Stryker Corp 10-Q for FY2020 Q3
Stryker Corp (SYK)
10-Q
2020-10-30
For: 2020-09-30
View Original
Added on
April 02, 2026
About this 10-Q
Stryker Corp filed this 10-Q on October 30, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.74B
- up 4.2% from $3.59B a year earlier
- Net income
- $621M
- up 33.3% from net income of $466M a year earlier
- Diluted EPS
- $1.63
- up 32.5% from $1.23 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number: 001-13149
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (I.R.S. Employer Identification No.) | ||||||||||||||||||||||
| | |||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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 ☒ 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 ☒ 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.
☒ | Accelerated filer | ☐ | Emerging growth company | ||||||||||||||||||||
| Non-accelerated filer | ☐ | Small reporting 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 ☒
There were 375,790,657 shares of Common Stock, $0.10 par value, on September 30, 2020.
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
PART I – FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS | ||||
Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Research, development and engineering expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Recall charges | ( | ||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Total operating expenses | $ | $ | $ | $ | |||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ( | |||||||||||||||||||
| Earnings before income taxes | $ | $ | $ | $ | |||||||||||||||||||
| Income taxes | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Net earnings per share of common stock: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares outstanding (in millions): | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Effect of dilutive employee stock compensation | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Cash dividends declared per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
Anti-dilutive shares excluded from the calculation of dilutive employee stock options were de minimis in all periods.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| Pension plans | ( | ( | |||||||||||||||||||||
| Unrealized gains (losses) on designated hedges | ( | ( | ( | ( | |||||||||||||||||||
| Financial statement translation | ( | ( | |||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 1 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
CONSOLIDATED BALANCE SHEETS
| September 30 | December 31 | ||||||||||
| 2020 | 2019 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Accounts receivable, less allowance of $125 ($88 in 2019) | |||||||||||
| Inventories: | |||||||||||
| Materials and supplies | |||||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Total inventories | $ | $ | |||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | $ | $ | |||||||||
| Property, plant and equipment: | |||||||||||
| Land, buildings and improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Total property, plant and equipment | $ | $ | |||||||||
| Less accumulated depreciation | |||||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
| Goodwill | |||||||||||
| Other intangibles, net | |||||||||||
| Noncurrent deferred income tax assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued compensation | |||||||||||
| Income taxes | |||||||||||
| Dividends payable | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Current maturities of debt | |||||||||||
| Total current liabilities | $ | $ | |||||||||
| Long-term debt, excluding current maturities | |||||||||||
| Income taxes | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
| Shareholders' equity | |||||||||||
| Common stock, $0.10 par value | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders' equity | $ | $ | |||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 2 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Common stock shares outstanding (in millions) | |||||||||||||||||||||||
| Beginning | |||||||||||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | |||||||||||||||||||||||
| Repurchase of common stock | ( | ||||||||||||||||||||||
| Ending | |||||||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Beginning | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | — | — | |||||||||||||||||||||
| Ending | $ | $ | $ | $ | |||||||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||
| Beginning | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | ( | ( | ( | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | |||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||
| Ending | $ | $ | $ | $ | |||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning | $ | $ | $ | $ | |||||||||||||||||||
| Net earnings | |||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | |||||||||||||||||||
| Cash dividends declared | ( | ( | ( | ( | |||||||||||||||||||
| Ending | $ | $ | $ | $ | |||||||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||||||||
| Beginning | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Ending | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Total Stryker shareholders' equity | $ | $ | $ | $ | |||||||||||||||||||
| Non-controlling interest | |||||||||||||||||||||||
| Total shareholders' equity | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 3 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating activities | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangible assets | |||||||||||
| Asset impairments | |||||||||||
| Share-based compensation | |||||||||||
| Recall charges | ( | ||||||||||
| Sale of inventory stepped-up to fair value at acquisition | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Recall-related payments | ( | ( | |||||||||
| Income taxes | ( | ||||||||||
| Other, net | ( | ||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| Investing activities | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Proceeds from sales of marketable securities | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Other investing, net | ( | ||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| Financing activities | |||||||||||
| Proceeds (payments) on short-term borrowings, net | ( | ||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Payments on long-term debt | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Repurchases of common stock | ( | ||||||||||
| Cash paid for taxes from withheld shares | ( | ( | |||||||||
| Other financing, net | ( | ||||||||||
| Net cash provided by (used in) financing activities | $ | $ | ( | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Change in cash and cash equivalents | $ | $ | ( | ||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 4 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
General Information
Management believes the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring items, considered necessary to fairly present the financial position of Stryker Corporation and its consolidated subsidiaries ("Stryker," the "Company," "we," us" or "our") on September 30, 2020 and the results of operations for the three and nine months 2020. 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 2019.
Certain prior year amounts have been reclassified to conform with current year presentation of segment results.
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.
Accounting Pronouncements Recently Adopted
On January 1, 2020 we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses for accounts receivables, loans and other financial instruments. 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 2019.
We disaggregate our net sales by product line and geographic location for each of our segments as we believe it best depicts how the nature, amount, timing and certainty of our net sales and cash flows are affected by economic factors.
| Net Sales by Product Line | |||||||||||||||||
| Three Months | Nine Months | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Orthopaedics: | |||||||||||||||||
| Knees | $ | $ | $ | $ | |||||||||||||
| Hips | |||||||||||||||||
| Trauma and Extremities | |||||||||||||||||
| Other | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| MedSurg: | |||||||||||||||||
| Instruments | $ | $ | $ | $ | |||||||||||||
| Endoscopy | |||||||||||||||||
| Medical | |||||||||||||||||
| Sustainability | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| Neurotechnology and Spine: | |||||||||||||||||
| Neurotechnology | $ | $ | $ | $ | |||||||||||||
| Spine | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||
| Net Sales by Geography | |||||||||||||||||
| Three Months 2020 | Three Months 2019 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| Orthopaedics: | |||||||||||||||||
| Knees | $ | $ | $ | $ | |||||||||||||
| Hips | |||||||||||||||||
| Trauma and Extremities | |||||||||||||||||
| Other | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| MedSurg: | |||||||||||||||||
| Instruments | $ | $ | $ | $ | |||||||||||||
| Endoscopy | |||||||||||||||||
| Medical | |||||||||||||||||
| Sustainability | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| Neurotechnology and Spine: | |||||||||||||||||
| Neurotechnology | $ | $ | $ | $ | |||||||||||||
| Spine | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||
| Net Sales by Geography | |||||||||||||||||
| Nine Months 2020 | Nine Months 2019 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| Orthopaedics: | |||||||||||||||||
| Knees | $ | $ | $ | $ | |||||||||||||
| Hips | |||||||||||||||||
| Trauma and Extremities | |||||||||||||||||
| Other | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| MedSurg: | |||||||||||||||||
| Instruments | $ | $ | $ | $ | |||||||||||||
| Endoscopy | |||||||||||||||||
| Medical | |||||||||||||||||
| Sustainability | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| Neurotechnology and Spine: | |||||||||||||||||
| Neurotechnology | $ | $ | $ | $ | |||||||||||||
| Spine | |||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||
Contract Assets and Liabilities
On September 30, 2020 there were no contract assets recorded on our Consolidated Balance Sheets.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 5 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
| Three Months 2020 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
| OCI | ( | ( | ( | ||||||||||||||
| Income taxes | ( | ||||||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | ( | ( | |||||||||||||||
| Other (income) expense | ( | ( | ( | ||||||||||||||
| Income taxes | |||||||||||||||||
| Net OCI | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||
| Ending | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
| Three Months 2019 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||
| OCI | ( | ||||||||||||||||
| Income taxes | ( | ( | |||||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | ( | ( | |||||||||||||||
| Other (income) expense | ( | ( | |||||||||||||||
| Income taxes | ( | ( | |||||||||||||||
| Net OCI | $ | $ | $ | ( | $ | $ | |||||||||||
| Ending | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||
| Nine Months 2020 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||
| OCI | ( | ( | ( | ( | |||||||||||||
| Income taxes | |||||||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | ( | ( | |||||||||||||||
| Other (income) expense | ( | ( | ( | ||||||||||||||
| Income taxes | ( | ||||||||||||||||
| Net OCI | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||
| Ending | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
| Nine Months 2019 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||
| OCI | ( | ( | |||||||||||||||
| Income taxes | ( | ( | |||||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | ( | ( | |||||||||||||||
| Other (income) expense | ( | ( | |||||||||||||||
| Income taxes | ( | ( | ( | ||||||||||||||
| Net OCI | $ | $ | $ | ( | $ | $ | |||||||||||
| Ending | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||
NOTE 4 - DERIVATIVE INSTRUMENTS
strategies, accounting practices or objectives from those disclosed in our Annual Report on Form 10-K for 2019.
