Quarterly Report (10-q)

Date : 07/26/2019 @ 4:22PM
Source : Edgar (US Regulatory)
Stock : Stryker Corp (SYK)
Quote : 218.18  -1.86 (-0.85%) @ 12:59AM

Quarterly Report (10-q)

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UNITED STATES
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 June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-09165
STRYKERLOGOA67.JPG
STRYKER CORP ORATION
(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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $.10 Par Value
 
SYK
 
New York Stock Exchange
1.125% Notes due 2023
 
SYK23
 
New York Stock Exchange
2.125% Notes due 2027
 
SYK27
 
New York Stock Exchange
2.625% Notes due 2030
 
SYK30
 
New York Stock Exchange
Floating Rate Notes due 2020
 
SYK20A
 
New York Stock Exchange

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.
 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
Small reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No
There were 374,103,607 shares of Common Stock, $0.10 par value, on June 30, 2019 .
 


STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

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

2019
 
2018
 
2019
 
2018
Net sales
$
3,650

 
$
3,322

 
$
7,166

 
$
6,563

Cost of sales
1,270

 
1,132

 
2,503

 
2,236

Gross profit
$
2,380

 
$
2,190

 
$
4,663

 
$
4,327

Research, development and engineering expenses
246

 
216

 
471

 
420

Selling, general and administrative expenses
1,282

 
1,190

 
2,685

 
2,426

Recall charges
117

 
2

 
130

 
6

Amortization of intangible assets
122

 
110

 
236

 
212

Total operating expenses
$
1,767

 
$
1,518

 
$
3,522

 
$
3,064

Operating income
$
613

 
$
672

 
$
1,141

 
$
1,263

Other income (expense), net
(48
)
 
(49
)
 
(96
)
 
(98
)
Earnings before income taxes
$
565

 
$
623

 
$
1,045

 
$
1,165

Income taxes
85

 
171

 
153

 
270

Net earnings
$
480

 
$
452

 
$
892

 
$
895

 
 
 
 
 
 
 
 
Net earnings per share of common stock:
 
 
 
 
 
 
 
Basic
$
1.29

 
$
1.21

 
$
2.39

 
$
2.39

Diluted
$
1.26

 
$
1.19

 
$
2.35

 
$
2.35

 
 
 
 
 
 
 
 
Weighted-average shares outstanding (in millions):
 
 
 
 
 
 
 
Basic
373.9

 
373.9

 
373.6

 
373.9

Effect of dilutive employee stock options
5.6

 
6.2

 
5.8

 
6.5

Diluted
379.5

 
380.1

 
379.4

 
380.4

 
 
 
 
 
 
 
 
Cash dividends declared per share of common stock
$
0.52

 
$
0.47

 
$
1.04

 
$
0.94

Anti-dilutive shares excluded from the calculation of dilutive employee stock options were de minimis in all periods.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months
 
Six Months
 
2019
 
2018
 
2019
 
2018
Net earnings
$
480

 
$
452

 
$
892

 
$
895

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

 

 
1

 
(1
)
Pension plans
(7
)
 
8

 
(11
)
 
2

Unrealized gains (losses) on designated hedges
3

 
2

 
(13
)
 
17

Financial statement translation
(61
)
 
(57
)
 
24

 
(22
)
Total other comprehensive income (loss), net of tax
$
(65
)
 
$
(47
)
 
$
1

 
$
(4
)
Comprehensive income
$
415

 
$
405

 
$
893

 
$
891


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

CONSOLIDATED BALANCE SHEETS
 
June 30
 
December 31
 
2019
 
2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,754

 
$
3,616

Marketable securities
85

 
83

Accounts receivable, less allowance of $70 ($64 in 2018)
2,408

 
2,332

Inventories:
 
 
 
Materials and supplies
652

 
606

Work in process
186

 
149

Finished goods
2,360

 
2,200

Total inventories
$
3,198

 
$
2,955

Prepaid expenses and other current assets
740

 
747

Total current assets
$
8,185

 
$
9,733

Property, plant and equipment:
 
 
 
