filings.toolsStryker 10-Q 2022-06-30
Filed 2022-07-27. 7 sections, 135K characters. Original on sec.gov · Markdown · JSON
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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, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-13149
STRYKER CORPORATION (Exact name of registrant as specified in its charter)
| Michigan | 38-1239739 | ||||||||||||||||||||||
| (State of incorporation) | (I.R.S. Employer Identification No.) | ||||||||||||||||||||||
| 2825 Airview Boulevard | Kalamazoo, | Michigan | 49002 | ||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||||||||
| (269) | 385-2600 | ||||||||||||||||||||||
| (Registrant’s telephone number, including area code) |
| 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 | ||||||
| 0.250% Notes due 2024 | SYK24A | New York Stock Exchange | ||||||
| 2.125% Notes due 2027 | SYK27 | New York Stock Exchange | ||||||
| 0.750% Notes due 2029 | SYK29 | New York Stock Exchange | ||||||
| 2.625% Notes due 2030 | SYK30 | New York Stock Exchange | ||||||
| 1.000% Notes due 2031 | SYK31 | 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 | ☐ | 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 378,320,706 shares of Common Stock, $0.10 par value, on June 30, 2022.
| STRYKER CORPORATION | 2022 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 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | 4,493 | $ | 4,294 | $ | 8,768 | $ | 8,247 | |||||||||||||||
| Cost of sales | 1,667 | 1,522 | 3,208 | 2,966 | |||||||||||||||||||
| Gross profit | $ | 2,826 | $ | 2,772 | $ | 5,560 | $ | 5,281 | |||||||||||||||
| Research, development and engineering expenses | 351 | 310 | 764 | 598 | |||||||||||||||||||
| Selling, general and administrative expenses | 1,539 | 1,505 | 3,249 | 3,080 | |||||||||||||||||||
| Recall charges | 4 | 76 | 18 | 82 | |||||||||||||||||||
| Amortization of intangible assets | 160 | 149 | 310 | 330 | |||||||||||||||||||
| Total operating expenses | $ | 2,054 | $ | 2,040 | $ | 4,341 | $ | 4,090 | |||||||||||||||
| Operating income | $ | 772 | $ | 732 | $ | 1,219 | $ | 1,191 | |||||||||||||||
| Other income (expense), net | (52) | (70) | (113) | (162) | |||||||||||||||||||
| Earnings before income taxes | $ | 720 | $ | 662 | $ | 1,106 | $ | 1,029 | |||||||||||||||
| Income taxes | 64 | 70 | 127 | 135 | |||||||||||||||||||
| Net earnings | $ | 656 | $ | 592 | $ | 979 | $ | 894 | |||||||||||||||
| Net earnings per share of common stock: | |||||||||||||||||||||||
| Basic | $ | 1.73 | $ | 1.57 | $ | 2.59 | $ | 2.37 | |||||||||||||||
| Diluted | $ | 1.72 | $ | 1.55 | $ | 2.56 | $ | 2.34 | |||||||||||||||
| Weighted-average shares outstanding (in millions): | |||||||||||||||||||||||
| Basic | 378.3 | 376.9 | 378.0 | 376.6 | |||||||||||||||||||
| Effect of dilutive employee stock compensation | 3.9 | 5.4 | 4.5 | 5.4 | |||||||||||||||||||
| Diluted | 382.2 | 382.3 | 382.5 | 382.0 | |||||||||||||||||||
| Cash dividends declared per share of common stock | $ | 0.695 | $ | 0.63 | $ | 1.39 | $ | 1.26 |
Anti-dilutive shares excluded from the calculation of dilutive employee stock options were 4.5 for the three months 2022 and de minimis in all other periods.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| Three Months | Six Months | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net earnings | $ | 656 | $ | 592 | $ | 979 | $ | 894 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Marketable securities | — | — | (1) | — | |||||||||||||||||||
| Pension plans | 8 | (4) | 7 | 3 | |||||||||||||||||||
| Unrealized gains (losses) on designated hedges | 24 | 8 | 25 | 36 | |||||||||||||||||||
| Financial statement translation | 161 | (80) | 214 | 175 | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | $ | 193 | $ | (76) | $ | 245 | $ | 214 | |||||||||||||||
| Comprehensive income | $ | 849 | $ | 516 | $ | 1,224 | $ | 1,108 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 1 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
CONSOLIDATED BALANCE SHEETS
| June 30 | December 31 | ||||||||||
| 2022 | 2021 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 1,044 | $ | 2,944 | |||||||
| Marketable securities | 83 | 75 | |||||||||
| Accounts receivable, less allowance of $144 ($167 in 2021) | 3,145 | 3,022 | |||||||||
| Inventories: | |||||||||||
| Materials and supplies | 790 | 691 | |||||||||
| Work in process | 315 | 264 | |||||||||
| Finished goods | 2,644 | 2,359 | |||||||||
| Total inventories | $ | 3,749 | $ | 3,314 | |||||||
| Prepaid expenses and other current assets | 804 | 662 | |||||||||
| Total current assets | $ | 8,825 | $ | 10,017 | |||||||
| Property, plant and equipment: | |||||||||||
| Land, buildings and improvements | 1,662 | 1,656 | |||||||||
| Machinery and equipment | 3,887 | 3,842 | |||||||||
| Total property, plant and equipment | $ | 5,549 | $ | 5,498 | |||||||
| Less accumulated depreciation | 2,746 | 2,665 | |||||||||
| Property, plant and equipment, net | $ | 2,803 | $ | 2,833 | |||||||
| Goodwill | 15,115 | 12,918 | |||||||||
| Other intangibles, net | 5,245 | 4,840 | |||||||||
| Noncurrent deferred income tax assets | 1,625 | 1,760 | |||||||||
| Other noncurrent assets | 2,419 | 2,263 | |||||||||
| Total assets | $ | 36,032 | $ | 34,631 | |||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 1,160 | $ | 1,129 | |||||||