Foreign Currency Hedges
| September 2020 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | $ | $ | $ | ||||||||||
| Maximum term in days | ||||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | $ | $ | $ | ||||||||||
| Other noncurrent assets | ||||||||||||||
| Other current liabilities | ( | ( | ( | |||||||||||
| Other noncurrent liabilities | ( | ( | ||||||||||||
| Total fair value | $ | $ | $ | ( | $ | ( | ||||||||
| December 2019 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | $ | $ | $ | ||||||||||
| Maximum term in days | ||||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | $ | $ | $ | ||||||||||
| Other noncurrent assets | ||||||||||||||
| Other current liabilities | ( | ( | ( | |||||||||||
| Other noncurrent liabilities | ( | ( | ||||||||||||
| Total fair value | $ | ( | $ | $ | $ | |||||||||
In December 2019 and November 2018 we designated the issuance of €2,400 and €2,250 of senior unsecured notes as net investment hedges to selectively hedge portions of our investment in certain international subsidiaries. The currency effects of our Euro-denominated senior unsecured notes are reflected in AOCI within shareholders' equity where they offset gains and losses recorded on our net investment in international subsidiaries. On September 30, 2020 the total after tax gain (loss) amount in AOCI related to these designated net investment hedges was ($179 ).
In July 2019 we entered into €1.0 billion in certain forward currency contracts and designated these as net investment hedges to hedge a portion of our investments in certain of our entities with functional currencies denominated in Euros.
Net Currency Exchange Rate Gains (Losses)
| Three Months | Nine Months | |||||||||||||||||||
| Derivative instrument | Recorded in: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
| Cash Flow | Cost of sales | $ | $ | $ | $ | |||||||||||||||
| Net Investment | Other income (expense), net | |||||||||||||||||||
| Non-Designated | Other income (expense), net | ( | ( | ( | ( | |||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
Pretax gains (losses) on derivatives designated as cash flow of $6 and net investment hedges of $27 recorded in AOCI are expected to be reclassified to cost of sales and other income (expense) in earnings within 12 months as of September 30, 2020. This cash flow hedge reclassification is primarily due to the sale of inventory that includes previously hedged purchases. A component of the AOCI amounts related to net investment hedges is reclassified over the life of the hedge instruments as we elected to exclude the initial value of the component related to the spot-forward difference from the effectiveness assessment.
Interest Rate Hedges
In conjunction with our offerings of senior unsecured notes in December 2019 and June 2020 we terminated cash flow hedges with gross notional amounts of €600 and $500 designated as
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 6 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
forward starting interest rate swaps of our interest rates, the impact of which will be recognized over time within interest expense. Pretax gains recorded in AOCI related to closed interest rate hedges of $6 are expected to be reclassified to other income (expense) in earnings within 12 months of September 30, 2020.
On September 30, 2020 we had interest rate swap agreements with notional amounts of $750 designated as forward starting interest rate swaps in anticipation of future debt issuances. Pretax losses of $66 were recorded in AOCI as of September 30, 2020. Upon the probable issuance of the debt, these amounts will be released to interest expense over the term of the debt. The cash flow effect of these hedges is recorded in cash flow from operations.
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 2019.
There were no significant transfers into or out of any level in 2020.
Assets Measured at Fair Value | September | December | ||||||
| 2020 | 2019 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trading marketable securities | ||||||||
| Level 1 - Assets | $ | $ | ||||||
| Available-for-sale marketable securities: | ||||||||
| Corporate and asset-backed debt securities | $ | $ | ||||||
| United States agency debt securities | ||||||||
| United States Treasury debt securities | ||||||||
| Certificates of deposit | ||||||||
| Total available-for-sale marketable securities | $ | $ | ||||||
| Foreign currency exchange forward contracts | ||||||||
| Interest rate swap asset | ||||||||
| Level 2 - Assets | $ | $ | ||||||
| Total assets measured at fair value | $ | $ | ||||||
Liabilities Measured at Fair Value | September | December | ||||||
| 2020 | 2019 | |||||||
| Deferred compensation arrangements | $ | $ | ||||||
| Level 1 - Liabilities | $ | $ | ||||||
| Foreign currency exchange forward contracts | $ | $ | ||||||
| Interest rate swap liability | ||||||||
| Level 2 - Liabilities | $ | $ | ||||||
| Contingent consideration: | ||||||||
| Beginning | $ | $ | ||||||
| Additions | ||||||||
| Change in estimate | ( | |||||||
| Settlements | ( | ( | ||||||
| Ending | $ | $ | ||||||
| Level 3 - Liabilities | $ | $ | ||||||
| Total liabilities measured at fair value | $ | $ | ||||||
Fair Value of Available for Sale Securities by Maturity | ||||||||
| September 2020 | December 2019 | |||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through three years | $ | $ | ||||||
On September 30, 2020 and December 31, 2019 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 $19 and $36 in the three months and $84 and $109 in the nine months 2020 and 2019.
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
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, the most significant of which 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.
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. In September 2020 we entered into a second settlement agreement to compensate eligible United States patients who had revision surgery prior to September 9, 2020. 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 defense and settlement of these matters. Based on the information that has been received, we have estimated the remaining range of probable loss related to these matters globally to be approximately $280 to $515 . 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 related to these matters may be materially different than the amount of our current estimate and
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 7 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
accruals and could have a material adverse effect on our results of operations and cash flows.
Leases | September | December | |||||||||
| 2020 | 2019 | ||||||||||
| Right-of-use assets | $ | $ | |||||||||
| Lease liabilities, current | $ | $ | |||||||||
| Lease liabilities, non-current | $ | $ | |||||||||
| Other information | |||||||||||
| Weighted-average remaining lease term | |||||||||||
| Weighted-average discount rate | % | % | |||||||||
| Three Months | Nine Months | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Operating lease cost | $ | ||||||||||||||||||||||
NOTE 7 - ACQUISITIONS
We acquire stock in companies and various assets that continue to support our capital deployment and product development strategies. The aggregate purchase price of our acquisitions, net of cash acquired was $26 and $446 in the nine months 2020 and 2019.
In October 2019 we completed the acquisition of Mobius Imaging and Cardan Robotics for net cash consideration of $360 and future regulatory and commercial milestone payments of up to $130 . Mobius Imaging is a leader in point-of-care imaging technology focused on integrating advanced imaging technologies into medical workflow. Cardan Robotics is working to develop innovative robotics and navigation technology systems for surgical and interventional radiology procedures. Mobius Imaging and Cardan Robotics (Mobius) are part of our Spine business within Neurotechnology and Spine. For income tax purposes the acquisition was treated as an asset purchase. Goodwill attributable to the acquisition is deductible for tax purposes.
