10-K 1 syk10k12312014.htm 10-K SYK 10K 12.31.2014
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________
FORM 10-K
_______________________________________________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
o
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)
Registrant’s telephone number, including area code: (269) 385-2600
_______________________________________________________________________
 Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.10 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ý      NO  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  o       NO  ý
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 and 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  ý       NO  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  ý       NO  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
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 definitions of large "accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
  
Accelerated filer  o
Non-accelerated filer  o
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o       NO  ý
Based on the closing sales price of June 30, 2014, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $29,425,287,926. The number of shares outstanding of the registrant’s common stock, $.10 par value, was 378,749,951 at January 31, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be filed with the U.S. Securities and Exchange Commission relating to the 2015 Annual Meeting of Shareholders (the 2015 proxy statement) are incorporated by reference into Part III.
 



STRYKER CORPORATION 2014 Form 10-K



TABLE OF CONTENTS
 
 
 
 
PART I
 
Item 1.
Business
1

Item 1A.
Risk Factors
4

Item 1B.
Unresolved Staff Comments
6

Item 2.
Properties
6

Item 3.
Legal Proceedings
7

Item 4.
Mine Safety Disclosures
7

 
 
PART II
 
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
7

Item 6.
Selected Financial Data
8

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
9

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
16

Item 8.
Financial Statements and Supplementary Data
17

 
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
17

 
Consolidated Statements of Earnings
18

 
Consolidated Statements of Comprehensive Income
18

 
Consolidated Balance Sheets
19

 
Consolidated Statements of Shareholders’ Equity
20

 
Consolidated Statements of Cash Flows
21

 
Notes to Consolidated Financial Statements
22

Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
34

Item 9A.
Controls and Procedures
34

Item 9B.
Other Information
35

 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
35

Item 11.
Executive Compensation
35

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
35

Item 13.
Certain Relationships and Related Transactions, and Director Independence
35

Item 14.
Principal Accounting Fees and Services
35

 
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
36

 










STRYKER CORPORATION 2014 Form 10-K

PART I

ITEM 1.
BUSINESS.
General
Stryker Corporation is one of the world's leading medical technology companies, with 2014 revenues of $9,675 and net earnings of $515. Stryker's products include implants used in joint replacement and trauma surgeries; surgical equipment and surgical navigation systems; endoscopic and communications systems; patient handling and emergency medical equipment; neurosurgical, neurovascular and spinal devices; as well as other medical device products used in a variety of medical specialties.
Stryker was incorporated in Michigan in 1946 as the successor company to a business founded in 1941 by Dr. Homer H. Stryker, a prominent orthopaedic surgeon and the inventor of several orthopaedic products. In the United States, most of our products are marketed directly to doctors, hospitals and other healthcare facilities. Internationally, our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors.
As used herein, and except where the context otherwise requires, "Stryker," "we," "us," and "our" refer to Stryker Corporation and its consolidated subsidiaries.
Business Segments and Geographic Information
In December 2014 we changed the name of our Reconstructive business segment to Orthopaedics. This change did not change the composition of any of our business segments and had no financial impact.
We segregate our reporting into three reportable business segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. Financial information regarding our reportable business segments and certain geographic information is included under "Results of Operations" in Item 7 of this report and Note 12 to the Consolidated Financial Statements in Item 8 of this report.
Net sales by reportable segment over the last three years were:
 
2014
 
2013
 
2012
Orthopaedics
$
4,153

43
%
 
$
3,949

44
%
 
$
3,823

44
%
MedSurg
3,781

39
%
 
3,414

38
%
 
3,265

38
%
Neurotechnology and Spine
1,741

18
%
 
1,658

18
%
 
1,569

18
%
Total
$
9,675

100
%
 
$
9,021

100
%
 
$
8,657

100
%
Orthopaedics
Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremities surgeries. We bring patients and physicians advanced implant designs and specialized instrumentation that make orthopaedic surgery and recovery simpler, faster and more effective. We support surgeons with the technology and services they need as they develop new surgical techniques.
Stryker is one of five leading competitors globally for joint replacement and trauma products; the other four are Zimmer Holdings, Inc. (Zimmer), DePuy Synthes Company, a subsidiary of Johnson & Johnson, Biomet, Inc. and Smith & Nephew plc (Smith & Nephew).
 
The composition of net sales of Orthopaedics products over the last three years was:
 
2014
 
2013
 
2012
Knees
$
1,396

34
%
 
$
1,371

35
%
 
$
1,356

35
%
Hips
1,291

31
%
 
1,272

32
%
 
1,233

32
%
Trauma and Extremities
1,230

30
%
 
1,116

28
%
 
989

26
%
Other
236

5
%
 
190

5
%
 
245

7
%
Total
$
4,153

100
%
 
$
3,949

100
%
 
$
3,823

100
%
In September 2014 we acquired certain assets of Small Bone Innovations, Inc. (SBi) for an aggregate purchase price of approximately $358. SBi products are designed and promoted for upper and lower extremity small bone indications, with a focus on small joint replacement.
In December 2013 we acquired MAKO Surgical Corp. (MAKO). The acquisition of MAKO, combined with our strong history in joint reconstruction, capital equipment (operating room integration and surgical navigation) and surgical instruments, will help further advance the growth of robotic arm assisted surgery. Our combined expertise offers the potential to simplify joint reconstruction procedures, reduce variability and enhance the surgeon and patient experience.
In March 2013 we acquired Trauson Holdings Company Limited (Trauson). The acquisition of Trauson enhances our product offerings, primarily within our Orthopaedics segment, broadens our presence in China and enables us to expand into the fast growing value segment of the emerging markets.
In 2013 we launched the Tritanium Cementless Baseplate for our Triathlon Knee Arthroscopy (TKA) system, which combines biologic fixation with Triathlon’s kinematics to provide surgeons with a superior option for cementless TKA. We also launched the Secur-Fit Advanced Femoral Hip Stem, which facilitates the accurate restoration of biomechanics when used with our new and unique Stryker Orthopaedics Modeling and Analytics system.
In 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. We notified healthcare professionals and regulatory bodies of this recall, which was taken due to potential risks associated with fretting and/or corrosion that may lead to adverse local tissue reactions. In November 2014 we entered into a Settlement Agreement (the “Settlement Agreement”) to compensate eligible United States patients who had surgery to replace their Rejuvenate and ABG II modular-neck hip stems, known as a "revision surgery", prior to November 3, 2014. To date we have recorded charges to earnings totaling $1,534 ($1,713 before $179 of third party insurance recoveries) representing the actuarially determined low end of the range of probable loss to resolve this entire matter globally. It is expected that a majority of the payments under the Settlement Agreement will be made by the end of 2015. See Note 7 to the Consolidated Financial Statements in Item 8 of this report for further information.
In 2012 we launched Accolade II, the first hip stem with a Morphometric Wedge design, an evolution of the tapered wedge stem.
MedSurg
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.


1
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

Stryker is one of four market leaders in Instruments, competing principally with Zimmer, Medtronic plc. and ConMed Linvatec, Inc., a subsidiary of CONMED Corporation (ConMed Linvatec) globally. In Endoscopy, we compete with Smith & Nephew Endoscopy, ConMed Linvatec, Inc., Arthrex, Inc., Karl Storz GmbH & Co. and Olympus Optical Co. Ltd. Our primary competitor in Medical is Hill-Rom Holdings, Inc.
The composition of net sales of MedSurg products over the last three years was:
 
2014
 
2013
 
2012
Instruments
$
1,424

38
%
 
$
1,269

37
%
 
$
1,261

39
%
Endoscopy
1,382

37
%
 
1,222

36
%
 
1,111

34
%
Medical
766

20
%
 
710

21
%
 
691

21
%
Sustainability
209

5
%
 
213

6
%
 
202

6
%
Total
$
3,781

100
%
 
$
3,414

100
%
 
$
3,265

100
%
In January 2015 we announced the asset acquisition of privately-held CHG Hospital Beds, Inc. ("CHG") in an all cash transaction. CHG, headquartered in London, Ontario, Canada, manufactures and markets low-height hospital beds and related accessories across Canada, and in the United States and the United Kingdom.
In April 2014 we acquired Berchtold Holding, AG (Berchtold), a privately-held business with operations in Germany and the United States, for an aggregate purchase price of approximately $184. Berchtold sells surgical tables, equipment booms and surgical lighting systems. In March 2014 we acquired Patient Safety Technologies, Inc. (PST), for an aggregate purchase price of $120. PST conducts its business through its wholly owned subsidiary, SurgiCount Medical, Inc. PST’s proprietary Safety-Sponge® System and SurgiCount 360™ compliance software help prevent Retained Foreign Objects in the operating room. Other business acquisitions in 2014 include the acquisition of Pivot Medical, Inc. (Pivot), which develops and sells innovative products for hip arthroscopy.
In March 2013 we received a warning letter from the United States Food and Drug Administration (FDA) concerning quality system observations made during an inspection and citing us for failing to notify the FDA of a product recall and for marketing devices, including certain of our Neptune Waste Management Systems, without a required 510(k) clearance. We were notified in January 2014 that the actions taken to address issues raised in the warning letter were sufficient and no further corrective actions related to the warning letter were required.
In December 2013 we received 510(k) clearance to market a modified Neptune 2 Waste Management System. The Neptune 2 Waste Management System mitigates risks to healthcare workers by eliminating harmful exposure to fluids and smoke in the operating room. This constantly closed system collects surgical waste and disposes of it without exposing the operator to contact with infectious fluids and surgical plumes.
In 2012 we launched System 7, the next generation of heavy duty surgical power tools. These tools are used in total joint procedures, such as hip and knee replacements, and offer the latest in advanced cutting technology. We also launched the 1488 HD 3-Chip Endoscopic Camera System, which utilizes advanced CMOS technology and premium optics to provide a clear bright image designed to enhance patient outcomes. In addition, we launched Power-LOADTM, our cot fastener system that lifts and lowers the cot into and out of ambulances, thereby reducing spinal loads and the risk of cumulative trauma injuries to emergency responders.
 
