10-Q 1 syk10q93016.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 September 30, 2016

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

Commission file number: 000-09165
strykerlogoa20.jpg
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: 374,451,718 shares of Common Stock, $0.10 par value, on September 30, 2016.
 


STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

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

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 
Three Months
 
Nine Months

2016
 
2015
 
2016
 
2015
Net sales
$
2,833

 
$
2,420

 
$
8,168

 
$
7,231

Cost of sales
960

 
796

 
2,759

 
2,449

Gross profit
$
1,873

 
$
1,624

 
$
5,409

 
$
4,782

Research, development and engineering expenses
184

 
155

 
526

 
461

Selling, general and administrative expenses
1,057

 
887

 
3,044

 
2,640

Recall charges
57

 
150

 
104

 
316

Amortization of intangible assets
89

 
54

 
230

 
152

Total operating expenses
$
1,387

 
$
1,246

 
$
3,904

 
$
3,569

Operating income
$
486

 
$
378

 
$
1,505

 
$
1,213

Other income (expense), net
(67
)
 
(33
)
 
(172
)
 
(90
)
Earnings before income taxes
$
419

 
$
345

 
$
1,333

 
$
1,123

Income taxes
64

 
44

 
196

 
206

Net earnings
$
355

 
$
301

 
$
1,137

 
$
917

 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
Basic net earnings per share of common stock
$
0.95

 
$
0.80

 
$
3.04

 
$
2.43

Diluted net earnings per share of common stock
$
0.94

 
$
0.79

 
$
3.01

 
$
2.40

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
374.4

 
376.3

 
373.9

 
377.4

Effect of dilutive employee stock options
4.6

 
4.4

 
4.4

 
4.4

Diluted
379.0

 
380.7

 
378.3

 
381.8

There were no anti-dilutive shares for any of the periods presented.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months
 
Nine Months
 
2016
 
2015
 
2016
 
2015
Net earnings
$
355

 
$
301

 
$
1,137

 
$
917

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

 

 

 
(3
)
Pension plans
(1
)
 

 
(4
)
 
10

Unrealized losses on designated hedges

 
(15
)
 
(35
)
 
(4
)
Financial statement translation
(4
)
 
(83
)
 
78

 
(278
)
Total other comprehensive (loss) income, net of tax
$
(5
)
 
$
(98
)
 
$
39

 
$
(275
)
Comprehensive income
$
350

 
$
203

 
$
1,176

 
$
642


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
September 30
 
December 31
2016
 
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
2,953

 
$
3,379

Marketable securities
69

 
700

Accounts receivable, less allowance of $64 ($61 in 2015)
1,803

 
1,662

Inventories:
 
 
 
Materials and supplies
396

 
304

Work in process
126

 
103

Finished goods
1,570

 
1,232

Total inventories
$
2,092

 
$
1,639

Prepaid expenses and other current assets
449

 
563

Total current assets
$
7,366

 
$
7,943

Property, plant and equipment:
 
 
 
Land, buildings and improvements
802

 
687

Machinery and equipment
2,321

 
2,043

Total property, plant and equipment
3,123

 
2,730

Less allowance for depreciation
1,618

 
1,531

Net property, plant and equipment
$
1,505

 
$
1,199

Goodwill
6,475

 
4,136

Other intangibles, net
3,608

 
1,794

Other noncurrent assets
1,233

 
1,151

Total assets
$
20,187

 
$
16,223

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY

 
 
Current liabilities
 
 
 
Accounts payable
$
420

 
$
410

Accrued compensation
640

 
637

Income taxes
213

 
141

Dividend payable
142

 
142

Accrued recall
603

 
694

Accrued expenses and other liabilities
873

 
710

Current maturities of debt
135

 
768

Total current liabilities
$
3,026

 
$
3,502

Long-term debt, excluding current maturities
6,713

 
3,230

Other noncurrent liabilities
1,116

 
980

Total liabilities
$
10,855

 
$
7,712

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
1,404

 
1,321

Retained earnings
8,491

 
7,792

Accumulated other comprehensive income
(600
)
 
(639
)
Total shareholders' equity
$
9,332

 
$
8,511

Total liabilities & shareholders' equity
$
20,187

 
$
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 Third 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


 


 
1,137

 


 
1,137

Other comprehensive income


 


 