| Accrued compensation | 779 | 1,092 | |||||||||
| Income taxes | 300 | 192 | |||||||||
| Dividends payable | 263 | 263 | |||||||||
| Accrued product liabilities | 400 | 401 | |||||||||
| Accrued expenses and other liabilities | 1,495 | 1,465 | |||||||||
| Current maturities of debt | 7 | 7 | |||||||||
| Total current liabilities | $ | 4,404 | $ | 4,549 | |||||||
| Long-term debt, excluding current maturities | 13,374 | 12,472 | |||||||||
| Income taxes | 787 | 913 | |||||||||
| Other noncurrent liabilities | 1,793 | 1,820 | |||||||||
| Total liabilities | $ | 20,358 | $ | 19,754 | |||||||
| Shareholders' equity | |||||||||||
| Common stock, $0.10 par value | 38 | 38 | |||||||||
| Additional paid-in capital | 1,989 | 1,890 | |||||||||
| Retained earnings | 13,933 | 13,480 | |||||||||
| Accumulated other comprehensive loss | (286) | (531) | |||||||||
| Total shareholders' equity | $ | 15,674 | $ | 14,877 | |||||||
| Total liabilities and shareholders' equity | $ | 36,032 | $ | 34,631 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 2 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
| Three Months | Six Months | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Common stock shares outstanding (in millions) | |||||||||||||||||||||||
| Beginning | 378.2 | 376.7 | 377.5 | 376.1 | |||||||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | 0.1 | 0.4 | 0.8 | 1.0 | |||||||||||||||||||
| Ending | 378.3 | 377.1 | 378.3 | 377.1 | |||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Beginning | $ | 38 | $ | 38 | $ | 38 | $ | 38 | |||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | — | — | — | — | |||||||||||||||||||
| Ending | $ | 38 | $ | 38 | $ | 38 | $ | 38 | |||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||
| Beginning | $ | 1,947 | $ | 1,806 | $ | 1,890 | $ | 1,741 | |||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | 6 | (1) | (8) | (4) | |||||||||||||||||||
| Share-based compensation | 36 | 39 | 107 | 107 | |||||||||||||||||||
| Ending | $ | 1,989 | $ | 1,844 | $ | 1,989 | $ | 1,844 | |||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning | $ | 13,540 | $ | 12,525 | $ | 13,480 | $ | 12,462 | |||||||||||||||
| Net earnings | 656 | 592 | 979 | 894 | |||||||||||||||||||
| Cash dividends declared | (263) | (236) | (526) | (475) | |||||||||||||||||||
| Ending | $ | 13,933 | $ | 12,881 | $ | 13,933 | $ | 12,881 | |||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||||||||
| Beginning | $ | (479) | $ | (867) | $ | (531) | $ | (1,157) | |||||||||||||||
| Other comprehensive income (loss) | 193 | (76) | 245 | 214 | |||||||||||||||||||
| Ending | $ | (286) | $ | (943) | $ | (286) | $ | (943) | |||||||||||||||
| Total shareholders' equity | $ | 15,674 | $ | 13,820 | $ | 15,674 | $ | 13,820 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 3 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Six Months | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities | |||||||||||
| Net earnings | $ | 979 | $ | 894 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation | 185 | 187 | |||||||||
| Amortization of intangible assets | 310 | 330 | |||||||||
| Asset impairments | — | 3 | |||||||||
| Share-based compensation | 107 | 107 | |||||||||
| Recall charges | 18 | 82 | |||||||||
| Sale of inventory stepped-up to fair value at acquisition | 12 | 137 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (159) | (24) | |||||||||
| Inventories | (523) | (128) | |||||||||
| Accounts payable | 34 | 57 | |||||||||
| Accrued expenses and other liabilities | (257) | 22 | |||||||||
| Recall-related payments | (19) | (163) | |||||||||
| Income taxes | (132) | (98) | |||||||||
| Other, net | 177 | (76) | |||||||||
| Net cash provided by operating activities | $ | 732 | $ | 1,330 | |||||||
| Investing activities | |||||||||||
| Acquisitions, net of cash acquired | (2,563) | (104) | |||||||||
| Purchases of marketable securities | (38) | (31) | |||||||||
| Proceeds from sales of marketable securities | 29 | 28 | |||||||||
| Purchases of property, plant and equipment | (262) | (189) | |||||||||
| Other investing, net | — | (2) | |||||||||
| Net cash used in investing activities | $ | (2,834) | $ | (298) | |||||||
| Financing activities | |||||||||||
| Proceeds (payments) on short-term borrowings, net | (376) | (7) | |||||||||
| Proceeds from issuance of long-term debt | 1,500 | 5 | |||||||||
| Payments on long-term debt | (252) | (1,151) | |||||||||
| Payments of dividends | (525) | (475) | |||||||||
| Cash paid for taxes from withheld shares | (84) | (74) | |||||||||
| Other financing, net | (23) | (27) | |||||||||
| Net cash provided by (used in) financing activities | $ | 240 | $ | (1,729) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (38) | (5) | |||||||||
| Change in cash and cash equivalents | $ | (1,900) | $ | (702) | |||||||
| Cash and cash equivalents at beginning of period | 2,944 | 2,943 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,044 | $ | 2,241 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 4 |
| STRYKER CORPORATION | 2022 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 ("Stryker," the "Company," "we," "us" or "our") on June 30, 2022 and the results of operations for the three and six months 2022. 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 2021.