Land, buildings and improvements
1,057

 
1,041

Machinery and equipment
3,421

 
3,236

Total property, plant and equipment
$
4,478

 
$
4,277

Less accumulated depreciation
2,091

 
1,986

Property, plant and equipment, net
$
2,387

 
$
2,291

Goodwill
8,762

 
8,563

Other intangibles, net
4,184

 
4,163

Noncurrent deferred income tax assets
1,613

 
1,678

Other noncurrent assets
1,223

 
801

Total assets
$
26,354

 
$
27,229

 
 
 
 
Liabilities and shareholders' equity

 
 
Current liabilities
 
 
 
Accounts payable
$
616

 
$
646

Accrued compensation
640

 
917

Income taxes payable
139

 
158

Dividend payable
192

 
192

Accrued expenses and other liabilities
1,820

 
1,521

Current maturities of debt
539

 
1,373

Total current liabilities
$
3,946

 
$
4,807

Long-term debt, excluding current maturities
7,974

 
8,486

Income taxes
1,106

 
1,228

Other noncurrent liabilities
1,385

 
978

Total liabilities
$
14,411

 
$
15,499

Shareholders' equity
 
 
 
Common stock, $0.10 par value
37

 
37

Additional paid-in capital
1,569

 
1,559

Retained earnings
10,967

 
10,765

Accumulated other comprehensive loss
(630
)
 
(631
)
Total shareholders' equity
$
11,943

 
$
11,730

Total liabilities and shareholders' equity
$
26,354

 
$
27,229


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
 
Three Months
 
Six Months
 
2019
 
2018
 
2019
 
2018
Common stock shares outstanding (in millions)
 
 
 
 
 
 
 
Beginning
373.8

 
373.7

 
374.4

 
374.4

Issuance of common stock under stock option and benefit plans
0.3

 
0.3

 
1.6

 
1.5

Repurchase of common stock

 

 
(1.9
)
 
(1.9
)
Ending
374.1

 
374.0

 
374.1

 
374.0

 
 
 
 
 
 
 
 
Common stock
 
 
 
 
 
 
 
Beginning
$
37

 
$
37

 
$
37

 
$
37

Issuance of common stock under stock option and benefit plans

 

 

 

Repurchase of common stock

 

 

 

Ending
$
37

 
$
37

 
$
37

 
$
37

Additional paid-in capital
 
 
 
 
 
 
 
Beginning
$
1,538

 
$
1,486

 
$
1,559

 
$
1,496

Issuance of common stock under stock option and benefit plans
3

 
(11
)
 
(45
)
 
(43
)
Repurchase of common stock

 

 
(8
)
 
(7
)
Share-based compensation
28

 
28

 
63

 
57

Ending
$
1,569

 
$
1,503

 
$
1,569

 
$
1,503

Retained earnings
 
 
 
 
 
 
 
Beginning
$
10,683

 
$
8,201

 
$
10,765

 
$
8,986

Cumulative effect of accounting changes

 

 

 
(759
)
Net earnings
480

 
452

 
892

 
895

Repurchase of common stock

 

 
(299
)
 
(293
)
Cash dividends declared
(196
)
 
(176
)
 
(391
)
 
(352
)
Ending
$
10,967

 
$
8,477

 
$
10,967

 
$
8,477

Accumulated other comprehensive (loss) income
 
 
 
 
 
 
 
Beginning
$
(565
)
 
$
(510
)
 
$
(631
)
 
$
(553
)
Other comprehensive income (loss)
(65
)
 
(47
)
 
1

 
(4
)
Ending
$
(630
)
 
$
(557
)
 
$
(630
)
 
$
(557
)
Total Stryker shareholders' equity
$
11,943

 
$
9,460

 
$
11,943

 
$
9,460

Non-controlling interest
 
 
 
 
 
 
 
Beginning
$

 
$
9

 
$

 
$
14

Interest purchased

 
(9
)
 

 
(15
)
Net earnings attributable to noncontrolling interest

 

 

 

Foreign currency exchange translation adjustment

 

 

