10-Q 1 syk10q63016.htm 10-Q Document


 

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

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

For the quarterly period ended June 30, 2016

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

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

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

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 374,302,065 shares of Common Stock, $0.10 par value, on June 30, 2016.
 


STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

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

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 
 
Three Months
 
Six Months

 
2016
 
2015
 
2016
 
2015
Net sales
 
$
2,840

 
$
2,432

 
$
5,335

 
$
4,811

Cost of sales
 
998

 
827

 
1,799

 
1,653

Gross profit
 
$
1,842

 
$
1,605

 
$
3,536

 
$
3,158

Research, development and engineering expenses
 
183

 
154

 
342

 
306

Selling, general and administrative expenses
 
1,043

 
861

 
1,987

 
1,753

Recall charges
 
28

 
112

 
47

 
166

Intangible asset amortization
 
88

 
49

 
141

 
98

Total operating expenses
 
$
1,342

 
$
1,176

 
$
2,517

 
$
2,323

Operating income
 
500

 
429

 
1,019

 
835

Other income (expense), net
 
(67
)
 
(28
)
 
(105
)
 
(57
)
Earnings before income taxes
 
$
433

 
$
401

 
$
914

 
$
778

Income taxes
 
53

 
9

 
132

 
162

Net earnings
 
$
380

 
$
392

 
$
782

 
$
616

 
 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
 
Basic net earnings per share of common stock
 
$
1.02

 
$
1.04

 
$
2.09

 
$
1.63

Diluted net earnings per share of common stock
 
$
1.00

 
$
1.03

 
$
2.07

 
$
1.61

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
374.2

 
377.0

 
373.7

 
377.9

Effect of dilutive employee stock options
 
4.3

 
4.1

 
4.3

 
4.3

Diluted
 
378.5

 
381.1

 
378.0

 
382.2

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

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months
 
Six Months
 
 
2016
 
2015
 
2016
 
2015
Net earnings
 
$
380

 
$
392

 
$
782

 
$
616

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

 
(4
)
 

 
(3
)
Pension plans
 
(2
)
 
(3
)
 
(3
)
 
10

Unrealized (losses) gains on designated hedges
 
(15
)
 
10

 
(35
)
 
11

Financial statement translation
 
44

 
87

 
82

 
(195
)
Total other comprehensive income (loss), net of tax
 
$
27

 
$
90

 
$
44

 
$
(177
)
Comprehensive income
 
$
407

 
$
482

 
$
826

 
$
439


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
 
June 30
 
December 31
 
2016
 
2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
3,490

 
$
3,379

Marketable securities
 
166

 
700

Accounts receivable, less allowance of $68 ($61 in 2015)
 
1,758

 
1,662

Inventories:
 
 
 
 
Materials and supplies
 
363

 
304

Work in process
 
126

 
103

Finished goods
 
1,500

 
1,232

Total inventories
 
$
1,989

 
$
1,639

Prepaid expenses and other current assets
 
421

 
563

Total current assets
 
$
7,824

 
$
7,943

Property, plant and equipment:
 
 
 
 
Land, buildings and improvements
 
797

 
687

Machinery and equipment
 
2,273

 
2,043

Total property, plant and equipment
 
3,070

 
2,730

Less allowance for depreciation
 
1,624

 
1,531

Net property, plant and equipment
 
$
1,446

 
$
1,199

Goodwill
 
6,372

 
4,136

Other intangibles, net
 
3,728

 
1,794

Other noncurrent assets
 
1,150

 
1,151

Total assets
 
$
20,520

 
$
16,223

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
425

 
$
410

Accrued compensation
 
530

 
637

Income taxes
 
166

 
141

Dividend payable
 
142

 
142

Accrued recall
 
582

 
694

Accrued expenses and other liabilities
 
833

 
710

Current maturities of debt
 
927

 
768

Total current liabilities
 
$
3,605

 
$
3,502

Long-term debt, excluding current maturities
 
6,717

 
3,230

Other noncurrent liabilities
 
1,100

 
980

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

 
37

Additional paid-in capital
 
1,378

 
1,321

Retained earnings
 
8,278

 
7,792

Accumulated other comprehensive income
 
(595
)
 
(639
)
Total shareholders' equity
 
$
9,098

 
$
8,511

Total liabilities & shareholders' equity
 
$
20,520

 
$
16,223


See accompanying notes to Consolidated Financial Statements.


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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

Stryker Corporation and Subsidiaries

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

 
$
1,321

 
$
7,792

 
$
(639
)
 
$
8,511

Net earnings
 


 


 
782

 


 
782

Other comprehensive income
 


 


 


 
44

 
44

Issuance of 1.4 million shares of common stock under stock option and benefit plans, including $28 excess income tax benefit
 


 
9

 


 


 
9

Repurchase of 0.1 million shares of common stock
 


 
(1
)
 
(12
)
 


 
(13
)
Share-based compensation
 


 
49

 


 


 
49

Cash dividends declared of $0.76 per share of common stock
 


 


 
(284
)
 


 
(284
)
June 30, 2016
 
$
37

 
$
1,378

 
$
8,278

 
$
(595
)
 
$
9,098


CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months
 
2016
 
2015
Operating activities
 
 
 