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.
New Accounting Pronouncements Recently Adopted
On January 1, 2022 we adopted ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This update requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers. 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 2021.
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 | Six Months | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| MedSurg and Neurotechnology: | |||||||||||||||||
| Instruments | $ | 563 | $ | 517 | $ | 1,091 | $ | 986 | |||||||||
| Endoscopy | 600 | 518 | 1,138 | 987 | |||||||||||||
| Medical | 666 | 640 | 1,330 | 1,262 | |||||||||||||
| Neurovascular | 306 | 301 | 607 | 590 | |||||||||||||
| Neuro Cranial | 337 | 310 | 660 | 591 | |||||||||||||
| Other | 77 | 73 | 146 | 134 | |||||||||||||
| $ | 2,549 | $ | 2,359 | $ | 4,972 | $ | 4,550 | ||||||||||
| Orthopaedics and Spine: | |||||||||||||||||
| Knees | $ | 500 | $ | 474 | $ | 964 | $ | 886 | |||||||||
| Hips | 364 | 353 | 691 | 662 | |||||||||||||
| Trauma and Extremities | 676 | 674 | 1,361 | 1,314 | |||||||||||||
| Spine | 290 | 307 | 569 | 585 | |||||||||||||
| Other | 114 | 127 | 211 | 250 | |||||||||||||
| $ | 1,944 | $ | 1,935 | $ | 3,796 | $ | 3,697 | ||||||||||
| Total | $ | 4,493 | $ | 4,294 | $ | 8,768 | $ | 8,247 |
| Net Sales by Geography | |||||||||||||||||
| Three Months 2022 | Three Months 2021 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| MedSurg and Neurotechnology: | |||||||||||||||||
| Instruments | $ | 451 | $ | 112 | $ | 401 | $ | 116 | |||||||||
| Endoscopy | 473 | 127 | 407 | 111 | |||||||||||||
| Medical | 536 | 130 | 488 | 152 | |||||||||||||
| Neurovascular | 113 | 193 | 115 | 186 | |||||||||||||
| Neuro Cranial | 281 | 56 | 256 | 54 | |||||||||||||
| Other | 75 | 2 | 72 | 1 | |||||||||||||
| $ | 1,929 | $ | 620 | $ | 1,739 | $ | 620 | ||||||||||
| Orthopaedics and Spine: | |||||||||||||||||
| Knees | $ | 368 | $ | 132 | $ | 349 | $ | 125 | |||||||||
| Hips | 230 | 134 | 221 | 132 | |||||||||||||
| Trauma and Extremities | 489 | 187 | 475 | 199 | |||||||||||||
| Spine | 209 | 81 | 217 | 90 | |||||||||||||
| Other | 86 | 28 | 99 | 28 | |||||||||||||
| $ | 1,382 | $ | 562 | $ | 1,361 | $ | 574 | ||||||||||
| Total | $ | 3,311 | $ | 1,182 | $ | 3,100 | $ | 1,194 |
| Net Sales by Geography | |||||||||||||||||
| Six Months 2022 | Six Months 2021 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| MedSurg and Neurotechnology: | |||||||||||||||||
| Instruments | $ | 865 | $ | 226 | $ | 756 | $ | 230 | |||||||||
| Endoscopy | 891 | 247 | 761 | 226 | |||||||||||||
| Medical | 1,061 | 269 | 961 | 301 | |||||||||||||
| Neurovascular | 223 | 384 | 226 | 364 | |||||||||||||
| Neuro Cranial | 545 | 115 | 480 | 111 | |||||||||||||
| Other | 143 | 3 | 132 | 2 | |||||||||||||
| $ | 3,728 | $ | 1,244 | $ | 3,316 | $ | 1,234 | ||||||||||
| Orthopaedics and Spine: | |||||||||||||||||
| Knees | $ | 713 | $ | 251 | $ | 643 | $ | 243 | |||||||||
| Hips | 432 | 259 | 407 | 255 | |||||||||||||
| Trauma and Extremities | 976 | 385 | 915 | 399 | |||||||||||||
| Spine | 409 | 160 | 410 | 175 | |||||||||||||
| Other | 158 | 53 | 193 | 57 | |||||||||||||
| $ | 2,688 | $ | 1,108 | $ | 2,568 | $ | 1,129 | ||||||||||
| Total | $ | 6,416 | $ | 2,352 | $ | 5,884 | $ | 2,363 |
Contract Assets and Liabilities
On June 30, 2022 and December 31, 2021 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 $640 and $529 on June 30, 2022 and December 31, 2021.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 5 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
| Three Months 2022 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (1) | $ | (156) | $ | 41 | $ | (363) | $ | (479) | |||||||
| OCI | — | 8 | 32 | 268 | 308 | ||||||||||||
| Income taxes | — | (2) | (4) | (98) | (104) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (3) | — | (3) | ||||||||||||
| Other (income) expense | — | 2 | (1) | (11) | (10) | ||||||||||||
| Income taxes | — | — | — | 2 | 2 | ||||||||||||
| Net OCI | $ | — | $ | 8 | $ | 24 | $ | 161 | $ | 193 | |||||||
| Ending | $ | (1) | $ | (148) | $ | 65 | $ | (202) | $ | (286) |
