Sales of marketable securities
289

 
1,087

Purchases of property, plant and equipment
(115
)
 
(46
)
Net cash provided by investing activities
$
57

 
$
326

Financing activities
 
 
 
Proceeds from borrowings
3,508

 
581

Payments on borrowings
(53
)
 
(1,081
)
Dividends paid
(142
)
 
(131
)
Repurchase of common stock
(13
)
 
(130
)
Other financing
18

 
27

Net cash provided by (used in) financing activities
$
3,318

 
$
(734
)
Effect of exchange rate changes on cash and cash equivalents
19

 
(93
)
Change in cash and cash equivalents
$
3,597

 
$
(121
)
Cash and cash equivalents at beginning of period
3,379

 
1,795

Cash and cash equivalents at end of period
$
6,976

 
$
1,674


See accompanying notes to consolidated financial statements.

3
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 - BASIS OF PRESENTATION
General Information
These statements should be read in conjunction with our Annual Report on Form 10-K for 2015. Management believes that the accompanying unaudited consolidated financial statements contain all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. However, the results of operations included in such consolidated financial statements may not necessarily be indicative of annual results. Certain prior year amounts on the balance sheet have been reclassified as a result of the adoption of ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs to conform with the current year presentation.
New Accounting Pronouncements Not Yet Adopted
In February 2016 the FASB issued ASU 2016-02, Leases (Topic 842). This update requires an entity to recognize assets and liabilities for leases with lease terms of more than 12 months on the balance sheet. We plan to adopt this standard on January 1, 2019. We are still evaluating the impact that this standard will have on our consolidated financial statements.
In March 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We plan to adopt this standard on January 1, 2017. We are still evaluating the impact that this standard will have on our consolidated financial statements.
In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update outlines a single, comprehensive model for accounting for revenue from contracts with customers. We plan to adopt the standard on January 1, 2018. We are still evaluating the impact that this standard will have on our consolidated financial statements.
No other new accounting pronouncements were issued or became effective during the period that had, or are expected to have, a material impact on our consolidated financial statements.
NOTE 2 - SUBSEQUENT EVENTS
On April 1, 2016 we completed the acquisition of Sage Products Holdings II, LLC (Sage) for approximately $2,775 and the acquisition of Synergetics' neuro portfolio (Synergetics). On April 5, 2016 we completed the acquisition of Physio-Control International, Inc. (Physio) for approximately $1,280. The results of operations for each of these acquisitions will be included in our consolidated financial statements beginning in the second quarter. Refer to Note 6 for further information.
 
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
Three Months 2016
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
—

$
(119
)
$
4

$
(524
)
$
(639
)
OCI before reclassifications
2

(3
)
(22
)
28

5

Tax (benefit) expense on OCI
(1
)
—

6

10

15

Reclassifications out of AOCI, net
 
 
 
 
 
Cost of Sales
—

2

(6
)
—

(4
)
Other (income) expense
(1
)
—

—

—

(1
)
Income tax expense (benefit)
—

—

2

—

2

Net current period OCI
—

(1
)
(20
)
38

17

Ending
$
—

$
(120
)
$
(16
)
$
(486
)
$
(622
)
Three Months 2015
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
3

$
(136
)
$
13

$
(134
)
$
(254
)
OCI before reclassifications
4

15

(1
)
(282
)
(264
)
Tax (benefit) expense on OCI
(1
)
(3
)
2

—

(2
)
Reclassifications out of AOCI, net
 
 
 
 
 
Cost of Sales
—

2

—

—

2

Other (income) expense
(2
)
—

—

—

(2
)
Income tax expense (benefit)
—

(1
)
—

—

(1
)
Net current period OCI
1

13

1

(282
)
(267
)
Ending
$
4

$
(123
)
$
14

$
(416
)
$
(521
)
NOTE 4 - FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1
Quoted market prices in active markets for identical assets or liabilities.
Level 2
Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3
Unobservable inputs reflecting our assumptions or external inputs from active markets.
When applying the fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculate the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of identical or similar instruments, where available, or based on other observable inputs taking into account our credit risk and that of our counterparties. Foreign currency exchange contracts and interest rate hedges are included in Level 2 as we use inputs other than quoted prices that are observable for the asset or liability. The Level 2 derivative instruments are primarily


4
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

valued using standard calculations and models that use readily observable market data as their basis.
Our Level 3 liabilities represent milestone payments for acquisitions. The fair value of the liabilities was estimated using a discounted cash flow technique. Significant unobservable inputs to this technique included our probability assessments of occurrence of triggering events, appropriately discounted considering the uncertainties associated with the obligation. We remeasure our assets and liabilities each reporting period and record the changes in fair value within selling, general and administrative expense and the changes in the time value of money within other income (expense), net.
There were no significant transfers into or out of any level between December 31, 2015 and March 31, 2016.
Valuation of Assets and Liabilities Measured at Fair Value
 
March
December
 
2016
2015
Cash and cash equivalents
$
6,976

$
3,379

Trading marketable securities
85

82

Level 1 - Assets
$
7,061

$
3,461

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
184

$
214

Foreign government debt securities
93

96

United States agency debt securities
77

120

United States treasury debt securities
139

264

Certificates of deposit
17

8

Total available-for-sale marketable securities
$
510

$
702

Foreign currency exchange forward contracts
12

69

Interest rate swap asset
35

15

Level 2 - Assets
$
557

$
786

   Total assets measured at fair value
$
7,618

$
4,247

 
 
 
Deferred compensation arrangements
$
85

$
82

Level 1 - Liabilities
$
85

$
82

Foreign currency exchange forward contracts
$
29

$
10

Interest rate swap liability
—

4

Level 2 - Liabilities
$
29

$
14

Contingent consideration:
 