 
1

Ending
$

 
$

 
$

 
$

Total shareholders' equity
$
11,943

 
$
9,460

 
$
11,943

 
$
9,460


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months
 
2019
 
2018
Operating activities
 
 
 
Net earnings
$
892

 
$
895

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
153

 
150

Amortization of intangible assets
236

 
212

Share-based compensation
63

 
57

Recall charges
130

 
6

Sale of inventory stepped-up to fair value at acquisition
38

 
11

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(72
)
 
115

Inventories
(285
)
 
(294
)
Accounts payable
(16
)
 
65

Accrued expenses and other liabilities
(76
)
 
(190
)
Recall-related payments
(34
)
 
(68
)
Income taxes
(86
)
 
(47
)
Other, net
(116
)
 
34

Net cash provided by operating activities
$
827

 
$
946

Investing activities
 
 
 
Acquisitions, net of cash acquired
(260
)
 
(767
)
Purchases of marketable securities
(37
)
 
(145
)
Proceeds from sales of marketable securities
34

 
117

Purchases of property, plant and equipment
(287
)
 
(278
)
Net cash used in investing activities
$
(550
)
 
$
(1,073
)
Financing activities
 
 
 
Proceeds (payments) on short-term borrowings, net
6

 
(7
)
Proceeds from issuance of long-term debt

 
595

Payments on long-term debt
(1,341
)
 
(600
)
Dividends paid
(390
)
 
(352
)
Repurchases of common stock
(307
)
 
(300
)
Cash paid for taxes from withheld shares
(111
)
 
(96
)
Payments to purchase noncontrolling interest

 
(14
)
Other financing, net
8

 
2

Net cash (used in) provided by financing activities
$
(2,135
)
 
$
(772
)
Effect of exchange rate changes on cash and cash equivalents
(4
)
 
(2
)
Change in cash and cash equivalents
$
(1,862
)
 
$
(901
)
Cash and cash equivalents at beginning of period
3,616

 
2,542

Cash and cash equivalents at end of period
$
1,754

 
$
1,641


See accompanying notes to Consolidated Financial Statements.

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
General Information
Management believes the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring items, considered necessary to fairly present the financial position of Stryker Corporation and its consolidated subsidiaries (the "Company," "we," us" or "our") on June 30, 2019 and the results of operations for the three and six months 2019 . The results of operations included in these Consolidated Financial Statements may not necessarily be indicative of our annual results. These statements should be read in conjunction with our Annual Report on Form 10-K for 2018 .
Certain prior year amounts have been reclassified to conform with current year presentation in our Consolidated Statements of Cash Flows.
New Accounting Pronouncements Not Yet Adopted
We evaluate all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) for consideration of their applicability. ASUs not included in our disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on our Consolidated Financial Statements.
In August 2018 the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contrac t, which amends the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract to align with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the impact on our Consolidated Financial Statements and the timing of adoption of this update.
Accounting Pronouncements Recently Adopted
On January 1, 2019 we adopted ASU 2016-02, Leases , and related amendments (ASC 842), which require lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. Refer to Note 6 for further information.
On January 1, 2019 we adopted ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities , which amends and simplifies hedge accounting guidance, as well as improves presentation and disclosure to align the economic effects of risk management strategies in the financial statements. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
NOTE 2 - REVENUE RECOGNITION
Our policies for recognizing sales have not changed from those described in our Annual Report on Form 10-K for 2018 .
We disaggregate our net sales by product line and geography for each of our segments as we believe it best depicts how the nature, amount, timing and certainty of our net sales and cash flows are affected by economic factors.
 
