10-K 1 syk10k123116.htm 10-K Document
 

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

FORM 10-K
(Mark one)
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-09165
strykerlogoa19.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)
 Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.10 par value
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES [X]    NO [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES [ ]    NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES [X]    NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES [X]    NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[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 Act).    YES [ ]    NO [X]
Based on the closing sales price of June 30, 2016, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $41,635,988,124. The number of shares outstanding of the registrant’s common stock, $.10 par value, was 372,878,298 on January 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be filed with the U.S. Securities and Exchange Commission relating to the 2017 Annual Meeting of Shareholders (the 2017 proxy statement) are incorporated by reference into Part III.
 


STRYKER CORPORATION 2016 Form 10-K



TABLE OF CONTENTS
 
PART I
 
Item 1.
Business
1

Item 1A.
Risk Factors
3

Item 1B.
Unresolved Staff Comments
6

Item 2.
Properties
6

Item 3.
Legal Proceedings
6

Item 4.
Mine Safety Disclosures
6

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

Item 6.
Selected Financial Data
8

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

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
15

Item 8.
Financial Statements and Supplementary Data
16

 
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
16

 
Consolidated Statements of Earnings
17

 
Consolidated Statements of Comprehensive Income
17

 
Consolidated Balance Sheets
18

 
Consolidated Statements of Shareholders’ Equity
19

 
Consolidated Statements of Cash Flows
20

 
Notes to Consolidated Financial Statements
21

Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
32

Item 9A.
Controls and Procedures
32

Item 9B.
Other Information
33

 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
33

Item 11.
Executive Compensation
33

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
33

Item 13.
Certain Relationships and Related Transactions, and Director Independence
33

Item 14.
Principal Accounting Fees and Services
33

 
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
34

Item 16.
Form 10-K Summary
34

 










STRYKER CORPORATION 2016 Form 10-K

PART I

ITEM 1.
BUSINESS.
Making healthcare better is at the heart of what Stryker does. We do this by collaborating with our customers to develop innovative products and services that ultimately improve patients' lives. Our core values guide our behaviors and actions and are fundamental to how Stryker executes its mission.
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We are a global leader in medical technology with 2016 net sales of $11,325 and net earnings of $1,647. Our products include implants used in joint replacement and trauma surgeries; surgical equipment and surgical navigation systems; endoscopic and communications systems; patient handling, emergency medical equipment and intensive care disposable products; neurosurgical, neurovascular and spinal devices; as well as other products used in a variety of medical specialties.
Stryker was incorporated in Michigan in 1946 as the successor company to a business founded in 1941 by Dr. Homer H. Stryker, a prominent orthopaedic surgeon and the inventor of several orthopaedic products. In the United States most of our products are marketed directly to doctors, hospitals and other healthcare facilities. Our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors.
As used herein, and except where the context otherwise requires, "Stryker," "we," "us," and "our" refer to Stryker Corporation and its consolidated subsidiaries.
Business Segments and Geographic Information
We segregate our operations into three reportable business segments: Orthopaedics, MedSurg and Neurotechnology and Spine. Financial information regarding our reportable business segments and certain geographic information is included under "Results of Operations" in Item 7 of this report and Notes 10 and 13 to our Consolidated Financial Statements.
Net Sales by Reportable Segment
 
2016
 
2015
 
2014
Orthopaedics
$
4,422

39
%
 
$
4,223

43
%
 
$
4,153

43
%
MedSurg
4,894

43

 
3,895

39

 
3,781

39

Neurotechnology and Spine
2,009

18

 
1,828

18

 
1,741

18

Total
$
11,325

100
%
 
$
9,946

100
%
 
$
9,675

100
%
Orthopaedics
Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremity surgeries. We bring patients and physicians advanced implant designs and specialized instrumentation that make orthopaedic surgery and
 
recovery simpler, faster and more effective. We support surgeons with the technology and services they need as they develop new surgical techniques. In 2015 we received clearance by the Food and Drug Administration (FDA) for our Mako total knee application. This expands our Mako product offerings of partial knee and total hip applications to provide a comprehensive solution in the robotic arm-assisted reconstructive surgery line. We anticipate the full commercial launch of our Mako total knee application in 2017.
Stryker is one of four leading global competitors for joint replacement and trauma products; the other three being Zimmer Biomet Holdings, Inc. (Zimmer), DePuy Synthes (a Johnson & Johnson company) and Smith & Nephew plc (Smith & Nephew).
Composition of Orthopaedics Net Sales
 
2016
 
2015
 
2014
Knees
$
1,490

34
%
 
$
1,403

33
%
 
$
1,396

34
%
Hips
1,283

29

 
1,263

30

 
1,291

31

Trauma and Extremities
1,364

31

 
1,291

31

 
1,230

30

Other
285

6

 
266

6

 
236

5

Total
$
4,422

100
%
 
$
4,223

100
%
 
$
4,153

100
%
In 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. In November 2014 we entered into a settlement agreement to compensate eligible United States patients who had surgery to replace their Rejuvenate and ABG II Modular-Neck hip stems prior to November 3, 2014, and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. To date we have recorded charges to earnings totaling $1,968 ($2,200 before $232 of insurance recoveries) representing the actuarially determined low end of the range of probable loss to resolve this entire matter globally. Refer to Note 6 to our Consolidated Financial Statements.
MedSurg
MedSurg products include surgical equipment and surgical navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling, emergency medical equipment and intensive care disposable products (Medical), reprocessed and remanufactured medical devices (Sustainability) and other medical device products used in a variety of medical specialties.
Stryker is one of five leading global competitors in Instruments; the other four being Zimmer, Medtronic plc., Johnson & Johnson and ConMed Linvatec, Inc. (a subsidiary of CONMED Corporation). In Endoscopy we compete with Smith & Nephew, ConMed Linvatec, Arthrex, Inc., Karl Storz GmbH & Co., Olympus Optical Co. Ltd. and STERIS plc. and our primary competitors in Medical are Hill-Rom Holdings, Inc., Zoll Medical Corporation and Koninklijke Philips N.V. 
Composition of Medsurg Net Sales
 
2016
 
2015
 
2014
Instruments
$
1,553

32
%
 
$
1,466

38
%
 
$
1,424

38
%
Endoscopy
1,470

30

 
1,390

36

 
1,382

37

Medical
1,633

33

 
823

21

 
766

20

Sustainability
238

5

 
216

5

 
209

5

Total
$
4,894

100
%
 
$
3,895

100
%
 
$
3,781

100
%
In 2016 we completed the acquisition of Sage Products, LLC (Sage) for total consideration of approximately $2,875. Sage develops, manufactures and distributes intensive care disposable products.
In 2016 we completed the acquisition of Physio-Control International, Inc. (Physio) for total net consideration of approximately $1,299. Physio develops, manufactures and markets monitors/defibrillators, AEDs and CPR-assist devices, along with data management and support services.


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

STRYKER CORPORATION 2016 Form 10-K

In 2016 we completed the acquisition of the 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.
In 2016 Instruments launched Neptune 3, the next generation of its surgical waste management system, which includes an interactive touch screen and an expanded suction range. Medical launched the Performance-LOAD manual cot fastener, which helps ensure caregiver and patient safety. Endoscopy launched a 4K surgical display component to the 1588 AIM Platform, which enables surgeons to optimize surgical visualization. 
In 2015 we completed the acquisition of CHG Hospital Beds, Inc. (CHG). CHG designs, manufactures and markets low-height hospital beds and related accessories.
Neurotechnology and Spine
Neurotechnology and Spine products include both neurosurgical and neurovascular devices. Our neurotechnology offering includes products used for minimally invasive endovascular techniques; a comprehensive line of products for traditional brain and open skull based surgical procedures; orthobiologic and biosurgery products, including synthetic bone grafts and vertebral augmentation products; and minimally invasive products for the treatment of acute ischemic and hemorrhagic stroke. Our spinal implant offering includes cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies.
Stryker is one of five leading global competitors in Neurotechnology; the other four being Medtronic, Johnson & Johnson, Terumo Corporation and Penumbra, Inc. Stryker is one of five leading competitors globally in Spine; the other four being Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic), DePuy Synthes, Nuvasive, Inc. and Globus Medical, Inc.
Composition of Neurotechnology and Spine Net Sales
 