In March 2019 we completed the acquisition of OrthoSpace, Ltd. (OrthoSpace) for net cash consideration of $110 and future regulatory milestone payments of up to $110 . OrthoSpace is a medical device company specializing in orthopaedic biodegradable technology for the treatment of irreparable rotator cuff tears. OrthoSpace is part of our Endoscopy business within MedSurg. Goodwill attributable to the acquisition is not deductible for tax purposes.
In November 2019 we announced a definitive agreement to acquire all of the issued and outstanding ordinary shares of Wright Medical Group N.V. (Wright) for $30.75 per share, or an aggregate purchase price of approximately $5.4 billion (including convertible notes). Pursuant to the agreement, on December 13, 2019 our wholly owned subsidiary, Stryker B.V., commenced a tender offer to purchase all of the outstanding ordinary shares, par value €0.03 per share, of Wright at a price of $30.75 per share, without interest, but subject to any applicable withholding of taxes. We expect the acquisition to close in the fourth quarter of 2020, subject to the expiration of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of other required approvals and clearances under applicable antitrust laws and other customary conditions. Wright is a global medical device company focused on extremities and biologics. Following closing, we plan to integrate Wright into our Trauma and Extremities business within Orthopaedics.
Purchase price allocations for our significant acquisitions are:
| Purchase Price Allocation of Acquired Net Assets | |||||||||||
| 2019 | |||||||||||
| Mobius | OrthoSpace | ||||||||||
| Tangible assets: | |||||||||||
| Accounts receivable | $ | $ | |||||||||
| Inventory | |||||||||||
| Other assets | |||||||||||
| Contingent consideration | ( | ||||||||||
| Other liabilities | ( | ( | |||||||||
| Intangible assets: | |||||||||||
| Customer relationship | |||||||||||
| Developed technology and patents | |||||||||||
| In-process research and development | |||||||||||
| Non-compete agreements | |||||||||||
| Goodwill | |||||||||||
| Purchase price, net of cash acquired | $ | $ | |||||||||
| Weighted-average life of intangible assets | |||||||||||
The purchase price allocation for Mobius is based on preliminary valuations, primarily related to intangible assets that are subject to change within the measurement period. The purchase price allocation for OrthoSpace was finalized in 2020.
| Estimated Amortization Expense | ||||||||||||||
| Remainder of 2020 | 2021 | 2022 | 2023 | 2024 | ||||||||||
| $ | $ | $ | $ | $ | ||||||||||
NOTE 8 - DEBT AND CREDIT FACILITIES
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 September 30, 2020.
Our commercial paper program allows us to have a maximum of $1,500 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On September 30, 2020 there were no amounts outstanding under our commercial paper program.
| Summary of Total Debt | September 2020 | December 2019 | ||||||||||||||||||
| Senior unsecured notes: | ||||||||||||||||||||
| Rate | Due | |||||||||||||||||||
| $ | $ | |||||||||||||||||||
| Variable | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total debt | $ | $ | ||||||||||||||||||
| Less current maturities of debt | ||||||||||||||||||||
| Total long-term debt | $ | $ | ||||||||||||||||||
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 8 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
| September 2020 | December 2019 | |||||||||||||||||||
| Unamortized debt issuance costs | $ | $ | ||||||||||||||||||
| Available secured borrowing capacity | $ | $ | ||||||||||||||||||
| Fair value of senior unsecured notes | $ | $ | ||||||||||||||||||
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 of our debt is classified within Level 2 of the fair value hierarchy.
In January 2020 we repaid $500 of senior unsecured notes with a coupon of 4.375 % that were due on January 15, 2020.
On April 30, 2020 we amended our primary credit facility. The principal change was to increase the leverage ratio financial covenant from 3.5 :1 to 4.5 :1 at the end of each fiscal quarter ending on or prior to June 30, 2021.
On April 30, 2020 we entered into a credit agreement that provides for up to $1,500 of borrowings in United States Dollars pursuant to a 364 -day revolving credit facility, which matures on April 29, 2021 and is available for working capital and general corporate purposes.
In June 2020 we issued $650 of senior unsecured notes with a fixed interest rate of 1.150 % due on June 15, 2025, $1,000 of senior unsecured notes with a fixed interest rate of 1.950 % due on June 15, 2030 and $650 of senior unsecured notes with a fixed interest rate of 2.900 % due on June 15, 2050. The 2025 and 2030 notes are subject to a special mandatory redemption feature in which we will be required to redeem the notes in whole at a price equal to 101 % of the aggregate principal amount plus accrued and unpaid interest if we do not consummate the Wright tender offer on or before February 4, 2021.
NOTE 9 - INCOME TAXES
Our effective tax rates were 20.4 % and 19.8 % in the three months and 19.6 % and 16.5 % in the nine months 2020 and 2019. The changes in the effective tax rates were primarily due to a change in geographic profit mix in the three months and a favorable audit settlement recorded in 2019 in the nine months.
In March 2020 the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in the United States. We do not expect the provisions of the CARES Act to have a material impact on our annual effective tax rate or Consolidated Financial Statements in 2020.
NOTE 10 - SEGMENT INFORMATION
| Three Months | Nine Months | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Orthopaedics | $ | $ | $ | $ | |||||||||||||
| MedSurg | |||||||||||||||||
| Neurotechnology and Spine | |||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||
| Orthopaedics | $ | $ | $ | $ | |||||||||||||
| MedSurg | |||||||||||||||||
| Neurotechnology and Spine | |||||||||||||||||
| Segment operating income | $ | $ | $ | $ | |||||||||||||
| Items not allocated to segments: | |||||||||||||||||
Corporate and other | ( | ( | ( | ( | |||||||||||||
Acquisition and integration-related charges | ( | ( | ( | ( | |||||||||||||
Amortization of intangible assets | ( | ( | ( | ( | |||||||||||||
Restructuring-related and other charges | ( | ( | ( | ( | |||||||||||||
Medical device regulations | ( | ( | ( | ( | |||||||||||||
Recall-related matters | ( | ( | ( | ||||||||||||||
Regulatory and legal matters | ( | ( | ( | ||||||||||||||
| Consolidated operating income | $ | $ | $ | $ | |||||||||||||
There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2019.
NOTE 11 - ASSET IMPAIRMENTS
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 9 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
| 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 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.
COVID-19 Pandemic
The COVID-19 global pandemic has led to severe disruptions in the market and the global and United States economies that may continue for a prolonged duration and trigger a recession or a period of economic slowdown. In response, various governmental authorities and private enterprises have implemented numerous measures to contain the pandemic, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. A significant number of our global suppliers, vendors, distributors and manufacturing facilities are located in regions that have been affected by the pandemic. Those operations have been materially adversely affected by restrictive government and private enterprise measures implemented in response to the pandemic.
Some of our products are particularly sensitive to reductions in deferrable medical procedures. Deferrable medical procedures were suspended in the first quarter of 2020 in many of the markets where our products are marketed and sold, which negatively affected our business, cash flows, financial condition and results of operations. While we have seen progressive improvement in the second and third quarters, to the extent individuals are required to continue to de-prioritize or delay deferrable procedures as a result of the COVID-19 pandemic or otherwise, our business, cash flows, financial condition and results of operations could be negatively affected.
Overview of the Three and Nine Months
The response to the COVID-19 pandemic has included unprecedented measures to slow the spread of the virus taken by
local governments and health care authorities globally, including the postponement of deferrable medical procedures and social contact restrictions, which have had, and we expect will continue to have, a significant negative impact on Stryker’s operations and financial results. While we are still recovering from the impacts of the COVID-19 pandemic, most of our businesses reported overall increased unit volume during the third quarter.
In the three months 2020 we achieved sales growth of 4.2%. Excluding the impact of acquisitions sales grew 3.3% in constant currency. We reported operating income margin of 23.0%, net earnings of $621 and net earnings per diluted share of $1.63. Excluding the impact of certain items, we expanded adjusted operating income margin(1) by 260 bps to 28.0%, with adjusted net earnings(1) of $812 and growth of 12.0% in adjusted net earnings per diluted share(1).