 
39

 
39

Issuance of 1.6 million shares of common stock under stock option and benefit plans, including $31 excess income tax benefit


 
13

 


 


 
13

Repurchase of 0.1 million shares of common stock


 
(1
)
 
(12
)
 


 
(13
)
Share-based compensation


 
71

 


 


 
71

Cash dividends declared of $1.14 per share of common stock


 


 
(426
)
 


 
(426
)
September 30, 2016
$
37

 
$
1,404

 
$
8,491

 
$
(600
)
 
$
9,332

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months
 
2016
 
2015
Operating activities
 
 
 
Net earnings
$
1,137

 
$
917

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
165

 
137

Amortization of intangible assets
230

 
152

Share-based compensation
71

 
65

Recall charges
104

 
316

Sale of inventory stepped up to fair value at acquisition
37

 
7

Excess income tax benefits from stock issued under employee stock plans
(31
)
 
(20
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
22

 
26

Inventories
(307
)
 
(124
)
Accounts payable
(11
)
 
15

Accrued expenses and other liabilities
(72
)
 
(35
)
Recall-related payments
(181
)
 
(1,172
)
Income taxes
(58
)
 
(241
)
Other
58

 
185

Net cash provided by operating activities
$
1,164

 
$
228

Investing activities
 
 
 
Acquisitions, net of cash acquired
(4,296
)
 
(140
)
Purchases of marketable securities
(136
)
 
(1,184
)
Sales of marketable securities
769

 
4,056

Purchases of property, plant and equipment
(347
)
 
(191
)
Other investing, net
(4
)
 

Net cash (used in) provided by investing activities
$
(4,014
)
 
$
2,541

Financing activities
 
 
 
Proceeds from borrowings
4,248

 
1,298

Payments on borrowings
(1,430
)
 
(1,799
)
Dividends paid
(426
)
 
(391
)
Repurchase of common stock
(13
)
 
(446
)
Excess income tax benefits from stock issued under employee stock plans
31

 
20

Other financing
(7
)
 
16

Net cash provided by (used in) financing activities
$
2,403

 
$
(1,302
)
Effect of exchange rate changes on cash and cash equivalents
21

 
(99
)
Change in cash and cash equivalents
$
(426
)
 
$
1,368

Cash and cash equivalents at beginning of period
3,379

 
1,795

Cash and cash equivalents at end of period
$
2,953

 
$
3,163


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2016 Third 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 Consolidated Balance Sheets 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 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 August 2016 the Financial Accounting Standards Board (FASB) issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which eliminates diversity in practice related to how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows. We plan to adopt this update on January 1, 2017 and do not anticipate that the adoption of this update will have a material impact on our Consolidated Financial Statements.
In March 2016 the 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 simplifying classification in the Consolidated Statements of Cash Flows. We plan to adopt this update on January 1, 2017. Upon adoption of this update, excess income tax benefits associated with share-based compensation, which are currently recognized within additional paid in capital, will be recognized within the income tax provision in our Consolidated Statements of Earnings. Additionally, our Consolidated Statements of Cash Flows will present such excess income tax benefits, which are currently presented as a financing activity, as an operating activity. If we had adopted this update on January 1, 2016, the impact would have been $31 through September 30, 2016. The impact of adopting this update in 2017 on our Consolidated Financial Statements will be dependent on market factors, the timing and intrinsic value of future share-based compensation award vests and exercises.
In February 2016 the FASB issued ASU 2016-02, Leases. This update requires an entity to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. We plan to adopt this update on January 1, 2019. We are still evaluating the impact that this update 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 this update on January 1, 2018. We are still evaluating the impact that this update 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 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Three Months 2016
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(122
)
$
(31
)
$
(442
)
$
(595
)
OCI
1

(4
)
(4
)
(8
)
(15
)
Income taxes

1

2

4

7

Reclassifications to:
 
 
 
 
 
Cost of sales

2

3


5

Other income
(1
)



(1
)
Income taxes


(1
)

(1
)
Net OCI

(1
)

(4
)
(5
)
Ending
$

$
(123
)
$
(31
)
$
(446
)
$
(600
)
Three Months 2015
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(126
)
$
24

$
(329
)
$
(431
)
OCI
(1
)
(2
)
(14
)
(83
)
(100
)
Income taxes


4


4

Reclassifications to:
 
 
 
 
 
Cost of sales

2

(7
)

