STRYKER CORP
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
|
(Mark one)
|
|
|
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2014
OR
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission file number: 0-9165
STRYKER CORPORATION
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
|
Michigan
|
38-1239739
|
|
|
(State of incorporation)
|
(I.R.S. Employer Identification No.)
|
|
|
2825 Airview Boulevard, Kalamazoo, Michigan
|
49002
|
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
|
(269)-385-2600
|
||
|
(Registrant’s telephone number, including area code)
|
||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
[X]
|
Accelerated filer
|
[ ]
|
|
|
Non-accelerated filer
|
[ ]
|
Small reporting company
|
[ ]
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
379,093,934
shares of Common Stock, $0.10 par value, as of
March 31, 2014
.
PART I. - FINANCIAL INFORMATION
|
ITEM 1.
|
FINANCIAL STATEMENTS.
|
Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
|
Three Months Ended March 31
|
||||||||
|
2014
|
2013
|
|||||||
|
Net sales
|
$
|
2,305
|
|
$
|
2,190
|
|
||
|
Cost of sales
|
769
|
|
713
|
|
||||
|
Gross profit
|
1,536
|
|
1,477
|
|
||||
|
Research, development and engineering expenses
|
150
|
|
129
|
|
||||
|
Selling, general and administrative expenses
|
1,205
|
|
916
|
|
||||
|
Intangible asset amortization
|
45
|
|
32
|
|
||||
|
Restructuring charges
|
5
|
|
14
|
|
||||
|
Total operating expenses
|
1,405
|
|
1,091
|
|
||||
|
Operating income
|
131
|
|
386
|
|
||||
|
Other income (expense), net
|
(24
|
)
|
(11
|
)
|
||||
|
Earnings before income taxes
|
107
|
|
375
|
|
||||
|
Income taxes
|
37
|
|
71
|
|
||||
|
Net earnings
|
$
|
70
|
|
$
|
304
|
|
||
|
|
||||||||
|
Net earnings per share of common stock:
|
||||||||
|
Basic net earnings per share of common stock
|
$
|
0.19
|
|
$
|
0.80
|
|
||
|
Diluted net earnings per share of common stock
|
$
|
0.18
|
|
$
|
0.79
|
|
||
|
Weighted-average shares outstanding—in millions:
|
||||||||
|
Basic
|
378.2
|
|
379.7
|
|
||||
|
Net effect of dilutive employee stock options
|
4.4
|
|
3.3
|
|
||||
|
Diluted
|
382.6
|
|
383.0
|
|
||||
|
Anti-dilutive shares excluded from the calculation of net effect of dilutive employee stock options
|
2.5
|
|
5.1
|
|
||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
Three Months Ended March 31
|
||||||||
|
2014
|
2013
|
|||||||
|
Net earnings
|
$
|
70
|
|
$
|
304
|
|
||
|
Unrealized gains (losses) on securities, net of tax (expense) benefit of $(0) and $0, respectively
|
3
|
|
(1
|
)
|
||||
|
Unfunded pension (losses) gains, net of tax benefit (expense) of $0 and ($1) respectively
|
(1
|
)
|
3
|
|
||||
|
Unrealized losses on the effective portion of designated hedges, net of tax benefit of $2
|
(3
|
)
|
—
|
|
||||
|
Foreign currency translation adjustments
|
37
|
|
(114
|
)
|
||||
|
Total other comprehensive income (loss)
|
36
|
|
(112
|
)
|
||||
|
Comprehensive income
|
$
|
106
|
|
$
|
192
|
|
||
See accompanying notes to Consolidated Financial Statements.
|
1
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
Stryker Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
March 31
|
December 31
|
|||||||
|
2014
|
2013
|
|||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
$
|
1,381
|
|
$
|
1,339
|
|
||
|
Marketable securities
|
2,666
|
|
2,641
|
|
||||
|
Accounts receivable, less allowance of $68 ($72 in 2013)
|
1,430
|
|
1,518
|
|
||||
|
Inventories
|
||||||||
|
Materials and supplies
|
231
|
|
227
|
|
||||
|
Work in process
|
96
|
|
85
|
|
||||
|
Finished goods
|
1,171
|
|
1,110
|
|
||||
|
Total inventories
|
1,498
|
|
1,422
|
|
||||
|
Deferred income taxes
|
918
|
|
880
|
|
||||
|
Prepaid expenses and other current assets
|
553
|
|
535
|
|
||||
|
Total current assets
|
8,446
|
|
8,335
|
|
||||
|
Property, plant and equipment
|
||||||||
|
Land, buildings and improvements
|
692
|
|
686
|
|
||||
|
Machinery and equipment
|
1,892
|
|
1,811
|
|
||||
|
Total property, plant and equipment
|
2,584
|
|
2,497
|
|
||||
|
Less allowance for depreciation
|
1,467
|
|
1,416
|
|
||||
|
Net property, plant and equipment
|
1,117
|
|
1,081
|
|
||||
|
Other assets
|
||||||||
|
Goodwill
|
3,997
|
|
3,844
|
|
||||
|
Other intangibles, net
|
2,085
|
|
1,989
|
|
||||
|
Other
|
514
|
|
494
|
|
||||
|
Total assets
|
$
|
16,159
|
|
$
|
15,743
|
|
||
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable
|
$
|
350
|
|
$
|
314
|
|
||
|
Accrued compensation
|
333
|
|
535
|
|
||||
|
Income taxes
|
118
|
|
131
|
|
||||
|
Dividend payable
|
116
|
|
115
|
|
||||
|
Accrued expenses and other liabilities
|
1,821
|
|
1,537
|
|
||||
|
Current maturities of debt
|
820
|
|
25
|
|
||||
|
Total current liabilities
|
3,558
|
|
2,657
|
|
||||
|
Long-term debt, excluding current maturities
|
2,244
|
|
2,739
|
|
||||
|
Other liabilities
|
1,294
|
|
1,300
|
|
||||
|
Shareholders' equity
|
||||||||
|
Common stock, $0.10 par value:
|
||||||||
|
Authorized: 1 billion shares, outstanding: 378 million shares (378 million in 2013)
|
38
|
|
38
|
|
||||
|
Additional paid-in capital
|
1,186
|
|
1,160
|
|
||||
|
Retained earnings
|
7,571
|
|
7,617
|
|
||||
|
Accumulated other comprehensive income
|
268
|
|
232
|
|
||||
|
Total shareholders' equity
|
9,063
|
|
9,047
|
|
||||
|
Total liabilities & shareholders' equity
|
$
|
16,159
|
|
$
|
15,743
|
|
||
See accompanying notes to Consolidated Financial Statements.
|
2
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)
|
Common
Stock |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income |
Total
|
||||||||||||||||
|
Balances at December 31, 2013
|
$
|
38
|
|
$
|
1,160
|
|
$
|
7,617
|
|
$
|
232
|
|
$
|
9,047
|
|
|||||
|
Net earnings
|
70
|
|
70
|
|
||||||||||||||||
|
Other comprehensive income
|
36
|
|
36
|
|
||||||||||||||||
|
Issuance of 1.4 million shares of common stock under stock option and benefit plans, including $2 excess income tax benefit
|
5
|
|
5
|
|
||||||||||||||||
|
Share-based compensation
|
21
|
|
21
|
|
||||||||||||||||
|
Cash dividends declared of $0.305 per share of common stock
|
(116
|
)
|
(116
|
)
|
||||||||||||||||
|
Balances at March 31, 2014
|
$
|
38
|
|
$
|
1,186
|
|
$
|
7,571
|
|
$
|
268
|
|
$
|
9,063
|
|
|||||
See accompanying notes to Consolidated Financial Statements.