In the nine months 2020 we experienced sales declines of 6.2%. Excluding the impact of acquisitions sales decreased 6.3% in constant currency. We reported operating income margin of 14.6%, net earnings of $1,031 and net earnings per diluted share of $2.71, including $170 of charges related to certain in-process asset impairments (primarily the portion of our investment in a new global ERP system that was in-process of being developed for future deployment) and product line and other exit costs resulting from our decision to suspend certain investments due to pandemic-related constraints. Excluding the impact of certain items, adjusted operating income margin(1) was 22.3%, with adjusted net earnings(1) of $1,756 and a reduction of 19.9% in adjusted net earnings per diluted share(1).
Recent Developments
In January 2020 we repaid $500 of our senior unsecured notes with a coupon of 4.375% that were due on January 15, 2020. In June 2020 we issued $650 of senior unsecured notes with a fixed interest rate of 1.150% due on June 15, 2025, $1,000 of senior unsecured notes with a fixed interest rate of 1.950% due on June 15, 2030 and $650 of senior unsecured notes with a fixed interest rate of 2.900% due on June 15, 2050. Refer to Note 8 to our Consolidated Financial Statements for further Information.
In the nine months 2020 we did not repurchase any shares of our common stock 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 September 30, 2020. As previously announced we intend to maintain the suspension of our share repurchase program through 2021.
(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.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 10 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
CONSOLIDATED RESULTS OF OPERATIONS
| Three Months | Nine Months | ||||||||||||||||||||||||||||||||||
| Percent Net Sales | Percentage | Percent Net Sales | Percentage | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | Change | 2020 | 2019 | 2020 | 2019 | Change | ||||||||||||||||||||||||||
| Net sales | $ | 3,737 | $ | 3,587 | 100.0 | % | 100.0 | % | 4.2 | % | $ | 10,089 | $ | 10,753 | 100.0 | % | 100.0 | % | (6.2) | % | |||||||||||||||
| Gross profit | 2,461 | 2,330 | 65.9 | 65.0 | 5.6 | 6,340 | 6,993 | 62.8 | 65.0 | (9.3) | |||||||||||||||||||||||||
| Research, development and engineering expenses | 242 | 246 | 6.5 | 6.9 | (1.6) | 729 | 717 | 7.2 | 6.7 | 1.7 | |||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,244 | 1,291 | 33.3 | 36.0 | (3.6) | 3,799 | 3,976 | 37.7 | 37.0 | (4.5) | |||||||||||||||||||||||||
| Recall charges | 2 | 49 | 0.1 | 1.4 | (95.9) | (4) | 179 | — | 1.7 | nm | |||||||||||||||||||||||||
| Amortization of intangible assets | 114 | 116 | 3.1 | 3.2 | (1.7) | 342 | 352 | 3.4 | 3.3 | (2.8) | |||||||||||||||||||||||||
| Other income (expense), net | (79) | (47) | (2.1) | (1.3) | 68.1 | (191) | (143) | (1.9) | (1.3) | 33.6 | |||||||||||||||||||||||||
| Income taxes | 159 | 115 | nm | nm | 38.3 | 252 | 268 | nm | nm | (6.0) | |||||||||||||||||||||||||
| Net earnings | $ | 621 | $ | 466 | 16.6 | % | 13.0 | % | 33.3 | % | $ | 1,031 | $ | 1,358 | 10.2 | % | 12.6 | % | (24.1) | % | |||||||||||||||
| Net earnings per diluted share | $ | 1.63 | $ | 1.23 | 32.5 | % | $ | 2.71 | $ | 3.58 | (24.3) | % | |||||||||||||||||||||||
Adjusted net earnings per diluted share(1) | $ | 2.14 | $ | 1.91 | 12.0 | % | $ | 4.62 | $ | 5.77 | (19.9) | % | |||||||||||||||||||||||
nm - not meaningful
| Geographic and Segment Net Sales | Three Months | Nine Months | |||||||||||||||||||||||||||
| Percentage Change | Percentage Change | ||||||||||||||||||||||||||||
| 2020 | 2019 | As Reported | Constant Currency | 2020 | 2019 | As Reported | Constant Currency | ||||||||||||||||||||||
| Geographic: | |||||||||||||||||||||||||||||
| United States | $ | 2,748 | $ | 2,644 | 3.9 | % | 3.9 | % | $ | 7,357 | $ | 7,918 | (7.1) | % | (7.1) | % | |||||||||||||
| International | 989 | 943 | 5.0 | 3.3 | 2,732 | 2,835 | (3.6) | (2.1) | |||||||||||||||||||||
| Total | $ | 3,737 | $ | 3,587 | 4.2 | % | 3.8 | % | $ | 10,089 | $ | 10,753 | (6.2) | % | (5.8) | % | |||||||||||||
| Segment: | |||||||||||||||||||||||||||||
| Orthopaedics | $ | 1,317 | $ | 1,262 | 4.4 | % | 3.8 | % | $ | 3,433 | $ | 3,785 | (9.3) | % | (9.0) | % | |||||||||||||
| MedSurg | 1,600 | 1,552 | 3.2 | 2.9 | 4,546 | 4,680 | (2.9) | (2.4) | |||||||||||||||||||||
| Neurotechnology and Spine | 820 | 773 | 6.0 | 5.5 | 2,110 | 2,288 | (7.8) | (7.4) | |||||||||||||||||||||
| Total | $ | 3,737 | $ | 3,587 | 4.2 | % | 3.8 | % | $ | 10,089 | $ | 10,753 | (6.2) | % | (5.8) | % | |||||||||||||
| Supplemental Net Sales Growth Information | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| Percentage Change | Percentage Change | ||||||||||||||||||||||||||||||||||||||||||||||
| United States | International | United States | International | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | As Reported | Constant Currency | As Reported | As Reported | Constant Currency | 2020 | 2019 | As Reported | Constant Currency | As Reported | As Reported | Constant Currency | ||||||||||||||||||||||||||||||||||
| Orthopaedics: | |||||||||||||||||||||||||||||||||||||||||||||||
| Knees | $ | 435 | $ | 426 | 2.2 | % | 1.7 | % | 4.6 | % | (4.8) | % | (6.9) | % | $ | 1,108 | $ | 1,305 | (15.1) | % | (14.8) | % | (13.4) | % | (19.8) | % | (18.8) | % | |||||||||||||||||||
| Hips | 334 | 332 | 0.4 | (0.1) | 5.3 | (8.2) | (9.7) | 866 | 1,011 | (14.4) | (13.9) | (12.3) | (18.1) | (16.8) | |||||||||||||||||||||||||||||||||
| Trauma and Extremities | 430 | 407 | 5.6 | 4.7 | 9.0 | (0.5) | (3.0) | 1,152 | 1,197 | (3.8) | (3.5) | (1.9) | (7.1) | (6.4) | |||||||||||||||||||||||||||||||||
| Other | 118 | 97 | 22.5 | 22.2 | 20.0 | 34.9 | 33.0 | 307 | 272 | 13.0 | 13.1 | 17.5 | (7.5) | (6.7) | |||||||||||||||||||||||||||||||||
| $ | 1,317 | $ | 1,262 | 4.4 | % | 3.8 | % | 7.5 | % | (2.6) | % | (4.7) | % | $ | 3,433 | $ | 3,785 | (9.3) | % | (9.0) | % | (7.1) | % | (14.2) | % | (13.2) | % | ||||||||||||||||||||
| MedSurg: | |||||||||||||||||||||||||||||||||||||||||||||||
| Instruments | $ | 467 | $ | 452 | 3.4 | % | 3.1 | % | 3.1 | % | 4.7 | % | 2.9 | % | $ | 1,308 | $ | 1,417 | (7.7) | % | (7.4) | % | (8.4) | % | (5.1) | % | (3.5) | % | |||||||||||||||||||
| Endoscopy | 467 | 474 | (1.3) | (1.5) | 1.0 | (10.1) | (11.0) | 1,238 | 1,424 | (13.0) | (12.7) | (12.2) | (16.4) | (14.8) | |||||||||||||||||||||||||||||||||
| Medical | 600 | 554 | 8.3 | 8.0 | 3.0 | 29.0 | 27.8 | 1,819 | 1,627 | 11.8 | 12.6 | 5.8 | 34.6 | 38.8 | |||||||||||||||||||||||||||||||||
| Sustainability | 66 | 72 | (8.7) | (8.7) | (8.9) | nm | nm | 181 | 212 | (14.7) | (14.7) | (14.7) | nm | nm | |||||||||||||||||||||||||||||||||
| $ | 1,600 | $ | 1,552 | 3.2 | % | 2.9 | % | 1.7 | % | 8.9 | % | 7.6 | % | $ | 4,546 | $ | 4,680 | (2.9) | % | (2.4) | % | (5.0) | % | 5.9 | % | 8.4 | % | ||||||||||||||||||||
