10-Q 1 syk10q3312019.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 March 31, 2019
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-09165
strykerlogoa67.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 373,810,085 shares of Common Stock, $0.10 par value, on March 31, 2019.
 


STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

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

2019
 
2018
Net sales
$
3,516

 
$
3,241

Cost of sales
1,233

 
1,104

Gross profit
$
2,283

 
$
2,137

Research, development and engineering expenses
225

 
204

Selling, general and administrative expenses
1,403

 
1,236

Recall charges
13

 
4

Amortization of intangible assets
114

 
102

Total operating expenses
$
1,755

 
$
1,546

Operating income
$
528

 
$
591

Other income (expense), net
(48
)
 
(49
)
Earnings before income taxes
$
480

 
$
542

Income taxes
68

 
99

Net earnings
$
412

 
$
443

 
 
 
 
Net earnings per share of common stock:
 
 
 
Basic
$
1.10

 
$
1.18

Diluted
$
1.09

 
$
1.16

 
 
 
 
Weighted-average shares outstanding (in millions):
 
 
 
Basic
373.3

 
374.0

Effect of dilutive employee stock options
6.0

 
6.7

Diluted
379.3

 
380.7

 
 
 
 
Cash dividends declared per share of common stock
$
0.52

 
$
0.47

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
 
2019
 
2018
Net earnings
$
412

 
$
443

Other comprehensive income (loss), net of tax:
 
 
 
Marketable securities
1

 
(1
)
Pension plans
(4
)
 
(6
)
Unrealized gains (losses) on designated hedges
(16
)
 
15

Financial statement translation
85

 
35

Total other comprehensive income (loss), net of tax
$
66

 
$
43

Comprehensive income
$
478

 
$
486


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

CONSOLIDATED BALANCE SHEETS
 
March 31
 
December 31
 
2019
 
2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,674

 
$
3,616

Marketable securities
84

 
83

Accounts receivable, less allowance of $67 ($64 in 2018)
2,284

 
2,332

Inventories:
 
 
 
Materials and supplies
608

 
606

Work in process
178

 
149

Finished goods
2,278

 
2,200

Total inventories
$
3,064

 
$
2,955

Prepaid expenses and other current assets
782

 
747

Total current assets
$
7,888

 
$
9,733

Property, plant and equipment:
 
 
 
Land, buildings and improvements
1,021

 
1,041

Machinery and equipment
3,321

 
3,236

Total property, plant and equipment
$
4,342

 
$
4,277

Less accumulated depreciation
2,045

 
1,986

Property, plant and equipment, net
$
2,297

 
$
2,291

Goodwill
8,710

 
8,563

Other intangibles, net
4,240

 
4,163

Noncurrent deferred income tax assets
1,631

 
1,678

Other noncurrent assets
1,171

 
801

Total assets
$
25,937

 
$
27,229

 
 
 
 
Liabilities and shareholders' equity

 
 
Current liabilities
 
 
 
Accounts payable
$
619

 
$
646

Accrued compensation
531

 
917

Income taxes payable
154

 
158

Dividend payable
192

 
192

Accrued expenses and other liabilities
1,696

 
1,521

Current maturities of debt
521

 
1,373

Total current liabilities
$
3,713

 
$
4,807

Long-term debt, excluding current maturities
7,950

 
8,486

Income taxes
1,218

 
1,228

Other noncurrent liabilities
1,363

 
978

Total liabilities
$
14,244

 
$
15,499

Shareholders' equity
 
 
 
Common stock, $0.10 par value
37

 
37

Additional paid-in capital
1,538

 
1,559

Retained earnings
10,683

 
10,765

Accumulated other comprehensive loss
(565
)
 
(631
)
Total shareholders' equity
$
11,693

 
$
11,730

Total liabilities and shareholders' equity
$
25,937

 
$
27,229


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
 
Three Months 2019
 
Three Months 2018
 
Shares
Amount
 
Shares
Amount
Common stock
 
 
 
 
 
Beginning
374.4

$
37

 
374.4

$
37

Issuance of common stock under stock option and benefit plans
1.3


 
1.2


Repurchase of common stock
(1.9
)

 
(1.9
)

Ending
373.8

$
37

 
373.7

$
37

Additional paid-in capital
 
 
 
 
 
Beginning
 
$
1,559

 
 
$
1,496

Issuance of common stock under stock option and benefit plans
 
(48
)
 
 
(32
)
Repurchase of common stock
 
(8
)
 
 
(7
)
Share-based compensation
 
35

 
 
29

Ending
 
$
1,538

 
 
$
1,486

Retained earnings
 
 
 
 
 
Beginning
 
$
10,765

 
 
$
8,986

Cumulative effect of accounting changes
 

 
 
(759
)
Net earnings
 
412

 
 
443

Repurchase of common stock
 
(299
)
 
 
(293
)
Cash dividends declared
 
(195
)
 
 
(176
)
Ending
 
$
10,683

 
 
$
8,201

Accumulated other comprehensive (loss) income
 
 
 
 
 
Beginning
 
$
(631
)
 
 
$
(553
)
Other comprehensive income (loss)
 
66

 
 
43

Ending
 
$
(565
)
 
 
$
(510
)
Total Stryker shareholders' equity
 
$
11,693

 
 