Net Sales by Product Line
 
 
 
 
 
 
Three Months
 
Six Months
 
2019
2018
 
2019
2018
Orthopaedics:
 
 
 
 
 
Knees
$
440

$
422

 
$
879

$
841

Hips
343

336

 
679

667

Trauma and Extremities
394

387

 
790

776

Other
96

83

 
175

160

 
$
1,273

$
1,228

 
$
2,523

$
2,444

MedSurg:
 
 
 
 
 
Instruments
$
520

$
438

 
$
998

$
850

Endoscopy
480

448

 
950

892

Medical
542

505

 
1,073

1,016

Sustainability
75

64

 
140

124

 
$
1,617

$
1,455

 
$
3,161

$
2,882

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
483

$
437

 
$
948

$
847

Spine
277

202

 
534

390

 
$
760

$
639

 
$
1,482

$
1,237

Total
$
3,650

$
3,322

 
$
7,166

$
6,563

Net Sales by Geography
 
 
 
 
 
 
Three Months 2019
 
Three Months 2018
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
324

$
116

 
$
304

$
118

Hips
219

124

 
207

129

Trauma and Extremities
252

142

 
242

145

Other
79

17

 
68

15

 
$
874

$
399

 
$
821

$
407

MedSurg:
 
 
 
 
 
Instruments
$
414

$
106

 
$
339

$
99

Endoscopy
383

97

 
354

94

Medical
430

112

 
384

121

Sustainability
75


 
63

1

 
$
1,302

$
315

 
$
1,140

$
315

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
311

$
172

 
$
280

$
158

Spine
208

69

 
144

57

 
$
519

$
241

 
$
424

$
215

Total
$
2,695

$
955

 
$
2,385

$
937


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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

Net Sales by Geography
 
 
 
 
 
 
Six Months 2019
 
Six Months 2018
 
United States
International
 
United States
International
Orthopaedics:
 
 
 
 
 
Knees
$
644

$
235

 
$
605

$
236

Hips
432

247

 
412

255

Trauma and Extremities
506

284

 
487

289

Other
142

33

 
131

29

 
$
1,724

$
799

 
$
1,635

$
809

MedSurg:
 
 
 
 
 
Instruments
$
795

$
203

 
$
655

$
195

Endoscopy
759

191

 
703

189

Medical
846

227

 
765

251

Sustainability
139

1

 
123

1

 
$
2,539

$
622

 
$
2,246

$
636

Neurotechnology and Spine:
 
 
 
 
 
Neurotechnology
$
608

$
340

 
$
536

$
312

Spine
403

131

 
282

107

 
$
1,011

$
471

 
$
818

$
419

Total
$
5,274

$
1,892

 
$
4,699

$
1,864


Contract Assets and Liabilities
On June 30, 2019 there were no contract assets recorded on our Consolidated Balance Sheets.
Our contract liabilities arise as a result of consideration received from customers at inception of contracts for certain businesses or where the timing of billing for services precedes satisfaction of our performance obligations. We generally satisfy performance obligations within one year from the contract inception date. Our contract liabilities were $321 and $327 on June 30, 2019 and December 31, 2018 .
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
Three Months 2019
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(3
)
$
(141
)
$
34

$
(455
)
$
(565
)
OCI

(10
)
3

(66
)
(73
)
Income taxes

2

2

5

9

Reclassifications to:
 
 
 
 
 
Other expense

2



2

Income taxes

(1
)
(2
)

(3
)
Net OCI
$

$
(7
)
$
3

$
(61
)
$
(65
)
Ending
$
(3
)
$
(148
)
$
37

$
(516
)
$
(630
)

Three Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(5
)
$
(140
)
$
43

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

3

(57
)
(49
)
Income taxes

2

(1
)

1

Reclassifications to:
 
 
 
 
 
Cost of sales


(1
)

(1
)
Other income
1

2



3

Income taxes

(2
)
1


(1
)
Net OCI
$

$
8

$
2

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

$
(465
)
$
(557
)

 
Six Months 2019
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(4
)
$
(137
)
$
50

$
(540
)
$
(631
)
OCI
1

(16
)
(16
)
28

(3
)
Income taxes

3

8

(4
)
7

Reclassifications to:
 
 
 
 
 
Cost of sales


(2
)

(2
)
Other expense

3



3

Income taxes

(1
)
(3
)

(4
)
Net OCI
$
1

$
(11
)
$
(13
)
$
24

$
1

Ending
$
(3
)
$
(148
)
$
37

$
(516
)
$
(630
)
Six Months 2018
Marketable Securities
Pension Plans
Hedges
Financial Statement Translation
Total
Beginning
$
(4
)
$
(134
)
$
28