(5
)
Other expense
1




1

Income taxes


2


2

Net OCI


(15
)
(83
)
(98
)
Ending
$

$
(126
)
$
9

$
(412
)
$
(529
)
Nine Months 2016
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(119
)
$
4

$
(524
)
$
(639
)
OCI
3

(10
)
(43
)
69

19

Income taxes
(1
)
2

13

9

23

Reclassifications to:
 
 
 
 
 
Cost of sales

5

(5
)


Other income
(3
)



(3
)
Income taxes
1

(1
)



Net OCI

(4
)
(35
)
78

39

Ending
$

$
(123
)
$
(31
)
$
(446
)
$
(600
)
Nine Months 2015
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
3

$
(136
)
$
13

$
(134
)
$
(254
)
OCI
2

8

6

(278
)
(262
)
Income taxes
(1
)
(2
)
(2
)

(5
)
Reclassifications to:
 
 
 
 
 
Cost of sales

6

(12
)

(6
)
Other income
(5
)



(5
)
Income taxes
1

(2
)
4


3

Net OCI
(3
)
10

(4
)
(278
)
(275
)
Ending
$

$
(126
)
$
9

$
(412
)
$
(529
)


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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

NOTE 3 - 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. 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 Accumulated Other Comprehensive Income (AOCI). On September 30, 2016 the total after-tax amount in AOCI related to our designated net investment hedges was $6.
We use the forward method to measure ineffectiveness. Under this method 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. 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 nine months 2016.
Designated and Non-Designated Hedges
September 2016
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
1,100

 
$
2,851

 
$
3,951

Maximum term in days
 
 
 
 
 
548

Fair value:
 
 
 
 
 
 
Other current assets
 
$
7

 
$
4

 
$
11

Other noncurrent assets
 
1

 

 
1

Other current liabilities
 
(25
)
 
(6
)
 
(31
)
Other noncurrent liabilities
 
(2
)
 

 
(2
)
Total
 
$
(19
)
 
$
(2
)
 
$
(21
)
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
 
Nine Months
Reported in:
2016
2015
 
2016
2015
Cost of sales
$
(3
)
$
7

 
$
5

$
12

Other income (expense), net
(5
)
(5
)
 
(15
)
(16
)
Total
$
(8
)
$
2

 
$
(10
)
$
(4
)
On September 30, 2016 and December 31, 2015 pretax (losses) gains on derivatives designated as hedges of ($25) 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
Forward starting interest rate derivative instruments designated as cash flow hedges are used to manage the exposure to interest rate volatility with regard to future issuance and refinancing of debt. The effective portion of the gains or losses on forward starting interest rate derivative instruments that are designated and qualify as cash flow hedges is reported as a component of AOCI. Beginning in the period in which the debt refinancing occurs and the related derivative instruments is terminated, the effective portion of the gains or losses is then reclassified into interest expense over the term of the related debt.
On September 30, 2016 we had interest rate swaps with notional amounts of $600 designated as forward starting interest rate swaps in anticipation of future debt issuances. The market value of outstanding interest rate swap agreements on September 30, 2016 was $1, which is recorded in other assets with an offsetting amount recorded in AOCI. Upon the probable issuance of the debt, these amounts will be released to interest expense over the term of the debt. The cash flow effect of this hedge is recorded in cash flow from operations.
In the nine 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 September 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 nine months 2016 there was no hedge ineffectiveness recorded as a result of these fair value hedges.
Fair Value Interest Rate Hedge Instruments
 
September 2016
 
December 2015
Gross notional amount
$
500

 
$
500

Fair value:
 
 
 
Other noncurrent assets
$
38

 
$
15

Long-term debt
(38
)
 
(15
)
Total
$

 
$



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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

NOTE 4 - FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1
Quoted market prices in active markets for identical assets or liabilities
Level 2
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3
Unobservable inputs reflecting our assumptions or external inputs from active markets
When applying the fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculate the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of identical or similar instruments, where available, or based on other observable inputs taking into account our credit risk and that of our counterparties. Foreign currency exchange contracts and interest rate hedges are included in Level 2, as we use inputs other than quoted prices that are observable for the asset or liability. The Level 2 derivative instruments are primarily 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 other liabilities was estimated using a discounted cash flow technique. Significant unobservable inputs to this technique included our probability assessments related to the occurrence of certain events, appropriately discounted considering the uncertainties associated with the obligation. We remeasure the fair value of 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.
Assets and Liabilities Measured at Fair Value
 