$
9,214

Non-controlling interest
 
 
 
 
 
Beginning
 
$

 
 
$
14

Interest purchased
 

 
 
(6
)
Net earnings attributable to noncontrolling interest
 

 
 

Foreign currency exchange translation adjustment
 

 
 
1

Ending
 
$

 
 
$
9

Total shareholders' equity
 
$
11,693

 
 
$
9,223


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months
 
2019
 
2018
Operating activities
 
 
 
Net earnings
$
412

 
$
443

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
76

 
74

Amortization of intangible assets
114

 
102

Share-based compensation
35

 
29

Recall charges
13

 
4

Sale of inventory stepped-up to fair value at acquisition
24

 
3

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
50

 
139

Inventories
(139
)
 
(144
)
Accounts payable
(12
)
 
33

Accrued expenses and other liabilities
(166
)
 
(306
)
Recall-related payments
(20
)
 
(28
)
Income taxes
9

 
48

Other, net
(83
)
 
(100
)
Net cash provided by operating activities
$
313

 
$
297

Investing activities
 
 
 
Acquisitions, net of cash acquired
(180
)
 
(704
)
Purchases of marketable securities
(20
)
 
(77
)
Proceeds from sales of marketable securities
19

 
53

Purchases of property, plant and equipment
(122
)
 
(121
)
Net cash used in investing activities
$
(303
)
 
$
(849
)
Financing activities
 
 
 
Proceeds and payments on short-term borrowings, net
(12
)
 
99

Proceeds from issuance of long-term debt

 
595

Payments on long-term debt
(1,341
)
 

Dividends paid
(195
)
 
(176
)
Repurchases of common stock
(307
)
 
(300
)
Cash paid for taxes from withheld shares
(97
)
 
(75
)
Payments to purchase noncontrolling interest

 
(5
)
Other financing, net
5

 
7

Net cash (used in) provided by financing activities
$
(1,947
)
 
$
145

Effect of exchange rate changes on cash and cash equivalents
(5
)
 
44

Change in cash and cash equivalents
$
(1,942
)
 
$
(363
)
Cash and cash equivalents at beginning of period
3,616

 
2,542

Cash and cash equivalents at end of period
$
1,674

 
$
2,179


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 First 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 March 31, 2019 and the results of operations for the three months 2019. 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 2018.
Certain prior year amounts have been reclassified to conform with current year presentation in our Consolidated Statements of Cash Flows.
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.
Accounting Pronouncements Recently Adopted
On January 1, 2019 we adopted ASU 2016-02, Leases, and related amendments (ASC 842), which require lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. Refer to Note 6 for further information.
On January 1, 2019 we adopted 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 adoption of this update did not have a material impact on our Consolidated Financial Statements.
NOTE 2 - REVENUE RECOGNITION
Our policies for recognizing sales have not changed from those described in our Annual Report on Form 10-K for 2018.
We disaggregate our net sales by product line and geography 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.
 
Net Sales by Product Line
 
 
 
Three Months
 
2019
2018
Orthopaedics:
 
 
Knees
$
439

$
419

Hips
336

331

Trauma and Extremities
396

389

Other
79

77

 
$
1,250

$
1,216

MedSurg:
 
 
Instruments
$
478

$
412

Endoscopy
470

444

Medical
531

511

Sustainability
65

60

 
$
1,544

$
1,427

Neurotechnology and Spine:
 
 
Neurotechnology
$
465

$
410

Spine
257

188

 
$
722

$
598

Total
$
3,516

$
3,241

Net Sales by Geography
 
 
 
 
 
 
Three Months 2019
 
Three Months 2018
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
320

$
119

 
$
301

$
118

Hips
213

123

 
205

126

Trauma and Extremities
254

142

 
245

144

Other
63

16

 
63

14

 
$
850

$
400

 
$
814

$
402

MedSurg:
 
 
 
 
 
Instruments
$
381

$
97

 
$
316

$
96

Endoscopy
376

94

 
349

95

Medical
416

115

 
381

130

Sustainability
64

1

 
60


 
$
1,237

$
307

 
$
1,106

$
321

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
297

$
168

 
$
256

$
154

Spine
195

62

 
138

50

 
$
492

$
230

 
$
394

$
204

Total
$
2,579

$
937

 
$
2,314

$
927


Contract Assets and Liabilities
On March 31, 2019 there were no contract assets recorded on our Consolidated Balance Sheets.
Our contract liabilities arise as a result of consideration 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. Our contract liabilities were $331 and $327 on March 31, 2019 and December 31, 2018.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
Three Months 2019
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(4
)
$
(137
)
$
50

$
(540
)
$
(631
)
OCI
1

(6
)
(19
)
94

70

Income taxes

1

6

(9
)
(2
)
Reclassifications to:
 
 
 
 
 
Cost of sales


(2
)

(2
)
Other expense

1



1

Income taxes


(1
)

(1
)
Net OCI
$
1

$
(4
)
$
(16
)
$
85

$
66

Ending
$
(3
)
$
(141
)
$
34

$
(455
)
$
(565
)
Three Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(4
)
$
(134
)
$
28

$
(443
)
$
(553
)
OCI
(1
)
(10
)
21

23

33

Income taxes

1

(5
)
12

8

Reclassifications to:
 
