10-Q 1 syk10q93018.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 September 30, 2018
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-09165
strykerlogoa59.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 every Interactive Data File required to be submitted 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 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
[ ]
 
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 374,187,286 shares of Common Stock, $0.10 par value, on September 30, 2018.
 


STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

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

2018
 
2017
 
2018
 
2017
Net sales
$
3,242

 
$
3,006

 
$
9,805

 
$
8,973

Cost of sales
1,087

 
1,022

 
3,323

 
3,034

Gross profit
$
2,155

 
$
1,984

 
$
6,482

 
$
5,939

Research, development and engineering expenses
221

 
198

 
641

 
582

Selling, general and administrative expenses
1,242

 
1,103

 
3,668

 
3,335

Recall charges
4

 
66

 
10

 
164

Amortization of intangible assets
112

 
92

 
324

 
275

Total operating expenses
$
1,579

 
$
1,459

 
$
4,643

 
$
4,356

Operating income
$
576

 
$
525

 
$
1,839

 
$
1,583

Other income (expense), net
(42
)
 
(54
)
 
(140
)
 
(169
)
Earnings before income taxes
$
534

 
$
471

 
$
1,699

 
$
1,414

Income taxes
(56
)
 
37

 
214

 
145

Net earnings
$
590

 
$
434

 
$
1,485

 
$
1,269

 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
Basic net earnings per share of common stock
$
1.58

 
$
1.16

 
$
3.97

 
$
3.39

Diluted net earnings per share of common stock
$
1.55

 
$
1.14

 
$
3.90

 
$
3.34

 
 
 
 
 
 
 
 
Weighted-average shares outstanding (in millions):
 
 
 
 
 
 
 
Basic
374.1

 
374.2

 
374.0

 
373.8

Effect of dilutive employee stock options
6.1

 
6.0

 
6.4

 
6.0

Diluted
380.2

 
380.2

 
380.4

 
379.8

 
 
 
 
 
 
 
 
Cash dividends declared per share of common stock
$
0.470

 
$
0.425

 
$
1.410

 
$
1.275

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
 
Nine Months
 
2018
 
2017
 
2018
 
2017
Net earnings
$
590

 
$
434

 
$
1,485

 
$
1,269

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

 
(3
)
 
(1
)
 
(3
)
Pension plans
(3
)
 
14

 
(1
)
 
4

Unrealized gains (losses) on designated hedges
6

 
(6
)
 
23

 
(7
)
Financial statement translation
(50
)
 
87

 
(72
)
 
269

Total other comprehensive income (loss), net of tax
$
(47
)
 
$
92

 
$
(51
)
 
$
263

Comprehensive income
$
543

 
$
526

 
$
1,434

 
$
1,532


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

CONSOLIDATED BALANCE SHEETS
 
September 30
 
December 31
 
2018
 
2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,918

 
$
2,542

Marketable securities
292

 
251

Accounts receivable, less allowance of $62 ($59 in 2017)
2,076

 
2,198

Inventories:
 
 
 
Materials and supplies
614

 
528

Work in process
174

 
148

Finished goods
2,105

 
1,789

Total inventories
$
2,893

 
$
2,465

Prepaid expenses and other current assets
739

 
537

Total current assets
$
7,918

 
$
7,993

Property, plant and equipment:
 
 
 
Land, buildings and improvements
976

 
936

Machinery and equipment
3,176

 
2,864

Total property, plant and equipment
$
4,152

 
$
3,800

Less accumulated depreciation
1,974

 
1,825

Property, plant and equipment, net
$
2,178

 
$
1,975

Goodwill
7,634

 
7,168

Other intangibles, net
3,463

 
3,477

Other noncurrent assets
891

 
1,584

Total assets
$
22,084

 
$
22,197

 
 
 
 
Liabilities and shareholders' equity

 
 
Current liabilities
 
 
 
Accounts payable
$
563

 
$
487

Accrued compensation
748

 
838

Income taxes
100

 
143

Dividend payable
176

 
178

Accrued recall expenses
111

 
196

Accrued expenses and other liabilities
1,180

 
1,011

Current maturities of debt
1,275

 
632

Total current liabilities
$
4,153

 
$
3,485

Long-term debt, excluding current maturities
5,928

 
6,590

Income taxes
1,251

 
1,261

Other noncurrent liabilities
892

 
881

Total liabilities
$
12,224

 
$
12,217

Shareholders' equity
 
 
 