Net earnings
$
782

 
$
616

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
106

 
90

Amortization of intangible assets
141

 
98

Share-based compensation
49

 
44

Gross recall charges
47

 
166

Sale of inventory stepped up to fair value at acquisition
35

 
13

Excess tax benefits from stock issued under employee stock plans
(27
)
 
(19
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
57

 
39

Inventories
(225
)
 
(67
)
Accounts payable
(5
)
 
17

Accrued expenses and other liabilities
(190
)
 
(125
)
Recall-related payments
(157
)
 
(31
)
Income taxes
(31
)
 
(251
)
Other
89

 
147

Net cash provided by operating activities
$
671

 
$
737

Investing activities
 
 
 
Acquisitions, net of cash acquired
(4,219
)
 
(92
)
Purchases of marketable securities
(116
)
 
(1,137
)
Sales of marketable securities
652

 
3,569

Purchases of property, plant and equipment
(229
)
 
(114
)
Net cash (used in) provided by investing activities
$
(3,912
)
 
$
2,226

Financing activities
 
 
 
Proceeds from borrowings
3,868

 
1,014

Payments on borrowings
(257
)
 
(1,512
)
Dividends paid
(284
)
 
(261
)
Repurchase of common stock
(13
)
 
(324
)
Excess tax benefits from stock issued under employee stock plans
27

 
19

Other financing
1

 
13

Net cash provided by (used in) financing activities
$
3,342

 
$
(1,051
)
Effect of exchange rate changes on cash and cash equivalents
10

 
(81
)
Change in cash and cash equivalents
$
111

 
$
1,831

Cash and cash equivalents at beginning of period
3,379

 
1,795

Cash and cash equivalents at end of period
$
3,490

 
$
3,626


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 - BASIS OF PRESENTATION
General Information
These statements should be read in conjunction with our Annual Report on Form 10-K for 2015. Management believes that the accompanying unaudited consolidated financial statements contain all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. However, the results of operations included in these consolidated financial statements may not necessarily be indicative of our annual results. Certain prior year amounts on the balance sheet were reclassified as a result of the adoption of Accounting Standards Update (ASU) 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs to conform with the current year presentation. Refer to Note 7 in the notes to our Consolidated Financial Statements for further information. Certain prior year amounts have been reclassified to conform to the current year presentation of our segment information in Note 10.
New Accounting Pronouncements Not Yet Adopted
In March 2016 the Financial Accounting Standards Board (FASB) issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as simplifies classification in the statement of cash flows. We plan to adopt this standard on January 1, 2017. We are still evaluating the impact that this standard will have on our consolidated financial statements.
In February 2016 the FASB issued ASU 2016-02, Leases. This update requires an entity to recognize assets and liabilities for leases with lease terms of more than 12 months on the balance sheet. We plan to adopt this standard on January 1, 2019. We are still evaluating the impact that this standard will have on our consolidated financial statements.
In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This update outlines a single, comprehensive model for accounting for revenue from contracts with customers. We plan to adopt the standard on January 1, 2018. We are still evaluating the impact that this standard will have on our consolidated financial statements.
No other new accounting pronouncements were issued or became effective during the period that had, or are expected to have, a material impact on our consolidated financial statements.
NOTE 2 - FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1
Quoted market prices in active markets for identical assets or liabilities
Level 2
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3
Unobservable inputs reflecting our assumptions or external inputs from active markets
When applying the fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculate the fair value of our Level 1 and Level 2 instruments based on the
 
exchange traded price of identical or similar instruments, where available, or based on other observable inputs taking into account our credit risk and that of our counterparties. Foreign currency exchange contracts and interest rate hedges are included in Level 2 as we use inputs other than quoted prices that are observable for the asset or liability. The Level 2 derivative instruments are primarily valued using standard calculations and models that use readily observable market data as their basis. Our Level 3 liabilities represent milestone payments for acquisitions. For certain Level 3 liabilities the Black-Scholes option pricing model was used to value the liabilities, while the fair value of remaining liabilities was estimated using a discounted cash flow technique. Significant unobservable inputs to this technique included our probability assessments of occurrence of triggering events, appropriately discounted considering the uncertainties associated with the obligation. We remeasure the fair value our assets and liabilities each reporting period. We record the changes in fair value within selling, general and administrative expense and the changes in the time value of money within other income (expense), net.
Valuation of Assets and Liabilities Measured at Fair Value
 
June
December
 
2016
2015
Cash and cash equivalents
$
3,490

$
3,379

Trading marketable securities
87

82

Level 1 - Assets
$
3,577

$
3,461

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
47

$
214

Foreign government debt securities
64

96

United States agency debt securities
16

120

United States treasury debt securities
26

264

Certificates of deposit
13

8

Total available-for-sale marketable securities
$
166

$
702

Foreign currency exchange forward contracts
11

69

Interest rate swap asset
44

15

Level 2 - Assets
$
221

$
786

Total assets measured at fair value
$
3,798

$
4,247

 
 
 
Deferred compensation arrangements
$
87

$
82

Level 1 - Liabilities
$
87

$
82

Foreign currency exchange forward contracts
$
41

$
10

Interest rate swap liability

4

Level 2 - Liabilities
$
41

$
14

Contingent consideration:
 
 
Beginning balance
$
56

$
48

Additions
13

11

Losses included in earnings
(5
)

Settlements
(2
)
(3
)
Balance at the end of the period
$
62

$
56

Level 3 - Liabilities
$
62

$
56

Total liabilities measured at fair value
$
190

$
152

There were no significant transfers into or out of any level between December 31, 2015 and June 30, 2016.
Fair Value of Available for Sale Securities by Maturity
 
June
December
 
2016
2015
Due in one year or less
$
91

$
588

Due after one year through three years
$
74

$
114

Due after three years
$
1

$

On June 30, 2016 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal.