 
 
 
 
Cost of sales


(1
)

(1
)
Other expense

2



2

Income taxes

1



1

Net OCI
$
(1
)
$
(6
)
$
15

$
35

$
43

Ending
$
(5
)
$
(140
)
$
43

$
(408
)
$
(510
)
NOTE 4 - DERIVATIVE INSTRUMENTS
Foreign Currency Hedges
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges (both derivative and non-derivative financial instruments) 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 2018.
March 2019
Designated
Non-Designated
Total
Gross notional amount
$
844

$
4,529

$
5,373

Maximum term in days
 
 
586

Fair value:
 
 
 
Other current assets
$
8

$
100

$
108

Other noncurrent assets

16

16

Other current liabilities
(12
)
(5
)
(17
)
Other noncurrent liabilities
(1
)

(1
)
Total fair value
$
(5
)
$
111

$
106

December 2018
Designated
Non-Designated
Total
Gross notional amount
$
870

$
5,466

$
6,336

Maximum term in days
 
 
586

Fair value:
 
 
 
Other current assets
$
15

$
28

$
43

Other noncurrent assets
1

33

34

Other current liabilities
(5
)
(15
)
(20
)
Other noncurrent liabilities



Total fair value
$
11

$
46

$
57

On March 31, 2019 the total after tax amount in AOCI related to our designated net investment hedges was $11. We evaluate the effectiveness of our net investment hedges quarterly. We have not recognized any ineffectiveness in 2019.
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 loss exposure is the asset balance of the instrument.
Net Currency Exchange Rate Gains (Losses)
 
Three Months
Recorded in:
2019
2018
Cost of sales
$
2

$
1

Other income (expense), net
(2
)
(2
)
Total
$

$
(1
)
Pretax gains (losses) 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 ($3) and $13 on March 31, 2019 and December 31, 2018. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There were de minimis ineffective portions of derivatives, which are included in the table above.
Interest Rate Risk
On March 31, 2019 there are no open cash flow or fair value interest rate hedges.
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 2018.
There were no significant transfers into or out of any level in 2019.
Assets Measured at Fair Value
March
December
2019
2018
Cash and cash equivalents
$
1,674

$
3,616

Trading marketable securities
132

118

Level 1 - Assets
$
1,806

$
3,734

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
36

$
38

United States agency debt securities
10

11

United States Treasury debt securities
28

23

Certificates of deposit
10

11

Total available-for-sale marketable securities
$
84

$
83

Foreign currency exchange forward contracts
124

77

Level 2 - Assets
$
208

$
160

Total assets measured at fair value
$
2,014

$
3,894

Liabilities Measured at Fair Value
March
December
2019
2018
Deferred compensation arrangements
$
132

$
118

Level 1 - Liabilities
$
132

$
118

Foreign currency exchange forward contracts
$
18

$
20

Level 2 - Liabilities
$
18

$
20

Contingent consideration:
 
 
Beginning
$
117

$
32

Additions
128

77

Change in estimate

15

Settlements
(1
)
(7
)
Ending
$
244

$
117

Level 3 - Liabilities
$
244

$
117

Total liabilities measured at fair value
$
394

$
255

Fair Value of Available for Sale Securities by Maturity
 
March 2019
December 2018
Due in one year or less
$
42

$
51

Due after one year through three years
$
42

$
32

On March 31, 2019 and December 31, 2018 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 $39 and $23 in the three months 2019 and 2018.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

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 March 31, 2019. On March 31, 2019 the majority of our investments with unrealized losses that were not deemed to be other-than-temporarily impaired were in a continuous unrealized loss position for less than twelve months, and the losses were not material.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed
29
$
13

United States agency
6
8

United States Treasury
13
12

Certificates of deposit
1
1

Total
49
$
34

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 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. Zimmer appealed, and on December 10, 2018 the Federal Circuit affirmed the decision. Zimmer filed a petition on January 23, 2019 to seek a rehearing of this ruling by the entire Federal Circuit. On March 19, 2019 the Federal Circuit denied Zimmer’s petition for a rehearing. Zimmer conditionally paid us $167 while it considers its options for additional appeals. Zimmer's opportunity for further appeals expires on June 17, 2019.
Recall Matters
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. In November 2014 we entered into a settlement agreement to compensate eligible United States patients who had revision surgery prior to November 3, 2014 and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. 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, there are remaining lawsuits that we will continue to defend against.
In August 2016 and May 2018 we voluntarily recalled certain lot-specific sizes and offsets of LFIT Anatomic CoCr V40 Femoral Heads. Product liability lawsuits and claims relating to this voluntary recall have been filed against us. In November 2018 we entered into a settlement agreement to resolve a significant number of claims and lawsuits related to the recalls. The specific terms of the settlement agreement, including the financial terms, are confidential.
We have incurred, and expect to incur in the future, costs associated with the settlement of these matters. Based on the information that has been received, we have estimated the remaining range of probable loss to resolve these matters globally to be approximately $250 to $470. We have recorded charges to earnings representing the minimum of the range of probable loss. The final outcomes of these matters are dependent on many factors that are difficult to predict. Accordingly, the ultimate cost to entirely resolve these matters globally may be materially different than the amount of our current estimate and accruals and could have a material adverse effect on our results of operations and cash flows.
Leases
We lease various manufacturing, warehousing and distribution facilities, administrative and sales offices as well as equipment under operating leases. We evaluate our contracts to identify leases, which is generally if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. Certain of our lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvement funding or other lease concessions. We recognize our minimum rental expense on a straight-line basis over the term of the lease beginning with the date of initial control of the asset. With the adoption of ASC 842 we recognized all leases with terms greater than twelve months in duration on our Consolidated Balance Sheets as right-of-use assets and lease liabilities of approximately $350 as of January 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in Other noncurrent assets on our Consolidated Balance Sheets. Current and non-current lease liabilities are recorded in Accrued expenses and other liabilities and Other noncurrent liabilities, respectively, on our Consolidated Balance Sheets.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
We elected the package of practical expedients available for transition which allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.
For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
The determination of the discount rate used in a lease is our incremental borrowing rate which is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Leases
March
2019
Right-of-use assets
$
355