September
December
 
2016
2015
Cash and cash equivalents
$
2,953

$
3,379

Trading marketable securities
91

82

Level 1 - Assets
$
3,044

$
3,461

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
26

$
214

Foreign government debt securities

96

United States agency debt securities
11

120

United States treasury debt securities
14

264

Certificates of deposit
18

8

Total available-for-sale marketable securities
$
69

$
702

Foreign currency exchange forward contracts
12

69

Interest rate swap asset
39

15

Level 2 - Assets
$
120

$
786

Total assets measured at fair value
$
3,164

$
4,247

 
 
 
Deferred compensation arrangements
$
91

$
82

Level 1 - Liabilities
$
91

$
82

Foreign currency exchange forward contracts
$
33

$
10

Interest rate swap liability

4

Level 2 - Liabilities
$
33

$
14

Contingent consideration:
 
 
Beginning balance
$
56

$
48

Additions
49

11

Losses included in earnings
(5
)

Settlements
(3
)
(3
)
Balance at the end of the period
$
97

$
56

Level 3 - Liabilities
$
97

$
56

Total liabilities measured at fair value
$
221

$
152

 
There were no significant transfers into or out of any level between December 31, 2015 and September 30, 2016.
Fair Value of Available for Sale Securities by Maturity
 
September
December
 
2016
2015
Due in one year or less
$
42

$
588

Due after one year through three years
$
27

$
114

On September 30, 2016 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. The total of interest and marketable securities income was $7 and $1 in the three months 2016 and 2015 and $19 and $12 in the nine 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 September 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.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed debt securities
6
$
3

United States agency debt securities
1
1

United States treasury debt securities
1
2

Certificates of deposit
13
7

Total
21
$
13

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 used primarily in the intensive care unit. This acquisition enhanced our product offerings within our MedSurg segment. Purchase price allocations for this acquisition were based on preliminary valuations. Our estimates and assumptions are subject to change within the measurement period.
In April 2016 we completed the acquisition of Physio-Control International, Inc. (Physio) for total consideration of approximately $1,299, net of a working capital adjustment received during the three months 2016. Physio develops, manufactures and markets monitors/defibrillators, automated external defibrillators (AEDs) and CPR-assist devices along with data management and support services. This acquisition enhances our product offerings within our MedSurg segment. Purchase price allocations for this acquisition were based on preliminary valuations. Our estimates and assumptions are subject to change within the measurement period.
The Other acquisitions in 2016 include the acquisition of Synergetics' neuro portfolio (Synergetics). The Synergetics acquisition enhances our product offerings within our MedSurg segment. Purchase price allocations for the Other acquisitions were based on preliminary valuations. Our estimates and assumptions are subject to change within the measurement period.
The Other acquisitions in 2015 include the acquisition of certain assets of CHG Hospital Beds, Inc. (CHG). The CHG acquisition enhances our product offerings within our MedSurg segment. The measurement period for CHG is complete. Revisions to the original purchase price allocation were nominal.


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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

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

$
1,299

$
314

 
$
140

Contingent consideration
5


27

 
9

Loss on settlement of pre-existing contract


(19
)
 

Total consideration
$
2,875

$
1,299

$
322

 
$
149

Tangible assets acquired:
 
 
 
 
 
Cash
$
91

$
32

$
1

 
$

Accounts receivable
29

106

5

 
4

Inventory
63

74

19

 
9

Other assets
80

118

16

 
13

Liabilities
(76
)
(387
)
(29
)
 
(7
)
Goodwill
1,515

638

170

 
62

Intangible assets:
 


 
 
 
Customer relationship
930

349

12

 
13

Trade name
70

150

13

 
2

Developed technology and patents
173

212

106

 
53

Non-compete


2

 

IPR&D

7

7

 

Total
$
2,875

$
1,299

$
322

 
$
149

Weighted-average life of intangible assets
15

14

12

 
10

Estimated Amortization Expense
Remainder of 2016
2017
2018
2019
2020
$
86

$
345

$
338

$
329

$
310

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 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 remain and we 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 currently estimated to be approximately $1,915 to $ 2,174 ($2,147 to $2,406 before $232 of third-party insurance recoveries.) In the three months 2016 we recognized additional charges to earnings of $45, representing the excess of the minimum of the range over the previously recorded reserves. We have made a total of $1,483 of recall-related payments, including $1,382 of settlement payments. 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 on 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. 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. On September 12, 2016 the Federal Circuit issued an opinion that,among other things, remanded the issue of enhanced damages to the trial court.
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.


