filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
Stryker Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | 4,160 | $ | 3,737 | $ | 12,407 | $ | 10,089 | |||||||||||||||
| Cost of sales | 1,518 | 1,276 | 4,484 | 3,749 | |||||||||||||||||||
| Gross profit | $ | 2,642 | $ | 2,461 | $ | 7,923 | $ | 6,340 | |||||||||||||||
| Research, development and engineering expenses | 306 | 242 | 904 | 729 | |||||||||||||||||||
| Selling, general and administrative expenses | 1,602 | 1,244 | 4,682 | 3,799 | |||||||||||||||||||
| Recall charges | 16 | 2 | 98 | (4) | |||||||||||||||||||
| Amortization of intangible assets | 144 | 114 | 474 | 342 | |||||||||||||||||||
| Total operating expenses | $ | 2,068 | $ | 1,602 | $ | 6,158 | $ | 4,866 | |||||||||||||||
| Operating income | $ | 574 | $ | 859 | $ | 1,765 | $ | 1,474 | |||||||||||||||
| Other income (expense), net | (79) | (79) | (241) | (191) | |||||||||||||||||||
| Earnings before income taxes | $ | 495 | $ | 780 | $ | 1,524 | $ | 1,283 | |||||||||||||||
| Income taxes | 57 | 159 | 192 | 252 | |||||||||||||||||||
| Net earnings | $ | 438 | $ | 621 | $ | 1,332 | $ | 1,031 | |||||||||||||||
| Net earnings per share of common stock: | |||||||||||||||||||||||
| Basic | $ | 1.17 | $ | 1.66 | $ | 3.54 | $ | 2.75 | |||||||||||||||
| Diluted | $ | 1.14 | $ | 1.63 | $ | 3.48 | $ | 2.71 | |||||||||||||||
| Weighted-average shares outstanding (in millions): | |||||||||||||||||||||||
| Basic | 377.1 | 375.7 | 376.8 | 375.3 | |||||||||||||||||||
| Effect of dilutive employee stock compensation | 5.6 | 4.5 | 5.5 | 4.7 | |||||||||||||||||||
| Diluted | 382.7 | 380.2 | 382.3 | 380.0 | |||||||||||||||||||
| Cash dividends declared per share of common stock | $ | 0.63 | $ | 0.575 | $ | 1.89 | $ | 1.725 |
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 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net earnings | $ | 438 | $ | 621 | $ | 1,332 | $ | 1,031 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Marketable securities | 3 | — | 3 | — | |||||||||||||||||||
| Pension plans | 5 | (6) | 8 | (14) | |||||||||||||||||||
| Unrealized gains (losses) on designated hedges | 7 | (2) | 43 | (58) | |||||||||||||||||||
| Financial statement translation | 112 | (194) | 287 | (239) | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | $ | 127 | $ | (202) | $ | 341 | $ | (311) | |||||||||||||||
| Comprehensive income | $ | 565 | $ | 419 | $ | 1,673 | $ | 720 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 1 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
CONSOLIDATED BALANCE SHEETS
| September 30 | December 31 | ||||||||||
| 2021 | 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 2,563 | $ | 2,943 | |||||||
| Marketable securities | 76 | 81 | |||||||||
| Accounts receivable, less allowance of $146 ($131 in 2020) | 2,817 | 2,701 | |||||||||
| Inventories: | |||||||||||
| Materials and supplies | 663 | 678 | |||||||||
| Work in process | 274 | 251 | |||||||||
| Finished goods | 2,497 | 2,565 | |||||||||
| Total inventories | $ | 3,434 | $ | 3,494 | |||||||
| Prepaid expenses and other current assets | 570 | 488 | |||||||||
| Total current assets | $ | 9,460 | $ | 9,707 | |||||||
| Property, plant and equipment: | |||||||||||
| Land, buildings and improvements | 1,627 | 1,546 | |||||||||
| Machinery and equipment | 3,813 | 3,636 | |||||||||
| Total property, plant and equipment | $ | 5,440 | $ | 5,182 | |||||||
| Less accumulated depreciation | 2,694 | 2,430 | |||||||||
| Property, plant and equipment, net | $ | 2,746 | $ | 2,752 | |||||||
| Goodwill | 12,893 | 12,778 | |||||||||
| Other intangibles, net | 5,058 | 5,554 | |||||||||
| Noncurrent deferred income tax assets | 1,860 | 1,530 | |||||||||
| Other noncurrent assets | 2,128 | 2,009 | |||||||||
| Total assets | $ | 34,145 | $ | 34,330 | |||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 934 | $ | 810 | |||||||