Lease liabilities, current
89

Lease liabilities, non-current
258

 
 
Other information
 
Weighted-average remaining lease term
5.5 years

Weighted-average discount rate
3.63
%
 
 
 
 
 
Three Months 2019
Operating lease cost
$
34

NOTE 7 - ACQUISITIONS
We acquire stock in companies and various assets that continue to support our capital deployment and product development strategies. Cash paid for acquisitions, net of cash acquired, was $180 and $704 in the three months 2019 and 2018. Acquisition and integration related charges, including the amortization of inventory stepped up to fair value, was $138 and $17 in the three months 2019 and 2018.
In March 2019 we completed the acquisition of OrthoSpace, Ltd. for total cash consideration of $110 with future milestone payments of up to an additional $110. OrthoSpace is a medical device company specializing in orthopaedic biodegradable technology for the treatment of irreparable rotator cuff tears.
In November 2018 we completed the acquisition of K2M Group Holdings, Inc. (K2M) for $27.50 per share, or an aggregate purchase price of approximately $1,380. K2M is a global leader of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. K2M is part of our Spine business within Neurotechnology and Spine. Goodwill attributable to the acquisition is not deductible for tax purposes.
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 is not deductible for tax purposes.
The purchase price allocation for K2M 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 Entellus was completed in the three months 2019.
Purchase Price Allocation of Acquired Net Assets
 
2018
 
K2M
 
Entellus
Tangible assets:
 
 
 
Accounts receivable
$
67

 
$
17

Inventory
136

 
14

Other assets
118

 
62

Contingent consideration

 
(79
)
Other liabilities
(247
)
 
(76
)
Intangible assets:
 
 
 
Customer relationship
34

 
33

Distributor relationship
1

 

Trade name
10

 

Developed technology and patents
473

 
261

Internally developed software
2

 

Goodwill
786

 
465

Purchase price, net of cash acquired
$
1,380

 
$
697

Weighted-average life of intangible assets
14

 
16

Estimated Amortization Expense
Remainder
of 2019
2020
2021
2022
2023
$
333

$
422

$
409

$
401

$
381


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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

NOTE 8 - DEBT AND CREDIT FACILITIES
In January 2019 we repaid $500 of our senior unsecured notes with a coupon of 1.800% that were due on January 15, 2019. In March 2019 we repaid $750 of our senior unsecured notes with a coupon of 2.000% that were due on March 8, 2019. 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 March 31, 2019 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 March 31, 2019.
Summary of Total Debt
March 2019
 
December 2018
Senior unsecured notes:
 
 
 
 
Rate
 
Due
 
 
 
 
1.800%
 
January 15, 2019
$

 
$
500

 
2.000%
 
March 8, 2019

 
750

 
4.375%
 
January 15, 2020
499

 
499

 
Variable
 
November 30, 2020
338

 
343

 
2.625%
 
March 15, 2021
748

 
747

 
1.125%
 
November 30, 2023
618

 
627

 
3.375%
 
May 15, 2024
585

 
584

 
3.375%
 
November 1, 2025
746

 
746

 
3.500%
 
March 15, 2026
990

 
990

 
2.125%
 
November 30, 2027
840

 
853

 
3.650%
 
March 7, 2028
595

 
595

 
2.625%
 
November 30, 2030
722

 
733

 
4.100%
 
April 1, 2043
391

 
391

 
4.375%
 
May 15, 2044
395

 
395

 
4.625%
 
March 15, 2046
980

 
980

Other
24

 
126

Total debt
$
8,471

 
$
9,859

Less current maturities of debt
521

 
1,373

Total long-term debt
$
7,950

 
$
8,486

 
 
 
 
Unamortized debt issuance costs
$
48

 
$
50

Available borrowing capacity
$
1,562

 
$
1,548

Fair value of senior unsecured notes
$
8,855

 
$
9,746

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 took into account 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 14.2% and 18.3% in the three months 2019 and 2018. The decrease in the effective tax rate was primarily due to excess tax benefit from stock option exercises.
 