 
Beginning balance
$
56

$
48

Additions
6

11

Losses included in earnings
(3
)
—

Settlements
(5
)
(3
)
Balance at the end of the period
$
54

$
56

Level 3 - Liabilities
$
54

$
56

Total liabilities measured at fair value
$
168

$
152

Fair Value of Available for Sale Securities by Contractual Maturity
 
March
December
 
2016
2015
Due in one year or less
$
413

$
588

Due after one year through three years
97

114

On March 31, 2016 the aggregate difference between the cost and fair value of available-for-sale marketable securities is nominal. Interest receivable of $3 related to our marketable securities portfolio was recorded in prepaid expenses and other current assets.The total of interest and marketable securities income was $5 and $6 in the three months 2016 and 2015. The amounts are included in other income (expense), net.
Less than 1% of our investments in available-for-sale marketable securities have a credit quality rating of less than A2 (Moody's), A (Standard & Poor's) and A (Fitch). We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis
 
which may be maturity. We do not consider these investments to be other-than-temporarily impaired on March 31, 2016.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed
34
$
37

Foreign government
2
10

United States agency
3
8

United States debt
3
5

Certificate of deposit
2
2

Total
44
$
62

On March 31, 2016 substantially all our investments with unrealized losses that are not deemed to be other-than-temporarily impaired have been in a continuous unrealized loss position for less than twelve months, and the losses are nominal.
NOTE 5 - DERIVATIVE INSTRUMENTS
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings and cash flow. At inception the derivative is designated as a cash flow hedge, a fair value hedge or a free standing derivative. We do not enter into derivative instruments for speculative purposes. We have not changed our hedging strategies, accounting practices, or objectives from those disclosed in our Annual Report on Form 10-K for 2015.
Designated Net Investment Hedges
We have designated certain long-term intercompany loans payable and forward exchange contracts as net investment hedges of our investments in certain international subsidiaries that use the Euro as their functional currency. The effective portion of derivatives designated as net investment hedges are reported as a component of AOCI. On March 31, 2016 the total after-tax amount in AOCI related to our designated net investment hedges was $5. For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative's gain or loss is recognized in OCI and reported as a component of AOCI.
We use the forward method to measure ineffectiveness. Under this method, for each reporting period the change in the carrying value of the Euro-denominated amounts due to remeasurement of the effective portion is reported as a component of AOCI and the remaining change in the carrying value of the ineffective portion, if any, is recognized in other income (expense), net. The gain or loss related to settled net investment hedges will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated. We evaluate the effectiveness of our net investment hedges quarterly and did not recognize any ineffectiveness in the three months 2016.


5
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

Designated and Non Designated Hedges
 
 
Designated
 
Non-Designated
 
Total
March 31, 2016
 
 
 
 
 
 
Gross notional amount
 
$
840

 
$
2,673

 
$
3,513

Maximum term in days
 
 
 
 
 
546

Fair value:
 
 
 
 
 
 
Other current assets
 
$
5

 
$
7

 
$
12

Other noncurrent assets
 
—

 
—

 
—

Other current liabilities
 
(22
)
 
(6
)
 
(28
)
Other noncurrent liabilities
 
(1
)
 
—

 
(1
)
Total fair value
 
$
(18
)
 
$
1

 
$
(17
)
December 31, 2015
 
 
 
 
 
 
Gross notional amount
 
$
889

 
$
4,061

 
$
4,950

Maximum term in days
 
 
 
 
 
546

Fair value:
 
 
 
 
 
 
Other current assets
 
$
27

 
$
41

 
$
68

Other noncurrent assets
 
1

 
—

 
1

Other current liabilities
 
(6
)
 
(3
)
 
(9
)
Other noncurrent liabilities
 
(1
)
 
—

 
(1
)
Total fair value
 
$
21

 
$
38

 
$
59

We are exposed to credit loss in the event of nonperformance by counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default our maximum exposure to loss is the asset balance of the instrument.
Net Currency Exchange Rate Gains (Losses)
 
 
Three Months
Recorded In:
 
2016
2015
Cost of sales
 
$
(6
)
$
—

Other income (expense), net
 
4

(4
)
Total
 
$
(2
)
$
(4
)
On March 31, 2016 and December 31, 2015 pretax (losses) gains on derivatives designated as hedges of ($4) and $17, which are reported in AOCI, are expected to be reclassified to earnings during the next 12 months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There have been no ineffective portions of derivatives that have resulted in gains or losses in any of the periods presented.
Interest Rate Risk on Future Debt Issuance
In the three months 2016 we terminated multiple designated interest rate cash flow hedges and recognized $7 in OCI related to hedges on our debt issuances and recognized a nominal amount of ineffectiveness in interest expense. The remaining amounts in AOCI will be reclassified to interest expense over the term of the debt. The cash flow effect of these hedges is recognized in cash flow from operations.
Fair Value Hedges
On March 31, 2016 we had interest rate swaps with gross notional amounts of $500 designated as fair value hedges of underlying fixed rate obligations representing a portion of our $600 senior unsecured notes due in 2024. There was no hedge ineffectiveness recorded as a result of these fair value hedges.
Fair Value Interest Rate Hedge Instruments
 
 
March 2016
 
December 2015
Gross notional amount
 
$
500

 
$
500

Fair value:
 
 
 
 
Other noncurrent assets
 
$
35

 
$
15

Long-term debt
 
(35
)
 