Common stock, $0.10 par value
37

 
37

Additional paid-in capital
1,535

 
1,496

Retained earnings
8,892

 
8,986

Accumulated other comprehensive loss
(604
)
 
(553
)
Total Stryker shareholders' equity
$
9,860

 
$
9,966

Noncontrolling interest

 
14

Total shareholders' equity
$
9,860

 
$
9,980

Total liabilities and shareholders' equity
$
22,084

 
$
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 Third Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months
 
2018
 
2017
Operating activities
 
 
 
Net earnings
$
1,485

 
$
1,269

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
223

 
198

Amortization of intangible assets
324

 
275

Share-based compensation
87

 
85

Recall charges
10

 
164

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
119

 
72

Inventories
(439
)
 
(322
)
Accounts payable
57

 
(2
)
Accrued expenses and other liabilities
(40
)
 
(97
)
Recall-related payments
(89
)
 
(492
)
Income taxes
(231
)
 
(7
)
Other, net
58

 
(263
)
Net cash provided by operating activities
$
1,564

 
$
880

Investing activities
 
 
 
Acquisitions, net of cash acquired
(770
)
 
(712
)
Purchases of marketable securities
(214
)
 
(85
)
Proceeds from sales of marketable securities
173

 
56

Purchases of property, plant and equipment
(418
)
 
(412
)
Net cash used in investing activities
$
(1,229
)
 
$
(1,153
)
Financing activities
 
 
 
Payments on short-term borrowings, net
(8
)
 
(198
)
Proceeds from issuance of long-term debt
595

 
498

Payments on long-term debt
(600
)
 

Dividends paid
(528
)
 
(477
)
Repurchases of common stock
(300
)
 
(230
)
Cash paid for taxes from withheld shares
(104
)
 
(83
)
Payments to purchase noncontrolling interest
(14
)
 

Other financing, net
8

 
(32
)
Net cash used in financing activities
$
(951
)
 
$
(522
)
Effect of exchange rate changes on cash and cash equivalents
(8
)
 
71

Change in cash and cash equivalents
$
(624
)
 
$
(724
)
Cash and cash equivalents at beginning of period
2,542

 
3,316

Cash and cash equivalents at end of period
$
1,918

 
$
2,592


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2018 Third 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 September 30, 2018 and the results of operations for the three and nine 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 2018 the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract to align with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the impact on our Consolidated Financial Statements and the timing of adoption of this update.
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 plan to adopt this update on January 1, 2019.
In February 2016 the FASB issued ASU 2016-02, Leases, in July 2018 issued ASU 2018-10, Codification Improvements to Topic 842, Leases and in August 2018 issued ASU 2018-11 Leases - Targeted Improvements (ASU 2018-11). 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 leases, as well as some service contracts, will result in the recognition of right of use assets and corresponding lease liabilities on 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 evaluation of our lease agreements and other contracts to assess the impact of the new guidance and are in the process
 
of implementing a lease administration application. We plan to adopt these updates on January 1, 2019, electing the additional transition method provided for in ASU 2018-11 by recording a cumulative-effect adjustment to our Consolidated Balance Sheets as of the adoption date.
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 nine 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.

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

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 added 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 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 have received a purchase order and appropriate notification the product has been used or implanted. 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 nine 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 certainty of our net sales and cash flows are affected by economic factors.
 
Three Months
 
Nine Months
 
2018
2017
 
2018
2017
Orthopaedics:
 
 
 
 
 
Knees
$
395

$
369

 
$
1,236

$
1,149

Hips
316

313

 
983

955

Trauma and Extremities
376

367

 
1,152

1,070

Other
84

83

 
244

234

 
$
1,171

$
1,132

 
$
3,615

$
3,408

MedSurg:
 
 
 
 
 
Instruments
$
442

$
404

 
$
1,292

$
1,190

Endoscopy
443

404

 
1,335

1,183

Medical
492

464

 
1,508

1,413

Sustainability
66

64

 
190

191

 
$
1,443

$
1,336

 
$
4,325

$
3,977

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
435

$
353

 
$
1,282

$
1,036

Spine
193

185

 
583

552

 
$
628

$
538

 
$
1,865

$
1,588

Total
$
3,242

$
3,006

 
$
9,805

$
8,973

 
 