NOTE 10 - SEGMENT INFORMATION
 
Three Months
 
2019
2018
Orthopaedics
$
1,250

$
1,216

MedSurg
1,544

1,427

Neurotechnology and Spine
722

598

Net sales
$
3,516

$
3,241

Orthopaedics
$
437

$
429

MedSurg
377

301

Neurotechnology and Spine
199

178

Segment operating income
$
1,013

$
908

Items not allocated to segments:
 
 
Corporate and other
(132
)
(99
)
Acquisition and integration-related charges
(138
)
(17
)
Amortization of intangible assets
(114
)
(102
)
Restructuring-related charges
(56
)
(63
)
Medical device regulations
(7
)

Recall-related matters
(13
)
(4
)
Regulatory and legal matters
(25
)
(32
)
Consolidated operating income
$
528

$
591

There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2018.

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

STRYKER CORPORATION
 
2019 First 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 Months
In the three months 2019 we achieved sales growth of 8.5%. Excluding the impact of acquisitions sales grew 7.3% in constant currency. We reported operating income margin of 15.0%, net earnings of $412 and net earnings per diluted share of $1.09.
 
Excluding the impact of certain items, we expanded adjusted operating income margin 10 basis points to 25.1%, with adjusted net earnings(1) of $714 and growth of 11.9% in adjusted net earnings per diluted share(1).
Recent Developments
In January 2019 we repaid $500 of our senior unsecured notes with a coupon of 1.800% that were due on January 15, 2019. In March 2019 we repaid $750 of our senior unsecured notes with a coupon of 2.000% that were due on March 8, 2019.
In the three months 2019 we completed two acquisitions for total cash consideration of $180 with future milestone payments due upon the achievement of certain clinical and sales milestones.
In the three months 2019 we repurchased 1.9 million shares of our common stock at a cost of $307 under our authorized repurchase program. The total dollar value of shares of our common stock that could be acquired under our authorized repurchase program was $1,033 as of March 31, 2019.
On January 1, 2019 we adopted ASU 2016-02, Leases, and related amendments (ASC 842), which require lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. Refer to Note 6 for further information. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
(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.
 
CONSOLIDATED RESULTS OF OPERATIONS
 
Three Months
 
 
 
Percent Net Sales
Percentage
 
2019
2018
2019
2018
Change
Net sales
$
3,516

$
3,241

100.0
 %
100.0
 %
8.5
 %
Gross profit
2,283

2,137

64.9

65.9

6.8

Research, development and engineering expenses
225

204

6.4

6.3

10.3

Selling, general and administrative expenses
1,403

1,236

39.9

38.1

13.5

Recall charges
13

4

0.4

0.1

225.0

Amortization of intangible assets
114

102

3.2

3.1

11.8

Other income (expense), net
(48
)
(49
)
(1.4
)
(1.5
)
(2.0
)
Income taxes
68

99

 
 
(31.3
)
Net earnings
$
412

$
443

11.7
 %
13.7
 %
(7.0
)%
 
 
 
 
 
 
Net earnings per diluted share
$
1.09

$
1.16

 
 
(6.0
)%
Adjusted net earnings per diluted share(1)
$
1.88

$
1.68

 
 
11.9
 %
Geographic and Segment Net Sales
Three Months
 
 
 
Percentage Change
 
2019
2018
As Reported
Constant
Currency
Geographic:
 
 
 
 
United States
$
2,579

$
2,314

11.5
%
11.5
%
International
937

927

1.1

8.3

Total
$
3,516

$
3,241

8.5
%
10.6
%
Segment:
 
 
 
 
Orthopaedics
$
1,250

$
1,216

2.8
%
5.1
%
MedSurg
1,544

1,427

8.2

10.0

Neurotechnology and Spine
722

598

20.7

23.2

Total
$
3,516

$
3,241

8.5
%
10.6
%

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

Supplemental Net Sales Growth Information
 
Three Months
 
 
Percentage Change
 
 
 
 
United States
International
 
2019
2018
As Reported
Constant Currency
As Reported
As Reported
Constant Currency
Orthopaedics:
 
 
 
 
 
 
 
Knees
$
439

$
419

4.9
%
7.0
%
6.6
 %
0.5
 %
8.1
 %
Hips
336

331

1.5

4.1

4.0

(2.4
)
4.4

Trauma and Extremities
396

389

1.7

4.1

3.4

(1.2
)
5.4

Other
79

77

2.1

3.5

(0.3
)
12.5

21.4


$
1,250

$
1,216

2.8
%
5.1
%
4.4
 %
(0.6
)%
6.5
 %
MedSurg:
 
 
 
 
 
 
 
Instruments
$
478

$
412

16.1
%
18.0
%
20.6
 %
1.2
 %
8.9
 %
Endoscopy
470

444

5.7

7.5

7.5

(1.0
)
7.5

Medical
531

511

4.0

5.8

9.2

(11.2
)
(4.6
)
Sustainability
65

60

9.0

9.0

8.4

117.6

128.2


$
1,544

$
1,427

8.2
%
10.0
%
11.9
 %
(4.4
)%
3.1
 %
Neurotechnology and Spine:
 
 
 
 
 