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

(34
)
(16
)
Income taxes

3

(6
)
12

9

Reclassifications to:
 
 
 
 
 
Cost of sales


(2
)

(2
)
Other income
1

4



5

Income taxes

(1
)
1



Net OCI
$
(1
)
$
2

$
17

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

$
(465
)
$
(557
)

NOTE 4 - DERIVATIVE INSTRUMENTS
Foreign Currency Hedges
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges (both derivative and non-derivative financial instruments) and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings and cash flow. We do not enter into derivative instruments for speculative purposes. We have not changed our hedging strategies, accounting practices or objectives from those disclosed in our Annual Report on Form 10-K for 2018 .
June 2019
Designated
Non-Designated
Total
Gross notional amount
$
842

$
4,928

$
5,770

Maximum term in days
 
 
586

Fair value:
 
 
 
Other current assets
$
9

$
93

$
102

Other noncurrent assets
1


1

Other current liabilities
(8
)
(15
)
(23
)
Other noncurrent liabilities
(1
)

(1
)
Total fair value
$
1

$
78

$
79


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

$
5,466

$
6,336

Maximum term in days
 
 
586

Fair value:
 
 
 
Other current assets
$
15

$
28

$
43

Other noncurrent assets
1

33

34

Other current liabilities
(5
)
(15
)
(20
)
Total fair value
$
11

$
46

$
57


On June 30, 2019 the total after tax loss amount in AOCI related to our designated net investment hedges was $5 . We evaluate the effectiveness of our net investment hedges quarterly. We have not recognized any ineffectiveness in 2019.
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. We have elected to use the spot method to assess effectiveness for our derivatives designated as net investment hedges. Accordingly, the change in fair value attributable to changes in the spot rate is recorded in AOCI. We

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

exclude the spot-forward difference from the assessment of hedge effectiveness and amortize this amount separately on a straight-line basis over the term of the forward contracts. This amortization will be recorded to Other income (expense), net on our Consolidated Statements of Earnings.
We are exposed to credit loss in the event of nonperformance by our counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default, our maximum loss exposure is the asset balance of the instrument.
Net Currency Exchange Rate Gains (Losses)
 
Three Months
 
Six Months
Recorded in:
2019
2018
 
2019
2018
Cost of sales
$

$
1

 
$
2

$
2

Other income (expense), net
(2
)
(2
)
 
(4
)
(4
)
Total
$
(2
)
$
(1
)
 
$
(2
)
$
(2
)

Pretax gains on derivatives designated as hedges recorded in AOCI that are expected to be reclassified to earnings within 12 months of the balance sheet date are $1 and $13 on June 30, 2019 and December 31, 2018 . This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There were de minimis ineffective portions of derivatives, which are included in the table above.
Interest Rate Risk
On June 30, 2019 there were no open cash flow or fair value interest rate hedges.
NOTE 5 - FAIR VALUE MEASUREMENTS
Our policies for managing risk related to foreign currency, interest rates, credit and markets and our process for determining fair value have not changed from those described in our Annual Report on Form 10-K for 2018 .
There were no significant transfers into or out of any level in 2019 .
Assets Measured at Fair Value
June
December
2019
2018
Cash and cash equivalents
$
1,754

$
3,616

Trading marketable securities
139

118

Level 1 - Assets
$
1,893

$
3,734

Available-for-sale marketable securities:
 
 
Corporate and asset-backed debt securities
$
38

$
38

United States agency debt securities
6

11

United States Treasury debt securities
32

23

Certificates of deposit
9

11

Total available-for-sale marketable securities
$
85

$
83

Foreign currency exchange forward contracts
103

77

Level 2 - Assets
$
188

$
160

Total assets measured at fair value
$
2,081

$
3,894


Liabilities Measured at Fair Value
June
December
2019
2018
Deferred compensation arrangements
$
139

$
118

Level 1 - Liabilities
$
139

$
118

Foreign currency exchange forward contracts
$
24

$
20

Level 2 - Liabilities
$
24

$
20

Contingent consideration:
 