|
3
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
Three Months Ended March 31
|
||||||||
|
2014
|
2013
|
|||||||
|
Operating activities
|
||||||||
|
Net earnings
|
$
|
70
|
|
$
|
304
|
|
||
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
||||||||
|
Depreciation
|
46
|
|
38
|
|
||||
|
Intangible asset amortization
|
45
|
|
32
|
|
||||
|
Share-based compensation
|
21
|
|
20
|
|
||||
|
Restructuring charges
|
5
|
|
14
|
|
||||
|
Sale of inventory stepped up to fair value at acquisition
|
5
|
|
—
|
|
||||
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
||||||||
|
Accounts receivable
|
93
|
|
7
|
|
||||
|
Inventories
|
(61
|
)
|
(38
|
)
|
||||
|
Accounts payable
|
30
|
|
(9
|
)
|
||||
|
Accrued expenses and other liabilities
|
89
|
|
(112
|
)
|
||||
|
Income taxes
|
(56
|
)
|
(9
|
)
|
||||
|
Other
|
(81
|
)
|
(11
|
)
|
||||
|
Net cash provided by operating activities
|
206
|
|
236
|
|
||||
|
Investing activities
|
||||||||
|
Acquisitions, net of cash acquired
|
(272
|
)
|
(600
|
)
|
||||
|
Purchases of marketable securities
|
(1,017
|
)
|
(773
|
)
|
||||
|
Proceeds from sales of marketable securities
|
1,008
|
|
1,062
|
|
||||
|
Purchases of property, plant and equipment
|
(70
|
)
|
(49
|
)
|
||||
|
Net cash used in investing activities
|
(351
|
)
|
(360
|
)
|
||||
|
Financing activities
|
||||||||
|
Proceeds from borrowings
|
344
|
|
1,060
|
|
||||
|
Payments on borrowings
|
(55
|
)
|
(51
|
)
|
||||
|
Dividends paid
|
(115
|
)
|
(101
|
)
|
||||
|
Repurchase and retirement of common stock
|
—
|
|
(250
|
)
|
||||
|
Other
|
12
|
|
(7
|
)
|
||||
|
Net cash provided by financing activities
|
186
|
|
651
|
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
1
|
|
(9
|
)
|
||||
|
Change in cash and cash equivalents
|
$
|
42
|
|
$
|
518
|
|
||
See accompanying notes to Consolidated Financial Statements.
|
4
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
Stryker Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2014
NOTE 1 - BASIS OF PRESENTATION
General Information
These statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2013
. Management believes that the accompanying unaudited Consolidated Financial Statements include all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. The results of operations for the
three
-month period ended
March 31, 2014
are not necessarily indicative of annual results.
Certain prior year amounts in our Segment Information in Note 11 have been reclassified to conform with the presentation used in 2014.
NOTE 2 - SUBSEQUENT EVENT
As further described in Note 7, on April 15, 2014 we completed the acquisition of Berchtold Holding, AG, a privately-held provider of surgical infrastructure equipment with operating facilities in Germany and the United States, for an aggregate purchase price of approximately $
172
.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
Changes in and reclassifications out of AOCI, net of tax, for the
three
-month periods ended
March 31, 2014
and
2013
were as follows:
|
Marketable Securities Unrealized Gain (Loss)
|
Defined Benefit Pension Plans
|
Unrecognized Gain (Loss) on Hedge
|
Foreign Currency Translation
|
Total AOCI
|
|||||||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
—
|
|
$
|
4
|
|
$
|
(81
|
)
|
$
|
(101
|
)
|
$
|
7
|
|
$
|
—
|
|
$
|
306
|
|
$
|
226
|
|
$
|
232
|
|
$
|
129
|
|
|||||||||
|
Other comprehensive income (OCI)
|
5
|
|
2
|
|
(3
|
)
|
1
|
|
(2
|
)
|
—
|
|
37
|
|
(114
|
)
|
37
|
|
(111
|
)
|
|||||||||||||||||||
|
Reclassifications out of AOCI
|
(2
|
)
|
(3
|
)
|
2
|
|
2
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
(1
|
)
|
|||||||||||||||||||
|
Net current-period OCI
|
3
|
|
(1
|
)
|
(1
|
)
|
3
|
|
(3
|
)
|
—
|
|
37
|
|
(114
|
)
|
36
|
|
(112
|
)
|
|||||||||||||||||||
|
Balance at March 31
|
$
|
3
|
|
$
|
3
|
|
$
|
(82
|
)
|
$
|
(98
|
)
|
$
|
4
|
|
$
|
—
|
|
$
|
343
|
|
$
|
112
|
|
$
|
268
|
|
$
|
17
|
|
|||||||||
The following items were reclassified out of AOCI into earnings for the
three
-month periods ended
March 31, 2014
and
2013
:
|
2014
|
2013
|
|||||||||||
|
Detail of AOCI Components
|
Amount Reclassified
|
Reclassified To
|
Amount Reclassified
|
Reclassified To
|
||||||||
|
Unrealized gains on available-for-sale marketable securities
|
$
|
(2
|
)
|
Other (income) expense
|
$
|
(5
|
)
|
Other (income) expense
|
||||
|
—
|
|
Income tax expense
|
2
|
|
Income tax expense
|
|||||||
|
$
|
(2
|
)
|
Net of tax
|
$
|
(3
|
)
|
Net of tax
|
|||||
|
Amortization of defined benefit pension plan actuarial losses
|
$
|
2
|
|
Cost of sales
|
$
|
2
|
|
Cost of sales
|
||||
|
—
|
|
Income tax benefit
|
—
|
|
Income tax benefit
|
|||||||
|
$
|
2
|
|
Net of tax
|
$
|
2
|
|
Net of tax
|
|||||
|
Unrealized losses on designated hedges
|
$
|
(2
|
)
|
Cost of sales
|
$
|
—
|
|
Cost of sales
|
||||
|
—
|
|
Other (income) expense
|
—
|
|
Other (income) expense
|
|||||||
|
1
|
|
Income tax expense
|
—
|
|
Income tax expense
|
|||||||
|
$
|
(1
|
)
|
Net of tax
|
$
|
—
|
|
Net of tax
|
|||||
|
5
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
NOTE 4 - FAIR VALUE MEASUREMENTS
Our valuation of our assets and liabilities measured at fair value is:
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||||||||
|
March
|
December 31
|
March
|
December 31
|
March
|
December 31
|
March
|
December 31
|
||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||
|
Assets:
|
|||||||||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
1,381
|
|
$
|
1,339
|
|
$
|
1,381
|
|
$
|
1,339
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Available-for-sale marketable securities
|
|||||||||||||||||||||||||||
|
Corporate and asset-backed debt securities
|
1,172
|
|
1,177
|
|
—
|
|
—
|
|
1,172
|
|
1,177
|
|
—
|
|
—
|
|
|||||||||||
|
Foreign government debt securities
|
828
|
|
845
|
|
—
|
|
—
|
|
828
|
|
845
|
|
—
|
|
—
|
|
|||||||||||
|
United States agency debt securities
|
124
|
|
211
|
|
—
|
|
—
|
|
124
|
|
211
|
|
—
|
|
—
|
|
|||||||||||
|
United States treasury debt securities
|
487
|
|
350
|
|
—
|
|
—
|
|
487
|
|
350
|
|
—
|
|
—
|
|
|||||||||||
|
Certificates of deposit
|
51
|
|
53
|
|
—
|
|
—
|
|
51
|
|
53
|
|
—
|
|
—
|
|
|||||||||||
|
Other
|
4
|
|
5
|
|
—
|
|
—
|
|
4
|
|
5
|
|
—
|
|
—
|
|
|||||||||||
|
Total available-for-sale marketable securities
|
2,666
|
|
2,641
|
|
—
|
|
—
|
|
2,666
|
|
2,641
|
|
—
|
|
—
|
|
|||||||||||
|
Trading marketable securities
|
74
|
|
72
|
|
74
|
|
72
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Foreign currency exchange forward contracts
|
17
|
|
25
|
|
—
|
|
—
|
|
17
|
|
25
|
|
—
|
|
—
|
|
|||||||||||
|
$
|
4,138
|
|
$
|
4,077
|
|
$
|
1,455
|
|
$
|
1,411
|
|
$
|
2,683
|
|
$
|
2,666
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
Liabilities:
|
|||||||||||||||||||||||||||
|
Deferred compensation arrangements
|
$
|
74
|
|
$
|
72
|
|
$
|
74
|
|
$
|
72
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Contingent consideration
|
47
|
|
59
|
|
—
|
|
—
|
|
—
|
|
—
|
|
47
|
|
59
|
|
|||||||||||
|
Foreign currency exchange forward contracts
|
6
|
|
2
|
|
—
|
|
—
|
|
6
|
|
2
|
|
—
|
|
—
|
|
|||||||||||
|
$
|
127
|
|
$
|
133
|
|
$
|
74
|
|
$
|
72
|
|
$
|
6
|
|
$
|
2
|
|
$
|
47
|
|
$
|
59
|
|
||||
We calculate the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments, where available, or based on other observable inputs taking into account our credit risk and that of our counterparties. The fair value of our Level 3 liabilities represent milestone payments for acquisitions and is calculated as the net present value of expected cash flows (using a discounted cash flow technique) based on externally provided or obtained inputs, including our probability assessments of the occurrence of triggering events, appropriately discounted considering the uncertainties associated with the obligation. We remeasure this liability each reporting period and record the changes in the fair value in general and administrative expense (for probability of occurrence) and other income (expense) (for changes in time value of money) in earnings. During the period we evaluated but did not change our unobservable input assumptions and fair value techniques used in measuring the fair value of any financial assets or liabilities from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. There were no significant transfers into or out of any levels that occurred between
December 31, 2013
and
March 31, 2014
.