 
Neurotechnology
$
465

$
410

13.6
%
16.1
%
16.0
 %
9.5
 %
16.2
 %
Spine
257

188

36.3

38.6

40.9

23.6

32.0


$
722

$
598

20.7
%
23.2
%
24.7
 %
12.9
 %
20.1
 %
Total
$
3,516

$
3,241

8.5
%
10.6
%
11.5
 %
1.1
 %
8.3
 %
 
Consolidated Net Sales
Consolidated net sales increased 8.5% in the three months 2019 as reported and 10.6% in constant currency, as foreign currency exchange rates negatively impacted net sales by 2.1%. Excluding the 3.3% impact of acquisitions, net sales in constant currency increased by 8.7% from unit volume partially offset by 1.4% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology, instruments, knee, hip, medical and endoscopy products.
Orthopaedics Net Sales
Orthopaedics net sales increased 2.8% in the three months 2019 as reported and 5.1% in constant currency, as foreign currency exchange rates negatively impacted net sales by 2.3%. Net sales in constant currency increased by 7.1% from unit volume partially offset by 2.1% due to lower prices. The unit volume increase was primarily due to higher shipments of knee, hip and trauma and extremities products.
MedSurg Net Sales
MedSurg net sales increased 8.2% in the three months 2019 as reported and 10.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 1.8%. Excluding the 1.1% impact of acquisitions, net sales in constant currency increased by 9.9% from unit volume partially offset by 1.0% due to lower prices. The unit volume increase was primarily due to higher shipments of instruments, medical and endoscopy products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales increased 20.7% in the three months 2019 as reported and 23.2% in constant currency, as foreign currency exchange rates negatively impacted net sales by 2.5%. Excluding the 15.4% impact of acquisitions, net sales in constant currency increased by 8.9% from unit volume partially offset by 1.1% due to lower prices. The unit volume increase was primarily due to higher shipments of neurotechnology products.
Gross Profit
Gross profit as a percentage of sales in the three months 2019 decreased to 64.9% from 65.9% in 2018. Excluding the impact of the items noted below, gross profit decreased to 65.8% of sales in the three months 2019 from 66.3% in 2018 primarily due to lower
 
selling prices and product mix, partially offset by increases due to leverage from higher sales volumes.
 
 
Percent Net Sales
Three Months
2019
2018
2019
2018
Reported
$
2,283

$
2,137

64.9
%
65.9
%
Inventory stepped up to fair value
24

6

0.7

0.2

Restructuring-related and other charges
5

5

0.2

0.2

Medical device regulations

1



Adjusted
$
2,312

$
2,149

65.8
%
66.3
%
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $21 or 10.3% to 6.4% of sales in the three months 2019 from 6.3% in 2018. Projects to develop new products, investments in new technologies and recent acquisitions contributed to the increased spending levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $167 or 13.5% in the three months 2019 and increased as a percentage of sales to 39.9% from 38.1% in 2018. Excluding the impact of the items noted below, expenses decreased to 34.5% of sales in 2019 from 35.0% in 2018, primarily due to leverage from higher sales volumes, continued focus on our operating expense improvement initiatives, partially offset by the leverage from recent acquisitions.
 
 
Percent Net Sales
Three Months
2019
2018
2019
2018
Reported
$
1,403

$
1,236

39.9
 %
38.1
 %
Other acquisition and integration-related
(114
)
(11
)
(3.2
)
(0.3
)
Restructuring-related and other charges
(52
)
(58
)
(1.5
)
(1.8
)
Regulatory and legal matters
(25
)
(32
)
(0.7
)
(1.0
)
Adjusted
$
1,212

$
1,135

34.5
 %
35.0
 %
Recall Charges
Recall charges were $13 and $4 in the three months 2019 and 2018. Charges were primarily due to the previously disclosed Rejuvenate and ABGII Modular-Neck hip stems and LFIT V40 femoral head voluntary recalls. Refer to Note 6 to our Consolidated Financial Statements for further information.

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

Amortization of Intangible Assets
Amortization of intangible assets was $114 and $102 in the three months 2019 and 2018. The increase in 2019 was primarily due to our recent acquisitions. Refer to Note 7 to our Consolidated Financial Statements for further information.
Operating Income
Operating Income decreased $63 or 10.7% to 15.0% of net sales in the three months 2019 from 18.2% in 2018. Excluding the impact of the items noted below, operating income increased to 25.1% of sales in 2019 from 25.0% in 2018 primarily due to leverage from higher sales volumes, continued focus on our operating expense improvement initiatives, partially offset by lower selling prices.
 
 
Percent Net Sales
Three Months
2019
2018
2019
2018
Reported
$
528

$
591

15.0
%
18.2
%
Inventory stepped up to fair value
24

6

0.7

0.2

Other acquisition and integration-related
114

11

3.2

0.4

Amortization of purchased intangible assets
114

102

3.2

3.2

Restructuring-related and other charges
56

63

1.6

1.9

Medical device regulations
7

1

0.2


Recall-related matters
13

4

0.4

0.1

Regulatory and legal matters
25

32

0.8

1.0

Adjusted
$
881

$
810

25.1
%
25.0
%
Other Income (Expense), Net
Other income (expense), net was ($48) and ($49) in the three months 2019 and 2018. The decrease in 2019 was primarily due to an increase in interest income due to higher interest rates partially offset by higher interest expense due to higher interest rates.
Income Taxes
The effective tax rates were 14.2% and 18.3% in the three months 2019 and 2018. The decrease in the effective tax rate in 2019 was primarily due to excess tax benefit from stock option exercises.
Net Earnings
Net earnings decreased to $412 or $1.09 per diluted share in the three months 2019 from $443 or $1.16 per diluted share in 2018. Adjusted net earnings per diluted share(1) increased 11.9% to $1.88 in 2019 from $1.68 in 2018. The impact of foreign currency exchange rates was to decrease net earnings per diluted share by approximately $0.06 in 2019 and increase net earnings per diluted share by approximately $0.02 in 2018.
 
