10-K 1 syk10k12312015.htm 10-K 10-K
 
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, 2015
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, 2015 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $33,330,554,534. The number of shares outstanding of the registrant’s common stock, $.10 par value, was 372,982,213 on January 31, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be filed with the U.S. Securities and Exchange Commission relating to the 2016 Annual Meeting of Shareholders (the 2016 proxy statement) are incorporated by reference into Part III.
 



STRYKER CORPORATION 2015 Form 10-K



TABLE OF CONTENTS
 
 
 
 
PART I
 
Item 1.
Business
1

Item 1A.
Risk Factors
3

Item 1B.
Unresolved Staff Comments
6

Item 2.
Properties
6

Item 3.
Legal Proceedings
6

Item 4.
Mine Safety Disclosures
6

 
 
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 2015 Form 10-K

PART I

ITEM 1.
BUSINESS.
General
Stryker Corporation is a global leader in medical technology with 2015 revenues of $9,946 and net earnings of $1,439. 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 Stryker's products are marketed directly to doctors, hospitals and other healthcare facilities. Stryker's 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
We segregate our operations 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 13 to the Consolidated Financial Statements in Item 8 of this report.
Net Sales by Reportable Segment
 
2015
 
2014
 
2013
Orthopaedics
$
4,223

43
%
 
$
4,153

43
%
 
$
3,949

44
%
MedSurg
3,895

39

 
3,781

39

 
3,414

38

Neurotechnology and Spine
1,828

18

 
1,741

18

 
1,658

18

Total
$
9,946

100
%
 
$
9,675

100
%
 
$
9,021

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 four leading competitors globally for joint replacement and trauma products; the other three being Zimmer Biomet Holdings, Inc. (Zimmer), DePuy Synthes (companies of Johnson & Johnson) and Smith & Nephew plc (Smith & Nephew).
Composition of Net Sales
 
2015
 
2014
 
2013
Knees
$
1,403

33
%
 
$
1,396

34
%
 
$
1,371

35
%
Hips
1,263

30

 
1,291

31

 
1,272

32

Trauma and Extremities
1,291

31

 
1,230

30

 
1,116

28

Other
266

6

 
236

5

 
190

5

Total
$
4,223

100
%
 
$
4,153

100
%
 
$
3,949

100
%
 
In 2015 we received clearance by the Food and Drug Administration (FDA) for our Mako total knee application. This expands our Mako product offerings of partial knee and total hip applications to provide a comprehensive solution in the robotic arm-assisted reconstructive surgery line.
In 2014 we acquired certain assets of Small Bone Innovations, Inc. (SBi). SBi products are designed and promoted for upper and lower extremity small bone indications, with a focus on small joint replacement.
In 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. In November 2014 we entered into a 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 $1,824 ($2,056 before $232 of insurance recoveries) representing the actuarially determined low end of the range of probable loss to resolve this entire matter globally. In 2015 we made recall-related payments of $1,202 to eligible United States patients who had revision surgery to replace their Rejuvenate and/or ABG II Modular-Neck hip stem as part of the settlement agreement. See Note 8 to the Consolidated Financial Statements in Item 8 of this report for further information.
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.
Stryker is one of five leading competitors globally in Instruments; the other four being Zimmer, Medtronic plc., Johnson & Johnson and ConMed Linvatec, Inc. (a subsidiary of CONMED Corporation). In Endoscopy we compete with Smith & Nephew, ConMed Linvatec, Arthrex, Inc., Karl Storz GmbH & Co., Olympus Optical Co. Ltd and Steris. Our primary competitor in Medical is Hill-Rom Holdings, Inc.
Composition of Net Sales
 
2015
 
2014
 
2013
Instruments
$
1,466

38
%
 
$
1,424

38
%
 
$
1,269

37
%
Endoscopy
1,390

36

 
1,382

37

 
1,222

36

Medical
823

21

 
766

20

 
710

21

Sustainability
216

5

 
209

5

 
213

6

Total
$
3,895

100
%
 
$
3,781

100
%
 
$
3,414

100
%
In 2015 we acquired CHG Hospital Beds, Inc. ("CHG"). CHG designs, manufactures and markets low-height hospital beds and related accessories.
In 2015 Instruments launched the Signature Drill Portfolio, the next generation neurosurgical high speed drill platform.  The Signature Drill Portfolio allows surgeons to customize their preferences from three new motors, four new attachment lines, I.D. Touch™ Software, tunable drive technology, new cutting accessories, and a variety of user preferences to configure their Signature custom-fit drill. Endoscopy launched the 1588 AIM Platform which is the first visualization system to seamlessly integrate five unique imaging modalities into one platform designed to enhance visualization of patient anatomy across multiple surgical specialties. Medical launched the TruRize clinical chair which is designed to promote early patient mobility and safe patient handling.