Neurotechnology and Spine
Our Neurotechnology and Spine products include both neurosurgical and neurovascular devices. Our neurotechnology offering includes products used for minimally invasive endovascular techniques; a comprehensive line of products for traditional brain and open skull base surgical procedures; orthobiologic and biosurgery products, including synthetic bone grafts and vertebral augmentation products; and minimally invasive products for the treatment of acute ischemic and hemorrhagic stroke. We also develop, manufacture and market spinal implant products including cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies.
Our primary competitors in Neurotechnology are Medtronic, including Covidien, which was recently acquired by Medtronic, and Johnson & Johnson. We are one of five market leaders in Spine, along with Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic), DePuy Synthes (a subsidiary of Johnson & Johnson), Nuvasive, Inc. and Globus Medical, Inc.
The composition of net sales of Neurotechnology and Spine products over the last three years was:
 
2014
 
2013
 
2012
Neurotechnology
$
1,001

57
%
 
$
915

55
%
 
$
842

54
%
Spine
740

43
%
 
743

45
%
 
727

46
%
Total
$
1,741

100
%
 
$
1,658

100
%
 
$
1,569

100
%
In 2012 we received 510(k) clearance to market the Trevo® Pro Retriever, our next generation clot removal technology that utilizes proprietary Stentriever® Technology for optimized clot integration and retrieval in patients experiencing acute ischemic stroke. In addition, we received 510(k) clearance to market our Trevo® ProVEUTM Retriever, the first clot removal device fully visible during the procedure for precise positioning within the clot and optimized clot retrieval in patients experiencing acute ischemic stroke.
Geographic Areas
In 2014 approximately 68.0% of our revenues were generated from customers in the United States. Additional geographic information is included under "Results of Operations" in Item 7 of this report and Note 12 to the Consolidated Financial Statements in Item 8 of this report.
Raw Materials and Inventory
Raw materials essential to our business are generally readily available from multiple sources. Substantially all products we manufacture are stocked in inventory, while certain MedSurg products are assembled to order. The dollar amount of backlog orders at any given time is not considered material to an understanding of our business taken as a whole.
Patents and Trademarks
Patents and trademarks are significant to our business to the extent that a product or an attribute of a product represents a unique design or process. Patent protection of such products restricts competitors from duplicating these unique designs and features. We seek to obtain patent protection on our products whenever appropriate for protecting our competitive advantage. As of December 31, 2014 we owned approximately 1,900 United States patents and approximately 3,400 international patents.
Seasonality
Our business is generally not seasonal in nature; however, the number of Orthopaedics implant surgeries is generally lower during the summer months and sales of capital equipment are generally higher in the fourth quarter.


2
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

Competition
In all of our product lines we compete with local and global companies located throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. The development of new and innovative products is important to our success in all areas of our business and competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The competitive environment requires substantial investments in continuing research and in maintaining sales forces.
The principal factors that we believe differentiate us in the highly competitive product categories in which we operate and enable us to compete effectively include our commitment to innovation and quality, service and reputation. We believe that our competitive position in the future will depend to a large degree on our ability to develop new products and make improvements to existing products.
Product Development
Most of our products and product improvements have been developed internally at research facilities in the United States, Ireland, Puerto Rico, Germany, Switzerland, India and France. We also invest through acquisitions in technologies developed by third parties that have the potential to expand the markets in which we operate. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist us in product development efforts. The total costs of research, development and engineering activities were $614, $536, and $471 in 2014, 2013 and 2012, respectively.
Regulation
Our businesses are subject to varying degrees of governmental regulation in the countries in which we operate, and the general trend is toward increasingly stringent regulation.
In the United States, the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act and its subsequent amendments, and the regulations issued and proposed thereunder, provide for regulation by the FDA of the design, manufacture and marketing of medical devices, including most of our products. Many of our new products fall into FDA classifications that require notification submitted as a 510(k) and review by the FDA before we begin marketing them. Certain of our products require extensive clinical testing, consisting of safety and efficacy studies, followed by pre-market approval (PMA) applications for specific surgical indications.
The FDA's Quality System regulations set forth standards for our product design and manufacturing processes, require the maintenance of certain records and provide for inspections of our facilities by the FDA. There are also certain requirements of state and local and foreign governments that must be complied with in the manufacture and marketing of our products.
The member states of the European Union (EU) have adopted the European Medical Device Directives that form a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to meet certain quality system requirements and obtain CE marking for their products. We have authorization to apply the CE marking to substantially all of our products. In addition, we comply with the unique regulatory requirements of each of the countries in Europe and other countries in which we market our products.
Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare expenses
 
generally and hospital costs in particular, including price regulation and competitive pricing, are ongoing in markets where we do business. It is not possible to predict at this time the long-term impact of such cost containment measures on our future business. In addition, business practices in the healthcare industry have come under increased scrutiny, particularly in the United States, by government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
Employees
At December 31, 2014, we had approximately 26,000 employees worldwide. Certain international employees are covered by collective bargaining agreements. We believe that we maintain positive relationships with our employees worldwide.
Executive Officers of the Registrant
The names and ages of our executive officers as of January 31, 2015 and certain information about them are:
Name
Age
 
First Became an Executive Officer
Kevin A. Lobo
49
Chairman, President and Chief Executive Officer
2011
Steven P. Benscoter
47
Vice President, Human Resources
2012
William E. Berry Jr.
49
Vice President, Corporate Controller and Principal Accounting Officer
2014
Lonny J. Carpenter
53
Group President, Global Quality and Operations
2008
David K. Floyd
54
Group President, Orthopaedics
2012
Michael D. Hutchinson
44
General Counsel
2014
William R. Jellison
57
Vice President and Chief Financial Officer
2013
Katherine A. Owen
44
Vice President, Strategy and Investor Relations
2007
Bijoy S.N. Sagar
46
Vice President, Chief Information Officer
2014
Timothy J. Scannell
50
Group President, MedSurg and Neurotechnology
2008
Ramesh Subrahmanian
53
Group President, International
2011
Each of our executive officers was elected by our Board of Directors to serve in the office indicated until the first meeting of the Board of Directors following the annual meeting of shareholders in 2015 or until a successor is chosen and qualified or until his or her resignation or removal. Each of our executive officers has held the position above or has served Stryker in various executive or administrative capacities for at least five years, except for Mr. Lobo, Mr. Berry, Mr. Jellison, Mr. Sagar, Mr. Subrahmanian and Mr. Floyd. Prior to joining Stryker in April 2011, Mr. Lobo held a variety of senior level leadership roles for the previous nine years at Johnson & Johnson, most recently as Worldwide President of Ethicon Endo-Surgery. Prior to joining Stryker in August 2011, Mr. Berry served for two years as Assistant Corporate Controller for Whirlpool Corporation, the world's leading manufacturer and marketer of major home appliances, and before that held a variety of senior finance roles at Delphi Automotive and Federal Mogul Corporation, both global automotive parts manufacturers. Prior to joining Stryker in April 2013, Mr. Jellison was Senior Vice President and Chief Financial Officer at Dentsply International, the world's largest manufacturer of professional dental products, and before that held a variety of senior level leadership roles over a 15-year period at Dentsply. Prior to joining Stryker in May 2014, Mr. Sagar served