2016
 
2015
 
2014
Neurotechnology
$
1,255

62
%
 
$
1,088

60
%
 
$
1,001

57
%
Spine
754

38

 
740

40

 
740

43

Total
$
2,009

100
%
 
$
1,828

100
%
 
$
1,741

100
%
In 2015 the New England Journal of Medicine released results of a study finding that intra-arterial treatment to remove stroke-causing blood clots provides better outcomes than using a clot dissolving drug. One of the devices used in this study was our Trevo™ Retriever. Medical professionals in the field believe that the study's results will change the practice of acute stroke treatments. Stryker's Trevo™ Retriever is a leading device in the market that allows physicians to visualize blood clot interaction during treatment. In 2016 the FDA expanded the indication for the Trevo™ Retriever as a front-line treatment to reduce paralysis, speech difficulties and other stroke disabilities in patients experiencing acute ischemic stroke. Trevo™ is the first thrombectomy device to receive this expanded indication.
Geographic Areas
In 2016 approximately 73% of our net sales were generated from customers in the United States. Additional geographic information is included under "Results of Operations" in Item 7 of this report and Note 13 to our Consolidated Financial Statements.
Raw Materials and Inventory
Raw materials essential to our business are generally readily available from multiple sources; however, certain of our raw materials are currently sourced from single suppliers. Substantially all products we manufacture are stocked in inventory, while certain MedSurg products are assembled to order. The dollar amount of
 
backlog orders at any given time is not meaningful to an understanding of our business taken as a whole.
Patents and Trademarks
Patents and trademarks are significant to our business to the extent that a product or an attribute of a product represents a unique design or process. Patent protection of such products restricts competitors from duplicating these unique designs and features. We seek to obtain patent protection on our products whenever appropriate for protecting our competitive advantage. On December 31, 2016 we owned approximately 2,184 United States patents and approximately 3,454 international patents.
Seasonality
Our business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is typically lower in the summer months, and sales of capital equipment are generally higher in the fourth quarter.
Competition
In each of our product lines we compete with local and global companies. Competition exists in all product lines without regard to the number and size of the competing companies involved. The development of new and innovative products is important to our success in all areas of our business. Competition in research involving the development and improvement of new and existing products and processes is particularly significant. The competitive environment requires substantial investments in continuing research and maintaining sales forces.
We believe our commitment to innovation, quality and service and our reputation differentiate us in the highly competitive product categories in which we operate and enable us to compete effectively. We believe that our competitive position in the future will depend to a large degree on our ability to develop new products and make improvements to existing products.
Product Development
Most of our products and product improvements were developed internally at research facilities in the United States, France, Germany, India, Ireland, Puerto Rico, Sweden and Switzerland. We also invest through acquisitions in technologies developed by third parties that have the potential to expand the markets in which we operate. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist us in product development efforts. The total costs of research, development and engineering activities were $715, $625 and $614 in 2016, 2015 and 2014.
Regulation
Our businesses are subject to varying degrees of governmental regulation in the countries in which we operate, and the general trend is toward increasingly stringent regulation.
In the United States the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act and its subsequent amendments and the regulations issued and proposed thereunder provide for regulation by the FDA of the design, manufacture and marketing of medical devices, including most of our products. Many of our new products fall into FDA classifications that require notification submitted as a 510(k) and review by the FDA before we begin marketing them. Certain of our products require extensive clinical testing, consisting of safety and efficacy studies, followed by pre-market approval (PMA) applications for specific surgical indications.
The FDA's Quality System regulations set forth standards for our product design and manufacturing processes, require the maintenance of certain records and provide for inspections of our


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

STRYKER CORPORATION 2016 Form 10-K

facilities by the FDA. There are also certain requirements of state, local and foreign governments that must be complied with in the manufacture and marketing of our products.
The member states of the European Union (EU) adopted the European Medical Device Directives, which form a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to meet certain quality system requirements and obtain CE marking for their products. We have authorization to apply the CE marking to substantially all of our products. In addition, we comply with the unique regulatory requirements of each of the countries in Europe and other countries in which we market our products.
Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare expenses generally and hospital costs in particular, including price regulation and competitive pricing, are ongoing in markets where we do business. It is not possible to predict at this time the long-term impact of such cost containment measures on our future business. In addition, business practices in the healthcare industry are scrutinized, particularly in the United States, by federal and state government agencies, and the resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
Employees
On December 31, 2016 we had approximately 33,000 employees globally. The number of employees increased from 2015 largely due to our Sage and Physio acquisitions. Certain international employees are covered by collective bargaining agreements. We believe that we maintain positive relationships with our employees globally.
Executive Officers on January 31, 2017
Name
Age
Title
First Became an Executive Officer
Kevin A. Lobo
51
Chairman and Chief Executive Officer
2011
Yin C. Becker
53
Vice President of Communication and Public Affairs
2016
William E. Berry Jr.
51
Vice President, Corporate Controller and Principal Accounting Officer
2014
Glenn S. Boehnlein
55
Vice President, Chief Financial Officer
2016
Lonny J. Carpenter
55
Group President, Global Quality and Business Operations
2008
M. Kathryn Fink
47
Vice President, Chief Human Resources Officer
2016
David K. Floyd
56
Group President, Orthopaedics
2012
Michael D. Hutchinson
46
General Counsel
2014
Graham A. McLean
52
President, Asia-Pacific
2017
Katherine A. Owen
46
Vice President, Strategy and Investor Relations
2007
Bijoy S.N. Sagar
48
Vice President, Chief Information Officer
2014
Timothy J. Scannell
52
Group President, MedSurg and Neurotechnology
2008
Each of our executive officers was elected by our Board of Directors to serve in the office indicated until the first meeting of the Board of Directors following the annual meeting of shareholders in 2017 or until a successor is chosen and qualified or until his or her resignation or removal. Each of our executive officers held the position above or served Stryker in various executive or administrative capacities for at least five years, except for Ms. Fink and Mr. Sagar. Prior to joining Stryker in October 2013, Ms. Fink held a variety of senior level human resources roles for the previous six years at Johnson & Johnson, most recently as the Worldwide Vice President, Human Resources of Ethicon. While at Stryker, Ms. Fink held two different senior level Human Resource roles. Prior to
 
joining Stryker in May 2014, Mr. Sagar served as the Chief Information officer for Merck Millipore, and before that as Global Head of Information Systems and a member of the divisional board for the chemicals division of Merck KGaA. Mr. McLean was appointed to the position of President, Asia-Pacific, effective January 1, 2017. Prior to this role, Mr. McLean held a variety of senior level leadership roles at Stryker since 2005.
William R. Jellison retired from his role as Vice President, Chief Financial Officer effective April 1, 2016. Glenn S. Boehnlein, who served as Group Vice President, Chief Financial Officer for MedSurg & Neurotechnology since 2011, was promoted to Vice President, Chief Financial Officer effective April 1, 2016. Before his role as Group Vice President, Chief Financial Officer for MedSurg & Neurotechnology, Mr. Boehnlein held a variety of senior finance roles in the MedSurg & Neurotechnology group.
Available Information
Our main corporate website address is www.stryker.com. Copies of our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K filed or furnished to the United States Securities and Exchange Commission (SEC) will be provided without charge to any shareholder submitting a written request to our Corporate Secretary at our principal executive offices. All of our SEC filings are also available free of charge on our website within the "For Investors - SEC Filings & Ownership Reports" link as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC's website at www.sec.gov.
ITEM 1A.
RISK FACTORS.
This report contains statements referring to us that are not historical facts and are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the "safe harbor" provisions of the Reform Act, are based on current projections about operations, industry conditions, financial condition and liquidity. Words that identify forward-looking statements include words such as "may," "could," "will," "should," "possible," "plan," "predict," "forecast," "potential," "anticipate," "estimate," "expect," "project," "intend," "believe," "may impact," "on track," "goal," "strategy" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, an acquisition or our businesses. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Those statements are not guarantees and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these forward-looking statements. Some important factors that could cause our actual results to differ from our expectations in any forward-looking statements include the risks discussed below.
Our operations and financial results are subject to various risks and uncertainties discussed below that could materially and adversely affect our business, cash flows, financial condition and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem not to be material may also materially and adversely affect our business, cash flows, financial condition or results of operations.
LEGAL AND REGULATORY RISKS
Current economic and political conditions make tax rules in any jurisdiction subject to significant change: Proposals for broad reform of the existing United States corporate tax system are under evaluation by various legislative and administrative bodies.


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

STRYKER CORPORATION 2016 Form 10-K

We cannot predict the overall impact that such proposals may have on our business. In addition, further changes in the tax laws of foreign jurisdictions could arise, including as a result of the base erosion and profit shifting (BEPS) project undertaken by the Organisation for Economic Cooperation and Development (OECD). The OECD, which represents a coalition of member countries, has issued recommendations that, in some cases, would make substantial changes to numerous long-standing tax positions and principles. These contemplated changes, to the extent adopted by OECD members and/or other countries, could increase tax uncertainty and may adversely affect our provision for income taxes.
The impact of United States healthcare reform legislation on our business remains uncertain: In 2010 the Patient Protection and Affordable Care Act (ACA) was enacted. While the provisions of the ACA are intended to expand access to health insurance coverage and improve the quality of healthcare over time, other provisions of the legislation, including Medicare provisions aimed at decreasing costs, comparative effectiveness research, an independent payment advisory board and pilot programs to evaluate alternative payment methodologies, are having a meaningful effect on the way healthcare is developed and delivered and could have a significant effect on our business. Among other things, the ACA imposed a 2.3 percent excise tax on medical devices that applies only to United States sales, which are a majority of our medical device sales; however, Congress suspended the excise tax for 2016 and 2017. We are unable to predict whether the suspension will be continued beyond 2017. We also face uncertainties that might result from modification or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may have on our business.
We are subject to extensive governmental regulation relating to the manufacturing, labeling and marketing of our products: Our products are subject to extensive and evolving regulations and rigorous regulatory enforcement by the FDA and other governmental authorities in the United States and internationally. The process of obtaining regulatory approvals to market a medical device can be costly and time consuming and approvals might not be granted timely. We have ongoing responsibilities under the laws and regulations applicable to our products and facilities and are subject to periodic inspections by the FDA and other governmental authorities to determine compliance with the quality system and medical device reporting regulations and other requirements. Remediation costs can be significant. If we fail to fully comply with applicable regulatory requirements, we may be subject to a range of sanctions, including substantial fines, warning letters that require corrective action, product seizures, recalls, the suspension of product manufacturing, revocation of approvals, exclusion from future participation in government healthcare programs, substantial fines and criminal prosecution.
We are subject to federal, state and foreign healthcare regulations including anti-bribery and anti-corruption laws, and could face substantial penalties if we fail to fully comply with such regulations and laws: The relationships that we and our distributors and others that market our products have with healthcare professionals, such as physicians and hospitals, are subject to scrutiny under various state and federal laws often referred to collectively as healthcare fraud and abuse laws. In addition, the United States and foreign government regulators have increased the enforcement of the Foreign Corrupt Practices Act and other anti-bribery laws. We also must comply with a variety of other
 
laws that protect the privacy of individually identifiable healthcare information and impose extensive tracking and reporting related to all transfers of value provided to certain healthcare professionals. These laws and regulations are broad in scope and are subject to evolving interpretation and we could be required to incur substantial costs to monitor compliance or to alter our practices if we are found not to be in compliance. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment of current or former employees and exclusion from participation in governmental healthcare programs.
We may be adversely affected by product liability claims, unfavorable court decisions or legal settlements: We are exposed to potential product liability risks inherent in the design, manufacture and marketing of medical devices, many of which are implanted in the human body for long periods of time or indefinitely. We are currently defendants in a number of product liability matters, including those relating to our Rejuvenate and ABGII Modular-Neck hip stems discussed in Note 6 to our Consolidated Financial Statements. These matters are subject to many uncertainties and outcomes are not predictable. In addition, we may incur significant legal expenses regardless of whether we are found to be liable. We are self-insured for product liability-related claims and expenses.
Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling certain of our products: The medical device industry is characterized by extensive intellectual property litigation and, from time to time, we are the subject of claims of infringement or misappropriation.  Regardless of outcome, such claims are expensive to defend and divert management and operating personnel from other business issues.  A successful claim or claims of patent or other intellectual property infringement against us could result in payment of significant monetary damages and/or royalty payments or negatively impact our ability to sell current or future products in the affected category.
Dependence on patent and other proprietary rights and failing to protect such rights or to be successful in litigation related to such rights may impact offerings in our product portfolios: Our long-term success largely depends on our ability to market technologically competitive products. If we fail to obtain or maintain adequate intellectual property protection, it could allow others to sell products that directly compete with proprietary features in our product portfolio. Also, our issued patents may be subject to claims challenging their validity and scope and raising other issues. In addition, currently pending or future patent applications may not result in issued patents.
MARKET RISKS
Macroeconomic developments could negatively affect our ability to conduct business in affected regions: Financial difficulties experienced by our customers, distributors and suppliers could result in product delays and inventory issues; risks to accounts receivable could also include delays in collection and greater bad debt expense.
We have exposure to exchange rate fluctuations on cross border transactions and translation of local currency results into United States Dollars: We report our financial results in United States Dollars and 27% of our net sales are denominated in foreign currencies, including the Euro, the British Pound and the Japanese Yen. Cross border transactions with external parties and intercompany relationships result in increased exposure to foreign currency exchange effects. While we use derivative instruments to manage the impact of currency exchange; our hedging strategies may not be successful, and our unhedged exposures continue to be subject to currency fluctuations. In addition, the weakening or


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

STRYKER CORPORATION 2016 Form 10-K

strengthening of the United States Dollar results in favorable or unfavorable translation effects when the results of our foreign locations are translated into United States Dollars.
Additional capital that we may require in the future may not be available to us or may only be available to us on unfavorable terms: Our future capital requirements will depend on many factors, including operating requirements, current and future acquisitions and the need to refinance existing debt. Our ability to issue additional debt or enter into other financing arrangements on acceptable terms could be adversely affected by our debt levels, unfavorable changes in economic conditions generally or uncertainties that affect the capital markets.  Changes in credit ratings issued by nationally recognized credit rating agencies could also adversely affect our access to and cost of financing.  Higher borrowing costs or the inability to access capital markets could adversely affect our ability to support future growth and operating requirements.
BUSINESS AND OPERATIONAL RISKS
We are subject to cost containment measures in the United States and other countries resulting in pricing pressures: Initiatives sponsored by government agencies, legislative bodies and the private sector to control healthcare costs, including price regulation and competitive pricing, are ongoing in markets where we do business. Pricing pressure has also increased due to continued consolidation among healthcare providers, trends toward managed care, the shift toward governments becoming the primary payers of healthcare expenses, reduction in reimbursement levels and medical procedure volumes and government laws and regulations relating to sales and promotion, reimbursement and pricing generally.
We operate in a highly competitive industry in which competition in the development and improvement of new and existing products is significant: The markets in which we compete are highly competitive.  New products and surgical procedures are introduced on an ongoing basis and our present or future products could be rendered obsolete or uneconomical by technological advances by our competitors, who may respond more quickly to new or emerging technologies, undertake more extensive marketing campaigns, have greater financial, marketing and other resources or be more successful in attracting potential customers, employees and strategic partners.
We may be unable to maintain adequate working relationships with healthcare professionals: We seek to maintain close working relationships with respected physicians and medical personnel in hospitals and universities who assist in product research and development. We rely on these professionals to assist us in the development and improvement of proprietary products. If we are unable to maintain these relationships, our ability to develop, market and sell new and improved products could be adversely affected.
We are subject to additional risks associated with our extensive international operations: We develop, manufacture and distribute our products globally. Our international operations are subject to additional risks and potential costs, including changes in reimbursement, changes in regulatory requirements, differing local product preferences and product requirements, diminished protection of intellectual property in some countries, trade protection measures and import or export licensing requirements, difficulty in staffing and managing foreign operations, and political and economic instability. Our business could be adversely impacted if we are unable to successfully manage these and other risks of international operations in an increasingly volatile environment.
 
We may be unable to capitalize on previous or future acquisitions: In addition to internally developed products, we invest in new products and technologies through acquisitions. Such investments are inherently risky, and we cannot guarantee that any acquisition will be successful or will not have a material unfavorable impact on us. The risks include the activities required and resources allocated to integrate new businesses, diversion of management time that could adversely affect management's ability to focus on other projects, the inability to realize the expected benefits, savings or synergies from the acquisition, the loss of key personnel and exposure to unexpected liabilities of acquired companies. In addition, we cannot be certain that the businesses we acquire will become or remain profitable.
We may incur goodwill impairment charges related to one or more of our business units: We perform our annual impairment test for goodwill in the fourth quarter of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In evaluating the potential for impairment we make assumptions regarding revenue projections, growth rates, cash flows, tax rates and discount rates. These assumptions are uncertain and by nature may vary from actual results. A significant reduction in the estimated fair values could result in impairment charges.
We could be negatively impacted by future changes in the allocation of income to each of the income tax jurisdictions in which we operate: We operate in multiple income tax jurisdictions both in the United States and internationally. Accordingly, our management must determine the appropriate allocation of income to each jurisdiction based on current interpretations of complex income tax regulations. Income tax authorities regularly perform audits of our income tax filings. Income tax audits associated with the allocation of income and other complex issues, including inventory transfer pricing and cost sharing, product royalty and foreign branch arrangements, may require an extended period of time to resolve and may result in significant income tax adjustments.
We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated sites or service providers: We rely extensively on information technology (IT) systems to conduct business. In addition, we rely on networks and services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality, availability and integrity of our data. While we have made investments seeking to address these threats, including monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party providers, the techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. If our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly, or we or one of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling or security breaches and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive and business harm as well as litigation and regulatory action.


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

STRYKER CORPORATION 2016 Form 10-K

An inability to successfully manage the implementation of our new global enterprise resource planning ("ERP") system could adversely affect our operations and operating results: We are in the process of implementing a new global ERP system. This system will replace many of our existing operating and financial systems. Such an implementation is a major undertaking, both financially and from a management and personnel perspective. Any disruptions, delays or deficiencies in the design and implementation of our new ERP system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business.
We may be unable to attract and retain key employees: Our sales, technical and other key personnel play an integral role in the development, marketing and selling of new and existing products. If we are unable to recruit, hire, develop and retain a talented, competitive work force, we may not be able to meet our strategic business objectives.
Interruption of manufacturing operations could adversely affect our business: We and our suppliers have manufacturing sites all over the world; however, the manufacturing of certain of our product lines is concentrated in one or more plants. Damage to these facilities or issues in our manufacturing arising from a failure to follow specific internal protocols and procedures, compliance concerns relating to the quality systems regulation, equipment breakdown or malfunction or other factors could adversely affect the availability of our products. In the event of an interruption in manufacturing, we may be unable to move quickly to alternate means of producing affected products to meet customer demand. In the event of a significant interruption, we may experience lengthy delays in resuming production of affected products due to the need for regulatory approvals. We may experience loss of market share, additional expense and harm to our reputation.
We use a variety of raw materials, components or devices in our global supply chains, production and distribution processes; significant shortages or price increases could increase our operating costs, require significant capital expenditures, or adversely impact the competitive position of our products: Our reliance on certain suppliers to secure raw materials, components and finished devices exposes us to product shortages and unanticipated increases in prices. In addition, several raw materials, components, and finished devices are procured from a sole-source due to the quality considerations, unique intellectual property considerations or constraints associated with regulatory requirements. If sole-source suppliers are acquired or were unable or unwilling to deliver these materials, we may not be able to manufacture or have available one or more products during such period of unavailability and our business could suffer. In certain cases we may not be able to establish additional or replacement suppliers for such materials in a timely or cost effective manner, largely as a result of FDA and other regulations that require, among other things, validation of materials and components prior to their use in our products.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
 
ITEM 2.
PROPERTIES.
Principal Manufacturing and Distribution Locations
Location
Segment
Approximate Square Feet
Owned/
Leased
Portage/Kalamazoo, Michigan
M
1,033,000

Owned
Changzhou, China
O & NS
889,000

Owned
Chicago, Illinois
M & NS
610,000

Owned
Plainfield, Indiana
O, M & NS
600,000

Leased
Mahwah, New Jersey
O
531,000

Owned
Redmond, Washington
M
291,000

Owned
Tuttlingen, Germany
M
279,000

Leased
Kayseri, Turkey
M
259,000

Owned
Carrigtwohill, Ireland
O & M
248,000

Owned
Arroyo, Puerto Rico
M
220,000

Leased
Venlo, Netherlands
O, M & NS
200,000

Owned
San Jose, California
M
185,000

Leased
Kiel, Germany
O
174,000

Owned
Fremont, California
M & NS
168,000

Leased
Suzhou, China
O & NS
160,000

Owned
West Valley/ Salt Lake City, Utah
M & O
141,000

Leased
Limerick Ireland
O
140,000

Owned
Selzach, Switzerland
O
138,000

Owned
Lakeland, Florida
M
119,000

Leased
Flower Mound, Texas
M
108,000

Leased
Malvern, Pennsylvania
O
107,000

Leased
Freiburg, Germany
O
106,000

Owned
Phoenix, Arizona
M
100,000

Leased
Newbury, United Kingdom
M
99,000

Owned
Carrigtwohill, Ireland
NS
97,000

Leased
Neuchatel, Switzerland
NS
88,000

Owned
Tijuana, Mexico
M
83,000

Leased
Cestas, France
NS
79,000

Owned
Ontario, Canada
M
75,000

Leased
Fort Lauderdale, Florida
O
68,000

Leased
Freiburg, Germany
O
62,000

Leased
Mountain View, California
M & NS
62,000

Leased
O = Orthopaedics M = MedSurg NS = Neurotechnology and Spine
Our corporate headquarters is located in Kalamazoo, Michigan, and we maintain administrative and sales offices and warehousing and distribution facilities in other locations domestically and globally. We believe that our properties are suitable and adequate for the manufacture and distribution of our products.
ITEM 3.
LEGAL PROCEEDINGS.
We are involved in various proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property, and the matters that are more fully described in Note 6 to our Consolidated Financial Statements.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.


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

STRYKER CORPORATION 2016 Form 10-K

PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the New York Stock Exchange under the symbol SYK.
Quarterly Stock Price and Dividend Information
2016 Quarter
Mar 31
Jun 30
Sep 30
Dec 31
Dividends declared per share of common stock
$
0.380

$
0.380

$
0.380

$
0.425

Market price of common stock:
 
 
 
 
High
$
107.95

$
119.83

$
123.55

$
121.84

Low
$
86.68

$
106.26

$
109.75

$
106.48

2015 Quarter
 
 
 
 
Dividends declared per share of common stock
$
0.345

$
0.345

$
0.345

$
0.380

Market price of common stock:
 
 
 
 
High
$
96.18

$
97.94

$
105.34

$
100.51

Low
$
89.81

$
90.19

$
91.73

$
90.30

Our Board of Directors considers payment of cash dividends at its quarterly meetings. On January 31, 2017 there were 2,988 shareholders of record of our common stock.
In 2016 shares repurchased at the end of 2015 totaling 135 thousand were settled at a cost of $13. 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 December 31, 2016 the total dollar value of shares that could be purchased under our authorized repurchase programs was $1,870.
We issued 100 shares of our common stock in the fourth quarter of 2016 as a performance incentive award to an employee. These shares were not registered under the Securities Act of 1933 based on the conclusion that the awards would not be events of sale within the meaning of Section 2(a)(3) of the Act.


 
The following graph compares our total returns (including reinvestments of dividends) against the Standard & Poor’s (S&P) 500 Index and the S&P 500 Health Care Index. The graph assumes $100 (not in millions) invested on December 31, 2011 in our common stock and each of the indices.
syk10k1231_chart-49655a03.jpg
Company / Index
2011
2012
2013
2014
2015
2016
Stryker Corporation
$
100.00

$
112.09

$
156.14

$
198.93

$
198.97

$
259.99

S&P 500 Index
$
100.00

$
116.00

$
153.57

$
174.60

$
177.01

$
198.18

S&P 500 Health Care Index
$
100.00

$
117.89

$
166.76

$
209.02

$
223.42

$
217.41






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

STRYKER CORPORATION 2016 Form 10-K

ITEM 6.
SELECTED FINANCIAL DATA.
Statement of Earnings Data
 
2016
 
2015
 
2014
 
2013
 
2012
Net sales
 
$
11,325

 
$
9,946

 
$
9,675

 
$
9,021

 
$
8,657

Cost of sales
 
3,830

 
3,344

 
3,319

 
3,002

 
2,806

Gross profit
 
$
7,495

 
$
6,602

 
$
6,356

 
$
6,019

 
$
5,851

Research, development and engineering expenses
 
715

 
625

 
614

 
536

 
471

Selling, general and administrative expenses
 
4,137

 
3,610

 
3,547

 
3,467

 
3,342

Recall charges, net of insurance proceeds
 
158

 
296

 
761

 
622

 
174

Amortization of intangible assets
 
319

 
210

 
188

 
138

 
123

Total operating expenses
 
$
5,329

 
$
4,741

 
$
5,110

 
$
4,763

 
$
4,110

Operating income
 
$
2,166

 
$
1,861

 
$
1,246

 
$
1,256

 
$
1,741

Other income (expense), net
 
(245
)
 
(126
)
 
(86
)
 
(44
)
 
(36
)
Earnings before income taxes
 
$
1,921

 
$
1,735

 
$
1,160

 
$
1,212

 
$
1,705

Income taxes
 
274

 
296

 
645

 
206

 
407

Net earnings
 
$
1,647

 
$
1,439

 
$
515

 
$
1,006

 
$
1,298

 
 
 
 
 
 
 
 
 
 
 
Diluted net earnings per share of common stock
 
$
4.35

 
$
3.78

 
$
1.34

 
$
2.63

 
$
3.39

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and current marketable securities
 
$
3,384

 
$
4,079

 
$
5,000

 
$
3,980

 
$
4,285

Accounts receivable, less allowance
 
1,967

 
1,662

 
1,572

 
1,518

 
1,430

Inventories
 
2,030

 
1,639

 
1,588

 
1,422

 
1,265

Property, plant and equipment, net
 
1,569

 
1,199

 
1,098

 
1,081

 
948

Total assets
 
20,435

 
16,223

 
17,258

 
15,383

 
13,025

Accounts payable
 
437

 
410

 
329

 
314

 
288

Total debt
 
6,914

 
3,998

 
3,952

 
2,748

 
1,752

Shareholders’ equity
 
$
9,550

 
$
8,511

 
$
8,595

 
$
9,047

 
$
8,597

 
 
 
 
 
 
 
 
 
 
 
Cash Flow Data
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
1,812

 
$
899

 
$
1,782

 
$
1,886

 
$
1,657

Capital expenditures
 
490

 
270

 
233

 
195

 
210

Depreciation
 
227

 
187

 
190

 
169

 
154

Acquisitions, net of cash acquired
 
4,332

 
153

 
916

 
2,320

 
154

Amortization of intangible assets
 
319

 
210

 
188

 
138

 
123

Dividends paid
 
568

 
521

 
462

 
401

 
324

Repurchase of common stock
 
$
13

 
$
700

 
$
100

 
$
317

 
$
108

 
 
 
 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
 
 
 
Number of shareholders of record
 
3,010

 
3,118

 
3,305

 
3,612

 
4,258

Approximate number of employees
 
33,000

 
27,000

 
26,000

 
25,000

 
22,000

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 effective January 1, 2016.



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

STRYKER CORPORATION 2016 Form 10-K


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ABOUT STRYKER
Stryker Corporation is a global leader in medical technology and 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.
Our goal is to achieve sales growth at the high-end of the medical technology (MedTech) industry and maintain our capital allocation strategy that prioritizes: (1) Acquisitions, (2) Dividends and (3) Share repurchases.
Overview of 2016
In 2016 we achieved reported sales growth of 13.9%. Excluding the impact of acquisitions, sales grew 6.4% in constant currency, in line with our ongoing goal to grow organic sales at the high-end of MedTech. We reported net earnings of $1,647 in 2016 and achieved 15.1% growth in net earnings per diluted share(1). Excluding the impact of certain items, we achieved adjusted net earnings of $2,194 and growth of 13.3% in adjusted net earnings per diluted share(1).
We continued our capital allocation strategy by investing $4,332 in acquisitions, paying $568 in dividends to our shareholders and using $13 for share repurchases.
 
In 2016 we completed the acquisitions of Sage Products, LLC (Sage) for total consideration of approximately $2,875, Physio-Control International, Inc. (Physio) for total net consideration of approximately $1,299 and the Synergetics neuro portfolio (Synergetics). Sage develops, manufactures and distributes intensive care disposable products. Physio develops, manufactures and markets monitors/defibrillators, AEDs and CPR-assist devices along with data management and support services. The acquired Synergetics products include 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 January 2017 we sold $500 of senior unsecured notes, and in 2016 we sold $3,500 of senior unsecured notes and repaid all $750 of our senior unsecured notes that were due in September 2016. Refer to Note 9 to our Consolidated Financial Statements for further information.

 

RESULTS OF OPERATIONS
 
 
 
 
 
Percent Net Sales
 
Percentage Change
2016
2015
2014
 
2016
2015
2014
 
2016/2015
2015/2014
Net sales
$
11,325

$
9,946

$
9,675

 
100.0
 %
100.0
 %
100.0
 %
 
13.9
 %
2.8
 %
Gross profit
7,495

6,602

6,356

 
66.2

66.4

65.7

 
13.5

3.9

Research, development and engineering expenses
715

625

614

 
6.3

6.3

6.3

 
14.4

1.8

Selling, general and administrative expenses
4,137

3,610

3,547

 
36.5

36.3

36.7

 
14.6

1.8

Recall charges, net of insurance proceeds
158

296

761

 
1.4

3.0

7.9

 
(46.6
)
(61.1
)
Amortization of intangible assets
319

210

188

 
2.8

2.1

1.9

 
51.9

11.7

Other income (expense), net
(245
)
(126
)
(86
)
 
(2.2
)
(1.3
)
(0.9
)
 
94.4

46.5

Income taxes
274

296

645

 
 
 
 
 
(7.4
)
(54.1
)
Net earnings
$
1,647

$
1,439

$
515

 
14.5
 %
14.5
 %
5.3
 %
 
14.5
 %
179.4
 %
 
 
 
 
 
 
 
 
 
 
 
Net earnings per diluted share
$
4.35

$
3.78

$
1.34

 
 
 
 
 
15.1
 %
182.1
 %
Adjusted net earnings per diluted share (1)
$
5.80

$
5.12

$
4.73

 
 
 
 
 
13.3
 %
8.2
 %
(1) Refer to "Non-GAAP Financial Measures" for a discussion of non-GAAP financial measures used in this report and a reconciliation to the most directly comparable GAAP financial measure.
Geographic and Segment Net Sales

 
 
Percentage Change
 
 
2016/2015
 
2015/2014
 
2016
2015
2014
 
As Reported
Constant
Currency
 
As Reported
Constant
Currency
Geographic:
 
 
 
 
 
 
 
 
 
United States
$
8,247

$
7,116

$
6,558

 
15.9
%
15.9
%
 
8.5
 %
8.5
%
International
3,078

2,830

3,117

 
8.8

10.2

 
(9.2
)
3.7

Total
$
11,325

$
9,946

$
9,675

 
13.9
%
14.3
%
 
2.8
 %
7.0
%
Segment:
 
 
 
 
 
 
 
 
 
Orthopaedics
$
4,422

$
4,223

$
4,153

 
4.7
%
5.1
%
 
1.7
 %
6.7
%
MedSurg
4,894

3,895

3,781

 
25.6

26.3

 
3.0

6.2

Neurotechnology and Spine
2,009

1,828

1,741

 
9.9

9.8

 
5.0

9.5

Total
$
11,325

$
9,946

$
9,675

 
13.9
%
14.3
%
 
2.8
 %
7.0
%

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

STRYKER CORPORATION 2016 Form 10-K

Supplemental Net Sales Growth Information
United States
International
 
 
 
 
United States
International
 
 
 
Percentage Change
 
 
 
Percentage Change
 
2016
2015
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
 
2015
2014
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Knees
$
1,490

$
1,403

6.2
%
6.7
%
6.8
%
4.6
 %
6.5
 %
 
$
1,403

$
1,396

0.5
 %
4.6
%
4.9
%
(9.6
)%
3.9
 %
Hips
1,283

1,263

1.5

2.3

2.0

0.8

2.9

 
1,263

1,291

(2.1
)
3.1

6.3

(13.6
)
(1.1
)
Trauma and Extremities
1,364

1,291

5.7

5.7

9.1

0.4

0.4

 
1,291

1,230

4.9

10.8

16.1

(8.7
)
4.4

Other
285

266

7.3

7.6

8.1

4.1

5.6

 
266

236

13.0

16.4

18.2

(5.0
)
10.2

Total Orthopaedics
$
4,422

$
4,223

4.7
%
5.1
%
6.2
%
1.8
 %
3.1
 %
 
$
4,223

$
4,153

1.7
 %
6.7
%
9.2
%
(10.5
)%
2.5
 %
MedSurg:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
1,553

$
1,466

5.9
%
6.3
%
7.2
%
1.5
 %
3.1
 %
 
$
1,466

$
1,424

2.9
 %
6.5
%
7.2
%
(9.1
)%
4.5
 %
Endoscopy
1,470

1,390

5.8

6.3

8.8

(3.1
)
(1.0
)
 
1,390

1,382

0.5

3.9

5.3

(11.5
)
0.4

Medical
1,633

823

98.4

99.9

94.9

114.0

122.1

 
823

766

7.5

10.4

9.2

0.5

15.1

Sustainability
238

216

9.9

9.9

9.8

33.3

37.6

 
216

209

3.4

3.5

3.5

(10.7
)
3.3

Total MedSurg
$
4,894

$
3,895

25.6
%
26.3
%
27.3
%
19.6
 %
22.5
 %
 
$
3,895

$
3,781

3.0
 %
6.2
%
6.7
%
(8.6
)%
4.4
 %
Neurotechnology and Spine:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
$
1,255

$
1,088

15.4
%
15.1
%
14.5
%
17.0
 %
16.2
 %
 
$
1,088

$
1,001

8.6
 %
14.2
%
15.6
%
(2.3
)%
11.9
 %
Spine
754

740

1.8

2.0

3.9

(4.1
)
(3.5
)
 
740

740

0.2

3.2

6.6

(14.7
)
(4.7
)
Total Neurotechnology and Spine
$
2,009

$
1,828

9.9
%
9.8
%
9.8
%
9.9
 %
9.6
 %
 
$
1,828

$
1,741

5.0
 %
9.5
%
11.5
%
(6.8
)%
5.9
 %
Total
$
11,325

$
9,946

13.9
%
14.3
%
15.9
%
8.8
 %
10.2
 %
 
$
9,946

$
9,675

2.8
 %
7.0
%
8.5
%
(9.2
)%
3.7
 %
Consolidated Net Sales
Consolidated net sales in 2016 increased 13.9% as reported and 14.3% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 7.9% impact of acquisitions, net sales increased in constant currency by 7.8% from increased unit volume partially offset by 1.4% lower prices. The unit volume increase was primarily due to higher shipments of knees, instruments, endoscopy, neurotechnology, trauma and extremities and medical products.
Consolidated net sales in 2015 increased 2.8% as reported and 7.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 4.2%. Excluding the 0.9% impact of acquisitions, net sales increased in constant currency by 7.6% from increased unit volume partially offset by 1.6% lower prices. The unit volume increase was led primarily by higher shipments of neurotechnology, trauma and extremities, medical and instruments products.
Orthopaedics Net Sales
Orthopaedics net sales in 2016 increased 4.7% as reported and 5.1% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 0.3% impact of acquisitions, net sales increased in constant currency by 6.9% from increased unit volume partially offset by 2.1% lower prices. The unit volume increase was led primarily by higher shipments of knees and trauma and extremities products.
Orthopaedics net sales in 2015 increased 1.7% as reported and 6.7% in constant currency, as foreign currency exchange rates negatively impacted net sales by 5.0%. Excluding the 0.5% impact of acquisitions, net sales increased in constant currency by 8.6% from increased unit volume partially offset by 2.4% lower prices. The unit volume increase was led primarily by higher shipments of trauma and extremities products.
MedSurg Net Sales
MedSurg net sales in 2016 increased 25.6% as reported and 26.3% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.7%. Excluding the 19.1% impact of acquisitions, net sales increased in constant currency by 7.8% from increased unit volume partially offset by 0.6% lower prices. The unit volume increase was led primarily by higher shipments of instruments, endoscopy and medical products.
 
MedSurg net sales in 2015 increased 3.0% as reported and 6.2% in constant currency, as foreign currency exchange rates negatively impacted net sales by 3.2%. Excluding the 1.7% impact of acquisitions, net sales increased in constant currency by 4.8% from increased unit volume partially offset by 0.3% lower prices. The unit volume increase was led primarily by higher shipments of our medical and instrument products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales in 2016 increased 9.9% as reported and 9.8% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.1%. Excluding the 1.4% impact of acquisitions, net sales in constant currency increased by 9.8% from increased unit volume partially offset by 1.4% lower prices. The unit volume increase was led primarily by higher shipments of neurotechnology products.
Neurotechnology and Spine net sales in 2015 increased 5.0% as reported and 9.5% in constant currency as foreign currency exchange negatively impacted net sales by 4.5%. Excluding the 0.1% impact of acquisitions, net sales increased in constant currency by 11.6% from increased unit volume and changes in product mix partially offset by 2.3% lower prices. The unit volume increase was led primarily by higher shipments of neurotechnology products.
Gross Profit
Gross profit in 2016 as a percentage of net sales decreased to 66.2% from 66.4% in 2015 as the benefit from the suspension of the medical device excise tax and favorable productivity was more than offset by unfavorable mix, including the impact of acquisitions and the unfavorable impact of foreign currency exchange. Gross profit as a percentage of net sales increased to 66.4% in 2015 from 65.7% in 2014, primarily due to product mix and the favorable impact of foreign currency exchange rates offset by decreases in the selling prices of our products.
 
 
 
 
 
Percent Net Sales
 
2016
2015
2014
 
2016
2015
2014
Reported
$
7,495

$
6,602

$
6,356

 
66.2
%
66.4
 %
65.7
%
Inventory stepped up to fair value
36

7

27

 
0.3

0.1

0.3

Restructuring-related charges
15

7

1

 
0.1



Adjusted
$
7,546

$
6,616

$
6,384

 
66.6
%
66.5
 %
66.0
%


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

STRYKER CORPORATION 2016 Form 10-K

Research, Development and Engineering Expenses
Research, development and engineering expenses represented 6.3% of net sales in each of 2016, 2015 and 2014. Recent acquisitions, and spending on projects and investments in new technologies contributed to the spending levels reflecting our continued investment in internal innovation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales in 2016 increased to 36.5% from 36.3% in 2015. Excluding the impact of certain items in the table below, expenses as a percentage of net sales decreased to 34.8% in 2016 from 35.3% in 2015. This improvement reflects favorable leverage from the continued focus on operating expense improvement initiatives, cost containment efforts and business mix, including leverage from our recent acquisitions. Selling, general and administrative expenses as a percentage of net sales in 2015 decreased to 36.3% from 36.7% in 2014. Excluding the impact of certain items noted below, selling, general and administrative expenses increased in 2015 due to increased expenses related to our European regional headquarters, higher compensation costs, due in part to sales performance-related commissions, partially offset by disciplined expense management.
 
 
 
 
 
Percent Net Sales
 
2016
2015
2014
 
2016
2015
2014
Reported
$
4,137

$
3,610

$
3,547

 
36.5
 %
36.3
 %
36.7
 %
Other acquisition and integration-related
(95
)
(28
)
(75
)
 
(0.8
)
(0.3
)
(0.8
)
Restructuring-related charges
(110
)
(125
)
(116
)
 
(1.0
)
(1.2
)
(1.2
)
Regulatory and legal matters
12

53


 
0.1

0.5


Adjusted
$
3,944

$
3,510

$
3,356

 
34.8
 %
35.3
 %
34.7
 %
Recall Charges, Net of Insurance Proceeds
Recall charges, net of insurance proceeds, were $158, $296 and $761 in 2016, 2015 and 2014. Charges were primarily due to the previously disclosed Rejuvenate and ABGII Modular-Neck hip stems voluntary recalls. Refer to Note 6 to our Consolidated Financial Statements for further information.
Amortization of Intangible Assets
Amortization of intangible assets was $319, $210 and $188 in 2016, 2015 and 2014. The increases were primarily due to acquisitions. Refer to Note 7 to our Consolidated Financial Statements for further information.
Other Income (Expense), Net
Other income (expense), net was ($245), ($126) and ($86) in 2016, 2015 and 2014. The increase in 2016 was primarily driven by higher interest expense due to higher debt levels as a result of our March 2016 debt offering. Refer to Note 9 to our Consolidated Financial Statements for further information.
Income Taxes
The effective income tax rate on earnings was 14.3%, 17.1% and 55.6% for 2016, 2015 and 2014. The effective income tax rate for 2014 includes the tax impacts of the establishment of a European regional headquarters and the cash repatriation that affected 2014 but was executed in 2015. The establishment of the European regional headquarters contributed to the lower effective income tax rates in 2015 and 2016. We adopted ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting on January 1, 2017 which will impact our effective tax rate in 2017.
 
Net Earnings
Net earnings in 2016 increased to $1,647 or $4.35 per diluted share from $1,439 or $3.78 per diluted share in 2015 and $515 or $1.34 per diluted share in 2014. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.11, $0.26 and $0.14 in 2016, 2015 and 2014.
 
 
 
 
 
Percent Net Sales
 
2016
2015
2014
 
2016
2015
2014
Reported
$
1,647

$
1,439

$
515

 
14.5
 %
14.5
 %
5.3
%
Inventory stepped up to fair value
23

4

15

 
0.2


0.2

Other acquisition and integration-related
77

20

50

 
0.7

0.2

0.5

Amortization of intangible assets
221

147

133

 
2.0

1.5

1.4

Restructuring-related charges
98

97

78

 
0.9

1.0

0.8

Rejuvenate and other recall matters
127

210

628

 
1.1

2.1

6.5

Regulatory and legal matters
(7
)
(46
)

 
(0.1
)
(0.5
)

Tax matters
8

78

391

 
0.1

0.8

4.0

Adjusted
$
2,194

$
1,949

$
1,810

 
19.4
 %
19.6
 %
18.7
%
Non-GAAP Financial Measures
We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures, including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; cost of sales excluding specified items; adjusted selling, general and administrative expenses; adjusted amortization of intangible assets; adjusted operating income; adjusted effective income tax rate; adjusted net earnings; and adjusted net earnings per diluted share (Diluted EPS). We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures.
To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions.
To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are


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

STRYKER CORPORATION 2016 Form 10-K

examples of the types of adjustments that may be included in a period:
1.
Acquisition and integration related costs. Costs related to integrating recently acquired businesses and specific costs related to the consummation of the acquisition process.
2.
Amortization of purchased intangible assets. Periodic amortization expense related to purchased intangible assets.
3.
Restructuring-related charges. Costs associated with workforce reductions and other restructuring-related activities.
4.
Rejuvenate and other recall matters. Our best estimate of the minimum of the range of probable loss to resolve certain product recalls.
5.
Regulatory and legal matters. Our best estimate of the minimum of the range of probable loss to resolve certain regulatory matters and other legal settlements.
6.
Tax matters. Certain significant and discrete tax items and adjustments to interest expense related to the settlement of certain tax matters.
Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other
 
companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, cost of sales, selling, general and administrative expenses, amortization of intangible assets, operating income, effective income tax rate, net earnings and net earnings per diluted share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Results of Operations below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The weighted-average basic and diluted shares outstanding used in the calculation of non-GAAP earnings per share are the same as those used in the calculation of the reported per share amounts.


Reconciliation of the Most Directly Comparable GAAP Financial Measure to Non-GAAP Financial Measures
2016
Gross Profit
Selling, General & Administrative Expenses
Amortization of Intangible Assets
Operating Income
Net Earnings
Effective Tax Rate
Diluted EPS
Reported
$
7,495

$
4,137

$
319

$
2,166

$
1,647

14.3
 %
$
4.35

Acquisition and integration related charges:
 
 
 
 
 
 
 
Inventory stepped up to fair value
36



36

23

0.4

0.06

Other acquisition and integration related

(95
)

95

77

0.1

0.20

Amortization of purchased intangible assets


(319
)
319

221

2.2

0.59

Restructuring-related charges
15

(110
)

125

98

0.3

0.26

Rejuvenate and other recall matters



158

127

0.1

0.34

Legal matters

12


(12
)
(7
)
(0.2
)
(0.02
)
Tax Matters




8

0.1

0.02

Adjusted
$
7,546

$
3,944

$

$
2,887

$
2,194

17.3
 %
$
5.80

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

$
3,610

$
210

$
1,861

$
1,439

17.1
 %
$
3.78

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



7

4

0.1

0.01

Other acquisition and integration related

(28
)

28

20

0.2

0.05

Amortization of purchased intangible assets


(210
)
210

147

1.5

0.39

Restructuring-related charges
7

(125
)

132

97

0.7

0.26

Rejuvenate and other recall matters



296

210

2.0

0.55

Legal matters

53


(53
)
(46
)
0.1

(0.12
)
Tax Matters




78

(4.4
)
0.20

Adjusted
$
6,616

$
3,510

$

$
2,481

$
1,949

17.3
 %
$
5.12

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

$
3,547

$
188

$
1,246

$
515

55.6
 %
$
1.34

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



27

15

0.5

0.04

Other acquisition and integration related

(75
)

75

50

0.7

0.13

Amortization of purchased intangible assets


(188
)
188

133

1.1

0.35

Restructuring-related charges
1

(116
)

117

78

1.1

0.20

Rejuvenate and other recall matters



761

628

(3.1
)
1.65

Tax Matters




391

(33.6
)
1.02

Adjusted
$
6,384

$
3,356

$

$
2,414

$
1,810

22.3
 %
$
4.73



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

STRYKER CORPORATION 2016 Form 10-K

FINANCIAL CONDITION AND LIQUIDITY
 
2016
2015
2014
Net cash provided by operations activities
$
1,812

$
899

$
1,782

Net cash (used in) provided by investing activities
(4,191
)
1,956

(1,878
)
Net cash provided (used in) financing activities
2,361

(1,141
)
629

Effect of exchange rate changes
(45
)
(130
)
(77
)
Change in cash and cash equivalents
$
(63
)
$
1,584

$
456

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and ready access to capital markets at competitive rates.
Operating cash flow provides the primary source of cash to fund operating needs and capital expenditures. Excess operating cash is used first to fund acquisitions to complement our portfolio of businesses. Other discretionary uses include dividends and share repurchases. As necessary, we supplement operating cash flow with debt to fund our activities. Our overall cash position reflects our strong business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations.
Operating Activities
Cash provided by operations was $1,812, $899, and $1,782 in 2016, 2015 and 2014. The increase in cash from operations in 2016 was primarily due to lower Rejuvenate and ABG II recall-related payments compared to 2015, which was partially offset by higher levels of inventory in 2016. The net of accounts receivable, inventory and accounts payable resulted in the consumption of $507, $231, and $249 of cash in 2016, 2015 and 2014.
Investing Activities
Cash (used in) provided by investing activities was ($4,191), $1,956 and ($1,878) in 2016, 2015 and in 2014.
Acquisitions: Acquisitions resulted in cash consumption of $4,332, $153 and $916 in 2016, 2015 and 2014. In 2016 we acquired Sage, Physio, Synergetics and certain other businesses and related assets. In 2015 the primary acquisition was CHG. In 2014 the primary acquisitions were Patient Safety Technologies, Inc., Pivot Medical Inc., Berchtold Holding, AG and Small Bone Innovations, Inc.
Purchases of Property, Plant and Equipment: Purchases of property, plant and equipment were $490, $270 and $233 in 2016, 2015 and 2014. Capital expenditures in 2016 were primarily due to capital expenditures associated with our global ERP system and the construction of a dedicated additive manufacturing facility.
Marketable Securities, Net: Net cash provided by (used in) the sale of marketable securities was $634, $2,379, and ($729) in 2016, 2015 and 2014. Cash provided by the sale of marketable securities in 2016 was used to repay all of our senior unsecured notes that were due in September 2016. Cash provided by sales of marketable securities in 2015 was primarily due to the sale of a portion of our marketable securities in 2015 used to make recall-related payments.
Financing Activities
Dividends and Share Repurchases: Dividends paid per common share increased 10.1% to $1.52 per share in 2016 compared to $1.38 per share in 2015, an increase of 13.1% from $1.22 in 2014.
 
2016
2015
2014
Dividends paid per common share
$
1.52

$
1.38

$
1.22

Total dividends paid to common shareholders
$
568

$
521

$
462

Total amount paid to repurchase common stock
$
13

$
700

$
100

Shares of repurchased common stock (in millions)
0.1

7.4

1.3

 
Borrowings and Repayments of Debt: We maintain debt levels that we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and overall cost of capital.
Net proceeds from borrowings were $2,912, $48 and $1,159 in 2016, 2015 and 2014. In 2016 the proceeds were primarily from the issuance of $3,500 of senior unsecured notes in March 2016 partially offset by repayment of $750 of our senior unsecured notes due in September 2016. In 2015 the proceeds were primarily from the public offerings of notes offset by the payment of certain notes due and paid in January 2015. Refer to Note 9 to our Consolidated Financial Statements for further information.
Liquidity
Cash, cash equivalents and marketable securities were $3,384 and $4,079, and our current assets exceeded current liabilities by $4,713 and $4,441 on December 31, 2016 and 2015. We anticipate being able to support our short-term liquidity and operating needs, including acquisitions and recall-related payments, from a variety of sources, including cash from operations, commercial paper and existing credit lines. We have raised funds in the capital markets and may continue to do so from time to time. As a result of the issuance of senior unsecured notes in March 2016, Moody's downgraded our unsecured note ratings to Baa1 from A3, and Standard & Poor's downgraded our corporate credit and long-term issue-level rating to A from A+ and our short-term rating to A-1 from A-1+. Nevertheless, we continue to have strong investment-grade short-term and long-term debt ratings that we believe should enable us to refinance our debt as needed.
We have existing credit facilities should additional funds be required. In August 2016 we increased the borrowing capacity available under our main credit facility by $250 to a maximum of $1,500. In September 2016 we increased the amount of commercial paper issuable under the commercial paper program by $250 to a maximum of $1,500.
On December 31, 2016 approximately 84% of our consolidated cash, cash equivalents and marketable securities were held in locations outside the United States compared to 46% on December 31, 2015. The majority of our cash held in locations outside the United States is considered to be indefinitely reinvested. We intend to use this cash to expand operations organically and through acquisitions.
In January 2017 we sold $500 of senior unsecured notes with an interest rate of 1.800% due on January 15, 2019.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.
CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS
As further described in Note 6 to our Consolidated Financial Statements, in 2016 we recorded additional charges to earnings totaling $144 related to the Rejuvenate and ABG II recalls. Based on the information received, the actuarially determined range of probable loss to resolve this matter was estimated to be approximately $1,968 to $2,224 ($2,200 to $2,456 before $232 of third-party insurance recoveries). The final outcome of this matter is dependent on many variables that are difficult to predict.  The ultimate cost to entirely resolve this matter may be materially different than the amount of the current estimate and could have a material adverse effect on our financial position, results of


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

STRYKER CORPORATION 2016 Form 10-K

operations and cash flows. We are not able to reasonably estimate the future periods in which payments will be made.
As further described in Note 10 to our Consolidated Financial Statements, on December 31, 2016 we had a reserve for uncertain income tax positions of $287. Due to uncertainties regarding the ultimate resolution of income tax audits, we are not able to reasonably estimate the future periods in which any income tax payments to settle these uncertain income tax positions will be made.
As further described in Note 11 to our Consolidated Financial Statements, on December 31, 2016 our defined benefit pension plans were underfunded by $280, of which approximately $271 related to plans outside the United States. Due to the rules affecting tax-deductible contributions in the jurisdictions in which the plans are offered and the impact of future plan asset performance, changes in interest rates and potential changes in legislation in the United States and other foreign jurisdictions, we are not able to reasonably estimate beyond 2017 the amounts that may be required to fund defined benefit pension plans.
 Long-term Contractual Obligations
 
Total
Under 1 year
1-3 years
3-5 years
After 5 years
Short-term and long-term debt
$
6,952

$
200

$
1,352

$
1,250

$
4,150

Unconditional purchase obligations
853

725

122

3

3

Operating leases
269

90

81

39

59

Contributions to defined benefit plans
20

20




Other
104

12

12

6

74

Total
$
8,198

$
1,047

$
1,567

$
1,298

$
4,286

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the United States, there are certain accounting policies that may require a choice between acceptable accounting methods or may require substantial judgment or estimation in their application. These include inventory reserves, income taxes, acquisitions, goodwill and intangible assets, and legal and other contingencies. We believe these accounting policies and the others set forth in Note 1 to our Consolidated Financial Statements should be reviewed as they are integral to understanding our results of operations and financial condition.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products at prices in excess of current carrying costs. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.
Income Taxes
Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary and reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
 
Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment was deferred, the tax effect of expenditures for which a deduction was taken in our tax return but has not yet been recognized in our financial statements or assets recorded at fair value in business combinations for which there was no corresponding tax basis adjustment.
Inherent in determining our annual tax rate are judgments regarding business plans, tax planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized.
We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may take tax positions that management believes are supportable but are potentially subject to successful challenge by the applicable taxing authority. These differences of interpretation with the respective governmental taxing authorities can be impacted by the local economic and fiscal environment. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that it is more likely than not that the ultimate outcomes will not have a material adverse effect on our financial position, results of operations or cash flows.
Due to the number of estimates and assumptions inherent in calculating the various components of our tax provision, certain changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, could have an impact on those estimates and our effective tax rate.
Acquisitions, Goodwill and Intangibles, and Long-Lived Assets
Our financial statements include the operations of an acquired business starting from the completion of the acquisition. In addition, the assets acquired and liabilities assumed are recorded on the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.
Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant items. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances


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

STRYKER CORPORATION 2016 Form 10-K

may occur that could affect the accuracy or validity of the estimates and assumptions.
Determining the useful life of an intangible asset also requires judgment. With the exception of certain trade names, the majority of our acquired intangible assets (e.g., certain trademarks or brands, customer and distributor relationships, patents and technologies) are expected to have determinable useful lives. Our assessment as to the useful lives of these intangible assets is based on a number of factors including competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the trademarked or branded products are sold. Our estimates of the useful lives of determinable-lived intangibles are primarily based on these same factors. Determinable-lived intangible assets are amortized to expense over their estimated useful life.
In certain of our acquisitions, we acquire in-process research and development (IPRD) intangible assets. IPRD is considered to be an indefinite-lived intangible asset until such time as the research is completed (at which time it becomes a determinable-lived intangible asset) or determined to have no future use (at which time it is impaired).
The value of indefinite-lived intangible assets and goodwill is not amortized but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We perform our annual impairment test for goodwill in the fourth quarter of each year. We consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. In certain circumstances, we may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances we test goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We test individual indefinite-lived intangibles by reviewing the individual book values compared to the fair value. We determine the fair value of our reporting units and indefinite-lived intangible assets based on the income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.
We did not recognize any impairment charges for goodwill in the years presented, as our annual impairment testing indicated that all reporting unit goodwill fair values exceeded their respective recorded values. Future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates and future cash flow projections, could result in significantly different estimates of the fair values. A significant reduction in the estimated fair values could result in impairment charges that could materially affect our results of operations.
We review our other long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual asset level or the asset group level. The undiscounted
 
cash flows expected to be generated by the related assets are estimated over their useful life based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related assets or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale, if any, are recorded at the lower of carrying amount or fair value less costs to sell.
Legal and Other Contingencies
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property, and other matters that are more fully described in Note 6 to our Consolidated Financial Statements. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages, as well as other compensatory and equitable relief, that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management had sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, for the resolution of these legal matters is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those projected by management, additional expense may be incurred, which could unfavorably affect future operating results. We are currently self-insured for product liability-related claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to our Consolidated Financial Statements for further information.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We sell our products globally and, as a result, our financial results could be significantly affected by factors such as weak economic conditions or changes in foreign currency exchange rates. Our operating results are primarily exposed to changes in exchange rates among the United States Dollar, European currencies, in particular the Euro, Swiss Franc and the British Pound, the Japanese Yen, the Australian Dollar and the Canadian Dollar. We develop and manufacture products in the United States, Canada, Turkey, China, France, Germany, Ireland, Mexico, Puerto Rico and Switzerland and incur costs in the applicable local currencies. This global deployment of facilities serves to partially mitigate the impact of currency exchange rate changes on our cost of sales. Refer to Notes 1, 3 and 4 to our Consolidated Financial Statements for information regarding our use of derivative instruments to mitigate these risks. A hypothetical 10% change in foreign currencies relative to the United States Dollar would change the December 31, 2016 fair value by approximately $188.



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

STRYKER CORPORATION 2016 Form 10-K

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of Stryker Corporation:
We have audited the accompanying consolidated balance sheets of Stryker Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stryker Corporation and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stryker Corporation's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 9, 2017 expressed an unqualified opinion thereon.
/s/    ERNST & YOUNG LLP
Grand Rapids, Michigan
February 9, 2017

 
16

STRYKER CORPORATION 2016 Form 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS
 
2016
 
2015
 
2014
Net sales
$
11,325

 
$
9,946

 
$
9,675

Cost of sales
3,830

 
3,344

 
3,319

Gross profit
$
7,495

 
$
6,602

 
$
6,356

Research, development and engineering expenses
715

 
625

 
614

Selling, general and administrative expenses
4,137

 
3,610

 
3,547

Recall charges, net of insurance proceeds
158

 
296

 
761

Amortization of intangible assets
319

 
210

 
188

Total operating expenses
$
5,329

 
$
4,741

 
$
5,110

Operating income
$
2,166

 
$
1,861

 
$
1,246

Other income (expense), net
(245
)
 
(126
)
 
(86
)
Earnings before income taxes
$
1,921

 
$
1,735

 
$
1,160

Income taxes
274

 
296

 
645

Net earnings
$
1,647

 
$
1,439

 
$
515

 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
Basic net earnings per share of common stock
$
4.40

 
$
3.82

 
$
1.36

Diluted net earnings per share of common stock
$
4.35

 
$
3.78

 
$
1.34

 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
Basic
374.1

 
376.6

 
378.5

Effect of dilutive employee stock options
4.4

 
4.3

 
4.3

Diluted
378.5

 
380.9

 
382.8

Anti-dilutive shares excluded from the calculation of dilutive employee stock options were de minimis in all periods.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
2016
 
2015
 
2014
Net earnings
$
1,647

 
$
1,439

 
$
515

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

 
(3
)
 
3

Pension plans
(13
)
 
17

 
(55
)
Unrealized gains (losses) on designated hedges
20

 
(9
)
 
6

Financial statement translation
(129
)
 
(390
)
 
(440
)
Total other comprehensive loss, net of tax
$
(122
)
 
$
(385
)
 
$
(486
)
Comprehensive income
$
1,525

 
$
1,054

 
$
29


See accompanying notes to Consolidated Financial Statements.

Dollar amounts in millions except per share amounts or as otherwise specified.
17

STRYKER CORPORATION 2016 Form 10-K

Stryker Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS
 
2016
 
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
3,316

 
$
3,379

Marketable securities
68

 
700

Accounts receivable, less allowance of $56 ($61 in 2015)
1,967

 
1,662

Inventories:
 
 
 
Materials and supplies
425