| Three Months 2021 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (3) | $ | (252) | $ | 18 | $ | (630) | $ | (867) | |||||||
| OCI | — | (9) | 7 | (75) | (77) | ||||||||||||
| Income taxes | — | 2 | (3) | 2 | 1 | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | 4 | — | 4 | ||||||||||||
| Other (income) expense | — | 4 | (1) | (9) | (6) | ||||||||||||
| Income taxes | — | (1) | 1 | 2 | 2 | ||||||||||||
| Net OCI | $ | — | $ | (4) | $ | 8 | $ | (80) | $ | (76) | |||||||
| Ending | $ | (3) | $ | (256) | $ | 26 | $ | (710) | $ | (943) |
| Six Months 2022 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | — | $ | (155) | $ | 40 | $ | (416) | $ | (531) | |||||||
| OCI | (1) | 4 | 36 | 354 | 393 | ||||||||||||
| Income taxes | — | — | (6) | (123) | (129) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (3) | — | (3) | ||||||||||||
| Other (income) expense | — | 4 | (2) | (22) | (20) | ||||||||||||
| Income taxes | — | (1) | — | 5 | 4 | ||||||||||||
| Net OCI | $ | (1) | $ | 7 | $ | 25 | $ | 214 | $ | 245 | |||||||
| Ending | $ | (1) | $ | (148) | $ | 65 | $ | (202) | $ | (286) |
| Six Months 2021 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (3) | $ | (259) | $ | (10) | $ | (885) | $ | (1,157) | |||||||
| OCI | — | (1) | 34 | 198 | 231 | ||||||||||||
| Income taxes | — | (2) | (11) | (10) | (23) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | 5 | — | 5 | ||||||||||||
| Other (income) expense | — | 8 | 9 | (17) | — | ||||||||||||
| Income taxes | — | (2) | (1) | 4 | 1 | ||||||||||||
| Net OCI | $ | — | $ | 3 | $ | 36 | $ | 175 | $ | 214 | |||||||
| Ending | $ | (3) | $ | (256) | $ | 26 | $ | (710) | $ | (943) |
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 2021.
Foreign Currency Hedges
| June 2022 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | 676 | $ | 1,578 | $ | 5,194 | $ | 7,448 | ||||||
| Maximum term in years | 4.4 | |||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | 36 | $ | — | $ | 158 | $ | 194 | ||||||
| Other noncurrent assets | 2 | 150 | — | 152 | ||||||||||
| Other current liabilities | (4) | — | (10) | (14) | ||||||||||
| Total fair value | $ | 34 | $ | 150 | $ | 148 | $ | 332 |
| December 2021 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | 973 | $ | 2,266 | $ | 5,512 | $ | 8,751 | ||||||
| Maximum term in years | 4.9 | |||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | 15 | $ | 39 | $ | 92 | $ | 146 | ||||||
| Other noncurrent assets | 1 | 65 | — | 66 | ||||||||||
| Other current liabilities | (7) | — | (10) | (17) | ||||||||||
| Total fair value | $ | 9 | $ | 104 | $ | 82 | $ | 195 |
We had €1.5 billion and €2.0 billion on June 30, 2022 and December 31, 2021 of certain foreign currency forward 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 had €4.4 billion on June 30, 2022 and December 31, 2021 of senior unsecured notes designated 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 June 30, 2022 the total after tax gain (loss) in AOCI related to designated net investment hedges was $254.
Net Currency Exchange Rate Gains (Losses)
| Derivative | Three Months | Six Months | ||||||||||||||||||
| instrument: | Recorded in: | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Cash Flow | Cost of sales | $ | 3 | $ | (4) | $ | 3 | $ | (5) | |||||||||||
| Net Investment | Other income (expense), net | 11 | 9 | 22 | 17 | |||||||||||||||
| Non-Designated | Other income (expense), net | 2 | 1 | 3 | (1) | |||||||||||||||
| Total | $ | 16 | $ | 6 | $ | 28 | $ | 11 |
Pretax gains (losses) on derivatives designated as cash flow hedges of $38 and net investment hedges of $32 recorded in AOCI are expected to be reclassified to cost of sales and other income (expense), net in earnings within 12 months as of June 30, 2022. 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
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), net in earnings within 12 months of June 30, 2022. The cash flow effect of interest rate hedges is recorded in cash flow from operations.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 6 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
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 2021.