3
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

as the Chief Information officer for Merck Millipore, and before that as Global Head of Information Systems and a member of the divisional board for the chemicals division of Merck KGaA. Prior to joining Stryker in September 2011, Mr. Subrahmanian was the Senior Vice President & President, Asia Pacific Human Health with Merck & Co. Inc. Prior to joining Stryker in November 2012, Mr. Floyd was the Chief Executive Officer for OrthoWorx and held a variety of senior level leadership roles with DePuy (a division of Johnson & Johnson), Abbott Spine, AxioMed Spine, and Centerpulse Orthopaedics.
Available Information
Our main corporate website address is www.stryker.com. Copies of our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K filed or furnished to the United States Securities and Exchange Commission (SEC) will be provided without charge to any shareholder submitting a written request to our Corporate Secretary at our principal executive offices. All of our SEC filings are also available free of charge on our website within the "For Investors - SEC Filings & Ownership Reports" link as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC's website at www.sec.gov.
ITEM 1A.
RISK FACTORS.
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," "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 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. Those 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 forward-looking statements. Some important factors that could cause our actual results to differ from our expectations in any forward-looking statements include the risks discussed below.
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, cash flows, financial condition and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, cash flows, financial condition or results of operations.
LEGAL AND REGULATORY RISKS
The impact of United States healthcare reform legislation on our business remains uncertain. In 2010 federal legislation to reform the United States healthcare system was enacted into law. The legislation is far-reaching and is intended to expand access to health insurance coverage and improve the quality and reduce the costs of healthcare over time. Its provisions become effective at various dates and there are many programs and requirements for which the details have not been determined. We expect the law will have a significant impact upon various aspects of our business operations. Among other things, the law imposed a 2.3 percent
 
excise tax on Class I, II and III medical devices that applies to United States sales of a majority of our medical device products. Other provisions of this legislation, including Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way healthcare is developed and delivered. Further, we cannot predict what other healthcare programs and regulations will be ultimately implemented at the federal or state level or the effect of any future legislation or regulation in the United States on our business and results of operations
We may be adversely affected by product liability claims, unfavorable court decisions or legal settlements. Our business exposes us to potential product liability risks that are inherent in the design, manufacture and marketing of medical devices, many of which are intended to be implanted in the human body for long periods of time or indefinitely. We are currently defendants in a number of product liability matters, including those relating to our Rejuvenate and ABGII Modular-Neck hip stems discussed in Note 7 to the Consolidated Financial Statements in Item 8 of this report. These matters are subject to many uncertainties and outcomes are not predictable. In addition, we may incur significant legal expenses regardless of whether we are found to be liable. We are currently 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.
Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling certain of our products.  The medical device industry is characterized by extensive intellectual property litigation and, from time to time, we are the subject of claims by third parties of potential infringement or misappropriation.  Regardless of outcome, such claims are expensive to defend and divert the time and effort of management and operating personnel from other business issues.  A successful claim or claims of patent or other intellectual property infringement against us could result in our payment of significant monetary damages and/or royalty payments or negatively impact our ability to sell current or future products in the affected category.
Dependence on patent and other proprietary rights and failing to protect such rights or to be successful in litigation related to such rights may impact offerings in our product portfolios. Our long-term success largely depends on our ability to market technologically competitive products. If we fail to obtain or maintain adequate intellectual property protection, such a failure could allow others to sell products that compete with offerings in our product portfolio. Also, our issued patents are subject to claims concerning priority, scope and other issues, and currently pending or future patent applications may not result in issued patents.
We are subject to extensive governmental regulations relating to the manufacturing, labeling and marketing of our products. Substantially all of our products are subject to regulation by the FDA and other governmental authorities in the United States and internationally. The process of obtaining regulatory approvals to market a medical device can be costly and time consuming and approvals might not be granted for future products on a timely basis, if at all. We have ongoing responsibilities under FDA regulations with respect to our products and facilities and are subject to periodic inspections by the FDA to determine compliance with the quality system and medical device reporting regulations and other requirements. If we fail to fully comply with applicable regulatory requirements, we may be subject to a range of sanctions, including


4
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

warning letters, product recalls, the suspension of product manufacturing, monetary fines and criminal prosecution.
We are subject to federal, state and foreign healthcare regulations, including fraud and abuse laws, as well as anti-bribery laws, and could face substantial penalties if we fail to fully comply with such regulations and laws. Our relationship with healthcare professionals, such as physicians, hospitals and those that may market our products, are subject to scrutiny under various state and federal laws often referred to collectively as healthcare fraud and abuse laws. In addition, the United States and foreign government regulators have increased the enforcement of the Foreign Corrupt Practices Act and other anti-bribery laws. These laws are broad in scope and are subject to evolving interpretation, which could require us to incur substantial costs to monitor compliance or to alter our practices if we are found not to be in compliance. We also must comply with a variety of other laws which protect the privacy of individually identifiable healthcare information and impose extensive tracking and reporting related to all transfers of value provided to certain healthcare professionals. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in governmental healthcare programs.
MARKET RISKS
Macroeconomic developments could negatively affect our ability to conduct business in affected regions. Financial difficulties experienced by our customers, including distributors, and suppliers could result in product delays and inventory issues; risks to accounts receivable could also include delays in collection and greater bad debt expense.
Exposure to exchange rate fluctuations on cross border transactions and translation of local currency results into United States dollars. We report our financial results in United States Dollars and approximately one-third of our revenues are denominated in foreign currencies, including the Euro, the British Pound, and the Japanese Yen. Cross border transactions, both with external parties and intercompany relationships, result in increased exposure to foreign exchange effects. Our results of operations and, in some cases, cash flows, have been and may in the future be adversely affected by movements in foreign exchange rates. While we implement currency hedges to partially reduce our exposure to changes in foreign currency exchange rates; our hedging strategies may not be successful, and our unhedged exposures continue to be subject to currency fluctuations. In addition, the weakening or strengthening of the United States dollar results in favorable or unfavorable translation effects when the results of our foreign locations are translated into United States dollars for inclusion in our consolidated financial statements and results.
BUSINESS AND OPERATIONAL RISKS
Cost containment measures in the United States and other countries resulting in pricing pressures could have a negative impact on our future operating results. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation and competitive pricing, are ongoing in markets where we do business. Pricing pressure has also increased in our markets due to continued consolidation among healthcare providers, trends toward managed care, the shift towards governments becoming the primary payers of healthcare expenses, and government laws and regulations relating to sales and promotion, reimbursement and pricing generally. Reductions in reimbursement levels or coverage for our products or other cost containment measures, including any that reduce medical procedure volumes, could unfavorably affect our future operating results.
 
We may be unable to effectively develop and market products against the products of our competitors in a highly competitive industry. Our present or future products could be rendered obsolete or uneconomical by technological advances by our competitors. Competitive factors include price, customer service, technology, innovation, quality, reputation and reliability. Our competition may respond more quickly to new or emerging technologies, undertake more extensive marketing campaigns, have greater financial, marketing and other resources or be more successful in attracting potential customers, employees and strategic partners. Given these factors, we cannot guarantee that we will be able to continue our level of success in the industry.
Competition in the development and improvement of new and existing products is particularly significant and results from time to time in product obsolescence. The markets in which we operate are highly competitive, and new products and surgical procedures are introduced on an ongoing basis. Such marketplace changes may cause some of our products to become obsolete. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, a higher level of inventory write downs may result.
We may be unable to maintain adequate working relationships with healthcare professionals. We seek to maintain close working relationships with respected physicians and medical personnel in hospitals and universities who assist in product research and development. We rely on these professionals to assist us in the development of proprietary products and product improvements to complement and expand our existing product lines. If we are unable to maintain these relationships, our ability to develop, market and sell new and improved products could decrease.
We are subject to additional risks associated with our extensive international operations. We develop, manufacture and distribute our products throughout the world. Our international operations are subject to a number of additional risks and potential costs, including changes in foreign medical reimbursement policies and programs, unexpected changes in foreign regulatory requirements, differing local product preferences and product requirements, diminished protection of intellectual property in some countries, trade protection measures and import or export licensing requirements, difficulty in staffing and managing foreign operations, political and economic instability. Our results of operations and/or financial condition could be adversely impacted if we are unable to successfully manage these and other risks of international operations in an increasingly volatile environment.
We may be unable to capitalize on previous or future acquisitions. In addition to internally developed products, we rely upon investment in new technologies through acquisitions. Investments in medical technology are inherently risky, and we cannot guarantee that any acquisition will be successful or will not have a material unfavorable impact on us. These risks include the activities required to integrate new businesses, which may result in the need to allocate more resources to integration and product development activities than originally anticipated, diversion of management time, which could adversely affect management's ability to focus on other projects, the inability to realize the expected benefits, savings or synergies from the acquisition, the loss of key personnel of the acquired company, and exposure to unexpected liabilities of the acquired company. In addition, we cannot be certain that the businesses we acquire will become profitable or remain so, which may result in unexpected impairment charges.


5
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

We may record future goodwill impairment charges related to one or more of our business units, which could materially adversely impact our results of operations. We perform our annual impairment test for goodwill in the fourth quarter of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In evaluating the potential for impairment we make assumptions regarding revenue projections, growth rates, cash flows, tax rates, and discount rates. These assumptions are uncertain and by nature may vary from actual results. A significant reduction in the estimated fair values could result in impairment charges that could materially affect our results of operations.
Our results of operations could be negatively impacted by future changes in the allocation of income to each of the income tax jurisdictions in which we operate. We operate in multiple income tax jurisdictions both in the United States and internationally. Accordingly, our management must determine the appropriate allocation of income to each jurisdiction based on current interpretations of complex income tax regulations. Income tax authorities regularly perform audits of our income tax filings. Income tax audits associated with the allocation of income and other complex issues, including inventory transfer pricing and cost sharing, product royalty and foreign branch arrangements, may require an extended period of time to resolve and may result in significant income tax adjustments. If changes to the income allocation are required between jurisdictions with different income tax rates, the related adjustments could have a material unfavorable impact on our results of operations.
Failure of a key information technology system, process or site could have a material adverse impact on our business. We rely extensively on information technology systems to conduct business. These systems include, but are not limited to, ordering and managing materials from suppliers, converting materials to finished products, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, providing data security and other processes necessary to manage our business. If our systems are damaged or cease to function properly due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively compensate on a timely basis, we may suffer interruptions in our operations.
A breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated sites or service providers could have a material adverse impact on our business or reputation. We rely extensively on information technology (IT) systems, networks and services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. Numerous and evolving cybersecurity threats, including advanced persistent threats, pose a potential risk to the security of our IT systems, networks and services, as well as the confidentiality, availability, integrity of our data and our responsibilities to governments. We have made investments seeking to address these threats, including monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party providers. However, because the techniques used in these attacks change frequently and may be difficult to detect for periods of time, we may face difficulties in anticipating and implementing adequate preventative measures. If the IT systems, networks or service providers we rely upon fail to function properly, or if we or one of
 
our third-party providers suffer a loss or disclosure of our business or stakeholder information, due to any number of causes, ranging from catastrophic events or power outages to improper data handling or security breaches, and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive and business harm as well as litigation and regulatory action. The costs and operational consequences of responding to breaches and implementing remediation measures could be significant.
We may be unable to attract and retain key employees. Our sales, technical and other key personnel play an integral role in the development, marketing and selling of new and existing products. If we are unable to recruit, hire, develop and retain a talented, competitive work force, we may not be able to meet our strategic business objectives.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
The following are our principal manufacturing locations as of December 31, 2014
Location
 