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

STRYKER CORPORATION 2015 Form 10-K

In 2014 we acquired Berchtold Holding, AG (Berchtold). Berchtold sells surgical tables, equipment booms and surgical lighting systems. In 2014 we acquired Patient Safety Technologies, Inc. (PST). PST’s proprietary Safety-Sponge® System and SurgiCount 360™ compliance software helps to prevent Retained Foreign Objects in the operating room. Other acquisitions in 2014 include the acquisition of Pivot Medical, Inc. (Pivot). Pivot develops and sells innovative products for hip arthroscopy.
Neurotechnology and Spine
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. Our spinal implant offering includes cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies.
Stryker is one of five leading competitors globally in Neurotechnology; the other four being Medtronic, Johnson & Johnson, Terumo Corporation, and Penumbra, Inc. Stryker is one of five leading competitors globally in Spine; the other four being MedTronic Sofamor Danek, Inc. (a subsidiary of Medtronic), DePuy Synthes, Nuvasive, Inc. and Globus Medical, Inc.
Composition of Net Sales
 
2015
 
2014
 
2013
Neurotechnology
$
1,088

60
%
 
$
1,001

57
%
 
$
915

55
%
Spine
740

40

 
740

43

 
743

45

Total
$
1,828

100
%
 
$
1,741

100
%
 
$
1,658

100
%
In 2015 the New England Journal of Medicine released results of a study finding that intra-arterial treatment to remove stroke-causing blood clots provides better outcomes than using a clot dissolving drug. One of the devices used in this study was our Trevo™ Retriever. Medical professionals in the field believe that the study's results will change the practice of acute stroke treatments. Stryker's Trevo™ Retriever is a leading device in the market that allows physicians to visualize blood clot interaction during treatment.
Geographic Areas
In 2015 approximately 71.5% 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 13 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. On December 31, 2015 we owned approximately 1,884 United States patents and approximately 3,014 international patents.
 
Seasonality
Our business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is typically lower during the summer months, and sales of capital equipment are generally higher in the fourth quarter.
Competition
In all of our product lines we compete with local and global companies. 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, France, Germany, India, Ireland, Puerto Rico and Switzerland. 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 $625, $614, and $536 in 2015, 2014 and 2013.
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, 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


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

STRYKER CORPORATION 2015 Form 10-K

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 are scrutinized, particularly in the United States, by federal and state government agencies, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
Employees
On December 31, 2015 we had approximately 27,000 employees globally. Certain international employees are covered by collective bargaining agreements. We believe that we maintain positive relationships with our employees globally.
Executive Officers on January 31, 2016
Name
Age
 
First Became an Executive Officer
Kevin A. Lobo
50
Chairman and Chief Executive Officer
2011
Yin C. Becker
52
Vice President of Communication and Public Affairs
2016
William E. Berry Jr.
50
Vice President, Corporate Controller and Principal Accounting Officer
2014
Lonny J. Carpenter
54
Group President, Global Quality and Business Operations
2008
M. Kathryn Fink
46
Vice President, Global Human Resources
2016
David K. Floyd
55
Group President, Orthopaedics
2012
Michael D. Hutchinson
45
General Counsel
2014
William R. Jellison
58
Vice President and Chief Financial Officer
2013
Katherine A. Owen
45
Vice President, Strategy and Investor Relations
2007
Bijoy S.N. Sagar
47
Vice President, Chief Information Officer
2014
Timothy J. Scannell
51
Group President, MedSurg and Neurotechnology
2008
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 2016 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. Floyd, Ms. Fink, Mr. Jellison and Mr. Sagar. 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. Mr. Floyd was the Chief Executive Officer for OrthoWorx and held a variety of senior level leadership roles with DePuy Synthes, Abbott Spine, AxioMed Spine, and
 
Centerpulse Orthopaedics. Prior to joining Stryker in October 2013, Ms. Fink held a variety of senior level human resources roles for the previous six years at Johnson & Johnson, most recently as the Worldwide Vice President, Human Resources of Ethicon. While at Stryker, Ms. Fink held two different senior level Human Resource roles. 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 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 November 2012, On December 31, 2015 Ramesh Subrahmanian stepped down from his role as International Group President. On January 26, 2016 we announced that Mr. Jellison has elected to retire from his role as Vice President, Chief Financial Officer effective April 1, 2016. Glenn S. Boehnlein, who has served as Group Vice President, Chief Financial Officer for MedSurg & Neurotechnology since 2011, has been promoted to Vice President, Chief Financial Officer effective April 1, 2016. Before his role as Group Vice President, Chief Financial Officer for MedSurg & Neurotechnology, Mr. Boehnlein held a variety of senior finance roles in the MedSurg & Neurotechnology group.
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


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

STRYKER CORPORATION 2015 Form 10-K

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. 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 medical devices that applies only to United States sales, which are a majority of our medical device products sales; however, in 2015 Congress enacted legislation that suspends the excise tax for 2016 and 2017. 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: We are exposed 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 8 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 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 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 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, it could allow others to sell products that directly compete with proprietary features 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 regulation 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 timely for future products, 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 and others 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 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 relationships 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 that 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, 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 30% of our revenues are denominated in foreign currencies, including the Euro, the British Pound, and the Japanese Yen. Cross border transactions with external parties and intercompany relationships result in increased exposure to foreign currency 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 currency 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.


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

STRYKER CORPORATION 2015 Form 10-K

Additional capital that we may require in the future may not be available to us, or only available to us on unfavorable terms: Our future capital requirements will depend on many factors, including operating requirements, current and future acquisitions and the need to refinance existing debt. Our ability to issue additional debt or enter into other financing arrangements on acceptable terms could be adversely affected by our debt levels, unfavorable changes in economic conditions generally or uncertainties that affect the capital markets.  Changes in credit ratings issued by nationally recognized credit rating agencies could also adversely affect our access to and cost of financing.  Higher borrowing costs or the inability to access capital markets could adversely affect our ability to support future growth and operating requirements and, as a result, our business, financial condition and results of operations could be adversely affected.
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 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 globally. 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.
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 and 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 to conduct business. These systems include, but are not limited to, ordering and managing materials