Rollforward of liabilities measured at fair value using unobservable inputs (Level 3):
|
March
|
December
|
||||||
|
2014
|
2013
|
||||||
|
Balance at the beginning of the period
|
$
|
59
|
|
$
|
103
|
|
|
|
Losses included in earnings
|
—
|
|
(5
|
)
|
|||
|
Settlements
|
(12
|
)
|
(39
|
)
|
|||
|
Balance at the end of the period
|
$
|
47
|
|
$
|
59
|
|
|
|
Summary of marketable securities:
|
|||||||||||||||||||||||||||
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
||||||||||||||||||||||||
|
March
|
December
|
March
|
December
|
March
|
December
|
March
|
December
|
||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||
|
Available-for-sale marketable securities:
|
|||||||||||||||||||||||||||
|
Corporate and asset-backed debt securities
|
$
|
1,171
|
|
$
|
1,177
|
|
$
|
2
|
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
1,172
|
|
$
|
1,177
|
|
|||
|
Foreign government debt securities
|
826
|
|
846
|
|
2
|
|
—
|
|
—
|
|
(1
|
)
|
828
|
|
845
|
|
|||||||||||
|
United States agency debt securities
|
124
|
|
211
|
|
—
|
|
—
|
|
—
|
|
—
|
|
124
|
|
211
|
|
|||||||||||
|
United States treasury debt securities
|
487
|
|
350
|
|
—
|
|
—
|
|
—
|
|
—
|
|
487
|
|
350
|
|
|||||||||||
|
Certificates of deposit
|
51
|
|
53
|
|
—
|
|
—
|
|
—
|
|
—
|
|
51
|
|
53
|
|
|||||||||||
|
Other
|
4
|
|
5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
5
|
|
|||||||||||
|
Total available-for-sale marketable securities
|
$
|
2,663
|
|
$
|
2,642
|
|
$
|
4
|
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
(2
|
)
|
2,666
|
|
2,641
|
|
|||||
|
Trading marketable securities
|
74
|
|
72
|
|
|||||||||||||||||||||||
|
Total marketable securities
|
$
|
2,740
|
|
$
|
2,713
|
|
|||||||||||||||||||||
|
Reported as:
|
|||||||||||||||||||||||||||
|
Current assets-marketable securities
|
$
|
2,666
|
|
$
|
2,641
|
|
|||||||||||||||||||||
|
Noncurrent assets-other
|
74
|
|
72
|
|
|||||||||||||||||||||||
|
$
|
2,740
|
|
$
|
2,713
|
|
||||||||||||||||||||||
|
6
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
The unrealized losses on available-for-sale marketable securities at
March 31, 2014
were primarily caused by increases in yields as a result of the rise in government benchmark rates. Less than
1%
of our investments in available-for-sale securities had a credit quality rating of less than A2 (Moody's), A (Standard & Poors) and A (Fitch). We do not intend 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; accordingly, we do not consider these investments to be other-than-temporarily impaired at
March 31, 2014
.
The cost and estimated fair value of available-for-sale marketable securities at
March 31, 2014
by contractual maturity are:
|
Cost
|
Estimated
Fair Value
|
|||||||
|
Due in one year or less
|
$
|
522
|
|
$
|
521
|
|
||
|
Due after one year through three years
|
1,905
|
|
1,908
|
|
||||
|
Due after three years
|
236
|
|
237
|
|
||||
|
$
|
2,663
|
|
$
|
2,666
|
|
|||
The gross unrealized losses and fair value of our investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at
March 31, 2014
are:
|
Corporate and Asset-Backed Debt Securities
|
Foreign Government Debt Securities
|
United States Agency Debt Securities
|
Other
|
Total
|
||||||||||||||||||||||||||||||
|
Less Than 12 Months
|
Total
|
Less Than 12 Months
|
Total
|
Less Than 12 Months
|
Total
|
Less Than 12 Months
|
Total
|
Less Than 12 Months
|
Total
|
|||||||||||||||||||||||||
|
Number of investments
|
170
|
|
173
|
|
86
|
|
93
|
|
46
|
|
46
|
|
114
|
|
115
|
|
416
|
|
427
|
|
||||||||||||||
|
Fair value
|
$
|
389
|
|
$
|
396
|
|
$
|
490
|
|
$
|
576
|
|
$
|
228
|
|
$
|
228
|
|
$
|
15
|
|
$
|
15
|
|
$
|
1,122
|
|
$
|
1,215
|
|
||||
|
Unrealized losses
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
(1
|
)
|
||||
Upon the sale of a security classified as available-for-sale, the security’s specific unrealized gain (loss) is reclassified out of AOCI into earnings based on the specific identification method. Interest and marketable securities income was
$6
and
$5
for the
three months ended March 31, 2014
and 2013, respectively, and is included in other income (expense).
NOTE 5 - DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES
We use operational and economic hedges as well as foreign currency exchange forward contracts to manage the impact of currency exchange on earnings and cash flow. During the period we did not change our hedging strategies or objectives from those disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2013
. The gross notional and gross fair value amounts of foreign exchange forward contract derivatives designated and non-designated as hedging instruments are:
|
March 31, 2014
|
December 31, 2013
|
||||||||||||||||||||||||||||||||||||||
|
Fair Value - Balance Sheet Location
|
Fair Value - Balance Sheet Location
|
||||||||||||||||||||||||||||||||||||||
|
Gross Notional
|
Other Current Assets
|
Other Assets – Noncurrent
|
Other Current Liabilities
|
Other Liabilities – Noncurrent
|
Gross Notional
|
Other Current Assets
|
Other Assets – Noncurrent
|
Other Current Liabilities
|
Other Liabilities – Noncurrent
|
||||||||||||||||||||||||||||||
|
Designated
|
$
|
315
|
|
$
|
5
|
|
$
|
1
|
|
$
|
2
|
|
$
|
1
|
|
$
|
344
|
|
$
|
11
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
|||||||||
|
Non-designated
|
2,170
|
|
10
|
|
1
|
|
3
|
|
—
|
|
2,000
|
|
10
|
|
3
|
|
1
|
|
—
|
|
|||||||||||||||||||
|
$
|
2,485
|
|
$
|
15
|
|
$
|
2
|
|
$
|
5
|
|
$
|
1
|
|
$
|
2,344
|
|
$
|
21
|
|
$
|
4
|
|
$
|
2
|
|
$
|
—
|
|
||||||||||
We are exposed to credit loss in the event of nonperformance by counterparties on our outstanding forward currency exchange contracts 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. The maximum term of the forward currency exchange contracts at
March 31, 2014
and
December 31, 2013
was
546
days for each period.
The aggregate currency exchange rate gains (losses) for the three months ended
March 31, 2014
was
($4)
, comprised of gains of
$2
recorded in cost of goods sold and losses of
($6)
recorded in other (income) expense. No aggregate gain (loss) was recorded for the three months ended March 31,
2013
. These total gains (losses) represent the net impact to the consolidated statements of earnings for both designated and non-designated derivative instruments.
The amount and location of gains in the consolidated statements of earnings and amounts recorded in AOCI related to the foreign exchange contract derivative instruments designated as hedges for the three months ended March 31 were:
|
7
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
|
Reported as a component of AOCI (net of tax effective portion)
|
Reclassified from AOCI into income (pre-tax effective portion)
|
Recognized in other income (expense) (pre-tax ineffective portion and amount excluded from effectiveness testing)
|
||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||
|
$
|
5
|
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||||
At
March 31, 2014
and
December 31, 2013
, deferred pretax gains on derivatives designated as hedges of $
7
and
$12
, which are recorded in AOCI, are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases.
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 and intellectual property, and other matters. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages, as well as other compensatory and equitable relief, that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management has sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, for the resolution of these legal matters is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those projected by management, additional expense may be incurred, which could unfavorably affect future operating results. We are currently self-insured for product liability-related claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we received a subpoena from the United States Department of Justice (DOJ) related to the sales and marketing of the OtisKnee device. The subpoena concerns allegations of violations of federal laws related to sales of a device not cleared by the United States Food and Drug Administration (FDA). We continue to discuss the settlement of this matter with the DOJ, but there can be no assurance that we will reach a consensual resolution rather than seeking a resolution through the courts. We have recorded charges totaling
$80
related to this matter.