Three Months 2018
 
Three Months 2017
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
291

$
104

 
$
270

$
99

Hips
198

118

 
194

119

Trauma and Extremities
242

134

 
237

130

Other
67

17

 
68

15

 
$
798

$
373

 
$
769

$
363

MedSurg:
 
 
 
 
 
Instruments
$
352

$
90

 
$
316

$
88

Endoscopy
346

97

 
316

88

Medical
393

99

 
357

108

Sustainability
66


 
63


 
$
1,157

$
286

 
$
1,052

$
284

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
284

$
150

 
$
222

$
131

Spine
142

52

 
139

46

 
$
426

$
202

 
$
361

$
177

Total
$
2,381

$
861

 
$
2,182

$
824

 
Nine Months 2018
 
Nine Months 2017
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
896

$
340

 
$
838

$
311

Hips
610

373

 
601

354

Trauma and Extremities
729

423

 
693

377

Other
198

46

 
190

44

 
$
2,433

$
1,182

 
$
2,322

$
1,086

MedSurg:
 
 
 
 
 
Instruments
$
1,007

$
285

 
$
927

$
263

Endoscopy
1,049

286

 
927

256

Medical
1,158

350

 
1,099

314

Sustainability
189

1

 
190

1

 
$
3,403

$
922

 
$
3,143

$
834

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
820

$
462

 
$
660

$
376

Spine
424

159

 
421

131

 
$
1,244

$
621

 
$
1,081

$
507

Total
$
7,080

$
2,725

 
$
6,546

$
2,427

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 we have received a purchase order and appropriate notification the product has been used or implanted. 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 a purchase order has been received and control has transferred. 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

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

installation, provide training and perform 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 a purchase order has been received and control has transferred.
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 September 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 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, $43 of which were recognized in sales in the three months 2018 and $201 in the nine months 2018. On September 30, 2018 our contract liabilities were $281.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
Three Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(5
)
$
(132
)
$
45

$
(465
)
$
(557
)
OCI
1

(2
)
8

(50
)
(43
)
Income taxes

(2
)
(2
)

(4
)
Reclassifications to:
 
 
 
 
 
Cost of sales

2

(2
)


Other expense
(1
)

1



Income taxes

(1
)
1



Net OCI
$

$
(3
)
$
6

$
(50
)
$
(47
)
Ending
$
(5
)
$
(135
)
$
51

$
(515
)
$
(604
)
Three Months 2017
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(142
)
$
23

$
(471
)
$
(590
)
OCI
(6
)
16

(7
)
74

77

Income taxes
2

(4
)
2

13

13

Reclassifications to:
 
 
 
 
 
Cost of sales

2

(1
)

1

Other income
1




1

Net OCI
$
(3
)
$
14

$
(6
)
$
87

$
92

Ending
$
(3
)
$
(128
)
$
17

$
(384
)
$
(498
)
 
Nine Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(4
)
$
(134
)
$
28

$
(443
)
$
(553
)
OCI
(1
)
(6
)
32

(84
)
(59
)
Income taxes

1

(8
)
12

5

Reclassifications to:
 
 
 
 
 
Cost of sales

6

(4
)

2

Other expense


1


1

Income taxes

(2
)
2



Net OCI
$
(1
)
$
(1
)
$
23

$
(72
)
$
(51
)
Ending
$
(5
)
$
(135
)
$
51

$
(515
)
$
(604
)
Nine Months 2017
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$

$
(132
)
$
24

$
(653
)
$
(761
)
OCI
(6
)
1

(17
)
227

205

Income taxes
2

(1
)
5

42

48

Reclassifications to:
 
 
 
 
 
Cost of sales

5

7


12

Other income
1




1

Income taxes

(1
)
(2
)

(3
)
Net OCI
$
(3
)
$
4

$
(7
)
$
269

$
263

Ending
$
(3
)
$
(128
)
$
17

$
(384
)
$
(498
)
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 have not changed our hedging strategies, accounting practices or objectives from those disclosed in our Annual Report on Form 10-K for 2017.
September 2018
Designated
Non-Designated
Total
Gross notional amount
$
828

$
4,611

$
5,439

Maximum term in days
 
 
586

Fair value:
 
 
 
Other current assets
$
16

$
22

$
38

Other noncurrent assets
1

1

2

Other current liabilities
(3
)
(15
)
(18
)
Total fair value
$
14

$
8

$
22

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 nine months 2018 we terminated our net investment hedges. The amounts related to settled net investment hedges will be subsequently recognized to other income (expense), net 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.