| Accrued compensation | 976 | 925 | |||||||||
| Income taxes | 373 | 207 | |||||||||
| Dividends payable | 238 | 237 | |||||||||
| Accrued product liabilities | 439 | 515 | |||||||||
| Accrued expenses and other liabilities | 1,467 | 1,586 | |||||||||
| Current maturities of debt | 22 | 761 | |||||||||
| Total current liabilities | $ | 4,449 | $ | 5,041 | |||||||
| Long-term debt, excluding current maturities | 12,629 | 13,230 | |||||||||
| Income taxes | 929 | 990 | |||||||||
| Other noncurrent liabilities | 1,960 | 1,985 | |||||||||
| Total liabilities | $ | 19,967 | $ | 21,246 | |||||||
| Shareholders' equity | |||||||||||
| Common stock, $0.10 par value | 38 | 38 | |||||||||
| Additional paid-in capital | 1,875 | 1,741 | |||||||||
| Retained earnings | 13,081 | 12,462 | |||||||||
| Accumulated other comprehensive loss | (816) | (1,157) | |||||||||
| Total shareholders' equity | $ | 14,178 | $ | 13,084 | |||||||
| Total liabilities and shareholders' equity | $ | 34,145 | $ | 34,330 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 2 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Common stock shares outstanding (in millions) | |||||||||||||||||||||||
| Beginning | 377.1 | 375.6 | 376.1 | 374.5 | |||||||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | 0.1 | 0.2 | 1.1 | 1.3 | |||||||||||||||||||
| Ending | 377.2 | 375.8 | 377.2 | 375.8 | |||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Beginning | $ | 38 | $ | 38 | $ | 38 | $ | 37 | |||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | — | — | — | 1 | |||||||||||||||||||
| Ending | $ | 38 | $ | 38 | $ | 38 | $ | 38 | |||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||
| Beginning | $ | 1,844 | $ | 1,706 | $ | 1,741 | $ | 1,628 | |||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | (3) | 1 | (7) | (7) | |||||||||||||||||||
| Share-based compensation | 34 | 29 | 141 | 115 | |||||||||||||||||||
| Ending | $ | 1,875 | $ | 1,736 | $ | 1,875 | $ | 1,736 | |||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning | $ | 12,881 | $ | 11,725 | $ | 12,462 | $ | 11,748 | |||||||||||||||
| Net earnings | 438 | 621 | 1,332 | 1,031 | |||||||||||||||||||
| Cash dividends declared | (238) | (217) | (713) | (650) | |||||||||||||||||||
| Ending | $ | 13,081 | $ | 12,129 | $ | 13,081 | $ | 12,129 | |||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||||||||
| Beginning | $ | (943) | $ | (715) | $ | (1,157) | $ | (606) | |||||||||||||||
| Other comprehensive income (loss) | 127 | (202) | 341 | (311) | |||||||||||||||||||
| Ending | $ | (816) | $ | (917) | $ | (816) | $ | (917) | |||||||||||||||
| Total shareholders' equity | $ | 14,178 | $ | 12,986 | $ | 14,178 | $ | 12,986 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 3 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net earnings | $ | 1,332 | $ | 1,031 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation | 278 | 247 | |||||||||
| Amortization of intangible assets | 474 | 342 | |||||||||
| Asset impairments | 119 | 161 | |||||||||
| Share-based compensation | 141 | 115 | |||||||||
| Recall charges | 98 | (4) | |||||||||
| Sale of inventory stepped-up to fair value at acquisition | 231 | 9 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (145) | 467 | |||||||||
| Inventories | (231) | (154) | |||||||||
| Accounts payable | 134 | (26) | |||||||||
| Accrued expenses and other liabilities | 184 | (184) | |||||||||
| Recall-related payments | (180) | (13) | |||||||||
| Income taxes | (193) | 5 | |||||||||
| Other, net | 21 | 44 | |||||||||
| Net cash provided by operating activities | $ | 2,263 | $ | 2,040 | |||||||
| Investing activities | |||||||||||
| Acquisitions, net of cash acquired | (226) | (26) | |||||||||
| Purchases of marketable securities | (38) | (34) | |||||||||