(15
)
Total
 
$
—

 
$
—

 
NOTE 6 - ACQUISITIONS
2016 Acquisitions
In February 2016 we announced an agreement to acquire Sage for approximately $2,775. Sage develops, manufactures and distributes disposable products targeted at reducing "Never Events," primarily in the intensive care unit.
In February 2016 we announced an agreement to acquire Physio for approximately $1,280. Physio develops, manufactures and markets monitors/defibrillators, automated external defibrillators (AEDs) and CPR-assist devices along with data management and support services.
In February 2016 we announced an agreement to acquire all of the assets associated with Synergetics. The portfolio includes the Malis generator, Spetzler Malis disposable forceps, and our existing Sonopet tips and RF generator.
These acquisitions were completed in the second quarter of 2016 and enhance our product offerings within our MedSurg segment.
We have also completed various other acquisitions that are included in the 2016 column in the table below.
2015 Acquisitions
In January 2015 we acquired certain assets of CHG Hospital Beds, Inc. (CHG). CHG designs, manufactures and markets low-height hospital beds and related accessories. This acquisition enhances our product offerings within our MedSurg segment. Goodwill acquired with the CHG acquisition is deductible for tax purposes. The measurement period for CHG has been completed. Revisions to the original purchase price allocation were nominal.
The purchase price allocations for other 2015 acquisitions were based upon preliminary valuations, and our estimates and assumptions are subject to change within the measurement period.
Purchase Price Allocation of Acquired Net Assets
 
2016
 
2015
Purchase price paid
$
23

 
$
138

Contingent consideration
4

 
9

Total consideration
$
27

 
$
147

Tangible assets acquired:
 
 
 
Inventory
$
—

 
$
9

Other assets
1

 
14

Liabilities
(6
)
 
(6
)
Intangible assets:
 
 
 
Customer relationship
—

 
12

Trade name
—

 
2

Developed technology and patents
21

 
53

Other
—

 
—

In process research and development
6

 
—

Goodwill
5

 
63

Total
$
27

 
$
147

Weighted average life of intangible assets
11

 
10

Estimated Amortization Expense
Remainder of 2016
2017
2018
2019
2020
$
159

$
191

$
188

$
172

$
153

NOTE 7 - CONTINGENCIES AND COMMITMENTS
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages as well as other compensatory and equitable relief that could result in


6
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management has sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those estimated by management, additional expense may be incurred, which could unfavorably affect future operating results. We are self-insured for product liability-related claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In June 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. Product liability lawsuits relating to this voluntary recall have been filed against us. On November 3, 2014 we announced that we had entered into a settlement agreement to compensate eligible United States patients who had revision surgery to replace their Rejuvenate and/or ABG II Modular-Neck hip stem prior to that date. We continue to offer support for recall-related care and reimburse patients who are not eligible to enroll in the settlement program for testing and treatment services, including any necessary revision surgeries. In addition, some lawsuits will remain and we will continue to defend against them. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter globally is estimated to be approximately $1,843 ($2,075 before $232 of third-party insurance recoveries) to $2,414.  In the three months 2016 we recognized additional charges to earnings of $19 representing the excess of the minimum of the range over the previously recorded reserves. We have made recall-related payments totaling $1,310 under the United States Rejuvenate and ABG II settlement agreement. The final outcome of this matter is dependent on many factors that are difficult to predict including the number of enrollees in the settlement program and the total awards to them, the number and costs of patients not eligible for the settlement program who seek testing and treatment services and require revision surgery and the number and actual costs to resolve the remaining lawsuits. Accordingly, the ultimate cost to resolve this entire matter globally may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we filed a lawsuit in federal court against Zimmer Biomet Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed three of our patents. In 2013 following a jury trial favorable to us, the trial judge entered a judgment that, among other things, awarded us damages of $76 and ordered Zimmer to pay us enhanced damages. Zimmer appealed this ruling. In December 2014 the Federal Circuit affirmed the damages awarded to us, reversed the order for enhanced damages and remanded the issue of attorney fees to the trial court. The Federal Circuit denied our petition for a rehearing en banc on the issue of enhanced damages. The United States Supreme Court agreed to hear our appeal on this issue and held oral arguments on February 23, 2016. In May 2015 the trial court entered a stipulated judgment that, among other things, required Zimmer to pay us the base amount of damages and interest, while the issues of enhanced damages and attorney fees continue to be pursued. In June 2015 we recorded a $54 gain, net of legal costs, which was recorded within selling, general and administrative expenses.
 
In April 2011 Hill-Rom Company, Inc. and affiliated entities (Hill-Rom) brought a lawsuit against us alleging infringement under United States patent laws with respect to nine patents related to electrical network communications for hospital beds. On March 31, 2015 the court granted the parties’ joint motion to dismiss with prejudice the claims and counterclaims associated with three of these patents. The case has been stayed with respect to the remaining six patents, until reexamination proceedings at the United States Patent Office have concluded.  The ultimate resolution of this matter cannot be predicted and it is not possible at this time for us to estimate any probable loss or range of probable losses; however, the ultimate result could have a material adverse effect on our financial position, results of operations and cash flows.
NOTE 8 - DEBT AND CREDIT FACILITIES
In March 2016 we sold $3,500 of senior unsecured notes. Our commercial paper program allows us to have a maximum of $1,250 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On March 31, 2016 there were no amounts outstanding under our commercial paper program.
Summary of Total Debt
 
 
 
 
March
 
December
 
 
 
 
2016
 
2015
Senior unsecured notes:
 
 
 
 
 
Rate
Due
 
 
 
 
 
2.000%
09/30/2016
 
$
750

 
$
749

 
1.300%
04/01/2018
 
597

 
597

 
2.000%
03/08/2019
 
745

 
—

 
4.375%
01/15/2020
 
496

 
496

 
2.625%
03/15/2021
 
744

 
—

 
3.375%
05/15/2024
 
627

 
606

 
3.375%
11/01/2025
 
744

 
744

 
3.500%
03/15/2026
 
986

 
—

 
4.100%
04/01/2043
 
391

 
390

 
4.375%
05/15/2044
 
394

 
394

 
4.625%
03/15/2046
 
979

 
—

Other
 
23

 
22

Total debt
 
$
7,476

 
$
3,998

Less current maturities
 
770

 
768

Total long-term debt
 
$
6,706

 
$
3,230

We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on March 31, 2016. On March 31, 2016 we had $1,305 of borrowing capacity available under all of our existing credit facilities.
On March 31, 2016 the total unamortized debt issuance costs incurred in connection with our outstanding notes were $50. The fair value of long-term debt (excluding the interest rate hedges) on March 31, 2016 and December 31, 2015 was $7,702 and $4,009 based on the quoted interest rates for similar types and amounts of borrowings. Substantially all of our long-term debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments.
On January 1, 2016 we retrospectively adopted ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This standard update requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability consistent with the treatment of debt discounts. The adoption of this standard resulted in the reclassification of $24 of unamortized debt issuance costs principally from other noncurrent assets to a reduction of long