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

STRYKER CORPORATION 2015 Form 10-K

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. In addition, our reliance on 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 and 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 are damaged or cease to function properly due to any number of causes, 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 interruptions in our operations and 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.
An inability to successfully manage the implementation of a new global enterprise resource planning ("ERP") system could adversely affect our operations and operating results: We are in the process of implementing a new global ERP system. This system will replace many of our existing operating and financial systems. Such an implementation is a major undertaking both financially and from a management and personnel perspective. Should the system not be implemented successfully, or if the system does not perform in a satisfactory manner, it could be disruptive and adversely affect our operations and results of operations, including our ability to report accurate and timely financial results.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
 
ITEM 2.
PROPERTIES.
Principal Manufacturing Locations on December 31, 2015
Location
 
Segment
 
Approximate Square Feet
 
Owned/
Leased
Portage, Michigan
 
M
 
1,144,000

 
Owned
Changzhou, China
 
O, NS
 
889,000

 
Owned
Mahwah, New Jersey
 
O
 
531,000

 
Owned
Kayseri, Turkey
 
M
 
259,000

 
Owned
Tuttlingen, Germany
 
M
 
230,000

 
Leased
Arroyo, Puerto Rico
 
M
 
220,000

 
Leased
Kiel, Germany
 
O
 
185,000

 
Owned
San Jose, California
 
M
 
185,000

 
Leased
Fremont, California
 
M, NS
 
168,000

 
Leased
Suzhou, China
 
O, NS
 
160,000

 
Owned
Carrigtwohill, Ireland
 
M, O
 
154,000

 
Owned
Selzach, Switzerland
 
O
 
138,000

 
Owned
Limerick, Ireland
 
O
 
130,000

 
Owned
Freiburg, Germany
 
O
 
123,000

 
Owned
Lakeland, Florida
 
M
 
119,000

 
Leased
Carrigtwohill, Ireland
 
NS
 
110,000

 
Leased
Flower Mound, Texas
 
M
 
108,000

 
Leased
Malvern, Pennsylvania
 
O
 
107,000

 
Leased
Phoenix, Arizona
 
M
 
100,000

 
Leased
Cestas, France
 
NS
 
91,000

 
Owned
Neuchatel, Switzerland
 
NS
 
88,000

 
Owned
Ft. Lauderdale, Florida
 
O, NS
 
84,000

 
Owned
Limerick, Ireland
 
O
 
78,000

 
Leased
Ontario, Canada
 
M
 
74,000

 
Leased
Mountain View, California
 
M, NS
 
62,000

 
Leased
Cestas, France
 
NS
 
51,000

 
Leased
Charleston, South Carolina
 
M
 
51,000

 
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
 
 
 
 
 
 
 
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 other locations domestically and globally. We believe that our properties are suitable and adequate for the manufacture and distribution of our products.
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 8 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.



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

STRYKER CORPORATION 2015 Form 10-K

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
2015 Quarter
 
Mar 31
 
Jun 30
 
Sep 30
 
Dec 31
Dividends declared per share of common stock
 
$
0.345

 
$
0.345

 
$
0.345

 
$
0.380

Market price of common stock:
 
 
 
 
 
 
High
 
$
96.18

 
$
97.94

 
$
105.34

 
$
100.51

Low
 
$
89.81

 
$
90.19

 
$
91.73

 
$
90.30

2014 Quarter
 
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


Our Board of Directors considers payment of cash dividends at each of its quarterly meetings. On January 31, 2016 there were 3,116 shareholders of record of our common stock.
In 2015 we repurchased 7.4 million shares at a cost of $700 under our repurchase programs. 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 made from time to time in the open market, in privately negotiated transactions or otherwise. On December 31, 2015 the total dollar value of shares that could be purchased under our authorized repurchase programs was $1,883.
Our repurchase program activity for the three months ended December 31, 2015 was:
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
10/1/2015-10/31/2015
0.9

$
96.24

0.9

$
2,052

11/1/2015-11/30/2015
0.8

96.49

0.8

1,974

12/1/2015-12/31/2015
1.0

93.78

1.0

$
1,883

Total
2.7

$
95.60

2.7

 






 


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, 2010 in our common stock and each of the indices.
Company / Index
2010
2011
2012
2013
2014
2015
Stryker Corporation
$100.00
$93.88
$105.24
$146.59
$186.76
$186.80
S&P 500 Index
$100.00
$102.11
$118.45
$156.82
$178.29
$180.75
S&P 500 Health Care Index
$100.00
$112.73
$132.90
$188.00
$235.63
$251.87


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

STRYKER CORPORATION 2015 Form 10-K

ITEM 6.
SELECTED FINANCIAL DATA.
CONSOLIDATED OPERATIONS
 
2015
 
2014
 
2013
 
2012
 
2011
Net sales
 
$
9,946

 
$
9,675

 
$
9,021

 
$
8,657

 
$
8,307

Cost of sales
 
3,344

 
3,319

 
3,002

 
2,806

 
2,834

Gross profit
 
$
6,602

 
$
6,356

 
$
6,019

 
$
5,851

 
$
5,473

Research, development and engineering expenses
 
625

 
614

 
536

 
471

 
462

Selling, general and administrative expenses
 
3,610

 
3,547

 
3,467

 
3,342

 
3,203

Recall charges, net of insurance proceeds
 
296

 
761

 
622

 
174

 

Intangible asset amortization
 
210

 
188

 
138

 
123

 
122

Total operating expenses
 
$
4,741

 
$
5,110

 
$
4,763

 
$
4,110

 
$
3,787

Operating income
 
1,861

 
1,246

 
1,256

 
1,741

 
1,686

Other income (expense), net
 
(126
)
 
(86
)
 
(44
)
 
(36
)
 