There were no significant transfers into or out of any level of the fair value hierarchy in 2022.
| Assets Measured at Fair Value | June | December | ||||||
| 2022 | 2021 | |||||||
| Cash and cash equivalents | $ | 1,044 | $ | 2,944 | ||||
| Trading marketable securities | 160 | 193 | ||||||
| Level 1 - Assets | $ | 1,204 | $ | 3,137 | ||||
| Available-for-sale marketable securities: | ||||||||
| Corporate and asset-backed debt securities | $ | 47 | $ | 48 | ||||
| Foreign government debt securities | 2 | 2 | ||||||
| United States agency debt securities | 4 | 5 | ||||||
| United States Treasury debt securities | 27 | 19 | ||||||
| Certificates of deposit | 3 | 1 | ||||||
| Total available-for-sale marketable securities | $ | 83 | $ | 75 | ||||
| Foreign currency exchange forward contracts | 346 | 212 | ||||||
| Level 2 - Assets | $ | 429 | $ | 287 | ||||
| Total assets measured at fair value | $ | 1,633 | $ | 3,424 |
| Liabilities Measured at Fair Value | June | December | ||||||
| 2022 | 2021 | |||||||
| Deferred compensation arrangements | $ | 160 | $ | 193 | ||||
| Level 1 - Liabilities | $ | 160 | $ | 193 | ||||
| Foreign currency exchange forward contracts | $ | 14 | $ | 17 | ||||
| Level 2 - Liabilities | $ | 14 | $ | 17 | ||||
| Contingent consideration: | ||||||||
| Beginning | $ | 306 | $ | 393 | ||||
| Additions | 1 | 62 | ||||||
| Change in estimate | (27) | (1) | ||||||
| Settlements | (24) | (148) | ||||||
| Ending | $ | 256 | $ | 306 | ||||
| Level 3 - Liabilities | $ | 256 | $ | 306 | ||||
| Total liabilities measured at fair value | $ | 430 | $ | 516 |
| Fair Value of Available for Sale Securities by Maturity | ||||||||
| June 2022 | December 2021 | |||||||
| Due in one year or less | $ | 52 | $ | 36 | ||||
| Due after one year through three years | $ | 31 | $ | 39 |
On June 30, 2022 and December 31, 2021 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest and marketable securities income was $20 and $18 in the three months and $35 and $35 in the six months 2022 and 2021, which was recorded in other income (expense), net.
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.
In April 2022 the United States District Court for the District of Delaware issued a judgment following a jury verdict in favor of PureWick Corporation (PureWick) for its 2019 complaint seeking patent infringement damages related to our PrimaFit and PrimoFit products. The court awarded damages and we recorded charges of $28 in March 2022. In June 2022 PureWick filed a motion to seek enhancement of the judgment and if successful, the judgment could total approximately $100 and include an injunction against future sales. We intend to appeal the outcome of this case.
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. In April 2022 we executed a second 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 Medical Group N.V. (Wright) in November 2020, 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.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 7 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
We have incurred, and expect to incur in the future, costs associated with the defense and settlement of these matters. For the six months 2022 we have recorded charges of $18 primarily related to Wright hip products and made payments of $19 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 $380 to $515. 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 material adverse effect on our results of operations and cash flows.
| Leases | June | December | |||||||||
| 2022 | 2021 | ||||||||||
| Right-of-use assets | $ | 469 | $ | 419 | |||||||
| Lease liabilities, current | $ | 118 | $ | 112 | |||||||
| Lease liabilities, non-current | $ | 353 | $ | 310 | |||||||
| Other information: | |||||||||||
| Weighted-average remaining lease term | 5.6 years | 5.4 years | |||||||||
| Weighted-average discount rate | 2.66 | % | 2.86 | % |
| Three Months | Six Months | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating lease cost | $ | 38 | $ | 31 | $ | 73 | $ | 67 |
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 $2,563 and $108 in the six months 2022 and 2021.
In February 2022 we completed the acquisition of Vocera Communications, Inc. (Vocera) for $79.25 per share, or an aggregate purchase price of $2.6 billion, net of cash acquired ($3.0 billion including convertible notes). Vocera is a leader in the digital care coordination and communication category. Vocera is part of our Medical business within MedSurg and Neurotechnology. Goodwill attributable to the acquisition reflects the strategic benefits of expanding our presence in adjacent markets, diversifying our product portfolio, advancing innovations, and accelerating our digital aspirations. This goodwill is not deductible for tax purposes.
In the six months 2022 note holders elected to redeem the 1.50% and 0.50% convertible notes assumed in the Vocera acquisition for $101 and $324. These repayments are classified as financing activities in the Consolidated Statements of Cash Flows.
Share-based awards for Vocera employees vested upon our acquisition and a charge of $132 was recorded in selling, general and administrative expenses in 2022.