7
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

term debt on our consolidated balance sheet on December 31, 2015.
NOTE 9 - CAPITAL STOCK
In February 2016 we declared a quarterly dividend of $0.38 per share payable on April 30, 2016 to shareholders of record at the close of business on March 31, 2016.
In the three months 2016 we repurchased 135,000 shares at a cost of $13 under our authorized repurchase programs. The manner, timing and amount of repurchases is determined by management based on an evaluation of market conditions, stock price and other factors and is subject to regulatory considerations. Purchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise. On March 31, 2016 the total dollar value of shares that could be purchased under our authorized repurchase programs was $1,870.
NOTE 10 - INCOME TAXES
Our effective tax rates in the three months 2016 and 2015 were 16.4% and 40.6%. The decrease in our effective tax rate was primarily due to favorable audit settlements in 2016 and certain discrete items in 2015 related to the establishment of our European regional headquarters. In 2015 we retrospectively adopted ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes that amends the balance sheet classification of deferred taxes.
NOTE 11 - SEGMENT INFORMATION
 
Three Months
 
2016
2015
Orthopaedics
$
1,057

$
1,023

MedSurg
958

927

Neurotechnology and Spine
480

429

Net sales
$
2,495

$
2,379

Orthopaedics
$
349

$
339

MedSurg
198

181

Neurotechnology and Spine
140

112

Segment operating income
$
687

$
632

Items not allocated to segments:
 
 
Corporate and other
$
(83
)
$
(77
)
Acquisition and integration-related charges
(5
)
(20
)
Amortization of intangible assets
(53
)
(49
)
Restructuring-related charges
(20
)
(26
)
Rejuvenate and ABG II recall
(19
)
(54
)
Legal matters
12

—

Consolidated operating income
$
519

$
406

There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2015.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ABOUT STRYKER
Stryker Corporation is a global leader in medical technology with 2015 revenues of $9,946 and net earnings of $1,439. We offer a diverse array of innovative medical technologies including orthopaedic, medical and surgical, and neurotechnology and spine products to help people lead more active and satisfying lives.
 
We segregate our operations into three reportable business segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremities surgeries. MedSurg products include surgical equipment and surgical navigation systems (Instruments); endoscopic and communications systems (Endoscopy); patient handling and emergency medical equipment (Medical); and reprocessed and remanufactured medical devices (Sustainability) as well as other medical device products used in a variety of medical specialties. Neurotechnology and Spine products include both neurosurgical and neurovascular devices.
Overview of the Three Months 2016
In the three months 2016 we achieved sales growth of 4.9% and 6.1% in constant currency. We reported net earnings per diluted share of $1.07 in the three months 2016 and achieved an 11.7% growth in adjusted net earnings per diluted share (see page 11 for a reconciliation of reported net earnings per diluted share to adjusted net earnings per diluted share).
Recent Developments
In January 2016 we announced that William R. Jellison elected to retire from his role as Vice President, Chief Financial Officer effective April 1, 2016. Glenn S. Boehnlein, who previously served as our Group Vice President, Chief Financial Officer for MedSurg and Neurotechnology, has been promoted to Vice President, Chief Financial Officer effective April 1, 2016.
In February 2016 we announced an agreement to acquire Sage Products Holdings II, LLC (Sage) for approximately $2,775. Sage develops, manufactures and distributes disposable products targeted at reducing "Never Events," primarily in the intensive care unit.
In February 2016 we announced an agreement to acquire Physio-Control International, Inc. (Physio) for approximately $1,280. Physio develops, manufactures and markets monitors/defibrillators, automated external defibrillators (AEDs) and CPR-assist devices along with data management and support services.
In February 2016 we announced an agreement to acquire all of the assets associated with Synergetics' neuro portfolio (Synergetics). The portfolio includes the Malis generator, Spetzler Malis disposable forceps, and our existing Sonopet tips and RF generator.
These acquisitions closed in the second quarter of 2016 and enhance our product offerings within our MedSurg segment.
In March 2016 we sold $3,500 of senior unsecured notes. Refer to Note 8 in the notes to our consolidated financial statements for further information.


8
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

RESULTS OF OPERATIONS
 
 
Three Months
 
 
2016
% Net Sales
2015
% Net Sales
Percentage Change
Net sales
 
$
2,495

100.0
 %
$
2,379

100.0
 %
4.9
 %
Gross profit
 
1,694

67.9

1,553

65.3

9.1

Research, development and engineering expenses
 
159

6.4

152

6.4

4.6

Selling, general and administrative expenses
 
944

37.8

892

37.5

5.8

Recall charges
 
19

0.8

54

2.3

(64.8
)
Intangible amortization
 
53

2.1

49

2.1

8.2

Other income (expense), net
 
(38
)
(1.5
)
(29
)
(1.2
)
31.0

Income taxes
 
79



153



(48.4
)
Net earnings
 
$
402

16.1
 %
$
224

9.4
 %
79.5
 %
 
 
 
 
 
 
 
Net earnings per diluted share
 
$
1.07

 
$
0.58

 
84.5
 %
Adjusted net earnings per diluted share
 
$
1.24

 
$
1.11

 
11.7
 %
See "Non-GAAP Financial Measures" on page 10 for a discussion of non-GAAP financial measures used in this report.
Geographic and Segment Net Sales
 