Earnings before income taxes
 
$
1,735

 
$
1,160

 
$
1,212

 
$
1,705

 
$
1,686

Income taxes
 
296

 
645

 
206

 
407

 
341

Net earnings
 
$
1,439

 
$
515

 
$
1,006

 
$
1,298

 
$
1,345

 
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
3.82

 
$
1.36

 
$
2.66

 
$
3.41

 
$
3.48

Diluted
 
$
3.78

 
$
1.34

 
$
2.63

 
$
3.39

 
$
3.45

Dividends per share of common stock:
 
 
 
 
 
 
 
 
 
 
Declared
 
$
1.42

 
$
1.26

 
$
1.10

 
$
0.90

 
$
0.75

Paid
 
$
1.34

 
$
1.22

 
$
1.06

 
$
0.85

 
$
0.72

Average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
376.6

 
378.5

 
378.6

 
380.6

 
386.5

Diluted
 
380.9

 
382.8

 
382.1

 
383.0

 
389.5

 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATED FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and current marketable securities
 
$
4,079

 
$
5,000

 
$
3,980

 
$
4,285

 
$
3,418

Accounts receivable, less allowance
 
1,662

 
1,572

 
1,518

 
1,430

 
1,417

Inventories
 
1,639

 
1,588

 
1,422

 
1,265

 
1,283

Property, plant and equipment, net
 
1,199

 
1,098

 
1,081

 
948

 
888

Capital expenditures
 
270

 
233

 
195

 
210

 
226

Depreciation and amortization
 
590

 
586

 
511

 
486

 
481

Total assets*
 
16,247

 
17,279

 
15,399

 
13,035

 
11,978

Accounts payable
 
410

 
329

 
314

 
288

 
345

Total debt
 
4,022

 
3,973

 
2,764

 
1,762

 
1,768

Shareholders’ equity
 
8,511

 
8,595

 
9,047

 
8,597

 
7,683

Net cash provided by operating activities
 
$
899

 
$
1,782

 
$
1,886

 
$
1,657

 
$
1,434

 
 
 
 
 
 
 
 
 
 
 
OTHER DATA
 
 
 
 
 
 
 
 
 
 
Number of shareholders of record
 
3,118

 
3,305

 
3,612

 
4,258

 
4,508

Approximate number of employees
 
27,000

 
26,000

 
25,000

 
22,000

 
21,000


*
Certain prior year amounts have been reclassified to comply with Accounting Standards Update (ASU) 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 was adopted in 2015.


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

STRYKER CORPORATION 2015 Form 10-K


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ABOUT STRYKER
Stryker Corporation is a global leader in medical technology with 2015 revenues of $9,946 and net earnings of $1,439. We offer a diverse array of innovative medical technologies, including 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. We generally 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. Our products are sold in approximately 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 orthopaedic implant surgeries is typically lower during the summer months and sales of capital equipment are generally higher in the fourth quarter.
Making healthcare better is at the heart of what we do. We do this by collaborating with our customers to develop innovative products and services that ultimately improve patients' lives. 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 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 achieve sales growth at the high-end of the medical technology industry (MedTech) industry and maintain our capital allocation strategy that prioritizes:
1.
Acquisitions
2.
Dividends
3.
Share repurchases
Overview of 2015
In 2015 we achieved sales growth of 2.8% in line with our ongoing goal to grow organic sales at the high-end of MedTech. Excluding the impact of acquisitions, sales grew 6.1% in constant currency. We reported net earnings per diluted share of $3.78 in 2015 and achieved an 8.2% 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 $153 in acquisitions, paying $521 in dividends to our shareholders and using $700 for share repurchases.
In 2015 we acquired CHG Hospital Beds, Inc. ("CHG"). CHG designs, manufactures and markets low-height hospital beds and related accessories.
Recent Developments
On January 26, 2016 we announced that William R. Jellison has elected to retire from his role as Vice President, Chief Financial Officer effective April 1, 2016. Glenn S. Boehnlein, who currently serves as Group Vice President, Chief Financial Officer for MedSurg & Neurotechnology, has been promoted to Vice President, Chief Financial Officer effective April 1, 2016.
On February 1, 2016 we entered into a definitive agreement to acquire Sage Products, LLC (Sage) in an all cash transaction for $2,775. Sage develops, manufactures and distributes disposable products targeted at reducing "Never Events," primarily in the intensive care unit and MedSurg hospital unit setting. Sage’s products include solutions for oral care, skin preparation and protection, patient cleaning and hygiene, turning and positioning devices and heel care boots. This transaction is expected to close during the second quarter of 2016.

RESULTS OF OPERATIONS

 
 
Percentage Change
 
2015
% Net Sales
2014
% Net Sales
2013
% Net Sales
 
2015/2014
2014/2013
Net sales
$
9,946

100.0
 %
$
9,675

100.0
 %
$
9,021

100.0
 %
 
2.8
 %
7.3
 %
Gross profit
6,602
66.4

6,356
65.7

6,019
66.7

 
3.9

5.6

Research, development and engineering expenses
625
6.3

614
6.3

536
5.9

 
1.8

14.6

Selling, general and administrative expenses
3,610
36.3

3,547
36.7

3,467
38.4

 
1.8

2.3

Recall charges, net of insurance proceeds
296
3.0

761
7.9

622
6.9

 
(61.1
)
22.3

Intangibles amortization
210
2.1

188
1.9

138
1.5

 
11.7

36.2

Other income (expense), net
(126)
(1.3
)
(86)
(0.9
)
(44)
(0.5
)
 
46.5

95.5

Income taxes
296
 
645
 
206
 
 
(54.1
)
213.1

Net earnings
$
1,439

14.5
 %
$
515

5.3
 %
$
1,006

11.2
 %
 
179.4
 %
(48.8
)%
 
 
 
 
 
 
 
 
 
 
Net earnings per diluted share
$
3.78

 
$
1.34

 
$
2.63

 
 
182.1
 %
(49.0
)%
Adjusted net earnings per diluted share
$
5.12

 
$
4.73

 
$
4.49

 
 
8.2
 %
5.3
 %
See "Non-GAAP Financial Measures" on page 12 for a discussion of non-GAAP financial measures used in this report.

