News Column

STRYKER CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

July 24, 2014

ABOUT STRYKER Stryker is one of the world's leading medical technology companies, with 2013 revenues of $9,021 and net earnings of $1,006. We are dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. We offer a diverse array Dollar amounts in millions except per share 10 amounts or as otherwise specified



--------------------------------------------------------------------------------

of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products, to help people lead more active and more satisfying lives. We segregate our operations into three reportable business segments: Reconstructive, MedSurg, and Neurotechnology and Spine. The Reconstructive segment includes orthopaedic reconstructive (hip and knee) and trauma implant systems as well as other related products. The MedSurg segment includes surgical equipment and surgical navigation systems (Instruments); endoscopic and communications systems (Endoscopy); patient handling and emergency medical equipment (Medical); and other related products. The Neurotechnology and Spine segment includes neurovascular products, spinal implant systems and other related products. In the United States, most of our products are marketed directly to doctors, hospitals and other healthcare facilities. For the most part, we maintain separate and dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Internationally, our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors. Our business is generally not seasonal in nature; however, the number of reconstructive surgeries is generally lower during the summer months and sales of capital equipment are generally stronger in the fourth quarter. Revenues in the United States accounted for 66.7% and 65.9% of total revenues in the first six months of 2014 and 2013, respectively, and international revenues accounted for 33.3% and 34.1% of total revenues in the first six months of 2014 and 2013, respectively. Subsequent to the announcement of our second quarter 2014 operating results on July 17, 2014, we have updated our preliminary estimate of the probable loss to resolve the Rejuvenate and ABG II recall matter based on all information received to date which resulted in a $110 increase to the actuarially determined range of probable loss to resolve the matter to approximately $1,400 to $2,090 before third-party recoveries. Our results for the three months ended June 30, 2014 now include charges to earnings totaling $270, representing the excess of the $1,400 minimum of the range over the previously recorded reserves. In June 2014 we announced our intention to acquire assets of Small Bone Innovations, Inc. (SBi) in an all cash transaction for up to $375. The net cost to Stryker after taking into account the present value of the tax benefits as a result of the asset purchase structure will be up to $285. SBi products are designed and promoted for upper and lower extremity small bone indications, with a focus on small joint replacement. The transaction is subject to customary closing conditions including the expiration or termination of the Hart-Scott-Rodino Antitrust Improvements Act waiting period and is expected to close in the third quarter of 2014. In April 2014 we completed the acquisition of Berchtold Holding, AG (Berchtold), a privately-held business with operations in Germany and the United States, for an aggregate purchase price of approximately $172. Berchtold sells surgical infrastructure equipment. In March 2014 we completed our acquisition of Patient Safety Technologies, Inc. (PST), for an aggregate purchase price of $120. PST conducts its business through its wholly owned subsidiary, SurgiCount Medical, Inc. PST's proprietary Safety-Sponge® System and SurgiCount 360™ compliance software help prevent Retained Foreign Objects in the operating room. Other business acquisitions completed in the six months ended June 30, 2014 include the acquisition of Pivot Medical, Inc (Pivot). Dollar amounts in millions except per share 11 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q RESULTS OF OPERATIONS Consolidated results of operations for the three and six months ended June 30, 2014 and 2013 were: Three Months Six Months 2014 2013 % Change 2014 2013 % Change Net Sales $ 2,363$ 2,212 6.8 $ 4,668$ 4,402 6.0 Gross profit 1,555 1,482 4.9 3,091 2,959 4.5 Research, development and engineering expenses 158 132 19.7 308 261 18.0 Selling, general and administrative expenses 1,148 1,015 13.1 2,353 1,931 21.9 Amortization of intangible assets 47 36 30.6 92 68 35.3 Restructuring charges 5 9 (44.4 ) 10 23 (56.5 ) Other income (expense) (30) (21) 42.9 (54) (32) 68.8 Income taxes 39 56 (30.4 ) 76 127 (40.2 ) Net earnings $ 128$ 213 (39.9 ) $ 198$ 517 (61.7 ) Diluted net earnings per share $ 0.33$ 0.56 (41.1 )