| Neurotechnology and Spine: | |||||||||||||||||||||||||||||||||||||||||||||||
| Neurotechnology | $ | 518 | $ | 490 | 5.7 | % | 5.1 | % | 1.9 | % | 12.6 | % | 11.1 | % | $ | 1,370 | $ | 1,443 | (5.1) | % | (4.7) | % | (10.2) | % | 4.2 | % | 5.3 | % | |||||||||||||||||||
| Spine | 302 | 283 | 6.6 | 6.1 | 4.9 | 11.3 | 9.6 | 740 | 845 | (12.4) | (12.1) | (14.8) | (4.9) | (3.9) | |||||||||||||||||||||||||||||||||
| $ | 820 | $ | 773 | 6.0 | % | 5.5 | % | 3.1 | % | 12.2 | % | 10.6 | % | $ | 2,110 | $ | 2,288 | (7.8) | % | (7.4) | % | (12.1) | % | 1.6 | % | 2.6 | % | ||||||||||||||||||||
| Total | $ | 3,737 | $ | 3,587 | 4.2 | % | 3.8 | % | 3.9 | % | 5.0 | % | 3.3 | % | $ | 10,089 | $ | 10,753 | (6.2) | % | (5.8) | % | (7.1) | % | (3.6) | % | (2.1) | % | |||||||||||||||||||
Consolidated Net Sales
Consolidated net sales increased 4.2% in the three months 2020 as reported and 3.8% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.4%. Excluding the 0.5% impact of acquisitions, net sales in constant currency increased by 4.7% from increased unit volume partially offset by 1.4% due to lower prices. The unit volume increase was primarily due to higher shipments of knee, hip, medical, instruments, neurotechnology and spine products.
Consolidated net sales in the nine months 2020 were significantly negatively impacted by the global response to the COVID-19
pandemic. Consolidated net sales decreased 6.2% in the nine months 2020 as reported and 5.8% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 0.5% impact of acquisitions, net sales in constant currency decreased by 5.6% from decreased unit volume and 0.7% due to lower prices. The unit volume decrease was primarily due to lower shipments of knee, hip, instruments, endoscopy, neurotechnology and spine products partially offset by higher shipments of medical products.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 11 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
Orthopaedics Net Sales
Orthopaedics net sales increased 4.4% in the three months 2020 as reported and 3.8% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.6%. Net sales in constant currency increased 5.9% from increased unit volume partially offset by 2.1% from lower prices. The unit volume increase was primarily due to higher shipments of knee, hip and trauma and extremities products.
Orthopaedics net sales decreased 9.3% in the nine months 2020 as reported and 9.0% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.3%. Net sales in constant currency decreased due to the postponement of deferrable medical procedures as part of the global response to the COVID-19 pandemic with 7.4% from lower unit volume and 1.6% from lower prices. The unit volume decrease was primarily due to lower shipments of knee and hip products.
MedSurg Net Sales
MedSurg net sales increased 3.2% in the three months 2020 as reported and 2.9% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.3%. Excluding the 0.4% impact of acquisitions, net sales in constant currency increased by 3.1% from increased unit volume partially offset by 0.6% due to lower prices. The unit volume increase was primarily due to higher shipments of instruments and medical products partially offset by lower shipments of sustainability solutions products.
MedSurg net sales decreased 2.9% in the nine months 2020 as reported and 2.4% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.5%. Excluding the 0.5% impact of acquisitions, net sales in constant currency decreased by 2.9% from lower unit volume. The unit volume decrease was primarily due to lower shipments of instruments, endoscopy and sustainability solutions products partially offset by higher shipments of medical products.
Neurotechnology and Spine Net Sales
Neurotechnology and Spine net sales increased 6.0% in the three months 2020 as reported and 5.5% in constant currency, as foreign currency exchange rates positively impacted net sales by 0.5%. Excluding the 1.2% impact of acquisitions, net sales in constant currency increased by 6.0% from increased unit volume partially offset by 1.7% due to lower prices. The unit volume increase was due to higher shipments of neurotechnology and spine products.
Neurotechnology and Spine net sales decreased 7.8% in the nine months 2020 as reported and 7.4% in constant currency, as foreign currency exchange rates negatively impacted net sales by 0.4%. Excluding the 1.2% impact of acquisitions, net sales in constant currency decreased by 8.2% from decreased unit volume and 0.4% due to lower prices. The unit volume decrease was due to lower shipments of neurotechnology and spine products.
Gross Profit
Gross profit as a percentage of sales in the three months 2020 increased to 65.9% from 65.0% in 2019. Excluding the impact of the items noted below, gross profit increased to 65.9% of sales in the three months 2020 from 65.7% in 2019 primarily due to leverage from higher sales volumes partially offset by lower selling prices.
Gross profit was significantly negatively impacted by the global response to the COVID-19 pandemic in the nine months 2020, decreasing as a percentage of sales to 62.8% from 65.0% in 2019. Excluding the impact of the items noted below, gross profit
decreased to 63.3% of sales in the nine months 2020 from 65.7% in 2019 primarily due to lower sales volumes, lower selling prices, lower manufacturing volumes and unfavorable product mix due to the postponement of deferrable medical procedures as part of the global response to the COVID-19 pandemic.
| Percent Net Sales | ||||||||||||||
| Three Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 2,461 | $ | 2,330 | 65.9 | % | 65.0 | % | ||||||
| Inventory stepped-up to fair value | — | 17 | — | 0.4 | ||||||||||
| Restructuring-related and other charges | — | 10 | — | 0.3 | ||||||||||
| Medical device regulations | — | — | — | — | ||||||||||
| Adjusted | $ | 2,461 | $ | 2,357 | 65.9 | % | 65.7 | % | ||||||
| Percent Net Sales | ||||||||||||||
| Nine Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 6,340 | $ | 6,993 | 62.8 | % | 65.0 | % | ||||||
| Inventory stepped-up to fair value | 9 | 55 | 0.1 | 0.5 | ||||||||||
| Restructuring-related and other charges | 36 | 21 | 0.4 | 0.2 | ||||||||||
| Medical device regulations | 1 | 1 | — | — | ||||||||||
| Adjusted | $ | 6,386 | $ | 7,070 | 63.3 | % | 65.7 | % | ||||||
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased $4 or 1.6% in the three months 2020 and decreased as a percentage of sales to 6.5% from 6.9% in 2019. Excluding the impact of the items noted below, expenses decreased to 6.1% of sales in 2020 from 6.5% in 2019. Overall spending levels decreased due to continued operating expense savings actions in response to the COVID-19 pandemic.