 
Percent Net Sales
Three Months
2019
2018
2019
2018
Reported
$
412

$
443

11.7
%
13.7
%
Inventory stepped up to fair value
19

4

0.5

0.1

Other acquisition and integration-related
88

9

2.5

0.3

Amortization of purchased intangible assets
91

83

2.6

2.6

Restructuring-related and other charges
50

50

1.5

1.6

Medical device regulations
6

1

0.2


Recall-related matters
10

3

0.3

0.1

Regulatory and legal matters
19

24

0.5

0.7

Tax matters
19

21

0.5

0.6

Adjusted
$
714

$
638

20.3
%
19.7
%
(1)Non-GAAP Financial Measures
We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures, including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; adjusted selling, general and
 
administrative expenses; adjusted amortization of intangible assets; adjusted operating income; adjusted effective income tax rate; adjusted net earnings; and adjusted net earnings per diluted share (Diluted EPS). We believe these non-GAAP financial measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current and prior year results at the same foreign currency exchange rate. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions, which affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing and may not be indicative of our past and future performance. The following are examples of the types of adjustments that may be included in a period:
1.
Acquisition and integration-related costs. Costs related to integrating recently acquired businesses and specific costs (e.g., inventory step-up and deal costs) related to the consummation of the acquisition process.
2.
Amortization of purchased intangible assets. Periodic amortization expense related to purchased intangible assets.
3.
Restructuring-related and other charges. Costs associated with the termination of sales relationships in certain countries, workforce reductions, elimination of product lines, weather-related asset impairments and associated costs and other restructuring-related activities.
4.
Medical Device Regulations. Costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with the medical device reporting regulations and other requirements of the European Union and China regulations for medical devices.
5.
Recall-related matters. Our best estimate of the minimum of the range of probable loss to resolve the Rejuvenate, LFIT V40 and other product recalls.
6.
Regulatory and legal matters. Our best estimate of the minimum of the range of probable loss to resolve certain regulatory matters and other legal settlements.
7.
Tax matters. Charges represent the impact of accounting for certain significant and discrete tax items.
Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, selling, general and administrative expenses, amortization of intangible assets, operating income, effective

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

income tax rate, net earnings and net earnings per diluted share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Consolidated Results of Operations below. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
 
The weighted-average diluted shares outstanding used in the calculation of non-GAAP net earnings per diluted share are the same as those used in the calculation of reported net earnings per diluted share for the respective period.



Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures
Three Months 2019
Gross Profit
Selling, General & Administrative Expenses
Amortization of Intangible Assets
Operating Income
Net Earnings
Effective
Tax Rate
Diluted EPS
Reported
$
2,283

$
1,403

$
114

$
528

$
412

14.2
 %
$
1.09

Reported percent net sales
64.9
%
39.9
%
3.2
%
15.0
%
11.7
%
 
 
Acquisition and integration-related charges:
 
 
 
 
 
 
 
Inventory stepped up to fair value
24



24

19

0.3

0.05

Other acquisition and integration-related

(114
)

114

88

2.0

0.23

Amortization of purchased intangible assets


(114
)
114

91

1.3

0.24

Restructuring-related and other charges
5

(52
)

56

50

(0.3
)
0.13

Medical device regulations



7

6

0.1

0.01

Recall-related matters



13

10

0.3

0.03

Regulatory and legal matters

(25
)

25

19

0.4

0.05

Tax matters




19

(3.9
)
0.05

Adjusted
$
2,312

$
1,212

$

$
881

$
714

14.4
 %
$
1.88

Adjusted percent net sales
65.8
%
34.5
%
%
25.1
%
20.3
%
 
 
Three Months 2018
Gross Profit
Selling, General & Administrative Expenses
Amortization of Intangible Assets
Operating Income
Net Earnings
Effective
Tax Rate
Diluted EPS
Reported
$
2,137

$
1,236

$
102

$
591

$
443

18.3
 %
$
1.16

Reported percent net sales
65.9
%
38.1
%
3.1
%
18.2
%
13.7
%
 
 
Acquisition and integration-related charges:
 
 
 
 
 
 
 
Inventory stepped up to fair value
6



6

4

0.2

0.01

Other acquisition and integration-related

(11
)

11

9


0.02

Amortization of purchased intangible assets


(102
)
102

83

0.4

0.22

Restructuring-related and other charges
5

(58
)

63

50

0.5

0.13

Medical device regulations
1



1

1



Recall-related matters



4

3

0.1

0.01

Regulatory and legal matters

(32
)

32

24

0.5

0.07

Tax matters




21

(3.9
)
0.06

Adjusted
$
2,149

$
1,135

$

$
810

$
638

16.1
 %
$
1.68

Adjusted percent net sales
66.3
%
35.0
%
%
25.0
%
19.7
%
 
 

FINANCIAL CONDITION AND LIQUIDITY
Three Months
2019
2018
Net cash provided by operating activities
$
313

$
297

Net cash used in investing activities
(303
)
(849
)
Net cash (used in) provided by financing activities
(1,947
)
145

Effect of exchange rate changes on cash and cash equivalents
(5
)
44

Change in cash and cash equivalents
$
(1,942
)
$
(363
)
Operating Activities
Cash provided by operating activities was $313 and $297 in the three months 2019 and 2018. The increase was primarily due to the receipt of cash related to a prospective legal settlement partially offset by lower earnings. Refer to Note 6 to our Consolidated Financial Statements for further information.
Investing Activities    
Cash used in investing activities was $303 and $849 in the three months 2019 and 2018. The decrease in cash used was primarily due to decreased payments for acquisitions in 2019.
 