$ 0.51$ 1.35 (62.2 )

Geographic and segment net sales were:

Percentage Change Percentage Change Three Months Constant Six Months Constant 2014 2013 Reported Currency 2014 2013 Reported Currency Geographic sales: United States $ 1,569$ 1,458 7.6 7.6 $ 3,111$ 2,899 7.3 7.3 International 794 754 5.4 5.4 1,557 1,503 3.6 5.3 Total net sales $ 2,363$ 2,212 6.8 6.9 $ 4,668$ 4,402 6.1 6.7 Segment sales: Reconstructive $ 1,028$ 966 6.5 6.3 $ 2,027$ 1,922 5.5 6.1 MedSurg 905 832 8.8 9.0 1,791 1,669 7.3 7.9 Neurotechnology and Spine 430 414 3.8 3.9 850 811 4.8 5.4 Total net sales $ 2,363$ 2,212 6.8 6.9 $ 4,668$ 4,402 6.1 6.7 Net sales increased 6.8% for the three-month period ended June 30, 2014 from 2013. Net sales grew 6.8% as a result of increased unit volume and changes in product mix and 2.1% due to acquisitions. Net sales were unfavorably impacted by 2.0% due to changes in price. and 0.1% due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions, net sales increased by 4.8% in constant currency. The increase was primarily due to higher shipments of trauma and extremities products, neurotechnology products, instruments and endoscopy products. Net sales increased 6.1% for the six-month period ended June 30, 2014 from 2013. Net sales grew 6.8% as a result of increased unit volume and changes in product mix and 1.8% due to acquisitions. Net sales were unfavorably impacted by 1.9% due to changes in price and 0.6% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased by 4.9% in constant currency. The increase was primarily due to higher shipments of trauma and extremities products, neurotechnology products, instruments and endoscopy products. Supplemental sales growth information: Three Months Six Months % Change % Change U.S. International U.S. International Constant Constant Constant Constant 2014 2013 As Reported Currency As Reported As Reported Currency 2014 2013 As Reported Currency As Reported As Reported Currency Knees $ 350$ 340 2.7 2.7 7.1 (5.6 ) (5.6 ) $ 698$ 685 1.9 2.5 5.7 (5.5 ) (3.7 ) Hips 326 319 2.3 2.2 6.3 (2.6 ) (2.7 ) 644 627 2.7 3.5 6.1 (1.5 ) 0.5