Research, development and engineering expenses increased $12 or 1.7% to 7.2% of sales in the nine months 2020 from 6.7% in 2019. Excluding the impact of the items noted below, expenses increased to 6.6% of sales in 2020 from 6.4% in 2019. Projects to develop new products, investments in new technologies, integration of recent acquisitions and the impact of lower sales contributed to the increase partially offset by operating expense savings actions in response to the COVID-19 pandemic that will continue to drive lower spending in the remainder of the year.
| Percent Net Sales | ||||||||||||||
| Three Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 242 | $ | 246 | 6.5 | % | 6.9 | % | ||||||
| Medical device regulations | (13) | (15) | (0.4) | (0.4) | ||||||||||
| Adjusted | $ | 229 | $ | 231 | 6.1 | % | 6.5 | % | ||||||
| Percent Net Sales | ||||||||||||||
| Nine Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 729 | $ | 717 | 7.2 | % | 6.7 | % | ||||||
| Medical device regulations | (59) | (33) | (0.6) | (0.3) | ||||||||||
| Adjusted | $ | 670 | $ | 684 | 6.6 | % | 6.4 | % | ||||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $47 or 3.6% in the three months 2020 and decreased as a percentage of sales to 33.3% from 36.0% in 2019. Excluding the impact of the items noted below, expenses decreased to 31.7% of sales in 2020 from 33.8% in 2019, primarily due to operating expense savings actions taken in response to the COVID-19 pandemic partially offset by the impact of higher sales volumes.
Selling, general and administrative expenses decreased $177 or 4.5% in the nine months 2020 and increased as a percentage of sales to 37.7% from 37.0% in 2019 and included charges related to certain in-process asset impairments (primarily the portion of our investment in a new global ERP system that was in-process of being developed for future deployment) and other exit costs resulting from our decision to suspend certain investments due to pandemic-related constraints. Excluding the impact of the items
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 12 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
noted below, expenses increased to 34.3% of sales in 2020 from 33.9% in 2019, primarily due to the impact of lower sales volumes partially offset by operating expense savings actions taken in response to the COVID-19 pandemic that will continue to drive lower spending in the remainder of the year.
| Percent Net Sales | ||||||||||||||
| Three Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 1,244 | $ | 1,291 | 33.3 | % | 36.0 | % | ||||||
| Other acquisition and integration-related | (29) | (15) | (0.8) | (0.4) | ||||||||||
| Restructuring-related and other charges | (29) | (37) | (0.8) | (1.1) | ||||||||||
| Regulatory and legal matters | — | (25) | — | (0.7) | ||||||||||
| Adjusted | $ | 1,186 | $ | 1,214 | 31.7 | % | 33.8 | % | ||||||
| Percent Net Sales | ||||||||||||||
| Nine Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 3,799 | $ | 3,976 | 37.7 | % | 37.0 | % | ||||||
| Other acquisition and integration-related | (76) | (168) | (0.8) | (1.6) | ||||||||||
| Restructuring-related and other charges | (256) | (125) | (2.6) | (1.2) | ||||||||||
| Regulatory and legal matters | (5) | (35) | — | (0.3) | ||||||||||
| Adjusted | $ | 3,462 | $ | 3,648 | 34.3 | % | 33.9 | % | ||||||
Recall Charges
Recall charges were minimal in the three and nine months 2020 and were $49 and $179 in the three and nine months 2019. 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.
Amortization of Intangible Assets
Amortization of intangible assets was $114 and $116 in the three months and $342 and $352 in the nine months 2020 and 2019. The decrease in 2020 was primarily due to decreased acquisition activity in 2020. Refer to Note 7 to our Consolidated Financial Statements for further information.
Operating Income
Operating income increased $231 or 36.8% to 23.0% of sales in the three months 2020 from 17.5% of sales in 2019. Excluding the impact of the items noted below, operating income increased to 28.0% of sales in 2020 from 25.4% in 2019 primarily due to leverage from higher sales volumes and continued focus on our operating expense savings actions partially offset by lower selling prices.
Operating income was significantly negatively impacted by the global response to the COVID-19 pandemic in the nine months 2020. Operating income decreased $295 or 16.7% to 14.6% of sales in the nine months 2020 from 16.5% in 2019. Excluding the impact of the items noted below, operating income decreased to 22.3% of sales in 2020 from 25.5% in 2019 primarily due to unfavorable business mix and the impact of lower sales volumes from the postponement of deferrable medical procedures as part of the global response to the COVID-19 pandemic partially offset by continued focus on our operating expense savings actions that will continue to drive lower spending in the remainder of the year.
| Percent Net Sales | ||||||||||||||
| Three Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 859 | $ | 628 | 23.0 | % | 17.5 | % | ||||||
| Inventory stepped-up to fair value | — | 17 | — | 0.5 | ||||||||||
| Other acquisition and integration-related | 29 | 15 | 0.7 | 0.4 | ||||||||||
| Amortization of purchased intangible assets | 114 | 116 | 3.1 | 3.2 | ||||||||||
| Restructuring-related and other charges | 29 | 48 | 0.7 | 1.3 | ||||||||||
| Medical device regulations | 14 | 15 | 0.4 | 0.4 | ||||||||||
| Recall-related matters | 2 | 49 | 0.1 | 1.4 | ||||||||||
| Regulatory and legal matters | — | 25 | — | 0.7 | ||||||||||
| Adjusted | $ | 1,047 | $ | 913 | 28.0 | % | 25.4 | % | ||||||
| Percent Net Sales | ||||||||||||||
| Nine Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 1,474 | $ | 1,769 | 14.6 | % | 16.5 | % | ||||||
| Inventory stepped-up to fair value | 9 | 55 | 0.1 | 0.5 | ||||||||||
| Other acquisition and integration-related | 76 | 168 | 0.8 | 1.6 | ||||||||||
| Amortization of purchased intangible assets | 342 | 352 | 3.3 | 3.2 | ||||||||||
| Restructuring-related and other charges | 292 | 146 | 2.9 | 1.4 | ||||||||||
| Medical device regulations | 60 | 34 | 0.6 | 0.3 | ||||||||||
| Recall-related matters | (4) | 179 | — | 1.7 | ||||||||||
| Regulatory and legal matters | 5 | 35 | — | 0.3 | ||||||||||
| Adjusted | $ | 2,254 | $ | 2,738 | 22.3 | % | 25.5 | % | ||||||
Other Income (Expense), Net
Other income (expense), net was ($79) and ($47) in the three months and ($191) and ($143) in the nine months 2020 and 2019. The increase in net expense in 2020 was primarily due to increased interest expense driven by the additional debt from the bond offerings completed in December 2019 and June 2020.
Income Taxes
Our effective tax rates were 20.4% and 19.8% in the three months and 19.6% and 16.5% in the nine months 2020 and 2019. The changes in the effective tax rates were primarily due to a change in geographic profit mix in the three months and a favorable audit settlement recorded in 2019 in the nine months.
In March 2020 the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in the United States. We do not expect the provisions of the CARES Act to have a material impact on our annual effective tax rate or Consolidated Financial Statements in 2020.
Net Earnings
Net earnings increased to $621 or $1.63 per diluted share in the three months 2020 from net earnings of $466 or $1.23 per diluted share in 2019. Adjusted net earnings per diluted share(1) increased 12.0% to $2.14 in 2020 from $1.91 in 2019. The impact of foreign currency exchange rates increased net earnings per diluted share by approximately $0.01 in 2020 and reduced net earnings per diluted share by approximately $0.02 in 2019.