Segment
 
Approximate Square Feet
 
Owned/
Leased
Portage, Michigan
 
M
 
1,027,000

 
Owned
Changzhou, China
 
O, NS
 
625,000

 
Owned
Mahwah, New Jersey
 
O
 
531,000

 
Owned
Arroyo, Puerto Rico
 
M
 
220,000

 
Leased
San Jose, California
 
M
 
185,000

 
Leased
Kiel, Germany
 
O
 
173,000

 
Owned
Suzhou, China
 
O, NS
 
160,000

 
Owned
Carrigtwohill, Ireland
 
M, O
 
154,000

 
Owned
Lakeland, Florida
 
M
 
153,000

 
Leased
Selzach, Switzerland
 
O
 
137,000

 
Owned
Limerick, Ireland
 
O
 
130,000

 
Owned
Freiburg, Germany
 
O
 
123,000

 
Owned
Flower Mound, Texas
 
M
 
114,000

 
Leased
Carrigtwohill, Ireland
 
NS
 
110,000

 
Leased
Phoenix, Arizona
 
M
 
100,000

 
Leased
Cestas, France
 
NS
 
91,000

 
Owned
Neuchatel, Switzerland
 
NS
 
88,000

 
Owned
Limerick, Ireland
 
O
 
78,000

 
Leased
Ft. Lauderdale, Florida
 
O, NS
 
78,000

 
Leased
Malvern, Pennsylvania
 
O
 
65,000

 
Leased
Mountain View, California
 
M, NS
 
62,000

 
Leased
Fremont, California
 
M, NS
 
50,000

 
Leased
Guayama Puerto Rico
 
M
 
46,000

 
Leased
Cestas, France
 
NS
 
35,000

 
Leased
Freiburg, Germany
 
M, O
 
34,000

 
Leased
Stetten, Germany
 
O
 
33,000

 
Owned
Rennes, France
 
O
 
31,000

 
Leased
West Valley, Utah
 
O, NS
 
29,000

 
Leased
Tokyo, Japan
 
M
 
11,000

 
Leased
 
 
 
 
 
 
 
O = Orthopaedics M = MedSurg NS = Neurotechnology and Spine
Our corporate headquarters is located in Kalamazoo, Michigan, in a 75,000 square foot owned facility. In addition, we maintain administrative and sales offices and warehousing and distribution facilities in multiple countries. We believe that our properties are suitable and adequate for the manufacture and distribution of our products.


6
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

ITEM 3.
LEGAL PROCEEDINGS.
We are involved in various proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property, and other matters that are more fully described in Note 7 to the Consolidated Financial Statements in Item 8 of this report; this information is incorporated herein by reference.
ITEM 4.
MINE SAFETY DISCLOSURES.

Not applicable.

PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is traded on the New York Stock Exchange under the symbol SYK. Quarterly stock price and dividend information for the years ended December 31, 2014 and 2013 were as follows:
2014 Quarter Ended
 
Mar 31
 
Jun 30
 
Sep 30
 
Dec 31
Dividends declared per share of common stock
 
$
0.305

 
$
0.305

 
$
0.305

 
$
0.345

Market price of common stock:
 
 
 
 
 
 
High
 
83.86

 
86.93

 
85.91

 
98.24

Low
 
74.02

 
75.78

 
78.91

 
77.87

2013 Quarter Ended
 
Mar 31
 
Jun 30
 
Sep 30
 
Dec 31
Dividends declared per share of common stock
 
$
0.265

 
$
0.265

 
$
0.265

 
$
0.305

Market price of common stock:
 
 
 
 
 
 
High
 
66.92

 
70.00

 
71.94

 
75.55

Low
 
55.24

 
63.35

 
63.71

 
66.93


Our Board of Directors considers payment of cash dividends at each of its quarterly meetings. On January 31, 2015, there were 3,285 shareholders of record of our common stock.
In December of 2012 and 2011, we announced that our Board of Directors had authorized us to purchase up to $405 and $500, respectively, of our common stock (the 2012 and 2011 Repurchase Programs, respectively). The manner, timing and amount of purchases is determined by management based on an evaluation of market conditions, stock price and other factors and is subject to regulatory considerations. Purchases are to be made from time to time in the open market, in privately negotiated transactions or otherwise.
Shares repurchased under the share repurchase programs are available for general corporate purposes, including offsetting dilution associated with stock option and other equity-based employee benefit plans.  During the year ended December 31, 2014 we repurchased 1.3 million shares at a cost of $100 under the 2011 Repurchase Program. As of December 31, 2014, the maximum dollar value of shares that may yet be purchased under the 2011 Repurchase Program was $178. We have not made any repurchases pursuant to the 2012 Repurchase Program in 2014.
 
The activity pursuant to the 2011 Repurchase Program for the three months ended December 31, 2014 is summarized as follows:
Period
Total
Number
of Shares
Purchased
Average Price
Paid
Per Share
Total 
Number of
Shares 
Purchased as
Part of Publicly
Announced Plan
Maximum Dollar Value of Shares that may yet be Purchased Under the Plan
10/1/2014-10/31/2014

$


$
178

11/1/2014-11/30/2014



178

12/1/2014-12/31/2014



178

Total

$


 
The following graph compares our total returns (including reinvestments of dividends) against the Standard & Poor’s (S&P) 500 Index and the S&P 500 Health Care Index. The graph assumes $100 (not in millions) invested on December 31, 2009 in our Common Stock and each of the indices.
Company / Index
2009
2010
2011
2012
2013
2014
Stryker Corporation
100.00
107.89
101.29
113.54
158.16
201.50
S&P 500 Index
100.00
115.06
117.49
136.30
180.44
205.14
S&P 500 Health Care Index
100.00
102.90
116.00
136.75
193.45
242.46


7
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

ITEM 6.
SELECTED FINANCIAL DATA.

Selected financial data for each of the five years ended December 31, 2014 is as follows: 
CONSOLIDATED OPERATIONS
 
2014
 
2013
 
2012
 
2011
 
2010
Net sales
 
$
9,675

 
$
9,021

 
$
8,657

 
$
8,307

 
$
7,320

Cost of sales
 
3,291

 
2,977

 
2,781

 
2,811

 
2,286

Gross profit
 
6,384

 
6,044

 
5,876

 
5,496

 
5,034

Research, development and engineering expenses
 
614

 
536

 
471

 
462

 
394

Selling, general and administrative expenses
 
3,575

 
3,492

 
3,367

 
3,226

 
2,831

Recall charges, net of insurance recoveries
 
761

 
622

 
174

 

 

Intangibles amortization
 
188

 
138

 
123

 
122

 
58

 
 
5,138

 
4,788

 
4,135

 
3,810

 
3,283

Operating income
 
1,246

 
1,256

 
1,741

 
1,686

 
1,751

Other income (expense)
 
(86
)
 
(44
)
 
(36
)
 

 
(22
)
Earnings before income taxes
 
1,160

 
1,212

 
1,705

 
1,686

 
1,729

Income taxes
 
645

 
206

 
407

 
341

 
456

Net earnings
 
$
515

 
$
1,006

 
$
1,298

 
$
1,345

 
$
1,273

 
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.36

 
$
2.66

 
$
3.41

 
$
3.48

 
$
3.21

Diluted
 
$
1.34

 
$
2.63

 
$
3.39

 
$
3.45

 
$
3.19

Dividends per share of common stock:
 
 
 
 
 
 
 
 
 
 
Declared
 
$
1.26

 
$
1.10

 
$
0.90

 
$
0.75

 
$
0.63

Paid
 
$
1.22

 
$
1.06

 
$
0.85

 
$
0.72

 
$
0.60

Average number of shares outstanding—in millions:
 
 
 
 
 
 
 
 
 
 
Basic
 
378.5

 
378.6

 
380.6

 
386.5

 
396.4

Diluted
 
382.8

 
382.1

 
383.0

 
389.5

 
399.5

 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATED FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and current marketable securities
 