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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

The total of interest and marketable securities income was $7 and $5 in the three months 2016 and 2015 and $12 and $11 in the six months 2016 and 2015. We record interest and marketable securities income in other income (expense), net.
Less than 1% of our investments in available-for-sale marketable securities had a credit quality rating of less than A2 (Moody's), A (Standard & Poor's) and A (Fitch). We do not plan to sell the investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. We do not consider these investments to be other-than-temporarily impaired on June 30, 2016.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed
11
$
10

United States agency
1
5

Total
12
$
15

On June 30, 2016 substantially all our investments with unrealized losses that were not deemed to be other-than-temporarily impaired were in a continuous unrealized loss position for less than twelve months, and the losses were nominal.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Three Months 2016
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(120
)
$
(16
)
$
(486
)
$
(622
)
OCI

(3
)
(18
)
49

28

Tax expense (benefit)

1

5

(5
)
1

Reclassifications to:
 
 
 
 
 
Cost of sales

1

(2
)

(1
)
Other income
(1
)



(1
)
Income tax expense (benefit)
1

(1
)



Net OCI

(2
)
(15
)
44

27

Ending
$

$
(122
)
$
(31
)
$
(442
)
$
(595
)
Three Months 2015
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
4

$
(123
)
$
14

$
(416
)
$
(521
)
OCI
(3
)
(6
)
22

87

100

Tax expense (benefit)

1

(8
)

(7
)
Reclassifications to:
 
 
 
 
 
Cost of sales

2

(6
)

(4
)
Other income
(2
)



(2
)
Income tax expense (benefit)
1


2


3

Net OCI
(4
)
(3
)
10

87

90

Ending
$

$
(126
)
$
24

$
(329
)
$
(431
)
Six Months 2016
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(119
)
$
4

$
(524
)
$
(639
)
OCI
2

(6
)
(40
)
77

33

Tax expense (benefit)
(1
)
1

11

5

16

Reclassifications to:
 
 
 
 
 
Cost of sales

3

(8
)

(5
)
Other income
(2
)



(2
)
Income tax expense (benefit)
1

(1
)
2


2

Net OCI

(3
)
(35
)
82

44

Ending
$

$
(122
)
$
(31
)
$
(442
)
$
(595
)
 
Six Months 2015
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
3

$
(136
)
$
13

$
(134
)
$
(254
)
OCI
1

9

21

(195
)
(164
)
Tax expense (benefit)
(1
)
(2
)
(6
)

(9
)
Reclassifications to:
 
 
 
 
 
Cost of sales

4

(6
)

(2
)
Other income
(4
)



(4
)
Income tax expense (benefit)
1

(1
)
2


2

Net OCI
(3
)
10

11

(195
)
(177
)
Ending
$

$
(126
)
$
24

$
(329
)
$
(431
)
NOTE 4 - DERIVATIVE INSTRUMENTS
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings and cash flow. At inception the derivative is designated as a cash flow hedge, a fair value hedge or a free standing derivative. We do not enter into derivative instruments for speculative purposes. We did not change our hedging strategies, accounting practices, or objectives from those disclosed in our Annual Report on Form 10-K for 2015.
Designated Net Investment Hedges
We have designated certain long-term intercompany loans payable and forward exchange contracts as net investment hedges of our investments in certain international subsidiaries that use the Euro as their functional currency. The effective portion of derivatives designated as net investment hedges are reported as a component of Accumulated Other Comprehensive Income (AOCI). On June 30, 2016 the total after-tax amount in AOCI related to our designated net investment hedges was $13. For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative's gain or loss is recognized in OCI and reported as a component of AOCI.
We use the forward method to measure ineffectiveness. Under this method, for each reporting period the change in the carrying value of the Euro-denominated amounts due to remeasurement of the effective portion is reported as a component of AOCI, and the remaining change in the carrying value of the ineffective portion, if any, is recognized in other income (expense), net. The gain or loss related to settled net investment hedges will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated. We evaluate the effectiveness of our net investment hedges quarterly and did not recognize any ineffectiveness in the six months 2016.
Designated and Non-Designated Hedges
June 2016
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
1,011

 
$
2,789

 
$
3,800

Maximum term in days
 
 
 
 
 
546

Fair value:
 
 
 
 
 
 
Other current assets
 
$
5

 
$
5

 
$
10

Other noncurrent assets
 
1

 

 
1

Other current liabilities
 
(31
)
 
(7
)
 
(38
)
Other noncurrent liabilities
 
(3
)
 

 
(3
)
Total
 
$
(28
)
 