Earnings were significantly negatively impacted by the global response to the COVID-19 pandemic in the nine months 2020. Net earnings decreased to $1,031 or $2.71 per diluted share in the nine months 2020 from $1,358 or $3.58 per diluted share in 2019. Adjusted net earnings per diluted share(1) decreased 19.9% to $4.62 in 2020 from $5.77 in 2019. The impact of foreign currency exchange rates reduced net earnings per diluted share by approximately $0.01 in 2020 and $0.12 in 2019.
| Percent Net Sales | ||||||||||||||
| Three Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 621 | $ | 466 | 16.6 | % | 13.0 | % | ||||||
| Inventory stepped-up to fair value | — | 13 | — | 0.4 | ||||||||||
| Other acquisition and integration-related | 24 | 8 | 0.6 | 0.2 | ||||||||||
| Amortization of purchased intangible assets | 93 | 105 | 2.5 | 2.8 | ||||||||||
| Restructuring-related and other charges | 26 | 40 | 0.7 | 1.1 | ||||||||||
| Medical device regulations | 11 | 13 | 0.3 | 0.4 | ||||||||||
| Recall-related matters | 2 | 28 | 0.1 | 0.8 | ||||||||||
| Regulatory and legal matters | — | 14 | — | 0.4 | ||||||||||
| Tax matters | 35 | 38 | 0.9 | 1.1 | ||||||||||
| Adjusted | $ | 812 | $ | 725 | 21.7 | % | 20.2 | % | ||||||
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 13 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
| Percent Net Sales | ||||||||||||||
| Nine Months | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Reported | $ | 1,031 | $ | 1,358 | 10.2 | % | 12.6 | % | ||||||
| Inventory stepped-up to fair value | 6 | 42 | 0.1 | 0.4 | ||||||||||
| Other acquisition and integration-related | 60 | 126 | 0.6 | 1.2 | ||||||||||
| Amortization of purchased intangible assets | 277 | 294 | 2.6 | 2.8 | ||||||||||
| Restructuring-related and other charges | 238 | 122 | 2.4 | 1.1 | ||||||||||
| Medical device regulations | 47 | 28 | 0.5 | 0.3 | ||||||||||
| Recall-related matters | (2) | 144 | — | 1.3 | ||||||||||
| Regulatory and legal matters | 6 | 19 | 0.1 | 0.2 | ||||||||||
| Tax matters | 93 | 58 | 0.9 | 0.5 | ||||||||||
| Adjusted | $ | 1,756 | $ | 2,191 | 17.4 | % | 20.4 | % | ||||||
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 research, development and engineering expenses; adjusted operating income; adjusted other income (expense), net; 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, certain long-lived 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, research, development and engineering expenses, operating income, other income (expense), net, effective income tax rate, net earnings and net earnings per diluted share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations 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.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 14 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
| Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures | ||||||||||||||||||||||||||
| Three Months 2020 | Gross Profit | Selling, General & Administrative Expenses | Research, Development & Engineering Expenses | Operating Income | Other income (expense), net | Net Earnings | Effective Tax Rate | Diluted EPS | ||||||||||||||||||
| Reported | $ | 2,461 | $ | 1,244 | $ | 242 | $ | 859 | $ | (79) | $ | 621 | 20.4 | % | $ | 1.63 | ||||||||||
| Reported percent net sales | 65.9 | % | 33.3 | % | 6.5 | % | 23.0 | % | (2.1) | % | 16.6 | % | ||||||||||||||
| Acquisition and integration-related charges: | ||||||||||||||||||||||||||
| Inventory stepped-up to fair value | — | — | — | — | — | — | — | — | ||||||||||||||||||
| Other acquisition and integration-related | — | (29) | — | 29 | — | 24 | 0.1 | 0.07 | ||||||||||||||||||
| Amortization of purchased intangible assets | — | — | — | 114 | — | 93 | 0.4 | 0.25 | ||||||||||||||||||
| Restructuring-related and other charges | — | (29) | — | 29 | — | 26 | (0.1) | 0.06 | ||||||||||||||||||
| Medical device regulations | — | — | (13) | 14 | — | 11 | 0.1 | 0.03 | ||||||||||||||||||
| Recall-related matters | — | — | — | 2 | — | 2 | (0.2) | 0.01 | ||||||||||||||||||
| Regulatory and legal matters | — | — | — | — | — | — | — | — | ||||||||||||||||||
| Tax matters | — | — | — | — | — | 35 | (4.6) | 0.09 | ||||||||||||||||||
| Adjusted | $ | 2,461 | $ | 1,186 | $ | 229 | $ | 1,047 | $ | (79) | $ | 812 | 16.1 | % | $ | 2.14 | ||||||||||
| Adjusted percent net sales | 65.9 | % | 31.7 | % | 6.1 | % | 28.0 | % | (2.1) | % | 21.7 | % | ||||||||||||||
| Three Months 2019 | Gross Profit | Selling, General & Administrative Expenses | Research, Development & Engineering Expenses | Operating Income | Other income (expense), net | Net Earnings | Effective Tax Rate | Diluted EPS | ||||||||||||||||||
| Reported | $ | 2,330 | $ | 1,291 | $ | 246 | $ | 628 | $ | (47) | $ | 466 | 19.8 | % | $ | 1.23 | ||||||||||
| Reported percent net sales | 65.0 | % | 36.0 | % | 6.9 | % | 17.5 | % | (1.3) | % | 13.0 | % | ||||||||||||||
| Acquisition and integration-related charges: | ||||||||||||||||||||||||||
| Inventory stepped-up to fair value | 17 | — | — | 17 | — | 13 | 0.2 | 0.03 | ||||||||||||||||||
| Other acquisition and integration-related | — | (15) | — | 15 | — | 8 | 0.6 | 0.02 | ||||||||||||||||||
| Amortization of purchased intangible assets | — | — | — | 116 | — | 105 | (1.5) | 0.28 | ||||||||||||||||||
| Restructuring-related and other charges | 10 | (37) | — | 48 | — | 40 | 0.1 | 0.11 | ||||||||||||||||||
| Medical device regulations | — | — | (15) | 15 | — | 13 | — | 0.03 | ||||||||||||||||||
| Recall-related matters | — | — | — | 49 | — | 28 | 2.2 | 0.07 | ||||||||||||||||||
| Regulatory and legal matters | — | (25) | — | 25 | — | 14 | 1.2 | 0.04 | ||||||||||||||||||
| Tax matters | — | — | — | — | — | 38 | (6.5) | 0.10 | ||||||||||||||||||
| Adjusted | $ | 2,357 | $ | 1,214 | $ | 231 | $ | 913 | $ | (47) | $ | 725 | 16.1 | % | $ | 1.91 | ||||||||||
| Adjusted percent net sales | 65.7 | % | 33.8 | % | 6.5 | % | 25.4 | % | (1.3) | % | 20.2 | % | ||||||||||||||
| Nine Months 2020 | Gross Profit | Selling, General & Administrative Expenses | Research, Development & Engineering Expenses | Operating Income | Other income (expense), net | Net Earnings | Effective Tax Rate | Diluted EPS | ||||||||||||||||||
| Reported | $ | 6,340 | $ | 3,799 | $ | 729 | $ | 1,474 | $ | (191) | $ | 1,031 | 19.6 | % | $ | 2.71 | ||||||||||
| Reported percent net sales | 62.8 | % | 37.7 | % | 7.2 | % | 14.6 | % | (1.9) | % | 10.2 | % | ||||||||||||||
| Acquisition and integration-related charges: | ||||||||||||||||||||||||||
| Inventory stepped-up to fair value | 9 | — | — | 9 | — | 6 | 0.1 | 0.02 | ||||||||||||||||||
| Other acquisition and integration-related | — | (76) | — | 76 | — | 60 | 0.4 | 0.16 | ||||||||||||||||||
| Amortization of purchased intangible assets | — | — | — | 342 | — | 277 | 1.0 | 0.73 | ||||||||||||||||||
| Restructuring-related and other charges | 36 | (256) | — | 292 | — | 238 | 0.8 | 0.62 | ||||||||||||||||||
| Medical device regulations | 1 | — | (59) | 60 | — | 47 | 0.3 | 0.12 | ||||||||||||||||||
| Recall-related matters | — | — | — | (4) | — | (2) | (0.2) | — | ||||||||||||||||||
| Regulatory and legal matters | — | (5) | — | 5 | — | 6 | (0.2) | 0.02 | ||||||||||||||||||
| Tax matters | — | — | — | — | 7 | 93 | (6.6) | 0.24 | ||||||||||||||||||
| Adjusted | $ | 6,386 | $ | 3,462 | $ | 670 | $ | 2,254 | $ | (184) | $ | 1,756 | 15.2 | % | $ | 4.62 | ||||||||||
| Adjusted percent net sales | 63.3 | % | 34.3 | % | 6.6 | % | 22.3 | % | (1.8) | % | 17.4 | % | ||||||||||||||