In June 2012 we voluntarily recalled our Rejuvenate and ABG II modular-neck hip stems and terminated global distribution of these hip products. We notified healthcare professionals and regulatory bodies of this recall, which was taken due to potential risks associated with fretting and/or corrosion that may lead to adverse local tissue reactions. Product liability lawsuits relating to this voluntary recall have been filed against us. As previously announced, we intend to reimburse implanted patients for reasonable and customary costs of testing and treatment services, including any necessary revision surgeries. We continue to work with the medical community to evaluate the data and further understand this matter. The ultimate total cost with respect to this matter will depend on many factors that are difficult to predict and
may vary materially based on the number of and actual costs of patients seeking testing and treatment services, the number of and actual costs of patients requiring revision surgeries, the number of and actual costs to settle lawsuits filed against us, and the amount of third-party insurance recoveries. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter is estimated to be approximately $
1,130
to $
1,580
before third-party insurance recoveries. In the three months ended
March 31, 2014
, we recorded charges to earnings of
$340
representing the excess of the
$1,130
minimum of the range over the previously recorded reserves. No contingent gain for third-party insurance recoveries was recorded as of
March 31, 2014
. As noted above, the final outcome of this matter is dependent on many variables that are difficult to predict. The ultimate cost to entirely resolve this matter may be materially different than the amount of the current estimate and 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 Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed three of our patents. In rulings issued in August and September 2013, the trial judge upheld the February 2013 jury verdict in our favor, issued a permanent injunction barring Zimmer from making or selling infringing products, and ordered Zimmer to pay us at least $
228
. Zimmer is appealing this ruling and the ultimate resolution of this matter may differ materially. Accordingly, we have not recorded a contingent gain related to this matter.
For each of the following legal matters the final outcome is dependent on many variables and cannot be predicted. Accordingly, it is not possible at this time for us to estimate any material loss or range of losses. However, the ultimate cost to resolve these matters could have a material adverse effect on our financial position, results of operations and cash flows.
In April 2011 lawsuits brought by Hill-Rom Company, Inc. and affiliated entities (Hill-Rom) against us were filed in the United States District Court for the Western District of Wisconsin and the United States District Court for the Southern District of Indiana. The Wisconsin lawsuit was subsequently transferred to the United States District Court in Indiana. The suits allege infringement under United States patent laws with respect to certain patient handling equipment we manufactured and sold and seek damages and permanent injunctions. We have entered into an agreement settling the first lawsuit, with terms as previously disclosed. The second lawsuit involves
nine
patents related to electrical network communications for hospital beds. The case has been stayed with respect to
six
of the patents that are currently under reexamination
|
8
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
by the United States Patent Office. With respect to the
three
remaining patents, Hill-Rom is appealing the trial court's grant of summary judgment in our favor and the ultimate resolution of this particular part of the suit may differ. The ultimate resolution of the entire second suit may have no relation to the resolution of the first suit and cannot be predicted; however, the result could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we received a subpoena from the DOJ related to sales and marketing and regulatory matters related to the Stryker PainPump. We have received requests for certain documents in connection with this investigation. The investigation is ongoing and we are fully cooperating with the DOJ regarding this matter.
NOTE 7 - ACQUISITIONS
In March 2014 we completed our acquisition of Patient Safety Technologies, Inc. (PST) for an aggregate purchase price of
$120
. PST conducts its business through its wholly owned subsidiary, SurgiCount Medical, Inc. PST’s proprietary Safety-Sponge
®
System and SurgiCount 360™ compliance software help prevent Retained Foreign Objects in the operating room. The acquisition of PST is expected to enhance our product offerings within our MedSurg segment. Intangible assets acquired with PST will be amortized over a weighted-average life of
14
years.
Other business acquisitions completed in the three-month period in 2014 include the previously announced acquisition of Pivot Medical, Inc. (Pivot). The acquired net assets of these acquisitions appear in the "Other" column in the table below.
In February 2014 we announced our intent to acquire Berchtold Holding, AG (Berchtold); on April 15, 2014 the acquisition closed for an aggregate purchase price of approximately $
172
. Berchtold, a privately held business with operating facilities in Germany and the United States, sells surgical infrastructure equipment including surgical tables, equipment booms and surgical lighting systems. The acquisition of Berchtold is expected to enhance our product offerings within our MedSurg segment.
In December 2013 we acquired MAKO Surgical Corp. (MAKO) for an aggregate purchase price of
$1,679
. The acquisition of MAKO, combined with our strong history in joint reconstruction, capital equipment (operating room integration and surgical navigation) and surgical instruments, will help further advance the growth of robotic arm assisted surgery. Our combined expertise offers the potential to simplify joint reconstruction procedures, reduce variability and enhance the surgeon and patient experience. The acquisition of MAKO enhances our product offerings within our Reconstructive segment. Intangible assets acquired with MAKO will be amortized over a weighted-average life of
9
years, except for the trade name that is deemed to have an indefinite life. In-process research and development (IPRD) is considered to be an indefinite-lived intangible asset until such time as the research is completed (at which time it becomes a determinable-lived intangible asset) or determined to have no future use (at which time it is impaired).
The purchase price allocations for MAKO, PST and other smaller acquisitions are based upon preliminary valuations, and our estimates and assumptions are subject to change within the measurement period as the valuations are finalized. Management is currently in the process of verifying data and finalizing information related to the MAKO valuation and all acquisitions completed in 2014 to finalize the recording of identifiable intangible assets, deferred income taxes and the corresponding effect on the value of goodwill.
In March 2013 we acquired Trauson Holdings Company Limited (Trauson) for an aggregate purchase price of
$751
. The acquisition of Trauson enhances our product offerings, primarily within our Reconstructive segment, broadens our presence in China and enables us to expand into the fast growing value segment of the emerging markets. Intangible assets acquired with Trauson will be amortized over a weighted-average life of
15
years, except for the trade name that is deemed to have an indefinite life. IPRD is considered to be an indefinite-lived intangible asset until the research is completed (at which time it becomes a determinable-lived intangible asset) or it is determined to have no future use (at which time it is impaired). The measurement period for the Trauson acquisition was completed in 2013.
The allocation of the purchase prices of each acquisition to the acquired net assets is as follows:
|
2014
|
2014
|
2013
|
2013
|
|||||||||||||
|
PST
|
Other
|
MAKO
|
Trauson
|
|||||||||||||
|
Purchase price paid
|
$
|
120
|
|
$
|
148
|
|
$
|
1,679
|
|
$
|
751
|
|
||||
|
Tangible assets acquired:
|
||||||||||||||||
|
Inventory
|
7
|
|
5
|
|
50
|
|
43
|
|
||||||||
|
Other assets
|
19
|
|
25
|
|
174
|
|
163
|
|
||||||||
|
Liabilities
|
(33
|
)
|
(32
|
)
|
(277
|
)
|
(87
|
)
|
||||||||
|
Identifiable intangible assets:
|
||||||||||||||||
|
Customer relationship
|
33
|
|
4
|
|
91
|
|
112
|
|
||||||||
|
Trade name
|
—
|
|
—
|
|
24
|
|
34
|
|
||||||||
|
Developed technology & patents
|
26
|
|
70
|
|
231
|
|
31
|
|
||||||||
|
IPRD
|
—
|
|
2
|
|
169
|
|
5
|
|
||||||||
|
Goodwill
|
68
|
|
74
|
|
1,217
|
|
450
|
|
||||||||
|
$
|
120
|
|
$
|
148
|
|
$
|
1,679
|
|
$
|
751
|
|
|||||
NOTE 8 - LONG-TERM DEBT AND CREDIT FACILITIES
Our debt is summarized as follows:
|
March 31
|
December 31
|
||||||||
|
2014
|
2013
|
||||||||
|
Senior unsecured notes:
|
|||||||||
|
Rate
|
Due
|
||||||||
|
3.00%
|
January 15, 2015
|
$
|
500
|
|
$
|
500
|
|
||
|
2.00%
|
September 30, 2016
|
749
|
|
749
|
|
||||
|
1.30%
|
April 1, 2018
|
598
|
|
598
|
|
||||
|
4.375%
|
January 15, 2020
|
498
|
|
498
|
|
||||
|
4.10%
|
April 1, 2043
|
395
|
|
394
|
|
||||
|
Commercial paper
|
300
|
|
—
|
|
|||||
|
Other
|
24
|
|
25
|
|
|||||
|
Total debt
|
3,064
|
|
2,764
|
|
|||||
|
Less current maturities
|
(820
|
)
|
(25
|
)
|
|||||
|
Total long-term debt
|
$
|
2,244
|
|
$
|
2,739
|
|
|||
|
9
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
During the three months ended
March 31, 2014
, we issued commercial paper under the commercial paper program we established in July 2011. The program allows us to have a maximum of
$500
in commercial paper outstanding, with maturities up to
397
days from the date of issuance. As of March 31, 2014, outstanding commercial paper totaled
$300
, the weighted average original maturity of the commercial paper outstanding was approximately
13 days
and the weighted average interest rate was
0.3%
.
In March 2013 we completed a public offering of
$600
in
1.30%
Notes due April 1, 2018, net of an offering discount of
$3
(2018 Notes), and
$400
in
4.10%
Notes due April 1, 2043, net of an offering discount of
$6
(2043 Notes and, together with the 2018 Notes, the Notes). Interest on the Notes is payable on April 1 and October 1 of each year, commencing on October 1, 2013. Unless previously redeemed, the 2018 Notes will mature on April 1, 2018 and the 2043 Notes will mature on April 1, 2043.