$
(2
)
 
$
(30
)


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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

December 2015
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
889

 
$
4,061

 
$
4,950

Maximum term in days
 
 
 
 
 
546

Fair value:
 
 
 
 
 
 
Other current assets
 
$
27

 
$
41

 
$
68

Other noncurrent assets
 
1

 

 
1

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

 
(1
)
Total
 
$
21

 
$
38

 
$
59


We are exposed to credit loss in the event of nonperformance by our counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default, our maximum exposure to loss is the asset balance of the instrument.
Net Currency Exchange Rate Gains (Losses)
 
Three Months
 
Six Months
Recorded In:
2016
2015
 
2016
2015
Cost of sales
$
2

$
5

 
$
8

$
5

Other income (expense), net
(6
)
(7
)
 
(10
)
(11
)
Total
$
(4
)
$
(2
)
 
$
(2
)
$
(6
)
On June 30, 2016 and December 31, 2015 pretax (losses) gains on derivatives designated as hedges of ($22) and $17, reported in AOCI, were expected to be reclassified to earnings during the next 12 months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There were no ineffective portions of derivatives that resulted in gains or losses in any of the periods presented.
Interest Rate Risk on Future Debt Issuance
In the six months 2016 we terminated multiple designated interest rate cash flow hedges, recognized $7 in OCI related to hedges on our debt issuances and recognized a nominal amount of ineffectiveness in interest expense. The remaining amounts in AOCI will be reclassified to interest expense over the term of the debt. The cash flow effect of these hedges is recognized in cash flow from operations.
Fair Value Hedges
On June 30, 2016 we had interest rate swaps with gross notional amounts of $500 designated as fair value hedges of underlying fixed rate obligations representing a portion of our $600 senior unsecured notes due in 2024. In the six months 2016, there was no hedge ineffectiveness recorded as a result of these fair value hedges.
Fair Value Interest Rate Hedge Instruments
 
 
June 2016
 
December 2015
Gross notional amount
 
$
500

 
$
500

Fair value:
 
 
 
 
Other noncurrent assets
 
$
44

 
$
15

Long-term debt
 
(44
)
 
(15
)
Total
 
$

 
$

NOTE 5 - ACQUISITIONS
In April 2016 we completed the acquisition of Sage Products, LLC (Sage) for total consideration of approximately $2,875. Sage develops, manufactures and distributes disposable products targeted at reducing "Never Events," primarily in the intensive care unit.
In April 2016 we completed the acquisition of Physio-Control International, Inc. (Physio) for total consideration of approximately $1,308. Physio develops, manufactures and markets monitors/defibrillators, automated external defibrillators (AEDs) and CPR-assist devices along with data management and support services.
 
Other acquisitions in 2016 include the April acquisition of Synergetics' neuro portfolio (Synergetics). The acquired portfolio of Synergetics includes the Malis generator, Spetzler Malis disposable forceps, and our existing Sonopet tips and RF generator.
Other acquisitions in 2015 include the acquisition of certain assets of CHG Hospital Beds, Inc. (CHG). CHG designs, manufactures and markets low-height hospital beds and related accessories. The measurement period for CHG is complete. Revisions to the original purchase price allocation were nominal.
These acquisitions enhanced our product offerings within our MedSurg segment. Goodwill acquired with the Sage, Synergetics and CHG acquisitions is deductible for tax purposes.
Supplemental pro forma combined statements of earnings have not been presented for the Sage and Physio acquisitions as the impact of their results of operations were not material to our Consolidated Statements of Earnings.
Purchase Price Allocation of Acquired Net Assets
 
2016
 
2015
 
Sage
Physio
Other
 
Other
Purchase price paid
$
2,870

$
1,308

$
225

 
$
138

Contingent consideration
5


8

 
9

Total consideration
$
2,875

$
1,308

$
233

 
$
147

Tangible assets acquired:
 
 
 
 
 
Cash
$
91

$
31

$

 
$

Accounts receivable
29

106

5

 
4

Inventory
63

72

9

 
9

Other assets
80

120

14

 
17

Liabilities
(76
)
(414
)
(18
)
 
(7
)
Intangible assets:
 


 
 
 
Customer relationship
948

365

11

 
12

Trade name
72

157

13

 
2

Developed technology and patents
176

221

90

 
53

IPR&D

8

7

 

Goodwill
1,492

642

102

 
57

Total
$
2,875

$
1,308

$
233

 
$
147

Weighted-average life of intangible assets
15

14

13

 
10

Purchase price allocations for acquisitions were based on preliminary valuations and our estimates and assumptions and are subject to change within the measurement period.
Estimated Amortization Expense
Remainder of 2016
2017
2018
2019
2020
$
171

$
343

$
336

$
328

$
308

NOTE 6 - CONTINGENCIES AND COMMITMENTS
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages as well as other compensatory and equitable relief that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management has sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those estimated by management, additional expense may be