| Nine Months 2019 | Gross Profit | Selling, General & Administrative Expenses | Research, Development & Engineering Expenses | Operating Income | Other income (expense), net | Net Earnings | Effective Tax Rate | Diluted EPS | ||||||||||||||||||
| Reported | $ | 6,993 | $ | 3,976 | $ | 717 | $ | 1,769 | $ | (143) | $ | 1,358 | 16.5 | % | $ | 3.58 | ||||||||||
| Reported percent net sales | 65.0 | % | 37.0 | % | 6.7 | % | 16.5 | % | (1.3) | % | 12.6 | % | ||||||||||||||
| Acquisition and integration-related charges: | ||||||||||||||||||||||||||
| Inventory stepped-up to fair value | 55 | — | — | 55 | — | 42 | 0.3 | 0.11 | ||||||||||||||||||
| Other acquisition and integration-related | — | (168) | — | 168 | — | 126 | 1.0 | 0.33 | ||||||||||||||||||
| Amortization of purchased intangible assets | — | — | — | 352 | — | 294 | 0.1 | 0.78 | ||||||||||||||||||
| Restructuring-related and other charges | 21 | (125) | — | 146 | — | 122 | 0.1 | 0.32 | ||||||||||||||||||
| Medical device regulations | 1 | — | (33) | 34 | — | 28 | 0.1 | 0.07 | ||||||||||||||||||
| Recall-related matters | — | — | — | 179 | — | 144 | 0.4 | 0.38 | ||||||||||||||||||
| Regulatory and legal matters | — | (35) | — | 35 | — | 19 | 0.5 | 0.05 | ||||||||||||||||||
| Tax matters | — | — | — | — | — | 58 | (3.5) | 0.15 | ||||||||||||||||||
| Adjusted | $ | 7,070 | $ | 3,648 | $ | 684 | $ | 2,738 | $ | (143) | $ | 2,191 | 15.5 | % | $ | 5.77 | ||||||||||
| Adjusted percent net sales | 65.7 | % | 33.9 | % | 6.4 | % | 25.5 | % | (1.3) | % | 20.4 | % | ||||||||||||||
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 15 | ||||
| STRYKER CORPORATION | 2020 Third Quarter Form 10-Q | |||||||
FINANCIAL CONDITION AND LIQUIDITY
| Nine Months | 2020 | 2019 | ||||||
| Net cash provided by operating activities | $ | 2,040 | $ | 1,456 | ||||
| Net cash used in investing activities | (349) | (736) | ||||||
| Net cash provided by (used in) financing activities | 1,046 | (2,360) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 9 | (28) | ||||||
| Change in cash and cash equivalents | $ | 2,746 | $ | (1,668) | ||||
Operating Activities
Cash provided by operating activities was $2,040 and $1,456 in the nine months 2020 and 2019. The increase was primarily due to higher accounts receivable collections and less spending on inventory due to lower production from lower sales partially offset by decreased net earnings.
Investing Activities
Cash used in investing activities was $349 and $736 in the nine months 2020 and 2019. The decrease in cash used was primarily due to decreased payments for acquisitions in 2020.
Financing Activities
Cash provided by (used in) financing activities was $1,046 and $2,360 in the nine months 2020 and 2019. The change in cash was primarily driven by the issuance of $2,300 of notes in June 2020, partially offset by the repayment of $500 of notes upon maturity in January 2020 compared to repayments of $1,341 of debt in the nine months 2019, along with the suspension of share repurchases.
| Nine Months | 2020 | 2019 | ||||||
| Total dividends paid to common shareholders | $ | 647 | $ | 585 | ||||
| Total amount paid to repurchase common stock | $ | — | $ | 307 | ||||
| Shares of repurchased common stock (in millions) | — | 1.9 | ||||||
Liquidity
Cash, cash equivalents and marketable securities were $7,161 and $4,425 on September 30, 2020 and December 31, 2019. Current assets exceeded current liabilities by $8,856 and $6,960 on September 30, 2020 and December 31, 2019. Despite the impact from the COVID-19 pandemic, we anticipate being able to support our short-term liquidity and operating needs from a variety of sources including cash from operations, commercial paper, existing credit lines and capital expenditure and operating expense reductions. We maintain a revolving credit facility with $1.5 billion of committed capital which expires in August 2023 and a $1.5 billion unsecured revolving credit facility that matures in April 2021.
We raised funds in the capital markets in 2020, 2019 and 2018 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 14% on September 30, 2020 compared to 25% on December 31, 2019.
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for 2019.
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, including uncertainties related to the impact of the COVID-19 pandemic on our operations and financial results. 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 2019 and in Part II, Item 1A. "Risk Factors" on Form 10-Q for the quarter ended March 31, 2020. 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 2019. We disclaim any intention or obligation to publicly update or revise any forward-looking statement to reflect any change in our expectations or in events, conditions or circumstances on which those expectations may be based, or that affect the likelihood that actual results will differ from those contained in the forward-looking statements.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||
We consider our greatest potential areas of market risk exposure to be exchange rate risk and the impacts of the COVID-19 pandemic on our operations and financial results. 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 2019. There were no material changes from the information provided therein. We are not able to quantify the impacts of the COVID-19 pandemic on our financial results. Qualitative disclosures about the COVID-19 pandemic are included in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 16 | ||||
and Results of Operations" and Part II, Item 1A "Risk Factors" of this Form 10-Q.
| 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 September 30, 2020. Based on that evaluation, the Certifying Officers concluded the Company's disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control Over Financial Reporting
There was no change to our internal control over financial reporting during the three months 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| ITEM 1A. | RISK FACTORS | ||||
We are not aware of any material changes to the risk factors included in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for 2019 and Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | ||||
In the three months 2020 we did not issue shares of our common stock as performance incentive awards to employees. When issued, these shares are 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 the nine months 2020 we did not repurchase any shares of our common stock 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 September 30, 2020. As previously announced we intend to maintain the suspension of our share repurchase program through 2021.
| ITEM 6. | EXHIBITS | ||||
| 31(i)* | |||||
| 31(ii)* | |||||
| 32(i)* | |||||
| 32(ii)* | |||||
| 101.INS | iXBRL Instance Document | ||||
| 101.SCH | iXBRL Schema Document | ||||
| 101.CAL | iXBRL Calculation Linkbase Document | ||||
| 101.DEF | iXBRL Definition Linkbase Document | ||||
| 101.LAB | iXBRL Label Linkbase Document | ||||
| 101.PRE | iXBRL Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document) | ||||
| † Filed with this Form 10-Q | |||||
| * Furnished with this Form 10-Q | |||||
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 17 | ||||
| STRYKER CORPORATION | 2020 Third 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: | October 30, 2020 | /s/ KEVIN A. LOBO | |||||||||
| Kevin A. Lobo | |||||||||||
| Chairman and Chief Executive Officer | |||||||||||
| Date: | October 30, 2020 | /s/ GLENN S. BOEHNLEIN | |||||||||
| Glenn S. Boehnlein | |||||||||||
| Vice President, Chief Financial Officer | |||||||||||
18 | ||||||||