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

STRYKER CORPORATION 2015 Form 10-K

Geographic and Segment Net Sales
 
 
 
Percentage Change
 
 
 
 
2015/2014
 
2014/2013
 
 
 
 
 
 
Constant
Currency
 
 
 
Constant
Currency
 
 
2015
 
2014
 
2013
 
Reported
 
 
Reported
 
Geographic net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
7,116

 
$
6,558

 
$
5,984

 
8.5
 %
 
8.5
%
 
9.6
%
 
9.6
%
International
 
2,830

 
3,117

 
3,037

 
(9.2
)
 
3.7

 
2.6

 
5.7

Total net sales
 
$
9,946

 
$
9,675

 
$
9,021

 
2.8
 %
 
7.0
%
 
7.3
%
 
8.3
%
Segment net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Orthopaedics
 
$
4,223

 
$
4,153

 
$
3,949

 
1.7
 %
 
6.7
%
 
5.2
%
 
6.3
%
MedSurg
 
3,895

 
3,781

 
3,414

 
3.0

 
6.2

 
10.8

 
11.7

Neurotechnology and Spine
 
1,828

 
1,741

 
1,658

 
5.0

 
9.5

 
5.0

 
6.2

Total net sales
 
$
9,946

 
$
9,675

 
$
9,021

 
2.8
 %
 
7.0
%
 
7.3
%
 
8.3
%
Consolidated Net Sales
Consolidated net sales in 2015 increased 2.8% as reported and 7.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 4.2%. Excluding the 0.9% impact of acquisitions, net sales increased 6.1% in constant currency, including 7.6% from increased unit volume and product mix partially offset by 1.6% lower prices. The increase was led primarily by higher product shipments of neurotechnology, trauma and extremities, medical and instruments.
 
Consolidated net sales in 2014 increased 7.3% as reported and 8.3% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.0%. Excluding the 2.5% impact of acquisitions, net sales increased 5.8% in constant currency, including 7.8% from increased unit volume and product mix partially offset by 2.0% lower prices. The increase was led primarily by higher product shipments of instruments, trauma and extremities, endoscopy, neurotechnology and medical.

Supplemental Geographical Net Sales Growth Information
 
 
 
Percentage Change
 
 
 
Percentage Change
 
 
 
 
United States
International
 
 
 
 
United States
International
 
2015
2014
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
 
2014
2013
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
Orthopaedics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Knees
$
1,403

$
1,396

0.5
 %
4.6
%
4.9
%
(9.6
)%
3.9
 %
 
$
1,396

$
1,371

1.8
 %
2.7
 %
4.3
 %
(3.5
)%
(0.7
)%
Hips
1,263

1,291

(2.1
)
3.1

6.3

(13.6
)
(1.1
)
 
1,291

1,272

1.5

2.7

6.1

(4.2
)
(1.4
)
Trauma and Extremities
1,291

1,230

4.9

10.8

16.1

(8.7
)
4.4

 
1,230

1,116

10.2

11.4

14.8

5.1

7.7

Other
266

236

13.0

16.4

18.2

(5.0
)
10.2

 
236

190

24.0

25.2

37.4

(7.6
)
(3.7
)
Total
$
4,223

$
4,153

1.7
 %
6.7
%
9.2
%
(10.5
)%
2.5
 %
 
$
4,153

$
3,949

5.2
 %
6.3
 %
9.4
 %
(1.1
)%
1.7
 %
MedSurg
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
1,466

$
1,424

2.9
 %
6.5
%
7.2
%
(9.1
)%
4.5
 %
 
$
1,424

$
1,269

12.2
 %
13.1
 %
14.8
 %
5.7
 %
8.8
 %
Endoscopy
1,390

1,382

0.5

3.9

5.3

(11.5
)
0.4

 
1,382

1,222

13.1

14.2

13.3

12.6

16.2

Medical
823

766

7.5

10.4

9.2

0.5

15.1

 
766

710

7.9

8.8

9.3

2.2

6.7

   Sustainability
216

209

3.4

3.5

3.5

(10.7
)
3.3

 
209

213

(1.9
)
(1.9
)
(1.8
)
nm

nm

Total
$
3,895

$
3,781

3.0
 %
6.2
%
6.7
%
(8.6
)%
4.4
 %
 
$
3,781

$
3,414

10.8
 %
11.7
 %
11.7
 %
7.9
 %
11.5
 %
Neurotechnology and Spine
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
$
1,088

$
1,001

8.6
 %
14.2
%
15.6
%
(2.3
)%
11.9
 %
 
$
1,001

$
915

9.4
 %
10.9
 %
11.2
 %
6.7
 %
10.4
 %
Spine
740

740

0.2

3.2

6.6

(14.7
)
(4.7
)
 
740

743

(0.4
)
0.3

(1.6
)
2.5

5.2

Total
$
1,828

$
1,741

5.0
 %
9.5
%
11.5
%
(6.8
)%
5.9
 %
 
$
1,741

$
1,658

5.0
 %
6.2
 %
5.0
 %
5.1
 %
8.5
 %
nm = not meaningful
Orthopaedics Net Sales
Orthopaedics net sales in 2015 increased 1.7% as reported and 6.7% in constant currency, as foreign currency exchange rates negatively impacted net sales by 5.0%. Excluding the 0.5% impact of acquisitions, net sales increased 6.1% in constant currency, including 8.6% from increased unit volume and changes in product mix, partially offset by 2.4% lower prices. The increase was led primarily by higher shipments of trauma and extremities products. Orthopaedics net sales in 2014 increased 5.2% as reported and 6.3% in constant currency, as net sales were negatively impacted by 1.1% due to the impact of foreign currency exchange rates. Excluding the 3.0% impact of acquisitions, net sales increased 3.2% in constant currency, including 6.2% from increased unit volume and changes in product mix, partially offset by 2.9% lower prices. The increase was led primarily by higher shipments of trauma and extremities products.
 
MedSurg Net Sales
MedSurg net sales in 2015 increased 3.0% as reported and 6.2% in constant currency, as foreign currency exchange rates negatively impacted net sales by 3.2%. Excluding the 1.7% impact of acquisitions, net sales increased 4.5% in constant currency, including 4.8% from increased unit volume and changes in product mix, partially offset by 0.3% lower prices. The increase was led primarily by higher shipments of medical and instruments products. MedSurg net sales in 2014 increased 10.8% as reported and 11.7% in constant currency, as net sales were negatively impacted by 0.9% due to the impact of foreign currency exchange rates. Excluding the 3.0% impact of acquisitions, net sales increased 8.7% in constant currency, including 9.5% from increased unit volume and changes in product mix, partially offset by 0.8% lower prices. The increase was led primarily by higher shipments of our instrument


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

STRYKER CORPORATION 2015 Form 10-K

and medical products partially offset by lower shipments of sustainability products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales in 2015 increased 5.0% as reported and 9.5% in constant currency, as foreign currency exchange rates negatively impacted net sales by 4.5%. Excluding the 0.1% impact of acquisitions, net sales in constant currency increased 9.4%, including 11.6% from increased unit volume and changes in product mix, partially offset by 2.3% lower prices. The increase was led primarily by higher shipments of neurotechnology products. Neurotechnology and Spine net sales in 2014 increased 5.0% as reported and 6.2% in constant currency as net sales were negatively impacted by 1.2% due to the impact of foreign currency exchange rates. Excluding the 0.5% impact of acquisitions, net sales increased 5.7% in constant currency, including 8.1% from increased unit volume and changes in product mix, partially offset by 2.4% lower prices. The increase was led primarily by higher shipments of neurotechnology products.
Gross Profit
Gross profit in 2015 increased to 66.4% from 65.7% in 2014, primarily due to product mix and the favorable impact of foreign currency exchange rates offset by decreases in the selling price of our products. Gross Profit decreased to 65.7% in 2014 compared to 66.7% in 2013, primarily due to decreases in the selling prices of our products, unfavorable product mix and the unfavorable impact of foreign currency exchange rates.
Gross Profit Adjustments
 
 
2015
 
2014
 
2013
 
 
$
% Net Sales
 
$
% Net Sales
 
$
% Net Sales
AS REPORTED
 
$
6,602

66.4
%
 
$
6,356

65.7
%
 
$
6,019

66.7
%
Inventory stepped up to fair value
 
7

0.1

 
27

0.3

 
28

0.3

Restructuring-related charges
 
7


 
1


 
11

0.1

Regulatory and legal matters
 


 


 
7

0.1

ADJUSTED
 
$
6,616

66.5
%
 
$
6,384

66.0
%
 
$
6,065

67.2
%
Research, Development and Engineering Expenses
Research, development and engineering expenses represented 6.3% of net sales in 2015 and 2014 compared to 5.9% in 2013. The increased spending levels in 2015 and 2014 were driven by the timing of projects and investments in new technologies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales in 2015 decreased to 36.3% from 36.7% in 2014 and 38.4% in 2013. Excluding the adjustments in the table below, selling, general and administrative expenses increased in 2015 due to increased expenses related to our European regional headquarters, higher compensation costs, due in part to sales performance-related commissions, partially offset by disciplined expense management.
 
Selling, General and Administrative Adjustments
 
 
2015
 
2014
 
2013
 
 
 $
% Net Sales
 
$
% Net Sales
 
$
% Net Sales
AS REPORTED
 
$
3,610

36.3
 %
 
$
3,547

36.7
 %
 
$
3,467

38.4
 %
Acquisition and integration-related
 
(28
)
(0.3
)
 
(75
)
(0.8
)
 
(70
)
(0.7
)
Restructuring-related charges
 
(125
)
(1.2
)
 
(116
)
(1.2
)
 
(52
)
(0.6
)
Regulatory and legal matters
 
53

0.5

 


 
(62
)
(0.7
)
Donations
 


 


 
(25
)
(0.3
)
ADJUSTED
 
$
3,510

35.3
 %
 
$
3,356

34.7
 %
 
$
3,258

36.1
 %
Recall Charges, Net of Insurance Proceeds
Recall charges, net of insurance proceeds, were due to the previously disclosed Rejuvenate and ABG II voluntary recall and other recall matters and were $296, $761 and $622 in 2015, 2014 and 2013. We received $53 and $179 of insurance proceeds in 2015 and 2014. Refer to Note 8 in the Notes to the Consolidated Financial Statements for further information.
Intangibles Amortization
Intangibles amortization was $210, $188 and $138 in 2015, 2014 and 2013. The increases were due to acquisitions.
Other Income (Expense), Net
Other income (expense), net was ($126), ($86) and ($44) in 2015, 2014 and 2013. The increase in other expense was primarily driven by higher interest costs on income tax reserves and the unfavorable impact of foreign currency exchange rate changes.
Income Taxes
The effective income tax rate on earnings was 17.1%, 55.6% and 17.0% for the 2015, 2014 and 2013. The effective income tax rate for 2014 included the tax impact of the establishment of our European regional headquarters and the planned cash repatriation that was executed in 2015.
Net Earnings
Net earnings in 2015 increased to $1,439 or $3.78 per diluted share from $515 or $1.34 per diluted share in 2014 and $1,006 or $2.63 per diluted share in 2013. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.26 and $0.14 in 2015 and 2014.
Net Earnings Adjustments
 