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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

incurred, which could unfavorably affect future operating results. We are self-insured for product liability claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In June 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. Product liability lawsuits relating to this voluntary recall have been filed against us. On November 3, 2014 we announced that we had entered into a settlement agreement to compensate eligible United States patients who had revision surgery to replace their Rejuvenate and/or ABG II Modular-Neck hip stem prior to that date. We continue to offer support for recall-related care and reimburse patients who are not eligible to enroll in the settlement program for testing and treatment services, including any necessary revision surgeries. In addition, some lawsuits will remain and we will continue to defend against them. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter globally is estimated to be approximately $1,870 ($2,102 before $232 of third-party insurance recoveries) to $2,411. In the three months 2016 we recognized additional charges to earnings of $28 representing the excess of the minimum of the range over the previously recorded reserves. We have made a total of $1,460 of recall-related payments, including $1,359 under the United States Rejuvenate and ABG II settlement agreement. The final outcome of this matter is dependent on many factors that are difficult to predict including the number of enrollees in the settlement program and the total awards to them, the number and costs of patients not eligible for the settlement program who seek testing and treatment services and require revision surgery and the number and actual costs to resolve the remaining lawsuits. Accordingly, the ultimate cost to resolve this entire matter globally may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we filed a lawsuit in federal court against Zimmer Biomet Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed three of our patents. In 2013 following a jury trial favorable to us, the trial judge entered a judgment that, among other things, awarded us damages of $76 and ordered Zimmer to pay us enhanced damages. Zimmer appealed this ruling. In December 2014 the Federal Circuit affirmed the damages awarded to us, reversed the order for enhanced damages and remanded the issue of attorney fees to the trial court. The Federal Circuit denied our petition for a rehearing en banc on the issue of enhanced damages. In May 2015 the trial court entered a stipulated judgment that, among other things, required Zimmer to pay us the base amount of damages and interest, while the issues of enhanced damages and attorney fees continue to be pursued. In June 2015 we recorded a $54 gain, net of legal costs, which was recorded within selling, general and administrative expenses. On June 13, 2016 the United States Supreme Court vacated the decision of the Federal Circuit that reversed our judgment for enhanced damages and remanded the case to the Federal Circuit to reconsider the issue.
In April 2011 Hill-Rom Company, Inc. and affiliated entities (Hill-Rom) brought a lawsuit against us alleging infringement under United States patent laws with respect to nine patents related to electrical network communications for hospital beds. On March 31, 2015 the court granted the parties’ joint motion to dismiss with prejudice the claims and counterclaims associated with three of these patents. The case has been stayed with respect to the remaining six patents, until reexamination proceedings at the United States Patent Office have concluded. The ultimate resolution of this
 
matter cannot be predicted and it is not possible at this time for us to estimate any probable loss or range of probable losses; however, the ultimate result could have a material adverse effect on our financial position, results of operations and cash flows.
NOTE 7 - DEBT AND CREDIT FACILITIES
In March 2016 we sold $3,500 of senior unsecured notes. Our commercial paper program allows us to have a maximum of $1,250 in commercial paper outstanding with maturities up to 397 days from the date of issuance. The weighted-average original maturity of the commercial paper outstanding was approximately 40 days. The following table is a summary of our total debt and other debt information.
 
 
June
 
December
 
 
2016
 
2015
Senior unsecured notes:
 
 
 
 
 
Rate
Due
 
 
 
 
 
2.000%
09/30/2016
 
$
750

 
$
749

 
1.300%
04/01/2018
 
597

 
597

 
2.000%
03/08/2019
 
745

 

 
4.375%
01/15/2020
 
497

 
496

 
2.625%
03/15/2021
 
744

 

 
3.375%
05/15/2024
 
636

 
606

 
3.375%
11/01/2025
 
744

 
744

 
3.500%
03/15/2026
 
986

 

 
4.100%
04/01/2043
 
391

 
390

 
4.375%
05/15/2044
 
394

 
394

 
4.625%
03/15/2046
 
979

 

Commercial paper
 
145

 

Other
 
36

 
22

Total debt
 
$
7,644

 
$
3,998

Less current maturities
 
927

 
768

Total long-term debt
 
$
6,717

 
$
3,230

 
 
 
 
 
Unamortized debt issuance costs
 
$
48

 
$
24

Available borrowing capacity under all existing facilities
 
$
1,157

 
$
1,236

Fair value of debt
 
$
7,881

 
$
4,009

We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on June 30, 2016.
The fair value of debt (excluding the interest rate hedge) was based on the quoted interest rates for similar types and amounts of borrowings. Substantially all of our debt was classified within Level 1 of the fair value hierarchy, because the fair value of the debt was estimated using rates with identical terms and maturities based on quoted active market prices and yields, which took into account the underlying terms of the debt instruments.
On January 1, 2016 we retrospectively adopted ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This standard update requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability consistent with the treatment of debt discounts. The adoption of this standard resulted in the reclassification of $24 of unamortized debt issuance costs principally from other noncurrent assets to a reduction of long term debt on our consolidated balance sheet on December 31, 2015.
NOTE 8 - CAPITAL STOCK
In February 2016 we declared a quarterly dividend of $0.38 per share payable on April 30, 2016 to shareholders of record at the close of business on March 31, 2016. In April 2016 we declared a