Trauma and Extremities 298 266 11.8 11.3 13.2 10.3 9.2

586 532 10.1 10.3 12.4 7.6 8.1 RECONSTRUCTIVE 1,028 966 6.5 6.3 10.7 0.5 0.2 2,027 1,922 5.5 6.1 9.3 - 1.5 Instruments 340 315 7.6 7.5 7.0 9.4 8.9 683 627 8.9 9.2 9.8 6.3 7.7 Endoscopy 336 287 17.3 17.6 16.8 18.5 19.7 648 578 12.1 12.8 11.3 13.9 16.5 Medical 177 172 3.3 3.8 2.5 6.3 8.6 358 354 1.3 2.1 2.2 (1.7 ) 1.8 MEDSURG 905 832 8.8 9.0 7.6 12.5 13.2 1,791 1,669 7.3 7.9 7.1 7.9 10.1 Neurotechnology 245 227 8.3 8.3 8.3 8.3 8.3 488 448 9.1 9.9 9.8 8.2 10.1 Spine 185 187 (1.6 ) (1.5 ) (6.1 ) 9.5 9.8 362 363 (0.5 ) (0.1 ) (2.9 ) 5.7 7.0 NEUROTECHNOLOGY AND SPINE 430 414 3.8 3.9 1.1 8.7 8.9 850 811 4.8 5.4 3.5 7.3 9.0 Dollar amounts in millions except per share 12 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q Reconstructive Net Sales Reconstructive net sales in the three-month period in 2014 increased 6.5% from 2013 primarily due to a 6.5% increase in unit volume and changes in product mix, 2.8% due to acquisitions and 0.1% due to the favorable impact of foreign currency exchange rates on net sales. Net sales were unfavorably impacted by 2.9% due to changes in price. Excluding the impact of acquisitions, net sales increased 3.6% in constant currency, primarily due to higher shipments of trauma and extremities products worldwide. Reconstructive net sales for the six-month period in 2014 increased 5.5% from 2013 primarily due to a 5.9% increase in unit volume and changes in product mix and 2.9% due to acquisitions. Net sales were unfavorably impacted by 2.6% due to changes in price and 0.6% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased 3.3% in constant currency primarily due to higher shipments of trauma and extremities products worldwide. MedSurg Net Sales MedSurg net sales in the three-month period in 2014 increased 8.8% from 2013, primarily due to a 7.8% increase in unit volume and changes in product mix and 2.3% due to acquisitions. Net sales were unfavorably impacted by 1.1% due to changes in price and 0.2% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased 6.7% in constant currency, primarily due to higher shipments of instruments and endoscopy products. MedSurg net sales in the six-month period in 2014 increased 7.3% from 2013 primarily due to a 7.8% increase in unit volume and changes in product mix and 1.2% due to acquisitions. Net sales were unfavorably impacted by 1.2% due to changes in price and 0.6% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased 6.7% in constant currency, primarily due to higher shipments of instruments and endoscopy products. Neurotechnology and Spine Net Sales Neurotechnology and Spine net sales in the three-month period in 2014 increased 3.8% from 2013 primarily due to a 5.5% increase in unit volume and changes in product mix and 0.2% due to acquisitions. Net sales were unfavorably impacted by 1.9% due to changes in price and 0.1% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased 3.7% in constant currency, led by higher shipments of neurotechnology products partially offset by lower shipments and continued pricing pressures in spinal implant products Neurotechnology and Spine net sales in the six-month period in 2014 increased 4.8% from 2013 primarily due to a 7.0% increase in unit volume and changes in product mix and 0.4% from acquisitions. Net sales were unfavorably impacted by 1.9% due to changes in price and 0.6% due to the unfavorable impact of foreign currency exchange rates on net sales. Excluding the impact of acquisitions, net sales increased by 5.1% in constant currency, primarily due to higher shipments of neurotechnology products partially offset by lower shipments and continued pricing pressures in spinal implant products. Cost of Sales Cost of sales increased 10.7% in the three-month period in 2014 to 34.2% of sales compared to 33.0% of sales in 2013. The impact of our recent acquisitions and product mix contributed to the increase in cost of sales, as sales growth for capital equipment in our MedSurg businesses outpaced sales growth in the Reconstructive segment. Cost of sales in 2014 and 2013 also includes $9 and $8, respectively, related to inventory that was "stepped up" to fair value following acquisitions. Cost of sales in 2013 also includes $7 in restructuring and restructuring-related costs. Excluding the impact of the acquisition and restructuring costs described above, cost of sales was 33.8% of sales compared to 32.3% in 2013. Cost of sales increased 9.3% in the six-month period in 2014 to 33.8% of sales compared to 32.8% of sales in 2013. The impact of our recent acquisitions and product mix contributed to the increase in cost of sales as sales of capital equipment in our MedSurg businesses. Cost of sales in 2014 and 2013 also includes $14 and $8, respectively, related to inventory that was "stepped up" to fair value following acquisitions and $1 and $7, respectively, in restructuring and restructuring-related costs. Excluding the impact of the acquisition and restructuring costs described above, cost of sales was 33.5% of sales as compared to 32.4% in 2013. Research, Development and Engineering Expenses Research, development and engineering expenses increased 19.7% to $158, representing 6.7% of sales for the three-month period in 2014 compared to 6.0% in 2013 and increased 18.0% to $308 in the six-month period in 2014, representing 6.6% of sales in the period compared to 5.9% in 2013. The timing of projects for anticipated future products, the impact of acquisitions and continued investment in new technologies causes the spending level to vary by period as a percentage of sales. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by 13.1% to $1,148, representing 48.6% of sales for the three-month period in 2014 compared to 45.9% in 2013. The three-month periods included $16 and $10, respectively, in acquisition and integration related charges; $15 and $3, respectively, in restructuring related charges; $276 and $170, respectively, related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System; and $19 in 2013 related to two previously disclosed United States regulatory matters. Excluding the impact of these charges, selling, general and administrative expenses were 35.6% of sales in 2014 compared to 36.8% in 2013, primarily due to improved control over general and administrative spending. Selling, general and administrative expenses in the six-month period increased by 21.9% to $2,353, representing 50.4% of sales compared to 43.9% in 2013. The six-month periods included $32 Dollar amounts in millions except per share 13 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q in 2014 and 2013, respectively, in acquisition and integration related charges; $24 and $3 in 2014 and 2013, respectively, in restructuring related charges; $620 and $210 in 2014 and 2013, respectively, related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System; and $59 in 2013 related to two previously disclosed United States regulatory matters. Excluding the impact of these charges, selling, general and administrative expenses were 35.9% of sales in 2014 compared to 37.0% in 2013, primarily due to improved control over general and administrative spending. Restructuring Charges Restructuring charges of $5 and $9 were recorded in the three-month periods in 2014 and 2013, respectively, and $10 and $23 in the six-month periods in 2014 and 2013, respectively. These restructuring charges are the result of our ongoing level of restructuring type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Our productivity and cost savings plans are designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes to help fund our growth strategy. Other Income (Expense) Other expense in the three-and six-month periods increased $9 and $22, respectively, compared to 2013, primarily due to increased interest expense associated with our public offering of notes in May 2014 and March 2013 and in the six-month period due to losses on foreign currency exchange transactions. Income Taxes Our effective income tax rate on earnings was 23.5% and 20.8% in the three-month periods in 2014 and 2013, respectively, and 27.8% and 19.7% in the six-month periods in 2014 and 2013, respectively. In 2013 we recorded retroactive net tax benefits of $13 pursuant to the American Taxpayer Relief Act of 2012 that was signed into law on January 2, 2013. These tax benefits related to the retroactive extension of numerous tax provisions, including an extension of the research tax credit and other provisions for companies with significant international operations. These same tax provisions expired at the end of 2013. Net Earnings Net earnings in the three-month period in 2014 decreased to $128 or $0.33 per diluted share compared to $213 or $0.56 per diluted share in 2013. Reported net earnings includes restructuring and restructuring-related charges of $20 and $10 in 2014 and 2013, respectively; acquisition and integration related charges of $17 and $15 in 2014 and 2013, respectively; amortization of purchased intangible assets of $33 and $26 in 2014 and 2013, respectively; charges related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System of $217 and $120 in 2014 and 2013, respectively; and charges related to two previously disclosed United States regulatory matters of $22 in 2013. The impact of foreign currency exchange rates on net earnings reduced diluted net earnings per share by approximately $0.03. Net earnings in the six-month period in 2014 decreased to $198 or $0.51 per diluted share compared to $517 or $1.35 per diluted share in 2013. Reported net earnings includes restructuring and restructuring-related charges of $30 and $21 in 2014 and 2013, respectively; acquisition and integration related charges of $30 and $32 in 2014 and 2013, respectively; amortization of purchased intangible assets of $64 and $49 in 2014 and 2013, respectively; charges related to the previously disclosed voluntary recall of the Rejuvenate and ABG II modular-neck hip stems and the recall of the Neptune Waste Management System of $489 and $152 in 2014 and 2013, respectively; tax expense related to certain discrete tax items of $8 in 2014 and charges related to two previously disclosed United States regulatory matters of $52 in 2013. The impact of foreign currency exchange rates on net earnings reduced diluted net earnings per share by approximately $0.07. NON-GAAP FINANCIAL MEASURES We supplement the reporting of our financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures, including percentage sales growth in constant currency; percentage organic sales growth; adjusted gross profit; cost of sales excluding specified items; adjusted selling, general and administrative expenses; adjusted amortization of intangible assets; adjusted operating income; adjusted effective income tax rate; adjusted net earnings; and adjusted diluted net earnings per share (EPS). We believe that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure percentage organic sales growth, we remove the impact of changes in foreign currency exchange rates and acquisitions that affect the comparability and trend of sales. Percentage organic sales growth is calculated by translating current year results at prior year average foreign currency exchange rates excluding the impact of acquisitions. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. These adjustments are Dollar amounts in millions except per share 14 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. Adjustments may include, but are not limited to, the following: 1. Acquisition and integration related costs. These adjustments include costs related to integrating recently acquired businesses and specific costs related to the consummation of the acquisition process.



