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 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ | 4,909 | $ | 4,479 | $ | 14,683 | $ | 13,247 | |||||||||||||||
| Cost of sales | 1,751 | 1,697 | 5,328 | 4,905 | |||||||||||||||||||
| Gross profit | $ | 3,158 | $ | 2,782 | $ | 9,355 | $ | 8,342 | |||||||||||||||
| Research, development and engineering expenses | 353 | 364 | 1,038 | 1,128 | |||||||||||||||||||
| Selling, general and administrative expenses | 1,701 | 1,455 | 5,188 | 4,704 | |||||||||||||||||||
| Recall charges, net | 9 | (4) | 12 | 14 | |||||||||||||||||||
| Amortization of intangible assets | 164 | 159 | 486 | 469 | |||||||||||||||||||
| Total operating expenses | $ | 2,227 | $ | 1,974 | $ | 6,724 | $ | 6,315 | |||||||||||||||
| Operating income | $ | 931 | $ | 808 | $ | 2,631 | $ | 2,027 | |||||||||||||||
| Other income (expense), net | (62) | 8 | (184) | (105) | |||||||||||||||||||
| Earnings before income taxes | $ | 869 | $ | 816 | $ | 2,447 | $ | 1,922 | |||||||||||||||
| Income taxes | 177 | — | 425 | 127 | |||||||||||||||||||
| Net earnings | $ | 692 | $ | 816 | $ | 2,022 | $ | 1,795 | |||||||||||||||
| Net earnings per share of common stock: | |||||||||||||||||||||||
| Basic | $ | 1.82 | $ | 2.16 | $ | 5.33 | $ | 4.75 | |||||||||||||||
| Diluted | $ | 1.80 | $ | 2.14 | $ | 5.27 | $ | 4.70 | |||||||||||||||
| Weighted-average shares outstanding (in millions): | |||||||||||||||||||||||
| Basic | 379.8 | 378.4 | 379.5 | 378.1 | |||||||||||||||||||
| Effect of dilutive employee stock compensation | 4.2 | 3.4 | 4.2 | 4.1 | |||||||||||||||||||
| Diluted | 384.0 | 381.8 | 383.7 | 382.2 | |||||||||||||||||||
| Cash dividends declared per share of common stock | $ | 0.75 | $ | 0.695 | $ | 2.25 | $ | 2.085 |
Anti-dilutive shares excluded from the calculation of dilutive employee stock options were 5.0 for the three months 2022 and 4.2 for the nine months 2022 and de minimis in all other periods.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net earnings | $ | 692 | $ | 816 | $ | 2,022 | $ | 1,795 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Marketable securities | — | — | — | (1) | |||||||||||||||||||
| Pension plans | (1) | 10 | (4) | 17 | |||||||||||||||||||
| Unrealized gains (losses) on designated hedges | 2 | 8 | 4 | 33 | |||||||||||||||||||
| Financial statement translation | 80 | 179 | (28) | 393 | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | $ | 81 | $ | 197 | $ | (28) | $ | 442 | |||||||||||||||
| Comprehensive income | $ | 773 | $ | 1,013 | $ | 1,994 | $ | 2,237 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 1 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
CONSOLIDATED BALANCE SHEETS
| September 30 | December 31 | ||||||||||
| 2023 | 2022 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 1,860 | $ | 1,844 | |||||||
| Marketable securities | 76 | 84 | |||||||||
| Accounts receivable, less allowance of $187 ($154 in 2022) | 3,276 | 3,565 | |||||||||
| Inventories: | |||||||||||
| Materials and supplies | 1,299 | 1,006 | |||||||||
| Work in process | 342 | 348 | |||||||||
| Finished goods | 3,242 | 2,641 | |||||||||
| Total inventories | $ | 4,883 | $ | 3,995 | |||||||
| Prepaid expenses and other current assets | 950 | 787 | |||||||||
| Total current assets | $ | 11,045 | $ | 10,275 | |||||||
| Property, plant and equipment: | |||||||||||
| Land, buildings and improvements | 1,650 | 1,739 | |||||||||
| Machinery and equipment | 4,505 | 4,066 | |||||||||
| Total property, plant and equipment | $ | 6,155 | $ | 5,805 | |||||||
| Less allowance for depreciation | 3,049 | 2,835 | |||||||||
| Property, plant and equipment, net | $ | 3,106 | $ | 2,970 | |||||||
| Goodwill | 15,138 | 14,880 | |||||||||
| Other intangibles, net | 4,731 | 4,885 | |||||||||
| Noncurrent deferred income tax assets | 1,406 | 1,410 | |||||||||
| Other noncurrent assets | 2,616 | 2,464 | |||||||||
| Total assets | $ | 38,042 | $ | 36,884 | |||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 1,296 | $ | 1,413 | |||||||
| Accrued compensation | 1,223 | 1,149 | |||||||||
| Income taxes | 407 | 292 | |||||||||
| Dividends payable | 285 | 284 | |||||||||
| Accrued product liabilities | 224 | 230 | |||||||||
| Accrued expenses and other liabilities | 1,715 | 1,744 | |||||||||
| Current maturities of debt | 2,308 | 1,191 | |||||||||
| Total current liabilities | $ | 7,458 | $ | 6,303 | |||||||
| Long-term debt, excluding current maturities | 10,382 | 11,857 | |||||||||
| Income taxes | 465 | 641 | |||||||||
| Other noncurrent liabilities | 1,832 | 1,467 | |||||||||
| Total liabilities | $ | 20,137 | $ | 20,268 | |||||||
| Shareholders' equity | |||||||||||
| Common stock, $0.10 par value | 38 | 38 | |||||||||
| Additional paid-in capital | 2,183 | 2,034 | |||||||||
| Retained earnings | 15,933 | 14,765 | |||||||||
| Accumulated other comprehensive loss | (249) | (221) | |||||||||
| Total shareholders' equity | $ | 17,905 | $ | 16,616 | |||||||
| Total liabilities and shareholders' equity | $ | 38,042 | $ | 36,884 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 2 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
| Three Months | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Common stock shares outstanding (in millions) | |||||||||||||||||||||||
| Beginning | 379.8 | 378.3 | 378.7 | 377.5 | |||||||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | 0.1 | 0.1 | 1.2 | 0.9 | |||||||||||||||||||
| Ending | 379.9 | 378.4 | 379.9 | 378.4 | |||||||||||||||||||
| 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 | $ | 2,127 | $ | 1,989 | $ | 2,034 | $ | 1,890 | |||||||||||||||
| Issuance of common stock under stock compensation and benefit plans | 4 | 6 | (16) | (2) | |||||||||||||||||||
| Share-based compensation | 52 | 33 | 165 | 140 | |||||||||||||||||||
| Ending | $ | 2,183 | $ | 2,028 | $ | 2,183 | $ | 2,028 | |||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning | $ | 15,526 | $ | 13,933 | $ | 14,765 | $ | 13,480 | |||||||||||||||
| Net earnings | 692 | 816 | 2,022 | 1,795 | |||||||||||||||||||
| Cash dividends declared | (285) | (263) | (854) | (789) | |||||||||||||||||||
| Ending | $ | 15,933 | $ | 14,486 | $ | 15,933 | $ | 14,486 | |||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||||||||
| Beginning | $ | (330) | $ | (286) | $ | (221) | $ | (531) | |||||||||||||||
| Other comprehensive income (loss) | 81 | 197 | (28) | 442 | |||||||||||||||||||
| Ending | $ | (249) | $ | (89) | $ | (249) | $ | (89) | |||||||||||||||
| Total shareholders' equity | $ | 17,905 | $ | 16,463 | $ | 17,905 | $ | 16,463 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 3 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating activities | |||||||||||
| Net earnings | $ | 2,022 | $ | 1,795 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation | 292 | 276 | |||||||||
| Amortization of intangible assets | 486 | 469 | |||||||||
| Asset impairments | 12 | 18 | |||||||||
| Share-based compensation | 165 | 140 | |||||||||
| Recall charges, net | 12 | 14 | |||||||||
| Sale of inventory stepped-up to fair value at acquisition | — | 12 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 266 | (186) | |||||||||
| Inventories | (922) | (754) | |||||||||
| Accounts payable | (118) | 111 | |||||||||
| Accrued expenses and other liabilities | 165 | 5 | |||||||||
| Recall-related payments | (28) | (26) | |||||||||
| Income taxes | (69) | (262) | |||||||||
| Other, net | (100) | 9 | |||||||||
| Net cash provided by operating activities | $ | 2,183 | $ | 1,621 | |||||||
| Investing activities | |||||||||||
| Acquisitions, net of cash acquired | (390) | (2,563) | |||||||||
| Purchases of marketable securities | (41) | (43) | |||||||||
| Proceeds from sales of marketable securities | 49 | 40 | |||||||||
| Purchases of property, plant and equipment | (430) | (400) | |||||||||
| Proceeds from settlement of net investment hedges | — | 197 | |||||||||
| Other investing, net | 2 | 7 | |||||||||
| Net cash used in investing activities | $ | (810) | $ | (2,762) | |||||||
| Financing activities | |||||||||||
| Proceeds (payments) on short-term borrowings, net | 540 | (376) | |||||||||
| Proceeds from issuance of long-term debt | — | 1,500 | |||||||||
| Payments on long-term debt | (852) | (502) | |||||||||
| Payments of dividends | (854) | (788) | |||||||||
| Cash paid for taxes from withheld shares | (121) | (89) | |||||||||
| Other financing, net | (21) | (48) | |||||||||
| Net cash provided by (used in) financing activities | $ | (1,308) | $ | (303) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (49) | (80) | |||||||||
| Change in cash and cash equivalents | $ | 16 | $ | (1,524) | |||||||
| Cash and cash equivalents at beginning of period | 1,844 | 2,944 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,860 | $ | 1,420 |
See accompanying notes to Consolidated Financial Statements.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 4 |
| STRYKER CORPORATION | 2023 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, 2023 and the results of operations for the three and nine months 2023. 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 2022. Certain immaterial reclassifications have been made to prior year's segment operating income to conform with current year presentation in our Consolidated Financial Statements.
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 2022.
We disaggregate our net sales by business 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.
Beginning in the first quarter 2023 we consolidated Other MedSurg and Neurotechnology into Endoscopy as Other MedSurg and Neurotechnology (primarily Sustainability Solutions) has been fully integrated into our Endoscopy business. Endoscopy includes sales related to Other of $84 and $72 for the three months 2023 and 2022 and $252 and $218 for the nine months 2023 and 2022. We have reflected these changes in all historical periods presented.
| Net Sales by Business | |||||||||||||||||
| Three Months | Nine Months | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| MedSurg and Neurotechnology: | |||||||||||||||||
| Instruments | $ | 628 | $ | 535 | $ | 1,833 | $ | 1,626 | |||||||||
| Endoscopy | 738 | 662 | 2,141 | 1,946 | |||||||||||||
| Medical | 798 | 765 | 2,417 | 2,095 | |||||||||||||
| Neurovascular | 311 | 294 | 906 | 901 | |||||||||||||
| Neuro Cranial | 384 | 332 | 1,112 | 992 | |||||||||||||
| $ | 2,859 | $ | 2,588 | $ | 8,409 | $ | 7,560 | ||||||||||
| Orthopaedics and Spine: | |||||||||||||||||
| Knees | $ | 515 | $ | 481 | $ | 1,643 | $ | 1,445 | |||||||||
| Hips | 362 | 347 | 1,130 | 1,038 | |||||||||||||
| Trauma and Extremities | 752 | 672 | 2,287 | 2,033 | |||||||||||||
| Spine | 291 | 280 | 871 | 849 | |||||||||||||
| Other | 130 | 111 | 343 | 322 | |||||||||||||
| $ | 2,050 | $ | 1,891 | $ | 6,274 | $ | 5,687 | ||||||||||
| Total | $ | 4,909 | $ | 4,479 | $ | 14,683 | $ | 13,247 |
| Net Sales by Geography | |||||||||||||||||
| Three Months 2023 | Three Months 2022 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| MedSurg and Neurotechnology: | |||||||||||||||||
| Instruments | $ | 503 | $ | 125 | $ | 425 | $ | 110 | |||||||||
| Endoscopy | 610 | 128 | 551 | 111 | |||||||||||||
| Medical | 660 | 138 | 625 | 140 | |||||||||||||
| Neurovascular | 120 | 191 | 110 | 184 | |||||||||||||
| Neuro Cranial | 315 | 69 | 274 | 58 | |||||||||||||
| $ | 2,208 | $ | 651 | $ | 1,985 | $ | 603 | ||||||||||
| Orthopaedics and Spine: | |||||||||||||||||
| Knees | $ | 385 | $ | 130 | $ | 365 | $ | 116 | |||||||||
| Hips | 231 | 131 | 225 | 122 | |||||||||||||
| Trauma and Extremities | 550 | 202 | 494 | 178 | |||||||||||||
| Spine | 217 | 74 | 206 | 74 | |||||||||||||
| Other | 87 | 43 | 85 | 26 | |||||||||||||
| $ | 1,470 | $ | 580 | $ | 1,375 | $ | 516 | ||||||||||
| Total | $ | 3,678 | $ | 1,231 | $ | 3,360 | $ | 1,119 |
| Net Sales by Geography | |||||||||||||||||
| Nine Months 2023 | Nine Months 2022 | ||||||||||||||||
| United States | International | United States | International | ||||||||||||||
| MedSurg and Neurotechnology: | |||||||||||||||||
| Instruments | $ | 1,465 | $ | 368 | $ | 1,290 | $ | 336 | |||||||||
| Endoscopy | 1,742 | 399 | 1,585 | 361 | |||||||||||||
| Medical | 1,954 | 463 | 1,686 | 409 | |||||||||||||
| Neurovascular | 361 | 545 | 333 | 568 | |||||||||||||
| Neuro Cranial | 910 | 202 | 819 | 173 | |||||||||||||
| $ | 6,432 | $ | 1,977 | $ | 5,713 | $ | 1,847 | ||||||||||
| Orthopaedics and Spine: | |||||||||||||||||
| Knees | $ | 1,207 | $ | 436 | $ | 1,078 | $ | 367 | |||||||||
| Hips | 716 | 414 | 657 | 381 | |||||||||||||
| Trauma and Extremities | 1,663 | 624 | 1,470 | 563 | |||||||||||||
| Spine | 650 | 221 | 615 | 234 | |||||||||||||
| Other | 233 | 110 | 243 | 79 | |||||||||||||
| $ | 4,469 | $ | 1,805 | $ | 4,063 | $ | 1,624 | ||||||||||
| Total | $ | 10,901 | $ | 3,782 | $ | 9,776 | $ | 3,471 |
Contract Assets and Liabilities
On September 30, 2023 and December 31, 2022 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. This occurs primarily when payment is received upfront for certain multi-period extended service contracts. Our contract liabilities of $788 and $741 on September 30, 2023 and December 31, 2022 are classified within accrued expenses and other liabilities and other noncurrent liabilities within our Consolidated Balance Sheets based on the timing of when we expect to complete our performance obligations.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 5 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
Changes in contract liabilities during the nine months 2023 were as follows:
| September 30 | |||||
| 2023 | |||||
| Beginning contract liabilities | $ | 741 | |||
| Revenue recognized from beginning of year contract liabilities | (306) | ||||
| Net advance consideration received during the period | 353 | ||||
| Ending contract liabilities | $ | 788 |
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (AOCI)
| Three Months 2023 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (1) | $ | 28 | $ | 54 | $ | (411) | $ | (330) | |||||||
| OCI | 1 | (1) | 11 | 133 | 144 | ||||||||||||
| Income taxes | — | 1 | (2) | (47) | (48) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (7) | — | (7) | ||||||||||||
| Other (income) expense, net | (1) | (1) | (2) | (8) | (12) | ||||||||||||
| Income taxes | — | — | 2 | 2 | 4 | ||||||||||||
| Net OCI | — | (1) | 2 | 80 | 81 | ||||||||||||
| Ending | $ | (1) | $ | 27 | $ | 56 | $ | (331) | $ | (249) |
| Three Months 2022 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (1) | $ | (148) | $ | 65 | $ | (202) | $ | (286) | |||||||
| OCI | — | 11 | 19 | 304 | 334 | ||||||||||||
| Income taxes | — | (3) | (1) | (119) | (123) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (7) | — | (7) | ||||||||||||
| Other (income) expense, net | — | 3 | (2) | (8) | (7) | ||||||||||||
| Income taxes | — | (1) | (1) | 2 | — | ||||||||||||
| Net OCI | — | 10 | 8 | 179 | 197 | ||||||||||||
| Ending | $ | (1) | $ | (138) | $ | 73 | $ | (23) | $ | (89) |
| Nine Months 2023 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | (1) | $ | 31 | $ | 52 | $ | (303) | $ | (221) | |||||||
| OCI | — | 2 | 38 | 10 | 50 | ||||||||||||
| Income taxes | — | (4) | (8) | (19) | (31) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (29) | — | (29) | ||||||||||||
| Other (income) expense, net | — | (3) | (4) | (25) | (32) | ||||||||||||
| Income taxes | — | 1 | 7 | 6 | 14 | ||||||||||||
| Net OCI | — | (4) | 4 | (28) | (28) | ||||||||||||
| Ending | $ | (1) | $ | 27 | $ | 56 | $ | (331) | $ | (249) |
| Nine Months 2022 | Marketable Securities | Pension Plans | Hedges | Financial Statement Translation | Total | ||||||||||||
| Beginning | $ | — | $ | (155) | $ | 40 | $ | (416) | $ | (531) | |||||||
| OCI | (1) | 15 | 55 | 658 | 727 | ||||||||||||
| Income taxes | — | (3) | (7) | (242) | (252) | ||||||||||||
| Reclassifications to: | |||||||||||||||||
| Cost of sales | — | — | (10) | — | (10) | ||||||||||||
| Other (income) expense, net | — | 7 | (4) | (30) | (27) | ||||||||||||
| Income taxes | — | (2) | (1) | 7 | 4 | ||||||||||||
| Net OCI | (1) | 17 | 33 | 393 | 442 | ||||||||||||
| Ending | $ | (1) | $ | (138) | $ | 73 | $ | (23) | $ | (89) |
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 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 2022.
Foreign Currency Hedges
| September 2023 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | 838 | $ | 1,583 | $ | 4,726 | $ | 7,147 | ||||||
| Maximum term in years | 3.1 | |||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | 31 | $ | 95 | $ | 86 | $ | 212 | ||||||
| Other noncurrent assets | 1 | 11 | — | 12 | ||||||||||
| Other current liabilities | (8) | — | (6) | (14) | ||||||||||
| Other noncurrent liabilities | (1) | (12) | — | (13) | ||||||||||
| Total fair value | $ | 23 | $ | 94 | $ | 80 | $ | 197 |
| December 2022 | Cash Flow | Net Investment | Non-Designated | Total | ||||||||||
| Gross notional amount | $ | 1,053 | $ | 1,598 | $ | 3,417 | $ | 6,068 | ||||||
| Maximum term in years | 3.9 | |||||||||||||
| Fair value: | ||||||||||||||
| Other current assets | $ | 20 | $ | — | $ | 9 | $ | 29 | ||||||
| Other noncurrent assets | 1 | 89 | — | 90 | ||||||||||
| Other current liabilities | (6) | — | (79) | (85) | ||||||||||
| Other noncurrent liabilities | (1) | (16) | — | (17) | ||||||||||
| Total fair value | $ | 14 | $ | 73 | $ | (70) | $ | 17 |
We had €1.5 billion at September 30, 2023 and December 31, 2022 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 had €4.9 billion and €4.4 billion at September 30, 2023 and December 31, 2022 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.
The total after-tax gain (loss) recognized in OCI related to designated net investment hedges was $42 in the nine months 2023.
Net Currency Exchange Rate Gains (Losses)
| Derivative | Three Months | Nine Months | ||||||||||||||||||
| instrument: | Recorded in: | 2023 | 2022 | 2023 | 2022 | |||||||||||||||
| Cash Flow | Cost of sales | $ | 7 | $ | 7 | $ | 29 | $ | 10 | |||||||||||
| Net Investment | Other income (expense), net | 8 | 8 | 25 | 30 | |||||||||||||||
| Non-Designated | Other income (expense), net | 4 | (1) | 13 | 2 | |||||||||||||||
| Total | $ | 19 | $ | 14 | $ | 67 | $ | 42 |
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 6 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
Pretax gains (losses) on derivatives designated as cash flow hedges of $35 and net investment hedges of $31 recorded in AOCI are expected to be reclassified to cost of sales and other income (expense), net in earnings within 12 months of September 30, 2023. 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 September 30, 2023. 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 2022.
In the third quarter 2022 we determined that certain commercial and regulatory milestones related to technology acquired in the purchase of Mobius Imaging and Cardan Robotics were no longer probable of being achieved and recorded a $110 reduction in the fair value of contingent consideration reflected in selling, general and administrative expenses.
In the second quarter 2023 we recorded $192 of contingent consideration related to the acquisition of Cerus Endovascular Limited (Cerus) described in Note 7.
There were no significant transfers into or out of any level of the fair value hierarchy in 2023.
| Assets Measured at Fair Value | September | December | ||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | 1,860 | $ | 1,844 | ||||
| Trading marketable securities | 189 | 166 | ||||||
| Level 1 - Assets | $ | 2,049 | $ | 2,010 | ||||
| Available-for-sale marketable securities: | ||||||||
| Corporate and asset-backed debt securities | $ | 38 | $ | 42 | ||||
| Foreign government debt securities | — | 1 | ||||||
| United States agency debt securities | 5 | 3 | ||||||
| United States treasury debt securities | 32 | 36 | ||||||
| Certificates of deposit | 1 | 2 | ||||||
| Total available-for-sale marketable securities | $ | 76 | $ | 84 | ||||
| Foreign currency exchange forward contracts | 224 | 119 | ||||||
| Level 2 - Assets | $ | 300 | $ | 203 | ||||
| Total assets measured at fair value | $ | 2,349 | $ | 2,213 |
| Liabilities Measured at Fair Value | September | December | ||||||
| 2023 | 2022 | |||||||
| Deferred compensation arrangements | $ | 189 | $ | 166 | ||||
| Level 1 - Liabilities | $ | 189 | $ | 166 | ||||
| Foreign currency exchange forward contracts | $ | 27 | $ | 102 | ||||
| Level 2 - Liabilities | $ | 27 | $ | 102 | ||||
| Contingent consideration: | ||||||||
| Beginning | $ | 121 | $ | 306 | ||||
| Additions | 192 | 1 | ||||||
| Change in estimate and foreign exchange | (8) | (137) | ||||||
| Settlements | (22) | (49) | ||||||
| Ending | $ | 283 | $ | 121 | ||||
| Level 3 - Liabilities | $ | 283 | $ | 121 | ||||
| Total liabilities measured at fair value | $ | 499 | $ | 389 |
| Fair Value of Available for Sale Securities by Maturity | ||||||||
| September | December | |||||||
| 2023 | 2022 | |||||||
| Due in one year or less | $ | 43 | $ | 53 | ||||
| Due after one year through three years | $ | 33 | $ | 31 |
On September 30, 2023 and December 31, 2022 the aggregate difference between the cost and fair value of available-for-sale marketable securities was nominal. Interest on cash and cash equivalents, short-term investments and marketable securities income was $15 and $26 in the three months and $40 and $61 in the nine months 2023 and 2022, 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. Following a jury trial, the court awarded damages related to this complaint and we recorded charges of $28 in March 2022. Stryker plans to appeal the results of the trial. If ultimately successful, PureWick may seek to recover its legal fees. In June 2022 PureWick filed a motion to enhance the damages awarded, which the court denied in March 2023. In 2022 PureWick also filed a separate complaint seeking additional patent infringement damages related to our current PrimaFit products. A trial for this matter is currently set for December 2023.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 7 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
We are currently investigating whether certain business activities in certain foreign countries violated provisions of the Foreign Corrupt Practices Act (FCPA) and have engaged outside counsel to conduct these investigations. We have been contacted by the United States Securities and Exchange Commission, United States Department of Justice and certain other regulatory authorities and are cooperating with these agencies. At this time we are unable to predict the outcome of the investigations or the potential impact, if any, on our financial statements.
Recall Matters
We have conducted voluntary recalls of certain products, including our Rejuvenate and ABG II Modular-Neck hip stems and certain lot-specific sizes and offsets of LFIT Anatomic CoCr V40 Femoral Heads. Additionally, we are responsible for certain product liability claims, primarily related to certain hip products sold by Wright Medical Group N.V. (Wright) prior to its 2014 divestiture of the OrthoRecon business.
We have incurred, and expect to incur in the future, costs associated with the defense and settlement of claims and lawsuits related to our recalls. Based on the information that has been received, we have recorded reserves of $198, representing our best estimate of probable loss related to recall matters globally. 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 | September 30 | December 31 | |||||||||
| 2023 | 2022 | ||||||||||
| Right-of-use assets | $ | 491 | $ | 473 | |||||||
| Lease liabilities, current | $ | 130 | $ | 121 | |||||||
| Lease liabilities, non-current | $ | 369 | $ | 357 | |||||||
| Other information: | |||||||||||
| Weighted-average remaining lease term (years) | 5.5 | 5.5 | |||||||||
| Weighted-average discount rate | 3.73 | % | 3.22 | % |
| Three Months | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating lease cost | $ | 48 | $ | 37 | $ | 127 | $ | 110 |
NOTE 7 - ACQUISITIONS
We acquire stock in companies and various assets that continue to support our capital deployment and product development strategies. In the nine months 2023 and 2022 cash paid for acquisitions, net of cash acquired was $390 and $2,563.
On May 2, 2023 we acquired Cerus for net cash consideration of $289 and up to $225 in future milestone payments that had a fair value of $192 at the acquisition date. Cerus designs, develops and manufactures neurovascular products used for the treatment of hemorrhagic stroke. Cerus is part of our Neurovascular business within MedSurg and Neurotechnology. Goodwill attributable to the acquisition is not deductible for tax purposes.
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 nine 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 | ||||||||
| 2023 | 2022 | |||||||
| Cerus | Vocera | |||||||
| Tangible assets acquired: | ||||||||
| Accounts receivable | $ | 1 | $ | 33 | ||||
| Inventory | 2 | 13 | ||||||
| Deferred income tax assets | 7 | 91 | ||||||
| Other assets | 1 | 92 | ||||||
| Debt | — | (425) | ||||||
| Deferred income tax liabilities | (60) | (193) | ||||||
| Other liabilities | (22) | (117) | ||||||
| Intangible assets: | ||||||||
| Customer and distributor relationships | — | 603 | ||||||
| Developed technology | 240 | 175 | ||||||
| Trade name | — | 18 | ||||||
| Goodwill | 312 | 2,273 | ||||||
| Purchase price, net of cash acquired of $7 and $281 | $ | 481 | $ | 2,563 | ||||
| Weighted average amortization period at acquisition (years): | ||||||||
| Developed technologies | 13 | 6 | ||||||
| Customer relationships | — | 15 | ||||||
| Trademarks | — | 9 |
The purchase price allocation for Cerus is based on preliminary valuations, primarily related to developed technology and deferred income taxes. Our estimates and assumptions are subject to change within the measurement period. The purchase price allocation for Vocera was finalized in the first quarter 2023 without material adjustments.
| Consolidated Estimated Amortization Expense | ||||||||||||||
| Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||
| $ | 159 | $ | 607 | $ | 590 | $ | 533 | $ | 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. Our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on September 30, 2023.
In August 2023 we repaid the remaining balance of $650 on the $1.5 billion term loan scheduled to mature on February 22, 2025. We also issued €500 of floating rate senior notes due November 16, 2024. The notes bear interest at a base rate based on the three-month Euro Interbank Offered Rate (EURIBOR) plus 0.3%. The notes are callable at February 16, 2024, May 16, 2024 or October 16, 2024 either by us or at the option of the notes holders. These notes are classified within current maturities of debt on our Consolidated Balance Sheet as of September 30, 2023.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 8 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
In the first quarter 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 September 30, 2023 there were no borrowings outstanding under our revolving credit facility or our commercial paper program which allows for maturities up to 397 days from the date of issuance.
| Summary of Total Debt | September | December | ||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| Rate | Due | |||||||||||||||||||
| Senior unsecured notes: | ||||||||||||||||||||
| 1.125% | November 30, 2023 | $ | 580 | $ | 585 | |||||||||||||||
| 0.600% | December 1, 2023 | 600 | 599 | |||||||||||||||||
| 3.375% | May 15, 2024 | 598 | 596 | |||||||||||||||||
| Various | November 16, 2024 | 527 | — | |||||||||||||||||
| 0.250% | December 3, 2024 | 895 | 903 | |||||||||||||||||
| 1.150% | June 15, 2025 | 648 | 647 | |||||||||||||||||
| 3.375% | November 1, 2025 | 749 | 748 | |||||||||||||||||
| 3.500% | March 15, 2026 | 996 | 995 | |||||||||||||||||
| 2.125% | November 30, 2027 | 788 | 795 | |||||||||||||||||
| 3.650% | March 7, 2028 | 598 | 597 | |||||||||||||||||
| 0.750% | March 1, 2029 | 841 | 848 | |||||||||||||||||
| 1.950% | June 15, 2030 | 992 | 991 | |||||||||||||||||
| 2.625% | November 30, 2030 | 679 | 684 | |||||||||||||||||
| 1.000% | December 3, 2031 | 783 | 790 | |||||||||||||||||
| 4.100% | April 1, 2043 | 392 | 392 | |||||||||||||||||
| 4.375% | May 15, 2044 | 396 | 396 | |||||||||||||||||
| 4.625% | March 15, 2046 | 983 | 983 | |||||||||||||||||
| 2.900% | June 15, 2050 | 642 | 642 | |||||||||||||||||
| Term loan | — | 850 | ||||||||||||||||||
| Other | 3 | 7 | ||||||||||||||||||
| Total debt | $ | 12,690 | $ | 13,048 | ||||||||||||||||
| Less current maturities | 2,308 | 1,191 | ||||||||||||||||||
| Total long-term debt | $ | 10,382 | $ | 11,857 | ||||||||||||||||
| September | December | |||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| Unamortized debt issuance costs | $ | 45 | $ | 52 | ||||||||||||||||
| Borrowing capacity on existing facilities | $ | 2,160 | $ | 2,162 | ||||||||||||||||
| Fair value of senior unsecured notes | $ | 11,333 | $ | 10,910 |
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 were 20.4% and 17.4% in the three and nine months 2023 and 0.0% and 6.6% in the three and nine months 2022. The effective tax rates for the three and nine months 2023 and 2022 reflect the continued lower effective income tax rates as a result of our European operations and certain discrete tax items. The effective tax rates for the three and nine months 2022 also reflect income tax benefits of $162 due to the effective settlement of the United States federal income tax audit for years 2014 through 2018. In addition, the effective tax rate for the nine months 2022 reflects the reversal of deferred income tax on undistributed earnings of foreign subsidiaries as our revised capital plan determined that certain cash outside of the United States would no longer need to be repatriated during the period previously contemplated.
NOTE 10 - SEGMENT INFORMATION
| Three Months | Nine Months | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| MedSurg and Neurotechnology | $ | 2,859 | $ | 2,588 | $ | 8,409 | $ | 7,560 | |||||||||
| Orthopaedics and Spine | 2,050 | 1,891 | 6,274 | 5,687 | |||||||||||||
| Net sales | $ | 4,909 | $ | 4,479 | $ | 14,683 | $ | 13,247 | |||||||||
| MedSurg and Neurotechnology | $ | 859 | $ | 611 | $ | 2,266 | $ | 1,870 | |||||||||
| Orthopaedics and Spine | 499 | 534 | 1,701 | 1,616 | |||||||||||||
| Segment operating income | $ | 1,358 | $ | 1,145 | $ | 3,967 | $ | 3,486 | |||||||||
| Items not allocated to segments: | |||||||||||||||||
| Corporate and other | $ | (209) | $ | (144) | $ | (596) | $ | (488) | |||||||||
| Acquisition and integration-related costs | 1 | 78 | (7) | (108) | |||||||||||||
| Amortization of intangible assets | (164) | (159) | (486) | (469) | |||||||||||||
| Structural optimization and other special charges | (28) | (58) | (142) | (229) | |||||||||||||
| Medical device regulations | (19) | (38) | (74) | (98) | |||||||||||||
| Recall-related matters | (9) | 4 | (12) | (14) | |||||||||||||
| Regulatory and legal matters | 1 | (20) | (19) | (53) | |||||||||||||
| Consolidated operating income | $ | 931 | $ | 808 | $ | 2,631 | $ | 2,027 |
There were no significant changes to total assets by segment from the information provided in our Annual Report on Form 10-K for 2022.
| Dollar amounts are in millions except per share amounts or as otherwise specified. | 9 |
| STRYKER CORPORATION | 2023 Third Quarter Form 10-Q |
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