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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

quarterly dividend of $0.38 per share payable on July 29, 2016 to shareholders at the close of business on June 30, 2016.
In the six months 2016, 135 thousand shares, repurchased at the end of 2015, were settled at a cost of $13 under our authorized repurchase programs. The manner, timing and amount of repurchases is determined by management based on an evaluation of market conditions, stock price and other factors and is subject to regulatory considerations. Purchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise. On June 30, 2016 the total dollar value of shares that could be acquired under our authorized repurchase programs was $1,870. We have suspended our share repurchase program through the remainder of 2016.
NOTE 9 - INCOME TAXES
Our effective tax rates were 12.3% and 2.2% in the three months 2016 and 2015 and 14.5% and 20.8% in the six months 2016 and 2015. The increase in the effective income tax rate in the three months 2016 was due to tax expense related to acquisitions in the quarter, while the effective income tax rate in 2015 included decreased tax expense related to the jurisdictional allocation of tax expense on recall charges. The effective income tax rate in the six months 2016 decreased from 2015 primarily due to certain discrete 2015 tax expense related to the establishment of our European regional headquarters.
NOTE 10 - SEGMENT INFORMATION
The following table is a summary of our results of operations by reportable segments.
 
Three Months
 
Six Months
 
2016
2015
 
2016
2015
Orthopaedics
$
1,082

$
1,035

 
$
2,139

$
2,058

MedSurg
1,258

939

 
2,216

1,866

Neurotechnology and Spine
500

458

 
980

887

Net sales
$
2,840

$
2,432

 
$
5,335

$
4,811

Orthopaedics
$
371

$
339

 
$
720

$
671

MedSurg
253

196

 
451

376

Neurotechnology and Spine
160

117

 
299

229

Segment operating income
$
784

$
652

 
$
1,470

$
1,276

Items not allocated to segments:
 
 
 
 
 
Corporate and other
$
(80
)
$
(73
)
 
$
(162
)
$
(142
)
Acquisition and integration-related charges
(66
)
(12
)
 
(71
)
(32
)
Amortization of purchased intangible assets
(88
)
(49
)
 
(141
)
(98
)
Restructuring-related charges
(22
)
(30
)
 
(42
)
(56
)
Rejuvenate and ABG II recalls
(28
)
(112
)
 
(47
)
(166
)
Legal matters

53

 
12

53

Consolidated operating income
$
500

$
429

 
$
1,019

$
835

Total assets of our MedSurg segment increased to $8,916 as a results of our recent acquisitions as discussed in Note 5. There were no other significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2015.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ABOUT STRYKER
Stryker Corporation is a global leader in medical technology with revenues of $9,946 and net earnings of $1,439 in 2015. Stryker offers a diverse array of innovative medical technologies including orthopaedic, medical and surgical, and neurotechnology and spine products to help people lead more active and satisfying lives.
We segregate our operations into three reportable business segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremities surgeries. MedSurg products include surgical equipment and surgical navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling and emergency medical equipment (Medical), and reprocessed and remanufactured medical devices (Sustainability) as well as other medical device products used in a variety of medical specialties. Neurotechnology and Spine products include both neurosurgical and neurovascular devices.
Overview of the Three and Six Months
In the three months we achieved sales growth of 16.8% and 17.0% in constant currency, including 10.4% from acquisitions. We reported net earnings per diluted share of $1.00 in the three months and achieved a 15.8% growth in adjusted net earnings per diluted share.
In the six months we achieved sales growth of 10.9% and 11.6% in constant currency, including 5.3% from acquisitions. We reported net earnings per diluted share of $2.07 in the six months and achieved a 13.9% growth in adjusted net earnings per diluted share.
A reconciliation of reported net earnings per diluted share to adjusted net earnings per diluted share is included on page 12 of this report.
Recent Developments
In April 2016 we completed the acquisitions of Sage Products, LLC (Sage) for total consideration of approximately $2,875, Physio-Control International, Inc. (Physio) for total consideration of approximately $1,308 and Synergetics' neuro portfolio (Synergetics). Sage develops, manufactures and distributes disposable products targeted at reducing "Never Events," primarily in the intensive care unit. Physio develops, manufactures and markets monitors/defibrillators, automated external defibrillators (AEDs) and CPR-assist devices along with data management and support services. The acquired portfolio of Synergetics includes the Malis generator, Spetzler Malis disposable forceps and our existing Sonopet tips and RF generator. Refer to Note 5 in the notes to our Consolidated Financial Statements for further information.
In March 2016 we sold $3,500 of senior unsecured notes. Refer to Note 7 in the notes to our Consolidated Financial Statements for further information.



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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

RESULTS OF OPERATIONS
 
 
Three Months

Six Months
 
 
2016
% Sales
2015
% Sales
% Change
 
2016
% Sales
2015
% Sales
% Change
Net sales
 
$
2,840

100.0
 %
$
2,432

100.0
 %
16.8
 %
 
$
5,335

100.0
 %
$
4,811

100.0
 %
10.9
 %
Gross profit
 
1,842

64.9

1,605

66.0

14.8

 
3,536

66.3

3,158

65.6

12.0

Research, development and engineering
 
183

6.4

154

6.3

18.8

 
342

6.4

306

6.4

11.8

Selling, general and administrative
 
1,043

36.7

861

35.4

21.1

 
1,987

37.2

1,753

36.4

13.3

Recall charges
 
28

1.0

112

4.6

(75.0
)
 