Purchase price allocations for our significant acquisitions are:
| Purchase Price Allocation of Acquired Net Assets | |||||
| 2022 | Vocera | ||||
| Tangible assets and liabilities: | |||||
| Accounts receivable | $ | 33 | |||
| Inventory | 13 | ||||
| Deferred income tax assets | 73 | ||||
| Other assets | 92 | ||||
| Debt | (425) | ||||
| Deferred income tax liabilities | (182) | ||||
| Other liabilities | (115) | ||||
| Intangible assets: | |||||
| Customer and distributor relationships | 550 | ||||
| Developed technology and patents | 178 | ||||
| Trade name | 18 | ||||
| Goodwill | 2,328 | ||||
| Purchase price, net of cash acquired of $281 | $ | 2,563 | |||
| Weighted-average life of intangible assets | 13 |
Purchase price allocations for Vocera were based on preliminary valuations, primarily related to intangible assets and deferred income taxes. Our estimates and assumptions are subject to change within the measurement period.
| Consolidated Estimated Amortization Expense | ||||||||||||||
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | ||||||||||
| $ | 320 | $ | 620 | $ | 590 | $ | 570 | $ | 513 |
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 June 30, 2022.
In February 2022 we entered into a $1.5 billion term loan agreement that matures on February 22, 2025 and bears interest at a base rate based on the Term Secured Overnight Financing Rate (SOFR) plus 0.725%. In June 2022 we repaid $250 on the term loan.
In 2022 our Board of Directors approved an increase to the maximum amount of commercial paper that can be outstanding from $1,500 to $2,250.
On June 30, 2022 there were no borrowings outstanding under our credit facility or commercial paper program which allows for maturities up to 397 days from the date of issuance.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 8 |
| STRYKER CORPORATION | 2022 Second Quarter Form 10-Q |
| Summary of Total Debt | June 2022 | December 2021 | ||||||||||||||||||
| Rate | Due | |||||||||||||||||||
| Senior unsecured notes: | ||||||||||||||||||||
| 1.125% | November 30, 2023 | $ | 577 | $ | 622 | |||||||||||||||
| 0.600% | December 1, 2023 | 598 | 598 | |||||||||||||||||
| 3.375% | May 15, 2024 | 595 | 593 | |||||||||||||||||
| 0.250% | December 3, 2024 | 890 | 958 | |||||||||||||||||
| 1.150% | June 15, 2025 | 646 | 645 | |||||||||||||||||
| 3.375% | November 1, 2025 | 748 | 748 | |||||||||||||||||
| 3.500% | March 15, 2026 | 994 | 994 | |||||||||||||||||
| 2.125% | November 30, 2027 | 784 | 845 | |||||||||||||||||
| 3.650% | March 7, 2028 | 597 | 597 | |||||||||||||||||
| 0.750% | March 1, 2029 | 836 | 901 | |||||||||||||||||
| 1.950% | June 15, 2030 | 990 | 990 | |||||||||||||||||
| 2.625% | November 30, 2030 | 675 | 727 | |||||||||||||||||
| 1.000% | December 3, 2031 | 779 | 840 | |||||||||||||||||
| 4.100% | April 1, 2043 | 392 | 392 | |||||||||||||||||
| 4.375% | May 15, 2044 | 395 | 395 | |||||||||||||||||
| 4.625% | March 15, 2046 | 982 | 982 | |||||||||||||||||
| 2.900% | June 15, 2050 | 642 | 642 | |||||||||||||||||
| Term loan | February 22, 2025 | 1,250 | — | |||||||||||||||||
| Other | 11 | 10 | ||||||||||||||||||
| Total debt | $ | 13,381 | $ | 12,479 | ||||||||||||||||
| Less current maturities of debt | 7 | 7 | ||||||||||||||||||
| Total long-term debt | $ | 13,374 | $ | 12,472 | ||||||||||||||||
| June 2022 | December 2021 | |||||||||||||||||||
| Unamortized debt issuance costs | $ | 57 | $ | 62 | ||||||||||||||||
| Borrowing capacity on existing facilities | $ | 2,162 | $ | 2,162 | ||||||||||||||||
| Fair value of senior unsecured notes | $ | 11,122 | $ | 13,391 |
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.
NOTE 9 - INCOME TAXES
Our effective tax rates of 8.9% and 11.5% in the three and six months 2022 include the reversal of deferred income tax on undistributed earnings of foreign subsidiaries determined to be indefinitely reinvested and certain discrete tax items. Our effective tax rates of 10.6% and 13.1% in the three and six months 2021 include certain discrete tax items.
We are routinely audited by income tax authorities in the jurisdictions we operate. In July 2022 we effectively settled the United States federal income tax audit for years 2014 through 2018. Accordingly in the three months ending September 30, 2022 we expect to reduce our accruals for uncertain tax positions and related interest by approximately $220.
NOTE 10 - SEGMENT INFORMATION
As previously disclosed, effective December 31, 2021 we changed our reportable business segments to (i) MedSurg and Neurotechnology and (ii) Orthopaedics and Spine to align to our new internal reporting structure. We have reflected these changes in all historical periods presented.
| Three Months | Six Months | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| MedSurg and Neurotechnology | $ | 2,549 | $ | 2,359 | $ | 4,972 | $ | 4,550 | |||||||||
| Orthopaedics and Spine | 1,944 | 1,935 | 3,796 | 3,697 | |||||||||||||
| Net sales | $ | 4,493 | $ | 4,294 | $ | 8,768 | $ | 8,247 | |||||||||
| MedSurg and Neurotechnology | $ | 601 | $ | 702 | $ | 1,212 | $ | 1,337 | |||||||||
| Orthopaedics and Spine | 607 | 563 | 1,129 | 1,018 | |||||||||||||
| Segment operating income | $ | 1,208 | $ | 1,265 | $ | 2,341 | $ | 2,355 | |||||||||
| Items not allocated to segments: | |||||||||||||||||
| Corporate and other | $ | (145) | $ | (154) | $ | (344) | $ | (316) | |||||||||
| Acquisition and integration-related costs | (37) | (120) | (186) | (369) | |||||||||||||
| Amortization of intangible assets | (160) | (149) | (310) | (330) | |||||||||||||
| Restructuring-related and other charges | (62) | (17) | (171) | (31) | |||||||||||||
| Medical device regulations | (32) | (26) | (60) | (45) | |||||||||||||
| Recall-related matters | (4) | (76) | (18) | (82) | |||||||||||||
| Regulatory and legal matters | 4 | 9 | (33) | 9 | |||||||||||||
| Consolidated operating income | $ | 772 | $ | 732 | $ | 1,219 | $ | 1,191 |
There were no significant changes to total assets by segment from information provided in our Annual Report on Form 10-K for 2021, other than the addition of the assets acquired in the Vocera acquisition which are included in the MedSurg and Neurotechnology segment.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 9 |
| STRYKER CORPORATION | 2022 Second 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 Medical and Surgical, Neurotechnology, Orthopaedics and Spine that help improve patient and hospital outcomes. Alongside its customers around the world, Stryker impacts more than 100 million patients annually.
We segregate our operations into two reportable business segments: (i) MedSurg and Neurotechnology and (ii) Orthopaedics and Spine. MedSurg and Neurotechnology products include surgical equipment and navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling, emergency medical equipment and intensive care disposable products (Medical), minimally invasive products for the treatment of acute ischemic and hemorrhagic stroke (Neurovascular), a comprehensive line of products for traditional brain and open skull based surgical procedures; orthobiologic and biosurgery products, including synthetic bone grafts and vertebral augmentation products (Neuro Cranial) and other medical device products used in a variety of medical specialties. Orthopaedics and Spine products consist primarily of implants used in hip and knee joint replacements and trauma and extremity surgeries, and cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies.
COVID-19 Pandemic and Macroeconomic Environment
The COVID-19 global pandemic and macroeconomic environment has led to severe disruptions in the market and the global and United States economies that may continue for a prolonged period. In response to the COVID-19 pandemic, various governmental authorities and private enterprises have implemented numerous containment measures, 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. This has led to product shortages and an increase in raw material and component pricing as well as other inflationary pressures particularly on our manufacturing costs.
During the quarter we have seen recovery of elective procedures as the impact of the COVID-19 pandemic has subsided in many geographies, with the exception of some countries in the Asia Pacific region. However sales growth in certain products has been constrained by the continuing supply chain challenges and electronic component shortages, especially impacting the capital products in our MedSurg businesses.
Russia and Ukraine Conflict
The military conflict in Russia and Ukraine and the sanctions imposed by the United States government and other nations in response to this conflict have caused significant volatility and disruptions to the global markets. Given that we provide life-saving and life-enhancing products, we plan to continue operating in Russia provided we can safely do so. During the six months 2022 net sales in Russia were approximately 0.2% of our revenues. Although Russia does not constitute a material portion of our business, there is uncertainty around the impact it will have on the global economy, supply chains and fuel prices generally, and therefore our business. Refer to Part II, Item 1A. "Risk
Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 for further details.
China Volume-Based Procurement and Import Purchase Evaluation
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. The prices required for a successful bid have negatively impacted our existing commercial operations of joint replacement and trauma products in China. To date our other businesses have not been significantly impacted; however, the national spine products VBP program was initiated in July 2022. China has also issued national guiding standards for Import Purchase Evaluation which has increased the purchase of locally sourced equipment in China's public hospitals and is impacting our MedSurg business in China. Our business in China represented approximately 2.6% of our revenues for the six months 2022.
Overview of the Three and Six Months
In the three months 2022 we achieved sales growth of 4.6% from 2021. Excluding the impact of acquisitions and divestitures sales grew 6.1% in constant currency. We reported operating income margin of 17.2%, net earnings of $656 and net earnings per diluted share of $1.72. Excluding the impact of certain items, adjusted operating income margin(1) contracted by 220 basis points to 23.7%, with adjusted net earnings(1) of $860 and adjusted net earnings per diluted share(1) of $2.25 in line with 2021.
In the six months 2022 we achieved sales growth of 6.3% from 2021. Excluding the impact of acquisitions and divestitures sales grew 7.6% in constant currency. We reported operating income margin of 13.9%, net earnings of $979 and net earnings per diluted share of $2.56. Excluding the impact of certain items, adjusted operating income margin(1) contracted by 190 basis points to 22.8%, with adjusted net earnings(1) of $1,612 and adjusted net earnings per diluted share(1) of $4.22 representing growth of 1.0%.
Recent Developments
In February 2022 we entered into a $1.5 billion term loan agreement that matures on February 22, 2025 and bears interest at a base rate based on the Term Secured Overnight Financing Rate (SOFR) plus 0.725%. In June 2022 we repaid $250 of this term loan.
In February 2022 we completed the acquisition of Vocera Communications, Inc. (Vocera) for $79.25 per share, or an aggregate purchase price of $2.6 billion, net of cash acquired ($3.0 billion including convertible notes). Vocera is a leader in the digital care coordination and communication category. Vocera is part of our Medical business within MedSurg and Neurotechnology. Goodwill attributable to the acquisition reflects the strategic benefits of expanding our presence in adjacent markets, diversifying our product portfolio, advancing innovations, and accelerating our digital aspirations. Refer to Note 7 to our Consolidated Financial Statements for further information.
(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 | 2022 Second Quarter Form 10-Q |
| CONSOLIDATED RESULTS OF OPERATIONS | |||||||||||||||||||||||||||||||||||
| Three Months | Six Months | ||||||||||||||||||||||||||||||||||
| Percent Net Sales |
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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 2021. 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 and Results of Operations" of this Form 10-Q and Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for 2021.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 16 |
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 June 30, 2022. Based on that evaluation, the Certifying Officers concluded the Company's disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control Over Financial Reporting
There was no change to our internal control over financial reporting during the six months 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In February 2022 we completed the acquisition of Vocera and are currently integrating Vocera into our operations, compliance programs and internal control processes. Vocera constituted approximately 8.5% of our total assets as of June 30, 2022, including the goodwill and intangible assets recorded as part of the purchase price allocation and approximately 1% of our net sales in the six months ended June 30, 2022. United States Securities and Exchange Commission guidance allows companies to exclude acquisitions from their assessment of the internal control over financial reporting during the first year following an acquisition while integrating the acquired company. We have excluded the acquired operations of Vocera from our assessment of the Company's 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 2021 and Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, except for updates to the following risk factor:
We use a variety of raw materials, components, devices and third-party services in our global supply chains, production and distribution processes; significant shortages, price increases or unavailability of third-party services could increase our operating costs, require significant capital expenditures, or adversely impact the competitive position of our products: Our reliance on certain suppliers to secure raw materials, components and finished devices, and on certain third-party service providers, such as sterilization service providers, exposes us to product shortages and unanticipated increases in prices, whether due to inflationary pressure, regulatory changes or otherwise. In addition, several raw materials, components, finished devices and services are procured from a sole-source due to the quality considerations, unique intellectual property considerations or constraints associated with regulatory requirements. If sole-source suppliers or service providers are acquired or were unable or unwilling to deliver these materials or services, we may not be able to manufacture or have available one or more products during such period of unavailability and our business could suffer. In certain cases we may not be able to establish additional or replacement suppliers for such materials or service providers for such services in a timely or cost effective manner, largely as a result of FDA and other regulations that require, among other things, validation of materials, components and services prior to their use in or with our products. In addition, during 2022, the market has experienced increasing inflationary pressures in part due to global supply chain disruptions, labor shortages and other impacts of the COVID-19 pandemic, which
we anticipate will continue. The existence of inflation in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, increased costs of labor, weakening exchange rates and other similar effects. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses as well as negative impacts from weakening exchange rates, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, and may not be able to pass these cost increases on to our customers in a timely manner, which could have a material adverse impact on our profitability and results of operations. Inflation may also cause our customers to reduce or delay orders for our products and services, which could have a material adverse impact on our sales and results of operations.
| Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
We issued 6,071 shares of our common stock in the three months 2022 as performance incentive awards to employees. 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 six months 2022 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 June 30, 2022.
Item 6. EXHIBITS
| 10(i) | Form of grant notice and terms and conditions for restricted stock units granted in 2022 under the 2011 Long-Term Incentive Plan to non-employee directors. | ||||
| 31(i) | Certification of Principal Executive Officer of Stryker Corporation pursuant to Rule 13a-14(a). | ||||
| 31(ii) | Certification of Principal Financial Officer of Stryker Corporation pursuant to Rule 13a-14(a). | ||||
| 32(i)* | Certification by Principal Executive Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350. | ||||
| 32(ii)* | Certification by Principal Financial Officer of Stryker Corporation pursuant to 18 U.S.C. Section 1350. | ||||
| 101.INS | 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) | ||||
| * Furnished with this Form 10-Q |
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 17 |
| STRYKER CORPORATION | 2022 Second 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: | July 27, 2022 | /s/ KEVIN A. LOBO | |||||||||
| Kevin A. Lobo | |||||||||||
| Chair, Chief Executive Officer and President | |||||||||||
| Date: | July 27, 2022 | /s/ GLENN S. BOEHNLEIN | |||||||||
| Glenn S. Boehnlein | |||||||||||
| Vice President, Chief Financial Officer |
| 18 |