Certain of our credit facilities require us to comply with certain financial and other covenants. We were in compliance with all covenants at
March 31, 2014
. We have lines of credit, issued by various financial institutions, available to fund our day-to-day operating needs. At
March 31, 2014
, we had
$762
of borrowing capacity available under all of our existing credit facilities. The weighted average interest rate, excluding required fees, for all borrowings was
2.7%
at
March 31, 2014
.
At
December 31, 2013
, the total unamortized debt issuance costs incurred in connection with our outstanding notes were
$15
. The fair value of long-term debt (including current maturities) at
March 31, 2014
and
December 31, 2013
was
$2,792
a
n
d
$2,790
, respectively, based on the quoted interest rates for similar types and amounts of borrowing agreements.
NOTE 9 - CAPITAL STOCK
In February 2014 we declared a quarterly dividend of
$0.305
per share, payable April 30, 2014 to shareholders of record at the close of business on March 31, 2014.
We did not repurchase any shares during the
three months ended March 31, 2014
. At
March 31, 2014
, the maximum dollar value of shares that may be purchased under authorized repurchase programs was
$683
.
NOTE 10 - RESTRUCTURING CHARGES
In recent years, we have incurred an ongoing annual level of restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. The costs incurred under the ongoing program have generally ranged from
$50
to
$75
annually. The productivity and cost savings plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes to help fund our growth strategy.
A rollforward of our restructuring liability balance for the
three months ended March 31, 2014
is as follows:
|
Total
|
Agent Conversions
|
Severance and Related Costs
|
Contractual Obligations and Other
|
|||||||||||||
|
January 1 Balance
|
$
|
20
|
|
$
|
2
|
|
$
|
10
|
|
$
|
8
|
|
||||
|
Charges to earnings
|
5
|
|
—
|
|
3
|
|
2
|
|
||||||||
|
Cash paid
|
(8
|
)
|
(1
|
)
|
(4
|
)
|
(3
|
)
|
||||||||
|
Other adjustments
|
(1
|
)
|
—
|
|
(1
|
)
|
—
|
|
||||||||
|
March 31 Balance
|
$
|
16
|
|
$
|
1
|
|
$
|
8
|
|
$
|
7
|
|
||||
NOTE 11 - SEGMENT INFORMATION
Net sales and net earnings by business segment for the
three
months ended
March 31, 2014
and
2013
are as follows:
|
Reconstructive
|
MedSurg
|
Neurotechnology and Spine
|
Total
|
||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||
|
Net sales
|
$
|
999
|
|
$
|
956
|
|
$
|
886
|
|
$
|
837
|
|
$
|
420
|
|
$
|
397
|
|
$
|
2,305
|
|
$
|
2,190
|
|
|||
|
Segment net earnings
|
249
|
|
234
|
|
145
|
|
161
|
|
86
|
|
78
|
|
$
|
480
|
|
$
|
473
|
|
|||||||||
|
Less: other (net of income taxes)
|
|||||||||||||||||||||||||||
|
Other
|
(76
|
)
|
(56
|
)
|
|||||||||||||||||||||||
|
Acquisition and integration related charges
|
(13
|
)
|
(17
|
)
|
|||||||||||||||||||||||
|
Intangible Amortization
|
(31
|
)
|
(23
|
)
|
|||||||||||||||||||||||
|
Restructuring and related charges
|
(10
|
)
|
(11
|
)
|
|||||||||||||||||||||||
|
Recall charges
|
(272
|
)
|
(32
|
)
|
|||||||||||||||||||||||
|
Regulatory matter charges
|
—
|
|
(30
|
)
|
|||||||||||||||||||||||
|
Tax matters
|
(8
|
)
|
—
|
|
|||||||||||||||||||||||
|
Net earnings
|
$
|
70
|
|
$
|
304
|
|
|||||||||||||||||||||
Other than assets associated with the acquisitions that are discussed in greater detail in Note 7, there were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
|
10
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
ABOUT STRYKER
Stryker is one of the world's leading medical technology companies, with
2013
revenues of $9,021 and net earnings of $1,006. We are dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. We offer a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products, to help people lead more active and more satisfying lives.
We segregate our operations into three reportable business segments: Reconstructive, MedSurg, and Neurotechnology and Spine. The Reconstructive segment includes orthopaedic reconstructive (hip and knee) and trauma implant systems as well as other related products. The MedSurg segment includes surgical equipment and surgical navigation systems (Instruments); endoscopic and communications systems (Endoscopy); patient handling and emergency medical equipment (Medical); and other related products. The Neurotechnology and Spine segment includes neurovascular products, spinal implant systems and other related products.
In the United States, most of our products are marketed directly to doctors, hospitals and other healthcare facilities. For the most part, we maintain separate and dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Internationally, our products are
sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors. Our business is generally not seasonal in nature; however, the number of reconstructive surgeries is generally lower during the summer months and sales of capital equipment are generally stronger in the fourth quarter.
Revenues in the United States accounted for 66.9% and 65.8% of total revenues in the first
three
months of 2014 and 2013, respectively, and international revenues accounted for 33.1% and 34.2% of total revenues in the first
three
months of 2014 and 2013, respectively.
In April 2014 we completed the acquisition of Berchtold Holding, AG (Berchtold), a privately-held business with operations in Germany and the United States, for an aggregate purchase price of approximately $
172
. Berchtold sells world-class surgical infrastructure equipment. In March 2014 we completed our acquisition of Patient Safety Technologies, Inc. (PST), for an aggregate purchase price of $120. PST conducts its business through its wholly owned subsidiary, SurgiCount Medical, Inc. PST’s proprietary Safety-Sponge
®
System and SurgiCount 360™ compliance software help prevent Retained Foreign Objects in the operating room. Other business acquisitions completed in the three-month period in 2014 include the previously announced acquisition of Pivot Medical, Inc. (Pivot).
RESULTS OF OPERATIONS
Consolidated results of operations for the
three
-month periods ended
March 31, 2014
and
2013
were:
|
Three Months
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
Net Sales
|
$
|
2,305
|
|
$
|
2,190
|
|
5.3
|
|
|
|
Gross profit
|
1,536
|
1,477
|
4.0
|
|
|||||
|
Research, development and engineering expenses
|
150
|
|
129
|
16.3
|
|
||||
|
Selling, general and administrative expenses
|
1,205
|
916
|
31.6
|
|
|||||
|
Intangible asset amortization
|
45
|
32
|
40.6
|
|
|||||
|
Restructuring charges
|
5
|
14
|
|
(64.3
|
)
|
||||
|
Other income (expense)
|
(24)
|
(11)
|
118.2
|
|
|||||
|
Income taxes
|
37
|
71
|
(47.9
|
)
|
|||||
|
Net earnings
|
$
|
70
|
|
$
|
304
|
|
(77.0
|
)
|
|
|
Diluted net earnings per share
|
$
|
0.18
|
|
$
|
0.79
|
|
(77.2
|
)
|
|
Geographic and segment net sales for the
three
-month periods ended
March 31, 2014
and 2013 were:
|
Percentage Change
|
||||||||||||
|
2014/2013
|
||||||||||||
|
Three Months
|
Constant
Currency |
|||||||||||
|
2014
|
2013
|
Reported
|
||||||||||
|
Geographic sales:
|
||||||||||||
|
United States
|
$
|
1,542
|
|
$
|
1,441
|
|
7.1
|
7.1
|
||||
|
International
|
763
|
|
749
|
|
1.8
|
5.2
|
||||||
|
Total net sales
|
$
|
2,305
|
|
$
|
2,190
|
|
5.3
|
6.4
|
||||
|
Segment sales:
|
||||||||||||
|
Reconstructive
|
$
|
999
|
|
$
|
956
|
|
4.5
|
5.9
|
||||
|
MedSurg
|
886
|
|
837
|
|
5.8
|
6.8
|
||||||
|
Neurotechnology and Spine
|
420
|
|
397
|
|
5.9
|
7.0
|
||||||
|
Total net sales
|
$
|
2,305
|
|
$
|
2,190
|
|
5.3
|
6.4
|
||||
|
11
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
Net sales increased
5.3
% for the three-month period. Net sales grew 6.9% as a result of increased unit volume and changes in product mix and 1.4% due to acquisitions. Net sales were unfavorably impacted by 1.8% due to changes in price and 1.1% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales increased by 6.4%. The increase was primarily due to higher shipments of trauma and extremities products, neurotechnology products, instruments and endoscopy products and hips.