2. Amortization of intangible assets. These adjustments represent the periodic

amortization expense related to purchased intangible assets.

3. Restructuring and related charges. These adjustments include costs associated

with focused workforce reductions and other restructuring activities.

4. Rejuvenate and recall matters. These adjustments are our best estimate of the

minimum of the range of probable loss to resolve certain product recalls,

including the recall of Rejuvenate / ABG II modular-neck hip stems and

certain matters pertaining to the recall of the Neptune Waste Management

System.



5. Regulatory and legal matters. These adjustments represent our best estimate

of the minimum of the range of probable

loss to resolve certain regulatory matters and other legal settlements.

6. Tax matters. These adjustments represent certain discrete tax items and

adjustments to interest expense related to the settlement of certain tax

matters.

Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, cost of sales, selling, general and administrative expenses, amortization of intangible assets, operating income, effective income tax rate, net earnings and diluted net earnings per share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Results of Operations below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.



The following reconciles the non-GAAP financial measures of adjusted gross profit; adjusted selling, general and administrative expense; adjusted amortization of intangible assets; adjusted operating income; adjusted net earnings; adjusted effective tax rate; and adjusted diluted net earnings per share with the most directly comparable GAAP financial measures: Three Months Ended June 30,

Selling, General & Intangible Effective Tax 2014 Gross Profit Administrative Expenses Amortization Operating Income Net Earnings Rate Diluted EPS AS REPORTED $ 1,555 $ 1,148 $ 47 $ 197 $ 128 23.5 % $ 0.33 Acquisition and integration related charges Inventory stepped up to fair value 9 - - 9 6 0.6 0.01 Other acquisition and integration related - (16 ) - 16 11 0.8 0.02 Amortization of intangible assets - - (47 ) 47 33 2.0



0.09

Restructuring and related charges - (15 ) - 20 20 (1.9 ) 0.05 Rejuvenate and recall matters - (276 ) - 276 217 (2.6 ) 0.58 ADJUSTED $ 1,564 $ 841 $ - $ 565 $ 415 22.4 % $ 1.08 Three Months Ended June 30, Selling General & Intangible Effective Tax 2013 Gross Profit Administrative Expenses Amortization Operating Income Net Earnings Rate Diluted EPS AS REPORTED $ 1,482 $ 1,015 $ 36 $ 290 $ 213 20.8 % $ 0.56 Acquisition and integration related charges Inventory stepped up to fair value 8 - - 8 6 - 0.02 Other acquisition and integration related - (10 ) - 10 9 (0.2 ) 0.02 Amortization of intangible assets - - (36 ) 36 26 0.2



0.07

Restructuring and related charges 7 (3 ) - 19 10 1.5 0.03 Rejuvenate and recall matters - (170 ) - 170 120 3.8 0.31 Regulatory and legal matters - (19 ) - 19 22 (2.6 ) 0.06 ADJUSTED $ 1,497 $ 813 $ - $ 552 $ 406 23.5 % $ 1.07 Dollar amounts in millions except per share 15 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q Six Months Ended June 30, Selling, General & Intangible Operating Effective Tax 2014 Gross Profit Administrative Expenses



Amortization Income Net Earnings Rate Diluted EPS AS REPORTED

$ 3,091 $ 2,353 $



92 $ 328 $ 198 27.8 % $ 0.51

Acquisition and integration related charges Inventory stepped up to fair value 14 - - 14 9 0.7 0.02 Other acquisition and integration related - (32 ) - 32 21 1.3 0.05 Amortization of intangible assets - - (92 ) 92 64 2.2 0.17 Restructuring and related charges 1 (24 ) - 35 30 (0.7 ) 0.08 Rejuvenate and recall matters - (620 ) - 620 489 (5.2 ) 1.29 Tax matters - - - - 8 (2.9 ) 0.02 ADJUSTED $ 3,106 $ 1,677 $ - $ 1,121 $ 819 23.2 % $ 2.14 Six Months Ended June 30, Selling General & Intangible Operating Effective Tax 2013 Gross Profit Administrative Expenses



Amortization Income Net Earnings Rate Diluted EPS AS REPORTED

$ 2,959 $ 1,931 $



68 $ 676 $ 517 19.7 % $ 1.35

Acquisition and integration related charges Inventory stepped up to fair value 8 - - 8 6 - 0.02 Other acquisition and integration related - (32 ) - 32 26 (0.1 ) 0.07 Amortization of intangible assets - - (68 ) 68 49 0.4 0.13 Restructuring and related charges 7 (3 ) - 33 21 0.6 0.06 Rejuvenate and recall matters - (210 ) - 210 152 2.0 0.40 Regulatory and legal matters - (59 ) - 59 52 (0.7 ) 0.13 ADJUSTED $ 2,974 $ 1,627 $ - $ 1,086 $ 823 21.9 % $ 2.16



The weighted-average basic and diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as those used in the calculation of the reported per share amounts.