| Proceeds from sales of marketable securities | 43 | 44 | |||||||||
| Purchases of property, plant and equipment | (319) | (322) | |||||||||
| Other investing, net | (5) | (11) | |||||||||
| Net cash used in investing activities | $ | (545) | $ | (349) | |||||||
| Financing activities | |||||||||||
| Proceeds (payments) on short-term borrowings, net | 7 | 3 | |||||||||
| Proceeds from issuance of long-term debt | 5 | 2,293 | |||||||||
| Payments on long-term debt | (1,151) | (500) | |||||||||
| Payments of dividends | (713) | (647) | |||||||||
| Cash paid for taxes from withheld shares | (88) | (79) | |||||||||
| Other financing, net | (137) | (24) | |||||||||
| Net cash provided by (used in) financing activities | $ | (2,077) | $ | 1,046 | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (21) | 9 | |||||||||
| Change in cash and cash equivalents | $ | (380) | $ | 2,746 | |||||||
| Cash and cash equivalents at beginning of period | 2,943 | 4,337 | |||||||||
| Cash and cash equivalents at end of period | $ | 2,563 | $ | 7,083 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 4 |
| STRYKER CORPORATION | 2021 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, 2021 and the results of operations for the three and nine months 2021. 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 2020.
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.
NOTE 2 - REVENUE RECOGNITION
Our policies for recognizing sales have not changed from those described in our Annual Report on Form 10-K for 2020.
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 | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Orthopaedics: | |||||||||||||||||
| Knees | $ | 439 | $ | 435 | $ | 1,325 | $ | 1,108 | |||||||||
| Hips | 328 | 334 | 990 | 866 | |||||||||||||
| Trauma and Extremities | 639 | 430 | 1,953 | 1,152 | |||||||||||||
| Other | 123 | 118 | 373 | 307 | |||||||||||||
| $ | 1,529 | $ | 1,317 | $ | 4,641 | $ | 3,433 | ||||||||||
| MedSurg: | |||||||||||||||||
| Instruments | $ | 525 | $ | 467 | $ | 1,511 | $ | 1,308 | |||||||||
| Endoscopy | 525 | 467 | 1,512 | 1,238 | |||||||||||||
| Medical | 636 | 600 | 1,898 | 1,819 | |||||||||||||
| Sustainability | 69 | 66 | 203 | 181 | |||||||||||||
| $ | 1,755 | $ | 1,600 | $ | 5,124 | $ | 4,546 | ||||||||||
| Neurotechnology and Spine: | |||||||||||||||||
| Neurotechnology | $ | 594 | $ | 518 | $ | 1,775 | $ | 1,370 | |||||||||
| Spine | 282 | 302 | 867 | 740 | |||||||||||||
| $ | 876 | $ | 820 | $ | 2,642 | $ | 2,110 | ||||||||||
| Total | $ | 4,160 | $ | 3,737 | $ | 12,407 | $ | 10,089 |
| Net Sales by Geography | |||||||||||||||||
| Three Months 2021 | Three Months 2020 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| Orthopaedics: | |||||||||||||||||
| Knees | $ | 321 | $ | 118 | $ | 332 | $ | 103 | |||||||||
| Hips | 199 | 129 | 223 | 111 | |||||||||||||
| Trauma and Extremities | 447 | 192 | 285 | 145 | |||||||||||||
| Other | 97 | 26 | 97 | 21 | |||||||||||||
| $ | 1,064 | $ | 465 | $ | 937 | $ | 380 | ||||||||||
| MedSurg: | |||||||||||||||||
| Instruments | $ | 415 | $ | 110 | $ | 369 | $ | 98 | |||||||||
| Endoscopy | 418 | 107 | 380 | 87 | |||||||||||||
| Medical | 496 | 140 | 455 | 145 | |||||||||||||
| Sustainability | 68 | 1 | 65 | 1 | |||||||||||||
| $ | 1,397 | $ | 358 | $ | 1,269 | $ | 331 | ||||||||||
| Neurotechnology and Spine: | |||||||||||||||||
| Neurotechnology | $ | 357 | $ | 237 | $ | 323 | $ | 195 | |||||||||
| Spine | 201 | 81 | 219 | 83 | |||||||||||||
| $ | 558 | $ | 318 | $ | 542 | $ | 278 | ||||||||||
| Total | $ | 3,019 | $ | 1,141 | $ | 2,748 | $ | 989 |
| Net Sales by Geography | |||||||||||||||||
| Nine Months 2021 | Nine Months 2020 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| Orthopaedics: | |||||||||||||||||
| Knees | $ | 964 | $ | 361 | $ | 833 | $ | 275 | |||||||||