47

0.9

166

3.5

(71.7
)
Intangible amortization
 
88

3.1

49

2.0

79.6

 
141

2.6

98

2.0

43.9

Other income (expense), net
 
(67
)
(2.4
)
(28
)
(1.2
)
139.3

 
(105
)
(2.0
)
(57
)
(1.2
)
84.2

Income taxes
 
53



9



488.9

 
132

 
162

 
(18.5
)
Net earnings
 
$
380

13.4
 %
$
392

16.1
 %
(3.1
)%
 
$
782

14.7
 %
$
616

12.8
 %
26.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per diluted share
 
$
1.00

 
$
1.03

 
(2.9
)%
 
$
2.07

 
$
1.61

 
28.6
 %
Adjusted net earnings per diluted share
 
$
1.39

 
$
1.20

 
15.8
 %
 
$
2.63

 
$
2.31

 
13.9
 %
See "Non-GAAP Financial Measures" on page 12 for a discussion of non-GAAP financial measures used in this report.
Geographic and Segment Net Sales
 
 
Three Months
 
Six Months
 
 
 
 
Percentage Change
 
 
 
Percentage Change
 
 
2016
 
2015
 
As Reported
 
Constant Currency
 
2016
 
2015
 
Reported
 
Constant
Currency
Geographic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
2,046

 
$
1,716

 
19.2
%
 
19.2
%
 
$
3,868

 
$
3,389

 
14.1
%
 
14.1
%
International
 
794

 
716

 
11.0

 
11.7

 
1,467

 
1,422

 
3.2

 
5.7

Total
 
$
2,840

 
$
2,432

 
16.8
%
 
17.0
%
 
$
5,335

 
$
4,811

 
10.9
%
 
11.6
%
Segment:
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Orthopaedics
 
$
1,082

 
$
1,035

 
4.6
%
 
4.8
%
 
$
2,139

 
$
2,058

 
3.9
%
 
4.7
%
MedSurg
 
1,258

 
939

 
33.8

 
34.2

 
2,216

 
1,866

 
18.7

 
19.5

Neurotechnology and Spine
 
500

 
458

 
9.3

 
9.0

 
980

 
887

 
10.6

 
11.0

Total
 
$
2,840

 
$
2,432

 
16.8
%
 
17.0
%
 
$
5,335

 
$
4,811

 
10.9
%
 
11.6
%
Supplemental Net Sales Growth Information
 
Three Months
 
Six Months
 
 
 
Percentage Change
 
 
 
 
Percentage Change
 
 
 
 
 
 
United States
 
International
 
 
 
 
 
 
U.S.
 
International
 
2016
2015
 
Reported
Constant Currency
 
Reported
 
Reported
Constant Currency
 
2016
2015
 
Reported
Constant Currency
 
Reported
 
As Reported
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Knees
$
370

$
346

 
7.1
%
7.5
%
 
7.0
%
 
7.2
 %
8.7
 %
 
$
731

$
691

 
5.8
%
6.6
%
 
8.0
%
 
0.3
 %
3.3
 %
Hips
323

320

 
1.2

1.8

 
1.2

 
1.3

2.8

 
639

632

 
1.2

2.3

 
2.8

 
(1.4
)
1.6

Trauma and Extremities
328

309

 
6.0

5.6

 
9.5

 
0.6

(0.4
)
 
655

622

 
5.3

5.6

 
10.2

 
(2.2
)
(1.3
)
Other
61

60

 
1.0

1.4

 
4.5

 
(11.6
)
(9.7
)
 
114

113

 
0.7

1.5

 
4.1

 
(12.9
)
(9.0
)
Total Orthopaedics
$
1,082

$
1,035

 
4.6
%
4.8
%
 
5.9
%
 
2.2
 %
2.9
 %
 
$
2,139

$
2,058

 
3.9
%
4.7
%
 
6.9
%
 
(1.6
)%
0.7
 %
MedSurg:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
377

$
354

 
6.4
%
6.6
%
 
8.0
%
 
1.4
 %
2.2
 %
 
$
742

$
700

 
6.0
%
6.7
%
 
9.1
%
 
(3.5
)%
(0.6
)%
Endoscopy
357

335

 
6.0

6.4

 
10.8

 
(7.7
)
(6.1
)
 
685

656

 
4.3

5.1

 
9.8

 
(11.1
)
(8.0
)
Medical
465

197

 
136.4

137.2

 
127.0

 
174.9

179.5

 
672

402

 
67.1

68.1

 
63.2

 
83.4

88.9

Sustainability
59

53

 
11.2

11.2

 
11.1

 
46.6

53.6

 
117

108

 
8.6

8.6

 
8.6

 
15.7

24.0

Total MedSurg
$
1,258

$
939

 
33.8
%
34.2
%
 
35.0
%
 
29.4
 %
31.3
 %
 
$
2,216

$
1,866

 
18.7
%
19.5
%
 
21.4
%
 
9.3
 %
12.8
 %
Neurotechnology and Spine:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
$
312

$
272

 
14.9
%
14.4
%
 
15.6
%
 
13.5
 %
12.3
 %
 
$
613

$
524

 
17.1
%
17.5
%
 
18.3
%
 
15.0
 %
16.2
 %
Spine
188

186

 
1.1

1.0

 
4.8

 
(8.9
)
(9.2
)
 
367

363

 
1.1

1.5

 
5.3

 
(10.4
)
(9.1
)
Total Neurotechnology and Spine
$
500

$
458

 
9.3
%
9.0
%
 
10.9
%
 
5.9
 %
5.0
 %
 
$
980

$
887

 
10.6
%
11.0
%
 
12.6
%
 
6.4
 %
7.6
 %
Total
$
2,840

$
2,432

 
16.8
%
17.0
%
 
19.2
%
 
11.0
 %
11.7
 %
 
$
5,335

$
4,811

 
10.9
%
11.6
%
 
14.1
%
 
3.2
 %
5.7
 %
Consolidated Net Sales
Consolidated net sales of $2,840 increased 16.8% in the three months as reported and 17.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.2%. Excluding the 10.4% impact of acquisitions, net sales in constant currency increased by 7.9% from increased unit volume partially offset by 1.3% due to lower prices. The unit volume increase was
 
primarily due to higher shipments of knees, medical, endoscopy and trauma and extremities products.
Consolidated net sales of $5,335 increased 10.9% in the six months as reported and 11.6% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.7%. Excluding the 5.3% impact of acquisitions, net sales in constant currency increased by 7.7% from increased unit volume partially offset by 1.3% due to lower prices. The unit volume increase was primarily


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

STRYKER CORPORATION
 
2016 Second Quarter Form 10-Q

due to higher shipments of knees, trauma and extremities, neurotechnology, medical, endoscopy and instruments products.
Orthopaedics Net Sales
Orthopaedics net sales of $1,082 increased 4.6% in the three months as reported and 4.8% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.2%. Excluding the 0.3% impact of acquisitions, net sales in constant currency increased by 6.7% from increased unit volume partially offset by 2.2% due to lower prices. The unit volume increase was led primarily by higher shipments of knees and trauma and extremities products.
Orthopaedics net sales of $2,139 increased 3.9% in the six months as reported and 4.7% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.8%. Excluding the 0.2% impact of acquisitions, net sales in constant currency increased by 6.5% from increased unit volume partially offset by 1.9% due to lower prices. The unit volume increase was led primarily by higher shipments of knees and trauma and extremities products.
MedSurg Net Sales
MedSurg net sales of $1,258 increased 33.8% in the three months as reported and 34.2% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 25.7% impact of acquisitions, net sales in constant currency increased by 9.0% from increased unit volume partially offset by 0.5% due to lower prices. The unit volume increase was led primarily by higher shipments of medical and endoscopy products.
MedSurg net sales of $2,216 increased 18.7% in the six months as reported and 19.5% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.8%. Excluding the 13.0% impact of acquisitions, net sales in constant currency increased by 7.0% from increased unit volume partially offset by 0.6% due to lower prices. The unit volume increase was led primarily by higher shipments of endoscopy, instruments and medical products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales of $500 increased 9.3% in the three months as reported and 9.0% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.3%. Excluding the 1.5% impact of acquisitions, net sales in constant currency increased by 8.5% from increased unit volume partially offset by 1.0% due to lower prices. The unit volume increase was led primarily by higher shipments of neurotechnology products.
Neurotechnology and Spine net sales of $980 increased 10.6% in the six months as reported and 11.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 0.8% impact of acquisitions, net sales in constant currency increased by 11.9% from increased unit volume partially offset by 1.7% due to lower prices. The unit volume increase was led primarily by higher shipments of neurotechnology products.
Gross Profit
Gross profit in the three months decreased to 64.9% of sales from 66.0% in 2015 primarily due to the impact of the sale of inventory stepped up to fair value in connection with our recent acquisitions and unfavorable product mix. The gross profit decrease in the three months was partially offset by the favorable impact of the two-year suspension of the United States medical device excise tax that became effective January 1, 2016. Gross profit in the six months increased to 66.3% from 65.6% in 2015 primarily due to suspension of the United States medical device excise tax. We expect this favorable impact to gross profit as a result of the suspension of the United States medical device excise tax to continue through 2017.
 
 
 
Three Months
 
 
2016
 
2015
 
 
$
% Sales
 
$
% Sales
Reported Gross Profit
 
$
1,842

64.9
%
 
$
1,605

66.0
%
Inventory stepped up to fair value
 
35

1.2

 
6

0.3

Restructuring-related charges
 
2

0.1

 
1


Adjusted Gross Profit
 
$
1,879

66.2
%
 
$
1,612

66.3
%
 
 
Six Months
 
 
2016
 
2015
 
 
$
% Sales
 
$
% Sales
Reported Gross Profit
 
$
3,536

66.3
%
 
$
3,158

65.6
%
Inventory stepped up to fair value
 
35

0.6

 
13

0.4

Restructuring-related charges
 
5

0.1

 
2


Adjusted Gross Profit
 
$
3,576

67.0
%
 
$
3,173

66.0
%
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $29 or 18.8% to $183 in the three months and were 6.4% of sales in 2016 compared to 6.3% in 2015. These expenses increased $36 or 11.8% to $342 in the six months and 6.4% of sales in both