$
5,000

 
$
3,980

 
$
4,285

 
$
3,418

 
$
4,380

Accounts receivable—net
 
1,572

 
1,518

 
1,430

 
1,417

 
1,252

Inventory—net
 
1,588

 
1,422

 
1,265

 
1,283

 
1,057

Property, plant and equipment—net
 
1,098

 
1,081

 
948

 
888

 
798

Capital expenditures
 
233

 
195

 
210

 
226

 
182

Depreciation and amortization
 
586

 
511

 
486

 
481

 
410

Total assets
 
17,713

 
15,743

 
13,206

 
12,146

 
10,895

Accounts payable
 
329

 
314

 
288

 
345

 
292

Total debt
 
3,973

 
2,764

 
1,762

 
1,768

 
1,021

Shareholders’ equity
 
8,595

 
9,047

 
8,597

 
7,683

 
7,174

Net cash provided by operating activities
 
1,782

 
1,886

 
1,657

 
1,434

 
1,547

 
 
 
 
 
 
 
 
 
 
 
OTHER DATA
 
 
 
 
 
 
 
 
 
 
Number of shareholders of record
 
3,305

 
3,612

 
4,258

 
4,508

 
4,586

Approximate number of employees
 
26,000

 
25,000

 
22,000

 
21,000

 
20,000






8
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ABOUT STRYKER
Stryker is one of the world's leading medical technology companies, with 2014 revenues of $9,675 and net earnings of $515. We offer a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products to help people lead more active and more satisfying lives.
In the United States, most of our products are marketed directly to doctors, hospitals and other healthcare facilities. In general, we maintain separate dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Internationally our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors. Our business is generally not seasonal in nature; however, the number of Orthopaedics implant surgeries is generally lower during the summer months and sales of capital equipment are generally higher in the fourth quarter.
At the heart of what we do and believe is making healthcare better. We do this by collaborating with our customers to develop innovative products and services that ultimately improve the lives of our patients. We express this through our mission statement:
"Together with our customers,
we are driven to make healthcare better."
We believe our success in the highly competitive product categories in which we operate depends to a large degree on our ability to develop new products and make improvements to existing products. We are committed to internal innovation to develop products and services that improve outcomes and deliver greater cost savings and efficiencies and to augment our efforts with focused acquisitions. Our success further depends on the ability of our people to execute effectively, every day.
Our goal is to drive sales growth at the high-end of the MedTech industry and maintain our capital allocation strategy that prioritizes:
1.
Acquisitions
2.
Dividends
3.
Share repurchases
 
Overview of 2014
In 2014 we achieved sales growth of 7.3% in line with our ongoing goal to grow organic sales at the high-end of the MedTech industry. Excluding the impact of acquisitions, sales grew 5.8% in constant currency. We converted our sales growth into a 5.3% growth in adjusted net earnings per diluted share (See page 12 for a reconciliation of reported net earnings per diluted share to adjusted net earnings per diluted share). We continued our capital allocation strategy by investing $916 in acquisitions, paying $462 in dividends to our shareholders and using $100 for share repurchases.
In November 2014 we entered into a Settlement Agreement to compensate eligible United States patients who had "revision surgery" to replace their Rejuvenate Modular-Neck hip stem and/or ABG II Modular-Neck hip stem.
In September 2014 we acquired the assets of Small Bone Innovations, Inc. (SBi) for an aggregate purchase price of approximately $358. SBi products are designed and promoted for upper and lower extremity small bone indications, with a focus on small joint replacement.
In July 2014 we established a European regional headquarters in the Netherlands. We believe that this increased presence will strengthen our brand in Europe, support the growth of our global business, provide operational efficiencies and simplify our customers’ experience.
In April 2014 we acquired Berchtold Holding, AG (Berchtold), a privately-held business with operations in Germany and the United States, for an aggregate purchase price of approximately $184. Berchtold sells surgical tables, equipment booms and surgical lighting systems.
In March 2014 we acquired Patient Safety Technologies, Inc. (PST), for an aggregate purchase price of $120. PST conducts its business through its wholly owned subsidiary, SurgiCount Medical, Inc. PST’s proprietary Safety-Sponge® System and SurgiCount 360™ compliance software help prevent retained foreign objects in the operating room. Other business acquisitions in 2014 include the acquisition of Pivot Medical, Inc, which develops and sells innovative products for hip arthroscopy.



RESULTS OF OPERATIONS
Consolidated results of operations:
Years Ended December 31,
 
Percentage Change
 
2014
2013
2012
 
2014/2013
2013/2012
Net Sales
$9,675
$9,021
$8,657
 
7.3

4.2

Gross Profit
6,384
6,044
5,876
 
5.6

2.9

Research, development and engineering expenses
614
536
471
 
14.6

13.8

Selling, general and administrative expenses
4,336
4,114
3,541
 
5.4

16.2

Intangibles amortization
188
138
123
 
36.2

12.2

Other income (expense)
(86)
(44)
(36
)
 
95.5

22.2

Income taxes
645
206
407
 
213.1

(49.4
)
Net Earnings
$515
$1,006
$1,298
 
(48.8
)
(22.5
)
Diluted Net Earnings per share
$1.34
$2.63
$3.39
 
(49.0
)
(22.4
)
Adjusted Net Earnings per share (1)
$4.73
$4.49
$4.30
 
5.3

4.4


9
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

Geographic and segment net sales:
 
 
 
Percentage Change
 
 
 
 
2014/2013
 
2013/2012
 
 
Years Ended December 31,
 
 
 
Constant
Currency
 
 
 
Constant
Currency
 
 
2014
 
2013
 
2012
 
Reported
 
 
Reported
 
Geographic sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
6,558

 
$
5,984

 
$
5,658

 
9.6
 
9.6
 
5.8
 
5.8
International
 
3,117

 
3,037

 
2,999

 
2.6
 
5.7
 
1.3
 
6.0
Total net sales
 
$
9,675

 
$
9,021

 
$
8,657

 
7.3
 
8.3
 
4.2
 
5.9
Segment sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Orthopaedics
 
$
4,153

 
$
3,949

 
$
3,823

 
5.2
 
6.3
 
3.3
 
5.4
MedSurg
 
3,781

 
3,414

 
3,265

 
10.8
 
11.7
 
4.6
 
5.5
Neurotechnology and Spine
 
1,741

 
1,658

 
1,569

 
5.0
 
6.2
 
5.6
 
7.7
Total net sales
 
$
9,675

 
$
9,021

 
$
8,657

 
7.3
 
8.3
 
4.2
 
5.9

Net sales increased 7.3% in 2014. In 2014 net sales grew by 7.8% as a result of increased unit volume and changes in product mix and 2.5% due to acquisitions and were negatively impacted by 2.0% due to changes in price and 1.0% due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions, net sales increased 5.8% in constant currency. Net sales increased primarily due to higher shipments of instruments products, trauma and extremities products, endoscopy products, neurotechnology products, medical products, and the impact of acquisitions.
Net sales increased 4.2% in 2013. In 2013 net sales grew by 6.5% as a result of unit volume and changes in product mix and 0.8%
 
due to acquisitions and were negatively impacted by 1.4% due to changes in price and 1.6% due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions, 2013 net sales increased 5.1% in constant currency. Net sales increased primarily due to higher shipments of trauma and extremities products, neurotechnology products, hips and endoscopy products.
In the United States net sales increased 9.6% in 2014 after increasing 5.8% in 2013. In constant currency, International sales increased 5.7% in 2014 after increasing 6.0% in 2013.


Supplemental geographical sales growth information
 
 
 
Percentage Change
 
 
 
Percentage Change
 
Years Ended December 31,
 
 
U.S.
International
 
Years Ended December 31,
 
 
U.S.
International
 
2014
2013
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
 
2013
2012
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
Orthopaedics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Knees
1,396

1,371

1.8
 %
2.7
 %
4.3
 %
(3.5
)%
(0.7
)%
 
1,371

1,356

1.1
 %
2.6
 %
3.4
 %
(3.3
)%
1.1
 %
Hips
1,291

1,272

1.5
 %
2.7
 %
6.1
 %
(4.2
)%
(1.4
)%
 
1,272

1,233

3.2
 %
6.0
 %
7.2
 %
(1.4
)%
4.5
 %
Trauma and Extremities
1,230

1,116

10.2
 %
11.4
 %
14.8
 %
5.1
 %
7.7
 %
 
1,116

989

12.8
 %
15.1
 %
18.4
 %
7.2
 %
11.8
 %
 Other
236

190

24.0
 %
25.2
 %
37.4
 %
(7.6
)%
(3.7
)%
 
190

245

(22.5
)%
(20.9
)%
(19.7
)%
(28.3
)%
(23.4
)%
ORTHOPAEDICS
4,153

3,949

5.2
 %
6.3
 %
9.4
 %
(1.1
)%
1.7
 %
 
3,949

3,823

3.3
 %
5.4
 %
6.2
 %
(0.6
)%
4.4
 %
MedSurg
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
1,424