| Hips | 606 | 384 | 564 | 302 | |||||||||||||
| Trauma and Extremities | 1,362 | 591 | 753 | 399 | |||||||||||||
| Other | 290 | 83 | 262 | 45 | |||||||||||||
| $ | 3,222 | $ | 1,419 | $ | 2,412 | $ | 1,021 | ||||||||||
| MedSurg: | |||||||||||||||||
| Instruments | $ | 1,171 | $ | 340 | $ | 1,028 | $ | 280 | |||||||||
| Endoscopy | 1,179 | 333 | 997 | 241 | |||||||||||||
| Medical | 1,457 | 441 | 1,363 | 456 | |||||||||||||
| Sustainability | 200 | 3 | 179 | 2 | |||||||||||||
| $ | 4,007 | $ | 1,117 | $ | 3,567 | $ | 979 | ||||||||||
| Neurotechnology and Spine: | |||||||||||||||||
| Neurotechnology | $ | 1,063 | $ | 712 | $ | 835 | $ | 535 | |||||||||
| Spine | 611 | 256 | 543 | 197 | |||||||||||||
| $ | 1,674 | $ | 968 | $ | 1,378 | $ | 732 | ||||||||||
| Total | $ | 8,903 | $ | 3,504 | $ | 7,357 | $ | 2,732 |
Contract Assets and Liabilities
On September 30, 2021 and December 31, 2020 contract assets recorded in our Consolidated Balance Sheets were not significant.
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 $501 and $416 on September 30, 2021 and December 31, 2020.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 5 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
| Three Months 2021 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (3) | $ | (256) | $ | 26 | $ | (710) | $ | (943) | |||||||
| OCI | 4 | 2 | 6 | 71 | 83 | ||||||||||||
| Income taxes | — | — | (2) | 47 | 45 | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | 4 | — | 4 | ||||||||||||
| Other (income) expense | — | 4 | (2) | (8) | (6) | ||||||||||||
| Income taxes | (1) | (1) | 1 | 2 | 1 | ||||||||||||
| Net OCI | $ | 3 | $ | 5 | $ | 7 | $ | 112 | $ | 127 | |||||||
| Ending | $ | — | $ | (251) | $ | 33 | $ | (598) | $ | (816) |
| Three Months 2020 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (3) | $ | (187) | $ | (9) | $ | (516) | $ | (715) | |||||||
| OCI | — | (11) | 2 | (248) | (257) | ||||||||||||
| Income taxes | — | 3 | (1) | 59 | 61 | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (3) | — | (3) | ||||||||||||
| Other (income) expense | — | 2 | (1) | (7) | (6) | ||||||||||||
| Income taxes | — | — | 1 | 2 | 3 | ||||||||||||
| Net OCI | $ | — | $ | (6) | $ | (2) | $ | (194) | $ | (202) | |||||||
| Ending | $ | (3) | $ | (193) | $ | (11) | $ | (710) | $ | (917) |
| Nine Months 2021 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (3) | $ | (259) | $ | (10) | $ | (885) | $ | (1,157) | |||||||
| OCI | 4 | 1 | 40 | 269 | 314 | ||||||||||||
| Income taxes | — | (2) | (13) | 37 | 22 | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | 9 | — | 9 | ||||||||||||
| Other (income) expense | — | 12 | 7 | (25) | (6) | ||||||||||||
| Income taxes | (1) | (3) | — | 6 | 2 | ||||||||||||
| Net OCI | $ | 3 | $ | 8 | $ | 43 | $ | 287 | $ | 341 | |||||||
| Ending | $ | — | $ | (251) | $ | 33 | $ | (598) | $ | (816) |
| Nine Months 2020 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (3) | $ | (179) | $ | 47 | $ | (471) | $ | (606) | |||||||
| OCI | — | (25) | (70) | (285) | (380) | ||||||||||||
| Income taxes | — | 5 | 18 | 61 | 84 | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (3) | — | (3) | ||||||||||||
| Other (income) expense | — | 8 | (4) | (20) | (16) | ||||||||||||
| Income taxes | — | (2) | 1 | 5 | 4 | ||||||||||||
| Net OCI | $ | — | $ | (14) | $ | (58) | $ | (239) | $ | (311) | |||||||
| Ending | $ | (3) | $ | (193) | $ | (11) | $ | (710) | $ | (917) |
NOTE 4 - DERIVATIVE INSTRUMENTS
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, cash flow and equity. We do not enter into derivative instruments for speculative purposes. We are exposed to potential 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. We have not changed our hedging
strategies, accounting practices or objectives from those disclosed in our Annual Report on Form 10-K for 2020.