 
2015
 
2014
 
2013
 
 
$
% Net Sales
 
$
% Net Sales
 
$
% Net Sales
AS REPORTED
 
$
1,439

14.5
 %
 
$
515

5.3
%
 
$
1,006

11.2
 %
Inventory stepped up to fair value
 
4


 
15

0.2

 
21

0.2

Acquisition and integration-related
 
20

0.2

 
50

0.5

 
51

0.6

Amortization of intangible assets
 
147

1.5

 
133

1.4

 
98

1.0

Restructuring-related charges
 
97

1.0

 
78

0.8

 
46

0.5

Rejuvenate and other recall matters
 
210

2.1

 
628

6.5

 
460

5.1

Regulatory and legal matters
 
(46
)
(0.5
)
 


 
63

0.7

Donations
 


 


 
15

0.2

Tax matters
 
78

0.8

 
391

4.0

 
(46
)
(0.5
)
ADJUSTED
 
$
1,949

19.6
 %
 
$
1,810

18.7
%
 
$
1,714

19.0
 %


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

STRYKER CORPORATION 2015 Form 10-K

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 net earnings per diluted share (Diluted EPS). We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures.
To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions.
To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are
 
examples of the types of adjustments that may be included in a period:
1.
Acquisition and integration related costs. Costs related to integrating recently acquired businesses and specific costs related to the consummation of the acquisition process.
2.
Amortization of intangible assets. Periodic amortization expense related to purchased intangible assets.
3.
Restructuring-related charges. Costs associated with workforce reductions, facility rationalizations and other restructuring activities.
4.
Recall matters. Our best estimate of the minimum of the range of probable loss to resolve certain product recalls.
5.
Regulatory and legal matters. Our best estimate of the minimum of the range of probable loss to resolve certain regulatory matters and other legal settlements.
6.
Tax matters. Certain significant and discrete tax items and adjustments to interest expense related to the settlement of certain tax matters.
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 net earnings per diluted 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 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), net; adjusted net earnings; adjusted effective tax rate; and adjusted diluted EPS; with the most directly comparable GAAP financial measures:

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures

2015
Gross Profit
Selling, General & Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
AS REPORTED
$
6,602

$
3,610

$
210

$
1,861

$
1,439

17.1
 %
$
3.78

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



7

4

0.1

0.01

    Other acquisition and integration-related

(28
)

28

20

0.2

0.05

Amortization of intangible assets


(210
)
210

147

1.5

0.39

Restructuring-related charges
7

(125
)

132

97

0.7

0.26

Rejuvenate and other recall matters



296

210

2.0

0.55

  Regulatory and legal matters

53


(53
)
(46
)
0.1

(0.12
)
Tax matters




78

(4.4
)
0.20

ADJUSTED
$
6,616

$
3,510

$

$
2,481

$
1,949

17.3
 %
$
5.12


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

STRYKER CORPORATION 2015 Form 10-K

2014
Gross Profit
Selling, General & Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
AS REPORTED
$
6,356

$
3,547

$
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

628

(3.1
)
1.65

Tax matters




391

(33.6
)
1.02

ADJUSTED
$
6,384

$
3,356

$

$
2,414

$
1,810

22.3
 %
$
4.73

2013
Gross Profit
Selling General and Administrative Expenses
Intangible Amortization
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
AS REPORTED
$
6,019

$
3,467

$
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

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
$
6,065

$
3,258

$

$
2,271

$
1,714

22.7
 %
$
4.49

The weighted-average basic and diluted shares outstanding used in the calculation of non-GAAP Diluted EPS are the same as the weighted-average basic and diluted shares outstanding used in the calculation of the reported Diluted EPS.

FINANCIAL CONDITION AND LIQUIDITY
 
2015
2014
2013
Net cash provided by operations activities
$
899

$
1,782

$
1,886

Net cash provided by (used in) investing activities
1,956

(1,878
)
(2,217
)
Net cash (used in) provided financing activities
(1,141
)
629

300

Effect of exchange rate changes
(130
)
(77
)
(25
)
Change in cash and cash equivalents
$
1,584

$
456

$
(56
)
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
Cash provided by operations was $899, $1,782, $1,886 in 2015, 2014 and 2013. The decrease in 2015 was primarily due to recall-related payments associated with the Rejuvenate and ABGII recall settlement agreement and the timing of income tax payments.
The net of accounts receivable, inventory and accounts payable resulted in the consumption of $231, $249, and $165 of cash in 2015, 2014 and 2013. Inventory days on hand for 2015 increased by 5 days from 2014 after increasing eight days in 2014. Accounts receivable days sales outstanding for 2015 increased by one day after decreasing one day in 2014.
 