Supplemental sales growth information for the
three
-month periods ended
March 31, 2014
and
2013
:
|
First Quarter Ended March 31, 2014
|
||||||||||||||
|
% Change
|
||||||||||||||
|
U.S.
|
International
|
|||||||||||||
|
2014
|
2013
|
As Reported
|
Constant Currency
|
As Reported
|
As Reported
|
Constant Currency
|
||||||||
|
Reconstructive
|
||||||||||||||
|
Knees
|
$
|
348
|
|
$
|
345
|
|
1.1
|
|
2.3
|
4.4
|
(5.3
|
)
|
(1.7
|
)
|
|
Hips
|
318
|
|
308
|
|
3.1
|
|
4.9
|
5.9
|
(0.4
|
)
|
3.7
|
|
||
|
Trauma and Extremities
|
288
|
|
266
|
|
8.4
|
|
9.4
|
11.6
|
4.8
|
|
6.9
|
|
||
|
TOTAL RECONSTRUCTIVE
|
999
|
|
956
|
|
4.5
|
|
5.9
|
8.0
|
(0.5
|
)
|
2.9
|
|
||
|
MedSurg
|
||||||||||||||
|
Instruments
|
343
|
|
312
|
|
10.1
|
|
11.0
|
12.8
|
3.3
|
|
6.4
|
|
||
|
Endoscopy
|
312
|
|
291
|
|
7.0
|
|
8.1
|
5.9
|
9.4
|
|
13.3
|
|
||
|
Medical
|
181
|
|
182
|
|
(0.5
|
)
|
0.6
|
1.9
|
(8.4
|
)
|
(3.8
|
)
|
||
|
TOTAL MEDSURG
|
886
|
|
837
|
|
5.8
|
|
6.8
|
6.7
|
3.4
|
|
7.1
|
|
||
|
Neurotechnology and Spine
|
||||||||||||||
|
Neurotechnology
|
243
|
|
221
|
|
10.0
|
|
11.6
|
11.3
|
8.1
|
|
12.0
|
|
||
|
Spine
|
177
|
|
176
|
|
0.7
|
|
1.3
|
0.4
|
1.5
|
|
3.8
|
|
||
|
TOTAL NEUROTECHNOLOGY AND SPINE
|
420
|
|
397
|
|
5.9
|
|
7.0
|
5.9
|
5.8
|
|
9.1
|
|
||
Reconstructive Net Sales
Reconstructive net sales for the three-month period increased
4.5
%, primarily due to a
5.3
% increase in unit volume and changes in product mix and
3.0
% due to acquisitions. Net sales were unfavorably impacted by
2.3
% due to changes in price and
1.4
% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales for the three-month period increased
5.9
%, primarily due to higher shipments of trauma and extremities products and hips worldwide.
MedSurg Net Sales
MedSurg net sales for the three-month period increased 5.8%, primarily due to a 7.9% increase in unit volume and changes in product mix. Net sales were unfavorably impacted by 1.2% due to changes in price and 1.0% due to the impact of foreign currency exchange rates. In constant currency, net sales for the three-month period increased 6.8%, primarily due to higher shipments of instruments and endoscopy products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales for the three-month period increased 5.9%, primarily due to an 8.5% increase in unit volume and changes in product mix and 0.5% due to acquisitions. Net sales were unfavorably impacted by 2.0% due to changes in price and 1.1% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency, net sales for the three-month period increased 7.0%, led by higher shipments of neurotechnology products.
Cost of Sales
Cost of sales increased
7.9%
for the three-month period to
33.4%
of sales, compared to
32.6%
in
2013
. Product mix contributed to the increase in cost of sales, as sales growth for MedSurg products outpaced sales growth in the Reconstructive segment. Cost of sales for the three-month period of 2014 also includes $
5
related to inventory that was stepped up to fair value following acquisitions and $1 in restructuring and restructuring-related costs. Excluding the impact of the acquisition and restructuring costs described above, cost of sales in the three-month period was
33.1
% of sales compared to
32.6
% in
2013
.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased
16.3%
to
$150
, representing
6.5%
of sales for the three-month period compared to 5.9% in
2013
. The timing of projects for anticipated future products, the impact of acquisitions and continued investment in new technologies causes the spending level to vary by period as a percentage of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
31.6%
to
$1,205
, representing
52.3
% of sales in the three-month period, compared to
41.8
% in
2013
. The
three
-month periods included $16 and $20 in
2014
and
2013
, respectively, in acquisition and integration related charges; $
9
and $
2
in
2014
and
2013
, respectively, in restructuring related charges; $344 and $40 in
2014
and
2013
, respectively, related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System;
|
12
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
and $
40
in
2013
related to two previously disclosed United States regulatory matters. Excluding the impact of these charges, selling, general and administrative expenses were
36.3
% of sales in
2014
compared to
37.2
% in
2013
, primarily reflecting improved control over general and administrative spending.
Restructuring Charges
Restructuring charges of $
5
and $
14
in the
three
-month periods in
2014
and
2013
, respectively, were related to the reorganization of our management structure outside of the United States, focused reductions of our global workforce and other restructuring activities. These actions have been initiated to provide efficiencies and realign resources to fund our growth strategy.
Other Income (Expense)
Other expense in the
three-month period
increased $13 from
2013
, primarily as a result of increased interest expense associated with our public offering of notes in March
2013
and due to losses on foreign currency exchange transactions.
Income Taxes
Our effective income tax rate on earnings in the
three
-month period was 34.5% compared to 18.9% in
2013
. In 2014 we recorded $8 in tax expense related to certain discrete tax items; in 2013 we recorded retroactive net tax benefits of $13 pursuant to the American Taxpayer Relief Act of 2012 that was signed into law on January 2, 2013. These tax benefits related to the retroactive extension of numerous tax provisions, including an extension of the research tax credit and other provisions for companies with significant international operations. These same tax provisions expired at the end of 2013.
Net Earnings
Net earnings in the three-month period decreased to $70 or $0.18 per diluted share compared to
$304
or
$0.79
per diluted share in
2013
. The impact of foreign currency exchange rates on net earnings reduced diluted net earnings per share by approximately $0.04.
Reported net earnings includes restructuring and restructuring-related charges of $
10
and $
11
in
2014
and
2013
, respectively; acquisition and integration related charges of $
13
and $17 in
2014
and
2013
, respectively; amortization expense for purchased intangible assets of $
31
and $
23
in 2014 and 2013, respectively; charges related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System of $
272
and $
32
in
2014
and
2013
, respectively; tax expense related to certain discrete tax items of $
8
in 2014; and charges related to two previously disclosed United States regulatory matters of $
30
in 2013.
NON-GAAP FINANCIAL MEASURES
We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures,
including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; cost of sales excluding specified items; adjusted selling, general and administrative expenses; adjusted intangible amortization; adjusted operating income; adjusted effective income tax rate; adjusted net earnings; and adjusted diluted net earnings per share (EPS). We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures.
To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions.
To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. Adjustments may include, but are not limited to, the following:
|
1.
|
Acquisition and integration related costs
. These adjustments include costs related to integrating recently acquired businesses and specific costs related to the consummation of the acquisition process.
|
|
2.
|
Restructuring and related charges
. These adjustments include costs associated with focused workforce reductions and other restructuring activities.
|
|
3.
|
Rejuvenate and recall matters
. These adjustments are our best estimate of the minimum of the range of probable loss to resolve certain product recalls, including the recall of Rejuvenate / ABG II modular-neck hip stems and certain matters pertaining to the recall of the Neptune Waste Management System.
|
|
4.
|
Regulatory and legal matters
. These adjustments represent our best estimate of the minimum of the range of probable loss to resolve certain regulatory matters and other legal settlements.
|
|
13
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
|
5.
|
Amortization of intangible assets
. These adjustments represent the periodic amortization expense related to purchased intangible assets.
|
|
6.
|
Tax matters
. These adjustments represent certain discrete tax items and adjustments to interest expense related to the settlement of certain tax matters.
|
Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, cost of sales, selling, general and administrative expenses, intangible amortization, operating income, effective income tax rate, net earnings and diluted net earnings per share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing
aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Results of Operations below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The following reconciles the non-GAAP financial measures of adjusted gross profit; adjusted selling, general and administrative expense; adjusted intangible amortization; adjusted operating income; adjusted net earnings; adjusted effective tax rate; and adjusted diluted net earnings per share with the most directly comparable GAAP financial measures:
|
Three Months Ended March 31, 2014
|
Gross Profit
|
Selling, General and Administrative Expenses
|
Intangible Amortization
|
Operating Income
|
Net Earnings
|
Effective Tax Rate
|
Diluted EPS
|
|||||||||||||
|
AS REPORTED
|
$
|
1,536
|
|
$
|
1,205
|
|
$
|
45
|
|
$
|
131
|
|
$
|
70
|
|
34.5
|
%
|
$
|
0.18
|
|
|
Acquisition and integration related charges
|
||||||||||||||||||||
|
Inventory stepped up to fair value
|
5
|
|
—
|
|
—
|
|
5
|
|
3
|
|
0.9
|
|
0.01
|
|
||||||
|
Other acquisition and integration related
|
—
|
|
(16
|
)
|
—
|
|
16
|
|
10
|
|
2.0
|
|
0.03
|
|
||||||
|
Intangible amortization
|
—
|
|
—
|
|
(45
|
)
|
45
|
|
31
|
|
2.5
|
|
0.08
|
|
||||||
|
Restructuring and related charges
|
1
|
|
(9
|
)
|
—
|
|
15
|
|
10
|
|
1.2
|
|
0.03
|
|
||||||
|
Rejuvenate and recall matters
|
—
|
|
(344
|
)
|
—
|
|
344
|
|
272
|
|
(9.6
|
)
|
0.71
|
|
||||||
|
Tax matters
|
—
|
|
—
|
|
—
|
|
—
|
|
8
|
|
(7.4
|
)
|
0.02
|
|
||||||
|
ADJUSTED
|
$
|
1,542
|
|
$
|
836
|
|
$
|
—
|
|
$
|
556
|
|
$
|
404
|
|
24.1
|
%
|
$
|
1.06
|
|
|
Three Months Ended March 31, 2013
|
Gross Profit
|
Selling General and Administrative Expenses
|
Intangible Amortization
|
Operating Income
|
Net Earnings
|
Effective Tax Rate
|
Diluted EPS
|
|||||||||||||
|
AS REPORTED
|
$
|
1,477
|
|
$
|
916
|
|
$
|
32
|
|
$
|
386
|
|
$
|
304
|
|
18.9
|
%
|
$
|
0.79
|
|
|
Acquisition and integration related charges
|
||||||||||||||||||||
|
Other acquisition and integration related
|
—
|
|
(20
|
)
|
—
|
|
20
|
|
17
|
|
(0.3
|
)
|
0.05
|
|
||||||
|
Intangible amortization
|
—
|
|
—
|
|
(32
|
)
|
32
|
|
23
|
|
0.6
|
|
0.06
|
|
||||||
|
Restructuring and related charges
|
—
|
|
(2
|
)
|
—
|
|
16
|
|
11
|
|
0.4
|
|
0.03
|
|
||||||
|
Rejuvenate and recall matters
|
—
|
|
(40
|
)
|
—
|
|
40
|
|
32
|
|
0.1
|
|
0.08
|
|
||||||
|
Regulatory and legal matters
|
—
|
|
(40
|
)
|
—
|
|
40
|
|
30
|
|
0.6
|
|
0.08
|
|
||||||
|
ADJUSTED
|
$
|
1,477
|
|
$
|
814
|
|
$
|
—
|
|
$
|
534
|
|
$
|
417
|
|
20.3
|
%
|
$
|
1.09
|
|
The weighted-average basic and diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as those used in the calculation of the reported per share amounts.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash from operations totaled $206 in the
three
-month period, compared to $236 in
2013
. Operating cash flow resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, share-based compensation, deferred income taxes and charges for product recall and regulatory matters). The adjustments for non-cash items in the three-month period in 2014 were due primarily to the charge to earnings for additional amounts related to the Rejuvenate and ABG II recalls of $340. The net of
accounts receivable, inventory and accounts payable provided $62 of cash in
2014
compared to the consumption of $40 of cash in
2013
, contributing a $102 increase in cash from operations as compared to
2013
.
The impact of the timing of sales in each period resulted in the generation of $93 of cash in the three-month period in 2014 from accounts receivable compared to the generation of $7 in 2013. Accounts receivable days outstanding has decreased compared to March 2013 by 2 days but has increased by 1 day from
December
2013
. Inventory days on hand compared to December 2013
|
14
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
increased by 23 days in 2014 and by 8 days compared to March 2013.
Investing Activities
Net investing activities consumed $351 and $360 of cash in the
three-month period
s in
2014
and
2013
, respectively.
Acquisitions.
Acquisitions used $272 and $600 of cash in the
three-month period
s in
2014
and
2013
, respectively. Cash used in 2014 was primarily for the acquisitions of PST and Pivot; cash used in 2013 was primarily for the acquisition of Trauson Holdings Company Limited.
Capital Spending.
We manage capital spending to support our business growth. Capital expenditures, primarily to support integration of acquisitions, capacity expansion, new product introductions, innovation and cost savings, were $70 and $49 in the
three-month period
s in
2014
and
2013
, respectively.
Marketable Securities.
Cash of $9 was used for the net purchase of marketable securities in the
three-month period
in
2014
compared to $289 of cash generated from the net sale of marketable securities in
2013
.
Financing Activities
Dividend Payments
.
Dividends paid per common share increased 15.1% to $0.305 per share in the
three-month period
in
2014
compared to $0.265 in 2013. Total dividend payments to common shareholders were $115 and $101 in
2014
and
2013
, respectively.
Long-Term and Short-Term Debt
.
Net proceeds from borrowings for the
three-month period
s were $289 and $1,009 in
2014
and
2013
, respectively. Cash proceeds in 2014 were primarily from the issuance of commercial paper; proceeds in 2013 were primarily from public offerings of notes. Refer to Note 8 in the Notes to the Consolidated Financial Statements for further information.
Share Repurchases
.
Total use of cash for share repurchases was $0 and $250 for the
three-month period
s in
2014
and
2013
, respectively. The 2013 repurchases were primarily pursuant to an Accelerated Share Repurchase program that was completed in April of 2013.
Liquidity
Cash, cash equivalents and marketable securities were $4,047 at
March 31, 2014
and
$3,980
at
December 31, 2013
and current assets exceeded current liabilities by $4,888 at
March 31, 2014
and
$5,678
at
December 31, 2013
.
We anticipate being able to support our short-term liquidity and operating needs, including settlements related to the Rejuvenate and ABG II recalls, from a variety of sources, including cash from operations, commercial paper and existing credit lines. In the past we have also raised funds in the capital markets and may continue to do so from time to time in the future. We have strong short- and long-term debt ratings that we believe should enable us to refinance our debt as it becomes due.
Should additional funds be required we had approximately
$762
of borrowing capacity available under all of our existing credit facilities at
March 31, 2014
.
At
March 31, 2014
approximately 77.4% of our consolidated cash and cash equivalents and marketable securities were held in locations outside the United States. These funds are considered indefinitely reinvested to be used to expand operations, either organically or through acquisitions, outside the United States.
We continually evaluate our receivables, particularly in Spain, Portugal, Italy and Greece (the Southern European Region). The total net receivables from the Southern European Region at
March 31, 2014
and
December 31, 2013
were approximately $
161
and $
199
, including approximately $
82
and $
103
, respectively, of sovereign receivables. We believe that our current reserves related to receivables are adequate and any additional credit risk associated with the Southern European Region is not expected to have a material adverse impact on our financial position or liquidity. We currently do not have any investments in the sovereign debt instruments of the Southern European Region. Any non-sovereign exposure in these countries in our investment portfolios is considered immaterial.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, 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 business, including proceedings related to product, labor and intellectual property, and other matters. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages, as well as other compensatory and equitable relief, that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management has sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, for the resolution of these legal matters is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those projected by management, additional expense may be incurred that could unfavorably affect future operating results. We are currently self-insured for product liability-related claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
|
15
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
In 2010 we received a subpoena from the United States Department of Justice (DOJ) related to the sales and marketing of the OtisKnee device. The subpoena concerns allegations of violations of federal laws related to sales of a device not cleared by the United States Food and Drug Administration (FDA). We continue to discuss the settlement of this matter with the DOJ, but there can be no assurance that we will reach a consensual resolution rather than seeking a resolution through the courts. We have recorded charges totaling $80 related to this matter.
In June 2012 we voluntarily recalled our Rejuvenate and ABG II modular-neck hip stems and terminated global distribution of these hip products. We notified healthcare professionals and regulatory bodies of this recall, which was taken due to potential risks associated with fretting and/or corrosion that may lead to adverse local tissue reactions. Product liability lawsuits relating to this voluntary recall have been filed against us. As previously announced, we intend to reimburse implanted patients for reasonable and customary costs of testing and treatment services, including any necessary revision surgeries. We continue to work with the medical community to evaluate the data and further understand this matter. The ultimate total cost with respect to this matter will depend on many factors that are difficult to predict and may vary materially based on the number of and actual costs of patients seeking testing and treatment services, the number of and actual costs of patients requiring revision surgeries, the number of and actual costs to settle lawsuits filed against us, and the amount of third-party insurance recoveries. Based on the information that has been received, the actuarially determined range of probable loss to resolve this matter is estimated to be approximately
$1,130
to
$1,580,
before third-party insurance recoveries. In the three months ended March 31, 2014, we recorded charges to earnings of
$340
representing the excess of the
$1,130
minimum of the range over the previously recorded reserves. No contingent gain for third-party insurance recoveries was recorded as of March 31, 2014. As noted above, the final outcome of this matter is dependent on many variables that are difficult to predict. The ultimate cost to entirely resolve this matter may be materially different than the amount of the current estimate and 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 Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed three of our patents. In rulings issued in August and September 2013, the trial judge upheld the February 2013 jury verdict in our favor, issued a permanent injunction barring Zimmer from making or selling infringing products, and ordered Zimmer to pay us at least $228. Zimmer is appealing this ruling and the ultimate resolution of this matter may differ materially. Accordingly, we have not recorded a contingent gain related to this matter.
For each of the following legal matters the final outcome is dependent on many variables and cannot be predicted. Accordingly, it is not possible at this time for us to estimate any material loss or range of losses. However, the ultimate cost to resolve these matters could have a material adverse effect on our financial position, results of operations and cash flows.
In April 2011 lawsuits brought by Hill-Rom Company, Inc. and affiliated entities (Hill-Rom) against us were filed in the United States District Court for the Western District of Wisconsin and the United States District Court for the Southern District of Indiana. The Wisconsin lawsuit was subsequently transferred to the United States District Court in Indiana. The suits allege infringement under United States patent laws with respect to certain patient handling equipment we manufactured and sold and seek damages and permanent injunctions. We have entered into an agreement settling the first lawsuit, with terms as previously disclosed. The second lawsuit involves nine patents related to electrical network communications for hospital beds. The case has been stayed with respect to six of the patents that are currently under reexamination by the United States Patent Office. With respect to the three remaining patents, Hill-Rom is appealing the trial court's grant of summary judgment in our favor and the ultimate resolution of this particular part of the suit may differ. The ultimate resolution of the entire second suit may have no relation to the resolution of the first suit and cannot be predicted; however, the result could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we received a subpoena from the DOJ related to sales, marketing and regulatory matters related to the Stryker PainPump. We have received requests for certain documents in connection with this investigation. The investigation is ongoing and we are fully cooperating with the DOJ regarding this matter.
|
16
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
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," "would," "possible," "plan," "predict," "forecast," "potential," "anticipate," "estimate," "expect," "project," "intend," "believe," "may impact," "on track," 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. These forward-looking 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 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 the year ended
December 31, 2013
. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
We consider our material area of market risk exposure to be exchange rate risk. Quantitative and qualitative disclosures about exchange rate risk are included in the "Other Information" section of Management's Discussion and Analysis of Financial Condition in Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2013
under the caption "Hedging and Derivative Financial Instruments" on page 17. There have been no material changes from the information provided therein.
|
ITEM 4.
|
CONTROLS AND PROCEDURES.
|
Evaluation of Disclosure Controls and Procedures –
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures at
March 31, 2014
was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President, Chief Financial Officer (the Certifying Officers). Based on that evaluation, the Certifying Officers concluded that our disclosure controls and procedures are effective.
Changes in Internal Controls Over Financial Reporting –
There was no change to our internal control over financial reporting during the quarter ended
March 31, 2014
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.
|
(a) We issued
34,710
shares of our common stock in the
three months ended March 31, 2014
as performance incentive awards to certain 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.
(c) In December of 2012 and 2011, we announced that our Board of Directors had authorized us to purchase up to
$405
and
$500
, respectively, of our common stock (the 2012 and 2011 Repurchase Programs, respectively). The manner, timing and amount of purchases is determined by management based on an evaluation of market conditions, stock price and other factors and is subject to regulatory considerations. Purchases are to be made from time to time in the open market, in privately negotiated transactions or otherwise.
Shares repurchased under the share repurchase programs are available for general corporate purposes, including offsetting dilution associated with stock option and other equity-based employee benefit plans. We did not repurchase any shares during the
three months ended March 31, 2014
. At
March 31, 2014
, the maximum dollar value of shares that may be purchased under the authorized Repurchase Programs was
$683,000,000
.
|
17
|
Dollar amounts in millions except per share amounts or as otherwise specified
|
|
|
ITEM 5.
|
OTHER INFORMATION.
|
Submission Of Matters To A Vote Of Security Holders.
|
At our Annual Meeting of Shareholders held on April 22, 2014, shareholders voted on three proposals and cast votes as follows:
|
|
|
1
|
|
Election of directors:
|
|
|
Shares
|
||||||||||
|
Name
|
For
|
Against
|
Abstain
|
Broker Non-Votes
|
||||||
|
Howard E. Cox, Jr.
|
301,312,721
|
|
2,696,443
|
|
807,676
|
|
34,314,417
|
|
||
|
Srikant M. Datar, Ph.D.
|
278,696,999
|
|
25,468,210
|
|
651,631
|
|
34,314,417
|
|
||
|
Roch Doliveux, DVM
|
302,782,567
|
|
1,377,993
|
|
656,280
|
|
34,314,417
|
|
||
|
Louise L. Francesconi
|
299,475,876
|
|
4,693,315
|
|
647,649
|
|
34,314,417
|
|
||
|
Allan C. Golston
|
300,096,838
|
|
4,069,152
|
|
650,850
|
|
34,314,417
|
|
||
|
Kevin A. Lobo
|
303,594,003
|
|
594,639
|
|
628,198
|
|
34,314,417
|
|
||
|
William U. Parfet
|
298,409,035
|
|
5,588,306
|
|
819,499
|
|
34,314,417
|
|
||
|
Andrew K. Silvernail
|
303,293,955
|
|
862,407
|
|
660,478
|
|
34,314,417
|
|
||
|
Ronda E. Stryker
|
286,977,191
|
|
17,015,773
|
|
823,876
|
|
34,314,417
|
|
||
|
2
|
|
Ratification of the appointment of Ernst & Young LLP as the Company's independent registered public accounting firm for 2014:
|
|
Shares
|
||||||
|
For
|
Against
|
Abstain
|
||||
|
328,314,612
|
|
10,058,378
|
|
758,267
|
|
|
|
3
|
|
Advisory vote to approve the Company's named executive officer compensation:
|
|
Shares
|
|||||||||
|
For
|
Against
|
Abstain
|
Broker Non-Votes
|
||||||
|
295,436,231
|
|
7,836,659
|
|
1,543,950
|
|
34,314,417
|
|
||
|
ITEM 6.
|
EXHIBITS
|
|
(a)
|
||
|
31(i)*
|
Certification of Principal Executive Officer of Stryker Corporation pursuant to Rule 13a-14(a)
|
|
|
31(ii)*
|
Certification of Principal Financial Officer of Stryker Corporation pursuant to Rule 13a-14(a)
|
|
|
32(i)*
|
Certification by Principal Executive Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350
|
|
|
32(ii)*
|
Certification by Principal Financial Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350
|
|
|
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
|
|
|
* Furnished with this Form 10-Q
|
||
|
18
|
||
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)
|
||
|
|
||
|
April 24, 2014
|
/s/ KEVIN A. LOBO
|
|
|
Date
|
Kevin A. Lobo, President and Chief Executive Officer
|
|
|
April 24, 2014
|
/s/ WILLIAM R. JELLISON
|
|
|
Date
|
William R. Jellison, Vice President, Chief Financial Officer
|
|
|
19
|
||
EXHIBIT INDEX
|
Exhibit 31
|
Rule 13a-14(a) Certifications
|
|
|
(i)*
|
Certification of Principal Executive Officer of Stryker Corporation
|
|
|
(ii)*
|
Certification of Principal Financial Officer of Stryker Corporation
|
|
|
Exhibit 32
|
18 U.S.C. Section 1350 Certifications
|
|
|
(i)*
|
Certification of Principal Executive Officer of Stryker Corporation
|
|
|
(ii)*
|
Certification of Principal Financial Officer of Stryker Corporation
|
|
|
Exhibit 101
|
XBRL (Extensible Business Reporting Language) Documents
|
|
|
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
|
|
|
*
|
Furnished with this Form 10-Q
|
|
20
|
||
TABLE OF CONTENTS
Part I. - Financial InformationprintItem 1. Financial StatementsprintNote 1 - Basis Of PresentationprintNote 2 - Subsequent EventprintNote 3 - Accumulated Other Comprehensive Income (aoci)printNote 4 - Fair Value MeasurementsprintNote 5 - Derivative Instruments and Hedging StrategiesprintNote 6 - Contingencies and CommitmentsprintNote 7 - AcquisitionsprintNote 8 - Long-term Debt and Credit FacilitiesprintNote 9 - Capital StockprintNote 10 - Restructuring ChargesprintNote 11 - Segment InformationprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 5. Other InformationprintItem 6. Exhibitsprint