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

Net Currency Exchange Rate Gains (Losses)
 
Three Months
 
Nine Months
Recorded in:
2018
2017
 
2018
2017
Cost of sales
$
2

$
1

 
$
4

$
(7
)
Other income (expense), net
1

(2
)
 
(3
)
(6
)
Total
$
3

$
(1
)
 
$
1

$
(13
)
On September 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 are $13 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 nine 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 to interest expense within other income (expense), net.
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 recognized in interest expense within other income (expense), net 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 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
September
December
2018
2017
Cash and cash equivalents
$
1,918

$
2,542

Trading marketable securities
130

121

Level 1 - Assets
$
2,048

$
2,663

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
53

$
125

Foreign government debt securities
112

2

United States agency debt securities
2

27

United States Treasury debt securities
33

70

Certificates of deposit
92

27

Total available-for-sale marketable securities
$
292

$
251

Foreign currency exchange forward contracts
40

15

Interest rate swap asset

49

Level 2 - Assets
$
332

$
315

Total assets measured at fair value
$
2,380

$
2,978

 
Liabilities Measured at Fair Value
September
December
2018
2017
Deferred compensation arrangements
$
130

$
121

Level 1 - Liabilities
$
130

$
121

Foreign currency exchange forward contracts
$
18

$
37

Level 2 - Liabilities
$
18

$
37

Contingent consideration:
 
 
Beginning
$
32

$
86

Additions
78

3

Change in estimate

2

Settlements
(9
)
(59
)
Ending
$
101

$
32

Level 3 - Liabilities
$
101

$
32

Total liabilities measured at fair value
$
249

$
190

Fair Value of Available for Sale Securities by Maturity
 
September 2018
December 2017
Due in one year or less
$
140

$
107

Due after one year through three years
$
152

$
144

On September 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 recorded in other income (expense), net, was $29 and $15 in the three months and was $79 and $38 in the nine months 2018 and 2017.
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 September 30, 2018. On September 30, 2018 substantially all our investments with unrealized losses that were not deemed to be other-than-temporarily impaired were nominal and were in a continuous unrealized loss position for less than 12 months.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed
116
$
87

Foreign government
1
2

United States agency
14
24

United States Treasury
39
86

Certificates of deposit
32
48

Total
202
$
247

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.

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

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 $2,077 to $2,318 ($2,309 to $2,550 before $232 of third-party insurance recoveries). We recognized additional charges to earnings of $4 in the three and nine months 2018, representing the excess of the minimum of the range over the 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 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 nine months 2018 and 2017 cash paid for acquisitions, net of cash acquired, was $770 and $712.
On October 23, 2018 we completed the acquisition of Invuity, Inc. (Invuity) for $7.40 per share, or an aggregate purchase price of approximately $230. Invuity is the leader in advanced photonics and single-use, lighted instruments that deliver enhanced visualization for a wide variety of clinical applications including orthopaedic and spine surgery, general surgery, and women's health procedures, and is a recent entrant into the enhanced energy market. Invuity will be integrated into our Instruments business within MedSurg.
On October 1, 2018 we completed the acquisition of HyperBranch Medical Technology, Inc. (HyperBranch) for an aggregate purchase price of approximately $220. HyperBranch is dedicated to developing medical devices based on its proprietary polymers and cross-linked hydrogels. Its Adherus AutoSpray Dural Sealant product is one of only two FDA-approved dural sealants on the market. HyperBranch will be integrated into our Neurotechnology business within Neurotechnology and Spine.
In August 2018 we announced a definitive agreement to acquire all the issued and outstanding shares of common stock of K2M Group Holdings, Inc. (K2M) for $27.50 per share, or an aggregate purchase price of approximately $1,400. K2M is a global leader of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. We expect the acquisition to close in the fourth quarter 2018, subject to expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, approval of the merger by K2M's stockholders and other customary closing conditions. K2M will be integrated into our Spine business within Neurotechnology and Spine.
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 our 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 our Endoscopy business within the MedSurg segment. Goodwill attributable to the acquisition of NOVADAQ is not deductible for tax purposes.
The purchase price allocation for Entellus is preliminary and is based on estimates and assumptions that are subject to change within the measurement period. The purchase price allocation for the acquisition of NOVADAQ was completed in the nine months 2018.

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

Purchase Price Allocation of Acquired Net Assets
 
2018
 
2017
 
Entellus
 
NOVADAQ
Tangible assets:
 
 
 
Accounts receivable
$
17

 
$
11

Inventory
14

 
25

Other assets
72

 
7

Contingent consideration
(78
)
 

Other liabilities
(92
)
 
(56
)
Intangible assets:
 
 
 
Customer relationship
33

 
18

Trade name

 
1

Developed technology and patents
256

 
141

Goodwill
475

 
527

Purchase price, net of cash acquired
$
697

 
$
674

Weighted-average life of intangible assets
16

 
15

Estimated Amortization Expense
Remainder of 2018
2019
2020
2021
2022
$
105

$
384

$
349

$
338

$
331

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 September 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. In August 2018 we extended for an additional two years the maturity date of our $1,500 Credit Agreement, which now matures on August 19, 2023. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on September 30, 2018.
Summary of Total Debt
September 2018
 
December 2017
Senior unsecured notes:
 
 
 
 
Rate
 
Due
 
 
 
 
1.300%
 
April 1, 2018
$

 
$
600

 
1.800%
 
January 15, 2019
500

 
499

 
2.000%
 
March 8, 2019
749

 
748

 
4.375%
 
January 15, 2020
499

 
498

 
2.625%
 
March 15, 2021
747

 
746

 
3.375%
 
May 15, 2024
584

 
598

 
3.375%
 
November 1, 2025
746

 
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
28

 
35

Total debt
$
7,203

 
$
7,222

Less current maturities of debt
1,275

 
632

Total long-term debt
$
5,928

 
$
6,590

 
 
 
 
Unamortized debt issuance costs
$
39

 
$
39

Available borrowing capacity
$
1,553

 
$
1,547

Fair value of senior unsecured notes
$
7,118

 
$
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.
NOTE 9 - INCOME TAXES
Our effective tax rates were (10.5)% and 7.9% in the three months 2018 and 2017. The decrease in the effective tax rate was primarily due to adjustments related to the Tax Cuts and Jobs Act (the Act) of 2017.
Our effective tax rates were 12.6% and 10.3% in the nine months 2018 and 2017. The increase in the effective income tax rate was primarily due to adjustments related to the Act 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 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
 
Nine Months
 
2018
2017
 
2018
2017
Orthopaedics
$
1,171

$
1,132

 
$
3,615

$
3,408

MedSurg
1,443

1,336

 
4,325

3,977

Neurotechnology and Spine
628

538

 
1,865

1,588

Net sales
$
3,242

$
3,006

 
$
9,805

$
8,973

Orthopaedics
$
397

$
390

 
$
1,263

$
1,178

MedSurg
341

272

 
968

841

Neurotechnology and Spine
173

157

 
532

446

Segment operating income
$
911

$
819

 
$
2,763

$
2,465

Items not allocated to segments:
 
 
 
 
 
Corporate and other
(104
)
(89
)
 
(291
)
(265
)
Acquisition and integration-related charges
(8
)
(11
)
 
(49
)
(29
)
Amortization of purchased intangible assets
(112
)
(92
)
 
(324
)
(275
)
Restructuring-related and other charges
(39
)
(36
)
 
(124
)
(119
)
European Medical Devices Regulation
(2
)

 
(5
)

Rejuvenate and other recall-related matters
(4
)
(66
)
 
(10
)
(164
)
Regulatory and legal matters
(66
)

 
(121
)
(30
)
Consolidated operating income
$
576

$
525

 
$
1,839

$
1,583

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 Third 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, 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 Nine Months
In the three months 2018 we achieved sales growth of 7.9%. 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 17.8% in the three months 2018, net earnings of $590 and net earnings per diluted share of $1.55. Excluding the impact of certain items, we expanded adjusted operating income margin 60 basis points to 24.9%, with adjusted net earnings(1) of $643 and growth of 11.2% in adjusted net earnings per diluted share(1).
 
In the nine months 2018 we achieved sales growth of 9.3%. Excluding the impact of acquisitions and the adoption of ASC 606, sales grew 7.6% in constant currency. We reported operating income margin of 18.8% in the nine months 2018, net earnings of $1,485 and net earnings per diluted share of $3.90. Excluding the impact of certain items, we expanded adjusted operating income margin 70 basis points to 25.2%, with adjusted net earnings(1) of $1,951 and growth of 13.2% in adjusted net earnings per diluted share(1).
Recent Developments
In August 2018 we announced a definitive agreement to acquire all the issued and outstanding shares of common stock of K2M Group Holdings, Inc. (K2M) for $27.50 per share, or an aggregate purchase price of approximately $1,400. K2M is a global leader of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. We expect the acquisition to close in the fourth quarter 2018, subject to expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, approval of the merger by K2M's stockholders and other customary closing conditions. K2M will be integrated into our Spine business within Neurotechnology and Spine.
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 our 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
 
Nine Months
 
 
 
Percent Net Sales
Percentage
 
 
 
Percent Net Sales
Percentage
 
2018
2017
2018
2017
Change
 
2018
2017
2018
2017
Change
Net sales
$
3,242

$
3,006

100.0
 %
100.0
 %
7.9
 %
 
$
9,805

$
8,973

100.0
 %
100.0
 %
9.3
 %
Gross profit
2,155

1,984

66.5

66.0

8.6

 
6,482

5,939

66.1

66.2

9.1

Research, development and engineering expenses
221

198

6.8

6.6

11.6

 
641

582

6.5

6.5

10.1

Selling, general and administrative expenses
1,242

1,103

38.3

36.7

12.6

 
3,668

3,335

37.4

37.2

10.0

Recall charges
4

66

0.1

2.2

(93.9
)
 
10

164

0.1

1.8

(93.9
)
Amortization of intangible assets
112

92

3.5

3.1

21.7

 
324

275

3.3

3.1

17.8

Other income (expense), net
(42
)
(54
)
(1.3
)
(1.8
)
(22.2
)
 
(140
)
(169
)
(1.4
)
(1.9
)
(17.2
)
Income taxes
(56
)
37

 
 
(251.4
)
 
214

145

 
 
47.6

Net earnings
$
590

$
434

18.2
 %
14.4
 %
35.9
 %
 
$
1,485

$
1,269

15.1
 %
14.1
 %
17.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per diluted share
$
1.55

$
1.14

 
 
36.0
 %
 
$
3.90

$
3.34

 
 
16.8
 %
Adjusted net earnings per diluted share(1)
$
1.69

$
1.52

 
 
11.2
 %
 
$
5.13

$
4.53

 
 
13.2
 %

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

Geographic and Segment Net Sales
Three Months
 
Nine Months
 
 
 
Percentage Change
 
 
 
Percentage Change
 
2018
2017
As Reported
Constant
Currency
 
2018
2017
As Reported
Constant
Currency
Geographic:
 
 
 
 
 
 
 
 
 
United States
$
2,381

$
2,182

9.1
%
9.1
%
 
$
7,080

$
6,546

8.2
%
8.2
%
International
861

824

4.5

7.8

 
2,725

2,427

12.3

8.9

Total
$
3,242

$
3,006

7.9
%
8.8
%
 
$
9,805

$
8,973

9.3
%
8.4
%
Segment:
 
 
 
 
 
 
 
 
 
Orthopaedics
$
1,171

$
1,132

3.4
%
4.5
%
 
$
3,615

$
3,408

6.1
%
5.0
%
MedSurg
1,443

1,336

8.0

8.8

 
4,325

3,977

8.8

8.2

Neurotechnology and Spine
628

538

16.7

17.7

 
1,865

1,588

17.4

16.2

Total
$
3,242

$
3,006

7.9
%
8.8
%
 
$
9,805

$
8,973

9.3
%
8.4
%
Supplemental Net Sales Growth Information
 
 
 
 
 
 
 
 
 
Three Months
 
Nine 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
$
395

$
369

7.0
%
8.3
%
7.8
 %
5.1
 %
9.2
 %
 
$
1,236

$
1,149

7.6
 %
6.7
 %
6.9
 %
9.3
%
6.2
%
Hips
316

313

1.0

2.2

2.1

(0.8
)
2.5

 
983

955

2.9

1.9

1.5

5.4

2.4

Trauma and Extremities
376

367

2.5

3.2

2.1

3.1

5.1

 
1,152

1,070

7.7

6.0

5.2

12.2

7.5

Other
84

83

1.2

2.7

(1.5
)
13.3

19.1

 
244

234

4.3

3.9

4.2

4.5

4.1


$
1,171

$
1,132

3.4
%
4.5
%
3.8
 %
2.8
 %
6.0
 %
 
$
3,615

$
3,408

6.1
 %
5.0
 %
4.8
 %
8.8
%
5.4
%
MedSurg:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
442

$
404

9.4
%
10.0
%
11.4
 %
2.3
 %
4.2
 %
 
$
1,292

$
1,190

8.6
 %
7.8
 %
8.6
 %
8.4
%
4.9
%
Endoscopy
443

404

9.7

10.8

9.5

10.2

15.0

 
1,335

1,183

12.8

12.4

13.2

11.7

9.3

Medical
492

464

6.0

6.8

10.1

(8.3
)
(4.4
)
 
1,508

1,413

6.7

6.1

5.4

11.5

8.5

Sustainability
66

64

3.1

3.9

4.8


15.0

 
190

191

(0.5
)
(0.6
)
(0.5
)

15.7


$
1,443

$
1,336

8.0
%
8.8
%
10.0
 %
0.7
 %
4.3
 %
 
$
4,325

$
3,977

8.8
 %
8.2
 %
8.3
 %
10.6
%
7.6
%
Neurotechnology and Spine:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Neurotechnology
$
435

$
353

23.2
%
24.1
%
27.9
 %
14.5
 %
18.1
 %
 
$
1,282

$
1,036

23.7
 %
22.3
 %
24.2
 %
22.9
%
18.9
%
Spine
193

185

4.3

5.5

2.2

13.0

15.8

 
583

552

5.6

4.8

0.7

21.4

17.5


$
628

$
538

16.7
%
17.7
%
18.0
 %
14.1
 %
17.5
 %
 
$
1,865

$
1,588

17.4
 %
16.2
 %
15.1
 %
22.5
%
18.6
%
Total
$
3,242

$
3,006

7.9
%
8.8
%
9.1
 %
4.5
 %
7.8
 %
 
$
9,805

$
8,973

9.3
 %
8.4
 %
8.2
 %
12.3
%
8.9
%
 
Consolidated Net Sales
Consolidated net sales increased 7.9% in the three months 2018 as reported and 8.8% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.9%. Excluding the 1.8% impact of acquisitions and 0.9% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 9.5% from unit volume partially offset by 1.6% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, instruments, knee, medical and endoscopy products.
Consolidated net sales increased 9.3% in the nine months 2018 as reported and 8.4% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.9%. Excluding the 1.8% impact of acquisitions and 1.0% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 9.0% from unit volume partially offset by 1.4% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, medical, instruments, knee, endoscopy and trauma and extremities products.
 
Orthopaedics Net Sales
Orthopaedics net sales increased 3.4% in the three months 2018 as reported and 4.5% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.1%. Excluding the 0.6% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 7.6% from unit volume partially offset by 2.6% due to lower prices. The unit volume increase was primarily due to higher shipments of knee and trauma and extremities products.
Orthopaedics net sales increased 6.1% in the nine months 2018 as reported and 5.0% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.1%. Excluding the 0.5% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 7.8% from unit volume partially offset by 2.4% due to lower prices. The unit volume increase was primarily due to higher shipments of knee and trauma and extremities products.

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

STRYKER CORPORATION
 
2018 Third Quarter Form 10-Q

MedSurg Net Sales
MedSurg net sales increased 8.0% in the three months 2018 as reported and 8.8% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.8%. Excluding the 1.5% impact of acquisitions and 1.5% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 9.5% from unit volume partially offset by 0.7% due to lower prices. The unit volume increase was primarily due to higher shipments of instruments, medical and endoscopy products.
MedSurg net sales increased 8.8% in the nine months 2018 as reported and 8.2% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.6%. Excluding the 1.8% impact of acquisitions and 1.6% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 8.5% from unit volume partially offset by 0.5% due to lower prices. The unit volume increase was primarily due to higher shipments of medical, instruments and endoscopy products.
 
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales increased 16.7% in the three months 2018 as reported and 17.7% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.0%. Excluding the 6.5% impact of acquisitions and 0.7% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 13.5% from unit volume partially offset by 1.6% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology products.
Neurotechnology and Spine net sales increased 17.4% in the nine months 2018 as reported and 16.2% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.2%. Excluding the 5.4% impact of acquisitions and 0.7% negative impact from adoption of a new revenue recognition standard, net sales in constant currency increased by 13.0% 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.
 
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