Investing Activities
Cash provided by investing activities was $1,956 in 2015 compared to cash used in investing of $1,878 in 2014 and $2,217 in 2013. This change is primarily due to the sale of a portion of our marketable securities in 2015 to make recall-related payments discussed above under Operating Activities.
Acquisitions: Acquisitions resulted in cash consumption of $153, $916 and $2,320 in 2015, 2014 and 2013. In 2015 the primary acquisition was CHG, and in 2014 the primary acquisitions were Patient Safety Technologies, Inc., Pivot Medical Inc., Berchtold Holding, AG and Small Bone Innovations, Inc. In 2013 we acquired Trauson Holdings Company Limited and Mako Surgical Corp.
Capital Expenditures: Capital expenditures were $270, $233 and $195 in 2015, 2014 and 2013. Capital expenditures in 2015 were primarily related to acquisition integration support, information technology infrastructure upgrades, capacity expansion, new product introductions, innovation and cost savings.
Financing Activities
Dividends Paid: Dividends paid per common share increased 9.8% to $1.34 per share in 2015 compared to $1.22 per share in 2014, an increase of 15.1% from 2013. Dividends paid per common share and total dividends paid to common shareholders are included in the following table for 2015, 2014 and 2013.
 
2015
2014
2013
Dividends paid per common share
$
1.34

$
1.22

$
1.06

Total dividends paid to common shareholders
$
521

$
462

$
401

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.


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

STRYKER CORPORATION 2015 Form 10-K

Net proceeds from borrowings were $48, $1,159 and $1,005 in 2015, 2014 and 2013. In 2015 the proceeds were primarily from the public offerings of notes offset by the payment of certain notes due and paid in January 2015. Proceeds in 2014 were primarily from the public offerings of notes and commercial paper. Refer to Note 9 in the Notes to the Consolidated Financial Statements for further information. Total debt was $4,022 and $3,973 in 2015 and 2014.
Share Repurchases: The total use of cash for share repurchases was $700, $100 and $317 in 2015, 2014 and 2013. We have decided to suspend our share repurchase program through 2016.
Liquidity
Cash, cash equivalents and marketable securities were $4,079 and $5,000 on December 31, 2015 and 2014 and our current assets exceeded current liabilities by $4,441 and $4,223 on December 31, 2015 and 2014. We anticipate being able to support our short-term liquidity and operating needs, including recall-related payments related to the Rejuvenate and ABG II recalls, from a variety of sources, including cash from operations, commercial paper and existing credit lines. We have raised funds in the capital markets and may continue to do so from time to time. We have strong short-term and long-term debt ratings that we believe should enable us to refinance our debt as it becomes due. We have existing credit facilities should additional funds be required. On December 31, 2015 we had approximately $1,236 of borrowing capacity available under our existing credit facilities.
On December 31, 2015 approximately 46% of our consolidated cash, cash equivalents and marketable securities were held in locations outside the United States. In 2014 we announced that we would begin a repatriation program. We completed the program in 2015 and repatriated approximately $1.8 billion to the United States. Our remaining cash held outside the United States is considered to be indefinitely reinvested. We intend to use this cash 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 $132 and $154 in 2015 and 2014, including approximately $51 and $78 of sovereign receivables in 2015 and 2014. 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 is considered immaterial. 
In 2015 we made recall-related payments of $1,202 under our United States Rejuvenate and ABG II settlement agreement. Refer to Note 8 in the Notes to the Consolidated Financial Statements for further information.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.
CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS
As further described in Note 8 to the Consolidated Financial Statements, in 2015 we recorded additional charges to earnings totaling $295 related to 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 $1,824 ($2,056 before $232 of third-party insurance recoveries) to $2,416.  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 12 to the Consolidated Financial Statements, on December 31, 2015 we have recorded a liability for uncertain income tax positions of $313. 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.
As further described in Note 11 to the Consolidated Financial Statements, on December 31, 2015 our defined benefit pension plans were underfunded by $240, of which approximately $231 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 2016 the amounts that may be required to fund defined benefit pension plans.
Long-term Contractual Obligations
 
Payment Period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
Short-term and long-term debt
$
4,022

 
$
769

 
$
600

 
$
500

 
$
2,153

Unconditional purchase obligations
1,020

 
792

 
172

 
55

 
1

Operating leases
263

 
69

 
90

 
48

 
56

Contributions to defined benefit plans
18

 
18

 

 

 

Other
93

 
10

 
15

 
2

 
66

Total
$
5,416

 
$
1,658

 
$
877

 
$
605

 
$
2,276

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.


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

STRYKER CORPORATION 2015 Form 10-K

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.
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 on 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 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


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

STRYKER CORPORATION 2015 Form 10-K

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 8 to the 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
Refer to Note 1 in the Notes to the Consolidated Financial Statements for further information.
OTHER INFORMATION
Hedging and Derivative Financial Instruments
We sell our products globally, 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, Canada, Turkey, China, France, Germany, Ireland, Puerto Rico and Switzerland and incur costs in the applicable local currencies. This global 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.
We have designated certain long-term intercompany loans payable and forward exchange contracts as net investment hedges of our investments in certain international subsidiaries that use the Euro as their functional currency. The effective portion of derivatives designated as net investment hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded as a component of other comprehensive income.
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, 2015 fair value by approximately $178. 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 2015 the weakening of foreign currencies relative to the United States dollar decreased the value of these investments in net assets and increased the related foreign currency translation adjustment loss in shareholders' equity by ($390). Refer to Note 3 in the Notes to the Consolidated Financial Statements for further information.
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."




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

STRYKER CORPORATION 2015 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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 11, 2016 expressed an unqualified opinion thereon.
/s/    ERNST & YOUNG LLP
Grand Rapids, Michigan
February 11, 2016

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STRYKER CORPORATION 2015 Form 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS
 
 
2015
 
2014
 
2013
Net sales
 
$
9,946

 
$
9,675

 
$
9,021

Cost of sales
 
3,344

 
3,319

 
3,002

Gross profit
 
$
6,602