LIQUIDITY AND CAPITAL RESOURCES Operating Activities Cash provided by operations totaled $366 and $356 in the three-month periods and $572 and $592 in the six-month periods of 2014 and 2013, respectively, resulting primarily from net earnings adjusted for non-cash items (depreciation and amortization, share-based compensation, deferred income taxes and charges for product recall and regulatory matters). The non-cash adjustments related to the Rejuvenate and ABG II recalls were $252 and $187 in the three-month periods and $582 and $227 in the six-month periods of 2014 and 2013, respectively. The net of accounts receivable, inventory and accounts payable consumed $118 and $64 of cash in the three-month periods and $56 and $104 of cash in the six-month periods of 2014 and 2013, respectively, contributing a $54 decrease in cash provided by operations in the three-month period and a $48 increase in cash provided by operations in the six-month period compared to 2013, respectively. In the three-month period $40 of cash was consumed from accounts receivable compared to $18 in 2013 as the benefit of a one day decrease in days sales outstanding was offset by higher sales. In the six-month period $53 of cash was generated compared to $11 of cash that was consumed in 2013 as days sales outstanding in 2014 increased by two days compared to an increase of three days in 2013 and due to changes in relative sales in the periods. In the three-month period $59 of cash was consumed to increase inventory levels to support higher sales levels compared to $25 in 2013 as days of inventory on hand increased by two days compared to a reduction of one day in 2013. In the six-month period $120 of cash was consumed to increase inventory levels compared to $63 in 2013 as days of inventory on hand increased by 25 days compared to an increase of 13 days in 2013. Investing Activities In the six-month periods $1,366 and $1,558 of cash was consumed in net investing activities in 2014 and 2013, respectively. The net investing activities in both periods were primarily in marketable securities and acquisitions. Acquisitions. In the six-month periods $457 and $662 of cash was consumed for acquisitions in 2014 and 2013, respectively. In 2014 the primary acquisitions were Berchtold, PST and Pivot and in 2013 the primary acquisition was Trauson Holdings Company Limited. Capital Spending. In the six-month periods in 2014 and 2013, respectively, $124 and $96 of cash was consumed for capital expenditures, primarily to support integration of acquisitions, capacity expansion, new product introductions, innovation and cost savings. We manage capital spending to support our business growth. Marketable Securities. In the six-month periods $785 and $800 of cash was consumed for the net purchase of marketable securities in 2014 and 2013, respectively. Financing Activities Dividend Payments. In the six-month period in 2014 dividends paid per common share increased 15.1% to $0.61 per share compared to $0.53 in 2013. Total dividend payments to common shareholders were $231 and $201 in 2014 and 2013, respectively. Dollar amounts in millions except per share 16 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q Long-Term and Short-Term Debt. In the six-month periods proceeds from borrowings were $1,093 and $1,011 in 2014 and 2013, respectively. In 2014 the proceeds were primarily from the public offerings of notes and commercial paper, and proceeds in 2013 were primarily from public offerings of notes. Refer to Note 7 in the Notes to the Consolidated Financial Statements for further information. Share Repurchases. In the six-month periods $60 and $250 of cash was consumed to repurchase shares in 2014 and 2013, respectively. Liquidity Cash, cash equivalents and marketable securities were $4,745 and $3,980 at June 30, 2014 and December 31, 2013, respectively, and current assets exceeded current liabilities by $5,668 and $5,678, respectively. We anticipate being able to support our short-term liquidity and operating needs, including settlements related to the Rejuvenate and ABG II recalls, from a variety of sources, including cash from operations, commercial paper and existing credit lines. In the past we have also raised funds in the capital markets and may continue to do so from time to time in the future. We have strong short- and long-term debt ratings that we believe should enable us to refinance our debt as it becomes due. Should additional funds be required we had approximately $949 of borrowing capacity available under all of our existing credit facilities at June 30, 2014. At June 30, 2014 approximately 66.1% of our consolidated cash and cash equivalents and marketable securities were held in locations outside the United States. These funds are considered indefinitely reinvested to be used to expand operations, either organically or through acquisitions, outside the United States. We continually evaluate our receivables, particularly in Spain, Portugal, Italy and Greece (the Southern European Region). The total net receivables from the Southern European Region at were approximately $173 and $199 at June 30, 2014 and December 31, 2013, respectively, including approximately $89 and $103, respectively, of sovereign receivables. We believe that our current reserves related to receivables are adequate and any additional credit risk associated with the Southern European Region is not expected to have a material adverse impact on our financial position or liquidity. We currently do not have any investments in the sovereign debt instruments of the Southern European Region. Any non-sovereign exposure in these countries in our investment portfolios is considered immaterial. Guarantees and Other Off-Balance Sheet Arrangements We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, that we believe could have a material impact on our financial condition or liquidity. OTHER MATTERS Legal and Regulatory Matters We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor, intellectual property, and other matters. 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 has 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, for the resolution of these legal matters 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 projected by management, additional expense may be incurred that could unfavorably affect future operating results. We are currently self-insured for product liability-related claims and expenses.



The ultimate cost to us with respect to product liability claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.

In 2010 we received a subpoena from the United States Department of Justice (DOJ) related to the sales and marketing of the OtisKnee device. The subpoena concerns allegations of violations of federal laws related to sales of a device not cleared by the United States Food and Drug Administration (FDA). We continue to discuss the settlement of this matter with the DOJ, but there can be no assurance that we will reach a consensual resolution rather than seeking a resolution through the courts. We have recorded charges totaling $80 related to this matter. In June 2012 we voluntarily recalled our Rejuvenate and ABG II modular-neck hip stems and terminated global distribution of these hip products. We notified healthcare professionals and regulatory bodies of this recall, which was taken due to potential risks associated with fretting and/or corrosion that may lead to adverse local tissue reactions. Product liability lawsuits relating to this voluntary recall have been filed against us. As previously announced, we intend to reimburse implanted patients for reasonable and customary costs of testing and treatment services, including any necessary revision surgeries. We continue to work with the medical community to evaluate the data and further understand this matter. The ultimate total cost with respect to this matter will depend on many factors that are difficult to predict and may vary materially based on the number of and actual costs of patients seeking testing and treatment services, the number of and actual costs of patients requiring revision surgeries, the number of and actual costs to settle lawsuits filed against us, and the amount of third-party insurance recoveries. Based on the information that has been received, the actuarially determined range of probable Dollar amounts in millions except per share 17 amounts or as otherwise specified