 
Three Months
 
 
 
 
Percentage Change
 
 
2016
 
2015
 
As Reported
 
Constant Currency
Geographic net sales:
 
 
 
 
 
 
 
 
United States
 
$
1,822

 
$
1,673

 
8.9
 %
 
8.9
 %
International
 
673

 
706

 
(4.6
)
 
(0.4
)
Total net sales
 
$
2,495

 
$
2,379

 
4.9
 %
 
6.1
 %
Segment net sales:
 
 
 
 
 
 
 
 
Orthopaedics
 
$
1,057

 
$
1,023

 
3.3
 %
 
4.6
 %
MedSurg
 
958

 
927

 
3.4

 
4.6

Neurotechnology and Spine
 
480

 
429

 
12.0

 
13.1

Total net sales
 
$
2,495

 
$
2,379

 
4.9
 %
 
6.1
 %
Supplemental Net Sales Growth Information
 
 
 
 
Percentage Change
 
 
Three Months
 
 
 
 
United States
 
International
 
 
2016
2015
 
As Reported
Constant Currency
 
As Reported
 
As Reported
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
 
 
 
 
Knees
 
$
361

$
345

 
4.4
%
5.8
%
 
9.0
%
 
(6.6
)%
(2.0
)%
Hips
 
316

312

 
1.2

2.9

 
4.5

 
(4.1
)
0.3

Trauma and Extremities
 
327

313

 
4.6

5.7

 
11.0

 
(4.9
)
(2.1
)
Other
 
53

53

 
0.4

1.6

 
3.8

 
(14.6
)
(8.1
)
Total Orthopaedics
 
$
1,057

$
1,023

 
3.3
%
4.6
%
 
7.9
%
 
(5.3
)%
(1.4
)%
MedSurg:
 
 
 
 
 
 
 
 
 
 
 
Instruments
 
$
365

$
346

 
5.6
%
6.8
%
 
10.2
%
 
(8.3
)%
(3.4
)%
Endoscopy
 
328

321

 
2.5

3.8

 
8.7

 
(14.7
)
(9.9
)
Medical
 
207

205

 
0.6

1.8

 
2.5

 
(7.6
)
(1.2
)
Sustainability
 
58

55

 
6.0

6.1

 
6.1

 
(10.3
)
(1.0
)
Total MedSurg
 
$
958

$
927

 
3.4
%
4.6
%
 
7.6
%
 
(10.8
)%
(5.6
)%
Neurotechnology and Spine:
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
 
$
301

$
252

 
19.5
%
20.9
%
 
21.2
%
 
16.6
 %
20.3
 %
Spine
 
179

177

 
1.1

1.9

 
5.8

 
(12.0
)
(8.9
)
Total Neurotechnology and Spine
 
$
480

$
429

 
12.0
%
13.1
%
 
14.3
%
 
6.9
 %
10.4
 %
Consolidated Net Sales
Consolidated net sales of $2,495 increased 4.9% in the three months 2016 as reported and 6.1% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.3%. Acquisitions did not significantly impact net sales in the three months 2016. Net sales in constant currency increased by 7.5% from increased unit volume partially offset by 1.4% due to lower prices. The increase was led primarily by higher shipments of neurotechnology, instruments, knees and trauma and extremities products.
 
Orthopaedics Net Sales
Orthopaedics net sales of $1,057 increased 3.3% in the three months 2016 as reported and 4.6% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.4%. Net sales in constant currency increased by 6.3% from increased unit volume partially offset by 1.7% due to lower prices. The increase was led primarily by higher shipments of knees and trauma and extremities products.


9
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

MedSurg Net Sales
MedSurg net sales of $958 increased 3.4% in the three months 2016 as reported and 4.6% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.2%. Acquisitions did not significantly impact net sales in the three months. Net sales in constant currency increased by 5.0% from increased unit volume partially offset by 0.6% due to lower prices. The increase was led primarily by higher shipments of our instruments and medical products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales of $480 increased 12.0% in the three months 2016 as reported and 13.1% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.1%. Net sales in constant currency increased by 15.5% from increased unit volume partially offset by 2.4% due to lower prices. The increase was led primarily by higher shipments of neurotechnology products.
Gross Profit
Gross profit in the three months 2016 increased to 67.9% from 65.3% in 2015 primarily due to favorable product mix and manufacturing productivity partially offset by decreases in the selling price of our products. In addition the two-year suspension of the United States medical device excise tax that became effective January 1, 2016 had a favorable impact on our gross profit in 2016. We expect this favorable impact to gross profit as a result of the suspension of the United States medical device excise tax for the next two years.
Gross Profit Adjustments
 
 
Three Months
 
 
2016
 
2015
 
 
$
% Net Sales
 
$
% Net Sales
Reported
 
$
1,694

67.9
%
 
$
1,553

65.3
%
Inventory stepped up to fair value
 
—

—

 
7

0.3

Restructuring-related charges
 
3

0.1

 
1

—

Adjusted
 
$
1,697

68.0
%
 
$
1,561

65.6
%
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $7 or 4.6% to $159 in the three months 2016 and was 6.4% of net sales in both the three months 2016 and 2015. The higher spending levels in 2016 were driven by the timing of spending on projects and investments in new technologies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $52 or 5.8% in the three months 2016 and as a percentage of net sales increased to 37.8% from 37.5% in 2015. Excluding the impact of the charges noted below, expenses in 2016 increased to 37.4% of net sales from 35.9%, primarily due to increased compensation costs due in part to sales performance-related compensation and expenses associated with the development of a global enterprise resource planning system partially offset by disciplined expense management.
 
Selling, General and Administrative Adjustments
 
 
Three Months
 
 
2016
 
2015
 
 
$
% Net Sales
 
$
% Net Sales
Reported
 
$
944

37.8
 %
 
$
892

37.5
 %
Other acquisition and integration-related
 
(5
)
(0.2
)
 
(13
)
(0.5
)
Restructuring-related charges
 
(17
)
(0.7
)
 
(25
)
(1.1
)
Legal matters
 
12

0.5

 
—

—

Adjusted
 
$
934

37.4
 %
 
$
854

35.9
 %
Recall Charges
Recall charges were $19 and $54 in the three months 2016 and 2015 and were due to the previously disclosed Rejuvenate and ABG II modular-neck hip stems voluntary recall. Refer to Note 7 in the notes to our consolidated financial statements for further information.
Intangibles Amortization
Intangibles amortization in the three months 2016 and 2015 was $53 and $49. The increase was due primarily to acquisitions in prior years.
Other Income (Expense), Net
Other income (expense), net in the three months 2016 and 2015 was ($38) and ($29). The increased expense was primarily driven by higher interest expense due to higher debt levels.
Income Taxes
The effective tax income tax rate on earnings was 16.4% and 40.6% in the three months 2016 and 2015. The effective income tax rate in 2016 was favorably impacted by audit settlements, while the effective income tax rate in 2015 included certain discrete tax expense related to the establishment of our European regional headquarters.
Net Earnings
Net earnings increased to $402 or $1.07 per diluted share from $224 or $0.58 per diluted share in the three months 2016. Adjusted net earnings per diluted share increased 11.7% to $1.24 in 2016 from $1.11 in 2015. The impact of foreign currency exchange rates on net earnings reduced net earnings per diluted share by approximately $0.02 and $0.06 in the three months 2016 and 2015.
Net Earnings Adjustments
 
 
Three Months
 
 
2016
 
2015
 
 
$
% Net Sales
 
$
% Net Sales
Reported
 
$
402

16.1
 %
 
$
224

9.4
%
Inventory stepped up to fair value
 
—

—

 
4

0.2

Other acquisition and integration-related
 
3

0.1

 
9

0.4

Amortization of intangible assets
 
39

1.6

 
35

1.5

Restructuring-related charges
 
15

0.6

 
19

0.8

Rejuvenate and ABG II recall
 
17

0.7

 
49

2.1

Tax matters
 
—

—

 
84

3.5

Legal matters
 
(8
)
(0.3
)
 
—

—

Adjusted
 
$
468

18.8
 %
 
$
424

17.9
%
NON-GAAP FINANCIAL MEASURES
We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; cost of sales excluding specified items; adjusted selling, general and administrative expenses; adjusted amortization of intangible assets; adjusted operating


10
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

income; adjusted effective income tax rate; adjusted net earnings; and adjusted diluted net earnings per share (Diluted EPS). We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures.
To measure percentage sales growth in constant currency we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions.
To measure earnings performance on a consistent and comparable basis we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are examples of the types of adjustments that may be included in a period:
1.
Acquisition and integration-related costs. Costs related to integrating recently acquired businesses and specific costs related to the consummation of the acquisition process.
 
2.
Amortization of intangible assets. Periodic amortization expense related to purchased intangible assets.
3.
Restructuring-related charges. Costs associated with focused workforce reductions and other restructuring activities.
4.
Recall matters. Our best estimate of the minimum of the range of probable loss to resolve certain product recalls.
5.
Regulatory and legal matters. Our best estimate of the minimum of the range of probable loss to resolve certain regulatory matters and other legal settlements.
6.
Tax matters. Certain significant and discrete tax items and adjustments to interest expense related to the settlement of certain tax matters.
Since non-GAAP financial measures are not standardized it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, cost of sales, selling, general and administrative expenses, amortization of intangible assets, operating income, effective income tax rate, net earnings and diluted net earnings per share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Results of Operations below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our consolidated financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.


Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures
 Three Months 2016
Gross Profit
Selling, General & Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
Reported
$
1,694

$
944

$
53

$
519

$
402

16.4
 %
$
1.07

  Acquisition and integration related charges:
 
 
 
 
 
 
 
    Other acquisition and integration related
—

(5
)
—

5

3

0.1

0.01

  Amortization of intangible assets
—

—

(53
)
53

39

1.1

0.10

  Restructuring-related charges
3

(17
)
—

20

15

0.4

0.04

  Rejuvenate and ABG II recall
—

—

—

19

17

—

0.04

  Legal matters
—

12

—

(12
)
(8
)
(0.6
)
(0.02
)
Adjusted
$
1,697

$
934

$
—

$
604

$
468

17.4
 %
$
1.24

Three Months 2015
Gross Profit
Selling, General & Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
Reported
$
1,553

$
892

$
49

$
406

$
224

40.6
 %
$
0.58

Acquisition and integration related charges:
 
 
 
 
 
 
 
    Inventory stepped up to fair value
7

—

—

7

4

0.4

0.01

    Other acquisition and integration related
—

(13
)
—

13

9

0.4

0.02

  Amortization of intangible assets
—

—

(49
)
49

35

1.2

0.09

  Restructuring-related charges
1

(25
)
—

26

19

0.5

0.06

  Rejuvenate and ABG II recall
—

—

—

54

49

(1.4
)
0.13

  Tax matters
—

—

—

—

84

(22.2
)
0.22

Adjusted
$
1,561

$
854

$
—

$
555

$
424

19.5
 %
$
1.11

The weighted-average basic and diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as those used in the calculation of the reported per share amounts.

11
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

FINANCIAL CONDITION AND LIQUIDITY
 
Three Months
 
2016
2015
Net cash provided by operating activities
$
203

$
380

Net cash provided by investing activities
57

326

Net cash provided by (used in) financing activities
3,318

(734
)
Effect of exchange rate changes
19

(93
)
Change in cash and cash equivalents
$
3,597

$
(121
)
Operating Activities
Cash provided by operations was $203 and $380 in the three months 2016 and 2015. Operating cash flows resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, share-based compensation and deferred income taxes). The decrease was primarily due to recall-related payments associated with the Rejuvenate and ABG II recall, higher compensation related payments and the timing of income tax payments. The net of accounts receivable, inventory and accounts payable resulted in the consumption of $6 and $22 of cash in the three months 2016 and 2015. Inventory days on hand on March 31, 2016 increased by 34 days from December 31, 2015.
Investing Activities    
Cash provided by investing activities was $57 in the three months 2016 compared to $326 in 2015. This change is primarily due to the sale of a portion of our marketable securities in 2015 in preparation for recall-related payments and other cash management activities.
Acquisitions: Acquisitions resulted in cash consumption of $23 and $84 in the three months 2016 and 2015. In 2016 we acquired various other businesses and related assets. In 2015 the primary acquisition was CHG.
Capital Expenditures: Capital expenditures were $115 and $46 in the three months 2016 and 2015.
Marketable Securities: Net cash provided by the sale of marketable securities was $195 and $456 in the three months 2016 and 2015.
Financing Activities
Dividend Payments: Dividends paid per common share increased 10.1% to $0.38 per share in the three months 2016 compared to $0.345 in 2015.
Dividends Paid
 
Three Months
 
2016
2015
Dividends paid per common share
$
0.38

$
0.345

Total dividends paid to common shareholders
$
142

$
131

Short-Term and Long-Term Debt: Net proceeds from borrowings were $3,455 in the three months 2016, primarily from the issuance of $3,500 of senior unsecured notes. Net repayments of debt were $500 in 2015 as we repaid all of our senior unsecured notes that were due on January 15, 2015. Refer to Note 8 in the notes to our consolidated financial statements for further information.
Share Repurchases: Share repurchases were $13 and $130 in the three months 2016 and 2015. We have decided to suspend our share repurchase program through the remainder of 2016.
Liquidity
Cash, cash equivalents and marketable securities were $7,483 and $4,079 on March 31, 2016 and December 31, 2015, and current assets exceeded current liabilities by $8,139 and $4,441. We anticipate being able to support our short-term liquidity and operating needs, including acquisitions and recall-related payments related to the Rejuvenate and ABG II recall, from a variety of
 
sources, including cash from operations, commercial paper and existing credit lines.
We have raised funds in the capital markets and may continue to do so from time to time. As a result of the issuance of senior unsecured notes in March of 2016, Moody's downgraded our unsecured note ratings to Baa1 from A3, and Standard & Poor's downgraded our corporate credit and long-term issue-level rating to A from A+ and our short-term rating to A-1 from A-1+. Nevertheless we continue to have strong investment-grade short-term and long-term debt ratings that we believe should enable us to refinance our debt as it becomes due.
We have existing credit facilities should additional funds be required. On March 31, 2016 we had approximately $1,305 of borrowing capacity available under all of our existing credit facilities.
On March 31, 2016 approximately 28.5% of our consolidated cash, cash equivalents and marketable securities were held in locations outside the United States compared to 46.2% on December 31, 2015. The decrease is due to cash proceeds from the issuance of senior unsecured notes. Our remaining cash held in locations outside the United States is considered to be indefinitely reinvested. We intend to use this cash to expand operations organically and through acquisitions.
Critical Accounting Policies
There have been no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for 2015.
New Accounting Pronouncements Not Yet Adopted
Refer to Note 1 in the notes to our consolidated financial statements for further information.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements including variable interest entities of a magnitude that we believe could have a material impact on our financial condition or liquidity.
OTHER MATTERS
Legal and Regulatory Matters
As further described in Note 7 to our consolidated financial statements, we recorded additional charges to earnings of $19 representing the excess of the minimum of the range of probable loss to resolve the Rejuvenate and ABG II recall over the previously recorded reserves. Based on the information that has been received the actuarially determined range of probable loss to resolve this matter is estimated to be approximately $1,843 ($2,075 before $232 of third-party insurance recoveries) to $2,414. The final outcome of this matter is dependent on many variables that are difficult to predict.  The ultimate cost to entirely resolve this matter may be materially different than the amount of the current estimate and could have a material adverse effect on our financial position, results of operations and cash flows.
FORWARD-LOOKING STATEMENTS
This report contains statements referring to us that are not historical facts and are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the "safe harbor" provisions of the Reform Act, are based on current projections about operations, industry conditions, financial condition and liquidity. Words that identify forward-looking statements include words such as "may," "could," "will," "should," "would," "possible," "plan," "predict," "forecast," "potential," "anticipate," "estimate," "expect," "project," "intend," "believe," "may impact," "on track," and words and terms of similar substance used in connection with any discussion of future operating or financial


12
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

performance, an acquisition or our businesses. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements are not guarantees and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these statements.
Some important factors that could cause our actual results to differ from our expectations in any forward-looking statements include those risks discussed in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for 2015. This Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes to our consolidated financial statements in our Annual Report on Form 10-K for 2015.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider our greatest potential area of market risk exposure to be exchange rate risk. Quantitative and qualitative disclosures about exchange rate risk are included in the "Other Information" section of Management's Discussion and Analysis of Financial Condition in Item 7 of our Annual Report on Form 10-K for 2015 under the caption "Hedging and Derivative Financial Instruments." There have been no material changes from the information provided therein.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures on March 31, 2016 was carried out under the supervision and with the participation of our management including our Chairman and Chief Executive Officer and our Vice President, Chief Financial Officer (the Certifying Officers). Based on that evaluation the Certifying Officers concluded that our disclosure controls and procedures are effective.
Changes in Internal Controls Over Financial Reporting
There was no change to our internal control over financial reporting in the three months 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) We issued 18,556 shares of our common stock in the three months 2016 as performance incentive awards to certain employees. These shares were not registered under the Securities Act of 1933 based on the conclusion that the awards would not be events of sale within the meaning of Section 2(a)(3) of the Act.
In the three months 2016 we repurchased 135,000 shares at a cost of $13 under our authorized repurchase programs. The manner, timing and amount of repurchases is determined by management based on an evaluation of market conditions, stock price and other factors and is subject to regulatory considerations. Purchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise. On March 31, 2016 the total dollar value of shares that could be purchased under our repurchase programs was $1,870.
 