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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

NOTE 7 - DEBT AND CREDIT FACILITIES
In March 2016 we sold $3,500 of senior unsecured notes. In September 2016 we repaid all $750 of our senior unsecured notes that were due on September 30, 2016.
In September 2016 we increased the amount of commercial paper issuable under the commercial paper program by $250 to a maximum of $1,500 outstanding with maturities up to 397 days from the date of issuance. On September 30, 2016 outstanding commercial paper totaled $100, the weighted-average original maturity of the commercial paper outstanding was approximately 50 days, and the weighted average annualized interest rate of short-term debt was approximately 0.7%.
We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. In August 2016 we entered into a new senior unsecured revolving credit facility that replaces our previous agreement dated August 29, 2014. The primary changes were to increase the aggregate principal amount of the commitments by $250 to $1,500 and to extend the maturity date to August 19, 2021.
Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on September 30, 2016.
The following table is a summary of our total debt and other debt information.
 
 
 
 
 
September
 
December
 
 
 
 
 
2016
 
2015
Senior unsecured notes:
 
 
 
 
 
Rate
 
Due
 
 
 
 
 
2.000%
 
09/30/2016
 
$

 
$
749

 
1.300%
 
04/01/2018
 
598

 
597

 
2.000%
 
03/08/2019
 
746

 

 
4.375%
 
01/15/2020
 
497

 
496

 
2.625%
 
03/15/2021
 
745

 

 
3.375%
 
05/15/2024
 
631

 
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
 
100

 

Other
 
37

 
22

Total debt
 
$
6,848

 
$
3,998

Less current maturities
 
135

 
768

Total long-term debt
 
$
6,713

 
$
3,230

 
 
 
 
 
Unamortized debt issuance costs
$
46

 
$
24

Available borrowing capacity under all existing facilities
$
1,560

 
$
1,236

Fair value of debt
 
$
7,118

 
$
4,009

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. 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. The adoption of this update 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 Sheets 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 quarterly dividend of $0.38 per share payable on July 29, 2016 to shareholders at the close of business on June 30, 2016. In July 2016 we declared a quarterly dividend of $0.38 per share payable on October 31, 2016 to shareholders at the close of business on September 30, 2016.
In the nine 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 September 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 15.2% and 12.8% in the three months 2016 and 2015 and 14.7% and 18.3% in the nine months 2016 and 2015. The increase in the effective income tax rate in the three months 2016 was primarily due to the impact of the jurisdictional allocation of tax expense related to recall matters in the three months 2015. The effective income tax rate in the nine months 2016 decreased primarily due to certain discrete tax items in 2015 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 segment.
 
Three Months
 
Nine Months
 
2016
2015
 
2016
2015
Orthopaedics
$
1,077

$
1,019

 
$
3,216

$
3,077

MedSurg
1,253

943

 
3,469

2,809

Neurotechnology and Spine
503

458

 
1,483

1,345

Net sales
$
2,833

$
2,420

 
$
8,168

$
7,231

Orthopaedics
$
385

$
370

 
$
1,105

$
1,041

MedSurg
255

198

 
706

574

Neurotechnology and Spine
156

113

 
455

342

Segment operating income
$
796

$
681

 
$
2,266

$
1,957

Items not allocated to segments:
 
 
 
 
 
Corporate and other
(90
)
(76
)
 
(252
)
(220
)
Acquisition and integration-related charges
(49
)
(1
)
 
(120
)
(31
)
Amortization of intangible assets
(89
)
(54
)
 
(230
)
(152
)
Restructuring-related charges
(25
)
(22
)
 
(67
)
(78
)
Rejuvenate and ABG II and other recalls
(57
)
(150
)
 
(104
)
(316
)
Legal matters


 
12

53

Total operating income
$
486

$
378

 
$
1,505

$
1,213

Total assets of our MedSurg segment increased to $8,724 as a result 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.


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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

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, disposable products for the intensive care unit and monitors/defibrillators (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 Nine Months
In the three months we achieved sales growth of 17.1% and 16.7% in constant currency, including 10.5% from acquisitions. We reported net earnings per diluted share of $0.94 in the three months and achieved a 19.0% growth in net earnings per diluted share. Excluding the impact of non-GAAP adjustments noted on page 12,
 
we achieved adjusted net earnings of $526 and growth of 11.2% in adjusted net earnings per diluted share.
In the nine months we achieved sales growth of 13.0% and 13.3% in constant currency, including 7.0% from acquisitions. We reported net earnings per diluted share of $3.01 in the nine months and achieved a 25.4% growth in net earnings per diluted share. Excluding the impact of non-GAAP adjustments noted on page 12, we achieved adjusted net earnings of $1,519 and growth of 12.9% in adjusted net earnings per diluted share.
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 $1,299, net of a working capital adjustment received during the three months 2016, and Synergetics' neuro portfolio (Synergetics). Sage develops, manufactures and distributes disposable products primarily used 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 to our Consolidated Financial Statements for further information.
In March 2016 we sold $3,500 of senior unsecured notes. Refer to Note 7 to our Consolidated Financial Statements for further information.


RESULTS OF OPERATIONS
 
Three Months

Nine Months
 
2016
% Sales
2015
% Sales
% Change
 
2016
% Sales
2015
% Sales
% Change
Net sales
$
2,833

100.0
 %
$
2,420

100.0
 %
17.1
 %
 
$
8,168

100.0
 %
$
7,231

100.0
 %
13.0
 %
Gross profit
1,873

66.1

1,624

67.1

15.3

 
5,409

66.2

4,782

66.1

13.1

Research, development and engineering expenses
184

6.5

155

6.4

18.7

 
526

6.4

461

6.4

14.1

Selling, general and administrative expenses
1,057

37.3

887

36.7

19.2

 
3,044

37.3

2,640

36.5

15.3

Recall charges
57

2.0

150

6.2

(62.0
)
 
104

1.3

316

4.4

(67.1
)
Amortization of intangible assets
89

3.1

54

2.2

64.8

 
230

2.8

152

2.1

51.3

Other income (expense), net
(67
)
(2.4
)
(33
)
(1.4
)
103.0

 
(172
)
(2.1
)
(90
)
(1.2
)
91.1

Income taxes
64

 
44

 
45.5

 
196

 
206

 
(4.9
)
Net earnings
$
355

12.5
 %
$
301

12.4
 %
17.9
 %
 
$
1,137

13.9
 %
$
917

12.7
 %
24.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per diluted share
$
0.94

 
$
0.79

 
19.0
 %
 
$
3.01

 
$
2.40

 
25.4
 %
Adjusted net earnings per diluted share
$
1.39

 
$
1.25

 
11.2
 %
 
$
4.02

 
$
3.56

 
12.9
 %
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
 
Nine Months
 
 
 
Percentage Change
 
 
 
Percentage Change
 
2016
 
2015
 
As Reported
 
Constant
Currency
 
2016
 
2015
 
As Reported
 
Constant
Currency
Geographic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
$
2,054

 
$
1,756

 
17.0
%
 
17.0
%
 
$
5,922

 
$
5,145

 
15.1
%
 
15.1
%
International
779

 
664

 
17.3

 
16.0

 
2,246

 
2,086

 
7.7

 
9.0

Total
$
2,833

 
$
2,420

 
17.1
%
 
16.7
%
 
$
8,168

 
$
7,231

 
13.0
%
 
13.3
%
Segment:
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Orthopaedics
$
1,077

 
$
1,019

 
5.6
%
 
5.3
%
 
$
3,216

 
$
3,077

 
4.5
%
 
4.9
%
MedSurg
1,253

 
943

 
33.0

 
33.0

 
3,469

 
2,809

 
23.5

 
24.0

Neurotechnology and Spine
503

 
458

 
9.7

 
8.7

 
1,483

 
1,345

 
10.3

 
10.2

Total
$
2,833

 
$
2,420

 
17.1
%
 
16.7
%
 
$
8,168

 
$
7,231

 
13.0
%
 
13.3
%

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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

Supplemental Net Sales Growth Information
 
Three Months
 
Nine Months
 
 
 
Percentage Change
 
 
 
 
Percentage Change
 
 
 
 
 
 
United States
 
International
 
 
 
 
 
 
United States
 
International
 
2016
2015
 
As Reported
Constant Currency
 
As Reported
 
As Reported
Constant Currency
 
2016
2015
 
As Reported
Constant Currency
 
As Reported
 
As Reported
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Knees
$
354

$
332

 
6.5
%
6.3
%
 
5.4
%
 
9.6
%
8.9
%
 
$
1,085

$
1,023

 
6.0
%
6.5
%
 
7.1
%
 
3.1
 %
5.0
 %
Hips
310

307

 
0.9

1.0

 
0.7

 
1.4

1.5

 
949

939

 
1.1

1.9

 
2.1

 
(0.5
)
1.5

Trauma and Extremities
343

318

 
7.7

6.9

 
6.9

 
9.0

6.8

 
998

940

 
6.1

6.1

 
9.1

 
1.5

1.3

Other
70

62

 
13.7

13.2

 
9.8

 
31.8

28.8

 
184

175

 
5.3

5.6

 
6.2

 
1.7

3.3

Total Orthopaedics
$
1,077

$
1,019

 
5.6
%
5.3
%
 
4.8
%
 
7.3
%
6.3
%
 
$
3,216

$
3,077

 
4.5
%
4.9
%
 
6.2
%
 
1.2
 %
2.5
 %
MedSurg:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
380

$
359

 
6.1
%
6.0
%
 
5.2
%
 
9.4
%
8.7
%
 
$
1,122

$
1,059

 
6.0
%
6.4
%
 
7.7
%
 
0.5
 %
2.3
 %
Endoscopy
364

336

 
8.6

8.5

 
10.4

 
3.4

2.9

 
1,049

992

 
5.8

6.3

 
10.0

 
(6.4
)
(4.4
)
Medical
450

195

 
131.1

131.5

 
121.4

 
177.4

179.6

 
1,122

597

 
87.9

88.8

 
82.5

 
111.8

116.4

Sustainability
59

53

 
10.3

10.3

 
10.3

 
21.1

20.7

 
176

161

 
9.2

9.2

 
9.1

 
17.5

22.9

Total MedSurg
$
1,253

$
943

 
33.0
%
33.0
%
 
32.3
%
 
35.8
%
35.8
%
 
$
3,469

$
2,809

 
23.5
%
24.0
%
 
25.2
%
 
17.7
 %
20.0
 %
Neurotechnology and Spine:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
$
311

$
275

 
13.1
%
11.7
%
 
9.1
%
 
21.0
%
16.7
%
 
$
924

$
799

 
15.7
%
15.5
%
 
15.1
%
 
17.0
 %
16.3
 %
Spine
192

183

 
4.6

4.2

 
5.0

 
3.3

1.6

 
559

546

 
2.3

2.4

 
5.2

 
(6.0
)
(5.6
)
Total Neurotechnology and Spine
$
503

$
458

 
9.7
%
8.7
%
 
7.4
%
 
15.1
%
11.7
%
 
$
1,483

$
1,345

 
10.3
%
10.2
%
 
10.8
%
 
9.2
 %
8.9
 %
Total
$
2,833

$
2,420

 
17.1
%
16.7
%
 
17.0
%
 
17.3
%
16.0
%
 
$
8,168

$
7,231

 
13.0
%
13.3
%
 
15.1
%
 
7.7
 %
9.0
 %
Consolidated Net Sales
Consolidated net sales of $2,833 increased 17.1% in the three months as reported and 16.7% in constant currency, as foreign currency exchange rates favorably impacted net sales by 0.4%. Excluding the 10.5% impact of acquisitions, net sales in constant currency increased by 7.5% from increased unit volume partially offset by 1.3% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, endoscopy, trauma and extremities, instruments and knee products.
Consolidated net sales of $8,168 increased 13.0% in the nine months as reported and 13.3% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.3%. Excluding the 7.0% impact of acquisitions, net sales in constant currency increased by 7.6% from increased unit volume partially offset by 1.3% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, instruments, knees, trauma and extremities, endoscopy and medical products.
Orthopaedics Net Sales
Orthopaedics net sales of $1,077 increased 5.6% in the three months as reported and 5.3% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.3%. Excluding the 0.5% impact of acquisitions, net sales in constant currency increased by 7.0% from increased unit volume partially offset by 2.2% due to lower prices. The unit volume increase was led primarily by higher shipments of trauma and extremities products and knees.
Orthopaedics net sales of $3,216 increased 4.5% in the nine months as reported and 4.9% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 0.2% impact of acquisitions, net sales in constant currency increased by 6.7% from increased unit volume partially offset by 2.0% due to lower prices. The unit volume increase was led primarily by higher shipments of trauma and extremities products and knees.
MedSurg Net Sales
MedSurg net sales of $1,253 increased 33.0% in the three months as reported and in constant currency. Excluding the 25.7% impact of acquisitions, net sales in constant currency increased by 7.9% 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 and instruments products.
MedSurg net sales of $3,469 increased 23.5% in the nine months as reported and 24.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 17.2% impact of acquisitions, net sales in constant currency increased by 7.4% from increased unit volume partially offset by 0.6% due to lower prices. The unit volume increase was led primarily by higher shipments of instruments, endoscopy and medical products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales of $503 increased 9.7% in the three months as reported and 8.7% in constant currency, as foreign currency exchange rates favorably impacted net sales by 1.0%. Excluding the 1.8% impact of acquisitions, net sales in constant currency increased by 7.9% 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 $1,483 increased 10.3% in the nine months as reported and 10.2% in constant currency, as foreign currency exchange rates favorably impacted net sales by 0.1%. Excluding the 1.1% impact of acquisitions, net sales in constant currency increased by 10.6% from increased unit volume partially offset by 1.5% due to lower prices. The unit volume increase was led primarily by higher shipments of neurotechnology products.
Gross Profit
Gross profit as a percentage of sales in the three months decreased to 66.1% from 67.1% in 2015, primarily due to the impact of the sale of inventory stepped up to fair value in connection with our recent acquisitions and the negative impact of foreign currency exchange rates. The decrease in gross profit as a percentage of sales 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.


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

STRYKER CORPORATION
 
2016 Third Quarter Form 10-Q

Gross profit in the nine months increased to 66.2% from 66.1% 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
$
1,873

66.1
%
 
$
1,624

67.1
 %
Inventory stepped up to fair value
2

0.1

 
(6
)
(0.2
)
Restructuring-related charges
2

0.1

 
2

0.1

Adjusted Gross Profit
$
1,877

66.3
%
 
$
1,620

67.0
 %
 
Nine Months
 
2016
 
2015
 
$
% Sales
 
$
% Sales
Reported Gross Profit
$
5,409

66.2
%
 
$
4,782

66.1
%
Inventory stepped up to fair value
37

0.5

 
7

0.1

Restructuring-related charges
7

0.1

 
4

0.1

Adjusted Gross Profit
$
5,453

66.8
%
 
$
4,793

66.3
%
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $29 or 18.7% in the three months to 6.5% of sales compared to 6.4% in 2015. These expenses increased $65 or 14.1% in the nine months and were 6.4% of sales in 2016 and 2015. Recent acquisitions and the timing of spending on projects and investments in new technologies contributed to the increased spending levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $170 or 19.2% in the three months to 37.3% of sales compared to 36.7% in 2015. Excluding the impact of the charges noted below, expenses decreased to 34.8% of sales compared to 35.6% in 2015, primarily due to disciplined expense management, partially offset by the impact of our recent acquisitions and higher sales performance-related compensation costs.
Selling, general and administrative expenses increased $404 or 15.3% in the nine months to 37.3% of sales compared to 36.5% in 2015. Excluding the impact of the charges noted below, expenses decreased slightly to 35.7% of sales compared to 35.9% in 2015, primarily due to disciplined expense management, partially offset by the impact of our recent acquisitions, increased compensation costs due in part to sales performance-related compensation and expenses associated with the development of a global enterprise resource planning system.
 
Three Months
 
2016
 
2015
 
$
% Sales
 
$
% Sales
Reported Selling, General and Administrative
$
1,057

37.3
 %
 
$
887

36.7
 %
Other acquisition and integration-related
(47
)
(1.7
)
 
(5
)
(0.2
)
Restructuring-related charges
(23
)
(0.8
)
 
(20
)
(0.9
)
Adjusted Selling, General and Administrative
$
987

34.8
 %
 
$
862

35.6
 %
 
Nine Months
 
2016
 
2015
 
$
% Sales
 
$
% Sales
Reported Selling, General and Administrative
$
3,044