--------------------------------------------------------------------------------

STRYKER CORPORATION 2014 Second Quarter Form 10-Q loss to resolve this matter is estimated to be approximately $1,400 to $2,090, before third-party insurance recoveries. In the three months ended June 30, 2014, we recorded charges to earnings of $270 representing the excess of the $1,400 minimum of the range over the previously recorded reserves. No contingent gain for third-party insurance recoveries was recorded as of June 30, 2014. As noted above, the final outcome of this matter is dependent on many variables that are difficult to predict. The ultimate cost to entirely resolve this matter may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on our financial position, results of operations and cash flows. In 2010 we filed a lawsuit in federal court against Zimmer Holdings, Inc. (Zimmer), alleging that a Zimmer product infringed three of our patents. In rulings issued in August and September 2013, the trial judge upheld the February 2013 jury verdict in our favor, issued a permanent injunction barring Zimmer from making or selling infringing products, and ordered Zimmer to pay us at least $228. Zimmer is appealing this ruling and the ultimate resolution of this matter may differ materially. Accordingly, we have not recorded a contingent gain related to this matter. For each of the following legal matters the final outcome is dependent on many variables and cannot be predicted. Accordingly, it is not possible at this time for us to estimate any material loss or range of losses. However, the ultimate cost to resolve these matters could have a material adverse effect on our financial position, results of operations and cash flows. In April 2011 lawsuits brought by Hill-Rom Company, Inc. and affiliated entities (Hill-Rom) against us were filed in the United States District Court for the Western District of Wisconsin and the United States District Court for the Southern District of Indiana. The Wisconsin lawsuit was subsequently transferred to the United States District Court in Indiana. The suits allege infringement under United States patent laws with respect to certain patient handling equipment we manufactured and sold and seek damages and permanent injunctions. We have entered into an agreement settling the first lawsuit, with terms as previously disclosed. The second lawsuit involves nine patents related to electrical network communications for hospital beds. The case has been stayed with respect to six of the patents that are currently under reexamination by the United States Patent Office. With respect to the three remaining patents, all of which have now expired, the Court of Appeals for the Federal Circuit reversed the trial court's grant of summary judgment in our favor and remanded the matter to the trial court for further proceedings. The ultimate resolution of the entire second suit may have no relation to the resolution of the first suit and cannot be predicted; however, the result could have a material adverse effect on our financial position, results of operations and cash flows. In 2010 we received a subpoena from the DOJ related to sales, marketing and regulatory matters related to the Stryker PainPump. We have received requests for certain documents in connection with this investigation. The investigation is ongoing and we are fully cooperating with the DOJ regarding this matter. FORWARD-LOOKING STATEMENTS This report contains statements referring to us that are not historical facts and are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the "safe harbor" provisions of the Reform Act, are based on current projections about operations, industry conditions, financial condition and liquidity. Words that identify forward-looking statements include words such as "may," "could," "will," "should," "would," "possible," "plan," "predict," "forecast," "potential," "anticipate," "estimate," "expect," "project," "intend," "believe," "may impact," "on track," and words and terms of similar substance used in connection with any discussion of future operating or financial performance, an acquisition or our businesses. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements are not guarantees and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these statements. Some important factors that could cause our actual results to differ from our expectations in any forward-looking statements include those risks discussed in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters