10-Q 1 syk10q63018.htm 10-Q Document


 

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

FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-09165
strykerlogoa51.jpg
STRYKER CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
 
 
 
38-1239739
(State of incorporation)
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
2825 Airview Boulevard Kalamazoo, Michigan
 
49002
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
(269) 385-2600
 
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES [X]    NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES [X]    NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
 
Accelerated filer
[ ]
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
Small reporting company
[ ]
 
 
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES [ ]    NO [X]
There were 373,990,494 shares of Common Stock, $0.10 par value, on June 30, 2018.
 


STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

PART I. – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 
Three Months
 
Six Months

2018
 
2017
 
2018
 
2017
Net sales
$
3,322

 
$
3,012

 
$
6,563

 
$
5,967

Cost of sales
1,132

 
1,021

 
2,236

 
2,012

Gross profit
$
2,190

 
$
1,991

 
$
4,327

 
$
3,955

Research, development and engineering expenses
216

 
192

 
420

 
384

Selling, general and administrative expenses
1,190

 
1,130

 
2,426

 
2,232

Recall charges
2

 
72

 
6

 
98

Amortization of intangible assets
110

 
95

 
212

 
183

Total operating expenses
$
1,518

 
$
1,489

 
$
3,064

 
$
2,897

Operating income
$
672

 
$
502

 
$
1,263

 
$
1,058

Other income (expense), net
(49
)
 
(58
)
 
(98
)
 
(115
)
Earnings before income taxes
$
623

 
$
444

 
$
1,165

 
$
943

Income taxes
171

 
53

 
270

 
108

Net earnings
$
452

 
$
391

 
$
895

 
$
835

 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
Basic net earnings per share of common stock
$
1.21

 
$
1.04

 
$
2.39

 
$
2.23

Diluted net earnings per share of common stock
$
1.19

 
$
1.03

 
$
2.35

 
$
2.20

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
373.9

 
373.9

 
373.9

 
373.7

Effect of dilutive employee stock options
6.2

 
5.9

 
6.5

 
5.9

Diluted
380.1

 
379.8

 
380.4

 
379.6

 
 
 
 
 
 
 
 
Cash dividends declared per share of common stock
$
0.470

 
$
0.425

 
$
0.940

 
$
0.850

Anti-dilutive shares excluded from the calculation of dilutive employee stock options were de minimis in all periods.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months
 
Six Months
 
2018
 
2017
 
2018
 
2017
Net earnings
$
452

 
$
391

 
$
895

 
$
835

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

 

 
(1
)
 

Pension plans
8

 
(6
)
 
2

 
(10
)
Unrealized gains (losses) on designated hedges
2

 
5

 
17

 
(1
)
Financial statement translation
(57
)
 
86

 
(22
)
 
182

Total other comprehensive income (loss), net of tax
$
(47
)
 
$
85

 
$
(4
)
 
$
171

Comprehensive income
$
405

 
$
476

 
$
891

 
$
1,006

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

Stryker Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
June 30
 
December 31
 
2018
 
2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,641

 
$
2,542

Marketable securities
279

 
251

Accounts receivable, less allowance of $59 ($59 in 2017)
2,089

 
2,198

Inventories:
 
 
 
Materials and supplies
572

 
528

Work in process
171

 
148

Finished goods
1,997

 
1,789

Total inventories
$
2,740

 
$
2,465

Prepaid expenses and other current assets
664

 
537

Total current assets
$
7,413

 
$
7,993

Property, plant and equipment:
 
 
 
Land, buildings and improvements
966

 
936

Machinery and equipment
3,070

 
2,864

Total property, plant and equipment
$
4,036

 
$
3,800

Less accumulated depreciation
1,935

 
1,825

Property, plant and equipment, net
$
2,101

 
$
1,975

Goodwill
7,636

 
7,168

Other intangibles, net
3,567

 
3,477

Other noncurrent assets
853

 
1,584

Total assets
$
21,570

 
$
22,197

 
 
 
 
Liabilities and shareholders' equity

 
 
Current liabilities
 
 
 
Accounts payable
$
561

 
$
487

Accrued compensation
600

 
838

Income taxes
130

 
143

Dividend payable
178

 
178

Accrued recall expenses
129

 
196

Accrued expenses and other liabilities
1,171

 
1,011

Current maturities of debt
1,277

 
632

Total current liabilities
$
4,046

 
$
3,485

Long-term debt, excluding current maturities
5,925

 
6,590

Income taxes
1,262

 
1,261

Other noncurrent liabilities
877

 
881

Total liabilities
$
12,110

 
$
12,217

Shareholders' equity
 
 
 
Common stock, $0.10 par value:
37

 
37

Additional paid-in capital
1,503

 
1,496

Retained earnings
8,477

 
8,986

Accumulated other comprehensive loss
(557
)
 
(553
)
Total Stryker shareholders' equity
$
9,460

 
$
9,966

Noncontrolling interest
$

 
$
14

Total shareholders' equity
$
9,460

 
$
9,980

Total liabilities & shareholders' equity
$
21,570

 
$
22,197

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months
 
2018
 
2017
Operating activities
 
 
 
Net earnings
$
895

 
$
835

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
150

 
127

Amortization of intangible assets
212

 
183

Share-based compensation
57

 
58

Recall charges
6

 
98

Sale of inventory stepped-up to fair value at acquisition
11

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
115

 
97

Inventories
(294
)
 
(192
)
Accounts payable
65

 
(12
)
Accrued expenses and other liabilities
(190
)
 
(151
)
Recall-related payments
(68
)
 
(124
)
Income taxes
(47
)
 
24

Other, net
34

 
(142
)
Net cash provided by operating activities
$
946

 
$
801

Investing activities
 
 
 
Acquisitions, net of cash acquired
(767
)
 
(38
)
Purchases of marketable securities
(145
)
 
(66
)
Proceeds from sales of marketable securities
117

 
36

Purchases of property, plant and equipment
(278
)
 
(270
)
Net cash used in investing activities
$
(1,073
)
 
$
(338
)
Financing activities
 
 
 
(Payments) Proceeds on short-term borrowings, net
(7
)
 
(55
)
Proceeds from issuance of long-term debt
595

 
498

Payments on long-term debt
(600
)
 

Dividends paid
(352
)
 
(318
)
Repurchases of common stock
(300
)
 
(230
)
Cash paid for taxes from withheld shares
(96
)
 
(73
)
Payments to purchase noncontrolling interest
(14
)
 

Other financing, net
2

 
1

Net cash used in financing activities
$
(772
)
 
$
(177
)
Effect of exchange rate changes on cash and cash equivalents
(2
)
 
47

Change in cash and cash equivalents
$
(901
)
 
$
333

Cash and cash equivalents at beginning of period
2,542

 
3,316

Cash and cash equivalents at end of period
$
1,641

 
$
3,649

See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
General Information
Management believes the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring items, considered necessary to fairly present the financial position of Stryker Corporation and its consolidated subsidiaries (the "Company," "we," us" or "our") on June 30, 2018 and the results of operations for the six months 2018. The results of operations included in these Consolidated Financial Statements may not necessarily be indicative of our annual results. These statements should be read in conjunction with our Annual Report on Form 10-K for 2017.
Certain prior year amounts have been reclassified to conform with current year presentation in our Consolidated Statements of Earnings, Consolidated Statements of Cash Flows and Note 10.
New Accounting Pronouncements Not Yet Adopted
We evaluate all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) for consideration of their applicability. ASUs not included in our disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on our Consolidated Financial Statements.
In August 2017 the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies hedge accounting guidance, as well as improves presentation and disclosure to align the economic effects of risk management strategies in the financial statements. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We have performed a preliminary assessment of the impact from this update and do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements. We are continuing to evaluate the timing of adoption of this update.
In February 2016 the FASB issued ASU 2016-02, Leases, and in July 2018 issued ASU 2018-10, Codification Improvements to Topic 842, Leases. These updates require an entity to recognize assets and liabilities on the balance sheet for leases with terms greater than 12 months. We are in the process of evaluating the impact on our Consolidated Financial Statements and anticipate most of our current operating leases, as well as some service contracts, will result in the recognition of right of use assets and corresponding lease liabilities in our Consolidated Balance Sheets. We do not anticipate adoption of these updates will have a material impact on net earnings or cash flows and continue to assess the impact on our Consolidated Balance Sheets. We have established a project team to lead the review of our lease agreements to assess the impact of the new guidance and the implementation of a lease administration application. We plan to adopt these updates on January 1, 2019.
Accounting Pronouncements Recently Adopted
On January 1, 2018 we adopted ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 2 for further information.
On January 1, 2018 we adopted ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to account for the income tax effect of intercompany sales and transfers of assets other than inventory when the transfer occurs. Under previous guidance, we deferred the income tax effects of intercompany transfers of assets until the asset had been sold to an outside party or otherwise recognized.
 
We recorded a $695 cumulative-effect adjustment to decrease the opening balance of retained earnings as of January 1, 2018.
On January 1, 2018 we adopted ASU 2017-07, Compensation - Retirement Benefits, which revises the presentation of the elements of net pension benefit costs. We have retrospectively applied the change in presentation of the non-service cost components of net periodic pension cost by reclassifying these amounts to Other income (expense), net within our Consolidated Statements of Earnings. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
On January 1, 2018 we adopted ASU 2017-09, Compensation - Stock Compensation, which revises the guidance related to changes in terms or conditions of a share-based payment award. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
On January 1, 2018 we adopted ASU 2018-02, Income Statements - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which was issued in February 2018 and provides guidance allowing for the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
NOTE 2 - REVENUE RECOGNITION
On January 1, 2018 we adopted ASU 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. The cumulative effect of initially applying ASC 606 was an adjustment to decrease the opening balance of retained earnings by $64 as of January 1, 2018.
With the adoption of ASC 606, we elected to apply certain permitted practical expedients. In evaluating the cumulative-effect adjustment to retained earnings, we adopted the standard only for contracts that were not complete as of the date of adoption. For contracts containing elements of variable consideration, we have elected to use the transaction price at the date the contract was deemed complete. For contracts that were modified prior to the adoption date, we have elected to present the aggregate effect of all contract modifications in determining the transaction price and for the allocation to the satisfied and unsatisfied performance obligations.
The impact of ASC 606 on our results of operations for the three and six months 2018 was not material and related primarily to the reclassification of certain costs previously presented as selling, general and administrative expenses to net sales.
Sales are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. In the United States most of our products and services are marketed directly to doctors, hospitals and other healthcare facilities through company-owned subsidiaries and branches. Our products are also sold in over 85 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors.
Sales represent the amount of consideration we expect to receive from customers in exchange for transferring products and services. Net sales exclude sales, value add and other taxes we collect from customers. Other costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of most of our sales. We extend terms of payment to our customers based on commercially reasonable terms for the markets of our customers, while also considering their credit quality. A provision for estimated sales

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

returns, discounts and rebates is recognized as a reduction of sales in the same period that the sales are recognized. Our estimate of the provision for sales returns has been established based on contract terms with our customers and historical business practices. Shipping and handling costs charged to customers are included in net sales.
Our sales continue to be recognized primarily when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment, the date of receipt by the customer or, for most Orthopaedics products, when we receive appropriate notification that the product has been used or implanted and a purchase order has been received. Products and services are primarily transferred to customers at a point in time, with some transfers of services taking place over time. In the three and six months 2018 less than 10% of our sales were recognized as services transferred over time.
We disaggregate our net sales by product line and geographic location for each of our segments as we believe it best depicts how the nature, amount, timing and uncertainty of our net sales and cash flows are affected by economic factors.
 
Three Months
 
Six Months
 
2018
2017
 
2018
2017
Orthopaedics:
 
 
 
 
 
Knees
$
422

$
389

 
$
841

$
780

Hips
336

322

 
667

642

Trauma and Extremities
387

351

 
776

703

Other
83

79

 
160

151

 
$
1,228

$
1,141

 
$
2,444

$
2,276

MedSurg:
 
 
 
 
 
Instruments
$
438

$
392

 
$
850

$
786

Endoscopy
448

406

 
892

779

Medical
505

474

 
1,016

949

Sustainability
64

64

 
124

127

 
$
1,455

$
1,336

 
$
2,882

$
2,641

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
437

$
352

 
$
847

$
683

Spine
202

183

 
390

367

 
$
639

$
535

 
$
1,237

$
1,050

Total
$
3,322

$
3,012

 
$
6,563

$
5,967

 
Three Months 2018
 
Three Months 2017
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
304

$
118

 
$
282

$
107

Hips
207

129

 
203

119

Trauma and Extremities
242

145

 
228

123

Other
68

15

 
65

14

 
$
821

$
407

 
$
778

$
363

MedSurg:
 
 
 
 
 
Instruments
$
339

$
99

 
$
303

$
89

Endoscopy
354

94

 
319

87

Medical
384

121

 
372

101

Sustainability
63

1

 
64

1

 
$
1,140

$
315

 
$
1,058

$
278

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
280

$
158

 
$
223

$
129

Spine
144

57

 
141

42

 
$
424

$
215

 
$
364

$
171

Total
$
2,385

$
937

 
$
2,200

$
812

 
 
Six Months 2018
 
Six Months 2017
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
605

$
236

 
$
568

$
212

Hips
412

255

 
407

235

Trauma and Extremities
487

289

 
456

247

Other
131

29

 
122

29

 
$
1,635

$
809

 
$
1,553

$
723

MedSurg:
 
 
 
 
 
Instruments
$
655

$
195

 
$
611

$
175

Endoscopy
703

189

 
611

168

Medical
765

251

 
742

206

Sustainability
123

1

 
127

1

 
$
2,246

$
636

 
$
2,091

$
550

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
536

$
312

 
$
438

$
245

Spine
282

107

 
282

85

 
$
818

$
419

 
$
720

$
330

Total
$
4,699

$
1,864

 
$
4,364

$
1,603

Orthopaedics
Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremity surgeries. Substantially all Orthopaedics sales are recognized when the product has been used or implanted and a purchase order has been received. For certain Orthopaedic products in the "other" category, we recognize sales at a point in time, as well as over time for performance obligations that may include an obligation to complete installation, provide training and ongoing services. These performance obligations are satisfied within one year.
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. Substantially all MedSurg sales are recognized when control is transferred and a purchase order is received. For certain Endoscopy, Instruments and Medical services, we may recognize sales over time as we satisfy performance obligations that may include an obligation to complete installation, provide training and ongoing services and are generally performed within one year.
Neurotechnology and Spine
Neurotechnology and Spine products include both neurosurgical and neurovascular devices. Our spinal implant products include cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies. Substantially all Neurotechnology and Spine sales are recognized when control is transferred and a purchase order is received.
Contract Assets and Liabilities
The nature of our products and services do not generally give rise to contract assets as we typically do not incur costs to fulfill a contract before a product or service is provided to a customer. Our costs to obtain contracts are typically in the form of sales commissions paid to employees of Stryker or third-party agents. We have elected to expense sales commissions associated with obtaining a contract as incurred as the amortization period is generally less than one year. These costs have been presented within selling, general and administrative expenses. On June 30, 2018 there were no contract assets recorded in our Consolidated Balance Sheets.
Our contract liabilities arise as a result of unearned revenue received from customers at inception of contracts for certain

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

businesses or where the timing of billing for services precedes satisfaction of our performance obligations. We generally satisfy performance obligations within one year from the contract inception date. On January 1, 2018 our contract liabilities were $381, which were reported in accrued expenses and other liabilities and other noncurrent liabilities in our Consolidated Balance Sheets, $33 of which was recognized in sales in the three months 2018 and $158 in the six months 2018. On June 30, 2018 our contract liabilities were $337.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
Three Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(5
)
$
(140
)
$
43

$
(408
)
$
(510
)
OCI
(1
)
6

3

(57
)
(49
)
Income taxes

2

(1
)

1

Reclassifications to:
 
 
 
 
 
Cost of sales

2

(1
)

1

Other income
1




1

Income taxes

(2
)
1


(1
)
Net OCI
$

$
8

$
2

$
(57
)
$
(47
)
Ending
$
(5
)
$
(132
)
$
45

$
(465
)
$
(557
)
Three Months 2017
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(136
)
$
18

$
(557
)
$
(675
)
OCI

(9
)
4

68

63

Income taxes

2

(1
)
18

19

Reclassifications to:
 
 
 
 
 
Cost of sales

1

3


4

Income taxes


(1
)

(1
)
Net OCI
$

$
(6
)
$
5

$
86

$
85

Ending
$

$
(142
)
$
23

$
(471
)
$
(590
)
Six Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(4
)
$
(134
)
$
28

$
(443
)
$
(553
)
OCI
(2
)
(4
)
24

(34
)
(16
)
Income taxes

3

(6
)
12

9

Reclassifications to:
 
 
 
 
 
Cost of sales

4

(2
)

2

Other Income
1




1

Income taxes

(1
)
1



Net OCI
$
(1
)
$
2

$
17

$
(22
)
$
(4
)
Ending
$
(5
)
$
(132
)
$
45

$
(465
)
$
(557
)
Six Months 2017
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(132
)
$
24

$
(653
)
$
(761
)
OCI

(15
)
(10
)
153

128

Income taxes

3

3

29

35

Reclassifications to:
 
 
 
 
 
Cost of sales

3

8


11

Income taxes

(1
)
(2
)

(3
)
Net OCI
$

$
(10
)
$
(1
)
$
182

$
171

Ending
$

$
(142
)
$
23

$
(471
)
$
(590
)
NOTE 4 - DERIVATIVE INSTRUMENTS
Foreign Currency Hedges
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges (both long-term intercompany loans payable and forward exchange contracts) and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings and
 
cash flow. We do not enter into derivative instruments for speculative purposes. We did not change our hedging strategies, accounting practices or objectives from those disclosed in our Annual Report on Form 10-K for 2017.
June 2018
Designated
Non-Designated
Total
Gross notional amount
$
782

$
4,548

$
5,330

Maximum term in days
 
 
586

Fair value:
 
 
 
Other current assets
$
12

$
62

$
74

Other noncurrent assets
2


2

Other current liabilities
(8
)
(4
)
(12
)
Other noncurrent liabilities
(1
)

(1
)
Total fair value
$
5

$
58

$
63

December 2017
Designated
Non-Designated
Total
Gross notional amount
$
1,104

$
4,767

$
5,871

Maximum term in days
 
 
548

Fair value:
 
 
 
Other current assets
$
11

$
4

$
15

Other noncurrent assets
1


1

Other current liabilities
(7
)
(29
)
(36
)
Other noncurrent liabilities
(1
)

(1
)
Total fair value
$
4

$
(25
)
$
(21
)
In the six months 2018 we terminated our net investment hedges. The amounts related to settled net investment hedges will be subsequently reclassified to interest expense when the hedged investment is either sold or substantially liquidated.
We are exposed to credit loss in the event of nonperformance by our counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default, our maximum exposure to loss is the asset balance of the instrument.
Net Currency Exchange Rate (Losses) Gains
 
Three Months
 
Six Months
Recorded in:
2018
2017
 
2018
2017
Cost of sales
$
1

$
(3
)
 
$
2

$
(8
)
Other income (expense), net
(2
)
(4
)
 
(4
)
(4
)
Total
$
(1
)
$
(7
)
 
$
(2
)
$
(12
)
On June 30, 2018 and December 31, 2017 pretax gains on derivatives designated as hedges recorded in AOCI that are expected to be reclassified to earnings within 12 months of the balance sheet date were $5 and $7. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There were no ineffective portions of derivatives that resulted in gains or losses in any of the periods presented.
Interest Rate Risk
In conjunction with our offering of senior unsecured notes in the six months 2018 we terminated cash flow hedges with gross notional amounts of $600 designated as hedges of our interest rates, the impact of which will be recognized over time as a benefit within interest expense.
We also elected to terminate interest rate swaps with gross notional amounts of $500 designated as fair value hedges of underlying fixed rate obligations representing a portion of our $600 unsecured senior notes due in 2024. The remaining fair value is presented in long-term debt and will be reclassified to interest expense over the term of the debt.
There was no hedge ineffectiveness recorded as a result of these cash flow and fair value hedges in 2018.
NOTE 5 - FAIR VALUE MEASUREMENTS
Our policies for managing risk related to foreign currency, interest rates, credit and markets and our process for determining fair value

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

have not changed from those described in our Annual Report on Form 10-K for 2017.
There were no significant transfers into or out of any level in 2018.
Assets Measured at Fair Value
June
December
2018
2017
Cash and cash equivalents
$
1,641

$
2,542

Trading marketable securities
129

121

Level 1 - Assets
$
1,770

$
2,663

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
99

$
125

Foreign government debt securities
2

2

United States agency debt securities
32

27

United States Treasury debt securities
77

70

Certificates of deposit
69

27

Total available-for-sale marketable securities
$
279

$
251

Foreign currency exchange forward contracts
76

15

Interest rate swap asset

49

Level 2 - Assets
$
355

$
315

Total assets measured at fair value
$
2,125

$
2,978

Liabilities Measured at Fair Value
June
December
2018
2017
Deferred compensation arrangements
$
129

$
121

Level 1 - Liabilities
$
129

$
121

Foreign currency exchange forward contracts
$
13

$
37

Level 2 - Liabilities
$
13

$
37

Contingent consideration:
 
 
Beginning
$
32

$
86

Additions
78

3

Change in estimate
(1
)
2

Settlements
(4
)
(59
)
Ending
$
105

$
32

Level 3 - Liabilities
$
105

$
32

Total liabilities measured at fair value
$
247

$
190

Fair Value of Available for Sale Securities by Maturity
 
June 2018
December 2017
Due in one year or less
$
123

$
107

Due after one year through three years
$
156

$
144

On June 30, 2018 and December 31, 2017 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest and marketable securities income was $27 and $12 in the three months and was $50 and $23 in the six months 2018 and 2017, which was recorded in other income (expense), net.
Our investments in available-for-sale marketable securities had a minimum credit quality rating of A2 (Moody's), A (Standard & Poor's) and A (Fitch). We do not plan to sell the investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. We do not consider these investments to be other-than-temporarily impaired on June 30, 2018. On June 30, 2018 substantially all our investments with unrealized losses that were not deemed to be other-than-temporarily impaired were in a continuous unrealized loss position for less than 12 months, and the losses were nominal.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed
107
$
76

Foreign government
1
2

United States agency
16
24

United States Treasury
27
75

Certificates of deposit
42
66

Total
193
$
243

 
NOTE 6 - CONTINGENCIES AND COMMITMENTS
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages as well as other compensatory and equitable relief that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management 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, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those estimated by management, additional expense may be incurred, which could unfavorably affect future operating results.
We are self-insured for product liability claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In June 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. Product liability lawsuits relating to this voluntary recall have been filed against us. On November 3, 2014 we announced that we had entered into a settlement agreement to compensate eligible United States patients who had revision surgery to replace their Rejuvenate and/or ABG II Modular-Neck hip stem prior to that date and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. We continue to offer support for recall-related care and reimburse patients who are not eligible to enroll in the settlement program for testing and treatment services, including any necessary revision surgeries. In addition, some lawsuits will remain and we will continue to defend against them. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter globally is currently estimated to be approximately $2,073 to $2,313 ($2,305 to $2,545 before $232 of third-party insurance recoveries). We did not recognize additional charges to earnings in the six months 2018 as the low end of the range of the liability was equal to the amount of previously recorded reserves. The final outcome of this matter is dependent on many factors that are difficult to predict including the number of enrollees in the settlement program and the total awards to them, the number and costs of patients not eligible for the settlement program who seek testing and treatment services and require revision surgery and the number and actual costs to resolve the remaining lawsuits. Accordingly, the ultimate cost to resolve this entire matter globally may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we filed a lawsuit in federal court against Zimmer Biomet Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed on three of our patents. In 2013 following a jury trial favorable to us, the trial judge entered a final judgment that, among other things, awarded us damages of $76 and ordered Zimmer to pay us enhanced damages. Zimmer appealed this ruling. In December 2014 the Federal Circuit affirmed the damages awarded to us, reversed the order for enhanced damages and remanded the issue of attorney fees to the trial court. In May 2015 the trial court entered a stipulated judgment that, among other things, required Zimmer to

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

pay us the base amount of damages and interest, while the issues of enhanced damages and attorney fees continue to be pursued. In June 2015 we recorded a $54 gain, net of legal costs, which was recorded within selling, general and administrative expenses. On June 13, 2016 the United States Supreme Court vacated the decision of the Federal Circuit that reversed our judgment for enhanced damages and remanded the case to the Federal Circuit to reconsider the issue. On September 12, 2016 the Federal Circuit issued an opinion that, among other things, remanded the issue of enhanced damages to the trial court. On July 12, 2017 the trial court reaffirmed its award of enhanced damages and entered a judgment of $164 in our favor. On July 24, 2017 Zimmer filed a notice of appeal of this decision.
NOTE 7 - ACQUISITIONS
We acquire stock in companies and various assets that continue to support our capital deployment and product development strategies. In the six months 2018 and 2017 cash paid for acquisitions, net of cash acquired, was $767 and $38.
In February 2018 we completed the acquisition of Entellus Medical, Inc. (Entellus) for $24.00 per share, or an aggregate purchase price of $697, net of cash acquired. Entellus is focused on delivering superior patient and physician experiences through products designed for the minimally invasive treatment of various ear, nose and throat (ENT) disease states. Entellus is part of the Neurotechnology business within Neurotechnology and Spine. Goodwill attributable to the acquisition of Entellus is not deductible for tax purposes.
In September 2017 we completed the acquisition of NOVADAQ Technologies Inc. (NOVADAQ) for an aggregate purchase price of $674, net of cash acquired. NOVADAQ is a leading developer of fluorescence imaging technology that provides surgeons with visualization of blood flow in vessels and related tissue perfusion in cardiac, cardiovascular, gastrointestinal, plastic, microsurgical, and reconstructive procedures. NOVADAQ is part of the Endoscopy business within the MedSurg segment. Goodwill attributable to the acquisition of NOVADAQ is not deductible for tax purposes.
Purchase price allocations for Entellus and NOVADAQ were based on preliminary valuations. Our estimates and assumptions are subject to change within the measurement period.
Purchase Price Allocation
of Acquired Net Assets
2018
 
2017
Entellus
 
NOVADAQ
Purchase price, net of cash acquired
$
697

 
$
674

 
 
 
 
Tangible assets:
 
 
 
Accounts receivable
$
17

 
$
11

Inventory
14

 
38

Other assets
66

 
9

Contingent consideration
(78
)
 

Other liabilities
(92
)
 
(58
)
Intangible assets:
 
 
 
Customer relationship
33

 
18

Trade name

 
1

Developed technology and patents
256

 
133

Goodwill
481

 
522

 
$
697

 
$
674

Weighted-average life of intangible assets
16

 
15

Estimated Amortization Expense
Remainder of 2018
2019
2020
2021
2022
$
198

$
379

$
354

$
343

$
333

 
NOTE 8 - DEBT AND CREDIT FACILITIES
In March 2018 we issued $600 of senior unsecured notes with a coupon of 3.650% due on March 7, 2028 (the notes). Our annual interest expense arising from the issuance of the notes will be reduced by the benefit from the cash flow hedges that were terminated in conjunction with the issuance. Refer to Note 4 for further information.
In April 2018 we repaid $600 of our senior unsecured notes with a coupon of 1.300%.
Our commercial paper program allows us to have a maximum of $1,500 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On June 30, 2018 there were no amounts outstanding under our commercial paper program.
We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on June 30, 2018.
Summary of Total Debt
June 2018
December 2017
Senior unsecured notes:
 
 
 
Rate
 
Due
 
 
 
1.300%
 
April 1, 2018
$

$
600

 
1.800%
 
January 15, 2019
499

499

 
2.000%
 
March 8, 2019
749

748

 
4.375%
 
January 15, 2020
498

498

 
2.625%
 
March 15, 2021
747

746

 
3.375%
 
May 15, 2024
583

598

 
3.375%
 
November 1, 2025
745

745

 
3.500%
 
March 15, 2026
989

988

 
3.650%
 
March 7, 2028
595


 
4.100%
 
April 1, 2043
391

391

 
4.375%
 
May 15, 2044
395

394

 
4.625%
 
March 15, 2046
980

980

Other
31

35

Total debt
$
7,202

$
7,222

Less current maturities of debt
1,277

632

Total long-term debt
$
5,925

$
6,590

 
 
 
Unamortized debt issuance costs
$
41

$
39

Available borrowing capacity
$
1,552

$
1,547

Fair value of senior unsecured notes
$
7,119

$
7,521

The fair value of the senior unsecured notes was estimated using quoted interest rates, maturities and amounts of borrowings based on quoted active market prices and yields that considered the underlying terms of the debt instruments. Substantially all our debt is classified within Level 2 of the fair value hierarchy.

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

NOTE 9 - INCOME TAXES
Our effective tax rates were 27.4% and 11.8% in the three months and 23.2% and 11.4% in the six months 2018 and 2017. The increase in the effective income tax rates in the three and six months 2018 is primarily due to an additional $57 of transition tax associated with the Tax Cuts and Jobs Act (the Act) of 2017 and restructuring-related activities to integrate recent acquisitions.
In December 2017 we recorded a provisional transition tax charge and a change in deferred tax accounts associated with the Act. Subsequent to the Act being signed into legislation, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to provide guidance that allows provisional amounts associated with the Act to be updated during a measurement period ending December 22, 2018. Our accounting for the impact of the Act is not considered complete and the final impact of the Act may differ from our estimates due to changes in interpretation of the Act, additional legislative action, or guidance issued by tax authorities or regulatory bodies.
NOTE 10 - SEGMENT INFORMATION
 
Three Months
 
Six Months
 
2018
2017
 
2018
2017
Orthopaedics
$
1,228

$
1,141

 
$
2,444

$
2,276

MedSurg
1,455

1,336

 
2,882

2,641

Neurotechnology and Spine
639

535

 
1,237

1,050

Net sales
$
3,322

$
3,012

 
$
6,563

$
5,967

Orthopaedics
$
437

$
395

 
$
866

$
788

MedSurg
326

285

 
627

569

Neurotechnology and Spine
181

150

 
359

289

Segment operating income
$
944

$
830

 
$
1,852

$
1,646

Items not allocated to segments:
 
 
 
 
 
Corporate and other
(89
)
(77
)
 
(187
)
(176
)
Acquisition and integration-related charges
(24
)
(9
)
 
(41
)
(18
)
Amortization of purchased intangible assets
(110
)
(95
)
 
(212
)
(183
)
Restructuring-related and other charges
(22
)
(45
)
 
(85
)
(83
)
European Medical Devices Regulation
(2
)

 
(3
)

Rejuvenate and other recall-related matters
(2
)
(72
)
 
(6
)
(98
)
Regulatory and legal matters
(23
)
(30
)
 
(55
)
(30
)
Consolidated operating income
$
672

$
502

 
$
1,263

$
1,058

There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2017.

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ABOUT STRYKER
Stryker Corporation ("we" or "our") is one of the world's leading medical technology companies and, together with our customers, we are driven to make healthcare better. We offer innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine that help improve patient and hospital outcomes.
We segregate our operations into three reportable business segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. Orthopaedics products consist primarily of implants used in hip and knee joint replacements and trauma and extremities surgeries. MedSurg products include surgical equipment and surgical navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling and emergency medical equipment, and intensive care disposable products (Medical), reprocessed and remanufactured medical devices (Sustainability) and other medical device products used in a variety of medical specialties. Neurotechnology and Spine products include neurosurgical, neurovascular and spinal implant devices.
Overview of the Three and Six Months
In the three months 2018 we achieved sales growth of 10.3%. Excluding the impact of acquisitions and the adoption of Accounting Standards Update 2014-09, Revenue From Contracts with Customers, as well as related amendments (ASC 606), sales grew 7.9% in constant currency. We reported operating income margin
 
of 20.2% in the three months 2018, net earnings of $452 and net earnings per diluted share of $1.19. Excluding the impact of certain items, we expanded adjusted operating income margin 70 basis points to 25.7%, with adjusted net earnings(1) of $670 and growth of 15.0% in adjusted net earnings per diluted share(1).
In the six months 2018 we achieved sales growth of 10.0%. Excluding the impact of ASC 606, sales grew 7.5% in constant currency. We reported operating income margin of 19.2% in the six months 2018, net earnings of $895 and net earnings per diluted share of $2.35. Excluding the impact of certain items, we expanded adjusted operating income margin 80 basis points to 25.4%, with adjusted net earnings(1) of $1,308 and growth of 14.3% in adjusted net earnings per diluted share(1).
Recent Developments
In March 2018 we issued $600 of senior unsecured notes with a coupon of 3.650% due on March 7, 2028. In April 2018 we repaid $600 of our senior unsecured notes with a coupon of 1.300%. Refer to Note 8 to our Consolidated Financial Statements for further information.
In February 2018 we completed the acquisition of Entellus Medical, Inc. (Entellus) for $24.00 per share, or an aggregate purchase price of $697, net of cash acquired. Entellus is focused on delivering superior patient and physician experiences through products designed for the minimally invasive treatment of various ear, nose and throat (ENT) disease states. Entellus is part of the Neurotechnology business within the Neurotechnology and Spine segment. Refer to Note 7 to our Consolidated Financial Statements for further information.

 
(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.
RESULTS OF OPERATIONS
 
Three Months
 
Six Months
 
 
 
Percent Net Sales
Percentage
 
 
 
Percent Net Sales
Percentage
 
2018
2017
2018
2017
Change
 
2018
2017
2018
2017
Change
Net sales
$
3,322

$
3,012

100.0
 %
100.0
 %
10.3
 %
 
$
6,563

$
5,967

100.0
 %
100.0
 %
10.0
 %
Gross profit
2,190

1,991

65.9

66.1

10.0

 
4,327

3,955

65.9

66.3

9.4

Research, development and engineering expenses
216

192

6.5

6.4

12.5

 
420

384

6.4

6.4

9.4

Selling, general and administrative expenses
1,190

1,130

35.8

37.5

5.3

 
2,426

2,232

37.0

37.4

8.7

Recall charges
2

72

0.1

2.4

(97.2
)
 
6

98

0.1

1.6

(93.9
)
Amortization of intangible assets
110

95

3.3

3.2

15.8

 
212

183

3.2

3.1

15.8

Other income (expense), net
(49
)
(58
)
(1.5
)
(1.9
)
(15.5
)
 
(98
)
(115
)
(1.5
)
(1.9
)
(14.8
)
Income taxes
171

53

 
 
222.6

 
270

108

 
 
150.0

Net earnings
$
452

$
391

13.6
 %
13.0
 %
15.6
 %
 
$
895

$
835

13.6
 %
14.0
 %
7.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per diluted share
$
1.19

$
1.03

 
 
15.5
 %
 
$
2.35

$
2.20

 
 
6.8
 %
Adjusted net earnings per diluted share(1)
$
1.76

$
1.53

 
 
15.0
 %
 
$
3.44

$
3.01

 
 
14.3
 %
Geographic and Segment Net Sales
Three Months
 
Six Months
 
 
 
Percentage Change
 
 
 
Percentage Change
 
2018
2017
As Reported
Constant
Currency
 
2018
2017
As Reported
Constant
Currency
Geographic:
 
 
 
 
 
 
 
 
 
United States
$
2,385

$
2,200

8.4
%
8.4
%
 
$
4,699

$
4,364

7.7
%
7.7
%
International
937

812

15.4

11.0

 
1,864

1,603

16.3

9.4

Total
$
3,322

$
3,012

10.3
%
9.1
%
 
$
6,563

$
5,967

10.0
%
8.1
%
Segment:
 
 
 
 
 
 
 
 
 
Orthopaedics
$
1,228

$
1,141

7.6
%
6.1
%
 
$
2,444

$
2,276

7.4
%
5.2
%
MedSurg
1,455

1,336

8.9

8.2

 
2,882

2,641

9.1

7.8

Neurotechnology and Spine
639

535

19.4

17.9

 
1,237

1,050

17.8

15.4

Total
$
3,322

$
3,012

10.3
%
9.1
%
 
$
6,563

$
5,967

10.0
%
8.1
%

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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

Supplemental Net Sales Growth Information
 
 
 
 
 
 
 
 
 
Three Months
 
Six Months
 
 
Percentage Change
 
 
Percentage Change
 
 
 
 
United States
International
 
 
 
 
United States
International
 
2018
2017
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
 
2018
2017
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Knees
$
422

$
389

8.5
%
7.4
 %
7.8
 %
10.3
%
6.4
%
 
$
841

$
780

7.8
 %
6.0
 %
6.5
 %
11.3
%
4.9
 %
Hips
336

322

4.3

3.0

2.0

8.4

4.5

 
667

642

3.9

1.7

1.2

8.5

2.4

Trauma and Extremities
387

351

10.3

8.3

6.1

17.9

12.8

 
776

703

10.4

7.5

6.8

17.0

8.8

Other
83

79

5.1

2.8

4.6

7.1

6.6

 
160

151

6.0

4.6

7.4


(3.3
)

$
1,228

$
1,141

7.6
%
6.1
 %
5.5
 %
12.1
%
7.9
%
 
$
2,444

$
2,276

7.4
 %
5.2
 %
5.3
 %
11.9
%
5.1
 %
MedSurg:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
438

$
392

11.7
%
10.9
 %
11.9
 %
11.2
%
8.2
%
 
$
850

$
786

8.1
 %
6.7
 %
7.2
 %
11.4
%
5.2
 %
Endoscopy
448

406

10.3

9.6

11.0

8.0

3.8

 
892

779

14.5

13.2

15.1

12.5

6.4

Medical
505

474

6.5

6.0

3.2

19.8

15.0

 
1,016

949

7.1

5.8

3.1

21.8

14.9

Sustainability
64

64


(0.9
)
(1.6
)

27.2

 
124

127

(2.4
)
(2.8
)
(3.1
)

16.1


$
1,455

$
1,336

8.9
%
8.2
 %
7.8
 %
13.3
%
9.3
%
 
$
2,882

$
2,641

9.1
 %
7.8
 %
7.4
 %
15.6
%
9.2
 %
Neurotechnology and Spine:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
$
437

$
352

24.1
%
22.4
 %
25.6
 %
22.5
%
16.8
%
 
$
847

$
683

24.0
 %
21.3
 %
22.4
 %
27.3
%
19.4
 %
Spine
202

183

10.4

9.2

2.1

35.7

31.2

 
390

367

6.3

4.5


25.9

18.4


$
639

$
535

19.4
%
17.9
 %
16.5
 %
25.7
%
20.4
%
 
$
1,237

$
1,050

17.8
 %
15.4
 %
13.6
 %
27.0
%
19.1
 %
Total
$
3,322

$
3,012

10.3
%
9.1
 %
8.4
 %
15.4
%
11.0
%
 
$
6,563

$
5,967

10.0
 %
8.1
 %
7.7
 %
16.3
%
9.4
 %
 
Consolidated Net Sales
Consolidated net sales increased 10.3% in the three months 2018 as reported and 9.1% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.2%. Excluding the 1.9% impact of acquisitions and 0.7% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 9.0% from unit volume partially offset by 1.1% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, instruments, knee, trauma and extremities and medical products.
Consolidated net sales increased 10.0% in the six months 2018 as reported and 8.1% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.9%. Excluding the 1.5% impact of acquisitions and 0.9% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 8.7% from unit volume partially offset by 1.2% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, trauma and extremities, knee, medical, endoscopy, instruments and medical products.
Orthopaedics Net Sales
Orthopaedics net sales increased 7.6% in the three months 2018 as reported and 6.1% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.5%. Excluding the 0.5% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 8.9% from unit volume partially offset by 2.3% due to lower prices. The unit volume increase was primarily due to higher shipments of trauma and extremities and knee products.
Orthopaedics net sales increased 7.4% in the six months 2018 as reported and 5.2% in constant currency, as foreign currency exchange rates positively impacted net sales by 2.2%. Excluding the 0.4% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 7.9% from unit volume partially offset by 2.3% due to lower prices. The unit volume increase was primarily due to higher shipments of trauma and extremities, reconstructive capital and knee products.
 
MedSurg Net Sales
MedSurg net sales increased 8.9% in the three months 2018 as reported and 8.2% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.7%. Excluding the 1.9% impact of acquisitions and 1.0% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 7.6% from unit volume partially offset by 0.3% due to lower prices. The unit volume increase was primarily due to higher shipments of instruments and medical products.
MedSurg net sales increased 9.1% in the six months 2018 as reported and 7.8% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.3%. Excluding the 1.6% impact of acquisitions and 1.4% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 7.9% from unit volume partially offset by 0.3% due to lower prices. The unit volume increase was primarily due to higher shipments of medical, endoscopy and instruments products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales increased 19.4% in the three months 2018 as reported and 17.9% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.5%. Excluding the 6.1% impact of acquisitions and 0.6% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 13.3% from unit volume partially offset by 0.9% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology products.
Neurotechnology and Spine net sales increased 17.8% in the six months 2018 as reported and 15.4% in constant currency, as foreign currency exchange rates positively impacted net sales by 2.4%. Excluding the 4.8% impact of acquisitions and 0.6% impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 12.7% from unit volume partially offset by 1.5% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology products.


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

STRYKER CORPORATION
 
2018 Second Quarter Form 10-Q

We adopted Accounting Standards Update 2014-09, Revenue From Contracts with Customers, as well as related amendments (ASC 606), issued by the Financial Accounting Standards Board on a modified retrospective basis, effective January 1, 2018. Refer to Note 1 and Note 2 to our Consolidated Financial Statements for further information.
The following sales growth data and subsequent analysis have been presented to supplement our discussion and analysis of net sales by quantifying and excluding the impact of the adoption of ASC 606 for our businesses, which related primarily to the reclassification of certain costs previously presented as selling, general and administrative expenses to net sales.
The impact of adopting ASC 606 is expected to continue to have an impact on net sales in 2018. The impact to the 12 months 2017 if ASC 606 was adopted would have resulted in a reduction to net sales of approximately $112 ($28 per quarter).
 
Three Months
 
 
 
 
 
Percentage Change Excluding ASC 606 Impact
 
 
Percentage Change
 
 
 
International
 
2018
2017
As Reported
Excluding ASC 606 Impact
 
Constant Currency
United States
Excluding ASC 606 Impact
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
 
 
Knees
$
422

$
389

8.5
%
9.0
%
 
7.8
%
8.2
%
11.0
%
6.7
%
Hips
336

322

4.3

4.7

 
3.3

2.5

8.5

4.7

Trauma and Extremities
387

351

</