1,269

12.2
 %
13.1
 %
14.8
 %
5.7
 %
8.8
 %
 
1,269

1,261

0.6
 %
1.9
 %
0.7
 %
0.6
 %
5.1
 %
Endoscopy
1,382

1,222

13.1
 %
14.2
 %
13.3
 %
12.6
 %
16.2
 %
 
1,222

1,111

10.0
 %
11.0
 %
11.4
 %
6.5
 %
9.9
 %
Medical
766

710

7.9
 %
8.8
 %
9.3
 %
2.2
 %
6.7
 %
 
710

691

2.8
 %
3.1
 %
3.4
 %
0.3
 %
2.0
 %
   Sustainability
209

213

(1.9
)%
(1.9
)%
(1.8
)%
nm

nm

 
213

202

5.6
 %
5.6
 %
5.8
 %
nm

nm

MEDSURG
3,781

3,414

10.8
 %
11.7
 %
11.7
 %
7.9
 %
11.5
 %
 
3,414

3,265

4.6
 %
5.5
 %
5.2
 %
2.9
 %
6.4
 %
Neurotechnology and Spine
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
1,001

915

9.4
 %
10.9
 %
11.2
 %
6.7
 %
10.4
 %
 
915

842

8.7
 %
11.4
 %
11.2
 %
5.1
 %
11.8
 %
Spine
740

743

(0.4
)%
0.3
 %
(1.6
)%
2.5
 %
5.2
 %
 
743

727

2.1
 %
3.4
 %
1.8
 %
2.9
 %
7.2
 %
NEUROTECHNOLOGY AND SPINE
1,741

1,658

5.0
 %
6.2
 %
5.0
 %
5.1
 %
8.5
 %
 
1,658

1,569

5.6
 %
7.7
 %
6.4
 %
4.3
 %
10.0
 %
nm = not meaningful
Orthopaedics Net Sales
Orthopaedics net sales in 2014 increased 5.2%, primarily due to a 6.2% increase in unit volume and changes in product mix and 3.0% due to acquisitions. Net sales were negatively impacted by 2.9% due to changes in price and 1.1% due to the unfavorable impact of foreign currency exchange rates. In constant currency, net sales increased by 6.3% in 2014, primarily due to increases in trauma and extremities products and the impact of acquisitions. Net sales in 2013 increased 3.3%, primarily due to a 7.9% increase in unit
 
volume and changes in product mix and 1.4% due to acquisitions. Net sales were negatively impacted by 2.4% due to changes in price and 2.1% due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions, net sales increased by 5.4% in constant currency in 2013, primarily due to increases in trauma and extremities products and hips.


10
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

MedSurg Net Sales
MedSurg net sales in 2014 increased 10.8%, primarily due to a 9.5% increase in unit volume and changes in product mix and 3.0% due to acquisitions, and were negatively impacted by 0.8% due to changes in price and 0.9% due to the unfavorable impact of foreign currency exchange rates. In constant currency, net sales in 2014 increased 11.7%, led by higher shipments of instruments products and medical products and the impact of acquisitions; these higher shipments were partially offset by lower shipments of sustainability products. Net sales in 2013 increased 4.6%, primarily due to a 3.8% increase in unit volume and changes in product mix and were negatively impacted by 0.9% due to the unfavorable impact of foreign currency exchange rates. The effect of pricing was not significant. In constant currency, net sales in 2013 increased 5.5%, led by higher shipments of endoscopy products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales in 2014 increased 5.0%, primarily due to an 8.1% increase in unit volume and changes in product mix and 0.5% due to acquisitions, and were negatively impacted by 2.4% due to changes in price and 1.2% due to the unfavorable impact of foreign currency exchange rates. In constant currency net sales in 2014 increased 6.2% led by higher shipments of neurotechnology products. Net sales in 2013 increased 5.6%, primarily due to an 8.8% increase in unit volume and changes in product mix and 0.9% due to acquisitions, and were negatively impacted by 2.0% due to changes in price and 2.1% due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions, net sales in 2013 increased 6.8% in constant currency, due to higher shipments of neurotechnology products.
Consolidated Cost of Sales
Cost of sales increased 10.5% in 2014 to 34.0% of sales compared to 33.0% in 2013. Cost of sales as a percentage of sales was adversely impacted by changes in selling prices for our products, unfavorable product mix and by the unfavorable effect of foreign currency exchange rates. Our product mix was unfavorable due to the impact of recent acquisitions and strong MedSurg sales. Cost of sales in 2014 and 2013 includes an additional cost of $27 and $28, respectively, related to inventory that was "stepped up" to fair value following acquisitions; $1 and $11, respectively in restructuring related charges; and $7 in 2013 for disgorgement of profits associated with a legal settlement. Cost of sales increased 7.0% in 2013 to 33.0% of sales compared to 32.1% in 2012. Cost of sales in 2012 includes an additional cost of $18 related to inventory that was "stepped up" to fair value following acquisitions and $5 in restructuring related costs.
Research, Development and Engineering Expenses
Research, development and engineering expenses represented 6.3% of sales in 2014 compared to 5.9% in 2013 and 5.4% in 2012. The increased spending levels in 2014 and 2013 were driven by the impact of acquisitions and by the timing of projects and our continued investment in new technologies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5.4% in 2014 and represented 44.9% of sales compared to 45.6% in 2013 and 40.9% in 2012, driven by strong sales growth and cost improvement efforts. These expenses included $75 and $70 in 2014 and 2013, respectively, of acquisition and integration related charges; $116 and $52, respectively, of restructuring related charges, $761 and $622, respectively, related to the Rejuvenate, ABG II and Neptune recalls; $62 in 2013 related to regulatory and legal matters; $25 in 2013 representing a donation to an educational
 
institution. Excluding the impact of these charges, selling, general and administrative expenses were 35.0% of sales in 2014 compared to 36.4% in 2013.
Other Income (Expense)
Other expense increased by $42 in 2014 after increasing by $8 in 2013. Net expense in 2014 increased primarily due to higher interest expense from the $1,000 senior unsecured notes issued in May 2014, partially offset by lower interest expense due to favorable tax audit resolutions. Net expense in 2013 increased due to lower income from interest and marketable securities, offset by hedge gains and lower interest expense. The decrease in interest expense was due to favorable tax audit resolutions in multiple jurisdictions, partially offset by higher interest expense on borrowings.
Income Taxes
Our effective income tax rate on earnings was 55.6%, 17.0% and 23.9% in 2014, 2013 and 2012, respectively. The effective income tax rate for 2014 includes the tax impacts of the establishment of a European regional headquarters and a cash repatriation to the United States planned for 2015. The effective income tax rate for 2013 includes income tax benefits relating to favorable audit resolutions in multiple jurisdictions. The effective income tax rate for 2012 includes the net impact of effective settlement of all tax matters through 2004 relating to two German subsidiaries, and adjustment of the estimate of foreign tax credits to the amount shown on the tax return as filed.  
The American Taxpayer Relief Act of 2012 (the Act) was signed on January 2, 2013. The Act provided numerous tax provisions for corporations including an extension of the research tax credit and an extension of certain provisions for companies with significant international operations. The provisions originally expired at December 31, 2011 but were retroactively extended through December 31, 2013. In 2013 we recorded tax benefits of $13 related to the 2012 research tax credit and other provision of the Act.
Net Earnings
Net earnings in 2014 decreased 48.8% to $515 compared to 2013. Basic net earnings per share in 2014 decreased 48.9% to $1.36, and diluted net earnings per share in 2014 decreased 49.0% to $1.34 compared to 2013, respectively. Foreign currency had a negative impact on our diluted net earnings per share in 2014 of approximately $0.14. Net earnings in 2013 decreased 22.5% to $1,006 compared to 2012. Basic net earnings per share in 2013 decreased 22.0% to $2.66, and diluted net earnings per share in 2013 decreased 22.4% to $2.63 compared to 2012, respectively.
Reported net earnings in 2014 includes charges for the Rejuvenate, ABG II and Neptune recalls, acquisition and integration related charges, and additional cost of sales for inventory sold that was "stepped up" to fair value related to acquisitions, restructuring related charges and benefits associated with the resolution of certain tax matters. Excluding the impact of these items, adjusted net earnings(1) in 2014 increased 5.6% to $1,810 after increasing 4.0% in 2013. Adjusted diluted net earnings per share(1) in 2014 increased 5.3% to $4.73 after increasing 4.4% in 2013.
(1)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 income; adjusted effective income tax rate; adjusted net earnings; and adjusted diluted net earnings per share (EPS). We believe that


11
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

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, other restructuring activities and long-lived asset impairments.
4.
Rejuvenate and 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.
Because 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 financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The following reconciles the non-GAAP financial measures: adjusted gross profit; adjusted selling, general and administrative expense; adjusted operating income; adjusted other income/(expense); adjusted net earnings; adjusted effective tax rate; and adjusted diluted net earnings per share; with the most directly comparable GAAP financial measures:

Year Ended December 31, 2014
Gross Profit
Selling, General & Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
AS REPORTED
$
6,384

$
4,336

$
188

$
1,246

$
515

55.6
 %
$
1.34

Acquisition and integration related charges
 
 
 
 
 
 
 
    Inventory stepped up to fair value
27



27

15

0.5

0.04

    Other acquisition and integration related

(75
)

75

50

0.7

0.13

Amortization of intangible assets


(188
)
188

133

1.1

0.35

Restructuring related charges
1

(116
)

117

78

1.1

0.20

Rejuvenate and other recall matters

(761
)

761

628

(3.1
)
1.65

Tax matters




391

(33.6
)
1.02

ADJUSTED
$
6,412

$
3,384

$

$
2,414

$
1,810

22.3
 %
$
4.73

Year Ended December 31, 2013
Gross Profit
Selling, General & Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
AS REPORTED
$
6,044

$
4,114

$
138

$
1,256

$
1,006

17.0
 %
$
2.63

 Acquisition and integration related charges
 
 
 
 
 
 
 
    Inventory stepped up to fair value
28



28

21

0.1

0.06

    Other acquisition and integration related

(70
)

70

51

0.3

0.13

Amortization of intangible assets


(138
)
138

98

0.4

0.26

Restructuring related charges
11

(52
)

63

46

0.3

0.12

Rejuvenate and other recall matters

(622
)

622

460

2.0

1.20

Regulatory and legal matters
7

(62
)

69

63

(0.6
)
0.17

Donations

(25
)

25

15

0.3

0.04

Tax matters




(46
)
2.9

(0.12
)
ADJUSTED
$
6,090

$
3,283

$

$
2,271

$
1,714

22.7
 %
$
4.49


12
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

Year Ended December 31, 2012
Gross Profit
Selling General and Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
AS REPORTED
$
5,876

$
3,466

$
123

$
1,741

$
1,298

23.9
 %
$
3.39

Acquisition and integration related charges
 
 
 
 
 
 
 
    Inventory stepped up to fair value
18



18

13


0.03

    Other acquisition and integration related

(37
)

37

24

0.3

0.06

Amortization of intangible assets


(123
)
123

88

0.3

0.23

Restructuring related charges
5

(75
)

80

59

0.1

0.15

Rejuvenate and other recall matters

(174
)

174

133


0.35

Regulatory and legal matters

(33
)

33

33

(0.5
)
0.09

ADJUSTED
$
5,899

$
3,147

$

$
2,206

$
1,648

24.1
 %
$
4.30

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

FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and ready access to capital markets at competitive rates.
Operating cash flow provides the primary source of cash to fund operating needs and capital expenditures. Excess operating cash is used first to fund acquisitions to complement our portfolio of businesses. Other discretionary uses include dividends and share repurchases. As necessary, we may supplement operating cash flow with debt to fund these activities. Our overall cash position shows our strong business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations.
Operating Activities
Operating cash flow was $1,782 in 2014, a decrease of 5.5% and resulted primarily from net earnings adjusted for non-cash items (recall charges, depreciation and amortization, share-based compensation, sale of inventory "stepped up" to fair value at acquisition and deferred income taxes). In addition, the increase in taxes payable was primarily due to the timing of tax payments associated with tax liabilities arising from the establishment of a European regional headquarters. These increases were partially offset by higher levels of inventory and accounts receivable. The net of accounts receivable, inventory and accounts payable resulted in the consumption of $249 of cash in 2014. Inventory days on hand increased by eight days compared to 2013 as inventory grew to support higher sales and acquisitions, while accounts receivable days sales outstanding decreased by one day compared to 2013.
Operating cash flow was $1,886 in 2013, an increase of 13.8%, and resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, share-based compensation, sale of inventory "stepped up" to fair value at acquisition and deferred income taxes), along with a decrease of $278 in cash paid for income taxes, associated with the timing of cash payments as well as favorable tax audit resolutions in multiple jurisdictions. The net of accounts receivable, inventory and accounts payable consumed $165 of cash in 2013. Inventory days on hand improved by 1 day due to continued focus on improved inventory management; accounts receivable days sales outstanding remained consistent with 2012.
Investing Activities
Net investing activities resulted in cash consumption of $1,878, $2,217 and $736 in 2014, 2013 and 2012, respectively, primarily due to acquisitions and capital spending.
Acquisitions. Acquisitions resulted in cash consumption of $916 in 2014 and $2,320 in 2013. In 2014 the cash consumed was primarily for SBi, Berchtold, PST and Pivot. In 2013 cash consumed was primarily for Trauson and MAKO. Cash consumed in 2012 of
 
$154 was primarily associated with the acquisition of Surpass Medical Ltd.
Capital Spending. We manage capital spending to support our business growth. Capital expenditures, primarily to support integration of acquisitions, information technology infrastructure upgrades, capacity expansion, new product introductions, innovation and cost savings, were $233, $195 and $210 in 2014, 2013 and 2012, respectively.
Financing Activities
Dividend Payments. Dividends paid per common share increased 15.1% to $1.22 per share in 2014, and increased 24.7% to $1.06 per share in 2013. As a result of the annual increase in dividends paid per share, total dividend payments to common shareholders were $462, $401 and $324 in 2014, 2013 and 2012, respectively.
Short-Term and Long-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and overall cost of capital.
Net proceeds from borrowings were $1,159 and $1,005 in 2014 and 2013, respectively. In 2014 the proceeds were primarily from the public offerings of notes and commercial paper, and proceeds in 2013 were primarily from public offerings of notes. Refer to Note 8 in the Notes to the Consolidated Financial Statements for further information.
Total debt was $3,973 and $2,764 in 2014 and 2013, respectively.
Share Repurchases. The total use of cash for share repurchases was $100, $317 and $108 in 2014, 2013 and 2012, respectively.
Liquidity
Our cash, cash equivalents and marketable securities were $5,000 and $3,980 at December 31, 2014 and 2013, respectively, and our current assets exceeded current liabilities by $5,209 and $5,678 at December 31, 2014 and 2013, respectively. We anticipate being able to support our short-term liquidity and operating needs, including settlements related to the Rejuvenate and ABG II recalls, from a variety of sources, including cash from operations, commercial paper and existing credit lines. In the past we have also raised funds in the capital markets and may continue to do so from time to time in the future. We have strong short-term and long-term debt ratings that we believe should enable us to refinance our debt as it becomes due.
Should additional funds be required we had approximately $1,289 of borrowing capacity available under all of our existing credit facilities at December 31, 2014.
At December 31, 2014, approximately 68% of our consolidated cash, cash equivalents and marketable securities were held outside of the United States. During the third quarter of 2014 we announced


13
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

that we plan to repatriate approximately $2,000 in total of cash from outside of the United States in 2015. The remainder of the funds outside of the United States are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside the United States.
We continually evaluate our receivables, particularly in Spain, Portugal, Italy and Greece (the Southern European Region). The total net receivables from the Southern European Region were approximately $154 and $199 at December 31, 2014 and 2013, respectively, including approximately $78 and $103 of sovereign receivables in 2014 and 2013, respectively. We believe that our current reserves related to receivables are adequate and any additional credit risk associated with the Southern European Region is not expected to have a material adverse impact on our financial position or liquidity. We currently do not have any investments in the sovereign debt instruments of the Southern European Region.  Any non-sovereign exposure in these countries in our investment portfolio is considered immaterial. 
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.
CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS
As further described in Note 7 to the Consolidated Financial Statements, as of December 31, 2014 we have recorded charges to earnings totaling $748 representing the minimum of the range of probable loss to resolve the Rejuvenate and ABG II recalls. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter is estimated to be approximately $1,534 ($1,713 before $179 of third-party insurance recoveries) to $2,453.  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. We are not able to reasonably estimate the future periods in which payments will be made.
As further described in Note 11 to the Consolidated Financial Statements, as of December 31, 2014 our defined benefit pension plans were underfunded by $260, of which approximately $250 related to plans outside the United States. Due to the rules affecting tax-deductible contributions in the jurisdictions in which the plans are offered and the impact of future plan asset performance, changes in interest rates and potential changes in legislation in the United States and other foreign jurisdictions, we are not able to reasonably estimate, beyond 2014, the amounts that may be required to fund defined benefit pension plans.
As further described in Note 10 to the Consolidated Financial Statements, as of December 31, 2014 we have recorded a liability for uncertain income tax positions of $315. Due to uncertainties regarding the ultimate resolution of income tax audits, we are not able to reasonably estimate the future periods in which any income tax payments to settle these uncertain income tax positions will be made.
Our future contractual obligations for agreements with initial terms greater than one year, including agreements to purchase materials in the normal course of business, are:
 
 
Payment Period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
 
Short-term and long-term debt
$
3,979

 
$
727

 
$
750

 
$
600

 
$
1,902

 
Unconditional purchase obligations
1,056

 
697

 
238

 
120

 
1

 
Operating leases
216

 
60

 
78

 
44

 
34

 
Contributions to defined benefit plans
19

 
19

 

 

 

 
Other
94

 
13

 
17

 
9

 
55

 
 
$
5,364

 
$
1,516

 
$
1,083

 
$
773

 
$
1,992

 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the United States, there are certain accounting policies that may require a choice between acceptable accounting methods or may require substantial judgment or estimation in their application. These include inventory reserves, income taxes, acquisitions, goodwill and intangible assets, and legal and other contingencies. We believe these accounting policies and the others set forth in Note 1 to the Consolidated Financial Statements should be reviewed as they are integral to understanding our results of operations and financial condition.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products at prices in excess of current carrying costs. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.
Income Taxes
Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary and reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, the tax effect of expenditures for which a deduction has already been taken in our tax return but has not yet been recognized in our financial statements or assets recorded at fair value in business combinations for which there was no corresponding tax basis adjustment.
Inherent in determining our annual tax rate are judgments regarding business plans, tax planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized.


14
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may take tax positions that management believes are supportable but are potentially subject to successful challenge by the applicable taxing authority. These differences of interpretation with the respective governmental taxing authorities can be impacted by the local economic and fiscal environment. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that it is more likely than not that the ultimate outcomes will not have a material adverse effect on our financial position, results of operations or cash flows.
Because there are a number of estimates and assumptions inherent in calculating the various components of our tax provision, certain changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, could have an impact on those estimates and our effective tax rate.
Acquisitions, Goodwill and Intangibles, and Long-Lived Assets
We account for acquired businesses using the purchase method of accounting. Under the purchase method, our financial statements include the operations of an acquired business starting from the completion of the acquisition. In addition, the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.
Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant items. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions.
Determining the useful life of an intangible asset also requires judgment. With the exception of certain trade names, the majority of our acquired intangible assets (e.g., certain trademarks or brands, customer and distributor relationships, patents and technologies) are expected to have determinable useful lives. Our assessment as to the useful lives of these intangible assets is based on a number of factors including competitive environment, market share, trademark and/or brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the trademarks or brands are sold. Our estimates of the useful lives of determinable-lived intangibles are primarily based on these same factors. Determinable-lived intangible assets are amortized to expense over their estimated useful life.
 
In certain of our acquisitions, we acquire in-process research and development (IPRD) intangible assets. IPRD is considered to be an indefinite-lived intangible asset until such time as the research is completed (at which time it becomes a determinable-lived intangible asset) or determined to have no future use (at which time it is impaired).
The value of indefinite-lived intangible assets and goodwill is not amortized but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We perform our annual impairment test for goodwill in the fourth quarter of each year. We have adopted the provisions of Accounting Standards Update (ASU) No. 2011-08, Intangibles - Goodwill and Other: Testing Goodwill for Impairment, which permits us to consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. In certain circumstances, we may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances we test goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We test individual indefinite-lived intangibles by reviewing the individual book values compared to the fair value. We determine the fair value of our reporting units and indefinite-lived intangible assets based on the income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.
We did not recognize any impairment charges for goodwill during the years presented, as our annual impairment testing indicated that all reporting unit goodwill fair values exceeded their respective recorded values. Future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates and future cash flow projections, could result in significantly different estimates of the fair values. A significant reduction in the estimated fair values could result in impairment charges that could materially affect our financial statements.
We review our other long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual asset level or the asset group level. The undiscounted cash flows expected to be generated by the related assets are estimated over their useful life based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related assets or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale, if any, are recorded at the lower of carrying amount or fair value less costs to sell.
Legal and Other Contingencies
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property, and other matters that are more fully described in Note 7 to the


15
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

Consolidated Financial Statements. 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 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, for the resolution of these legal matters 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 projected by management, additional expense may be incurred, which could unfavorably affect future operating results. We are currently 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.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014 the FASB issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes and replaces nearly all currently-existing guidance under United States Generally Accepted Accounting Principles related to revenue recognition including related disclosure requirements. This guidance will be effective for us beginning January 1, 2017. We have not yet completed an assessment of the impact that adoption of this guidance will have on our consolidated financial statements.
OTHER INFORMATION
Hedging and Derivative Financial Instruments
We sell our products throughout the world. As a result, our financial results could be significantly affected by factors such as weak economic conditions or changes in foreign currency exchange rates. Our operating results are primarily exposed to changes in exchange rates among the United States dollar; European currencies, in particular the euro, Swiss franc and the British pound; the Japanese yen; the Australian dollar; and the Canadian dollar. We develop and manufacture products in the United States, China, France, Germany, Ireland, Puerto Rico and Switzerland and incur costs in the applicable local currencies. This worldwide deployment of facilities serves to partially mitigate the impact of currency exchange rate changes on our cost of sales.
We enter into designated and non-designated forward currency exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, thereby limiting risk that would otherwise result from changes in exchange rates. These nonfunctional currency exposures principally relate to intercompany receivables and payables arising from intercompany purchases of manufactured products. The periods of the forward currency exchange contracts correspond to the periods of the exposed transactions, with realized gains and losses included in the measurement and recording of transactions denominated in the nonfunctional currencies. All forward currency exchange contracts are recorded at their fair value each period, with resulting gains (losses) for non-designated forward contracts and any ineffectiveness measured on designated forward currency exchange contracts included in our Consolidated Statements of Earnings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other
 
comprehensive income, and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The estimated fair value of forward currency exchange contracts represents the measurement of the contracts at month-end spot rates as adjusted by current forward points. A hypothetical 10% change in foreign currencies relative to the United States dollar would change the December 31, 2014 fair value by approximately $79. We are exposed to credit loss in the event of nonperformance by counterparties on our outstanding forward currency exchange contracts, but we do not anticipate nonperformance by any of our counterparties.
We have certain investments in net assets in international locations that are not hedged. These investments are subject to translation gains and losses due to changes in foreign currency exchange rates. For 2014 the strengthening of foreign currencies relative to the United States dollar increased the value of these investments in net assets and the related foreign currency translation adjustment loss in shareholders' equity by $(440) to $(134), from $306 as of December 31, 2013.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider our material 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, under the caption "Other Information - Hedging and Derivative Financial Instruments."
  


16
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of Stryker Corporation:

We have audited the accompanying consolidated balance sheets of Stryker Corporation and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stryker Corporation and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stryker Corporation's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 12, 2015 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP
Grand Rapids, Michigan
February 12, 2015



17
 
 

STRYKER CORPORATION 2014 Form 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
Net sales
 
$
9,675

 
$
9,021

 
$
8,657

Cost of sales
 
3,291

 
2,977

 
2,781

Gross profit
 
6,384

 
6,044

 
5,876

Research, development and engineering expenses
 
614

 
536

 
471

Selling, general and administrative expenses
 
3,575

 
3,492

 
3,367

Recall charges, net of insurance recoveries
 
761

 
622

 
174

Intangible asset amortization
 
188

 
138

 
123

Total operating expenses
 
5,138

 
4,788

 
4,135

Operating income
 
1,246

 
1,256

 
1,741

Other income (expense), net
 
(86
)
 
(44
)
 
(36
)
Earnings before income taxes
 
1,160

 
1,212

 
1,705

Income taxes
 
645

 
206

 
407

Net earnings
 
$
515

 
$
1,006

 
$
1,298

 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
  Basic net earnings per share of common stock
 
$
1.36

 
$
2.66

 
$
3.41

  Diluted net earnings per share of common stock
 
$
1.34

 
$
2.63

 
$
3.39

 
 
 
 
 
 
 
Weighted-average shares outstanding—in millions:
 
 
 
 
 
 
Basic
 
378.5

 
378.6

 
380.6

Net effect of dilutive employee stock options
 
4.3

 
3.5

 
2.4

Diluted
 
382.8

 
382.1

 
383.0

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

 

 
6.4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
Net earnings
 
$
515

 
$
1,006

 
$
1,298

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
  Marketable securities
 
3

 
(4
)
 
4

  Pension plans
 
(55
)
 
20

 
(69
)
  Unrealized gains on designated hedges
 
6

 
7

 

  Financial statement translation
 
(440
)
 
80

 
50

Total other comprehensive (loss) income, net of tax
 
(486
)
 
103

 
(15
)
Comprehensive income
 
$
29

 
$
1,109

 
$
1,283


See accompanying notes to Consolidated Financial Statements.

18
 
Dollar amounts in millions except per share amounts or as otherwise specified.

STRYKER CORPORATION 2014 Form 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
1,795

 
$
1,339

Marketable securities
 
3,205

 
2,641

Accounts receivable, less allowance of $59 ($72 in 2013)
 
1,572

 
1,518

Inventories
 
 
 
 
Materials and supplies
 
248

 
227

Work in process
 
88

 
85

Finished goods
 
1,252

 
1,110

Total inventories
 
1,588

 
1,422

Deferred income taxes
 
989

 
880

Prepaid expenses and other current assets
 
524

 
535

Total current assets
 
9,673

 
8,335

Property, plant and equipment
 
 
 
 
Land, buildings and improvements
 
678

 
686

Machinery and equipment
 
1,919

 
1,811

Total property, plant and equipment
 
2,597

 
2,497

Less accumulated depreciation
 
1,499

 
1,416

Net property, plant and equipment
 
1,098

 
1,081

Other assets
 
 
 
 
Goodwill
 
4,186

 
3,844

Other intangibles, net
 
2,018

 
1,989

Other
 
738

 
494

Total assets
 
$
17,713

 
$
15,743

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
329

 
314

Accrued compensation

597

 
535

Income taxes

333

 
131

Dividend payable

131

 
115

Accrued recall expenses
 
1,593

 
772

Accrued expenses and other liabilities

754

 
765

Current maturities of debt

727

 
25

Total current liabilities

4,464

 
2,657

Long-term debt, excluding current maturities
 
3,246

 
2,739

Other liabilities

1,408

 
1,300

Shareholders' equity
 
 
 
 
Common stock, $0.10 par value:
 
 
 
 
  Authorized: 1 billion shares, outstanding: 378 million shares (378 million in 2013)
 
38

 
38

Additional paid-in capital
 
1,252

 
1,160

Retained earnings
 
7,559

 
7,617

Accumulated other comprehensive income
 
(254
)
 
232

Total shareholders' equity
 
8,595