Three Months 2016 Share Repurchase Activity
 
Total Number of Shares (in millions)
 
 
Period
Purchased
Purchased
as Part of Public
Announced Plans
Average Price
Paid
Per Share
Maximum Dollar Value of Shares that may yet be Purchased Under the Plans
Jan 1 - 31, 2016
0.1

0.1

$
94.28

$
1,870

Feb 1 - 29, 2016
—

—

—

1,870

Mar 1 - 31, 2016
—

—

—

$
1,870

Total
0.1

0.1

94.28

 
ITEM 6.
EXHIBITS
(a)
 
 
2.1
Agreement, dated as of January 31, 2016, by and among Star Acquisition Sub Inc., Stryker Corporation, Sage Products Holdings II, LLC, Madison Dearborn Capital Partners VI-C, L.P., MDCP VI-C Sage Holdings, Inc., TG SP Holdings Corp., Madison Dearborn Partners VI-B, L.P., and MDP Sage Holdings, LLC - Incorporated by reference to Exhibit 2(ii) to the Company’s Form 10-K for the year ended December 31, 2015 (Commission File No. 000-09165).
 
2.2
Agreement and Plan of Merger, dated February 13, 2016, by and among Stryker Corporation, Computer Merger Sub Corp., Charger Holding Corp. and Bain Capital Partners, LP, solely in its capacity as the representative as set forth therein. - Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated February 13, 2016 (Commission File No. 000-09615).
 
4.1
Ninth Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.2 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).
 
4.2
Tenth Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.3 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).
 
4.3
Eleventh Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.4 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).
 
4.4
Twelfth Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.5 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).
 
10.1
Transition Agreement between Stryker Corporation and William R. Jellison - Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated January 22, 2016 (Commission File No. 000-09165)
 
10.2
Letter Agreement between Stryker Corporation and Glenn Boehnlein - Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K dated January 22, 2016 (Commission File No. 000-09165)


13
 
Dollar amounts in millions except per share amounts or as otherwise specified
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

 
31(i)*
Certification of Principal Executive Officer of Stryker Corporation pursuant to Rule 13a-14(a)
 
31(ii)*
Certification of Principal Financial Officer of Stryker Corporation pursuant to Rule 13a-14(a)
 
32(i)*
Certification by Principal Executive Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350
 
32(ii)*
Certification by Principal Financial Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350
 
101.INS
XBRL Instance Document
 
101.SCH
XBRL Schema Document
 
101.CAL
XBRL Calculation Linkbase Document
 
101.DEF
XBRL Definition Linkbase Document
 
101.LAB
XBRL Label Linkbase Document
 
101.PRE
XBRL Presentation Linkbase Document
 
           *    Furnished with this Form 10-Q


14
 
 
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
STRYKER CORPORATION
 
 
(Registrant)
 



 
April 22, 2016
 
/s/ KEVIN A. LOBO
Date
 
Kevin A. Lobo, Chairman and Chief Executive Officer
 
 
 
 
 
 
April 22, 2016
 
/s/ GLENN S. BOEHNLEIN
Date
 
Glenn S. Boehnlein, Vice President, Chief Financial Officer




15
 
 
STRYKER CORPORATION
 
2016 First Quarter Form 10-Q

EXHIBIT INDEX

2.1
 
Agreement, dated as of January 31, 2016, by and among Star Acquisition Sub Inc., Stryker Corporation, Sage Products Holdings II, LLC, Madison Dearborn Capital Partners VI-C, L.P., MDCP VI-C Sage Holdings, Inc., TG SP Holdings Corp., Madison Dearborn Partners VI-B, L.P., and MDP Sage Holdings, LLC - Incorporated by reference to Exhibit 2(ii) to the Company’s Form 10-K for the year ended December 31, 2015 (Commission File No. 000-09165).
2.2
 
Agreement and Plan of Merger, dated February 13, 2016, by and among Stryker Corporation, Computer Merger Sub Corp., Charger Holding Corp. and Bain Capital Partners, LP, solely in its capacity as the representative as set forth therein. - Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated February 13, 2016 (Commission File No. 000-09615).
4.1
 
Ninth Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.2 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).

4.2
 
Tenth Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.3 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).
4.3
 
Eleventh Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.4 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).
4.4
 
Twelfth Supplemental Indenture (including the form of the note), dated March 10, 2016, between Stryker Corporation and U.S. Bank National Association. - Incorporated by reference to Exhibit 4.5 to the Company's Form 8-K dated March 10, 2016 (Commission File No. 000-09615).

10.1
 
Transition Agreement between Stryker Corporation and William R. Jellison - Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated January 22, 2016 (Commission File No. 000-09165)
10.2
 
Letter Agreement between Stryker Corporation and Glenn Boehnlein - Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K dated January 22, 2016 (Commission File No. 000-09165)
Exhibit 31
 
Rule 13a-14(a) Certifications
(i)*
 
Certification of Principal Executive Officer of Stryker Corporation
(ii)*
 
Certification of Principal Financial Officer of Stryker Corporation
 
 
 
Exhibit 32
 
18 U.S.C. Section 1350 Certifications
(i)*
 
Certification of Principal Executive Officer of Stryker Corporation
(ii)*
 
Certification of Principal Financial Officer of Stryker Corporation
 
 
 
Exhibit 101
 
XBRL (Extensible Business Reporting Language) Documents
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Schema Document
101.CAL
 
XBRL Calculation Linkbase Document
101.DEF
 
XBRL Definition Linkbase Document
101.LAB
 
XBRL Label Linkbase Document
101.PRE
 
XBRL Presentation Linkbase Document

*
Furnished with this Form 10-Q


16