 
Beginning
$
117

$
32

Additions
165

77

Change in estimate
(2
)
15

Settlements
(9
)
(7
)
Ending
$
271

$
117

Level 3 - Liabilities
$
271

$
117

Total liabilities measured at fair value
$
434

$
255


 
Fair Value of Available for Sale Securities by Maturity
 
June 2019
December 2018
Due in one year or less
$
44

$
51

Due after one year through three years
$
41

$
32


On June 30, 2019 and December 31, 2018 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest and marketable securities income recorded in other income (expense), net, was $34 and $27 in the three months and was $73 and $50 in the six months 2019 and 2018 .
Our investments in available-for-sale marketable securities had a minimum credit quality rating of A2 (Moody's), A (Standard & Poor's) and A (Fitch). We do not plan to sell the investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. We do not consider these investments to be other-than-temporarily impaired on June 30, 2019 . On June 30, 2019 the majority of our investments with unrealized losses that were not deemed to be other-than-temporarily impaired were in a continuous unrealized loss position for less than twelve months, and the losses were not material.
Securities in a Continuous Unrealized Loss Position
 
Number of Investments
Fair Value
Corporate and asset-backed
19
$
10

United States agency
4
4

United States Treasury
5
6

Total
28
$
20


NOTE 6 - CONTINGENCIES AND COMMITMENTS
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property and other matters that are more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages as well as other compensatory and equitable relief that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management had sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those estimated by management, additional expense may be incurred, which could unfavorably affect future operating results. We are self-insured for product liability claims and expenses. The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
In 2010 we filed a lawsuit in federal court against Zimmer Biomet Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed on three of our patents. In 2013 following a jury trial favorable to us, the trial judge entered a final judgment that, among other things, awarded us damages of $76 and ordered Zimmer to pay us enhanced damages. Zimmer appealed this ruling. In December 2014 the Federal Circuit affirmed the damages awarded to us, reversed the order for enhanced damages and remanded the issue of attorney fees to the trial court. In May 2015 the trial court entered a stipulated judgment that, among other things, required Zimmer to pay us the base amount of damages and interest, while the issues of enhanced damages and attorney fees continue to be pursued. In June 2015 we recorded a $54 gain, net of legal costs, which was recorded within selling, general and administrative expenses. On June 13, 2016 the United States Supreme Court vacated the decision of the Federal Circuit that reversed our judgment for enhanced damages and remanded the case to the Federal Circuit to reconsider the issue. On September 12, 2016 the Federal Circuit

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

issued an opinion that, among other things, remanded the issue of enhanced damages to the trial court. On July 12, 2017 the trial court reaffirmed its award of enhanced damages and entered a judgment of $164 in our favor. Zimmer appealed, and on December 10, 2018 the Federal Circuit affirmed the decision. Zimmer filed a petition on January 23, 2019 to seek a rehearing of this ruling by the entire Federal Circuit. On March 19, 2019 the Federal Circuit denied Zimmer’s petition for a rehearing. Zimmer conditionally paid us $167 while it seeks a review of the decision by the Supreme Court.
Recall Matters
In June 2012 we voluntarily recalled our Rejuvenate and ABG II Modular-Neck hip stems and terminated global distribution of these hip products. Product liability lawsuits relating to this voluntary recall have been filed against us. In November 2014 we entered into a settlement agreement to compensate eligible United States patients who had revision surgery prior to November 3, 2014 and in December 2016 the settlement program was extended to patients who had revision surgery prior to December 19, 2016. We continue to offer support for recall-related care and reimburse patients who are not eligible to enroll in the settlement program for testing and treatment services, including any necessary revision surgeries. In addition, there are remaining lawsuits that we will continue to defend against.
In August 2016 and May 2018 we voluntarily recalled certain lot-specific sizes and offsets of LFIT Anatomic CoCr V40 Femoral Heads. Product liability lawsuits and claims relating to this voluntary recall have been filed against us. In November 2018 we entered into a settlement agreement to resolve a significant number of claims and lawsuits related to the recalls. The specific terms of the settlement agreement, including the financial terms, are confidential.
We have incurred, and expect to incur in the future, costs associated with the settlement of these matters. Based on the information that has been received, we have estimated the remaining range of probable loss to resolve these matters globally to be approximately $350 to $600 . We have recorded charges to earnings representing the minimum of the range of probable loss. The final outcomes of these matters are dependent on many factors that are difficult to predict. Accordingly, the ultimate cost to entirely resolve these matters globally may be materially different than the amount of our current estimate and accruals and could have a material adverse effect on our results of operations and cash flows.
Leases
We lease various manufacturing, warehousing and distribution facilities, administrative and sales offices as well as equipment under operating leases. We evaluate our contracts to identify leases, which is generally if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. Certain of our lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvement funding or other lease concessions. We recognize our minimum rental expense on a straight-line basis over the term of the lease beginning with the date of initial control of the asset. With the adoption of ASC 842 we recognized all leases with terms greater than twelve months in duration on our Consolidated Balance Sheets as right-of-use assets and lease liabilities of approximately $350 as of January 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in Other noncurrent assets on our Consolidated Balance Sheets. Current and non-current lease liabilities are recorded in Accrued expenses and other liabilities and Other
 