Foreign Currency Hedges
| September 2021 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | 945 | $ | 1,755 | $ | 6,016 | $ | 8,716 | ||||||
| Maximum term in years | 4.2 | |||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | 12 | $ | 19 | $ | 43 | $ | 74 | ||||||
| Other noncurrent assets | 2 | 36 | — | 38 | ||||||||||
| Other current liabilities | (10) | — | (10) | (20) | ||||||||||
| Other noncurrent liabilities | (1) | — | — | (1) | ||||||||||
| Total fair value | $ | 3 | $ | 55 | $ | 33 | $ | 91 |
| December 2020 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | 949 | $ | 1,828 | $ | 5,382 | $ | 8,159 | ||||||
| Maximum term in years | 4.9 | |||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | 9 | $ | — | $ | 7 | $ | 16 | ||||||
| Other noncurrent assets | — | 4 | — | 4 | ||||||||||
| Other current liabilities | (12) | — | (121) | (133) | ||||||||||
| Other noncurrent liabilities | (1) | (26) | — | (27) | ||||||||||
| Total fair value | $ | (4) | $ | (22) | $ | (114) | $ | (140) |
We have €1,500 in certain forward currency contracts designated as net investment hedges to hedge a portion of our investments in certain of our entities with functional currencies denominated in Euros. In addition to these derivative financial instruments designated as net investment hedges, we have designated €4,350 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, 2021 the total after tax gain (loss) in AOCI related to designated net investment hedges was ($185).
Net Currency Exchange Rate Gains (Losses)
| Derivative | Three Months | Nine Months | ||||||||||||||||||
| instrument: | Recorded in: | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
| Cash Flow | Cost of sales | $ | (4) | $ | 3 | $ | (9) | $ | 3 | |||||||||||
| Net Investment | Other income (expense), net | 8 | 7 | 25 | 20 | |||||||||||||||
| Non-Designated | Other income (expense), net | (5) | (3) | (6) | (12) | |||||||||||||||
| Total | $ | (1) | $ | 7 | $ | 10 | $ | 11 |
Pretax gains (losses) on derivatives designated as cash flow hedges of $1 and net investment hedges of $30 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, 2021. 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 the nine months 2021 a loss of $11 was reclassified from AOCI to other income (expense) in earnings relating to the termination of forward starting interest rate swaps with notional amounts of $750 designated as cash flow hedges as we now consider it
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 6 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
probable that the original forecasted debt issuances will not occur. Pretax gains of $5 recorded in AOCI related to other interest rate hedges closed in conjunction with debt issuances are expected to be reclassified to other income (expense) in earnings within 12 months of September 30, 2021. The cash flow effect of interest rate 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 2020.
There were no significant transfers into or out of any level of the fair value hierarchy in 2021.
| Assets Measured at Fair Value | September | December | ||||||
| 2021 | 2020 | |||||||
| Cash and cash equivalents | $ | 2,563 | $ | 2,943 | ||||
| Trading marketable securities | 184 | 171 | ||||||
| Level 1 - Assets | $ | 2,747 | $ | 3,114 | ||||
| Available-for-sale marketable securities: | ||||||||
| Corporate and asset-backed debt securities | $ | 46 | $ | 38 | ||||
| United States agency debt securities | 5 | 5 | ||||||
| United States Treasury debt securities | 22 | 36 | ||||||
| Foreign government | 1 | — | ||||||
| Certificates of deposit | 2 | 2 | ||||||
| Total available-for-sale marketable securities | $ | 76 | $ | 81 | ||||
| Foreign currency exchange forward contracts | 112 | 20 | ||||||
| Level 2 - Assets | $ | 188 | $ | 101 | ||||
| Total assets measured at fair value | $ | 2,935 | $ | 3,215 |
| Liabilities Measured at Fair Value | September | December | ||||||
| 2021 | 2020 | |||||||
| Deferred compensation arrangements | $ | 184 | $ | 171 | ||||
| Level 1 - Liabilities | $ | 184 | $ | 171 | ||||
| Foreign currency exchange forward contracts | $ | 21 | $ | 160 | ||||
| Interest rate swap liability | — | 53 | ||||||
| Level 2 - Liabilities | $ | 21 | $ | 213 | ||||
| Contingent consideration: | ||||||||
| Beginning | $ | 393 | $ | 306 | ||||
| Additions | 43 | 108 | ||||||
| Change in estimate | 11 | 9 | ||||||
| Settlements | (133) | (30) | ||||||
| Ending | $ | 314 | $ | 393 | ||||
| Level 3 - Liabilities | $ | 314 | $ | 393 | ||||
| Total liabilities measured at fair value | $ | 519 | $ | 777 |
| Fair Value of Available for Sale Securities by Maturity | ||||||||
| September 2021 | December 2020 | |||||||
| Due in one year or less | $ | 39 | $ | 42 | ||||
| Due after one year through three years | $ | 37 | $ | 39 |
On September 30, 2021 and December 31, 2020 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest and marketable securities income was $15 and $19 in the three months and $50 and $84 in the nine months 2021 and 2020, which was recorded in other income (expense).
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.
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 certain 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.
With the acquisition of Wright as more fully described in Note 7, we are responsible for certain product liability claims, primarily related to certain hip products sold by Wright prior to its 2014 divestiture of the OrthoRecon business. We will continue to evaluate each claim and the possible loss we may incur.
We have incurred, and expect to incur in the future, costs associated with the defense and settlement of these matters. For the nine months 2021 we have recorded charges of $98 and made payments of $180, primarily related to Rejuvenate and ABG II Modular-Neck hip stems. Based on the information that has been received, we have estimated the remaining range of probable loss related to recall matters globally to be approximately $410 to $545. We have recorded reserves representing the remaining 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 accruals and could have a
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 7 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
material adverse effect on our results of operations and cash flows.
| Leases | September | December | |||||||||
| 2021 | 2020 | ||||||||||
| Right-of-use assets | $ | 400 | $ | 423 | |||||||
| Lease liabilities, current | $ | 108 | $ | 109 | |||||||
| Lease liabilities, non-current | $ | 298 | $ | 325 | |||||||
| Other information: | |||||||||||
| Weighted-average remaining lease term | 5.6 years | 5.6 years | |||||||||
| Weighted-average discount rate | 2.83 | % | 2.57 | % |
| Three Months | Nine Months | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating lease cost | $ | 35 | $ | 27 | $ | 102 | $ | 94 |
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 $267 and $26 in the nine months 2021 and 2020.
In September 2021 we completed the acquisition of Gauss Surgical, Inc. (Gauss). Gauss is a medical device company that has developed Triton, an artificial intelligence-enabled platform for real-time monitoring of blood loss during surgery. Gauss is part of our Instruments business within MedSurg. Goodwill attributable to the acquisition is not deductible for tax purposes.
In November 2020 we completed the acquisition of Wright Medical Group N.V. (Wright) for $30.75 per share, or an aggregate purchase price of $4.1 billion ($5.6 billion including convertible notes). Wright is a global medical device company focused on extremities and biologics. Wright is part of our Trauma and Extremities business within Orthopaedics. Goodwill attributable to the acquisition is not deductible for tax purposes.
In December 2020 we completed the acquisition of OrthoSensor, Inc. (OrthoSensor). OrthoSensor is a leader in the digital evolution of musculoskeletal care and sensor technology for total joint replacement. OrthoSensor is part of our Orthopaedics business. Goodwill attributable to the acquisition is not deductible for tax purposes.
Purchase price allocations for our significant acquisitions are:
| Purchase Price Allocation of Acquired Net Assets | |||||
| 2020 | Wright | ||||
| Tangible assets and liabilities: | |||||
| Accounts receivable | $ | 127 | |||
| Inventory | 448 | ||||
| Deferred income tax assets | 472 | ||||
| Other assets | 345 | ||||
| Debt | (1,446) | ||||
| Deferred income tax liabilities | (494) | ||||
| Product liabilities | (208) | ||||
| Other liabilities | (292) | ||||
| Intangible assets: | |||||
| Customer and distributor relationships | 182 | ||||
| Developed technology and patents | 1,503 | ||||
| Trade name | 58 | ||||
| Goodwill | 3,386 | ||||
| Purchase price, net of cash acquired | $ | 4,081 | |||
| Weighted-average life of intangible assets | 12 |
Purchase price allocations for Wright and other acquisitions were based on preliminary valuations, primarily related to intangible assets, product liabilities and deferred income taxes. Our
estimates and assumptions are subject to change within the measurement period.
| Consolidated Estimated Amortization Expense | ||||||||||||||
| Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | ||||||||||
| $ | 149 | $ | 577 | $ | 558 | $ | 534 | $ | 512 |
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, 2021.
In October 2021 we entered into a new revolving credit agreement that replaces our previous agreement dated August 19, 2016. The primary changes were to increase the aggregate principal amount of the facility by $750 to $2,250, extend the maturity date to October 26, 2026, increase the leverage ratio to 3.75 and provide LIBOR replacement language. On September 30, 2021 there were no borrowings outstanding under our previous credit facility or commercial paper programs.
| Summary of Total Debt | September 2021 | December 2020 | ||||||||||||||||||
| Rate | Due | |||||||||||||||||||
| Senior unsecured notes: | ||||||||||||||||||||
| 2.625% | March 15, 2021 | $ | — | $ | 750 | |||||||||||||||
| 1.125% | November 30, 2023 | 642 | 668 | |||||||||||||||||
| 0.600% | December 1, 2023 | 598 | 597 | |||||||||||||||||
| 3.375% | May 15, 2024 | 592 | 590 | |||||||||||||||||
| 0.250% | December 3, 2024 | 989 | 1,030 | |||||||||||||||||
| 1.150% | June 15, 2025 | 645 | 644 | |||||||||||||||||
| 3.375% | November 1, 2025 | 747 | 747 | |||||||||||||||||
| 3.500% | March 15, 2026 | 993 | 992 | |||||||||||||||||
| 2.125% | November 30, 2027 | 873 | 909 | |||||||||||||||||
| 3.650% | March 7, 2028 | 597 | 596 | |||||||||||||||||
| 0.750% | March 1, 2029 | 931 | 969 | |||||||||||||||||
| 1.950% | June 15, 2030 | 990 | 989 | |||||||||||||||||
| 2.625% | November 30, 2030 | 751 | 782 | |||||||||||||||||
| 1.000% | December 3, 2031 | 867 | 903 | |||||||||||||||||
| 4.100% | April 1, 2043 | 392 | 392 | |||||||||||||||||
| 4.375% | May 15, 2044 | 395 | 395 | |||||||||||||||||
| 4.625% | March 15, 2046 | 982 | 981 | |||||||||||||||||
| 2.900% | June 15, 2050 | 642 | 641 | |||||||||||||||||
| Variable term loan | November 10, 2023 | — | 400 | |||||||||||||||||
| Other | 25 | 16 | ||||||||||||||||||
| Total debt | $ | 12,651 | $ | 13,991 | ||||||||||||||||
| Less current maturities of debt | 22 | 761 | ||||||||||||||||||
| Total long-term debt | $ | 12,629 | $ | 13,230 | ||||||||||||||||
| September 2021 | December 2020 | |||||||||||||||||||
| Unamortized debt issuance costs | $ | 64 | $ | 71 | ||||||||||||||||
| Borrowing capacity on existing facilities | $ | 1,408 | $ | 2,903 | ||||||||||||||||
| Fair value of senior unsecured notes | $ | 13,736 | $ | 15,022 |
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 March 2021 we repaid $750 of senior unsecured notes with a coupon of 2.625% that were due on March 15, 2021.
In June 2021 we repaid the $400 term loan that was due on November 10, 2023.
NOTE 9 - INCOME TAXES
Our effective tax rates were 11.5% and 20.4% in the three months and 12.6% and 19.6% in the nine months 2021 and
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 8 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
- The change in the effective income tax rate for the three months was primarily due to lower pre-tax income and certain discrete tax items recorded in 2021. The change in effective income tax rates for the nine months reflects certain discrete tax items recorded in 2021.
In March 2021 the American Rescue Plan Act (the Act) was signed into law in the United States. We do not expect the provisions of the Act to have a material impact on our annual effective tax rate or Consolidated Financial Statements in 2021.
NOTE 10 - SEGMENT INFORMATION
| Three Months | Nine Months | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Orthopaedics | $ | 1,529 | $ | 1,317 | $ | 4,641 | $ | 3,433 | |||||||||
| MedSurg | 1,755 | 1,600 | 5,124 | 4,546 | |||||||||||||
| Neurotechnology and Spine | 876 | 820 | 2,642 | 2,110 | |||||||||||||
| Net sales | $ | 4,160 | $ | 3,737 | $ | 12,407 | $ | 10,089 | |||||||||
| Orthopaedics | $ | 455 | $ | 472 | $ | 1,388 | $ | 1,027 | |||||||||
| MedSurg | 425 | 451 | 1,266 | 1,085 | |||||||||||||
| Neurotechnology and Spine | 283 | 228 | 864 | 513 | |||||||||||||
| Segment operating income | $ | 1,163 | $ | 1,151 | $ | 3,518 | $ | 2,625 | |||||||||
| Items not allocated to segments: | |||||||||||||||||
| Corporate and other | (105) | (104) | (421) | (371) | |||||||||||||
| Acquisition and integration-related charges | (126) | (29) | (495) | (85) | |||||||||||||
| Amortization of intangible assets | (144) | (114) | (474) | (342) | |||||||||||||
| Restructuring-related and other charges | (178) | (29) | (209) | (292) | |||||||||||||
| Medical device regulations | (27) | (14) | (72) | (60) | |||||||||||||
| Recall-related matters | (16) | (2) | (98) | 4 | |||||||||||||
| Regulatory and legal matters | 7 | — | 16 | (5) | |||||||||||||
| Consolidated operating income | $ | 574 | $ | 859 | $ | 1,765 | $ | 1,474 |
There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2020.
NOTE 11 - ASSET IMPAIRMENTS
The government in China has launched regional and national programs for volume-based procurement ("VBP") of high-value medical consumables to reduce healthcare costs. Each VBP program has specific requirements to award contracts to the lowest bidders who are able to satisfy the quality and quantity requirements. The successful bidders may be guaranteed sales volume for certain products, while unsuccessful bidders may lose unit sales volume. We expect that the prices required for a successful bid will, nevertheless, negatively impact our existing commercial operations of joint replacement and trauma products in China. As a result of the outcome of certain regional programs for our trauma products and the national VBP program for hips and knees we recorded charges of $105 to impair certain long-lived and intangible assets in the third quarter of 2021. These charges were included in selling, general and administrative expenses. Spine products are part of the VBP program in one province and it is not clear to what extent spine products will be included in further provincial or national VBP programs. We do not expect any significant impairments related to the potential Spine VBP programs. Our business in China represented approximately 2% of our revenues for the year ended December 31, 2020.
In the second quarter of 2020 due to the significant negative impact the COVID-19 pandemic had on our operations and financial results, we suspended certain in-process investments resulting in charges of $189 to impair certain long-lived assets (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. These charges were included in cost of sales and selling, general and administrative expenses.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 9 |
| STRYKER CORPORATION | 2021 Third Quarter Form 10-Q |
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