Financing Activities
Cash (used in) provided by financing activities was ($1,947) and $145 in the three months 2019 and 2018. The increase in cash used was primarily driven by the repayment of $1,341 of debt upon maturity in 2019, $307 of repurchases of common stock and $195 of dividend payments.
Three Months
2019
2018
Total dividends paid to common shareholders
$
195

$
176

Total amount paid to repurchase common stock
$
307

$
300

Shares of repurchased common stock (in millions)
1.9

1.9

Liquidity
Cash, cash equivalents and marketable securities were $1,758 and $3,699 on March 31, 2019 and December 31, 2018. Current assets exceeded current liabilities by $4,175 and $4,926 on March 31, 2019 and December 31, 2018. We anticipate being able to support our short-term liquidity and operating needs from a variety of sources including cash from operations, commercial paper and existing credit lines. We raised funds in the capital markets in 2018

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

and may continue to do so from time to time. We continue to have strong investment-grade short-term and long-term debt ratings that we believe should enable us to refinance our debt as needed.
Our cash, cash equivalents and marketable securities held in locations outside the United States was approximately 47% on March 31, 2019 compared to 25% on December 31, 2018. We intend to use this cash to expand operations organically and through acquisitions.
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for 2018.
New Accounting Pronouncements Not Yet Adopted
Refer to Note 1 to our Consolidated Financial Statements for information.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.
OTHER MATTERS
Legal and Regulatory Matters
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of our business, including proceedings related to product, labor, intellectual property and other matters. Refer to Note 6 to our Consolidated Financial Statements for further information.
FORWARD-LOOKING STATEMENTS
This report contains statements referring to us that are not historical facts and are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the "safe harbor" provisions of the Reform Act, are based on current projections about operations, industry conditions, financial condition and liquidity. Words that identify forward-looking statements include words such as "may," "could," "will," "should," "possible," "plan," "predict," "forecast," "potential," "anticipate," "estimate," "expect," "project," "intend," "believe," "may impact," "on track," "goal," "strategy" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, an acquisition or our businesses. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Those statements are not guarantees and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these forward-looking statements. Some important factors that could cause our actual results to differ from our expectations in any forward-looking statements include those risks discussed in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for 2018. This Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for 2018.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider our greatest potential area of market risk exposure to be exchange rate risk. Quantitative and qualitative disclosures about exchange rate risk are included in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for 2018. There were no material changes from the
 
information provided therein.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer (the Certifying Officers), evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) on March 31, 2019. Based on that evaluation, the Certifying Officers concluded the Company's disclosure controls and procedures were effective as of March 31, 2019.
Changes in Internal Control Over Financial Reporting
There was no change to our internal control over financial reporting during the three months 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We issued 6,779 shares of our common stock in the three months 2019 as performance incentive awards to employees. These shares were not registered under the Securities Act of 1933 based on the conclusion that the awards would not be events of sale within the meaning of Section 2(a)(3) of the Act.    
In March 2015 we announced that our Board of Directors had authorized us to purchase up to $2,000 of our common stock. The manner, timing and amount of repurchases are determined by management based on an evaluation of market conditions, stock price, and other factors and are subject to regulatory considerations. Purchases are made from time to time in the open market, in privately negotiated transactions or otherwise.
In 2019 we repurchased 1.9 million shares of our common stock at a cost of $307 under our authorized repurchase program. The total dollar value of shares of our common stock that could be acquired under our authorized repurchase program was $1,033 as of March 31, 2019.
 
Total Number of Shares
(in millions)
 
 
2019 Period
Total Number of Shares Purchased
Purchased
as Part of Public
Announced Plans
Average
Price
Paid
Per
Share
Approximate Dollar Value of Shares that may yet be Purchased Under the Plans
January
1.9

1.9

$
161.35

$
1,033

February



1,033

March



$
1,033

Total
1.9

1.9

$
161.35

 

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

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

ITEM 6.
EXHIBITS
10(i)
31(i)*
31(ii)*
32(i)*
32(ii)*
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
 
† Filed with this Form 10-Q
 
* Furnished with this Form 10-Q

 
 
15

STRYKER CORPORATION
 
2019 First Quarter Form 10-Q

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
STRYKER CORPORATION
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
Date:
April 24, 2019
 
/s/ KEVIN A. LOBO
 
 
 
Kevin A. Lobo
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
 
 
Date:
April 24, 2019
 
/s/ GLENN S. BOEHNLEIN
 
 
 
Glenn S. Boehnlein