noncurrent liabilities, respectively, on our Consolidated Balance Sheets.
We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
We elected the package of practical expedients available for transition which allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.
For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
The determination of the discount rate used in a lease is our incremental borrowing rate which is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Leases
 
 
June
 
 
2019
Right-of-use assets
 
 
$
357

Lease liabilities, current
 
 
$
88

Lease liabilities, non-current
 
 
$
269

 
 
 
 
Other information
 
 
 
Weighted-average remaining lease term
 
 
5.9 years

Weighted-average discount rate
 
 
3.44
%
 
 
 
 
 
 
 
 
 
Three Months 2019
 
Six Months 2019
Operating lease cost
$
34

 
68


NOTE 7 - ACQUISITIONS
We acquire stock in companies and various assets that continue to support our capital deployment and product development strategies. Cash paid for acquisitions, net of cash acquired, was $260 and $767 in the six months 2019 and 2018 . Acquisition and integration related charges, including the amortization of inventory stepped up to fair value, was $53 and $24 in the three months and $191 and $41 in the six months 2019 and 2018 .
In March 2019 we completed the acquisition of OrthoSpace, Ltd. for total cash consideration of $110 with future milestone payments of up to an additional $110 . OrthoSpace is a medical device company specializing in orthopaedic biodegradable technology for the treatment of irreparable rotator cuff tears. Goodwill attributable to the acquisition was $114 and is not deductible for tax purposes.
In November 2018 we completed the acquisition of K2M Group Holdings, Inc. (K2M) for $27.50 per share, or an aggregate purchase price of approximately $1,380 . K2M is a global leader of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. K2M is part of our Spine business within Neurotechnology and Spine. Goodwill attributable to the acquisition is not deductible for tax purposes.
In February 2018 we completed the acquisition of Entellus Medical, Inc. (Entellus) for $24.00 per share, or an aggregate purchase price of $697 , net of cash acquired. Entellus is focused on delivering superior patient and physician experiences through products designed for the minimally invasive treatment of various ear, nose

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

and throat (ENT) disease states. Entellus is part of our Neurotechnology business within Neurotechnology and Spine. Goodwill attributable to the acquisition is not deductible for tax purposes.
The purchase price allocations for K2M and OrthoSpace are preliminary and are based on estimates and assumptions that are subject to change within the measurement period. The purchase price allocation for the acquisition of Entellus was completed in 2019.
Purchase Price Allocation of Acquired Net Assets
 
2018
 
K2M
 
Entellus
Tangible assets:
 
 
 
Accounts receivable
$
60

 
$
17

Inventory
131

 
14

Other assets
122

 
62

Contingent consideration

 
(79
)
Other liabilities
(243
)
 
(76
)
Intangible assets:
 
 
 
Customer relationship
34

 
33

Distributor relationship
1

 

Trade name
10

 

Developed technology and patents
475

 
261

Internally developed software
2

 

Goodwill
788

 
465

Purchase price, net of cash acquired
$
1,380

 
$
697

Weighted-average life of intangible assets
14

 
16


Estimated Amortization Expense
Remainder
of 2019
2020
2021
2022
2023
$
230

$
439

$
426

$
415

$
396


NOTE 8 - DEBT AND CREDIT FACILITIES
In January 2019 we repaid $500 of our senior unsecured notes with a coupon of 1.800% that were due on January 15, 2019 . In March 2019 we repaid $750 of our senior unsecured notes with a coupon of 2.000% that were due on March 8, 2019 . Our commercial paper program allows us to have a maximum of $1,500 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On June 30, 2019 there were no amounts outstanding under our commercial paper program.
We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on June 30, 2019 .
 
Summary of Total Debt
June 2019
 
December 2018
Senior unsecured notes:
 
 
 
 
Rate
 
Due
 
 
 
 
1.800%
 
January 15, 2019
$

 
$
500

 
2.000%
 
March 8, 2019

 
750

 
4.375%
 
January 15, 2020
500

 
499

 
Variable
 
November 30, 2020
341

 
343

 
2.625%
 
March 15, 2021
748

 
747

 
1.125%
 
November 30, 2023
623

 
627

 
3.375%
 
May 15, 2024
586

 
584

 
3.375%
 
November 1, 2025
746

 
746

 
3.500%
 
March 15, 2026
990

 
990

 
2.125%
 
November 30, 2027
847

 
853

 
3.650%
 
March 7, 2028
595

 
595

 
2.625%
 
November 30, 2030
729

 
733

 
4.100%
 
April 1, 2043
391

 
391

 
4.375%
 
May 15, 2044
395

 
395

 
4.625%
 
March 15, 2046
981

 
980

Other
41

 
126

Total debt
$
8,513

 
$
9,859

Less current maturities of debt
539

 
1,373

Total long-term debt
$
7,974

 
$
8,486

 
 
 
 
Unamortized debt issuance costs
$
47

 
$
50

Available borrowing capacity
$
1,531

 
$
1,548

Fair value of senior unsecured notes
$
9,142

 
$
9,746


The fair value of the senior unsecured notes was estimated using quoted interest rates, maturities and amounts of borrowings based on quoted active market prices and yields that took into account the underlying terms of the debt instruments. Substantially all our debt is classified within Level 2 of the fair value hierarchy.
NOTE 9 - INCOME TAXES
Our effective tax rates were 15.0% and 27.4% in the three months and 14.6% and 23.2% in the six months 2019 and 2018 . The decrease in the effective tax rate for the three and six months was primarily due to a favorable United States audit settlement for tax years 2012 and 2013.
 
NOTE 10 - SEGMENT INFORMATION
 
Three Months
 
Six Months
 
2019
2018
 
2019
2018
Orthopaedics
$
1,273

$
1,228

 
$
2,523

$
2,444

MedSurg
1,617

1,455

 
3,161

2,882

Neurotechnology and Spine
760

639

 
1,482

1,237

Net sales
$
3,650

$
3,322

 
$
7,166

$
6,563

Orthopaedics
$
448

$
437

 
$
885

$
866

MedSurg
404

326

 
781

627

Neurotechnology and Spine
214

181

 
413

359

Segment operating income
$
1,066

$
944

 
$
2,079

$
1,852

Items not allocated to segments:
 
 
 
 
 
Corporate and other
(122
)
(89
)
 
(254
)
(187
)
Acquisition and integration-related charges
(53
)
(24
)
 
(191
)
(41
)
Amortization of intangible assets
(122
)
(110
)
 
(236
)
(212
)
Restructuring-related charges
(42
)
(22
)
 
(98
)
(85
)
Medical device regulations
(12
)
(2
)
 
(19
)
(3
)
Recall-related matters
(117
)
(2
)
 
(130
)
(6
)
Regulatory and legal matters
15

(23
)
 
(10
)
(55
)
Consolidated operating income
$
613

$
672

 
$
1,141

$
1,263


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

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

STRYKER CORPORATION
 
2019 Second Quarter Form 10-Q

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS